Timing is Everything – Are the Assets "Safely" in the Trust

Protect Assets

One of the main reasons trusts are established is to provide protection from creditors if times get tough.  We are now in tough times so many people will be relying on the trust they have established to protect their key assets – often including the family home. 

Insolvency Act 2006 and Property Law Act 2007

Timing is everything.  The transfer of assets to the trust and gifting of moneys owed back to the trust settlors can be overturned under the provisions of the Insolvency Act 2006 and the Property Law Act 2007. 

The Insolvency Act 2006 provides that a transaction may be cancelled if it takes place within two years of the bankruptcy of an individual and if it was entered into at a time when the bankrupt was unable to pay all his or her due debts. 

Such transactions include transferring a property, giving a charge on a property or incurring an obligation.  There is a presumption that any transaction that is made within the six months immediately before bankruptcy will be an insolvent transaction. 

The Insolvency Act also deals with gifting and a gift may be cancelled if the bankrupt made the gift within five years immediately before the bankruptcy and the bankrupt was unable to pay his or her due debts immediately after making the gift.  There is a presumption that a person who makes a gift within two years of their bankruptcy was at the time of the gift unable to pay their due debts. 

The Property Law Act 2007 provides that the Court may set aside certain sales of property if the Court is satisfied that the position of a creditor has been prejudiced by the sale of the property. 

Regal Castings Limited v Lightbody & Ors

A recent Supreme Court case considered the issue of the transfer of a property to a trust when a settlor was insolvent.

In 1998 Mr and Mrs Lightbody (Mr and Mrs L) transferred their home to a family trust of which they and their solicitor were the trustees.   Mr and Mrs L continued to live in the home with their family.  The sale price was $230,000 which was to be repaid in one sum seven years after the transfer.  At the same time as the transfer $54,000 of the outstanding purchase price was forgiven.  Mr and Mrs L made regular gifts and the debt was completely forgiven three years before it was due to be repaid.  At the time of the transfer Mr L was personally responsible for debts owed by his business to his major supplier, Regal Castings Limited (RCL).  RCL was not told of the transfer of the house, which was Mr L's only asset, or of the gifting programme which basically stripped him of all his assets.

Mr L's company was placed in liquidation in April 2003.  RCL was unable to recover the moneys it was owed and obtained judgment against Mr L but failed to recover the judgment sum upon Mr L's bankruptcy.  RCL brought a claim seeking an order to set aside the transfer of the house under the provisions of the Property Law Act 1952 on the basis that the transfer had been made with the intent to defraud.

The Court considered that the question of "intention to defraud is one of fact to be determined by the evidence".  A key issue was therefore the solvency of the transferor at the time the transfer took place, that is what was Mr L's  financial position at the time the transfer occurred.  If his financial position was precarious at the time, the Court considered it would be "objective evidence of an intention to defraud if he acts to put property beyond the reach of creditors".  Other indicators of fraud are for example transferring assets to close relatives particularly when the transfer is for less than market value and the transferor retains the use of the property.

Decisive Factors

The Court considered the decisive factors in the case were:

• at the time of the transfer the house was Mr L's only substantial asset;
• Mr and Mrs L remained in the house;
• the transfer was for no effective consideration as the outstanding purchase price was gifted;
• the seven year term for repayment was prejudicial to RCL as its loan term ended two years after the transfer and this debt was payable immediately upon demand;
• Mr L had provided personal guarantees for his business debts and without the house Mr L had no means to repay these debts;
• there was no reason for the transfer except to protect against creditors.

Decision

The Court held that the transfer of the house to the trust by Mr L was an alienation with the intention to defraud creditors and that the trustees of the trust held a half share of the house on trust for the Official Assignee of Mr L for Mr L's creditors.  This excluded the half interest in the house originally held by Mrs L.

The Court commented that under the new Property Law Act 2007 a disposition by gift by someone insolvent, if made after 31 December 2007, can be set aside without the need to show an intent to defraud creditors because the transferor has not received "reasonably equivalent value in exchange".

Take Advice Before Signing

This case is a timely illustration of a situation which unfortunately could become commonplace in the present economic environment.

If you require any information about Brookfields' trust administration services please contact:

Howard Johnston
Partner
t: +64 9 979 2161
e: Howard Johnston

Alison Gilbert
Senior Associate
Trusts and Estates
t: +64 9 979 2253
e: Alison Gilbert

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Last updated: 15 May 2009

The contents of this publication are general in nature and are not intended to serve as a substitute for legal advice on a specific matter. In the absence of such advice no responsibility is accepted by Brookfields for reliance on any of the information provided in this publication.