Cold water poured on amending ipso facto clauses from trust deeds pre-appointment

Does this work? Amending the trust deed before a liquidator or administrator is appointed to a company in external administration (“EA“) so that the appointee can sell trust assets.

Not according to 2 new Federal Court cases delivered last Friday (see the bottom of the page for the links).

The Court prefers that in all instances, the appointee apply to court to become a Receiver over the trust assets!!

Imagine Co A acts as trustee of a trust, and operates its business through the trust.

The trust deed normally contains a clause that renders the trusteeship of Co A terminated or void upon the happening of the EA. Called an ipso facto clause.

Typically, to keep costs down, advisors recommend preparing an amending deed to remove this clause, thereby, allowing the Liquidator, etc, to sell trust assets.

This is pretty common in small liquidations.

But the Fed Court has poured cold water over this approach, by raising some important points that I recommend you consider:

1. the amending deed may constitute a “fraud on the power of amendment” – because the purpose of the amendment is possibly extraneous or ulterior

2. the purpose of the amendment is to benefit the trustee, appointee and creditors. Does this fit within the purpose for which the power was conferred?

3. by continuing as trustee, how does the appointee meet the requirements under the Corps Act (to creditors) and trust deed (to beneficiaries)?

This is potentially uncommercial and impractical in many SME liquidations … otherwise for every trustee company liquidation you will have to apply to court first. Costing c$5k-10k each time.

Let me know what you think in the comments below.

Case 1 –

Case 2 –

insolvency trustee SVVoidables

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