Focus
Automatic vacation clauses in trusts can spell
Automatic
vacation of
trustees
danger in distressed
sales
Finance and Property
22 June 2015
WHO SHOULD READ
THIS
Almost inevitably, trust deeds will contain a clause which
automatically removes the trustee or requires the trustee to resign in
certain events, particularly receivership or liquidation. Trustees of self
managed super funds will also be a ‘disqualified person’ and be
required to resign upon commencement of any winding up of the
trustee company, by reason of the provisions of the Superannuation
Creditors with security
comprising trust property,
receivers appointed to sell
trust property and buyers of
property where the trustee is
in receivership
THINGS YOU NEED TO
KNOW
Trust deeds must be reviewed
to ensure the trustee is not
automatically removed after
appointment of a receiver, and
Industry (Supervision) Act 1993.
A recent requisition from the Queensland Titles Office has brought
the issue to the forefront, with practical consequences for financiers
exercising enforcement rights, receivers appointed by them (used in
this alert to include receivers and managers, liquidators and
administrators), buyers of real property and their financiers.
Background
The requisition arose from the sale of a Queensland property by the receiver
and manager appointed to a corporate trustee. The trust was disclosed on title.
if there is doubt, consider
Under the terms of the trust deed, the trustee’s role was automatically vacated
applying to the Court for a
if a receiver was appointed. That clause had not been removed by way of
declaration approving the sale
variation before the receiver was appointed.
WHAT YOU NEED TO DO
The sale of the property was completed, with the transfer signed by the receiver
and manager, and a copy of the ASIC form 504 provided at settlement.
Financiers – review practices
The Titles Office reviewed the trust deed and issued a requisition seeking
and ensure that automatic
evidence of the receiver and manager’s power to sell the property, given the
vacation clauses are removed
automatic vacation clause.
Receivers – ensure the
The law
A trust is not a legal entity in itself, and cannot ‘own’ property. Instead,
connection to the property to
be sold remains, or apply to
the Court
Buyers – ensure that the
property of the trust is owned by the trustee and held for the benefit of the
beneficiaries. Secured creditors of a trust have a right against the trustee, who
is personally liable for debts incurred as trustee, and the trustee is then given a
right of indemnity from the trust assets for properly incurred debts, essentially
trustee (in receivership) has
creating the nexus between the secured creditor and the trust assets.
not been automatically
If a trustee’s role as trustee is automatically vacated then, in the absence of any
removed and has the power to
sell the property
deemed appointments under the trust deed, the trustee becomes a ‘bare
trustee’, with very limited powers. The removal of a trustee severs the creditor’s
link to the trust assets, leaving secured creditors without recourse.
In that situation, it would be necessary for a receiver to apply to the Court for a declaration that they have the power to sell
the trust asset.
A number of cases in recent years have considered whether a liquidator has the power to sell trust assets where they have
been appointed to a corporate trustee. Earlier cases suggested that liquidators did have such a power under the
Corporations Act 2001 (Cth) (Corporations Act), largely removing the need for approval by the Courts. Arguably, however,
more recent cases have substantially limited that principle.
The position of a receiver is somewhat analogous to that of a liquidator, including the power under the Corporations Act,
to enter into possession of and sell property of the corporation.
Ramifications and cautions
If a receiver is unable to satisfy a purchaser or its financier that it has power to sell a trust asset, particularly real property,
following the removal of a trustee under an automatic vacation clause, or if having satisfied them that it has that power, the
Titles Office issues a requisition as happened here, there are obviously substantial ramifications for a number of persons,
including:
 the secured creditor, who may be unable to realise valuable assets;
 the receiver, who may need to approach the Court to confirm their power to sell or find themselves personally liable;
 a buyer and their financier who may find they are unable to achieve registration of the transfer of the real property they
sought to purchase and finance; and
 any advisors of those people who either gave incorrect or incomplete advice.
Secured creditors
It is critical that any financier seeking to take security over an asset of a trust reviews the trust deed and, if an automatic
vacation clause is present, has it removed by variation prior to advancing funds. In doing that, particular care should be
taken to satisfy the variation requirements of the deed (i.e. third party consents and form).
Obviously, should the issue not be identified until default arises and a receiver is about to be appointed, it will be much
more difficult to negotiate the variation to the trust deed.
If the secured creditor is on notice not only of an automatic vacation clause but also that a change of trustee has occurred,
it has a period of only five business days to re-register its security interest against the new trustee under section 588FN
Corporations Act, unless that period is extended by the Court.
Receivers
If there is a risk that the nexus to the trust asset has been severed and the receiver may not have a power to sell, it would
be prudent to apply to the Court for a declaration that the receiver does have power of sale. However, that is a costly
exercise, and should be avoided if possible.
Alternatively, it will usually be possible to effect a sale of the secured property as mortgagee (under the mortgage) and or
secured party (under a GSA), subject to ensuring compliance with the appropriate requirements for such a sale (i.e. service
of notice of exercise of power of sale and the swearing of appropriate statutory declarations of service and default). The
financier’s powers of sale under the mortgage and GSA continue despite any change of trustee.
Receiver’s sale contracts often contain clauses entitling the parties to effect the sale as a mortgagee sale (rather than a
receiver sale) should there be some impediment to effecting a sale as receiver.
Buyers
Potentially one of the most at risk parties is the buyer of real property owned by a trustee in receivership.
If the purchase is settled without review of the trust deed and without considering the receiver’s power to sell the asset, a
purchaser of land may find the transfer requisitioned by the Titles Office and that they are unable to obtain registration as
purchaser of the property (as was the case here). If the secured creditor and receiver fail to cooperate in addressing the
requisition, it would be necessary to start Court proceedings to address the issue and seek appropriate declarations or
orders to allow the sale to be effected. Again, this is a significant and expensive step.
In any purchase from a trustee in receivership, the buyer (or their advisors) should:
 review the trust deed and any variations to satisfy themselves that the receiver has power to sell (notwithstanding any
warranties as to title which may be present in the contract);
 ensure that an original or certified copy (complying with the Titles Office requirements) of a deed of variation removing
any automatic vacation clause is provided at or before settlement; and
 ensure that the sale contract obliges the receiver to procure the transfer of the property by the receiver’s appointor (the
financier), as mortgagee or secured party exercising power of sale, or by obtaining an order of the Court validating the
sale, should there be an impediment or legal challenge to the sale.
Advisors
Great care must be taken when advising clients in this area to ensure that all relevant issues are identified and dealt with
efficiently and effectively. There may be potential liability for advisors if the circumstances and law are not correctly
understood and explained.
Ultimately, it is clear that this is becoming an area of significant practical consequence. Anyone involved with security over
trust property should take the time to clearly understand the circumstances and legal implications in the specific case, with
the starting point being the trust deed and always bearing in mind that early intervention is key. Failure to do so can leave
all parties involved in a risky position.
For further information on any of the issues raised in this alert please contact:
 Peter Kennedy on +61 7 3233 8537
 Peter Stewart on +61 7 3233 8942
 Scott Butler on +61 7 3233 8653
 Kirby Jukes on +61 7 3233 8897
 Emile McPhee +61 7 3233 8761
Focus covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. Focus is intended for information purposes only and
should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.