On 15 October 2021 the Australian Treasury published a consultation paper 'Clarifying the treatment of trusts under insolvency law (Consultation Paper).

MinterEllison has submitted a response to the Consultation Paper (MinterEllison Submissions).

The MinterEllison Submissions address the questions and issues raised in the Consultation Paper in detail, and raise for consideration some complex issues in relation to any proposed law reform in relation to trust insolvency.

A copy of the MinterEllison Submissions are available.

Summary of MinterEllison Submissions

MinterEllison's position is that the Consultation Paper raises complex legal and policy issues concerning the intersection of corporate insolvency law and trust law that warrant careful consideration by Government prior to the development of any law reform proposals.

Many of these issues have previously been recommended for law reform. Despite this, there is no legislative scheme dealing with the insolvency of trusts. We note that most of the issues raised in the Consultation Paper have been the subject of law reform proposals since the Harmer Report.

Thus the complex problems arising in the insolvency of trusts have largely been solved by the 'ingenuity' of the nationwide superior and appellate courts in the context of litigation. And in our assessment, the cost of doing so has not been wasted.

Given the prevalence of trusts with corporate trustees as vehicles for commerce in Australia, any legislative reform regarding corporate trustee insolvency should focus on clarifying the position of stakeholders and providing certainty of the outcomes.

In our view, it would not be appropriate for legislation to treat insolvent trusts as separate entities. To do so would unnecessarily contradict and undermine the fundamental principles of trust law.

With certain modifications discussed below, we consider that some of the recommendations in Chapter 6 of the Harmer Report together with further or other measures could be considered for implementation by way of amendment to the existing external administration legislation in the Corporations Act. The power of the Court to make ameliorative orders (analogous to s 447A) should apply to any legislative provisions in respect of trust insolvency.

Next steps

We welcome further consultation with Treasury about these matters prior to any draft legislation being released. We will provide further updates on the next steps in the consultation process as and when additional details are made available.