Australia’s current insolvency law does not clearly address the treatment of corporate trusts which are commonly used by small to medium businesses.
This is an issue for the many small to medium, family owned businesses that are facing financial difficulties.
Therefore, the Government, on 15 October 2021 announced a consultation process to clarify the treatment of corporate trusts under insolvency law.
Given Australia’s corporate insolvency law does not expressly cover how an insolvent trust or corporate trustee should be dealt with if insolvent, numerous issues arise when a business operating through a corporate trust becomes insolvent. These include:
- There are two distinct entities, being the trustee (usually a corporate entity) and the trust fund. Current insolvency law only recognises the corporate trustee.
- Many creditors are not aware that they had been trading with a business held by a trust.
- The insolvency of the trust generally triggers the removal of the corporate trustee, which requires the insolvency practitioner (appointed to the insolvent corporate trustee) to apply to Court for directions to deal with the trust assets.
- Further directions from Court may also be required to determine how to distribute the trust funds, as well as the order of payment of liabilities.
- These Court applications add uncertainty and considerable costs and delays to the winding up of the insolvent business.
The Australian Restructuring Insolvency and Turnaround Association (ARITA) supports reform of the treatment of trusts under insolvency law and is preparing a detailed submission in this regard.
It is anticipated that clarifying the treatment of corporate trusts under insolvency law will help reduce the costs and complexities associated with dealing with those insolvent businesses. This should provide greater certainty to those key stakeholders, such as business owners and creditors, impacted by the business insolvency.
If you are a small to medium, family-owned business owner who is struggling financially, a William Buck Restructuring and Insolvency advisor can assist you to understand your current duties and obligations and ensure the best outcome for your business and its creditors.