Peter Johnson highlights the complexities that arise from historical issues in SMSF trust deeds and provides practical strategies to address these challenges. […]
Automatic Removal of Automatic Removal?
Emily Pritchard, current as of: 10 October 2019.
We are seeing an increasing number of clients requesting an amendment to our trust deeds that deletes the automatic removal of trustee clause. Financial institutions are always behind this request, and often hold up finance applications until the executed deed of amendment is provided.
Just last week we received two such requests, each of which involved a major bank. What concerns us is that the provision the institutions want removed or modified offers an important protection for our clients that we will continue to stand by – their interests always come first in the design of our products.
What exactly is the automatic removal of trustee clause – and why don’t the banks like it?
The Acis trust deed provides that the trustee is automatically removed from that office following the occurrence of certain events, mostly in regards to trustee capacity. Of these, it is the insolvency/liquidation/receivership/bankruptcy of the trustee with which the banks generally take issue.
Why? Because if a trustee’s role is automatically vacated and a new trustee has not been appointed, then the trustee becomes a ‘bare trustee’. This means that, while the trustee remains the holder of the legal title of the trust property, they do so without any of the powers previously afforded by the trust deed. This includes the power to sell a trust asset.
If the trustee can no longer exercise the power to sell trust assets, then nor can the liquidator or trustee in bankruptcy. In such an event, a creditor trying to take control of, and sell, an asset would need to apply to the courts for approval to do so. This makes it more difficult for the banks to realise their security once a default has occurred. You can see why the banks are pushing to have this clause removed.
Why the Acis deed allows for automatic removal of the trustee
In the absence of an automatic removal of trustee clause, a liquidator/trustee in bankruptcy assumes the powers of the trustee, including the power to sell assets. This completely undermines the asset protection provided by the trust structure, which is (and will remain) one of our primary goals. In our experience, and based on other major deeds in the market, it’s best practice to include provision for the automatic removal of the trustee for this very reason.
This is a problem of competing interests. Our concern is to ensure the asset protection given by the trust deed works in your clients’ favour, whereas the banks’ only concern is the recovery of loan funds. The clause is intentionally included in our deed because we believe it’s in our clients’ best interests from an asset protection point of view.
All this said, we appreciate that sometimes the banks’ requests for the removal of this clause must be complied with in order to proceed with finance applications. If you want to secure finance from the institution requesting the change, please get in touch and we’ll be sure to take care of your needs.