Most ‘modern’ trust deeds include automatic disqualification clauses, which remove a trustee or appointor upon certain events happening to that person.
The most common disqualification events are:
- bankruptcy of an individual trustee or appointor
- insolvency of a corporate trustee or appointor
- death, total and permanent disability or mental incapacity of an individual
- the occurrence of a relationship breakdown for an individual
The rationale behind the approach is that if an individual or corporate entity is in a position of control in relation to the trust, we would prefer to see them automatically removed if an event occurs which is likely to hinder their ability to fulfil their role, or which exposes the assets of the trust to jeopardy.
Obviously if an automatic disqualification clause is included then an appropriate successor needs to be nominated.
Again, most ‘modern’ deeds cater for this in two ways:
- by allowing the current trustee or appointor to nominate their successor
- by including default succession provisions, such as appointing a disqualified trustee or appointor’s legal personal representatives as their successor
The effectiveness of these automatic disqualification clauses is the subject of some contention.
As far back as 1988, the Harmer Report recommended that legislation be introduced to prevent the effectiveness of automatic disqualification clauses in trust deeds, as ‘the operation of such a provision may lead to conflict between the liquidator and the new trustee and impair the efficient winding up of the affairs of the company, resulting in additional expense and delay’.
While it took almost 30 years, the Treasury Laws Amendment (2017 Enterprises Incentives No. 2) Act 2017 (Cth) (Treasury Act) partially implemented the Harmer Report recommendation by providing that contractual clauses which allow a party to terminate or modify a contract upon the occurrence of a specific event, can be prevented from taking effect in some circumstances.
Relevantly, the Treasury Act (which amended the Corporations Act 2001 (Cth) with effect from 1 July 2018) arguably prevents a party from enforcing the automatic removal or replacement a corporate trustee if the removal is a consequence of an insolvency event.
While this limits the effectiveness of automatic disqualification events in some circumstances, it is important to note that the Treasury Act only applies to corporate trustees (and arguably corporate appointors) and does not have any impact in relation to the automatic disqualification of individual trustees or appointors, who may be disqualified as a result of bankruptcy.
In addition, the impact of the Treasury Act has not been tested in the Courts and it is unclear exactly how the provision operates in the context of a discretionary trust deed, as opposed to an ordinary contract between two parties.
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