Insolvency: 07 February 2024
Author: Oren Polichtuk - Our People
On 13 December 2023, the Supreme Court of Victoria handed down a decision concerning a creditors statutory demands in respect to unpaid present entitlements under trust.
The plaintiff, a trustee of a family trust applied to set aside a statutory demand on a number of bases including that there was a genuine dispute under section 459H(1)(a) of the Corporations Act 2001 (Cth).
The debt demanded comprised of two unpaid present entitlement (UPEs) distributed by the plaintiff as trustee of the family trust but not yet paid. The debt was contemporaneously recorded in various books and records of both the plaintiff and the defendant across a number of financial years.
In Seoud v Fortythird Garland Pty Ltd (Seoud), a decision of the Supreme Court of Victoria of 2019, McMillan J held that a trustee can become liable as a debtor to a beneficiary in certain circumstances. Where the trustee acknowledges to a beneficiary that the trustee holds an amount of money to which that beneficiary is immediately and unconditionally entitled to payment, the trustee will become a debtor to the beneficiary in respect of that amount. The amount to which the beneficiary is entitled may be recovered by the beneficiary at common law as money had and received.
In Re Haidi, Hetyey AsJ noted that whether a resolution by a trustee to distribute trust income to a beneficiary constitutes a debt which may support a statutory demand is not a matter free from doubt, referring to the decision of Euroasian Holdings Pty Ltd v Ron Diamond Plumbing Pty Ltd (in liq) (1996) 64 FCR 147 where Heerey J set aside a statutory demand which sought the payment of trust distributions the subject of resolutions by the trustee company and that the rights of a beneficiary against a trustee in respect of trust income are enforceable in equity only and do not give rise to a debtor/creditor relationship.
Hetyey AsJ referred to the McMillan J’s decision in Seoud where she found that there is an overlay of the equitable relationship of trustee and beneficiary and the legal relationship of debtor and creditor.
In Haidi, Hetyey AsJ found that the plaintiff’s case appeared to be a general complaint that the defendant had not obtained a judgment to support the debt and did not actually suggest that the defendant lacked the status of creditor and only has equitable rights in respect of the UPEs and ultimately, it was neither necessary nor appropriate for him to determine whether the UPEs constitute debts that are ‘due and payable’ for the purpose of section 459 of the Act, and therefore capable of supporting a statutory demand.
The decision (and previous decisions referred to by Hetey AsJ) reflect that where a trustee has resolved to distribute the profits of a trust and the amount of those distributions was shown in the books and records of the trust as a loan by the beneficiary to the trust, the trustee is taken to have admitted the existence of a debt owing, on account of the distributed amounts in question, and the beneficiary is entitled to recover those amounts from the trustee by an action for money had and received. In such circumstances and argument in support of the contention there is a genuine dispute is unlikely to be made out.