There are over 800,000 trusts in Australia earning over $330 billion dollars each year. Why are there so many? Because accountants will tell you to set one up if you want your wealth or business in a protected and tax effective environment.
But they sometimes miss telling you about the great trust paradox – treat the trust like it is yours and others can get it, treat it like it isn’t yours and you will better be able to keep it.
This is the lesson that Steven Rowley faced and it cost him and his family upwards of $2,000,000. In fact he faced it twice, once in the Supreme Court of Victoria in 2013 and then again in the Court of Appeal in 2015. You can follow his trials and tribulations in Australasian Annuities Pty Ltd (in liq) v Rowley Super Fund Pty Ltd. Steven failed the most basic of trust management principles, he treated the trust like it was his.
Treat the Trust Like it is Yours? = Failure!
When attacking trusts, Receivers and Liquidators not only look to what the trust holds but also how it was run. The more that you treat the trust like it is yours, the greater the risk that the wealth will be taken from the family it was intended to support in years to come. The lawyers will tell you it is all about the fiduciary duties. The truth is that it is about common sense and careful attention to the paperwork.
Steven Rowley was the sole director of a private family company (Australasian Annuities Pty Ltd – AAPL), he held one of the two issued shares, the other share was owned by his wife, Barbara. The company was the trustee of the Rowley Family Trust, a discretionary trust in which Steven and Barbara Rowley’s family were beneficiaries. If your business structure looks similar to this you really need to read on and take note of what Steven did wrong that cost his family so much.
As sole director of the company Steven caused it to borrow monies in its trustee capacity to make payments to him and his wife so that they could contribute these monies into their personal superannuation accounts. This wasn’t the problem, it was how he went about it.
Unfortunately the business of AAPL fell on bad times and both the company and the trust were placed into the hands of receivers and managers. These receivers and managers looked inside the trust business records and found nothing but money transfers. This is what they decided to attack. They brought a claim against Steven and Barbara as well as their super fund to recover the amounts paid. They claimed that Steven had breached his fiduciary duties when he borrowed in the name of the trust and they claimed back the monies used to fund his and Barbara’s super contributions.
The Victorian Court of Appeal ordered the payment by the super fund to the liquidator of AAPL of the amount of $1,674,744.99 together with interest calculated at 6% per annum…ouch!
Documenting Your Fiduciary Duty is the Safeguard
What went wrong? It simply appears that Steven Rowley did not respect the role of the trust and the trustee.
Had Steven Rowley documented that he followed a fiduciary duty process we probably would never have heard about him and his family and his loss of millions. The fiduciary duty is the most fundamental of duties of every family trust trustee. It is a duty of loyalty and care to the beneficiaries of the trust and has been around for 900 plus years. When you and your company take on the role of trustee of your family trust you are promising to adhere to a duty of loyalty and care to the beneficiaries. Conceptually it should be easy, as trustee you are being asked to be able to demonstrate your loyalty and care to your family.
This is where Steven Rowley failed, the Supreme Court of Victoria agreed with the Receivers and Managers that he put himself first and did not balance his own interest to that of others to whom he had a duty.
The Top 6 Trust Duty Failures
Below are the top 6 things that Steven Rowley did wrong which exposed the Rowley Family Trust to Receivers and Managers and eventually to a claw-back of monies that were thought to be safe.
- If your trust has a company as its trustee, know that a director must act in good faith and in the interests of the company, they must not exercise powers for improper purposes and must avoid conflicts of interest. When paying the borrowed monies to himself and his wife Barbara, nowhere did Steven consider that he and she were taking an unfair personal advantage of the wealth under the control of the company.
- The fiduciary duty owed by a director to a company is somewhat expanded when the company is a trustee company. If may feel like it is your company, and your trust indeed like Steven you may be the sole director, but if the company acts as trustee it has a much greater responsibility to care for the assets for all within the family.
- The issue is not whether what Steven did was wrong, that is not the right question to ask. The issue was whether what he did was right for the family trust. This required Steven, when directing monies out of the family trust in favour of himself and Barbara “to consider the legitimate interest of the beneficiaries”, which the Supreme Court of Victoria concluded that he did not.
- The best interests of the company as a corporate trustee are to act properly in accordance with the trust deed in managing the business of the trust and in dealing with the assets and liabilities of the trust. Did Steven Rowley read the family trust deed and know what it said, did he use the terms of the trust deed to guide future trustee decisions by him as the sole director of the trustee-company? Apparently not. The Trial Judge was not satisfied that the powers under the trust deed were so wide that AAPL could make any payment it liked.
- Be independent, treat all dealings between you and the trust on an arm’s length basis, or at least have good reasons why it might not be. Steven Rowley arranged for AAPL to borrow $2.5 million on commercial interest rates and fees, and on terms that the principal was repayable, he then lent most of the money to himself in the form of undocumented, unsecured and interest-free loans.
- Get it right the first time. Whilst shareholders can excuse and ratify a breach by a company director, if creditors of the company are to be effected by the director’s decisions, there is no longer any power to excuse or ratify a breach.
As trite as it may seem to some, it is the way that Steven Rowley managed the company that was trustee of the family trust that enabled the receiver and manager of the company to claw back the monies that passed through his hands. Had Steven taken a little more care in his role as a director of a trustee company it is probable that no claw back of monies could have succeeded.
What could Steven Rowley have done?
When making director-trustee decisions, point out why the action is in the company’s best interest. Had Steven documented that an interest free loan will secure the future retention of the director for the future business of the trust, this may have provided the balance needed to support an unbalanced decision.
When making trust distributions to and among beneficiaries, actually consider everybody named or described in the trust. And put some words down as to why one person or another was favoured with a distribution.
Always check the trust deed to make sure that an action is not prohibited and is in fact authorised. Some trust deeds can be quite unforgiving. And so too will a court be unforgiving if a trustee action is not empowered by a trust deed.
How do you run your trust? Would a receiver and manager find flaws in the way you deal with conflicts of interest in running your trust. The true lesson that Steven Rowley has taught us is that the more critical and serious the role of trustee is embraced, the greater the protection. Anything less simply means a lower level of protection.
