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Lost trust deeds – a forgotten saviour?

August 20th, 2019

Lost, destroyed or missing trust deeds can sometimes lead to tears, misery and heart attacks.  But is the situation as dire as it seems if a document, crucial to organising your financial affairs, disappears?

Maybe it is the advent of trusts as a useful financial planning structure, or the rise of the self‑managed super fund (“SMSF”) (read our previous article on self-managed super funds here), but in recent times, well recent for the law, there have been a number of cases which are resurrecting a seemingly forgotten principle of law, the presumption of regularity.

The presumption of regularity is that deeds and other documents will be presumed to have been validly executed and made, unless there is some contrary evidence.  The cases below illustrate the point, and highlight that the presumption is only applied in very limited circumstances, often where there is a substantial lack of evidence.

Sutherland v Woods[1]

In Sutherland v Woods there was a question as to whether a SMSF had been validly established.  The trust deed could not be located, and because there was no deed, Woods claimed that it was not a valid SMSF.

Sutherland sought to rely upon the presumption of regularity and contended that despite the absence of the deed, the fund was valid.  The subsequent conduct of the parties, including their bank and the ATO, led to the conclusion that the SMSF must have been correctly established, even if the deed was now missing.

Importantly, the parties did all they could to locate a signed copy of the original deed, contacting Westpac, the ATO and titles office to see if any of those entities held a signed copy.  These enquiries were unsuccessful, and the parties were forced to rely upon an unsigned copy of the alleged deed.

The court ultimately agreed with Sutherland, and held that although a true signed copy of the deed was unavailable, that did not prevent the inference that the trust had been validly created.

The missing deed would have been conclusive evidence that the SMSF was established correctly.  In absence of the deed, Sutherland was instead required to prove the validity of the SMSF through other means, such as subsequent dealings.

It was apparent that through the actions of the parties, and third parties, relying upon the existence of the deed, the trust had always been intended as a superannuation fund and had been validly created as such.

The absence of the missing document did not invalidate the fund, and indeed the evidence in the circumstances led to the presumption that the establishing deed must have existed at some point.

Re Thomson[2]

In Re Thomson, the deed establishing the trust was not an issue.  Instead, there were two subsequent amending deeds, one was missing and the other unsigned.

The first deed, which was missing entirely, purported to remove two of the original trustees.  The second deed, which was unsigned, referred to the first deed and amended the trust so that if both of the remaining trustees were to pass away, the trust would vest in the estate of whomever survived the longest.

The dispute arose around the validity of the two amending deeds. If they were not valid, then the two trustees who were allegedly removed would be entitled to the property of the trust.  If both were valid, then the trust would vest in the estate of Thomson.

Such matters around the validity of documents when it comes to the administration of an estate are not uncommon, and is the context in which the presumption is commonly applied.

In determining the validity of the irregular deeds, the court again looked at similar factors as in Sutherland.

In particular, the court relied on the fact that since the removal of the trustees, only the two remaining trustees had been signing off on the trust’s financial reports, indicating that the deed existed, and the parties had been acting as if it were the true state of affairs.

The court found that the two irregular deeds could be presumed to be regular because the evidence indicated that was probably the correct and true situation.  The executor was therefore entitled to include the trust property in the deceased’s estate.

So what is the presumption?

So now that we have reviewed a couple of examples of the presumption, when should you be considering relying upon it?

The presumption will only apply in limited circumstances, it should not be considered a cure-all for any trust problems you have.

The courts have held that before applying the presumption:

  1. a considerable amount of time must have passed since the event happened;
  2. there is no other way to prove the existence or validity of the missing deed;
  3. there is some other extrinsic evidence indicating the deed, or missing instrument was valid and people have since acted as if it were valid; and
  4. the presumption must only be applied to a procedural or formal detail.

Point 3 above is clearly identified in the two cases.  The evidence from the bank, the ATO, and financial reports all indicated the legitimacy of the actions being undertaken, even where the deed was not located.

The presumption should not be thought of as applying in all situations, indeed, its limited application throughout the last 50 years suggests it should only be thought of as a last resort.

In many circumstances, simply claiming the deed is lost, without exhausting all possibilities will not be enough.

Before relying on the presumption, consideration should be given to some of the following alternatives:

  1. preparing a deed of rectification;
  2. relying on the trustee powers in the Trusts Act;
  3. for a SMSF, where practicable, rolling the assets over to another SMSF which does not have any issues with documentation; and
  4. last but certainly not least, no effort should be spared in locating the original deed.

Of course, these options are not always available, some may rely on the original trustees still being available, or simply be inapplicable in the circumstances.

Lost or irregular trust documents often have circumstances unique to each case.  For that reason, when irregularities are detected, efforts should immediately be made to correct them.

In most cases involving the presumption, it is not raised until there is a crisis, for example the breakdown of a marriage or the administration of a deceased estate.  By taking proactive steps, most of these situations, and possibly expensive litigation, can be avoided.

The experienced team at Miller Harris can help you, or your clients in dealing with lost or irregular deeds.  Many situations will require a bespoke solution, and our experience across many areas of the law enable us to come up with the right solution to your problem.

Should you have any questions or enquiries, please do not hesitate to contact Ashley Jan on 07 4036 9700, or ashleyjan@millerharris.com.au.

[1] Sutherland v Woods [2011] NSWSC 13 ( http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWSC/2011/13.html ).

[2] Re Thomson [2015] VSC 370. ( http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/vic/VSC/2015/370.html )

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Self managed super funds – not just another trust

December 4th, 2018

Self managed superannuation funds (“SMSF”) have become quite popular investment vehicles in recent years.  It is, however, important to remember that they are not a “set and forget” investment, nor are they like other investments or even other trusts such as family discretionary trusts. The superannuation legislation imposes stringent restrictions on what a SMSF can and cannot do, and also requires a much higher degree of record keeping, auditing and reporting than other forms of trusts.  It is important that trustees of SMSFs keep on top of these obligations and seek professional support to ensure compliance with them.

A recent example of SMSFs trustees not paying any regard to his obligations, essentially treating the SMSFs as his own (or at least as being a financial resource for his family), and coming spectacularly undone as a result is the case of Hart v Commissioner of Taxation.  That case involved a review of a decision by the Commissioner to disqualify Mr Hart from acting as a trustee, investment manager, custodian or officer of a trustee of a superannuation entity. The Commissioner was alerted to the issues by the fund’s auditor issuing a contravention report to the Commission in relation to one aspect of the SMSFs conduct.  The list of the contraventions of the superannuation legislation which were alleged by the Commissioner, and upheld by the Administrative Appeals Tribunal, were extensive and included:

  • failure to lodge annual tax returns for four years;
  • mixing super assets with personal assets;
  • transferring a property from related parties in circumstances where it was not permitted;
  • transferring the property at less than market value;
  • failing to register the property in the name of the trustee;
  • transferring the property subject to an existing mortgage;
  • making several cash payments to super fund members;
  • granting a rent free lease over the property to a related entity;
  • a dodgy investment in an overseas company, related to the tax payer;
  • providing money to allow a related entity to build a shed on the property;
  • the fund ceasing to be a SMSF because it at one stage had five members, when only four are permitted;
  • failing to ensure that the SMSF had the sole purpose of providing retirement benefits to members.

The tribunal found that the breaches were established, and the Commissioner’s decision to disqualify Mr Hart was correct.  We shudder to think what the tax implications of all this might have been, but it no doubt involved reassessments of tax payable by the fund and by the beneficiaries of it, with significant additional tax, and probably penalties payable.

The lesson to heed from this is that if you have a SMSF, do not treat it like your own money, or even like any other trust, ensure that your accountants are on top of the reporting requirements, and seek advice before you enter into any significant transactions, even if (or perhaps especially if) they are only “in house” transactions with related parties.

For more information, speak with our SMSF legal expert Nigel Hales.

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Reforms to combat illegal phoenix activity

August 30th, 2018

Illegal phoenix activity is a means by which unscrupulous company directors seek to avoid payment of a company’s creditors.  It typically involves the transfer of a business (or assets) from one company shell to another, without properly recognising the value of the assets transferred.  It leaves company creditors, often including employees, with claims which cannot be satisfied from company assets.

In the 2018/2019 budget, the Commonwealth Government announced a package of reforms to the corporations and tax law to combat illegal phoenix activity.  The government has now released an exposure draft of proposed legislation.  The proposed reforms include:

1.  introducing new phoenix offences which target both those who conduct and advisors who facilitate the illegal phoenix transactions including:

1.1.  making it an offence for company directors to engage in creditor defeating transfers of company assets;

1.2.  making pre-insolvency advisors and other facilitators of illegal phoenix activities liable to both civil and criminal penalties; and

1.3.  extending and enhancing the existing liquidator “callback” powers;

2.  preventing directors from resigning in some situations;

3.  extending Director Penalty Notice provisions to include GST and related liabilities; and

4.  restricting the voting rights of related creditors at meetings considering the appointment or removal of an external administrator.

An exposure draft of the proposed legislation has been released for public consultation.  The final text of the reforms is yet to be revealed.  The draft legislation can be accessed here.

For more information, please contact partner Tim McGrath.

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Buying a Franchise – 5 Top Tips

March 20th, 2018

Entering into a franchise arrangement and running your own business can be a very exciting time.  You receive the benefits of the established brand, and usually a well-documented operations manual to assist you to run the franchised business.  However, before you take that big step, consider my 5 Top Tips before entering into a franchise.

1.  Read the disclosure statement

Yes, this document has been provided for a very good reason, so you should read it.  Franchisors are required by law to give prospective franchisees a disclosure statement and the law prescribes what must be included in the statement.  Whilst the statement provides numerous pieces of useful information, I suggest you pay particular attention to the number of franchises that have been terminated in the last few years, whether there is any litigation that the franchisor is involved in, and carefully peruse the table provided by the franchisor outlining all estimated franchise costs.  The disclosure statement provides really useful and important information about the franchise – be sure to read it!

2.  Contact other franchisees

The disclosure statement also contains details of other franchisees operating the franchise in other territories throughout Australia.  Ring at least five other franchisees including the ones in the territories closest to you.  Ask them how their franchise is going, how much support they receive operationally, marketing-wise and in relation to training from the franchisor.  Ask them if they would enter into the franchise if they had their time again.  In my experience, this is often where you will receive the most honest and practical information in relation to the franchise you propose to purchase.

3.  Do a business plan and budget

A business plan is integral to the success of any business – especially a franchised business.  As part of the plan, consider your operating budget – this is often where other franchisees can assist, identifying costs of the franchised business that were not necessarily clear from the outset.  For example, how much did it cost to fit out the premises with the franchisors corporate branding, and what do they spend on marketing and training annually.

4.  Get the right advice

A lawyer and an accountant play an important role in advising a prospective franchisee before entering into a franchise agreement.  As professional advisors who have often read many franchise agreements, they are qualified to know when a clause is unusual or uncertain.  When advising my clients in relation to a franchise I provide a comprehensive review of the franchise agreement and draw to the attention of the franchisee any critical clauses and relevant dates.  Whilst a majority of franchisors are reluctant to agree to any changes to their franchise agreement, I always highlight changes that I would recommend be made to the agreement to benefit the franchise and encourage the franchisee to negotiate the proposed changes directly with the franchisor to save costs in the first instance.  I have found that franchisors of newer franchises are often more agreeable to discussing changes to a franchise agreement than those that are well-established.

Further, it is at this time, I would recommend the franchisee seek clarification from the franchisor in relation to any clauses that are uncertain or lacking in detail.  It is always best that a franchisee finds out this information before signing on the dotted line.

5.  Do not rush in

Entry into a new franchise or the purchase of an existing franchise is a big and often costly exercise.  Therefore, it is important that you do not rush into this decision.  It is vital that you complete your due diligence investigations in relation to the franchise and the business first, draft your business plan and budget, obtain independent legal and financial advice and spend a good amount of time reading the proposed agreement before you proceed.

For more information about franchise agreements, please contact Partner, Melissa Nielsen.

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You’ve been served!

February 23rd, 2018

A guide for professionals on what to do if you’ve been served with a family law subpoena

We often receive calls from accountants, financial advisors, counsellors, business owners and other professionals asking us what they should do after being served with a subpoena to produce documents to the court or to appear as a witness in court.

We have put together a guide to help our clients and referrers be better prepared the next time that they are served with a subpoena.

What is a subpoena?

A subpoena is issued by a court at the request of a party to Family Court proceedings.  A subpoena requires a person to either produce documents to the court or attend court to give evidence.  Sometimes, a subpoena will require a person to do both.  The schedule to the subpoena will describe the documents that must be produced.

A subpoena must be complied with unless:

  1. it is served incorrectly;
  2. you are not provided with ‘conduct money’;
  3. the person who applied for the subpoena has written to you and advised that you no longer need to comply with the subpoena; or
  4. you complete an objection to the subpoena.

If you do not comply with a subpoena

The consequences of not complying with a subpoena or objecting to a subpoena is that you may be found in contempt of court and you may be ordered to pay costs of your non‑compliance, or a warrant may be issued for your arrest.

The court takes non‑compliance seriously which is why you should obtain legal advice from a family lawyer if you intend not to comply with a subpoena or do not understand what you are required to do to comply with the document.

Service of the subpoena

The subpoena must be served on you at least 10 days prior to the time and date stated in the subpoena for the production of the documents.  If you are served with a subpoena less than 10 days prior to the time and date for production, the party serving you may request that you consent to a reduction in the time for compliance.  You should not agree to reduce the time for compliance unless you are certain that you will be able to produce the documents to the court on or before the date stated in the subpoena.

Conduct money

The party who has requested the subpoena must provide you with at least $25.00 to meet your costs of complying with the subpoena.  If you have not been provided with conduct monies, then you do not need to comply with the subpoena.

If the money that has been provided to you is insufficient to meet your costs of complying with the subpoena, then you must still comply with the subpoena and produce the requested documents or attend court to give evidence.  However, you can write to the issuing party directly giving them notice that you will incur substantial loss or expense in complying with the subpoena and estimating that loss or expense.  If the party does not supply you with sufficient conduct money to cover your loss or expense you may apply to the court (prior to the court date) for an order that the party pay to you an amount in addition to the conduct money supplied to cover your loss or expense.  You will then need to attend court at the next court date for the hearing of your application.

Objecting to a subpoena

You cannot just object to the subpoena if you do not want to comply with it.

Typical reasons for objecting to a subpoena include:

  1. it is an abuse of process. This means you cannot issue a subpoena in the hope of finding information.  This is commonly referred to in family law as a ‘fishing expedition’;
  2. the documents are privileged, e.g. generally speaking a solicitor’s file is privileged; or
  3. the terms of the subpoena are too broad or oppressive.

You must communicate your objection in writing and on the required form.

We strongly recommend that you obtain legal advice prior to objecting to a subpoena.  Our team of family lawyers are able to review the subpoena and determine whether an objection can be made on any of the above grounds.

Producing the documents

To comply with the subpoena you must produce to the court (and not to the issuing party) the documents specified in the subpoena, with a copy of the subpoena.

Documents can be produced by attending at the court registry in person on or before the date and time for production that is stipulated in the subpoena.  Otherwise you may post, or otherwise deliver the documents not less than two days before the date and time stipulated for production in the subpoena.

If you are producing original documents, then you will need to complete the ‘notice’ on the last page of the subpoena.  You can produce copies but you must complete an ‘affidavit for producing document under subpoena’.

Recent changes to law now permit persons served with a subpoena to produce copies of documents in any electronic format, i.e. on a USB.

If you are unable to produce the documents by the date stated by the court, then you should contact the court and explain why you are unable to comply within the required time and request an extension.

What happens to the documents after the matter has been determined?

When producing the documents, you may inform the court that the documents may be destroyed rather than returned to you.  If you do not specify that the documents can be destroyed, then the court will return the documents to you.

The subpoenaed documents can only be used by the parties for the court proceedings and cannot be disclosed to any other persons except their legal representatives without prior authority from the court.

For more information about this issue and all family law matters please contact Rochelle Ryan.

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