Tara (00:50):
Welcome back to the Art of Estate Planning Podcast. I'm your host, Tara Lucke. In this episode, I want to talk to you about the full federal court decision of Philippini and Keystone Asset Management Limited.
(01:06):
The decision citation will be in the show notes. Why are we talking about this random case? It's a freezing order sort of bankruptcy era case. Well, in this decision, the three judges in the full federal court have basically decided to reheat the old Rich Star decision, which you might be aware sent shock waves through the trust community back in 2006. So I want to talk about that because yeah, has Rich Star risen from the dead? What does this mean for trust that we are setting up, family trust, testamentary trust? So I'll tell you a little story. If you are like, "What Rich Star? What are you talking about?" It probably will depend on how long you've been practising for. So obviously that was a 2006 decision and I had just been... When did I start? I started as a uni student in 2007 working in a law firm and a graduate lawyer in 2008.
(02:18):
So it was very omnipresent in the areas that I was practising in, particularly our structuring division where we focused on asset protection and trusts and business strategy. So Rich Star, if you don't know, you will know this if you are practising back then because it probably had a legacy lasting for about 10 years where everyone was really terrified that the asset protection afforded by trusts for bankruptcy and insolvency would go the way that family law did. So Rich Star was actually 2006, so two years before Kennon and Spry, but I think we had this compounding effect of Rich Star and then Kennon and Spry, where collectively both of those decisions, whilst obviously dealing with distinct areas of law, really focused on the protection afforded by trusts and eroded everyone's confidence in the ability for trust to safeguard assets. So let's have a look at what RichStar was.
(03:24):
It's actually cited as ASIC v. Carey and Cary number six in most of the judgments, but it was colloquially nicknamed Rich Star as sort of the first corporate trustee party in the decision. But you'll see it cited in Filipini, which we'll discuss as ASIC v. Kerry. So this arose out of the failed West Point property group where ASIC was pursuing the directors of that group for a lot of corporate mismanagement, breach of directed duties, predatory and unlicensed financial product distribution. And what they were seeking to do is apply to the court for an order under section 1323 of the Corporations Act or under Section 23 of the Federal Court of Australia Act to have a receiver appointed to the property of the entities that the directors controlled. So they all had assets in trusts and companies and the ASIC was trying to get the trust and company assets frozen and under the control of the receivers so that there were funds available to satisfy their orders.
(04:49):
So in RichStar, they focused very heavily on obviously the section 1323, but also section nine in the Corporations Act about the meaning of property and trying to have a look at can the property of the directors or the individuals involved in the proceedings extend to assets they controlled through their trust. So section nine of property in the Corporations Act means any legal or equitable estate or interest, whether present or future and whether vested or contingent in real or personal property of any description and includes a thing in action. So Richstar was just a single court judge, Justice French. Now, if you know your justices, I have to admit I don't really, not being a litigator, I can't recite the various tenancies of the High Court, but you might know that Justice French was actually the chief justice of the High Court of Australia. So despite this being a decision of a single court justice, the fact that Justice French went on to become a judge on the High Court and ultimately the Chief Justice really did get people nervous because they're concerned about the tone from the top and is this indicative of the position that the court will keep taking?
(06:35):
So in the decision, Chief Justice French particularly focused on the control. So I think it's helpful to read out paragraph 36 from the judgement . Justice French says, "The difficulty with applying the notion of contingent interest to beneficiaries of a discretionary trust lies partly in the uncertain scope of the distribution, be it income or capital, which may be made in favour of any given beneficiary. I am inclined to think that a beneficiary in such a case at arm's length from the trustee does not have a contingent interest, but rather an expectancy or a mere possibility of a distribution." So here he's saying, "If you're just a beneficiary, but you are at arm's length from the trustee, then you just have an expectancy. You do not even have a contingent interest." But in some discretionary trusts, and they're in this example among those of which Mr. Beck, which was one of the directors, is a beneficiary, charities as a class are included in the class of beneficiaries, and it could be hardly said that every charity in Australia has therefore acquired a contingent interest in that trust.
(07:49):
But on the other hand, where a discretionary trust is controlled by a trustee who is in truth the alter ego of a beneficiary, then at the very least, a contingent interest may be identified because to use the words of Justice North, it is as good as certain that the beneficiary will receive the benefits of distributions, either of income or capital or both. As discussed earlier, the beneficiary who effectively controls the trustee's power of selection because he is the trustee or one of them and/or has that power to appoint a new trustee has something approaching a general power and the ownership of the trust property. So to summarise that, if you are just a beneficiary with no control through the trustee or appointor, then the standard trust theories apply from Garts side where all you have is a mere expectation or right to be considered. It is not enough to be property of the trust.
(09:00):
You don't have a property interest in the trust. But if you are a controller and a beneficiary, then you could have a contingent interest in the property of the trust. In this decision, it was basically enough to order that a receiver be appointed over the property of the trust controlled by the directors of the failed West Point Group. So he looked at some of the examples pretty much in all of them. We'll look at Mr. Beck is a beneficiary of the Agribusiness Annuity Trust of which Eagle Bluff nominees PTY LTD is the trustee. He is the director and secretary of the trustee company. He is the original appointor under the trust and his wife is the current appointor. There's a wide power of discretion for the beneficiaries and he is a beneficiary. So he appears through his trustee company to have effective control of the assets of the trust.
(10:05):
At the very least, he has a contingent interest in the sense used earlier, and his interest would appear to amount to effective ownership of the trust property. And the property of that trust is, in my opinion, amenable to control by the receivers. So this was a new extension of the powers under the Corporations Act to discretionary trusts. Historically, particularly relying on Garthside, it was basically like it's a separate legal entity. You are just a mere beneficiary. The assets of the trust are protected. Now, I do want to emphasise in Rich Star, it was just an interlocutory application designed to prevent the assets in the trust being restructured or wasted or taken away from being available to satisfy. So all they did was basically appoint receivers and stop the parties dealing with it. It didn't actually make the assets of the trust available to satisfy any claims or any judgments so that we weren't at that stage in the proceedings.
(11:21):
And I have done a little bit of research. I'm very happy to be told otherwise. Actually, I should put that whole disclaimer out there for any insolvency practitioners. I am not an insolvency practitioner, so if I do jumble up and say the wrong thing about the particular powers or under the corporations or bankruptcy act and all of that, please feel free to come in and correct me. I would love to hear. So I'm not holding myself out as being that I know everything on that front. But from what I can tell from research, ultimately, well, I think the assets were effectively frozen under receivership for about two years, but they ultimately were not used to satisfy any judgmental claim and they received control back of their entities and their assets. But yeah, obviously it's very serious losing control and having your trust assets put into receivership.
(12:25):
So yeah, Rich Stark really sent shockwaves through the industry, and we did a lot of seminars and there was a lot of articles and judgements. And everyone, especially I think in conjunction with Kennon and Spry two years later, really adapted their practise to stop making people sole controllers of trust. We would look at our high risk person in a relationship and our low risk person in a relationship and really try not to put our high risk person in charge and as a controller of things or we would have joint controllers. That practise, I think 20 years later, has obviously calmed down. I would say there were some judgements following Rich Star. There's a Queensland one called Fordice and quite a few others where Rich Star was refused to be followed. So they did not keep following Rich Star as good law, and it was also criticised quite heavily in the academic sense.
(13:33):
So up until this year, I would be like, look, Rich Star's not really good law. It's an outlier decision. Those powers have not been relied upon to the same degree in the last 20 years, so we can all just chill a little when it comes to Rich Star. But now Filipini is reheating the Rich Star leftovers and serving it up as the foundation for their freezing order as a result of the failed Keystone asset management mess. Okay, so if you don't know, ASIC is suing the former Keystone asset management directors over the loss of a lot of superannuation money. So it's all pretty sad. From what I understand is Keystone had put all their investors' assets, the superannuation funds, into a shield master fund that was owned and managed by Keystone. And then through that, the funds in Shield was basically property development and it was all done very dodgily.
(14:45):
And I think there's fraud allegations. So ASIC is suing the Keystone directors. Filipini and Keystone Asset Management, as I understand it, is actually a civil action by the liquidators or receivers of Keystone against Robert Filipini. So he was a builder who had been engaged by the fund, I think, to build some of the property developments, except he did not have a building licence. There was barely any contracts in place. And this I think was done as part of a fraud, and then fraud was alleged in terms of how that was all conducted. So this is separate to the ASIC proceedings. So basically Keystone is asking for a freezing order to be placed over three of the discretionary trusts connected with Robert Filipini. So there was pretty much two commercial properties on Chapel Street and Lygon Street in Victoria, and then four high-end cars. So there's two trusts where his wife was the trustee, Robert was the appointor, and then a third trust where there was a corporate trustee.
(16:13):
Robert was the shareholder of that corporate trustee. His accountant was the director and Robert was the appointor. So they're trying to basically secure those assets in case there is personal claim against him. So again, we're just talking about a freezing order here, not a judgement where these assets are available to satisfy the judgement . So we haven't gone that far down the path. It's just an interim thing. So nearly everything I know about freezing orders, which is not much, I've learned from reading these decisions, so bear with me. I'll do my best to explain it. But as I understand it, they're usually made quite quickly. The purpose of them is to prevent assets being dealt with in a way that erodes them from being available to satisfy a judgement . So it could be to prevent restructuring or to prevent assets from being taken out of the jurisdiction.
(17:14):
So in this case, we're not actually dealing with the Corporations Act like in Rich Star. We're dealing with Section 23 of the Federal Court Act and their jurisdiction to make a freezing order. So it's mostly construction of rule 7. 355A of the Federal Court Rules 2011 Commonwealth, because it basically says that you can make the freezing order if there's a danger that a judgement or prospective judge will be wholly or partially unsatisfied because the third party holds or is using or has exercised a power of disposition over assets of the judgement debtor or the third party is in possession of or in a position of control or influence concerning assets of the judgement debtor. So they're trying to look at, well, does the roles that Robert held in the trust fall within the ambient of 5A of rule 7.35? So a little bit of facts.
(18:22):
I've just explained that he's the appointer of everything so he can hire and fire those trustees. He's actually not the trustee. He's a beneficiary of everything. And at the trial, so this is an appeal of a trial decision. So at trial, it was discussed that he had access to the bank accounts. So even though he wasn't the trustee, he had made a series of transfers of large sums of money from the trust bank accounts without the knowledge of the trustee who was his wife. He also had signed the Baz's even though he was not the trustee himself or the director of the corporate trustee of one of the trusts. And he had done all of this without consulting his wife who was the trustee. There also seemed to be evidence of intermingling of assets with his personal assets. And in terms of how instructions were given to the accountant, it was from a joint bank account.
(19:25):
So the accountant never really knew if the instructions were coming from Mrs. Filipini or a Mr. Filipini. So all of this sort of built a case that Mr. Filipini Robert is really the one in control. So the primary judge did order the freezing order, and then this is the appeal about that. So the primary judge relied very heavily on Rich Star and also a tax case facilides to support the control of the trust meant it was able to order the freezing order. I do just want to mention this Vasilides decision. So I'll put the citation for that in the notes as well. So this was actually a tax decision, so Deputy Commissioner of Taxation versus Mr. Vasilides. So he owed $29 million to the ATO. He again was involved in some property development and the family had decided to move offshore to Europe, and there was evidence that he was relocating most of the assets from Australia to various tax havens.
(20:39):
The structure there that they were seeking to freeze the assets of, so basically the deputy commissioner was worried that the assets of this trust would be relocated offshore, so sought a freezing order against it, was a family trust with a corporate trustee and Mr. Vesilides was the sole shareholder and director and appointor and a beneficiary. So he was just in all the control roles. Now this again is just a single judge of the federal court, but it was Justice Gordon. So she is now on the high court. So we've got two single court judge decisions which start in Vacilides, but both of those justices have gone on to be sitting high court judges. So they are given a fair bit of weight, I think, than some other decisions where it's just a single judge. So the consideration of the power is pretty light on in Vacilides.
(21:46):
There's literally two paragraphs of it and they basically just go, "Well, based on Kerry Richter, he controls everything. So the trust is his alter ego and he can be said to have a contingent interest because it is as good as certain that he will receive the benefits of the distributions of the income or the capital. It is unnecessary to finally resolve that question, but it is sufficient for present purposes to find that I am satisfied the commissioner has a good arguable case that Mr. Facilides does have a contingent interest of the kind identified by Justice French in Richtar." And that's kind of it. So it's pretty light on. And that is like a 2014 decision. I didn't even know about it, have never heard of it until looking at Filipini. So people really didn't give it a lot of weight at the time that it followed the Rich Star decision.
(22:48):
Jumping back to Filipini, I want to touch on some of the key paragraphs from that judgement . So I think 43 is quite helpful. They say, "A mere expectancy is not a chose in action. An expectancy is not an item of property in and of itself that can be owned by someone. Expectancies do not exist at large such that they can directly be the subject of a freezing order." So one might ask how an order would conceivably be framed to freeze an expectancy, rather an expectancy exists in relation to something else. For example, beneficiaries of discretionary trusts are in the ordinary cause said not to have any interest in assets of the trust, but to have a mere expectancy that they may in time receive a distribution of income or capital from the trust. Another difficulty is that even if the expectancy could be the subject of the freezing order, preventing a person from dealing with an expectancy would not ensure that the expectancy retains value.
(23:51):
For example, in the discretionary trust context, the value of the expectancy is responsive to the assets and income of the trust that may be distributed, but preventing someone from dealing with the expectancy itself would not prevent dealings that denude the expectancy of any value. It is apparent that rule 7.355 is not limited to the making of a freezing order that fixes on and freezes the expectancy that is the asset of the judgement debtor or prospective judgement debtor. Rather, it is where a third party has some kind of power of disposition over the expectancy of the judgement debtor that the power to make a freezing order against that third party arises. So then they then go on to say at 48, "An expectancy is not something that can itself be readily specified in freezing orders, but it is necessary for the freezing order to be framed and to operate so that the expectancy is preserved.
(24:46):
This will, in some cases, require freezing orders to be framed so that they are directed to the third party. They prevent the third party from dealing with the items of property and/or rights that render that expectancy something worth preserving. So in the case of a discretionary trust in respect of which the judgement debtor is merely a beneficiary, it is doubtful that the circumstances would warrant a freezing order being made. But where the beneficiary also controls the trust with its income and assets, that expectancy may well be worth preserving. That is so whether or not one goes further and characterises a beneficiary in such a position as having something approaching ownership of property, being the formulation of Justice French in Carey, which was adopted and applied by Justice Gordon in facilities. So I think they are not going as far to say here that the interest of the beneficiary because they are a controller is property or contingent property like Justice French did in Richtar, but they are saying nonetheless, the existence of the expectancy because of the control is worth freezing.
(26:03):
So I'll just repeat what they said again at the end of 48. In the case of a discretionary trust in respect of which the judgement debtor is merely a beneficiary, it is doubtful that the circumstances would warrant a freezing order being made. So just being a beneficiary is not enough, but where the beneficiary also controls what the trust does with its income and assets, the expectancy may well be worth preserving. So control is so key. Now at 49, they I guess acknowledge the elephant in the room. We pause at this point to note that recognising that a freezing order may be made to prevent an expectancy being compromised does not involve trameling on orthodox trust and property law. It does not necessarily involve conflating control with ownership or treating control as somehow converting the mere expectancy of the beneficiary of a discretionary trust into a beneficial interest in assets.
(27:05):
They then say once the genesis of the terminology and structure of rule 7.355 are understood, it is apparent that Richstar and facilities do not do violence to those orthodoxies. Rather, they recognise and give effect to the broader canvas of this court's power to prevent prejudice to its processes. They also refer to a decision of Anchorage, which is predates Richstar. And they say what should be observed from Anchorage is that the court there recognised that a simple beneficiary of a discretionary trust, for want of a better term, is not in the same position as a beneficiary who also has powers of effective control over a trust, its assets, and income. Now they acknowledge that Richstar has been distinguished several times in various cases, but they basically say the reasoning in those decisions was flawed or that they were actually holding Richstar out as going further than Justice French actually said.
(28:13):
So they just put all of that to the side and basically rely on Rich Star for the freezing order in this decision. There was a second line to the appeal about the fact that there needed to be a clear enforcement pathway available. So it needed to be shown that the assets that were subject to the freezing order would actually be available to satisfy any ultimate judgement against, in this case, Mr. Filipini. And the court rejected that proposition. They basically said acknowledge that this is a interim or interlocutory decision. They are often obtained in urgent circumstances and there are limits to the extent to which such complexities can be explored in determined in the context of the application for the freezing orders. They said, as long as there is a good arguable case or a reasonably arguable standard can be met, you do not have to meet the proof on the balance of probabilities that the assets would actually be used to satisfy the judgement .
(29:23):
So they said, while the pathway by which enforcement action may ultimately occur is not well trodden on the facts of this case, it is sufficient that there are potential avenues by which those assets may ultimately be available to contribute to the satisfaction of the prospective judgement debt. So it reinforces that the clear identification of an enforcement pathway cannot be a matter that must be established by the applicant for the freezing order. They do acknowledge how serious a freezing order is, but also that they usually are needed urgently and they Hear the whole case and look at all the various pathways that might be available. So they acknowledge what a trustee and bankruptcy may be able to do in respect of the trust and Mr. Filipini's rights as appointor is a complex question with no clear answer. Okay, so where does this leave us? Firstly, this is just one judgement .
(30:27):
The last judgement of a similar vein, they only pop up every couple of years. This is not a final order allowing assets in trusts to be available to satisfy a judgement . It is just a freezing interim order while they are worried that people are going to rearrange their assets or take them overseas so that they are not outside of being available to satisfy a judgement . So it's important to remember that. It is still very serious, but it's not like a final order. We'll have to see what ultimately happens with this case. I do think though that it is probably prudent to start factoring in these types of considerations when it comes to structuring trusts, particularly trading trusts. That's the real concern here. We're looking at bankruptcy insolvency, so where there's trading and they're carrying on activities. In one sense, there's an alignment of the position more closely to what's happening in the family courts.
(31:36):
And for a lot of us, we're already considering these factors. So I would say that the decisions that are being made and what's being considered from a family court perspective pretty well aligns with what you would do from a bankruptcy perspective and making sure there's no sole controller. We might do a podcast episode shortly on what to do and how to set up the control and what factors, which roles to consider. For now, I think we're on notice. I think this is an official notice that we need to watch this. And look, they're not eroding, as I said in the judgement , eroding the core of the way that a trust operates and those principles. These decisions have all considered very specific legislative powers and rules. The one in the Corporations Act was a power granted to ASIC. This is the court's power to grant a freezing order.
(32:38):
So it's not like it's sort of ripping the rug out from the basis of how trust law works and all of those longstanding trust law principles. But at the same time, we're definitely seeing a tone from the top that these assets should be available. Now, interestingly, I don't want to just rely on this and think it'll be fine, but in both Keystone and Rich Star, these people are basically committing fraud. And Richstar was unlicensed financial products. Keystone is dealing with the general public superannuation funds. So I think it could be a case of we need to find a position that gets us the right outcome, which is to prevent these people who have a hoarding money and wealth that they've accumulated through fraudulent means away from judgement debts. So this is the right outcome, I would think, in Filipini and in RichStar. I mean, ultimately, I don't think ASIC was as successful as they wanted to be against the directors of RichStar and the assets in the trust ended up being returned to most of those directors.
(33:55):
But at the end of the day, I don't know necessarily if we're just talking about moms and dads running small businesses, how far they would be pushing these principles. So I wanted to use this episode just to get this on your radar. If you haven't heard of Rich Star, now you have. If Rich Star is bringing back PTSD and all of those memories, it is kind of like a zombie coming back from the dead to be relied upon again. So let's see what happens. I'll be watching this really closely as well, and it's a bit of a watch this space. Thanks so much for tuning in and bearing with me through some of the heavy judgement paragraphs, but I hope you found this episode interesting. Thank you so much.
