Expensive mistakes – a cautionary tale!

Trusts are often utilised as asset holding vehicles for asset protection reasons.  As such, where assets are intended to be purchased in a trust, it is important to ensure that the trustee is reflected as the purchaser in the contract documents.

A recent case Thompson v Leigh [2006] NSWSC 540 handed down by the Supreme Court of New South Wales in Australia highlights the importance of being precise about which entity within a privately held structure is entering into a transaction and illustrates the costly consequences where mistakes are made.

In Thompson v Leigh, two property purchase contracts were mistakenly entered into by the director (Mr Thompson) personally instead of the trustee company.  While Mr Thompson had intended to purchase the properties via his trust, it was suggested to him by the property sales representative that he purchase the properties in his personal name as this would make it easier to secure finance. Without seeking advice from his solicitor and accountant, Mr Thompson obliged and entered into the purchase contracts in his own name.

After the contracts were signed, Mr Thompson then took advice from his accountant and solicitor who advised him that it was too late to substitute a different purchaser without incurring double stamp duty.  Subsequently, Mr Thompson’s accountant prepared meeting minutes to state that Mr Thompson was appointed by his trust to enter into the purchase contracts and the properties were to be held by him as nominee for the trust (these minutes were never signed). 

Thereafter, the trust was credited with all of the rent from the properties and paid all the expenses connected with them and also made all repayments on the bank loan (although the bank loan was taken out by three joint borrowers – Mr and Mrs Thompson and the trustee) and arranged for insurance on the property in the trust’s name.  Basically, all transactions were conducted as though the properties were owned by the trust.

In 2001, Mr Thompson was declared bankrupt and his trustee in bankruptcy sought to have the properties treated as his personal assets and Mr Thompson brought a proceeding seeking orders that the properties were held by him in his capacity as nominee for the trustee for the unit trust.

Although the trustee repaid the entire bank loan, the court found that the trustee and Mrs Thompson each had a one third interest in the properties on the basis of a resulting trust (between the three joint borrowers) and thus the remainder one third interest of the properties were assets of Mr Thompson personally and thus available to Mr Thompson’s creditors. 

Thompson v Leigh serves as a warning that where it is intended that an asset be purchased by a trust, prudence must be exercised to ensure that the acquisition of the asset is in fact made by the trustee of that trust.  Once the asset is acquired by the wrong entity or person, the mistake will not be fixed simply by treating cashflows and tax returns as though the asset was owned by the correct entity.

As evidenced above, it is important that clients seek advice before entering into transactions and have a sufficient understanding of any trust structures that are recommended to them by their advisers. 

This information has been prepared in good faith, is in the nature of general comment only, and neither purports, nor is intended, to be advice on any particular matter.  You should not act or rely upon any matter or information contained in or implied without taking appropriate professional advice which relates specifically to your particular circumstances.  The authors and consultants expressly disclaim all and any liability to any person (whether a reader or not) who acts or fails to act as a consequence of reliance upon the whole or any part of this information.