Legal Tip 46: Is property held by a trustee safe if trustee becomes bankrupt?

Is property held by a person as trustee safe if that person were to become bankrupt?


Generally yes that property is safe.


Property that is held by a person as trustee for someone else is not property that is divisible amongst creditors if that person becomes bankrupt.


116(2)(a) of the Bankruptcy Act http://www.austlii.edu.au/au/legis/cth/consol_act/ba1966142/s116.html


e.g. Tom is trustee for money held for his deceased brother’s children until they become 18. Tom becomes bankrupt. The children’s money is not able to be taken for Tom’s creditors.



However there the bankrupt has transferred assets to the trust then these assets will be subject to the clawback provisions.


Also there may be evidentiary issues such as proving that certain assets are held in the capacity as trustee. For example if Tom doesn’t have a separate account for the children’s money and/or uses the trust account as if it was his own money then the money will be taken and it will be up to him to fight to get it back.

A bankrupt can not be a trustee either.

 

Terry - Is it true that a bankrupt cant initiate court proceedings except with special permission ?

 

A bankrupt is legally disabled so any court proceedings would have to be done by their trustee in bankruptcy. And any money recovered would go to creditors.