Recent debate in NSW highlights the potential risk to Legal Personal Representatives and their legal advisers when distributing estate assets to beneficiaries who may be bankrupt.
There is often a mistaken belief that advertising to creditors of the estate of a deceased for any claims prior to distribution is all that is needed to protect Legal Personal Representatives from future claims. However this only relates to the creditors of the actual deceased person.
What is the situation when a beneficiary is bankrupt? In Australia all of the property and rights thereto of a bankrupt vest in the Trustee in Bankruptcy. This includes the rights to any assets of a deceased estate.
Last financial year in Australia there were over 35,000 insolvencies. With various financial crisis’ occurring around the world this number is unlikely to diminish as years go on. The likelihood therefore that a beneficiary of an estate is a bankrupt is higher than ever.
Previous practice by legal advisers has been to obtain a declaration by beneficiaries that they are not undischarged bankrupts. Recently however that practice has been said to be insufficient. It has been suggested that to properly protect legal personal representatives and their advisers that a search of the Bankruptcy register should be undertaken before any distribution is made1.
It could also suggested that this should be done at the beginning of the administration as soon as the beneficiaries are known. This is because the rights of the beneficiary in the estate immediately vest in the Trustee in Bankruptcy and that decisions involving the estate administration should involve that Trustee rather than the beneficiary.
More recently however, the NSW Law Society’s Elder Law and Succession Committee have formed a view that a search of this nature is not required if there is no suspicion or knowledge about any beneficiaries insolvency. The committee recommends still that the obtaining of a declaration from beneficiaries is sufficient protection as a false declaration would open the declarant to criminal proceedings2.
I am unsure of the position in New Zealand with bankruptcy and beneficiaries. In the last 20 years I have not searched any beneficiaries on the bankruptcy register here (which is actually a relatively straight forward task) nor have I seen any such declarations of the overseas estates that I administer. Are we taking the right steps to protect the Personal Representatives?
An end to Predatory Share Offers???
In July last year, my article referred to these “offers”, essentially people making offers for shares at either well below market price or at market price with the proceeds payable over a 15 year period. These people had a right to get electronic copies of registers of shareholders from Companies. At the time the Government had implemented legislation to attempt to stop this, which was held over due to the 2010 election.
Finally the Corporations Amendment (No.1) Bill 2010 was assented to on 24 November 2010 and commenced on 13 December 2010. The Bill principally amends a person’s right to obtain a copy of a company’s register of members amongst other things, to require a person seeking a copy of the register to apply to the company and state the purpose for which they intend to use the information contained in the copy of the register. The company can refuse to provide a copy where the purpose is an improper purpose as provided in the Corporations Regulations.
After a flurry of unsolicited offers ahead of the new legislation becoming effective on 13 December 2010, one of the main perpetrators, David Tweed, is reportedly moving his operations to greener pastures in New Zealand so he can target investors in Australian companies from offshore and thereby avoid new laws designed to shut his underhanded operations down.
During the period from 19 November 2010, when the new legislation was passed, until 13 December 2010 when it became effective, Tweed targeted a number of frozen mortgage and unlisted property funds, purportedly raking in more than $1.45 million from 95 investors in just three of the frozen funds.
One of Tweed’s companies, Direct Share Purchasing, has recently launched a Federal Court case in Melbourne against Queensland’s LM Investment Management for their refusal to provide a copy of its register for its frozen mortgage fund, in October 2010 – prior to the passing of the new legislation. The case has been adjourned until 25 February 2011 and it is hoped it will set a precedent that would enable other investors who have been fleeced to join in a class action and recover some of their money.