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Model Directions for an Insolvent Trust

Harneys, on behalf of the INSOL Technical Research Committee (the Technical Committee), and approved by the INSOL Board of Directors, has worked since 2015 to develop model case management directions (“CMDs”) to be used by Courts for insolvent trusts.

It is hoped that the model directions will be approved around the world in a similar manner to the Judicial Insolvency Network (“JIN”) Guidelines as a means of standardizing the Courts’ approach to insolvent trusts. The CMDs have been provided to academics and professionals in various jurisdictions for comment and revision prior to approval. In most jurisdictions, a trust is not a separate legal personality so cannot itself become insolvent. The use of this term is accepted as being a shorthand reference to circumstances where a trustee has insufficient trust assets to meet the liabilities he has assumed in his capacity as a trustee.

The draft CMDs are proposed for use where such a situation arises. In these circumstances it is necessary for the trustee to ‘wind up’ the trust so as to realise and apply any assets towards payment of liabilities owed to third party creditors. Parties may be dealing with the trustee either in its own right (in which case they will have claims against the trustee in that personal capacity) or as trustee of the trust. In the latter case, creditors would still take action against the trustee, but will need to rely on the principle of subrogation in order to enforce against the trust assets.

The principle of subrogation applies whereby one person, in this case the creditor, is put in the place of another, here the trustee, so that it can enforce the latter's rights. In the present context, the right which the creditor will wish to rely on to satisfy its debt is the trustee’s right of indemnity from trust assets. This is of particular relevance in the context of trading trusts, as the corporate trustee of a trading trust may have very few or no assets of their own that are not held on trust. Harneys and the INSOL Technical Research Committee welcome views.

Click here to view the Model CMDs.

Model Directions for an Insolvent Trust

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