Liquidating a trustee company

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In the United States, a Trustee in Bankruptcy is a person who is appointed by the United States Trustee Program, a division of the United States Department of Justice.In limited circumstances, the creditors involved in a bankruptcy case can elect a trustee.A typical structure for a trust arrangement is to have a company act as a trustee.At the time of establishing a trust structure little time is spent by advisers understanding the impact an insolvency of the corporate trustee (“insolvent”) would have on the trust structure and the assets it holds.

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Just because potential liability may attach to an independent trustee does not necessarily mean that the concept should be discarded.

However, the impact of the insolvency and a liquidator appointment as the controlling officer managing the wind down of the insolvent can present problems for the trust itself and for any incumbent trustee of the trust due to the insolvent’s right of indemnity, which is secured by an equitable lien over the trust assets.

This equitable lien over the trust’s assets allows the liquidator to indemnify itself for any liabilities incurred by the insolvent on behalf of the trust assets.

Often trust deeds use standard clauses whereby the insolvency of the corporate trustee automatically disqualifies it from acting as trustee.

This appears to protect the trust assets from the hands of a liquidator of the insolvent corporate trustee.

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