At the Interface of Trusts Law and Insolvency Law: The Quest for Alternative Forms of Risk Management

Abstract

The law of insolvency can trace its early modern beginnings to the equitable jurisdiction of the Court of Chancery. It is therefore unsurprising to note that throughout the development of the subject of insolvency numerous questions surrounding the law of trusts have percolated through for consideration by jurists and the judiciary, the Farepak case being a recent example. Perhaps the most important impact the law of trusts has on the law of insolvency relates to the effect of trusts on the make up of the insolvent estate, i.e. defining what is property for the purpose of collection and subsequent distribution, and perhaps more importantly for lenders, defining what falls outside the insolvent estate. In this article it will be argued that the importance of the trust instrument again needs to be addressed in the context of this property identification because of the Enterprise Act 2002 provisions relating to administration and the abolition of receivership. Alternative methods must be examined which will facilitate, or continue lending practice in light of the diminution in charge security interests and, inter alia, the risk protection such security affords. It will be argued that there will be an increase in the use of trusts because of the reduction in charges as security following the Enterprise Act 2002. Other non-insolvency avenues will and must be explored to protect lender interests.

Keywords: equity and trusts, insolvency, security, creditor protection, resulting trusts

JEL Classification: K00