Trusts can arise in various ways but usually (for this discussion) are created by the Trustee entering into a trust deed which sets out the terms of the trust.
In addition to the rights and obligations of the Trustee as set out in the trust deed, there are hundreds of years of decided cases under the general law and various pieces of legislation in Queensland. These precedents have a lot to say about the rights and obligations of Trustees in their conduct of the trust.
Relevant pieces of legislation:
Trustee Liabilities for Debts – An Overview
Under Australian trust law, a Trustee bears unlimited personal liability for all debts, liabilities and expenses incurred by the trust.
This liability comes about because whilst trusts are commonly spoken about as entities which exist in their own right, this is not correct. Trusts are not legal entities with separate legal personalities.
Rather trusts are nothing more than a series of solemn undertakings between the parties to the trust and particularly the Trustee in favour of the beneficiaries. The trust can only deal with the outside world through the actions of the Trustee.
Accordingly, all debts, liabilities and expenses incurred by a Trustee while acting as Trustee are personal to that Trustee.
Personal Liability in Trusts Explained
Because of this personal liability many Trustees when dealing in large commercial transactions, e.g. when the trustee is the “responsible entity” under a large managed investment scheme attempt to specifically limit their liability within the contractual document being negotiated. The Trustee may seek to limit his liability to the net value of trust assets (see below) or a fixed amount with which he is comfortable.
A company, like an individual person, does have a separate legal identity so can be appointed Trustee in the same way as an individual can.
While a Trustee is personally liable, they do have the right to be indemnified out of trust assets and to use trust assets in satisfaction of trust debts (this is so under the general law and dealt with specifically in section 72 of the Trusts Act) and various other protections as set out in Part 6 of that Act. Section 65 of that Act states that the indemnities and protections of trustees as set out in Part 6 apply regardless of what the trust deed itself may say.
These protections of the Trustee are subject to the Trustee having acted properly and responsibly in his administration of the trust.
If an individual is acting as the Trustee, they are personally liable to third parties. Similarly, if a company is appointed Trustee it is directly liable – is the answer to avoiding personal liability simply the appointment of a company of which the individual is a director?
Sadly, Section 197 (1) of the Corporations Act provides that a director of a company which acts as Trustee of a trust is personally liable for debts incurred by the company in that capacity if the company is not able to pay those debts and is not entitled to be fully indemnified out of trust assets due to the company having acted improperly or outside the terms of the trust in incurring the debts.
Interestingly, this section does not make a director personally liable merely because there are insufficient trust assets to fully indemnify the company for the third-party debts. In other words, provided the Trustee company acts properly in incurring the debt on behalf of the trust (meaning the directors of that Trustee company have acted properly and in the best interests of the Trust), they do not have personal liability to third party creditors just because there are not enough trust assets to pay the debt.
In this case, the company itself would still be liable to the third-party creditors. It could be placed into Administration like any other insolvent company and this could well expose the directors to allegations of insolvent trading etc.
From a liability point of view, there is probably not much difference between an individual being the Trustee and the individual being director of a company which is the Trustee.
From my experience, the real benefit in having a company as Trustee is to avoid any confusion about the capacity in which the Trustee is acting i.e. in his own right or as Trustee. Humans do all sorts of things for themselves and only occasionally something in their capacity as Trustee of a trust, and sometimes they do not make it clear what capacity they are acting in particularly when they are Trustee of several trusts.
I always encourage clients to incorporate a company to do nothing else except act as Trustee of a specific trust. This is made very clear in the first set of directors’ minutes recording the fact that the company consents to become Trustee of the relevant trust and the directors acknowledge that all actions of the company in future will be in that capacity unless specifically noted in the meeting minutes otherwise.
The relatively small cost of setting up a company and maintaining its registration is well worth the certainty of the capacity in which it always acts.
If you would like to discuss this article in more detail, please contact me directly.
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