It is not uncommon for SME companies to be trustees of trading
trusts. It is a common asset protection device. Accountants and
lawyers love them. The trading company will act as a trustee of a
trust, with beneficiaries entitled to the income and net assets of
the trustee company. The corporate trustee is often a shell in its
non-trustee capacity, holding only trust assets. The trust deed
governing the trust almost always excludes any obligation on a
beneficiary to indemnify the trustee. Beneficiaries are usually
family members of the directors of the corporate trustee.
Trusts add a layer of complexity and risk for third parties
dealing with the trustee company, as the trust assets are held by
the trustee on trust for its beneficiaries and are not always
available to meet debts incurred by the trustee.
How can you know?
Usually, the corporate trustee will describe its trustee status
in its public documents, such as its order forms, invoices and
communications. That warns persons contracting with it, that it is
contracting with a trustee which is subject to a trust deed. Trust
deeds are not searchable public records. They can only be obtained
from the trustee. Trusts are not shown on land title searches. If
no trust disclosure is made, the contracting party will naturally
believe it is contracting with the trading company in a non-trustee
capacity. Regardless, debts contracted by the trustee are
contracted for in its own personal capacity, meaning it owes the
debt to the creditor and is the proper defendant in any claim for
the debt. You might get a judgement, but when you try to enforce
it, the debtor company will say "I don't own any
assets. I am only a trustee. Wind me up and another trustee will be
appointed to the assets."
Thankfully for creditors, the trustee can normally access the
trust assets to pay the debts it incurs. It does this via
exercising its "right of indemnity" over the trust
assets, for the purpose of meeting expenses and debts it properly
incurs in accordance with the trust deed provisions. This right is
secured by an equitable charge, which arises automatically and need
not be registered under the PPSA. Removing the trustee does not
remove the old trustee's charge over the trust assets, if
properly incurred debts remain due.
Another issue in dealing with a trustee, is that its power to
contract in that capacity is always subject to the limitations in
the relevant trust deed. The possible sting for creditors, is that
this right of indemnity to use the trust's assets will not
apply to expenses or debts incurred by the trustee in breach of the
trustee's powers. Further, if the trustee has caused loss to
its beneficiaries in breach of trust, those beneficiaries may have
first rights against the trust assets ahead of the trustee and its
Particularly in a sale by the corporate trustee of the
trust's entire assets or business, the trust deed needs to be
checked to check whether the trustee has power to affect such a
sale and so pass good title to the buyer. It is possible that such
a significant sale needs beneficiary approval under the trust deed
provisions, or otherwise the sale may be in breach of the
trustee's powers and be invalid.
The effect of all these principles is that dealing with a
corporate trustee is an inherently more risky proposition than not
dealing with a trustee.
First ask the question of the directors of the company whether
it is a trustee. Get it in writing. If it is, a review of the trust
deed should occur if you propose to engage in any significant
dealings with a corporate trustee.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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