The Five Golden Rules When Trading with a Trust

Legal The five golden rules when trading with a Trust

By Rhett Kipps and 1. A trust is not a separate trustee, including ordinary trading Karl Hill* legal entity debts incurred. At its most fundamental, a trust is a As the trustee is the one exercising relationship where a person or legal legal rights on behalf of the trust, it is Trading trusts have become entity such as a company (being the legally responsible for unpaid liabilities. increasingly common in Australia. trustee) holds and deals with property The trustee is the proper defendant in The term “trading trust” refers to for the benefit of others (otherwise respect of any proceedings or claims an entity (trustee) that is conducting a known as beneficiaries). arising out of the activities of the trust. business under the authority of a trust There are three essential features The trustee’s personal liability to the instrument in its capacity as trustee of of a trust: trust’s creditors is generally unlimited, a trust. (a) One or more persons or entities unless that liability is modified or Trust structures create confusion called a trustee; excluded by contract. and many legal issues for trade (b) Trust property or assets; and For example, if a trust has ordered creditors. Often, trade creditors may (c) One or more beneficiaries. goods or services then it is the trustee not even realise they are trading with The trustee holds the property ‘on who bears liability to complete the a customer as trustee of a trust. trust’ for the beneficiaries. At law, the order and pay the debts, even if the This article provides a broad person entitled to deal with the assets credit application nominates the overview of trading trusts, how of the trust is the trustee. When you trustee “as trustee”. trading trusts apply in the context are dealing with the trust, you are The creditor’s remedy is against of trade credit, and some important actually dealing with the trustee as the trustee personally and not the pointers to trade creditors. the legal entity. trust (or the beneficiaries), as the The beneficiaries have an interest trade debts are deemed to be the in the trust property (which in the trustee’s own debts. case of a trading trust includes a However, trustees have what is business), and repose great trust in referred to as a “right of indemnity” the trustee to exercise legal rights and an associated lien over the assets over their property. of the trust to recoup the liabilities A trust deed often documents the and pay the debts the trustee incurred nature of the relationship between the whilst lawfully acting on behalf of trustee, the beneficiaries and how the the trust. This valuable right creates assets may be dealt with. Ordinarily, a lien and charge (security interest) the following documents are proof of in favour of the trustee that takes a trust relationship: priority to any of the beneficiaries or Rhett Kipps (a) A deed of trust; later appointed trustee. (b) If the trustee is a company, company minutes confirming 3. Trust assets cannot that the company is acting in be attacked directly its capacity as trustee of the Ordinary unsecured trade creditors trust; and cannot attack trust assets directly. (c) A separate bank account for As the trustee is the entity that trust money. incurs liabilities in the course of trade, the trustee is personally liable to be 2. You sue the trustee, pursued by creditors. not the trust Insolvency proceedings may be Generally, the trustee is personally taken against a trustee, if it does not Karl Hill liable for its acts and omissions as pay the debts.

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If this occurs, the person appointed To avoid a situation where the interest over both trust and personal to the trustee (trustee in bankruptcy trust assets are insufficient to meet property, you should register your or liquidator) will call upon the right your claims, you should consider security interest against the trustee in of indemnity in order to realise trust obtaining security from the trustee both capacities i.e. in its own right and assets for the benefit of creditors. both in its own right and as trustee. as trustee. If you are in any doubt, you This means that in the ordinary For example, your terms of trade should take specialised advice. course, when the trustee incurs debts, should include something to the effect it realises trust assets with which to of “the guarantor charges all property, 5. Know who you are meet the liabilities which it incurred in whether held in its own right or in its trading with its capacity as trustee. capacity as trustee”. In our experience, it is not unusual for Usually, a trustee has a right of A trustee can also, in some trading trusts to apply for credit by indemnity from trust assets to recoup instances, pursue beneficiaries to identifying only the name of the trust payment of liabilities which it incurred enable it to meet liabilities of the trust. (as opposed to the trustee), and for in its capacity as trustee, unless the If trust assets have been distributed to the trade creditor to not possess a trust deed specifically excludes such beneficiaries in an attempt to defeat copy of the trust deed. trust assets from being recouped. This creditors, then they may be pursued This creates considerable difficulty has become rare because the law now to repay the trust assets received. for the creditor in pursuing an provides that directors of corporate unidentified trustee. trustees will be personally liable 4. Get your PPSR A properly drafted credit for the debts incurred in the event registrations right agreement will require a customer that the trust deed provides that a The Personal Properties Securities to complete the necessary fields to corporate trustee cannot realise trust Act 2009 (PPSA) imposes significant capture the required information. assets to meet its liabilities. obligations upon trade creditors The following checklist may be A creditor pursuing a trustee may seeking to enforce security interests. useful to tick off when trading with a face the following problems: Trading trusts often hold trust: (a) insufficient assets of the trustee an Australian Business Number (a) Who is the trustee? If the or in the trust; associated with the affairs of the trustee is a company, what is (b) the trustee’s right of indemnity trust (as taxation law treats trusts its ACN? being excluded by the trust are separate entities, despite the true (b) What is the trust’s ABN? deed; or legal position). (c) Does the credit application (c) the trustee’s right of indemnity Although all dealings are with confer a security interest? Does being lost by misconduct on the trustee in reality and the trustee it extend to both assets held the part of the trustee. becomes liable for any debts incurred in the trustee’s own right and In some instances, the creditor whilst trading, the existence of a trust on trust? Should I seek advice may be able to subrogate into the may alter how you are to register any on how to register this security trustee’s right of indemnity to the security interest you may have under interest on the PPSR? trust’s assets where a claim against the PPSA . the trustee itself would be fruitless. The PPSA provides that Conclusion While a trustee can limit their registration of security interests in The law regarding trusts is complex. liability to others by providing in a respect of trust property may need Likewise complexities often arise contract that their trustee’s liability to be registered against the ABN of when dealing with a trust. Creditors is limited to the assets of the trust. the trust (rather than the trustee’s should take considerable care to be In practice, this is rare and is mainly ACN or individual name) in order to aware of the above to ensure that used by large institutional trustee be effective. Some creditors elect a their interests are protected and companies. conservative course of registering take specialist legal advice when The use of language such as “as their security interest against both the required. trustee only” or “as trustee but not ABN of the trust and the ACN of the otherwise” might indicate an exclusion trustee. *Rhett Kipps is a Senior Associate of the trustee’s personal liability to the An important question to bear in at Results Legal creditor. This should put you on notice mind is whether the trustee is granting Email: [email protected] and prompt you to take specialist security only over trust property, in *Karl Hill is the Managing Director and legal advice. A properly drafted credit its capacity as trustee, or whether it Founder of Results Legal agreement will avoid a lot of these is also granting security over personal Email: [email protected] issues by conferring the maximum property. Ph: 1300 757 534 protection available to the creditor. Generally, if you have a security www.resultslegal.com.au

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