On 13 November 2012, the Law Commission published its issues paper, Review of the Law of Trusts: Preferred Approach. This paper is a comprehensive final version of five previous reports that the Commission has published. The Commission provides many suggestions for review, being too numerous to summarise for the purposes of this Update. However, three points that may be of particular interest to entities (and their directors) acting as corporate trustees are outlined briefly below.
Currently, the law does not require a company to disclose that it is acting as a trustee rather than in its own right. This creates the risk that creditors who deal with a corporate trustee may arrange their affairs based on mistaken understandings of the debtor's assets. The Commission has responded by proposing that section 25 of the Companies Act 1993 (Act) be amended to require that all written legal communications disclose when a company is acting as a trustee.
Director liability to creditors
The primary remedy available for a creditor dealing with a corporate trustee is through the trustee's right of indemnity, which will allow the discharge of debts from trust assets. However, where the trust has insufficient assets or the trustee has no right of indemnity, creditors may be left with no recourse. As a result, the Commission proposes that the Act be amended along similar lines to the Australian Corporations Act 2001 (Cth) and provide that a person who is a director of a company when the company incurs a liability as a trustee be liable to discharge that liability if the company cannot discharge the liability itself. Directors would only be liable when the company is not entitled to be indemnified out of trust assets because of a breach of trust, acting outside the scope of its powers as trustee or the trust's terms denying or limiting the company's indemnity rights.
Director liability to beneficiaries
The Commission has also recommended that directors of corporate trustees be personally accountable to the beneficiaries for any breach of the trustee's duties. Beneficiaries already enjoy strong rights and remedies against any trustee, but invariably the trustee will be the company not the directors themselves. This means that the beneficiaries can only recover against directors through indirect claims such as dishonest assistance or knowing receipt. The Commission is concerned that such claims may be inadequate and has proposed that the corporate veil of the trustee company should be pierced to attribute liability directly to a trustee company's directors. If the trust's assets cannot satisfy a claim by the beneficiaries, directors may be personally liable as though they themselves were the trustees. This is a significant change that arguably undermines the benefit of corporate trustees and may curtail the willingness of professional services firms to operate trustee companies for their clients.
Submissions and comments on these proposals are due by 22 February 2013. A final report of recommendations is expected to be released subsequent to that.