duncan_m said:
Hi Nigel,
Great post.. very informative.. many thanks.
If the Trust Deed was worded so that the Trustee did NOT have the right to be indemnified then would that secure things a little more effectively?
You're a crafty one aren't you Duncan!
Without wanting to delve too deep into the legal mumbo jumbo, this is a really contentious area in some states. As an aside, it often comes as a shock to some people that there are areas of the law where either different answers to the same question can arise in different states or where there is in fact no definitive answer...
The starting point is that the trustee legislation in each state and territory gives trustees a
statutory right of indemnity - ie this applies even if the trust deed didn't provide for this right.
The heart of the question then becomes twofold:
1) Can this
statutory right of indemnity be switched off in the
trust deed? Answer is that only in WA, Vic and Tas is that allowed under their respective trustee legislation.
2) Even if you're allowed to switch it off under the trustee legislation, is the trustee's right of indemnity actually impossible to switch off because it is so integral to the office of being a trustee? The answer here is, at the moment, yes in Victoria, but maybe not in WA and Tas (but based on NSW and Qld reasoning - gee gets confusing doesn't it!
).
But when a corporate trustee is involved the story doesn't end there... an innocuous little section of the Corporations Act can have
BIG consequences for directors of trustee companies.
What section 197 says, in a nutshell, is that if a trustee company incurs a liability and loses its right of indemnity (due for example to it acting outside what the trust deed permits) then the directors of the trustee company are
personally liable for the company's debts! Ie this is a complete reversal of the usual scenario of limited liability for shareholders and directors being liable, generally speaking, only for insolvent trading...
SO what this means in a nutshell is that you can't have a $2 company act as trustee of your trust, as a director get your trustee company to do something in breach of the trust deed and then seek to absolve both the trustee and yourself as director on the basis that: a) the company and not you as director is the party that has done wrong and b) the company can't use the trust's assets to reimburse itself because it's breached the trust deed. (Apparently that sort of despicable conduct became common in the 1970s and in the mid 80s the predecessor to section 197 was introduced to curb that conduct).
As another aside there's currently a big concern about the scope of section 197 due to a case in your home state. 2 out of the 3 foolish IMHO South Aus judges decided that it's not only where the right to indemnity is lost that s197 kicks in, but instead it operates where there is a right to indemnity but the trust assets are insufficient!!!
Kind of defeats the whole purpose of using a company and trust really...and IMHO just wrong when you trace through the history of the section and the parliamentary statements about its purpose...
Having said all that, I still reckon trusts are GREAT! Just remember that they're not a cure for all ills. People need to remember that the law has evolved since Bondy etc...partly in fact due to Bond etc.
Cheers
N.
