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June 2011

Trustee Personal Liability

The risk when you are a Trustee

Trusts are operated by Trustees with all legal obligations being in the names of the Trustees. Normally Trustees will attempt to limit or remove any personal liability when acting on behalf of a Trust. However there can be risks to the Trustees, where they have agreed to personal liability (even if it is limited), if transactions go wrong.

A Recent High Court Decision

In a recent High Court decision, judgement was ordered personally against the Trustee of a Trust for over $500,000 after the Trust failed to complete the purchase of a number of subdivision lots.

The facts of the case as outlined in the judgement were that the Trust (through its Trustee) contracted to purchase 21 lots in a subdivision for over $3.3 million. Eight lots were purchased by the Trust but 13 lots were not. The vendor cancelled the Agreement, resold the 13 lots and claimed for the losses incurred. In the meantime, the Trust (through its Trustee) disbursed the assets of the Trust to other parties and claimed that it had no assets to pay the amount claimed by the vendor.

A clause in the Agreement for Sale and Purchase limited the Trustee's personal liability to an amount equivalent to the value of the assets of the Trust. The essential finding of the Court was that the Trustee's liability was to be defined by the value of the assets of the Trust at the time the Agreement became unconditional (at that date the Trust still had sufficient assets) rather than at the date when the Agreement was cancelled by the vendor (at that date the Trust had disbursed its assets).

The Court held the purpose of the Trustee limitation clause was to limit but not remove the Trustee's personal liability. If the Trust assets increased in value, the Trustee's personal liability remained at the pre-agreed level (in this case, "an amount equivalent to the value of the assets of the Trust" when the Agreement became unconditional). Equally, if the Trust assets decreased in value, the Trustee's personal liability still remained at the pre-agreed level.

It is the Trustee who controls the Trust. If the Trustee allows a dissipation of assets of the Trust then it is the Trustee who must run the risk of the Trustee's personal liability being called upon.

Conclusions

The lessons to be learnt from this case are:

  • Trustees can and do have personal liability depending upon the documentation;
  • Trustees must fully understand the potential risk they are personally putting themselves at;
  • If a Trustee wishes liability to be defined at a future point in time rather than at the date when there is a binding contract THEN the agreement needs to specify the detail surrounding such proposed alternative date in time;
  • Trustees can not reduce their exposure to personal liability by dissipating the assets of the Trust;
  • Where Trustees have personal liability for debts of the Trust they must ensure that the Trust retains sufficient assets to cover such personal liability.

If in doubt as to Trustee's potential personal liability see us before signing any commitments on behalf of the Trust.