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JUNE 2014

Trustee Liability

The Risks Continue

At our successful client presentations held in April this year I highlighted the issue of risks for trustees of family trusts.

In 2013 the High Court has continued the trend of making trustees personally accountable in the administration of trusts and for obligations incurred on behalf of a trust (whether it be contract or tax obligations). Also, creditors of trusts need to carefully consider the methods by which they can gain remedies against trustees or trust assets.

The law in this area continues to develop, the following is a broad summary of findings from cases decided in 2013:

  • When the phrase “trust liability” is mentioned what is actually being referred to is the liability of trustees.
  • A trust has no legal or corporal existence, and is only manifest through its trustees.
  • It is only through a trustee that a creditor can gain access to trust assets.
  • Unless specifically excluded, a trustee is personally liable on any contract they enter into, regardless of whether they stated it was as a trustee or not.
  • A trustee remains liable even if the other party to the contract knows the signatory entered into the transaction in the capacity of a trustee
  • The trustee will be entitled to an indemnity from the trust assets provided they are not in breach of trust. This means they can recover their personal liability from the assets of the trust.
  • But here’s the rub – if the trustee has committed a breach of trust the right to an indemnity to recover from the trust’s assets will be lost (i.e. lost to both the trustee or any creditor standing in the trustees’ shoes trying to obtain recovery from trust assets).
  • A trustee has many duties in carrying out their role. For example, a trustee is not allowed to delegate their authority, and trustees must act unanimously. To act otherwise are examples of breaches of trust.
  • The divergent way in which the Court is dealing with cases is seen in I v S. In that case an agreement to purchase land was signed by one of the two trustees. The agreement named her personally, she signed personally and there was no mention she was acting as a trustee. When the market turned down, the purchasing trust defaulted, and the trustee signatory was insolvent. The vendor sued, and sought to establish an agency arrangement between the signatory and the other trustee so that it could access the trust’s assets through the non-signatories trustee’s indemnity.
  • On the ordinary principles of non-delegation and unanimity of trustees there would have needed to be a decision by the non-signing trustee to purchase the property.
  • Nevertheless the High Court held both trustees liable by way of agency principles. The evidence of that was the non-signing trustee had tacitly left the running of the trust to her co-trustee and had agreed to her signing for both trustees in the past. This illustrates that a trustee who does not take an active role in the trust can find themselves held liable. The Court reiterated there is no such thing as a “passive trustee”.
  • The Court was willing to hold the other trustee personally liable notwithstanding that the signatory had acted unilaterally, this was on the basis of that one trustee was the agent for the other. This decision raises a number of issues, and the losing party duly appealed.
  • The Court of Appeal has remitted this case back for further consideration of the agency, consent and indemnity issues.
  • The converse factual scenario to the I v S case arose where a party to an agreement was named as a trust, (eg, ABC’s trust). Any trustee who has not signed will not normally be bound unless they have consented (or an agency has been established as in the I v S case).
  • The signatory trustee will be personally liable as a trust cannot itself be a party to a contract as it is not a legal entity. If not acting unanimously with other trustees, the signatory may not be able to obtain an indemnity from the trust (as they are acting in a breach of trust).
  • In summary, where the property is being purchased for a trust, it is desirable for the agreement to be signed by all trustees. In this way trustees can gain access to an indemnity from the trust assets if things go wrong.
  • This may not assist if the trust has no assets. In those instances if there is an appropriate clause in the trust Deed, a trustee held liable may have a right of indemnity to recover against other trustees.
  • However, in S v M a professional trustee was held personally liable for a tax debt of a trust. There were two trustees, the professional trustee sought an indemnity against his co-trustee when the IRD came calling for unpaid tax. The High Court held that the right of indemnity should be less than a full one as it could not be established clearly on the evidence that the co-trustee was acting in breach of trust over the trust’s tax affairs. The solvent professional trustee was found liable in that case as liability could not be limited, given it involved a tax debt.
  • This is a correct, but harsh, result and illustrates the care trustees must take in carrying out their roles as trustee. To paraphrase a now retired Court of Appeal Judge – “family trusts are used more than they are understood”.

Conclusions

Please contact us to discuss any issues of concern you have in relation to the management of any trust you are involved with.

If you have a professional trustee as a trustee of the family trust you have set up, you will likely find that the professional trustee will be much more pro active in carrying out their role than in the past. This won’t be because the professional trustee wants to make life difficult for the other trustees; it’s because the Courts are reinforcing the legal obligations of trustees now more than ever before.