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SEPTEMBER 2012

Guarantees - Independent Trustee?

Understanding your obligations

A recent Court of Appeal decision, (Westpac NZ v Chahil) underlines the care that needs to be taken by parties when entering into obligations under guarantees.

In this case Westpac successfully sued Mr Chahil for $14.985 million plus interest on his guarantee of a loan from Westpac. Mr Chahil successfully argued in the High Court that his guarantee of a loan was only as a Trustee, and that a provision in the guarantee limited Mr Chahil’s liability to the assets of a Trust. However, the Court of Appeal held that the clause in the guarantee was clear.  Its purpose is to limit, to the value of the assets of a Trust, the personal liability of a party who borrows and then agrees to repay as an “independent Trustee”. Here, however, Mr Chahil also executed the guarantee in his separate capacity as a personal guarantor, and the clause did not apply to limit Mr Chahil’s liability in that capacity.

In summary, parties who are signing guarantees need to be vigilant and take legal advice as to the terms of the guarantee and their effect.  Are they signing as a Trustee of a Trust? Are they signing as an “independent Trustee”with limited liability? Or are they signing in their own personal capacity? Parties signing as Trustees need to be certain as to whether they have unlimited liability under the guarantee or whether their liability may be limited (and if so, to what extent the limitation may apply).

There are potential dangers in being a Trustee, which may place all their personal assets at risk. It is essential to fully understand your rights and obligations before signing any guarantee.

What is an “independent Trustee”?

In the Chahil case, the Westpac guarantee contained the following provision: “You are an independent trustee for the purpose of this clause unless you have any right to or interest in any of the assets of the trust except in your capacity as a trustee of the Trust”. In particular, this provision would exclude any beneficiary of the Trust (a beneficiary would have a “right to or interest” in assets of the Trust) as an “independent Trustee”.

Other banks use the term “limited liability Trustee” with the effect being essentially the same.

So an “independent Trustee” is a Trustee of a Trust who has no interest in the Trust but for the role as Trustee.