A trust is a legal mechanism of which there are a number of types:
Discretionary Trust – which is under a written Deed, usually the beneficiaries are members of a family and the Trustee is either an individual or corporation.
Unit Trust – which is set up under a written Deed whereby the units are owned by other entities. This often used as a joint venture vehicle and percentages of ownership of each unit are set out.
Resulting Trust – this is a legal mechanism from the Court whereby a person acquires property with their own money but may not be on the title to the purchased property. The Court will recognise their interest and that the registered owner holds part or all of the property on resulting trust.1
Constructive Trust – arises where there is a promise for an event to occur and upon that event property will be transferred. Constructive trust is imposed by the Court by reason of the conduct of the parties. There must be some element of joint endeavour and it would be unconscionable for the Court to allow the owner of the trust property to retain such ownership adverse to the interest of the person claiming ownership of the property. Generally the Court would regard the constructive trust as having some element of joint endeavour.2
Fixed Trust – arises where there is an express trust for an identified entity without any of the ordinary questions of discretion that might apply. It is very similar to a Unit Trust. Sometimes it can be called a "bare trust".
Australian Business Number (ABN)
It is absolutely essential that the provider of credit be aware of who they are dealing with. In this respect in most trade credit relationships the party seeking credit will have an ABN – the problem with this is that if it is a trust the ABN registration will only identify "trustee of the XYZ trust" and not the identity of the trustee. It is the trustee to whom you are providing credit.
Within the ambit of the credit approval process it is necessary to properly identify the legal entity which is trustee of the relevant trust. The trust mechanism occurs more and more often both in personal and corporate administrations.
Usually the first two types of trusts, operating through either a company or an individual obtain an ABN. This is to distinguish the trust trading venture from that of the individual Trustee. The trust is not a separate legal entity. Because a separate and identifiable ABN is required for each trust many credit providers assume that the trust is its own legal entity. The incorrect assumption that the trust is different to the trustee arises as a consequence of tax law where for revenue purposes trusts are dealt with as separate identifiable entities. This of course does not change the fundamental position that the trustee is not a separate legal entity and is able to sue and be sued in its name by its "trustee".
It must be remembered that once the credit agreement has been established that contract is with the then existing trustee and not with any subsequent trustee of any trading trust. Although there may be an argument that if there was a change in trustee and the credit is provided only in relation to and by reference to the ABN the new trustee is the one that incurs the liability. Trusts cause difficulties for enforcement of contracts and judgments. This is particularly so when viewed in circumstances of preservation of PMSI under the Personal Property Securities Act 2009.
The legal position is that the liabilities of the Trustee of the trust, whether a person or company, are the liabilities of the Trustee. In other words the Trustee must pay the debts that it incurs. The Trustee has a right of indemnity against the trust property. This is either at law e.g. Trustee Act, 1925 (NSW) or by reason of the terms of the written trust Deed. Therefore it is important to identify the name of the trustee. An entity simply described as “XYZ Trust” is in insufficient for litigation or registration under PPSR.
However for creditors the difficulty may be that the trust is hollow and has no assets against which the Trustee can recover. In these circumstances the Trustee is insolvent and can be wound up or made bankrupt for recovery of the liabilities of the Trustee of the trust. If there is no money left in the trust or assets left in the trust there is nothing against which the Trustee is able to claim indemnity.
There is no separate register into which a search can be made as to whether or not the debtor is a Trustee of a trust. Trust Deeds are not registered on any register either with ASIC or Land Titles Office in any State. The exception being that a change of Trustee has to be registered: s. 6 and s. 9 Trustee Act, 1925 (NSW).
It is therefore very important to have a personal guarantee whereby the beneficiary or shareholder guarantees the trustee’s obligation.
The personal guarantee must be in writing and physically witnessed by a person whose name and address are printed. An electronic signature on email is not recommended as there are issues with the authority to use electronic signatures. Unless expressly given a guarantee will not be binding if an electronic signature is used.3
Further the guarantee should be a separate document and separately signed. So there is no doubt as to the basis of signing the personal guarantee a witness to the signature should be required. A signature as director of the trustee or trust is not sufficient to create a personal guarantee or liability.4
Requirement for Writing
Generally a trust must be in writing5. It is a requirement of Australian law. Regrettably the exemption is the resulting and constructive trusts which are not usually in writing where the very existence of the trust arises as a consequence of conduct existing between the parties.
Ipso Facto Clauses
An ipso facto clause is one where the Trustee of the trust is automatically removed upon an insolvency event such as liquidation, bankruptcy, voluntary administration, receivership or control being given to an insolvency practitioner. It means there is no Trustee in control of the trust assets. However, until a new Trustee is appointed in terms of the relevant trust the old trustee remains a “bare trustee” with limited powers being powers merely to preserve the property of the underlying trust pending either an order of the court or appointment of the new trustee at which time the property of the trust will vest in a new trustee or in terms of any order of the court.
This causes issues in a liquidation as the liquidator has to have a Receiver appointed over the trust so he can get access to the trust property to pay the creditors.
If the Trustee is insolvent and a Liquidator, Receiver or Trustee is appointed the assets of the trust may be more difficult to access because the right of the Trustee is limited to being indemnified from the trust property. Expressly, in the case of personal bankruptcy Section 116(2)(a) of the Bankruptcy Act6 excludes trust property from vesting in a Trustee in Bankruptcy.
It is now common practice for the liquidator and on occasions a voluntary administrator to apply to the Court for the appointment of a Receiver over the trust property. Indeed the current status of the law in relation to company liquidations was that the liquidator could sell trust assets without the appointment of a Receiver.7 Generally it has now been determined that a separate application for a Receiver over trust property must be made by the insolvency practitioner having control of the Trustee. This is the only way in which the trust property can be realised.8
The above two-step process in the liquidation or bankruptcy of the Trustee and the appointment of a Receiver gives rise to difficult determination of remuneration issues for the insolvency practitioner and makes them less inclined to accept an appointment where a trust is involved. Generally, fee approval of the Court is required where there is trust property involved.
Real Property Land
In New South Wales the Registrar General does not recognise trusts or Trustees registered on title to land. This is because the registered owner of land owns it beneficially albeit there may be a trust mechanism involved. The liability for rates, land tax, the mortgage security creditors, and ownership is with the Trustee and the trust is irrelevant to determining the interest.9 The fact that there is a change of Trustee does not affect the relationship of the trust property to the former or the new Trustee. In New South Wales the trust is not registered at the Land Titles Office but the change of Trustee has to be registered to be effective: s. 6 and s. 9 Trustee Act, 1925 (NSW).
No Priorities for Payment
A more interesting aspect is that it has generally been held that the priorities under Section 556 of the Corporations Act and Section 109 of the Bankruptcy Act do not apply in an insolvency of the trustee of a trust i.e. employees’ priority, FEG priority, other Administrator priority are not applied. Generally, all creditors whether employees or directors or trade creditors, rank equally and are to receive a distribution from the trust property on a pari passu basis. There is no provision in the Trustee Act to distinguish different classes of creditors.
Because of the difficulty of administering both the financial affairs of the insolvent Trustee and of the trust which are separate structures, it is currently being considered whether to remove the ipso facto clauses. This would mean that the trust assets would still be under the control of the insolvent Trustee and available to the Liquidator or Trustee rather than the necessity of appointing a separate Receiver.
1. That for account customers the ABN site is accessed and “ABN Lookup” checked for the ABN of the entities to determine if it is a trust or regular trading entity.
2. Having regard to the foregoing it is absolutely essential that:
a. the credit provider have a provision in any document evidencing the terms and conditions of trade relating to notification of any change in trustee of the trading entity – so that the credit provider credit records can be updated together with fresh guarantees;
b. the credit provider only operate in its dealings in with a recipient of the credit upon the approved ABN registration both so far as acceptance of orders and issue of invoices and statements; and
c. that a personal guarantee be obtained from the shareholders or beneficiaries;
d. consideration be given to an annual review of credit accounts particularly where a trust is involved to seek confirmation as to the identity of any Trustee.
e. that the credit application be re-designed to consider a notification by way of a tick-a-box form as to whether the credit applicant is a sole trader, partnership, company or trust.
3. If there is a trust involved, then guarantees from the beneficiaries not just the directors should be obtained – although in the case of discretionary trusts this may be difficult.
4. Similarly, we would recommend where there is a large account involved and the directors and shareholders are different people that personal guarantees be obtained from the shareholders of the corporate Trustee.
5. If a large account is involved, that property searches be obtained and if, for example, the director’s wife owns all property that a personal guarantee be obtained from her.
6. In circumstances where goods are supplied which have serial numbers attention needs to be given as to whether or not as part of the trade supply, leaving aside for a moment PMSI provisions, it is necessary to register according to serial numbers and then whether or not other provisions of the Personal Property Securities Act 2009 can give rise to an extinguishment of any security interest perfection because the goods were acquired for resale or as part of for example the real estate development.
7. Where there are substantial credit arrangements being put in place consideration should be given to the entry into of a General Security Agreement that would be an ALLPAP in terms of the Personal Property Securities Act 2009.
Sally Nash is a Solicitor at O’Neill Partners Commercial Lawyers Incorporating Sally Nash & Co.
Ph: (02) 9232 1244.
Jim Johnson is a Barrister at the Sydney Bar.
Ph: (02) 9229 7333
1. Calverley v Green  HCA 81; (1984) 155 CLR 242; (1984) 56 ALR 483
2. Muschinski v Dodds  HCA 78; (1985) 160 CLR 583; (1985) 62 ALR 429
3. Williams Group Australia Pty Ltd v Crocker  NSWCA 265
4. Reozone Pty Ltd v Rene Santoro  NSWSC 1383
5. Section 23C(1) of the Conveyancing Act, 1919 (NSW)
6. Bankruptcy Act, 1966
7. Kitay, in the matter of South West Kitchens (WA) Pty Ltd  FCA 670; (2014) 224 FCR 408
8. Re Stansfield DIY Wealth Pty Ltd (In Liquidation)  NSWSC 1484; (2014) 291 FLR 17; (2014) 103 ACSR 401
9. Agusta Pty Ltd v Provident Capital Ltd  NSWCA 26; (2012) 16 BPR 30, 397 and as to priorities between parties claiming to be trust creditors: Independent Contractor Services (Aust) Pty Ltd (in liquidation) (No 2)  NSWSC 106