At a recent Part X meeting a debtor sought to include a Bill of Exchange which was endorsed by the debtor as Trustee of a Trust. The question was raised as to whether the Trust could prove against the Trustee for the debt to a creditor.
The basic concept of a Trust is that a person acts in the capacity of a figurehead and holds assets or something for an alternative party (the beneficiary). The Trustee will be liable to a third party in his capacity as Trustee but will have a right to be indemnified from the Trust assets.
If the Trustee strictly adheres to the terms of their Trust and carries out their duties diligently and prudently in regard to the business of the Trust, the Trustee in essence should not hold liability subject to there being sufficient Trust assets to cover the debt (see Youang Pty Ltd v Minter Ellison, Morr’s Fletcher (2003) 212 CLR 484 at 32).
If the Trustee has breached the terms of the Trust or performs some degree of negligence the loss that is suffered is recoverable as a debt provable in the estate of the bankruptcy Trustee/debtor.
The fact that a Trust estate is not an entity means that the Trustees cannot be a guarantor in respect of Trust related debts in the way that directors of a company may guarantee company’s debts. This is however subject to the liability falling on Trustees personally who carry on trade and are liable to the trade creditors for debts incurred in the business to the extent as if they had been carrying on business on their own account (see Wightman v Townroe (1813) 1 M&S 412; 105 ER 154). The Trustee of course will have a right of reimbursement out of the Trustee assets for any amount personally expended or a right to be exonerated out of Trustee assets in respect of liabilities incurred. If the value of the Trust assets is below the amount of the liability the Trustee will then bear the liability to the extent of the deficiency.
Further, it has been held that a Trust related creditor has a right to be subrogated to the Trustee in respect of the Trustee’s right of exoneration in relation to the creditor’s debt.
In particular, in a matter of Helvetic Investment Corp Pty Ltd v Knight (1984) 9 ACLR 773 where a guarantor was described as a Trustee of a Trust the Court on appeal held that the Trustee’s liability on the guarantee was not limited to the Trust assets. The words in the guarantee served the function of describing the only person liable namely, the Trustee of the Trust. To limit the liability of the Trustee to the extent of the Trust assets the Court has held that further words must be utilised such as “as Trustee but not otherwise”.
Accordingly, the conclusion to be drawn from these cases is that a Trustee of a Trust will be liable for a debt of the Trust personally but will have a right of subrogation from the assets of the Trust.
The Trustee will be personally liable (excluding the assets of the Trust) if the Trustee has committed a breach of Trust or an act of negligence.
To limit the Trustee’s liability to simply the assets of the Trust specific wording must be utilised which clearly details to the creditor that the liability of the Trustee is limited to that degree.
Application to Part X proceedings
In this regard the next question is whether the personal liability of the Trustee can be utilised by the Trust for voting purposes at a meeting of creditors. In this regard the debt is between the Trustee (the debtor) and the creditor.
The creditor would certainly have a cause of action against the debtor as Trustee.
In this instance the Trust sought to prove the debt between the Trust and the debtor. In this regard the liability is between the debtor and the creditor. There is no liability between the Trust and the debtor. The liability is simply between the debtor and the creditor and an action will be between the debtor and the Trust seeking an indemnity in respect of the debtor’s liability as Trustee.
Any prospect of the Trust incorporating a debt against the debtor (acting as Trustee) would clearly be a sham.
Subject to documentary proof, the including of a creditor which has lent money to the debtor as Trustee of the Trust (in this case evidenced by a bill of exchange) would on its face be a bona fide creditor and should be included in the Part X proceedings.
The fact that the Trustee has accepted the debt owing to this creditor when they are entitled to an indemnity would not cause the transaction to be a sham but would simply be a confirmation of the liability of the debtor as Trustee personally to the creditor irrespective of the Trustee’s right of indemnity from the assets of the Trust.
If however the wording on the bill of exchange was of the nature of “to the extent of the assets of the Trust” or “as Trustees but not otherwise” this would clearly limit the liability of the Trustee and would limit the debt that is capable of being proven by the creditor in the estate or pursuant to the Part X proposal.
Should you wish to discuss this matter further, please do not hesitate to contact Mr O’Hare of our office.