Join Australia's most dynamic and respected property investment community

Legal Tip 43: Suing a Corporate Trustee

Discussion in 'Legal Issues' started by Terry_w, 31st Jul, 2015.

  1. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

    Joined:
    18th Jun, 2015
    Posts:
    14,028
    Location:
    Remote
    Suing a Corporate Trustee


    Private companies are separate legal persons at law. Companies are not the directors or shareholders behind them. Even where there is a company with 1 shareholder who is also a director the company that company is a separate person to the director.

    Companies can enter into contracts just like a person can. They can be sued in contract or in negligence just like a person can too.


    Liability of a company generally is restricted to the company. The directors of the company are not liable for the company debt, except in 2 circumstances

    1. because of legislation that makes them personally liable (such as trading while insolvent), and/or

    2. Because of contract law - they agreed to make themselves liable for company debts by given a personal guarantee for example.

    So where a trust is being set up it is a good idea to arrange for a company to act as trustee. This is very important where there will be a business operated, and is also important for where the trust will hold assets which carry risk. Real Estate carries a certain amount of risk as the owner of the property can be sued by tenants and others entering the property.


    So where there is any risk having a corporate trustee can limit the liability to the company which is acting as trustee. If the trust is sued it will be the trustee that cops it - see my previous legal tip.


    This is why the trustee should not own any other property other than trust property. The company will be a $2 company with no assets set up only to operate as trustee.


    The assets of the trust will still be at risk though.
     
  2. willy1111

    willy1111 Well-Known Member

    Joined:
    16th Jul, 2015
    Posts:
    45
    Location:
    Melbourne
    @Terry_w

    Thanks Terry,

    It is often suggested/advised to use a company as trustee rather than individual name just to make it so much clearer assets aren't those of the individuals.

    Curious what your thoughts are for trustee of a SMSF that only invests in shares/cash.

    Ie would it be smarter to have a corporate trustee over individual so it is very clear who owns what to outsiders looking to take you to the cleaners.
     
  3. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

    Joined:
    18th Jun, 2015
    Posts:
    14,028
    Location:
    Remote
    Asset protection from litigation is only one aspect. Other benefits include clear segration of trust assets from personal assets and asset protection on death - allways better to have a company as trustee for these reasons and more so with a SMSF as these are special trusts with a number of other issues.
     
  4. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    5,179
    Location:
    Sydney
    Willy

    A SMSF that has human trustees has loads of issues now. The ATO can impose penalties on Trustees for apparent breaches of law for mistakes etc. Human Trustees are personally jointly and severally liable and can have far more serious penalties imposed. Note also that Trustee Directors can be fined and are unable to recover the cost from the fund.

    There really is no place for a SMSF with human trustees other than a short term view that it saves money on ASIC fees. That is $46 a year....And $600+ upfront. If you add a member or one dies with human trustees the smsf must change bank accounts and every investment so it complies with all names. I refuse point blank to setup a SMSF with human trustees. It paints a picture of the people you deal with if they squabble over basic costs like that.

    A good comparison is here : https://www.ato.gov.au/Super/Self-m...e-individual-trustees-or-a-corporate-trustee/

    Note that each human trustee can have an administrative penalty imposed where a company cant.
     
  5. Blackmores

    Blackmores Well-Known Member

    Joined:
    29th Sep, 2015
    Posts:
    58
    Location:
    Melbourne
    Apologies for bumping this up. We have a corporate trustee for our trust and holds a few properties. If for whatever reason the corporate trustee or director gets sued, are the assets in the trust fully safe? The director and appointor for the trust are the same person.

    We run a small property development business and I know if something happens with one of the projects and our builder has decided to close shop, end the of day it will come to us, the developers so I am a bit worried.
     
  6. Ross Forrester

    Ross Forrester Well-Known Member Business Member

    Joined:
    30th Oct, 2016
    Posts:
    1,152
    Location:
    Perth, Western Australia
    If it is a different trust asset s away from the trustee you will need to show the assets are a different trust.

    Consider changing trustee as well to clean up the situation.

    The corporate trustee also makes estate administration easier.
     
  7. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

    Joined:
    18th Jun, 2015
    Posts:
    14,028
    Location:
    Remote
    It will depend on a lot of factors. If you mean the trustee gets sued then no the assets of the trust will not be safe. If the trustee holders assets for another trust these assets may be safe but it will depend.

    If the director is sued they are separate to the trust so the trust assets will generally be safe.

    Exceptions are mixing of assets. Transfers. Resulting trust issues.

    Eg I advised 2 doctors who had set up a trust in such a way that there was almost no asset protection at all.
     
  8. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    5,179
    Location:
    Sydney
    The trustee can be liable in numerous ways. Legal advice on risk is important. Eg unpa id debts. Super. Tax. Gst or employee entitlements are all different but similar
     
  9. Blackmores

    Blackmores Well-Known Member

    Joined:
    29th Sep, 2015
    Posts:
    58
    Location:
    Melbourne
    Thanks guys. Hmm.. let's say something goes wrong with one of the projects and ultimately leads to us the developer. Should be the trustee company (development company) that gets sued isn't it? And my assets in the trust will not be safe. Am I right in saying that? Does it work if the moment we sense something is wrong, we sack the trustee company and change the appointor? Thanks guys appreciate it.
     
  10. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

    Joined:
    18th Jun, 2015
    Posts:
    14,028
    Location:
    Remote
    It would likely be the company that is sued. It will be indemnified out of the trust assets so all the assets owned by that trust will be at risk. Depending on what happens the directors of this company may also be sued and their personal assets at risk. "my assets in the trust" - doesn't make sense. you mean the trustee's assets held on trust?

    if something goes wrong you can sack the trustee. But the assets of the trust will still be exposed.

    Changing appointors won't really do much.
     
  11. Blackmores

    Blackmores Well-Known Member

    Joined:
    29th Sep, 2015
    Posts:
    58
    Location:
    Melbourne
    Thanks Terry. I am just trying to think of the best way to protect ourselves. But can't seem to find anything I can do. At the moment my wife is the sole director of the trustee company. Does it serve any purpose for me to start another company and do the developments instead (employed by the trustee company as a project manager or something) with just me as the director? A company that is not connected to the trust at all. If we ever get sued, this company doesn't own any assets.
     
  12. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

    Joined:
    18th Jun, 2015
    Posts:
    14,028
    Location:
    Remote
    This is something you need specific legal advice on - from a lawyer. A new company will generally be safer than a trust containing other assets.
     
  13. sanj

    sanj Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    2,637
    Location:
    Perth
    no need to change the appointor if the correct appointor was put in place from the start, ie someone low risk, not a director of the trustee company and unlikely to be part of any potential commercial or legal risk from the project/business.

    the appointor would kick out the old trustee and appoint a new one but as much as that can definitely be a welcome ace up your sleeve it isn't a complete magic wand either, as mentioned earlier directors of trustee companies can still be held liable for actions while trustee even eafter replaced. apologies if I'm repeating something youre already aware of, ive just seen a couple of people act really stupidly and recklessly because someone along the way oversimplified and magnified the inmpact of corporate trustee of trust setups and they felt and behaved like they were "invincible" for want of a better term
     
  14. sanj

    sanj Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    2,637
    Location:
    Perth
    call a competent lawyer specialising in this field, pay said lawyer for his or her time and expertise and then enjoy spending your time focusing on the actual business and making money instead of extremely important but ultimately unproductive matters like structures and asset protection

    the most bullet proof structure in the world will not put $$ in the bank account and ultimately it definitely sounds like you need some assistance in this field so just save the next few weeks of thinking about it and jump to the inevitable decision of getting expert advice imo
     
  15. Blackmores

    Blackmores Well-Known Member

    Joined:
    29th Sep, 2015
    Posts:
    58
    Location:
    Melbourne
    Thank you very much guys. Appreciate the advise greatly. I will have a think over the weekend and get some better advisers.