On 2 June 2005, a Bill was introduced into Federal Parliament which is intended to clarify the scope of personal liability faced by directors of trustee companies.
The Corporations Amendment Bill (No 1) 2005 proposes amendments to section 197(1) of the Corporations Act 2001 (Cth). Section 197(1) prescribes the circumstances in which a director of a trustee company will be personally liable for liabilities incurred by the company while acting (or purporting to act) as trustee. These changes arise from a decision of the South Australian Supreme Court in Hanel v O’Neill1 (2003) 48 ACSR 378; (2004) 22 ACLC 274; [2003] SASC 409. The court held that directors of trustee companies will be personally liable if there are insufficient trust assets out of which the trustee corporation can be indemnified.
The Bill is intended to clarify and correct the result of the decision in Hanel v O’Neill. The Bill was passed in the House of Representatives on 17 August 2005 and is now before the Senate.
Current law
Currently section 197(1) imposes personal liability on directors, and allows the corporate veil to be pierced in certain circumstances. Directors of a trustee company may be personally liable, individually and jointly with the company, for the payment of outstanding liabilities of the trust. They may be liable to discharge the whole or part of the liability if the trustee company cannot discharge the liability and the company is not entitled to be fully indemnified for the liability out of the assets of the trust. However the exact circumstances in which the section is intended to operate are not settled. The main source of debate and contention rests around the interpretation of when the trustee company will not be “entitled” to be fully indemnified out of the assets of the trust.
Prior to December 2003, section 197 had traditionally been interpreted to apply in very limited circumstances, such as where the trustee company had acted fraudulently or outside its powers. However the case of Hanel v O’Neill proposed a much wider interpretation of section 197(1). The majority in that case held that where there are no, or insufficient assets, comprising the trusts fund, then the trustee company is not entitled to be fully indemnified out of the assets of the trust. It follows that in those circumstances, a director would be personally liable for the outstanding debts of the trustee company, without regard to the conduct or state of mind of the directors.
Corporations Amendment Bill (No. 1) 2005
The Bill introduced amendments designed to address concerns about the effect of Hanel v O’Neill, and to restore the narrow interpretation of section 197 which existed prior to the decision. The Bill proposes that section 197(1) of the Act should be repealed and substituted for a revised section 197(1).
Under the revised section, a director will not be held to be individually and jointly liable with the trustee company merely because there are insufficient trust assets to satisfy a liability.
The proposed section provides that directors will be liable for the trustee company’s undischarged liabilities if the liabilities are not wholly covered by an indemnity solely because of one or more of the following:
- a breach of trust by the trustee company;
- the trustee company acted outside of the scope of its power as trustee in incurring the liability; and/or
- a term of the trust denies or limits the trustee company’s right to be indemnified
The Bill will insert a note below section 197(1) which expressly states that directors will not be liable under section 197(1) merely because there are insufficient assets to indemnify the trustee company. Under the proposed new section 197(1), the directors’ liability will not arise if the trustee company’s right of indemnity is lost for any reason other than those listed above.
Observations
If the proposed amendments to section 197(1) receive the Royal Assent (which we have no reason to believe will not happen) they will clarify the position of directors of trustee companies. Given the uncertainty in the current law exposed by the decision in Hanel v O’Neill this is a change that should be welcomed by all directors of trustee companies. However until the Bill is enacted, directors of trustee companies will continue to be exposed to the risk that they will be held liable for the debts of the company if the assets of the relevant trust are insufficient to satisfy the trusts’ liabilities.
Directors of trustee companies should continue to ensure that the acts and purported acts of the trustee company accord with the company’s rights, powers and fiduciary obligations as trustee, both under common law and as prescribed in the relevant Trust Deed. Directors should also ensure that Trust Deeds include a clear, broad and enduring indemnity, and the trustee company’s liability is limited to the assets of the trust. It is recommended that in agreements with third parties, the trustee company’s liability be expressly limited to the value of the trusts’ assets. Although it is sometimes difficult to include such provisions in contracts, directors should carefully weight the risks and consequences of entering into contracts without adequate protective provisions.
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