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Corporate Trustee Director’s Duties

Corporate Trustee Director’s Duties

By Wisewould Mahony
September 9, 2016

Directors of trustee companies must ensure that they comply with all relevant regulations or they may be personally liable for any damages caused by the trustee.

Of the various corporate structures available, trusts are often recommended as they can provide asset protection and reduce the amount of tax payable.

The most common types of trusts are Unit Trusts, Discretionary Trusts and Testamentary Trusts.

When establishing a trust, the parties must appoint a trustee. The trustee can be an individual or a company. The trustee of a trust owes duties under legislation and common law to the trust. In certain circumstances, for example a breach of those duties, the trustee is personally liable to the trust.

When deciding whether the trustee of a trust should be a company or an individual it is relevant to consider whether the legal principle of separate legal entity shields the director of a trustee company (Trustee Director) from liability in the event of breach of trust.

Common Law Duties

The trustee of a trust (either an individual or corporate trustee) owes Common Law duties to the trust.

These duties include:

  • Understanding the trust deed: the trustee must ensure that they have a thorough knowledge and understanding of the trust deed
  • Complying with the terms of the trust
  • Preserving and protecting trust property
  • Duty of fidelity to the trust
  • Duty to use diligence and prudence
  • Seeking advice where necessary
  • Not to permit the discretion of the trustee to be restricted by a third party or beneficiary; and
  • To act impartially between beneficiaries unless the trust deed provides otherwise

A trustee company and the Trustee Director will owe the above listed duties to the trust. The Trustee Director will owe these duties over and above their ordinary director’s duties under the Corporations Act 2001 (Cth) (Corporations Act).

Fiduciary duties

A trustee also owes fiduciary duties to the beneficiaries of the trust. A fiduciary cannot have a conflicting personal interest or conflicting duty owed to a third party and cannot profit from his or her position as a fiduciary.

It is therefore the responsibility of the Trustee Director to ensure that the trustee company complies with these fiduciary duties.

Legislation and Self Managed Super Funds (SMSF)

Certain trusts are subject to specific legislation. SMSF’s are subject to the Superannuation Industry (Supervision) Act 1993 (SIS). The SIS Act imposed additional obligations for Trustee Directors of SMSF’s which include the duty to: 

  • Act honestly
  • Exercise care, skill and diligence in managing the fund
  • Act in the best interest of all fund beneficiaries
  • Keep the money and assets of the fund separate from other assets (such as the trustees’ personal or business assets)
  • Retain control over the fund
  • Develop and implement an investment strategy 
  • Allow members access to information about the fund

A Trustee Director of a SMSF must also ensure compliance with the sole purpose test, the relevant investment strategy and understand the regulations surrounding member contributions and the proper administration of the SMSF.

Consequences and Penalties for Breach

In addition to any consequence and penalty for breach of director’s duties, a director of a trustee company may be personally liable for liabilities incurred by the company as trustee of the trust under section 197 of the Corporations Act.

The personal liability of a Trustee Director may extend to the insolvency of the trustee company where:

  • the trust deed specifically excludes the right of indemnity; or
  • the trustee company is not entitled to be completely indemnified out of the assets contained in the trust for some other reason; such as a breach of trust by the trustee company.

Directors’ Liability for PAYG withholding and Employees’ Superannuation

Directors have personal liability for a company’s unpaid PAYG withholding and Superannuation. This personal liability applies equally to a company acting in its own right and a company acting as trustee of a trust. 

Summary

Trustee Directors are not shielded from their obligations to the trust through the imposition of a trustee company. While there are a number of benefits of having a company as the trustee of a trust, the Corporations Act and Common Law protect beneficiaries from the deliberate wrongdoing of Trustee Directors. In those circumstances, Trustee Directors may find themselves personally liable.

If you are appointed as the director of a corporate trustee of a trust, it is therefore important that you understand your duties.

Wisewould Mahony can assist with:

  • review of trust deeds for liability issues;
  • resolving disputes between beneficiaries and trustees; and
  • preparing trust deed and structuring advice

James Allen
Solicitor
Corporate & Commercial