The quick guide to the duties, powers, and liabilities of being a trustee

The quick guide to the duties, powers, and liabilities of being a trustee

So, you’ve just been appointed as a trustee – congratulations.  It’s just like being a director of a corporation right?  Not quite.  While similar, a trust isn’t a separate legal entity like a corporation is which means that when entering into contracts it is going to be you as trustee that is bound to perform the contractual obligations and not a separate entity (as is the case in a director and corporation situation where the director signs to bind a separate legal entity, the company as opposed to himself/herself).

There are also certain situations where a Trustee can become liable for the debts owing by the Trust.  If you are interested in reading more about this, please refer to our earlier article “Why a Corporate Trustee is always a good idea”: http://www.jhklegal.com.au/why-a-corporate-trustee-is-always-a-good-idea/.

What is a trust then?

A “trust” is the legal relationship formed between one or more person(s) or an entity (here you, the Trustee) and another person(s) (the beneficiaries) for you to hold and deal with certain property (the Trust Property) at all times for the benefit of the beneficiaries (the trust obligation) and in accordance with certain duties (generally set out in the document establishing the relationship of trust (known as the Trust Deed)).

What are your responsibilities?

In acting as Trustee, your primary responsibility is to act in accordance with the Trust Deed.  In addition to the Trust Deed (or where there is none) there are several responsibilities placed on trustees by common law (court decided law) and legislation (government made law) (Trustee’s Duties).

  1. Duty to preserve trust property: you must act in a manner to preserve and safeguard the Trust Property against loss – this extends to both the income and capital held in trust for the beneficiaries.
  1. Duty to exercise reasonable care: in managing the affairs of the trust, you must perform the Trustee’s Duties with the reasonable care and skill that an ordinary business person would expend in managing similar affairs of their own.
  1. Duty not to make a profit out of the trust: acting as trustee means you are not entitled to make any profit out of the relationship of trust between you and the beneficiaries and, if you do so, you must account for such profit to the Trust.
  1. Duty to keep accounts: you must keep proper, up-to date and accurate accounts and make them available to a beneficiary on request.
  1. Duty to provide information to beneficiaries: you are required to provide all information to the beneficiaries as it relates to their interest in the trust. On-going performance of this duty is essential to allow beneficiaries to ensure that you are properly administering the Trust.
  1. Duty to act in person: unless the Trust Deed provides otherwise, you are personally responsible for exercising the duties of trustee (though you are permitted to consult with others to exercise those duties, such as the beneficiaries and accountants). Trust Deeds usually contain provisions allowing a trustee to retain accountants and lawyers to perform specific tasks.

Where this is the case, the Trustee must strictly comply with the scope of these provisions and not delegate any additional tasks to these external consultants.

  1. Duty to act impartially: you must act impartially between beneficiaries and not favour the interests of one beneficiary more than another.

Where you are appointed as a director of a corporate trustee, remember that in addition to ensuring that the corporation acts in accordance with its Trustee’s Duties, as a director you are subject to director’s duties under the Corporations Act 2001 (Cth).  Where you fail to perform your duties, a beneficiary is entitled to apply to the Court for an order compelling you to perform.  Generally speaking, you will only be compelled where it is shown that you are refusing to perform your duties and that such refusal is not in good faith.

In order to administer the Trust Property, you are provided with the power to do all acts necessary to preserve the Trust Property.  The scope of this power is outlined in the Trust Deed, but we provide below an explanation of some of the key powers generally found in Trust Deeds:

  1. Power to sell Trust Property: unless the piece of property to be sold is a depreciating asset, you are not able to sell Trust Property unless the power is specifically provided for in the Trust Deed. If the Trust Deed is silent and you wish to sell all or part of the Trust Property then an application must be made to the Court seeking an order allowing the sale to occur (or the consent of all beneficiaries obtained).
  1. Power to mortgage or lease Trust Property: this power is distinct from the power of sale. The power of sale does not provide you with an automatic right to mortgage the Property. The Trust Deed must provide this power to you and the mortgage power must only be exercised in good faith for the benefit of advancing the Trust Property.  In terms of leasing, the power is construed in accordance with the Trust Deed or, where the Trust Deed is silent, operates pursuant to legislation in each State/Territory (with different rules applying as to the terms of the lease).
  1. Power to insure Trust Property: you have the power to insure Trust Property against loss and/or damage with this power extending to insuring the Trust Property against any risk that a prudent person would insure such property against if it were their own. In some States and Territories, legislation prevents insuring property for more than its value (or liability).  Insurance Premiums can be paid from the income of the Trust.
  1. Power to repair or improve Trust Property: the scope of this power is generally construed having regard to the terms of the Trust Deed. Where the Trust Deed is silent, you are able to ensure that the Trust Property remains in good repair and order.  This power is essential for you being able to comply your duty to preserve the Trust Property.
  1. Power to carry on a business utilising Trust Property: in Queensland and Western Australia there is a limited legislative power to carry on a business where the Trust Deed is silent. Otherwise, the business must be conducted strictly in accordance with the terms of the Trust Deed.
  1. Power to compromise: provided you are acting in good faith in doing so, you are entitled to compromise or settle claims against the Trust Property.

Where you breach your Trustee Duties or fail to administer the Trust Property in accordance with the terms of the Trust Deed you become liable to account to the Trust for any loss caused by your failure to perform your duties (and to put the Trust Property back into the same position it was in).

You may be able to defend against a claim for breach of your Trustee Duties if you can show that you acted honestly and reasonably at all times in exercising the Trustee’s Duties.

As you can appreciate, the above is just a summary of what is a very broad area of law and is not intended to be a substitute for legal advice.

Before agreeing to be a trustee we recommend that you obtain advice about the scope of your duties and powers under the Trust Deed and legislation applying in your State/Territory.

ASSOCIATE

BELINDA PINNOW

What is the process of issuing a notice under the Subcontractors’ Charges Act 1974 (Qld)?

A Form 1 Notice of Claim of Charge and Form 2 Notice to Contractor of Claim of Charge Being Given (“the Notices”) are often issued in circumstances where the contractor is experiencing financial difficulties. The construction industry is the second highest industry in number of external administrations between December 2015 and September 2016, at 1530 companies.

The Notices are an effective tool which allows a subcontractor to essentially leapfrog the contractor and seek to recover outstanding funds from the principal/developer/owner (“the Principal”). This includes retention monies and any security monies held by the Principal.

Who can issue the Notices?

A subcontractor who has been engaged to undertake work by a contractor is entitled to claim a charge over money payable to the contractor by the Principal, provided the work undertaken by the subcontractor is within the meaning of work under Subcontractors’ Charges Act 1974 (Qld) (“the Act”) and the funds have not yet been paid to the contractor by the Principal.

Pursuant to section 3 of the Act, the definition of work “includes work or labour, whether skilled or unskilled, done or commenced upon the land where the contract or subcontract is being performed by a person of any occupation in connection with—

(a) the construction, decoration, alteration or repair of a building or other structure upon land; or

(b) the development or working of a mine, quarry, sandpit, drain, embankment or other excavation in or upon land; or

(c) the placement, fixation or erection of materials, plant or machinery used or intended to be used for a purpose specified in paragraph (a) or (b); or

(d) the alteration or improvement of a chattel;

and includes also the supply of materials used or brought on premises to be used by a subcontractor in connection with other work the subject of a contract or subcontract but does not include—

(e) the mere delivery of goods sold by a vendor under a contract for the sale of goods, to at or upon land; or

(f) work or labour done or commenced by a person—

(i) under a contract of service; or

(ii) in connection with the testing of materials or the taking of measurements or quantities; or

(g) the supply under a contract of hire of materials, plant or machinery not intended to be incorporated in the work.”

How are the Notices issued?

The Notices may be downloaded from the Queensland Building and Construction Commission website.

In order to complete the Notices, a subcontractor must know:

  1. The name and registered office of the Principal;
  2. The name and registered office of the contractor;
  3. The specifications of the contract. E.g. reference numbers or the date it commenced.
  4. The address the works are being carried out;
  5. The amount being claimed (including GST);
  6. The particulars of the claim. E.g. the details of the work undertaken; and
  7. The dates between which the work was undertaken.

Pursuant to section 10A of the Act, the claim must be certified by a qualified person who is:

  • “an architect registered in accordance with the Architects Act 2002;
  • a registered professional engineer under the Professional Engineers Act 2002; or
  • a person licensed under the Queensland Building and Construction Commission Act 1991 to carry out or supervise work of the type to which the claim relates; or
  • a quantity surveyor who is a member of the Australian Institute of Quantity Surveyors; or
  • a person having expert knowledge of the work to which the claim relates who is accepted in a particular case as a qualified person by the contractor and subcontractor.”

The qualified person must not have a direct or indirect specific interest in the work.

A Notice of Claim of Charge must also be supported by a statutory declaration of the subcontractor about the correctness of the claim and the amount claimed. Pursuant to section 10(9) of the Act, an officer of a corporation means:

  • if the corporation is a corporation under the Corporations Act 2001 (Cwlth)—a person who, under that Act, is an officer of the corporation; or
  • otherwise—a person, by whatever name called, who is concerned, or takes part, in the management of the corporation.

Once the Notices have been completed, service is effected by serving the Notices pursuant to section 109X of the Corporations Act 2001 (Cth). We often recommend that the Notices are also emailed to the contractor and the Principal.

When should the Notices be issued?

Pursuant to section 10(2), the Notices may be issued although the work is not completed or the time for payment of the money has not arrived, but if the work is completed, the Notices must be issued within three months after such completion.

Notices in respect of retention money only may be given at any time while work under the subcontract is being performed, but must be given within three months after the expiration of the period of maintenance provided for by the subcontract and no later.

What are the consequences of issuing the Notices?

Pursuant to section 11 of the Act, once the Notices are issued, the Principal must retain, until the court in which the claim is heard directs to whom and in what manner the funds is to be paid. A Principal who fails to retain that amount is personally liable to pay to the subcontractor the amount of the claim not exceeding the amount that the person is required by this section to retain.

What are the steps of enforcing the Notices?

Pursuant to section 15 of the Act, proceedings in respect of a charge under the Act must be commenced within four months after such retention money or the balance thereof is payable or within one month after the Notices have been issued.

It is critical that a subcontractor commences proceedings within the relevant timeframes “as every charge is deemed to be extinguished unless the subcontractor duly commences a proceeding … to enforce it.”

The Act is very technical and great attention to detail is required when drafting the Notices to ensure that the Notices have been correctly issued and are able to be enforced.

LAWYER

ALEKSANDRA SYMENOVYCH

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Duties of Directors

‘The business of a company is to be managed by or under the direction of the directors.’

Being a director of a company comes with certain legal duties and responsibilities. These are often confusing and can catch directors off guard when they are unaware of their obligations. Below, we explain and simplify the main responsibilities of a director. It is firstly important to note, the legal definition of director includes a person who may not be formally appointed as a director, however is acting in the capacity of a ‘shadow’ director.

Duty of Care and Diligence

Every director must discharge their duties and exercise their powers with a degree of care and diligence. This means that when making a business judgment, it should be made:

  • In good faith for a proper purpose,
  • With no material personal interest in the subject matter,
  • By being reasonably informed, and
  • In the best interests of the company (this must be a rational judgment)

A business judgment is any decision to take or not take action of a matter relevant to the business operations of a company.

Good Faith

Directors must discharge their duties and exercise their powers for a proper purpose and in good faith in the interests of the company. A director commits an offence if they are reckless and intentionally dishonest.

Use of Position

Any officer or employee of a company must not use their position dishonestly or recklessly gain advantage for a person (whether that be themselves or another person) or cause detriment to the company.

Use of Information

As a director, you will gain access to information as a result of your position. Any officer or employee of a company must not improperly use information to gain advantage for themselves or another person or to cause detriment to the company. It is important to note that this duty continues even after a person resigns as director.

A director commits a criminal offence is they are reckless or intentionally dishonest and fail to discharge their duties and exercise their powers in good faith in the best interests of the company or for a proper purpose, if they use their position dishonestly

Getting advice when making a business judgment

If a director relies on information or professional or expert advice from:

  • An employee of the company that the director believes (on reasonable grounds) is reliable and competent in the matters concerned;
  • A professional adviser or expert on a matter that the director believes on reasonable grounds to be within the person’s professional expertise;
  • Another officer of the company who has authority;
  • A committee of directors that the director was not part of;

and the reliance was made in good faith, after making an independent assessment of the information or advice, reliance on the information will be taken to be reasonable unless the contrary can be proved.

Delegating responsibility

If a director delegates any of their responsibilities to another, the director remains responsible for the exercise of power by a delegate. If however, the director believed (on reasonable grounds) that the delegate would exercise the power legally complying with all obligations imposed on a director and the director believed in good faith and after making inquiry (if the circumstances required), the director will not be responsible for the delegate’s non-compliance.

Directors obligations when company is a trustee

A director of a company who incurs a liability as trustee must discharge the whole or part of the liability if the company has not or cannot discharge the liability and the company is not entitled to be fully indemnified against the liability out of the trust assets solely because of:

  • A breach of trust of the company; or
  • The company was acting outside the scope of its powers as trustee; or
  • A term of the trust denying or limiting the company’s right to be indemnified against the liability.

The director will be liable both personally and jointly with the company and any other persons. If the director was entitled to have been fully indemnified by one or more of the other directors against the liability, they will not be liable.

Personal liability of a director if company goes into liquidation

A director may be held liable by the liquidator of the company also.

Duty not to trade whilst insolvent

As well as the general duties detailed above, directors have a duty to prevent the company from trading if it is insolvent. The definition of solvency is ‘able to pay their debts as and when they fall due.’ When new debts are incurred by the company, directors must ensure the company can pay these debts as they fall due. Further thought needs to be given as to whether the company will become insolvent because of incurring the debt. A director must be constantly aware of the company’s financial position. If a director has been found to be trading a company whilst insolvent, they may become personally liable.

It is a defence if the director had reasonable grounds to expect and did expect the company was solvent and would remain solvent after incurring the debt and any other debts. It is also a defence if, when the debt was incurred, the director had reasonable grounds to rely on advice provided that the company was solvent. If the director was not partaking in the management of the company because of illness or some other good reason or if they took all reasonable steps to prevent the company from incurring the debt, these will also be defences against insolvent trading.

If you have just become a director of a company that you suspect is insolvent, you should contact a legal practitioner urgently. There may be available avenues of defence if you act immediately upon your appointment.

Duty to keep proper books and records

It is an obligation for each company to keep proper books and records – this means up to date financial records and evidence of all company accounts and liabilities. If a company fails to keep proper books and records, it may be an indicator of insolvency. A director is responsible for ensuring the company complies with keeping financial records adequately recording transactions.

Unreasonable director-related transaction

If a director or nominee received an unreasonable benefit either by paying money, issuing securities or incurring obligations, the director may be held liable for the loss suffered by the company because of entering into the transaction.

Preference payments

If payments are made to certain creditors which prioritise debts over other creditors, the liquidator will request these payments be paid back by creditors to become part of the pool of assets the liquidator will divide amongst creditors equally.

Director Penalty Notices

A director can be held personally liable by the ATO if they fail to lodge or remit PAYG withholding tax or pay superannuation contributions. Please refer to our detailed article on Director Penalty Notices here: How powerful is the Australian Taxation Office? Very, according to Directors Penalty Notices!

The above is general guidance only and does not replace the need to get specific advice. If you are a director and unsure of your obligations or liabilities, we strongly recommend you obtain legal advice as soon as you become aware of any of the above. Ignoring any of these issues may likely become detrimental personally.

Aamena Hussein

SENIOR ASSOCIATE

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