Directors of Corporate Trustees Beware!

24th June, 2011

Are you personally liable for debts?

BE AWARE...

Section 197 of the Corporations Act 2001 is often overlooked as a rather innocuous and frequently forgotten section.  However, its implications are significant and both directors of trustee companies and those who deal with trading trusts should be aware of its consequences.

WHAT IS SECTION 197 ABOUT?

Section 197 was introduced into the Australian corporate law regime in the mid 1980s for the protection of unsecured creditors who deal with trading trusts.  Generally, a trustee is liable for any debts incurred whilst acting as trustee.  To cover these debts, trustees are usually entitled to be indemnified out of trust property.  A creditor who incurs a trust debt is normally entitled to recover that debt either from the trustee company or by "stepping into the shoes" of the trustee and exercising the right of indemnity against trust property.

However, where a corporate trustee is unable to discharge the whole or part of this debt because it has insufficient assets and has lost the right of indemnity from trust assets, creditors are seemingly unable to recover.  In these circumstances,  section 197 will impose personal liability on the directors of the corporate trustee.

HOW DOES IT WORK?

Consider the example of a trust that has assets of $1,000 and a trust deed restricts the trustee's right to be indemnified to $500,000.  Where the corporation incurs a legitimately incurred liability of $300,000, the directors will not be personally liable under section 197 as the corporation is entitled to be fully indemnified from trust assets, even though there are insufficient assets to meet the liability.

However, where a trust has assets of $300,000, the trust deed restricts the trustee's right to be indemnified to $500,000 and the corporation incurs liability of $600,000 which cannot be discharged, under section 197 the directors are potentially liable as the corporation is not entitled to be fully indemnified.

FOR MORE INFORMATION

At Scoglio Law we can assist you with all aspects of commercial litigation under the Corporations Act.  If you are a director who is interested in understanding your potential personal liabilities, or simply want more information about how our processes can work for you, please contact Tony Scoglio of Scoglio Law on (07) 3833 2100 or email tony@scogliolaw.com.au.

Scoglio Law eNewsletter is a service to clients and associates of Scoglio Law. The advice is of a general nature and for particular legal problems, it is always best to seek one-to-one advice. If you do not wish to receive any further newsletters, please click on the ‘unsubscribe' button below.