Contracts with Trustees

Wednesday, November 22, 2023

Trust structures often create confusion and legal issues for creditors.  Trade creditors may not even realize they are trading with a customer as trustee of a trust. 

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Consider the following points before entering into any contracts:

  • A Trust is not a separate legal entity.
  • You sue the trustee, not the trust.

The trustee is the proper defendant in respect of any proceedings or claims arising out of the activities of the trust.  The trustee is personally liable for its acts and commissions as trustee, including ordinary trading debts that are incurred.  The trustee is legally responsible for unpaid liabilities, as the trustee is the one exercising legal rights on behalf of the trust.  The trustee’s personal liability to the trust’s creditors is generally unlimited, unless that liability has been modified or excluded by a contract.  Trustees have what is referred to as a ‘right of indemnity’ over the assets of the trust to recoup the liabilities and pay the debts the trustee incurred whilst lawfully acting on behalf of the trust.  This valuable right creates a lien and charge (security interest) in favour of the trustee that takes priority to any of the beneficiaries or later appointed trustee.

  • Trust assets cannot be attacked directly

Unsecured trade creditors cannot attack trust assets directly.  As the trustee is the entity that incurs liabilities in the course of trade, the trustee is personally liable to be pursued by creditors.  Insolvency proceedings may be taken against a trustee, if it does not pay the debts.

  • Know who you are trading with

In our experience, it is not unusual for trading trusts to apply for credit, sign contracts or terms and conditions by identifying only the name of the trust (as opposed to the trustee), and for the trade creditor to not possess a copy of the trust deed.  This creates considerable difficulty for the creditor in pursuing an unidentified trustee.  Properly drafted contracts and terms and conditions will identify the trustee as the contracting party not merely name the trust which is irrelevant.

If you would like advice on any contract you are thinking of entering into, then email us today.

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