12 August 2004
In South Australia, highly likely.
In NSW, yes ... or maybe not.
In the rest of Australia, perhaps.
That's the situation this week, as courts grapple with an unexpected side-effect of a 2000 amendment to the Corporations Act.
At issue is whether an indemnity out of trust assets can protect trustee company directors from personal liability for trust debts.
Until recently, directors weren't liable for trust debts if the company had such an indemnity - even if the trust's assets weren't sufficient to meet the indemnity. However, the South Australian Supreme Court late last year said that a little-noticed amendment in 2000 had completely changed the law.
Background
For reasons which no-one has been able to discover, section 197 of the Corporations Act was re-written by the first CLERP Act in 2000. The new provision says:
"A person who is a director of a corporation when it incurs a liability while acting, or purporting to act, as trustee, is liable to discharge the whole or a part of the liability if the corporation:
(a) has not, and cannot, discharge the liability or that part of it; and
(b) is not entitled to be fully indemnified against the liability out of trust assets.
This is so even if the trust does not have enough assets to indemnify the trustee."
Until the matter came up in the SA Supreme Court in December last year, no-one gave much thought to the new section. However, the SA Court in Hanel's case noticed that there is a problem with the last sentence. Does it refer to:
The majority of the judge's in Hanel's case opted for the first meaning. This means that directors are personally liable if the trust doesn't have sufficient assets to meet the trust debts. An indemnity will only protect directors if there are sufficient trust assets to back it up.
This completely changes the law and greatly expands trustee directors' personal liability. Among other things, it means that trustee company directors can be liable for debts without any of the defences that are usually available for insolvent trading.
NSW weighs in
Given the significance of this, it's no surprise that it has been the subject of some debate.
The first shot was fired in a speech to a legal seminar by Austin J (NSW Supreme Court) in February. His Honour diplomatically (but firmly) indicated his disagreement with the Hanel decision.
Two weeks ago, the issue came up in a NSW Supreme Court case (Intagro v ANZ Banking Group). McDougall J endorsed Austin J's criticisms of Hanel. But (and it's a big but), he couldn't see a legally valid alternative argument. Accordingly, he followed Hanel.
This means that, in SA and NSW, indemnities may not protect trustee directors if there aren't sufficient assets in the trust.
The tale took another twist last Friday. In the course of dealing with different legal issue, the NSW Court of Appeal took the opportunity to make it clear that it disagreed with Hanel. Unfortunately, the Court of Appeal didn't have to rule on the point, so its comments - although important - don't have any binding effect.
The outcome
The end result is one of legal confusion.
In South Australia, trustee directors are very likely to face expanded liability.
In NSW, they currently face expanded liability, but, if the matter ever goes to the Court of Appeal, that may change.
In the rest of Australia, the Hanel and Intagro decisions currently state the law. However, other States' courts are free to disagree if the matter comes before them.
This is clearly an unsatisfactory state of affairs. It can only be authoritatively resolved by:
In the meantime, trustee directors should consider managing their potential liability by:
