Directors of companies face a multitude of responsibilities, potential exposures and personal liabilities.
The Corporations Act imposes an additional responsibility on directors of companies which act in a trustee capacity. Trustees will ordinarily have a right of indemnity against the assets and property of the trust to discharge liabilities, which it incurs in its capacity as trustee. However, if that right of indemnity is unable to be called upon, then the Corporations Act may impose a liability on directors of trustee companies, for any unsatisfied liabilities which the company incurred in its capacity as trustee.
Specifically, Section 197 of the Corporations Act imposes a potential liability on a director of a company when it incurs a liability while acting or appointed to act as trustee where:
- a corporation has not discharged and can not discharge the liability and
- the corporation is not entitled to be fully indemnified against the liability out of trust assets solely because:
- there has been a breach of trust by the corporation, or;
- the corporation is acting outside of the scope of its power as trustee (ultra vires), or;
- there is a term of the trust deed which denies or limits the corporation’s right to be indemnified against it the liability.
In this situation, the director would be liable for any unsatisfied liability which the trustee corporation has incurred, but which has not discharged.
Directors of trustee companies need to be careful of any limitation of liability, which may arise due to the conditions of any relevant trust deeds or through breaches of the trustee company. This may limit the company’s right of indemnity against trust assets.
