What you need to know about trading with a Trust

What you need to know about trading with a Trust

‘Trading trusts’ are now quite common in Australia. The term refers to a legal entity (the trustee) conducting a business under the authority of a trust instrument in its capacity as trustee. Trust structures regularly create confusion and many legal issues for creditors. Often, problems do not come to light until a trade relationship sours, and it is not uncommon for some creditors to not even realise that they are trading with a customer as trustee of a trust.

As a starting point, it is important to understand that whilst each trading trust will have a name, a trust is not a separate legal entity. Instead, it is a relationship where the trustee (whether a person or another type of legal entity such as a company) holds and deals with property for the benefit of the beneficiaries of that trust.

Whilst the trustee holds the property ‘on trust’ for the beneficiaries, at law the person or entity entitled to deal with the assets of the trust is the trustee. This means that when you are dealing with the trust, you are actually dealing with the trustee. Because the trustee is acting on behalf of the trust, it is legally responsible for any trust debts. A such the trustee is generally personally liable for its acts and omissions as trustee, including debts incurred on behalf of the trust. In simple terms, if you need to sue a trust, you sue the trustee.

However, trustees have what is known as a ‘right of indemnity’ against the trust assets to recoup the liabilities and pay the debts the trustee incurred whilst acting lawfully on behalf of the trust. This right creates a security in favour of the trustee that takes priority to any of the beneficiaries or any later appointed trustee.

Further, if you are planning on trading with a trust then at a minimum you ought to request a copy of the trust deed. A trust deed ordinarily documents the nature of the relationship between the trustee, the beneficiaries and how the assets may be dealt with. In addition, company minutes confirming that a company is acting in its capacity as trustee of the trust (if the trustee is a company) and/or a separate bank account statement for trust money can be helpful documents in establishing that there is a trust relationship.

The takeaway message from the above is that you need to know who you are actually trading with. It is not unusual for trading trusts to apply for credit 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 in turn creates considerable difficulty in pursuing an unidentified trustee as there is currently no publicly searchable register of trustees. Somewhat unsuprisingly, trustees who owe debts do not routinely cooperate with creditors by then providing identifying details on a voluntary basis.

Indeed, the easiest way to garner a level of protection is to have a properly drafted credit application form which requires a customer to complete the necessary fields to capture the relevant information, specifically:

(a) who is the trustee and if the trustee is a company, what is its ACN?

(b) what is the trust’s ABN?

(c) does the credit application form confer a security interest, and if so, does it extend to both assets held in the trustee’s own right and on trust?

In summary, complexities often arise when dealing with trusts. Businesses and individuals should take considerable care to be aware of the above and ensure that their interests are protected right from the outset as often trying to ‘fix’ the problem down the track can be both time consuming and costly.

Finally, if you have read this far and think that you need some practical advice or assistance in relation to your matter, then now is probably the time to get in touch. Austral Legal can help and we offer an initial discounted 30-minute SmartMove appointment for $80 by phone or in person at our office. Bookings can be made online through our website or simply by phoning our office on 08 9745 9550. Once we have a handle on what is required, we may well be able to offer a fixed fee for any further legal services, giving you cost certainty from the start. Austral Legal. Practical advice.