Commercial trusts 9780409338829, 0409338826

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Commercial Trusts

Nuncio D’Angelo LLB/BJuris (NSW), LLM, PhD (Syd) Legal practitioner admitted in New South Wales, Victoria and Western Australia Partner and Head of Banking & Finance, Norton Rose Fulbright Australia

LexisNexis Butterworths Australia 2014

For my Darcey and Harry

AUSTRALIA

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National Library of Australia Cataloguing-in-Publication entry Author: Title: ISBN: ISBN: Notes: Subjects: Dewey Number:

D’Angelo, Nuncio. Commercial Trusts. 9780409338812 (pbk). 9780409338829 (ebk). Includes index. Trusts, Industrial — Australia. 338.850994

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Foreword A Massachusetts judge remarked more than a century ago on the ingenuity of the promoters of a trading venture who, by appointing trustees, managed to obtain for themselves ‘most of the advantages belonging to corporations, without the authority of any legislative act, and with freedom from the restrictions and regulations imposed by law upon corporations’: Hussey v Arnold 70 NE 87 (1904) at 87. So prevalent today is the use of trusts for commercial purposes that even lawyers lose sight of axiomatic distinctions. How else can one explain an allegation, apparently seriously pleaded, that ‘Homebush Unit Trust is a corporation and/or business name … liable to sue and/or be sued in and by its name and style’ (P&M Quality Smallgoods Pty Ltd v Leap Seng [2013] NSWCA 167 at [6]) or a resolution of trustees ‘that a final distribution be and is hereby made out of the asset revaluation reserve for the period ending 30 September 1995’ (Fischer v Nemeske Pty Ltd [2014] NSWSC 203 at [34])? These are but two examples of error directly traceable to what Justice Leeming recently described as ‘[t]he incorrect but prevalent notion that a trust is a legal person’ (Kelly v Mina [2014] NSWCA 9 at [103]) — a legal person, moreover, that is often perceived to have the characteristics of a company. Coalescence of two forms of business organisation in the minds of illinformed professionals is bad enough. What may be of greater concern is that ordinary investors will often be quite unaware (and possibly indifferent) whether they hold shares in a company, equitable interests in trust property, rights to be considered as objects of a trustee’s discretion or some ‘stapled’ combination of these. While fine print will usually provide explanation to those who care to read, aspects such as the comparative fragility of the limited liability of trust beneficiaries and the absence of any tailored regime of insolvent or rehabilitation administration for trusts will very likely not enter their consciousness. Nowhere are these matters more pronounced than in relation to registered managed investment schemes regulated by the Corporations Act

2001 (Cth). The statutory requirement that the responsible entity be a company (s 601FA) and the statutory statement that the responsible entity holds scheme property on trust for scheme members (s 601FC(2)) compel a potentially uneasy alliance of company and trust thinking. Despite efforts of some scholars to develop a contractarian theory of trusts, we continue, at least for the present, to see trustees’ duties and beneficiaries’ rights as non-contractual with trustees, as fiduciaries, subjected by equitable principle to a core and irreducible responsibility that public policy will not allow to be compromised by some collateral contract: Rinehart v Welker [2012] NSWCA 95 at [139]. Companies registered under the Corporations Act are unambiguously contractarian. The legislation causes the provisions adopted at formation and thereafter altered by statutory process to have contractual force between the corporation and its members and among the members: s 140. With trusts, however, there is no necessary contractual link between trustee and beneficiaries, although the trust may be accompanied by a contract. In the case of an unregulated investment trust, for example, investors’ applications for allotment of units or for recognition as transferees may cause their interests as beneficiaries to be supplemented by contract: Australia and New Zealand Banking Group Ltd v National Mutual Life Nominees Ltd (1977) 137 CLR 252. In the case of a registered managed investment scheme, an amalgam of trust and contract is directed by the statutory provision concerning scheme property noted above and its companion requiring that the scheme’s constitution be contained in a document that is legally enforceable as between the members and the responsible entity (s 601GB)1 — albeit in a way that allows alteration without the unanimous assent of the persons concerned: s 601GC. And what of the rule against perpetuities, the original purpose of which was concerned with free alienation of land? A company has perpetual succession and therefore no need to worry about remotness of vesting of the interests of its investors. Nor are questions of remoteness of vesting relevant to the trusts of a fund or scheme for the benefit of employees of a corporation: s 1346. Otherwise, creation of a valid non-charitable trust in this country2 requires compliance with some version of the perpetuities rule, so that any equivalent of perpetual succession may be elusive. A degree of forum shopping may be available (Augustus v Permanent Trustee

Co (Canberra) Ltd (1971) 124 CLR 245) and, in the case of a registered managed investment scheme, there will be a question whether the rule operates if the only trust is the statutorily imposed trust for members. The absence until now of a book devoted to commercial trusts may perhaps be explained by their use in diverse fields for diverse purposes. Asset securitisation, leveraged lease, intercreditor agreement, syndicated loan, subordinated debt, debenture stock, nominee holding, custodian service, mutual fund, collective investment scheme, client account, retention money, superannuation fund and pension scheme are some of a great many labels indicating fields of commercial endeavour in which the law of trusts plays an indispensable part. Aspects of applicable trusts principles are dealt with in specialised works on particular commercial topics. However books about equity and trusts as such usually do not emphasise the mercantile areas in which trusts are encountered and employed. This book comprehensively covers the field suggested by its title, combining legal analysis with economic insight, international comparison and practical guidance to make it a valuable companion for scholar and practitioner alike. R I Barrett Judges’ Chambers Court of Appeal Supreme Court of New South Wales Sydney March 2014 1.

The market assumes that covenant by deed poll is ‘legally enforceable’ in the required sense: ING Funds Management Ltd v ANZ Nominees Ltd [2009] NSWSC 243.

2.

Except in South Australia: see the Law of Property Act 1936 (SA) s 61.

Publisher’s Note This book is not, and is not intended to be, a complete exposition of all issues that may arise when dealing with commercial trusts, nor is it a definitive statement of the law on the subject matter. The materials in the Appendices do not address every issue that may arise. This book is not and should not be taken as professional legal advice. If you wish to take action based on the contents, or to use the materials in the Appendices, you should consider the applicable law carefully and, if necessary, seek expert professional advice (including in relation to tax impacts) that takes into account your specific circumstances. The publisher, author and endorsers of this publication each exclude liability for loss suffered by any person resulting in any way from the use of, or reliance on, this publication. The views expressed and positions taken in this book, including in the materials in the Appendices, are the author’s and do not necessarily reflect those of Norton Rose Fulbright Australia or any client. © LexisNexis. The legislation reproduced in this work does not purport to be an official or authorised version.

Preface I have two abiding fascinations that, at first blush, appear to have very little in common: commercial trusts (as defined in Chapter 1) and highpowered motorcycles. I acknowledge that a reference to motorcycles might seem an unconventional way to begin the preface to a book on trusts but it gives me an excuse to share a metaphor that I have long entertained, which goes to the heart of the argument in this book: had they never been invented, neither would be approved for use today. Both are powerful devices that provide users with advantages, some quite valuable, that are not available to those who choose competing devices, and both can be very appealing to those who can harness that power. But the trade-off in each case is greater risk. Indeed, so great are those risks that, in these heavily regulated times where state-imposed user protection is the norm, it is unlikely that either vehicle would be authorised for use if, having never existed, it was presented to the authorities today. The fact that they do exist and are tolerated despite these risks can be explained by a single irrefutable reality — both have been around longer than, and survived the emergence of, safer alternatives and their continuing widespread use and popularity simply makes it too difficult to abolish them now. Trusts in this form pre-date the limited liability company and not only survived the emergence of companies but, in Australia, have flourished despite them. They now co-exist with and indeed compete with Corporations Act companies as business vehicles, and can deliver many advantages not available to those who use companies. However, the very features that make them so attractive, that is unincorporated status and a lighter regulatory framework, expose participants to risks and uncertainties that simply do not exist for those who are involved with companies. Had these trusts never existed, it is almost inconceivable in the current investor and creditor protection environment that a proposal to establish them today would find favour with regulators or a properly informed market, at least as they are currently configured and regulated. This book is based on my PhD thesis, completed in September 2012, entitled The Trust: From Guardian to Entrepreneur. Why the Changing

Role of the Trust Demands a Better Legal Framework for Allocating Stakeholder Risk. While much of the doctrinal analysis and comparative elements remain, I have substantially rewritten some parts of it, omitted others and added new features to bring a greater practitioner focus but without, I hope, sacrificing too much of the substantive academic content. Some of the ideas and arguments in this book were explored by me in a number of published articles.1 Some but not all of these were written and published during my period of candidature and emanated from research conducted as part of it. Some were the result of collaborative work with colleagues. With some exceptions, I have not specifically footnoted these articles where I have used material that appeared in them. In this book I occasionally assert that something is market practice or usual practice, or is common or typical, or is observed from experience, without citation or other substantiation. The reader is invited to accept these assertions on the basis that I have practised in commercial banking and finance and corporate law in large commercial law firms in Australia, the United Kingdom and elsewhere, during a practising career spanning almost three decades which has involved close contact with commercial trusts. During this time, I have advised many financiers and other counterparties dealing with trusts, as well as investors, trustees and directors of trustees, including in relation to many of the issues the subject of this book. I have reviewed, drafted and negotiated many commercial trust instruments and other documents to which trustees are party, and have a high level of working familiarity with Australian market expectations and norms in relation to them. I have drafted or been involved in the drafting of precedent documents for dealing with commercial trusts as a partner of two global law firms. In writing my thesis I was fortunate indeed in having colleagues and friends who were prepared to offer themselves as sounding boards for my thoughts and theories, to read and comment upon draft materials and generally to provide moral and spiritual support. Some of them were generous enough to volunteer for a second tour of duty during the writing of this book. I thank in particular my professional colleagues and good friends Helena Busljeta, Rebecca Hope, Martin James, Diccon Loxton, John Moutsopoulos, Kathleen O’Grady and Paul Rogerson.

Much of the United States law comparative analysis and argumentation were developed during my time on exchange at Harvard Law School where I was fortunate to be able to engage with some of America’s leading trust law academics, including Professor Robert Sitkoff and Professor Bruce Mann, both of whom were generous with their time. My greatest debt, however, is to my doctoral supervisor, Professor Sheelagh McCracken of the University of Sydney Law School, for her wisdom and guidance, and for willingly devoting more of her time than I was entitled to expect, to help me bring to fruition the thesis on which this book is based; I could not have hoped for a better or more dedicated supervisor. I am grateful also to my associate supervisor, Professor Joellen Riley, now Dean of the Sydney Law School, for her ancillary support as my associate supervisor. Finally, I thank my examiners — protocol dictates that they remain anonymous — whose insightful comments have helped make this book a better work than the thesis on which it is based. Of course, despite all of this assistance, I retain responsibility for errors and omissions. Finally, and most importantly, I acknowledge the unwavering support of my loving wife Dimity and my darling children Darcey and Harry, who patiently indulged my obsession and tolerated long absences (both mental and physical) as I journeyed through the labyrinthine world of commercial trusts. The rate of change in this area has accelerated dramatically in the aftermath of the GFC. Even as I write, the law is in flux. Judgments are delivered with unsettling frequency; learned academics and practitioners continue to enrich the canon; law reform bodies toil tirelessly. On more than one occasion during the writing of this book a new development provoked a re-examination or revision. The French poet Paul Valéry is said to have remarked, with romantic ennui typical of the metier, that a poem is never finished, only abandoned. I have chosen to abandon this work by reference to the law and materials available to me on 31 March 2014. NED 1.

‘The Trust: Evolution From Guardian to Risk-Taker, and How a Lagging Insolvency Law

Framework Has Left Financiers and Other Stakeholders in Peril’ (2009) 20 Journal of Banking & Finance Law & Practice 279; ‘The Unsecured Creditor’s Perilous Path To a Trust’s Assets: Is a Safer, More Direct United States-Style Route Available?’ (2010) 84 Australian Law Journal 833; ‘When is a Trustee or Responsible Entity Insolvent? Can a Trust or Managed Investment Scheme be “Insolvent’?’ (2011) 39 Australian Business Law Review 95; ‘Shares And Units: The Parity Myth and the Truth About Limited Liability’ (2011) 29 Companies & Securities Law Journal 477; (with Helena Busljeta) ‘The Trustee’s Lien or Charge Over Trust Assets: A PPSA Security Interest or Not?’ (2011) 22 Journal of Banking & Finance Law & Practice 251; ‘The CAMAC Report on Managed Investment Schemes: Another Opportunity Missed?’ (2012) 23 Journal of Banking & Finance Law & Practice 253; (with Diccon Loxton) ‘Trustees’ Limitation of Liability: Myths, Mysteries and a Model Clause’ (2013) 41 Australian Business Law Review 142. Those articles were published by Thomson Reuters (www.thomsonreuters.com.au) and, where material from them is used, it is with their kind permission.

Table of Cases References are to paragraphs

A A & K Holdings Pty Ltd, Re [1964] VR 257 …. 2.122 Abacus Funds Management Ltd, Re (2006) 24 ACLC 211; [2005] NSWSC 1309 …. 2.155 Accounting Systems 2000 (Developments) Pty Ltd v CCH Australia Ltd (1993) 42 FCR 470 …. 5.57 ACN 007 528 207 Pty Ltd (in liq) v Bird Cameron (Reg) (2005) 91 SASR 570 …. 3.30, 3.34, 3.42, 3.50 Action A1 Pty Ltd v Chin Matter No 3179/97 [1997] NSWSC 421 …. 4.91 Adams v Zen 28 Pty Ltd [2010] QSC 36 …. 6.14 Adamstoun Holdings Pty Ltd v Brogue Tableau Pty Ltd [2007] WASCA 43 …. 3.2 Advanced Glazing v Multimetro, 2000 BCSC 804 …. 3.46 Agriculturist Cattle Insurance Co, Re; Official Manager, Ex p (1874-75) LR 10 Ch App 1 …. 3.84 Agusta Pty Ltd v Provident Capital Ltd (2012) 16 BPR 30,397; [2012] NSWCA 26 …. 4.136, 5.24, 5.30, 5.130 Alemite Lubrequip pty Ltd v Adams (1997) 41 NSWLR 45 …. 4.44 Alexander (t/as Minter Ellison) v Perpetual Trustees WA Ltd [2001] NSWCA 240 …. 4.35 Allam’s Estate, Re (1901) 199 Pa 573 …. 5.102 Alpha Wealth Financial Services Pty Ltd v Frankland River Olive Company Ltd (2008) 66 ACSR 594; [2008] WASCA 119 …. 2.124, 2.129

Alphena Pty Limited (In liq) v PS Securities Pty Ltd as Trustee of the Joseph Family Trust [2013] NSWSC 447 …. 6.14 Aluma-Lite Products Pty Ltd v Simpson [1999] FCA 1105 …. 5.29 AMP Capital Property Nominees Ltd v Westfield Management Ltd [2011] NSWCA 386 …. 2.124, 2.128 Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424 …. 3.89 Anders Utkilens Rederi A/S v O/Y Lovisa Stevedoring Co A/B ‘The Golfstraum’ [1985] 2 All ER 669 …. 5.136 Anderson, Re; Alexander, Ex p (1927) 27 SR (NSW) 296 …. 4.66, 4.90 Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; [2012] HCA 30 …. 7.42 ANZ Banking Group Ltd v Intagro Projects Pty Ltd [2004] NSWSC 1054 …. 3.80 Armitage v Nurse [1998] Ch 241 …. 4.18, 4.33, 4.35, 4.41, 4.43, 4.44, 4.81 Armstead and Margaret Wayson Trust, Re (1982) 29 BR 58 …. 6.75 ASIC v Australian Property Custodian Holdings Limited (rec & mgrs apptd) (in liq) (controllers apptd) (No 3) [2013] FCA 1342 …. 1.49, 2.36, 2.37, 4.39 — v Chase Capital Management Pty Ltd (2001) 36 ACSR 778; [2001] WASC 27 …. 3.54 — v Citigroup Global Markets Australia Pty Ltd (No 4) [2007] FCA 963 …. 2.139 — v Commercial Nominees of Australia Ltd (2002) 42 ACSR 240; [2002] NSWSC 576 …. 2.168, 6.14 — v IP Product Management Group Pty Ltd (2002) 42 ACSR 343; [2002] VSC 255 …. 3.54 — v Knightsbridge Managed Funds Ltd [2001] WASC 339 …. 6.33 — v Letten (No 7) (2010) 80 ACSR 401; [2010] FCA 1231 …. 6.14, 6.67, 6.68

— v Letten (No 17) (2011) 286 ALR 346; [2011] FCA 1420 …. 4.47, 4.49, 4.78, 5.114, 7.39 — v Sydney Investment House Equities Pty Ltd (2008) 69 ACSR 1; [2008] NSWSC 1224 …. 1.41, 2.97 — v Takaran Pty Ltd (2002) 43 ACSR 46; [2002] NSWSC 834 …. 2.168 — v Tasman Investment Management Ltd (2004) 50 ACSR 153; [2004] NSWSC 651 …. 2.168 — v — (2006) 59 ACSR 113; [2006] NSWSC 943 …. 2.168, 6.14, 6.22 — v Wellington Capital Ltd (2012) 91 ACSR 514; [2012] FCA 1140 …. 4.20 — v — (2013) 94 ACSR 293; [2013] FCAFC 52 …. 4.20 — v West (2008) 100 SASR 496; [2008] SASC 111 …. 1.41, 6.33 Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (2000) 202 CLR 588 …. 2.123, 2.124 Astley v Austrust Ltd (1999) 197 CLR 1 …. 3.28, 3.85, 4.5, 4.98 Attorney General v Blake [2001] 1 AC 268 …. 2.126 Australian Fixed Trusts Pty Ltd v Clyde Industries Ltd [1959] SR (NSW) 33 …. 2.86 Australian Pipeline Trust 01R, Re (2006) 59 ACSR 341; [2006] ATP 29 …. 3.55 Australian Securities Commission v AS Nominees Ltd [1995] FCA 1663 …. 2.168, 3.55 — v Marlborough Gold Mines Ltd (1993) 177 CLR 485 …. 2.148 — v Windsor [1995] FCA 1663 …. 1.49, 1.50, 4.47 Austrust Ltd v Astley (1996) 67 SASR 207 …. 3.85, 4.98

B Baden v Société Générale [1993] 1 WLR 509 …. 5.16 Baker v JE Clark & Co (Transport) UK Ltd [2006] EWCA Civ 464 ….

4.33 Balkin v Peck (1998) 43 NSWLR 706 …. 3.58, 3.69, 3.70, 3.78 Ballantyne v Ballantyne (2010) 272 LSJS 104; [2010] SASC 273 …. 2.124 Balsh v Hyam (1728) 2 P Wms 453 …. 3.62 Bank of Australasia v Breillat (1847) 13 ER 642 …. 3.32 — v Hall (1907) 4 CLR 1514 …. 6.27 Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221 …. 5.27 Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 …. 2.131, 2.134 Barescape Pty Limited as trustee for The V’s Family Trust v Bacchus Holdings Pty Limited as trustee for The Bacchus Holdings Trust (No 9) [2012] NSWSC 984 …. 4.28 Barnes v Addy (1874) LR 9 Ch App 244 …. 2.138, 5.16, 5.17, 5.18, 5.22 Bartlett v Barclays Bank Trust Co Ltd (No 1) [1980] Ch 515 …. 4.38 — v — (No 2) [1980] Ch 539 …. 4.150 Basis Capital Funds Management Ltd v BT Portfolio Services Ltd (2008) 67 ACSR 297; [2008] NSWSC 766 …. 2.129 Bastion v Gideon Investments Pty Ltd (in liq) (No 2) (2000) 35 ACSR 466 …. 2.92 Baumgartner v Baumgartner (1987) 164 CLR 137 …. 7.46 Beach Petroleum NL v Abbott Tout Russell Kennedy (1999) 48 NSWLR 1 …. 2.138 Beddoe, Re [1893] 1 Ch 547 …. 4.55, 4.72 Belar Pty Ltd (in liq) v Mahaffey [1999] 1 Qd R 477 …. 3.67, 4.21 Bell Group (in liq) v Westpac Banking Corp (No 9) (2008) 225 FLR 1 …. 2.36, 4.33, 4.107, 5.18, 6.26, 6.28 Blundell, Re (1888) 40 Ch D 370 …. 2.81, 4.59, 5.49, 5.63 Boardman v Phipps [1967] 2 AC 46 …. 2.30, 2.36, 2.134, 4.45, 4.81

Bofinger v Kingsway Group Ltd (2009) 239 CLR 269 …. 3.78, 5.27, 5.28, 5.115 Bogg v Raper (1998/99) 1 ITELR 267 …. 4.33 Boscawen v Bajwa [1996] 1 WLR 328 …. 5.27 Boston’s Will Trusts, Re [1956] Ch 395 …. 2.27 Box Valley Pty Ltd v Kidd (2006) 24 ACLC 471; [2006] NSWCA 26 …. 6.27 Bramalea Inc (Trustee of) v KPMG, 1999 CanLII 15013 …. 3.46 Bray v Ford [1896] AC 44 …. 2.30, 2.36 Breen v Williams (1996) 186 CLR 71 …. 2.35, 2.36, 2.37, 2.134, 2.135, 2.139, 4.25, 4.81 Brian Fletcher as trustee of the Brian Fletcher Family Trust v St George Bank Ltd [No 2] [2011] WASC 277 …. 2.33 Bridgewater v Leahy (1998) 194 CLR 457 …. 5.28, 7.8 Bristol & West Building Society v Mothew [1998] Ch 1 …. 2.35, 2.36, 4.28 Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd (2009) 260 ALR 643; [2009] FCAFC 147 …. 1.41 Bruce v L M Investment Management Ltd (2013) 94 ACSR 684; [2013] QSC 192 …. 6.14, 6.40 Bruton Holdings Pty Ltd (in liq) v Federal Commissioner of Taxation (2011) 193 FCR 442 …. 3.37 Burgess v Wheate (1759) 1 Wm Bl 123; 96 ER 67 …. 2.22 Burke v LFOT Pty Ltd (2002) 209 CLR 282 …. 7.40 Burns Philp Hardware Ltd v Howard Chia Pty Ltd (1987) 8 NSWLR 642 …. 2.122 Burton v Arcus (2006) 57 ACSR 468; [2006] WASCA 71 …. 3.54 Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd (2010) 77 ACSR 410; [2010] NSWSC 233 …. 6.28

Byrne Australia Pty Ltd (No 2), Re [1981] 2 NSWLR 364 …. 5.127, 6.14 Byrnes v Kendle (2011) 243 CLR 253; [2011] HCA 26 …. 1.34, 2.27, 2.124, 5.119

C Cachia v Westpac Financial Services Ltd (2000) 170 ALR 65; [2000] FCA 161 …. 3.1, 3.4 Capelli v Shepard (2010) 29 VR 242; [2010] VSCA 2 …. 6.20, 6.30, 6.33, 6.34, 6.35, 6.39 Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] 1 Ch 207 …. 4.127 Carter v Dennis Family Corporation [2010] VSC 406 …. 4.42 Caterpillar Financial Australia Ltd v Ovens Nominees Pty Ltd [2011] FCA 677 …. 6.14 Causley v Countryside (No 5) Pty Ltd [1996] NSWSC 394 …. 3.63, 3.80 C B Darvall & Darvall (A Firm) v Moloney (No 2) [2007] QSC 337 …. 4.77, 5.127 Centro Retail Limited and Centro MCS Manager Ltd, Re (2011) 255 FLR 28; [2011] NSWSC 1175 …. 4.25, 4.33 Chan v Zacharia (1984) 154 CLR 178 …. 3.32 Chapman, Re; Cocks v Chapman [1896] 2 Ch 763 …. 4.5 Charles v Federal Commissioner of Taxation (1954) 90 CLR 598 …. 2.104, 2.150, 2.160 Chennell, Re; Jones v Chennell (1878) 8 Ch 492 …. 4.66 Cherry v Boultbee (1839) 41 All ER 171 …. 4.78, 5.129 Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 …. 1.30, 1.35, 4.54, 4.59, 4.62, 4.63, 4.64, 4.67, 5.29, 5.77, 5.116, 5.126 Citibank NA v MBIA Assurance SA [2007] EWCA Civ 11 …. 2.139, 4.34 Claflin v Claflin 149 Mass 19 (1889) …. 7.57

Clark v Commissioner of Taxation (2009) 77 ATR 460; [2009] FCA 1401 …. 1.37, 4.57 CMG Equity Investments Pty Ltd v Australia and New Zealand Banking Group Ltd [2008] FCA 455 …. 4.42 Coad v Wellness Pursuit Pty Ltd (in liq) (2009) 71 ACSR 250 …. 4.63 Cochrane v Cochrane (1985) 3 NSWLR 403 …. 5.30 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 …. 5.119 Commercial Bank of Australia v Amadio (1983) 151 CLR 447 …. 7.46 Commissioner of Stamp Duties (NSW) v Simpson (1917) 24 CLR 209 …. 2.122 Commissioner of Taxation v Bamford (2010) 240 CLR 481 …. 2.160 — v Linter Textiles Australia Ltd (in liq) (2005) 220 CLR 592 …. 1.50, 2.160, 7.60 Commonwealth v Verwayen (1990) 170 CLR 394 …. 7.46 Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1985) 155 CLR 541 …. 3.31 Cooper v Commissioner of Taxation (2009) 76 ATR 91; [2009] NSWSC 880 …. 6.26 Correa v Whittingham [2013] NSWCA 263 …. 5.15 Corumo Holdings Pty Ltd v C Itoh Ltd (1991) 24 NSWLR 370 …. 7.60 Cox and Wheatcroft v Hickman (1860) 11 ER 431 …. 3.43, 3.83 Crowther v Thorley (1884) 50 LTR 43 …. 3.43

D Dalewon Pty Ltd (in liq), Re (2010) 79 ACSR 530; [2010] QSC 311 …. 4.60, 6.14 Daly v The Union Trustee of Australia Ltd (1898) 24 VLR 460 …. 4.85 Daniels v Anderson (1995) 16 ACSR 607 …. 1.50

— v AWA Ltd (1995) 37 NSWLR 438 …. 6.6 Deancrest Nominees Pty Ltd v Nixon (2007) 25 ACLC 1681 …. 5.30 Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 …. 5.57 Dennis Willcox Pty Ltd v Federal Commissioner of Taxation (1988) 19 ATR 1122 …. 3.50 Department of Health & Community Services v JWB & SMB (Marion’s Case) (1992) 175 CLR 218 …. 7.56 Dowse v Gorton [1891] AC 190 …. 2.81, 4.67 Dreiberg v Bettles & Carter as liquidators of Corindi Beach Developments Pty Ltd [2007] NSWSC 1204 …. 6.14 Duke of Norfolk’s Settlement Trusts, Re [1982] Ch 61 …. 4.45, 4.47

E Earl of Oxford’s Case (1615) 1 Ch Rep 1 …. 2.15 E C investment Holding Pte Ltd v Ridout Residence Pte Ltd [2013] SGHC 139 …. 6.14 Elders Trustee & Executor Co Ltd v E G Reeves Pty Ltd [1987] FCA 332 …. 1.50, 2.50, 2.68, 2.73, 4.90, 4.179 — v Higgins (1963) 113 CLR 426 …. 4.25 Elliot v Secretary, Department of Education, Employment and Workplace Relations [2008] FCA 1293 …. 3.37 Enhill Pty Ltd, Re [1983] 1 VR 561 …. 3.28, 4.62, 4.63, 5.126, 5.127, 5.128, 6.14 Environinvest Ltd, Re; Shepard v Downey (2009) 69 ACSR 530; [2009] VSC 33 …. 6.38, 6.68 Estate of the Assignment for the Benefit of Creditors of May, Re 405 BR 443 (2008) …. 6.77 European Assurance and Insurance Association, Re (1875) 1 Ch D 307 …. 3.84 Everest Canadian Properties Ltd v Mallmann 2007 BCSC 312 …. 2.160

Expo International Pty Ltd (in liq) v Chant [1979] 2 NSWLR 820 …. 6.27, 6.28

F Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22 …. 2.35, 4.81, 5.16 Federal Commissioner of Taxation v Bruton Holdings Pty Ltd (in liq) (2008) 173 FCR 472 …. 4.59, 4.62, 5.122, 5.127 — v Commercial Nominees of Australia Ltd (1999) 167 ALR 147; [1999] FCA 1455 …. 2.22 Ferry v Laible 27 NJ Eq 146 (1876) …. 5.102 Fidelity-Bankers Trust Co v Helvering 113 F 2d 14 (1940) …. 1.22, 2.113 Firma C-Trade SA v Newcastle Protection and Indemnity Association (The Fanti) [1991] 2 AC 1 …. 4.59 Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liq) [2002] FCAFC 285 …. 3.55, 3.70, 4.80 Foran v Wright (1989) 168 CLR 385 …. 7.46 Fraser v Power (2001) Aust Contract R 90-127; [2000] NSWSC 257 …. 5.27 French Caledonia Travel Service Pty Ltd (in liq), Re (2002) 42 ACSR 524; [2002] NSWSC 641 …. 6.14 —, Re (2003) 59 NSWLR 361; [2003] NSWSC 1008 …. 5.123

G Garland, Re (1804) 32 ER 786 …. 2.81, 5.102 Gatsios Holdings Pty Ltd v Nick Kritharas Holdings Pty Ltd (in liq) (2002) ATPR 41-864; [2002] NSWCA 29 …. 4.69, 4.149, 5.57 Gee, Re [1948] Ch 284 …. 4.47 General Credits Ltd v Tawilla Pty Ltd [1984] 1 Qd R 388 …. 4.88, 5.27, 5.30, 5.87, 5.140

Giumelli v Giumelli (1999) 196 CLR 101 …. 7.46 Glazier v Australian Men’s Health (No 2) [2001] NSWSC 6 …. 4.150 Glennon v Federal Commissioner of Taxation (1972) 127 CLR 503 …. 4.48, 4.117 Goldwater v Oltman 210 Cal 408 (1930) …. 3.39 Gordon v Campbell (1842) 1 Bell’s App 428 …. 4.161, 4.168, 4.177, 4.179 Gosper v Sawyer (1985) 160 CLR 548 …. 2.125, 2.132 Gra-Ham Australia Pty Ltd v Perpetual Trustees WA Ltd (1989) 1 WAR 65 …. 3.4 Gramophone & Typewriter Ltd v Stanley [1908] 2 KB 89 …. 3.50 Great Southern Managers Australia Ltd (ACN 083 825 405) (rec and mgr apptd) (in liq), Re (2009) 76 ACSR 146; [2009] VSC 557 …. 6.30 Great Southern Managers Australia Ltd (in liq) v Thackray [2010] WASC 138 …. 6.30 Green v Wilden Pty Ltd [2005] WASC 83 …. 1.49, 2.129, 2.134, 2.135 Grill v General Iron Screw Collier Co (1866) 35 LJCP 321 …. 4.41 Grimaldi v Chameleon Mining NL (No 2) (2012) 287 ALR 22; [2012] FCAFC 6 …. 5.16, 5.17, 5.18 Gunns Finance Limited (in liq) (recs & mgrs apptd), Re; Re Gunns Plantations Limited (in liq) (recs & mgrs apptd) (No 2) [2013] VSC 365 …. 4.57, 4.70

H Hagan v Waterhouse (1991) 34 NSWLR 308 …. 4.18 Hall v Poolman (2007) 65 ACSR 123; [2007] NSWSC 1330 …. 6.28 Hallett v Dowdall (1852) 118 ER 1 …. 3.83, 3.84 Hanel v O’Neill (2003) 48 ACSR 378; [2003] SASC 409 …. 3.3 Hardoon v Belilios [1901] AC 118 …. 3.61, 3.62, 3.64, 3.65, 3.66, 3.67,

3.68, 3.69, 3.80 Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298; [2003] NSWCA 10 …. 2.126 Hassell v The Merchant Traders’ Ship Loan and Insurance Association (Lord Talbot’s case) (1849) 154 ER 1322 …. 3.84 Head v Kelk (1961) 63 SR (NSW) 340 …. 4.91 Helvetic Investment Corp Pty Ltd v Knight (1982) 7 ACLR 225 …. 4.164 — v — (1984) 9 ACLR 773 …. 4.90, 5.114, 5.140 Henderson v Merrett Syndicates Ltd (No 1) [1995] 2 AC 145 …. 2.134, 2.137 Henry Wolf Sinclair (as trustee for the Maro Trust) v Westpac Banking Corporation [1997] FCA 144 …. 4.90 Herdegen v Federal Commissioner of Taxation (1988) 84 ALR 271 …. 1.34 Hewitt v Court (1983) 149 CLR 639 …. 4.63 — v Phelps 105 US 393 (1881) …. 5.103 Hollis v Vabu (2001) 207 CLR 21 …. 3.42, 3.53 Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 …. 2.32, 2.36, 2.134, 2.135, 2.139 Hotel Terrigal Pty Ltd v Latec Investments Ltd (No 2) [1969] 1 NSWR 676 …. 3.50 HP Mercantile Pty Limited v Commissioner of Taxation (2005) 219 ALR 591; [2005] FCAFC 126 …. 2.150 Hundy (Liquidator), Re; Enviro Friendly Products Pty Ltd (in liq) [2013] FCA 852 …. 6.14 Hymix Concrete Pty Ltd v Garrity (1977) 2 ACLR 559 …. 6.28

I Idoport Pty Ltd v National Australia Bank Ltd [2004] NSWSC 695 …. 3.30, 3.50

ING Funds Management Ltd v ANZ Nominees Ltd (2009) 228 FLR 444; [2009] NSWSC 243 …. 2.121 Intel Corporation v Unwired Group Ltd [2008] FCA 1927 …. 2.124 International Harvester Company of Australia Pty Ltd v Carrigan’s Hazeldene Pastoral Company (1958) 100 CLR 644 …. 3.33 Interwest Hotels Pty Ltd (in liq), Re (1993) 12 ACSR 78 …. 4.115, 5.7 Italtractor ITM SpA v 425528 Alberta Ltd, 1993 CanLII 7131 …. 3.46

J J A Pty Ltd v Jonco Holdings Pty Ltd (2000) 33 ACSR 691; [2000] NSWSC 147 …. 4.57, 4.99, 5.87, 5.140 James N Kirby Foundation v Attorney-General [2004] NSWSC 1153 …. 2.109 Jennings v Mather [1902] 1 KB 1 …. 2.81, 4.45, 4.55, 4.62, 4.66 Jessup v Queensland Housing Commission [2002] 2 Qd R 270; [2001] QCA 312 …. 4.57 — v Smith 223 NY 203 (1908) …. 5.103 J G M Nominees Pty Ltd v Australvic Pty Ltd (No 2) (2010) 28 ACLC 383 …. 6.14 J H Rayner (Mincing Lane) Ltd v Department of Trade and Industry [1990] 2 AC 418 …. 3.30, 3.34, 3.50 Johnson, Re; Sherman v Robinson (1880) 15 Ch D 548 …. 2.81, 4.66, 5.21, 5.25, 5.36, 5.47 Joint Eastern & Southern Districts Asbestos Litigation v Falise, Re 878 F Supp 473 (1995) …. 7.50 Jonsue Investments Pty Ltd v Balweb Pty Ltd [2013] NSWSC 325 …. 3.2 J W Broomhead (Vic) Pty Ltd (in liq) v JW Broomhead Pty Ltd [1985] VR 891 …. 3.61, 3.69

K

Kation Pty Ltd v Lamru Pty Ltd (2009) 257 ALR 336; [2009] NSWCA 145 …. 5.28 Keller v L E D Technologies Pty Ltd (2010) 268 ALR 613; [2010] FCAFC 55 …. 5.57 Kemtron Industries Pty Ltd v Commissioner of Stamp Duties (1984) 15 ATR 627 …. 3.61, 3.66, 3.80, 4.57, 4.62 Kirkpatrick v Kotis (2004) 62 NSWLR 567; [2004] NSWSC 1265 …. 3.32, 3.34

L Langman v Handover (1929) 43 CLR 334 …. 5.28 Lawrence Waterhouse Pty Ltd (in liq), Re; Shaw v Minsden Pty Ltd [2011] NSWSC 964 …. 1.50 Leerac Pty Ltd v Fay [2008] NSWSC 1082 …. 2.140, 4.34 Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd (2008) 74 NSWLR 550; [2008] NSWSC 1344 …. 4.64 Lerinda Pty Ltd v Laertes Investment Pty Ltd [2010] 2 Qd R 312; [2009] QSC 251 …. 5.28, 5.29, 5.31, 5.127, 6.14 Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459 …. 6.27 Lethbridge v Adams; Liquidator of the International Life Assurance Society, Ex p (1871–72) LR 13 Eq 547 …. 3.84 London Loan and Savings Co of Canada v Brickenden [1934] 3 DLR 465 …. 4.30 Lowe v Pascoe (as Trustee of Estate of Late Kut Zhe Tu) (2010) 5 ASTLR 1; [2010] NSWSC 388 …. 3.32 Lucht v Behrens 28 Ohio St 231 (1876) …. 5.102 Lumsden v Buchanan (1865) 3 M(HL) 89 …. 4.161, 4.168, 4.177

M Mabo v Queensland (1988) 166 CLR 186 …. 7.46

MacarthurCook Fund Management Limited v Zhaofeng Funds Limited [2012] NSWSC 911 …. 2.128, 4.21, 4.48 Macedonian Orthodox Community Church St Petka Inc v The Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66 …. 2.74, 2.109, 4.45, 4.55, 4.130 McLean v Burns Philp Trustee Co Pty Ltd (1985) 2 NSWLR 623 …. 3.75, 3.80, 3.86, 3.89, 4.91, 5.28 McLellan, Re; Stake Man Pty Ltd v Carroll (2009) 76 ACSR 67; [2009] FCA 1415 …. 6.24 Mcpharlin as Liquidator of United Invesmtents Trust (in liq), Re [2013] FCA 635 …. 6.14 Macquarie Capital Advisers Ltd v Brisconnections Management Company Ltd [2011] 1 Qd R 1; (2009) 71 ACSR 234; [2009] QSC 82 …. 3.52, 3.80 Maggbury Pty Ltd v Hafele Aust Pty Ltd (2001) 210 CLR 181 …. 2.139 Maguire v Makaronis (1997) 188 CLR 449 …. 2.32, 4.28 Manderson’s Appeal 113 PA 631 (1886) …. 5.103 Manpac Industries Pty Ltd v Ceccattini (2002) 20 ACLC 1304; [2002] NSWSC 330 …. 3.16 Marginson v Ian Potter & Co (1976) 136 CLR 161 …. 3.61, 3.68, 3.75 Markovzki v The Queen (1998) 52 DTC 2040 …. 2.160 Mason v Pomeroy 151 Mass 164 (1890) …. 5.102 Matheson, Re; Worrell v Matheson, Ex p (1994) 49 FCR 454 …. 4.62, 5.123, 6.14 Melbase Corp Pty Ltd v Segenhoe Ltd (1995) 17 ACSR 187 …. 6.27 Mentha v GE Capital Ltd (1997) 154 ALR 565 …. 2.122 Mercedes Holdings Pty Ltd v Waters (No 3) [2011] FCA 236 …. 3.5 — v — (No 5) [2011] FCA 1428 …. 4.18 Metro Motor Inns Hotels & Motels Pty Ltd v Strathaven Holdings Pty Ltd [2000] NSWSC 1004 …. 7.8, 7.39

Mier & Jonsson v F N Management Pty Ltd [2006] 1 Qd R 339; [2005] QCA 408 …. 2.168 Mirvac Ltd, Re (1999) 32 ACSR 107 …. 1.42 Mitchell v Crane [2009] NSWSC 489 …. 5.27 Moore v McFall 263 Ill 596 (1914) …. 5.102 Morrissey v Commissioner 296 US 344 (1935) …. 2.144, 2.160 Moyes v J & L Developments Pty Ltd (No 2) (2007) 250 LSJS 61;2007] SASC 261 …. 4.57 MTM Funds Management v Cavalane (2000) 35 ACSR 440; [2000] NSWSC 922 …. 3.55 Muir v City of Glasgow Bank (1879) 4 App Cas 337 …. 4.90, 4.161, 4.164, 4.168, 4.177, 4.179, 4.181, 5.137 Muschinski v Dodds (1985) 160 CLR 583 …. 7.46

N National Nominees Limited v Agora Asset Management Pty Ltd (No 2) [2011] VSC 425 …. 2.128 National Trustee’s Executors & Agency Co of Australasia Ltd v Barnes (1941) 64 CLR 268 …. 4.54, 4.67 Navarro Savings Association v Lee 446 US 462 (1979) …. 2.160 Neeeat Holdings (in liq), Re (2013) 299 ALR 744; [2013] FCA 61 …. 6.14 Nestle v National Westminster Bank plc [1994] 1 All ER 118 …. 2.27 New, Re [1901] 2 Ch 534 …. 4.16 New v Nicoll 73 NY 127 (1878) …. 5.103 Newmarket Trustees Limited v The Commissioner of Inland Revenue [2010] NZHC 810 …. 4.92 News Ltd v Australian Rugby Football League (1996) 64 FCR 410 …. 2.139 Nolan v Collie & Merlaw Nominees Pty Ltd (in liq) (2003) 7 VR 287;

[2003] VSCA 39 …. 4.69, 4.71, 4.72, 4.81, 4.149, 5.28, 5.29, 5.31 Northwest Capital Management v Westate Capital Ltd [2012] WASC 121 …. 6.61

O Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 …. 2.96, 3.28, 3.68, 4.61, 4.63, 4.67, 5.122, 5.123, 5.126, 5.127, 5.130, 5.131, 5.132, 6.14 Ooregum Gold Mining Co of India v Roper [1892] AC 125 …. 3.20 Optus Networks Pty Ltd v Horman [2010] VSC 108 …. 3.42 Orchard Aginvest Ltd, Re [2008] QSC 2 …. 6.20, 6.34, 6.35, 6.68, 6.69 Owen v Delamere (1872) LR 15 Eq 134 …. 5.102 Owen, in the matter of RiverCity Motorway Pty Limited (admin and rec apptd) v Madden (No 3) [2012] FCA 313 …. 6.14 Owners-Strata Plan No 43551 v Walter Construction Group Ltd (2004) 62 NSWLR 169 …. 3.32

P Parsons v Spooner (1846) 67 ER 845 …. 4.90, 4.161, 4.169, 6.8 Paterson v Pongrass Group Operations Pty Ltd [2011] NSWSC 1588 …. 4.59 Pauling’s Settlement Trusts, Re[1964] Ch 303 …. 4.85 Penn v Lord Baltimore (1750) 1 Ves Sen 444; 27 ER 1132 …. 2.25 Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187 …. 2.35 Perpetual Trustees Australia Ltd v Schmidt [2010] VSC 67 …. 3.34, 3.42 Perpetual Trustees WA Ltd v Kelly (1993) 8 WAR 480 …. 4.47 Perre v Apand Pty Ltd (1999) 198 CLR 180 …. 2.133 Peters’ American Delicacy Co Ltd v Heath (1939) 61 CLR 457 …. 2.59

Pikes Wines Pty Ltd v Kelly [2000] SASC 380 …. 2.150 Pilkington v IRC [1964] AC 612 …. 2.32 Pilmer v The Duke Group Ltd (in liq) (2001) 207 CLR 165 …. 2.37, 2.137, 2.139 Pleash, Re; Suncoast Restoration Pty Ltd (in liq) (2013) 93 ACSR 606; [2013] FCA 355 …. 6.14 Ponsetti v GE Pension Plan 614 F 3d 684 (2010) …. 2.125 Pople v Evans [1969] 2 Ch 255 …. 3.31 Producers and Genral Finance Corp Ltd v Dickson (1938) 40 WALR 34 …. 4.100, 4.180 Professional Life Assurance Co, Re (1866-67) LR 3 Eq 668 …. 3.84 Provident Capital Ltd v Zone Developments Pty Ltd (2001) 10 BPR 19,133 …. 2.150 Public Trustee (Qld) v Octaviar Ltd (in prov liq) (recs & mgrs appt) (2009) 74 ACSR 109; [2009] QSC 283 …. 6.14 Public Trustee v Smith (2008) 1 ASTLR 488; [2008] NSWSC 397 …. 3.37 PWL ACN 084 252 488 Ltd, Re; PWL Ltd (admin apptd) (No 2), Ex p [2008] WASC 232 …. 6.20, 6.34, 6.37, 6.68, 6.69

Q Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 …. 6.28 Quick v Stoland Pty Ltd (1998) 87 FCR 371 …. 6.27 Quistclose Investments Ltd v Rolls Razor Ltd (in liq) [1970] AC 367 …. 4.127

R R v Dodds (1808) 103 ER 670 …. 3.18 — v Hopkins (1915) 20 CLR 464 …. 2.123, 3.32 Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 …. 2.36

Reynolds Wines v Huntley Management Ltd (2004) 50 ACSR 58; [2004] NSWSC 609 …. 6.34 Richardson, Re; Governors of St Thomas Hospital, Ex p [1911] 2 KB 705 …. 4.59, 5.123, 5.127, 5.130, 5.132 Richstar Enterprises Pty Ltd, Re; ASIC v Carey (No 6) (2006) 153 FCR 509 …. 3.37 Rinehart v Welker [2012] NSWCA 95 …. 4.33 Roach v Electoral Commissioner (2007) 233 CLR 162 …. 7.56 Robinson v Lindsey 184 Ga 684 (1937) …. 5.101 — v Pett (1734) 40 ER 1049 …. 4.45 Robinson’s Settlement, Re; Gant v Hobbs [1912] 1 Ch 717 …. 4.161, 4.164, 4.166, 4.168, 4.173, 4.178, 5.137 Robson v M’Creight (Official Manager) (1858) 53 ER 641 …. 3.84 Romanos v Pentagold Investments Pty Ltd (2003) 217 CLR 367 …. 5.115 Ron Kingham Real Estate Pty Ltd v Edgar [1999] 2 Qd R 439 …. 2.105, 3.3, 3.67, 3.68, 3.77, 3.87 Rothmore Farms Pty Ltd (in liq) v Belgravia Pty Ltd (2005) 239 LSJS 105; [2005] SASC 117 …. 2.105, 3.3, 4.57 Rubicon Asset Management Ltd (adm apptd), Re (2009) 77 NSWLR 96; [2009] NSWSC 1068 …. 6.30, 6.34, 6.36, 6.47 Rural & Agricultural Management Ltd v West Merchant Bank Ltd (1995) 128 FLR 440 …. 2.124, 2.127 RWG Management Ltd v Commissioner for Corporate Affairs [1985] VR 385 …. 2.95, 4.53, 4.54, 4.77, 4.85, 5.24, 5.114

S S & D International Pty Ltd (No 4), Re [2010] VSC 388 …. 1.49 Saker, Re; Great Southern Managers Australia Ltd (rec and mgrs apptd) (in liq) (No 2) (2011) 85 ACSR 211; [2011] FCA 958 …. 4.69 Salomon v Salomon & Co Ltd [1897] AC 22 …. 3.50

Sandell v Porter (1966) 115 CLR 666 …. 6.28 Saunders v Vautier (1841) 4 Beav 115 …. 7.57 Savage v The Union Bank of Australia Ltd (1906) 3 CLR 1170 …. 2.81, 4.62, 4.67, 5.26, 5.29 Scaffidi v Montevento Holdings Pty Ltd (2011) 6 ASTLR 446; [2011] WASCA 146 …. 1.82, 2.124, 4.33 Schuhmacher v Emmerson [2013] QSC 205 …. 4.25, 4.33 Scott (decd), Re [1948] SASR 193 …. 1.37 Scott v Davis (2000) 204 CLR 333 …. 3.31, 3.35 Sea Fire and Life Assurance Co, Re (Greenwood’s case) (18540 43 ER 180 …. 3.83, 3.84 Securities Commission v Chenery Corporation 318 US 80 (1943) …. 2.137 Shawmut Bank Conn v First Fidelity Bank (Re Secured Equipment Trust of Eastern Air Lines) 38 F 3d 86 (1994) …. 6.76 Siddall, Re (1885) 29 Ch D 1 …. 3.43 Silvia, in the matter of FEA Plantations Ltd (admin apptd) [2010] FCA 468 …. 6.14 Smith v Anderson (the Submarine Cables’ Trust case) (1880) 15 Ch D 247 …. 1.53, 2.68, 2.69, 2.82, 3.43 — v Permanent Trustee Australia Ltd (1992) 10 ACLC 906 …. 2.129 Smith, Stone and Knight Ltd v Birmingham Corporation [1939] 4 All ER 116 …. 3.30 Sons of Gwalia Ltd v Margaretic (2007) 231 CLR 160; [2007] HCA 1 …. 1.50, 2.77, 5.38, 6.70, 7.47 South Sydney District Rugby League Football Club Ltd v News Ltd (2000) 177 ALR 611; [2000] FCA 1541 …. 3.42 Southern Cross Interiors Pty Ltd (in liq) v DCT (2001) 53 NSWLR 213 …. 6.28 Southern Wines Corp Pty Ltd (in liq) v Frankland River Olive Co Ltd (2005) 31 WAR 162 …. 1.42, 4.45, 4.47, 4.48

Spellson v George (1992) 26 NSWLR 666 …. 4.30 Spies v The Queen (2000) 201 CLR 603 …. 6.14 Spread Trustee Company Limited v Sarah Ann Hutcheson [2011] UKPC 13 …. 4.33, 4.36, 4.44, 4.150 Stacks Managed Investments Ltd, Re (2005) 219 ALR 532; [2005] NSWSC 753 …. 2.168, 5.8, 6.14, 6.22, 6.32 Staff Benefits Pty Ltd, Re [1979] 1 NSWLR 207 …. 4.66, 4.75, 4.86 Stanley, Re [1906] 1 Ch 131 …. 1.53 State Street Trust Co v Hall 41 NE 2d 30 (1942) …. 2.144, 3.39 Suco Gold Pty Ltd (in liq), Re (1983) 33 SASR 99 …. 3.68, 4.54, 4.63, 5.122, 5.123, 5.1127, 5.130, 5.132, 6.14 Surf Road Nominees Pty Limited v Tass James [2004] NSWSC 61 …. 3.4 Sutherland, Re (2004) 50 ACSR 297; [2004] NSWSC 798 …. 4.45 Sykes v Beadon (1879) 11 Ch D 170 …. 2.67

T Target Holdings Ltd v Redferns [1996] 1 AC 421 …. 4.77, 4.81, 4.85, 4.86, 7.7 Taylor v Davis 110 US 330 (1884) …. 5.88 Teheran-Europe Co Ltd v S T Belton (Tractors) Ltd [1968] 2 QB 53 …. 3.34 TFML Ltd v MacarthurCook Fund Management Ltd [2013] NSWCA 291 …. 4.21, 4.68, 4.104, 4.115, 4.117, 4.142, 4.153, 5.7, 5.140 Thackray v Gunns Plantations Ltd [2011] VSC 380 …. 4.141 Thomas, Re (1884–85) LR 14 QBD 379 …. 3.43 Thompson v Schmitt 274 SW 554 (1925) …. 3.39 Timbatec Pty Ltd, Re [1974] 1 NSWLR 613 …. 6.28 Timbercorp Securities Ltd (in liq) (No 3), Re (2009) 74 ACSR 626; [2009] VSC 510 …. 6.30, 6.69

Timbercorp Securities Ltd (in liq), Re (2010) 77 ACSR 291; [2010] VSC 50 …. 6.69 — v WA Chip & Pulp Co Pty Ltd [2009] FCA 901 …. 6.14 Tolcher v John Danks & Son Pty Ltd [2007] NSWSC 1207 …. 6.14 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 …. 3.34 Tomasetti v Brailey [2011] NSWSC 1446 …. 1.84 Traditional Values Management Limited (in liq), Re [2010] VSC 339 …. 6.34 — v Taylor [2012] VSC 299 …. 1.49 Treasure Island Land Trust, Re 2 BR 332 (1980) …. 6.76 Tricontinental Corporation Ltd v HDFI Ltd (1990) 21 NSWLR 689 …. 7.60 Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 …. 2.122, 5.136 Trident Holdings Ltd v Danand Investments Ltd (1988) 49 DLR (4th) 1 …. 3.28, 3.46 Trim Perfect Australia Pty Ltd (in liq) v Albrook Constructions Pty Ltd [2006] NSWSC 153 …. 4.60, 4.63 Trio Capital Ltd (admin apptd) v ACT Superannuation Management Pty Ltd (2010) 79 ACSR 425; [2010] NSWSC 941 …. 4.45, 6.14, 6.30, 6.33, 6.68 Tru Block Concrete Products, Inc, Re 27 BR 486 (1983) …. 6.75, 6.77 Tru Floor Service Pty Ltd v Jenkins (No 2) (2006) 232 ALR 532 …. 6.27 T S B Private Bank International S A v Chabra [1992] 2 All ER 245 …. 3.53

U United Dominion Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1 …. 2.36 United Medical Protection Ltd, Re (2003) 47 ACSR 705 …. 6.27

V Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319 …. 2.81, 3.28, 3.68, 4.51, 4.53, 4.54, 4.67, 5.26 Vigliaroni v CPS Investment Holdings Pty Ltd (2009) 74 ACSR 282; [2009] VSC 428 …. 3.4

W Walker v Stones [2001] QB 902 …. 4.33 Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 …. 7.46, 7.58 Warne v GDK Financial Solutions Pty Ltd (2006) 24 ACLC 1000; [2006] NSWSC 259 …. 4.78 Watling v Lewis [1911] 1 Ch 414 …. 4.100, 4.114, 4.161, 4.162, 4.164, 4.170, 4.172, 4.173, 4.174, 4.179, 4.180, 4.182, 5.101, 5.119, 5.137 Wells v Wily (2004) 50 ACSR 103; [2004] NSWSC 607 …. 4.134, 6.14 West Merchant Bank Ltd v Rural & Agricultural Management Ltd (1996) 20 ACSR 563 …. 2.124, 2.129 Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 …. 2.25, 2.31 Western Export Services Inc v Jireh International Pty Ltd (2011) 282 ALR 604; [2011] HCA 45 …. 5.119 Westfield Management Ltd v AMP Capital Property Nominees Ltd (2012) 247 CLR 129; [2012] HCA 54 …. 2.102, 4.4 Westpac Banking Corporation v Garrett [2004] SASC 265 …. 5.30 — v The Bell Group Ltd (in liq) (No 3) (2012) 89 ACSR 1; 44 WAR 1; [2012] WASCA 157 …. 2.35, 5.18, 5.20 Wickham v King (1879) 1 QLJ (Supp) 13 …. 4.45 Wickstead v Browne (1992) 30 NSWLR 1 …. 4.48 Wilden Pty Ltd v Green [2009] WASCA 38 …. 4.33 Wilkinson v Feldworth Financial Services Pty Ltd [1998] NSWSC 775 ….

3.89, 4.90, 4.99 Williams, Re [1897] 2 Ch 12 …. 2.22 — v Hathaway (1877) LR 6 Ch D 544 …. 4.161, 4.170, 4.176, 4.180, 5.137 — v Nicoski [2003] WASC 131 …. 3.32 — v Scott [1900] AC 490 …. 4.48 Willmott Forests Limited (No 2), Re (2012) 88 ACSR 18; [2012] VSC 125 …. 2.109 Wilson v Brett (1843) 152 ER 737 …. 4.41 Wise v Perpetual Trustee Co Ltd [1903] AC 139 …. 3.63, 3.80 Woddrop v Weed 32 WNC 189 (1893) …. 5.102 Woodsville Realty Trust, Re 120 BR 2 (1990) …. 7.76 Woolworths Ltd v Kelly (1991) 22 NSWLR 189 …. 4.28 Worrall v Harford (1802) 32 ER 250 …. 4.54, 4.59, 5.124 Wylly v Collins & Co 9 Ga 223 (1851) …. 5.101

X Xat Ky v Australvic Property Management Pty Ltd [2007] FCA 1541 …. 3.78 Xebec Pty Ltd (in liq) v Enthe Pty Ltd (1987) 18 ATR 893 …. 4.60

Y Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15 …. 2.36, 4.84

Z Zen Ridgeway Pty Ltd v Adams [2009] 2 Qd R 298; [2009] QSC 117 …. 4.60, 5.30 Zhu v Treasurer of the State of New South Wales (2004) 218 CLR 530; [2004] HCA 56 …. 2.124, 5.17

Table of Statutes References are to paragraphs

Commonwealth A New Tax System (Goods and Services Tax) Act 1999 …. 2.150 s 184-1 …. 2.154 Australian Consumer Law s 18 …. 4.97, 5.57 Australian Securities and Investments Commission Act 2001 s 12DA …. 4.97, 5.57 Bills of Exchange Act 1909 s 36(5) …. 5.140 Cheques Act 1986 s 33 …. 5.140 Companies Act 1967 …. 2.94 Competition and Consumer Act 2010 Sch 2 …. 4.97, 5.57 Corporations Act 2001 …. 1.10, 1.41, 1.45, 1.53, 2.78, 2.90, 2.103, 2.156 Ch 2J …. 2.105 Ch 2L …. 2.121, 4.39 Ch 2M …. 2.154, 7.25 Ch 5 …. 2.165 Ch 5C …. 1.41, 1.77, 1.89, 2.78, 2.97, 2.107, 2.129, 2.167, 2.168, 3.4, 3.54, 3.72, 4.4, 4.25, 6.19, 6.32, 7.22, 7.26, 7.35, 7.44 Ch 7 …. 1.42, 1.89 Pt 1.2A …. 2.103

Pt 2B.2 …. 7.31, 7.32 Pt 2B.4 …. 2.165, 7.37 Pt 2D.1 …. 2.165, 7.35 Pt 2F …. 7.25 Pt 2F.1A …. 3.5, 7.25 Pt 2G.2 …. 2.154, 7.27 Pt 2G.3 …. 2.154 Pt 2G.4 …. 2.154, 7.27 Pt 2H.2 …. 2.106 Pt 2J.1 …. 2.106, 3.50 Pt 2M …. 2.103 Pt 5.3A …. 6.18 Pt 5.4 …. 6.18 Pt 5.4 Div 2 …. 7.33 Pt 5.4B …. 6.18 Pt 5.5 Div 1 …. 2.108 Pt 5.6 …. 6.66 Pt 5.6 Div 8 …. 6.67 Pt 5.7 Div 2 …. 6.18 Pt 5.9 …. 6.66 Pt 5C.6 …. 2.106 Pt 5C.7 …. 4.31 Pt 5C.9 …. 7.38 s 9 …. 2.154, 3.54, 6.26 s 50AA …. 3.53 s 64A …. 2.154

s 79 …. 5.15 s 88A …. 4.141 s 92 …. 2.154 s 95A …. 6.26, 6.51 s 115 …. 2.80, 3.41, 3.53 s 119 …. 2.165 s 124 …. 2.165, 4.20, 5.15 s 124(1) …. 4.20, 4.21 s 125 …. 2.165, 4.22, 5.15 ss 128–129 …. 5.18 s 128 …. 5.15 s 128(1) …. 5.18 s 128(4) …. 5.15, 7.31 s 129 …. 2.165, 5.15 s 129(4) …. 5.18 s 140 …. 1.69 s 181 …. 5.15 s 181(2) …. 5.15 s 197 …. 1.49, 3.3, 4.95, 4.111, 5.34 s 213 …. 4.31 s 219 …. 4.31 ss 232–234 …. 3.4 s 254T …. 2.104, 3.50 s 283DA …. 4.39 s 283DB …. 4.39, 7.28 s 285(3)(c) …. 2.154

s 286 …. 6.68 s 428 …. 4.141 s 435A …. 7.38 s 436C …. 4.141 s 441A …. 4.141 s 461(1)(k) …. 2.75, 6.33 s 511 …. 2.109 s 516 …. 2.165, 3.19, 7.24 s 563A …. 5.38 s 588E(4) …. 6.68 s 588G …. 1.49, 6.18 s 588V …. 3.19, 3.50, 7.27 s 601ED …. 1.42, 2.101 s 601ED(4)(b)(ii) …. 3.53 s 601EE …. 6.32 s 601EF …. 2.101 s 601FA …. 1.42 s 601FB(2) …. 2.32, 4.79, 4.147 s 601FB(3) …. 4.79, 4.147 s 601FB(4) …. 4.79 s 601FC …. 1.42, 4.39, 5.18, 7.26 s 601FC(1) …. 5.15 s 601FC(5) …. 2.39, 5.15 s 601FD …. 1.42, 1.49, 5.18, 7.26 s 601FD(4) …. 5.15 s 601FE …. 1.42, 5.18, 7.26

s 601FE(3) …. 5.15 s 601FH …. 3.72, 4.57, 4.70 s 601FM …. 3.4, 3.55 s 601GA …. 2.106, 2.108, 4.70, 7.37 s 601GA(2) …. 3.72, 4.70 s 601GA(2)(a) …. 4.46 s 601GA(2)(b) …. 4.49 s 601GA(3) …. 4.23 s 601GB …. 2.123 s 601LA …. 4.31 s 601LB …. 4.31 s 601NA …. 6.32 s 601ND(1)(a) …. 6.30, 6.33, 6.39 s 601ND(1)(b) …. 5.140, 6.33 s 601ND(3) …. 6.33 s 601NF …. 6.32 s 601UAA …. 1.49 s 604 …. 2.154 s 604(1)(g) …. 1.50 s 914A …. 2.97 s 1041H …. 4.97, 5.57 s 1317E …. 2.39 s 1318 …. 2.109, 4.82 Corporations Amendment (Sons of Gwalia) Act 2010 …. 5.38 Corporations Regulations 2001 reg 5C.11.06 …. 4.79

Income Tax Assessment Act 1936 s 102N …. 1.39 s 254 …. 5.140 Income Tax Assessment Act 1997 s 960-100 …. 2.154 Personal Property Securities Act 2009 s 12(1) …. 1.64 Social Security Act 1991 s 1207V(2) …. 3.53 Trade Practices Act 1974 …. 7.55 s 52 …. 4.97

Australian Capital Territory Partnership Act 1963 s 6 …. 3.31 s 9 …. 3.31 Trustee Act 1925 …. 2.45 Pt 2 Div 2.3 …. 2.32 s 4A …. 2.27 s 9(4) …. 3.72 s 14A …. 4.38 s 14B …. 4.17 s 59(4) …. 4.54, 4.70 s 63 …. 2.109 s 70 …. 6.61 s 81 …. 2.109 s 85 …. 2.36, 2.109, 4.82

s 86 …. 3.72, 4.83 Trustee Amendment Act 1999 …. 4.17

New South Wales Companies Act 1874 …. 2.80 Conveyancing Act 1919 s 24 …. 4.48, 4.117 s 66B …. 5.14 Fair Trading Act 1987 s 42 …. 5.57 Partnership Act 1892 Div 3 …. 3.15 s 1 …. 3.31 s 5 …. 3.31 Supreme Court Act 1970 s 67 …. 4.134, 6.18 Trustee Act 1925 Pt 2 Div 3 …. 2.32 s 13 …. 5.14 s 14A …. 2.27 s 14A(1) …. 4.38 s 14A(2) …. 4.38 s 14B …. 4.17 s 27C …. 5.14 s 39 …. 5.14 s 59(4) …. 3.72, 4.54, 4.70 s 63 …. 2.109

s 70 …. 6.61 ss 81–82A …. 4.16 s 81 …. 2.109 s 85 …. 2.36, 2.109, 4.82 s 86 …. 3.72, 4.83 Trustee Amendment (Discretionary Investments) Act 1997 …. 4.17 Uniform Civil Procedure Rules Pt 26 …. 6.18

Northern Territory Partnership Act s 5 …. 3.31 s 9 …. 3.31 Trustee Act s 6 …. 3.72, 4.38 s 7 …. 2.27, 4.17 s 26 …. 4.54, 4.70 s 27 …. 6.61 s 49A …. 2.36, 2.109, 4.82 s 50 …. 3.72, 4.83 s 50A …. 2.109 Trustee Amendment (No 2) Act 1995 …. 4.17

Queensland Companies Act 1863 …. 2.80 Partnership Act 1891 Ch 3 …. 3.15 s 5 …. 3.31

s 8 …. 3.31 Trustee (Investments) Amendment Act 1999 …. 4.17 Trusts Act 1973 Pt 6 …. 2.45 s 22 …. 2.27, 4.38 s 23 …. 4.17 s 56 …. 2.32 s 57 …. 4.17 s 65 …. 2.45, 4.10, 4.57 s 71 …. 3.72, 4.54, 4.70 s 72 …. 4.57 s 76 …. 2.36, 2.109, 4.82 s 77 …. 3.72, 4.83 s 80 …. 6.61 s 94 …. 2.109 s 96 …. 2.109

South Australia Companies Act 1864 …. 2.80 Partnership Act 1891 Pt 3 …. 3.15 s 1 …. 3.31 s 5 …. 3.31 Trustee Act 1936 Pt 2 Div 2 …. 2.32 s 7 …. 2.27, 4.38 s 8 …. 4.17

s 36 …. 6.61 s 56 …. 2.36, 2.109, 4.82 s 57 …. 3.72, 4.83 s 59B …. 2.109 s 91 …. 2.109 Trustee (Investment Powers) Act 1995 …. 4.17

Tasmania Companies Act 1869 …. 2.80 Partnership Act 1891 Pt 3 …. 3.15 Trustee Act 1898 s 5AA …. 2.32 s 7 …. 2.109, 4.38 s 9 …. 2.27, 4.17 s 27(1) …. 3.72, 4.54, 4.70 s 32 …. 6.61 s 50 …. 2.36, 2.109, 4.82 s 53 …. 3.72, 4.83 Trustee Amendment (Investment Powers) Act 1997 …. 4.17

Victoria Companies Act 1955 …. 2/90 Companies Statute 1864 …. 2.80 Partnership Act 1958 Pt 3 …. 3.15 s 5 …. 3.31

s 9 …. 3.31 Supreme Court (General Civil Procedure) Rules 2005 O 54 …. 2.109 Trustee Act 1958 s 6 …. 2.27, 4.38 s 7 …. 4.17 s 30 …. 2.32 s 36(2) …. 3.72, 4.54, 4.70 s 41 …. 6.61 s 63 …. 2.109 s 67 …. 2.36, 2.109, 4.82 s 68 …. 3.72, 4.83 Trustee and Trustee Companies (Amendment) Act 1995 …. 4.17

Western Australia Limited Partnerships Act 1909 …. 3.15 Partnership Act 1895 s 7 …. 3.31 s 13 …. 3.31 Trustees Act 1962 s 18 …. 2.27, 4.38 s 19 …. 4.17 s 54 …. 2.32 s 55 …. 4.17 s 71 …. 3.72, 4.54, 4.70 s 75 …. 2.36, 2.109, 4.82 s 76 …. 3.72, 4.83

s 77 …. 6.61 s 92 …. 2.109 Trustees Amendment Act 1997 …. 4.17

Canada Civil Code Quebec s 1299 …. 3.97 s 1322 …. 3.97 Income Trust Liability Act, SA 2004 …. 3.96 c I-1.5 s 2 …. 3.96 Income Trust Liability Act, SBC 2006 …. 3.96 c 14 s 2 …. 3.96 Income Trust Liability Act, SS 2006 …. 3.96 c I-2.02 s 3 …. 3.96 Trust Beneficiaries’ Liability Act 2004 (Ont) s 95 …. 3.95

Channel Islands Trusts (Guernsey) Law 2007 s 42(1) …. 4.157 Trusts (Jersey) Law 1984 Art 32(1) …. 4.157

Singapore Business Trusts Act (Ch 31A) …. 1.77 s 10 …. 4.38 s 29 …. 4.36, 7.28 s 32 …. 3.98

s 40 …. 4.38 s 41 …. 3.4 s 42 …. 3.5

United Kingdom Bubble Act 1720 …. 2.51, 2.57, 2.58, 2.60, 2.67 s 18 …. 2.57 Companies Act 1862 …. 2.48, 2.77, 2.80, 3.21 s 4 …. 2.66, 2.68 Contracts (Rights of Third Parties) Act 1999 …. 2.122 Joint Stock Banking Companies Act 1857 …. 2.48 Joint Stock Companies Act 1844 …. 1.32, 2.48, 2.51, 3.20, 3.21, 3.83 s 25 …. 3.83 Joint Stock Companies Act 1856 …. 2.48 Joint Stock Companies Act 1857 …. 2.48 Joint Stock Companies Amendment Act 1858 …. 2.48 Joint Stock Companies Winding-up Acts 1840s …. 2.76 Limited Liability Act 1855 …. 2.48, 2.76, 3.19, 3.21, 3.83, 3.90 Lord St Leonards’ Act 1859 …. 2.74 Married Women’s Property Act 1882 …. 2.18 Married Women’s Property Act 1893 …. 2.18 Statute of Frauds …. 2.119 Statute of Wills 32 Hen 8, cl, 1540 …. 2.17

United States Bankruptcy Code …. 6.72, 6.74, 6.75, 6.77 s 101(9)(a)(v) …. 6.74

s 101(41) …. 6.74 Sherman Anti-Trust Act 1890 …. 7.54 Uniform Commercial Code Art 9 …. 1.64 § 1-201(35) …. 1.64 Uniform Probate Code …. 5.91 Uniform Statutory Trust Entity Act …. 1.37, 6.72 s 101 …. 6.75 s 304 …. 3.93, 4.157 s 504 …. 5.71, 7.31 s 505 …. 7.35 Uniform Trust Code …. 5.66, 5.67, 5.93, 6.72, 7.33, 7.34 s 104(a) …. 5.67 s 105 …. 7.28 s 105(b)(1) …. 4.37 s 106 …. 5.106 s 1008 …. 4.37, 7.28 s 1010 …. 4.157, 4.158, 5.90, 5.91, 5.94, 5.106, 5.114, 7.34 s 1010(a) …. 4.157 s 1010(b) …. 5.90 s 1012 …. 5.67, 5.68, 5.69, 5.71, 7.31 s 1013 …. 5.67, 5.69, 7.31 s 1013(a) …. 5.69 s 1013(f) …. 5.69 s 1013(g) …. 5.70

International

Hague Convention on the Law Applicable to Trusts and on their Recognition Art 2 …. 1.78

List of Abbreviations The following abbreviations and defined terms are used in this book: ASIC

Australian Securities and Investments Commission.

ASX

Australian Securities Exchange Limited and the securities exchange managed by it.

Blackacre Trust hypothetical

The hypothetical scenario described in Appendix 6 ‘The Blackacre Trust hypothetical’. It is referenced throughout to provide simplified concrete examples of outcomes under trust law.

Bogert on Trusts

George G Bogert, George T Bogert and Amy Hess, The Law of Trusts and Trustees (3rd ed, Thomson West, 2007).

Bowstead on Agency

Francis M B Reynolds, Bowstead and Reynolds on Agency (18th ed, Sweet & Maxwell, London, 2006).

CAMAC

The Corporations and Markets Advisory Committee, a body constituted under the Australian Securities and Investments Commission Act 2001 (Cth) whose purpose is to provide independent advice to the Australian Government on issues that arise in corporations and financial services law and practice.1

CAMAC Discussion Paper (2011)

CAMAC’s Discussion Paper entitled ‘Managed Investment Schemes’ (June 2011).

CAMAC Discussion Paper (2014)

CAMAC’s Discussion Paper entitled ‘The Establishment and Operation of Managed Investment Schemes’ (March 2014). As noted at [1.1] of that paper, it represents the beginning of Stage 2 of CAMAC’s work on the review of MIS.

CAMAC Report

CAMAC’s Report entitled ‘Managed Investment Schemes’ (July 2012). This followed the CAMAC Discussion Paper (2011) and completed Stage 1 of CAMAC’s work on the review of managed investment schemes: see [1.1] of CAMAC Discussion Paper (2014).

Corporations Act

Corporations Act 2001 (Cth).

Ford & Lee on Trusts

Harold A J Ford, W A Lee, Michael Bryan, John Glover and Ian Fullerton, The Law of Trusts

(Law Book Co, Subscription Service). Ford on Corporations Law

Robert P Austin and Ian M Ramsay, Ford’s Principles of Corporations Law (14th ed, LexisNexis Butterworths, 2010).

GFC and global financial crisis

The financial crisis generally considered to have been precipitated in late 2008 and which affected markets in securities and commodities and the availability of credit around the world, including in Australia.2

Harris, Industrialising English Law

Ron Harris, Industrializing English Law — Entrepreneurship and Business Organization, 1720–1844 (Cambridge University Press, 2000).

Jacobs on Trusts

John Dyson Heydon and Mark J Leeming, Jacobs’ Law of Trusts in Australia (7th ed, LexisNexis Butterworths, 2006).

Lewin on Trusts

John Mowbray, Lynton Tucker, Nicholas Le Poidevin, Edwin Simpson and James Brightwell, Lewin on Trusts (18th ed, Thomson Sweet & Maxwell, 2008).

Maitland on Equity

Frederick W Maitland, Equity — A Course of Lectures (Cambridge University Press, 1936, reprinted 1969).

Massachusetts trust

Is a generic term used in the United States to describe a business or commercial trust, named after that state because of the widespread use of trusts there for business and commercial purposes from the late 18th century.3 In its more formal configurations, it closely resembles that which in Australia would today be described as a unit trust. It predated the enactment of corporations legislation and was in effect a form of unincorporated company. It had much in common with the English unincorporated joint stock company and emerged for similar reasons before the ready availability of incorporation. Unlike the English experience, however, the enactment of the first corporations legislation in Massachusetts and other states in the 19th century did not have a chilling effect on the use of the trust as a form of unincorporated company: see the brief discussion in 7.51–7.54. It is no longer used in commerce due to the availability of a range of alternative statutory entities (including the statutory business trust) which provide many of the benefits of the trust but remedy many of its shortcomings in a

commercial context. However, the term is still occasionally used today to describe the statutory business trust (see the definition of ‘Uniform Statutory Trust Entity Act’ below). Meagher, Gummow & Lehane

Roderick P Meagher, John Dyson Heydon and Mark J Leeming, Meagher, Gummow & Lehane’s Equity: Doctrines and Remedies (4th ed, Butterworths LexisNexis, 2002).

MIS

Managed investment scheme, including one that is registered under s 601ED of the Corporations Act.

PPSA

Personal Property Securities Act 2009 (Cth).

Restatement

Restatement (Second) of Trusts (1959). The first Restatement of Trusts was published in 1935. Work began on a third Restatement of Trusts in the 1980s and is ongoing. Much of the material revised to date in the third Restatement is not applicable to the arguments in this book and so the second Restatement is the more appropriate source. Although structured in statute-like form, Restatements are not statutes and have no force of law, until they (or a relevant part) are accepted by the courts of a particular state. They are, however, regarded as highly authoritative (including by the courts) because they are written by highly respected experts in their field, under the auspices of the American Law Institute, and because they collect and summarise the law, and strive to resolve ambiguities by recommending a rule.

Scott on Trusts

Austin W Scott, William F Fratcher and Mark Ascher, Scott and Ascher on Trusts (5th ed, Aspen Publishers, 2006).

Thomas & Hudson on Trusts

Geraint Thomas and Alastair Hudson, The Law of Trusts (2nd ed, Oxford University Press, 2010).

Trust

Includes a MIS that is structured as a trust, unless in any given case the context otherwise requires.

Trustee

Includes, in the context of a registered MIS that is a trust, the responsible entity, unless the context otherwise requires.

Trusts/trustee legislation

Is a reference to legislation in each state and territory of Australia that regulates some activities of trustees by clarifying and in some

cases modifying the general law. This includes the Trustee Act 1925 (NSW), the Trustee Act 1958 (Vic), the Trusts Act 1973 (Qld), the Trustees Act 1962 (WA), the Trustee Act 1936 (SA), the Trustee Act 1898 (Tas), the Trustee Act (NT) and the Trustee Act 1925 (ACT). Underhill on Trusts

David Hayton, Paul Matthews and Charles Mitchell, Underhill and Hayton Law Relating to Trusts and Trustees (18th ed, LexisNexis, 2010).

Uniform Statutory Trust Entity Act

The model Uniform Statutory Trust Entity Act of the United States promulgated in 2009 by the National Conference of Commissioners on Uniform State Laws.4 The Prefatory Note to the model Act states that it ‘validates the statutory trust as a permissible form of business organization and invites the states to bring the disparate and often inadequate existing state laws into uniformity’. The statutory business trust emerged out of the Massachusetts trust. Over the course of the 20th century, various states began individually to take note of the Massachusetts trust phenomenon and passed legislation to accommodate it, to resolve doubts in some states as to its legal status as a business association, to clarify certain important matters such as limited liability for investors and the ability of the trust to sue and be sued, and overall to give it ‘quasi-entity’ status. Massachusetts was the first to do so in 1909 and by 2009 over 30 states had followed in various (and not always consistent) permutations.5

Uniform Trust Code

The model Uniform Trust Code of the United States promulgated in 2000 (and amended several times since).6 The Prefatory Note to the model Code states that the ‘greater use of the trust, and consequent rise in the number of dayto-day questions involving trusts, has led to a recognition that the trust law in many states is thin. It has also led to a recognition that the existing Uniform Acts relating to trusts, while numerous, are fragmentary. The Uniform Trust Code will provide states with precise, comprehensive, and easily accessible guidance on trust law questions. On issues on which states diverge or on which the law is unclear or unknown, the Code will for the first time

provide a uniform rule. The Code also contains a number of innovative provisions’. The Code is described in Scott on Trusts as ‘a well-drafted and carefully considered codification of large portions of the law of trusts’, at §1.11. Langbein (who was a primary draftsman of the Code) urged that ‘this development should be seen less as a break with the past than as an intensification or culmination of a trend toward statute that has been underway in trust law for many decades’.7 It perpetuates and in some cases replaces the substance of many of the state acts and narrower, more specific uniform codes which preceded it. Waters on Trusts

Donovan W Waters, Mark R Gillen and Lionel D Smith, Waters’ Law of Trusts in Canada (3rd ed, Thomson Carswell, 2005).

1.

See its home page at .

2.

For judicial discussion see Pape v Commissioner of Taxation (2009) 238 CLR 1; [2009] HCA 23 at [19]–[20] and OneSteel Manufacturing Pty Ltd v BlueScope Steel (AIS) Pty Ltd [2011] NSWSC 1450 at [39].

3.

A brief history of the Massachusetts trust was provided by the Supreme Judicial Court of Massachusetts in State Street Trust Co v Hall 41 NE 2d 30 (1942) and the Supreme Court of California in Goldwater v Oltman 210 Cal 408 (1930).

4.

The history and process of bringing the Act to fruition are described in Thomas E Rutledge and Ellisa O Habbart, ‘The Uniform Statutory Trust Entity Act: A Review’ (2010) 65 Business Lawyer 1055. For a list of the states that have adopted it, see the Uniform Law Commission’s website .

5.

The development of business trust legislation through the 20th century is discussed in Robert H Sitkoff, ‘Trust as “Uncorporation”: A Research Agenda’ (2005) University of Illinois Law Review 31.

6.

For a list of the states that have adopted it, see the Uniform Law Commission’s website . Some states have not adopted the Code because they followed the lead of New York in codifying and updating many trust principles in separate legislation.

7.

John H Langbein, ‘Why Did Trust Law Become Statute Law in the United States?’ (2006– 2007) 58 Alabama Law Review 1069 at 1081.

Contents Foreword Publisher’s Note Preface Table of Cases Table of Statutes List of Abbreviations Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7

Introduction: Concepts and Principles Evolution of the Australian Commercial Trust Legal Risks of the Beneficiary as an Equity Investor Legal Risks of the Commercial Trustee Legal Risks of the Trust Creditor The Commercial Trust in Insolvency Conclusion: Reforming the Commercial Trust

Appendix 1 Appendix 2 Appendix 3 Appendix 4

Extracts from the Corporations Act Selected Reports into the Law Affecting Commercial Trusts Protecting Equity Investors Protecting the Trustee

Appendix Protecting Creditors and Other Counterparties 5 Appendix The Blackacre Trust Hypothetical 6

Bibliography Index

Detailed Contents Foreword Publisher’s Note Preface Table of Cases Table of Statutes List of Abbreviations Chapter Introduction: Concepts and Principles 1 The objectives of this book A summary of the central argument The core hypothesis: from guardian to entrepreneur A practitioner focus The ‘commercial trust’: definition, elements and essential anatomy Dramatis personae: the three principal actors The beneficiary as ‘equity investor’ The corporate trustee The commercial creditor Directors of the corporate trustee Other key terms and concepts Commercial expectations ‘Contractualisation’ Company vs corporation Comparisons with the United States: why? Law and economics theory Enterprise theory Contractarian theory

England and elsewhere Trusts and taxes Other exclusions from scope Chapter Evolution of the Australian Commercial Trust 2 Introduction The historical narrative The trust as a creature of conscience and not of commerce The first element: the trust as a device for circumvention The second element: the trust as a property concept and the trustee as ‘guardian’ The third element: the personal nature of the trustee’s role as guardian The fourth element: flexibility The trust becomes a business entity The trust as progenitor of the limited liability company The end of history for the commercial trust in England Separation of the trust and the company: consequences for trust law The two manifestations of the Australian commercial trust The public unit trust/managed investment scheme The Australian trading trust The advantages of the commercial trust over the company Ease (and privacy) of establishment Flexibility in structuring the fiduciary framework and beneficial entitlements Public reporting Distributions to equity investors — profits Distributions to equity investors — returns of capital Redemption of invested equity Management, governance and decision-making

Solvent winding up Advantages for trustees The phenomenon of ‘contractualisation’ Trust and contract: ‘no necessary antipathy’ The trustee-beneficiary relationship: ‘the flexible interplay of law and equity’ The parity myth and how it is encouraged Functional similarities between the company and the commercial trust The trust mimics the company: the role of promoters and advisers Blurring the distinction: the role of legislators and regulators Separate legal frameworks: regulatory dissonance and the question of efficiency Conclusion Chapter Legal Risks of the Beneficiary as an Equity Investor 3 Introduction Commercial expectations of the equity investor beneficiary The risk: unlimited personal liability for enterprise debts The issues: difficult questions with difficult answers for investors The prima facie rule: the trust veil and an ‘ill-defined species of limited liability’ Direct liability: the hybrid trust-agency and trust-partnership The implication of agency The ‘control test’ Lifting the trust veil Indirect liability: the trustee’s personal indemnity In what circumstances will the personal indemnity arise? Can a creditor subrogate to the personal indemnity? Can the risk of unlimited liability be eliminated through private means?

A contractualised solution for indirect liability: excluding the personal indemnity A contractualised solution for direct liability Undermining the protection Eliminating the risk by statutory intervention: the United States and elsewhere The United States Canada Singapore Application to the Blackacre Trust hypothetical Conclusion Chapter Legal Risks of the Commercial Trustee 4 Introduction The commercial expectations of the corporate trustee Facing equity investors Facing creditors and other external parties The source of the issue: the personal and proprietary elements of the trust Facing beneficiaries: power and its proper exercise What is a ‘breach of trust’? Power ‘Plenary powers’ or ‘universal powers’ clauses Acting ‘properly’: the fiduciary burden and its attenuation Relief from conflicts Exculpation and the ‘irreducible core’ Gross negligence Facing beneficiaries: contractualising the trustee’s right to remuneration Facing external parties: personal liability and the proprietary indemnity Excluding the proprietary indemnity The elements of the proprietary indemnity

‘Impairment’ of the proprietary indemnity Condition 1: liabilities properly incurred and the concept of ‘related breaches’ Condition 2: the clear accounts rule and the concept of ‘unrelated breaches’ Relevance of the trustee’s intentions and motivations in relation to breaches Effect of breaches of trust on the proprietary indemnity: ‘impairment’ Contractualising the relationship with beneficiaries: a summary Facing external parties: limiting personal liability The parties’ commercial expectations and objectives The legal effect of limitation clauses Market experience Limitation clauses are an imperfect solution for the trustee Limitation clauses are an imperfect solution for the unsecured trust creditor A model limitation of liability clause Clause X.1 Clause X.2(a) Optional insert regarding beneficiaries’ personal indemnity Clause X.2(b) Clause X.2(b)(i) and (vi) Clause X.2(b)(ii) Set-off Clause X.2(b)(iii) Receivership Clauses X.2(b)(ii), (iv) and (v) Clause X.3 Clause X.3(a) Clause X.3(b)

Clause X.4 The position of the trustee under United States trust law Why a limitation on recourse via the indemnity rather than an outright exclusion? Watling v Lewis and ‘repugnancy’ The impact on Australian trustee liability limitation clauses Conclusion Chapter Legal Risks of the Trust Creditor 5 Introduction What is a ‘trust debt’ and who is a ‘trust creditor’? The commercial expectations of the trust creditor Secured trust creditors Unsecured trust creditors No statutory indoor management protections Subrogation: the unsecured creditor’s indirect (and only) route to trust assets The ‘double equity risk’ Analysis of the Blackacre Trust hypothetical The asymmetry of the trustee’s indemnity Asymmetry resulting from the separation of ownership The interplay of law and equity The unrelated breach problem and the clear accounts rule The effect of the clear accounts rule on the exoneration power Evolutionary mismatch and the ‘lag effect’ ‘Related breaches’: creditor protection by private means Due diligence Contractual protections Legal opinions and commercial trusts The quality of protection these steps provide: a summary

‘Related breaches’: the American solution ‘Unrelated breaches’: creditor protection by private means ‘Unrelated breaches’: the American solution The United States doctrine of direct access to the trust estate The evolution as observed by scholars and commentators The journey through the courts Current United States position, according to the Restatement Could these principles be adopted in Australia? A direct access theory for Australia: severing the nexus with the clear accounts rule The reimbursement limb distinguished from the exoneration limb The true nature of the exoneration limb: a power to apply assets for the benefit of creditors Severing the nexus: the ‘modified subrogation theory’ Severing the nexus: the ‘independent power to apply theory’ Suing the trustee in its representative capacity Conclusion Chapter The Commercial Trust in Insolvency 6 Introduction The historical context and background The many issues attending commercial trusts affected by insolvency The commercial trust and insolvency law: an awkward relationship What is ‘insolvency’ when it comes to trustees? The ‘insolvent trust’: legal nonsense vs commercial reality The ‘insolvent trust’: a proposed definition The four possible scenarios Elements of the analysis The solvency of the trustee in its own right The solvency of the trust fund

The trustee’s proprietary indemnity Limitation of the trustee’s personal liability The sequence of investigation Indicators of insolvency of a commercial trust Insolvent commercial trusts and the United States Bankruptcy Code Conclusion Chapter Conclusion: Reforming the Commercial Trust 7 From guardian to entrepreneur and beyond: reforming the commercial trust The road ahead: options Statutory remediation Definitional and structural matters Protection of all participants Protection of equity investors Protection of creditors and other external parties Protection of trustees Standard (default) trust terms Dedicated insolvency regime Reform through the courts: ‘equity is not beyond the age of child bearing’ How influential could United States trust law be? Closing: relocating the commercial trust to its proper place Appendix Extracts from the Corporations Act 1 Part 1: ‘Managed investment scheme’ Part 2: Innocent outsider protections for those dealing with a company Appendix Selected Reports into the Law Affecting Commercial Trusts 2

Appendix Protecting Equity Investors 3 Part 1: Excluding unit holders’ personal indemnity to trustee Part 2: Excluding unit holders’ personal liability to external parties Appendix Protecting the Trustee 4 Part 1: The plenary or universal powers clause Part 2: Clauses attenuating the fiduciary burden Part 3: Remuneration of trustee clause Part 4: Trustee limitation of liability clauses Appendix Protecting Creditors and Other Counterparties 5 Part 1: Due diligence checklist for dealing with the trustee of a commercial trust Part 2: Contractual protections Part 3: Legal opinions Part 4: Creditor protection against unrelated breaches Appendix The Blackacre Trust Hypothetical 6 Bibliography Index

[page 1]

CHAPTER 1 Introduction: Concepts and Principles SYNOPSIS This chapter sets out the scope of the discussion and defines and describes the entity which is the subject of this book — the commercial trust. It introduces the three principal actors whose risk positions are the subject of detailed analysis in later chapters: the beneficiary as an equity investor; the corporate trustee; and the commercial trust creditor. It outlines the principal premises, hypotheses and arguments and describes other concepts which are central to the discussion. It explains the reasons for the United States trust law comparisons made throughout and introduces elements of law and economics theory which support the analyses and arguments in later chapters.

THE OBJECTIVES OF THIS BOOK 1.1 The trust is among the most ancient creatures known to AngloAustralian law and remains in widespread use in 21st century Australia. This remarkable longevity ought to have resulted in a general working familiarity. Yet many who deal with trusts, particularly in a commercial context, will admit in either fear or admiration to there being a degree of mystery about them. 1.2 In a well-known and often cited paean to the trust, Maitland declared that: The idea of a trust is so familiar to us all that we never wonder at it. And yet surely we ought to wonder. If we were asked what was the greatest and most distinctive achievement performed by Englishmen in the field of jurisprudence, I cannot think

[page 2] that we could have any better answer to give than this, namely, the development from century to century of the trust idea.1

1.3 This book builds on that statement by investigating elements of ‘the development from century to century of the trust idea’, specifically in the commercial context, culminating in a close examination of the modern Australian commercial trust, that is the trust configured as a company (described and defined more fully below). The objective is to examine that manifestation of the trust and expose the legal risks it creates for its participants for which there are no analogues under company law. However, this is more than a dry elemental comparison of the trust against the company or a stocktake of trust-specific risks. Rather, the aspiration is to remove some of the mystery around the trust by placing it within the broader historical context in which it evolved and examining the modern commercial trust through the lens of business associations law and theory rather than as a subset of the law of property and estates.

A SUMMARY OF THE CENTRAL ARGUMENT 1.4 Despite originating as a device to prevent and correct perceived injustices committed by men in connection with privately held land in English feudal times, by the 17th century the trust was in use in commerce and ultimately became a progenitor of the modern limited liability company. Its adaptability saw the trust travel with the expansion of the British Empire to the New World where it continued to evolve. In Australia the trust as a form of business association survived the advent of incorporation by registration and, from the latter half of the 20th century, flourished as an alternative (and competitor) to the limited liability company. 1.5 One cannot help but marvel at the resilience of the trust and the ingenuity of those who, driven by commercial and economic imperatives, identified and exploited its foundational characteristics to put it to work in applications which were not, and could not possibly have been, in the contemplation of those who were present at its birth and infancy. The

trust’s ability to circumvent legal obstacles and avoid unwanted outcomes, its highly useful proprietary and fiduciary characteristics and its inherent flexibility allowed those seeking a more sophisticated business vehicle than the general law partnership, in an environment where charters of incorporation were scarce, to create complex [page 3] enterprise entities. In Australia today the trust continues to find employment as a vehicle for business enterprises, many worth billions of dollars. 1.6 However, unquestioning admiration of the trust as a commercial vehicle is quickly challenged by clear-eyed critical analysis. Its early use as a form of business association was born of necessity and not because it was ideal for entrepreneurial activity; it was, in essence, part of a compromise solution to fill a legal vacuum. The trust was an imperfect alternative to the chartered corporation in pre-companies law England and those imperfections fuelled the reformist fires that led to prohibition and general incorporation legislation in the 1840s. It is an imperfect alternative to the Corporations Act company in Australia today but it seems that not all of its imperfections are apparent to those who participate in them. 1.7 In modern Australia the ideological descendants of those who created the English unincorporated joint stock company or ‘deed of settlement’ company are the promoters, entrepreneurs and advisers who, in what is argued to be an implicit manifestation of law and economics thinking, have contractualised the trust so that it has effectively become a ‘company’, in the pre-1844 English sense. Because of the resemblance to the Corporations Act company, a perception of parity appears to have emerged and indeed is encouraged by market participants as well as legislators and regulators. Although modern Australian promoters have incorporation readily available to them, they seek to bypass corporations law so as to take advantage of benefits that are perceived as economically valuable, even after allowing for the additional transactional costs generated. In doing this, however, they place themselves and all those who

participate with them within an entity that has no separate legal personality and a legal framework that is not premised on facilitating commercial endeavour. The perception of parity is a myth. While these differences have permitted a degree of regulatory arbitrage as participants exploit the advantages of a less regulated entity form, the trade-off is the absence of company-like protections for participants; trust law does not adequately support them, particularly if their expectations might be that their legal and insolvency risk position corresponds to that of their counterparts in a Corporations Act company. This mismatch may be described as ‘regulatory dissonance’. 1.8 The evolution of the trust into a business entity was accompanied by a corresponding transformation of the role and expectations of each of the three principal participants — the beneficiary, the trustee and the creditor — and their relationships with each other. The commercial trust involves a shift in the entire foundational premise of the trust. At the nucleus of the trust notion, as originally conceived, is a deep aversion to risk; this is evident in the law’s [page 4] emphasis on trustees’ duties and the protection of beneficiaries and the trust estate. However, in pursuing profits and other commercial returns in competitive market environments, trustees of modern commercial trusts are, and indeed are expected by investors to be, more risk-tolerant and entrepreneurial in their dealings with trust property — including by incurring substantial contractual debts — than traditional trust law contemplated. The law appears not yet to have fully acknowledged or accommodated this transformation, leaving those who regard the trust as a useful business device to rectify inadequacies by private means, with the objective of yielding risk profiles that approximate those which result under company law. As a regime for regulating commercial enterprises, then, trust law can be argued to be highly inefficient. It leaves participants to construct their governing framework privately, both within the entity and when engaging with external parties — an exercise that involves a

delicate balance of risk-taking and risk-shifting which, to be effective, demands a sophisticated understanding of those risks. 1.9 Despite these private measures, however, trust participants can be shown to be materially worse off than their counterparts in a company, both pre- and post-insolvency. The defining characteristics of the commercial trust which distinguish it from the company can be distilled into two: 1. the absence of separate legal personality; and 2. the absence of a fully evolved policy-based statutory regime to regulate them and the relationships among those who participate in them. As the analyses in Chapters 3–6 demonstrate, there is a limit to the extent to which private measures can neutralise the negative consequences of these essential differences. 1.10 For example, equity investor beneficiaries do not enjoy the rights and remedies available to a company’s shareholders under the Corporations Act. Most fundamentally, they have no statutory protection against unlimited personal liability for enterprise debts. There is no ‘corporate veil’ behind which they may shelter and even if it might be argued that the interposition of a trustee between them and trust creditors provides a form of ‘trust veil’, it is much more vulnerable to penetration than the corporate form. A trust creditor may pursue the investors directly if it can establish a relationship of principal and agent or partnership between them and the trustee in connection with its debt, arising from control of the trustee’s decision-making, or indirectly if it can subrogate to the trustee’s personal indemnity, where that indemnity has not been negated. Contractualisation techniques in current use are inadequate to protect against these risks and in any case can never be fully effective if the parties conduct themselves in a manner that is inconsistent with them. [page 5] 1.11 Commercial trustees carry legal risks and potential personal liabilities

that are not borne by company directors. Their implied powers and discretions are narrower and their fiduciary burden (and thus potential personal liability to investors) is greater, so both must be heavily modified for the commercial context. Unlike directors, they automatically carry personal liability for enterprise debts and other liabilities and, although they enjoy the benefit of an indemnity against enterprise assets, that indemnity is highly conditional and fragile. Protections against personal action by external counterparties must, wherever possible (and it is not always possible), be negotiated contractually with each of them on an individual bilateral basis; even then, these protections are imperfect, and are only as effective as their drafting. The commercial trustee thus faces, and must deal as best it can, with a double personal exposure: to investors and to external counterparties. 1.12 Intending trust creditors and other external counterparties, who are often expected to deal on an unsecured basis with a commercial trustee who will not accept personal liability, do not enjoy the protections and preferential treatment with respect to equity investors and enterprise assets that are accorded to creditors of companies. There are no innocent outsider protections for them like the statutory indoor management assumptions available under the Corporations Act. Those who are well advised and have the necessary resources and bargaining power will seek to secure a measure of protection by conducting forensic investigations and negotiating a suite of contractual assurances. However, no matter how assiduously an intending trust creditor attends to its own protection, complete prophylaxis can never be achieved. There are matters in respect of which it is legally and practically helpless. 1.13 And all participants suffer uncertainty, cost and the risk of frustrated expectations when insolvency intervenes, due to the absence of a dedicated statutory insolvency regime. Issues that, in relation to insolvent companies, are dealt with under a policy-based legislative framework that produces relatively predictable outcomes are, in the case of a commercial trust, left to the courts to resolve on a largely fact-dependent case-by-case basis, applying an uncomfortable amalgam of trust law, company law, contract law and others. The commercial trust is, in effect, invisible to the insolvent administration regimes in the Corporations Act; those regimes do not even

acknowledge its existence as an economic entity. The law struggles to cope with a company that is the trustee of a commercial trust when the shadow of insolvency descends; even the basic threshold question of whether a corporate trustee is insolvent and when it became so, matters which are critical for its directors and creditors (including trust creditors), can be impossible to answer without a comprehensive analysis of a range of factual and legal criteria requiring a detailed knowledge of trust law principles. [page 6] 1.14 In each case, participants whose commercial expectations might be that their position corresponds to that of their counterparts in a corporate enterprise risk disappointment, losses and the real possibility of litigation due to the many uncertainties that remain. 1.15 One of the underlying themes of this book is that it is necessary to understand fully the complex history and nature of the trust, and the issues it raises when used in commerce, to establish a sound basis for remediation. Danger lies in not properly appreciating those complexities when formulating solutions, whether privately or as law reform proposals. 1.16 It is argued in Chapter 7 that the gap between law and commerce can be closed without damaging the market or undermining the valuable advantages over the Corporations Act company that have seen the trust transformed into a business association. Commercial trusts are indeed special and trust law can be refurbished and modernised to accommodate the reasonable expectations of those who are involved in and with them.

THE CORE HYPOTHESIS: FROM GUARDIAN TO ENTREPRENEUR 1.17 The hypothesis underpinning the discussion in this book is that the trust device has evolved from a ‘guardian’, that is:

a private arrangement; to protect and preserve; over time and generations; family landholdings; transferred gratuitously; to one or more human trustees; who act gratuitously; under full personal liability; and manage the assets in a conservative, risk-averse manner; for the benefit of gratuitous familial beneficiaries, to an ‘entrepreneur’, that is, a vehicle which: may be private but may also be public; has a remunerated corporate trustee who will accept almost no personal liability; [page 7] raises equity funds from arm’s length investors who purchase their equitable interest, and thus acquire beneficiary status, by subscription or transfer; borrows and incurs other substantial debts at arm’s length; applies the aggregated equity and debt funds in risk-taking enterprise; resembles and functions much like a trading corporation; operates as a business entity despite not being a separate legal entity. The features of each are staggered in this way to highlight the elemental differences. Set out this way, it is readily apparent that there is almost nothing in the first that presaged the emergence of the second. The

elements that distinguish them dramatically outweigh those which they have in common. 1.18 As part of this evolution, the role and expectations of each of the three principal participants (that is, beneficiaries, trustees and creditors) and their relationship with each other and the trust assets were transformed. The role of the courts of equity in relation to trusts changed from being, in effect, the settlor’s or testator’s proxy, ensuring that their wishes in relation to their property were duly and properly carried out, to being the arbiter of disputes over legal risk between commercial parties at arm’s length. As Young and others put it, ‘equity’s clientele has varied from century to century’.2 1.19 However, the legal framework which governs trusts has not kept up with this evolutionary shift. It is inadequate in that it does not properly accommodate the legitimate commercial expectations of those who participate in those trusts. Commerce has raced ahead of the law and left a significant regulatory gap because the law continues to view commercial trusts largely through the lens of traditional trust law, which is hostile to risk-taking behaviour, is overly protective of beneficiaries and is patently not designed to facilitate commerce. It has been observed that: The law of equity and trusts in New South Wales is notoriously conservative. By conservative we mean an insistence by many within the New South Wales legal community — be it bench, bar or academy — that equity and trusts law maintains a particular historical, intellectual and, ultimately, doctrinal position which is said to be purer and closer to the true traditions of equity and trusts.3

1.20 The result is that the allocation of legal and insolvency risk among the key participants in the commercial trust is determined by rules and policies that are different from those which apply to companies and are in some cases inappropriate [page 8] for a modern commercial enterprise. In the absence of legislative guidance to the contrary, the courts apply (and have no choice but to apply) ancient trust principles that were built on the premise of the trust as a risk-averse

guardian to questions of risk allocation among arm’s length commercial stakeholders in a business enterprise. 1.21 In an Australian market where billions of dollars of investors’ funds are at stake, it is discomforting to realise that the allocation of risk and losses among competing stakeholders when a commercial trust collapses falls to be determined under such an inappropriate regime. While it is true that ‘the decisions of the Courts of Chancery are no longer the whole of the law of trusts’,4 efforts to date properly to accommodate the evolution in the use of the trust for commercial purposes in Australia are inchoate. 1.22 This evolutionary transformation of the trust is not unique to Australia. The authors of the standard American treatise Scott on Trusts note that in the United States today, the ‘uses of the trust go far beyond providing for the family. The trust is frequently used in business transactions’, at §1.1. In 1940, the US Court of Appeals for the District of Columbia noted that: The conversion or perversion, as the case may be, of the trust from its historic conserving function to entrepreneurial purposes has been a perpetual source of … conflicts … Whether therefore a particular arrangement of this sort … establishes a business enterprise as an independent entity requires something more than impressionistic answer.5

1.23 Unlike the Australian law of trusts, the law in the United States has adapted to accommodate this ‘conversion or perversion’. The result is that the allocation of legal risk among the three key participants in the trust is determined by rules and policies that are more appropriate for a commercial enterprise, in many cases resulting in outcomes which are aligned with those under corporations law. In this book, comparisons are made against trust law jurisprudence in the United States to highlight this point.

A PRACTITIONER FOCUS 1.24 This is neither a textbook nor a practitioner manual. However, in addition to doctrinal, theoretical and comparative analyses, this book adopts a practitioner focus and considers how the issues impact day-to-day practice.

[page 9] In appropriate cases, solutions are suggested, either by way of practical steps that can be taken to mitigate a risk or by suggesting documentary solutions through sample clauses. 1.25 The use of commercial trusts in Australia is widespread and pervasive; some statistical data concerning modern commercial trusts is included in Chapter 2. Australian practitioners — solicitors, barristers and judges — deal with them daily. The author’s observation is that many of the issues are poorly understood and sometimes not identified and, even where they are, the solutions applied to deal with them are not always effective. There is also the rather sobering fact that some of the issues are incapable of remedy by private means. 1.26 Ample material is available on key elements relevant to this discussion. However the major Australian texts on trusts and insolvency respectively, and indeed company law, either do not deal with the core issues at all or touch on them only peripherally or superficially. There is no comprehensive treatment of the commercial trust as a modern business association. The evolutionary process appears to have resulted in the commercial trust becoming ‘something of an orphan’ in the legal academy; no longer completely comfortable within the traditional law of property and estates, it has not yet been fully adopted into the law of business associations.6 1.27 For example, in relation to the law of trusts, Australian practitioners, scholars and jurists enjoy the benefit of several highly regarded treatises and texts. Yet when placed in the context of the hypothesis, a fundamental weakness is exposed; they ‘present the law of trusts not as a living, evolving body of law, serving and responding to the calls of the here and now, but as a static categorisation of rules … they retain the mould of a form of legal scholarship that is now 150 years old’.7 Professor Bryan has argued that ‘a defect of the trusts literature in Australia, especially academic writing, is that it conveys very little sense of the varieties of commercial trusts and the range of transactional objectives they are designed to meet’.8

[page 10] 1.28 Such analysis as is available on the issues is limited to a small number of articles, some now quite dated, by scholars, judges and practitioners and some law reform papers (as to which, see Appendix 2: ‘Selected reports into the law affecting commercial trusts’). Important areas of the law have not been the subject of comprehensive analysis, although the volume of literature is growing rapidly in the aftermath of the global financial crisis. What appears to be missing from the canon is a comprehensive and current treatment of the point of intersection that brings together the relevant elements of trust, company, insolvency and contract law to treat the commercial trust as a modern business association acting as a surrogate company. 1.29 This book seeks to make a contribution to the body of knowledge in this area by analysing the trust as a business association, including by the application of functionalist elements of law and economics theory; by identifying and analysing, in most cases in ways not previously attempted, some of the fundamental risks, uncertainties and shortcomings in the Australian law of trusts as it applies to commercial trusts, particularly concerning the potential for the commercial expectations of stakeholders to be frustrated; by proposing arguments and theories for how these uncertainties and shortcomings might be resolved through the courts and the legislatures, drawing on jurisprudence and statutory interventions in the United States and elsewhere; and, finally, by providing practical guidance on mitigating the risks through private means.

THE ‘COMMERCIAL TRUST’: DEFINITION, ELEMENTS AND ESSENTIAL ANATOMY 1.30 A premise of this book is the evolution of the trust from guardian to entrepreneur. The trust in the evolved form is described in this book as the ‘commercial trust’. This expression is not a legal term of art and it is not a category of trust in the traditional taxonomy.9 It has been used in commerce and the literature to describe a wide range of trusts used in a commercial context, many of which are not the subject of this book. The

subject of this discussion is a subset of the wider category of commercial trusts, that is those which operate effectively as a surrogate company. [page 11] 1.31 In this book, the expression ‘commercial trust’ means an arrangement by which a business enterprise is conducted by the trustee of an express trust: which is a unit trust that has been constructed so as to resemble in form and function a limited liability company incorporated under the Corporations Act; where the trustee is a limited liability company incorporated under the Corporations Act; where the beneficiaries may be regarded as equity investors in the enterprise in that they either contribute capital directly by subscription and are issued a tradeable security called a ‘unit’ or acquire pre-existing units by transfer; which may be anything from a closely held private arrangement in the form of a trading trust to a public unit trust with thousands of members and billions of dollars of enterprise value, with units listed on the ASX; where arm’s length third parties are prepared to contract with and extend credit (including financial accommodation) to the trustee for the purposes of the enterprise, including on an unsecured basis; where the trustee is authorised by the trust instrument to carry on, and does carry on, risk-taking business activities with the trust assets with a view to profit maximisation (whether those activities involve an active trading business or passive investment in securities or real property); and in the course of which business the trustee is authorised to incur, and does incur, contractual debts.

1.32 Key elements of this definition are described in more detail below. It is acknowledged that this definition embraces a wide spectrum of Australian entities from the partially regulated public unit trust (or MIS) to the almost wholly unregulated private trading trust. Where the distinction is material it is noted, but otherwise the issues are equally applicable across the spectrum. The expression ‘commercial trust’ as used in this book also encompasses unincorporated joint stock or ‘deed of settlement’ companies common in England prior to the enactment of the Joint Stock Companies Acts of 1844 and the ‘common law’ Massachusetts trust in use in the United States until the early 20th century (in each case, without the obvious Australian specifics). This is a convenience for the purposes of comparative analysis to emphasise the ancestral connection; there is no evidence that they were called ‘commercial trusts’ at the time.10 [page 12] 1.33 It has been observed that ‘no sharp line can be drawn between commercial and other applications of the trust. There is considerable conceptual difficulty in distinguishing between commercial and noncommercial activities’.11 That is undoubtedly true. Many different types of trust have been described as ‘commercial trusts’ in the sense that they are used in a commercial rather than a testamentary or inter vivos family context. Indeed, ‘the commercial objectives to which the trust can be harnessed are so various, and the ensuing structures so complex, that they might be thought to defy any kind of summary or rationalisation’.12 1.34 This book is concerned with express trusts which engage in commercial activity, but not all of them. There are some types of express trust that, although not private donative arrangements, do not come within the scope of this book because the trustee does not, in that capacity, engage in risk-taking entrepreneurial endeavour. Examples include nominee trusts, custodian trusts and bare trusts.13 Trusts are also used as an aid to financing transactions, an application that is neither novel nor restricted to Australia. Professor Goode has described the trust as an ‘immensely powerful and flexible instrument of modern finance’.14 A common example is the security trust where the trustee holds the benefit of

security and/or other covenants from the obligors for the benefit of a syndicate of financiers or the holders of debt instruments issued by the obligors; ‘the trust is at the centre of syndicated secured lending and structured or secured bond finance’.15 Another is the trust as a single or special purpose vehicle used in structured financing transactions such as securitisations. Trusts may also be used in aid of subordination arrangements. None of these trusts are the focus of this book, although some of the issues discussed will apply with respect to them also. [page 13] 1.35 The expression ‘discretionary trust’ has no fixed meaning and has emerged as a matter of usage to describe a form of express trust having certain distinguishing features, including discretions given to the trustee to make decisions as to the allocation and distribution of capital and income. Many kinds of structures may be described as a discretionary trust and the expression admits of a great deal of flexibility; it is not ‘a component of the doctrinal divisions by which there is determined the formal and essential validity of trusts’: Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 at 234. Discretionary trusts can be and are used for business activities as trading trusts.16 According to statistics published by the Australian Taxation Office for the fiscal year 2010-2011 (the most recent available at the time of writing), a total of 556,264 discretionary trusts lodged an income tax return, of which 232,431 declared trading (as opposed to investment) as their main source of income.17 Because the trustee may incur debts and liabilities to external counterparties, a discretionary trust can be the subject of some of the issues discussed in this book. However, those are usually relatively small entities involving families and/or other related parties and so the beneficiaries are not ‘equity investors’ in the sense defined below. Moreover, the trustees are usually natural persons rather than companies. Given the fact that the discretionary trust is never used as a collective investment vehicle for business by truly arm’s length commercial participants, there is no further discussion of it. 1.36 Also excluded are superannuation or pension trusts (about which

there is a substantial and growing literature). 1.37 In this book, as in commerce, the commercial trust is often spoken of as an entity. This is convenient for the purposes of the discussion and, indeed, supports the argument that it acts as a surrogate company. However, a strictly legal exposition would eschew expressions that speak of the trust as if it were a person; under Australian law, the trust has no legal personality separate from its trustee and beneficiaries and is not a juristic person.18 The corporation is easily identified and defined by reference to its enabling legislation. A reasonably well-informed [page 14] audience will immediately apprehend the meaning of the expression ‘company incorporated under the Corporations Act’ and the essential componentry implied by law, such as legal personality and limited liability. By comparison, a precise definition of the trust has proven elusive; indeed ‘no definition of a “trust” seems to have been accepted as comprehensive and exact’.19 Maitland himself ‘knew not where to find an authoritative definition’.20 Regarding the express trust at least, a formulation which enjoys a reasonable degree of consensus is that it is an aggregate of rights and obligations between two or more persons involving some property, where one or more of those persons carries a burden of fiduciary and related equitable duties towards one or more of the others, which is enforceable in equity.21 It is therefore a matrix of relationships that involves both a ‘proprietary element’, which allows for the creation, recognition and protection of multiple separate economic interests in property, and a ‘personal element’, an essentially personal fiduciary framework offering inbuilt protections for beneficiaries through the imposition of personal obligations and sanctions on trustees. Beyond that, however, its flexibility and myriad manifestations mean that a search for an exhaustive definition would lead only to disappointment. The foundational elements of the trust relevant to the argument are discussed in some detail in Chapter 2 and reference is made to them throughout. 1.38 Thus, in a purely legal sense the expression ‘trust’ describes an

arrangement rather than an entity. However, this book takes an applied rather than a pure approach. The traditional descriptions provided in the case law and the literature are inadequate to capture properly the modern commercial trust and the legal risks borne by those who participate in them. To law and economics theorists, and indeed to commercial people generally, a commercial trust is an enterprise rather than a mere legal form, viewed as the manifestation of a bargain and the theory of business associations rather than as a mere arrangement for holding and conveying interests in real property. That is a primary theme of this book. 1.39 The expression ‘trading trust’ is used in the Australasian literature. Again, this not a legal term of art but rather is used to describe an express trust in which the trustee is given the power to carry on business activities, either generally or of a particular type, with some or all of the trust assets at its disposal: see the definitional discussion in Chapter 2. It can be a commercial trust within the [page 15] definition above. However, the expression also has a narrower technical meaning under the Income Tax Assessment Act 1936 (Cth) s 102N, that is in effect a unit trust in which the trustee carries on an active trading business (as opposed to engaging in passive investment), and so, to avoid confusion, the expression ‘trading trust’ is not used except where specific reference is warranted. 1.40 The commercial trust in the sense contemplated by this book is structured as a ‘unit trust’.22 This is not a particularly new or modern construct (both the English unincorporated joint stock company and the American Massachusetts trust were in effect unit trusts), and it is the configuration in which the trust most closely resembles the company. It may be described as a specialised form of express trust, designed to facilitate investment by a number of investors, by which the beneficial entitlements of the beneficiaries, called ‘unit holders’, with respect to the income and corpus of the trust estate are fixed and are determined by reference to a number of fractions or ‘units’ created by and defined in the

trust instrument. In commercial idiom, the beneficial estate is thus said to be ‘unitised’. By detailed drafting of the trust instrument, each beneficiary’s aliquot interest in the enterprise is clearly delineated and distinguished from that of other beneficiaries so as to facilitate the allocation of capital entitlements, the distribution of profits or income and, crucially, the transferability of the beneficial interest, enabling the creation and functioning of a secondary market. Typically the trustee will be obliged to establish and maintain a register and detailed operational provisions regulating how units may be issued, redeemed and otherwise dealt with by the trustee and unit holders. In this way, a tradeable security is created that resembles, at least economically, commercially and functionally if not legally, a share in a company (as to which, see Chapter 3). Unit trusts are often structured so as to appear to investors, and to function commercially, as equivalent to companies, but without compromising the valuable benefits of the trust over the company (which benefits are discussed in Chapter 2). This apparent similarity provides a useful comparative platform for identifying the more material inadequacies of the commercial trust. 1.41 A commercial trust will be a ‘managed investment scheme’ if it falls within the definition of that term in the Corporations Act (as to which, see Part 1 of Appendix 1: ‘Extracts from the Corporations Act’). The expression [page 16] does not describe a separate category or species of trust. Rather, the Act gives that name to any multiple-participant arrangement having certain characteristics for the purpose of imposing an investor protection regulatory framework on it, contained mainly in the Corporations Act Chapter 5C.23 The word ‘scheme’ is given a very broad meaning,24 and can capture unit trusts. However, not every unit trust is a MIS, and not every MIS is a unit trust; for example, funding and retainer arrangements entered into by a group of litigants in class action proceedings have been held to constitute a MIS.25 In any case, a distinction is also drawn between trust-based schemes (which are sometimes described as ‘pooled schemes’)

and contract-based schemes (also called ‘common enterprise schemes’); schemes may exhibit elements of both and may even comprise partnerships.26 In many ways, a MIS represents a similar hybrid entity to the pre-1844 English unincorporated joint stock company, discussed in Chapter 2. 1.42 By s 601ED of the Corporations Act a MIS which bears certain characteristics (as to which, see Part 1 of Appendix 1: ‘Extracts from the Corporations Act’) is required to be registered with ASIC. The trustee of a registered MIS is described by the Act as a ‘responsible entity’ and, so as to bring it under the financial services licensing regime in Chapter 7 of the Act, must be a public company holding an Australian financial services licence authorising it to operate a MIS: Corporations Act s 601FA. The Act reinforces the fiduciary nature of the role by providing that the responsible entity is a trustee of the scheme’s assets (that is, whether or not the scheme is structured as a trust) and imposing fiduciary-like duties on them and their officers and employees: Corporations Act ss 601FC, 601FD and 601FE.27

DRAMATIS PERSONAE: THE THREE PRINCIPAL ACTORS 1.43 An American scholar noted that ‘a critical approach to the trust from the primary perspective of the benefits it provides to beneficiaries offers essential [page 17] insights into the nature of the device’.28 That is conventional and uncontroversial in relation to trusts generally. However when it comes to analysing the nature of the commercial trust, a more sophisticated and multi-dimensional approach is required. The investigation in this book is risks-based, conducted primarily by analysing the more material legal risks faced by each of the three principal stakeholders or participants in a commercial trust, namely:

1. the beneficiary unit holder, which in an arm’s length commercial context may be regarded as an ‘equity investor’ or ‘equity participant’ in the trust enterprise; 2. the trustee, which will invariably be a company rather than a natural person; and 3. the trust creditor: while the emphasis in this discussion is on intending and actual creditors, in fact the issues apply equally with respect to any contractual counterparty, including under nonmonetary contracts, since they could become creditors in respect of damages for breach.29 1.44 This three-pronged division reflects the established distinction in business associations theory between the economic owners of enterprise assets, those who manage the assets on their behalf in the pursuit of profits and external parties who engage with those managers in the ordinary course of the enterprise’s business.30 The fact that we may speak of the three main participants in a trust in these terms demonstrates the fundamental shift in roles, expectations and risks wrought by the evolutionary process.

The beneficiary as ‘equity investor’ 1.45 No longer ‘widows and orphans’ in need of equity’s paternal protection, beneficiaries have become equity investors in the commercial trust enterprise, at arm’s length both to the trustee and to each other. They acquire an interest in the trust fund either by contribution (by subscribing cash or other assets for units) or by transfer (by acquiring an existing unit holding). Their expectations are very different from those of a beneficiary under a testamentary trust or family settlement; rather, they are akin to those of a shareholder in a trading corporation. [page 18] At general law, consistent with the historical notion of the trust as a riskaverse guardian for the legally and economically vulnerable, the legal risks

of beneficiaries are few. However, the issue acquires a quite different complexion where the trustee engages in risk-taking profit-maximising business activities. Equity investors in commercial trusts do not enjoy the benefit of the many shareholder rights and protections provided by the Corporations Act. The most fundamental risk they face is unlimited personal liability for enterprise debts incurred by the trustee. The ‘trust veil’ does not protect them in the way that the corporate veil protects shareholders.

The corporate trustee 1.46 Historically the trustee was a natural person, usually of high repute, and well-known to and trusted by the testator or settlor.31 The modern commercial trustee is a corporation, usually at arm’s length to all other participants. Typically trustees of smaller commercial trusts are companies set up by the promoters and managers of the enterprise. In larger public commercial trusts they are wholly independent entities with a solid commercial reputation.32 Professional corporate trustees bring particular skills and expertise to the role and are remunerated out of the trust fund for managing the trust fund as a business enterprise. They are, in effect, professional service providers. Trustees of commercial trusts act, and are expected by equity investors and creditors to act, in a manner not dissimilar from the boards of directors of trading corporations. However, trust law does not automatically recognise this alignment. Trustees of commercial trusts, as a prima facie proposition, are burdened with two layers of potential personal liability: first, in favour of the equity investors they bear the entire range of fiduciary and other equitable duties, and accompanying sanctions, imposed by the law of trusts, many of which are manifestly inappropriate in a commercial context; and secondly, debts and other legal liabilities incurred by them in favour of external parties in undertaking the commercial activities of the trust are personal to them and, although they enjoy certain rights of indemnification, those rights are conditional and are not available in all circumstances.

The risks accompanying this ‘double exposure’ position may to some extent be ameliorated through contractualisation techniques. However, commercial trustees retain a residual liability that may put their personal assets at risk. [page 19]

The commercial creditor 1.47 Financiers and other contractual commercial counterparties are prepared to contract with and extend credit to the trustees of commercial trusts, including on an unsecured basis, in circumstances where the trustee has limited its personal liability, and typically look to the creditworthiness of the enterprise rather than of the trustee personally. They may transact on terms not dissimilar to those on which they engage with trading corporations of corresponding size and worth. Their expectations are very different from those of the banks and trade creditors who provide goods and services to the trustees of a family trust or executors of a testamentary trust, who are invariably individuals, where the engagement is supported by the individuals’ personal reputation and credit. However, trust creditors do not enjoy the protections and preferential treatment vis-à-vis equity investors and enterprise assets which are accorded to creditors of companies. There is no indoor management rule or much else in the way of innocent outsider protection for intending trust creditors. Further, while a secured trust creditor will have direct access to trust assets under its security, in enforcing its debts as against the value in trust assets an unsecured trust creditor must navigate two equitable remedies in subrogating to the trustee’s indemnity, thus exposing it to a ‘double equity risk’. A problem with either remedy, even if caused by trustee misconduct of which the creditor is innocent and ignorant, may result in denial of access to those assets, leaving the creditor with a personal claim against a trustee who may be insolvent (and a possible windfall gain for the equity investors). As the discussion will show, there are crucial differences in risk profile between secured and unsecured trust creditors which go beyond the differences between secured and unsecured creditors of a company.

1.48 Not every legal risk facing those participants is dealt with in this book. Rather, the focus is on the more fundamental risks (including some which appear not to have been fully explored to date) and, in particular, on those that have no analogue in company law for a corresponding participant in an incorporated enterprise.

Directors of the corporate trustee 1.49 Arguably, given the risks and potential liabilities they undertake, the directors of a corporate trustee could in some senses also be described as stakeholders. However, because they are at a remove from the core engagements between the other stakeholders they are excluded from the principal argument in this book. Still, directors of a corporate trustee bear duties and responsibilities specific to their company’s trustee status which are in addition to the burden of ordinary directors’ duties under common law and legislation. They risk personal liability under Corporations Act s 197 if the trustee incurs a liability as trustee but [page 20] that liability is not discharged and is not able to be indemnified out of trust assets solely because of a breach of trust, an act beyond power or a term of the trust denying or limiting that right of indemnity. They may incur accessorial liability for breaches of trust by the company.33 If the trustee is a responsible entity of a registered MIS, s 601FD of the Act imposes additional express duties on the directors with respect to the scheme and its members, including a duty to act in the best interests of the members.34 If the trustee is a licensed trustee company, there are further personal duties under the Corporations Act s 601UAA. If they do not properly manage the trust fund, including trust debts, and that results in the trustee becoming insolvent, directors risk personal liability for trust debts under the Corporations Act s 588G. There is a range of other circumstances under which creditors (including trust creditors) may seek personal recovery against directors.35 Each of these matters raises important

substantive issues meriting detailed treatment, but they are excluded from the scope of this book, except incidentally where relevant. 1.50 Nevertheless, reference is made to company directors (or the board of directors as an organ) as a comparison point for the risk position of the commercial trustee. In many senses their role, function and expectations in a commercial context, as managers of assets economically owned by others, can be seen as aligned. When making this comparison one must always hasten to add the qualification that the apparent similarity between directors and trustees has its limits and breaks down quickly under close legal scrutiny. The author does not wish to ‘reignite the arid debate on whether directors are trustees’.36 [page 21] Justice Gummow (as he then was) observed that ‘it has not always been readily appreciated how misleading it is to describe directors as trustees’.37 By way of contrast, however, note Corporations Act s 604(1)(g) which, in applying Chapter 6 (Takeovers) to listed MIS, states that ‘the appointment of a responsible entity for the scheme [is to be treated as if it] were the election of a director of the company’.

OTHER KEY TERMS AND CONCEPTS Commercial expectations 1.51 In considering the position of stakeholders, the expression ‘commercial expectations’ is used. This is given particular meaning at the beginning of Chapter 3 in respect of equity investors, Chapter 4 in respect of corporate trustees and Chapter 5 in respect of trust creditors. More generally it refers to the risk and reward expectations of a hypothetical reasonable commercial person who is not, and who is not advised by, an expert in trust law, and who makes its decision to participate in a given commercial trust enterprise at least partially on the assumption that its legal risk position will approximate that of a corresponding participant in a similar enterprise conducted via an incorporated vehicle (where, in a very

general sense only, trustees may be said to correspond to the board of directors of a company, subject to the qualification in the preceding paragraph).

‘Contractualisation’ 1.52 In considering the way participants have modified the trust vehicle to overcome inconveniences attending it and accommodate modern commercial expectations, the expression ‘contractualisation’ is sometimes used. Its meaning is discussed in 2.111 and following. It is a term used frequently in law and economics literature and as a neologism in the Australian trust context it appears to have been coined by Professor Bryan in a monograph entitled ‘Contractual modifications of the duties of a trustee’,38 albeit without specific definition. The focus of Professor Bryan’s argument was the modification and exclusion of trustees’ fiduciary and other equitable duties. As used in this book, however, it implies a much broader idea involving the use of private bargaining [page 22] techniques, and contractual and contract-like documentary devices derived from and operating in a manner analogous to contractual principles, to shape or reallocate the risks of any of the three principal participants in the commercial trust enterprise. It is echoed in Whincop’s concept of ‘contractibility’, that is, the notion that doctrinal principles are susceptible to private ordering.39 In this context, ‘contract’, both as a noun and a verb, is sometimes used in the commercial or metaphorical sense and is not limited to that which is known to the common law as a contract.

Company vs corporation 1.53 The commercial trust is compared throughout to the ‘company’ or the ‘corporation’, terms which, in Australia, are used more or less interchangeably to include a legal entity incorporated under the Corporations Act. However, they are not necessarily perfect synonyms in

every context. It has been noted that, technically, what Anglo-Australian lawyers call the ‘company’ is called a ‘corporation’ in the United States; due to divergent historical paths following the American Revolution, ‘American business corporations are descendants of the chartered corporation. English registered companies, on the other hand, are not simply chartered corporations created another way. They are descended from the unincorporated joint stock company’.40 Moreover, while today the expression ‘company’, without further qualification, is generally understood in Australia to mean an incorporated body having, among other things, separate legal personality, this is not so when discussing the unincorporated joint stock company: ‘For scholars of Lord Lindley’s generation the term “company” was the umbrella term applying to both unincorporated and incorporated companies which were, roughly speaking, viewed as different forms of partnership and which were, to a significant extent, subject to the same legal architecture of contract and trust law that governed a partnership’.41 [page 23]

COMPARISONS WITH THE UNITED STATES: WHY? 1.54 In a 2013 article on accessorial liability for breach of trust, former High Court justice Gummow expressed concern at ‘the persistent failure in the study in Australia (and in England) of many fields of law to look to the development of those fields in the United States’.42 1.55 At various points in this book comparisons are made with the position in the United States. This is not commonly seen in the existing Australian literature on trusts (but not unheard of; occasional references to US authority appear in some of the standard texts). When it comes to the commercial trust, however, the American experience provides a highly appropriate, useful and relevant touchstone for comparative analysis. As discussed below, the commercial trust, as defined above, is virtually unknown in England. 1.56 In the United States the trust device was used for commercial

purposes, including as a business entity (often described as a ‘Massachusetts trust’), since at least the late 18th century: see the brief discussion in 7.51–7.54. Indeed, while the notion of a company as trustee is unremarkable in Australia today, the United States is credited with having developed the idea of the corporate trustee.43 Despite a common ancestry, there have been some interesting doctrinal divergences between Anglo-Australian and the American law of trusts. While the introduction of general companies legislation in England effectively brought to an end the use of the trust as a business vehicle, for a range of reasons the same did not occur in the United States and so the law in relation to commercial trusts continued to evolve alongside corporations law. This resulted over time in a degree of alignment between company and trust law principles, as applicable to the commercial trust, both in the courts and through the legislatures. 1.57 The ‘common law’ commercial trust is still in use today in the United States, although not on the scale of the Australian commercial trust, largely because promoters and investors seeking corporate style benefits, such as legal personality and limited liability, with trust-like tax treatment, a lighttouch [page 24] regulatory framework and structural flexibility, have in recent decades been provided with a menu of additional options not available in Australia.44 These statutory hybrid entities include the real estate investment trust (or ‘REIT’), the limited liability partnership (or ‘LLP’), the limited liability limited partnership (or ‘LLLP’), the limited liability company (or ‘LLC’, a partnership-like entity which among other things offers pass-through tax treatment provided it adheres to certain conditions) and the statutory business trust.45 Nevertheless, the advances made in American trust law during the evolutionary process remain. Before the creation of these hybrid entities many of the issues identified in this book arising out of the use of the trust device for commercial applications were resolved through a combination of active judicial interpretation and statutory intervention. That process continues into the present day with the

gradual enactment across the states of the Uniform Trust Code and statutory business trust legislation, along the lines of the Uniform Statutory Trust Entity Act. 1.58 The use of trusts in American commerce was acknowledged early by jurists, scholars and legislators. Their thinking on commercial trusts has been influenced by a range of economic considerations — in modern times described under the general rubric of ‘law and economics theory’ — many of which were imported from the corporate sphere. Parallels were drawn between the corporation and the trust from a functional and economic perspective, with the motivating idea that, for certain purposes and regardless of the legal form, it is valid to equate a trust that is configured like, and behaves like, a corporation with a corporation. The United States courts have been willing to apply these ideas when considering disputes over risk allocation, often by adopting a more flexible approach to equity and equitable principles as applicable to the trust. For their part, United States legislatures have been much more active than their Australian counterparts in shaping and modernising trust law through targeted statutory intervention to meet the commercial expectations of trust stakeholders, often by aligning their risk profile with that of counterparts in the corporation. 1.59 By this process, the United States courts and legislatures have given those who wish to participate in commercial trusts that which their Australian [page 25] counterparts must pursue through private means: a set of rules of engagement designed to meet reasonable commercial expectations. Using the language of law and economics theory, American law applicable to commercial trusts may be described as more ‘efficient’, while the Australian equivalent is relatively ‘inefficient’.

LAW AND ECONOMICS THEORY

1.60 Reference is made throughout to the theoretical hybrid known as ‘law and economics theory’, which brings together elements of both legal and economic aspects of analysis, as it applies to the business association generally and the commercial trust in particular. The literature on that theory (or, perhaps to be more accurate, theories) is extensive and there are several schools within it. The emphasis for the purposes of this book is on the so-called ‘functionalist’ or ‘legal realist’ school. 1.61 Law and economics theory originated in the United States and is a fundamental guiding doctrine in the American law of business associations. A consideration of modern United States law of commercial trusts would be incomplete without at least an elementary understanding of it. It is also evident in how the trust has been contractualised into a commercial vehicle and is an essential pillar of the argument for how and why the regulation of Australian commercial trusts should be more closely aligned to that of commercial companies. 1.62 There is evidence that law and economics theory has begun to influence thinking and scholarly discourse in Australia, at least in relation to company law, although it remains controversial. In relation to trusts, the Australian judiciary and legislatures appear to date to be unaffected by this theoretical influence and there is almost no mention of it in scholarly literature in relation to commercial trusts. Nevertheless, it is argued that law and economics thinking has infiltrated, and has manifested itself implicitly in, the way market participants have contractualised the trust into a surrogate company, although it has not been acknowledged as such. 1.63 It is not necessary to conduct a detailed analysis of the entire body of law and literature surrounding the theory. The theory or elements of it have been applied to areas of law as diverse as corporate law, competition law, contract law, criminal law and family law. In the preface to the 2010 edition of his celebrated treatise Economic Analysis of Law, Richard Posner, generally regarded as a pioneer and leading proponent of the modern law and economics movement, described the economic analysis of legal rules and institutions as ‘the [page 26]

foremost interdisciplinary field of legal studies’ and quoted others who described it as ‘an enormous enlivening force in American legal thought’ which ‘continues and remains the single most influential jurisprudential school in this country’.46 Similar sentiments have been expressed by others.47 1.64 In essence, law and economics theory, in the sense used in this book, is a substance-over-form methodology which emphasises the economic, functional and commercial aspects of a transaction, a relationship or an enterprise entity over the legal form through which it is conducted. This is often described as ‘functionalism’. An instructive example of functionalism in statutory reform is in the law of secured transactions where, for the purposes of Art 9 (‘Secured Transactions’) of the Uniform Commercial Code, the many and varied common law legal forms of security, with all their historical technical idiosyncrasies in relation to creation, perfection and priority, were replaced with a functional definition of ‘security interest’, being ‘an interest in personal property or fixtures which secures payment or performance of an obligation’: see Uniform Commercial Code §1-201(35). This concept has been adopted in Australia in the Personal Property Securities Act 2009 (Cth): see in particular the definition of ‘security interest’ in s 12(1). 1.65 A pillar of this complex hybrid discipline is the assumption that participants in any given legal system, and in any transaction, relationship or entity within it, behave rationally and self-interestedly to maximise the satisfaction they derive from that participation in the way they respond to risks and benefits, and incentives and disincentives, whether legal or economic. In doing this they tend to move towards an ‘efficient’ allocation of risks to those who ought economically to bear them (or who are prepared to be paid to bear them), and of resources to those who can most efficiently exploit them (or who are prepared to pay for them). For example, proponents argue that limited liability for investors promotes efficiency by encouraging investment and managed risk-taking in the exploitation of economic resources; this in turn lowers the cost of capital, which in turn increases economic output and the public welfare.48 [page 27]

1.66 It is evident that United States corporations law has been heavily influenced by law and economics theory.49 In 1997, American law and economics scholar Stephen Bainbridge asserted that: Over the last few decades, law and economics scholars have mounted a largely successful hostile takeover of the corporate legal academy … The law and economics movement remains the most successful example of intellectual arbitrage in the history of corporate jurisprudence. It is virtually impossible to find serious corporate law scholarship that is not informed by economic analysis … Perhaps the most telling evidence of the success of law and economics in our field … is that many leading corporate law judges and lawyers now rely upon economic analysis extensively. Both judicial opinions and practitioner publications are filled with the jargon of law and economics. This is a claim that no other modern school of jurisprudence can make.50

1.67 More latterly, law and economics theory has been applied to the comparison between the company and the commercial trust, drawing parallels between them from a functional and economic perspective. The motivating notion is that, regardless of the legal form, for certain purposes it is valid to equate, align or compare critically a trust which is configured like, and behaves like, a corporation with a corporation. Streams of law and economics thinking that are relevant for the present discussion include ‘enterprise theory’ and ‘contractarian theory’.

Enterprise theory 1.68 Enterprise theory is a central tenet of the American law and theory of business associations. The expression is a loose descriptor for a broad range of functionalist doctrines that emphasise the underlying enterprise rather than the legal form through which it is conducted, involving an acknowledgement that the legal form is but one element of its identity and ought not distract attention from the underlying economic reality. Elements of enterprise theory are reflected in the American law of trusts and this represents an acknowledgement that, in some configurations, they are business associations. The principal examples [page 28] are innocent outsider protections and the fixing of trust liabilities on the

‘trust estate’ as the enterprise rather than, or in addition to, the trustee personally. The objective is to give contract creditors and tort claimants safe and direct access to the assets in the estate, regardless of trustee behaviour which might otherwise leave them with a mere personal claim and therefore the risk of loss if the trustee was impecunious or insolvent. This is discussed in more detail in Chapter 5. The more recent body of literature comparing the trust to the corporation also contains discussion of the commercial trust as an enterprise and identifies the various respects in which trusts operate and are considered as enterprises rather than legal forms. Sitkoff described the trust as an ‘enterprise organisation’.51

Contractarian theory 1.69 Contractarian theory posits that every multiple-participant business organisation is or can be seen as essentially a matrix or nexus of contracts, regardless of legal form. Contractarians argue that business organisations can be, and for most purposes other than strictly legal ought to be, analysed by reference to the economic bargains struck between the principal participants in it and their expectations and behaviours within those bargains. Typically, contractarians regard a purely legal analysis referencing the doctrinal framework of the entity as too narrow for many applied purposes.52 As with enterprise theory, contractarian theory cannot have been relevant to trusts in their original conception; they were not the result of a bargain struck in a commercial context. However, when trusts are used for business, and are contractualised to resemble corporations in form, function and activity, it is appropriate to view them through the conceptual framework of business associations theory. Langbein explored in detail the notion that ‘the trust is a deal, a bargain about how the trust assets are to be managed and distributed’ in an influential 1995 article.53 While this might seem radical in relation to Australian trusts, the notion of the company as a network of contractual engagements is not an unfamiliar one in Australia. Corporations Act s 140 provides that the company’s constitution and any replaceable rules have effect as a contract between the stakeholders in certain combinations (but not as between shareholders and directors).54

[page 29] 1.70 It is not an objective of this book to explore or critique law and economics theory in detail or to promote the adoption of American law and economics theory in Australia, or to suggest that it can or should be transplanted as a package to the Australian context; it is, in many senses, a uniquely American construct, an emanation of the American experience, and it continues to evolve in the courts, the legal academy and the literature. It is acknowledged that aspects of the theory have attracted criticism, both inside and outside the United States, and that the debates between proponents and opponents are robust, but this book does not engage with those debates. 1.71 If evidence is required that law and economics theory, as applicable to the trust, is a predominantly (and perhaps, at least to date, a uniquely) American notion, one need look no further than Lau’s 2011 monograph, The Economic Structure of Trusts,55 which approaches the debate from an English trust law perspective. In it, the author challenges with some vigour what he describes as the ‘obligational approach’ and entity theories argued by Langbein, Sitkoff and others, describing them as ‘inaccurate and analytically flawed’ and ‘just wrong’, and derides the body of thinking they represent as the ‘trust deal syndrome’.56 He states that they simply ‘took corporate law and economics theories and forcefully transplanted them onto trusts without paying due regard to the trust’s unique attributes’.57 He attacks contractarian theory, saying that ‘trusts should not be understood as contracts, even if only metaphorically, as there are too many anatomical differences between the two legal concepts’, and dismisses enterprise theory, stating bluntly that ‘trusts are not firms’.58 Lau in effect seeks to reclaim the trust as a property concept. He argues that law and economics theories pay too little regard to the fundamental property-based and fiduciary nature of the trust. 1.72 Lau is no more or less ‘right’ than Langbein, Sitkoff et al. In truth, this is not a debate about what is the right or wrong theory, or whether the trust is contractual or property-based, or whether it is indeed appropriate to regard it as a firm. What is observed here is the existential jurisprudential debate over whether, and if so the extent to which, the

modern commercial trust should be regarded by the law as an economic entity similar to the corporation, and whether it is primarily a creature of the law of property or the law of obligations and business associations. Lau’s emphasis is on the historical underpinnings [page 30] of the trust as a property-holding vessel; he takes a predominantly doctrinal approach to focus on that which is unique about the trust and which distinguishes it from contract and from other devices used in commerce. In none of this is he incorrect or misled and his position reflects the fact that the place from where he writes, England, does not see the commercial trust in operation as we do in the Antipodes. On the other hand, Langbein, Sitkoff and others approach the trust from the modern commercial perspective, placing it within the broader family of business associations, focusing less on its historical and doctrinal elements and more on those elements which, in the commercial context, it shares with contract and with other entities used for similar purposes, including in particular the corporation.

ENGLAND AND ELSEWHERE 1.73 English trust law is the source of Australian trust law and English authority is, of course, persuasive in the Australian courts. It is also the ancestor of United States trust law. However, while many of the issues at the heart of this book have been dealt with by the United States courts and legislatures, English trust law appears to be no further advanced than (and in some cases lags) Australia’s in relation to the commercial trust. The applicable law is not materially different to that of Australia, at least not in ways that are useful for the present analysis. What discussion there is about express trusts put to commercial applications tends to be clustered around private client structures and ‘international trusts’ established in tax haven jurisdictions, or in the context of pension funds, or trusts used to hold secured property in a financing context such as bond or note issuances, securitisation structures or syndicated loans, all of which are

beyond the scope of this book. The unit trust is well-known in England and continues in use for mutual investment funds but not, it seems, for active profit maximising business activities.59 If anything, English commentators appear to regard the large-scale commercial trust as an Australian idiosyncrasy. One commentator stated that, ‘to English readers the words trading trust look like a contradiction in terms’ and that, in England, ‘the trust does not normally empower the trustee to trade’.60 [page 31] 1.74 Eminent British trust lawyers Geraint Thomas and Alastair Hudson stated in 2010 that: Business enterprises are generally organised as a company, as a partnership or by means of an entrepreneur acting as a sole trader. It is comparatively rare for such enterprises to be undertaken through a trust structure unless done as part of a family trust arrangement dealing with a family business, or to avoid regulation of some kind … most commonly … taxation. … [a] trust structure does not lend itself easily to the constitution of complex business ventures in a manner that a company can.61

1.75 In the same year, Lau said of the English context that: The costs of the trustee becoming the central counterparty clearly outweigh the benefits. This is why trusts are not in the business of operating real businesses.62

1.76 Whatever may be the status of those observations in the English commercial context, they certainly do not reflect the position in Australia. Nevertheless, there is some analysis of the risks to stakeholders in dealing with trusts engaging in commercial activities in English legal literature and some of the more fundamental issues have been identified in law reform papers and been the subject of discussion: see, for example, the reports listed in Appendix 2: ‘Selected reports into the law affecting commercial trusts’. 1.77 Trading trusts are also in use in New Zealand, and the Canadian literature and authorities acknowledge a ‘business trust’ concept; consequently some of the issues have been debated in those places also.63 Singapore has the concept of a statutory business trust.64 Reference is occasionally made to the law and literature from those places, although the

substantive comparative study is limited to Australian and United States laws. 1.78 Finally, although the trust is essentially a creation of English equity jurisprudence which has been adopted in other common law jurisdictions, [page 32] trust-like concepts have been embraced in other places and legal systems where, in the absence of the concept of equity, there is an ongoing debate as to whether the trust is properly located in the law of obligations or property. For example, a definition of ‘trust’ which enjoys a degree of international consensus is contained in Art 2 of the Hague Convention of 1st July 1985 on the Law Applicable to Trusts and on their Recognition (ratified in Australia on 17 October 1991) but even that demonstrates a degree of compromise between the law of obligations and the law of property when it speaks of ‘assets hav[ing] been placed under the control of a trustee for the benefit of a beneficiary’ (emphasis added). To the Anglo-Australian equity lawyer, for there to be a trust the putative trustee must have some form of ‘ownership’ of the property; mere control or possession of it is not sufficient. None of this has prevented the widespread use of the trust or trust-like devices in commercial applications in those places, although not in the ways the commercial trust operates in Australia.65

TRUSTS AND TAXES 1.79 It is necessary to provide some observations on the role of taxation because it is not otherwise a focus of this book. It is clear from the literature and a number of important trust law cases both in Australia and in the United States (and indeed England and elsewhere) that taxation has been a significant factor in the history and evolution of the trust. The role played by tax drivers in the growth of the Australian trading trust from the 1960s and 1970s is discussed briefly in Chapter 2. 1.80 In the 1930s the celebrated American trust scholar Professor Austin

W Scott observed that ‘no phenomenon in the law has been more interesting than the struggle between the taxpayer and the government, in which the trust has played a notable part’.66 More recently, Australian scholars drew a direct causal connection in observing that: [page 33] The most significant developments [in the law of trusts] occurred in the 20th century when taxation laws were such that there was an incentive for businesses and investments to be constructed as “trusts”. Consequently, the nature of trusts became the subject of dispute … and detailed analyses … tax law has led to the clarification and expansion of trust principles.67

1.81 Any discussion of the relationship between trusts and taxes must acknowledge an important distinction. On the one hand, Australian tax laws expressly contemplate trusts and as a matter of policy deliberately extend certain benefits to participants in them if they are structured a certain way and conform to certain ongoing requirements; in this context, the trust is not used as an instrument of tax evasion or avoidance. The Australian Taxation Office acknowledges, on its own website, that ‘trusts are widely used for investment and business purposes’.68 CAMAC has described the attraction of this aspect as follows: A trust is a tax-efficient vehicle for collective investments, in that investors with different tax profiles (for instance, companies, pension funds, individuals) can invest together without adversely affecting their tax positions. Most MIS involve the use of a trust. The taxation of trusts in Australia is also more favourable to the use of collective investment vehicles than in other major jurisdictions … This factor [is a] major driver of the burgeoning use of MIS in Australia.69

1.82 On the other hand, there is a long history of the trust being used specifically as a device for evading, avoiding or minimising direct and indirect taxes.70 Miller describes the distinction as being between trusts that ‘enjoy tax-advantaged status but are engaged in some form of independent productive (that is, wealth generating) activity’ and those which are used as instruments for ‘tax-arbitrage’.71 This is a useful and apposite distinction for present purposes;

[page 34] in particular, it highlights the point that the trust vehicle may be used for creating entities that do not have tax outcomes as their primary objective, even if they enjoy certain revenue conveniences. 1.83 Although empirical comparative evidence on the use of the trust as against the company in commerce is not readily available, it is clear that to an extent tax benefits can still be seen as a feature that makes the trust attractive to a particular class of promoter and investor in Australia. The trust enjoys advantages not available to the company, and this helps explain its enduring popularity in commerce as an alternative to the corporate form. Tax imposts, whether direct or indirect, can have a material impact on decision-making by commercial parties seeking to maximise their return on investment, by changing the economics of a given transaction or business model. Whether incidentally or as a manifestation of deliberate targeted policy, taxes (or their absence) create incentives and disincentives; for example if, as has previously been suggested,72 the Commonwealth Government were to reverse its long-standing policy position and change the law so that all trusts were taxed on their income as if they were companies regardless of when and how they distributed it, abolishing the benefits of ‘pass-through’ status and associated concessions, it would be reasonable to predict that this would have a chilling effect on the use of trusts over companies in commerce (and, for that matter, in private estate planning). The commercial trust’s chances of survival would then depend on the relative weight accorded by promoters and investors to the remaining available advantages described in this book, as balanced against the perceived risks. 1.84 It is an unsurprising consequence of the use of the trust for tax purposes over the years that Australian law governing the taxation of trusts, at both the state and federal level, has become vast, dense and complex, and has generated an enormous body of literature. Absent empirical evidence, it is difficult to estimate the relative weight of taxation benefits over other factors in the expansion of commercial usage of the trust.73

[page 35] 1.85 The focus of this book is the commercial trust within Miller’s first category above, that is a trust that may enjoy tax-advantaged status but is engaged in some form of independent productive, wealth-generating activity. The tax aspects of the commercial trust the subject of this book are incidental rather than central to the arguments and analyses around legal and insolvency risks. Thus, they are mentioned where germane to the analysis but are not otherwise explored in detail.

OTHER EXCLUSIONS FROM SCOPE 1.86 Apart from the tax dimension, it is important in a work of this nature, which covers such potentially vast terrain, to describe other exclusions from scope. 1.87 This book is not, and is not intended to be, a detailed theoretical investigation into the nature of the trust and its component parts, or a doctrinal analysis and call for reform of the law of trusts more generally. Nor is it a comprehensive dissertation on the Australian general law of trusts or the law of insolvency; the canon of literature for both is wellstocked. Naturally, it is necessary to discuss elements of each of those areas for the purposes of the argument. 1.88 It is not intended to be an exhaustive or complete exposition of all of the issues attending the insolvent commercial trust in Australia; some have been identified and described in various practitioner and scholarly publications as well as in several official reports. Rather, the objective is to identify and discuss in detail several of the more material but least explored of them in support of the overall hypothesis. 1.89 This book is not a specialist publication for those dealing with registered MIS and the securities they issue. Being bodies that can raise subscriptions from the public and have their securities listed on the ASX, they are subject to a higher degree of regulation than other commercial trusts, not only under Chapters 5C (‘Managed Investment Schemes’) and 7

(‘Financial Services and Markets’) of the Corporations Act, but also under the ASX Listing Rules and through various instruments issued by ASIC. The regulatory burden on promoters of those schemes and their responsible entities (and directors) is indeed a heavy one and, for the most part, is not explored in detail here. There are publications that specialise in the details of those regulatory frameworks.74 [page 36] 1.90 This book is not a comparative study of the trust as against the corporation or generally of Australian trust law against United States trust law, but the argument is advanced by drawing on each and some critical differences between them. 1.91 The author is not a legal historian and so this is not a historiography of the trust or the law of trusts. This book draws substantially on the work of legal historians for the discussion of the evolution of the trust device in England, the United States and Australia, which is necessary to set various premises for the argument. The legal historian is a hybrid specialist and the study of legal history is a distinct discipline in the academy, demanding the application of skills, learning and experience of both the academic lawyer and the academic historian. The history of law, or of any given category within it, is not a collection of objective propositions, neatly bundled in readily discernible facts and publicly available documents. Much is open to contest and the debates among legal historians are as vigorous as any in the academy. The time frame and developments dealt with in the historical discussion in Chapter 2 are mighty and not all of the views and conclusions expressed are necessarily settled. It must be borne in mind that the discussion is deliberately general and selective, designed to establish baseline propositions (such as, for example, the fact that neither trust law nor the trust itself emerged in a commercial context or for commercial reasons) and a contextual framework for the substantive discussion that follows. 1.92 Due to its largely unregulated and non-statutory nature, there is limited statistical data in relation to the scale of use of the commercial

trust, so this book does not take an empirical approach. Some information is publicly available in relation to MIS and various Australian governmental agencies provide some statistical data on trusts also. Quantitative information is cited where appropriate, particularly in Chapter 2. 1.93 While this book references liberally Australian case law generated by recent collapses of MIS, it does not investigate any particular one of them in any detail or otherwise take a ‘case study’ approach, apart from positing and referencing the Blackacre Trust hypothetical set out in Appendix 6: ‘The Blackacre Trust hypothetical’. 1.94 Despite the references throughout to law and economics theory and to the work of its proponents, this is not an economics-based argument and this book does not purport to break new ground in the field of economics as applied to private law generally or trusts in particular, apart from the application of elements of law and economics theory to the Australian commercial trust. The [page 37] material in this book on law and economics theory is intended to be descriptive, narrative and contextual, to set the scene for the principal arguments. It is not intended to be analytical or critical and does not engage in the current debates between proponents and detractors. The arguments in relation to the Australian commercial trust do not assume an advanced understanding of American law and economics theory nor do they depend on resolution (if there can be one) of the competing views of its many followers and opponents. 1.

Frederic W Maitland, The Unincorporated Body (Collected Papers, 1903). Oliver Wendell Holmes Jr shared this sentiment, calling the use ‘the greatest contribution to the substantive law which has ever been set down to the credit of the Chancery’: Oliver Wendell Holmes, ‘Early English Equity’ (1885) 1 Law Review Quarterly 162 at 162.

2.

Peter W Young, Clyde Croft and Megan Louise Smith, On Equity (Lawbook Co, 2009) at 387.

3.

Andrew Butler and Tim Miller, ‘Thoughts on Equity in New Zealand and New South Wales’ in Jamie Glister and Pauline Ridge (eds), Fault Lines in Equity (2012) at 11.

4.

Alistair Hudson, ‘The Regulation of Trustees’ in Martin Dixon and Gerwyn L L H Griffiths (eds), Contemporary Perspectives on Property, Equity and Trusts Law (Oxford University Press, 2007).

5.

Fidelity-Bankers Trust Co v Helvering 113 F 2d 14 (1940) at 18.

6.

An observation made, in the historical American context, by Professor Robert Sitkoff: see Robert H Sitkoff, ‘Trust as “Uncorporation”: A Research Agenda’ (2005) University of Illinois Law Review 31 at 33–4.

7.

Donovan W M Waters, ‘The Role of the Trust Treatise in the 1990s’ (1994) 59 Missouri Law Review 121 at 127–8. A similar argument is made in Patrick Parkinson, ‘Chaos in the Law of Trusts: Principles of the Law of Trusts (HAJ Ford and WA Lee)’ (1991) 13 Sydney Law Review 227.

8.

Michael Bryan, ‘Reflections on Some Commercial Applications of the Trust’ in I M Ramsay (ed), Key Developments in Corporate Law and Trusts Law (LexisNexis Butterworths, 2002) at 207.

9.

The conventional taxonomy of trusts has been described by the High Court of Australia thus: ‘Divisions are made between express trusts, implied or resulting trusts, and constructive trusts, between purpose trusts and non-purpose trusts, between trust powers and bare powers, and between testamentary trusts and settlements inter vivos’: Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 at 234. Recently, Professor Finn wryly observed a ‘bewildering English preoccupation with the proper taxonomy of trusts’: Paul Finn, ‘Common Law Divergences’ (2013) 37 Melbourne University Law Review (Advance) at 5 (fn 24).

10. There were important differences however. The trustees will have been natural persons rather than a limited liability company. Further, those entities were not described as ‘unit trusts’ although they were structured in a form that closely resembles that which today would be called a unit trust. Equity interests in those entities were usually called ‘shares’ rather than units even though those were not incorporated bodies. 11. Robert D Flannigan, ‘Business Applications of the Express Trust’ (1998) 36 Alberta Law Review 630 at 631. 12. Michael Bryan, ‘Reflections on Some Commercial Applications of the Trust’ in Ramsay (ed), Key Developments in Corporate Law and Trusts Law (2002) at 205. See also Thomas & Hudson on Trusts, Chapter 51: ‘Trusts Used to Take Security in Commercial Transactions’ and Chapter 52: ‘Trusts in Relation to Debt Securities’; Waters on Trusts, Chapter 12: ‘Uses of the Trust Device’; Robert H Sitkoff, ‘Trust as “Uncorporation”: A Research Agenda’ (2005) University of Illinois Law Review 31; Steven L Schwarcz, ‘Commercial Trusts as Business Organizations: Unraveling the Mystery’ (2002–2003) 58 Business Lawyer 559. 13. In relation to nominee and bare trusts, see Herdegen v Federal Commissioner of Taxation (1988) 84 ALR 271 at 281 (per Gummow J) and Byrnes v Kendle (2011) 243 CLR 253; [2011] HCA 26. A ‘custodian’ trust differs from a bare trust in that a custodian usually carries some active obligations: Thomas & Hudson on Trusts at [23.21]. 14. Roy Goode, Commercial Law (3rd ed, LexisNexis UK, 2004) at 151–2. 15. Daniel Whitehead, ‘Corporate Trustees: Pride or Prejudice?’ (2011) 34 International Finance Law Review 32.

See, generally, Ian J Hardingham and Robert Baxt, Discretionary Trusts (2nd ed, 16. Butterworths, 1984). 17. These and other statistics relating to trusts are available on the ATO’s website . 18. One commentator has noted that discussion in commerce of the trust as a person ‘bespeaks a fundamental and surprisingly common misconception’: Kalev J Crossland, ‘Unsecured Creditors and the “Uncorporation”: Issues with Trading Trusts Post Global Financial Crisis’ (2011) 17 Trusts & Trustees 183 at 190. Similar sentiments are expressed in Lionel Smith, ‘Mistaking the Trust’ (2011) 40 Hong Kong Law Journal 787. United States laws contemplate a form of trust that does have statutory legal personality, the statutory business trust: see the Uniform Statutory Trust Entity Act. 19. Re Scott (decd) [1948] SASR 193 at 196. Leeming concludes that ‘the answer to the question is the whole body of the law of trusts’: Mark J Leeming, ‘What is a Trust?’ (2008) 31 Australian Bar Review 211 at 211. 20. Maitland on Equity at 43. 21. Ford & Lee on Trusts at [23.010]. See also Jacobs on Trusts at [101]; Underhill on Trusts at 2; Scott on Trusts at §1.1; Bogert on Trusts at §1. See too Clark v Commissioner of Taxation (2009) 77 ATR 460; [2009] FCA 1401 at [94]. 22. There is a range of literature on the unit trust, but useful discussions are to be found in Harold A J Ford and W A Lee, The Principles of the Law of Trusts (2nd ed, Law Book Co, 1990) Chapter 23: ‘Public Unit Trusts’; Robert Allan Hughes, The Law of Public Unit Trusts (Longman Professional, 1992); Harold A J Ford, ‘Unit Trusts’ (1960) 23 Modern Law Review 129; Guy C Spavold, ‘The Unit Trust — A Comparison with the Corporation’ (1991) 3 Bond Law Review 249; and Kam Fan Sin, The Legal Nature of the Unit Trust (Oxford University Press, 1997). 23. A helpful summary of the scope and operation of the legislative scheme in Chapter 5C of the Act is contained in ASIC v West (2008) 100 SASR 496; [2008] SASC 111 at [106]–[127] and in the CAMAC Discussion Paper (2014) Chapter 2: ‘Current position’. 24. ASIC v Sydney Investment House Equities Pty Ltd (2008) 69 ACSR 1; [2008] NSWSC 1224 at [256]. 25. Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd (2009) 260 ALR 643; [2009] FCAFC 147. 26. See the CAMAC Discussion Paper (2014) at [2.1.1]. 27. See Re Mirvac Ltd (1999) 32 ACSR 107 and Southern Wines Corp Pty Ltd (in liq) v Frankland River Olive Co Ltd (2005) 31 WAR 162. See also Pamela Hanrahan, ‘The Responsible Entity as Trustee’ in I M Ramsay (ed), Key Developments in Corporate Law and Trusts Law (LexisNexis Butterworths, 2002). 28. Kent D Schenkel, Trust Law and the Title-Split: A Beneficial Perspective (Selected Works, 2009) at 4. 29. The discussion is limited to contract creditors of the trustee; other considerations apply in relation to tort and other involuntary creditors. 30. Detailed historical analyses of this distinction in the British context, with some reference to the United States, are to be found in Paul Johnson, Making the Market: Victorian Origins of Corporate Capitalism (Cambridge University Press, 2010), Chapter 7: ‘Shareholders, Directors

and Promoters’ and, more generally, in Brian R Cheffins, Corporate Ownership and Control: British Business Transformed (Oxford University Press, 2008). 31. A characterisation that is well explored in Chantal Stebbings, The Private Trustee in Victorian England (Cambridge University Press, 2002). 32. In Australia, the market is primarily serviced by a number of dedicated professional trust companies: see the website of the Trustee Corporations Association of Australia . 33. Australian Securities Commission v Windsor [1995] FCA 1663; Re S & D International Pty Ltd (No 4) [2010] VSC 388. 34. See ASIC v Australian Property Custodian Holdings Limited (rec & mgrs apptd) (in liq) (controllers apptd) (No 3) [2013] FCA 1342. In relation to suits against directors of responsible entities of MIS generally, see Traditional Values Management Ltd (in liq) v Taylor [2012] VSC 299. As a rule, at general law directors of corporate trustees do not owe fiduciary duties to beneficiaries of the trust but they may do so ‘in certain special circumstances’: Green v Wilden Pty Ltd [2005] WASC 83 at [537]. 35. See Janine Pascoe and Helen Anderson, ‘Personal Recovery Actions By Creditors Against Company Directors’ (2002) 10 Insolvency Law Journal 205; Helen Anderson, ‘Directors’ Liability to Creditors — What are the Alternatives?’ (2006) 18 Bond Law Review 1. 36. Australian Securities Commission v Windsor [1995] FCA 1663 at [48]. The issue is discussed in some detail in its historical context in Commissioner of Taxation v Linter Textiles Australia Ltd (in liq) (2005) 220 CLR 592 (per Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ), and more briefly by Gummow J in Sons of Gwalia Ltd v Margaretic (2007) 231 CLR 160; [2007] HCA 1 at [37]. See also Re Lawrence Waterhouse Pty Ltd (in liq); Shaw v Minsden Pty Ltd [2011] NSWSC 964; Daniels v Anderson (1995) 16 ACSR 607 at 658 (per Clarke and Sheller JJA); Robert P Austin, Harold A J Ford and Ian M Ramsay, Company Directors: Principles of Law & Corporate Governance (LexisNexis Butterworths, 2005) at [5.16]; Leonard S Sealy, ‘The Director as Trustee’ (1967) Company Law Journal 83. See also Andrew Keay and Hao Zhang, ‘Incomplete Contracts, Contingent Fiduciaries and a Director’s Duty to Creditors’ (2008) 32 Melbourne University Law Review 141 in relation to the similarities between trustees and directors as fiduciaries from a law and economics perspective. 37. Elders Trustee & Executor Co Ltd v EG Reeves Pty Ltd [1987] FCA 332 at [152]. See also William MC Gummow, ‘The Equitable Duties of Company Directors’ (2013) 87 Australian Law Journal 753. 38. In Sarah Worthington (ed), Commercial Law and Commercial Practice (Hart Publishing, 2003). 39. Michael J Whincop, ‘Liberalism, Conservatism, and Economic Efficiency: Tradition and Change in the Values of Corporate Law’ (2000) 23 University of New South Wales Law Journal 111. 40. Ford on Corporations Law at [2.130]. See also Colin A Cooke, Corporation Trust and Company: An Essay in Legal History (Harvard University Press, 1951) at 93–4. 41. David Kershaw, The Path of Fiduciary Law (London School of Economics and Political Science, Law Dept, 2011) at 10. In Smith v Anderson (the Submarine Cables’ Trust case) (1880) 15 Ch D 247 James LJ said ‘Company or association … I take to be synonymous terms’ at 273. See also Re Stanley [1906] 1 Ch 131. 42. William M C Gummow, ‘Knowing Assistance’ (2013) 87 Australian Law Journal 311 at 311.

The extent to which United States trust law might be influential in reforming Australian trust law as applicable to the commercial trust is discussed in Chapter 7. 43. ‘One of America’s greatest contributions to the development of the trust is the corporate trustee … the corporate trustee is primarily an American institution’: Scott on Trusts at §1.9. The idea of a corporate trustee has been described as one of the defining influences that American jurisprudence has had on the development of the trust: George W Keeton and L A Sheridan, The Comparative Law of Trusts in the Commonwealth and the Irish Republic (Barry Rose (Publishers) Limited, 1976) at 322. 44. This has been described by one commentator as ‘entity proliferation’: Robert W Hamilton, ‘Entity Proliferation’ (2004) 37 Suffolk University Law Review 859. See also Henry Hansmann, Reinier Kraakman and Richard Squire, ‘Law and the Rise of the Firm’ (2006) 119 Harvard Law Review 1335. 45. There is extensive literature on the evolution of and differences between these entities, but a useful discussion is contained in Larry E Ribstein, The Rise of the Uncorporation (Oxford University Press, 2009). For the statutory business trust, see Thomas E Rutledge and Ellisa O Habbart, ‘The Uniform Statutory Trust Entity Act: A Review’ (2010) 65 Business Lawyer 1055. 46. Richard A Posner, Economic Analysis of Law (8th ed, Wolters Kluwer, 2010) at xxi. 47. See the discussion and references in Andrew Keay, ‘Directors’ Duties to Creditors: Contractarian Concerns Relating to Efficiency and Over-Protection of Creditors’ (2003) 66 The Modern Law Review 665. 48. See David L Cohen, ‘Theories of the Corporation and the Limited Liability Company: How Should Courts and Legislatures Articulate Rules For Piercing The Veil, Fiduciary Responsibility and Securities Regulation for the Limited Liability Company?’ (1998) 51 Oklahoma Law Review 427. 49. The seminal work in this regard is considered to be Frank H Easterbrook and Daniel R Fischel, The Economic Structure of Corporate Law (Harvard University Press, 1991), which has been described as ‘the definitive theoretical account of corporate law from a neoclassical, contractarian perspective [which has] had a huge impact on the scholarship, pedagogy and doctrine of corporate law, becoming the most significant book in the field [and] one of the most cited books in all of law, in any area of doctrine, in the last 25 years’: Kent Greenfield, The Failure of Corporate Law: Fundamental Flaws & Progressive Possibilities (The University of Chicago Press, 2006) at 4 (original emphasis). A voluminous literature has emerged on the subject since it was published. 50. Stephen Bainbridge, ‘Community and Statism: A Conservative Contractarian Critique of Progressive Corporate Law Scholarship’ (1997) 82 Cornell Law Review 856 at 857–9. 51. Robert H Sitkoff, ‘An Agency Costs Theory of Trust Law’ (2004) 89 Cornell Law Review 621 at 637. 52. See Richard A Posner, Economic Analysis of Law (8th ed, Wolters Kluwer, 2010) at 429–39 and Frank H Easterbrook and Daniel R Fischel, The Economic Structure of Corporate Law (Harvard University Press, 1991), Chapter 1: ‘The Corporate Contract’. 53. John H Langbein, ‘The Contractarian Basis of the Law of Trusts’ (1995) 105 Yale Law Journal 625 at 627. 54. For discussion of the contractual nature of the relationships between stakeholders in a company see Ford on Corporations Law at [1.360]–[1.370] and Stephen Bottomley, ‘From

Contractualism to Constitutionalism: A Framework for Corporate Governance’ (1997) 19 Sydney Law Review 277. 55. Ming Wai Lau, The Economic Structure of Trusts (Oxford University Press, 2011). 56. Ibid at 9 and 13. 57. Ibid at 17. 58. Ibid at 14 and Part II: ‘Trusts as Firms’. 59. The unit trust is used as a collective investment vehicle in England and is regulated by the Financial Services and Markets Act 2000 (Eng). See Robert Helm (ed), Practitioner’s Guide to Conflicts of Interest in the Financial Services Industry (2012) at [1.16] and Thomas & Hudson on Trusts, Chapter 53: ‘Unit Trusts’. 60. Christopher McCall, ‘Trustees — Risks They Never Thought They Ran’ (1995) 6 Private Client Business 419 at 422–3. See further the discussion regarding the Australian trading trust in the next chapter. 61. Thomas & Hudson on Trusts at [55.15]. 62. Ming Wai Lau, The Economic Structure of Trusts (Oxford University Press, 2011) at 101–2. 63. For New Zealand, see New Zealand Law Commission, ‘Review of the Law of Trusts: A Trusts Act for New Zealand’ (Report 130, 2013) and the other reports and materials listed in Appendix 2: ‘Selected reports into the law affecting commercial trusts’. For Canada, see the reports and other materials listed in Appendix 2: ‘Selected reports into the law affecting commercial trusts’ and Waters on Trusts, Chapter 12, Part III; Robert D Flannigan, ‘Business Trusts — Past and Present’ (1984) 6 Estates & Trusts Quarterly 375; David A Steele and Andrew G Spence, ‘Enforcement Against the Assets of a Business Trust by an Unsecured Creditor’ (1999) 31 Canadian Business Law Journal 72. 64. See the Business Trusts Act (Chapter 31A) (Singapore). Enacted in 2004, the Act contains many provisions which are similar in substance to corresponding parts of Corporations Act Ch 5C, but also has some interesting differences which are relevant to the discussion. 65. See, generally, Scott on Trusts at §1.10; Bogert on Trusts at §9; Ugo Mattei, Lionel D Smith and Michele Graziadei, Commercial Trusts in European Private Law (Oxford University Press, 2005); Steven L Schwarcz, ‘Commercial Trusts as Business Organizations: An Invitation to Comparatists’ (2003) 13 Duke Journal of Comparative & International Law 321; David Hayton, Trusts and Their Commercial Counterparts in Continental Europe (A report for The Association of Corporate Trustees (UK), January 2002); Michael Bryan, ‘Reflections on Some Commercial Applications of the Trust’ in Ramsay (ed), Key Developments in Corporate Law and Trusts Law (2002). 66. Austin W Scott, ‘Fifty Years of Trusts’ (1936-1937) 50 Harvard Law Review 60 at 66. See also Dale Pinto and Stewart Karlinsky, ‘Darwinian Evolution of the Taxation of Trusts: A Comparative Analysis’ (2007) 10(2) Journal of Australian Taxation 251. 67. Peter W Young, Clyde Croft and Megan Louise Smith, On Equity (Lawbook Co, 2009) at 387. Similar observations, complete with statistical data, are made in Pinto and Karlinsky, ibid. See also Bernard Marks, Taxation of Trusts (CCH Australia Ltd, 1980). 68. See . 69. CAMAC Discussion Paper (2011) at [2.1]. See also the CAMAC Report at [2.1]; Board of Taxation, ‘Review of the Tax Arrangements Applying to Managed Investment Trusts:

Discussion Paper’ (August 2008). There are many complexities in the taxation aspects of MIS: see Australian Financial Centre Forum, ‘Australia as a Financial Centre: Building on Our Strengths (the Johnson Report)’ (2009); and Commissioner of Taxation v Bamford (2010) 240 CLR 481. 70. For example, the discretionary trust has been described by the Supreme Court of Western Australia, perhaps a little harshly, as a ‘tax avoidance device’: Scaffidi v Montevento Holdings Pty Ltd [2011] WASCA 146 at [69]. See also P R Adams and Brian J McMahon, Australian Tax Planning (Butterworths, 1961) at 103–21. 71. Paul B Miller, ‘The Future for Business Trusts: A Comparative Analysis of Canadian and American Uniform Legislation’ (2010–2011) 36 Queen’s Law Journal 443 at 450. 72. The Exposure Draft of the New Business Tax System (Entity Taxation) Bill 2000 contained provisions changing the law so that trading trusts would be taxed as companies. That proposal did not proceed to enactment. The issue re-emerges from time to time but is always defused due to its intense political ramifications. 73. It is quite clear that some types of MIS are marketed to investors, and entered into by them, with tax benefits as a primary attraction: see, for example, the evidence noted in Tomasetti v Brailey [2011] NSWSC 1446. Empirical research might reveal that removing the various available concessions may significantly reduce the economic appeal of some types of commercial trust to some classes of participants. 74. See, for example, Alan Jessup, Managed Investment Schemes (Federation Press, 2011) and Managed Investments Law and Practice (CCH looseleaf).

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CHAPTER 2 Evolution of the Australian Commercial Trust SYNOPSIS This chapter establishes important contexts for the substantive discussions in Chapters 3–6 and seeks to provide a deeper understanding of the issues by briefly tracing the evolution of the trust from a conservative risk-averse guardian of private family wealth to the company-like risk-taking business entity which is in common use in Australia today as the commercial trust. It explains both how and why trust law failed to keep pace with this evolution, with the result that it does not properly accommodate the expectations of those who participate in commercial trusts. It introduces and describes the two manifestations of the Australian commercial trust: the public unit trust (partially regulated as a managed investment scheme) and the private trading trust. It describes the functional similarities between the company and the commercial trust, and the actions of market participants, advisers, legislators and regulators that have led to the ‘parity myth’, that is the widespread view that they are largely interchangeable and yield similar risk profiles. It considers the advantages of the trust over the company which make it so attractive for commercial use. It critically analyses the differences between the two, and the laws that regulate them, that give rise to the risks and uncertainties discussed in later chapters.

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INTRODUCTION The trust was not in its origin and perhaps never has been primarily a device of commerce.1

2.1 The trust device emerged in feudal England, several centuries before Australia was settled by Europeans. Its original purpose was to assist men (and for centuries it was only men) to protect and preserve private landholdings. Despite its non-commercial origins, in 21st century Australia the trust is used as a vehicle for the arm’s length aggregation of billions of dollars of equity and debt capital and the carrying on of business, through the commercial trust. It competes with the Corporations Act company as a form of business association. Yet, when compared to the company, it is poorly regulated, exposing its participants to a range of legal risks unique to the trust form. How did this happen? 2.2 From about the 17th century, English entrepreneurs searching for a form of business association that was more sophisticated than the partnership and could facilitate a greater aggregation of capital identified certain characteristics of the trust that were useful for their purposes. They recruited the trust and combined it with partnership, contract and agency concepts to create a form of unincorporated business entity that could mimic a corporation but circumvent the difficulties in securing a royal or parliamentary charter of incorporation. Although the original premises on which the trust was built were selfless gratuitous service in a private context and a strong aversion to risk, its flexibility and inbuilt proprietary and personal elements allowed it to be used to raise capital at arm’s length, for which investors were issued shares that were transferable in a secondary market, and to carry on risk-taking profit-maximising business with that pooled capital. The trust was the cornerstone of these entities and so, although described as companies, they were in essence the first commercial trusts. 2.3 Ultimately, however, the increasing complexity of these unincorporated entities challenged equity’s ability properly to supervise them. Uncertainties created inefficiencies and unexpected losses, particularly when insolvency intervened. Finally, in 1844 Parliament began a process that resulted in the creation of the modern limited liability company and the effective abolition of the commercial trust.

2.4 Interestingly, however, risks and uncertainties not dissimilar from those faced by participants in pre-1844 unincorporated companies, and legislation very similar to that enacted in and after that year which was designed to abolish [page 40] them, were not sufficient to prevent the commercial trust from emerging as a serious and substantial commercial vehicle in Australia in the latter half of the 20th century.

THE HISTORICAL NARRATIVE 2.5 Four propositions may be stated with relative certainty: 1. The trust is a creation of equity. 2. Equity is a feature of English legal history. 3. To understand the trust one must understand equity. 4. Therefore, to understand the trust, one must have some understanding of English legal history. 2.6 The investigation in this chapter is conducted in three stages. The first stage considers the core question: what is it about the trust that made it attractive for commercial use? The answer, it is argued, lies in four foundational elements or characteristics: 1. an ability to circumvent legal obstacles and avoid unwanted outcomes otherwise mandated by common law or statute; 2. a proprietary element that permitted the creation, recognition and protection of multiple separate economic interests in property (described in this book as the ‘proprietary element’); 3. an essentially personal fiduciary framework that facilitated the separation of ownership and management of property and offered inbuilt protections for beneficiaries and contracting third parties through the imposition of personal obligations, liabilities and

sanctions on trustees (the ‘personal element’); and 4. almost infinite flexibility, which allowed both the proprietary and personal elements to be fashioned (or, in the commercial context, ‘contractualised’) to accommodate specific requirements and desired outcomes. 2.7 These characteristics are, of course, inter-related: circumvention is a function of flexibility and is achieved by manipulating the proprietary and/or personal elements, which are themselves intertwined. Nevertheless, it is useful to study them as separate limbs for the purposes of the analyses in this book. Tax advantages may be described as another characteristic, but they should be seen as a consequence of these four rather than as a fifth limb. A similar point may be made about the trust’s ability to shelter assets from creditors on bankruptcy, whether of the settlor/transferor himself or herself or those of [page 41] spendthrift offspring. The key point is that neither the trust itself nor any of these essential characteristics emerged in a commercial context or to accommodate commercial objectives. 2.8 The second stage of this chapter analyses the transformation of the trust into a business vehicle in England in the period up to the middle of the 19th century, and exposes the role played by these elements in that process. This analysis includes, in particular, the role of the trust in the evolution of the limited liability company, and the effect that enactment of general incorporation legislation had on the use of the trust as a business vehicle in England. It demonstrates how the modern Australian commercial trust and the modern Australian limited liability company had a common ancestor — the unincorporated joint stock company. 2.9 The third stage examines in some detail the modern Australian manifestations of the commercial trust — the public unit trust (now regulated as a MIS) and the private trading trust — and investigates how the four foundational elements continue to play a part in the way they are

structured and operate. It then explores how and why the commercial trust emerged as a competitor to the Corporations Act company, to the point where they are regarded by some as interchangeable in many respects, except for the risks the commercial trust presents to participants sourced in two fundamental differences: the absence of a separate legal personality and a dedicated regulatory regime.

THE TRUST AS A CREATURE OF CONSCIENCE AND NOT OF COMMERCE 2.10 Scholars disagree on the precise genesis of the trust and its relationship, if any, with close non-English equivalents. Holmes and others believed that the origin of trusts (and, before them, ‘uses’) could be traced back to early Germanic law; indeed, the similarities between the Germanic salman and the English feoffee to uses was declared by Holmes ‘to be enough, without more, to satisfy me that the latter was the former transplanted’.2 Others have said its origins lie in the Roman law concept of fidei commissa.3 Maitland acknowledged both.4 [page 42] 2.11 Regardless, the trust is inherently bound up in the uniquely English development of an equity jurisdiction as a stream of jurisprudence separate and distinct from the common law. Thus, to understand the trust, one must first understand equity. 2.12 The development of the trust as a creation of equity and the Chancery courts is well documented in the academic literature. As the authors of Scott on Trusts observed at §1.3 it certainly did not ‘spring full-grown into being. There were centuries of growth and gestation before it took its place as the central feature of the system of equity’. It originated as a remedy but it was not in its origins or for centuries thereafter called in aid of commerce: ‘Chancery never set out to provide general regulation of dealings in the market place [or to] correct the clear eyed and hard hearted perception of the common law that a loss suffered in trade or commerce

“is often no more than one of the ordinary consequences of participation in a market economy”’.5 2.13 Despite that, certain characteristics of the trust, evident from the outset, appear to have been identified later by entrepreneurs and their advisers as useful for commercial purposes.

The first element: the trust as a device for circumvention 2.14 The history of the trust, from its very beginnings through to the present day, is largely a story about circumvention of unwanted legal, regulatory and fiscal burdens. In its origins, it was essentially an emanation of the willingness of the Chancellor and his courts to side with deserving claimants to circumvent the strictures of the common law and even of statutes. Scott on Trusts describes at §§1.4–1.7 the numerous statutes passed over centuries, including the Statute of Uses, as Parliament struggled, only ever with partial success, to deal with the use and the trust. Leeming describes how historically equity responded to the intrusion of legislation by creating new doctrines.6 Another scholar has observed how the changes wrought by the courts of equity were so dramatic that they required the entire legal profession and other vested interests to acquiesce in what was ‘in essence a legal fiction, with all sides in agreement that one state of affairs would appear on the legal record … while a completely different state of affairs would be given effect in real life …’.7 As the rulings of those courts accumulated to create a substratum of law, individuals used the trust [page 43] device to construct arrangements that circumvented other outcomes considered undesirable. Whether of the common law or of statutes, in neither case was circumvention originally motivated by business or commercial objectives.

2.15 As is generally acknowledged, the trust developed in connection with interests in land and feudal incidents and taxes attaching to them, in the pre-medieval period; Harris argued that ‘one of the main motives for the creation of uses, as fiscal feudalism advanced, was the evasion of feudal dues’.8 The common law, which began to emerge around the 12th century, was ill-equipped to protect a landholder from unconscionable conduct of others in relation to that land because for centuries it was a primitive, unsophisticated and inflexible system, hidebound in procedure. An inability to assemble and plead a claim strictly within one of the recognised forms or writs of action would leave a claimant without remedy.9 However, in those early times before modern notions of separation of powers became ascendant, the courts were always subordinate to the King, seen as instruments to effect his will. They could be circumvented by direct petition to the monarch; claimants disappointed by the common law courts could appeal to the King to exercise his royal prerogative. As these pleas multiplied, adjudication was delegated to the Chancellor whose role was, among other things, ‘to correct men’s consciences for frauds, breach of trusts, wrongs and oppressions … and to soften and mollify the extremity of the law’.10 2.16 One of the great attractions of Chancery was its discretionary and generally accommodating attitude to remedies. While remedy in the common law courts was largely limited to damages, the Chancellor was free to fashion remedies more suitable to the needs of the case, such as specific performance and injunction. While a simplification, it is not inappropriate to say that the trust (or, in its original configuration, the ‘use’) was itself essentially a remedy devised by the Chancellor, to afford relief in circumstances where the common law would not or could not respond. 2.17 The trust was not confined to inter vivos arrangements. It owed much of its development to the willingness of Chancery to facilitate the preservation and orderly distribution post mortem of a man’s wealth for the benefit of his family at a time when it was not legally possible to bequeath land by will (which was not [page 44]

possible until the Statute of Wills 32 Hen 8, cl, 1540). By conveying land during his life to male friends for his own use while alive and after death for the benefit of his family or other selected beneficiaries, a man could circumvent harsh feudal rules such as primogeniture (which could leave a widow, daughters and younger sons destitute), wardship (by which the feudal lord could take wardship of a widow’s minor children and the rents and profits of a dead man’s land until the heir reached majority) and escheat (by which land held by a man dying without natural heirs would revert to the feudal lord or the King). 2.18 The arrangement was not only for the benefit of men. At a time when married women were legally incapable of owning land or other assets of value by the so-called doctrine of coverture (that is, before passage of the Married Women’s Property Acts of 1882 and 1893), a father wanting to provide for his married daughter separately and beyond the reach of her husband (and his creditors), or indeed a husband wanting to provide independent means for his wife, could settle property on male trustees for her benefit. 2.19 Nor was the trust’s ability to circumvent confined necessarily to family arrangements. As early as the 13th century, the trust (or use) was used to hold land for the benefit and use of Franciscan friars and other mendicant orders, who were otherwise forbidden from owning property. Land for their use was conveyed to men who were friends of the order or to the borough community who thus held title while possession and all of the agricultural benefits of the land were enjoyed by the friars. 2.20 These arrangements were not recognised by the common law courts and so the legal titleholders (or, as described in the earlier days, the feoffees, since the land was enfeoffed to them by the original owner) could bring an action at common law to evict the beneficiaries and take the benefit and use of the land for themselves. The common law did not enforce the promise to hold for the benefit of others for a range of reasons to do with the still developing but not yet fully formed rules around the law of obligations. In recognition of the clear unconscionability of such behaviour and outcomes, the Chancellor, as the ‘keeper of the King’s conscience’ would hear pleadings from those whom the arrangement was

intended to benefit and, if certain conditions were satisfied, would compel feoffees to perform the obligations which they had willingly taken on — even if this meant overruling the common law courts.11 [page 45] 2.21 Thus, the ability of the trust to circumvent unwanted rules and outcomes was applied to achieve private rather than commercial objectives, to effectuate the wishes of settlors and the deceased and, importantly, to protect their beneficiaries.

The second element: the trust as a property concept and the trustee as ‘guardian’ 2.22 Leaving aside for one moment the jurisprudential question about the place, if any, of the modern commercial trust in the law and theory of business associations (a point taken up in later chapters), trust law historically is regarded as a branch of property law; indeed, property has from its inception been the raison d’etre of the trust.12 The traditional formulation is that the trust is an obligation or aggregate of obligations having a fiduciary element, involving some property.13 This emphasis on property manifested in two essential features of the trust: the recognition of a proprietary interest in trust property in the hands of the beneficiary and the imposition of duties on the trustee to protect and preserve trust property.14 2.23 The traditional role of the trust was to facilitate gratuitous, intergenerational conveyances of real estate, inter vivos or by will: ‘we think of the trust as a branch of the law of gratuitous transfers … the trust originated in the Middle Ages as a means of transferring wealth within the family’.15 The authors of Scott on Trusts put it simply: ‘the trust is a device for the disposal of property’ at §1.1. Carefully constructed, the trust could be used to fragment title into a range of different interests held by different people, enabling the separation of ownership from management and use of

property, the layering of entitlements over time through successive interests, the splitting of income and capital and an [page 46] almost infinite number of other combinations that were impossible at law. The proprietary element has been expressed this way: The elegant simplicity of the device which the law of trusts uses to resolve these disputes [ie between various people over their rights and duties in relation to private property] is its greatest strength. That is, the recognition that more than one person can have rights in property at the same time such that a bundle of rights and obligations is created between those people.16

Indeed, ‘the magic of the trust lies in its proprietary characteristics’.17 2.24 A necessary corollary to the trust’s role as a device for the holding and conveyance of property was equity’s role in the protection of that property; ‘if one were trying to explain what a trust is to a layperson or a child, one might use words that sound like slogans for a local police force: the purpose of trusts is to preserve and protect the assets for the trust’s beneficiaries’.18 As the person holding title and therefore primarily responsible to the courts for discharging this protective function, the trustee acted as the guardian of trust property. 2.25 Although the original emphasis of equity was on actions in personam, over time equity shifted from merely enforcing conscience-based personal duties to protecting rights in rem, and created rules that allowed a proprietary interest recognisable only in equity to be enforced against a person other than the trustee, where that person acquired its interest in the underlying property with the requisite notice of the pre-existing trust (thus extending to external parties something akin to a duty to assist in the protection of beneficiaries).19 Proprietary remedies are, as Bant puts it, ‘both highly durable and intrusive’.20 They protect the beneficiary against the trustee’s creditors in its insolvency, circumstances in which a mere personal claim against the trustee could be worthless to the beneficiary. Even where the trustee fails in its guardianship, tracing remedies allow the

beneficiary to follow trust property that has been improperly dealt with and to retrieve it, or property into which it has been converted, if certain [page 47] conditions exist. The underlying principle is that, despite title and control being held legally by the trustee, equity regards trust property as being beneficially (or, to use a more modern term, economically) that of the beneficiaries and strives to protect their interest in it. Maitland captured the essence of this when he said: Even when the Court of Equity could not give the cestui que trust the very thing that was the original subject-matter of the trust it has struggled hard to prevent its darling from falling into the ruck of unsecured creditors of a defaulting trustee. It has allowed him to pursue a ‘reified’ trust-fund from investment to investment: in other words, to try to find some thing for which the original thing has been exchanged by means of a longer or shorter series of exchanges. That idea of the trust-fund which is dressed up (invested) now as land and now as current coin, now as shares and now as debentures seems to me one of the most remarkable ideas developed by modern English jurisprudence. … the main point is that [the] cestui que trust is magnificently protected.21

2.26 As guardians, trustees were discouraged from taking undue risks with trust property. The role was fundamentally defensive and trustees were expected to behave as conservative and risk-averse guardians of that property. Equity imposed on them a range of duties relating to that property to compel them to behave accordingly and in doing that protected the property, and the beneficiaries, against the potential for trustee abuse, incompetence or insolvency. Trustees are ‘required to “preserve trust capital”, to exercise “caution”, and to avoid “speculation”’.22 2.27 The duty to preserve trust property has been described as ‘the primary duty of a trustee’: Re Boston’s Will Trusts [1956] Ch 395 at 405. Getzler looks back, from a post-GFC perspective, to the historical insistence of equity that trustees invest only in assets where the capital value was ‘indestructible’, and observed that ‘the Lord Chancellors had enormous authority as great officers of the state, and the default investment policies they developed in the Court of Chancery had a sizeable impact on trustee conduct’.23 Harris notes the ‘severe

[page 48] limitations’ imposed by 18th century Chancery on what trustees could and could not do with or with respect to trust property.24 On the other hand, the courts did not permit absolute passivity; there evolved a duty to invest trust assets to generate some return, and a failure to do so became actionable.25 In discussing issues of risk aversion in trustees, Donald notes inconsistent themes over time and the differences of approach taken by some courts and identifies two distinct strands in the case law relating to ‘prudence’. He concludes that risk aversion cannot mean taking no risk because, among other things, that would invariably mean no return and may even risk degradation of capital value. Rather ‘it is the task of trustees to ensure that their funds are not exposed to uncompensated risks, such as those arising from carelessness, lack of diligence or from naive exposure to diversifiable risks’.26 2.28 Once again, these concepts and doctrines did not emerge out of commercial pressures or needs. Equity’s concern with property was not driven by commercial considerations; on the contrary, it is not an egregious oversimplification to say, as one commentator has, that traditionally ‘trusts are gifts’.27

The third element: the personal nature of the trustee’s role as guardian 2.29 To limit the definitional discussion of the trust to the proprietary element is to fail to appreciate the essentially personal nature of the arrangement. The office of trustee was and remains a fundamentally personal and selfless one, bound up in conscience. This is reflected in the fact that the trustee faces a double personal exposure: on the one hand, it owes personal fiduciary and other equitable duties to (and thus carries potential liabilities towards) its beneficiaries and, on the other, it carries personal liability to external parties with whom it deals in the course of carrying out trust activities. 2.30 The Chancery courts, as protectors of legally and economically

vulnerable beneficiaries, were suspicious of trustees. Since they held title and control of property not their own and considerable discretion in how they performed their role, trustees had in their hands the ability to abuse their position of trust and so required supervision: ‘human nature being what it is, there is danger … of the [page 49] person holding the fiduciary position being swayed by interest rather than duty’.28 This supervision manifested in the imposition of a wide range of personal duties, constraints, limitations and sanctions designed to protect beneficiaries and to reinforce the guardian role.29 Later, Parliaments intervened to render some of these more certain, sometimes by ameliorating their strictness — but not usually so as to change the fundamental premise.30 2.31 While the common law was essentially concerned with declaring and protecting rights, equity rather acted to declare or impose duties or proscriptions, acting in personam and on the conscience of a relevant person including, where necessary, by restraining the unconscionable assertion of legal rights. The law recognised the trustee’s title to property, but equity bound the trustee to exercise its discretions and rights in relation to that property on behalf of another or others.31 The courts of equity, in effect, acted as the proxy of the settlor or testator and not as arbiters of commercial disputes; ‘fiduciary law was austere and demanding. Courts of chancery used it to monitor trustees who managed money for widows and orphans’.32 2.32 It is useful at this point to draw the focus onto the fiduciary nature of the relationship between the trustee and its beneficiary since it is at the heart of contractarian theory and the process of contractualisation, both of which are central to the commercialisation of the trust and feature prominently in the argumentation in the following chapters. The fiduciary element is the unifying factor underpinning the personal duties, constraints, limitations and sanctions borne by the trustee. Indeed, the trustee has been described as ‘the exemplar of a fiduciary’,33 and the

‘archetype of the fiduciary’.34 The trustee role is fundamentally one of trust and confidence;35 the word ‘fiduciary’ itself derives from the Latin fiducia, meaning trust or confidence. The personal nature [page 50] of the duties is best exemplified by the rule delegatus non potest delegare in its application to trustees, that is a trustee must act personally and cannot delegate discretions to another except if expressly authorised so to do by the trust instrument or the beneficiaries.36 2.33 The critical feature of a fiduciary relationship is that: [T]he fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense … From this power or discretion comes the duty to exercise it in the interests of the person to whom it is owed.37

2.34 Trustees’ duties have been described, categorised and enumerated in various ways, and the literature identifies many separate and distinct duties that have evolved over time, some of them very specific indeed.38 Chalmers distinguishes between ‘primary duties (and rights)’, being those which arose when the trust was created, and ‘secondary duties (and rights)’ which arise as a consequence of a breach of trust.39 Hanrahan proposes a division of trustee duties into four categories: negative or proscriptive duties, prescriptive duties, the equitable duty of care and duties governing the exercise of discretions.40 Another commentator has argued that a clear distinction cannot be made between positive and negative [page 51] duties.41 Clearly, what began as a ‘handful of general standards’ developed into a ‘thick weave of concrete rules’.42 2.35 Even though the trustee may be the ‘exemplar’ or ‘archetype’ of a fiduciary, not all of these duties are ‘fiduciary’ in the strict sense; some are

equitable without being fiduciary. The only true fiduciary duties are the two proscriptive obligations described as the no conflict rule and the no profit rule. Although a trustee may be (and in a commercial trust usually is) under prescriptive duties which are enforceable in equity, that does not make those duties fiduciary.43 This distinction is not always respected, even among the judiciary. Former High Court justice Gummow acknowledged that ‘the expression “fiduciary duty” is sometimes used in the looser sense of an equitable obligation attended by equitable remedies’.44 In light of this it is not inappropriate to speak generally of the ‘fiduciary burden’ carried by trustees since even the proscriptive duties may manifest in positive obligations, such as to disclose information or to provide assistance.45 2.36 Leaving that definitional matter to one side, all of a trustee’s equitable duties can be said to be, or to be sub-species of, one or more of the following genera: Observe the terms of the trust: the trust instrument has been described by the authors of Jacobs on Trusts as the ‘third source of law … the trust instrument has primacy’ at [1617]. In Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15 the High Court of Australia declared that ‘perhaps the most important duty of a trustee is to obey the terms of the trust’ at [32].46 So strictly was this duty enforced in equity that Parliaments intervened to encourage the courts to forgive [page 52] breaches of trust where the trustee had acted honestly and reasonably and it was fair to do so.47 Best interests: a duty to act in the best interests of the beneficiary, even at the expense of the trustee’s own personal interest, except to the extent (if any) otherwise permitted by the terms of the trust or the informed consent of the beneficiary. This has been described as

‘essentially a foundational duty which underpins the core fiduciary nature of a trustee’s function’.48 No conflict: a duty to avoid placing itself, or otherwise being placed, in a position of actual or potential conflict, whether of duty and interest (that is, the trustee’s duties to the beneficiary as against the trustee’s self-interest) or duty and duty (that is, the trustee’s duties to the beneficiary as against the trustee’s duties to another, for example a beneficiary under another trust of which it is trustee), except to the extent, if any, otherwise permitted by the terms of the trust or the informed consent of the beneficiary.49 No profit: a duty to act gratuitously and not to profit personally from their position, except to the extent, if any, otherwise permitted by the terms of the trust or the informed consent of the beneficiary. Although usually stated as a separate genus, this is sometimes said to be a sub-species of the no conflict rule.50 Care: trustees also bear an equitable duty of care, although its precise scope and ambit, and the relationship with the common law duty of the [page 53] same name, remains fluid.51 It is neither fiduciary nor immutable: see the discussion in 4.32 and following. Good faith: a duty to act in good faith at all times in the performance of their trust activities.52 This genus of duty, though not, of course, unique to trustees, is so fundamental that it forms part of the ‘irreducible core’ of the fiduciary nature of the trustee’s office (discussed in 4.32 and following) and so, unlike those above, is not susceptible to waiver by the terms of the trust or the informed consent of the beneficiary.53 2.37 These duties may appear to overlap to some extent. This is understandable given that there is no universally accepted taxonomy of trustees’ duties and over time different courts and commentators have

placed different emphases on one or other of them. If one were to take a totally reductionist view, all of these genera may themselves be described as subcategories of, or ancillary to, the fundamental duty of undivided loyalty, the rule by which equity resolves the inherent conflict between duty and self-interest.54 All fiduciary and other trustee duties are, in essence, organised around a central altruistic obligation to abnegate selfinterest in favour of the interests of another or others.55 Given that, as Justice Keane has noted, ‘the burdens of the obligation of self-abnegation upon a trustee are heavy’,56 it is not surprising that the core duty of undivided [page 54] loyalty has been fragmented over time into numerous specific ‘sub-duties’ by the courts as they adjudicated specific disputes.57 2.38 Personal liability to beneficiaries is not a trustee’s only concern. As analysed in more detail in Chapter 5, whenever a trustee incurs a liability to third parties in the course of trust activities, whether that liability be in contract, tort or otherwise, that liability is personal to the trustee; the trustee acts as principal and not as agent of the beneficiaries. This outcome is not mandated by equity but rather results from the fact that the common law (where contract and tort reside) does not recognise the trust as a legal entity, leaving the trustee as the person legally liable. Equity assists by implying certain indemnities in the trustee’s favour but they are conditional and by no means automatic; indeed, they may even be described as fragile.58 2.39 A wide range of personal sanctions awaits trustees who breach their duties.59 A sanction that is of crucial relevance to the discussion in this book, and which is considered in detail in Chapters 4 and 5, is impairment of the trustee’s indemnity against trust property for a liability incurred in conducting trust activities if the transaction is affected by breach of trust, leaving the trustee to carry the liability on its personal account. In most cases, these sanctions can operate whether the trustee acted fraudulently or innocently in committing the breach and are not subject to the moderating

effects of the common law damages rules, although the harshness of this can be ameliorated by the courts in appropriate cases, both under its inherent jurisdiction and by statute. 2.40 If these sanctions seem uncommercial or disproportionate it is because they bear the hallmarks of equity’s jealous protection of its ward, the beneficiary, [page 55] and the wholesale foisting of risk onto the trustee. They evidence trust law’s roots in cases involving family and testamentary trusts based on donative transfers and not in matters of business and commerce. 2.41 Historically, this imposition of unambiguous personal responsibility broadly achieved the desired objective of making trustees conservative and risk-averse when dealing with trust property, and militated against the taking of entrepreneurial risks. In the result, insofar as they could be described as economic entities, trusts were not prone to financial distress or insolvency, even if the trustee became bankrupt (in which circumstances he would simply be replaced as trustee). The relative dearth of case law dealing with insolvent trust estates, at least until relatively recently, appears to bear this out. 2.42 In considering the effect this combination of personal duties and sanctions had on the appetite for risk-taking by trustees, it is germane to remember that, until relatively recently, the trustee was invariably a natural person, ‘a timid, breathing and sweating human body, against whom … the Courts of Chancery could enforce their remedies with the peculiarly salutary sanction of imprisonment for contempt of court’.60 In the traditional testamentary or inter vivos family trust, trustees tended to be respected friends or relatives, or perhaps the family’s solicitor, to whom honour and reputation would likely have been of great importance, but in an environment of managing a relatively static asset like real estate, their personal risk was manageable. Nevertheless, even as the composition of trust funds changed to include more sophisticated assets that required

more active management and decision-making, equity did not relax its ‘ferocious rules of personal liability’.61 Equity’s historical aversion to risk and protection of vulnerable beneficiaries, evidenced in centuries of stern and unforgiving dicta of solicitous equity judges, continued even after the advent and eventual universal adoption of the corporate trustee for commercial trusts. 2.43 Thus, the essential structural characteristic of the trust which is described in this book as the ‘personal element’ did not emerge to achieve commercial objectives nor did it take into account the possibility of risktaking business activities. To the extent trust activities involved risks, those risks were cast primarily onto the trustee, despite the gratuitous nature of the office; the beneficial or economic owners of the underlying assets bore almost no legal risk and were, to use Maitland’s expression, ‘magnificently protected’. Harris [page 56] noted that, even after the trust began to be used for business purposes, advice was given in a popular trustees’ guidebook in 1830 that ‘carrying on of trade or business for the object of a trust estate is a very hazardous expedient, for the trustee may easily make himself responsible for various losses’.62

The fourth element: flexibility 2.44 Once firmly established as a doctrine and a device, the trust became useful for the creation of sophisticated arrangements for the intergenerational conveyance and preservation of family real estate holdings, leading to the emergence of great dynastic trusts. The proprietary element protected the assets from ‘disturbance by greedy, mentally disabled, or improvident elder sons, who might try to dispose of the entire estate and thus terminate the family’s landed social status’,63 and allowed for the fragmentation and segregation of interests in a fixed or fluid pool of assets into any number of lesser entitlements among a broad range of

beneficiaries. The personal element gave settlors and testators a measure of confidence that their chosen trustees would execute their wishes properly. Its use in this context, while still not commercial, was no longer primarily about circumvention of the common law or statute; rather, it was about applying the inherent attributes of the trust in increasingly structured ways to satisfy quite specific needs and desires. Advisers clearly realised that the rules developed by equity were flexible and malleable. So long as the arrangement satisfied and remained within certain basic parameters,64 lawyers could construct for their clients, either inter vivos or in a testamentary context, an arrangement of intricate complexity. 2.45 Much of trust law evolved as rules imposed upon or implied into a given set of circumstances if a factual matrix existed that would arouse the interest of the courts of equity. However, these were almost entirely prima facie or default rules that could be modified and even overridden by agreement or informed consent and, so long as equity could find no vitiating factor at play or other reason to intervene, it would respect the wishes of the parties. It has been observed that ‘virtually all trust law is default law that can be altered in the trust instrument’.65 Indeed, even that part of trust law which has become embodied in statute is, [page 57] to some extent, able to be displaced, and this is achieved by the inclusion in many provisions of language that make them subject to any applicable trust instrument. By way of example, the Trustee Act 1925 (NSW) contains in several sections the formulation: ‘This section applies only if and as far as a contrary intention is not expressed in the instrument, if any, creating the trust, and shall have effect subject to the terms of that instrument and to the provisions therein contained’.66 This flexibility is not entirely unlimited, but the limits are few. 2.46 Thus, the trust attracted attention as a creature of great flexibility; scholars and commentators in England, the United States and Australia have noted that this was and is a large part of its ongoing appeal. Maitland noted that the trust ‘is an “institute” of great elasticity and generality; as

elastic, as general, as contract’.67 The authors of Scott on Trusts observed at §1.1 that ‘few other legal systems have … so flexible a tool. This is what makes the trust so intriguing’. The American academic Nathan Isaacs asserted that ‘foremost among the advantages of trusteeship over the standardized legal devices is its flexibility’ and that ‘next to contract, the universal tool, and incorporation, the standard instrument of organization, [the trust] takes its place wherever the relations to be established are too delicate or too novel for these coarser devices’.68 Many other commentators have made the observation that this is the attribute most responsible for the enduring and widespread application of the trust to commercial purposes.69 Indeed, flexibility has been described as ‘a large part of the lifeblood of trusts’.70 That this is so is evidenced by the different [page 58] sub-species of trusts described in Chapter 1 that have emerged alongside the strict doctrinal taxonomy. 2.47 As with the other elements described above, this characteristic of the trust is not sourced in commerce nor was it designed to achieve commercial objectives. Nevertheless, the express trust was seen to be susceptible to a high degree of structuring and manipulation by which participants could create a highly sophisticated entity suitable for commerce.

THE TRUST BECOMES A BUSINESS ENTITY 2.48 Despite these antecedents but, it is contended, because of those four essential characteristics, there evolved, as a matter of usage and practice rather than doctrine, a particular species of trust that retained much of the original framework but was quite different in function and objective: the trust as a business entity. Although this process began in England before the Industrial Revolution, it was given impetus by the demand for a form of association to accommodate ever larger multiple-participant enterprises involving ever greater aggregations of capital that was generated by that

Revolution. This demand outstripped, for a time, Parliament’s willingness to provide such a vehicle beyond ad hoc charters on a case-by-case basis, leaving market participants to meet the challenge by private means. Those participants turned to the trust, noting its great flexibility and ability to circumvent legal obstacles while providing a basic legal infrastructure with proprietary and personal elements, and stretched it into increasingly complex forms that, eventually, challenged equity’s ability properly to supervise them. Finally, in the mid-19th century, Parliament capitulated and gave the market the legal framework it demanded: incorporation by registration with separate legal personality, limited liability for investors, an insolvency regime and a range of other benefits. A legislative process began in 1844 with an ‘Act for Registration, Incorporation and Regulation of Joint Stock Companies’ and an ‘Act for Facilitating the Winding Up of the Affairs of Joint Stock Companies’ (often described together as the Joint Stock Companies Acts) and was followed by several further Acts and amendments in the 1840s and 1850s until rationalised and consolidated by the Companies Act 1862, which has been described as company law’s ‘Magna Carta’.71 [page 59]

The trust as progenitor of the limited liability company 2.49 The concept of a fictitious legal person in the form of a body corporate is not a recent construct in Anglo-Australian law; the facility to create one quickly, easily and cheaply with the express intention of engaging in commercial activity, however, is a relatively modern development. 2.50 The history of the trust in commerce is intertwined with the history of the incorporated limited liability company; ‘the trust played an extensive role in the evolution of the limited liability corporation as an instrument of business endeavour’.72 In the early 1900s, when modern company law was still in its infancy, Maitland said:

Of late years under American teaching we have learned to couple together the two terms ‘corporations’ and ‘trusts’. In the light of history we may see this as a most instructive conjunction. And yet an apprentice of English law might well ask what the law of trusts has to do with the law of corporations. Could two topics stand farther apart from each other in an hypothetical code? Could two law-books have less in common than Grant on Corporations and Lewin on Trusts? To such questions English history replies that, none the less, a branch of the law of trusts became a supplement for the law of corporations, and some day when English history is adequately written, one of the most interesting and curious tales that it will have to tell will be that which brings trust and corporation into intimate connexion with each other.73

2.51 The relationship between the trust and the company, and therefore the beginnings of the use of the trust and trust concepts in commerce, began with the trading partnership that eventually became the unincorporated joint stock company or ‘deed of settlement’ company. Lipton makes the point that the evolution of the joint stock company was an economic and commercial, or ‘institutional’, development, rather than a legal one; the law followed and responded rather than led and facilitated. He argues that the historic emphasis on landmark laws like the Bubble Act of 1720 and the Joint Stock Companies Acts of 1844 presents a misleading impression which over-emphasises the importance of statutory developments, and suggests that it is more important to examine institutional change and commercial developments.74 He and others have noted [page 60] that a business association in the nature of a ‘company’ was already in operation by the 17th century and that most of the fundamental characteristics of the modern company had evolved before the enactment of general incorporation legislation in the mid-19th century.75 This was due largely to social and economic forces and the ingenuity of promoters, entrepreneurs and advisers (willingly supported, for the most part, by judges) making creative use of the few tools available to them at the time, including partnership, agency, contract and, importantly for present purposes, the trust. Getzler and Macnair argue that the courts in effect molded existing doctrines to fill the statutory vacuum, thus creating a

‘workable organizational law’, and posit the idea that ‘private law can order commercial associations without state-granted incorporation’.76 2.52 The idea of a body corporate with separate legal personality having the ability to hold land and to bear tort and contract liabilities in its own name had taken hold in England by the Middle Ages, although in those times it was confined to institutions such as universities, municipalities and ecclesiastic bodies. It did not include commercial or business concerns. Indeed, it has been said that modern English law owes its conception of the corporation to the Church during the Middle Ages, even though the idea of a persona ficta can be traced back to the ancient Romans and Greeks.77 The idea of an implicit or common law corporation did not expand much beyond that and, by the 16th century, the only mode of private incorporation — the creation of a fictitious corporate person, separate from its participants with immortality and perpetual succession — was by a Charter or Letters Patent from the King or by Act of Parliament with Royal Assent. The incorporation of private entities was within the exclusive prerogative of the King, in effect a concession granted by the Crown.78 [page 61] 2.53 By the 17th century the benefits of incorporation by Charter were apparent to those who wished to engage in large-scale enterprise, particularly when compared to the available alternatives. For example, in what may be described as privatised colonialism at a time of aggressive competition among European powers for expansion into Asia, Africa and the Americas, charters were obtained for substantial enterprises whose objectives were to enlarge the British Empire and exploit the enormous economic and strategic opportunities available in new colonies around the world. One of the most famous, the East India Company, which was formed to pursue opportunities on the Indian subcontinent, received its Royal Charter in 1600. The Virginia Company of 1606, the Providence Island Company of 1629, the Massachusetts Bay Company of the same year and the Hudson’s Bay Company of 1670 were chartered to exploit and colonise the North American continent.

2.54 However, incorporation by Royal Charter, Letters Patent or Act of Parliament was not a simple matter. Because it required supplication to the King or Parliament, it was fraught with uncertainty, delay and cost and was open to abuse, political machinations and corruption — and interference by richer or more powerful competitors seeking sabotage or revenge. Charters were also expensive to maintain, often made conditional on the payment of ongoing royalties. Typically only the largest enterprises, supported by well-connected (and wealthy) promoters, were able to secure a charter. In the absence of readily available incorporation, commercial parties were left to use other means of aggregating capital for enterprise; ‘the business community developed … adequate substitute(s) in the private sphere … designed by shrewd businessmen and lawyers’.79 2.55 The general partnership was evident in the Middle Ages, both in England and in continental Europe, as a vehicle for conducting business, and its origins as a matter of contract or obligation under law merchant can be traced back to Roman times; indeed, it was the only option for multiple-participant enterprises for many centuries.80 Unlike the partnership, however, the trust was a uniquely English concept and gave English entrepreneurs an option not available to their continental counterparts. Like the partnership, the trust could be created easily and relatively informally, but it brought with it additional elements not available under partnership law that could facilitate the creation of larger firms. [page 62] 2.56 Well before the Industrial Revolution, resourceful entrepreneurs seeking large sums of short- or long-term capital for shipping, trading and exploration ventures, in circumstances where a simple partnership was not an appropriate form, created a primitive form of unincorporated entity that was the ancestor of the joint stock company by manipulating concepts borrowed from the law of partnership and trust. With some exceptions, this did not require the King’s or Parliament’s sanction. The proprietary element of the trust allowed it to issue tradeable instruments called ‘shares’ to investors that facilitated the creation of a secondary market, a feature

that added considerably to the attractions of such an investment. Scholars observed that: The joint stock company was a business form improvised to mimic the chartered company during a time when parliamentary obduracy and demand for the company form had combined to create a charter shortage. The attribute of the chartered company most coveted by investors appears to have been share tradability, which was reproduced with some success in the unincorporated companies through a union of the trust form and the partnership. The result was a partnership-like form whose assets were held in trust for the partners by trustees whom the partners had themselves selected.81

2.57 Being largely unregulated, inevitably these entities were used by the less scrupulous to exploit the vulnerable and perpetrate frauds — the trust’s ability to circumvent could be used for evil as well as good. After a succession of catastrophic collapses, Parliament enacted the Bubble Act in 1720,82 which was designed to stamp out the unincorporated company and: … more particularly the acting or presuming to act as a Corporate Body or Bodies, the raising or pretending to raise transferable Stock or Stocks, the transferring or pretending to transfer or assign any Share or Shares in such Stock or Stocks, without legal Authority, either by Act of Parliament or by any charter from the Crown.83

2.58 It was, however, unsuccessful in this objective; while the Act was intended to drive entrepreneurs to seek incorporation by charter, ‘paradoxically it caused the government to exhibit great reluctance to grant charters of incorporation and thus produced a rebirth of the unincorporated association which the [page 63] Act had sought to destroy’.84 The irresistible force that eventually overwhelmed the Bubble Act was the Industrial Revolution. The demand by entrepreneurs and promoters for ways to fund greater and more ambitious projects was matched by a demand from investors for transferability of investment, orderly and enforceable management structures and limited liability. Where incorporation by charter was possible and feasible, it was obtained. Where it was not, the objective was achieved by even greater reliance by entrepreneurs and their lawyers on the

trust, which they called in aid of the ‘deed of settlement’ company, where the assets were placed in the hands of trustees who, via a management committee, conducted the business of the enterprise.85 Lindgren describes how, after a short pause in the years immediately following the Bubble Act, the unincorporated joint stock company became increasingly popular due to the general view that by careful structuring and drafting, it was possible to escape the Bubble Act prohibition.86 By the end of the 18th century, the Act was all but forgotten, and it was repealed in 1825. 2.59 Once again, we see the trust pressed into service as a device for circumventing legal obstacles, its flexibility permitting it to be used in a context for which it was not originally designed. To modify the trust for commercial use, the deed of settlement contained detailed provisions ameliorating the prima facie strictness of the trustees’ duties and limitations and molding them to suit commercial objectives predicated on risk-taking and profit maximisation.87 In particular, in the absence of royal or statutory charter, the highly valued limitation of personal liability for investors was sought via documentary and structural means (albeit with less than complete success: see the next chapter). The trust was ‘contractualised’ (in the sense defined in 1.53) to achieve specific [page 64] commercial objectives that could not have been in the contemplation of the early Chancellors who were the trust’s midwives. 2.60 As disputes regarding these entities arose, they were initially litigated in different courts depending on the context in which the dispute arose, including the Courts of Common Pleas, King’s Bench, Exchequer, Admiralty and Chancery. As a result, they acquired different elements. In resolving these disputes, the courts applied those concepts and principles most familiar to them, including contract, agency and partnership law in the common law courts and principles of equity, fiduciary law and trusts in the Chancery courts. Ultimately, the latter prevailed, due largely to the heavy influence of trust and fiduciary elements in these hybrid entities and their importance in controlling the behaviour of trustees and directors, and

the Chancery courts’ more flexible attitude toward risk allocation, dispute resolution and remedies. Also relevant, particularly when dealing with entities that had collapsed, was Chancery’s experience with matters of bankruptcy of individuals and partnerships and its more highly developed procedures for taking accounts and administering estates.88 Thus: Contemporary company law was distilled in the regulation by the Court of Chancery of joint stock companies. They combined features of partnership and trust in a successful attempt to avoid the operation of the Bubble Act which, on one interpretation, made the conduct of non-chartered corporations a criminal offence.89

2.61 Noteworthy in this is the active participation, again, of the Courts of Chancery in the process of circumvention. Although unincorporated companies had no formal recognisable status as entities at common law, in effect they were recognised as such in the equitable jurisdiction, albeit without separate legal personality; they ‘developed within the bounds of equitable jurisdiction and did not trouble the common law courts with the problem of their existence’.90 Legally, then, unincorporated companies were essentially partnership-trust hybrids, combining various elements of those two juristic concepts with contract and agency. American scholars described them as being: … constituted as a strong entity by grafting the trust form onto the partnership. The entity shielding provided by both of these forms would have made them

[page 65] useful for combining investment capital from multiple owners, thus increasing their attractiveness as the scale of enterprise expanded during the seventeenth, eighteenth, and nineteenth centuries.91

2.62 Whincop observed that: [M]ost of the key corporate governance principles, which apply to relations between shareholders inter se and between shareholders and officers, derive not from parliamentary fiat but from principles of equity and the decisions of judges [and that in] the absence of an available incorporation procedure, the adaptation of other legal forms, such as the partnership and the trust, played an important part in this legal innovation.92

2.63 The personal element of the trustee role was an important part of how these entities functioned to protect investors. Those who controlled

the enterprise were either trustees or delegates of the trustees (for example, a management committee) and so were bound to the whole range of fiduciary and related equitable duties; although these duties were usually modified by the terms of the constituent instrument, they were still monitored and supervised by Chancery. This fiduciary and prudential framework supplied ‘a ready-made set of “default rules” which fill[ed] gaps left by the trust instrument or by the applicable regulatory regime’.93 It did not always achieve its investor protection objective (indeed, one significant reason for the eventual enactment of comprehensive companies legislation is that it did not) but it was an element of the trust device that made it attractive in the first instance to investors and, therefore, to the entrepreneurs who hoped to attract their interest. 2.64 The proprietary element is the distinguishing feature of the trust that sets it apart from other fiduciary relationships like partnership and agency. Title to the enterprise assets was held by trustees, and there the proprietary element aided the structure by eliminating the inconvenience of having to share title to a potentially large and ever-changing pool of assets among a potentially large and ever-changing pool of investors. It protected the assets for the benefit of investors against the trustee’s insolvency. It gave investors’ shares a residual proprietary content and facilitated transferability. It enabled the trustees to contract with external parties with the confidence of having a first claim on the enterprise assets for liabilities incurred, and gave external parties confidence in dealing with [page 66] trustees, knowing that they were engaging with those who held and controlled those assets. It allowed trustees to sue external parties with the assets supporting the costs and external parties to sue trustees if necessary without joining to the action all of the shareholder-members (often a fluctuating pool), eliminating one of the greatest inconveniences in dealing with a large general partnership. In this, it facilitated also a form of limited liability (albeit, an imperfect one). A vestige of this historical development is that shares and shareholdings in companies are still referred to as the ‘equity’ of a company.

2.65 At each step in the process, therefore, and in multiple ways, the four foundational characteristics of the trust had their role to play in the evolution of the corporation. The trust truly was the ‘cornerstone of the unincorporated company’.94

The end of history for the commercial trust in England 2.66 Section 4 of the Companies Act 1862 prohibited: … any company association or partnership consisting of more than twenty persons … formed … for the purposes of carrying on … business that has for its object the acquisition of gain by the company association or partnership or by any individual member thereof unless it is registered.

2.67 This finally achieved that which the Bubble Act over 140 years earlier did not: the death of the trust-based deed of settlement company as a business entity, and with it the relevance of the trust as an entity form for carrying on risk-taking business activities.95 It did this because it offered something that the Bubble Act did not: a viable and attractive alternative, easily and cheaply secured. Incorporation moved from ‘special privilege to general utility’.96 2.68 However, one form of trust survived in commerce: the so-called ‘investment trust’ or ‘management trust’, a device in use from at least the late-18th century for the aggregation of capital for investment in non-land assets such as stocks and bonds. In Smith v Anderson (1880) 15 Ch D 247 (also known as the Submarine Cables’ Trust case), an action had been taken to wind up an entity called the Submarine Cables Trust, which was structured in a form that would today be [page 67] described as a unit trust,97 on the basis that it was an illegal association in breach of s 4 of the Companies Act 1862. In rejecting the action, the court held that the investors were not ‘associated’ with each other in any way relevant to the meaning of the Act; that the object of the deed of settlement was not to authorise the carrying on of a business within the meaning of

the Act, but to provide for the management of a trust fund which comprised investments (that is, shares) in submarine telegraph cable companies; and that even if the deed did authorise the carrying on of a business, and the activities did constitute business, that business was carried on only by the trustees, who carried it on as trustees, and not as agents or directors, and they were fewer than twenty (there were only six). Thus, the arrangement did not breach the prohibition in the Act. 2.69 Thereafter, for so long as a trust operating in a commercial context could satisfy the Smith v Anderson criteria, it could continue to exist in a post-Companies Act environment free of the strictures of that legislation. However, that was a relatively narrow universe of possibility and, in the absence of assured limited liability, Hughes argued that the decision in Smith v Anderson ‘could provide but little impetus to the commercial usage of the public unit trust in the face of the much more appealing company structure’.98 2.70 This was, indeed, the end of history for the commercial trust as a business and trading entity in England.

SEPARATION OF THE TRUST AND THE COMPANY: CONSEQUENCES FOR TRUST LAW 2.71 Legislative intervention caused participants to cease using the trust as an enterprise entity; this was, indeed, one of its objectives. Thereafter, the English courts appear not to have been given opportunities to consider issues that might otherwise have arisen in connection with large-scale commercial trusts as a result of risk-taking entrepreneurial activity which, in turn, might have generated a body of common law on those matters and perhaps even some form of responsive statutory intervention. 2.72 The law applicable to unincorporated companies before the enactment of general incorporation legislation was suffused with trust law principles and for a time after 1844, in the absence of any other option, the courts continued to draw guidance from trust law (among others) when dealing with companies. Given

[page 68] their relevance to the unincorporated form, the laws of partnership, agency and contract were also applied, and elements of all of them remain evident in modern company law. Soon enough, however, as the relationship between the trust and the company became more distant, company law took its own path and diverged from trust law. A body of case law evolved, and companies legislation was regularly amended, to deal with new and emerging circumstances requiring regulation; indeed, ‘company law has often developed as a legislative reaction to some newly perceived commercial mischief, usually after some spectacular corporate failure’.99 2.73 The context in which disputes involving trusts came before the courts reverted to the historical one, that is, the trust as guardian, engaging the courts’ traditional role as supervisor of trustees and protector of beneficiaries. As those responsible for adjudicating company law disputes became focused on the facilitation of risk-taking entrepreneurial activity, the courts reasserted trust law’s historical conservative and protective bias. Of this period Justice Gummow observed that: [T]he trust as a mechanism for the conduct of business enterprise went into decline. In addition to the statutory forces at work directing efforts into incorporated entities, what Ogus (op cit) describes as the ‘intense fiduciary principles’ developed in the nineteenth century for trustees of family settlements were unreasonably stringent for the entrepreneur. In particular, directors were given more flexibility in exercise of their powers than trustees. It has not always been readily appreciated how misleading it is to describe directors as trustees …100

2.74 Later, the High Court of Australia noted that: [Lord St Leonards’ Act] was enacted in England at a time [ie 1859] when the legal and practical burdens on trustees were increasing, and against a background conception … that the office of trustee is a gratuitous one …101

2.75 Thus, after the enactment of companies legislation, the courts and the legislatures were not compelled to progress or expand the law of trusts to suit commerce. As a matter of policy, there prevailed a view that commerce was for companies, not trusts. A consequence of particular relevance for this book is the challenge of insolvency. Before 1844, insolvent companies

(some of them the notorious ‘bubble’ companies) were dealt with in the Courts of Chancery [page 69] by application of basic agency, partnership, contract, bankruptcy and trust law; there was no other choice in the absence of a legislative regime.102 In this environment, while those courts tended to apply fiduciary principles and rules applicable to the administration of estates, when it came to allocating liability for losses they did not invariably do so.103 2.76 Harris noted that by the early 19th century, Chancery became clogged with the volume of cases brought before it: ‘there could be up to 20,000 pending cases, and a plaintiff could expect to wait as long as thirty years for a final judgment … the Court of Chancery [became] a place to be avoided if at all possible’.104 In addition, the inadequacies of this state of affairs for participants are illustrated by the history of limited liability, the potential for personal liability for directors as trustees and/or partners in respect of enterprise debts and uncertainty in investors’ ability to recover losses from negligent and fraudulent promoters and directors.105 The need for legislative action was recognised and finally, as part of the process of constructing a body of general companies legislation, Parliament enacted a series of Joint Stock Companies Winding-up Acts in the 1840s and the Limited Liability Act in 1855. To this day, there is no equivalent for trusts (including those which are MIS) and that is the focus of the discussion in Chapter 6. 2.77 Reflecting on this history, the High Court of Australia noted that: There are no ‘general principles of company law’ applicable in a winding up and to which there must be reconciled those provisions of the [Corporations] Act and its predecessors (beginning with the Companies Act 1862 (UK) …) which stipulate a particular system of proof of debts and the ranking of debts and the placement of ‘shareholder claims’ in that system.

[page 70]

Further, in any quest to locate such general principles, the older case law is not always a satisfactory guide. Excessive significance should not be attributed to statements in nineteenth century British cases, decided at a time of endeavours to ‘flesh out’ the developing body of statute law by use of principles derived from a range of sources in the general law. These sources included the law of agency, partnership, bankruptcy, and trusts. It later was recognised that some of those endeavours miscarried. One was the attribution to directors of the character of trustees of the assets of the company, and another the treatment of a company in liquidation as trustee of its assets for distribution among creditors.106

THE TWO MANIFESTATIONS OF THE AUSTRALIAN COMMERCIAL TRUST 2.78 The modern Australian commercial trust manifests as two different vehicles. The first is the public unit trust, which today is regulated as a MIS. Typically, this is the unit trust form used to raise funds from the public, but the MIS regulatory regime can embrace even private arrangements if they satisfy the definitional criteria in the Corporations Act (as to which, see Appendix 1: ‘Extracts from the Corporations Act’). The second is the so-called ‘trading trust’, which may be in the form of a unit trust or a discretionary trust, but is used exclusively for private arrangements and not for raising public funds (although they can be quite large in terms of invested capital and participants may be at arm’s length). A trading trust may be a MIS but in order to escape the regulatory regime in Chapter 5C of the Corporations Act, participants would normally strive to ensure that it is not. Because it has no strict technical meaning, the expression ‘trading trust’ is sometimes used in the literature in a generic sense to include both the private trading trust as so described and the public unit trust or MIS. Taking a broad view of the term, Lindgren included both in the expression and argued convincingly that they are direct lineal descendants of the English unincorporated joint stock company.107 2.79 Lipton notes that, in Australia ‘by the 1820s and 1830s there was already demand for pooled equity investment and share trading, and for the utilisation of unincorporated joint stock companies with transferable shares’.108 Formed in 1817, the Bank of New South Wales (whose modern day successor is Westpac

[page 71] Banking Corporation) was the colony’s first domestic company and, when the colonial masters in London refused Governor Macquarie’s request for its investors to have limited liability, operated as an unincorporated joint stock company. Many others followed, tracking developments in England but with a local flavour, accommodating Australia’s status as a penal colony moving towards becoming a self-sufficient economy in its own right. As well as other banks, joint stock companies were formed for insurance, pastoral, agricultural, mining and utilities businesses. An active secondary market emerged for trading the shares in those companies. Towards the middle of the 19th century both the number of companies and the volume of share trading grew rapidly as the colonies expanded and enjoyed periods of economic prosperity and even booms. As in England, a major impetus for the enactment of comprehensive companies legislation was the desire for ease of incorporation and limited liability, since various corporate collapses in the first half of the 19th century had ‘highlighted the risks involved in being a shareholder of an unlimited company and resulted in a marked downturn in company formations and share trading’.109 2.80 After some experimentation with legislation for limited liability partnerships, general incorporation legislation was enacted in the colonies, each modelled on the Companies Act 1862.110 These laws took the same ‘carrot and stick’ approach as the English legislation; while offering the benefits of incorporation by registration and limited liability, they prohibited any association or partnership consisting of more than 20 persons from carrying on business, unless registered as a company.111 As in England, this spelt the end of the large unincorporated joint stock company. And, as in England, it did not see the demise of the investment trust. However, unlike England, general incorporation legislation did not prevent the emergence of the commercial trust in the 20th century. 2.81 The idea that a trustee should, in that capacity, engage in trade, commerce or business activities with trust assets is not a recent one, and evidence of it appears even in the period after the enactment of companies legislation in both England and Australia. Some of the landmark cases in trust law dating back to the 19th century involved actions by or against

creditors who had extended credit to trustees or executors carrying on a business that they controlled in their [page 72] trust capacity under the provisions of a will or settlement.112 However those cases involved small private arrangements, with natural persons as trustees and family members as gratuitous beneficiaries. What is interesting, for present purposes, is the way in which this concept was later extrapolated by Australian entrepreneurs and their advisers to create complex and substantial commercial entities that operated as surrogate companies, applying the same four foundational elements discussed earlier in this chapter. 2.82 While early ventures followed the ‘investment trust’ model sanctioned by Smith v Anderson, that is an entity for relatively passive investment in intangible assets rather than active trading or business, entrepreneurs and their advisers later realised that other techniques could be adopted to circumvent the prohibition on unincorporated business associations. The inherent flexibility of the trust device and the amenability of the proprietary and personal elements to contractualisation techniques allowed the trustee (or managers working with the trustee, so long as together they numbered fewer than 20) to be given expansive powers to conduct business and a wide discretion to exercise those powers, while the investors’ powers were curtailed correspondingly. Provided the relationship among investors, and between them and the trustee, were configured appropriately and, most importantly, that the investors had no mutual rights and obligations inter se, it would be difficult to argue that they comprised a partnership or association in the relevant sense.113 2.83 The modern large-scale commercial trust is in some quarters regarded as an Australian idiosyncrasy.114 An English commentator noted in 1995 that ‘Australia has developed concepts of trading trusts in the last decade or so which

[page 73] appear to be responsible for the only major source of modern learning of the topic of trustee liabilities, even though to English readers the words trading trust look like a contradiction in terms’.115 Another described the insolvent trading trust as a ‘specifically Australian problem’.116 Even in Australia, the trading trust has been described as an ‘antipodean mutation’.117 Slater observed that the trading trust ‘has few parallels outside Australia’.118 2.84 In terms of scale, the Australian Taxation Office reported that, for the 2010–2011 fiscal year (the most recent figures available at the time of writing) 729,622 trusts lodged returns (an increase of 3.9 per cent on the previous year) and trusts reported total business income of $316.7 billion (an increase of 7.3 per cent on the previous year).119

The public unit trust/managed investment scheme 2.85 The growth in 20th century Australia of the public unit trust (since 1998, regulated as ‘managed investment schemes’) is well documented.120 Mees, Wehner and Hanrahan’s 2005 Research Report is particularly comprehensive with respect to the post-World War II period.121 [page 74] 2.86 The first public unit trust in Australia was the Australian Fixed Trusts, established in 1936.122 After initially flourishing, public unit trusts fell into disfavour following World War II but re-emerged in the 1950s, with the aggregate invested capital in public unit trusts growing from A$8.6 million in 1951 to A$44.2 million in 1956. By 1965 the figure was A$250 million, and by 1978 A$488.3 million. By 1990 the value held in the sector reached A$26.6 billion.123 The primary driver for this growth was said to be the availability of certain tax advantages over companies and other features not available under a corporate form.124 It also helped that, as a sector, public unit trusts generated returns on investment that

exceeded most other available investment classes. Hughes cites figures showing that over the five years to 1989, one of the strongest growth periods in the post-war era to that time, investors in the public unit trust sector enjoyed an annual compound growth rate of 34 per cent. 2.87 In the 1990s and into the new millennium, the use of trusts and MIS as vehicles for acquiring and holding assets, and conducting businesses, of substantial value escalated dramatically. The Australian Bureau of Statistics reported that, as at 30 September 2013, public unit trusts held a total of A$279.6 billion in unconsolidated assets (that is, excluding investments in other public unit trusts).125 The CAMAC Report noted at 23–4 that listed registered MIS with a capitalisation of over A$100 billion together constitute some 8 per cent of the total market capitalisation of securities listed on the ASX. 2.88 No single sector has demonstrated this phenomenon as starkly as the property sector, through the growth of Australian real estate investment trusts or ‘A-REITs’: [page 75] In the 1950s and early 60s managed funds were mostly invested in equities, with a smattering of debentures, fixed interest and direct property. Mortgages joined the mix in 1963. But a sustained period of poor performance by equities from the mid sixties to mid seventies saw the rise of property at the expense of other asset classes that eventually resulted in about three-quarters of the industry comprising property or related investments by the late 1970s.126

2.89 The aggregate market capitalisation of A-REITs on the ASX grew from less than A$10 billion in 1993, to around A$20 billion at the turn of the century, to over A$140 billion in 2007, the year before the events that heralded the commencement of the GFC.127 The Board of Taxation noted that, by 2008, Australia accounted for 15 per cent of the global market capitalisation of real estate investment trusts, making it the second largest market by value after the United States.128 During the same period, MIS, listed and unlisted, also began to be used widely as collective investment vehicles for holding infrastructure assets (such as toll roads, airports, utilities, communications assets, rail and other transport assets) and, on a

smaller and more ‘retail’ level, for cash management trusts, equity (share) trusts, agricultural schemes (such as horticulture, aquaculture and commercial horse breeding), timeshare schemes, some mortgage schemes and other ‘managed funds’.129 2.90 As participation by the public in these vehicles grew, so too did the need for regulation of them, since they were not amenable to traditional laws regulating companies. The growth of the public unit trust generated several waves of regulation as sharp promoters and entrepreneurs took advantage of the light-touch regulatory environment.130 The close commercial relationship between companies and unit trusts was implicitly acknowledged by the fact that, when Australian Parliaments responded to the pressure for regulation, they did so by amending company statutes rather than trustee legislation. The earliest [page 76] regulation appeared in 1955, in the form of amendments to the Companies Act 1955 (Vic) and even today regulation of commercial trusts that are MIS is contained in the Corporations Act. By 1993, the Australian Law Reform Commission observed that ‘the need for a comprehensive review of collective investment schemes has been acknowledged in Australia for almost 20 years’, and described the ‘quite spectacular losses’ suffered by investors when the unlisted Estate Mortgage property trusts collapsed.131 2.91 Many efforts to pursue further and better regulation, however, misfired, miscarried or were simply ignored by governments, leaving issues unresolved and risks unaddressed, including those discussed in this book, a point taken up again in Chapter 7.

The Australian trading trust 2.92 As with the unit trust and so many other sub-species of trust mentioned in Chapter 1, the trading trust evolved as a matter of practice and usage. The expression ‘trading trust’ is not a term of art but rather describes an express trust in which the trustee is given the power to carry

on business, either generally or of a particular type, with some or all of the trust assets at its disposal.132 It may be structured as a discretionary trust (the form most commonly used for smaller, private and familial arrangements) or a unit trust (for larger and more arm’s length commercial arrangements). While it is described in Jacobs on Trusts at [316] as ‘an example of the family trust gone commercial’, it has also been used more generically to describe a wider range of commercial trusts.133 2.93 The use of the trading trust as an alternative to the company enjoyed a surge in Australia in the 1960s and 1970s. The trust was able to provide almost all the useful attributes of the incorporated form but with certain added advantages, as discussed in more detail below. Once again, the trust’s ability to circumvent unwanted outcomes (particularly fiscal but also by way of asset [page 77] protection), and the inbuilt proprietary and personal elements that enabled it to imitate the corporate form, proved a great attraction. Its flexibility allowed it to be manipulated to suit a range of commercial and fiscal objectives. It was thought to offer a high degree of limited liability for beneficiaries through the use of a limited liability company of nominal value as trustee (although that element is contentious: see Chapter 3). 2.94 The primary economic force that energised the emergence of the trading trust was tax. Slater describes this surge as ‘relatively sudden’ and credited tax advisers with the creation of the trading trust idea as a tax effective device for inter vivos family business arrangements in an environment of high tax rates and accelerating inflation.134 The ability of the trust to be effectively ‘invisible’ to taxation laws so that income could pass through it and be taxed only once in the hands of the beneficiaries, and to direct income to lower marginal tax rate recipients, compared favourably to the double taxation problem created for shareholders in companies in the days before the introduction of dividend imputation and franking credits. In 1968, in an article on the Companies Act 1967 an Australian commentator noted that ‘the primary disincentives to the use of

the company in the case of certain smallish concerns relate to the impact of corporation tax. … The number of new incorporations is decreasing, and chambers are advising some clients to consider the advantages of the partnership and the trading trust’.135 In its 1984 report, ‘Forms of Legal Organisation for Small Business Enterprises’, the Companies and Securities Law Review Committee noted that: A hybrid form of organization of fairly recent development is the corporate trading trust. Its popularity derives largely from a combination of taxation advantages not generally afforded to companies and a somewhat ill-defined species of limited liability. In a typical case, a proprietary company formed with minimum capital becomes party to a deed of settlement by which it undertakes certain trusts and in exercise of powers conferred by the trust instrument, carries on a business … The view has been expressed that ‘The use of trusts for this purpose may fairly be described as a distortion, a distortion which probably would never have occurred but for the difference in treatment for tax purposes between trusts and companies.’136

[page 78] 2.95 The private trading trust caused disquiet among creditors in Australia almost from the start, primarily because it was, and still is, usually headed by a corporate trustee of nominal value (that is, over and above the asset constituted by its right of indemnity against the trust fund it holds). In RWG Management Ltd v Commissioner for Corporate Affairs [1985] VR 385 Brooking J noted at 395 that ‘much trade nowadays [is] in the hands of corporate trustees which have a trifling capital’. This poses risks for creditors and other outsiders dealing with trading trusts and led Professor Ford to make his famous observation in 1981 that a trust with a limited liability corporate trustee for conducting business activities is a ‘union of the law of trusts and the law of limited companies [which] is a commercial monstrosity’.137 In 1984 Justice McPherson agreed, noting extracurially that ‘the last decade or so has seen the spread in Australia of the trading trust as a form of business enterprise’, and observing that, while the idea of a trustee carrying on business was not new, ‘what is different about the trading trusts established in recent times is that the trustee is almost invariably a corporation … to enable the business to be conducted by a trustee with limited liability’.138 In 1988 the Australian Law Reform Commission noted that:

[T]he trading trust has been used extensively for more than a decade, yet the companies legislation makes little or no provision for corporate trustees which become insolvent … trading trusts will continue to be used for commercial purposes. It is important, therefore, that the existing law be clarified to create more certainty.139

2.96 In Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360, a seminal High Court decision on trading trusts, Justice Murphy said, at 372: It would be a curious perversion of the doctrines of trust evolved by Equity Courts if they can be used to implement a scheme in which a straw company is used as a trading trustee, and assets can be transferred preferentially to defeat ordinary creditors … Trusts, including trading trusts, should not be allowed to become instruments to undermine the protection which the law otherwise confers on creditors, as was attempted in this case.

2.97 These sentiments have been echoed by many others in the cases and the literature, and are the subject of more detailed discussion in the following [page 79] chapters; as will be seen, not much has changed since those observations were made.140

THE ADVANTAGES OF THE COMMERCIAL TRUST OVER THE COMPANY 2.98 Tax benefits alone do not account for the popularity of the modern Australian commercial trust. After all, those benefits could be swept away with the stroke of a legislative pen (although given the intense political debates that are sparked whenever the suggestion arises, that is unlikely to happen in the foreseeable future). Nevertheless, a non-expert observer might be forgiven for wondering why else promoters of large-scale businesses would choose an unincorporated vehicle that requires so much effort to achieve a similar result to incorporation, given the apparent advantages bestowed on the corporate form by law. After all, the absence of a statutorily imposed regime means that parties who choose the trust form for their enterprise are required to pursue the company-like

characteristics and outcomes they desire through bargaining, documentation and structured governance arrangements, a point explored later in this chapter. This must lead to transaction costs and inefficiencies. 2.99 But that question, without more, is asymmetrical, in that it assumes that the law regulating companies provides only advantages over the trust without accompanying costs. In reality the benefits of incorporation come at a price. From the outset, the trade-off for what one American scholar described as the ‘democratisation’ of the corporation,141 where incorporation by registration made access to the corporate form more freely available, was interventionist regulation aimed at equity investor and creditor protection. Once a corporation of a particular type is registered under the Corporations Act the entire regulatory regime applicable to that type of body corporate descends upon it and its stakeholders. Much of this regime is mandatory and cannot be contracted away. It imposes procedural and substantive burdens on the company and its directors, [page 80] none of which apply to an enterprise conducted through a trust (although some may apply in modified form to a trust which is a registered MIS). 2.100 This presents an opportunity for what might be described as ‘regulatory arbitrage’. Given the option, parties may choose an enterprise entity that is governed by a lighter regulatory regime to achieve outcomes not otherwise available. The trust’s flexibility and its freedom from (that is, ability to circumvent) Corporations Act constraints mean that it is capable of providing benefits of a kind not available under the corporate form including, for example, the following.

Ease (and privacy) of establishment 2.101 A commercial trust may be established by nothing more than the execution of a trust instrument that satisfies the minimum trust law requirements and the presence of the three ‘certainties’, that is subject, object and intention. No filing, registration or other public formality is

required for a trust to be properly constituted and legally recognised.142 A trustee is not obliged to disclose that it is acting in a trustee capacity when it engages with third parties in that capacity. A trust may be created, and may conduct business through its trustee, completely invisible to the world.

Flexibility in structuring the fiduciary framework and beneficial entitlements 2.102 As discussed above, the personal fiduciary framework supplied by the law of trusts is highly flexible, making it amenable to modification and manipulation to suit a given commercial context (although there are limitations in relation to the statutory duties imposed on responsible entities of registered MIS: see Westfield Management Ltd v AMP Capital Property Nominees Ltd (2012) 247 CLR 129; [2012] HCA 54). So too is the proprietary element of the trust, permitting the creation of a ‘dizzying array’ of different entitlements attaching to different classes or tranches of units, some of which could not be created as shares if the entity was a company.143 [page 81]

Public reporting 2.103 While the trustee of a commercial trust, as a company, has the normal reporting obligations of a company under the Corporations Act, it has no public reporting obligations concerning the activities of the trust (unless it is a MIS which is registered and/or a disclosing entity).144

Distributions to equity investors — profits 2.104 The distributions made by a trustee to unit holders may comprise profits, capital or both — the mix is usually determined by the terms of the trust instrument which, in turn, are influenced by tax and accounting rather than legal considerations. The character of an amount in the hands of the trustee does not change by payment to the beneficiary.145

Distribution of profits to equity investor unit holders may be effected with very little formality and few legal restrictions beyond those imposed by the trust instrument and the general law. This is not the case for a company; Corporations Act s 254T imposes prescriptive conditions on the payment by a company of dividends.

Distributions to equity investors — returns of capital 2.105 Similarly, a trustee may distribute amounts in the nature of capital to the equity investor unit holders (either alone or aggregated with profits) with relative ease, subject to general law protections against defrauding trust creditors.146 This is not the case for a company; the traditional company law concern for the preservation of capital still manifests in Corporations Act Chapter 2J, which limits the circumstances and the manner in which capital may be returned to shareholders.

Redemption of invested equity 2.106 Another way in which capital may be returned to equity investors in a unit trust is by the redemption of units. This may be effected relatively simply and without formality if it is part of the pre-agreed bargain between trustee and investors. In a commercial trust, the trust instrument will usually give the investors the right to demand redemption at a price calculated in accordance with a mandated formula.147 By contrast, consistent with the doctrine of preservation [page 82] of capital, the Corporations Act imposes prescriptive conditions on the issue and redemption of redeemable preference shares and share buybacks: see Pt 2H.2 and Pt 2J.1 respectively.

Management, governance and decision-making

2.107 The Corporations Act imposes a management and governance structure through a company’s two main organs, the board of directors and general meeting, and regulates the process by which decisions are made by them through prescriptive requirements for the calling, holding and conduct of directors’ and shareholders’ meetings and the passing of resolutions. It imposes governance rules, only some of which may be replaced or displaced. While these will bind a trustee that is a company in relation to its status as a company, they are irrelevant in relation to its trust activities. There is no law, beyond the general fiduciary overlay imposed on trustees (which, as noted, to a very large extent may be modified or excluded), regulating the decision-making processes within a trust and parties are free to construct whatever governance regime they wish through the trust instrument, subject only in the case of a trust that is a registered MIS to a degree of regulation under the Corporations Act Ch 5C.

Solvent winding up 2.108 While the issues concerning insolvent trusts are complex (see the discussion in Chapter 6), the solvent winding up of a trust can be straightforward. A trust instrument may, and a well-drafted one invariably will, expressly provide for the circumstances and manner in which a trust is to be terminated and wound up (Corporations Act s 601GA requires the constitution of a registered MIS to make adequate provision for winding up the scheme. See the latest ASIC regulatory guidance for specific requirements). By contrast, a company may only be wound up in the manner prescribed in Corporations Act Division 1 of Pt 5.5, which imposes a range of formalities and waiting periods.

Advantages for trustees 2.109 Trustees enjoy the special privilege of being able to approach the court for ‘an opinion advice or direction on any question respecting the management or administration of the trust property, or respecting the interpretation of the trust instrument’ and the trustee is provided with a

degree of legal immunity if all material matters have been fully and fairly disclosed to the court and the [page 83] trustee acts in accordance with the opinion advice or direction.148 Trustees may also seek ex ante protection from the court in relation to dealings with trust property that might be beyond power or otherwise in breach of trust,149 and ex post forgiveness for honest and reasonable breaches of trust.150 There are no direct equivalents for directors of companies in that capacity, although in some cases a board of directors could seek ex ante authority, or ex post ratification, from shareholders in respect of some matters that might otherwise constitute breaches of directors duties, and Corporations Act s 1318 gives the court a discretion to excuse negligence, default, breach of trust or breach of duty by a director in that capacity. 2.110 Many of these advantages derive from the very same foundational attributes that originally propelled the trust from guardian to entrepreneur before general incorporation legislation. The popularity of the commercial trust demonstrates that these advantages are valuable and worth pursuing. There is, however, another side to the analysis. The lighter regulatory environment within which the commercial trust operates lacks many of the protections enjoyed by participants in a Corporations Act company. A participant in a commercial trust who believes that legal risk outcomes for it will be similar to those for a corresponding participant in a company would be mistaken. [page 84]

THE PHENOMENON OF ‘CONTRACTUALISATION’ The inventiveness of practising lawyers in devising new applications of the trust has opened up many opportunities for the academic to analyse, and in some cases to demystify, the interaction of trust principles, contract and regulatory provision.151

2.111 ‘Contractualisation’, as used in this book, describes the process by which the Australian trust has been moulded and structured by private means so as to resemble closely the company in form and function. It is argued that this process, and the quite conscious efforts of participants and even of Australian regulators and legislators to make the commercial trust resemble the company appear to be manifestations of law and economics theory; in particular, the contractualisation of the trust aligns closely with contractarian theory and the mimicry of the company is enterprise theory at work (as to which, see 1.69 and 1.70). 2.112 In very many respects the Australian commercial trust and the Australian company are so similar that they may appear, at least to the non-expert observer, to be interchangeable or substitutable. This ought not be surprising. The historical account in the early part of this chapter demonstrates that the relationship between the trust and the company is a close one. The Anglo-Australian company which emerged from 19th century general incorporation legislation can be seen as the progeny of the trust and, in turn, the trust in the commercial context has since mimicked the company. There has been a degree of mutual mutation over time. This has resulted in the emergence of a perception of parity among participants. This perception has not been accidental; indeed, it has been actively encouraged by promoters and advisers, and by legislators and regulators, who have blurred the distinction between them. But therein lies the problem. However valid that perception may be from a commercial perspective, it is not supported by Australian trust law; the perception of parity is a myth. As a matter of legal risk, the commercial trust, even after heavy contractualisation, compares unfavourably to the company in several key respects. Certain benefits and protections which accrue to a company’s stakeholders are unavailable to a trust’s stakeholders. Attempts to imitate the company yield imperfect outcomes due ultimately to the very different legal frameworks within which the company and the trust are located; this may be described as ‘regulatory dissonance’. 2.113 In 1940 a United States court noted the ‘simulation by unincorporated organizations of corporate forms and approximation of corporate advantages by skillful use of trust and contract devices’.152 The same observation may be made

[page 85] in present day Australia, although ‘the fact that the trust relationship in a public unit trust is fundamentally contractarian in nature goes largely unremarked in the Australian jurisprudence’.153 2.114 In 2003 Professor Bryan stated that to ‘announce the arrival of the “contractualisation” of the commercial trust as a legal phenomenon … would obviously be premature’.154 With respect, this depends on the meaning one chooses to attribute to the expression. Professor Bryan’s reason for stating this was that ‘trusts created for commercial purposes are too diverse … to permit any sensible generalisation as to the relative significance of contract and trust principles, to be formulated’. That is undoubtedly true. As discussed below, the relationship between contract and trust is a complex one. However, the focus of this book is specifically on the commercial trust as defined in 1.31. It is appropriate to describe the process of private ordering and risk-shifting by which participants create what is in effect a surrogate company as ‘contractualisation’. 2.115 As previously noted, very little of the law of trusts is absolute or immutable; most of it is susceptible to modification to suit particular requirements. Commercial parties bargaining at arm’s length, who seek the advantages and benefits of the trust form as the vehicle for their enterprise, will import contractual and contract-like devices into their documentation suite in shaping the trust framework to modify prima facie outcomes which are inconsistent with their objectives; indeed, the trust instrument has been described as the ‘third source of law’ in relation to a trust, after the general law and applicable statutes; ‘the trust instrument has primacy’.155 These devices are used to circumscribe duties and rights, or to displace what would otherwise be the position under the law of trusts, so as to protect or benefit one or other of the participants by reallocating a benefit or risk. 2.116 As described earlier in this chapter, a similar process led to the creation of the pre-1844 unincorporated joint stock company, as entrepreneurs and their advisers sought to imitate the corporation where a charter was not available to them. The process occurs in relation to the

modern Australian commercial trust, despite incorporation being readily available, due to certain perceived advantages of the trust over the company, some of which are described above. [page 86] To be able to access the available advantages, certain commercial exigencies need addressing. For example, in the modern Australian market a professional trustee company will be unwilling to accept an appointment where it is obliged to act gratuitously, has unlimited personal liability for trust debts and is subject to the entire panoply of fiduciary and related duties otherwise applicable to trustees. Beneficiaries who are arm’s length commercial investors with a certain tolerance for risk may be prepared to forgo some of the protection and supervisory benefits that trust law would otherwise provide them in exchange for the expert management a professional trustee promises to bring to the enterprise and the opportunity of risk-based returns. Financiers and other external counterparties dealing with a commercial trustee who are expected, and prepared, as a matter of credit assessment to rely solely on the worth of the enterprise may be willing to waive the trustee’s unlimited personal liability. Devices used to achieve these and other outcomes are designed primarily to yield risk outcomes that approximate those which result under a corporate structure. Through them, parties seek to align the economic, if not always the legal, risk position of the various stakeholders in the trust enterprise with those in an incorporated enterprise. The commercial expectations of the three participants in the commercial trust and how contractualisation techniques are used to satisfy them, are discussed in detail in the following chapters. 2.117 It is useful to examine the interwoven tapestry of trust, fiduciary and contract law against which this market-driven development has occurred and the elements of law and economics theory embedded within it.

Trust and contract: ‘no necessary antipathy’156

2.118 Neither contractualisation nor its theoretical stablemate, contractarian theory, are concepts of the law of contract, despite the obvious etymological connection. Nor is the law of contract a part of the law of trusts (or vice versa). On the contrary, many of the standard texts and treatises, in defining or describing the trust, distinguish it from other doctrines and forms of legal relationship; usually, this includes contract.157 This distinction does not, however, disqualify the trust from analysis through the lenses of contractarian theory and contractualisation. [page 87] 2.119 It is clear that trust law does not rest on contract and operates independently of it. It is not premised on formal contractual notions like offer and acceptance, consideration, privity, vitiation and the damages rules. A trust is not necessarily the manifestation of a bargain (even though it may be). If a given circumstantial matrix exists, trust law will be engaged and applicable elements of it will settle on the arrangement as a set of implied or imposed terms, even if the arrangement is completely undocumented (subject to certain Statute of Frauds exceptions) and even in the absence of agreement between participants on precise terms. 2.120 It is therefore fundamentally incorrect to say that the trust is a creature of contract. Contract does not import a proprietary element and so cannot, alone, achieve the separation of proprietary interests that quarantines assets held on trust from the holder’s personal creditors in insolvency, or the fragmentation of proprietary interests in a single asset or fund among multiple participants; nor (with some limited exceptions) does it offer the potential to benefit or bind non-parties. Neither does the law of contract provide for the deep and nuanced layering of personal fiduciary and related obligations that is implied by the mere existence of a given relationship that engages trust law. 2.121 This is so even where a trust arrangement is fully documented. Trust instruments may comprise unilateral declarations of trust executed by the trustee as a deed poll: see ING Funds Management Ltd v ANZ Nominees Ltd (2009) 228 FLR 444; [2009] NSWSC 243. Others may be deeds inter

partes but without the beneficiary being a party. The traditional trust instrument by which a settlor transfers assets to a trustee to be held for the benefit of present and future family members is a typical example. An example in a commercial context is a debenture trust deed executed between a corporation and a trustee (usually a professional trustee company) in connection with an issue of debt instruments (arrangements which are regulated under the Corporations Act Ch 2L). It will contain the primary principal and interest obligations and a suite of supporting warranties and undertakings, and in a secured arrangement, it may contain the terms of security over the assets of the corporation. The trustee agrees to hold the benefit of the deed on trust for the members of a class, being persons who from time to time are holders of the debt instruments issued by the corporation under it. An investor becomes a member of that class either through an initial subscription for instruments or by transfer from an existing holder. In an unregistered issuance, there would usually be no engagement at all between the holder and the trustee. While the relationship between the investor and the issuer is clearly contractual (see ING Funds Management Ltd v ANZ Nominees Ltd (2009) 228 FLR 444; [2009] NSWSC 243 at [58]) it is difficult to identify a basis in contract for the relationship between the trustee and any given holder. [page 88] 2.122 In either instance, subject to formalities, the instrument would be enforceable by the intended beneficiaries, but this does not result as a matter of contract.158 In relation to the first example, a deed poll is not a contract,159 and in relation to the second example, the privity doctrine would deny contractual enforcement by the beneficiaries, at least in those jurisdictions where that doctrine has not been displaced.160 A trust instrument may operate by adhesion if, by its terms, a person is or may become a beneficiary simply by being or becoming a member of an identified class without providing consideration or executing a document or entering into a bilateral engagement with the trustee. Absent direct involvement ex ante or an express provision in the trust instrument, a beneficiary or intending beneficiary who is not satisfied with the terms of

the trust is in no position to bargain on terms. In those circumstances, it would be difficult to construe the arrangement as contractual. 2.123 On the other hand, an instrument establishing and governing a commercial express trust may be a contract.161 But even if a trust is expressly documented in contractual form (say, a document inter partes the trustee and beneficiaries), it is not always a simple matter to distinguish which elements are contract and which are trust. The relationship between trustee and beneficiary is not governed solely by contractual principles and the trust elements of the arrangement do not rest on contract. 2.124 However, even if a trust instrument is not, in itself, a contract the courts have held that, in a commercial context at least, contract principles, including the modern notion of commercial construction and other contract-based [page 89] concepts, are applicable.162 There is, in effect, a notion of ‘equitable contractual principles’ in connection with trust documents, where equity will, as a matter of conscience, enforce contract-like provisions even if common law contract formalities are lacking.163 2.125 In Australia, the United States, Canada and England, there is a lively debate on the relationship between contract and trust in the context of superannuation or pension trusts, particularly the question of which parts of a scheme are to be interpreted by contractual principles and which by trust principles.164 The High Court of Australia has acknowledged that a company pension fund may comprise elements of both trust and contract.165 2.126 Thus, the question is not a binary one; a document need not perforce be either a contract or an instrument of trust. A conclusion that a document comprises the terms of a trust does not preclude that document being a contract or containing elements of contract, or vice versa; it may comprise both.166 The question of whether a particular provision is

properly characterised as contractual or trust-based will arise where there is a failure to comply with an obligation and the person holding the benefit of it seeks a remedy. An action by a beneficiary against a trustee may be for breach of contract or breach of trust or both, and caution must be exercised against assuming that common law remedies, such as [page 90] contract law damages, are available in relation to an equitable claim, such as a breach of fiduciary duty, or vice versa.167 2.127 The unit trust, which is the framework for the commercial trust as defined in 1.31 for the purposes of this book, is the archetypical contractualised trust. By structural and documentary techniques, the trust form is modified and manipulated so as to resemble closely a company in form, function and many economic outcomes. It has been noted that: [A] unit trust is a congerie of rights and that congerie may, with different trusts, be made up of different rights … Without doubt some of those rights are legal contractual rights … However, it would be a mistake to think that all rights are in this category even though they might look like contractual rights.168

2.128 The modern unit trust has galvanised support for the idea that, in some circumstances, the constituent instrument of a commercial trust may be regarded as a contract or as comprising contractual elements.169 In National Nominees Limited v Agora Asset Management Pty Ltd (No 2) [2011] VSC 425 the Victorian Supreme Court held at [17]—[19] that a MIS constitution comprised a ‘binding contract between the RE [responsible entity] and all of the unit holders’ and was ‘part of the contractual matrix governing the legal relations between [the] RE and the respective unit holders in relation to matters relevant to the [trust]’.170 Of course if, as is often the case in closely-held commercial trusts, part of the terms of trust are contained in an agreement to which all the unit holders are party (usually called a ‘Unit Holders Agreement’ or similar) there is little [page 91]

doubt that that agreement is contractual: see AMP Capital Property Nominees Ltd v Westfield Management Ltd [2011] NSWCA 386.171 2.129 Further, the existence of a trust instrument does not preclude unit holders from contracting with the trustee outside the finite terms of the trust instrument in relation to matters pertaining to the trust and the trust relationship between them; such contracts have been called ‘special contracts’.172 These may have the effect of expanding or limiting the obligations, duties or liabilities of one or the other of them. In Smith v Permanent Trustee Australia Ltd (1992) 10 ACLC 906, a case concerning a trust deed of a unit trust regulated under the predecessor of Corporations Act Chapter 5C, the court proceeded on the basis that the trust deed conferred ‘contractual and equitable rights’ on the unit holders. Provisions in a unit trust deed which govern the issue, repurchase and redemption of units as between trustee and unit holder beneficiaries have been held to be contractual as between the trustee and unit holder.173 2.130 It would thus be overly simplistic to dismiss, as some have done (see, for example, the discussion in 1.72–1.73), contractarian theory as inapplicable to trusts simply because trust and contract are located in separate doctrinal genera.

The trustee-beneficiary relationship: ‘the flexible interplay of law and equity’174 2.131 The nature of a trustee’s fiduciary and other equitable duties was explored briefly in 2.29–2.37. It has been noted that those duties are neither fixed in content nor immutable; subject to an ‘irreducible core’ they are susceptible to modification to a very large degree, a point discussed more fully in Chapter 4. The ‘personal element’ of the trust enjoys the benefit of almost infinite flexibility. 2.132 The contractualisation of the trustee-beneficiary relationship directly engages the interplay between fiduciary law and contract law: The origins and nature of contract and trust are, of course, quite different. There is however no dichotomy between the two. The contractual relationship provides one of the most common bases for the establishment or implication and for the

[page 92] definition of a trust … An action to vary the terms of a trust could, in some cases, properly be seen as an action affecting a contract pursuant to whose terms the trust was established and governed.175

2.133 Contract is sourced in the common law while trust and fiduciary law are emanations of equity. On their face, they would appear to be strange bedfellows. Traditionally, the common law of contract contemplates commercial rivalry, vigorous negotiation, freedom of contract, caveat emptor and the free pursuit of self-interest, with minimal controls.176 This bears little congruence with equity’s emphasis on protecting those perceived as vulnerable, manifested by recognising or imposing, in appropriate circumstances, a duty on a party to abnegate selfinterest and act loyally and selflessly in the best interests of another, even at its own expense. Justice Keane noted, extracurially, that: The fiduciary obligation is a special exception to the acceptance of selfishness as a fact of life. The common law recognises the legitimacy of selfish behaviour so long as it is honest and reasonable.177

2.134 Yet, fiduciary duties may co-exist and interrelate with common law modes such as contract in the same factual matrix where parties have entered into a given relationship voluntarily. Indeed, company law itself has been described as being ‘organised around the poles of contract law and fiduciary duties … an antinomy between self-interest and selflessness’.178 The House of Lords observed that ‘there is surely no difficulty in recognising the co-existence in one transaction of legal and equitable rights and remedies’179 and ‘the existence of a contract does not exclude the co-existence of concurrent fiduciary duties (indeed, the contract may well be their source); but the contract can and does modify the extent and nature of the general duty that would otherwise arise’.180 The High Court of Australia has held to similar effect.181 [page 93] 2.135 Fiduciary law is not inimical to contract law; ‘fiduciary duties may

be superimposed upon contractual obligations’,182 but not ‘in such a way as to alter the operation which the contract was intended to have according to its true construction’.183 A fiduciary relationship may be created by contract, but a contractual relationship may also exist between parties to a relationship which is fiduciary in nature, such that regulation and enforcement of the arrangement is influenced by a combination of contract and fiduciary law.184 2.136 In any case, fiduciary and related equitable duties do not descend on a given relationship as a pre-packaged bundle; whether or not a fiduciary relationship exists, and the range and scope of attendant duties if it does, depend to a very large extent on the nature of the engagement between the parties and the circumstances in which they engage, including in particular any agreements between them. The House of Lords has acknowledged this: The phrase ‘fiduciary duties’ is a dangerous one, giving rise to a mistaken assumption that all fiduciaries owe the same duties in all circumstances. That is not the case … the extent and nature of the fiduciary duties owed in any particular case fall to be determined by reference to any underlying contractual relationship between the parties.185

2.137 Justice Frankfurter of the United States Supreme Court, in a wellknown passage, put it this way: … to say that a man is a fiduciary only begins analysis; it gives direction to further inquiry. To whom is he a fiduciary? What obligations does he owe as a fiduciary? In what respect has he failed to discharge these obligations? And what are the consequences of his deviation from duty?186

2.138 At the core of fiduciary and related equitable duties are the key characteristics, in various mixtures, of vulnerability, dependence, reliance, trust and confidence.187 However, the scope and reach of duties on any given trustee will be determined by the nature of the trust and the contents of the trust instruments. A person is not obliged to accept the office of trustee under an express trust, but if he, she or it does so, the range of duties applicable to [page 94] the nature of the trust will arise from the undertakings so accepted.188 As

Lord Selbourne LC said in Barnes v Addy (1874) LR 9 Ch App 244 at 251, ‘those who create a trust clothe the trustee with legal power and control over the trust property, imposing on him a corresponding responsibility’. 2.139 Until relatively recently, Australian courts espoused a reluctance to extend fiduciary concepts into commercial relationships outside the established categories, while at the same time emphasising that these categories are infinitely varied and are not closed.189 In one sense, a flexible approach to fiduciary concepts in the commercial context can be seen as a trade-off for admitting such duties into the commercial context in the first place. If, despite the traditional reluctance to import fiduciary principles into commerce they are permitted to encroach (or, as in the case of the trust, are inherent in the relationship), then it is arguably a necessary corollary that parties in that context ought to be given maximum freedom to mould them, or even exclude them, at the outset of their relationship or venture to suit their bargain. The argument must apply a fortiori where the parties have voluntarily chosen to place themselves within the equity jurisdiction by consciously selecting the trust as their commercial vehicle.190 While freedom of contract is not, in modern Australian commerce, an unfettered doctrine, it remains a powerful guiding principle in adjudicating disputes between sophisticated commercial parties bargaining at arm’s length: see Maggbury Pty Ltd v Hafele Aust Pty Ltd (2001) 210 CLR 181. [page 95] 2.140 A keystone precept of the American law and economics movement and the jurisprudence it has generated is the almost complete malleability of fiduciary and related equitable duties in commercial contexts; indeed, this is at the heart of contractarian theory. A premise of this theory is that the body of fiduciary law performs a gap-filling function to protect parties where they have entered into a trust or agency arrangement which is not completely and perfectly documented, in effect implying terms which the parties might have chosen if they had directed their minds to relevant issues.191 Thus, fiduciary obligations, even for a trustee, are not absolute.

Subject to the ‘irreducible core’ discussed in 4.36 and following, parties who wish, for commercial reasons, to modify the implied fiduciary overlay are free to negotiate it: see Leerac Pty Ltd v Fay [2008] NSWSC 1082.

THE PARITY MYTH AND HOW IT IS ENCOURAGED 2.141 The defining characteristics of the trust which distinguish it from the company have not prevented the trust from being contractualised to resemble a company and put to very similar commercial risk-taking applications as the company. In the form of public unit trusts and, latterly, registered MIS, they have been allowed, and indeed encouraged, to raise funds from the public and to expand and grow large, including via listing on the ASX. Investors have been encouraged to disregard the legal differences as commercially insignificant, and to focus instead on the differentiating economic benefits. From an investor’s point of view, for commercial purposes units in a unit trust may appear to be indistinguishable from shares in a company: this aspect is discussed further in the next chapter. Creditors and other external counterparties who are not well enough advised may deal with a commercial trust on the same or similar terms on which they would deal with a company of similar size and creditworthiness: this is the focus of Chapter 5. This perception of parity, however, is a myth. 2.142 Why and how has the parity myth emerged? The answer is threefold: first, there are genuine economic and functional similarities between the company and the commercial trust and, to a lay investor, their similarities are more apparent than their differences; [page 96] second, promoters and advisers in the Australian market have quite consciously striven to make the commercial trust mimic the company as far as legally possible through structuring and documentation techniques; and

third, legislators and regulators have blurred the distinction between them, both actively and by omission, perpetuating a regulatory regime that encourages a perception of parity in fact but without assuring it in law.

Functional similarities between the company and the commercial trust 2.143 A comparison between the trust and the company admits of both a legal and an economic dimension. An intending investor or creditor who was to take a solely or primarily legal approach might focus on the risks attending the trust form and, as a result, might eschew it as an investment option but in doing so would forgo certain economic advantages, while one who takes a solely or primarily economic approach might favour trusts but fail to appreciate fully the attendant legal risks. It is argued that many investors (and creditors) fall into the latter category. 2.144 If the focus is primarily economic, the company and the commercial trust can appear to be almost identical. In a leading decision on Massachusetts trusts, Morrissey v Commissioner 296 US 344 (1935), the United States Supreme Court described in detail ‘the salient features of a trust — when created and maintained as a medium for the carrying on of a business enterprise and sharing its gains — which may be regarded as making it analogous to a corporate organization’ at 359–60. In State Street Trust Co v Hall 41 NE 2d 30 (1942) the Supreme Judicial Court of Massachusetts said, of the Massachusetts trust before it, that ‘not only does this trust differ in its essential features from an ordinary partnership, but it possesses many of the attributes that are characteristic of a corporation … The sum total of these distinctive features of a business trust has brought trusts into such close resemblance to corporations that they have been frequently considered as corporations’ at 33. 2.145 And so it is in Australia. As legal forms, both the company and the trust are capable of providing a supporting framework for the aggregation and management of invested assets in the carrying on of enterprise. As with the trust, from certain perspectives the company may itself be

regarded as a ‘fund’. As with the company, from certain perspectives the trust may be regarded as a ‘firm’. Their similarities are numerous: Both forms can be used to attract and pool equity funds from a potentially infinite number of investors. Both are sufficiently flexible to accommodate a low-value singlepurpose venture between a small fixed group of investors with restricted transferability [page 97] of interests, and a high-value multi-purpose enterprise entity among an open-ended class of investors whose interests are freely tradeable on a public securities exchange. Both can be used to borrow or otherwise raise financial accommodation from arm’s length financiers. Both place invested funds in the control of managers (or, in law and economics terms, ‘agents’) who may be separate from and otherwise unrelated to the economic owners. A company has a board of directors while a trust has a trustee, which may be empowered to perform similar functions. In both cases, in larger enterprises those managers/agents will appoint a chief executive and a management team to exercise delegated executive functions under their oversight and supervision. In both cases, those managers/agents are vested with broad discretionary authority to take risks with the invested equity and debt capital for the purpose of generating profits on behalf of the equity investors, whose expectations for return on their investment are risk and profit based. Equity investors in both enjoy the benefit of an inbuilt fiduciary regime for moderating that broad discretionary authority and controlling those managers/agents. In both cases prima facie rules within these regimes are able to be

modified to reflect more closely the specific bargain between the participants, by terms in the constituent instrument and ancillary documents. In both cases equity investors’ participation will be segregated and separately identified to facilitate the distribution of profits and capital, and transferability. 2.146 American law and economics theorists have sought to equate companies and commercial trusts in economic or ‘enterprise’ terms, the overriding theme being that, economically and functionally, companies and commercial trusts should be regarded as equivalents. Sitkoff described the central feature of both the corporation and the trust as the separation of ownership and control of value and saw them as competitors for investors’ funds; some empirical research has been conducted along those lines.192 Schwarcz similarly drew the fiduciary parallel between the two forms, focusing on the separation of management and ownership and the attendant fiduciary overlay, and aligned them by reference to [page 98] several key indicators.193 Langbein saw the trust as ‘locked in a sort of Darwinian struggle against other modes of business organization and finance, in particular the corporation’.194 Klein and others have distilled the essential elements of the bargain among participants in any business venture, regardless of form, by reference to risk.195 Collectively, their message is clear: commercial trusts and companies are both business associations and, indeed, are sufficiently similar to be validly compared and even equated for some purposes.

The trust mimics the company: the role of promoters and advisers 2.147 While the lack of legal personality is at the root of many of the issues the subject of this book, conversely it is also the heart of one of the four foundational attributes of the trust: flexibility. It is clear that, utilising

the unit trust form and with careful drafting of the trust instrument, the commercial trust can be made to resemble very closely an incorporated company. Indeed, this is precisely what occurred in England with the pre1844 unincorporated joint stock company, and in the United States with the Massachusetts trust. There is very little about the company that cannot be replicated; for example, of the six fundamental characteristics of the incorporated form which are generally considered to be the reasons for its success — separate legal personality, the facility to bundle together multiple smaller investments into a single larger corpus, continuity of existence, limited liability for investors, centralised management separate from economic ownership with inbuilt controls based on fiduciary principles, and transferability of equity interests — the trust may be made to offer all of them except the first (subject, in relation to continuity of existence, to the rule against perpetuities in some places and the qualifications regarding limited liability discussed in the next chapter). 2.148 In the United States there is a generous menu of options for promoters seeking an appropriate business entity for their multipleparticipant venture or enterprise. By contrast, the choices available to promoters in Australia remain limited, in effect, to the same two that have been available since the 19th century: [page 99] the company and the trust.196 Behaving self-interestedly, given the choice between two entity forms, promoters and investors will tend to select that which provides them with the greatest advantages, so long as the risks are no greater or at least are able to be managed satisfactorily by private means. 2.149 In Australia’s sophisticated commercial market, promoters who choose the trust form acknowledge that, if left unmodified, it suffers certain shortcomings in the commercial context, and so will structure their arrangements through bargaining and documentation techniques with a view to neutralising those shortcomings in an endeavour to achieve the desired alignment with the corporate form. This is contractualisation at

work and evidences the application to the trust of the contractarian notion that multiple-participant business organisations, regardless of legal form, can be analysed by reference to the economic bargains struck (or ‘contracted’) between the principal participants in it. By this process participants seek to allocate risks and returns in such a way as to create an economic enterprise in which all participants feel they have an opportunity to maximise their satisfaction, with an ‘efficient’ allocation of risks to those who ought economically to bear them (or who are prepared to be paid to bear them), and of resources to those who can most efficiently exploit them (or who are prepared to pay to receive them). Although the endeavour to modify the trust, and commercial trust participants’ rights and risks, appears not to have been overtly described in Australia as an application of law and economics theory, it is plainly so — the trust has been contractualised so that it has become an enterprise entity. 2.150 The problem appears to be that those who engage in this process, and those who invest in vehicles so structured, do not always appreciate that the alignment is imperfect. Canadian trusts academic Lionel Smith describes how ‘professionals such as lawyers and accountants may lead their clients astray as a result of a failure to appreciate the juridical nature of the trust relationship’.197 The failure of advisers to appreciate the differences has been acknowledged [page 100] by the courts.198 Thus has the parity myth been encouraged by promoters and, indeed, by investors’ own advisers.

Blurring the distinction: the role of legislators and regulators 2.151 On the one hand investors, aided by their tax and accounting advisers and promoters, may have a perception of parity as between companies and commercial trusts, while on the other hand expert legal

advisers will tell them that they are fundamentally different. What role have Australian legislators and regulators had to play in this outcome? 2.152 The authors of Ford on Corporations Law have noted at [1.360] that, ‘although unit trusts resemble companies in function, they and all other trusts are fundamentally different under basic law. That is not to say that a legislature cannot pass legislation blurring the distinctions’. There is a compelling argument that those responsible for enacting and supervising Australian laws applicable to the commercial trust have perpetuated regimes that encourage a perception of parity in fact but without ensuring it in law. 2.153 Slater argued that the evolution in Australia of the trading trust generated ‘a belief in the authors of Australian tax legislation that “a trust” is no more than a specialized version of a company whereby income passed through the “entity” without suffering company tax on the way. … [T]his misconception has had a pernicious effect not only on the language of the legislation but also on its administration’.199 Smith makes similar observations about Canadian tax and other legislation.200 2.154 Even apart from the fact that the statutory regime which governs MIS appears in the Corporations Act, in what appears to be a short-hand way of achieving some sort of regulatory order and revenue capture for those trusts which functionally resemble corporations, certain statutes and other regulatory instruments assume or deem a trust to be an entity for certain purposes, particularly in the tax and accounting spheres. Income Tax Assessment Act 1997 (Cth) [page 101] s 960-100 and s 184-1 of the GST legislation, deem both a trust and a superannuation fund to be an ‘entity’ for certain purposes under that legislation. A ‘trading trust’ may have its own Australian business number (or ‘ABN’) and tax file number. Corporations Act Ch 2M requires MIS to prepare financial reports on an entity basis and deems the debts incurred by the responsible entity in operating the scheme to be debts of the scheme:

s 285(3)(c). Australian Accounting Standard AASB 101 (Presentation of Financial Statements) defines ‘entity’ for reporting purposes as ‘any legal, administrative, or fiduciary arrangement, organisational structure or other party (including a person) having the capacity to deploy scarce resources in order to achieve objectives’, and paragraph [80] of that Standard makes it clear that this includes trusts. For most purposes under the Corporations Act, s 64A defines the expression ‘entity’ to include trusts. Under the PPSA, a security interest granted by a trustee over trust property, where the trust has an ABN or, in the case of a registered MIS, an ARSN, may be registered against the trust’s ABN or ARSN. 2.155 The Corporations Act and the ASX Listing Rules align listed MIS with companies, and shares with units, in many respects relevant to the way they are dealt with and regulated. For example, the definition of ‘securities’ in the Corporations Act s 92, a term which is used throughout the Act to regulate dealings and conduct, includes ‘interests in a managed investment scheme’. Apart from certain specific exceptions, the ASX Listing Rules make no distinction between company shares and interests in MIS. The Corporations Act extends the takeover provisions in the Act to listed MIS through a series of deemings in s 604 which align a scheme with a company. By the definition in s 9 of the Act, a ‘constitution’ is defined to mean both the trust instrument for a MIS and the constituent document for a company (which before 1 July 1998 was called the ‘memorandum and articles of association’). The statutory rules for the calling and conduct of meetings of shareholders and members of registered MIS are substantially identical: see the Corporations Act Pts 2G.2 and 2G.3 for shareholder meetings and Pt 2G.4 for meetings of members of registered MIS. Shares in a company and units in a related MIS are sometimes ‘stapled’ so that they may be listed and traded together, as if they were a single security.201 [page 102] 2.156 The legislative alignment manifests by omission also, and this is apparent in the various investor protection provisions relating to registered MIS in the Corporations Act, the ASX Listing Rules and, until very

recently, ASIC guidance instruments. It is perhaps surprising that there is no express requirement to identify and explain the differences between companies and trusts, or the trust law-specific risks for both equity investors and creditors discussed in this book and elsewhere in the literature, in the establishment of a MIS, the listing of a scheme on the ASX or public disclosure requirements for the raising of debt or equity funds. While it is generally understood that the Corporations Act adopts a ‘principles-based’ approach to regulation in these circumstances which is designed to avoid the checklist attitude encouraged by previous disclosure regimes, in mandating general touchstones like ‘significant risks’ and matters which investors ‘reasonably require to make an informed assessment’, there is an embedded assumption that promoters and their advisers are alert to the issues and their complexities, and will make appropriate disclosure to investors accordingly.202 2.157 Further, ASIC guidance in relation to directors’ personal liability for insolvent trading appears to ignore the question of trusts and MIS altogether, a puzzling omission when one considers the additional complexities for directors of corporate trustees. 2.158 The implied message from the legislators and regulators could be interpreted to be that the differences are not material.

SEPARATE LEGAL FRAMEWORKS: REGULATORY DISSONANCE AND THE QUESTION OF EFFICIENCY 2.159 In 1980, Australian equity scholar and later judge of the Federal Court of Australia, John Lehane, observed that: In general terms, company law — both statutory and general — proceeds on the assumption that it is normal and appropriate for a trading concern to be organised as a company incorporated under the Companies Act [a predecessor of the Corporations Act]. It is not unfair to say that the whole of trust law — both statutory and general — proceeds on the contrary assumption about trusts.203

[page 103]

2.160 In reviewing the literature on the comparison between the company and the trust it is apparent that those who take a predominantly economic approach (that is, investors and creditors and their non-legal advisers, as well as law and economics scholars) tend to focus on the similarities, while those whose analysis is predominantly focused on the legal aspects (judges, lawyers and legal scholars) tend to highlight the differences. The High Court of Australia, while noting the similarities, has highlighted the legal differences: see Commissioner of Taxation v Bamford (2010) 240 CLR 481; Commissioner of Taxation v Linter Textiles Australia Ltd (in liq) (2005) 220 CLR 592; and Charles v Federal Commissioner of Taxation (1954) 90 CLR 598. So too has the United States Supreme Court (Navarro Savings Association v Lee 446 US 462 (1979) at 462; Morrissey v Commissioner 296 US 344 (1935) at 359) and the superior courts in Canada: Everest Canadian Properties Ltd v Mallmann 2007 BCSC 312; and Markovzki v The Queen (1998) 52 DTC 2040. The authors of Ford on Corporations Law provide a list of differences at [1.360]–[1.370]. This is where the perception of parity comes unstuck; despite their similarities, there are differences between the company and the trust that no degree of contractualisation can bridge. 2.161 The defining characteristics of the commercial trust which distinguish it from the company can be distilled down to two: 1. the absence of separate legal personality; and 2. the absence of a fully evolved policy-based statutory regime to regulate them and the relationships among those who participate in them. All other differences flow as a consequence of one or both of these. Neither of these essential characteristics can be changed by private means. 2.162 The exploitation of these differences, via the commercial trust, to yield benefits for participants not available under a Corporations Act company, is described above as ‘regulatory arbitrage’. However, those benefits come at a price; in placing themselves outside the Act and within the legal framework that governs trusts, participants forgo certain protections and expose themselves to a range of uncertainties and legal risks.

2.163 It is undeniably true, as Professor Bryan has noted, that the general law of trusts offers a default regime of sorts in that it supplies a readymade set of gap-filling default rules and an ethical regulatory framework.204 This is the personal element of the trust and, as observed earlier in this chapter, is one of the reasons the trust became successful in commerce. However, as a regime for regulating [page 104] large and complex enterprise entities, Australian trust law suffers several quite fundamental structural weaknesses. It is not comprehensive in the commercial context because it was not developed specifically with the commercial enterprise in mind. With some exceptions, it is neither statutory nor readily accessible to the non-expert. It is not monitored, policed and enforced by executive government in the way that compliance with companies legislation is supervised through the agency of the primary regulator, ASIC. Its traditional ‘regulator’ and supervisor is the court of equity which, being part of the judicial arm of government, cannot act on its own initiative. Being based in equity, important remedies are in the discretion of the court and subject to a range of equitable defences which allow the court to investigate whether the plaintiff has conformed to certain standards of conscience in its behaviour; this has the potential ‘to produce relief in a form which could not have been wholly anticipated. Indeed … the final result may not exactly represent what either side would have wished for’.205 2.164 A central pillar of law and economics theory is efficiency, and any given body of organisational law may be analysed by reference to whether it facilitates or hinders efficiency. Posner observed that: … the primary utility of corporation law lies in providing a set of standard, implied contract terms … so that business firms do not have to stipulate these terms anew every time they transact, although they could do so if necessary. To the extent that the terms implied by corporation law accurately reflect the normal desires of transacting parties, they reduce the cost of transactions. The criterion of an efficient corporation law is therefore whether the terms do in fact reflect commercial realities, so that transacting parties are generally content with them. A corporation law that is out of step with those realities, and so induces contracting parties to draft waivers of the contract terms supplied by the law, is inefficient

because it imposes unnecessary transaction costs. Thus a corporation law is inefficient if it fails to provide standard implied contract terms that afford creditors the sorts of protections against default that they would normally insist upon in an express negotiation. Such a law can be criticized for creating avoidable costs of explicit negotiation.206

2.165 Modern Australian company law is the result of centuries of evolution in a commercial context, driven over time by a desire to facilitate the conduct of enterprise which, in liberal democracies with market-based economies, is seen as a social and economic good, and by a corresponding imperative to curtail behaviours of promoters, entrepreneurs, investors and advisers that were deemed [page 105] unfair, inappropriate, unacceptable or even fraudulent. As a consequence, it is a highly evolved, state-subsidised and enforced, statutory regulatory regime offering orderly risk allocation and investor and creditor protection commensurate with the nature of the investment (that is, equity versus debt), through an imposed framework of rules which support legitimate commercial endeavour. Ready examples of ‘efficient’ rules mandated by the Corporations Act are: the granting of legal entity status upon registration by s 119; the statutory abolition of ultra vires in ss 124 and 125 (see Part 2 of Appendix 1: ‘Extracts from the Corporations Act’); the abolition of the need for a constitution in favour of statutorily provided ‘replaceable rules’ in Pt 2B.4; the indoor management assumptions available to external counterparties under s 129 (see Part 2 of Appendix 1: ‘Extracts from the Corporations Act’); a finely tuned regime of directors’ duties in Pt 2D.1 which seeks to balance fiduciary-like responsibilities with the need to encourage (or at least not discourage) entrepreneurial risk-taking; a guarantee of limited liability for equity investors in s 516; and

the provisions in Ch 5 which impose a mandatory policy-based regime for dealing with insolvent companies which, among other things, gives creditors a clear priority over equity investors. 2.166 Together these mean that, in very large measure, the protective framework, risk allocation and legal protocols that participants would otherwise need to bargain for privately, both among themselves within the entity and when engaging with external parties, are imposed by law, thereby minimising transaction costs, reducing transaction delays and ameliorating the risk of litigation. 2.167 In stark contrast, trust law has no equivalents to any of these and can be argued to be inefficient in terms of its economic effect on the conduct of business via the trust vehicle, making the process of transacting by and with a commercial trustee riskier or more expensive or both. While it is apparent that, over time, the law governing corporations moved from predominantly common law to predominantly statute so that today the Corporations Act is almost, if not quite, a code, no such transformation has occurred in relation to Australian commercial trusts. This is so despite the state and territory trusts/trustee legislation (which is patently not designed for commercial trusts or equity investor and creditor protection) and the MIS regulatory regime in Ch 5C of the Corporations Act and the extension of other provisions of the Act to schemes; [page 106] the Act governs trusts ‘only in limited circumstances’.207 Even apart from the fact that it does not regulate all trusts which engage in commercial activities, and does not confer the benefits of limited liability on equity investors (a curious omission when one considers the obvious investor protection bias in the Ch 5C regime), the structural criticism of Ch 5C as a governing regime is that it leaves much of the supervision and administration of MIS to the general law of trusts; ‘trust principles remain at the forefront’ and the structure of Ch 5C ‘brings with it an unavoidable overlay of trust law [and] the need in some areas to reconcile the statutory scheme with principles of trust law’.208

2.168 Further, Ch 5C in effect delegates almost all matters to do with insolvency and the winding up of MIS to the discretion of the courts, leaving them to find their own way and build a body of common law around the issues: this is discussed in Chapter 6. There is a rich irony in this; as discussed earlier in this chapter, before the enactment of general companies legislation in the mid-19th century the courts were left in a similar position with respect to collapsed joint stock companies. Then, even after that legislation was enacted, for a time the courts had little choice but to resort to trust law principles in adjudicating disputes involving the new incorporated entities. Today, in the absence of applicable trust law principles to fall back on, the courts have sought guidance from laws governing other business associations, such as company law and partnership law, although not without caution; some have noted, with evident regret, that company law does not and cannot apply to trusts, even those which support large commercial enterprises.209 2.169 As a result, terms and outcomes implied by trust law do not, to use Posner’s expression in the above extract, ‘accurately reflect the normal desires of transacting parties’ who participate in commercial trusts. This necessitates a high degree of ex ante due diligence and manipulation through negotiation, trade-offs, [page 107] risk reallocation and cost shifting, involving often highly detailed and complex documentation, thus ‘creating avoidable costs of explicit negotiation’. Residual uncertainties invite litigation when disputes arise or insolvency intervenes. 2.170 All of this makes trust law in its current form, even as modified by statute, much less appropriate as a regulatory regime for business associations than company law. The perception of parity is, indeed, a myth.

CONCLUSION

2.171 This chapter has traced the evolutionary path that saw the trust transformed from a guardian of privately held real estate to a vehicle for entrepreneurial endeavour in Australia via England. It has demonstrated that the trust did not emerge as a result of commercial needs or pressures. It has identified and analysed the foundational characteristics of the trust that made it attractive to those who, in the absence of readily available incorporation, sought to create business associations of greater size and complexity than the general partnership alone could comfortably accommodate. It explored the role of the trust in the evolution of the limited liability company in England and Australia and the effect of the enactment of general incorporation legislation on the commercial use of the trust in those places. And it investigated and analysed the emergence of the modern Australian commercial trust and the reasons for its success as a competitor to the company. Driven by certain tax advantages and the same attributes that saw the trust applied to commercial purposes prior to the enactment of general companies legislation, the trust became a competitor to the company but despite this was not, and even today is not, regulated in the way that companies are. 2.172 The trust evolved at the hands of market participants who understood the trust’s essential characteristics and realised that they could be used to put the trust to work in commerce. For it to be commercially useful, the trust required a high degree of manipulation because in its pure, unmodified form, it yielded outcomes for stakeholders that were not always consistent with commercial expectations. Participants appeared to grasp readily the principle that, with few exceptions, the duties, liabilities, rights and entitlements of trust participants which are ordained by the law of trusts are merely prima facie default rules and could be managed in a commercial context by careful drafting of trust instruments and related structural documents, often involving negotiation and bargaining and, eventually, use of a corporate trustee. Looking back from the modern perspective, it seems that, with this understanding, participants set about ‘contractualising’ the trust device into a business entity of great complexity [page 108]

so that, in the result, it closely resembled the incorporated company in form and function. 2.173 The danger for Australian participants in commercial trusts, however, lies in the misalignment between commerce and law. While contractualisation has transformed the trust into a commercial entity which is functionally and commercially very similar to a company, and which may be perceived by equity investors and creditors as providing them with a similar legal risk profile as if they had participated in a company, not all of the trust-specific legal risks they face can be eliminated by private means. In using the trust device in this way, participants place themselves within an entity that has no separate legal personality and an ancient legal framework that is not premised on facilitating commercial endeavour. While these differences create opportunities for regulatory arbitrage, the trade-off is the absence of company-like protections for participants. 2.174 The consequences of all of this for the three principal participants in the commercial trust, that is, equity investor, trustee and creditor, are the subject of the following chapters. 1.

Roderick P Meagher and William M C Gummow, Jacobs’ Law of Trusts in Australia (6th ed, Butterworths, 1997) at lxxxvii.

2.

Oliver Wendell Holmes, ‘Early English Equity’ (1885) 1 Law Review Quarterly 162 at 164; cf J L Barton, ‘The Medieval Use’ (1965) Law Quarterly Review 562. See, too, Oliver Wendell Holmes, The Common Law (Belknap Press of Harvard University Press, 1881) and James Barr Ames, Lectures on Legal History and Miscellaneous Legal Essays (Cambridge University Press, 1913).

3.

Joseph Story, Commentaries on Equity Jurisprudence as Administered in England and America (13th ed, Melville M Bigelow, Little Brown & Company, 1886), Volume II at 268–9.

4.

Maitland on Equity, Lecture III (The Modern Trust).

5.

Patrick A Keane, ‘The 2009 WA Lee Lecture in Equity: The Conscience Of Equity’ (2010) 84 Australian Law Journal 92 at 98 (quoting from Perre v Apand Pty Ltd (1999) 198 CLR 180).

6.

Mark J Leeming, ‘What is a Trust?’ (2008) 31 Australian Bar Review 211 at 36–7.

7.

David J Seipp, ‘Trust and Fiduciary Duty in the Early Common Law’ (2011) 91 Boston University Law Review 1011.

8.

Harris, Industrializing English Law at 148. Maitland cites a range of other burdens and consequences at law which were evaded by the use of the trust: Maitland on Equity at 26–7.

9.

Various examples are given throughout Oliver Wendell Holmes, The Common Law (Belknap Press of Harvard University Press, 1881). See generally William Blackstone, Commentaries on the Laws of England (Oxford Clarendon Press, 1765) at 63 and following and Henry Sumner Maine, On Early Law and Custom (J Murray, 1890) at 389 and following.

10. Earl of Oxford’s Case (1615) 1 Ch Rep 1 (per Lord Ellesmere). 11. As a threshold matter, it is convenient for the purposes of this discussion to draw the traditional distinction between rights recognised by the common law and those recognised in equity, and to adopt the popular generalisation that the common law was blind to the trust and the equitable interests and fiduciary duties connected with it. This is, however, an oversimplification. Recent scholarship has shown that historically the relationship was much more nuanced, and that trust and fiduciary-like concepts existed in the common law even before the trust evolved: see David J Seipp, ‘Trust and Fiduciary Duty in the Early Common Law’ (2011) 91 Boston University Law Review 1011 and Mark J Leeming, ‘What is a Trust?’ (2008) 31 Australian Bar Review 211. 12. Scott on Trusts at §1.1. The authors go on to say that the trust is ‘something unique: a form of double ownership’. The Federal Court of Australia has said that ‘a trust estate … will be that property the ownership of which is divided between trustee and beneficiary’: Federal Commissioner of Taxation v Commercial Nominees of Australia Ltd (1999) 167 ALR 147; [1999] FCA 1455 at [51]. See also the Restatement at §74. 13. Ford & Lee on Trusts at [23.010]; Bogert on Trusts at §1. Lindley LJ observed that trusts were ‘equitable obligations to deal with property in a particular way’: Re Williams [1897] 2 Ch 12 at 18. 14. See Paul Matthews’ essay on Burgess v Wheate (1759) 1 Wm Bl 123; 96 ER 67 in Charles Mitchell and Paul Mitchell (eds), Landmark Cases in Equity (Hart Publishing, 2012) at 115. 15. John H Langbein, ‘The Secret Life of the Trust: The Trust as an Instrument of Commerce’ (1997) 107 Yale Law Journal 165 at 165. 16. Thomas & Hudson on Trusts at 5. 17. Kent D Schenkel, Trust Law and the Title-Split: A Beneficial Perspective (Selected Works, 2009) at 5. 18. Dale Pinto and Stewart Karlinsky, ‘Darwinian Evolution of the Taxation of Trusts: A Comparative Analysis’ (2007) 10(2) Journal of Australian Taxation 251 at 253. 19. See Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 at 696 (per Lord Browne-Wilkinson). A discussion of the relationship between rights in personam and rights in rem in the equitable jurisdiction and the consequences of the decision in Penn v Lord Baltimore (1750) 1 Ves Sen 444; 27 ER 1132 is in Paul Mitchell’s essay in Charles Mitchell and Paul Mitchell (eds), Landmark Cases in Equity (Hart Publishing, 2012) at 87. See further the discussion of potential accessorial liability for external counterparties dealing with trustees in Chapter 5. 20. Elise Bant, ‘Trusts, Powers And Liens: An Exercise in Ground-Clearing’ (2009) 3 Journal of Equity 286 at 288. 21. Frederic W Maitland, The Unincorporated Body (Collected Papers, 1903) (emphasis added). 22. M Scott Donald, ‘Prudence under Pressure’ (2010) 4 Journal of Equity 44 at 45 (citations omitted). For a historical account of the judicial development of these rules as the trust moved towards a more commercial setting, see Chantal Stebbings, The Private Trustee in Victorian

England (Cambridge University Press, 2002), Chapter 5: ‘Trustees in the Commercial Context’ and, specifically in relation to the development of the trustee’s duty of care, Joshua Getzler’s essay, ‘Duty of Care’, in Peter Birks and Arianna Pretto, Breach of Trust (Hart Publishing, 2002) at 41. A useful discussion is also in Ford & Lee on Trusts at [12.012]. 23. Joshua Getzler, ‘Fiduciary Investment in the Shadow of Financial Crisis: Was Lord Eldon right?’ (2009) 3 Journal of Equity 1 at 8. The duties of care, skill, diligence and prudence in the management of trust property are now clarified by statute, and the standard will differ depending on the qualifications of the trustee and the nature of the trust property: see Trustee Act 1925 (NSW) s 14A; Trustee Act 1958 (Vic) s 6; Trusts Act 1973 (Qld) s 22; Trustees Act 1962 (WA) s 18; Trustee Act 1936 (SA) s 7; Trustee Act 1898 (Tas) s 9; Trustee Act (NT) s 7; Trustee Act 1925 (ACT) s 4A. 24. See Harris, Industrializing English Law at 152–3. 25. Byrnes v Kendle (2011) 243 CLR 253; [2011] HCA 26 at [119] (per Heydon and Crennan JJ). See also Nestle v National Westminster Bank plc [1994] 1 All ER 118. 26. M Scott Donald, ‘Prudence under Pressure’ (2010) 4 Journal of Equity 44 (quote from page 70). 27. John H Langbein, ‘The Contractarian Basis of the Law of Trusts’ (1995) 105 Yale Law Journal 625 at 632. 28. Bray v Ford [1896] AC 44 at 51, affirmed in Boardman v Phipps [1967] 2 AC 46 at 123 (per Upjohn LJ). 29. There is detailed analysis of the taxonomy and nature of remedies available against trustees for breach in Robert Chalmers essay, ‘Liability’, in Peter Birks and Arianna Pretto (eds), Breach of Trust (Hart Publishing, 2002). See also James Edelman’s essay on Nocton v Lord Ashburton [1914] AC 932 in Charles Mitchell and Paul Mitchell (eds), Landmark Cases in Equity (Hart Publishing, 2012) at 473. 30. A prime example is the power given to the courts by statute to forgive breaches of trust if the trustee’s actions are honest and reasonable, discussed in 4.82. 31. Maitland on Equity, Lecture IV (Uses and Trusts). For a modern analysis, see Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 at 696 (per Lord BrowneWilkinson). 32. Lawrence M Friedman, A History of American Law (3rd ed, Touchstone Simon & Shuster, 2005) at 393. 33. James Edelman, ‘When do Fiduciary Duties Arise?’ (2010) 126 Law Quarterly Review 302 at 304. 34. Maguire v Makaronis (1997) 188 CLR 449 at 473. 35. Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at 96 (per Mason J). 36. Pilkington v IRC [1964] AC 612. There has long been a qualification on the strictness of this rule and that is that the trust may employ agents to perform some functions. Trustees’ powers of delegation are now provided for and regulated by statute, but only in limited circumstances: see Trustee Act 1925 (NSW) Pt 2 Div 3; Trustee Act 1958 (Vic) s 30; Trusts Act 1973 (Qld) s 56; Trustees Act 1962 (WA) s 54; Trustee Act 1936 (SA) Pt 2 Div 2; Trustee Act 1898 (Tas) s 5AA; Trustee Act 1925 (ACT) Pt 2 Div 2.3. For responsible entities of registered MIS a power of delegation is enshrined in s 601FB(2) of the Corporations Act. A well-drafted trust instrument will always expressly empower the trustee to appoint and act through agents and

other delegates. 37. Brian Fletcher as trustee of the Brian Fletcher Family Trust v St George Bank Ltd (No 2) [2011] WASC 277 at [115] (citations omitted). 38. See, for example, Jacobs on Trusts, Chapters 16–19; Meagher, Gummow & Lehane, Chapter 5; Thomas & Hudson on Trusts, Chapters 10–12; Lewin on Trusts, Chapters 34–37; Waters on Trusts, Chapters 18–20; Paul D Finn, Fiduciary Obligations (The Law Book Company Ltd, 1977). The authors of Underhill on Trusts list 14 quite specific and distinct duties at [42.1]– [56.1]. In the United States, see the Restatement (Third) of Trusts, Chapter 15: ‘Specific Duties of Trusteeship’ and §86: Fiduciary Duties and the Exercise of Trustee Powers. 39. Robert Chalmers, ‘Liability’, in Peter Birks and Arianna Pretto (eds), Breach of Trust (Hart Publishing, 2002) 1 at 5. 40. Pamela Hanrahan, ‘The Responsible Entity as Trustee’ in Ramsay (ed), Key Developments in Corporate Law and Trusts Law (2002) at 232–9. 41. Leon Firios, ‘Precluding prescriptive Duties in Fiduciary Relationships: The Problems With the Proscriptive Delimitation’ (2012) 40 Australian Business Law Review 166. 42. Harris, Industrializing English Law at 157. 43. Breen v Williams (1996) 186 CLR 71 at 113; Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187 at 237; Bristol & West Building Society v Mothew [1998] Ch 1 at 16– 17. For further discussion, see Ford & Lee on Trusts at [9.100] and Matthew Conaglen, Fiduciary Loyalty: Protecting the Due Performance of Non-fiduciary Duties (Hart Publishing, 2010), Chapter 3. 44. William M C Gummow, ‘The Equitable Duties of Company Directors’ (2013) 87 Australian Law Journal 753 at 754. 45. Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22; Westpac Banking Corporation v The Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1; [2012] WASCA 157 at [897]. 46. See also Underhill on Trusts at 432 and Jacobs on Trusts at [1704]–[1710]. 47. See Trustee Act 1925 (NSW) s 85; Trustee Act 1958 (Vic) s 67; Trusts Act 1973 (Qld) s 76; Trustees Act 1962 (WA) s 75; Trustee Act 1936 (SA) s 56; Trustee Act 1898 (Tas) s 50; Trustee Act (NT) s 49A; Trustee Act 1925 (ACT) s 85. See also the discussion at 4.81 and following. The history of these provisions was discussed extracurially by Justice Bergin of the New South Wales Supreme Court in Patricia Bergin, ‘The Repentant Trustee’ (Paper presented at the Law Society of South Australia and The Adelaide Branch of the Society of Trust and Estate Practitioners Trusts Symposium, Adelaide SA, 2011). 48. Geraint W Thomas, ‘The Duty of Trustees to Act in the “Best Interests” of Their Beneficiaries’ (2008) 2 Journal of Equity 177 at 177. A useful conspectus of the authorities and literature on the meaning and scope of the best interests duty is contained in ASIC v Australian Property Custodian Holdings Limited (rec & mgrs apptd) (in liq) (controllers apptd) (No 3) [2013] FCA 1342 at [450] and following. For responsible entities of registered MIS, the best interests duty is enshrined in Corporations Act s 601FC(1)(c). MIS constitutions will usually also state it expressly. 49. Bray v Ford [1896] AC 44 at 51–2 (per Lord Herschell); Breen v Williams (1996) 186 CLR 71 at 108 (per Gaudron and McHugh JJ); Boardman v Phipps [1967] 2 AC 46. For further discussion, see Michael Bryan’s essay in Charles Mitchell and Paul Mitchell (eds), Landmark

Cases in Equity (Hart Publishing, 2012) at 581. See also the discussion at 4.27–4.31. 50. Boardman v Phipps [1967] 2 AC 46 at 123 (per Upjohn LJ); Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134. See also Bell Group (in liq) v Westpac Banking Corp (No 9) (2008) 225 FLR 1 at [4501]–[4503]; and Underhill on Trusts at [10.115]. 51. See Joshua Getzler, ‘Duty of Care’, in Peter Birks and Arianna Pretto (eds), Breach of Trust (Hart Publishing, 2002) at 41–74 in relation to this point and a discussion of the historical underpinnings of the duty. See, more generally, Jacobs on Trusts at [1718]. The question whether the trustee’s duty of care is fiduciary in nature is the subject of some controversy: see William M C Gummow, ‘Equity: Too Successful?’ (2003) 77 Australian Law Journal 30 at 39; John Dyson Heydon, ‘Are the Duties of Company Directors to Exercise Care and Skill Fiduciary?’ in Simone Degeling and James Edelman (eds), Equity in Commercial Law (Lawbook Co., 2005) and Matthew Conaglen, Fiduciary Loyalty: Protecting the Due Performance of Non-fiduciary Duties (Hart Publishing, 2010) at 35–9. For responsible entities of registered MIS, a duty of reasonable care and diligence is imposed by Corporations Act s 601FC(1)(b). 52. Bristol & West Building Society v Mothew [1998] Ch 1 at 18 (per Millet LJ); Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41; United Dominion Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1. 53. As to the difference between the fiduciary’s duty of good faith and the contractual or general duty of the same name, see James Edelman, ‘When do Fiduciary Duties Arise?’ (2010) 126 Law Quarterly Review 302 at 323–5. 54. Breen v Williams (1996) 186 CLR 71 at 108. 55. See generally Pilmer v The Duke Group Ltd (in liq) (2001) 207 CLR 165 at 195–201 (per McHugh, Gummow, Hayne and Callinan JJ); Meagher, Gummow & Lehane at [5–005]; David Hayton, ‘Unique Rules for the Unique Institution, the Trust’ in Simone Degeling and James Edelman (eds), Equity in Commercial Law (Lawbook Co., 2005); Patrick A Keane, ‘Equitable Doctrines and Financiers’ Liabilities’ (Paper presented at the Banking & Financial Services Law Association Annual Conference, Gold Coast Qld, August 2011). 56. Extracurially in Patrick A Keane, ‘The 2009 WA Lee Lecture in Equity: The Conscience of Equity’ (2010) 84 Australian Law Journal 92 at 99. 57. For a discussion of the operation of these duties, and the corresponding statutory duties under the Corporations Act, to a responsible entity of a registered MIS, see ASIC v Australian Property Custodian Holdings Limited (rec & mgrs apptd) (in liq) (controllers apptd) (No 3) [2013] FCA 1342. 58. As indeed they were by Justice Barrett, speaking extracurially: Reginald I Barrett, ‘Insolvency of Registered Managed Investment Schemes’ (Paper presented at the Banking & Financial Services Law Association Annual Conference, Queenstown NZ, July 2008) at 5. 59. See Underhill on Trusts, Chapter 22: ‘The liability of the trustees’; Lewin on Trusts, Part Five: ‘Breach of Trust and Remedies’; Meagher, Gummow & Lehane, Part Five: ‘Remedies’; Charles Rickett, ‘Understanding Remedies for Breach of Trust’ (2008) 11 Otago Law Review 603; Jeremy Birch, ‘Exemplary Damages for Breach of Fiduciary Duty’ (2005) 33 Australian Business Law Review 429; Matthew Conaglen, ‘Equitable Compensation for Breach of Fiduciary Dealing Rules’ (2003) 119 Law Quarterly Review 246; Sir Anthony Mason, ‘The Place of Equity and Equitable Remedies in the Contemporary Common Law World’ (1994) 110 Law Quarterly Review 238. In addition, the Corporations Act imposes certain statutory

sanctions for breaches of duty on companies which are trustees or responsible entities (see ss 601FC(5) and 1317E) and their directors (as to which, see the discussion in 1.49–1.50). 60. Yuri Grbich and others, Winding Up Trusts (CCH Australia Ltd, 1984) at 184. 61. Chantal Stebbings, The Private Trustee in Victorian England (Cambridge University Press, 2002) at 131. Stebbings argues that this was ‘to ensure the probity of trustees reflected the essential values and ideals of Victorian society’, at 173. 62. And yet, as Harris notes, ‘this is exactly what trustees of unincorporated companies were expected to do’: Harris, Industrializing English Law at 154. 63. Harris, Industrializing English Law at 150. 64. There are several (but not many) formal requirements for the creation and ongoing validity of an express trust and these are discussed in all of the standard texts and treatises: see, for example, Jacobs on Trusts at [104]–[110]. 65. John H Langbein, ‘The Contractarian Basis of the Law of Trusts’ (1995) 105 Yale Law Journal 625 at 636. See also Jacobs on Trusts at [1617] and Pamela Hanrahan, ‘The Responsible Entity as Trustee’ in Ramsay (ed), Key Developments in Corporate Law and Trusts Law (2002) at 246. 66. By contrast, the Trusts Act 1973 (Qld) reverses the prima facie position for some provisions by stating at the beginning of Part 6: ‘Indemnities and protection of trustees’ that ‘Except where otherwise provided in this part, the provisions of this part shall apply whether or not a contrary intention is expressed in the instrument (if any) creating the trust’: see s 65. 67. Frederic W Maitland, Equity — Also the Forms of Action at Common Law — Two Courses of Lectures (Cambridge University Press, 1929) at 23. 68. Nathan Isaacs, ‘Trusteeship in Modern Business’ (1929) 42 Harvard Law Review 1048 at 1052 and 1060–2. 69. See Aakash Desai, ‘Commercial Trusts and Securitisation: Lessons from the Global Financial Crisis’ (2010) 28 Companies & Securities Law Journal 10 at 11–12; Kalev J Crossland, ‘Unsecured Creditors and the “Uncorporation”: Issues with Trading Trusts Post Global Financial Crisis’ (2011) 17 Trusts & Trustees 183 at 187; Robert H Sitkoff, ‘Trust as “Uncorporation”: A Research Agenda’ (2005) University of Illinois Law Review 31 at 32; Roy Goode, Commercial Law (3rd ed, LexisNexis UK, 2004) at 151; Michael Bryan, ‘Reflections on Some Commercial Applications of the Trust’ in Ramsay (ed), Key Developments in Corporate Law and Trusts Law (2002) at 206–7; Henry Hansmann and Ugo Mattei, ‘The Functions of Trust Law: A Comparative Legal and Economic Analysis’ (1998) 73 New York University Law Review 434 at 472–3; John H Langbein, ‘The Secret Life of the Trust: The Trust as an Instrument of Commerce’ (1997) 107 Yale Law Journal 165 at 183–5. 70. Jonathan Hilliard, ‘The Flexibility of Fiduciary Doctrine in Trust Law: How Far Does it Stretch in Practice?’ (2009) 23(3) Trust Law International 119 at 129. 71. David Kershaw, The Path of Fiduciary Law (London School of Economics and Political Science, Law Dept, 2011) at 11 (fn 36), citing Palmer. The Acts it consolidated and superseded included, in addition to the 1844 legislation, An Act to Regulate Joint Stock Banks in England 1844; the Limited Liability Act 1855; the Joint Stock Companies Act 1856; the Joint Stock Companies Act 1857; the Joint Stock Banking Companies Act 1857; the Joint Stock Companies Amendment Act 1858; and An Act to enable Joint Stock Banking Companies to be formed on the principle of Limited Liability 1858.

Elders Trustee & Executor Co Ltd v E G Reeves Pty Ltd [1987] FCA 332 at [147]. See more 72. generally the historical conspectus in Harris, Industrializing English Law at 147–59. 73. Frederic W Maitland, The Unincorporated Body (Collected Papers, 1903). 74. Phillip Lipton, The Evolution of the Joint Stock Company to 1800: A Study of Institutional Change (Monash University Department of Business Law & Taxation Research Paper No 19, 2009). See also Colin A Cooke, Corporation Trust and Company: An Essay in Legal History (Harvard University Press, 1951); Harris, Industrializing English Law; Rob McQueen, A Social History of Company Law: Great Britain and the Australian Colonies 1854–1920 (Ashgate, 2009); David Kershaw, The Path of Fiduciary Law (London School of Economics and Political Science, Law Dept, 2011). 75. See, for example, Paul Johnson, Making the Market: Victorian Origins of Corporate Capitalism (Cambridge University Press, 2010), Chapter 4: ‘The incorporation of business’. 76. Joshua Getzler and Mike Macnair, ‘The Firm as an Entity Before the Companies Acts’ in P Brand, K Costello and W N Osborough (eds), Adventures of the Law: Proceedings of the Sixteenth British Legal History Conference, Dublin, 2003 (Four Courts Press, Dublin, 2005) at 268. 77. Frederick Pollock and Frederic W Maitland, The History of the English Law (Cambridge University Press, 1895), Volume 1 at 473. 78. For further discussion, see Harris, Industrializing English Law at 16–19 and Frederic W Maitland, Trust and Corporation (1904). Getzler and Macnair offer a compelling challenge to this ‘standard assumption’: see Joshua Getzler and Mike Macnair, ‘The Firm as an Entity Before the Companies Acts’ in P Brand, K Costello and W N Osborough (eds), Adventures of the Law: Proceedings of the Sixteenth British Legal History Conference, Dublin, 2003 (Four Courts Press, Dublin, 2005). 79. Harris, Industrializing English Law at 7. 80. See the discussion in George D Hornstein, ‘Judicial Tolerance of the Incorporated Partnership’ (1953) 18 Law & Contemporary Problems 435. 81. Henry Hansmann, Reinier Kraakman and Richard Squire, ‘Law and the Rise of the Firm’ (2006) 119 Harvard Law Review 1335 at 1383. 82. Officially ‘An Act for Better Securing Certain Powers and Privileges, Intended to Be Granted by His Majesty by Two Charters, for Assurance of Ships and Merchandise at Sea, and for Lending Money upon Bottomry; and for Restraining Several Extravagant and Unwarrantable Practices therein Mentioned 1720, 6 Geo 1, c 18’. 83. Section 18 of the Bubble Act 1720. 84. Leonard C B Gower, ‘Some Contrasts between British and American Corporation Law’ (1956) 69 Harvard Law Review 1369 at 371. Ford and Hardingham noted that promoters ‘were ready to avail themselves of any loophole that would enable them to carry out their plans without subjecting themselves to the ponderous and almost immovable processes of government’: Harold A J Ford and Ian J Hardingham, ‘Trading Trusts: Rights and Liabilities of Beneficiaries’ in Paul D Finn (ed), Equity and Commercial Relationships (Law Book Co, 1987) at 53, citing Du Bois, The English Business Company After the Bubble Act 1720–1800 (1938). 85. See the discussion in Phillip Lipton, The Evolution of the Joint Stock Company to 1800: A Study of Institutional Change (Monash University Department of Business Law & Taxation

Research Paper No 19, 2009) at 26–8. 86. Kevin Lindgren, ‘The Birth of the Trading Trust’ (2011) 5 Journal of Equity 1 at 4–5. 87. For a discussion of the deed of settlement as the predecessor of the companies’ memorandum and articles of association, and the historic role of the courts of equity in interpreting and enforcing them, see Peters’ American Delicacy Co Ltd v Heath (1939) 61 CLR 457 (per Dixon J). Scholars have noted the similarities between the deed of settlement and the trust deed for a modern public unit trust or MIS: Robert Allan Hughes, The Law of Public Unit Trusts (Longman Professional, 1992) at 28; Kevin Lindgren, ‘The Birth of the Trading Trust’ (2011) 5 Journal of Equity 1 at 16. 88. See Ford on Corporations Law at [2.160]. For a more detailed discussion, see Joshua Getzler and Mike Macnair, ‘The Firm as an Entity Before the Companies Acts’ in P Brand, K Costello and W N Osborough (eds), Adventures of the Law: Proceedings of the Sixteenth British Legal History Conference, Dublin, 2003 (2005). 89. Neil Andrews, ‘Comment on Corporate Law and Historical Methodology: a Critical Perspective by Rob McQueen’ (1996) 3 Canberra Law Review 15 at 15–16. 90. Colin A Cooke, Corporation Trust and Company: An Essay in Legal History (Harvard University Press, 1951) at 85. 91. Henry Hansmann, Reinier Kraakman and Richard Squire, ‘Law and the Rise of the Firm’ (2006) 119 Harvard Law Review 1335 at 1379. 92. Michael J Whincop, ‘Liberalism, Conservatism, and Economic Efficiency: Tradition and Change in the Values of Corporate Law’ (2000) 23 University of New South Wales Law Journal 111 at 112–13. 93. Michael Bryan, ‘Reflections on Some Commercial Applications of the Trust’ in Ramsay (ed), Key Developments in Corporate Law and Trusts Law (2002), at 219. 94. Harris, Industrializing English Law at 147. Harris’ enthusiasm for the trust in this context is qualified; he notes that it ‘was by no means an omnipotent device in the context of the unincorporated company’, at 157. 95. See in particular Sykes v Beadon (1879) 11 Ch D 170. 96. James Willard Hurst, The Legitimacy of the Business Corporation in the Law of the United States, 1780–1970 (The Law Book Exchange, Ltd, 1970) at 13. 97. Justice Gummow described trusts of the type at issue in this case as ‘the forerunners of the modern unit trust’: Elders Trustee & Executor Co Ltd v E G Reeves Pty Ltd [1987] FCA 332 at [151]. 98. Robert Allan Hughes, The Law of Public Unit Trusts (Longman Professional, 1992) at 32. 99. Ian M Ramsay, ‘Professor Harold Ford and the Development of Australian Corporate Law’ (2011) 29 Companies & Securities Law Journal 30 at 40. 100. Elders Trustee & Executor Co Ltd v E G Reeves Pty Ltd [1987] FCA 332 at [152]. 101. Macedonian Orthodox Community Church St Petka Inc v The Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66 at 93. Lord St Leonards’ Act is currently manifested in Australia in the provisions noted in fn 150 below. 102. See generally Joshua Getzler and Mike Macnair, ‘The Firm as an Entity Before the Companies

Acts’ in P Brand, K Costello and W N Osborough (eds), Adventures of the Law: Proceedings of the Sixteenth British Legal History Conference, Dublin, 2003 (2005). Vestiges of Chancery’s involvement are evident throughout the Corporations Act but relevantly in this context is the ‘just and equitable’ ground for winding up a company: see s 461(1)(k). Further, ‘even today when the Federal Court or a Supreme Court … orders that a company be wound up it is the court that administers the winding up through the insolvency practitioner … whom it appoints as liquidator and whom it treats as an officer of the court’: Ford on Corporations Law at [2.160]. See also Ashley K Ehlers, ‘The Inherent Equitable Jurisdiction and the Plenary Power of the Supreme Court of New South Wales to Order the Winding Up of Companies’ (2010) 18 Insolvency Law Journal 52. 103. Michael Lobban, ‘Nineteenth Century Frauds in Company Formation: Derry v Peek in Context’ (1996) 112 Law Quarterly Review 287 at 304, citing (1850–1851) 16 Law Times 181. 104. Harris, Industrializing English Law at 164. 105. These matters are discussed in detail in their historical context in Harris, Industrializing English Law. See also Michael Lobban, ‘Nineteenth Century Frauds in Company Formation: Derry v Peek in Context’ (1996) 112 Law Quarterly Review 287. 106. Sons of Gwalia Ltd v Margaretic (2007) 231 CLR 160; [2007] HCA 1 at [36]–[37] (per Gummow J). 107. Kevin Lindgren, ‘The Birth of the Trading Trust’ (2011) 5 Journal of Equity 1. The similarities between the unincorporated joint stock company and the Australian public unit trust had been noted also in Harold A J Ford and Ian J Hardingham, ‘Trading Trusts: Rights and Liabilities of Beneficiaries’ in Finn (ed), Equity and Commercial Relationships (1987) at 52–3. 108. Phillip Lipton, ‘A History of Company Law in Colonial Australia: Economic Development and Legal Evolution’ (2007) 31 Melbourne University Law Review 805 at 806. 109. Phillip Lipton, ‘A History of Company Law in Colonial Australia: Economic Development and Legal Evolution’ (2007) 31 Melbourne University Law Review 805 at 811. 110. They were the Companies Act 1874 (NSW); the Companies Statute 1864 (Vic); the Companies Act 1863 (Qld); the Companies Act 1864 (SA); and the Companies Act 1869 (Tas). Some of these repealed earlier specific but less comprehensive legislation. 111. The limit for banking businesses was 10 persons. The substance of this prohibition has survived to this day in the Corporations Act s 115. 112. For example, Re Garland (1804) 32 ER 786 (executor incurred debts carrying on the testator’s trade as a milliner and farming business); Re Johnson; Sherman v Robinson (1880) 15 Ch D 548 (executor incurred debts carrying on the testator’s business as a tailor and robe-maker); Re Blundell (1888) 40 Ch D 370 (executor incurred debts carrying on the testator’s copper and brass works business); Dowse v Gorton [1891] AC 190 (executor incurred debts carrying on the testator’s yarn dying and small wares manufacturing businesses); Savage v The Union Bank of Australia Ltd (1906) 3 CLR 1170 (executor incurred debts carrying on the testator’s business as an ‘oil and colour merchant’); Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319 (executor incurred debts carrying on the testator’s business as a garage proprietor (though contrary to the will)). In Jennings v Mather [1902] 1 KB 1 the trustee under a deed of assignment for creditors incurred debts carrying on the assignor’s business. The general principles of law regulating the rights and liabilities of the parties (that is, the executor, beneficiaries and creditors) when an executor carries on the business of a testator are set out in

some detail in Latham CJ’s judgment in Vacuum Oil at 323–9. 113. See Harold A J Ford and Ian J Hardingham, ‘Trading Trusts: Rights and Liabilities of Beneficiaries’ in Finn (ed), Equity and Commercial Relationships (1987) at 53. 114. See David Ipp, ‘The Diligent Director’ (1997) 18(6) Company Lawyer 162 at 167; Christopher McCall, ‘Trustees — Risks They Never Thought They Ran’ (1995) 6 Private Client Business 419 at 422–3; Alexander Trukhtanov, ‘The Irreducible Core Of Trust Obligations’ (2007) 123 Law Quarterly Review 342. 115. McCall, ibid, at 423. 116. Charles Harpum, ‘Book Review’ (1986) 45 Cambridge Law Journal 347 in a review of P D Finn (ed), Essays in Equity (Law Book Co, 1984). 117. Peter Agardy, ‘Aspects of Trading Trusts’ (2006) 14 Insolvency Law Journal 7 at 7. 118. Anthony H Slater, ‘Amendment of Trust Instruments’ (Paper presented at the Society of Trust and Estate Practitioners, Sydney NSW, 29 September 2009) at 2. 119. These and other statistics relating to trusts are available on the ATO’s website . It is acknowledged that not all of these would be commercial trusts as defined in 1.31 but the ATO’s published information is not sufficiently granular to be able to construct figures limited to them. 120. See, for example, Harold A J Ford, ‘Unit Trusts’ (1960) 23 Modern Law Review 129; Guy C Spavold, ‘The Unit Trust — A Comparison with the Corporation’ (1991) 3 Bond Law Review 249; Robert Allan Hughes, The Law of Public Unit Trusts (Longman Professional, 1992); Australian Law Reform Commission and Companies and Securities Advisory Committee, ‘Collective Investments: Other People’s Money’ (Report No 65, 1993); Australian Government, ‘Review of the Managed Investments Act 1998’ (December 2001); Grant Moodie and Ian Ramsay, ‘Managed Investment Schemes: An Industry Report’ (Centre for Corporate Law and Securities Regulation, The University of Melbourne, 2003); Bernard T Mees, Monica S Wehner and Pamela F Hanrahan, ‘Fifty Years of Managed Funds in Australia: Preliminary Research Report’ (University of Melbourne Centre for Corporate Law and Securities Regulation, 2005); Pamela F Hanrahan, ‘ASIC and Managed Investments’ (2011) 29 Companies & Securities Law Journal 287; Alan Jessup, Managed Investment Schemes (Federation Press, 2011). 121. Bernard T Mees, Monica S Wehner and Pamela F Hanrahan, ‘Fifty Years of Managed Funds in Australia: Preliminary Research Report’ (University of Melbourne Centre for Corporate Law and Securities Regulation, 2005). 122. The terms of which were discussed in Australian Fixed Trusts Pty Ltd v Clyde Industries Ltd [1959] SR (NSW) 33. 123. Figures extracted from Robert Allan Hughes, The Law of Public Unit Trusts (Longman Professional, 1992) at 34, quoting from Australian Bureau of Statistics data, and Bernard T Mees, Monica S Wehner and Pamela F Hanrahan, ‘Fifty Years of Managed Funds in Australia: Preliminary Research Report’ (University of Melbourne Centre for Corporate Law and Securities Regulation, 2005) at 13. 124. See Guy C Spavold, ‘The Unit Trust — A Comparison with the Corporation’ (1991) 3 Bond Law Review 249 at 252–5 and Harold A J Ford and Ian J Hardingham, ‘Trading Trusts: Rights and Liabilities of Beneficiaries’ in Finn (ed), Equity and Commercial Relationships (1987).

Australian Bureau of Statistics Report 5655.0 — Managed Funds, Australia, September 2013. 125. The Bureau defines a public unit trust as ‘a trust which is governed by a trust deed; is or has been open to the general public to buy units; and allows unit holders to redeem or dispose of their units within a reasonable period of time on a well-developed secondary market (for example, ASX) or has readily accessible redemption facilities offered by the management company in association with the trust’. Despite the Bureau’s preference for the generic term ‘public unit trust’, technically these would all be MIS. 126. Bernard T Mees, Monica S Wehner and Pamela F Hanrahan, ‘Fifty Years of Managed Funds in Australia: Preliminary Research Report’ (University of Melbourne Centre for Corporate Law and Securities Regulation, 2005) at 4–5. 127. David Parker, ‘Impact of Board Composition on Australian REIT Performance’ (Paper presented at the 15th Pacific-Rim Real Estate Society Conference, Sydney NSW, January 2009); Australian Securities Exchange, ‘ASX A-REITs: ASX-listed Australian Real Estate Investment Trusts’ (2008), . 128. Board of Taxation, ‘Review of the Tax Arrangements Applying to Managed Investment Trusts: Discussion Paper’ (August 2008) at 7. In 2012, CAMAC noted that ‘some 80% of investment-grade commercial real estate, comprising office buildings, shopping centres and industrial facilities, are [sic] held in [managed investment] schemes’: CAMAC Report at 24. 129. See the ASIC website at . 130. These waves are described in Robert Allan Hughes, ‘Public Unit Trusts: Some Regulative Models’ (1999) 3 Journal of South Pacific Law (Working Paper 2). 131. Australian Law Reform Commission and Companies and Securities Advisory Committee, ‘Collective Investments: Other People’s Money’ (Report No 65, 1993), Volume 1 at [1.5]– [1.6]. 132. Jacobs on Trusts at [314]. See also Harold A J Ford, ‘Trading Trusts and Creditors’ Rights’ (1981) 13 Melbourne University Law Review 1; Bruce H McPherson, ‘The Insolvent Trading Trust’ in Paul D Finn (ed), Essays in Equity (Law Book Co, 1985); Harold A J Ford and Ian J Hardingham, ‘Trading Trusts: Rights and Liabilities of Beneficiaries’ in Finn (ed), Equity and Commercial Relationships (1987); New Zealand Law Commission, ‘Review of the Law of Trusts: A Trusts Act for New Zealand’ (Report 130, 2013). 133. Demonstrating how loosely the term may be used, in Bastion v Gideon Investments Pty Ltd (in liq) (No 2) (2000) 35 ACSR 466 a trust where the trustee was given very wide powers of investment in shares, stocks, funds, securities, land or any other investment or property, but not to carry on a trading business generally, was described as a ‘trading trust’. 134. Anthony H Slater, ‘Amendment of Trust Instruments’ (Paper presented at the Society of Trust and Estate Practitioners, Sydney NSW, 29 September 2009). 135. H W Wilkinson, ‘Statutes: Companies Act 1967’ (1968) 31 Modern Law Review 183 at 185. 136. Companies and Securities Law Review Committee, ‘Forms of Legal Organisation for Small Business Enterprises’ (1984), citing John Lehane, ‘Trading Trusts’ in The Companies Bill 1980 — The Revised Draft (University of Sydney, 1980). 137. Harold A J Ford, ‘Trading Trusts and Creditors’ Rights’ (1981) 13 Melbourne University Law Review 1 at 1. 138. Brian H McPherson, ‘The Insolvent Trading Trust’ in Finn (ed), Essays in Equity (1985) at

142. 139. Australian Law Reform Commission, ‘General Insolvency Inquiry’ (Report No 45, 1988) at [240]–[241]. 140. It should be acknowledged that ASIC seeks to provide for a solvency buffer for companies acting as responsible entities of registered MIS by imposing minimum net tangible assets requirements on them under Corporations Act s 914A. This is because ‘the purpose of Ch 5C of the CA is to protect investors by the requirement that investment schemes satisfying the relevant criteria are registered with ASIC, are operated by a responsible entity with sufficient assets and backing to provide a measure of comfort to investors and are subject to the statutory protection of investors’ rights provided by that Chapter’: ASIC v Sydney Investment House Equities Pty Ltd (2008) 69 ACSR 1; [2008] NSWSC 1224 at [266]. However, the current minimum amount is relatively nominal compared to the liabilities which responsible entities of large schemes can incur. 141. Lawrence M Friedman, A History of American Law (3rd ed, Touchstone Simon & Shuster, 2005) at 132. 142. Trusts which are MIS having certain characteristics are required to be registered with ASIC by Corporations Act s 601ED (see Appendix 1: ‘Extracts from the Corporations Act’) but a failure to comply with those requirements does not invalidate the trust as a matter of law. It does, however, render it liable to be wound up: s 601EE. 143. This is a particularly valuable attribute in securitisation transactions: see Aakash Desai, ‘Commercial Trusts and Securitisation: Lessons from the Global Financial Crisis’ (2010) 28 Companies & Securities Law Journal 10 at 25–6. The expression ‘dizzying array’ is taken from John H Langbein, ‘The Secret Life of the Trust: The Trust as an Instrument of Commerce’ (1997) 107 Yale Law Journal 165 at 183. 144. In respect of which see Corporations Act Pts 1.2A and 2M. 145. Charles v Federal Commissioner of Taxation (1954) 90 CLR 598 at 607–8. 146. See, for example, Rothmore Farms Pty Ltd (in liq) v Belgravia Pty Ltd (2005) 239 LSJS 105; [2005] SASC 117; Ron Kingham Real Estate Pty Ltd v Edgar [1999] 2 Qd R 439. 147. Corporations Act s 601GA requires members rights to withdraw (that is, redeem) to be set out in a registered MIS’s constitution. Withdrawal rights are further regulated by Pt 5C.6 which imposes constraints on redemptions where liquidity is in question. See also the latest ASIC regulatory guidance for specific requirements. 148. See Trustee Act 1925 (NSW) s 63; Supreme Court (General Civil Procedure) Rules 2005 (Vic) O 54; Trusts Act 1973 (Qld) s 96; Trustees Act 1962 (WA) s 92; Trustee Act 1936 (SA) s 91; Trustee Act 1925 (ACT) s 63, in respect of which see Macedonian Orthodox Community Church St Petka Inc v The Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66. Judging by the number of applications made under these provisions (particularly post-GFC), as shown in the case reports, well-advised trustees are very conscious of the benefits. Company liquidators enjoy a broadly corresponding benefit under s 511 of the Corporations Act, which can be used when the company in liquidation is the responsible entity of a MIS: Re Willmott Forests Limited (No 2) (2012) 88 ACSR 18; [2012] VSC 125. 149. See Trustee Act 1925 (NSW) s 81; Trustee Act 1958 (Vic) s 63; Trusts Act 1973 (Qld) s 94; Trustees Act 1962 (WA) s 89; Trustee Act 1936 (SA) s 59B; Trustee Act 1898 (Tas) 7; Trustee Act (NT) s 50A; Trustee Act 1925 (ACT) s 81. See also James N Kirby Foundation v

Attorney-General (NSW) (2004) 62 NSWLR 276; [2004] NSWSC 1153. 150. See Trustee Act 1925 (NSW) s 85; Trustee Act 1958 (Vic) s 67; Trusts Act 1973 (Qld) s 76; Trustees Act 1962 (WA) s 75; Trustee Act 1936 (SA) s 56; Trustee Act 1898 (Tas) s 50; Trustee Act (NT) s 49A; Trustee Act 1925 (ACT) s 85. The relationship between these provisions and those discussed in fn 150 was discussed by the High Court of Australia in Macedonian Orthodox Community Church St Petka Inc v The Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66. 151. Michael Bryan, ‘Reflections on Some Commercial Applications of the Trust’ in Ramsay (ed), Key Developments in Corporate Law and Trusts Law (2002) at 222. 152. Fidelity-Bankers Trust Co v Helvering 113 F 2d 14 (1940) at 17. 153. Pamela Hanrahan, ‘The Responsible Entity as Trustee’ in Ramsay (ed), Key Developments in Corporate Law and Trusts Law (2002) at 231. 154. Michael Bryan, ‘Contractual Modifications of the Duties of a Trustee’ in Sarah Worthington (ed), Commercial Law and Commercial Practice (Hart Publishing, 2003) at 514. 155. Jacobs on Trusts at [1617]. 156. ‘There is no necessary antipathy between contract and trust’: William M C Gummow, ‘Equity: Too Successful?’ (2003) 77 Australian Law Journal 30 at 33. 157. See, for example, Jacobs on Trusts, Chapter 2: ‘The Distinction between a Trust and Certain Other Legal Institutions’; Scott on Trusts §2.3: ‘Distinctions between Trusts and Other Relationships’. The authors of Underbill on Trusts set out a list of 12 fundamental differences between trust and contract, at [1.23]. 158. See Burns Philp Hardware Ltd v Howard Chia Pty Ltd (1987) 8 NSWLR 642; Mentha v GE Capital Ltd (1997) 154 ALR 565; Re A & K Holdings Pty Ltd [1964] VR 257. 159. Commissioner of Stamp Duties (NSW) v Simpson (1917) 24 CLR 209. Of course, a deed poll may represent evidence of a contract which is partially in writing if consideration is provided by the counterparty and other requirements for contract formation are satisfied. 160. Jacobs on Trusts contains a discussion of the distinction between trust and contracts for the benefit of third parties, at [217]. A historiography of the privity doctrine in Australia and elsewhere, including its erosion, was provided by the High Court of Australia of Australia in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107. While United States law has recognised and enforced third party beneficiary contracts for many years, the concept was resisted under English common law contract doctrine of privity. In England see the Contracts (Rights of Third Parties) Act 1999. 161. R v Hopkins (1915) 20 CLR 464 at 471 (per Griffith CJ); see also Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (2000) 202 CLR 588. In relation to MIS, Corporations Act s 601GB requires that ‘the constitution of a registered scheme must be contained in a document that is legally enforceable as between the members and the responsible entity’, but this does not necessarily mean that it must be enforceable as a contract. See the latest ASIC regulatory guidance for specific requirements. 162. See AMP Capital Property Nominees Ltd v Westfield Management Ltd [2011] NSWCA 386; Byrnes v Kendle (2011) 243 CLR 253; [2011] HCA 26; Scaffidi v Montevento Holdings Pty Ltd (2011) 6 ASTLR 446; [2011] WASCA 146; Intel Corporation v Unwired Group Ltd [2008] FCA 1927; Ballantyne v Ballantyne (2010) 272 LSJS 104; [2010] SASC 273; Alpha Wealth Financial Services Pty Ltd v Frankland River Olive Company Ltd (2008) 66 ACSR

594; [2008] WASCA 119; Zhu v Treasurer of the State of New South Wales (2004) 218 CLR 530; [2004] HCA 56; Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (2000) 202 CLR 588. 163. Rural & Agricultural Management Ltd v West Merchant Bank Ltd (1995) 128 FLR 440; affirmed on this point in the New South Wales Court of Appeal: West Merchant Bank Ltd v Rural & Agricultural Management Ltd (1996) 20 ACSR 563. However, there are limits: see Michael Bryan, ‘Contractual Modifications of the Duties of a Trustee’ in Worthington (ed), Commercial Law and Commercial Practice (2003). 164. In Australia, see Scott Donald, ‘Beneficiary, Investor, Citizen: Characterising Australia’s Super Fund Participants’ (2009) University of New South Wales Faculty of Law Research Series 8; Michael Vrisakis, ‘Co-habitation of Contract and Trust Relationships In Contemporary Investment Trusts’ (2008) 2 Journal of Equity 274; Michael Bryan, ‘Reflections on Some Commercial Applications of the Trust’ in Ramsay (ed), Key Developments in Corporate Law and Trusts Law (2002) at 220–2; Graham Hill, ‘The True Nature of a Member’s Interest in a Superannuation Fund’ (Paper presented at the National Superannuation Conference for Lawyers, 2002) at [1.15]. In relation to Canada and England, see Donovan W M Waters, ‘The Role of the Trust Treatise in the 1990s’ (1994) 59 Missouri Law Review 121 at 149–53. In the United States, see Ponsetti v G E Pension Plan 614 F 3d 684 (2010). 165. Gosper v Sawyer (1985) 160 CLR 548. 166. Ford & Lee on Trusts at [6.030]. 167. Although monetary awards can be granted in equity, including for breaches of fiduciary duties: Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298; [2003] NSWCA 10. Note the conundrum in relation to equitable remedies for contractual claims posed by Attorney General v Blake [2001] 1 AC 268, which is analysed in detail in James Edelman, ‘Fiduciaries and Profit Disgorgement for Breach of Contract’ (Paper presented at the 2012 Journal of Equity Conference ‘Equity & Contract’, Sydney, 30 March 2012). 168. Rural & Agricultural Management Ltd v West Merchant Bank Ltd (1995) 128 FLR 440 at 445. 169. Vince Battaglia, ‘The Liability of Members Of Managed Investment Schemes in Australia: An Unresolved Issue’ (2009) 23 Australian Journal of Corporate Law 122 at 132–3; Charles Zhen Qu, ‘Australia’s Managed Investment Schemes: The Nature of Relationships among Scheme Participants’ (2004) 12 Asia Pacific Law Review 69 at 83; Pamela Hanrahan, ‘The Responsible Entity as Trustee’ in Ramsay (ed), Key Developments in Corporate Law and Trusts Law (2002) at 230; Kam Fan Sin, ‘Enforcing the Unit Trust Deed Amongst Unitholders’ (1997) 15 Companies & Securities Law Journal 108; Robert Allan Hughes, The Law of Public Unit Trusts (Longman Professional, 1992) at 198–204. 170. See also Macarthur Cook Fund Management Limited v Zhaofeng Funds Limited [2012] NSWSC 911. 171. And see Kam Fan Sin, ‘Enforcing the Unit Trust Deed Amongst Unitholders’ (1997) 15 Companies & Securities Law Journal 108. 172. Alpha Wealth Financial Services Pty Ltd v Frankland River Olive Company Ltd (2008) 66 ACSR 594; [2008] WASCA 119 at [89] (per Buss JA). 173. Basis Capital Funds Management Ltd v B T Portfolio Services Ltd (2008) 67 ACSR 297; [2008] NSWSC 766; West Merchant Bank Ltd v Rural & Agricultural Management Ltd (1996) 20 ACSR 563; Green v Wilden Pty Ltd [2005] WASC 83.

174. An expression used by Lord Wilberforce in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 at 582. 175. Gosper v Sawyer (1985) 160 CLR 548 at 568–9 (per Mason and Deane JJ). See also the critical analysis in Mark Leeming, ‘The Scope of Fiduciary Obligations: How Contract Informs, but Does not Determine, the Scope of Fiduciary Obligations’ (2009) 3 Journal of Equity 181. 176. See the discussion in Perre v Apand Pty Ltd (1999) 198 CLR 180. This is, of course, subject to statutory modification where policy has deemed it necessary, for example, in consumer law or to discourage misleading or deceptive conduct. 177. Patrick A Keane, ‘The 2009 WA Lee Lecture in Equity: The Conscience of Equity’ (2010) 84 Australian Law Journal 92 at 99. 178. Michael J Whincop, ‘Promoters, Prospectuses and Pragmatism: Updating Fiduciary Duties in a Time of Economic Reform’ (1998) 24 Monash University Law Review 454. 179. Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 at 581 (per Lord Wilberforce). 180. Henderson v Merrett Syndicates Ltd (No 1) [1995] 2 AC 145 at 206 (per Lord BrowneWilkinson). See also Boardman v Phipps [1967] 2 AC 46 at 123–5 (per Upjohn LJ). 181. Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at 97 (per Mason J). See also Breen v Williams (1996) 186 CLR 71 at 132–3 (per Gummow J). 182. Breen v Williams (1996) 186 CLR 71 at 93 (per Dawson and Toohey JJ). 183. Green v Wilden Pty Ltd [2005] WASC 83 at [940], citing Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41. 184. Paul D Finn, ‘Contract and the Fiduciary Principle’ (1989) 12 University of New South Wales Law Journal 76; Paul D Finn, ‘Fiduciary Reflections’ (2014) 88 Australian Law Journal 27. 185. Henderson v Merrett Syndicates Ltd (No 1) [1995] 2 AC 145 at 206 (per Lord BrowneWilkinson). To similar effect, see Pilmer v The Duke Group Ltd (in liq) (2001) 207 CLR 165. 186. Securities Commission v Chenery Corporation 318 US 80 (1943) at 85–6. 187. Paul D Finn, ‘Contract and the Fiduciary Principle’ (1989) 12 University of New South Wales Law Journal 76. 188. Beach Petroleum NL v Abbott Tout Russell Kennedy (1999) 48 NSWLR 1. See also Patrick A Keane, ‘The 2009 WA Lee Lecture in Equity: The Conscience of Equity’ (2010) 84 Australian Law Journal 92 at 100; and James Edelman, ‘When do Fiduciary Duties Arise?’ (2010) 126 Law Quarterly Review 302. 189. See Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41; Breen v Williams (1996) 186 CLR 71; News Ltd v Australian Rugby Football League (1996) 64 FCR 410; Pilmer v The Duke Group Ltd (in liq) (2001) 207 CLR 165. For an historical perspective, see Paul D Finn, ‘Common Law Divergences’ (2013) 37 Melbourne University Law Review (Advance). See also the discussion in John Lehane, ‘Fiduciaries in a Commercial Context’ in Paul D Finn (ed), Essays in Equity (Law Book Co, 1985); John O’Sullivan, ‘The Roles of Managers and Agents In Syndicated Loans’ (1992) 3 Journal of Banking and Finance Law & Practice 162; and Patrick A Keane, ‘The 2009 WA Lee Lecture in Equity: The Conscience of Equity’ (2010) 84 Australian Law Journal 92 at 98. On the English position see Peter J Millet, ‘Equity’s Place in The Law of Commerce’ (1998) 114 Law Quarterly Review

214, and Thomas & Hudson on Trusts, Chapter 56: ‘Fiduciary Liability in the Creation of Financial and Commercial Transactions’. 190. On the broader principle, see Citibank NA v MBIA Assurance SA [2007] EWCA Civ 11; ASIC v Citigroup Global Markets Australia Pty Ltd (No 4) [2007] FCA 963. The ASIC v Citigroup decision and the principles enunciated in it are discussed in Joshua Getzler, ‘ASIC v Citigroup: Bankers’ Conflict of Interest and the Contractual Exclusion of Fiduciary Duties’ (2007) 2 Journal of Equity 62. 191. Frank H Easterbrook and Daniel R Fischel, ‘Contract and Fiduciary Duty’ (1993) 36 Journal of Law & Economics 425; Frank H Easterbrook and Daniel R Fischel, The Economic Structure of Corporate Law (Harvard University Press, 1991), Chapter 4: ‘The fiduciary principle, the business judgment rule and the derivative suit’; Robert H Sitkoff, ‘The Economic Structure of Fiduciary Law’ (2011) 91 Boston University Law Review 1039. 192. Robert H Sitkoff, ‘An Agency Costs Theory of Trust Law’ (2004) 89 Cornell Law Review 621 at 623. Robert H Sitkoff, ‘Trust as “Uncorporation”: A Research Agenda’ (2005) University of Illinois Law Review 31. See also Robert H Sitkoff, ‘Trust Law, Corporate Law, and Capital Market Efficiency’ (2002–2003) 28 Journal of Corporate Law 565; Joseph A Warburton, ‘Trusts Versus Corporations: An Empirical Analysis of Competing Organizational Forms’ (2010–2011) 36 Journal of Corporate Law 183. 193. Steven L Schwarcz, ‘Commercial Trusts as Business Organizations: An Invitation to Comparatists’ (2003) 13 Duke Journal of Comparative & International Law 321 and Steven L Schwarcz, ‘Commercial Trusts as Business Organizations: Unraveling the Mystery’ (2002– 2003) 58 Business Lawyer 559. 194. John H Langbein, ‘The Secret Life of the Trust: The Trust as an Instrument of Commerce’ (1997) 107 Yale Law Journal 165 at 179. 195. William A Klein, John C Coffee and Frank Partnoy, Business Organisation and Finance (Foundation Press, 2010) at 45 and following. See also Thomas Earl Geu, ‘Understanding the Limited Liability Company: A Basic Comparative Primer (Part One)’ (1991–1992) 37 South Dakota Law Review 44. 196. Strictly, this list would include a third option, partnership, whether general or limited, but that may safely be excluded as inappropriate in the circumstances under discussion. Further, the expression ‘company’ is to some extent a simplification in that included within it is a range of subcategories such as the public company, proprietary company, no liability company, unlimited public company, unlimited proprietary company, company limited by guarantee, statutory corporation and others: see Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485. 197. Lionel Smith, ‘Mistaking the Trust’ (2011) 40 Hong Kong Law Journal 787 at 787. See also David A Steele and Andrew G Spence, ‘Enforcement Against the Assets of a Business Trust by an Unsecured Creditor’ (1999) 31 Canadian Business Law Journal 72 at 73. 198. See Charles v Federal Commissioner of Taxation (1954) 90 CLR 598 at 608–9; Provident Capital Ltd v Zone Developments Pty Ltd (2001) 10 BPR 19,133 at [49] (per Young CJ); Pikes Wines Pty Ltd v Kelly [2000] SASC 380 at [35]–[36]. In HP Mercantile Pty Limited v Commissioner of Taxation (2005) 219 ALR 591; [2005] FCAFC 126 Hill J noted that ‘the idea that a trust is in some way a legal entity entitled to bring proceedings is encouraged by the Goods and Services Tax (“GST”) legislation’, at [2]. See also the recent cases cited by Justice Barrett in the Foreword on page v.

199. Anthony H Slater, ‘Amendment of Trust Instruments’ (Paper presented at the Society of Trust and Estate Practitioners, Sydney NSW, 29 September 2009) at 2. 200. Lionel Smith, ‘Mistaking the Trust’ (2011) 40 Hong Kong Law Journal 787. 201. See, for example, Re Abacus Funds Management Ltd (2006) 24 ACLC 211; [2005] NSWSC 1309. ‘A stapled security consists of a unit in a managed investment scheme and a security such as a share. These two instruments cannot be disposed of separately but are ‘stapled’ together and must be traded as a single unit. The two components of the stapled security are frequently an interest in the trust holding the assets of the entity (an interest in a managed investment scheme) and a share in the company carrying out the asset management and/or development functions (a security)’: Explanatory Memorandum for the Corporations Legislation Amendment (Simpler Regulatory System) Bill 2007. 202. Having said all of that, since 2012 ASIC has been more active in issuing regulatory guidance in this area, motivated by the outcomes of MIS collapses in the agribusiness and property sectors. However, although ASIC has issued a prodigious volume of guidance on companies and MIS, none of it addresses comprehensively the shortcomings of trust law when compared to companies law (and, less surprisingly, none of it deals with commercial trusts which are not MIS). 203. John Lehane, ‘Trading Trusts in The Companies Bill 1980 — The Revised Draft’ (University of Sydney, 1980), cited in Companies and Securities Law Review Committee, ‘Forms of Legal Organisation for Small Business Enterprises’ (1984). 204. See Michael Bryan, ‘Reflections on Some Commercial Applications of the Trust’ in Ramsay (ed), Key Developments in Corporate Law and Trusts Law (2002). 205. William M C Gummow, ‘Equity: Too Successful?’ (2003) 77 Australian Law Journal 30 at 32. 206. Richard A Posner, ‘The Rights of Creditors of Affiliated Corporations’ (1975–1976) 43 University of Chicago Law Review 499 at 506–7 (emphases added). 207. Ford on Corporations Law at [1.370]. 208. Reginald I Barrett, ‘Insolvency of Registered Managed Investment Schemes’ (Paper presented at the Banking & Financial Services Law Association Annual Conference, Queenstown NZ, July 2008) at 1–2. For a critique of the Ch 5C regime as against International Organisation of Securities Commissions (‘IOSCO’) Principles for the Regulation of Collective Investment Schemes, see Grant Moodie and Ian Ramsay, ‘Managed Investment Schemes: An Industry Report’ (Centre for Corporate Law and Securities Regulation, The University of Melbourne, 2003). 209. See Australian Securities Commission v AS Nominees Ltd [1995] FCA 1663; ASIC v Takaran Pty Ltd (2002) 43 ACSR 46; [2002] NSWSC 834; ASIC v Commercial Nominees of Australia Ltd (2002) 42 ACSR 240; [2002] NSWSC 576; ASIC v Tasman Investment Management Ltd (2004) 50 ACSR 153; [2004] NSWSC 651; Mier & Jonsson v F N Management Pty Ltd [2006] 1 Qd R 339; [2005] QCA 408; Re Stacks Managed Investments Ltd (2005) 219 ALR 532; [2005] NSWSC 753; ASIC v Tasman Investment Management Ltd (2006) 59 ACSR 113; [2006] NSWSC 943.

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CHAPTER 3 Legal Risks of the Beneficiary as an Equity Investor SYNOPSIS This chapter begins by describing the commercial expectations of the beneficiary unit holder as an equity investor in a commercial trust and the similarities with those of a shareholder in a company, then demonstrates how those expectations are not met or properly supported by trust law. It explains why this is so, harking back to the historical discussion in Chapter 2 so as to give context and depth of understanding. It analyses in detail the greatest and possibly least appreciated risk of all: the absence of statutory limited liability and thus the potential for unlimited personal liability for enterprise debts. It considers the extent to which this risk can be managed through structural and contractual techniques and proposes sample clauses for protecting equity investors.

INTRODUCTION 3.1 The point has been made in the previous chapter that, despite in some configurations appearing to be interchangeable, the trust and the company are legally very different creatures. A consequence is that the legal nature of a unit in a unit trust, and the bundle of rights and risks of a unit holder, are fundamentally different from a share in a company and the bundle of rights and risks of a shareholder. Yet, in commerce units and shares can appear to be virtually indistinguishable to investors, at least in the absence of insolvency. The authors of Jacobs on Trusts observe at [312] that ‘from

an investor’s commercial point of view, owning units in a unit trust is the same as owning shares in a company’. Others contend that ‘the securities [page 110] market still tends to equate an interest in a unit trust with a share or a debenture’.1 In Cachia v Westpac Financial Services Ltd (2000) 170 ALR 65; [2000] FCA 161 the Federal Court noted, at [86], that ‘in a commercial sense, ownership of units in a trust may be similar to ownership of shares in a company’. Shares in companies and units in commercial trusts are traded on the ASX as ‘securities’ without distinction. The resemblance is not accidental. 3.2 This chapter is not a survey of the similarities and differences between units and shares. The nature of unit holders’ rights, entitlements and benefits against the trustee (that is, the ‘personal element’, as perceived from the beneficiary’s perspective) and with respect to trust assets (that is, the ‘proprietary element’, as perceived from the beneficiary’s perspective) is a matter which turns essentially on the terms of the trust instrument and the general law (including applicable statutes), and has been explored extensively in the authorities and the literature.2 Constitutions of MIS, in particular, typically set out in detail and in language of limitation the rights of the unit holders against the responsible entity and in relation to scheme assets. The rights of unit holders inter se have also been considered.3 The previous chapter discussed the hybrid contract-trust nature of a unit trust and a unit holder’s interest. 3.3 Rather, consistent with the overall theme of this book, the focus is on a less explored aspect of the comparison: the legal risks borne by equity investors in Australian commercial trusts. This is particularly worthy of investigation because, under general trust law, a beneficiary has very few obligations or legal risks, apart from, in some cases, a personal indemnity in favour of the trustee (which, in well-constructed commercial trust arrangements is invariably excluded by express terms in the trust instrument). This absence of personal legal risk for beneficiaries is consistent with the historical notion of the trust as a guardian of private

wealth for vulnerable beneficiaries, where risks were mostly borne by the trustee and those with whom he dealt. Once the trust became a business entity, however, the question of beneficiary liability for the entrepreneurial actions of the trustee acquired a different complexion. An unpaid trust creditor may [page 111] legitimately ask whether it has any recourse against equity investors personally where it is facing an insolvent trustee and an inadequate trust fund,4 or where the trust assets are adequate but the creditor is denied access to them via the orthodox route, that is subrogation to the trustee’s indemnity, due to trustee misconduct, a scenario which is a focus of the next two chapters.5 3.4 The Corporations Act regulates trusts only in very limited circumstances (and not at all unless they are MIS). This regulatory gap presents a range of risks and disabilities for unit holders. For example, while they may in some circumstances replace the trustee (for registered MIS see s 601FM of the Corporations Act) absent specific provision in the trust instrument (which would be highly unusual) they have no say in the appointment or removal of directors of the trustee. They enjoy no statutory protection of minority rights or remedies against oppressive conduct by the majority; they must rely on whatever general relief might be available in equity’s supervisory jurisdiction and enforcing any relevant rights given them in the trust instrument.6 An oppression remedy for investors in collective investment schemes was recommended in the Australian Law Reform Commission and Companies and Securities Advisory Committee, ‘Collective Investments: Other People’s Money’ (Report No 65, 1993) (see Volume 1 at [11.33]) but this did not find its way into Ch 5C of the Corporations Act. By comparison, s 41 of Singapore’s Business Trusts Act (Ch 31A) gives a unit holder of a registered business trust rights to apply to the court for relief from oppressive conduct.7 3.5 Further, unit holders have no ability to take derivative actions on

behalf of the entity in the way shareholders do under Pt 2F.1A of the Corporations Act. There are some limited circumstances in which a beneficiary may bring an action against a third party without the trustee, but the authors of Ford & Lee on Trusts [page 112] say that it is available only in ‘exceptional circumstances’.8 By comparison, s 42 of Singapore’s Business Trusts Act (Ch 31A) gives a unit holder of a registered business trust rights to apply to the court for leave to bring a derivative action on behalf of all unit holders. 3.6 It might be argued, with some justification, that equitable remedies offer analogous relief to these statutory regimes, but the similarities are misleading since they are subject to the usual discretions and defences attending actions for remedy in equity. Indeed, some equitable remedies were the progenitors of the statutory remedies but, in common with so much of company law which began as a transplant from trust law but was later modified to acquire a more commercial hue, ‘generally speaking, the statutory remedies [under the Corporations Act] have been framed very broadly, overcoming some of the limitations which had developed over time with the equitable remedies … furthermore, the courts have shown a willingness to interpret some of these statutory remedies broadly’.9 3.7 However, the focus of this chapter is on what may be regarded as perhaps the most fundamental risk of all when it comes to investing in a business association: the risk of unlimited personal liability for enterprise debts. Curiously, the issue of unlimited personal liability for equity investors in commercial trusts has been left largely unexplored in the Australian literature,10 even though it was an issue with the unincorporated joint stock company in England before the enactment of general companies legislation, generated a body of law and literature in the United States in the late 19th and early 20th centuries as the popularity of the Massachusetts trust grew and spread to other states, and more recently has been the subject of vigorous debate in Canada. When general companies legislation effectively brought to an end the use of the

commercial trust in England and provided a statutory guarantee of limited liability for companies, the issue appeared to become moot; promoters shifted quickly to the incorporated form so that, among other things, they could offer the statutory protection to their investors. The issue has remained relatively dormant despite the resurgence of the commercial trust in Australia in the 20th century. 3.8 In 1984, the Companies and Securities Law Review Committee wrote to the Commonwealth Ministerial Council suggesting a legislative amendment to [page 113] limit the liability of unit holders in public unit trusts, pointing out that ‘the investing public sees the purchase of units in a public unit trust as analogous to the purchase of shares in a limited liability company and generally assumes that the limited liability that attaches to shares in such companies applies equally to units’.11 Three decades later no such amendment has been enacted, despite the fact that the issue has been formally brought to the government’s attention several times since in official reports.12 None of these reports, however, has explored fully the circumstances in which an equity investor beneficiary may become personally liable to creditors of the trust enterprise; in particular, the risk of direct liability, as framed below, has received little attention. 3.9 Today, there appears to be a pervasive assumption in the Australian market that the issue has been properly dealt with by provisions in commercial trust instruments and the use of a limited liability company as trustee. This assumption is wrong; the risk of unlimited personal liability for enterprise debts is real and the arguments in this chapter may be considered in some quarters to be controversial, particularly since they take issue with general market perceptions, as evidenced in public disclosure documents. A random review of recent MIS product disclosure statements publicly available on the ASIC website and elsewhere online shows that either they do not address the issue of investor liability at all or mention it only briefly. Some assert that the scheme constitution contains

provisions designed to limit investors’ personal liability for trust debts to the issue price of units and some (but by no means all) of those go further and warn that the Australian courts are yet to determine finally the effectiveness of those types of provisions. On closer inspection, however, these statements refer to a provision in the constitution designed to eliminate the indirect liability risk by excluding the unit holder’s personal indemnity to the trustee; as argued below, those provisions do not protect against direct liability risk of the trustee incurring debts as the implied agent of the investors. [page 114] 3.10 The conclusion is that the legal risk position of a unit holder under Australian trust law with respect to personal liability for enterprise debts is materially worse than that of a shareholder, even after attempts are made to equalise the position through contractualisation techniques. By contrast, the position has been resolved in other places through legislative intervention that, in effect, equates the position of the commercial trust beneficiary with that of the shareholder.

COMMERCIAL EXPECTATIONS OF THE EQUITY INVESTOR BENEFICIARY 3.11 Unit holders in larger commercial trust enterprises will usually be investors who are at arm’s length from the trustee and each other. In exchange for the opportunity to share in risk-based profits and capital accretions resulting from entrepreneurial action, they are prepared to contribute to the trust fund by subscription (or to pay to acquire an existing unit holding), to permit the trustee to manage their investment within agreed parameters (including by taking legitimate business risks) and to forgo many of the prima facie protections and supervisory benefits offered to them by the general law of trusts. This is achieved through waivers, modifications and attenuations of the trustee’s duties, effected by careful drafting of the trust instrument and related documentation.

3.12 In this way, a unit holder’s bundle of rights and interests as a beneficiary in the trust is moulded to suit the context; in particular, the parties may be said to have contracted (in the non-technical sense) out of many of the default rules that would otherwise apply. In essence, by consensual modification of the ‘personal element’ of the trust, they agree to allow the trustee to undertake a range of activities which could, prima facie, be breaches of trust. The trustee, as steward of a business enterprise, is expected to take business risks with trust assets in accordance with the terms of its appointment. It is usually permitted to profit from its office by taking fees and other remuneration directly out of the trust assets. It is usually allowed to engage in other business activities unrelated to the trust which might otherwise conflict with its prima facie duty of undivided loyalty to the beneficiaries. It will usually be permitted to delegate powers and decision-making to managers, agents, nominees and custodians. It may enjoy exculpation from certain categories of breach of trust. In this, the position of the commercial trustee resembles that of the board of directors of a trading company; this aspect is discussed in more detail in the next chapter. 3.13 As quid pro quo, on the risk side the arm’s length commercial unit holder may expect to be in the same or a similar position as a shareholder. Where the general law of trusts does not provide outcomes analogous to those afforded to shareholders under companies legislation, the participants might seek to achieve [page 115] a corresponding result by private means. Importantly, as with a shareholder, the typical arm’s length unit holder does not expect to be personally liable for enterprise debts beyond the value of its invested equity.

THE RISK: UNLIMITED PERSONAL LIABILITY FOR ENTERPRISE DEBTS

3.14 It is surprising how much of the practitioner literature in Australia regarding the use of trusts includes in the list of advantages limited liability protection for beneficiaries. As this chapter will demonstrate, limited liability for equity investors in commercial trusts is not only not assured, the potential for full liability for enterprise debts can arise quite readily. 3.15 In pure economic theory, for the trust device to be a viable competitor to the company for investors’ funds, either a unit holder in a unit trust would need to be no worse off overall than a shareholder in a company, or alternatively any higher risks identified as such would need to be compensated by commensurately higher returns on investment.13 In this equation, a crucial factor is limited liability, that is, the principle that equity investors’ maximum risk on enterprise insolvency is their invested equity. After separate legal personality, it is arguable that limited liability is the economic essence of the sophisticated multiple-participant enterprise entity in corporate form.14 It has been described as ‘a distinguishing feature of corporate law — perhaps the distinguishing feature’.15 In 1926, The Economist magazine said: The economic historian of the future … may be inclined to assign to the nameless inventor of the principle of limited liability, as applied to trading corporations, a place of honour with Watt and Stephenson, and other pioneers of the Industrial Revolution.16

[page 116] 3.16 Limited liability is said to encourage investment, particularly by smaller, less wealthy investors, and to facilitate transferability of the investment; this in turn lowers the costs of capital, which increases economic output.17 On a broader scale, it is said to generate both personal and societal benefits, in that it ‘provides individuals with an incentive to undertake entrepreneurial activities, which increase economic prosperity and social welfare’.18 Ramsay has posited a range of reasons for limited liability based upon principles of economic efficiency.19 3.17 On the other side of the equation, it is interesting to observe what limited liability means in practical terms: creditors of failed enterprises are left unpaid. Leading law and economics proponents Easterbrook and

Fischel note that, in effect, limited liability externalises a large part of the risk of enterprise insolvency to creditors, and that this necessarily gives rise to a moral hazard problem; this in turn, makes contracting counterparties more risk-sensitive and inclined to bargain for all the protections that are available.20 One could add that it might also incline an unpaid creditor to seek opportunities to penetrate the limitation to recoup losses from investors where the law permits. 3.18 True limited liability is neither a common law nor a contractual concept; it may be described as a ‘privilege’ conferred by the state through statute, ‘a franchise given by society to save the members from having to seek limitation of liability by more cumbersome methods’.21 As the use of the unincorporated multiple-participant enterprise expanded in the 18th and 19th centuries and began attracting investment from less wealthy, less sophisticated participants for whom partner-like liability was inappropriate (including those which today would be [page 117] described as ‘retail investors’), the issue of limited liability became notorious and promoters, investors and their advisers actively sought to address it by private means. Ultimately, statutory intervention was thought necessary because the common law and privately bargained arrangements proved inadequate. Indeed, before statutory limited liability, the whole question was fraught with misunderstanding and fraud. Lindgren notes the case of R v Dodds (1808) 103 ER 670 where a prosecution was brought under the Bubble Act of 1720 against promoters who published a prospectus which falsely promised limited liability on condition of ‘a deed of trust to be enrolled in Chancery’, implying some manner of court approval and protection for investors. Lord Ellenborough described this particular statement in the prospectus as ‘a mischievous delusion, calculated to deceive the unwary public’.22 Another commentator noted that: There were multiple practical problems associated with carrying out business through an unincorporated company, including, in particular, … the problem of unlimited member

liability which, although partially managed through contract, could never be fully excluded.23

3.19 For shareholders in Australian companies, limited liability is assured by the Corporations Act, a benefit whose provenance can be traced back to the English Limited Liability Act 1855. In the liquidation of a company limited by shares, Corporations Act s 516 limits a shareholder’s liability to the amount (if any) unpaid on its shares. This is subject to common law principles on lifting or piercing the corporate veil (discussed briefly below), and statutory cognates such as a holding company’s liability for a subsidiary’s insolvent trading under s 588V of the Act. 3.20 By dint of statutory mandate, a shareholder who commits a given amount of capital to a company in effect purchases immunity from further liability for the debts of the company.24 As noted in Chapter 2, prior to the Joint Stock Companies Acts of 1844 promoters of multiple-participant enterprises who were unable or unwilling to secure incorporation via a specific charter would operate as an unincorporated body, under a ‘deed of settlement’ with the assets of the enterprise held by trustees. Harris notes that, by the end of the 18th century (well before incorporation by registration became available), limited liability became ‘a declared motive of entrepreneurs who petitioned for incorporation. Those entrepreneurs explained, either in parliament or to the Law Officers, that limited liability was essential for the success of their undertaking’. He notes that by the [page 118] end of the 19th century ‘limitation of liability joined, or even surpassed, the raising of a large amount of capital as the leading motive for incorporation’.25 3.21 However, while the 1844 Acts facilitated incorporation, they did not provide for limited liability; creditors could still proceed against shareholders for any shortfall. Even after enactment of the Joint Stock Companies Winding-up Acts later in the 1840s, shareholders retained personal liability as contributories. It was not until the Limited Liability Act 1855 that limited liability became a permanent feature of such

companies, but even then it still allowed creditors to enforce unpaid calls by execution and thus pursue the shareholders directly, once the company’s assets were exhausted.26 Limited liability, as with other elements of companies law, went through several statutory refinements until it was cast in the form we recognise today, in the Companies Act 1862, the Act which formed the basis of companies legislation in the Australian colonies. Such is the fundamental importance of limited liability in company law, and so vigorously is it defended as a principle, that it operates even where a shareholder has and exerts complete control over the actions of the company; as discussed below, the corporate veil is only lifted or pierced if there is some additional aggravating factor.

THE ISSUES: DIFFICULT QUESTIONS WITH DIFFICULT ANSWERS FOR INVESTORS 3.22 There is no equivalent statutory assurance of limited liability in the Corporations Act, or indeed elsewhere in the law applicable to trusts, for equity investors in commercial trusts. This immediately gives rise to the following questions: How confident are equity investors in Australian commercial trusts entitled to be that they enjoy ‘immunity’ from enterprise debts of the trustee beyond their committed equity? [page 119] Is the interposition of a trustee between equity investors and trust creditors structurally sufficient, in and of itself, to insulate them against liability to those creditors in the same way that the interposition of a company insulates shareholders from liabilities to the company’s creditors? A shareholder who controls a company is not, without some additional aggravating factor, personally liable for the debts incurred by that company. Is that the case for trust debts where an equity investor controls the trustee?

Does the personal liability risk-profile of equity investors differ as between widely-held and closely-held commercial trusts? Typically, commercial trust constitutions purport to limit equity investors’ personal liability to their subscription money. How effective are these provisions and is it possible for parties to achieve by documentary means that which was thought to require statutory intervention in relation to corporations? 3.23 In effect, it is appropriate to ask if, despite their expectations being similar to those of shareholders in companies, investors in today’s commercial trusts are in any better position regarding limited liability than investors in 19th century unincorporated joint stock companies. A legal vacuum has been created by the evolution of the trust as a vehicle for large-scale enterprise and the apparent tardiness of Australian legislatures to accommodate this development. 3.24 Investors have been encouraged to regard companies and unit trusts, and therefore shares and units, as economically and functionally aligned. Whether this is because they do not perceive investments in commercial trusts as being materially riskier, legally speaking, than investments in companies, or they do but feel compensated for that differential by the attendant tax and other advantages is, without empirical evidence, a matter of conjecture. Either is possible and the absence of clamour for change among the investor community cannot be taken as an indicator either way. Similarly, there is no publicly available evidence that financiers and other commercial counterparties routinely take into account the personal assets of unit holders when extending credit to trustees.27 Investors who choose the trust over the company are, in effect, accepting a trade-off between perceived advantages and certain risks. While the advantages are notorious, largely because they are used actively to promote investment in commercial [page 120] trusts, what is not clear in the absence of empirical study is whether the full extent of the risk side of the trade-off is in all cases appreciated.

3.25 In theory, the viability of the trust device as a competitor to the company would be seriously compromised if equity investors, as commercial trust beneficiaries, perceived that they did not enjoy the same or equivalent limited liability as shareholders in a company. It might not dissuade investment completely, but it would change fundamentally the economics of that investment and the business model of the enterprise since reasonable investors would only participate if their returns reflected their increased risk. If that risk was unlimited as to enterprise debts, the comparison against the company would break down rapidly because investors’ risk profile would more closely resemble that of the members of a general partnership. 3.26 It is argued that the law as applicable to commercial trusts admits of the possibility of unlimited personal liability for equity investors in respect of contract debts incurred by their trustee in two distinct circumstances: 1. directly to a creditor if the relationship between the trustee and equity investors has acquired the character of agency as a result of actions of the investors amounting to control of the trustee, either generally or in connection with that particular creditor’s debt. The point of contention in this regard is how and in what circumstances that might occur;28 and 2. indirectly, that is via the trustee under a right of personal indemnity. There are two points of contention in this regard: (a) whether and in what circumstances the trustee has a right of personal indemnity against the equity investors (that is, in addition to its indemnity with respect to trust property: see the next chapter), and (b) if the trustee does have a personal indemnity in any given case, whether trust creditors may subrogate to that indemnity in the way they may subrogate to the indemnity against trust property. There is nothing unique or peculiar about the nature of unit trusts, even those which are MIS, and no matter how similar they appear to a company, that shields them or their investors from these outcomes. Due to the nature of trusts and the legal regime that governs them, efforts to

eliminate this risk by structuring and documentary techniques are only partially successful. [page 121]

THE PRIMA FACIE RULE: THE TRUST VEIL AND AN ‘ILL-DEFINED SPECIES OF LIMITED LIABILITY’29 3.27 The corporate law doctrine of lifting or piercing the corporate veil is inapplicable to trusts — the trust is not, of course, a legal entity like a corporation. But it is legitimate to speak of a ‘trust veil’ to describe the interposition of the trustee between the equity investors and trust creditors. It is argued that the trust veil may be lifted, pierced or disregarded to give creditors recourse against equity investors for the contract debts of the trust enterprise in insolvency in circumstances where the corporate veil could not.30 3.28 The starting point for any discussion of the liability of a trust beneficiary for contractual liabilities incurred by the trustee is the somewhat deceptively straightforward proposition that, because it is the trustee and not the beneficiary incurring the liability then as a matter of trust law and, indeed, privity of contract, the external counterparty has no right of action against the beneficiary directly with respect to that liability; this is so even in the absence of an express stipulation to that effect in the contract between the trustee and the counterparty.31 The trustee contracts as principal and trust debts are its own personal debts; it does not, absent an express appointment or relevant conduct, engage with contractual counterparties as agent for the beneficiaries, even though the benefit of such contracts will be held as trust property for their benefit. The trustee does not act under a duty of obedience to the beneficiaries; rather, it acts under a duty to carry out the terms of the trust.32 The conventional position is that equity protects the trustee against this personal liability by giving it certain rights of indemnity as against the assets comprising the trust fund. These propositions are discussed in more detail in the following chapters.

3.29 If that were the end of the analysis, then equity investors in commercial trusts would be insulated against creditors; the interposition of a trustee between the beneficiaries and trust creditors would operate in a similar way to the interposition of a company between the shareholders and a company’s creditors. Limited liability would be assured under trust law and, at least in this respect, [page 122] one could argue that equity investors in trusts are in no worse a legal risk position than shareholders. That, however, is merely a prima facie conclusion, even if a powerful one. There are at least two scenarios in which equity investors may be personally liable for trust debts: one direct and the other indirect.

DIRECT LIABILITY: THE HYBRID TRUST-AGENCY AND TRUST-PARTNERSHIP 3.30 Consider the corporate law doctrine of lifting or piercing the corporate veil. While a company is not normally in partnership with its shareholders, and it does not otherwise normally contract as agent of its shareholders,33 a court may in appropriate circumstances be persuaded to look through or behind the corporate entity to fix a given liability on those who own it. The authorities demonstrate a range of circumstances in which the courts will do this; sometimes, but by no means always, this is done on an implied agency basis.34 Note that care must be exercised when speaking of the ‘implied agency’ basis of the corporate veil doctrine; a finding that a company has acted as the agent of the parent or controlling shareholder is to respect rather than disregard the corporate entity status of the company, and to apply basic agency law to look through the agent to fix a liability on its principal.35 In this context it might be more appropriate to speak of lifting or looking behind, rather than piercing, the corporate veil. Nevertheless, it is an accepted category within the broader concept of the veil doctrine because it achieves a similar economic, if not

necessarily legal, outcome as other categories which operate by ignoring or notionally annihilating the corporate entity.

The implication of agency36 3.31 The position of an agent who incurs a debt contrasts with the position of a trustee who does the same. Just as a trustee does not (normally) contract as the agent of the beneficiary, an agent does not (normally) contract as a trustee of the principal. An agent acts under powers delegated by its principal, and the debts it incurs properly within that delegated authority are the debts of its [page 123] principal, just as if the principal itself had entered into the engagement.37 These agency principles apply also where two or more persons constitute a partnership; subject to the partnership instrument (if any), each partner is an agent of the firm and of the other partners for the purpose of the business of the partnership.38 3.32 Although the roles of trustee and agent are legally and conceptually different they are not mutually exclusive; they may overlap and co-exist, partially or entirely, within the same factual matrix.39 Similarly, it is possible for a relationship between two or more persons to comprise a trust and a partnership simultaneously; partnership is the relationship which exists between persons carrying on a business in common with a view of profit, but one or more of the partners may hold partnership assets on trust for all of them and be delegated with authority to engage with external parties on behalf of the firm as a whole.40 In an 1847 case involving Australia’s first significant banking collapse, Bank of Australasia v Breillat (1847) 13 ER 642, the Privy Council applied ordinary principles of partnership law in deciding that the directors of the bank, which was an unincorporated joint stock company, had the power under the deed of settlement to borrow money and that they acted as agents for the

shareholders, and so bound them, in exercising that right (see in particular the discussion at 657–8). 3.33 The High Court of Australia has said that ‘agency is a word used in the law to connote an authority or capacity in one person to create legal relations between a person occupying the position of principal and third parties’: [page 124] International Harvester Company of Australia Pty Ltd v Carrigan’s Hazeldene Pastoral Company (1958) 100 CLR 644 at 652. The question therefore is this: in what circumstances, if any, can a person who bears an express appointment as trustee but not as agent nonetheless, in relation to a given debt or liability, be held to have acted as the agent of the beneficiary, thus making the debt that of the beneficiary as principal and displacing or modifying the prima facie trust law position? This may occur by virtue of the trustee and beneficiary being partners, in which case the trustee and beneficiary might be jointly and severally liable, but need not; it may arise under an implied agency simpliciter. 3.34 These are questions of construction of the true nature of the relationship between the parties, based not only on the terms of the trust instrument but also on their conduct and other relevant circumstances.41 If either by express provision in the instrument of trust or by mutual conduct the relationship acquires certain characteristics, the fact that it is first a trust does not preclude construction of a relationship of principal and agent or one of partnership as between the beneficiaries and the trustee. The agency relationship must be consensual but need not be express; it may exist even in the face of an express disclaimer in the trust instrument (and many trust instruments, particular constitutions for MIS, do contain a clause along the lines of ‘Any relationship of agency between the Trustee in its capacity as such and any Unit holder is expressly excluded’). The necessary consent may be implied from conduct, even if the parties have no express intention to create a relationship of principal and agent.42 The authorities are ‘clear that if in fact the relationship is properly

characterised as one of agency then the fact that one of the parties sought to avoid that consequence will not prevent a court from concluding that an agency relationship existed’: ACN 007 528 207 Pty Ltd (in liq) v Bird Cameron (Reg) (2005) 91 SASR 570 at 594. There need not be a permanent or general agency or partnership between the parties; it may exist in relation to a single specific debt: Kirkpatrick v Kotis (2004) 62 NSWLR 567; [2004] NSWSC 1265. If an agency exists, a contractual liability might be of the beneficiary alone, or of the beneficiary and the trustee jointly: Teheran-Europe Co Ltd v ST Belton (Tractors) Ltd [1968] 2 QB 53.

The ‘control test’ 3.35 In deciding whether the prima facie position under trust law is displaced or modified by an implied agency, a critical question is the degree to which the beneficiaries control, or have the right to control, the trustee. The authors [page 125] of Bowstead on Agency state at [1-017] that ‘a distinction between agent and trustee … is that control cannot in general be exercised by beneficiaries over trustees’. In its 2000 decision Scott v Davis (2000) 204 CLR 333, the High Court of Australia held at [229] that a trustee is not ordinarily an agent, and stated the control principle of agency (although without any further discussion): … a trustee of a settlement inter vivos, whilst a fiduciary to the beneficiaries, ordinarily will not be an agent. This is because the legal title to property is vested in the trustee and, in the absence of an express provision in the settlement, the trustee is not subject to the exercise of ‘control’ by the settlor or beneficiaries in the same way as an agent is controlled by the principal.

3.36 In the commercial trust context, the authors of Bogert on Trusts describe the difference as follows at §1161: The primary difference between real estate trusts … and business trusts … is that the trustees of a business trust act as principals free from control by the beneficial owners, while the

trustees of a real estate trust are nominees for the beneficial owners and act under their direction. A business trust is used in lieu of other entity forms (such as corporations, partnerships and limited liability companies).

But what degree of control in the hands of the beneficiary is sufficient to characterise a trustee as an agent? 3.37 One may visualise a continuum or spectrum.43 At one end, the beneficiaries are passive; they might have no greater rights than the right to enforce the proper administration of the trust by the trustee, while the trustee has a broad discretion in its decision-making, including in relation to incurring contract debts. In this case the prima facie position would prevail. The prototypical example of this is the discretionary trust.44 At the other extreme, the trustee is passive; it holds title to trust assets as nominee or custodian only, while the beneficiary possesses all the decision-making power and exerts control by giving the trustee directions, such that the trustee is merely a cipher. In these circumstances, an implication of agency would be almost irresistible. A commonplace example is an arrangement under which a stockbroker holds shares in its own name for an active dealer client but has little or no discretion with respect to dealings with them, acting only in accordance with the instructions of its client. There, the trust may be described as a bare or nominee trust; indeed, ‘a bare trustee has a duty to … [page 126] refrain from active management that does not fall within this duty’.45 Thus, another way of viewing the test might be to distinguish between passive and active involvement of the beneficiaries in the actions of the trustee. The challenge is to define the precise point of recharacterisation along that continuum. 3.38 It is quite clear under United States law that if a beneficiary has the right to exert a principal-like degree of control over the acts of the trustee, the relationship may be characterised as a hybrid trust-agency arrangement. Section 8 of the Restatement states that ‘an agency is not a trust’. However, §14B of the Restatement (Second) of Agency (1958)

provides that ‘one who has title to property which he agrees to hold for the benefit and subject to the control of another is an agent-trustee and is subject to the rules of agency’ (emphasis added). The explanatory comment to §14B states that ‘when the required elements in each relation exist, that is the holding of a title by one subject to the directions of the beneficiary, there is both an agency and a trust relation’. This is consistent with §1 of the Restatement (Second) of Agency, which defines agency as ‘the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act’ (emphasis added). 3.39 The issue arose in a number of decisions concerning Massachusetts trusts.46 There were lengthy debates at the time, in the courts and the literature, much of it turning on the degree to which the equity holder beneficiaries (described as ‘shareholders’ despite the unincorporated form) controlled the trustee’s decision-making and the related question of whether the shareholders and the trustee were in partnership.47 At stake was a liability issue; agency or partnership would result in investor liability for enterprise debts. The requisite degree of control was contentious and uncertain. In some states, particularly in Massachusetts itself, the courts were relatively indulgent and applied liberally [page 127] the ‘trust veil’, that is the trustee contracts as principal and not as agent or as partner, thus giving the shareholders the trust law equivalent of limited liability.48 The courts in some other states were hostile to the business trust, none more so than the Supreme Court of Texas which decided that participants in all business trusts, even if overtly structured as such and not as partnerships, are liable for all obligations of the trustee incurred in conducting the business of the trust, even in a case where the trustees had plenary powers to conduct the business with almost no control by the shareholders.49 The issue has since been resolved legislatively (discussed below). 3.40 The control principle has been identified in Australia but appears not

to have been fully ventilated. The basic position has been stated thus: If a settlor were to reserve power to give directions generally to the trustee the trustee would also be an agent of the settlor with the possible result that the trustee could contract as agent for the settlor so as to make the settlor liable to the other contracting party. Likewise the conferring in the trust instrument on a beneficiary of a power to give directions to the trustee could result in an implied relationship of principal and agent between the beneficiary and the trustee …50

3.41 The authors of Ford on Corporations Law agree, stating that: ‘If a trust instrument were to give beneficiaries wide powers to direct a trustee, the beneficiaries might be treated as principals of the trustee: there would be an agency relationship as well as a trust relationship.’51 3.42 While the rule, so stated, appears to be uncontroversial as a matter of principle, the precise degree of control which, under Anglo-Australian law, might activate the risk of recharacterisation is unclear. In Hollis v Vabu (2001) 207 CLR 21, the High Court of Australia confirmed, at 40–1, that control in [page 128] the agency context did not require the actual exertion of control or direction but merely the right to do so, even if only in relation to incidental or collateral matters. In Optus Networks Pty Ltd v Horman [2010] VSC 108 the Victorian Supreme Court held, at [37], that ‘the question whether a party acts as agent or trustee for another does, at least to a material degree, depend upon the level of potential control which the other might exercise over the particular party’ (emphasis added), citing United States and Canadian authority. A month later in Perpetual Trustees Australia Ltd v Schmidt [2010] VSC 67 the court clarified at [125]–[126] that control is not a necessary condition to a finding of an agency relationship although it may be indicative, endorsing the views of Finn J in South Sydney District Rugby League Football Club Ltd v News Ltd (2000) 177 ALR 611; [2000] FCA 1541.52 In both cases the issue was decided on the facts and in neither case did the court attempt to establish a test for the degree of control that is sufficient to engage this principle.

3.43 There is a series of 19th century English cases involving unincorporated joint stock companies structured as trusts, where the question was whether the company carried on a business and, if it did, whether the business was carried on by the trustees in their own right or as agents of the investors. The decisions are inconsistent on these issues and, on examination, appear to have been decided on their facts and the terms of the trust instrument, without generating an apparent normative rule as to control. In some cases, ambiguous drafting exacerbated the problem; in some the court was split with strongly opposing views on the main question.53 3.44 In the 1980s a Canadian scholar, Robert Flannigan, considered the English and American authorities and proposed a ‘control test’.54 In Flannigan’s test, it was not necessary that the beneficiaries had complete control over the trustee; control could, for example, be at issue in relation to a given debt. He posited [page 129] that the question should be considered from the viewpoint of the engaged third party: was it the beneficiary’s acts that affected the position of the third party or those of the trustee acting alone in exercising an authorised discretion?55 In this, he identified in the authorities a distinction between beneficiary rights which, if exercised, affect a trustee’s dealing with trust assets including decisions on how they are to be deployed (which rights, Flannigan argued, trigger the risk of recharacterisation due to control in a relevant sense), and rights which deal with structural matters, for example, the election, removal and replacement of trustees, amendments to trust instruments and termination of the trust (which should not). 3.45 Flannigan’s arguments were animated by the policy tension between beneficiary protection and creditor protection. As between beneficiary and creditor, if the former was passive in the relevant engagement, then its protection against the creditor is limited liability (in the trust veil sense) and the creditor ought to be left with its rights against the trustee and, through it, the trust estate. If, on the other hand, the beneficiary was

actively in control of the decision that engaged the creditor, then it has implicitly chosen to forego that protection and the interests of the creditor ought to prevail; the beneficiary cannot have it both ways. In other words, the trade-off for the shelter of the trust veil is passivity in relevant decisions; to allow beneficiaries to exert control in a way that affects external parties while remaining free of personal liability for those actions would create an artificial barrier vulnerable to the risk of fraud. Of course, a counterparty is always free to agree limited liability for beneficiaries in any circumstances as a matter of contract, but that would need to be bargained for. 3.46 Flannigan’s views met with objection from another Canadian commentator, Maurice Cullity, who attacked Flannigan’s reliance on the English authorities he cited, argued that no Canadian authority supported his arguments and cited contradicting authority. Cullity distinguished the American courts’ greater willingness to find agency through control as peculiar to that country and identified a degree of immunity afforded to beneficiaries of business trusts in Canadian authority which colour Flannigan’s thesis. He conceded that the agency argument was available but limited it to situations of bare trust only.56 Flannigan and Cullity exchanged conflicting views on these issues over a period of years; the vigorous and compelling debate between them is recorded in a [page 130] series of articles in the Canadian literature.57 Flanagan’s control test has found support in the Canadian courts.58 3.47 In the end, the precise location of the point along the continuum at which control by beneficiaries is sufficient to trigger the risk of recharacterisation of a trustee (other than a bare trustee) as the agent of the beneficiary may not be capable of identification as a normative rule. However, it might become apparent as a matter of fact and evidence in relation to any given debt or liability. There is much appeal in Flannigan’s analysis, but degrees of control are not always straightforward matters, particularly if the trust instrument appears on its face to give the trustee

wide discretion. Perhaps the more germane enquiry is the degree of involvement of the beneficiaries in the day-to-day decision-making of the trustee (particularly if they, or their nominees, are directors of a trustee which is a company) or, in relation to the incurrence of a specific debt or liability, the act of incurring it. In this, more than mere consultation would be required; there would need to be the imposition of the beneficiaries’ will upon the trustee, even if falling short of control, in the sense that the trustee remained legally entitled to exercise a discretion to resist but did not. In any case, the threshold for lifting the trust veil is much lower than that for the corporate veil.

Lifting the trust veil 3.48 What are the ramifications of an implied agency relationship, for example, in the context of a corporate group where ‘subsidiaries’ include trusts, that is the immediate parent company is the only, or the controlling, beneficiary and where the trustee is a subsidiary? In those circumstances, there is no question but that the trustee, as a subsidiary, is under the control of the beneficiary who is its parent but in this situation there are two separate legal relationships between them: parent + subsidiary and beneficiary + trustee. [page 131] 3.49 While as a matter of company law debts incurred by the subsidiary on its own account could not be sheeted home to the parent merely because of that control, there would seem to be opportunity for creditors of the subsidiary in its trustee capacity to fix liability for trust debts on the beneficiary parent, in a trust law approximation of veil-lifting. The same question arises for a unit trust not within a corporate group but with a sole unit holder or a dominant majority unit holder. 3.50 In relation to companies, Australian courts may be persuaded to look behind the corporate veil, but given the import of doing so in the face of separate legal personality, they will be inclined to do so only in relatively

extreme circumstances.59 One such circumstance is based on principles of implied agency, where a shareholder controls the subject company. However control, even complete control, is not of itself sufficient. If it were otherwise then the concept of separate legal personality would largely be annihilated, and certainly so within wholly owned corporate groups.60 Control in this context must be accompanied by an aggravating factor, such as a failure to provide the company with adequate resources to perform its functions.61 Even the statutory manifestation of the corporate veil doctrine which operates to impose liability for insolvent trading by a subsidiary on its holding company, Corporations Act s 588V, requires more than mere control. Among other things, the holding company or one or more of its directors must be aware at the relevant time that there are grounds for suspecting the subsidiary’s insolvency or, having regard to the nature and extent of the holding company’s control over the subsidiary’s affairs and to any other relevant circumstances, it is reasonable to expect that a company in the holding company’s circumstances would be so aware or that one or more of its directors would be so aware. 3.51 However, the premises which underpin the courts’ inherent reluctance to apply the corporate veil doctrine have no place in looking through a trustee on an implied agency basis. First, the primary constraint on the corporate veil doctrine is legal entity status itself, which the courts are strongly inclined to respect unless it is abused in a relevant way; a trust, of course, has no separate legal personality [page 132] to respect. Secondly, an inbuilt trade-off for limited liability is the doctrine of maintenance of capital and statutory constraints on the payment of dividends (see Corporations Act Pt 2J.1 and s 254T respectively), which are designed to benefit creditors by preventing the dissipation of a company’s assets back to the investors except in circumstances where creditors’ interests are protected. There is no such inbuilt trade-off or creditor protection in respect of trusts and, indeed, the return of trust capital to unit holders, either by distributions on units or a redemption of them, and the payment to unit holders of other amounts, may be effected

with relative ease (which, as discussed in Chapter 2, is one of the very useful advantages of the commercial trust over the company). Thirdly, the ‘aggravating factor’ of under-resourcing required in corporate veil cases can, in a practical sense, be seen as merely derivative of the previous two points. It exists as a brake on the veil doctrine, so that mere control cannot of itself be grounds for violating the sanctity of legal entity status, while simultaneously constituting evidence that the maintenance of capital protection has failed. Finally, a further trade-off for limited liability is the statutory preference given to creditors over shareholders in an insolvent winding up; no such preference is assured under trust law and indeed it is possible for the beneficiaries of a trust to be preferred over innocent creditors (matters which are discussed in Chapter 5). 3.52 Some insight into the circumstances in which a court might be persuaded to lift the trust veil can be gleaned by considering the trajectory of the corporate doctrine. In an empirical study Ramsay and Noakes concluded that: (1) there has been a substantial increase in the number of lifting or piercing cases heard by courts over time; (2) courts are more prepared to pierce the corporate veil of a proprietary company than a public company; (3) piercing rates decline as the number of shareholders in companies increases; (4) courts pierce the corporate veil less frequently when piercing is sought against a parent company than when piercing is sought against one or more individual shareholders; and (5) courts pierce more frequently in a contract context than in a tort context.62 If this were to be extrapolated for commercial trusts, it would indicate that the courts might be prepared to consider direct liability arguments in a closely-held trust with a single or a dominant majority unit holder. However, an issue that appears not to have been satisfactorily addressed in the cases and literature is how the ‘control test’, to the extent that expression has content, is to be analysed by reference to voting rights in a widely held unit trust, that is where no single unit holder alone [page 133] has the ability to control or direct the trustee, but the unit holders as a

matter of fact act together to direct the trustee in relation to a crucial decision.63 3.53 To protect against the risk of partnership and breach of the prohibition on unincorporated business associations in Corporations Act s 115, it is common practice in commercial unit trust instruments to give the trustee wide discretionary powers and the right to decide how and when to exercise those powers, subject to the instrument and the law: see, for example, the ‘plenary powers’ clause set out in Part 1 of Appendix 4: ‘Protecting the trustee’. The instrument will also expressly circumscribe the nature of the unit holders’ interests in the trust fund. It will allow for majority decisions (including giving directions to the trustee, or its removal and replacement) to be made on a majority vote of unit holders. Does the mere existence of such voting rights mean the unit holders, as a whole, have control in the requisite sense and are they, as a whole, the ‘principal’? Some United States and Canadian authorities would suggest so; in Australia, if the High Court’s test for control in Hollis v Vabu is to be the touchstone, the same result might follow.64 But then, where a controlling decision to incur a debt has been made by majority vote rather than unanimously, who would be liable as ‘principal’ — all unit holders or only those who voted in favour? The authorities provide no guidance. 3.54 It is appropriate at this point to note that the definition of ‘managed investment scheme’ in Corporations Act s 9 includes as an essential element that ‘the members do not have day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions)’. [page 134] In other words it seems that, as a policy matter, if the investors have sufficient control over the operations of a scheme, and therefore over the trustee, they are taken not to be in need of the investor protections provided by Chapter 5C. The courts have given this a narrow interpretation such that the exclusion only operates if the members as a whole, and not a lesser number or committee of them, are involved in the

control and are bound by it, that control is in fact and not merely a legal right, and it involves participation in making the routine, ordinary, everyday business decisions relating to management.65 However, because the Corporations Act does not resolve the question of limited liability one way or the other, and the common law ‘control test’ does not necessarily require that control be of a ‘day-to-day’ nature, this is a distinction without a difference for present purposes. 3.55 Numerous cases have involved parties having or seeking to acquire ‘control’ of a trust enterprise structured as a unit trust through the holding or acquisition of units sufficient to entitle them to exercise majority rights as against the trustee. Some of these cases involve an acquisition of sufficient units to be able to remove and replace the trustee.66 There appears nothing in those cases or the literature which seriously suggests that, in those circumstances, the trustee (or replacement trustee) becomes the agent of the unit holders such that they then carry personal liability for trust debts incurred. This may be simply because the argument has not been raised, or it may be out of an implied deference to the parallel situation with companies, that is that mere control of the composition of the board of directors is not sufficient to look through the corporate entity. 3.56 In the end, the essential question remains: why should mere control by equity investors of, or active participation by them in, decisions of a commercial trustee which give rise to enterprise debts put them at risk of personal liability for those debts when that is not the result for shareholders doing the same with respect to their company, absent a relevant aggravating factor? There is no reason in logic or theory for this difference; it is explicable only by reference to regulatory dissonance. [page 135]

INDIRECT LIABILITY: THE TRUSTEE’S PERSONAL INDEMNITY 3.57 Equity’s protection of the trustee by allowing it a priority right of indemnification out of trust property for debts properly incurred is

sufficiently settled as to be a defining characteristic of the office of trustee and integral to the institution of the trust: see Chapter 4. Subrogation to this indemnity is the unsecured creditor’s only route of access to the trust assets: see Chapter 5. 3.58 However, a trustee may also have rights of indemnification against the beneficiaries personally, although there is surprising uncertainty around the question. The two indemnities are fundamentally different legal rights; the proprietary indemnity is a right in rem with respect to the trust property, while the personal indemnity is a right in personam against the beneficiaries; despite this, they have been described as merely two aspects of the same trustee right.67 A personal indemnity could operate indirectly to make the beneficiary liable for trust debts, thus undermining indirectly limited liability by virtue of the trust veil. Ford thought that, based on the authorities, the principle may only apply to trusts involving business or investment ventures and not to family arrangements,68 and while not expressed as such in the cases, this is vindicated by the weight of authority. 3.59 In the absence of an express indemnity in the trust instrument (or, indeed, an express exclusion of it: see below), the questions which remain open include: (1) in what circumstances does a personal indemnity arise; and (2) if it does exist, may creditors subrogate to it in the way they may subrogate to the trustee’s proprietary indemnity?

In what circumstances will the personal indemnity arise? 3.60 It is sometimes thought that a personal indemnity against beneficiaries only arises in respect of debts incurred by the trustee at their request or direction. This is not the case; on the authorities, the personal indemnity may exist in all fixed trusts, absent an express exclusion. On a strict view, the test is not whether a request has been made, but whether the debt was incurred properly within authority and for the benefit of the beneficiaries — which would, by definition, capture all trust debts. If this is the case, then the beneficiary is, in effect, in an economically similar

position to a principal — despite the fact that, as discussed above, it is clear that a trustee does not contract as the beneficiaries’ agent. [page 136] 3.61 The Privy Council decision in Hardoon v Belilios [1901] AC 118 is most commonly cited as authority for the existence of a personal indemnity. The general principle emanating from that decision is that a trustee is entitled to an indemnity for liabilities properly incurred in carrying out the trust; that right extends beyond the trust property and is enforceable in equity against a beneficiary who is absolutely entitled and who is sui juris; liability arises from status and not conduct. This principle has support in Australia, including from the High Court.69 3.62 However, the law on this point is not necessarily settled. While there appears to be little doubt that a liability incurred expressly at the request of the beneficiary engages the personal indemnity,70 beyond that its existence and scope of application appear to depend on the facts and the relationship between the trustee and beneficiary. Hardoon v Belilios involved a bare or nominee trust in respect of shares; the Board acknowledged that the trustee had no beneficial interest in them (the beneficiary was described as the ‘absolute beneficial owner of [the] trust property’) and had no active discretionary powers in respect of them. In support of its decision, the Board cited ancient authority, Balsh v Hyam (1728) 2 P Wms 453, where a trustee was granted personal indemnity in respect of moneys borrowed at the request and for the benefit of the beneficiary, yet there was no such request by the beneficiary in the case before it. In both a bare trust and where an express request has been made, consistent with the logic of the ‘control’ arguments above in connection with the agency risk, the finding of a personal indemnity is not surprising, nor is the sentiment which infuses the well-known statement of Lord Lindley that ‘the plainest principles of justice require that the cestui que trust who gets all the benefit of the property should bear its burdens unless he can shew some good reason why his trustee should bear them himself’.71 But his Lordship did not confine the principle to circumstances of bare trust or request; rather he found that there was a general right in

equity, unless expressly negated. In his view, all that is required is that the trustee has incurred liability within the scope of its trust authority for the benefit of the beneficiary. 3.63 In what may arguably be seen as a retreat, two years later Lord Lindley, in another Privy Council decision but where a personal indemnity was found not to exist, said: [page 137] In Hardoon v Belilios this Board had to consider the right of trustees to be indemnified by their cestuis que trustent against liabilities incurred by the trustees by holding trust property. The right of trustees to such indemnity was recognised as well established in the simple case of a trustee and an adult cestui que trust. But, as was then pointed out, this principle by no means applies to all trusts, and it cannot be applied to cases in which the nature of the transaction excludes it.72

3.64 With respect, his Lordship’s summary of the Board’s decision in Hardoon v Belilios is misleading. The ‘recognition’ in Hardoon v Belilios was not merely of a principle operating ‘in the simple case of a trustee and an adult cestui que trust’. In any case, in this later decision the Privy Council left open the possibility that in some configurations a personal indemnity may not exist. 3.65 Although it is not mentioned as a motivating factor in the Board’s opinion, it is legitimate to note that the trust property against which the trustee had a proprietary indemnity in Hardoon v Belilios, being shares in a company that was being wound up and on which calls had been made, was worthless; the trustee stockbroker would have been left without recourse of value if the beneficiary had not been obliged to pay the calls. This, and the fact that it involved a single beneficiary who was sui juris and absolutely entitled, means that much of the wider gloss added by the Privy Council on the question of personal indemnity can be seen as obiter. Nevertheless, the courts have since picked up on the wider import of the decision and, in several respects, the scope of the indemnity seems to have expanded. 3.66 In Kemtron Industries Pty Ltd v Commissioner of Stamp Duties

(1984) 15 ATR 627 McPherson J simply stated at 633 that, as well as the proprietary indemnity, a trustee has ‘in general a right to be indemnified by the beneficiaries personally’ citing Hardoon v Belilios. However, as that indemnity had been excluded by the trust instrument and was not in issue in the case before the court, the comment was obiter. 3.67 In Ron Kingham Real Estate Pty Ltd v Edgar [1999] 2 Qd R 439 the question of personal indemnity arose because the trust fund had been depleted by the trustee distributing the assets to the beneficiaries, leaving nothing for the trustee’s proprietary indemnity or, as a result, for trust creditors to reach [page 138] via subrogation. A personal indemnity was found to exist because, as the court said, ‘all the relevant conditions are fulfilled in the present case’, which the court described as being that the beneficiaries were directors of the trustee and were in control of both the affairs of the corporate trustee and the trust. But if the authority for this proposition was, as cited by the court, Hardoon v Belilios, that is problematic. The Privy Council did not indicate that control was a necessary element; on the contrary, it even expressly rejected the existence of a request as a condition precedent to the indemnity arising. The Ron Kingham Real Estate decision was affirmed in Belar Pty Ltd (in liq) v Mahaffey [1999] 1 Qd R 477. Note that in Ron Kingham Real Estate the conclusion was not that control led to agency and thereby direct personal liability of the beneficiaries to creditors as principal, of the type described above; rather, control was seen as the animating factor for the existence of a personal indemnity in favour of the trustee. 3.68 In Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319, one of several seminal cases concerning the rights of trustees of trading trusts in Australia, the High Court said at 352: [I]f a beneficiary actually authorizes [the trustee] to carry on the business [the trustee] is entitled as against that beneficiary to indemnity out of the estate in respect of the debts which, in the course of such carrying on, he incurs to the trading creditors. (emphasis added)

While appearing at first blush to say that the indemnity is personal, the court was merely describing in particular terms the proprietary indemnity. The ‘trust estate’ is not, of course, a person against whom an indemnity may be exercised; the indemnity rather may be seen as being exercisable as against the beneficiary, albeit with a limitation on recourse to the trust estate and no right of personal recourse for any shortfall.73 Nowhere in the discussion of the trustee’s rights in that case does the court identify or suggest the existence of a personal indemnity. In Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360, another High Court of Australia decision often cited in discussion about the rights of indemnification of the trustee of a trading trust, there is no mention at all of a personal indemnity; nor was there mention of a negativing provision in the trust instrument. A similar observation may be made with respect to Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99. On the other hand, in Marginson v Ian Potter & Co (1976) 136 CLR 161, Jacobs J of the High Court assumed at 175–6 [page 139] that a personal indemnity existed, referring only to Halsbury’s Laws of England, but did not provide any further reasoning, or reference to supporting authority. As noted above, in Ron Kingham Real Estate the court found for the existence of a personal indemnity relying solely on Hardoon v Belilios and Marginson. 3.69 On its facts, Hardoon v Belilios involved a single beneficiary, but whether the personal indemnity applies where there are multiple beneficiaries was for a time in doubt. Ford thought that, despite the facts of Hardoon v Belilios, it would apply even where there were multiple beneficiaries,74 as did Hughes, after acknowledging that the authorities are in conflict.75 The matter has since been resolved in the affirmative, and the liability will be proportionate.76 3.70 On the question of whether there is any natural ordering of the proprietary and personal indemnities, Ford observed that many of the authorities held that the indemnity only arose once the trustee had

exhausted the trust fund, giving the personal indemnity the nature of a ‘last recourse’ right; he acknowledged however that this did not necessarily mean that it was an immutable rule.77 Hughes thought that, where both indemnities exist, the trustee need not exhaust its rights against the trust estate before calling on the beneficiaries.78 The New South Wales Court of Appeal has implied that both indemnities are actionable at the same time.79 On the other hand, the Federal Court has held that the personal indemnity will only arise where the trust assets are insufficient to satisfy the proprietary indemnity.80 3.71 This lack of consistency in the authorities must mean that, unlike the proprietary indemnity, and despite Lord Lindley’s declaration, noted above, that ‘the plainest principles of justice require that the cestui que trust who gets all the benefit of the property should bear its burdens’, the personal indemnity is not a necessary incident of the office of trustee at all. It may not arise in the hands of a person automatically by virtue of their assuming the office of trustee, but [page 140] rather may exist only in appropriate circumstances (and even then there is a lack of clarity as to what those circumstances ought to be). Unlike the proprietary indemnity, the courts have no hesitation in supporting its consensual exclusion in any given case (as to the courts’ position on attempts to exclude the proprietary indemnity, see 4.57). 3.72 Finally, it is interesting that state and territory trusts/trustee legislation, and Corporations Act Ch 5C, expressly recognise the proprietary indemnity, but are silent as to the existence of a personal indemnity.81 Even where a trustee incurs a debt in breach of trust but at a beneficiary’s request, the state and territory legislation empowers the court, as a measure for protecting the trustee, to order the impounding of all or any part of the interest of the beneficiary in the trust estate by way of indemnity, but does not mention a personal indemnity.82 3.73 There is a clear lack of agreement in the authorities on the status of a

separate personal trustee indemnity against beneficiaries. While as a matter of market practice in commercial trusts it is routinely negated by express provision in the trust instrument (see Appendix 3: ‘Protecting equity investors’), the question would become relevant where the parties had failed to do that and the trust documentation is otherwise silent. A more appropriate position for a commercial trust would be a reversal of the current position, that is no indemnity ought to exist unless expressly contracted for.

Can a creditor subrogate to the personal indemnity? 3.74 If a personal indemnity exists, the next question when considering beneficiary liability is whether a trust creditor may subrogate to it. The circumstances in which this issue might arise are: (1) a trust debt has fallen due; (2) trust assets are insufficient to discharge it; (3) the trustee is protected from any personal action by a robust limitation of personal liability clause, and is innocent of any misconduct which would otherwise disengage the limitation; and (4) the trustee is unable or unwilling to pursue the beneficiaries under the personal indemnity. The trustee might not enforce a personal indemnity where, for example, the beneficiaries are directors of or otherwise related to the trustee. [page 141] This fourth element is critical to the discussion in this paragraph because if the trustee does in fact take action under the personal indemnity in relation to a trust debt then the question of subrogation is moot as far as the liability position of the beneficiaries is concerned; if they can be called upon to indemnify a trust debt personally then their liability is not limited. 3.75 The locus classicus regarding the unsecured trust creditor’s position is that it has no direct claim against the trust estate but rather has only a personal claim against the trustee, although it may subrogate to the trustee’s indemnity with respect to the trust property in certain circumstances: this is discussed in Chapter 5. Ford expressed serious

doubts as to whether subrogation was available to the personal indemnity, noting the historical underpinnings of the subrogation right with respect to the trust estate as part of the Chancery Court’s rules for distribution of assets on administration of a deceased estate. Given that history, he thought that the creditor could only access the personal indemnity by bankrupting the trustee and having the right pursued by its liquidator or bankruptcy trustee.83 Of course, if the trustee’s personal liability in relation to a given debt is contractually limited, something which is quite usual in commercial trusts, this route would not be available to the creditor. In McLean v Burns Philp Trustee Co Pty Ltd (1985) 2 NSWLR 623 Young J seemed to assume that subrogation was available, but cited in support cases that involved discussion of the proprietary remedy against the trust estate, at 640. Jacobs J in Marginson v Ian Potter & Co relied on Halsbury’s Laws of England alone in finding that subrogation was available. 3.76 Canadian commentators on the other hand have expressed quite adamant views that, based on Canadian authorities dating back as far as the 19th century, subrogation to this right is not available in that country.84 3.77 In Ron Kingham Real Estate Pty Ltd v Edgar [1999] 2 Qd R 439 the court noted the ambiguity in the cases and the tendency of some authorities not to distinguish between the proprietary indemnity and the personal indemnity when speaking of the creditor’s right of subrogation but, in the end, could not [page 142] refer to any specific decision holding that there is an ability on the part of the creditor to subrogate to the personal indemnity. What followed was of particular interest, however; while finding that there was a personal indemnity and a right to subrogate to it, the court seemed to go further and implied that in some circumstances creditors should be entitled to proceed against the beneficiaries directly in equity, saying at 444: [I]t is difficult to see why in the circumstances of this case the plaintiff here should not be

entitled to sue the beneficiaries directly. The defendants had notice of the plaintiff’s claim at the time they arranged for the trust assets to be paid to themselves, and they enriched themselves at the expense of satisfying the plaintiff’s claim against the trustee. It would plainly be against conscience for them to retain the proceeds of their conduct so as to defeat that claim. In equity they would be considered as constructive trustees of the assets received at least to the extent necessary to satisfy the trustee’s liability. (emphases added)

3.78 This conclusion would generate the same direct liability result as under the implied agency argument above, which is based on control, but the rationale differs in that it relies rather on what appears to be an unjust enrichment basis.85 There appears to be no subsequent support in the authorities for this idea of a broader equity (and the correctness of the decision was queried in Xat Ky v Australvic Property Management Pty Ltd [2007] FCA 1541 at [39]), but it would be interesting to test the High Court of Australia’s position in an appropriate case.

CAN THE RISK OF UNLIMITED LIABILITY BE ELIMINATED THROUGH PRIVATE MEANS? 3.79 It is clear, then, that equity investors in Australian commercial trusts, even those that are MIS, risk unlimited liability for trust debts. This means that, as with the unincorporated joint stock company, promoters who wish to offer limited liability to investors are left to devise ways of achieving it by private means. The question whether it is appropriate or satisfactory for such an important matter to be left to private bargaining in this way is, of course, a policy matter going to the heart of the balance of risk between equity investors and creditors. [page 143]

A contractualised solution for indirect liability: excluding the personal indemnity 3.80 There is nothing in the law that prevents, in principle, a trustee agreeing to waive or exclude, or being bound by an entrenched waiver or exclusion of, any personal indemnity against beneficiaries; the courts have said that such waivers and exclusions are not contrary to public policy and

are valid.86 That contrasts with their position in relation to the trustee’s proprietary indemnity, as discussed in 4.57. Although there is no statutory obligation to do so, well-drafted trust instruments for Australian commercial trusts will invariably contain an express provision excluding the personal indemnity. The emphasis on ‘well-drafted’ is because an exclusion must be express; a provision in a trust instrument which merely confirms the trustee’s proprietary indemnity with respect to trust assets, but is silent as to the personal indemnity, has been held not to exclude the personal indemnity: Causley v Countryside (No 5) Pty Ltd [1996] NSWSC 394. The CAMAC Report notes, in respect of registered MIS, that ‘scheme constitutions usually exempt scheme members from any obligation to indemnify the RE [responsible entity] for costs and liabilities that it has incurred in operating the scheme’, at [2.3.4]. A sample clause is set out in Part 1 of Appendix 3: ‘Protecting equity investors’.87 3.81 These provisions seek to simulate the liability position of a shareholder in a company. However, while it is clear that they are effective against the trustee, the question is their effect as against creditors. It is beyond doubt that a valid clause would protect equity investors against indirect claims by creditors, via subrogation to the trustee’s indemnity, if and to the extent that subrogation might otherwise be available; by definition, subrogation is a derivative claim and gives the creditor no greater claim than that of the trustee. 3.82 It is argued, however, that these clauses would not, without more, protect equity investors against direct claims by trust creditors who have not bargained away the right of direct enforcement and (possibly) who had no knowledge of the exclusion in the trust instrument.

A contractualised solution for direct liability 3.83 Before limited liability for shareholders was mandated by the Limited Liability Act 1855, investors in joint stock companies attempted to limit their [page 144]

liability by provisions embedded in the companies’ constitutional documents similar in substance to that set out in Part 1 of Appendix 3: ‘Protecting equity investors’. In the 1854 decision Re The Sea Fire and Life Assurance Company (Greenwood’s Case) (1854) 43 ER 180 the deed of settlement for such a company contained a clause purporting to limit the liability of the shareholders to third parties to the amount of their shares. Upon an insolvent winding up of the company, a call was made by the official manager on shareholders to assist in discharging debts in excess of the value of assets. A shareholder challenged the call based on the limitation clause. Applying partnership principles the court held that, while the clause may be effective inter se the shareholders, it could not bind creditors. Interestingly, that result was said to apply regardless of any notice the creditors may have had of the limitation; even if ‘the deed … containing such a provision … were hung up in the shop, it would make no difference’.88 This result applied despite the incorporated status that came with registration, because the Joint Stock Companies Act of 1844 not only did not limit the personal liability of shareholders to creditors, by s 25 it expressly preserved it. 3.84 The error committed by the shareholders in Greenwood’s case was in their reliance on the deed of settlement alone, without the company having agreed a limitation with each external creditor bilaterally. The consequence of this error is demonstrated by contrast with a series of cases involving unincorporated insurance companies which, in addition to the limitation clause in their deeds of settlement, had inserted into the terms of the insurance policies which they contracted with customers (that is, contingent creditors) an express limitation of the liability of their shareholders. The limitations were upheld.89 3.85 By way of parallel, more modern authority exists in relation to trustee limitation clauses, where the courts have said that a provision limiting a trustee’s personal liability embedded in the trust instrument would not have the desired effect against a creditor who has not otherwise agreed a limitation with the trustee bilaterally.90 Whether an embedded trustee limitation would have any effect on a creditor with actual notice of it but who had not expressly agreed

[page 145] to a limitation in the contractual engagement with the trustee is an interesting question. The view has been expressed that ‘it is entirely irrelevant to the trustee’s personal liability whether the creditor knew either of the fact of the trust or of its terms’.91 Some American commentators writing at the height of popularity of the Massachusetts trust thought the same, based on New York and Massachusetts superior court authority.92 On the other hand, others pointed to authorities which suggest that knowledge by the creditor of a relevant limitation or exclusion in the trust instrument may ground an estoppel argument.93 This argument would be particularly compelling as a defence against a creditor who had received and was therefore possessed of actual knowledge of the contents of the trust instrument, including the limitation. 3.86 In McLean v Burns Philp Trustee, Young J suggested at 641 that, as a matter of public policy, the courts would override such clauses if they were used as a cloak for fraud on the creditors. That is unremarkable as a statement of principle. Yet, in making this point, he gave the following example: Whilst, of course, no-one in commerce would ever deal with a family trust except after obtaining guarantees from those obtaining the benefit of the transaction, if the situation did occur that a creditor did not take guarantees, equity would not permit the person who got the benefit of the transaction to say that the creditor could only sue the trustee to the limit of the assets of the trust, because of some exemption clause in the trust deed.

3.87 There is no mention of fraud (equitable or otherwise) in that example and, on its face, it seems to suggest that such clauses in trust deeds can never be effective against creditors; this dictum appears to hint at an unjust enrichment justification similar to that implied by the court in Ron Kingham Real Estate, discussed above. However, his Honour did not distinguish between direct and indirect liability; if this dictum was intended to include the situation where the creditor were to seek redress against the beneficiaries via subrogation to a personal indemnity, that would, with respect, run counter to the overwhelming weight of authority.94 [page 146]

3.88 It follows that, to achieve full protection against direct claims, two documentary tools are needed: 1. first, the trust instrument would need to contain an express and comprehensive exclusion of the personal indemnity and any other personal liability; and 2. secondly, the trustee, when contracting with external counterparties, would need to bargain for an express waiver by the counterparty of any rights it might have to pursue the beneficiaries personally, much as trustees currently do in relation to their own personal liability. Appropriately drafted, the benefit of that waiver would be held by the trustee on trust for all beneficiaries from time to time. As with trustee limitation of liability clauses, they would need to be included in every contractual engagement undertaken by the trustee in that capacity, since they operate, if at all, as a matter of contract and not trust law: see generally Chapter 4 at 4.88 and following. Suggested clauses are set out in Appendix 3: ‘Protecting equity investors’.

Undermining the protection 3.89 Of course, even an express documentary waiver is not immune to challenge. Any ambiguity in such a provision is likely to be construed strictly against the beneficiary.95 In any case, most terms of most documents, including trust instruments, are susceptible to modification or displacement by express or implied contrary agreement, or by countervailing conduct. In pursuing an action against beneficiaries, a trustee or a creditor might persuade a court to negate the effect of a waiver of beneficiaries’ personal liability with an argument based on estoppel, misrepresentation or misleading or deceptive conduct — or, indeed, conduct which supports an implied agency argument.

ELIMINATING THE RISK BY STATUTORY INTERVENTION: THE UNITED STATES AND ELSEWHERE

3.90 In order to deal properly with the issue for shareholders in companies, limited liability was ultimately assured by statute. While the enactment of the Limited Liability Act 1855 was not free from controversy (the fear of fraud and reckless risk-taking and, indeed, of ‘vicious and improvident speculation’, was a powerful brake and helps explain why it was so long in coming),96 the [page 147] weaknesses of leaving the issue to private bargaining were acknowledged in the debates over the Limited Liability Bill.97 Yet, this is precisely the situation currently facing equity investors in Australian commercial trusts. 3.91 Such was the concern in both the United States and Canada around the issue of trust beneficiary liability that legislation has been enacted to guarantee limited liability in relation to certain trusts. Similar legislation has been enacted in Singapore. There is no equivalent in Australia of this legislation, including in respect of commercial trusts that are MIS. In relation to members of registered MIS, the CAMAC Report referenced some earlier reports and noted the conflicting views expressed in submissions. It reaffirmed its preference for statutory limited liability for members who do not have day-to-day control over the operation of a scheme but did not make a specific recommendation or suggest language for proposed legislation: see [8.4]. In particular, it did not identify the direct liability risk, or the distinction between it and indirect liability.

The United States 3.92 In the United States, parties seeking to promote or invest in an enterprise entity and to whom limited liability is important enjoy a menu of options when deciding on an entity form. Several of these hybrid entities deliver trust-like flexibility without suffering the risks described above. Given the variety of choices, American promoters and investors seeking the flexibility and tax advantages of the trust but who do not wish to risk the possibility of unlimited liability under the general law of trusts in any

particular state would be unlikely to use a common law trust for risktaking enterprise and expose equity investors to the risk of personal unlimited liability. 3.93 Those who still wish for whatever reason to use a trust or trust-like form have available to them the ‘statutory business trust’ legislation available in various states. This legislation clothes commercial trusts coming within its ambit with company-like characteristics. In doing that, it provides participants with protections that have traditionally been available to participants in a corporate entity. Most relevantly for present purposes is the granting of limited liability for beneficiaries. Uniform Statutory Trust Entity Act §304 provides that: A debt, obligation, or other liability of a statutory trust or series thereof is solely a debt, obligation, or other liability of the trust or series thereof. A beneficial owner, trustee, agent of the trust, or agent of the trustee is not personally liable, directly or indirectly, by way of contribution or otherwise, for a debt, obligation,

[page 148] or other liability of the trust or series thereof solely by reason of being or acting as a trustee, beneficial owner, agent of the trust, or agent of the trustee

3.94 It is acknowledged that this does not represent a general removal of the risk of unlimited liability for all equity investors in all commercial trusts; the benefit is extended only to those who invest in the statutory entity. It is unlikely that the notion of a statutory business trust could be imported into Australia in the short or medium term. In this context, useful guidance is provided by reference to legislation in Canada and Singapore.

Canada 3.95 Several Canadian provinces have enacted legislation to clarify the issue of beneficiary liability in relation to trusts that offer securities to the public. In Ontario, the Trust Beneficiaries’ Liability Act 2004 s 1, headed ‘Limit on beneficiaries’ liability’, provides as follows:

The beneficiaries of a trust are not, as beneficiaries, liable for any act, default, obligation or liability of the trust or any of its trustees if, when the act or default occurs or the obligation or liability arises, (a) the trust is a reporting issuer under the Securities Act; and (b) the trust is governed by the laws of Ontario.98

3.96 In Alberta, British Columbia and Saskatchewan, there are Income Trust Liabilities Acts that are to similar effect.99 Interestingly, the legislation in Alberta and British Columbia goes on to provide that ‘this Act does not affect any liability of a beneficiary of a trust to which this Act does not apply’ and ‘this Act does not affect any liability of a beneficiary of a trust in any other circumstance’ respectively. The Saskatchewan legislation is silent on this point, but it seems that the same result would flow in any case from the fact that the protection only applies to defined trusts. Thus, in all these places, the general law position is unchanged for non-qualifying trusts. 3.97 In Quebec, as with other civil law jurisdictions, the concept of the trust is somewhat problematic, but the Civil Code deals with the issue in Title 7, which is entitled ‘Administration of the Property of Others’. Section 1322 of the Code provides as follows: [page 149] The beneficiary is liable towards third persons for the damage caused by the fault of the administrator in carrying out his duties only up to the amount of the benefit he has derived from the act. In the case of a trust, these obligations fall back upon the trust patrimony.100

Singapore 3.98 Singapore’s Business Trust Act (Ch 31A) s 32 similarly legislates away the risk of personal liability for unit holders in ‘registered business trusts’, in the following terms: (1) … a unitholder of a registered business trust shall not be liable to contribute to the registered business trust or in respect of any debts, liabilities or obligations incurred by the trustee-manager in its capacity as trustee-manager for the registered business trust, other than such outstanding amounts of money, if any, which the unitholder has expressly agreed to contribute to the registered business trust.

(2) The limitation of the liability of a unitholder of a registered business trust referred to in subsection (1) shall apply notwithstanding — (a) any provision to the contrary in the trust deed of the registered business trust; or (b) the winding up of the registered business trust.

APPLICATION TO THE BLACKACRE TRUST HYPOTHETICAL 3.99 Turning to the Blackacre Trust hypothetical, an option available to Bank of Australia would be to investigate the relationship between the Unit Holders and the Trustee, both generally and in particular in relation to the loan transaction. The Trust Deed, if in the usual form, may contemplate that, despite the Trustee’s discretions, the Unit Holders may by majority vote give it directions and oblige it to act in accordance with any such directions. If it could be established that the Trustee exercised little or no discretion of its own in entering into the loan transaction, and that rather it acted at the direction and under the control of the Unit Holders, there may be an arguable case that it was acting as their agent in incurring the debt, thus making the Unit Holders potentially liable to the Bank as principals under the Loan Agreement. Questions regarding the unanimity or otherwise of the decision-making process among the Unit Holders would need to be considered. [page 150] 3.100 A clause in the Trust Deed which purports to limit the Unit Holders’ liability would protect the Unit Holders from indirect liability but there is serious doubt as to whether it would protect them against direct liability if the facts support an implied agency argument; the fact that the Bank had notice of the clause by virtue of being given a certified copy of the Trust Deed may be relevant but not necessarily determinative. The contractualised solution to the unlimited personal liability risk is not a perfect one for the Unit Holders.

CONCLUSION

3.101 Despite apparent similarities, the company and the commercial trust are fundamentally different legal creatures, as are the shares and units they issue. Equity investors in companies are in a better position, in terms of legal risk, than equity investors in trusts. To the extent there might be a perception of parity among investors, the fallacy in that perception is demonstrated most dramatically in relation to the question of personal liability of equity investors for enterprise debts. Unlike shareholders, equity investors in Australian commercial trusts have no statutory assurance of limited liability. 3.102 The answers to the questions posed in 3.22 are worrying for equity investors in Australian commercial trusts. The interposition of a trustee between unit holders and trust creditors is not, in and of itself, sufficient to insulate them against the risk of personal liability to trust creditors in the way that the interposition of a company insulates shareholders from liabilities to the company’s creditors. The trustee may enjoy a personal indemnity against the equity investors in respect of trust debts, to which the creditors may be able to subrogate, resulting in the potential for indirect personal liability for trust debts. Where equity investors possess the ability to control, or actually exert control, over the trustee and its business decisions, there is a risk of recharacterisation of the trust arrangement as a hybrid trust-agency or trust-partnership, with the potential for making the equity investors directly personally liable for contract debts incurred by the trustee. However, beyond the case of a bare trust, the degree of control of the trustee or active participation in the underlying business which is required to trigger this recharacterisation is unclear. 3.103 The contractualised solution in use in current Australian market practice does not deal fully with this risk. Express exclusions in trust instruments which purport to limit investors’ personal liability to their subscription money may eliminate the indirect liability risk by attenuating or excluding any personal indemnity but, at least in the form most commonly seen in current practice, do not deal properly (if at all) with direct liability. In any case, even if the language of exclusion does purport to exclude the direct liability risk, there is doubt that

[page 151] an exclusion clause embedded in a trust instrument is, of itself, sufficient to bind creditors; a direct bilateral contractual waiver, exclusion or limitation may be required from each creditor, along the lines of those currently obtained by well-advised trustees regarding their own personal liability. 3.104 In theory, this risk could apply to the unit holders of a widely-held trust where by the terms of trust material decisions or directions may be effected by majority vote, but that risk is unlikely to materialise in the absence of a provocative factual matrix, such as where control is actually exerted. The risk is much more tangible for the beneficiaries of a closelyheld trust where the unit holders are actively involved in the underlying business, or a trust where there is a dominant unit holder who has the power to exert, or does exert, control over the trustee. However, the issue is less about whether a unit trust is widely-held or closely-held, public or private, or even whether it is large or small — the critical element is active participation amounting to control. Thus, while a shareholder who controls a company is not, without the presence of a relevant aggravating factor, personally liable for the debts incurred by that company, a beneficiary who controls a trustee may very well be. 3.105 The result is that a trust creditor may be able to lift the trust veil, to make equity investors personally liable for enterprise debts, in circumstances where a company’s creditor could not lift or look behind the corporate veil. 1.

Peter W Young, Clyde Croft and Megan Louise Smith, On Equity (Lawbook Co, 2009) at 433.

2.

See, for example, Thomas & Hudson on Trusts at [1.40]–[1.49] and Chapter 7: ‘The Nature of a Beneficiary’s Interest’; Jacobs on Trusts, Chapter 23: ‘The Rights of a Beneficiary’; Ford & Lee on Trusts at [1.8750]; Richard W White, ‘The Nature of a Beneficiary’s Equitable Interest in a Trust’ (Paper presented at the Supreme Court of NSW Annual Conference, 2007) and his recent decision in Jonsue Investments Pty Ltd v Balweb Pty Ltd [2013] NSWSC 325. A useful conspectus of the authorities is contained in Adamstoun Holdings Pty Ltd v Brogue Tableau Pty Ltd [2007] WASCA 43.

3.

See Kam Fan Sin, ‘Enforcing the Unit Trust Deed Amongst Unitholders’ (1997) 15 Companies & Securities Law Journal 108.

4.

Particularly in circumstances where the trust fund has been depleted by distribution to the beneficiaries: see, for example, Ron Kingham Real Estate Pty Ltd v Edgar [1999] 2 Qd R 439; Hanel v O’Neill (2003) 48 ACSR 378; [2003] SASC 409; and Rothmore Farms Pty Ltd (in liq) v Belgravia Pty Ltd (2005) 239 LSJS 105; [2005] SASC 117.

5.

A creditor in those circumstances may also be inclined to explore whether it has any personal recourse against the directors of the trustee company, including under Corporations Act s 197.

6.

Gra-Ham Australia Pty Ltd v Perpetual Trustees WA Ltd (1989) 1 WAR 65; Surf Road Nominees Pty Limited v Tass James [2004] NSWSC 61; Cachia v Westpac Financial Services Ltd (2000) 170 ALR 65; [2000] FCA 161. However, an oppression action may lie against the trustee itself in certain circumstances: Vigliaroni v CPS Investment Holdings Pty Ltd (2009) 74 ACSR 282; [2009] VSC 428.

7.

On 30 October 2013 the Victorian Law Reform Commission announced a review into the desirability of having legislative remedies in Victoria similar to the Corporations Act ss 232– 234 to protect the rights of the beneficiaries of trading trusts who may be subject to oppressive conduct by a trustee. The Commission expects to report by 3 February 2015: see the Commission’s website .

8.

See Underhill on Trusts at [68.2] and Ford & Lee on Trusts [1.8410]. See also Mercedes Holdings Pty Ltd v Waters (No 3) [2011] FCA 236.

9.

Ford on Corporations Law at [11.027].

10. Notable exceptions are Harold A J Ford and Ian J Hardingham, ‘Trading Trusts: Rights and Liabilities of Beneficiaries’ in Finn (ed), Equity and Commercial Relationships (1987) and Vince Battaglia, ‘The Liability of Members of Managed Investment Schemes in Australia: An Unresolved Issue’ (2009) 23 Australian Journal of Corporate Law 122. 11. This letter is referenced in the Turnbull report to the Australian Government, ‘Review of the Managed Investments Act 1998’ (December 2001). 12. Most recently in the CAMAC Report, at [8.4] (albeit briefly and generally, and without identifying any of the arguments put in this chapter). Historically, see Australian Law Reform Commission, ‘General Insolvency Inquiry’ (Report No 45, 1988), Volume 1 at [252]–[253]; Australian Law Reform Commission and Companies and Securities Advisory Committee, ‘Collective Investments: Other People’s Money’ (Report No 65, 1993), Volume 1 at [11.37] and Volume 2 Recommendation 128; Companies and Securities Advisory Committee, ‘Report to the Minister for Financial Services and Regulation on Liability of Members of Managed Investment Schemes’ (March 2000); the Turnbull report to the Australian Government, ‘Review of the Managed Investments Act 1998’ (December 2001) at [2.6.2]; Australian Government, ‘Review of Non-forestry Managed Investment Schemes’ (December 2008); Parliamentary Joint Committee on Corporations and Financial Services, ‘Inquiry on Aspects of Agribusiness Managed Investment Schemes’ (2009); CAMAC Discussion Paper at [7.3]. 13. Because this is not an economics-based argument, no empirical analysis has been conducted in relation to risk/reward and pricing-for-risk differentials that may exist between the returns offered to or received by investors in trusts as against those for investors in companies, or on the effect any perceived difference in risk profile might have on capital allocation decisions by investors. 14. Separate legal personality and limited liability are not the same thing, or even necessary bedfellows; a modern example is the limited liability accorded to some partners in unincorporated limited partnerships: see, for example, Partnership Act 1892 (NSW) Division

3; Partnership Act 1958 (Vic) Pt 3; Partnership Act 1891 (Qld) Chapter 3 Limited Partnerships Act 1909 (WA); Partnership Act 1891 (SA) Pt 3; Partnership Act 1891 (Tas) Pt 3. 15. Frank H Easterbrook and Daniel R Fischel, The Economic Structure of Corporate Law (Harvard University Press, 1991) at 40. 16. The Economist, 18 December 1926 at 1053, cited in Paul G Mahoney, ‘Contract or Concession — An Essay on the History of Corporate Law’ (1999–2000) 34 Georgia Law Review 873 at 875. 17. Richard A Posner, Economic Analysis of Law (8th ed, Wolters Kluwer, 2010) at §14.3; Frank H Easterbrook and Daniel R Fischel, The Economic Structure of Corporate Law (Harvard University Press, 1991) Chapter 2: ‘Limited Liability’. 18. Joseph Savirimuthu, ‘Governments, Markets and Risk Paradigms: A Case Study of Winsor v Bloom’ (2003) 5 Insolvency Lawyer 186 at 191. See also Manpac Industries Pty Ltd v Ceccattini (2002) 20 ACLC 1304; [2002] NSWSC 330 at [78]. 19. Ian M Ramsay, ‘The Expansion of Limited Liability: A Comment on Limited Partnerships’ (1993) 15 Sydney Law Review 537. Compare Stephen Griffin, ‘Limited Liability: A Necessary Revolution?’ (2004) 25 Company Lawyer 99 and Graeme G Acheson, Charles R Hickson and John D Turner, ‘Does Limited Liability Matter? Evidence from Nineteenth-Century British Banking’ (2010) 6 Review of Law & Economics 247. 20. Frank H Easterbrook and Daniel R Fischel, The Economic Structure of Corporate Law (Harvard University Press, 1991) at 49–50. 21. Ford & Lee on Trusts at [1.080]. Getzler and Macnair take issue with this conventional view and note that the courts used trust law and other doctrinal tools to construct a form of enterprise limited liability in the period before the mid-19th century companies legislation: see Joshua Getzler and Mike Macnair, ‘The Firm as an Entity Before the Companies Acts’ in P Brand, K Costello and W N Osborough (eds), Adventures of the Law: Proceedings of the Sixteenth British Legal History Conference, Dublin, 2003 (2005). 22. Kevin Lindgren, ‘The Birth of the Trading Trust’ (2011) 5 Journal of Equity 1 at 5–6. 23. David Kershaw, The Path of Fiduciary Law (London School of Economics and Political Science, Law Dept, 2011) at 9. 24. Ooregum Gold Mining Co of India v Roper [1892] AC 125 at 145 (per Lord Macnaghton). 25. Harris, Industrializing English Law at 130. 26. See the discussion in Louis De Koker, ‘The Limited Liability Act of 1855’ (2005) 26 Company Lawyer 130. Literature on the history of limited liability in English company law is vast but useful analytical summaries are contained in Paul Johnson, Making the Market: Victorian Origins of Corporate Capitalism (Cambridge University Press, 2010), Chapter 5: ‘The limitation of liability’ and Jean J du Plessis, ‘Corporate Law and Corporate Governance Lessons From The Past: Ebbs Aand Flows, But Far From “The End Of History …”: Part 2’ (2009) 30 Company Lawyer 71. For further discussion, see Ford on Corporations Law Chapter 2; Harris, Industrializing English Law Chapter 10 Graeme G Acheson and others, ‘Does Limited Liability Matter? Evidence from Nineteenth-Century British Banking’ (2010) 6 Review of Law & Economics 247; Henry Hansmann and others, ‘Law and the Rise of the Firm’ (2006) 119 Harvard Law Review 1335. 27. And this reflects the author’s experience in commercial legal practice also. A counterparty who wants to rely on the personal worth of the unit holders would normally seek personal

guarantees and other security from them directly. Indeed, the contrary is true — the discussion on trustees’ limitation of liability clauses in Chapter 4 demonstrates that, very often, financiers do not even take into account the personal credit of the trustee — their focus is on the balance sheet and cashflows of the fund as a stand-alone economic entity. 28. The concern here is with arrangements where there is no express agency, and even where there is an express exclusion of agency. Some contract-based MIS do involve an express agency by which the responsible entity may bind the members in certain defined ways. 29. An expression used in Companies and Securities Law Review Committee, ‘Forms of Legal Organisation for Small Business Enterprises’ (1984) at [115]. 30. There is extensive literature on the doctrine of lifting or piercing the corporate veil in Australia and elsewhere, but a useful summary is contained in Ford on Corporations Law at [4.250]. 31. Astley v Austrust Ltd (1999) 197 CLR 1; Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360; Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319; Re Enhill Pty Ltd [1983] 1 VR 561. 32. Trident Holdings Ltd v Danand Investments Ltd (1988) 49 DLR (4th) 1. See also the general discussion of this point in David Hayton, ‘Unique Rules for the Unique Institution, the Trust’ in Degeling and Edelman (eds), Equity in Commercial Law (2005). 33. J H Rayner (Mincing Lane) Ltd v Department of Trade and Industry [1990] 2 AC 418. 34. Smith, Stone and Knight Ltd v Birmingham Corporation [1939] 4 All ER 116, in relation to which see Jason Harris, ‘Lifting the Corporate Veil on The Basis of an Implied Agency: A Reevaluation of Smith, Stone and Knight’ (2004) 23 Companies & Securities Law Journal 7. 35. Idoport Pty Ltd v National Australia Bank Ltd [2004] NSWSC 695 at [144]; ACN 007 528 207 Pty Ltd (in liq) v Bird Cameron (Reg) (2005) 91 SASR 570 at 592. 36. In this part of the discussion it is important to distinguish MIS which are contract-based (also called ‘common enterprise schemes’). In those arrangements, the responsible entity is usually expressly appointed as the agent of each investor for the purpose of entering into certain contracts: see the CAMAC Report at [2.3.1] and [2.3.3]. 37. Pople v Evans [1969] 2 Ch 255 Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1985) 155 CLR 541 at 546; Scott v Davis (2000) 204 CLR 333 at 408–9 (per Gummow J). 38. At law, a partnership is the relation which exists between persons carrying on a business in common with a view of profit: see Partnership Act 1892 (NSW) s 1; Partnership Act 1958 (Vic) s 5; Partnership Act 1891 (Qld) s 5; Partnership Act 1895 (WA) s 7; Partnership Act 1891 (SA) s 1; Partnership Act (NT) s 5; Partnership Act 1963 (ACT) s 6. Every partner is an agent of the firm and of the other partners for the purpose of the business of the partnership, with the power to bind the firm and the other partners: see Partnership Act 1892 (NSW) s 5; Partnership Act 1958 (Vic) s 9; Partnership Act 1891 (Qld) s 8; Partnership Act 1895 (WA) s 13; Partnership Act 1891 (SA) s 5; Partnership Act (NT) s 9; Partnership Act 1963 (ACT) s 9. 39. R v Hopkins (1915) 20 CLR 464 at 476–7 (per Griffith CJ); Owners-Strata Plan No 43551 v Walter Construction Group Ltd (2004) 62 NSWLR 169 at 179 (per Spigelman CJ). Historically, the relationship between agency and trust is a close one: Bowstead on Agency at [6-035]. The question of whether a person is another’s agent is always to be considered in the context of the purpose for which the question is asked and the consequences of the answer; ‘being “the agent of P” is not a characteristic that a person has always and in all circumstances and for all purposes’: Kirkpatrick v Kotis (2004) 62 NSWLR 567; [2004] NSWSC 1265 at [89].

40. Chan v Zacharia (1984) 154 CLR 178. See, for example, Lowe v Pascoe (as Trustee of Estate of Late Kut Zhe Tu) (2010) 5 ASTLR 1; [2010] NSWSC 388; Williams v Nicoski [2003] WASC 131. 41. Bowstead on Agency at [3-038]. 42. Perpetual Trustees Australia Ltd v Schmidt [2010] VSC 67 at [125]; J H Rayner (Mincing Lane) Ltd v Department of Trade and Industry [1990] 2 AC 418; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165. 43. The notion of a ‘control continuum’ appears in Robert D Flannigan, ‘The Control Test of Principal Status Applied to Business Trusts: Part I’ (1986–1987) 8 Estates & Trusts Quarterly 37. Flannigan’s arguments are discussed further below. 44. Although it is, of course, possible for the trustee of a discretionary trust to be ‘controlled’: see Re Richstar Enterprises Pty Ltd: ASIC v Carey (No 6) (2006) 153 FCR 509; Elliot v Secretary, Department of Education, Employment and Workplace Relations [2008] FCA 1293; Public Trustee v Smith (2008) 1 ASTLR 488; [2008] NSWSC 397. 45. Bruton Holdings Pty Ltd (in liq) v Federal Commissioner of Taxation (2011) 193 FCR 442 at [21]. 46. See Herbert B Chermside, ‘Modern Status of the Massachusetts or Business Trust’ (2009) 88 American Law Reports 3d 704 at 8. One commentator, writing in 1930 of a then recent decision of the Supreme Court of California confirming its application in that state (Goldwater v Oltman 210 Cal 408 (1930)), described ‘the Massachusetts doctrine that members of a business trust may gain the advantage of immunity from partnership liability … if the declaration of trust is so drawn as to give shareholders or associates no substantial control over the trustees’: Arthur W Hill, ‘Business Trusts: Liability of Shareholders: Regulation and Taxation’ (1930) 19 California Law Review 42. 47. See, for example, Henry J Aaron, ‘Massachusetts Trust as Distinguished from Partnership’ (1917–1918) 12 Illinois Law Review 482; Robert S Stevens, ‘Limited Liability in Business Trusts’ (1921–1922) 7 Cornell Law Quarterly 116; Noble Brandon Judah, ‘Possible Partnership Liability under the Business Trust’ (1922–1923) 17 Illnois Law Review 77. 48. For a typical example, see the dictum of Ronan J of the Supreme Judicial Court of Massachusetts in State Street Trust Co v Hall 41 NE 2d 30 (1942) in which an argument that a Massachusetts trust was a partnership was firmly rejected. 49. Thompson v Schmitt 274 SW 554 (1925). For context, at the time the Massachusetts trust was used extensively in that state in the structuring of oil businesses, mainly to engage certain tax advantages. A conspectus of the position on this issue of the different states over time is set out in Bogert on Trusts at §247. For a detailed account of the history of the debates, see Ira P Hildebrand, ‘Liability of the Trustees, Property and Shareholders of Massachusetts Trust’ (1923–1924) 2 Texas Law Review 139; Ira P Hildebrand, ‘Massachusetts Trust — A Sequel’ (1925–1926) 4 Texas Law Review 57. 50. Ford & Lee on Trusts at [1.1590]. 51. Ford on Corporations Law at [1.370]. For completeness, it should be noted that if the trustee and equity investors in an Australian commercial trust are in partnership as a result of a control or agency relationship, and there are more than 20 of them in aggregate, they may be in contravention of Corporations Act s 115 which prohibits unincorporated business associations of that size.

This proposition was earlier supported by the South Australian Supreme Court in ACN 007 52. 528 207 Pty Ltd (in liq) v Bird Cameron (Reg) (2005) 91 SASR 570. The authors of Bowstead on Agency say that control is not part of the formal definition of agency although it can be an indicator of it, at [1-017]. 53. Those cases are Cox and Wheatcroft v Hickman (1860) 11 ER 431 (which involved a creditors’ trust where an ongoing business was assigned to trustees for them, to be carried on for their benefit until they were paid); Smith v Anderson (the Submarine Cables’ Trust case) (1880) 15 Ch D 247 (which involved a joint stock company for investment in shares); Re Thomas (1884–85) LR 14 QBD 379 (which involved an investment club); Crowther v Thorley (1884) 50 LTR 43 and Re Siddall (1885) 29 Ch D 1 (each of which involved trusts established for the acquisition and development of land). 54. The concept of a ‘control test’ had been mentioned earlier in American literature: see Notes, ‘Liability of Shareholders in a Business Trust — The Control Test’ (1962) 48 Virginia Law Review 1105. 55. Robert D Flannigan, ‘Beneficiary Liability in Business Trusts’ (1982–1984) 6 Estates & Trusts Quarterly 278. 56. The position regarding bare trustees was later supported by the Supreme Court of Ontario in Trident Holdings Ltd v Danand Investments Ltd (1988) 49 DLR (4th) 1 and Bramalea Inc (Trustee of) v KPMG, 1999 CanLII 15013. 57. See Maurice C Cullity, ‘Liability of Beneficiaries — A Rejoinder’ (1985–1986) 7 Estates & Trusts Quarterly 35; Robert D Flannigan, ‘The Control Test of Principal Status Applied to Business Trusts: Part I’ (1986–1987) 8 Estates & Trusts Quarterly 37; Robert D Flanagan, ‘The Control Test of Principal Status Applied to Business Trusts: Part II’ (1986–1987) 8 Estates & Trusts Quarterly 97; Maurice C Cullity, ‘Liability of Beneficiaries — A Further Rejoinder to Mr Flannigan’ (1986–1987) 8 Estates & Trusts Quarterly 130; Maurice C Cullity, ‘Personal Liability of Trustees and Rights of Indemnification’ (1996–1997) 16 Estates & Trusts Journal 115; Robert D Flannigan, ‘Business Applications of the Express Trust’ (1998) 36 Alberta Law Review 630. 58. See Italtractor ITM SpA v 425528 Alberta Ltd, 1993 CanLII 7131; Bramalea Inc (Trustee of) v KPMG, 1999 CanLII 15013; Advanced Glazing v Multimetro, 2000 BCSC 804. 59. Ford on Corporations Law, at [4.250]. 60. Gramophone & Typewriter Ltd v Stanley [1908] 2 KB 89 at 98 (per Fletcher-Moulton LJ); ACN 007 528 207 Pty Ltd (in liq) v Bird Cameron (Reg) (2005) 91 SASR 570 at 595. This is, of course, the heart of the principle in Salomon v Salomon & Co Ltd [1897] AC 22. For a more recent rejection of the ‘mere control’ argument, see J H Rayner (Mincing Lane) Ltd v Department of Trade and Industry [1990] 2 AC 418. 61. Dennis Willcox Pty Ltd v Federal Commissioner of Taxation (1988) 19 ATR 1122; Hotel Terrigal Pty Ltd v Latec Investments Ltd (No 2) [1969] 1 NSWR 676; Idoport Pty Ltd v National Australia Bank Ltd [2004] NSWSC 695. 62. Ian M Ramsay and David B Noakes, ‘Piercing the Corporate Veil in Australia’ (2001) 19 Companies & Securities Law Journal 250. 63. In most widely held unit trusts, a unit holder’s rights may be limited to an interest in the trustee acting in accordance with the law and the trust instrument, and a right to vote with other unit holders in general meeting: see Macquarie Capital Advisers Ltd v Brisconnections Management Company Ltd [2011] 1 Qd R 1; (2009) 71 ACSR 234; [2009] QSC 82.

64. The idea of transparency or looking through a trust to the beneficiary for a given purpose is not a novel idea in the Australian legal system. Even apart from pass-through conduit status for tax purposes, the Corporations Act mandates it, for example, when calculating the number of members in a MIS to assess whether it needs to be registered; there ‘an interest in the scheme held on trust for a beneficiary is taken to be held by the beneficiary (rather than the trustee) if … the beneficiary is, individually or together with other beneficiaries, in a position to control the trustee’ (emphasis added), where ‘control’ has the meaning in s 50AA: see s 601ED(4) (b)(ii). There is also a concept of a ‘controlled private trust’ under s 1207V(2) of the Social Security Act 1991 (Cth). For an argument of how Chancery and Family Court concepts, and relief in what is known as the ‘Chabra jurisdiction’ (from TSB Private Bank International SA v Chabra [1992] 2 All ER 245) which may be exercised against a third party who holds or controls assets beneficially owned by a defendant, may be used by the English courts to achieve a trust-piercing effect, see Toby Graham and Joanna Poole, ‘Switching Assets From One Shadowy Hand To Another: Piercing the Veil of Company and Trust’ (2010) 16 Trusts & Trustees 705. 65. Burton v Arcus (2006) 57 ACSR 468; [2006] WASCA 71; ASIC v IP Product Management Group Pty Ltd (2002) 42 ACSR 343; [2002] VSC 255; ASIC v Chase Capital Management Pty Ltd (2001) 36 ACSR 778; [2001] WASC 27. 66. See Corporations Act s 601FM. ‘Control of a listed Managed Investment Scheme is frequently synonymous with control of the management of the scheme’: Re Australian Pipeline Trust 01R (2006) 59 ACSR 341; [2006] ATP 29. See the facts and discussion in MTM Funds Management v Cavalane (2000) 35 ACSR 440; [2000] NSWSC 922 at [51]; Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liq) [2002] FCAFC 285; Australian Securities Commission v AS Nominees Ltd [1995] FCA 1663. Note that this is a different situation to acquiring the shareholding in the trustee and controlling it that way — that situation would be protected by the usual rules about separation of a company from its shareholders, regardless of control. 67. Balkin v Peck (1998) 43 NSWLR 706; Robert Allen Hughes, ‘The Right of a Trustee To a Personal Indemnity From Beneficiaries’ (1990) 64 Australian Law Journal 567. 68. Harold A J Ford, ‘Trading Trusts and Creditors’ Rights’ (1981) 13 Melbourne University Law Review 1 at 7. 69. Marginson v Ian Potter & Co (1976) 136 CLR 161; Kemtron Industries Pty Ltd v Commissioner of Stamp Duties (1984) 15 ATR 627; J W Broomhead (Vic) Pty Ltd (in liq) v J W Broomhead Pty Ltd [1985] VR 891; Balkin v Peck (1998) 43 NSWLR 706. 70. See the discussion and authorities cited in Harold A J Ford, ‘Trading Trusts and Creditors’ Rights’ (1981) 13 Melbourne University Law Review 1 at 6–7. 71. Hardoon v Belilios [1901] AC 118 at 123. 72. Wise v Perpetual Trustee Co Ltd [1903] AC 139 at 149. This case involved trustees for a social club who had entered into a lease and sought personal indemnity from the members for the liabilities under it, which in the result was denied on the facts. It is also not irrelevant that the association in question was a not-for-profit social club rather than a commercial concern: Harold A J Ford, ‘Unit Trusts’ (1960) 23 Modern Law Review 129 at 150. In relation to arguments in ‘cases in which the nature of the transaction excludes it’, see Causley v Countryside (No 5) Pty Ltd [1996] NSWSC 394. 73. Williams drew on Vacuum Oil to conclude that ‘by extension, if a beneficiary requests a trustee to carry on a business with trust property …, the beneficiary is personally liable to indemnify the trustee in respect of the business liabilities’: Darryl R Williams, ‘Winding Up

Trading Trusts: Rights of Creditors and Beneficiaries’ (1983) 57 Australian Law Journal 273 at 276. The analysis above shows, with respect, that Vacuum Oil does not stand for that proposition at all. 74. Harold A J Ford, ‘Trading Trusts and Creditors’ Rights’ (1981) 13 Melbourne University Law Review 1 at 7. 75. Robert Allen Hughes, ‘The Right of a Trustee to a Personal Indemnity from Beneficiaries’ (1990) 64 Australian Law Journal 567. 76. J W Broomhead (Vic) Pty Ltd (in liq) v J W Broomhead Pty Ltd [1985] VR 891 and Balkin v Peck (1998) 43 NSWLR 706. 77. Harold A J Ford, ‘Trading Trusts and Creditors’ Rights’ (1981) 13 Melbourne University Law Review 1 at 8, a position he and Lee later confirmed in Harold A J Ford and W A Lee, The Principles of the Law of Trusts (2nd ed, Law Book Co, 1990) at 633. 78. Robert Allen Hughes, ‘The Right of a Trustee to a Personal Indemnity From Beneficiaries’ (1990) 64 Australian Law Journal 567. 79. Balkin v Peck (1998) 43 NSWLR 706. 80. Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liq) [2002] FCAFC 285 at [135]. 81. See, for example, Trustee Act 1925 (NSW) s 59(4); Trustee Act 1958 (Vic) s 36(2); Trusts Act 1973 (Qld) s 71; Trustees Act 1962 (WA) s 71; Trustee Act 1898 (Tas) s 27(1); Trustee Act (NT) s 6; Trustee Act 1925 (ACT) s 9(4); Corporations Act ss 601GA(2) and 601FH. The fact that Corporations Act Ch 5C which has a clear investor protection bias, does not expressly exclude personal liability of members in relation to the debts of a MIS is indeed odd, but is part of the broader question of why it does not provide expressly for limited liability. 82. See Trustee Act 1925 (NSW) s 86; Trustee Act 1958 (Vic) s 68; Trusts Act 1973 (Qld) s 77; Trustees Act 1962 (WA) s 76; Trustee Act 1936 (SA) s 57; Trustee Act 1898 (Tas) s 53; Trustee Act (NT) s 50; Trustee Act 1925 (ACT) s 86. 83. Harold A J Ford, ‘Trading Trusts and Creditors’ Rights’ (1981) 13 Melbourne University Law Review 1 at 18–19, a position he later reiterated in Harold A J Ford and Ian J Hardingham, ‘Trading Trusts: Rights and Liabilities of Beneficiaries’ in Finn (ed), Equity and Commercial Relationships (1987) at 82. 84. Maurice C Cullity, ‘Personal Liability of Trustees and Rights of Indemnification’ (1996–1997) 16 Estates & Trusts Journal 115 at 136; David A Steele and Andrew G Spence, ‘Enforcement Against the Assets of a Business Trust by an Unsecured Creditor’ (1999) 31 Canadian Business Law Journal 72 at 78–9. The United States position on this question is of less interest for present purposes because it is heavily influenced by the third party beneficiary rule and the US courts’ more liberal application of unjust enrichment principles. 85. In Balkin v Peck (1998) 43 NSWLR 706, Mason P noted at [20], that on some authorities the basis of the personal indemnity itself is unjust enrichment. It would be interesting to see what the current High Court of Australia would have to say about this issue, given its comments on unjust enrichment and subrogation in Bofinger v Kingsway Group Ltd (2009) 239 CLR 269 at 299–302 (per Gummow, Hayne, Heydon, Kiefel and Bell JJ). 86. Hardoon v Belilios [1901] AC 118; Wise v Perpetual Trustee Co Ltd [1903] AC 139; Kemtron Industries Pty Ltd v Commissioner of Stamp Duties (1984) 15 ATR 627; McLean v Burns Philp Trustee Co Pty Ltd (1985) 2 NSWLR 623; Macquarie Capital Advisers Ltd v Brisconnections Management Company Ltd [2011] 1 Qd R 1; (2009) 71 ACSR 234; [2009]

QSC 82. 87. See also clause 19.2 of the trust instrument the subject of discussion in ANZ Banking Group Ltd v Intagro Projects Pty Ltd [2004] NSWSC 1054 at [9]. 88. Greenwood’s case at 476. See, to similar effect, Hallett v Dowdall (1852) 118 ER 1 at 50–1 (per Martin B), and Cox and Wheatcroft v Hickman (1860) 11 ER 431. 89. See Hassell v The Merchant Traders’ Ship Loan and Insurance Association (Lord Talbot’s case) (1849) 154 ER 1322; Hallett v Dowdall (1852) 118 ER 1; Robson v M’Creight (Official Manager) (1858) 53 ER 641; Re Professional Life Assurance Co (1866–67) LR 3 Eq 668; Lethbridge v Adams; Ex parte Liquidator of the International Life Assurance Society (1871– 72) LR 13 Eq 547; Re Agriculturist Cattle Insurance Co; Ex parte Official Manager (1874– 75) LR 10 Ch App 1; Re European Assurance and Insurance Association (1875) 1 Ch D 307. 90. In Austrust Ltd v Astley (1996) 67 SASR 207, confirmed by the High Court of Australia in Astley v Austrust Ltd (1999) 197 CLR 1. 91. Roderick P Meagher, ‘Insolvency of Trustees’ (1979) 53 Australian Law Journal 648 at 652. 92. Ira P Hildebrand, ‘Liability of the Trustees, Property and Shareholders of Massachusetts Trust’ (1923–1924) 2 Texas Law Review 139 at 144–5; William W Cook, ‘Mysterious Massachusetts Trusts’ (1923) 9 American Bar Association Journal 763 at 766. 93. See, for example, Notes, ‘Liability of Shareholders in a Business Trust — The Control Test’ (1962) 48 Virginia Law Review 1105 at 1118. 94. In any case, his Honour went on to say that such clauses would be valid and supported by the courts in the case of investors in a unit trust, at 940. He seemed to be implying a distinction between private family arrangements and arm’s length commercial arrangements. 95. Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424; Wilkinson v Feldworth Financial Services Pty Ltd [1998] NSWSC 775; McLean v Burns Philp Trustee Co Pty Ltd (1985) 2 NSWLR 623. 96. See Hansard, House of Commons Debates, 26–27 July 1855; the quoted expression is from Mr Strutt at 1389. 97. For the broader political debates at the time, see Louis De Koker, ‘The Limited Liability Act of 1855’ (2005) 26 Company Lawyer 130. 98. To summarise a lengthy definition, a ‘reporting issuer’ under the Securities Act includes an entity which offers securities to the public. Each relevant province has similar legislation. 99. See Income Trusts Liability Act, SA 2004, c I–1.5 s 2; Income Trust Liability Act, SBC 2006, c 14 s 2; Income Trust Liability Act, SS 2006, c I–2.02 s 3. 100. A trustee would be an ‘administrator’ in this context; s 1299 provides that ‘any person who is charged with the administration of property or a patrimony that is not his own assumes the office of administrator of the property of others’.

[page 152]

CHAPTER 4 Legal Risks of the Commercial Trustee SYNOPSIS This chapter begins by describing the commercial expectations of the corporate trustee of a commercial trust, then demonstrates how those expectations are not met or properly supported by trust law. It explains why this is so, harking back to the historical discussion in Chapter 2 so as to give context and depth of understanding. Comparisons and contrasts are drawn against the position of their approximate corporate equivalent, the board of directors. It analyses in detail the ways in which trust law differs from company law to make the commercial trustee’s position much riskier than that of company directors, by reference to both the equity investors and creditors. It considers how these issues are dealt with practically in the Australian commercial market and analyses the extent to which the risks can be eliminated through structural and contractual techniques. It proposes and explains in detail sample clauses for inclusion in trust instruments and in counterparty contracts to protect commercial trustees.

INTRODUCTION 4.1 Although the trustee is not, in that role, an equity or debt participant in the commercial trust enterprise, it carries a range of personal exposures not borne by its approximate equivalent in a trading company, the board of directors. As with the other principal stakeholders in the commercial trust, the trustee brings certain commercial expectations to the role. In particular — and unlike the traditional gratuitous (human) trustee under a family or testamentary trust — the modern arm’s length commercial (corporate) trustee expects to be remunerated for its services at market

rates, will not agree to be bound to the entire panoply of trustee duties and will not normally accept unlimited personal [page 153] liability for trust debts and liabilities. In these senses the trustee has a personal interest to protect and so may be regarded as a principal in the trust enterprise. This chapter considers the commercial expectations of trustees of Australian commercial trusts and analyses the extent to which Australian trust law supports, or fails to support, those expectations. Trustees face certain legal risks under trust law and this chapter investigates how they seek to ameliorate or shift those risks and, in a general sense, to align their risk position to that of the board of directors of a company, by use of sophisticated contractualisation techniques. Despite these techniques, risks remain.

THE COMMERCIAL EXPECTATIONS OF THE CORPORATE TRUSTEE 4.2 Fundamental to the law of trusts is that no one is bound to accept the office of trustee of an express trust. This affords a person who is asked to become, or who seeks to become, the trustee of a commercial trust the opportunity to bargain on the terms upon which it is prepared to accept that appointment. Typically, in negotiating its position, a well-advised intending trustee will be concerned with three critical matters on the risk side of its assessment: 1. the extent of its personal responsibilities and potential liabilities to its equity investors; 2. (if it is at arm’s length to the equity investors) the remuneration it is to receive for its services and whether it can be taken directly from the trust fund; and 3. the extent of its potential personal liability to trust creditors and other persons external to the trust.

4.3 These, in turn, may be distilled further into two relational questions: 1. What is to be the precise nature and scope of the trustee’s relationship with its beneficiaries? 2. What is to be the precise nature and scope of its relationship with external counterparties? This bifurcation reflects what has been described as the two-faced ‘Janus-like’ character of the trust and, therefore, the office of trustee: it has a private, equitable side where the trustee faces its beneficiaries, and a public, common law side where the trustee faces external counterparties.1 4.4 As discussed in the previous chapter, equity investors are in a very different position to gratuitous beneficiaries under a family or testamentary settlement, [page 154] and have quite different expectations of their trustee. Correspondingly, commercial trustees do not expect to carry the entire range of duties that would otherwise support the expectations of a beneficiary under those traditional trust arrangements. It is the universal practice of well-advised trustees of Australian commercial trusts to seek to confine the scope of their duties (and therefore potential liabilities) to the maximum extent available in the circumstances so that they are liberated to take the kind of risks that are expected of the steward of a profit-seeking enterprise entity.2 4.5 It is also common for them to seek, where possible, to limit their personal liability to creditors and other external counterparties under financing and other material contracts entered into in their capacity as trustee. Indeed, so common and accepted is the practice that a legal adviser who does not adequately warn an intending trustee (even an experienced one) of the issue of personal liability and the desirability of limiting it runs the risk of a negligence suit: see Astley v Austrust Ltd (1999) 197 CLR 1. Professional trustees who are engaged to undertake remunerated trustee roles are not in the business of taking on unlimited personal liability for trust debts; that is not their commercial offering as a business. They do not

underwrite the debts of the trust or, to use the business vernacular, put their personal balance sheet at risk for trust liabilities; in this sense, a ‘trustee is not a surety, nor is he an insurer; he is only liable for some wrong done by himself, and a loss of trust money is not per se proof of such wrong’: Re Chapman; Cocks v Chapman [1896] 2 Ch 763 at 775. If it were otherwise, the trustee would be in an economically asymmetrical position, carrying unlimited personal liability for the entire indebtedness and losses of the trust enterprise but without participation in any profits it generates. 4.6 Thus, the ultimate objective of a commercial trustee is a ‘no personal liability’ position vis-à-vis both its equity investors and its external counterparties. In a very general sense, trustees of commercial trusts may be seen as corresponding to the board of directors of a trading company, in that they are the persons who manage the invested equity and debt of the enterprise on behalf of the investors.3 They are remunerated for doing so, and there are many professional [page 155] trustee companies in the market who specialise in the role; like professional non-executive company directors of larger public companies, they are essentially service providers. As with company directors, it is therefore commercially appropriate that they should carry no personal liability for the engagements they undertake on behalf of investors in their fiduciary role, unless guilty of relevant misconduct. 4.7 Applying law and economics principles, then, as a participant in an economic enterprise the trustee of a commercial trust will act selfinterestedly in seeking to maximise its remuneration and minimise its risks, and will settle for a trade-off between them that most closely achieves its goals. If the market will only remunerate on a fee for service basis rather than by a share of profits, then the trustee’s risk must be commensurate with that. It is therefore commercially reasonable for a trustee to have the following expectations.4

Facing equity investors 4.8 In respect of its relationship with the equity investors, a commercial trustee will expect: its scope of authority, protection against enterprise debts and liabilities and its fiduciary and other duties to reflect the arm’s length commercial nature of the arrangement, the overall business objectives of the enterprise and the trustee’s desired risk: reward outcome; acceptance of legally imposed personal liability for losses to the trust assets attributable to agreed types of trustee misconduct, on the basis of an express or implied promise by the trustee that it will not misconduct itself in those ways; and (if it is at arm’s length to the equity investors) an entitlement to be paid fees and other remuneration for services rendered in accordance with agreed terms, and a preferential right to take them directly from the trust fund when due so as not to be exposed to the creditworthiness and caprice of the equity investors. [page 156]

Facing creditors and other external parties 4.9 In relation to any given commercial contract between it (in its trustee capacity) and an intending creditor or other contract counterparty, a reasonable commercial trustee’s expectations will be: no personal liability to the creditor under the contract but no objection to being bound, as part of its role, to perform the function of applying enterprise assets in discharge of contracted trust debts when due; objective indifference as to how the creditor enforces as against the enterprise assets once entitled to do so under the contract, provided it cannot proceed against the trustee (or its directors) personally; no objection to the commercial principle that the creditor, though

unsecured, should have a prior ranking claim to the enterprise assets vis-à-vis the equity investors; and acceptance of legally imposed personal liability if a creditor suffers a shortfall in recovery against the enterprise assets that is attributable to agreed types of trustee misconduct, on the basis of an express or implied promise by the trustee that it will not misconduct itself in those ways. 4.10 Australian trust law presents a commercial trustee with a prima facie cluster of risks which are not consistent with these expectations. Typically the intending trustee deals with this through bargaining and contractualisation techniques, the outcomes of which are ultimately reflected in the trust instrument and the documentation by which the trustee engages with external parties. Trust law is highly flexible and the courts generally respect decisions made by parties in settling a trustee’s powers and discretions and the extent of its personal liability to external contract counterparties; it has been observed that ‘virtually all trust law is default law that can be altered in the trust instrument’.5 But even contractualised solutions suffer weaknesses and yield unsatisfactory outcomes.

THE SOURCE OF THE ISSUE: THE PERSONAL AND PROPRIETARY ELEMENTS OF THE TRUST 4.11 The starting point in discussing an Australian trustee’s position vis-àvis beneficiaries and external parties is the personal and proprietary elements described in Chapter 2. These elements emanate from equity’s solicitous [page 157] protective attitude towards beneficiaries and ‘their’ trust property, and a corresponding presumptive suspicion of trustees.6 Clearly, these elements would have their attractions for beneficiaries as equity investors and external parties who become trust creditors. Left unmodified, however,

they are unduly harsh and economically inappropriate for, and thus unacceptable to, a remunerated arm’s length corporate trustee of a commercial trust. Equity’s protective attitude and presumptive suspicion create disincentives in a commercial context that do not support the expectations identified above. 4.12 Critical features of these elements are: the overriding altruistic duty of undivided loyalty to beneficiaries, and a range of related or subsidiary duties that stem from it, which heavily restrict the trustee’s ability to benefit personally from the engagement or to undertake other engagements that may potentially compete for the trustee’s attention and resources; the ‘no profit’ rule which prohibits the trustee from taking remuneration for its services; the duty to act prudently and conservatively to protect and preserve the trust property, which militates against taking the kinds of entrepreneurial risks that are necessary to generate risk-based profits; very little inherent power to deal with trust property which, again, militates against entrepreneurial risk-taking; and the established principle that when a trustee enters into a contract with an external party, even if expressly in that capacity, it acts as principal and is personally liable for the debts and liabilities thereby incurred without limitation by reference to the trust assets, subject only to rights of indemnity that are conditional on the trustee’s acts being within power and in proper performance of its duties. 4.13 Thus, when considering a trustee’s risk position, the critical question is always the scope and extent of its powers and duties. The narrower its powers and the heavier its burden of duties, the greater the risk of breach of trust and personal consequences. The wider its powers and the lighter its burden, the lower that risk. Included in this calculus is the effect of exclusion and exculpation clauses which can operate to forgive a trustee for breaches right down to (but

[page 158] not including) the irreducible core duty to act in good faith for the benefit of the beneficiaries. 4.14 Consideration is now given to ways in which trustees use contractualisation techniques (including by use of the various clauses described in Appendix 4: ‘Protecting the trustee’) to maximise power and minimise duties so as to manage their risk position vis-à-vis both the equity investors and external parties. Taken as a package, these provisions, some of which are embedded in the trust instrument and others in contractual engagements with external parties, may be seen as shaping the personal and proprietary elements of the trust to reflect an economic bargain between the participants by which equity’s natural tendency to constrain trustees so as to protect beneficiaries is resisted in exchange for the beneficiaries (as equity investors) gaining the benefit of professional management of the assets and the opportunity of risk-based returns on their investment.

FACING BENEFICIARIES: POWER AND ITS PROPER EXERCISE What is a ‘breach of trust’? 4.15 Although perhaps counterintuitive, it is useful to begin by examining the concept of ‘breach of trust’ since it helps explain the crucial distinction between power and its proper exercise, and the importance of considering both. When a trustee undertakes a dealing purportedly as trustee, either of two quite different circumstances may constitute a breach of trust: the trustee had no power or authority (the terms are interchangeable in this context) as trustee to undertake that dealing, whether in the trust instrument or otherwise.7 When this happens, the trustee is said to have acted ‘beyond power’ or ultra vires with respect to the trust; or the trustee had the power to undertake that dealing but in doing so it

breached or failed to discharge a fiduciary or other duty or obligation, whether in the trust instrument or at general law, which has not been attenuated or waived (where that is legally possible). This could relate to any of the duties described in 2.36, ranging from a failure to observe the terms of the trust to a failure to exercise the appropriate standard of care. When this happens, the trustee is usually said to have acted ‘improperly’ with respect to the trust. [page 159] Thus, to protect its personal position, a trustee must always ensure that its conduct, as trustee, is both within power and a proper exercise of that power. Some of the consequences of a failure to do so, for both the trustee and outsiders dealing with it, are discussed below and in the next chapter.

Power 4.16 Until the beginning of the 20th century, the courts were quite strict in their view that a trustee had only those powers conferred by the trust instrument, and even after that were only inclined to imply powers necessary to take action for the preservation of the trust estate, such as repair and maintenance. In Re New [1901] 2 Ch 534 the Court of Appeal held at 544–5 that: As a rule, the court has no jurisdiction to give, and will not give, its sanction to the performance by trustees of acts with reference to the trust estate which are not, on the face of the instrument creating the trust, authorized by its terms. But in the management of a trust estate … it not infrequently happens that some peculiar state of circumstances arises for which provision is not expressly made by the trust instrument, and which renders it most desirable, and it may be even essential, for the benefit of the estate and in the interest of all the cestuis que trust, that certain acts should be done by the trustees which in ordinary circumstances they would have no power to do.8

4.17 Thus, trustees have very little inherent power to put trust property at risk in dealings with external parties beyond what is expressly provided in the trust instrument; as discussed in Chapter 2, trustees’ inherent powers regarding trust property are fundamentally defensive and protective. Legislation provides some relief against the strictness of this rule. After a

series of amendments in the mid-1990s, the state and territory trusts/trustee legislation replaced the long-standing regime of an imposed list of ‘authorised investments’, and gave trustees broad discretionary powers of investment (subject to any constraints in a trust instrument) while imposing a duty to exercise the care, diligence and skill that a prudent person would exercise in managing the affairs of other persons (or, for professional trustees, that a prudent person in that position would exercise in managing the affairs of other persons), and a non-exclusive list of matters to which a trustee must have regard when making investments. These modify but do not exclude equitable duties and obligations.9 But they are not sufficient to [page 160] support a trustee engaging in wide-ranging risk-taking entrepreneurial activities with trust property. For example, legislation preserves the equitable prohibition against investing trust funds in investments that are speculative or hazardous.10 4.18 Traditionally, the courts have been wary of trustees and executors carrying on businesses with trust property and required there to be an express authority in the trust instrument to that effect.11 A mere power of investment was not sufficient; something more was needed.12 However, if language empowering a trustee who is intended to carry on entrepreneurial business activities is specific and limiting rather than broad and discretionary there would be a greater potential for breaches in the nature of acts beyond power. Clearly, this is inappropriate if those managing a commercial trust are expected to engage in a wide range of commercial and business activities.

‘Plenary powers’ or ‘universal powers’ clauses 4.19 For a trust enterprise whose purpose is profit-seeking through business activities involving risk-taking behaviour by the trustee, in the course of which trust assets are put at risk and contract debts and liabilities

are incurred, the trustee requires the maximum possible scope of authority. Giving the trustee the widest possible powers should eliminate the risk of the trustee performing an act that is beyond power and thus in breach of trust under the first head described in 4.15. This operates to the benefit of both the trustee and creditors, who claim though the trustee, and in this sense it is a means by which the trustee is protected vis-à-vis both the equity investors and creditors simultaneously. In the Australian market, this is achieved by including provisions in the trust instrument along the lines of those shown in Part 1 of Appendix 4: ‘Protecting the trustee’. These are sometimes described in market parlance as ‘plenary powers’ or ‘universal powers’ clauses. 4.20 Some of these clauses quite deliberately set out to mimic the language and concepts in the Corporations Act s 124(1), which when enacted had the effect of abolishing ultra vires in respect of companies incorporated under that Act: see Part 2 of Appendix 1: ‘Extracts from the Corporations Act’. In doing [page 161] this, drafters seek to give a trustee the most extensive powers available under law. The author’s preference is not to do that because it can and does lead to confusion.13 A universal powers clause in a trust instrument does not have the same effect on a trust as s 124(1) has on a company; they address entirely different factual and legal matrices. Section 124 will, of course, apply to a trustee as a company but it cannot apply with respect to a trust, which is not a juristic person (and is certainly not an entity to which s 124 applies). 4.21 In seeking to echo s 124(1), these clauses occasionally refer to the trustee having the ‘legal capacity’ of a natural person. This can confuse; capacity, in the sense of the legal ability to do something, can only apply in relation to a legal person. It will apply to the trustee as a company under the Corporations Act, but it cannot apply with respect to a trust. The use of the expression ‘capacity’ in relation to a person acting as a trustee is common in practice and even in the courts (it is not unusual in Australian

case reports for a case name to be styled ‘[Plaintiff] v [Defendant] in its capacity as trustee for the ABC Trust’) but it must be understood to have a different meaning to ‘capacity’ in the context of companies or natural persons; ‘the assumption that a trustee in its personal capacity and in its trustee capacity are different persons is a false one’: MacarthurCook Fund Management Limited v Zhaofeng Funds Limited [2012] NSWSC 911 at [117] (citation omitted).14 The expression in the trust context is in effect a reference to authority or power to deal with trust property. A person who performs an act ‘in its capacity as’ a trustee is purporting to do that thing within its authority as a trustee, with the result (if properly within that authority and absent any other disentitling factor) that it has immunity from action by its beneficiaries in relation to that act and any debt, liability or expense incurred in performing that act is indemnifiable out of the trust estate.15 This has certain consequences for persons with whom the trustee deals: see 5.8. 4.22 The critical difference comes down to consequences, particularly for unsecured creditors. While the Corporations Act s 125 allows for a company’s constitution to ‘contain an express restriction on, or a prohibition of, the company’s exercise of any of its powers’ or to narrow the scope of its objects (see Part 2 of Appendix 1: ‘Extracts from the Corporations Act’), no act of the company in contravention is invalidated as a result. The company remains bound [page 162] to its engagements, any counterparty’s claim remains sound (absent relevant misconduct on their part) and, importantly, the assets of the enterprise continue economically to support any liabilities incurred. By contrast, if a trustee enters into a transaction acting beyond its given powers as trustee the consequences for both it and the counterparty are dramatically different. While the engagement is not invalidated if the counterparty is innocent of disentitling conduct, the trustee has no right to apply the trust fund in respect of any debts or liabilities arising from that act. The unsecured counterparty’s claim is undermined; even if ignorant of the want of power and innocent of the breach of trust arising from it, there

is no indemnity to which it may subrogate to get at the trust assets and it is left with a personal claim against the trustee alone: see the more detailed discussion in the next chapter. In the result, the assets of the trust enterprise do not support the engagement. Universal powers clauses seek to avoid these outcomes at source by eliminating the risk of ultra vires breaches. 4.23 Even a broad power can be constrained. For example, trust instruments may also contain restrictions on the trustee’s ability to exercise its powers or which make the exercise of the power in certain circumstances conditional. Some give the trustee universal powers but require the trustee to obtain the consent or approval of the beneficiaries or a majority of them, or of some committee (for example an ‘Advisory Committee’ or ‘Investment Committee’) or other person before undertaking certain types of transaction involving investment of the trust assets or incurring certain liabilities. When it comes to registered MIS, there is recognition of the specific risks imposed on stakeholders if the responsible entity is to borrow or raise money for the purposes of the scheme by the requirement in the Corporations Act s 601GA(3) that any such powers must be specified in the constitution.

Acting ‘properly’: the fiduciary burden and its attenuation 4.24 A universal or plenary powers clause has its limitations. Despite the breadth of language (including use of expressions like ‘absolute discretion’), it does not give a trustee unfettered or absolute rights in dealing with trust property. As discussed above in relation to breaches of trust, for any given act purportedly undertaken in its trustee capacity not only must a trustee have the requisite power but the act must also be a proper exercise of that power. Universal powers clauses cannot eliminate breaches that arise from an improper exercise of powers. 4.25 As the discussion of the ‘personal element’ in Chapter 1 demonstrated, although not all of a trustee’s duties are fiduciary in the strict sense, a trustee’s powers and discretions are essentially fiduciary in

nature; it is not inappropriate to speak generally of a trustee’s fiduciary burden. They are held, and must be [page 163] exercised, consistently with the terms of the trust; ‘the duty of the trustee is to perform his or her trust, however simple or complex it may be. The trustee’s powers as trustee exist for that purpose and for no other’.16 The fiduciary burden weighs heavily on its dealings with the trust assets and the exercise of the powers and discretions that come with the office. No matter how widely cast, a trustee must exercise its powers properly and for proper (that is, trust) purposes. The nature of the duties borne by the trustee of a trading trust has been described in those terms by the High Court of Australia.17 Even plenary powers must be exercised in the best interests of the beneficiaries — indeed, the office of trustee ‘exists for the benefit of the beneficiaries’18 — as well as consciously, personally, honestly, fairly and in good faith; within the scope and for the purpose for which they were conferred; only upon due consideration; and prudently.19 Unless displaced or modified, the no conflicts and no profit rules apply. If a trust is a registered MIS the responsible entity is subject also to the statutory duties imposed by the Corporations Act, principally in Ch 5C which, though statutory, are fiduciary or quasi-fiduciary in nature and are in addition to the normal equitable overlay.20 The primary (though by no means only) sanction imposed by equity for a failure in this regard is strict and immediate: the trustee’s ability to exonerate its personal liability to external creditors by applying trust assets to discharge their debts and liabilities is impaired, a matter which is discussed further below. 4.26 For a trustee to be able to operate a commercial trust as a business vehicle and support its commercial expectations as a remunerated arm’s length service provider and those of the equity investors who seek riskbased returns, its prima facie fiduciary burden must be attenuated. The ancient rule that the office of trustee is gratuitous must be displaced and the self-abnegation and risk-aversion inherent in the traditional equitable framework must be ameliorated. A universal powers clause in a trust instrument is only part of that task; it is usually accompanied by a range of

provisions that give the trustee relief from conflicts, the right to seek and rely on advice, powers to delegate and an entitlement to take trust money as personal remuneration. Importantly, many commercial trust instruments expressly excuse breaches of trust, within certain limits. Regardless of the precise terms of their drafting, in substance these may [page 164] be seen as contractualised waivers or consents permitting the trustee to perform acts and omissions that would otherwise constitute breaches of trust. Part 2 of Appendix 4: ‘Protecting the trustee’ contains examples commonly found in modern trust instruments. Other examples of contractualised trustee protection and risk-shifting are considered below.

Relief from conflicts 4.27 But these provisions are neither panacea nor prophylactic. Take, for example, relief from the no conflict and no profit duties (see 2.36 for a brief description of these duties). The content of the sample clause ‘Relief from conflicts’ in Part 2 of Appendix 4: ‘Protecting the trustee’ is typical. On its face it is unqualified and unlimited, even appearing to permit the trustee to act solely in its own interests. As with universal powers clauses, however, these provisions do not necessarily mean what they say; the right to act regardless of a conflict is not unfettered. Despite their wide remit, neither a universal powers clause nor a relief from conflicts provision gives a trustee carte blanche to use its office to benefit itself. Both are always subject to (at least) the ‘irreducible core’ of obligation described below, that is to act honestly and in good faith for the benefit of the beneficiaries, and the overall terms of the trust. 4.28 There is another consideration which is not always respected in practice. The no conflict and no profit rules are the most fundamental planks of the fiduciary burden, underpinning the essential duty of undivided loyalty. That being so, equity imposes an important condition to a waiver or consent: to be effective it must be given on a fully informed

basis. The waiver or consent need not be express — it may be implied in some circumstances — but it must still be based on full information: Woolworths Ltd v Kelly (1991) 22 NSWLR 189. What constitutes sufficient information is a question of fact in each case and there is no precise formula: Maguire v Makaronis (1997) 188 CLR 449; Bristol & West Building Society v Mothew [1998] Ch 1. It would include all information in the trustee’s possession in relation to the proposed transaction that is relevant to the beneficiaries’ consideration of whether or not to consent, including the material facts that disclose the conflict itself and the rights, protections and benefits that the beneficiaries are being asked to forego in giving that consent.21 4.29 It follows that there is a real question about the outer limits of efficacy of a generic waiver clause in a commercial trust instrument, particularly as against investors who acquire their interest without any specific information about [page 165] activities or intended activities of the trustee that may be in conflict; for them, the extent of the disclosure is limited to the contents of the clause itself. That clause, being generic, does not deal with any particular transaction. That of itself may be of little moment insofar as the question is simply whether the trustee is permitted to undertake remunerated activities on its own account that are wholly independent of and unrelated to the trust, if those activities are described with sufficient clarity in the clause. In a commercial trust, there is a compelling argument that it is unreasonable to expect an arm’s length remunerated professional trustee to dedicate itself exclusively to the trust and do nothing else. 4.30 The issue has a more serious complexion however in relation to substantial transactions directly involving trust assets, for example where a controlled associate of the trustee purchases trust assets or contracts to provide paid services to the trust or where the trustee applies trust assets to a personal purpose, that is circumstances in which the ‘self-dealing’ and/or ‘fair-dealing’ rules may apply.22 Even then, there is no positive duty on a

trustee to obtain a waiver or consent; rather, the issue is whether the trustee would have a defence to a charge of breach of trust. In relation to any given transaction, the onus is on the trustee to establish that it has been properly relieved of the no conflict and no profit duties to the extent they might otherwise apply with respect to that transaction. Waiver or consent is not an absolute defence; the court will always examine all the circumstances to see if it is appropriate that the trustee should be allowed to keep the benefit: Spellson v George (1992) 26 NSWLR 666 at 669 (per Handley JA); 674–5 (per Hope AJA). It must follow that if in a transaction involving the trust the trustee has enjoyed a personal benefit which would otherwise be in breach, but has not sought a specific waiver or consent based on full disclosure in respect of that transaction, there is a real question as to whether a generic clause in the trust instrument will be a sufficient defence. In what way would the waiver or consent relied upon have been ‘fully informed’? The lesson for trustees is clear: if in doubt, consider seeking a specific waiver or consent on the basis of full disclosure so that, if received, it can be said to be fully informed. In the author’s experience this is not always done and reliance is often placed on a generic clause in the trust instrument in the mistaken belief that it operates literally. It may be no defence to argue that, if proper disclosure had been made, the consent would have been forthcoming: London Loan and Savings Co of Canada v Brickenden [1934] 3 DLR 465. 4.31 When it comes to registered MIS, the Corporations Act confronts this issue head-on. Part 5C.7 contains highly prescriptive mandatory provisions which ‘are designed to protect the interests of the scheme’s members as a whole, [page 166] by requiring member approval for giving financial benefits to the responsible entity or its related parties that come out of scheme property or that could endanger those interests’: s 601LB. These are in addition to and do not displace applicable general law. Scheme member approval can only be given in a general meeting following full disclosure in an explanatory memorandum which satisfies the very specific information requirements of

s 219 (as modified by s 601LA), which is sent to members and ASIC. There is a de minimis exception: s 213. In relation to listed MIS, ASX Listing Rule 10.1 regulates disposals of substantial assets to related parties of the responsible entity.

Exculpation and the ‘irreducible core’ 4.32 As discussed in 4.82, the court may excuse a breach if it appears to the court that the trustee has acted honestly and reasonably. However, parties to a commercial trust may also bargain for a pre-agreed forgiveness of trustee breaches, thus benefiting both the trustee and those who claim through it by keeping open the gateway to the trust assets for liabilities incurred as a consequence of the subject conduct; the trustee need not bear the liability on its personal account despite the breach. The substance of such forgiveness may be embedded in a specific exclusion clause or by expansion of the terms of the trustee’s indemnity. 4.33 However, this ability to bargain is not unlimited or absolute; equity imposes certain constraints. There is at the heart of the office of trustee an ‘irreducible core’ of minimum obligation, described as a duty to act honestly and in good faith for the benefit of the beneficiaries, which is essential and fundamental to the concept of the trust.23 If a trustee is immune from consequences for all breaches of trust then, in reality, there can be no trust.24 [page 167] 4.34 As discussed in 2.131 and following, in a commercial arrangement where there is no evidence of unconscionability or other vitiating factor, the courts have been willing to allow the parties to reduce the fiduciary content of a trustee’s obligations almost entirely. However, at some point the arrangement must cease to be a trust and may be recharacterised as ‘something else’.25 In Leerac Pty Ltd v Fay [2008] NSWSC 1082 the New South Wales Supreme Court explained, at [23], that: [A] clause in a trust deed may validly exempt the trustee from obligations and liabilities other

than those contained in that irreducible core of a trustee’s obligation — namely, to act honestly and in good faith. It is not contrary to public policy to exclude a trustee’s liability even for gross negligence, but it is to exclude liability for dishonesty or bad faith.

4.35 Further, the New South Wales Court of Appeal has held that: … if [the trustee] consciously takes [a] risk in good faith and with the best intentions, honestly believing that the risk is one which ought to be taken in the interests of the beneficiaries, there is no reason why [the trustee] should not be protected by an exemption clause which excludes liability for wilful default.26

4.36 The matter is not, however, free from controversy. There are divergent views on this issue in England, New Zealand, Ireland, Scotland and Canada, particularly around the issue of gross negligence (as to which, see further below).27 In Singapore, the irreducible core has in effect been enlarged for trustee-managers of registered business trusts by legislation which renders void any provision which has the effect of exempting a trustee-manager from, or indemnifying it against, liability for breach of trust where it fails to exercise the requisite degree of care and diligence: see Business Trusts Act (Chapter 31A) s 29. [page 168] Without abrogating the civil consequences (as to which see s 40), s 10 of the Act makes it an offence for a trustee-manager to fail to exercise reasonable diligence in the discharge of its duties. 4.37 Even in the United States, where law and economics proponents maintain that a trustee’s fiduciary obligations are or should be regarded as default rules able to be bargained away (a principle that suffuses the Uniform Trust Code), there is dispute among them as to the outer limits, if any, of that principle. The resolution is in §105(b)(1) of the Uniform Trust Code which states that, notwithstanding anything to the contrary in a trust instrument, and ‘notwithstanding the breadth of discretion granted to a trustee in the terms of the trust, including the use of such terms as “absolute”, “sole”, or “uncontrolled”, the trustee shall exercise a discretionary power in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries’. Section 1008 of

the Code renders prima facie unenforceable any term of a trust to the extent that it relieves the trustee of liability for breach of trust committed in bad faith or with reckless indifference to the purposes of the trust or the interests of the beneficiaries. 4.38 Further, there is a live debate as to the moral and economic legitimacy of professional trustees, who bring to the role (or at least hold themselves out as having) the requisite degree of skill, experience and expertise, and are remunerated for their services on that basis, insisting on contractualised exculpation, particularly to the extent that it would purport to relieve such a trustee of its duty to exercise the degree of care, diligence and skill otherwise required.28 It has been held that that where a trustee, such as a trust corporation, has held itself out as having the skill and expertise to carry on the specialised business of trust management, the duty of care of such a trustee is higher than the standard of care of the ordinary prudent man of business as demanded of a trustee without specialised knowledge: Bartlett v Barclays Bank Trust Co Ltd (No 1) [1980] Ch 515. In this regard, the Trustee Act 1925 (NSW) s 14A(2) provides that: A trustee must, in exercising a power of investment … if the trustee’s profession, business or employment is or includes acting as a trustee or investing money on behalf of other persons, exercise the care, diligence and skill that a prudent person engaged in that profession, business or employment would exercise in managing the affairs of other persons.

[page 169] However, subs (1) makes this expressly ‘subject to the instrument (if any) creating the trust’.29 4.39 Interestingly, trustees for public debenture issues under the Corporations Act Chapter 2L are not permitted to enjoy the benefit of exculpation from duties of care and diligence in relation to certain matters. By s 283DB a term of a debenture, provision of a trust deed or a term of a contract with holders of debentures secured by a trust deed, is void in so far as the term or provision would have the effect of exempting a trustee from liability for breach of s 283DA for failure to show the degree of care

and diligence required of it as trustee or indemnifying the trustee against that liability. Although the Corporations Act s 601FC imposes duties of care and diligence on responsible entities of registered MIS, it does not prohibit exculpation for breach (although it should be noted that no exculpation would relieve the responsible entity from the statutory sanctions applicable for a breach of the s 601FC duty). The CAMAC Report acknowledges this and states that an ‘RE [responsible entity] should not be entitled to contract out of any breach of its duties properly to manage a scheme. Any provision in a scheme constitution, or otherwise, that affords an RE an indemnity for any form of maladministration on its part in relation to that scheme should be unenforceable’, at 85.30 4.40 Relieving a trustee from the consequences of breaches of trust to the maximum extent possible gives it two related benefits. First, it is immune from action by the beneficiaries in relation to any loss or damage occasioned to the trust estate by the forgiven conduct. Secondly, the indemnification gateway is kept open to allow the trustee to access trust assets to discharge trust debts, liabilities and expenses — something which also transcends the relationship between trustee and beneficiaries and operates to benefit creditors who in some circumstances may need to subrogate to the indemnity. This second benefit is discussed in some detail below and in the next chapter. A sample exculpation clause, headed ‘Exculpation from breaches of trust’, is set out in Part 2 of Appendix 4: ‘Protecting the trustee’. [page 170]

Gross negligence 4.41 While on the subject, one of the more persistent chestnuts in modern Australian legal practice is the argument that the expression ‘gross negligence’ has no technical meaning under Anglo-Australian law and that therefore it is pointless negotiating over it. Some reach back to the 19th century to cite the notorious statement of Rolfe B in Wilson v Brett (1843) 152 ER 737 at 739 that it is merely negligence with the addition of a ‘vituperative epithet’, repeated by Willes J in Grill v General Iron Screw

Collier Co (1866) 35 LJCP 321 at 330. Lord Millet expressed reservations along these lines in Armitage v Nurse [1998] Ch 241 at 254. These authorities should today be regarded as incorrect. 4.42 Even if it is not a recognised separate taxonomic category in the law of torts or otherwise a technical term of art, that does not mean the word ‘gross’ adds nothing. The authors of Charlesworth & Percy on Negligence note that the expression ‘gross negligence’ is in regular use and that ‘to deny it meaning would be pedantic’.31 Indeed, experience demonstrates that it is used routinely in commercial contracts in Australian practice, often in the context of indemnities and exclusion clauses.32 The expression also appears frequently in Australian statutes and statutory instruments (both civil and criminal). Australian courts have given the expression meaning when coming across it in documents or in statutes on the not unreasonable proposition that parties, and Parliaments, use it because they intend it to mean a more culpable form of negligence. Both English and Australian courts have said that gross negligence is ‘at least … carelessness of so aggravated a nature as to amount to the neglect of precautions which the ordinarily reasonable man would have observed and to indicate an attitude of mental indifference to obvious risks’: CMG Equity Investments Pty Ltd v Australia and New Zealand Banking Group Ltd [2008] FCA 455 at [28]. Another Australian court described it as ‘a grave, serious or significant departure from the standard of care which a reasonable person would have observed in all the circumstances which causes substantial loss or damage’: Carter v Dennis Family Corporation [2010] VSC 406 at [35]. 4.43 When it comes to gross negligence and trustees, in a Consultation Paper issued shortly after Armitage v Nurse the Trust Law Committee in England identified six possible degrees of trustee dereliction, namely (in descending order of culpability) fraud, wilful misconduct, recklessness, gross negligence, ordinary negligence and acts incurring strict liability, and stated that: ‘[T]here is [page 171] a long and respectable line of authority (not cited to the court [in Armitage

v Nurse]) dealing with the concept of gross negligence in the common law and distinguishing it from ordinary negligence.’33 4.44 More recently, after reviewing the historical debate on trustee exculpation clauses the Privy Council concluded in Spread Trustee Company Ltd v Sarah Ann Hutcheson [2011] UKPC 13 that English law does recognise gross negligence in that context and that there is a difference in legal principle between what the Board described as ‘ordinary negligence’ and gross negligence thus overturning Millet LJ in Armitage v Nurse on this point. The New South Wales Court of Appeal did not even acknowledge a controversy in considering the possibility that a trustee’s conduct may have been grossly negligent in Alemite Lubrequip Pty Ltd v Adams (1997) 41 NSWLR 45.

FACING BENEFICIARIES: CONTRACTUALISING THE TRUSTEE’S RIGHT TO REMUNERATION 4.45 Equity has always regarded the role of trustee as gratuitous and has not permitted trustees to take anything for themselves out of the trust estate absent express permission in the trust instrument.34 The rule continues to apply in Australia today: Macedonian Orthodox Community Church St Petka Inc v The Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66 at 93. In the absence of express provision in the trust instrument, the harshness of this rule can be ameliorated to some extent by the court under its inherent jurisdiction and under state and territory trusts/trustee legislation,35 but these exceptions are quite limited in scope and are certainly not adequate for a sophisticated arm’s length commercial arrangement such as a commercial trust. [page 172] 4.46 The arm’s length professional corporate trustee of a commercial trust expects to be remunerated; it does not provide services gratuitously (the position may be different for ‘captive’ trustees of private trading trusts).

Moreover, since it will be holding and controlling the trust fund, it will demand that its right to remuneration be ‘secured’ by an entitlement to take it directly out of the fund when due, either as its only recourse or in addition to any personal recourse it may have as against the beneficiaries. This is prima facie prohibited by the no profit rule. The solution is to displace or modify the operation of that rule by including these rights in the express terms of the trust or in a related contract between the trustee and all of the beneficiaries. An inconvenience presented by the law of trusts is thus rectified by private means. This is commonly done by including a provision in the trust instrument along the lines of that shown in Part 3 of Appendix 4: ‘Protecting the trustee’. When done this way, the right to remuneration is not based in contract but rather is an incident of the trust or part of the terms of trust. Note that in relation to MIS, the Corporations Act s 601GA(2)(a) requires that rights to be paid fees out of scheme property must be specified in the scheme constitution (and see the latest ASIC regulatory guidance for specific requirements). 4.47 There is an important distinction between, on the one hand, debts, liabilities and expenses incurred or paid by a trustee properly in that capacity and, on the other, amounts which the trust instrument or other agreement allows the trustee to take out of the trust estate for itself by way of remuneration. The trustee’s implied equitable indemnity with respect to trust assets is designed to reimburse or exonerate the trustee in respect of debts, liabilities and expenses payable or paid by the trustee to third parties in the proper performance of the trust, in effect to make or keep the trustee whole and protect its personal assets; this is discussed in detail below. An expense in the nature of a fee which is paid or payable by the trustee to a third party (even if related to the trustee), if authorised and properly incurred, is a trust expense which is indemnifiable out of the trust fund. By contrast, a fee or other remuneration to which the trustee is entitled personally is not a third party expense and therefore is not a matter to which the implied equitable indemnity can apply. Rather, if a remuneration clause is included in the documentation, the correct characterisation is that the terms of trust permit the trustee to do that which prima facie would otherwise be a breach of trust, that is take trust assets for its own benefit.36 Care must be taken

[page 173] in the drafting; these provisions comprise exceptions to a fundamental fiduciary obligation of a trustee and so will be construed strictly: Re Gee [1948] Ch 284. 4.48 There is a puzzling statement at the end of Pullen JA’s judgment in Southern Wines Corp Pty Ltd (in liq) v Frankland River Olive Co Ltd (2005) 31 WAR 162 as follows: ‘In my opinion, a trustee, who is entitled to fees out of trust property, merely becomes a creditor of the trust for unpaid fees (absent the independent creation of an equitable charge or lien or a specifically conferred beneficial interest)’. With respect, it is difficult to understand the meaning of this formulation; ‘the trust’ is not an entity capable of having creditors, nor can the trustee owe a fee or other remuneration to itself, regardless of its different ‘capacities’; a trustee cannot contract with itself.37 4.49 It also follows that, because a trustee fee or other remuneration is purely a private arrangement among the participants in the trust for which the trustee does not rely on the indemnity, there is no implied condition at general law that the trustee may only take it if it has ‘properly’ performed its trust duties. The fee or other remuneration is simply payable on its terms. If the parties wish to make the trustee’s entitlement to take its remuneration conditional on minimum performance standards or other criteria, they need to do so expressly. However, even in the absence of such a condition, if the trustee is in breach of trust in a way that has caused loss to the estate, then the ‘clear accounts rule’ (discussed below) operates so that the trustee may only take its fee after making good the loss or offsetting the loss in an accounting sense: ASIC v Letten (No 17) (2011) 286 ALR 346; [2011] FCA 1420 at [72]. But the actual entitlement to the fee is not lost or forfeited ipso facto because of a breach (unless that results from its express terms). There is an exception in relation to registered MIS, where the Corporations Act s 601GA(2)(b) provides not only that fees payable out of scheme property must be specified in the scheme constitution but also that they must be available only in relation to the proper performance by the responsible entity of its duties. This formulation is problematic. How great must the failure be before the

responsible entity loses its right to remuneration? There is no suggestion in the legislation that some form of pro rating or allocation applies [page 174] and, in any case, that would be impossible where remuneration is simply a stated amount or percentage of funds under management payable periodically. 4.50 In the United States, the matter is reversed. Rather than having expressly to provide for remuneration, the position is that ‘a trustee is entitled to reasonable compensation out of the trust estate for services as trustee, unless the terms of the trust provide otherwise or the trustee agrees to forgo compensation’: §38(1). It has been observed that this is associated with the early acceptance of the idea of a corporate trustee and the rise of the professional trustee who is paid for service in the ordinary course of business and not as the result of an express power to charge remuneration in the trust instrument.38

FACING EXTERNAL PARTIES: PERSONAL LIABILITY AND THE PROPRIETARY INDEMNITY 4.51 The position under Australian trust law of a trustee who incurs debts as trustee is relatively well settled and uncontroversial. A trustee (including one which is the responsible entity of a MIS) bears unlimited personal liability for all trust debts, liabilities and expenses; as Latham CJ put it in Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319 at 423, ‘in respect of debts incurred by him [that is, the trustee] in so carrying on the business [of the trust] he is personally liable to the trading creditors — the debts are his debts’. This follows as a matter of both doctrine and legal reality. While trusts are often spoken of as entities or enterprises, they have no separate legal personality. Thus, as a matter of fact and law, trusts as economic entities may only engage with the world, including with creditors and contracting counterparties, through the trustee.

4.52 If the personal liability of trustees for trust debts and liabilities was immutable and unqualified, one could safely surmise that the circumstances in which any person would agree to accept the office of trustee in a commercial context might be very limited indeed. It would also change fundamentally the attitude of an intending trust creditor, since it would be relying on the personal credit of the trustee alone, without regard to the trust assets; there would be no competition between creditors and equity investors over those assets. It is therefore necessary in considering the position of both the trustee and the trust creditor to analyse closely the nature of the trustee’s interest in the trust assets. 4.53 While trust debts, liabilities and expenditures are, at law, personal to the trustee, equity intervenes by implying a right to be indemnified for them out [page 175] of the trust assets, subject to the satisfaction of certain conditions.39 Clearly, equity’s primary objective in supervising trusts is the protection of beneficiaries against trustee misconduct, but this indemnity may be regarded as an instance where equity acts to protect the well-behaved trustee. Although this right has been historically described as an ‘indemnity’, the discussion below shows that this label is misleading. Nevertheless, except where issue is taken, it is used in the discussion to remain consistent with the authorities. 4.54 This right is not something that must be contracted for, though it may be modified by agreement or consent. It derives from three sources: decisions of the courts of equity; legislation, such as the Trustee Act 1925 (NSW) s 59(4) which provides that ‘a trustee may reimburse himself or herself, or pay or discharge out of the trust property all expenses incurred in or about execution of the trustee’s trusts or powers’;40 and the instrument creating the trust.41 It is said to be integral to the institution of the trust and incidental to the office of a trustee.42 It operates for the benefit of the trustee and, through it, trust creditors; the unsecured trust creditors’ claims against the trust assets on enforcement is through the

trustee, via the equitable remedy of subrogation: see 5.21 and following. The indemnity is, in essence, a right of the trustee, enforceable in equity, to have resort to the trust fund to protect and preserve its personal assets against debts, liabilities and expenditures that it incurs in the proper performance of the trust: Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99 at 104–5 (per King CJ). It is not a right exercisable against the beneficiaries, but it is not incorrect to describe it as exercisable as against the beneficiaries in that it represents a claim on the trust [page 176] assets that ranks in priority to their claim43 (the separate and quite different personal indemnity against beneficiaries is discussed in the previous chapter). 4.55 The language used in the older authorities evidences the trust’s traditional role in the management of family assets and deceased estates, where the trustee or executor typically was a gentleman of stature or a trusted friend or relative who agreed to act gratuitously as a matter of honour, affection or moral obligation. Thus, the indemnity was described as ‘the price paid by cestuis que trust for the gratuitous and onerous services of trustees’ (.Re Beddoe [1893] 1 Ch 547 at 558 (per Lindley LJ)), and was said to arise because liabilities are incurred by the trustee in acting for the benefit of the beneficiaries and the trust estate: … [since a] trustee is prohibited by law from making any profit for himself out of the trust estate … it is only just that, on the other hand, he should be legally protected against all liabilities properly incurred by him in the administration of the trust estate.44

4.56 Despite these origins, the indemnity entitlement has survived the transformation of the trust into a commercial vehicle. It exists whether or not the services are provided gratuitously or are particularly onerous.

Excluding the proprietary indemnity 4.57 As discussed in Chapter 3, the personal indemnity of beneficiaries in favour of the trustee may be excluded by express provision in the trust

instrument. The position regarding attempts to insulate trust assets for the benefit of beneficiaries by excluding the trustee’s proprietary indemnity is a very different matter and is the subject of some controversy. The legal status of such provisions is contentious, due to the potential for serious prejudice to unsecured creditors, on the policy basis that the indemnity is provided by equity to protect not only trustees but also trust creditors.45 Note that the Trusts Act 1973 (Qld) [page 177] ss 65 and 72 prohibit exclusion and the Corporations Act s 601FH invalidates such provisions in the liquidation of a registered MIS.

The elements of the proprietary indemnity 4.58 This so-called indemnity in respect of trust property is not a single right. It is more appropriately described as a bundle of rights. The distinctions that follow are critical for the arguments advanced later in this and the next chapter, particularly as to the way they affect the position of unsecured creditors, and so they are analysed in some detail here. 4.59 First, the indemnity itself comprises two limbs: 1. a right of reimbursement or recoupment in respect of trust debts, liabilities and expenditures that the trustee has satisfied out of its own assets (let us describe this as the ‘reimbursement limb’); and 2. an exoneration power by which the trustee can directly apply trust assets to discharge trust debts and liabilities properly incurred (the ‘exoneration limb’).46 The nature of the exoneration limb is discussed in detail in the next chapter (see 5.124 and following) and may be regarded as an acknowledgement that in equity there is no need for the trustee to pay a debt or liability before claiming its indemnity.47 The trustee is said to be indemnified ‘not merely against the payments actually made, but against his liability’: Re Blundell (1888) 40 Ch D 370 at 376.

4.60 The nature of the trustee’s right against the trust fund in respect of an undischarged debt or liability depends on how the trustee has responded to it. Because the right to indemnification arises, if it arises at all, concurrently with the incurring of the debt or liability, typically the exoneration limb will be engaged first, at the moment the debt or liability is incurred. If the trustee chooses to [page 178] discharge that debt or liability out of its own assets, the exoneration limb lapses and the reimbursement limb is engaged. It follows that the right of indemnity in relation to trust expenditures disbursed by the trustee out of its own funds also arises immediately and automatically the expenditure is made.48 4.61 Secondly, these rights are afforded a priority in respect of trust assets as against the beneficiaries; that is, the beneficiaries are not entitled to call for a distribution of trust assets for so long as the trustee is owed money under the indemnity: Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 367 (per Stephen, Mason, Aickin and Wilson JJ). 4.62 Finally, this priority is reinforced by an equitable lien or charge over all of the trust assets for the purpose of enforcing the indemnity.49 In Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 the High Court of Australia said at 247 that: A court of equity may authorise the sale of assets held by the trustee so as to satisfy the right to reimbursement or exoneration. In that sense, there is an equitable charge over the ‘trust assets’ which may be enforced in the same way as any other equitable charge. However, the enforcement of the charge is an exercise of the prior rights conferred upon the trustee as a necessary incident of the office of trustee. (emphasis added)

4.63 Curiously, although Sykes insists that liens and charges are quite distinct creatures,50 the courts have tended not to distinguish between ‘lien’ and ‘charge’ in describing the trustee’s equitable right in respect of the trust property. In some of the cases, the expressions ‘lien’ and ‘charge’ are used interchangeably, in some only one or the other expression is used, while some others simply skip over the distinction by describing the right as a

‘lien or charge’ or ‘lien and charge’. This is so even in the High Court.51 It has been described as a ‘right in possession’ [page 179] for the purpose of protecting and enforcing the indemnity and as a right of the trustee as against the beneficiaries to retain trust assets until it is put in funds to discharge the liabilities resulting from trust trading and a related right to raise the necessary funds for that purpose out of the trust assets themselves.52 There is a question as to whether the interest is a proprietary interest or a mere power or chose in action.53 Ford argued that the exoneration limb is not a proprietary right of the trustee but is rather a mere power.54 The author has argued that the courts have never really troubled themselves to clarify the distinction because nothing of consequence turned on it.55 4.64 So we see that, as with the use of the word ‘indemnity’, the expressions ‘lien’ and ‘charge’ when used in this context can be misleading. One cannot have a charge or lien over one’s own property. But nor is the trustee’s right an encumbrance over the beneficiaries’ interest in the trust assets: Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226. It may be better seen simply as an incident of the trustee’s interest in the trust property, a claim exercisable in equity which enables it to discharge properly incurred debts, which ranks in priority to the interests of the beneficiaries in those assets. However, the trustee does not have a right of foreclosure or, absent an express provision in the trust instrument, a power of sale out of court: Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd (2008) 74 NSWLR 550; [2008] NSWSC 1344 at [18]. 4.65 This priority is critical in that it supports the enforcing unsecured creditor’s priority over equity investors when subrogating to the trustee’s rights. In that sense, it reflects the commercial outcomes applicable to investors in companies, that is that creditors rank ahead of equity investors (that is, shareholders). However, as discussed in the next chapter, this indirect route of access makes unsecured trust creditors vulnerable to

trustee misconduct and outcomes that have no analogue in company law. That misconduct is the subject of the following discussion. [page 180]

‘Impairment’ of the proprietary indemnity 4.66 The trustee’s indemnity with respect to trust assets is in the nature of relief available in a court of equity. It is often described as a ‘right’, but as with all equitable relief, there is an element of discretion in its availability.56 The indemnity is always subject to the equities as between the trustee and beneficiaries.57 The authorities are clear that (subject to any additional conditions in the trust instrument) a trustee is only entitled to enjoy indemnification out of the trust estate if two conditions are satisfied: 1. the debt, liability or expense in question has been incurred by the trustee acting properly and within its powers as trustee; and 2. the accounts as between trustee and beneficiaries are ‘clear’, that is the trustee is not obliged to reimburse or make good the trust fund on any count.

Condition 1: liabilities properly incurred and the concept of ‘related breaches’ 4.67 The first condition is well-established.58 The precise language used by the authorities to describe the qualifying threshold (or, to put it another way, the limits to be placed on the right of indemnity) differs. The language of connection between the trustee’s acts and the trust in this context varies in the authorities.59 Most refer to liabilities incurred ‘properly’,60 and Williams J of the High Court of Australia confirmed this as correct in National Trustee’s Executors & Agency Co of Australasia Ltd v Barnes (1941) 64 CLR 268 at 279: Such expressions as acting ‘for the benefit of’ ‘with reference to’ or ‘on behalf of’ the trust estate or in the discharge of his duty as a trustee are used indiscriminately

[page 181] in the judgments, but they all mean the same thing, namely, that the question is whether the costs, charges and expenses are properly incurred by the trustee as an incident of his administration of the estate.

4.68 More recently, the New South Wales Court of Appeal in TFML Ltd v MacarthurCook Fund Management Ltd [2013] NSWCA 291 said at [70] that: Whether the trustee has incurred a liability in the performance of the trust depends on that being the correct legal characterisation of what occurred. That characterisation cannot be determined by the label or description given to the relevant conduct by the parties to it. Rather it depends upon whether the conduct or action was, or must be taken to have been, undertaken in the proper execution of the trust.

4.69 The expression ‘properly’ has generated controversy. The New South Wales Court of Appeal condemned the expression ‘properly’ as ‘almost meaningless’: Gatsios Holdings Pty Ltd v Nick Kritharas Holdings Pty Ltd (in liq) (2002) ATPR 41-864; [2002] NSWCA 29 at [47] (per Meagher JA). In response to this, the Victorian Court of Appeal said: With the greatest of respect, it is by no means clear why a majority of their Honours in Gatsios Holdings seemed to sanction so significant a departure from accepted principle as to leave the trustee’s right largely unconstrained … the majority’s views would appear to leave this important area of trust law rudderless and in a state where mischievous trustees might seize upon an almost unfettered right to indemnity as justifying improper depredations of trust funds, contrary to their obligation not to abuse their position by making it ‘a means of profit or benefit’ to themselves.61

Ultimately, the court decided to confine what was said in Gatsios Holdings to liabilities in tort incurred by trustees and the circumstances in which they should be so indemnified.62 4.70 The expression used in the statutory recognition of the indemnity in the Trustee Act 1925 (NSW) s 59(4) and equivalents is ‘expenses incurred in or about execution of the trustee’s trusts or powers’.63 In the case of a MIS, the indemnity is unavailable to the responsible entity if the liability is incurred otherwise than [page 182]

in ‘the proper performance of [its] duties’: Corporations Act ss 601GA(2) and 601FH.64 There is no guidance in the Act as to what ‘proper performance’ entails and so the general law would apply. 4.71 The conventional position has been stated thus: To my way of thinking the conventionally stated test as to expenses ‘properly incurred’ is merely a convenient shorthand to describe those restraints applicable to trustees who would seek to look to trust funds for the payment of their expenses and other trust liabilities. It also has the advantage of succinctly expressing the notion of propriety as underpinning a trustee’s relationship with the trust estate and the beneficiaries.65

4.72 Perhaps these differences are semantic;66 it is at least clear from the authorities that the indemnity is not available if the activity that generated the liability in question involved a breach of trust, was beyond the powers given to the trustee, or was criminal or fraudulent in nature. 4.73 Therefore, harking back to the distinction discussed in 4.15 between having power and the proper exercise of it, in relation to a debt, liability or expense, a trustee may be in breach of trust, and thus compromise its ability to indemnify itself out of trust property in relation to it, if: in incurring that debt, liability or expense the trustee acted beyond power; or in incurring that debt, liability or expense the trustee was within power but it acted improperly in that it breached or failed to discharge a fiduciary or other obligation. 4.74 For convenience, breaches in this category are described in this book (as they often are in commercial practice in Australia) as ‘related breaches’ since they relate to a particular debt or liability or expense incurred by the trustee. The principal sanction for misconduct of this type is very clear, direct and strict; absent exceptional relief of the type described below, the trustee has no right to indemnify itself out of the trust assets and so carries the debt, liability or expense personally. The precise juridical effect of a related breach may be analysed [page 183]

in either of two ways. Often it is said in respect of a related breach that the indemnity is ‘lost’. This assumes that the right exists in a contingent sense in the first place and the absence of related breach is a condition precedent to exercise or enforcement by the trustee; in other words, the right exists but becomes unenforceable if the condition is not satisfied. An alternative view, based on the fact that the indemnity is not an absolute legal right but is in the nature of a discretionary equitable entitlement, is that the indemnity simply never arises (that is, equity will not assist the trustee) because a condition precedent to its existence is not satisfied. In either case, however, the result is the same.

Condition 2: the clear accounts rule and the concept of ‘unrelated breaches’ 4.75 The second condition is that, even if all debts, liabilities and expenses in respect of which the trustee seeks indemnity were properly incurred within power, the right of indemnity is always subject to, and diminished by, the claims of the beneficiaries against the trustee in connection with any breaches not connected to specific debts, liabilities or expenses. This sanction addresses misconduct of a different type, that is acts and omissions which occasion loss or damage to the trust estate, such as misappropriation or misapplication of trust money or neglect of trust assets. For convenience, breaches of this type are described in this book (and often in commercial practice) from the perspective of trust creditors as ‘unrelated breaches’ because they need not relate to a particular debt, liability or expense incurred by the trustee.67 4.76 The consequences for the trustee of an unrelated breach are quite different from those for related breaches because they do not involve a particular external debt, liability or expense in respect of which the trustee might otherwise seek indemnity. They flow even if every single debt, liability or expense has been properly incurred and is otherwise able to be indemnified. The consequence is that the trustee is obliged to make restitution to the trust estate and cannot avail itself of the indemnity until it discharges that obligation.

[page 184] 4.77 The sanction is partially self-executing in the sense that the trustee’s legitimate right to indemnification in respect of debts, liabilities and expenses properly incurred becomes subject to a condition precedent, that is it must first make good the loss to the estate. Thus, before the trustee is entitled to make a claim, ‘a balance is to be struck between what is due [by the trustee] by way of compensation and what is due [to the trustee] by way of indemnity and … if the balance is in favour of the trustee he may recover from the estate to that extent’: RWG Management Ltd v Commissioner for Corporate Affairs [1985] VR 385 at 397. The balance is to be struck at the time of judgment: Target Holdings Ltd v Redferns [1996] 1 AC 421 at 437 (per Lord Browne-Wilkinson). For an example of how this is done, see C B Darvall & Darvall (A Firm) v Moloney (No 2) [2007] QSC 337. 4.78 For this reason, the concept is often described as the ‘clear accounts rule’, a reference to the state of accounts as between trustee and beneficiaries with respect to the trust estate. The jurisprudential basis for the rule is the ancient principle in Cherry v Boultbee (1839) 41 All ER 171, which may be stated thus: where a person entitled to participate in a fund is also obliged to make a contribution to that fund, they may not so participate unless and until they have fulfilled their obligation to contribute. The variation in its application to trusts is that, under the clear accounts rule, the process is an accounting exercise and the trustee need not actually pay its contribution first. Putting it another way, when assessing the extent of the trustee’s indemnity, ‘it is good practice to assume that the trustee (whether bare or active) has a prima facie right of indemnity, but to order accounts if there is doubt about the entitlement of the trustee because of a default, and suspend the right of the claimant while those accounts are taken’: Warne v GDK Financial Solutions Pty Ltd (2006) 24 ACLC 1000; [2006] NSWSC 259 at [194] (per Young CJ in Eq). See also the discussion in ASIC v Letten (No 17) (2011) 286 ALR 346; [2011] FCA 1420 at [20]–[22]. 4.79 Note that the responsible entity of a registered MIS suffers what might be described as an ‘extended’ unrelated breach risk if it appoints an

agent or otherwise engages another person to do anything that it is authorised to do in connection with the scheme. Under the Corporations Act s 601FB(2), for the purpose of determining whether there is a liability to the members or if the responsible entity has properly performed its duties, the responsible entity is taken to have done (or failed to do) anything that the agent or other engaged person has done (or failed to do) because of the appointment or engagement, even if they were acting fraudulently or outside the scope of their authority or engagement. Further, by subsection (3) this extends to sub-agents and sub-appointees engaged by any such agent or person. The problem for the responsible entity is compounded by the apparent inconsistency between [page 185] s 601FB(4) and Corporations Regulations 2001 reg 5C.11.06 which appears to make the responsible entity liable for all losses regardless of amounts compensated by the defaulting agent (which amounts become scheme property on receipt and so would not reduce the quantum of the responsible entity’s personal liability). 4.80 Again, as with a related breach, the indemnity is not ‘lost’ for an unrelated breach; rather, its exercise is subject to the condition precedent of a taking of accounts and there being a positive balance in the trustee’s favour: Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liq) [2002] FCAFC 285 at [138]. If the mathematical result of that exercise is that the value of the trustee’s indemnity claim is exceeded by the value of the trustee’s restitution obligation, then the indemnity is rendered worthless and the economic effect is as if the indemnity was ‘lost’.

Relevance of the trustee’s intentions and motivations in relation to breaches 4.81 The High Court of Australia has acknowledged that ‘breaches of trust and breaches of fiduciary duty vary greatly in their seriousness. Some breaches are well intentioned, some are trivial’: Farah Constructions Pty

Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22 at [84]. While the degree of trustee culpability is relevant for some purposes, under traditional equity that question has little relevance to the effect of breaches on the trustee’s proprietary indemnity, which is strict and applies regardless of the trustee’s state of mind.68 The conduct which constitutes the breach need not involve fraud, dishonesty or bad faith; it may be deliberate or inadvertent and may have been innocent;69 it may even have been reasonable.70 4.82 However, the harshness of this rule is ameliorated by statute. The court is given a discretion to excuse a breach of trust in circumstances where the trustee has acted honestly and reasonably. The Trustee Act 1925 (NSW) s 85 provides that: [page 186] Where a trustee is or may be personally liable for any breach of trust, the Court may relieve the trustee either wholly or partly from personal liability for the breach [but the] relief may not be given unless it appears to the Court that the trustee has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the direction of the Court in the matter in which the trustee committed the breach.71

4.83 Further, s 86 of the Act provides that: Where a trustee commits a breach of trust at the instigation or request or with the written consent of a beneficiary, the Court may, if it thinks fit, make such order as to the Court seems just for impounding all or any part of the interest of the beneficiary in the trust estate by way of indemnity to the trustee or person claiming through the trustee.72

4.84 These provisions have been described by the High Court of Australia as evidence of the rigour of the trustee’s duty to obey the terms of the trust, such that the legislature needed to step in to provide some machinery for relief in appropriate circumstances: Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484 at [33]. 4.85 Further, there are common law exceptions relating to expenses and liabilities incurred to preserve trust property, and where the trustee, though in breach, acted in good faith and benefited the trust estate, or where the

beneficiary has acquiesced in the conduct in a manner that raises an estoppel against it.73

Effect of breaches of trust on the proprietary indemnity: ‘impairment’ 4.86 Thus, although the trustee’s indemnity with respect to trust assets is sometimes described simplistically as being ‘lost’ if the trustee acts in breach of trust, that description is imprecise and in some senses incorrect. As an oversimplification it ignores the different ways in which a trustee may breach trust and how different breaches affect the indemnity. The indemnity is not [page 187] automatically forfeited ipso facto because there is a breach of trust. The effect of a breach in relation to a given debt, liability or expense incurred by the trustee will depend on whether it is a related breach or an unrelated breach and, if the latter, the extent of the loss caused to the trust fund. It is possible, for example, for there to be unrelated breaches of trust that have no material effect on the right of indemnity in relation to a given debt because they do not cause or result in a loss to the trust estate.74 For simplicity and convenience, in this book the neutral expression ‘impaired’ is used to describe the effect of a breach on the trustee’s proprietary indemnity.

Contractualising the relationship with beneficiaries: a summary 4.87 The sensitivity of the indemnity right to a trustee’s conduct, and the apparent readiness of the courts to hold the trustee personally to account by denial or diminution of the indemnity, bear all the hallmarks of equity’s solicitous protection of vulnerable beneficiaries in a non-commercial

context. While equity will aid the trustee in protecting its personal position, that protection is very much conditional upon: the trustee acting only within the remit of authority given it; and scrupulous discharge by it of its duties. The critical question in any given case is the scope and extent of that remit and those duties. It is in the trustee’s interests to maximise the scope of that remit and attenuate as far as possible the burden of duties to reduce the risk of breach and consequent impairment of indemnity. That is the role played by the various clauses described above and in Parts 1–3 of Appendix 4: ‘Protecting the trustee’.

FACING EXTERNAL PARTIES: LIMITING PERSONAL LIABILITY 4.88 The issue of personal liability limitation vis-à-vis creditors and other external parties is of great importance in large commercial trusts, where contract debts and liabilities incurred by the trustee, including under financing arrangements, can run to the many millions and even billions of dollars. Under Australian law, there is no implied or deemed limitation of personal liability for trustees at law, even if the party engaging with a person knows that the person is doing so as a trustee; the mere inclusion in a contract of the expression ‘as [page 188] trustee’ in association with a party’s name is not sufficient to limit that party’s personal liability: General Credits Ltd v Tawilla Pty Ltd [1984] 1 Qd R 388.75 4.89 If a trust liability is due, the trustee must pay it. If there are liquid trust assets available, it can use its exoneration power to pay the liability directly. If there are not, then if it has sufficient assets of its own to pay the liability, it must pay it out of its own assets and then seek to recoup the

payment by liquidating trust assets (if it can). If it has insufficient assets of its own to pay the liability, it may be insolvent (even if there is sufficient, but illiquid, value in the trust fund). The question of the trustee’s solvency and how it can be affected by the state of the trust fund is discussed in detail in Chapter 6. 4.90 The law does permit trustees to limit their personal liability, but something more than mere identification of their trustee capacity is required. If a trustee seeks relief from the prima facie position of full personal liability it must do it contractually. The trustee must bargain with each intending trust creditor to modify or eliminate this risk by displacing what would otherwise be the full extent of the creditor’s rights against the trustee personally. The courts have long supported the contractual limitation by trustees of their personal liability, so long as the limitation is expressed in clear and unambiguous terms.76 A trustee does not need an express power or permission in the trust instrument to do that.77 The position was summarised by Gummow J (as he then was) in Elders Trustee & Executor Co Ltd v E G Reeves Pty Ltd [1987] FCA 332 at [244] as follows: … [the trustee’s] liability to creditors is not limited or quantified by reference to the extent of trust assets. The debts are his debts … however, the law does permit a trustee to contract with third parties on the basis that his personal liability is limited, for example to the extent of his right to resort to and apply trust funds for the discharge of liabilities incurred by him in the authorised conduct of the trust. Nevertheless, third parties may, in a given case, not be prepared to deal with

[page 189] a trustee on such a basis and, in any event, clear words are necessary to achieve a result whereby what is prima facie the unlimited personal liability of a trustee is so qualified. (citations omitted)78

4.91 A limitation by reference to a specific fund has been held to be enforceable,79 including where the fund is a trust estate: McLean v Burns Philp Trustee Co Pty Ltd (1985) 2 NSWLR 623 at 640. If properly drafted, limitation clauses effectively insulate the trustee against personal insolvency which might otherwise arise due to trust debts. Model limitation of liability provisions are set out in Part 4 of Appendix 4:

‘Protecting the trustee’ and their component parts are discussed in detail below. 4.92 Limitation clauses are critical for a corporate trustee that has material personal assets and/or is trustee of more than one trust. Assume that a company ‘T’ is trustee of several trusts. Absent an agreed limitation of liability provision in relation to all trust debts, if the fund of Trust A is inadequate to support the debts incurred by T as trustee of that trust, T could become insolvent; the Trust A creditors could force T into liquidation, in the process of which T’s personal assets become available to them to cover any shortfall in the Trust A fund. Further, T’s position as trustee of Trust B, Trust C and so on is imperilled, even if those trusts are otherwise in good financial health.80 T cannot be insolvent solely ‘in its capacity’ as trustee of Trust A, a point that is discussed in more detail in Chapter 6.

The parties’ commercial expectations and objectives 4.93 The expectations of commercial trustees were described at the beginning of this chapter. In relation specifically to the question of personal liability for [page 190] enterprise debts and liabilities, trustees (particularly those which have material personal assets or hold assets on other trusts) generally want to limit their exposure to the trust assets. They do not want to have to reach into their own pocket or put their own assets at risk. They want to limit trust creditors’ recourse against them to the extent the liability may be discharged out of the trust fund, via the exoneration power. Importantly, they do not want the risk of being rendered insolvent by trust debts. 4.94 The expectations of trust creditors and other counterparties are discussed in 5.10–5.12. When dealing with the trustee of a commercial trust they may be asked by the trustee to look solely to the credit of the

underlying economic entity, that is the trust estate or fund, rather than the corporate balance sheet of the trustee. If they are satisfied with that credit they may be prepared to limit the trustee’s liability, and their own recourse, to the trust fund. Common exceptions are where the economic ownership of the trustee and the trust fund is the same, for example where the trust is a stapled entity, or where shareholders in the trustee and unit holders in the trust are identical (that is, the trustee is ‘captive’), or where a trustee is a member of a corporate group and trust beneficiaries are members of that group or where the trustee is of nominal value or has no assets other than the trust assets. In those cases, it may be seen as commercially appropriate for the corporate assets and balance sheet of the trustee to be at risk. While there may seem to be little point in limiting the liability of a trustee of nominal value, full recourse would create the potential for director liability. 4.95 If a creditor does agree to a limitation, this necessarily means that they accept the commercial risk that the trust fund might be inadequate in value or liquidity at the relevant time to discharge the debts owed to them. But that acceptance does not include taking risk on their legal rights of access to the trust assets via the trustee’s right of exoneration. If that is not available they will have no recourse to the assets at all. If it is impaired then their access will be correspondingly impaired. Thus they will want to cover the possibility that access to the trust assets is impaired due to trustee misconduct, and in that case they will want to look to the trustee and its personal assets (and potentially even its directors personally, under the Corporations Act s 197, particularly if the trustee’s personal assets are unreachable or inadequate).

The legal effect of limitation clauses 4.96 Trustee limitation of liability clauses seek to address these issues and achieve an agreed allocation of risk between the trustee and unsecured trust creditors. If properly drafted, they effectively insulate the trustee against personal insolvency which might otherwise arise due to trust debts. [page 191]

4.97 In essence, limitation clauses typically used in the Australian market purport to operate as contractual limitations on the trustee’s personal liability by limiting the creditor’s rights to the recourse the trustee has to trust assets. They are purely a matter of contract and are not a feature of trust law. They must be actively sought and bargained for in respect of each debt, liability or expense incurred or to be incurred by the trustee. They bind only those creditors who agree to them. They will not usually have been bargained for with employees, utility providers, trade creditors, revenue authorities or many claimants in tort. Some statutory liability (including, arguably, for misleading and deceptive conduct)81 may not be limited in this way at all, as a matter of public policy. 4.98 A trustee who does not insist upon, or is unable to secure, a limitation clause in respect of a given trust debt carries unlimited personal liability for it (subject to its right to indemnify itself out of trust assets, if intact). A limitation of liability provision which is embedded in the trust instrument rather than the contract with a counterparty would almost certainly not have the desired effect against the counterparty not having notice of it and who has not otherwise agreed a limitation.82 Whether it would have any effect on a counterparty with notice but who has not expressly agreed it in the contractual engagement is an interesting question: see the discussion in relation to beneficiary limited liability clauses in 3.87–3.91. 4.99 Limitation clauses must be drafted with care. The courts will approach them with caution and construe them strictly against the trustee. This is said to be because they operate to limit or reduce the extent of the legal remedies which the counterparty would otherwise have against the trustee.83 The premise on which this logic is based (that is, that the trustee should have unlimited personal liability for trust debts) is patently at odds with the commercial expectations of a remunerated corporate trustee, as described above. 4.100 While agreeing to a limitation, trust creditors and other counterparties will also want to maintain sufficient rights and remedies, despite the limitation. They will want to ensure that the documents operate as written, so that, for

[page 192] example, the trustee cannot say that because it had no liability to pay a debt, there was no breach by a failure to pay and default interest should not accrue. It must be clear that personal liability is not negated (something which might result in the limitation clause being struck down altogether as being ‘repugnant’ to the primary obligation to pay, resulting in no limitation at all)84 but rather is merely limited. Thus, the typical clause is drafted as a limitation on recourse rather than as an exclusion of personal liability. This creates significant issues for both trustees and creditors. The historical reasons for this formulation are interesting and are discussed below at 4.161 and following. 4.101 A trustee which has properly limited its personal liability in respect of a debt has no need of a right of reimbursement or recoupment; the very point of the limitation from the trustee’s perspective is that the trustee wishes to avoid being obliged to pay the creditor out of its personal funds and then seek reimbursement out of the trust fund. Critically, if properly drafted, it will limit the creditor’s recourse against the trustee to the extent the debt may be discharged out of the trust fund. Equally importantly, however, the limitation is typically stated to fall away if there has been conduct that impairs the indemnity, leaving the trustee exposed personally for the debt.

Market experience 4.102 In Australia, trustee limitation of liability clauses which seek to address the above issues have become very common. Trustee companies and funds management companies which act as trustees, responsible entities or custodians insist on them. They often have their standard forms and fiercely resist deviations from those forms in negotiations. In other cases, negotiations can be protracted and difficult. They can become technical and abstruse in a way that can frustrate non-expert commercial parties and can result in a clause that is both confusing and substantively flawed. In yet other cases, they are regarded by the parties as mere ‘boilerplate’ and not carefully reviewed or negotiated at all.

4.103 Once these clauses were very short and very simple, comprising just a few lines. Now they are complex and often long. While superficially similar to each other, they are often different in substantial ways and in their operation. As contractual tools, they are only as good as their drafting. On a close analysis many use inaccurate technical concepts and some appear to misconstrue the law. Sometimes they contain internal inconsistencies, particularly as they wrestle with competing commercial points of view, or attempt to deal with legal issues and [page 193] in turn raise other issues. Some so zealously protect the trustee that on a strict reading they leave counterparties and creditors with almost no rights or recourse, inevitably inviting a court to read them down. Others give counterparties some recourse but leave them without some of the rights and remedies that they may reasonably have expected, cutting off valuable, and legitimate, avenues of recovery. On the other hand, others leave trustees exposed by not properly limiting counterparties’ rights. Some of these issues have been perpetuated over time and across the market. 4.104 The terms of modern longer clauses appear not to have been tested in the courts.85 In the typical commercial transaction there is usually neither the time nor the inclination to put them to rigorous analysis, particularly when there is much else is to be negotiated. One might expect that in most cases the courts could find some way through the thicket laid before them to come to a commercially sensible result, and lawyers and parties negotiating them under time and commercial pressure may well operate on that assumption, or that hope. But ultimately that is not a sensible way for the market to proceed; time and costs may be spent in litigation in the hope of getting to a sensible result, and judgments may yield unexpected (and undesirable) outcomes. A clause which deals with such a sensitive commercial subject and such a complex area of the law, where the stakes can run into the millions and even billions of dollars, should recognise and avoid technical difficulties, to ensure that it achieves its commercial ends.

Limitation clauses are an imperfect solution for the trustee 4.105 While in the United States trustees are protected against personal liability for trust debts as a matter of trust law (see below), the Australian construct presents risks for trustees arising out of the threshold point that liability limitation is a matter of contract rather than trust law. 4.106 The fact that such clauses are contractual means there is no uniformity across the Australian market and they differ in style, content and quality. In the author’s experience, some are quite poorly drafted and display a lack of understanding of some important fundamentals. Given the courts’ stated wariness of limitation clauses, poor drafting risks failure to achieve the intended effect, leaving the trustee with full personal liability. For example, a limitation clause that simply states that the liability of the trustee with respect to a particular debt is limited to the extent to which it is ‘entitled to be indemnified’ out of fund assets provides protection against balance sheet insolvency (that is, the trustee is not bound to make up any shortfall in asset value out of its own money) but may not [page 194] necessarily protect it against cash flow insolvency (that is, inadequate liquidity in the fund to meet present indebtedness on its due date). As a statement of fact and law, it may well be the case that the trustee is ‘entitled to be indemnified’ (that is, that the indemnity has not been impaired), but that does not mean that the trustee necessarily has available to it out of the trust estate the liquid assets to meet a demand in relation to any particular trust debt when due — or that it will exercise that indemnity to discharge the debt. 4.107 Despite prima facie unlimited liability, the law does not oblige a trustee to pay trust debts out of its own pocket first then seek reimbursement; the exoneration power allows it to pay trust debts directly out of trust assets. But the trust estate may be ‘cash poor’ in that, despite

having property of sufficient value to cover the principal value of debts, that value is comprised mostly of assets which are highly illiquid (say, commercial or industrial real estate during a severe economic downturn). In this case, absent a contractual limitation, the trustee might have no option but to pay the due debts out of its own money and seek to recoup those payments out of the trust fund as and when trust assets can be liquidated or refinanced. If the trustee does not have ready access to liquid funds and does not enjoy the protection of a well-drafted limitation clause that allows time to liquidate assets (it is rare for limitation clauses to do this), the trustee may become insolvent.86 Protection against cash flow insolvency would require the clause to be clear that it operates to the extent the trustee is both entitled to be indemnified, and is actually or in fact indemnified by payment out of the trust fund, so that even if there is sufficient value in the trust fund, if it is illiquid the creditor may not seek to recover, and the trustee is not obliged personally to satisfy, the amount due out of the trustee’s own money.87 A clause that does not properly protect against cash flow insolvency in effect places the risk of illiquidity on the trustee, whereas a limitation clause that properly protects against both balance sheet insolvency and cash flow insolvency effectively shifts the risk of illiquidity to the creditor. [page 195] 4.108 One commentator has identified another common drafting defect in limitation clauses that has the potential to leave trustees exposed to unintended personal liability. Some clauses describe the limitation by reference to the value of ‘trust assets’. The risk is that this may be interpreted as gross assets, rather than net assets after deduction of other liabilities, possibly allowing creditors to claim from the trustee the shortfall.88 4.109 Of course, because they must be bargained for as a matter of contract, they will not apply to every debt or liability; as noted in 4.97, there are some debts and liabilities for which a trustee will always carry unlimited personal liability.

4.110 Finally, because limitations are contractual, they will sometimes generate transaction costs and delays in their drafting and negotiation. While most large professional trustee companies will have standard form clauses, not all commercial trusts are serviced by them; some trustees will rely on their legal advisers’ advice and drafting. In some cases, a counterparty such as a bank will insist on their standard clause being used. In either case, the result can be negotiation, sometimes protracted. Although these clauses are to protect the trustee personally, the transaction costs will usually be regarded as legitimate trust expenses and so will be indemnified out of the trust fund; thus, the costs are in effect borne by the equity investors.

Limitation clauses are an imperfect solution for the unsecured trust creditor89 4.111 These clauses can compound the unsecured creditor’s risk under the traditional trust law doctrine that an unsecured trust creditor may only reach trust assets through subrogation to the trustee’s indemnity, as discussed in the next chapter. The critical weakness is that these clauses do not remedy that risk and, indeed entrench it, leaving the creditor exposed to trustee misconduct and the clear accounts rule, and the personal financial position of the trustee. The limitation may well, by its own terms, fall away if the trustee is guilty of misconduct of the type that impairs its indemnity, but that is of little benefit to an unsecured trust creditor who, having lost its only route of access to the trust assets (which may be valuable), is left with a personal claim against a limited liability company trustee (who may be insolvent).90 An expert drafter may come close to mimicking the American position of creditors’ ‘direct access’ to trust [page 196] assets (discussed in the next chapter), but for so long as he or she drafts the clause as a limitation on recourse via the trustee’s indemnity this will always be a fundamental weakness in the fabric of these clauses. Because the American doctrine bypasses the trustee’s right of indemnity, it also

removes the clear accounts rule from the equation; no matter how well drafted, a contractual limited recourse-style limitation anchored in the indemnity will not do that. 4.112 The vagaries of negotiation and inexpert drafting pose other risks for creditors. Some limitation clauses include, as part of the limitations, a prohibition on the creditor bringing proceedings against the trustee, or appointing, or taking action to procure the appointment of, a receiver or other insolvency officer to the trustee, each of which can, in a practical sense, have the effect of stymieing enforcement in the normal way. Some clauses, demonstrating a flawed understanding of the point that a trustee is not a distinct legal person having a representative capacity separate from its personal capacity, provide that the creditor may not take action of any kind against the trustee ‘in its personal capacity’ or in any ‘capacity other than as trustee’ of the relevant trust. This is problematic, at least in respect of legal action in the courts. Persons are not sued in a particular ‘capacity’ — they are simply sued: see 5.140.

A MODEL LIMITATION OF LIABILITY CLAUSE91 4.113 In light of the above, and the widespread use of limitation clauses by trustees of commercial trusts and others, it is appropriate to put these clauses under scrutiny and to propose model language that seeks to address both the technical legal issues and the commercial issues in a balanced way. The suggested model clauses are set out in Part 4 of Appendix 4: ‘Protecting the trustee’. There is both a short clause for inclusion in the trust instrument to remove any doubt that the trustee is permitted to deal on a limited liability basis and a more detailed clause for insertion into contracts with counterparties. The focus of the discussion which follows is on the latter. Of course, in specific transactions, changes may be appropriate. Parties may have different risk appetites, or may negotiate different results. The suggested clause could in some cases be considered a starting point for negotiations. [page 197]

4.114 The proposed clause attempts to deal with some of the difficulties outlined above (as well as those described in the discussion around Watling v Lewis in 4.161 and following) in a way which is legally effective and more closely aligned with legal principle. It also attempts to make a fair allocation of risks as between trustees and creditors which, from experience, reflects general commercial understandings in the market. The approach is to concentrate on the result to be achieved rather than to complicate or limit the drafting by over-engineered focus on the legal machinery for achieving it. The model follows in many ways the general scheme of many clauses seen in the market, but there are some important differences. It is not short. Its length reflects the fact that the market has grown accustomed to seeing some issues dealt with expressly, and parties may want to take a cautious view. Its length also reflects the complexity of the issues, and a careful division of rights and protections between the parties. Capitalised terms in the following discussion have the meanings given with the clause in Part 4 of Appendix 4: ‘Protecting the trustee’.

Clause X.1 4.115 This paragraph sets the scene for the remainder of the clause. The statement that the trustee enters into the Transactions as trustee is important to open the gateway to the Trust Assets, for both the trustee and (by way of subrogation or security) the counterparty.92 It reverses what would be the situation where liability was not to be limited, that is despite identifying itself as a trustee, it remains personally liable beyond and regardless of the value of trust assets: see 4.88. 4.116 The use of the defined expression ‘Transactions’ means that the clause extends beyond the document to include transactions contemplated by it and all acts, omissions and obligations of the trustee in connection with the document or those transactions. This is wider than the usual construct which is to limit the assurance by reference to the document only and operates so that, as far as possible, access to the Trust Assets, and the limitations set out later in the clause, will apply with respect to all resulting liability. It is important from the trustee’s perspective that the limitations in the clause extend to all related non-contractual liability, as far as legally possible.

4.117 It is not uncommon for limitation clauses to adopt language along the lines of ‘Trustee enters into this agreement only in its capacity as trustee of the [page 198] Trust and not in its personal capacity’. The second part is unnecessary and potentially confusing. The trustee is and remains personally liable, despite the clause, even though the clause limits liability and recourse to the extent of the Trust Assets. However, in acknowledging current practice the model clause does assist in setting the scene (and in removing any possible suggestion the trustee may somehow also be an agent for the beneficiaries) by saying that entry into the Transactions is ‘only’ as trustee of the Trust. The language also eliminates the use of the term ‘in its capacity’ as trustee. In this context those words are otiose and in some senses misleading. As discussed in 4.21, the expression ‘capacity’ in the trustee context does not have the legal meaning applicable in relation to natural persons or companies and other entities given legal personality by law. It simply means ‘role’ or ‘position’. A person (whether a company or a natural person) acting as a trustee does not have two separate capacities in any legal sense.93 4.118 The carve-out ‘except where expressly stated otherwise’, is not commonly seen. It modifies the limitation by merely stating a fact, particularly by reference to the disapplication provisions in clause X.3. Very often limitation clauses purport to say that the trustee enters into the document only as trustee, with no qualifier, suggesting that any and all liabilities are limited. This is plainly not correct where there is any circumstance at all in which the trustee’s personal assets might be available upon enforcement by the contracting counterparty. 4.119 As a corollary, it is very common practice, when introducing and defining the trustee at the beginning of the document, to use the following formulation or something similar: Trustee Co Ltd (ACN 123 456 789) of 1 High Street, Blackacre as trustee/in its capacity as trustee of the Blackacre Trust (‘Obligor’)

For the reasons described above, language identifying the trustee capacity is important where the document does not otherwise make that capacity clear, but that language does not of itself have a limiting effect. However, as an unqualified statement this can be misleading if a limitation has been agreed because it can appear on its face to contradict or at least be inconsistent with exclusions within the limitation clause. It does not allow for the fact that some assurances go to personal rather than trustee matters — obvious examples are representations and undertakings concerning the Obligor’s status as a company and other matters that are not affairs of the trust — or the fact that there may be other circumstances in which the parties may have agreed that the trustee is to be [page 199] liable personally: see the discussion of clause X.3(b) below. The result of using that unqualified language in the party introduction is that additional pressure is placed on the drafter to make the position clear through the limitation clause. This could be assisted by drafting the introduction as follows (where ‘clause *’ is a reference to the limitation clause):94 Trustee Co Ltd (ACN 123 456 789) of 1 High Street, Blackacre who, subject to clause *, enters into this document as trustee of the Blackacre Trust (‘Obligor’)

Clause X.2(a) 4.120 This is the main part of the clause. It limits liability to the extent of the Trust Assets, and more particularly to the extent that a liability ‘can be satisfied’ out of the Trust Assets. This language is deliberately chosen to include both the legal and the practical availability of the Trust Assets and to ensure that the trustee does not have to use its personal assets to discharge the liability. 4.121 It may have been simpler, at least from the point of view of creditors, to have left the liability intact but instead limited the counterparty’s recourse. But that would have left some issues for the trustee. Most notably it could, strictly speaking, be insolvent in the legal

sense if there were insufficient trust assets to pay the liability. The liability would still be there, as one of the trustee’s debts, to be counted in determining whether the trustee can pay its debts as they fall due. 4.122 The clause quite deliberately avoids wording commonly seen in clauses of this nature which limit liability expressly by reference to the trustee’s right of indemnity out of the Trust Assets. It is better to refer to the ultimate limitation, and the commercial principle that liability is limited to Trust Assets, rather than to select one legal mechanism for access to those assets, and focus on it. There is no legal reason why the clause must refer to or be constructed around the right of indemnity. The words used are sufficiently broad to cover Trust Assets available under the right of indemnity but also deal with other means of access which do not necessarily rely on the indemnity. These might include the enforcement of security, any available process against trust assets, and potentially a wider equitable right to apply Trust Assets for trust purposes. The objective is to leave open the possibility of access through other means, should Australian law change to give unsecured creditors other modes of access to trust assets which do not rely on the trustee’s indemnity and the creditors’ ability to subrogate to it. As discussed in the next chapter, the current Australian two-step route of access makes creditors vulnerable to conduct of the trustee which impairs [page 200] the indemnity; this is described as the ‘double equity risk’. For so long as the law in Australia remains as such, that risk will continue but the formulation in clause X.2(a) leaves open room to argue that an innocent creditor’s rights are (or should be) unaffected by unrelated trustee misconduct or, therefore, the clear accounts rule. For a more detailed explanation of these issues, see in particular the discussion in 4.161 and following below and 5.116 and following in the next chapter. 4.123 Not limiting liability by reference to the indemnity also avoids the ‘chicken and egg’ problem seen in the drafting of some of these clauses, particularly those that limit liability to the right of indemnity. On a strict

application of some wording, there could be no liability without a right of indemnity, and no right of indemnity without a liability which triggers the indemnity. Some clauses compound this issue. In an attempt to avoid the risk of cash flow insolvency of the trustee (that is, where the fund is ‘asset rich but cash poor’), they provide that it is only liable to the extent that it is actually indemnified out of the trust assets. On a strict interpretation, the trustee is not liable until it receives the cash to pay the liability that does not arise until it receives the cash which is why, as mentioned above, clauses that use this formulation should go on to oblige the trustee to actively pursue indemnification: see, for example, positive undertaking clause 4(b)(iii) in Part 2 of Appendix 5: ‘Protecting creditors and other counterparties’. Alternatively, some clauses by their terms avoid the balance sheet solvency problem to which trustees are exposed (that is, where trust debts exceed the value of the fund) but do not protect the trustee against the cash flow insolvency problem, that is they leave the trustee exposed to the lack of liquid trust assets sufficient to pay the liability. To insulate the trustee against personal insolvency, a limitation clause should pass to the creditor not only the risk of a shortfall in the value of trust assets but also the risk of illiquidity in the trust fund. In doing so, it must be drafted carefully so as to avoid circularity or gaps. 4.124 As noted above, the expression ‘can be satisfied’ is deliberately chosen to capture both a legal and practical ability to apply trust assets to discharge trust liabilities. If a trustee is under a legal disability which is not of the type that engages the disapplication in clause X.3, then the limitation should prevail. Similarly, if the trustee is unable to discharge fully a trust liability out of trust assets for purely practical or economic reasons, for example because the fund is of insufficient value or is highly illiquid, otherwise than as a result of relevant trustee misconduct, then it should not be personally liable. 4.125 The model clause is designed to cover every possible liability, but avoids the traditional ‘laundry list’ approach to inclusions and exclusions; for example, some clauses use language to the effect of ‘any liability or obligation of whatever [page 201]

kind undertaken or incurred by the trustee, whether at law, in equity or under statute, in any way connected with any representation, warranty, conduct, act, omission, agreement or transaction related to this agreement’. The words used in this clause are wide enough to include liability of all kinds which can be excluded (although it might not be able to exclude some types of statutory liability). But an exception is made here for negligence and it is referred to expressly. This is due to the confused state of the authorities in relation to references to negligence in indemnities, releases and exclusions. There is authority that if clauses of that nature are intended to include negligence then they must be express about that.95 This appears to be unique to negligence; the courts do not seem to have had any difficulty extending wide words of exclusion to any other form of liability (leaving aside crime and fraud). This inclusion seeks to make abundantly clear that the trustee’s liability limitation operates even if that liability arises from negligence, an outcome that might not necessarily follow if this language was omitted.96

Optional insert regarding beneficiaries’ personal indemnity 4.126 There is an option to insert at the end of clause X.2(a) an additional sentence along the lines of the following: In relation to any given liability, amounts which are not Trust Assets and which have been actually received by the Obligor to indemnify it against that liability will be taken to be Trust Assets (but no other party will have any rights in respect of any such indemnity).

This requires the trustee to treat as Trust Assets, for the purposes of the clause, amounts actually received by the trustee to pay a specific liability owed by it so that the trustee would be required to hand such amounts over in satisfaction of that liability. This would include amounts received by way of personal indemnity from Beneficiaries (if that indemnity exists in any given case) but could also include other amounts such as insurance proceeds. This element has not often been seen in limitation clauses. The majority of commercial trust instruments do not contain a personal indemnity from the Beneficiaries and indeed usually expressly negate such an indemnity. But, as discussed in Chapter 3, Beneficiary indemnities can exist.

4.127 The principle behind the optional insert is that, if the trustee receives an amount to satisfy a specific liability owed by it, it ought to be required to pay it over and not simply to sit on it as windfall, or count it as its own funds or apply [page 202] it for other purposes. There is no case law directly on point, but it is reasonably arguable that the courts in most such circumstances should find that the funds are not the trustee’s own personal funds to deal with as it thinks fit, but are impressed with some type of trust.97 4.128 The optional insert limits the extension to amounts actually received by the trustee. The trustee should not bear credit risk on the Beneficiaries. This feature may be uncontroversial in most cases, but the language also expressly provides that a counterparty has no rights to collect such amounts from the Beneficiaries. This is to prevent arguments that counterparties may be subrogated to the trustee’s rights in relation to any personal indemnity from Beneficiaries, or might otherwise be able to force the trustee to collect from its Beneficiaries.98 Of course, counterparties may object to this latter part and want to expressly provide for such a right but that raises complex issues. Whether to allow some prospect of the counterparty/creditor being able in some way to force a collection against Beneficiaries in relation to personal indemnities would be a matter for negotiation. It might be argued that if Beneficiaries agree to financially support trust liabilities, then as between them and the trust creditors they should bear the risk of a shortfall in Trust Assets. On the other hand, it materially changes the limited recourse nature of the transaction — the trustee is protected but the Beneficiaries do not then enjoy the ability to shelter behind the trust. 4.129 Ultimately, whether or not the optional insert is included in documents between the trustee and external counterparties will be a matter for negotiation but it is worth remembering that, in theory at least, the trustee should be largely indifferent. The real, or economic, issue here is as between the Beneficiaries and the counterparty.

Clause X.2(b) 4.130 This paragraph reinforces the principle in clause X.2(a). In a sense all it does is give examples of the principle in operation, but in doing so it seeks to capture the universe of possibilities. On a strict view, the clause overall could survive without clause X.2(b) (except for the prohibition against taking steps [page 203] to have the trustee placed in any form of insolvency administration) and the parties could rely on clause X.2(a), but the market has become accustomed to language specifying barred and permitted action in this way, and some parties may prefer to take that more cautious and certain approach. The overriding guiding theme of clause X.2(b) is that the counterparty should be allowed to take steps that involve the Trust Assets, but nothing that imperils other assets held by the trustee (whether personally or on other trusts) or the status of the trustee itself.99 4.131 The clause first lists those rights and remedies that can be exercised in respect of Trust Assets (that is, the rights and remedies that a counterparty or creditor may legitimately expect to have to give it access to the trust assets without causing undue harm to the trustee’s other operations and assets) before listing actions that are barred. Some clauses do the reverse, listing first the barred actions and describing permitted actions as exceptions to the general prohibition but in substance there is no difference so long as the drafting is clear. 4.132 Because some of the permitted actions can themselves create a liability, for example, costs orders, there is the qualification that any liability created will be subject to the clause. This has not generally been seen in clauses in the market, but can be important. In particular, from a trustee’s perspective it confirms that any resulting liability is subject to the limitation. On the other hand, from the perspective of creditors and counterparties, it means that action is not barred simply on the basis that the resulting liability is not limited — this provides the limit.

Clause X.2(b)(i) and (vi) 4.133 In relation to liabilities subject to the limitation, many clauses in the market prohibit a creditor both from seeking to have the trustee placed in any form of insolvency administration and from proving or otherwise participating in it. Subject to what is said below in relation to receivership, the first is self-evidently necessary (and is contained in clause X.2(b)(vi)), but the second is not necessarily appropriate. There is no reason in logic why a trust creditor should be prevented from participating in the liquidation or administration of a trustee for those liabilities so long as their claim is limited to the Trust Assets and does not affect the personal assets of the trustee. Where the trustee is in [page 204] liquidation, it may be necessary in some circumstances to do this to gain access to Trust Assets. Further, trust creditors may need to be able to exercise votes as creditors. Clause X.2(b)(i) preserves this right. 4.134 Note that receivership is not a form of insolvency administration. It is a private contractual remedy given to a particular secured creditor in a security document, or a court remedy available (even to unsecured creditors) against assets in certain cases.100 A company need not even be insolvent to be in receivership; there merely needs to have been an event triggering the secured creditor’s rights (usually, an ‘event of default’ or similar) or circumstances supporting a claim for the remedy of a courtappointed receiver. Note that the appointment of receiver (or indeed an administrator or liquidator) does not in and of itself terminate the trustee’s appointment or somehow vacate the office, unless the trust instrument expressly provides for that result.101 The status of receivership in the context of limitation clauses is discussed below.

Clause X.2(b)(ii) 4.135 This is an important provision. Generally it allows the counterparty to exercise rights in respect of the Trust Assets. Some clauses limit the

creditor to its rights ‘against’ trust assets. This paragraph eschews that expression in favour of the more neutral ‘with respect to Trust Assets’. Leaving aside creditors whose claims are secured in the traditional sense against trust property, the only true claimants ‘against’ trust assets are the trustee and the beneficiaries. As discussed in the next chapter, the unsecured trust creditor’s claim is a personal one against the trustee rather than a proprietary claim against the trust property, unless and until it has successfully secured the necessary orders in equity for subrogation to the trustee’s (unimpaired) indemnity. That said, some contractual promises may give proprietary rights, and in any event, once a creditor is subrogated, it should be able to obtain any necessary orders with respect to the trust assets. 4.136 The provision permits a counterparty to bring a proceeding seeking orders with respect to the Trust Assets. For example, it may be necessary to obtain orders like specific performance in order to be able to assert title to an asset, for example, where the trustee is a defaulting vendor. Further, this language would allow the appointment of a court-appointed receiver over Trust Assets, [page 205] which may be a necessary remedy to levy the equitable equivalent of execution (where that is available),102 or a remedy to protect Trust Assets from breaches of trust or dissipation where that may be necessary. Appointment by the court of a receiver over an asset may have unfortunate consequences from the point of view of the trustee which are described below, but in practice it should not be a concern for reputable trustees, who will easily be able to avoid the appointment by recognising the rights of creditors, and complying with court orders and their duties. On the other hand, from the point of view of unsecured counterparties, courtappointed receivership is an essential part of their armoury. It may be a necessary route for a counterparty to have any ability through the courts to ensure that trust assets are applied to satisfy the liability, or where the trustee refuses to recognise its rights or co-operate.

Set-off 4.137 The express mention of set-off in this clause is also important in clarifying that a creditor may exercise rights of set-off as between Trust Assets and Trust liabilities, but only them. 4.138 Some clauses in the market forbid the exercise of any right of set-off altogether. This would be uncontroversial to the extent it prevents any setoff between liabilities owed to or by the trustee as trustee against liabilities owed by or to it not as trustee. Arguably a general restriction on such setoff would be unnecessary. Legal, equitable and insolvency set-off would not usually be available due to lack of mutuality.103 However contractual set-off is still legally possible between liabilities owed by the counterparty to the trustee in its own right (that is, not as trustee of any trust) against liabilities owed to the counterparty by the trustee, as trustee. Documents between the trustee in its own right and the counterparty may contain setoff provisions wide enough to provide for such a contractual set-off. Trustees will want to avoid this as it places their own assets at risk of being used to satisfy trust liabilities. Worse, there are significant problems with contractual set-off in the reverse situation, that is where set-off is between an amount owed by the counterparty to the trustee, as trustee (where, therefore, the receivable would be held as a trust asset) and a personal debt of the trustee to the counterparty. That could be a breach of trust by the trustee for allowing trust assets to be applied to non-trust purposes, that is the discharge of a personal debt. A counterparty exercising contractual setoff in those circumstances could find itself subject to accessory liability in equity, [page 206] exposing it to various equitable remedies at the suit of the beneficiaries: see the discussion in the next chapter. 4.139 A prohibition has been included in clause X.2(b)(vii) to meet possible market expectations in this regard. But a prohibition is inappropriate to the extent it prevents set-off of liabilities owed to the

trustee as trustee against liabilities owed by the trustee as trustee, and so an express permission has been inserted, effectively as a carve-out.

Clause X.2(b)(iii) 4.140 This clause allows the counterparty to exercise the rights bargained for, that is its security (if any) and contractual rights. Some clauses in the market are so biased in favour of the trustee that they appear, on their face at least, to prevent the counterparty exercising even those rights — something that would inevitably invite a court to read down the clause to give it a sensible scope of operation. Any exercise of those rights is still subject to the overall restraint in the clause so that if, for example, the creditor suffered a shortfall on enforcement of its security, the limitation would continue to apply in respect of that shortfall.

Receivership 4.141 Note that the permission for a creditor to ‘enforce its security’ would include the appointment of a receiver or receiver and manager in relation to some or all of the secured property or the secured creditor taking possession of some or all of the secured property (and becoming a ‘controller’ of the trustee, as defined by the Corporations Act). To avoid doubt, controllers are also carved out of the prohibition in clause X.2(b) (vi) of the model clause. Where the security is over all of the Trust Assets, receivership has the effect of giving the receiver or secured creditor effective control of the Trust itself.104 Whether the appointment is over a single Trust Asset or the entire fund, a notice that a receiver or other controller has been appointed must be filed against the trustee company at ASIC and all of its public documents must contain after its name a statement that a receiver or controller has been appointed.105 The obligation to notify, and the notification itself, do not distinguish between receivership of personal assets [page 207]

and receivership of trust assets, nor whether the receivership affects all of the trustee’s assets (personal or trust) or only one or some of them. Notification of receivership of trust assets could be awkward for a corporate trustee that is otherwise solvent and in good standing (and who might be trustee of other trusts). Nevertheless, this should be accepted as an incident of the role of a trustee giving security — receivership and taking possession are essential tools in the secured creditor’s armoury and their exclusion would be a serious erosion of its enforcement options. So, from a creditor’s perspective at least, they should not be excluded despite the limitation.

Clauses X.2(b)(ii), (iv) and (v) 4.142 The model clause allows the counterparty to take proceedings which do not disturb the limitation on liability. Many clauses in the market forbid the counterparty from commencing proceedings against the trustee ‘in its personal capacity’ or ‘in any capacity other than as trustee’. As discussed above, this is problematic — a trustee does not have separate capacities in any legal sense. Legal action against a trustee is not in a representative capacity. With some statutory exceptions it is not possible to sue a person in a representative capacity under Australian law106 (despite some case reports identifying parties as ‘X in its capacity as trustee for the ABC Trust’). This can lead to a clash of expectations. Counterparties may need to bring an action against the trustee seeking equitable relief such as an injunction or declaration or to obtain some sort of order to have access to the Trust Assets. Trustees on the other hand want to restrict actions which seek a judgment against them. They would be concerned that a judgment obtained against them for a contractual obligation creates a judgment debt, into which the contractual debt may merge, and without more, might not be subject to the limitation.107 4.143 The drafting of clauses X.2(b)(ii), (iv) and (v) meets these expectations. There is a ban in clause X.2(b)(v) on bringing proceedings against the trustee, but clause X.2(b)(ii) and (iv) give express permission to bring proceedings which are directed only at Trust Assets, or other proceedings which would be subject to the limitation or would not offend it. The counterparty is entitled to bring an action so long as the resulting

orders are subject to the limitations. For the purposes of this clause there is no need to analyse exhaustively whether that is or is not possible in the various possible jurisdictions (which would include foreign ones). There is no compelling reason why a counterparty should not have free [page 208] reign to the fullest extent possible. Ultimately, a limitation of liability clause is about protecting the trustee’s personal (that is, non-trust) assets (and assets held on other trusts) and thus its solvency, rather than to prevent the trustee ever becoming party to litigation or enforcement action.

Clause X.3 4.144 This critical paragraph sets out exceptions which switch off the limitation. In effect, it describes the circumstances in which a trustee’s personal assets may be placed at risk and pursued (including by pressing the trustee into liquidation or administration) in satisfaction of a liability that might otherwise be a trust liability. As discussed above, it is based on an underlying theory that, while contracting counterparties may be prepared to accept the commercial risk that the trust fund may be inadequate at the relevant time to discharge all debts, they do not normally accept the legal risk of trustee misconduct which impairs the trustee’s right of access to whatever may be in the trust fund to discharge trust debts. 4.145 Most trustee limitation of liability clauses seen in the market contain some wording which seeks to express this principle, although the content and style differ. The wording of some clauses seems to confuse a loss or reduction of the trust assets with a loss or reduction of the trustee’s right of access to them. A limitation clause should normally only address the latter. The former is a business risk generally inherent in agreeing to take credit risk against the trust estate. 4.146 Note that the disapplication in this paragraph is not absolute, but operates only ‘to the extent that’ the relevant liability has been adversely affected. If misconduct is of the type that engages the clear accounts rule,

the trustee may not have lost all of its rights and there may remain enough net value in the trustee’s claim for it to be able to partially discharge trust debts out of the Trust Assets. In that case, the trustee would be personally liable only for the shortfall. On the other hand, this approach does mean that if a trustee loses its right of access to the Trust Assets altogether it can become liable for the whole of the obligation, without regard to the value of the Trust Assets. 4.147 The author has seen examples of clauses which say or have the effect that exception provisions of the type described in clause X.3 do not apply (that is, the limitation survives) if the relevant act(s) or omission(s) which impair the trustee’s rights to access to trust assets were committed by a person appointed by the trustee to do things it is authorised as trustee to do, such as an agent, investment manager, custodian, nominee or subtrustee. As a threshold point, [page 209] this runs directly counter to the Corporations Act s 601FB(2) and s 601FB(3) in relation to trustees which are responsible entities of registered MIS. In other cases, there may be circumstances where this language would not apply, because the trustee does not lose its right of access as a result of misconduct by a person appointed by it in good faith. But where it does lose its right of access because it is responsible for the appointee, the clause has the effect of shifting the risk of the appointee’s misconduct to the counterparty, leaving them with little or no recourse. For example, if an appointee were to misappropriate trust property in a way that meant that the trustee was responsible for its actions the limitation would survive, leaving the unpaid creditors with no recourse to the trust assets or the trustee’s personal assets. As creditors will usually have no say in the selection of a trustee’s agents and other appointees, and those appointees will usually have been approved and appointed by and be under the control of the trustee, they would argue strongly that this would not be an appropriate allocation (or reallocation) of risk.

Clause X.3(a) 4.148 This is the core of the exception to the limitation. It is clear from the language that the exception is engaged if the right of access to Trust Assets is impaired in some way (that is, the legal risk) but not if there is a shortfall in Trust Assets where the right of access to them is unimpaired (that is, the commercial risk). 4.149 The clause addresses the situation where the trustee’s right of access to the Trust Assets (and therefore the counterparty’s access) is lost or reduced because of some failure on the trustee’s part. As discussed above, this can occur where the trustee either acts beyond power or acts within power but improperly. The emphasis is on it overreaching its powers or exercising them in a way that offends against its fiduciary and other duties, whether under the trust instrument or at general law. There are circumstances in which a trustee can act culpably, for example, some torts (such as negligence) and misleading and deceptive conduct, and thereby become liable to other parties, and still be indemnified out of trust assets because the relevant conduct was within power and did not otherwise constitute a breach of trust.108 The circumstances in which this clause operates to lift the limitation should align with the circumstances in which the trustee can lose access to Trust Assets or have its access impaired. If the field is too narrow, the counterparty is left exposed with no recourse. If it is too wide, and it operates [page 210] in circumstances where access is not lost or impaired, then at best it contains irrelevant language. 4.150 In this clause, the language seeks to be coextensive with the risk. The critical expression is ‘because Obligor has acted beyond power or improperly in relation to the Trust’. Traditionally, limitation clauses in the Australian market have taken a ‘laundry list’ approach, stating that the limitation does not apply if the trustee commits an act which comes within any one of a number of categories. The list of categories varies from clause

to clause and will include any or all of the following: fraud, wilful misconduct/default,109 [gross] negligence,110 [material] breach of trust, [material] breach of duty, recklessness, bad faith and others, but the market demonstrates a surprising lack of consistency in this regard. 4.151 This emphasis on characterising or particularising the causal aspect is misplaced. The real issue here only arises if the trustee has found itself in a position where its right of access has been impaired and as a result it has no ability, or a reduced ability, to discharge in full a relevant liability out of the trust assets, leaving the creditor with an unsatisfied claim. If that happens, the critical (and, it is argued, the only) question then becomes this: in what circumstances should the trustee bear personal liability for the shortfall? The answer should normally be where the impairment of the right of access has arisen as a result of misconduct on its part, regardless of the nature of the misconduct. As between the creditor and the trustee, the trustee would be expected to bear the risk of its own misconduct. If the misconduct is sufficient to cause the impairment, that should be enough (bearing in mind that not all misconduct will cause impairment). As discussed above, equity’s denial of the trustee’s access to the trust assets for misconduct is strict and operates regardless of the state of mind of the trustee. It should not matter whether the misconduct could be described as fraud, wilful misconduct/default, [gross] negligence, a [material] breach of trust, a [material] breach of duty, recklessness, bad faith or anything else. The reference to acting ‘beyond power or improperly in relation to the Trust’ is wide enough to encompass all circumstances in which the right of indemnity will be impaired, but not those circumstances in which it will not. 4.152 An example serves to show how a clause which is not drafted in this way can work to the detriment of the trustee. Assume that the disapplication clause states that the limitation does not operate with respect to a liability if the trustee [page 211] has been guilty of negligence. The trustee commits an act of negligence

against the counterparty which exposes it to damages. We know that, as a matter of law, equity does not so disapprove of negligence in a trustee that it automatically switches off the indemnity and so, assuming nothing to the contrary in the trust instrument, the indemnity remains intact; the trustee may use trust assets to pay the damages. However, assume the assets are inadequate at that time to cover the damages. Because the limitation clause does not apply the trustee’s personal liability for the damages is not limited to the trust assets; it must make up the difference out of its own money. The attempt to shift to the counterparty the commercial risk of shortfall in the trust assets has failed.

Clause X.3(b) 4.153 In some transactions the parties may agree that it is appropriate for the limitation not to apply in respect of the resulting loss or damages if certain core representations and warranties or undertakings are breached. This might include the usual representations and warranties going to the trustee’s status as a company since they are essentially personal assurances and are not to do with the trust. It need not include representations and warranties and undertakings relating to the trust which, if incorrect or breached could result in impairment of the indemnity (since that situation is already addressed by the exclusion in clause X.3(a)) but it should include those which might not have that result and so might leave the counterparty with a shortfall if its recourse is limited to Trust Assets: see the samples set out in Part 2 of Appendix 5: ‘Protecting creditors and other counterparties’. There may also be provisions in the agreement (or elsewhere in the documentation suite) which expressly bind the trustee personally (whether or not they also bind it as trustee).111

Clause X.4 4.154 Clauses which deal with the issues covered in this paragraph are common but by no means universal. Nevertheless, they should be included because they do important work in seeking to correct some of the sideeffects of the fact that the clause reduces liability. Where the clause operates so that the trustee is not liable to pay an amount under the

documents when otherwise due (for example, because there were insufficient available liquid assets), the trustee might seek to argue that there has been no breach, and therefore no event of default, or that default interest should not accrue because there was no liability to pay the amount. Clearly that would not normally be the parties’ commercial expectation, and so the argument should be expressly dealt with. From the trustee’s point of [page 212] view it should still be clear that the clause does not circumvent the limitation on its liability. This paragraph addresses both concerns. 4.155 Also the liability to pay damages depends on securing an order. If a counterparty is not able to bring a claim because it is barred under the clause then the amount would not become payable. This clause addresses this issue.

THE POSITION OF THE TRUSTEE UNDER UNITED STATES TRUST LAW 4.156 As the above shows, the personal position of an Australian trustee is a difficult and complex one. If it wishes to limit its liability it is put to the trouble of having to negotiate it privately. By way of comparison, in the United States, both as a matter of equity and (in applicable states) by statute, unless the relevant contract provides otherwise, a trustee is not personally liable on a contract properly entered into in its fiduciary capacity. This is immediately recognisable as the reverse of the position under Australian law; the imperfections of the Australian position do not arise there because the limitation is not contractual but rather operates as a matter of law. Yet, this has not undermined the American trust creditor’s ability to access trust assets on enforcement. On the contrary, the trust creditor’s position is improved significantly; as a trade-off, the law allows trust creditors to reach the trust assets directly by suing the trustee in a representative capacity, thus circumventing the trustee’s indemnity and,

therefore, the clear accounts rule: this is discussed in detail in the next chapter. 4.157 Section 1010 (‘Limitation on Personal Liability of Trustee’) of the Uniform Trust Code represents the culmination of an evolutionary process.112 Subsection (a) provides as follows: Except as otherwise provided in the contract, a trustee is not personally liable on a contract properly entered into in the trustee’s fiduciary capacity in the course of administering the trust if the trustee in the contract disclosed the fiduciary capacity.113

4.158 Hence, a person entering into a contract in a trustee capacity need only identify itself as such, without more; as noted in the Comment to §1010, this ‘protects a trustee who reveals the fiduciary relationship either by indicating a [page 213] signature as trustee or by simply referring to the trust’. Put another way, a trustee is only personally liable if it neglects to identify itself as such to the creditor, in which case the policy appears to be that it would be unfair to limit the creditor’s access to a fund of which it is not aware and will not have had an opportunity to assess for viability. 4.159 In 1959, the Restatement identified the common law rule as somewhat different to this. The rule in §263(1) acknowledges a trustee’s right to exclude personal liability when contracting in its trustee capacity, but the onus is on the trustee to ensure this is made explicit in the contract: The trustee is not subject to personal liability upon a contract made by him in the course of the administration of the trust, if by the contract it is provided that he shall not be personally liable.

4.160 Under either formulation, provided the counterparty is made aware that the person they are dealing with is acting as trustee and not in its personal capacity, thus giving the counterparty notice that they cannot rely on the trustee’s personal worth but must make their risk assessment on the basis of the viability of the trust estate, the objective of legal exclusion of

liability is achieved as a matter of law, without the need for contractual limitation language, as in Australia; the liability is excluded entirely, by law, rather than partially, by contract.

WHY A LIMITATION ON RECOURSE VIA THE INDEMNITY RATHER THAN AN OUTRIGHT EXCLUSION? Watling v Lewis and ‘repugnancy’ 4.161 The question arises: why are the Australian and United States positions so different if they emanated from the same source? The early Chancery and House of Lords authorities on trustee liability limitation and exclusion,114 on which later Australian cases relied, appear inconclusive in relation to how a trustee liability limitation ought be phrased to be effective; it was observed by an American commentator in 1928 that the legal position regarding trustees seeking to limit or exclude personal liability was ‘somewhat confused in England’.115 Importantly for present purposes, there is no consensus in those cases that a [page 214] creditor’s only recourse to trust assets is via subrogation so that a limitation must preserve personal liability to enable the creditor to do that; indeed, the preponderance of authority seems to disregard that aspect of the issue and takes a less doctrinaire approach in deciding that a trustee may eliminate all personal liability. 4.162 In Watling v Lewis, trustees entered into an arrangement ‘as such trustees, but not so as to create any personal liability on the part of them or either of them’. The court (Warrington J, sitting as a single judge in Chancery), refused to enforce that provision as a defence to a personal claim, saying, at 422–4: In Furnivall v Coombes … it was held … that the proviso in terms excluded any personal liability on the part of the covenantors, that inasmuch as there was a covenant to pay, any

such attempt to exclude personal liability was repugnant to the covenant and would have no effect, and that the defendants were therefore liable under the covenant as if the proviso had not been there. On the other hand it was pointed out in Williams v Hathaway … that there is no objection in law to a proviso limiting the liability of the covenantor provided it really limits it without destroying it; if it really limits the liability either in point of time or by specifying the particular fund out of which alone the payment has to be made, that may be perfectly good … Do the words of this covenant purport to limit the liability of the defendants, or to destroy it altogether? In my opinion they purport to destroy it altogether … The result is, I think, that first there is a covenant to pay the money and to indemnify, and then the parties have attempted to qualify that covenant by using words the effect of which, if effect is to be given to them, would be to destroy the personal liability. That being so, the words they have used can have no effect at law and the liability remains. (emphasis added)

4.163 This conclusion is, on its face, unsurprising and may be argued to follow as a matter of logic. After all, without a personal liability, the trustee has no claim for indemnity against the trust assets. Without that, there is nothing in respect of which the trust creditor may subrogate, and the creditor would be left with no claim at all; if the trustee is not liable, then no one is liable. That analysis, however, implies an embedded premise: that the creditor’s only route of access to a trust’s assets is via subrogation to that indemnity. 4.164 A year later in Re Robinson, the English Court of Appeal, in overturning a different decision of Warrington J,116 held that the expression in a mortgage document ‘the trustees as such trustees but not otherwise hereby covenant with the mortgagee to pay him’ did not bind the trustees personally. The differences in [page 215] this language from that considered in Watling v Lewis appear not to be material for present purposes; the trustees agreed a covenant to pay, but included a statement implying that their liability was not personal but as trustees. In support, the Court of Appeal cited the judgment of Lord Cairns in Muir’s case, a decision not mentioned in Watling v Lewis.117 The relevant part of that judgment, in its fuller context, was as follows (at 355): [W]hether, in any particular case, the contract of an executor or trustee is one which binds himself personally, or is to be satisfied only out of the estate of which he is the representative,

is, as it seems to me, a question of construction, to be decided with reference to all the circumstances of the case; the nature of the contract; the subject-matter on which it is to operate, and the capacity and duty of the parties to make the contract in the one form or in the other. I know of no reason why an executor … entering into a contract for payment of money with a person who is free to make the contract in any form he pleases, should not stipulate by apt words that he will make the payment, not personally, but out of the assets of the testator. If, for example, AB, the executor of X, contracted to make a payment as executor of X, and as executor only, to CD, it would be difficult to suppose that any obligation except an obligation to pay out of assets was intended. (emphasis added)

4.165 While this dictum could support a proposition that a trustee may limit its liability to the extent of its indemnity, its application is not confined to that. There is no mention of the trustee’s indemnity or of the creditor’s need to subrogate to it. Lord Cairns’ language draws a distinction between, on the one hand, a ‘contract of an executor or trustee [as] one which binds himself personally’ and, on the other, one which ‘is to be satisfied only out of the estate of which he is the representative’. This language just as readily supports an interpretation that a trustee may contractually promise to discharge liabilities arising under the contract by, and only by, exercising a power to apply trust assets directly. 4.166 The provision before the Court of Appeal in Re Robinson was a covenant to pay money that was secured by a mortgage. The matter became an issue because there was a fear (justified, given the decision of the Court of Appeal) that the mortgage was invalid for certain statutory reasons. Moreover, at the relevant date the trustees held no trust property. Thus, the mortgagee claimed in the alternative on the covenant to pay, arguing that the trustees were personally liable. The court rejected this argument, Buckley LJ holding, at 160, that: [T]his covenant as trustees was I think not a covenant which bound [the trustees] personally: it was a covenant which bound only the … trustees in respect of the

[page 216] trust fund in their hands at the date of the issue of the writ … when this writ was issued there were no funds in their hands.

4.167 Again, the absence of mention of the trustee’s indemnity or subrogation is noteworthy. The relational expression is a general one —

the covenant bound the trustees ‘in respect of the trust fund’. Interestingly, an American commentator cited Re Robinson as evidence that the English courts accepted the proposition that the mere fact that the trustee is not personally liable does not mean that a creditor has no enforceable claim.118 4.168 In both Muir’s case and Re Robinson, an earlier House of Lords decision, Gordon v Campbell, was cited. In that case, the language ‘as trustees aforesaid’ and ‘qua trustees only’ was held to mean ‘that there was no personal liability created against the trustees beyond their possession of the trust funds’. In another House of Lords decision cited in Muir’s case, Lumsden v Buchanan, Lord Westbury LC said that ‘a trustee may … so limit and restrict any contract he may enter into, so as to exclude (as between himself and the other parties to such contract) personal liability’, at 93; to similar effect, Lord Cranworth said that ‘trustees in dealing with third persons may so contract as to exempt themselves from personal responsibility, and to confine those with whom they are dealing to such as they can obtain from the trust funds’, at 95 (emphasis added in both quotes). None of these cases are mentioned in the reported judgment in Watling v Lewis. 4.169 In Parsons v Spooner the Chancery court held that there was nothing illegal or improper in either a trustee excluding personal liability or a liability for payment being cast upon a trust fund. A moral hazard argument that personal liability should not be excluded because that liability gave the beneficiaries the comfort of ‘the diligence of the trustee himself if he were acting upon his own personal responsibility’ (at 849) was rejected on the basis that they always retained the power to have the trustees’ conduct supervised by the court. 4.170 In Williams v Hathaway (mentioned by Warrington J in the above extract from Watling v Lewis) two vicars contracted with a builder to construct a church and parsonage, provided that they would only be liable if they were in a position to pay out of a fund dedicated for the purpose. The covenant was phrased ‘not so as to bind either of themselves or his heirs, executors, or administrators, after he or they should have ceased to be entitled to apply the same fund’. Sir George Jessel MR said, at 551:

[page 217] That is a negative provision. What they mean to say is, ‘We as trustees bind the fund, but the moment we cease to be trustees we will not be liable for any breach of trust committed afterwards.’ That is the meaning of the covenant as I read it. It simply binds the fund, and makes the covenantors liable to apply the fund, but not in any event; for it does not make them liable to apply the fund the moment after they have ceased to be trustees. (emphasis added)

4.171 Once again the court’s interpretation of the relevant provision relieves the trustees of all personal liability except for an obligation to exercise their power to apply the fund, if and when they were legally able so to do, but not otherwise; the covenant ‘binds the fund’ and not the trustees personally.119 4.172 These cases were decided around the same time as the issue was being considered in the United States courts. Ultimately, those courts were faced with a choice: do as was eventually done in Australia and, following Watling v Lewis, read down attempts at exclusion of personal liability to mean a limitation on recourse, or if that is not possible, strike them down as void, so as to preserve the integrity of the traditional route to the trust assets via subrogation; or, instead, seek to give the provisions a scope of operation consistent with the apparent intention of the parties, that is that the creditor should not be permitted to proceed against the trustee personally at all but rather should seek its satisfaction solely and directly out of the trust estate. While American law followed the latter course, Australian law and practice appears to have elected to follow Watling v Lewis, although strangely without any legal foundation other than a fear of ‘repugnancy’, and despite compelling authority to the contrary. Although the requirement of liability limitation is addressed, the content and structure of typical Australian limitation clauses appears not to have been the subject of litigation or therefore critical judicial treatment. The limitation on recourse model appears to have evolved as a matter of market practice. 4.173 An American commentator said in 1923 that Re Robinson ‘modifies’ the holding in Watling v Lewis.120 After considering the limitation language in Muir’s case, and American authorities that both pre-

date and post-date Watling v Lewis, the authors of Scott of Trusts express the view that Watling v Lewis had been ‘disapproved’ by Re Robinson and that ‘in this country [the United States] it has been held that effect should be given to the provision and that the trustee is not personally liable’ at 739. [page 218] 4.174 It is submitted that Watling v Lewis was incorrectly decided, for the following reasons. 4.175 First, the decision demonstrates no overwhelming logic that undermines other, much weightier authority. Even though Warrington J conceded that a limitation of liability ‘either in point of time or by specifying the particular fund out of which alone the payment has to be made … may be perfectly good’, he still required that there be personal liability; he could not tolerate a provision that would ‘destroy’ the personal liability. This reasoning, rejected in later authority, appears to assume, without a compelling logical foundation, that the only way a creditor could and should be permitted access to the trust assets is by subrogation to the trustee’s indemnity; for that indemnity to operate, the trustee needs to be personally liable; ergo, the trustee must retain personal liability so that it has an indemnity to which the creditor may subrogate. 4.176 Secondly, in citing Williams v Hathaway in support of his conclusion, Warrington J appears to have misconstrued it. He cites it in support of the proposition that ‘there is no objection in law to a proviso limiting the liability of the covenantor provided it really limits it without destroying it’. The clause in Williams v Hathaway was not a limitation on liability, whether by reference to time or a fund; it excluded personal liability on the debt altogether and was construed as an obligation to apply the trust fund if and for so long as the trustees held office. 4.177 Thirdly, the critical House of Lords authorities Gordon v Campbell, Lumsden v Buchanan and Muir’s case appear not to have been put to Warrington J or, if they were put to him, they were ignored. None of those

cases support a proposition that a total exclusion of personal liability by a trustee is invalid. Those cases stand for the proposition that a trustee’s liability can be totally excluded if as a matter of construction that is the effect of what the parties agreed, so long the creditor remains able to compel the trustee to apply the trust fund in discharge of the liability. 4.178 Fourthly, it can be said to have been overruled by Re Robinson. 4.179 The learned authors of Jacobs on Trusts say of Watling v Lewis (albeit without further elaboration) that the repugnancy basis is ‘illogical’, at [2103]. In 1979, the noted Australian equity lawyer, the late Roddy Meagher said that, ‘since the law on this subject is sometimes doubted it is worth emphasising’ that the decisions in Gordon v Campbell and Muir mean that a trustee can avoid personal liability to his creditors ‘if he distinctly and unambiguously so stipulates’ and that ‘such a stipulation is perfectly legal’; he does not mention Watling v Lewis [page 219] in this context at all.121 In Elders Trustee & Executor Co Ltd v E G Reeves Pty Ltd, the relevant extract from which is cited in 4.90 above, Gummow J neither states nor implies that the only way a limitation may be effected is via the trustee’s indemnity. As discussed in the next chapter, the trustee may have other express or implied powers to apply trust assets in discharge of debts. 4.180 If there is a distinction to be drawn that gives Watling v Lewis some scope of operation it is this: Warrington J focused on the fact that there was a personal covenant to pay and an exclusion that was inconsistent with it. This was the case in Producers and General Finance Corp Ltd v Dickson (1938) 40 WALR 34 also, where the court stated at 37 that ‘it is a rule of law that a covenant in a deed which is clearly a personal covenant cannot be destroyed by a proviso excluding personal liability, and such a proviso is repugnant and must be rejected’. This appears to be the only reported Australian case that overtly supports Watling v Lewis. The House of Lords and Chancery cases that have gone the other way involved

provisions that did not contain this combination, but rather a direct stipulation that the liability was to be discharged only from the trust estate. In Williams v Hathaway Sir George Jessel MR said, at 549, that ‘a distinction has always been taken between a proviso which is repugnant to the covenant and therefore void, and a proviso which can be incorporated in the covenant, and be made consistent with it’, such as a promise to discharge a debt or liability by applying assets from a fund but not otherwise. In other words, the matter is not one of trust law principle so much as one of drafting, interpretation and construction of the terms of the relevant provisions. 4.181 It is argued, therefore, that the correct position is that if, as a matter of construction of any given contract, it appears that the intention of the parties was, to use the language of Lord Penzance in Muir’s case at 368, that ‘personal liability should be excluded; and that although [the trustee] was the contractor to the obligation, the creditor should look to the trust estate alone’, then that result is legally permissible, so long as procedurally the creditor is able to have recourse to the trust’s assets, that is there is a promise by the trustee that can ground an action against it in equity to compel it to apply trust assets. It is not said in any of the cases cited that the only way the creditor may have that recourse is by subrogation to the trustee’s indemnity: see the further discussion about subrogation to the indemnity in the next chapter. [page 220]

The impact on Australian trustee liability limitation clauses 4.182 Due to the doubt cast by Watling v Lewis and a misinterpretation of it and the contrary proposition for which other more authoritative cases stand, and the proposition that the creditor’s only recourse to trust assets is via subrogation to the trustee’s indemnity, contracting parties in Australia, as a matter of market practice, take the path of a limitation on recourse rather than a release or exclusion of liability. In making this choice, they have taken the difficult and risky route of negotiating complex contractual

limitation of liability clauses that are constructed around the indemnity. They have sought to contractualise away the Watling v Lewis problem. The shortcomings of this approach, for both trustees and creditors, are discussed above and in the next chapter. 4.183 These shortcomings demonstrate that while Australian-style limitation clauses attempt, by contract, to achieve the twin objectives of no personal liability for trustees while preserving access to the trust assets by creditors, they fall short of satisfying the commercial expectations of trustees, as described in this chapter, or of trust creditors, as described in the next chapter. The suggested limitation clause in in Part 4 of Appendix 4: ‘Protecting the trustee’ seeks to adjust for this issue by not anchoring the limitation in the trustee’s indemnity.

CONCLUSION 4.184 Perhaps the most dramatic transformation of roles that has accompanied the evolution of the trust from guardian to entrepreneur has been that of the trustee. The trustee of a commercial trust, often a remunerated company at arm’s length to the equity investors, is in a very different position vis-à-vis those investors and external counterparties, and has very different expectations, to those of the traditional trustee, invariably a natural person usually related to or otherwise known to the settlor and/or beneficiaries and acting gratuitously under a burden of wideranging personal duties and unlimited personal liability. Yet the same rules apply and present the commercial trustee with a double-sided personal exposure: first, to its equity investors as a fiduciary and, secondly, to external contract counterparties as principal. In this sense, it can be said that Australian trust law does not adequately support the commercial trustee and its commercial expectations, if those expectations can be seen as aligned to those of directors of a trading company (as it is argued they can). 4.185 The Australian market has developed sophisticated contractualisation techniques which operate to ameliorate or shift the resultant risks by modifying the default trust law outcomes in an effort to

align more closely, in a general sense, the commercial trustee’s position with that of the board of directors of a trading [page 221] company. With respect to the relationship between the trustee and equity investors these techniques are relatively successful in achieving that objective, provided they are well-drafted and provided the trustee conducts itself in accordance with them and trust law. In relation to creditors and other external parties, however, the results are imperfect and leave the trustee with residual personal liabilities and exposures. Securing protection is a market-based process of contractual negotiation on a bilateral basis with each and every intending counterparty, resulting in delays, transaction costs and the risk of error. In any case, there are counterparties against whom contract-based protections cannot be secured. 4.186 Further texture is layered upon the position of the commercial trustee by considering the position of those who claim through it, that is trust creditors, and that is the focus of the next chapter. 1.

See Ford & Lee on Trusts at [12.020].

2.

Note, however, that when it comes to registered MIS, the ability to contract out of or around the fiduciary-like statutory protections provided to investors in the Corporations Act Chapter 5C is limited: Westfield Management Ltd v AMP Capital Property Nominees Ltd (2012) 247 CLR 129; [2012] HCA 54.

3.

Subject to the limitations on the trustee-director comparison discussed in 1.50. A critical point of difference in this context is that directors owe their duties to the company and not to the equity investors (that is, shareholders) directly, while trustees owe their duties to the equity investors directly, there being no interposed legal entity. However, it is argued that economically the position of trustees and directors (or, to be more precise, the board of directors as an organ) is sufficiently comparable to support this argument. Apart from this, this chapter does not engage in a comparative study of the similarities and differences between trustees and directors.

4.

It is acknowledged that ‘captive’ trustees, that is those which are controlled by their beneficiaries (as is common in private trading trusts), may have different expectations and tolerance for risk than arm’s length independent trustees of a registered MIS. Nevertheless, the prima facie desire is the same — no (or minimal) personal liability.

5.

John H Langbein, ‘The Contractarian Basis of the Law of Trusts’ (1995) 105 Yale Law

Journal 625 at 636. The Corporations Act imposes certain restrictions on this flexibility when it comes to registered MIS. So too does some state and territory trusts/trustee legislation: see, for example, Trusts Act 1973 (Qld) s 65. 6.

For a more detailed account of the origins of these attitudes in the equity jurisdiction, see Chantal Stebbings, The Private Trustee in Victorian England (Cambridge University Press, 2002), Chapter 3: ‘The Relationship with the Beneficiaries’ and Robert Chalmers’ essay ‘Liability’ in Peter Birks and Arianna Pretto (eds), Breach of Trust (Hart Publishing, 2002).

7.

With some limited exceptions, a trustee has only those powers given to it in the trust instrument. Some limited powers are implied by general law or statute. Further, a trustee of a commercial trust may be empowered to perform a specific act or undertake a specific transaction which is not otherwise the subject of express power in the trust instrument by the fully informed direction or consent of the beneficiaries: see Ford & Lee on Trusts at [16.090].

8.

Now, see Trustee Act 1925 (NSW) ss 81–82A and equivalents in other states’ and territories’ trusts/trustee legislation.

9.

See Trustee Amendment (Discretionary Investments) Act 1997 (NSW); Trustee and Trustee Companies (Amendment) Act 1995 (Vic); Trustee (Investments) Amendment Act 1999 (Qld); Trustees Amendment Act 1997 (WA); Trustee (Investment Powers) Act of 1995 (SA); Trustee Amendment (Investment Powers) Act 1997 (Tas); Trustee Amendment (No 2) Act 1995 (NT); Trustee Amendment Act 1999 (ACT). Some states’ legislation gives trustees express powers to carry on an existing business of the settlor or testator for a limited period: Trusts Act 1973 (Qld) see s 57; Trustees Act 1962 (WA) s 55.

10. See Trustee Act 1925 (NSW) s 14B; Trustee Act 1958 (Vic) s 7; Trusts Act 1973 (Qld) s 23; Trustees Act 1962 (WA) s 19; Trustee Act 1936 (SA) s 8; Trustee Act 1898 (Tas) s 9; Trustee Act (NT) s 7; Trustee Act 1925 (ACT) s 14B. 11. Armitage v Nurse [1998] Ch 241; Hagan v Waterhouse (1991) 34 NSWLR 308. 12. See the various authorities cited by Lindgren in Kevin Lindgren, ‘The Birth of the Trading Trust’ (2011) 5 Journal of Equity 1 at 12. The scope of a trustee’s power of investment was discussed in Mercedes Holdings Pty Ltd v Waters (No 5) [2011] FCA 1428. 13. See the discussion on this point in the Wellington Capital litigation at first instance, ASIC v Wellington Capital Ltd (2012) 91 ACSR 514; [2012] FCA 1140, and on appeal, ASIC v Wellington Capital Limited (2013) 94 ACSR 293; [2013] FCAFC 52. Note that at the time of writing the Full Court decision is on appeal to the High Court. 14. See the interesting discussion in relation to action against a person in different capacities, including as trustee, in Belar Pty Ltd (in liq) v Mahaffey [1999] 1 Qd R 477 at 489. 15. TFML Ltd v MacarthurCook Fund Management Ltd [2013] NSWCA 291. 16. Harold A J Ford and W A Lee, The Principles of the Law of Trusts (2nd ed, Law Book Co, 1990) at [1207] (emphasis added). 17. Elders Trustee and Executor Co Ltd v Higgins (1963) 113 CLR 426 at 449 (per Dixon CJ, McTiernan and Windeyer JJ); Breen v Williams (1996) 186 CLR 71, per Gummow J at [70]. 18. Schuhmacher v Emmerson [2013] QSC 205 at [94]. 19. Jacobs on Trusts at [1606]; Underhill on Trusts at [49.57] and [57.1]–[57.42]. 20. Re Centro Retail Limited and Centro MCS Manager Ltd (2011) 255 FLR 28; [2011] NSWSC 1175. For a specific discussion of the duties of responsible entities, see Pamela Hanrahan, ‘The

Responsible Entity as Trustee’ in Ramsay (ed), Key Developments in Corporate Law and Trusts Law (2002). 21. See the useful discussion of the authorities in Barescape Pty Limited as trustee for The V’s Family Trust v Bacchus Holdings Pty Limited as trustee for The Bacchus Holdings Trust (No 9) [2012] NSWSC 984 at [154]–[161]. 22. See Jacobs on Trusts at [1742]–[1743] and Thomas & Hudson on Trusts at [10.115]– [10.134]. See also James Edelman, ‘The Fiduciary “Self Dealing” Rule’ in Jamie Glister and Pauline Ridge (eds), Fault Lines in Equity (2012) at 107. 23. Armitage v Nurse [1998] Ch 241 at 253–4, affirmed as correct by the Privy Council in Spread Trustee Company Limited v Sarah Ann Hutcheson [2011] UKPC 13 at [52] (per Lord Clarke). See also Bogg v Raper (1998/99) 1 ITELR 267; Walker v Stones [2001] QB 902; Baker v J E Clark & Co (Transport) UK Ltd [2006] EWCA Civ 464. The Armitage principle has been cited with approval in Australian authority: see Schuhmacher v Emmerson [2013] QSC 205; Rinehart v Welker [2012] NSWCA 95; Re Centro Retail Limited and Centro MCS Manager Ltd (2011) 255 FLR 28; [2011] NSWSC 1175; Scaffidi v Montevento Holdings Pty Ltd (2011) 6 ASTLR 446; [2011] WASCA 146; Wilden Pty Ltd v Green [2009] WASCA 38; Bell Group (in liq) v Westpac Banking Corp (No 9) (2008) 225 FLR 1. Professor Bryan has taken issue with the analysis applied to the exculpation clause in Armitage v Nurse and has argued that the ‘irreducible core’ may actually be larger than suggested by Millet LJ in that case: Michael Bryan, ‘Contractual Modifications of the Duties of a Trustee’ in Worthington (ed), Commercial Law and Commercial Practice (2003). The authors of Ford & Lee on Trusts argue that, in addition to what is essentially the trustee’s duty of loyalty, other ‘core’ duties include the duty to adhere to the terms of the trust, to keep and render accounts and to act personally, although they acknowledge that those duties may be alleviated by express words, at [9.270]. 24. Jacobs on Trust at [1620]. 25. Citibank NA v MBIA Assurance SA [2007] EWCA Civ 11. See also Mark Leeming, ‘The Scope of Fiduciary Obligations: How Contract Informs, But Does Not Determine, The Scope Of Fiduciary Obligations’ (2009) 3 Journal of Equity 181; Alexander Trukhtanov, ‘The Irreducible Core of Trust Obligations’ (2007) 123 Law Quarterly Review 342. In relation to trustees for investors in a debt instrument issuance (such as debentures, bonds, notes etc) see Philip Rawlings, ‘Reinforcing Collectivity: The Liability of Trustees and The Power of Investors In Finance Transactions’ (2009) 23(1) Trust Law International 14. 26. Alexander (t/as Minter Ellison) v Perpetual Trustees WA Ltd [2001] NSWCA 240, Stein J at [62], quoting from Armitage v Nurse [1998] Ch 241 at 252. The question of what constitutes ‘honesty’ in this context is subject to some judicial debate: see Jacobs on Trusts at [1620]. 27. See Spread Trustee Company Limited v Sarah Ann Hutcheson [2011] UKPC 13; The Law Commission (UK), ‘Trustee Exemption Clauses — A Consultation Paper’ (CP No 171 2002); Hilary Delany, ‘Trustee Exemption Clauses — Proposals For Reform in Ireland’ (2009) 23(2) Trust Law International 89; The Law Reform Commission (Ireland), ‘Consultation Paper on Trust Law General Proposals’ (2005); Scottish Law Commission, ‘Breach of Trust’ (Discussion Paper No 123, 2003); British Columbia Law Institute, ‘Exculpation Clauses in Trust Instruments’ (BCLI Report No 17, 2002); New Zealand Law Commission, ‘Report on Some Problems in the Law of Trusts’ (Report No 79, 2002) at [7.27]–[7.36]. 28. See, for example, Jacobs on Trusts at [1619]; Peter J Millet, ‘Equity’s Place in The Law of Commerce’ (1998) 114 Law Quarterly Review 214; Law Commission, ‘Consultation Paper

No 171: Trustee Exemption Clauses’ (December 2002); Law Commission, ‘Trustee Exemption Clauses, Law Com No 301’ (Cmnd 6874, 2006); New Zealand Law Commission, ‘Report on Some Problems in the Law of Trusts’ (Report No 79, 2002) at [7.27]–[7.36]. 29. For equivalents in other places see Trustee Act 1958 (Vic) s 6; Trusts Act 1973 (Qld) s 22; Trustees Act 1962 (WA) s 18; Trustee Act 1936 (SA) s 7; Trustee Act 1898 (Tas) s 7; Trustee Act (NT) s 6; Trustee Act 1925 (ACT) s 14A. 30. For a recent discussion of the duty of care for directors of responsible enmities of registered MIS, see ASIC v Australian Property Custodian Holdings Limited (rec & mgrs apptd) (in liq) (controllers apptd) (No 3) [2013] FCA 1342 at [531] and following. 31. Christopher Walton and others, Charlesworth & Percy on Negligence (12th ed, Sweet and Maxwell London, 2010) at 1–15. 32. See the discussion in Nuncio D’Angelo, ‘Indemnities, Gross Negligence and the Accidental Insurer’ (2009) 37 Australian Business Law Review 7. 33. Trust Law Committee, ‘Consultation Paper on Trustee Exemption Clauses’ (1999) at paragraph [2.8]. 34. Robinson v Pett (1734) 40 ER 1049; Jennings v Mather [1902] 1 KB 1; Wickham v King (1879) 1 QLJ (Supp) 13, pp 14–15; confirmed Southern Wines Corp Pty Ltd (in liq) v Frankland River Olive Co Ltd (2005) 31 WAR 162 at [62]. See also Chantal Stebbings, The Private Trustee in Victorian England (Cambridge University Press, 2002). 35. Re Duke of Norfolk’s Settlement Trusts [1982] Ch 61. See also Trio Capital Ltd (admin apptd) v ACT Superannuation Management Pty Ltd (2010) 79 ACSR 425; [2010] NSWSC 941; Re Sutherland (2004) 50 ACSR 297; [2004] NSWSC 798 at [14]; Ford & Lee on Trusts at [13.1010]–[13.1410]. Further, a trustee who is a professional may, in some circumstances, be entitled to be reimbursed expenditures, and to the paid for work and skill employed, in generating a benefit for the trust estate: Boardman v Phipps [1967] 2 AC 46 at 104 (per Lord Cohen) and 112 (per Lord Hodson). 36. See further Re Duke of Norfolk’s Settlement Trusts [1982] Ch 61 at 77; Australian Securities Commission v Windsor [1995] FCA 1663 at [235]; Southern Wines Corp Pty Ltd (in liq) v Frankland River Olive Co Ltd (2005) 31 WAR 162; Perpetual Trustees WA Ltd v Kelly (1993) 8 WAR 480. There is some question as to whether this right may be characterised as a beneficial interest in the trust fund: see the discussion in Re Duke of Norfolk’s Settlement Trusts [1982] Ch 61 and Southern Wines Corp Pty Ltd (in liq) v Frankland River Olive Co Ltd (2005) 31 WAR 162. Gordon J in ASIC v Letten (No 17) (2011) 286 ALR 346; [2011] FCA 1420 implied that it is in deciding, at [72], that a trustee’s right to fees is subject to the clear accounts rule. 37. See Glennon v Federal Commissioner of Taxation (1972) 127 CLR 503 at 512; Wickstead v Browne (1992) 30 NSWLR 1 and 13; Williams v Scott [1900] AC 490 at 503; MacarthurCook Fund Management Limited v Zhaofeng Funds Limited [2012] NSWSC 911 at [11]. Certain exceptions have been created by statute: see Conveyancing Act 1919 (NSW) s 24 and equivalents in other states and territories. 38. George W Keeton and L A Sheridan, The Comparative Law of Trusts in the Commonwealth and the Irish Republic (Barry Rose (Publishers) Limited, 1976) at 322. 39. Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319; RWG Management Ltd v Commissioner for Corporate Affairs [1985] VR 385. 40. In other places, see Trustee Act 1958 (Vic) s 36(2); Trusts Act 1973 (Qld) s 71; Trustees Act

1962 (WA) s 71; Trustee Act 1898 (Tas) s 27(1); Trustee Act (NT) s 26; Trustee Act 1925 (ACT) s 59(4). It has been held that these legislative provisions are merely statutory recognition of the rule in equity (National Trustee’s Executors & Agency Co of Australasia Ltd v Barnes (1941) 64 CLR 268 at 274) although it has been argued that they do not reflect the equitable rule but rather do less than it: Kevin Lindgren, ‘A Superannuation Trustee’s Right of Indemnity’ (2010) 4 Journal of Equity 85 at 89; a comparison of the statutory language against the authorities confirms that this is clearly so. Because it does not purport to exclude the general equitable indemnity, this difference is of little consequence. 41. RWG Management Ltd v Commissioner for Corporate Affairs [1985] VR 385 at 394. To similar effect, see Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99 at 102 (per King CJ). The trust instrument has been described as the ‘third source of law … the trust instrument has primacy’: Jacobs on Trusts at [1617]. The trust instrument may expand or enlarge the indemnity rights given the trustee by the equitable rule or reduce them: Kevin Lindgren, ‘A Superannuation Trustee’s Right of Indemnity’ (2010) 4 Journal of Equity 85 at 89. This is critical for the discussion later in this chapter on contractualisation of the trustee’s protection. 42. Worrall v Harford (1802) 32 ER 250; National Trustee’s Executors & Agency Co of Australasia Ltd v Barnes (1941) 64 CLR 268. 43. Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319 and Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226. 44. Jennings v Mather [1902] 1 KB 1 at 6–7 (per Stirling LJ). See also Macedonian Orthodox Community Church St Petka Inc v The Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66 at 93. 45. See the differing positions expressed in Ford & Lee on Trusts at [14.3930]; Jacobs on Trusts at [2106]; Kevin Lindgren, ‘A Superannuation Trustee’s Right of Indemnity’ (2010) 4 Journal of Equity 85 at 94–6; Bruce H McPherson, ‘The Insolvent Trading Trust’ in Finn (ed), Essays in Equity (1985); Re Gunns Finance Limited (in liq) (recs & mgrs apptd); Re Gunns Plantations Limited (in liq) (recs & mgrs apptd) (No 2) [2013] VSC 365; Clark v Commissioner of Taxation (2009) 77 ATR 460; [2009] FCA 1401 at [119]; Moyes v J & L Developments Pty Ltd (No 2) (2007) 250 LSJS 61; [2007] SASC 261 at [37]–[41]; Jessup v Queensland Housing Commission [2002] 2 Qd R 270; [2001] QCA 312; J A Pty Ltd v Jonco Holdings Pty Ltd (2000) 33 ACSR 691; [2000] NSWSC 147 at [87]; Rothmore Farms Pty Ltd v Belgravia Pty Ltd [2005] SASC 117 at [37]–[42]; Kemtron Industries Pty Ltd v Commissioner of Stamp Duties (1984) 15 ATR 627, and the discussion in Jeremy Cooper, ‘Piercing the “Veil of Obscurity” — The Decision in Hanel v O’Neill’ (2004) 22 Companies & Securities Law Journal 313 at 320–2; Law Commission, ‘Court Jurisdiction, Trading Trusts and Other Issues. Review of the Law of Trusts. Fifth Issues Paper’ (No 28, 2011) at 7.27– 7.36. 46. Worrall v Harford (1802) 32 ER 250; Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226; Federal Commissioner of Taxation v Bruton Holdings Pty Ltd (in liq) (2008) 173 FCR 472. 47. Re Richardson; Ex parte Governors of St Thomas Hospital [1911] 2 KB 705 at 709–10 (per Cozens-Hardy MR). By comparison, the common law requires a loss to be actually incurred before a claim could be made under a contractual indemnity: see the discussion of the difference between the common law’s and equity’s position on indemnities in Firma C-Trade SA v Newcastle Protection and Indemnity Association (The Fanti) [1991] 2 AC 1; Paterson v Pongrass Group Operations Pty Ltd [2011] NSWSC 1588.

48. See Re Dalewon Pty Ltd (in liquidation) (2010) 79 ACSR 530; [2010] QSC 311; Zen Ridgeway Pty Ltd v Adams [2009] 2 Qd R 298; [2009] QSC 117; Xebec Pty Ltd (in liq) v Enthe Pty Ltd (1987) 18 ATR 893; Trim Perfect Australia Pty Ltd (in liq) v Albrook Constructions Pty Ltd [2006] NSWSC 153. 49. Jennings v Mather [1902] 1 KB 1; Savage v The Union Bank of Australia Ltd (1906) 3 CLR 1170; Savage v The Union Bank of Australia Ltd (1906) 3 CLR 117; Re Enhill Pty Ltd [1983] 1 VR 561; Kemtron Industries Pty Ltd v Commissioner of Stamp Duties (1984) 15 ATR 627; Re Matheson; Ex parte Worrell v Matheson (1994) 49 FCR 454; Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360; Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226; Federal Commissioner of Taxation v Bruton Holdings Pty Ltd (in liq) (2008) 173 FCR 472. 50. Edward I Sykes and Sally Walker, The Law of Securities (5th ed, The Law Book Company Ltd, 1993) at 199. 51. See Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 367 (per Stephen, Mason, Aickin and Wilson JJ); Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 at 230. The confusion is not limited to the trustee’s lien/charge: see Hewitt v Court (1983) 149 CLR 639 and Coad v Wellness Pursuit Pty Ltd (in liq) (2009) 71 ACSR 250. 52. Compare Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99 at 109 (per King CJ) with Re Enhill Pty Ltd [1983] 1 VR 561 at 567 (per Lush J). 53. Compare Trim Perfect Australia Pty Ltd (in liq) v Albrook Constructions Pty Ltd [2006] NSWSC 153 at [20] with Re Enhill Pty Ltd [1983] 1 VR 561 at 567 (per Lush J). 54. Harold A J Ford, ‘Trading Trusts and Creditors’ Rights’ (1981) 13 Melbourne University Law Review 1. 55. Nuncio D’Angelo and Helena Busljeta, ‘The Trustee’s Lien or Charge Over Trust Assets: A PPSA Security Interest or Not?’ (2011) 22 Journal of Banking & Finance Law & Practice 251. 56. Nevertheless, the discretion is not absolute: ‘a Court of Equity will never take trust property out of the hands of a trustee without seeing that [properly incurred] costs and expenses are reimbursed to him, and that he is relieved from personal liability in respect of them … It is most important that this right should be maintained’ Jennings v Mather [1902] 1 KB 1 at 6 (per Stirling LJ). Thus, it has been said that denying a trustee its rights of indemnification is ‘a violent exercise of the court’s discretion’: Re Chennell; Jones v Chennell (1878) 8 Ch 492 at 502 (per Sir George Jessel MR). 57. Re Johnson; Sherman v Robinson (1880) 15 Ch D 548 at 552; Re Anderson; Ex parte Alexander (1927) 27 SR (NSW) 296 at 299; Re Staff Benefits Pty Ltd [1979] 1 NSWLR 207 at 214. 58. Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319; Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360. 59. See the conspectus in Kevin Lindgren, ‘A Superannuation Trustee’s Right of Indemnity’ (2010) 4 Journal of Equity 85 at 89 and following. 60. Dowse v Gorton [1891] AC 190 at 203 (per Lord Macnaghton); Savage v The Union Bank of Australia Ltd (1906) 3 CLR 1170; National Trustee’s Executors & Agency Co of Australasia Ltd v Barnes (1941) 64 CLR 268; Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 at [47]. 61. Nolan v Collie & Merlaw Nominees Pty Ltd (in liq) (2003) 7 VR 287; [2003] VSCA 39 at

[45], per Ormiston JA (Batt and Vincent JJA concurring). 62. A useful summary of the debate is contained in Re Saker; Great Southern Managers Australia Ltd (rec and mgrs apptd) (in liq) (No 2) (2011) 85 ACSR 211; [2011] FCA 958 at [45]–[49]. The issue, and the differences between the courts, are explored at further length in Lee Aitken, ‘A Liability ‘Properly Incurred’? The Trustee’s Right to Indemnity, and Exemption From Liability for Breach of Trust’ (2011) 35 Australian Bar Review 53. 63. An expression described, with some justification, as ‘imprecise’: Kevin Lindgren, ‘A Superannuation Trustee’s Right of Indemnity’ (2010) 4 Journal of Equity 85 at 89. See also Trustee Act 1958 (Vic) s 36(2); Trusts Act 1973 (Qld) s 71; Trustees Act 1962 (WA) s 71; Trustee Act 1898 (Tas) s 27(1); Trustee Act (NT) s 26; Trustee Act 1925 (ACT) s 59(4). 64. For a discussion of the relationship between the general law indemnity and s 601GA see Re Gunns Finance Limited (in liq) (recs & mgrs apptd); Re Gunns Plantations Limited (in liq) (recs & mgrs apptd) (No 2) [2013] VSC 365. 65. Nolan v Collie & Merlaw Nominees Pty Ltd (in liq) (2003) 7 VR 287; [2003] VSCA 39 at [44] (per Ormiston JA, with Batt and Vincent JJA concurring). 66. In Re Beddoe [1893] 1 Ch 547 the court held that the expression ‘properly incurred’ means ‘not improperly incurred’. This was supported by the court in Nolan v Collie & Merlaw Nominees Pty Ltd (in liq) (2003) 7 VR 287; [2003] VSCA 39. 67. There is obiter dictum of Needham J in Re Staff Benefits Pty Ltd [1979] 1 NSWLR 207 at 215, which seems to imply that the breach must be shown to relate to ‘the subject matter of the indemnity’, but the passage is ambiguous. However, this proposition is not otherwise supported by the authorities and is difficult to understand, given that the clear accounts rule applies on a whole-of-estate basis rather than a creditor-by-creditor or debt-by-debt basis. The Trust Law Committee Report dismissed Re Staff Benefits on this basis: Trust Law Committee, ‘Rights of Creditors Against Trustees and Trust Funds — Consultation Paper’ (Tolley Publishing Co, 1997), fn 33 at 6. Perhaps Needham J’s statement was intended to be confined to related breaches, in respect of which it is undoubtedly correct. 68. Boardman v Phipps [1967] 2 AC 46. See also the discussion in David Hayton, ‘Unique Rules for the Unique Institution, the Trust’ in Degeling and Edelman (eds), Equity in Commercial Law (2005). 69. Target Holdings Ltd v Redferns [1996] 1 AC 421. See also Armitage v Nurse [1998] Ch 241 at 251 (per Millett LJ). 70. Nolan v Collie & Merlaw Nominees Pty Ltd (in liq) (2003) 7 VR 287; [2003] VSCA 39. While some duties of a trustee are strict, the more day-to-day functions of a trustee in the management of a trading trust require only that the trustee ‘exercise the same care as an ordinary, prudent person of business will exercise in the conduct of that business were it his or her own’: Breen v Williams (1996) 186 CLR 71 at [70] (per Gummow J). For further discussion, see Meagher, Gummow & Lehane at [5-110]. 71. See equivalents in Trustee Act 1958 (Vic) s 67; Trusts Act 1973 (Qld) s 76; Trustees Act 1962 (WA) s 75; Trustee Act 1936 (SA) s 56; Trustee Act 1898 (Tas) s 50; Trustee Act (NT) s 49A; Trustee Act 1925 (ACT) s 85. There is a corresponding provision for directors in the Corporations Act s 1318 although, interestingly, honesty is enough — the conduct need not also have been ‘reasonable’ — further evidence of the higher standards imposed upon trustees. 72. See also Trustee Act 1958 (Vic) s 68; Trusts Act 1973 (Qld) s 77; Trustees Act 1962 (WA) s 76; Trustee Act 1936 (SA) s 57; Trustee Act 1898 (Tas) s 53; Trustee Act (NT) s 50; Trustee

Act 1925 (ACT) s 86. 73. Daly v The Union Trustee of Australia Ltd (1898) 24 VLR 460; RWG Management Ltd v Commissioner for Corporate Affairs [1985] VR 385; Target Holdings Ltd v Redferns [1996] 1 AC 421, per Lord Browne-Wilkinson at 433; Re Pauling’s Settlement Trusts [1964] Ch 303. 74. See for example Re Staff Benefits Pty Ltd [1979] 1 NSWLR 207, and its analysis in Ford & Lee on Trusts at [1407]. See also Target Holdings Ltd v Redferns [1996] 1 AC 421 at 433 (per Lord Browne-Wilkinson). 75. However it is not inconceivable that language such as ‘as trustee /in its capacity as trustee of the Blackacre Trust’ when introducing and defining a party might ground an argument by way of implication or estoppel that a limitation was intended by those words if other evidence supported it. See the further discussion in 4.119. 76. See Muir v City of Glasgow Bank (1879) 4 App Cas 337 at 355 (per Lord Cairns); Re Anderson; Ex parte Alexander (1927) 27 SR (NSW) 296 at 300; Helvetic Investment Corp Pty Ltd v Knight (1984) 9 ACLR 773 at 774; Elders Trustee & Executor Co Ltd v E G Reeves Pty Ltd [1987] FCA 332; Wilkinson v Feldworth Financial Services Pty Ltd [1998] NSWSC 775. 77. Parsons v Spooner (1846) 67 ER 845. Merralls has noted that in none of the English or Australian cases that have upheld the trustee’s right to exclude or limit its liability was it held necessary for the trust instrument to authorise the trustee to do it: James D Merralls, ‘Unsecured Borrowings by Trustees of Trading Trusts’ (1993) 10 Australian Bar Review 248 at 252. 78. See also Henry Wolf Sinclair (as trustee for the Maro Trust) v Westpac Banking Corporation [1997] FCA 144, citing Helvetic Investment Corp Pty Ltd v Knight (1984) 9 ACLR 773 (New South Wales Court of Appeal). Of course, language such as ‘as trustee of/in its capacity as trustee of the Blackacre Trust’ when introducing and defining a party might in any given case ground an argument by way of implication or estoppel that a limitation was intended by those words if other evidence supported it. See further discussion in 4.119. 79. ‘In Head v Kelk (1961) 63 SR (NSW) 340 and in earlier cases … it was said that it is a defence to a claim for debt where there is clear evidence that the parties have agreed that the debt is only to be repaid out of a certain fund. So in Head v Kelk, if the parties had agreed that the debt was only to be repaid if the defendant could afford to do so, then the defendant could show that he could not afford to repay the debt and so was under no liability’: Action A1 Pty Ltd v Chin Matter No 3179/97 [1997] NSWSC 421 at 422. 80. See the discussion in Newmarket Trustees Limited v The Commissioner of Inland Revenue [2010] NZHC 810 where the High Court of New Zealand was faced with a trustee company which was trustee of 118 different trusts and registered proprietor of 145 properties when it became insolvent as a result of dealings with respect to one of the trusts. 81. Australian Consumer Law s 18, which is found in Competition and Consumer Act 2010 (Cth) Sch 2 (and formerly in Trade Practices Act 1974 (Cth) s 52), Corporations Act s 1041H and Australian Securities and Investment Commission Act 2001 (Cth) s 12DA. There are very similar provisions in other Commonwealth and state legislation. 82. In Austrust Ltd v Astley (1996) 67 SASR 207, the Full Court of the Supreme Court of South Australia held at [112] that a provision in the trust deed excluding personal liability would not have protected the appellant trustee (per Doyle CJ and Olsson J). The High Court of Australia agreed: Astley v Austrust Ltd (1999) 197 CLR 1.

83.

Wilkinson v Feldworth Financial Services Pty Ltd [1998] NSWSC 775; J A Pty Ltd v Jonco Holdings Pty Ltd (2000) 33 ACSR 691; [2000] NSWSC 147 at [50].

84. Watling v Lewis [1911] 1 Ch 414; Producers and General Finance Corp Ltd v Dickson (1938) 40 WALR 34. 85. There is a brief discussion of the operation of a limitation clause in TFML Ltd v MacarthurCook Fund Management Ltd [2013] NSWCA 291 at [75]–[76]. 86. ‘It is possible that a company might be cash flow insolvent but show a positive balance sheet where assets exceed liabilities. A company may be at the same time, insolvent and wealthy. It may have wealth locked up in investments that are not easy to realise. Regardless of its wealth (in this sense), unless it has assets available to meet its current liabilities, it is commercially insolvent and therefore liable to be wound up’: Bell Group (in liq) v Westpac Banking Corp (No 9) (2008) 225 FLR 1 at [1070]. 87. As mentioned in the discussion of the model limitation clause below in 4.123, to protect the creditor an ‘actually indemnified’ formulation needs to be accompanied by an obligation on the trustee to exercise the indemnity at the relevant time, otherwise there will be a circularity, that is the liability to pay the creditor will not arise unless and until the trustee actually indemnifies itself out of the fund. 88. Bruce Taylor, ‘The Enforceability of Debt Securities Issued by Trustees in Securitisation Programs’ (1998) 9 Journal of Banking and Finance Law & Practice 261 at 266. 89. This discussion relates to the position of the unsecured creditor and so, strictly, should be located in the next chapter, but it is convenient to discuss it briefly here. 90. Although recourse may be available against its directors under the Corporations Act s 197. 91. The model clause for insertion into contracts with counterparties shown in Part 4 of Appendix 4 and much of the accompanying explanatory material in this part of this chapter were the result of a collaborative effort between the author and Mr Diccon Loxton, partner with law firm Allens. They appeared in substantially this form in Diccon Loxton and Nuncio D’Angelo, ‘Trustees’ Limitation of Liability: Myths, Mysteries and a Model Clause’ (2013) 41 Australian Business Law Review 142. The clause and an abridged version of the explanatory notes appear on the website of the Asia Pacific Loan Markets Association. The author is grateful to Mr Loxton and Thomson Reuters for their kind permission to use the clause and material here. 92. A failure to make this clear can have adverse impacts on creditors and their ability to have access to trust assets: see Re Interwest Hotels Pty Ltd (in liq) (1993) 12 ACSR 78. See also the discussion in TFML Ltd v MacarthurCook Fund Management Ltd [2013] NSWCA 291 at [70]–[78]. 93. TFML Ltd v MacarthurCook Fund Management Ltd [2013] NSWCA 291 at [74]; Glennon v Commissioner of Taxation (Cth) (1972) 127 CLR 503 at 511–13. Note the limited statutory exceptions created by Conveyancing Act 1919 (NSW) s 24 and equivalents in other states and territories. 94. Or, if there is to be no limitation, ‘clause *’ could be a reference to a representation along the lines of that shown in clause 1(a) in Part 2 of Appendix 5: ‘Protecting creditors and other counterparties’, if one is included. 95. See the discussion in Nuncio D’Angelo, ‘Indemnities, Gross Negligence and the Accidental Insurer’ (2009) 37 Australian Business Law Review 7.

The common qualifier ‘without limitation’ is not used here on the assumption that documents 96. will have a general interpretation clause along the lines that expressions like ‘includes’ are not to be read as exclusions or limitations. 97. This trust might be, or be in the nature of, a Quistclose trust in which the funds are held for the benefit of the beneficiaries who pay them, pending payment in satisfaction of the liability: Quistclose Investments Ltd v Rolls Razor Ltd (in liq) [1970] AC 367. Perhaps they would be regarded as being trust funds subject to be main trust and held for the benefit of all beneficiaries. Depending on the arrangement, there might even be a Carreras Rothmans type trust for the counterparty/creditor: Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] 1 Ch 207. 98. As discussed in Chapter 3, whether a personal indemnity exists in any given case where the trust instrument is silent on the question is not a straightforward matter and it is an open question as to whether trust creditors would be subrogated to any such indemnity. 99. It is important to remember that a trustee may neither commence nor defend legal proceedings without first obtaining judicial advice under state and territory trusts/trustee legislation: Macedonian Orthodox Community Church St Petka Inc v The Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66. In the author’s experience this is not always done, raising questions around breach of trust. 100. Supreme Court Act 1970 (NSW) s 67 provides that ‘the Court may, at any stage of proceedings, on terms, appoint a receiver by interlocutory order in any case in which it appears to the Court to be just or convenient so to do’. There are equivalents in other jurisdictions. 101. Wells v Wiley (2004) 183 FLR 284. Because so-called ‘automatic vacation’ clauses can frustrate enforcement, well advised creditors will usually insist on the removal of any such clause from the trust instrument before transacting: see item F4 of the Checklist in Part 1 of Appendix 5: ‘Protecting creditors and other counterparties’. 102. Agusta Pty Ltd v Provident Capital Ltd (2012) 16 BPR 30,397; [2012] NSWCA 26. 103. Derham suggests the matter is not so clear cut: Rory Derham, The Law of Set-off (4th ed, Oxford University Press, 2010) at [17.122]–[17.125]. 104. See for example Thackray v Gunns Plantations Ltd [2011] VSC 380. Note, in passing, that security over all of the assets of a trust does not necessarily mean that a creditor has security over ‘the whole or substantially the whole of the property of the company’ (that is, the trustee), in the sense contemplated by the Corporations Act ss 436C and 441A, so as to give the secured creditor the ability to appoint an administrator to the trustee or to defeat the enforcement moratorium during the administration of the trustee. The voluntary administration provisions do not apply to trusts as such. 105. Corporations Act s 428. For the meaning of ‘public documents’ see s 88A of the Act. 106. See 5.140. 107. Nevertheless, in the context of limitation clauses, the courts will give the expression ‘in its personal capacity’ meaning if the intention is clear: TFML Ltd v MacarthurCook Fund Management Ltd [2013] NSWCA 291 at [75]. 108. See Gatsios Holdings Pty Ltd v Nick Kritharas Holdings Pty Ltd (in liq) (2002) ATPR 41-864; [2002] NSWCA 29; Nolan v Collie & Merlaw Nominees Pty Ltd (in liq) (2003) 7 VR 287; [2003] VSCA 39.

Whatever the meaning of the expression ‘wilful misconduct’ (as to which see Spread Trustee 109. Company Ltd v Sarah Ann Hutcheson [2011] UKPC 13), the expression ‘wilful default’ in some contexts has a technical meaning in relation to trustees: see Bartlett v Barclays Trust Co (No 2) [1980] Ch 539 at 546 and Glazier v Australian Men’s Health (No 2) [2001] NSWSC 6 at [56]. 110. As to which, see the discussion in 4.41 and following. 111. See also the discussion in TFML Ltd v MacarthurCook Fund Management Ltd [2013] NSWCA 291 at [70]–[78]. 112. In relation to ‘statutory business trusts’, §304 (‘Statutory Trust Solely Liable for Debt, Obligation, or other Liability of Statutory Trust’) of the Uniform Statutory Trust Entity Act is to similar effect. Because that evolutionary process is bound up in the development of the ‘direct access’ doctrine, it is discussed in more detail in the next chapter. 113. See Channel Island equivalents in the Trusts (Jersey) Law 1984 article 32(1) and the Trusts (Guernsey) Law 2007 s 42(1). 114. Being Watling v Lewis [1911] 1 Ch 414; Gordon v Campbell (1842) 1 Bell’s App 428; Larsons v Spooner (1846) 67 ER 845; Lumsden v Buchanan (1865) 3 M(HL) 89; Williams v Hathaway (1877) LR 6 Ch D 544; Muir v City of Glasgow Bank (1879) 4 App Cas 337; Re Robinson’s Settlement; Gant v Hobbs [1912] 1 Ch 717. From here on in this chapter these authorities are referred to by their short name without citation. 115. Allen Hunter White, ‘Trustee’s Avoidance of Personal Liability on Contracts’ (1928–1929) 3 Temple Law Quarterly 117 at 121. A similar sentiment was implied earlier in Jeffreys Lewis Collinson, ‘The Limitation of Liability Under Contracts’ (1915) 27 Juridical Law Review 293. 116. In the report for Re Robinson, it is recorded that the appellants argued: ‘Warrington J. [in his first instance decision in this case] followed his own decision in Watling v Lewis, in which [certain] cases were not cited, and held that the words ‘as such trustees but not otherwise’ were repugnant to the covenant and had no effect. We ask the Court to overrule that decision’. 117. An omission that was noted by Yeldham J in Helvetic Investment Corp Pty Ltd v Knight (1982) 7 ACLR 225 at 229. 118. Rubin Tepper, ‘Liability of the Trust Estate Arising Out of Trustee’s Contracts with Third Persons’ (1950–1951) 2 Hastings Law Journal 53 at 55. 119. The ‘fund’, to state the obvious, is not a legal person. The expression ‘binding the trust estate’ is used liberally in the United States literature and its meaning is explored in the next chapter. 120. Ira P Hildebrand, ‘Liability of the Trustees, Property and Shareholders of Massachusetts Trust’ (1923–1924) 2 Texas Law Review 139 at 147, fn 23. 121. Roderick P Meagher, ‘Insolvency of Trustees’ (1979) 53 Australian Law Journal 648 at 652.

[page 222]

CHAPTER 5 Legal Risks of the Trust Creditor SYNOPSIS This chapter begins by describing the commercial expectations of secured and unsecured trust creditors and the similarities with those of their counterparts in companies. It then demonstrates how those expectations are not met or properly supported by trust law. It explains why this is so, harking back to the historical discussion in Chapter 2 so as to give context and depth of understanding. It analyses in detail the ways in which trust law differs from company law to make the trust creditor’s position much riskier than that of creditors of companies, even though their expectations are similar. It considers how these issues are dealt with practically in the Australian market and analyses the extent to which the risks can be eliminated through structural and documentary techniques. It proposes checklists, guidelines and sample clauses for protecting intending creditors and other external counterparties who deal with commercial trusts.

INTRODUCTION 5.1 As with the other stakeholders discussed in the preceding chapters, it may convincingly be argued that Australian trust law does not properly accommodate the reasonable commercial expectations of creditors of a commercial trust, particularly those which are unsecured. Trust law offers them very little in the way of protection when dealing with a trustee. On the contrary, equity’s protective predisposition towards beneficiaries and ‘their’ trust property can appear to punish trust creditors for misconduct of the trustee — even, in some cases, if they are innocent and ignorant of that conduct.

[page 223] 5.2 Canadian commentators have observed that ‘the law is not simply unfair from the creditor’s perspective but is also quite at odds with the expectations of commercial parties generally. As business trusts proliferate, this is a matter of no small importance’.1 That observation applies with equal force in Australia. In fact, of all the issues and legal risks facing participants in the modern commercial trust, those that have received the most attention in the Australian courts and the literature are those affecting creditors. Although legally speaking it is not correct to describe a trust creditor as being a creditor of ‘the trust’ or ‘the trust estate’, from a commercial perspective they are debt participants in the economic enterprise held within the trust. Unless familiar with the intricacies of trust law (and, importantly, the differences from company law), trust creditors may mistakenly believe that their position with respect to equity investors and the enterprise assets is similar to that of a creditor of an economically corresponding enterprise conducted under a corporate form. This misapprehension can lead to unfortunate consequences for an unwary trust creditor. This is another manifestation of the ‘parity myth’. 5.3 Creditors of commercial trusts do not enjoy the benefit of statutory innocent outsider protections of the type provided to creditors and intending creditors of companies, or of a sophisticated policy-based insolvency regime that gives them preferential status over equity investors. In some circumstances, this may result in an inversion of priorities vis-à-vis equity investors when compared to that applicable to companies: in an insolvent winding up of a commercial trust, equity investors can be in a better position with respect to the enterprise assets than trust creditors. 5.4 This chapter identifies key anatomical elements of these risks, many of which have not been the subject of detailed treatment in the authorities or the literature, analyses them critically by reference to their sources in trust law and proposes arguments and theories by which they could be ameliorated or shifted back to ‘the trust’, that is the trustee and/or equity investors. But it also takes a pragmatic approach and suggests practical ways in which the risks can be eliminated or ameliorated through due diligence and documentary measures. Efforts to protect against those risks

by private means involve transaction costs and delays and, in any case, can never provide complete protection; due to the unincorporated nature of the trust and the limitations of Australian trust law, the results are necessarily imperfect and risks remain. [page 224] 5.5 There is also a comparison against the position of trust creditors in the United States who, as a result of protections extended to them at law for which there are no equivalents in Australia, enjoy a less risky position than their Australian counterparts. These protections reflect elements of law and economics ‘enterprise theory’ in that they acknowledge that, economically, the trust creditor is indeed a creditor of ‘the trust’ or ‘the trust estate’. In this very important regard, United States trust law more closely supports the expectations of a trust creditor than does Australian trust law in that the position of a trust creditor is more closely aligned with the position of a creditor of a corporation.

WHAT IS A ‘TRUST DEBT’ AND WHO IS A ‘TRUST CREDITOR’? 5.6 As indicated in the definition of ‘commercial trust’ in 1.31, the discussion is limited to contract creditors of the trustee; other considerations apply in relation to tort and other involuntary creditors. A commercial trustee may have trade creditors as well as financial creditors such as banks that have provided financing facilities and related products such as derivatives. Some larger commercial trustees may raise debt funding through the issue of bonds, notes, debentures and other debt instruments. Also, while the emphasis in this discussion is on intending and actual creditors, in fact the issues apply equally with respect to any contractual counterparty, including under non-monetary contracts, since they could become creditors in respect of damages for breach. 5.7 As discussed in the previous chapter, all debts and other liabilities of a trustee are personal, and this applies whether or not the trustee identifies

itself as a trustee in contracts under which it incurs debts and liabilities. A ‘trustee’ is not a distinct legal person having a representative capacity separate from its personal capacity. That does not mean that the expression ‘in its capacity as trustee’ in a document is legally meaningless. The issue of contracting capacity is important from the creditor’s point of view because it assists the analysis of whether a creditor is able to have some form of access to trust assets held by the trustee, and confusion can result where capacities are not properly spelt out in the documentation. The question of capacity is crucial if the trustee’s personal resources are insufficient (or unavailable, due to a contractual liability limitation) to discharge a liability and the creditor seeks recourse to assets held by it on trust.2 [page 225] 5.8 Given that all debts and liabilities incurred by a company that is a trustee, whether on its personal account for non-trust activities or in its capacity as trustee, are personal to the company, the expression ‘trust creditors’ is, therefore, a shorthand expression to distinguish those creditors of the company that have prima facie access to the trust assets in enforcing their claim, either through proprietary security over those assets or, if unsecured, by subrogation to the trustee’s indemnity with respect to those assets.3

THE COMMERCIAL EXPECTATIONS OF THE TRUST CREDITOR 5.9 In extending credit to or otherwise contracting with a company it knows is acting as the trustee of a commercial trust but who is unwilling to accept personal liability (which, as discussed in the previous chapter, is a common fact pattern with respect to commercial trusts), the intending trust creditor may be prepared to rely on the creditworthiness and viability of the underlying enterprise. If that is satisfactory, then objectively a creditor might be indifferent as to the personal worth of the trustee, although naturally it will want to be satisfied that the trustee is a competent and

capable manager of the enterprise (just as it would the board of directors and senior management of a company) and has the resources to discharge its trustee duties. Naturally, if it is able to negotiate security over trust assets it will be in a superior position but for legal reasons (such as the absence of trustee power to give security over trust assets) or commercial reasons (competitive pressures because other potential counterparties may be prepared to deal on an unsecured basis) security is not always available.4

Secured trust creditors 5.10 By parity of reasoning with the position of a secured creditor of a company, the commercial expectations of a reasonable counterparty in relation to any given commercial contract between it and a trustee who will accept no personal liability on that contract, but who will enjoy the benefit of security over trust assets, may be described as follows: it wants to be able to contract with the trustee with no undue delay and with minimal due diligence and transaction costs (or at least no greater than when dealing with an economically equivalent company); it expects to be able to enforce its claim directly against the secured assets in the usual way; [page 226] it expects that claim to have legal priority with respect to the secured assets over the claims of equity investors, the trustee and unsecured trust creditors (priority between secured creditors is not considered here); it expects its claim against the secured assets to be exercisable free and clear of consequences of trustee misconduct. If there is trustee misconduct, the consequences should fall on the equity investors if the creditor has not actually known of or suspected it; it expects the trustee to be personally liable if it suffers a shortfall in

recovery against the secured assets if and to the extent that shortfall is attributable to misconduct of the trustee (and the creditor has not actually known of or suspected it), on the basis of an express or implied promise by the trustee that it will not engage in that misconduct; and if all of these expectations are met it should otherwise be indifferent as to whether the trustee is legally personally liable for the secured debt.

Unsecured trust creditors 5.11 By parity of reasoning with the position of an unsecured creditor of a company, the commercial expectations of a reasonable counterparty in relation to any given commercial contract between it and a trustee who will accept no personal liability on that contract, and who is prepared to contract on an unsecured basis, may be described as follows: it wants to be able to contract with the trustee with no undue delay and with minimal due diligence and transaction costs (or at least no greater than when dealing with an economically equivalent company); it expects a claim in insolvency as against the value of unencumbered enterprise assets to the extent of the debt; it expects that claim to have legal priority over the claims of equity investors and the trustee and to rank equally with those of other unsecured trust creditors; because it will have agreed to bargain without security, it will be indifferent as to whether its claim gives it a proprietary interest in the enterprise assets, provided the other expectations described in this list are met; it expects its claim against the enterprise assets to be exercisable free and clear of consequences of trustee misconduct. If there is trustee misconduct, the consequences should fall on the equity investors if the creditor has not actually known of or suspected it; it expects the trustee to be personally liable if it suffers a shortfall in

recovery against the enterprise assets if and to the extent that shortfall is attributable [page 227] to relevant misconduct of the trustee (and the creditor has not actually known of or suspected it), on the basis of an express or implied promise by the trustee that it will not engage in that misconduct; and if all of these expectations are met it should otherwise be indifferent as to whether the trustee is legally personally liable on the contract. 5.12 For reasons described more fully below, Australian trust law suffers weaknesses from a trust creditor’s point of view and yields outcomes which do not meet these expectations. Trust law is heavily biased towards beneficiary protection and against the trustee — and anyone claiming through it.

NO STATUTORY INDOOR MANAGEMENT PROTECTIONS 5.13 With limited exceptions, the law does not oblige a commercial trustee to disclose the fact that it is acting as trustee, or even the existence of the trust, when dealing with external counterparties. Other than registered MIS and for some tax purposes, commercial trusts need not have a public presence at all. As implied by the Janus metaphor described at the beginning of Chapter 4, the trust is a private arrangement as between the trustee and its beneficiaries, recognised in equity but not at law. As far as the law is concerned, counterparties do not deal with the trust but rather with the legal person who is the trustee. However equity does not fully compensate for this by providing a comprehensive set of protections to external counterparties; on the contrary, in some ways it extends to them responsibility for protecting beneficiaries against trustee misconduct, even where they do not have actual knowledge of that misconduct. This differs markedly from the position in the United States (discussed below) where

the guiding principle, as stated in Scott on Trusts at §30.6.6, is that those who deal with a trustee ‘should not be required to supervise the trustee’s conduct and should ordinarily be liable only for actual participation in a breach of trust’. 5.14 It also differs markedly from the position of outsiders dealing with companies. Australian law does not provide statutory assumptions regarding matters of indoor governance and management within a trust of the type provided to those dealing with companies under the Corporations Act. With some very narrow and specific statutory exceptions relating to certain dealings with trust property,5 external counterparties transacting with a person acting as trustee have only the benefit of limited general law protections. These are constructed around [page 228] the threshold question of whether and the extent to which the counterparty had, or ought to have had, knowledge of the trust, its terms and the propriety of the trustee’s conduct. The locus classicus of this is the bona fide purchaser rule: a third party who acquires legal title to trust property in good faith, for value and without notice of any breach of trust or prior equitable interest is protected against a claim in equity by the beneficiaries; the purchaser’s conscience is said to be unaffected by the trust and it is immune from equity’s intervention. Notice includes actual notice and constructive notice, that is knowledge of facts which would put a reasonable and honest person on inquiry. Possession of the requisite notice exposes the counterparty to a range of consequences in equity that can include return of the acquired property and compensation for loss.6 5.15 Section 124 of the Corporations Act abolished corporate ultra vires by giving companies all the powers of a natural person and, although s 125 contemplates that a constitution may contain specific objectives, or restrictions or prohibitions on exercise of that power, no act is invalidated if it is in breach: see Part 2 of Appendix 1: ‘Extracts from the Corporations Act’. Sections 128 and 129 (also extracted in that Appendix) allow persons dealing with companies to make certain assumptions about indoor

management and related matters, including compliance with the constitution. An external counterparty may deal with a company with a high degree of confidence and with minimal or no due diligence as to the subject matter of those provisions, provided they are not disentitled by contrary knowledge or suspicion at the time of the dealing: s 128(4). That knowledge or suspicion must be actual (that is, subjective); there is no constructive knowledge or ‘put on enquiry’ test.7 By contrast, a person dealing with a trustee has no corresponding statutory comfort. If they wish to maximise transactional safety, they must actively investigate trustee power, the propriety of the intended exercise of that power, compliance with the trust’s constituent instrument(s) and other matters of indoor management before entering into the engagement; those who have sufficient bargaining strength will also seek a range of contractual assurances and other protections. Examples of the kind of [page 229] enquiries made and assurances required by well-advised counterparties in the Australian market are discussed in detail later in this chapter and in Appendix 5: ‘Protecting creditors and other counterparties’. Those steps involve costs, delays and other transactional inefficiencies, including the risk of error. Thus, while the Corporations Act implicitly encourages outsiders dealing with a company not to make enquiries for fear of acquiring actual knowledge or suspicion, the relevant elements of trust law can be said to have the opposite effect in that they compel (well advised) outsiders seeking safe harbour to conduct active investigations. 5.16 In particular, a counterparty will seek to ensure that its dealing is not tainted by a breach of trust because it can suffer accessorial liability in equity for receiving trust property (including by way of a security interest over trust property) knowing that it is in breach of trust or knowingly assisting in a dishonest or fraudulent design on the part of the trustee. These are the two limbs of the rule in Barnes v Addy.8 ‘Knowledge’ in this context means any of the following: actual knowledge;

wilfully shutting one’s eyes to the obvious; wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make; and knowledge of circumstances which would indicate the facts to an honest and reasonable person.9 5.17 Of particular interest is that actual knowledge is but one category; the doctrine includes various levels of culpable indifference and on one view imposes a positive burden on all third parties dealing with a known trustee to look out for [page 230] the interests of the beneficiaries. The purpose served by the rule was described succinctly by the Full Court of the Federal Court thus: Characteristically, Barnes v Addy liability has been invoked by innocent trust and fiduciary beneficiaries so as to project liability to compensate for their losses onto third parties who have participated in the delinquency of the trustee or fiduciary.10

5.18 It is clear that Barnes v Addy accessorial liability can be fixed upon a counterparty dealing with a company if the breach is by its directors of their fiduciary (and, more controversially, other equitable) duties in relation to the company.11 On its face, the doctrine operates beyond the scope of the statutory assumptions in the Corporations Act and can be engaged by a level of knowledge or indifference that would not undermine a counterparty’s right to rely on those assumptions. For both disentitlement in relation to the statutory assumptions and accessory liability in equity an element of culpable knowledge or indifference is required, but the standard differs as between the statutory and equitable rules; the latter creates an exposed overhang.12 5.19 When dealing with trusts, however, there are circumstances that have no analogue in company law in which even a completely innocent counterparty acting in total ignorance of trustee misconduct amounting to a breach of trust may suffer catastrophic consequences. An unsecured

creditor seeking to enforce a trust debt may be left with no route of access to trust assets and nothing more [page 231] than a personal claim against the trustee; if the trustee happens to be insolvent, the creditor is left unpaid while the beneficiaries can enjoy what appears to be a windfall. In the result, the consequences of trustee misconduct can be borne by the innocent external counterparty rather than the beneficiaries. This is the subject of detailed discussion below. 5.20 Before leaving the comparison between directors’ and a trustee’s duties and the impact of breaches on outsiders, there is another difference that bears out the relative disadvantage of trust creditors. While directors owe their duties to the company and not to its creditors, it is wellestablished that as a company approaches insolvency the creditors are seen as having a direct interest in the company which cannot be overridden by the shareholders; they have, in effect, become the economic owners of the enterprise. In those circumstances, the duties borne by directors acquire a gloss that requires them to recognise and take into account the interests of the creditors. If they fail to do that in dealing with the company’s assets, and creditors are prejudiced, that dealing may be voidable at the instance of the company or a liquidator subsequently appointed (but not the creditors themselves).13 Trust creditors enjoy no such protection; there is no authority for the proposition that, as a trust approaches insolvency (itself a concept that is problematic: see Chapter 6) trust creditors assume some special status in the mind of a trustee such that it must take into account their interests when dealing with trust assets. 5.21 These outcomes may be seen as vestiges of the non-commercial origins of the trust as a device for protecting vulnerable beneficiaries and their economic interest in underlying property against trustee misbehaviour, which resulted in legal and insolvency risks being imposed on trustees and those who dealt with them, including creditors.14

SUBROGATION: THE UNSECURED CREDITOR’S INDIRECT (AND ONLY) ROUTE TO TRUST ASSETS 5.22 The risk of Barnes v Addy accessorial liability affects both secured and unsecured trust creditors. The problem identified in this part of the discussion, however, affects only unsecured creditors. Secured creditors are unaffected by it because they do not need to resort to subrogation to the trustee’s indemnity to access trust assets on enforcement. Their access is direct and they may take [page 232] possession of and sell trust assets through their security. Of course, it is relevant to them if and to the extent they might become unsecured creditors because of failure of their security or a shortfall in recovery against their secured asset. 5.23 Under Australian corporations law, unsecured creditors of an insolvent company are able to participate in a statutorily mandated collective process which ultimately results in a distribution to them, rateably and pari passu, of the value of the company’s unencumbered assets (if any) in priority to the equity investors.15 Provided a creditor is able to prove its claim, misconduct on the part of the company or its officers will not impeach it, subject to disentitlement in relation to the statutory assumptions and the risk of accessory liability in equity in relation to director misconduct. 5.24 Unsecured trust creditors enjoy no such certainty. Their only means of access to the value of trust assets on enforcement is by subrogation to the trustee’s right of indemnity.16 If that means of access fails, they are left with an unsecured personal claim against the trustee. The trust creditor’s claim through subrogation is subject to legal risks arising from a range of procedural and substantive hurdles placed by equity between the creditor and the trust’s assets, none of which exist for creditors of a Corporations Act company under the statutory regime. The impact this has had on the

way trustee limitation of liability clauses are drafted in Australia is explored in the previous chapter at 4.161 and following. 5.25 The unsuitability of the subrogation route for modern commercial trust creditors is exposed by considering its origins. Subrogation exists because of the fundamental premise that, because the trust has no separate legal personality, trust debts are personal to the trustee, being the person with whom the creditor contracts. If available, it is said to be a remedy that gives trust creditors an ‘advantage’ over general creditors of the trustee in insolvency.17 Indeed, the unsecured trust creditors of a trustee have been said to be in a privileged position over its general creditors because of the ‘lucky accident’ of being able to access trust assets via subrogation: Re Johnson; Sherman v Robinson (1880) LR 15 Ch D 548 at 552. This notion is faithful to the doctrinal premise in [page 233] characterising trust creditors and general creditors of a trustee as being prima facie in competition with each other but denies the economic reality that the trust is a distinct economic entity separate from its trustee. 5.26 One of the mysteries surrounding this issue is how and why subrogation has, in Australian trust law, become the sole means by which trust creditors may gain access to trust assets when it is not the case under United States trust law, as discussed below. This conclusion seems to have resulted as a leap in logic from the otherwise uncontroversial proposition that unsecured trust creditors have no proprietary interest in trust assets.18 Yet none of the older Chancery and House of Lords authorities discussed in the previous chapter in relation to limitation of trustees’ liability held that this was so, and all of them contemplated other means of access where a trustee had properly limited or excluded its personal liability. Sackville posits that it may have resulted from a ‘hardening’ of general principles, originally designed to serve sensible policy objectives built on notions of fairness and commercial morality, into a settled and inflexible rule.19 Others argue that the cases that appeared to disallow creditors access to

trust assets other than by subrogation may merely have been making a procedural rather than a substantive point.20 5.27 Subrogation is an ancient remedy and is not unique to the law of trusts. It is a creation of the English courts of equity.21 While equity’s main objective in supervising trusts is the protection of beneficiaries, this may be regarded as an instance where equity acts to protect the trust creditor, albeit in a heavily qualified manner. Equity’s assistance of trust creditors is manifested quite differently in the [page 234] United States. American equity gives unsecured creditors a direct right of access to a trust’s assets, while Australian equity gives them rights that are entirely derivative. Adopting the commonly used vernacular, Australian trust creditors step into the shoes of the trustee with respect to its rights of indemnity as against the trust assets. Therefore, to the extent that the indemnity has been impaired in any of the ways described in the previous chapter, including as a result of trustee misconduct of which the creditor is ignorant and innocent (that is, the ‘unrelated breach’ problem), the creditor seeking subrogation is correspondingly affected; the subrogating creditor can have no better claim on the trust assets than the trustee itself: General Credits Ltd v Tawilla Pty Ltd [1984] 1 Qd R 388 at 389–90. In a sense, this may be seen as a manifestation of the rule applicable to subrogation generally, that the person against whom it is claimed may raise against the subrogator any defences otherwise available against the subrogated: Fraser v Power (2001) Aust Contract R 90-127; [2000] NSWSC 257. 5.28 Subrogation is often referred to, including in the authorities, as a ‘right’. Strictly, it is not a right or cause of action, but rather an equitable remedy. Thus, it is subject to all the usual rules for engaging equitable remedies. In particular, it is ‘discretionary’. This does not mean that the courts have an absolute discretion whether to grant the remedy or not; rather, it is ‘discretionary … to the extent that courts of equity reserve to themselves a right to refuse to make equitable orders if the party seeking

them has acted unconscientiously or is otherwise disqualified by reason of any other rule of equity’: Nolan v Collie & Merlaw Nominees Pty Ltd (in liq) (2003) 7 VR 287; [2003] VSCA 39 at [65] (per Ormiston JA). This means that an enforcing unsecured trust creditor may be denied subrogation by application of disentitling equitable defences such as unconscionability, acquiescence or delay,22 laches,23 absence of clean hands,24 or who seeks equity must do equity.25 Again, there is no analogue in company law. Potentially, parties in competition with a given trust creditor (such as the beneficiaries or even other trust creditors) could use this rule to seek to deny an unsecured trust creditor its claim to subrogation and, therefore access to the trust assets, by proving conduct that disentitles it from the equitable remedy, thus leaving the creditor to its rights (if any) against the trustee personally and a share out of the trustee’s personal assets (if any) in liquidation. In the result, an unsecured trust creditor could be left without a remedy of value in circumstances that would not have that result [page 235] if it were an unsecured creditor of a Corporations Act company, where contract debt claims exercisable in liquidation are not a matter of equitable principle. This is not to say that a company creditor is never subject to the application of equitable principles that could defeat its claim; rather, the point is that a contract creditor of a company need not resort to equity to make its claim against the value in the company’s assets. 5.29 It is clear that subrogation does not mean that trust creditors enjoy direct proprietary security in the trust fund or are in any sense ‘secured’.26 Unless and until the remedy is granted, the unsecured creditor has no equitable interest in the trust assets, or other equity that has priority over those of other creditors of the trustee.27 Further, while the order will give the creditor an equitable interest in the trust assets corresponding to that held by the trustee, it does not prevail over secured creditors; it merely gives the subrogating creditor the same priority the trustee enjoyed, that is over the beneficiaries only: Nolan v Collie & Merlaw Nominees Pty Ltd (in liq) (2003) 7 VR 287; [2003] VSCA 39.

5.30 The remedy is inchoate unless and until the trustee is insolvent or it is otherwise reasonable to assume that obtaining a judgment against the trustee would be pointless.28 Thus, if the unsecured creditor cannot establish the latter, it must first take recovery proceedings against the trustee personally. If the claim is successful, the trustee must fund the judgment in whatever way it can. If its exoneration power is unimpaired and the trust fund has sufficient liquid or liquefiable assets, the trustee may discharge the debt in full directly out of trust assets. If its exoneration power is impaired, or the trust fund is inadequate or insufficiently liquid to discharge the debt, the creditor is exposed to the personal solvency position of the trustee.29 If the trustee does not discharge the judgment debt, the unsecured trust creditor has no right to levy common law execution [page 236] against the trust assets, even if the debt was incurred by the trustee expressly in its capacity as trustee.30 The creditor’s remedy is to gain access to trust assets through subrogation to the indemnity and this may require pushing it into liquidation.31 This can be problematic, particularly in the face of an effective liability limitation clause which prevents winding up actions (see 4.133) and even if the creditor was successful in pushing the trustee into liquidation, a range of additional uncertainties would operate, as discussed in Chapter 6. 5.31 Finally, there is an important distinction to be made in this regard by reference to the difference between ‘related breaches’ and ‘unrelated breaches’ by the trustee (discussed in Chapter 4). The former will only affect a specific creditor, that is the creditor whose engagement with the trustee is tainted by the breach. That creditor will have no ability to subrogate in connection with its debt because the trustee will have no right of indemnity against the trust estate in respect of that debt. On the other hand, unrelated breaches affect all unsecured trust creditors since the loss occasioned to the trust estate by such a breach is, in effect, deducted from the aggregate claim the trustee has in respect of all debts which are properly incurred and in respect of which the trustee otherwise has a prima

facie claim under its indemnity. Because subrogation is a collective process for the benefit of all creditors and not just those who seek it,32 the loss is, in effect, shared among all creditors not otherwise affected by a ‘related breach’.

The ‘double equity risk’ 5.32 The uncertainty attending the subrogation remedy, when combined with the fragility of the trustee’s indemnity, exposes unsecured trust creditors to what may be described as a ‘double equity risk’. While the subrogation risk is to a large extent controllable if the creditor conducts itself in a manner that does not arouse the disapproval of equity, and the potential for indemnity impairment through related breaches can be managed in the ways described below, the risk that the trustee’s indemnity might be impaired by an unrelated breach is almost entirely uncontrollable by an external party. [page 237] 5.33 The double equity risk exists because of equity’s insistence that unsecured trust creditors’ only route of access to trust assets is via subrogation to the trustee’s indemnity. The elements of the double equity risk and its consequences are highlighted in the Blackacre Trust hypothetical set out in Appendix 6: ‘The Blackacre Trust hypothetical’ and the discussion that now follows.

ANALYSIS OF THE BLACKACRE TRUST HYPOTHETICAL 5.34 In the Blackacre Trust hypothetical, assuming that the Trustee is irredeemably insolvent, the directors are either impecunious or unable to be located,33 and none of the grounds for lifting the trust veil, as discussed in Chapter 3, could be made out to fix personal liability for the loan on the Unit Holders, Bank of Australia would suffer a total loss of its debt

investment. As an unsecured trust creditor, it may only reach trust property via subrogation and thus can have no greater claim than the Trustee. This is so even though it had acted with reasonable diligence when providing the loan, and was both innocent and ignorant of the breaches. There is no need for the Unit Holders to raise a Barnes v Addy style argument against the Bank and the result does not rest on concepts like knowing receipt or knowing assistance. 5.35 Meanwhile, the Unit Holders would remain beneficially entitled to the value of an unencumbered Blackacre, free and clear of any claims by the former Trustee, and enjoy the benefit of not having to repay Bank of Australia’s loan of $200,000; they suffer a net zero loss in respect of the misappropriated $200,000.34 Assuming they are not guilty of any relevant disentitling conduct, the Unit Holders enjoy what appears to be a windfall or, put another way, the benefit of an external party in effect ‘insuring’ them against the Trustee’s default. This scenario has been described as ‘shocking’ and ‘the one authentic instance in the law where one may pay his debts with his losses’.35 It self-evidently is not the result of a wellconsidered, commercially focused and statutorily mandated allocation of risks consistent with articulated policy objectives, such as applies in the case of a corporate insolvency. [page 238] 5.36 It might be argued that this is a risk that unsecured creditors take in dealing with a trustee and not bargaining for security, as was suggested by Sir George Jessel MR in Re Johnson; Sherman v Robinson (1880) 15 Ch D 548 at 552–3. But that view assumes that security is in all instances realistically available. It does not take into account variable bargaining strength and market conditions. In buoyant economic times, with heavy competition among financiers and a commercial trust that appears to be financially viable, a request for security may result in the loss of the transaction to a competitor financier who is prepared to engage on an unsecured basis. In any case, security is not generally available for nonfinancier unsecured contract creditors such as trade creditors and

employees. In some instances, the trustee may have no power in the terms of the trust to grant security over trust assets. 5.37 It is instructive to consider the broader import of the outcome in the Blackacre Trust hypothetical: a person selected by, and acting for the benefit of, the equity investors has misbehaved, possibly fraudulently, but the financial consequences of that misbehaviour are borne by an innocent external party who advanced credit in good faith for the benefit of the enterprise and, while unsecured, did so on a not unreasonable commercial expectation that, if it became necessary, the assets of the enterprise would be available to discharge the debt. Undoubtedly, as between the Trustee and the Unit Holders in a situation like the Blackacre Trust hypothetical the Unit Holders ought to be preferred, but it is an extraordinary commercial result that the Unit Holders should prevail in the competition between them and Bank of Australia as an innocent arm’s length external creditor without any form of notice of the relevant misconduct. 5.38 Commercially speaking, the result in the Blackacre Trust hypothetical means that, in a competition in equity between two classes of participants, where both are innocent of any applicable disentitling conduct, equity investors are preferred over creditors. It is difficult to conceive of a result like this in relation to a company. The controversy generated by the 2007 decision of the High Court of Australia in Sons of Gwalia v Margaretic (2007) 231 CLR 160; [2007] HCA 1 demonstrated the depth of attachment to the fundamental commercial principle that, as far as arm’s length creditors are concerned, the claims of equity investors should always be subordinate to their claims (even if, as stated by Gummow J at [36]– [37], the attachment to that principle is based on erroneous assumptions about the history of company law). In that case the court held that shareholders who had a claim in damages against a company for misleading or deceptive conduct in connection with their shareholding ranked as creditors alongside ordinary unsecured creditors in corporate insolvencies. In 2010 the Corporations Amendment (Sons of Gwalia) Act 2010 (Cth) amended the Corporations Act to reverse the effect of the decision (and restore what [page 239]

in many commercial people’s minds was the rightful position), effectively by replacing the subordination provision at the heart of the decision, s 563A, with a new provision having a much wider scope in relation to shareholder claims.36 5.39 If a counterfactual is assumed, where the parties had instead chosen to structure their venture as a corporation under the Corporations Act (let us call it Blackacre Limited), with the equity investors becoming shareholders and the misappropriation of rental moneys being committed by the directors, an entirely different result is generated. By dint of statutory mandate, Bank of Australia and other creditors would be preferred over the equity investors in the liquidation of Blackacre Limited; the equity investors as shareholders would only receive a distribution if all creditors, including the Bank, were paid in full. The result under company law is that the equity investors rather than the creditors suffer the first layer of loss for misconduct by those who manage the enterprise. In this scenario, provided the Bank was confident that it did not possess any disentitling knowledge, it could rely on statutory and common law indoor management assumptions, thus reducing transactional costs through reduced due diligence. Blackacre Limited would be personally liable for the Bank loan (and indeed all other debts of the venture properly incurred by it). Once Bank of Australia accelerated the loan as a consequence of the directors’ misappropriation, making it immediately due and payable, then unless Blackacre Limited could repay the Bank in time or negotiate a deferral or rescheduling of the loan, Blackacre Limited would be insolvent for the purposes of the Corporations Act and could be forced into voluntary administration and possibly liquidation. In liquidation the enterprise assets would be sold, and the winding up regime in the Act would result in the net proceeds being applied first in payment of the loan and all other unsecured debts of the company pari passu (leaving aside for one moment unsecured creditors preferred by statute), before any residue is distributed among the shareholders. Based on the assumed financial information, the net financial result of distribution in that order would be that Bank of Australia would be paid in full and the losses caused by the misappropriation of the rental proceeds would be borne by the shareholders.

5.40 It is important at this stage to analyse the reasons for the Blackacre Trust outcome, to establish the premises for the discussion that follows. The loss suffered by Bank of Australia (and indeed any unsecured creditor of a commercial trust placed in a similar position) is the result of the double equity risk with respect to unrelated breaches. That risk exists because of the following [page 240] jurisprudential peculiarities in the Australian law of trusts (some of which are related or overlap, but they are discussed separately to highlight the issues).

The asymmetry of the trustee’s indemnity 5.41 First, although traditionally the language of indemnity, lien and charge has been used to describe the trustee’s prior rights with respect to trust assets, as argued in Chapter 4 those labels are misleading and the rights they give the trustee are asymmetrical. They are not granted by the beneficiaries and there is no other person with a reciprocating duty or obligation.37 The benefit of the lien and/or charge is held by the person who legally owns and controls the property so affected, and who is primarily responsible for performance. In fact, these are not rights at all. There is no person on the other side of any of them who might otherwise be held responsible if the trustee defaults; they simply disappear, leaving the creditor who seeks subrogation with no recourse to the trust assets. In this sense, the language of indemnity, lien and charge is inappropriate; in essence, all equity has given the trustee is permission to reach into the trust estate and take assets to satisfy a personal liability incurred in pursuance of trust objectives. From an economic viewpoint, there is an obvious asymmetry in the persons enjoying the benefit of a bargain struck by their trustee (that is, the beneficiaries), being free of any corresponding personal obligation in relation to it.

Asymmetry resulting from the separation of ownership 5.42 The way in which trust assets are held creates another apparent incongruity. An essential feature of the trust, and a consequence of holding property through it, is that ‘ownership’ is divided between the trustee and beneficiaries; this is a facet of the ‘proprietary element’ described in 2.22 and following.38 One consequence of ‘ownership’ of any given asset is that it is available to a person’s creditors on bankruptcy or insolvency. The debtor under trust law is the trustee. Trust assets are not ‘owned’ by the trustee in the relevant (economic) sense and so are not available to the trustee’s personal creditors; but neither are they available to the trustee’s trust creditors in the circumstances described in the Blackacre Trust hypothetical where the trust creditors’ route of access fails. Because the trust creditor is not a creditor of the beneficiaries, and despite the beneficiaries enjoying the benefit of the credit bargain, the beneficiaries’ ownership interest in [page 241] the trust assets is not available to the trust creditor. The creditor has, in effect, fallen between two stools. 5.43 As an interesting corollary to this anomaly, a beneficiary’s interest in the trust fund (that is, each Unit Holder’s unit holding in the Blackacre Trust), being a personal asset, would be available to personal creditors of that Unit Holder in its bankruptcy or liquidation. The Bank as a trust creditor, therefore, is in a potentially subordinate position to personal creditors of the Unit Holder with respect to trust assets against which it has extended credit.

The interplay of law and equity 5.44 The enforcement of contractual debts and liabilities is a matter primarily of common law. The trust is not an entity recognised by the

common law of contract in any relevant sense. Except in the circumstances described in Chapter 3, the trustee does not contract as agent of the beneficiaries. Thus, at law, the debt or liability is always that of the trustee personally, as principal. Equity’s intervention to protect the trustee through the implication of an indemnity for debts properly incurred, and to protect creditors through the benefit of subrogation to that indemnity, is evidence of recognition that the ‘trust estate’ should bear those debts and liabilities. American equity’s recognition of this economic imperative resulted in it permitting the trustee to exclude entirely its personal liability and giving unsecured creditors direct access to the estate, thus bypassing the trustee’s indemnity altogether: this is discussed in detail below. Australian equity does not go so far as to relieve the trustee of its personal burden, nor does it give the creditor direct access to the trust estate. Australian equity’s ‘two-step’ solution is an imperfect one for creditors.

The unrelated breach problem and the clear accounts rule 5.45 Another peculiarity is the fact that unrelated breaches are permitted to operate as against an innocent creditor through the clear accounts rule. In the Blackacre Trust hypothetical, the breaches of trust committed by the Trustee were in no meaningful way related to the transaction with Bank of Australia. Indeed, the Bank took all reasonable steps available to it to ensure that nothing in the loan transaction with them would constitute a breach of trust. The clear accounts rule self-evidently goes to the equities as between trustee and beneficiary. The unrelated breach problem means that, even if an intending creditor does all it reasonably can to protect its position against a related breach, it remains vulnerable to prior or later misconduct by the trustee which causes loss to the estate of which the creditor may have no knowledge and no way of obtaining knowledge. The clear accounts rule results in unrelated breaches operating to the detriment of innocent creditors. [page 242]

The effect of the clear accounts rule on the exoneration power 5.46 As a corollary to the preceding point, a further peculiarity is the fact that the clear accounts rule derogates against the exoneration power. It is argued below that this is the result of a conflation of the reimbursement limb and the exoneration limb of the trustee’s indemnity. Logically, the clear accounts rule — which, as observed above, goes to the equities as between trustee and beneficiaries — should derogate only from the right of reimbursement, since that right is unambiguously a personal right of the trustee, designed to allow it to replenish personal assets expended for the benefit of the trust. The exoneration limb, on the other hand, is essentially a power to apply assets in discharge of liabilities properly incurred and thus operates primarily for the benefit (even if not in a fiduciary or trust sense) of the unpaid trust creditors.

Evolutionary mismatch and the ‘lag effect’ 5.47 The final peculiarity can be described as a structural outcome of the evolutionary process described in Chapter 2. The substratum of Australian trust law relating to the rights of trust creditors was formulated in the 19th and early 20th centuries, in England and Australia, in the context mainly of disputes to do with deceased estates and family trusts, where the intervention of equity was aroused by a need to protect the vulnerable in the absence of adequate remedies at common law. Commercial trusts and the concept of the beneficiary as an equity investor were not, until relatively recently, a significant feature of the Australian commercial landscape. The reasoning behind the result in the Blackacre Trust hypothetical can be traced at least as far back as the 1880 decision of the court of Chancery in Re Johnson; Sherman v Robinson (1880) 15 Ch D 548 which involved a testamentary trust where the beneficiaries were family members of the deceased, including children, and a misbehaving executor. In finding that the creditors could not subrogate, the dicta of Sir George Jessel MR evidenced a clear protective bias towards the beneficiaries, and an implication that the creditor should bear the risk, and suffer the consequences, of the trustee’s default because they bargained for

personal liability of the trustee when they were in a position to protect themselves (for example, by demanding security).

‘RELATED BREACHES’: CREDITOR PROTECTION BY PRIVATE MEANS 5.48 A primary concern for a counterparty dealing with the trustee of a commercial trust is to be assured that the enterprise assets support the engagement; after all, in a commercial sense they are dealing with the economic entity which is the trust and not (or not only) the trustee. If those assets are not available on enforcement, the counterparty is left with only a personal claim [page 243] against the trustee which is not appropriate if the counterparty has made its credit assessment on the basis of the worth and viability of the trust enterprise. 5.49 Related breaches are of concern to intending counterparties, whether secured or unsecured, because they have the potential to undermine their claim against the trust assets. The mere fact that an intending counterparty has knowledge that it is dealing with the trustee of a trust is not enough to fix it with knowledge of a breach: Re Blundell (1888) 40 Ch D 370. The key question is whether it has actual knowledge of a breach or displays culpable indifference as to relevant facts. Unfortunately for unsecured counterparties, as the Blackacre Trust hypothetical shows, the matter goes beyond even that — in some situations it may suffer loss even if it is completely ignorant and innocent of a breach. 5.50 If properly advised, an intending counterparty wishing to maximise transactional safety will seek to ensure that the engagement they are contemplating entering into with the trustee is not itself in breach of trust, by conducting detailed due diligence and, if possible in the circumstances, negotiating contractual protections. If feasible and available, it might also

seek security over trust assets, but as mentioned above whether for legal reasons (such as a want of power) or commercial reasons (competitive pressures) security is not always available. In any case, security is not in and of itself a substitute for due diligence and contractual protections since it can be undermined by a Barnes v Addy claim. 5.51 Thus, they must take these steps because: they risk accessory liability for breaches of trust if they have a degree of knowledge or display a level of indifference that engages the Barnes v Addy principle, by which they may suffer a range of adverse consequences in equity (see 5.16–5.17); and even if they do not trigger Barnes v Addy accessorial liability (that is, they have no relevant knowledge or indifference) a breach of trust may impair the trustee’s indemnity and leave an unsecured creditor with no route of access to the trust assets on enforcement. 5.52 Not all intending counterparties are in a position to take these protective steps before contracting with a trustee, but one class of counterparty is: the well-advised financier with negotiating leverage against a trustee borrower seeking financial accommodation.

Due diligence 5.53 In addition to the usual enquiries regarding the trustee as a company in its own right (detailed discussion of which is outside the scope of this book), [page 244] a well-advised intending financier or other contract counterparty will, before entering into a transaction with a trustee, make certain enquiries to ensure that a number of critical matters are in order in relation to the trustee and the trust. Part 1 of Appendix 5: ‘Protecting creditors and other counterparties’ sets out a checklist of matters an intending counterparty

should consider when conducting due diligence in anticipation of engaging with the trustee of a commercial trust.

Contractual protections 5.54 In addition to those due diligence enquiries, well-advised financiers and other intending creditors with sufficient bargaining leverage will usually seek contractual comfort from the trustee by way of: representations and warranties: these provide assurances in relation to past conduct and confirmations in relation to key information about, among other things, the trustee and the trust. These are made on the date of the agreement and, in most financing transactions at least, are deemed to be repeated periodically; undertakings: these impose ongoing positive and negative obligations on the trustee in relation to its conduct and the status of the trust during the term of the arrangement; and events of default: these are trustee- and trust-specific events that are considered so serious that, if they occur, the financier is given the right, among others things, to terminate the arrangement and call for immediate repayment. 5.55 Examples of the kind of contractual assurances that are (or should be) contained in well-drafted financing agreements are set out in Part 2 of Appendix 5: ‘Protecting creditors and other counterparties’. Although they are framed in terms used in financing transactions, they can be modified to suit any commercial contract. It is sometimes possible for a creditor to obtain supporting contractual comfort from the beneficiaries (or even the trustee’s directors) but generally this is only feasible when dealing with smaller closely-held commercial trusts where the beneficiaries are identifiable and amenable. 5.56 The reason financiers who provide credit to trustees seek these assurances, and the matters in respect of which they provide comfort, are evident from their contents. While addressing different matters of detail, as a whole they are designed to maximise the prospects that the trustee will

have a claim of indemnification against the trust assets in respect of the indebtedness incurred under the facility agreement, to which the financier, if unsecured, may subrogate if it becomes necessary. If the financier is to take security over trust assets, they are also designed to maximise the prospects that the security will withstand challenge at the crucial time. [page 245] 5.57 In the absence of supporting security, however, any claim for damages for a breach of contractual comfort would still be an unsecured claim against the trustee (and, moreover, one in respect of which the trustee may have no indemnity as against trust assets if it involves a breach of trust). Still, these assurances provide a range of benefits beyond that: first, under conventional drafting of financing agreements, a breach of a representation and warranty or undertaking results in an event of default, giving the financier certain enforcement rights and remedies. In some circumstances, this in itself could undermine the financial viability of the trustee and/or the trust enterprise itself and so is a serious matter for the trustee, its directors and the beneficiaries; secondly, they provide an inbuilt incentive for the reasonably diligent trustee to ensure that all is in order, at the outset and on an ongoing basis, so that it may give these contractual assurances safely and without incurring an unindemnified personal liability; and thirdly, a breach of a representation may ground a claim for misleading or deceptive conduct under relevant statutes,39 both against the trustee personally40 and its directors.41

Legal opinions and commercial trusts 5.58 In the Australian market, financers and other counterparties contracting with the trustee of a commercial trust will sometimes require their legal counsel to conduct the necessary due diligence and provide comfort by way of a formal legal opinion.42 In financing transactions,

receipt by the financier of the required legal opinion will be a condition precedent to funding at financial close and so [page 246] they are sometimes described as ‘closing opinions’. Opinions address a range of matters which go to (among other things) the legal status of a counterparty and authorisation, execution and enforceability of transaction documents. While it would be putting it too highly to say that they are standardised across the market, subject to what is said below in relation to trusts and trustees it is fair to say that, at least as among the larger Australian law firms, there is a high degree of similarity in their content, if not always in the ways in which it is expressed.43 5.59 Apart from descriptive, definitional and scoping matters, opinions usually comprise three main components: 1. opinions: this part contains the expressions of opinion themselves, which will usually be set out as a list of separate paragraphs addressing a number of specific matters; 2. assumptions: this part contains a range of assumptions that establish the assumed factual matrix upon which the opinions are based. They will be matters in respect of which it is not possible, feasible or appropriate for legal counsel to opine because they are factual rather than legal and/or cannot effectively be verified through reasonable due diligence; and 3. qualifications: this part will describe relevant matters of law which qualify the opinions expressed. In essence they alert the addressee of the opinion to rules, doctrines and principles of law that can operate to render one or more of the expressed opinions incorrect in some circumstances. A good (and typical) example is ‘enforceability may be affected by general law doctrines or statutory relief, particularly in relation to matters such as fraud, misrepresentation, mistake, duress, unconscionable conduct, frustration, estoppel, waiver, lapse of time, penalties, public policy or illegality’.

5.60 When it comes to trusts and trustees, the matter of closing opinions can be complex, and different firms take different approaches. In any case, there are actually very few matters on which an external lawyer can comfortably opine (that is, in addition to those relating to the trustee as a company), even after conducting the due diligence enquiries contemplated by the Checklist in Part 1 of Appendix 5: ‘Protecting creditors and other counterparties’. This is because much depends on factors that are not readily ascertainable by arm’s length enquiry, particularly where they relate to or are affected by trustee or beneficiary conduct. Nevertheless, in one sense the exercise of asking for and receiving an opinion is just as much about the addressee seeking comfort that due diligence [page 247] has been properly conducted and that no material issues have emerged, since no diligent lawyer would issue one without having made thorough enquiries. The assumptions and qualifications also serve the useful purpose of alerting the addressee to matters in respect of which an opinion is not possible so that comfort for those matters may be sought from the trustee (and perhaps the beneficiaries, or even the trustee’s directors) via direct contractual assurances and obligations. Suggested sample opinions, assumptions and qualifications are set out in Part 3 of Appendix 5: ‘Protecting creditors and other counterparties’. 5.61 As final practice points for practitioners, note that a closing opinion is different to a ‘sign-off’ on the due diligence Checklist, which is less formal and might simply be a factual report on the results of the enquiries. Further, it is important to bear in mind the difference between opinions, in the sense used in this discussion, and advice. A formal opinion is, by its very nature, limited and highly qualified. It is not a substitute for the more detailed advice that a client might need in relation to the risks inherent in dealing with the trustee of a commercial trust (including the risks addressed in the Checklist in Appendix 5). It would be unfortunate indeed if the first time the client is made aware of the issues raised by the assumptions and qualifications in a closing opinion was when they were presented with it.44

The quality of protection these steps provide: a summary 5.62 In summary, the combination of due diligence enquires (assuming ‘clean’ responses) and contractual protections (and, if obtained, a legal opinion) is designed to satisfy the intending counterparty that there is no, and will be no, breach of trust in connection with the proposed transaction and that if, despite that, there is or will be a breach then (using language applicable to the Barnes v Addy doctrine): the counterparty will have no actual knowledge of it; the counterparty will not have wilfully shut its eyes to the obvious; the counterparty will not have wilfully and recklessly failed to make such inquiries as an honest and reasonable person would make; and the counterparty will have no knowledge of circumstances which would indicate relevant facts to an honest and reasonable person. This would then form the basis of a defence against a Barnes v Addy style claim for accessory liability. [page 248] 5.63 However the Barnes v Addy issue is not only alive at the time the transaction is initiated. It continues in relation to each and every dealing the counterparty has with the trustee after that. Even if it has satisfied itself at the outset that it may safely deal because the trustee is acting within power and otherwise properly in accordance with the terms of the trust, the counterparty remains at risk in relation to any later related breaches, and so a degree of ongoing vigilance is required. An example might be an instruction or direction given by a trustee to the financier in relation to moneys in an account. Even if the act in question was within the trustee’s power, if it were exercised for a non-trust purpose or otherwise improperly (say, by unauthorised payment to itself or for another non-trust purpose), and the financier had the requisite knowledge or culpable indifference, then adverse consequences could follow, despite the presence of

contractual assurances in the transaction documents. Another example is presented by the Blackacre Trust hypothetical itself. If the defaulting Trustee in that scenario had applied trust funds to repay the loan to an anxious Bank of Australia without ‘clearing the accounts’, such that the taking of trust funds was itself a breach of trust, and Bank of Australia was aware of this or indifferent to it in the relevant sense, Bank of Australia may have been forced to disgorge the payment (and possibly pay other equitable compensation).45 Given the mathematics of the Blackacre Trust hypothetical, in effect the Trustee would have had to pay the entire $200,000 out of its own pocket. If the Trust had its accounts with the Bank and the money to repay the loan was drawn from those accounts, then because the Bank knew of the misappropriation, it is likely that the Bank would have sufficient knowledge that the payment was in breach of trust to attract accessorial liability. 5.64 It follows that a counterparty’s ability to rely on assurances from a trustee that all is in order is qualified. It may do so only if it has no knowledge, in the requisite sense, of any breach of trust in connection with the relevant facts. 5.65 While these practical steps may be described as a contractualised solution, they are time consuming, costly and only partially effective. In law and economics terms (see 2.159 and following), they demonstrate the inherent inefficiencies in trust law as a regime for regulating the trust as an enterprise entity and the legal risks of those who participate in them. In a market environment where competitive tensions and the potential for loss of the transaction require rapid deal execution, intending counterparties will be inclined toward greater risk-taking and less protection. A failure to take protective measures, or to execute them properly, [page 249] may result in a counterparty being exposed to trust breaches that may undermine its claim with respect to trust assets because the consequences of trustee misconduct can be borne by external counterparties rather than the beneficiaries.

‘RELATED BREACHES’: THE AMERICAN SOLUTION 5.66 As noted briefly above, trust law in the United States offers external counterparties more protection (and imposes less responsibility) when dealing with trustees than does Australian law. The issues have been addressed by statutory intervention, via the Uniform Trust Code where that has been adopted. As with other American trust law differences discussed in this book, these provisions of the Code represent a codification of developments over time in the courts rather than a radical departure from them. 5.67 The Uniform Trust Code provides two lines of protection: §1012 and §1013. Section 1012 (‘Protection of person dealing with trustee’), provides as follows: (a) A person other than a beneficiary who in good faith assists a trustee, or who in good faith and for value deals with a trustee, without knowledge that the trustee is exceeding or improperly exercising the trustee’s powers is protected from liability as if the trustee properly exercised the power. (b) A person other than a beneficiary who in good faith deals with a trustee is not required to inquire into the extent of the trustee’s powers or the propriety of their exercise. (c) A person who in good faith delivers assets to a trustee need not ensure their proper application. (d) A person other than a beneficiary who in good faith assists a former trustee, or who in good faith and for value deals with a former trustee, without knowledge that the trusteeship has terminated is protected from liability as if the former trustee were still a trustee.

5.68 The protection offered by §1012 is comprehensive and multi-layered. Not only does it protect a counterparty from the consequences of a breach of trust by the trustee, whether by exceeding its powers or by the improper exercise of them, it relieves the counterparty from any obligation to make enquiry in that regard — so long as the counterparty does not have knowledge of a breach. ‘Knowledge’ is defined in §104(a), as relevant, as follows: [A] person has knowledge of a fact if the person: (1) has actual knowledge of it; (2) has received a notice or notification of it; or (3) from all the facts and circumstances known to the person at the time in question, has reason to know it.

[page 250] 5.69 The result of §1012 is that a counterparty is entitled to assume that the trustee has the necessary power and is exercising it properly, and so need not obtain and examine a copy of the trust instrument; indeed, it actively encourages a counterparty not to make enquiries, lest it compromise its position by acquiring ‘knowledge’ of an impending breach, including facts and circumstances which would give them reason to know of the breach. A counterparty who wishes to go further and require assurance as to authority may request a certificate as to essential trust matters under §1013 (‘Certification of Trust’). This is designed to protect the confidentiality of a trust instrument by discouraging requests from persons other than beneficiaries for complete copies of the instrument in order to verify a trustee’s authority. Section 1013(a) provides that: ‘Instead of furnishing a copy of the trust instrument to a person other than a beneficiary, the trustee may furnish to the person a certification of trust containing [certain essential] information’. By §1013(f): A person who acts in reliance upon a certification of trust without knowledge that the representations contained therein are incorrect is not liable to any person for so acting and may assume without inquiry the existence of the facts contained in the certification. Knowledge of the terms of the trust may not be inferred solely from the fact that a copy of all or part of the trust instrument is held by the person relying upon the certification.

5.70 Further, by §1013(g): A person who in good faith enters into a transaction in reliance upon a certification of trust may enforce the transaction against the trust property as if the representations contained in the certification were correct.

5.71 A person dealing with a statutory business trust enjoys similar benefits. Uniform Statutory Trust Entity Act §504, headed ‘Protection of Person Dealing with Trustee’, is in similar terms to Uniform Trust Code §1012.

‘UNRELATED BREACHES’: CREDITOR PROTECTION BY PRIVATE MEANS

5.72 Unrelated breaches, that is breaches of trust in respect of matters unrelated to the counterparty’s particular engagement with the trustee, can also result in the enterprise assets not supporting the engagement and can leave the counterparty with only a personal claim against the trustee. Even though the issue is primarily one for unsecured creditors, secured creditors should also be concerned because of the detriment that breaches may cause to the trust assets or the creditworthiness of the trustee itself. It is also relevant if it finds itself claiming as an unsecured creditor either because its security has failed or the secured asset is of insufficient value to discharge the secured debt. [page 251] 5.73 The unrelated breach problem facing creditors is a direct result of the fiduciary overlay, since the clear accounts rule engaged by such breaches goes to the equities as between the beneficiaries and their trustee. Despite the undoubted logic of this as between trustee and beneficiaries the rule yields adverse consequences for innocent external counterparties, as the Blackacre Trust hypothetical demonstrates. 5.74 While, as discussed above, an intending creditor may take a series of steps to protect itself against related breaches, unrelated breaches can be the source of a different type of anxiety among a trustee’s creditors. Each creditor (particularly if unsecured) is concerned that the trustee may in the future commit, or may in the past have committed, breaches that are unrelated to its engagement with the creditor but which may arouse the operation of the clear accounts rule. Even after taking steps of the type described above, there will always be an uncovered risk that the trustee’s indemnity may be impaired due to unrelated breaches. There are limits to what any given creditor can do, practically speaking, to prevent this or protect itself against its consequences, short of taking security (which, as discussed above, is not always available). Contractualised protections of the type discussed above provide only a limited degree of protection against unrelated breaches and, in any case, if unsecured will provide little recourse of worth in insolvency (for example, if Bank of Australia in the Blackacre Trust hypothetical held valid security over Blackacre it could

have recovered its loan by enforcing that security directly — it would not need to enforce via subrogation to the Trustee’s (impaired) indemnity). 5.75 In the result, creditors who engage with a commercial trustee on an unsecured basis are, whether consciously or otherwise, placing a high degree of trust in the integrity and competence of its directors and management. It may be argued, not unreasonably, this is no different from the trust that unsecured creditors place in the directors and senior management of a corporation when dealing with it on unsecured terms. Yet the consequences if that trust proves to be misplaced differ materially as between companies and commercial trusts, as the Blackacre Limited counterfactual discussed in 5.39 shows. 5.76 It would be preferable if the problem could be dealt with at its source. As discussed in Chapter 4, clauses in trust instruments which purport to exempt trustees from liability for breaches of trust have been held to be valid, so long as they do not trespass into the ‘irreducible core’ of trustee responsibility. While at one level, removing the unrelated breach problem has the potential to erode the equity of the beneficiaries, it may equally be argued that it is in their interests to ameliorate the problem to the extent possible, to encourage external parties to [page 252] engage with the trustee in carrying on its activities and achieving the legitimate business objectives of the trust. Promoters who recognise the issue may seek to overcome it by including in the constitution of a commercial trust a provision along the lines of that shown in Part 4 of Appendix 5: ‘Protecting creditors and other counterparties’. Alternatively, an intending creditor such as a financier with sufficient bargaining leverage may demand that the trust instrument be amended to include a clause like this before they will transact with the trustee. 5.77 The effectiveness of such clauses is yet to be tested before the courts but the core argument in favour of efficacy would be that the beneficiaries, by agreeing to the inclusion of such a clause in the trust instrument (or

acquiring their interest in the trust subject to it) and allowing the trustee to engage with creditors and other third parties on the basis of it, waive or are precluded from asserting the clear accounts rule to the detriment of a third party claimant if and when that claimant subrogates to the trustee’s indemnity. The clear accounts rule, as with the trustee’s indemnity itself, is a creation of equity and, like the indemnity, ought to be susceptible to some modification by the terms of trust.46 As between beneficiary and creditor this provision would not and could not rest on contract (absent a bilateral engagement between them either directly or via the agency of the trustee), but it could, depending on the facts, support an argument based on estoppel or, alternatively, an argument that the clause in effect circumscribes the nature of the beneficiaries’ interest, which is residual in nature, in the sense contemplated by the High Court of Australia in Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226. For greater certainty, the trustee could be asked to undertake in favour of the creditor that it will enforce that clause against the beneficiaries at the creditor’s request: for an example, see positive undertaking clause 4(b)(iii) in Part 2 of Appendix 5: ‘Protecting creditors and other counterparties’. 5.78 If valid, on subrogation the creditor would step into an indemnity that has been, in a sense, enlarged to displace the clear accounts rule in circumstances applicable to the creditor; the net effect would be to shift the economic consequences of trustee misbehaviour in the nature of an unrelated breach from the creditors to the beneficiaries. The creditors’ contingent interest in the trust assets is unaffected and the beneficiaries rather than the creditors are burdened with the risk of the trustee’s personal creditworthiness, leaving them to resolve the matter bilaterally with the trustee (in respect of which established laws of [page 253] equity in relation to trustee breaches provide them with ample remedies). This is much closer to the outcome that would prevail in relation to a company and director misconduct. 5.79 However, despite the breadth of language it seems clear that this

clause could not operate if the unrelated breach was of the ‘irreducible core’ of the trustee’s duty, that is to act honestly and in good faith for the benefit of the beneficiaries (see 4.32 and following). Therefore, if the unrelated breach is grounded in dishonesty or involves the trustee benefiting itself at the expense of the beneficiaries, this clause would be unlikely to protect the indemnity and even a creditor who is innocent of the relevant conduct and has no notice of it would be affected. Again it is noted that the contractualised solution is imperfect because it fails to protect properly the unsecured creditor. The risk shifting from creditors to equity investors is incomplete.

‘UNRELATED BREACHES’: THE AMERICAN SOLUTION 5.80 The discussion that follows focuses on the unrelated breach problem facing unsecured trust creditors and how it is dealt with in the United States. The analysis is more detailed than that for the related breach issue because it exposes a fascinating example of how the United States courts effected fundamental changes to English trust law principles by taking a more flexible approach to equitable principles and remedies than did the Anglo-Australian courts, to achieve a result that more closely reflects the expectations of creditors and other counterparties dealing with a commercial trust. 5.81 As discussed above, in Australia the unsecured creditor’s only legal right of access to the assets in a trust estate is via subrogation to the trustee’s indemnity (for convenience, from here on described as the ‘subrogation route’). This gives rise to a ‘double equity risk’. Creditors are particularly exposed in relation to unrelated breaches committed by the trustee that engage the clear accounts rule and impair the indemnity. In the result, the financial consequences of trustee misbehaviour can be shifted to the creditors and away from the economic owners of the enterprise, the equity investors. 5.82 The contention argued here is that the current Australian position has arisen as a result of a number of misapprehensions by the courts,

particularly as to the interpretation of the early authorities in relation to the nature of the trustee’s proprietary indemnity and the relationship between the clear accounts rule and subrogation. The Australian courts could eliminate the unsecured creditor’s double equity risk with respect to unrelated breaches and generate a result similar to that which would prevail under the United States ‘direct access’ [page 254] doctrine, but without necessarily adopting entirely the more fluid jurisprudential methodology the American courts applied in the establishment of that doctrine. This could be achieved within the ambit of current Australian jurisprudence by challenging certain critical premises supporting the current Australian position. Two arguments are posited, one which suggests a modification in the way the clear accounts rule applies to the trustee’s indemnity and subrogation, the other which bypasses the clear accounts rule, the indemnity and subrogation. These are not alternatives and would co-exist to deal with different contractual matrices. 5.83 The first premise underpinning the double equity risk with respect to unrelated breaches is that the clear accounts rule should apply with respect to the trustee’s exoneration power in relation to undischarged trust debts. It is argued that this is based on a flawed understanding of the nature of the exoneration limb of the trustee’s proprietary indemnity (in respect of which its application is illogical and inappropriate), and a conflation of it with the reimbursement limb of the indemnity (in respect of which its application is logical and appropriate). If the subrogation route is, in any given case, necessitated by the terms of a contractual liability limitation clause between the trustee and an unsecured trust creditor (that is, the clause expressly or impliedly casts the limitation in terms of the trustee’s indemnity), then the commercial expectations of that creditor should be met by recognising that distinction and acknowledging that the clear accounts rule operates only with respect to the reimbursement limb. Subrogation would then operate free of the clear accounts rule (for

convenience, this argument is described as the ‘modified subrogation theory’). 5.84 The second premise underpinning the double equity risk with respect to unrelated breaches is that the subrogation route is the unsecured creditor’s exclusive route of access to trust assets. It is argued in the preceding chapter and above that this is based on a flawed analysis of the authorities. It is further argued that a trustee who has the power to incur a trust debt or liability has an ancillary power to promise (expressly or implicitly) to apply trust assets in discharge of it, independently of the exoneration power. The commercial expectations of an unsecured trust creditor could be met by acknowledging that, in voluntarily incurring a contract debt (and provided the language of the contract did not mandate the subrogation route), a trustee is implied to have undertaken to exercise in favour of the creditor some other inherent right or power to apply trust assets in the discharge of the debt (for convenience, this argument is described as the ‘independent power to apply theory’). 5.85 As a starting point, it is interesting to investigate the development and essential anatomy of the American doctrine. [page 255]

THE UNITED STATES DOCTRINE OF DIRECT ACCESS TO THE TRUST ESTATE 5.86 As discussed in the previous chapter, in the United States both in equity and (in applicable states) by statute, unless the relevant contract provides otherwise, a trustee is not personally liable on a contract properly entered into in its fiduciary capacity if the trustee discloses that fiduciary capacity in the contract (and, in non-Uniform Trust Code states, expressly states in the contract that it shall not be personally liable). 5.87 An intending creditor who contracts with a trustee on those terms knows that they cannot rely on the trustee’s personal worth and must

make their risk assessment on the basis of the financial circumstances of the trust estate. The law allows them to proceed directly against the trust estate by suing the trustee in its representative capacity without having to subrogate to the trustee’s personal right of indemnity or, therefore, being subject to adverse application of the clear accounts rule. The ability to access trust assets through a suit against the trustee in a representative capacity, something not possible under traditional common law principles,47 has been described as giving the trustee a separate entity-like status, in effect ‘split[ting] the trustee into two distinct legal persons’.48 The distinction has been described thus: The true distinction between an action against a trustee personally and one against him ‘as trustee’ seems to be that the former is an action to charge the person who is trustee while the latter is a suit to reach the trust property and is in no other sense a proceeding against the trustee at all.49

5.88 It is said that the trustee is thus able to ‘bind the trust estate’ in its dealings with third parties. This does not represent a security interest in the trust estate nor is it a right exercisable by creditors against the beneficiaries personally.50 5.89 To support the arguments that follow, it is necessary to examine more closely the nature and evolution of this idea of ‘binding the trust estate’. Clearly, the ‘trust estate’ is not a legal person and so cannot be bound in the sense of an [page 256] obligation. Even after acknowledging that the expression is ‘purely figurative’,51 the enquiry demands precision of analysis, by reference to established touchstones and principles recognisable to an Australian court. 5.90 It is convenient to begin with §1010 of the Uniform Trust Code, which provides (as relevant) as follows: (a) Except as otherwise provided in the contract, a trustee is not personally liable on a contract properly entered into in the trustee’s fiduciary capacity in the course of administering the trust if the trustee in the contract disclosed the fiduciary capacity.

(b) …52 (c) A claim based on a contract entered into by a trustee in the trustee’s fiduciary capacity … may be asserted in a judicial proceeding against the trustee in the trustee’s fiduciary capacity, whether or not the trustee is personally liable for the claim.

5.91 This provision has been said to be based on an assumption that it is ‘awkward and unnecessary to require a third party to sue a trustee personally, and then require that the trustee seek indemnification from the trust’.53 The authors of Scott on Trusts begin their discussion on trustees’ contractual liability at §26.2 by describing a position that is, at least in relation to American commercial trusts in the present day, mostly of historical interest; that discussion implicitly tracks very closely the current position under Australian trust law. After discussing the many ‘substantial problems with the traditional scheme’, the authors describe an evolutionary process which led to a different conception of trustee liability. While there was some statutory impetus (the Uniform Probate Code is given as an example), much of the change came through the courts.54 The authors of Scott on Trusts maintain that §1010 of the Uniform Trust Code is the culmination of this evolutionary process and embodies the principle that ‘third parties who [page 257] contract with the trustee are permitted … to assert their claims directly against the trust estate’, at §26.2. They observe that one of the significant differences between the position codified in §1010 of the Code and the traditional (that is, Australian) formulation is that the risk of dealing with a misbehaving trustee is shifted from the innocent third party to ‘the trust estate’. This shift is said to be appropriate because the trust is the ‘enterprise’ that has generated the contract, even if the trustee has acted improperly in entering into the contract. They state that ‘forcing third parties, who have nothing to do with the trustee’s selection, to bear the consequences of such a poor choice seems manifestly unfair’ at §26.2. Similar observations are made in Bogert on Trusts at §§712, 715 and 716. 5.92 The law and economics ‘enterprise theory’ underpinnings of this analysis are inescapable. The discussion of this theory in the cases and

literature is intriguing in its anthropomorphic reification of the ‘trust estate’, which is entirely consistent with enterprise theory. Both legally and economically it may be seen to be shifting the risk and cost of trustee misconduct to the ‘trust’ (that is, the trustee and/or the beneficiaries, to be allocated between them according to the terms of the trust). 5.93 The Uniform Trust Code is evolutionary rather than revolutionary. The parts of the Code which deal with trustee liability and creditors’ claims do not represent a sudden shift in the fundamentals of American trust law, but are in large part the statutory embodiment of doctrines or theories that had already evolved in American equity jurisprudence and which led to a ‘profoundly different conception of trustee liability’: Scott on Trusts at §26.2. Nor is the Code a complete statement of the position: the Restatement sets out in more detail the various theories which operate to give the unsecured creditor rights of direct access. 5.94 While the end result in the United States today is clear enough, thanks to §1010 of the Code and the provisions of the Restatement described below, the evolutionary path of the doctrine which ultimately resulted in a significant departure from English (and Australian) trust law was gradual and indirect.

The evolution as observed by scholars and commentators 5.95 In the late 19th century Brandeis, later to become an associate justice of the United States Supreme Court, noted that ‘the authorities are in conflict as to whether the creditor is merely subrogated to the rights of the trustee or has an independent, contingent equity against the estate’, but then argued against what he described as the ‘subrogation theory’ in the following terms: [page 258] The adoption of the ‘subrogation’ theory would amount practically to a repudiation of the whole doctrine [that is, of direct access]. Every suit by a creditor would either involve an

examination of the multifarious and voluminous accounts of a trust estate, or, if there had been a judicial settlement of the accounts, the creditor would be bound by a proceeding to which he had actually not been party, because, by the hypothesis, he claims as a privy of the trustee.55

5.96 Proponents of the doctrine were clear on their intended destination — a right of direct access to trust assets by creditors that bypasses the trustee’s indemnity — but they sought to reach it by different routes. The doctrine did not receive general recognition and acceptance as an alternative to the subrogation route until the middle of the 20th century, and even then operated only if the trustee had expressly excluded personal liability in taking on the relevant engagement. Although there had been decisions and scholarly commentary from the mid-19th century indicating the early signs of an evolving doctrine, in the 1920s commentators were still warning of the dangers to stakeholders in commercial trusts under the traditional analysis, and suggesting contractual and structural techniques for dealing with the risks. 5.97 By the 1940s, the transition was well under way. In 1942, one commentator observed: The difference between stating that ‘usually’ or ‘ordinarily’ a trustee incurs personal liability on his contracts and stating that there is a general rule of personal liability may appear to be of little importance in outlining the results reached in past cases; but it is certainly of importance as an approach to new cases, since it is not at all clear that the usual liability of a trustee is to be attributed to a rigid rule of law … from the cases taken as a whole there is much to support the conclusion that the trustee does not become personally bound if, in any manner, it appears from the contract, construed in the light of the attending circumstances, that a personal liability was not intended … the trust estate may be bound and the trustee not.56

5.98 By 1959, the Restatement described the traditional position but also highlighted the direct access doctrine, not as a single settled rule but as several competing ‘theories’ achieving that result. The Reporter’s Notes to §267 identified a: … present tendency … to permit the third person to reach the trust estate [in] situations where the trustee in the administration of the trust has incurred a liability to a third person … to give the third person a direct claim against the

[page 259]

trust estate, permitting him to maintain a proceeding in equity against the trustee in his representative capacity to compel the application of the trust property to the payment of his claim.

5.99 By 1988, the authors of the fourth edition of Scott on Trusts observed that ‘the courts have come to recognise the justice of permitting a third person to whom the trustee has incurred a liability in the administration of the trust to obtain satisfaction of his claim out of the trust estate’ and that ‘it does not seem that the risk of loss resulting from the trustee’s breach of trust should be thrown upon the creditor’.57 5.100 The authors of the current edition of Scott on Trusts (2006) observe that there is no longer any reason why a suit in equity may not be maintained to satisfy the creditor directly out of the trust property without having to rely on the trustee’s indemnity, though the authors acknowledge at §26.5 that ‘there is not entire agreement … as to the circumstances, or the theories, that justify such a result’.

The journey through the courts 5.101 The initial pressure on the courts was the dilemma between, on the one hand, allowing parties the freedom to release the trustee from personal liability, which was seen as necessary to encourage arm’s length trustees to accept office and, on the other, protecting external parties against sham transactions and those designed to shield business assets from legitimate claims, and giving creditors appropriate avenues of recourse.58 Having accepted that a person acting as trustee is free, by contract, to exclude personal liability to a creditor entirely (see the discussion in the previous chapter), as a necessary corollary the American courts were required to deal with the consequences of that for the trust creditor and access to the trust assets. After all, under the traditional subrogation route, without personal liability the trustee has no claim for indemnity against the trust assets, and therefore there is nothing in respect of which the creditor may subrogate; this was the ‘repugnancy’ doctrine emanating from the decision in Watling v Lewis [1911] 1 Ch 414, discussed in Chapter 4. Creditors acting in good faith, giving credit at the request of the trustee on the strength and solvency of the trust estate, for the benefit of that estate, ought not be left without a remedy. A path to the trust assets needed to be

found to support the creditor where the trustee had excluded all personal liability, and that path needed to [page 260] give priority over the claims of beneficiaries and be free of ‘defects’ like the clear accounts rule. In an early example from the middle of the 19th century, the Supreme Court of Georgia acknowledged the inherent injustice (for creditors) of the subrogation route but without attacking its legal underpinnings; the court simply refused to follow it on the grounds of policy and necessity.59 5.102 In the 1804 English Chancery decision Re Garland it was held that creditors dealing with an executor have ‘something very like a lien upon the estate’, giving them direct access to the assets in the estate in addition to a personal claim against the executor.60 There appears to be no support for this notion of a ‘creditor’s lien’ in Australian (or, indeed, post-Garland English) authority and, as discussed above, the courts have been at pains, where the question has arisen, to emphasise that the unsecured trust creditor has no direct interest of any kind, let alone of a proprietary nature, in the trust assets unless and until subrogation is awarded. The American courts, on the other hand, followed Re Garland and the ‘creditor’s lien’ theory. In several 19th century and early 20th century cases involving deceased estates where the executor had been given authority to continue carrying on a business of the deceased, it was held that a trust creditor who is otherwise unsecured has the right to look to the trust estate in the first instance for the payment of its debt, without having to exhaust its remedies against the executor personally.61 In 1915, Scott said that a provision in a contract that excluded personal liability of the trustee ‘creates a charge on the trust estate enforceable in equity by the creditor against the trust estate’.62 5.103 However, this was not the only route by which the desired result was achieved; the American courts took various different approaches as to the nature of the claim, and applied the concept outside the context of testamentary trusts. While the theory is grounded squarely in equity, it

may or may not give the creditor an interest in the trust assets in the nature of a charge or lien or which is otherwise proprietary in nature, depending on which theory is preferred. In addition to a ‘creditor’s lien’, the right has been characterised as [page 261] the trustee exercising an implicit power to charge assets in a creditor’s favour when incurring a debt,63 a transfer to the creditor of the trustee’s lien,64 a right arising by operation of law but not in the nature of a lien or charge,65 and a contractual right enforceable in equity to compel the trustee to apply the trust property to the discharge of liabilities arising under the contract.66 In Hewitt v Phelps 105 US 393 (1881), the United States Supreme Court ruled that, so long as the trust estate has benefited, a contractual counterparty may, by suit in equity, obtain satisfaction of its claim out of the trust estate directly if the remedy at law was inadequate, that is if the trustee was insolvent, not resident in the jurisdiction or otherwise unable to satisfy it personally; this was the case even if the trustee lacked an express power to charge the trust assets. In Manderson’s Appeal 113 Pa 631 (1886) the Supreme Court of Pennsylvania held similarly when it allowed an attorney, who had contracted with the trustee to provide services for the benefit of the estate, to recover his fees directly from the estate when the trustee defrauded the estate and absconded with a large sum of money, events which under the traditional rule would have denied the attorney any recovery via the subrogation route. 5.104 This difference of opinion about the nature of the creditor’s interest, if any, with respect to the trust assets and the overall nature of the equity involved, seems not, however, to have affected the essential efficacy of the remedy in equity. In administering equity under the exigencies of the American experience rather than the English, the United States courts were willing to take a more flexible approach in moulding a remedy more consistent with creditors’ expectations. While Anglo-Australian trust law held that the unsecured creditor’s only route of access to trust assets was via subrogation, the United States courts acknowledged the subrogation route, but saw it as constituting:

… merely one satisfactory ground upon which the creditor might prevail in particular circumstances, [and not] … a general conclusion that in no other circumstances could equity grant relief … the nearly universal propensity to formulate broad rules of law for guidance in future cases has resulted in an arbitrary limitation upon the application of ordinary equitable principles, for instances will arise in which the justice of requiring a trust estate to pay for benefits received will

[page 262] be unaffected by the state of the accounts existing as to other matters between the trustee and the estate.67 (emphasis added)

5.105 Certainly, neither the Restatement nor the authors of Scott on Trusts seek to resolve the matter one way or the other, and instead refer generically to the creditor’s right to commence a proceeding in equity to reach trust property and apply it to the satisfaction of their claim; the Restatement is silent on whether the claim is or implies an equitable charge or lien over, or any other proprietary right in, the trust estate in favour of the creditor.

Current United States position, according to the Restatement 5.106 Section 1010 of the Uniform Trust Code is not a complete or exhaustive statement of the current position (§106 expressly preserves the operation of the common law of trusts and principles of equity except as modified by the Code). It stands beside and is augmented by the general law as recorded in the Restatement, which contains a summary of the competing theories that give creditors the ability to reach trust assets (including the traditional subrogation route), but without attempting to describe any one of them as definitive or more correct than any other. Of most interest for present purposes are §§263, 267, 268, 271 and 271A of the Restatement. Below each section in the Restatement appear ‘Reporter’s Notes’ by way of explanatory commentary. It is useful to set out relevant parts of these sections and associated notes because they describe the state of the law, and demonstrate clearly the differences from the Australian position.

5.107 The starting point of the analysis is §263(1), which acknowledges a trustee’s right to exclude personal liability when contracting in its trustee capacity: The trustee is not subject to personal liability upon a contract made by him in the course of the administration of the trust, if by the contract it is provided that he shall not be personally liable.

5.108 Section 263 is supported by §267, which deals with a contractual counterparty’s right to reach the trust estate. This right is available in a range of circumstances, reflecting the different theories within the doctrine: A person to whom the trustee has incurred a liability in the course of the administration of the trust can by a proceeding in equity reach trust property and apply it to the satisfaction of his claim under the circumstances stated in §§268–271A.

[page 263] 5.109 The Reporter’s Notes describe five classes of situation, stated in §268 to §271A, in which the contractual counterparty may reach trust assets and apply them to satisfaction of their claim. Of the five, those of particular interest for present purposes are the ones described in §268, §271 and §271A. 5.110 Section 268 describes something that is very similar to the current Australian position, and may be considered to be the prima facie position under US law, that is the situation where a trustee has not expressly excluded personal liability. It provides as follows: If a person to whom the trustee has become personally liable in the course of the administration of the trust cannot obtain satisfaction of his claim out of the trustee’s individual property, he can by a proceeding in equity reach trust property and apply it to the satisfaction of his claim to the extent to which the trustee is entitled to exoneration out of the trust estate.

5.111 The second provision of those mentioned in §267 that is of interest is §271, and this becomes the focus of discussion below. It describes a position that is not available under Australian law. It deals with a situation where it is clear, as a matter of contractual interpretation, that a trustee has either excluded personal liability under the contract as contemplated

by §263 or that the counterparty has agreed to look only to the trust assets to discharge its claim and not to the trustee personally: If the trustee makes a contract with a third person and the contract provides that the trustee shall not be personally liable upon the contract but that the third person shall look only to the trust estate, the third person can by a proceeding in equity reach trust property and apply it to the satisfaction of his claim upon the contract, provided that the contract was properly made by the trustee in the administration of the trust.

5.112 The Reporter’s Notes to §267 explain that the remedy described in this section is available even though the trustee is not entitled to exoneration out of the trust estate because it is in default to the trust estate as a result of a breach of trust committed by him, and the creditor is thereby precluded from reaching the trust estate under the traditional subrogation route, as described in §268. 5.113 Section 271A is the last referenced item in §267. It is headed ‘Other Situations Where It Is Equitable to Permit Satisfaction Out of the Trust Estate’ and reflects a broad safety net concept which may be available if a claimant cannot bring their case within the more specific claims described in §§268–271. It describes a wide-ranging discretion in equity to permit direct access: [page 264] A person to whom the trustee has incurred a liability in the course of the administration of the trust may be permitted to obtain satisfaction of his claim out of the trust estate if it is equitable to permit him to do so, although his claim does not fall within the rules stated in §§268–271.

Could these principles be adopted in Australia? 5.114 Clearly, the position of unsecured trust creditors in Australia could be improved by legislation along the lines of §1010 of the Uniform Trust Code and relevant parts of the Restatement. However, legislation is not always possible or feasible. It is argued that in the absence of legislation, the Australian courts could achieve a similar result. The American notion

of direct access is not completely unknown in Australia,68 but it has not been adopted or applied. 5.115 As the above demonstrates, there is no single doctrine of direct access as such. American equity evolved pragmatically in slightly different ways to meet what it regarded as the reasonable expectations of creditors where traditional doctrine would have left them without recourse. The American authorities and scholarly commentary appear to be in agreement that a trustee can and should be permitted to exclude all personal liability, and that an unsecured trust creditor can and should be able to access directly the trust estate despite this, free of the clear accounts rule. However, that twin objective is reached via different routes, as described in the Restatement. While some of the less doctrinally rigorous of those routes would almost certainly not be acceptable under the current state of Australian trust law (for example, the theory enunciated in §271A of the Restatement is likely to imply too broad and too discretionary a jurisdiction in equity)69 it is submitted that the High Court of Australia could consider adopting the substance of the less radical theories in a case where the facts, and terms of the relevant documentation, could admit of it. The court might find the essence [page 265] of the theory stated in §271 (read with §263) of the Restatement to be of merit and not such a departure from current Australian trust and equity principles as to comprise a ‘violent new advance or retreat or revolution or rupture’.70 This theme is developed further in the discussion that follows.

A direct access theory for Australia: severing the nexus with the clear accounts rule 5.116 A critical objective in meeting the commercial expectations of creditors is eliminating the double equity risk with respect to unrelated breaches by severing the nexus between their claims and the clear accounts rule.71 It is difficult to conceive of a reason in policy or principle, whether

purely legal or based on law and economics theory, to preserve the application of the clear accounts rule in a manner which works to the detriment of innocent third parties dealing in good faith and at arm’s length with the trustee of a commercial trust. 5.117 It is argued that the nexus may be severed in one of two ways: 1. the ‘modified subrogation theory’ posits that the clear accounts rule does not, and as a matter of principle should not, apply in derogation of the exoneration power in the trustee’s indemnity, and that it is, and as a matter of principle should be, limited in its application to the reimbursement right; 2. the ‘independent power to apply theory’ posits that the unsecured creditors’ ability to access trust assets on enforcement is not limited to the subrogation route but includes enforcement of an implied power of the trustee to apply trust assets in discharge of trust debts, which power is different and separate from the trustee’s exoneration power and in respect of which the clear accounts rule can have no application. 5.118 As is evident from this summary, these arguments are not alternatives; rather, they co-exist to deal with two different situations. The subrogation route would continue to operate in situations where the documentation between the parties expressly or by necessary implication relies upon subrogation (as some trustee liability limitation clauses in the Australian market do) by framing the trustee’s liability limitation in terms of the amount it is able to extract out of the trust fund by exercising its indemnity; the clear language of [page 266] a contract could not be ignored. But it is argued that subrogation should not be the only route available to unsecured trust creditors seeking discharge of their claim out of trust assets. The ‘independent power to apply theory’ should operate where either:

the parties have not agreed a contractual liability limitation at all; or it appears, on application of the usual rules of contractual construction, that (adopting the language of §271 of the Restatement) ‘the contract provides that the trustee shall not be personally liable upon the contract but that the [creditor] shall look only to the trust estate … to [satisfy] his claim upon the contract’, in which case the court should interpret the limitation in accordance with the independent power to apply theory rather than as an agreement that the creditor’s recourse is limited to the extent of the trustee’s indemnity. 5.119 While discussion of the applicable rules of contractual construction is beyond scope, the question will always be one of contractual intention and construction of the relevant contract, including but not limited to the limitation clause. Because the actual intention of the parties is irrelevant,72 then even if the parties had in mind avoiding the ‘repugnancy’ problem arising out of Watling v Lewis when drafting a limitation clause so that it preserves the personal liability, that in itself is not a bar to a court finding that the clause generates a US-style result, if the language so admits. The precise language used in the clause and the rest of the contract in which it appears (and the trust instrument, if relevant) will be critical. A clause that is very specific about the trustee’s indemnity and/or the creditor’s subrogation to it may be more difficult to interpret as meaning something else, while a more general clause may admit of this ‘special’ treatment. 5.120 As discussed in the previous chapter, this is why the model limitation clause in Part 4 of Appendix 4: ‘Protecting the trustee’ does not cast the limitation in terms of the indemnity.

The reimbursement limb distinguished from the exoneration limb 5.121 As is apparent thus far, a critical consideration in this debate is the distinction between the two limbs of the trustee’s proprietary indemnity, that is the reimbursement limb and the exoneration limb. They are fundamentally different rights and it is argued that the conflation of them

has led to confusion and a doctrinally erroneous application of the clear accounts rule. [page 267] 5.122 A simple example will assist the discussion. Assume that the trust fund of the Blackbox Cash Management Trust for the time being comprises mostly cash held in a bank account in the name of the trustee, Blackbox Management Ltd. For whatever reason, and despite not being obliged to do so, the trustee pays a trust debt (for example, taxes or audit expenses) out of its personal account. At that point, the trustee has a priority claim over the trust assets to secure its right to recoup the payment. That claim is sourced in the reimbursement limb, and it serves to replace personal money expended by the trustee. Subject to the terms of the trust, Blackbox Management Ltd could reimburse itself by drawing a cheque on the trust account payable to itself personally (or, more likely in modern times, simply direct a transfer of funds out of the trust account into its personal account). The money so recouped would cease to have its character as part of the trust estate once received by Blackbox Management Ltd personally.73 Its claim on the trust assets is, therefore, a personal asset.74 As a personal claim, it is logical that, if engaged by any relevant circumstances, the clear accounts rule should operate against it, since the rule goes to the equities as between trustee and beneficiary.75 5.123 However, where the claim is in relation to a trust debt yet to be satisfied, there is no need of a right of reimbursement because there is nothing to reimburse. On receipt of the relevant invoice, Blackbox Management Ltd’s claim is under the exoneration limb. Not wishing to use its own money to pay the invoiced expenses, Blackbox Management Ltd could discharge them by drawing a cheque on the trust account payable to the creditor directly. Until that money is received by the creditor in discharge of the debts, it remains trust money, and is never beneficially the property of Blackbox Management Ltd; ownership of it does not pass first to it en route to the creditor. Even if Blackbox Management Ltd, for whatever reason, drew a cheque on the trust account as payable to itself first and banked it in its personal account pending payment to the

creditors, it would retain its character as trust property in its bank account.76 Thus, in relation to the exoneration power, Blackbox Management Ltd is little more than a conduit. The exoneration right is no more than a power to apply trust assets in discharge of trust debts, and does not give the trustee an interest in the trust estate for its [page 268] own benefit.77 That power is held to benefit trust creditors.78 After all, if it were otherwise it could result in the application of trust assets to non-trust purposes (for example, payment to the trustee personally or, in insolvency, to non-trust creditors of the trustee), something which, absent express provision in the terms of trust or informed consent of the beneficiaries, would be a breach of trust.79

The true nature of the exoneration limb: a power to apply assets for the benefit of creditors 5.124 Thus, the right given the trustee by the exoneration limb may correctly be described, and indeed has been described, as ‘a power to apply trust assets’.80 This description was used as far back as 1802, when Lord Eldon LC said ‘if [the trustee] has not discharged [the trust liability], he is entitled to apply the trust property in discharging it, that is he is entitled to exoneration’: Worrall v Harford (1802) 32 ER 250. It has also been described as ‘a right not to be compelled to discharge [a trust] a liability out of [the trustee’s] own private property … it is not a right to receive money; it is a right to be saved harmless, to be exonerated by having his liability to the creditor discharged’.81 In essence, it is not so much a right as a fiduciary power to be exercised, as with all such powers, in the interests of the beneficiaries and not the trustee.82 In an article supporting the American direct access doctrine, Stone argued that the power of the trustee to appropriate trust property in payment of obligations properly incurred but not yet paid exists independently of the state of its accounts as trustee, that is independently of the clear accounts rule. That power exists, he said, for the benefit of the creditors and not of the trustee.83

5.125 The nature of the trustee’s interest pending exoneration can be further tested by reference to what happens in the insolvent winding up of the trustee. It is axiomatic that, in the insolvency of a corporate trustee, assets held on trust [page 269] are not assets of the company and so cannot be applied to meet liabilities to the general (non-trust) creditors of the company. The question of what happens to the trustee’s exoneration power in the case of insolvency of a corporate trustee has been a matter of some controversy in Australia; it is argued that the resolution of that controversy supports the contention that the clear accounts rule ought to have no application to the trustee’s exoneration power. 5.126 In Octavo Investments v Knight (1979) 144 CLR 360 the High Court of Australia held that the trustee’s interest in the trust fund with respect to its indemnity is proprietary.84 Not long after that decision, the Full Court of the Supreme Court of Victoria in Re Enhill Pty Ltd [1983] 1 VR 561 referred to it, considered that a trustee company’s right of indemnity forms part of the assets of the company in its winding up and is property under the control of the liquidator, and concluded, first, that trust assets recovered pursuant to that right of indemnity (including, by implication, the exoneration limb) were divisible among the company’s creditors generally and not merely among the trust creditors, and secondly, that trust creditors rank with the general creditors of the bankrupt trustee. 5.127 Two years before Enhill, but after Octavo Investments, the New South Wales Supreme Court in Re Byrne Australia Pty Ltd (No 2) [1981] 2 NSWLR 364 acknowledged that the indemnity is a proprietary right of the trustee which is controlled by the liquidator, but held that it only entitled the liquidator to resort to trust property for the purpose of discharging trust liabilities, not personal liabilities of the insolvent company. In Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99 the court held to similar effect, saying that to hold otherwise would result in the application of trust assets to non-trust purposes. This result is entirely

consistent with the English Court of Appeal’s conclusions in Re Richardson; Ex parte Governors of St Thomas Hospital [1911] 2 KB 705. The Enhill decision, and its analysis in this regard, are clearly flawed and have been heavily criticised as such.85 They are the result of a failure to respect the [page 270] distinction between the reimbursement limb and the exoneration limb, and a conflation of them into a general ‘right of indemnity’.

Severing the nexus: the ‘modified subrogation theory’ 5.128 The example of the Blackbox Cash Management Trust given above demonstrates that, in relation to an exercise of the exoneration power, the trustee acts merely as a conduit — it never acquires beneficial ownership of the funds passing through to the creditor. If the above analysis is correct, then the exoneration power is not for the personal benefit of the trustee at all. Apart from the anomalous decision in Enhill, the authorities are quite clear on this. 5.129 It is argued that the fact that the clear accounts rule has been permitted to operate at all in relation to the exoneration power is the result of a failure to respect the distinction between the reimbursement limb and the exoneration limb. The clear accounts rule has undoubted application in relation to the reimbursement limb, since the rule operates, in effect, as a self-executing claim by the beneficiaries against the trustee personally. On the other hand, the rule is both legally and economically nonsensical in relation to the exoneration limb because the power is not a personal right intended to benefit the trustee (other than in the general sense of shielding it against having to first use its own funds in discharging trust debts). To the extent that, as discussed in the previous chapter, the rule in Cherry v Boultbee underpins the clear accounts rule, the logic of it fails with respect to the exoneration power due to the asymmetry of the respective claims: the claim of the beneficiaries in respect of the trustee’s misconduct is

against the trustee personally, while the claim of the trustee against the estate is not to benefit itself but for the benefit of another or others. A similar point operates with respect to the rule applicable to subrogation generally, that is that the person against whom subrogation is claimed (in this case, the beneficiaries) may raise against the subrogator (the trust creditor) any defences otherwise available against the subrogated (the trustee). Because subrogation must, by definition, relate to a claim under the exoneration limb (if the reimbursement limb is engaged then the debt has been discharged) the result is that the ‘defence’ of unrelated breach is exercised against persons who are not the wrongdoers. 5.130 In Octavo Investments, having held that the trustee’s interest in the trust fund is proprietary, the High Court of Australia went on to say that ‘the [page 271] trustee’s interest in that property will pass to the trustee in bankruptcy for the benefit of the creditors’. It is submitted that, to the extent that this refers to the exoneration limb of the indemnity, the court intended it to mean trust creditors. To similar effect, in Re Suco Gold, King CJ said: ‘The existence of the right of subrogation must mean that the trust property, to the extent of the trustee’s right of indemnity, in respect of the unpaid trust liabilities, must be applied in payment of the trust creditors’ (emphasis added). In Re Richardson the English Court of Appeal said that ‘an indemnity like this can be used by the trustee only for the purpose of bringing about payment to the … creditor of the claims against which he is indemnified’. More recently, Barrett JA in Agusta Pty Ltd v Provident Capital Ltd (2001) 19 ACLC 1006; [2012] NSWCA 26 said that the trustee’s ‘preferred beneficial interest in the trust assets [that is, the exoneration power] enures for the benefit of the unpaid creditors’ (at [70]) and ‘the trustee will be compelled to deal with the preferred beneficial interest for the benefit of the unpaid creditors’ (at [74]). 5.131 The conclusion is that the exoneration limb is, in fact, a power held by the trustee to apply trust assets for, and solely for, the benefit of

creditors (even though not in the fiduciary or trust sense), in that it may be exercised for the purpose of discharging trust debts but for no other purpose, including to benefit the trustee personally. It is clear enough that when the High Court in Octavo Investments spoke of the right being held for ‘the benefit of the creditors’, it did not intend that expression to have its formal fiduciary or trust meaning; there is no authority for the proposition that the trustee holds the right on trust for the creditors. It is not, and cannot be used, for paying trust money to the trustee beneficially (or, it must follow, its general or personal creditors in insolvency). This conclusion must apply a fortiori where a trustee has been excused from personal liability on the debts so incurred so that the scope of its right of indemnity is entirely occupied by the exoneration limb. 5.132 There may appear, superficially at least, to be a tension here. On the one hand, Octavo Investments, Re Suco Gold, Re Richardson and other authorities maintain that the right or power is held for the benefit of the creditors. On the other, as described by Ford and others, it is a fiduciary power to be exercised in the interests of the beneficiaries. These propositions appear to be mutually inconsistent and indeed would be if ‘in the interests of the beneficiaries’ means an implied instruction from the beneficiaries to the trustee ‘do not pay the creditors so that we may enjoy a windfall’. The answer is explained by the authors of Ford & Lee on Trusts who maintain as follows on this point: The reason for the trustee being under a fiduciary duty to the beneficiaries in the use of the amount appropriated [via an exercise of the exoneration power] is that the beneficiaries have an interest in the trust-related liability being discharged.

[page 272] Their interest lies in the trust estate being free of any expense that might arise from a creditor making any claim (whether or not well founded) for payment of the liability out of the trust assets, the creditor claiming to be subrogated to a right of exoneration of the trustee after the trustee has become bankrupt, or being a corporation, has gone into liquidation.86

5.133 This being so, there is a compelling argument that: the clear accounts rule should not operate, and should never have

operated, in respect of the exoneration power; and trustee misconduct which is unrelated to a given unsecured debt should not affect the claim of the relevant trust creditor subrogating to and thus relying on that power for their claim against the trust estate. The nexus between creditors’ claims and the clear accounts rule would thus be severed and the double equity risk eliminated with respect to unrelated breaches.

Severing the nexus: the ‘independent power to apply theory’ 5.134 The analysis in respect of the ‘independent power to apply theory’ is more straightforward. Under current Australian law, the trustee’s implicit promise to trust creditors may be framed as follows: I promise to pay you when due the agreed sum. Equity will allow me to indemnify myself out of the trust assets for it. If I do not pay you the sum when due, equity may assist you by allowing you to subrogate to and exercise that indemnity, but only if and to the extent that it has not been impaired by my conduct as trustee (even if that conduct was unrelated to you or your debt).

5.135 Under the independent power to apply theory, the trustee’s implicit promise would be framed as follows: I promise to pay you when due the agreed sum by taking money out of the trust fund and giving it to you at the relevant time. If I do not do that then equity may assist you in enforcing that promise, regardless of any misconduct on my part as trustee (unless you knew of or participated in it in the Barnes v Addy sense).87

5.136 The net economic effect is identical, but the legal effect is fundamentally different; in the second promise, the clear accounts rule has no scope of operation vis-à-vis the creditor. The creditor’s action is not one of subrogation but rather one of enforcement in equity of a direct promise to perform an act. The suit, being [page 273]

in equity, would be subject to all the usual equitable discretions and defences, but insofar as the order sought required proof that an order for damages would be inadequate to meet the justice of the case, that could be established readily enough if the trustee was insolvent.88 5.137 The independent power to apply theory in the context of a contractual limitation or exclusion of trustee liability is not necessarily radical. It is clearly supported by the pre-Watling v Lewis authorities discussed in the previous chapter: see 4.161 and following. In Muir’s case, Lord Cairns said at 355 that it was possible to craft a limitation that relieved the trustee of ‘any obligation except an obligation to pay out of [trust] assets’. In Williams v Hathaway, Sir George Jessel MR said of the limitation in that case that ‘it simply binds the fund, and makes the covenantors liable to apply the fund’, they being the persons who for the time being ‘have the charge of the fund, and have power to direct the destination of it’, at 551. Later, in Re Robinson the conclusion of the court was assisted by the fact that the powers given to the trustees in the settlement instrument included a power ‘for the said trustees or trustee to apply any part of the trust fund … for the purpose of paying off or compounding any debts secured or unsecured incurred by the settlor’, at 718. In none of these authorities is it expressed or implied that a creditor’s only route of access to trust assets is via subrogation to the trustee’s indemnity. 5.138 As to the source of such a power in the absence of an express provision in the trust instrument, there appears to be no authority directly on point but the decisions discussed above in relation to trustee liability exclusions support a compelling argument that such a power is implicit in the trustee’s armoury: if a trustee has the power to incur a liability of the relevant type in the first place, and to limit or exclude its personal liability in doing so (see 4.90), then it must, as a necessary corollary, have the power to apply (and to agree contractually with a counterparty to apply) trust assets in discharge; the beneficiaries can hardly be held to have authorised the trustee, in effect, to defraud creditors by permitting it to exclude personal liability but denying it the power to apply trust assets to satisfy them. In 1997, the UK Trust Law Committee expressed the view

that if on the face of a trust instrument a trustee is authorised to enter into a particular contract with a given counterparty, then the trustee: … may well be implicitly authorised to agree with [the counterparty] for the independent direct liability of the trust fund [and because the counterparty’s] claim is not derived through [the trustee] it is to be expected that [the counterparty] will

[page 274] still have a direct right of recourse even if [the trustee] exercised its fiduciary power improperly, so long as [the counterparty] was not aware of this’.89

Scott claimed that ‘to give the creditor a right against the estate it is necessary only that the trustee acted properly in incurring the debt’.90 5.139 Because a power so configured is independent of the exoneration power, the clear accounts rule can have no scope of operation at all. The nexus between the creditors’ claims and the clear accounts rule is thus severed and the double equity risk eliminated with respect to unrelated breaches, although in a manner different from how that result is achieved under the modified subrogation theory.

Suing the trustee in its representative capacity 5.140 Unlike the United States, with some statutory exceptions, it is not possible to sue a person in a representative capacity under Australian law.91 However, neither the ‘modified subrogation theory’ nor the ‘independent power to apply theory’ is premised on an ability to sue the trustee in a representative capacity. That ability is only rendered necessary if the trustee’s release from personal liability is absolute. There is no need for it where the trustee retains an express or implied residual and conditional obligation to exercise a power to apply assets to pay debts, even if nothing more. This is clearly the case under both theories. Importantly, unlike subrogation, neither theory would be conditional on the trustee being insolvent or a reasonable assumption that obtaining a judgment against it would be pointless as is currently required as a condition to the ability to subrogate.

[page 275]

CONCLUSION 5.141 This chapter has shown that creditors of a commercial trustee are in a vulnerable position under Australian trust law. That law does not accommodate their commercial expectations if they are that their position is similar to that of a creditor of a corresponding enterprise conducted under a corporate form. Trust creditors are exposed to legal risks that unsecured creditors of a company are not. This is the result of a number of jurisprudential peculiarities in the Australian law of trusts that hark back to the origins of the trust. While these risks have received a reasonable degree of attention in the Australian courts and literature, this chapter has sought to identify anatomical elements of them that have not been the subject of detailed treatment, to analyse them critically by reference to their sources in trust law and to propose novel arguments and theories by which creditor risks could be ameliorated or shifted back to ‘the trust’, that is the trustee and/or equity investors. In particular, this chapter has exposed the ‘double equity risk’ facing unsecured trust creditors, by which a creditor may suffer a loss due to misconduct of the trustee of which the creditor is both ignorant and innocent and which may result in an inversion of priorities vis-à-vis equity investors when compared to the priority order or ranking applicable to companies. 5.142 It has also been shown that creditors of commercial trustees in the United States enjoy a much less risky position than their Australian counterparts as a result of protections extended to them at law for which there are no counterparts in Australian law. These protections evolved over the course of many years through the courts taking a more flexible approach to equity and, in this respect, American trust law more closely aligns the position of trust creditors with their counterparts in companies. These protections reflect elements of law and economics enterprise theory in that they acknowledge that, economically, the trust creditor is indeed a creditor of ‘the trust’ or ‘the trust estate’. 5.143 Finally, consistent with the practitioner focus of this book, this

chapter suggests practical solutions for dealing with the issues, including detailed due diligence checklists and contractual provisions. 1.

David A Steele and Andrew G Spence, ‘Enforcement Against the Assets of a Business Trust by an Unsecured Creditor’ (1999) 31 Canadian Business Law Journal 72 at 81.

2.

See, for example, Re Interwest Hotels Pty Ltd (in liq) (1993) 12 ACSR 78; and TFML Ltd v MacarthurCook Fund Management Ltd [2013] NSWCA 291.

3.

See Re Stacks Managed Investments Ltd (2005) 219 ALR 532; [2005] NSWSC 753 at [44].

4.

It is a matter of fact that many larger trading trusts and registered MIS routinely incur substantial trade debts and financial accommodation on an unsecured basis.

5.

See, for example, Trustee Act 1925 (NSW) ss 13, 27C and 39 and Conveyancing Act 1919 (NSW) s 66B. There are approximate equivalents in other states and territories. Indefeasibility under Torrens title legislation provides some (but not complete) protection.

6.

See generally Ford & Lee on Trusts at [22.10320]–[22.10340]. Note also that the question of who, within a large institution like a bank, must have that knowledge before it is imputed to the institution is problematic and is not discussed further here.

7.

See Correa v Whittingham [2013] NSWCA 263 at [158]–[163]. There is statutory accessory liability for persons involved in a breach of the directors’ statutory obligations of good faith, best interests and proper purpose in Corporations Act s 181 (see s 181(2)), but the meaning of ‘involvement’ in s 79 contains embedded high-threshold knowledge requirements. For registered MIS see also s 601FC(5) regarding accessory liability for persons involved in a contravention by a responsible entity of the fiduciary-like statutory duties in s 601FC(1), and ss 601FD(4) and 601FE(3) in respect of involvement in a contravention by officers and employees of their statutory duties.

8.

Barnes v Addy (1874) LR 9 Ch App 244 at 251–2; 43 LJ Ch 512 at 514. The rule does not represent the entire universe of circumstances in which a counterparty’s participation in another’s breach of fiduciary duty or breach of trust will bring adverse consequences upon it in equity: Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22 at [161]. Nor is it interpreted or applied uniformly across the common law world: Grimaldi v Chameleon Mining NL (No 2) (2012) 287 ALR 22; [2012] FCAFC 6 at [2] and see Pauline Ridge, ‘Participatory Liability for Breach of Trust or Fiduciary Duty’ in Jamie Glister and Pauline Ridge (eds), Fault Lines in Equity (2012) at 119. The discussion here is introductory and by way of positioning the broader themes of this chapter and so it does not engage with the various controversies.

9.

These are based on the so-called ‘Baden rules’, after Baden v Société Générale [1993] 1 WLR 509 at 575–6, 582. A fifth category described in that case, knowledge of circumstances which would have put an honest and reasonable person on inquiry (that is, constructive notice in the sense applicable to the bona fide purchaser rule), is not part of the law in Australia with respect to the Barnes v Addy principle: Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22 at [178] and Grimaldi v Chameleon Mining NL (No 2) (2012) 287 ALR 22; [2012] FCAFC 6 at [268].

10. Grimaldi v Chameleon Mining NL (No 2) (2012) 287 ALR 22; [2012] FCAFC 6 at [249]. See also Zhu v Treasurer of the State of New South Wales [2004] HCA 56 at [121].

11. See the Bell Group litigation at first instance, Bell Group (in liq) v Westpac Banking Corp (No 9) (2008) 225 FLR 1, and on appeal, Westpac Banking Corporation v The Bell Group Ltd (in liq) (No 3) (2012) 89 ACSR 1; [2012] WASCA 157; and Grimaldi v Chameleon Mining NL (No 2) (2012) 287 ALR 22; [2012] FCAFC 6. The relationship between statutory accessorial liability under the Corporations Act and accessorial liability in equity is discussed in William M C Gummow, ‘The Equitable Duties of Company Directors’ (2013) 87 Australian Law Journal 753 and Thomas F Bathurst and Sienna Merope, ‘It Tolls for Thee: Accessorial liability after Bell v Westpac’ (2013) 87 Australian Law Journal 831. There is a corresponding debate in relation to the specific fiduciary-like statutory duties imposed on responsible entities and their officers and employees by Corporations Act ss 601FC, 601FD and 601FE. 12. There is an interesting argument, made by Diccon Loxton in a paper presented to a workshop of the Academic Committee of the Banking & Financial Services Law Association on 21 February 2014 (which is to be published mid 2014), that once a company’s counterparty is within the shelter of the ss 128–129 regime that protects them also from Barnes v Addy accessory liability despite this overhang. It requires reading the reference to ‘duties to the company’ in s 129(4) to include both the statutory and equitable duties and the reference to ‘proceedings’ in s 128(1) to include proceedings by the company claiming equitable relief under the Barnes v Addy doctrine. The argument is fortified by the not unreasonable premise that parliament may have intended the protective regime for outsiders in the Corporations Act to cover the field. As an argument it certainly has its attractions although there is no direct authority to date. 13. Westpac Banking Corporation v The Bell Group Ltd (in liq) (No 3) (2012) 89 ACSR 1; [2012] WASCA 157. 14. See, for example, the sentiments to this effect expressed by Sir George Jessel MR in Re Johnson; Sherman v Robinson (1880) 15 Ch D 548. 15. Subject to the prior claims of any secured creditors with respect to secured assets and certain preferential unsecured creditors. Sources which discuss this process are too numerous to list, but for a useful summary see Ford on Company Law, Part VII: ‘External Administration’. 16. RWG Management Ltd v Commissioner for Corporate Affairs [1985] VR 385 at 401; Agusta Pty Ltd v Provident Capital Ltd (2001) 19 ACLC 1006; [2012] NSWCA 26. The discussion in this chapter is limited to the creditor’s ability to subrogate to the trustee’s in rem indemnity with respect to trust assets and not to any in personam indemnity it may have against the beneficiaries, which is discussed in Chapter 3. 17. See Ford & Lee on Trusts at [14.60.30]. 18. See the discussion in Savage v The Union Bank of Australia Ltd (1906) 3 CLR 1170 at 1186– 8 (per Griffith CJ) and Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319 at 327–8 (per Latham CJ). 19. Ronald Sackville, ‘The Trustee’s Right of Indemnity and the Creditor’s Right of Subrogation: The Hardening of Equity’ (2013) 7 Journal of Equity 34. 20. Yuri Grbich and others, Winding up Trusts (CCH Australia Ltd, 1984) at 188. 21. See the discussion in Meagher, Gummow & Lehane at [9-005]–[9-020]. In terms of jurisprudence, the English courts have said subrogation is founded in principles of unjust enrichment (Boscawen v Bajwa [1996] 1 WLR 328; Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221), as have the American courts, but the Australian position differs. The High Court of Australia has rejected the use of unjust enrichment as anything

more than a conceptual tool — it is not a ‘unifying legal concept’ — and has affirmed that subrogation rests on equitable principles and unconscionability: see Bofinger v Kingsway Group Ltd (2009) 239 CLR 269 at 299–302 (per Gummow, Hayne, Heydon, Kiefel and Bell JJ). Hence, the equity is explained in terms of the obligations in conscience of the trustee: Mitchell v Crane [2009] NSWSC 489 at [28]. For further discussion, see Gareth Tilley, ‘Restitution and the Law of Subrogation in England and Australia’ (2005) 79 Australian Law Journal 518; and Mark Leeming, ‘Subrogation, Equity and Unjust Enrichment’ in Jamie Glister and Pauline Ridge (eds), Fault Lines in Equity (2012) at 27. 22. Lerinda Pty Ltd v Laertes Investment Pty Ltd [2010] 2 Qd R 312; [2009] QSC 251 at [8]. 23. McLean v Burns Philp Trustee Co Pty Ltd (1985) 2 NSWLR 623. 24. Bridgewater v Leahy (1998) 194 CLR 457 at 494. The offending conduct must be sufficiently proximate to the claim: see Kation Pty Ltd v Lamru Pty Ltd (2009) 257 ALR 336; [2009] NSWCA 145. 25. Langman v Handover (1929) 43 CLR 334 at 353–4 (per Dixon and Rich JJ); Bofinger v Kingsway Group Ltd (2009) 239 CLR 269 at [67]. 26. Aluma-Lite Products Pty Ltd v Simpson [1999] FCA 1105; cf Williams’ statement that ‘the trust creditor is, by virtue of the right to be subrogated to the trustee’s right of indemnity, in effect a secured creditor of the trustee. He has priority over the beneficiaries to the same extent as the trustee’: Darryl R Williams, ‘Winding Up Trading Trusts: Rights of Creditors and Beneficiaries’ (1983) 57 Australian Law Journal 273. This statement can only be correct in the most general and non-technical sense. As confirmed later by the High Court of Australia, the trustee’s priority rights with respect to the trust assets is not in the nature of an encumbrance: Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226. 27. Savage v The Union Bank of Australia Ltd (1906) 3 CLR 1170 at 1187–8 (per Griffith CJ); Lerinda Pty Ltd v Laertes Investment Pty Ltd [2010] 2 Qd R 312; [2009] QSC 251 at [8]. 28. Deancrest Nominees Pty Ltd v Nixon (2007) 25 ACLC 1681 at [49]. See also Zen Ridgeway Pty Ltd v Adams [2009] 2 Qd R 298; [2009] QSC 117 and Cochrane v Cochrane (1985) 3 NSWLR 403 at 405. 29. The existence and content of any limitation of liability provisions agreed by the creditor in favour of the trustee would need to be taken into consideration also; these are discussed in the previous chapter. 30. General Credits Ltd v Tawilla Pty Ltd [1984] 1 Qd R 388; Westpac Banking Corporation v Garrett [2004] SASC 265. See too Bruce H McPherson, ‘The Insolvent Trading Trust’ in Finn (ed), Essays in Equity (1985) at 150. An exception may be made where they are the only trust creditor: Agusta Pty Ltd v Provident Capital Ltd (2001) 19 ACLC 1006; [2012] NSWCA 26. 31. See Peter Agardy, ‘Aspects of Trading Trusts’ (2006) 14 Insolvency Law Journal 7; Jacobs on Trusts at [2102]. 32. Lerinda Pty Ltd v Laertes Investment Pty Ltd [2010] 2 Qd R 312; [2009] QSC 251; Nolan v Collie & Merlaw Nominees Pty Ltd (in liq) (2003) 7 VR 287; [2003] VSCA 39. 33. The Bank may have claims against the Trustee’s directors under s 197 and a number of other provisions of the Corporations Act. 34. Bank of Australia may have a claim based on ancient authority giving a creditor rights to trust property if it has benefited the estate, but that remedy is discretionary and poorly developed: see Ford & Lee on Trusts at [14.6070]. The remedy is more established in the United States:

see §269 of the Restatement, discussed below. 35. Harlan F Stone, ‘A Theory of Liability of Trust Estates for the Contracts and Torts of the Trustee’ (1922) 22 Columbia Law Review 527 at 528–9. 36. A summary of investors’ and creditors’ concerns with the decision is set out in Chapter 2 of the Explanatory Memorandum which accompanied the amending legislation and Corporations and Markets Advisory Committee, ‘Shareholder Claims Against Insolvent Companies: Implications of the Sons of Gwalia Decision’ (December 2008). 37. The proprietary indemnity may in one sense be described as a right exercisable as against the beneficiaries, but it is limited always in recourse to the trust assets. 38. The expressions ‘ownership’ and ‘owned’ are used in a non-technical sense. The precise nature of a beneficiary’s interest in the trust res, particularly in the case of a unit trust, very much depends on the terms of the trust instrument: see 3.2. 39. Australian Securities and Investments Commission Act 1989 (Cth) s 12DA and Corporations Act s 1041H in relation to the provision of financial products and services; generally, see s 18 of the Australian Consumer Law comprised in Competition and Consumer Act 2010 (Cth) Sch 2, Fair Trading Act 1987 (NSW) s 42 and corresponding legislation in other states. A breach of contract may ground an action under the misleading or deceptive conduct statute: Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31. The giving of a contractual warranty can be ‘conduct’ for the purposes of the misleading or deceptive conduct statute: Accounting Systems 2000 (Developments) Pty Ltd v CCH Australia Ltd (1993) 42 FCR 470. 40. Misleading or deceptive conduct damages are not excluded per se from the benefit of the trustee’s indemnity: Gatsios Holdings Pty Ltd v Nick Kritharas Holdings Pty Ltd (in liq) (2002) ATPR 41-864; [2002] NSWCA 29. 41. See the discussion in Keller v LED Technologies Pty Ltd (2010) 268 ALR 613; [2010] FCAFC 55. 42. Occasionally, financiers may instead require the opinion to be provided to them by counsel to the trustee. These are sometimes described as ‘across the table’ opinions, an expression that evokes physical settlements where the obligor’s counsel would literally hand their opinion ‘across the table’ to the other side. Given how qualified they invariably are, across the table opinions should never be regarded by a counterparty as a substitute for conducting its own due diligence. 43. There is an ongoing project to encourage standardisation and uniformity of opinions in the Australian market, under the auspices of the Banking & Financial Services Law Association: see the Association’s website www.bfsla.org. 44. It should go without saying that there is no place for advice in an across the table opinion, since by definition it is not addressed to the issuing counsel’s client. The issue can arise almost unconsciously if an opinion is negotiated through an iterative process. 45. A claim of this nature was made in Re Blundell (1888) 40 Ch D 370 but failed because the payee did not have the requisite knowledge of breach. 46. Note that this argument is not affected by the objections made in some quarters to attempts to completely exclude the trustee’s proprietary indemnity, discussed in 4.57; those objections are substantially based on the detriment to creditors. This suggested modification has the opposite effect. 47. J A Pty Ltd v Jonco Holdings Pty Ltd (2000) 33 ACSR 691; [2000] NSWSC 147 at [50];

General Credits Ltd v Tawilla Pty Ltd [1984] 1 Qd R 388. 48. Jesse Dukeminier, Robert H Sitkoff and James Lindgren, Wills, Trusts and Estates (8th ed, Aspen Publishers, 2009) at 550. 49. W W Allen, ‘Comment Note — Contract of Trustee as Basis of Suit to Reach the Trust Estate or to Charge the Trustee Personally or as Trustee’ (1942) 139 American Law Reports 134 at 143. 50. There is no suggestion in the theory that the beneficiaries are personally liable on the trustee’s contracts (that is, consistent with the prima facie position explored in Chapter 3, the trustee does not usually contract as their agent): Taylor v Davis 110 US 330 (1884). See also Scott on Trusts at §27.1. 51. Rubin Tepper, ‘Liability of the Trust Estate Arising Out of Trustee’s Contracts with Third Persons’ (1950–1951) 2 Hastings Law Journal 53 at 63. 52. Paragraph (b) speaks of tort and environmental liabilities. The focus of the discussion in this book is on contract liabilities and so there is no further discussion of this aspect of §1010. 53. David M English, ‘The Uniform Trust Code (2000): Significant Provisions and Policy Issues’ (2002) 67 Missouri Law Review 143 at fn 262. 54. See Louis D Brandeis, ‘Liability of Trust-Estates on Contracts Made for Their Benefit’ (1881) 15 American Law Review 449; Harlan F Stone, ‘A Theory of Liability of Trust Estates for the Contracts and Torts of the Trustee’ (1922) 22 Columbia Law Review 527 at 542–3; Carl H Fulda and Walter Pond, ‘Tort Liability of Trust Estates’ (1941) 41 Columbia Law Review 1332 at 1353; Jerome J Curtis, ‘The Transmogrification of the American Trust’ (1996) Real Property Probate & Trust Journal 251 at 286; Timothy L Bertschy, ‘Personal Liability of an Executor or Trustee — Time For a Change’ (2010) 98 Illinois Bar Journal 140 at 144. 55. Louis D Brandeis, ‘Liability of Trust-Estates on Contracts Made for Their Benefit’ (1881) 15 American Law Review 449 at 457. 56. W W Allen, ‘Comment Note — Contract of Trustee as Basis of Suit to Reach the Trust Estate or to Charge The Trustee Personally or as Trustee’ (1942) 139 American Law Reports 134 at 141–2. 57. Austin W Scott and William F Fratcher, The Law of Trusts (4th ed, Aspen Publishers, 1988) at §271A. 58. Jerome J Curtis, ‘The Transmogrification of the American Trust’ (1996) Real Property Probate & Trust Journal 251 at 14. 59. Wylly v Collins & Co 9 Ga 223 (1851) at 232; affirmed in Robinson v Lindsey 184 Ga 684 (1937). 60. Re Garland (1804) 32 ER 786 at 790–1. In a later English case, it was held that the action against the estate could only be maintained if available actions against the executor or trustee were exhausted or would prove fruitless: Owen v Delamere (1872) LR 15 Eq 134. This gloss was rejected by the Supreme Judicial Court of Massachusetts in Mason v Pomeroy 151 Mass 164 (1890). 61. Ferry v Laible 27 NJ Eq 146 (1876) (Court of Chancery New Jersey); Lucht v Behrens 28 Ohio St 231 (1876) (Supreme Court of Ohio); Woddrop v Weed 32 WNC 189 (1893) (Supreme Court of Pennsylvania); Re Allam’s Estate (1901) 199 Pa 573 (Supreme Court of Pennsylvania); Moore v McFall 263 Ill 596 (1914) (Supreme Court of Illinois).

Austin W Scott, ‘Liabilities Incurred in the Administration of Trusts’ (1915) 28 Harvard Law 62. Review 725 at 739. 63. Jessup v Smith 223 NY 203 (1908) at 207. See also Austin W Scott, ‘Liabilities Incurred in the Administration of Trusts’ (1915) 28 Harvard Law Review 725 at 739. 64. New v Nicoll 73 NY 127 (1878) at 131. 65. See Louis D Brandeis, ‘Liability of Trust-Estates on Contracts Made for Their Benefit’ (1881) 15 American Law Review 449 at 452. 66. Described in the cases cited in Harlan F Stone, ‘A Theory of Liability of Trust Estates for the Contracts and Torts of the Trustee’ (1922) 22 Columbia Law Review 527. 67. W W Allen, ‘Comment Note — Contract of Trustee as Basis of Suit to Reach the Trust Estate or to Charge the Trustee Personally or as Trustee’ (1942) 139 American Law Reports 134 at 145. 68. It is mentioned, for example, in ASIC v Letten (No 17) (2011) 286 ALR 346; [2011] FCA 1420 at [22]; RWG Management Ltd v Commissioner for Corporate Affairs [1985] VR 385; Helvetic Investment Corp Pty Ltd v Knight (1984) 9 ACLR 773; James D Merralls, ‘Unsecured Borrowings by Trustees of Trading Trusts’ (1993) 10 Australian Bar Review 248; and Harold A J Ford, ‘Trading Trusts and Creditors’ Rights’ (1981) 13 Melbourne University Law Review 1. Although the idea of an Australian direct access doctrine was picked up in the CAMAC Report, that report contained no detailed analysis of the concept or how it might be adopted into Australian law (other than by legislation). 69. The High Court of Australia is wary of using equity as a panacea to cut through the clear terms of a contract, or to fill in transactional gaps, solely on the basis of a nebulous notion of ‘fairness’, as exemplified by its stated position on unconscionability and unjust enrichment: see Romanos v Pentagold Investments Pty Ltd (2003) 217 CLR 367 at 375 (per Gleeson CJ, McHugh, Gummow, Hayne and Heydon JJ) and Bofinger v Kingsway Group Ltd (2009) 239 CLR 269. See also Justice Gummow’s extracurial comments in the concluding chapter of Simone Degeling and James Edelman (eds), Equity in Commercial Law (2005) and in ‘Equity: too successful?’ (2003) 77 Australian Law Journal 30 at 31. 70. John Dyson Heydon, ‘Judicial Activism and the Death of the Rule Of Law’ (2003) 23 Australian Bar Review 110 at 116. 71. Another crucial issue is, of course, priority over the claims of beneficiaries. As the claim, whether under a ‘modified subrogation theory’ or an ‘independent power to apply theory’, seeks to enforce a right or power exercised by the trustee in the performance of its trust, it must follow that it should have that status, as under the present law: see the analysis in Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226. 72. Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; Byrnes v Kendle (2011) 243 CLR 253; [2011] HCA 26; Western Export Services Inc v Jireh International Pty Ltd (2011) 282 ALR 604; [2011] HCA 45. 73. Ford & Lee on Trusts at [14.110]. 74. Federal Commissioner of Taxation v Bruton Holdings Pty Ltd (in liq) (2008) 173 FCR 472; Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99. 75. Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360. 76. Re Matheson; Ex parte Worrell v Matheson (1994) 49 FCR 454; Re French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361; [2003] NSWSC 1008. Of course, any such act

might also constitute a breach of trust, unless authorised. 77. Harold A J Ford, ‘Trading Trusts and Creditors’ Rights’ (1981) 13 Melbourne University Law Review 1 at 4; Ford & Lee on Trusts at [14.110]. 78. Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360; Re Richardson; Ex parte Governors of St Thomas Hospital [1911] 2 KB 705. 79. Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99. 80. Harold A J Ford, ‘Trading Trusts and Creditors’ Rights’ (1981) 13 Melbourne University Law Review 1 at 4; Harlan F Stone, ‘A Theory of Liability of Trust Estates for the Contracts and Torts of the Trustee’ (1922) 22 Columbia Law Review 527 at 533–4. 81. Austin W Scott, ‘Liabilities Incurred in the Administration of Trusts’ (1915) 28 Harvard Law Review 725 at 730, 734 (emphasis added). 82. Harold A J Ford, ‘Trading Trusts and Creditors’ Rights’ (1981) 13 Melbourne University Law Review 1 at 14. See also James D Merralls, ‘Unsecured Borrowings by Trustees of Trading Trusts’ (1993) 10 Australian Bar Review 248 at 253; Ford & Lee on Trusts at [14.030]. 83. Harlan F Stone, ‘A Theory of Liability of Trust Estates for the Contracts and Torts of the Trustee’ (1922) 22 Columbia Law Review 527. 84. This proposition was later supported in Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226. 85. The decision was described extracurially by the former Chief Justice Sir Anthony Mason, as ‘distinctly fragile’ (Sir Anthony Mason, ‘Themes and Prospects’ in Paul D Finn (ed), Essays in Equity (Law Book Co, 1985)) and by others as ‘obviously wrong’: Jacobs on Trusts at [2114]. Justice Barrett of the New South Wales Supreme Court has observed (also extracurially) that ‘the preponderance of opinion backs Suco Gold’: Reginald I Barrett, ‘Insolvency of Registered Managed Investment Schemes’ (Paper presented at the Banking & Financial Services Law Association Annual Conference, Queenstown NZ, July 2008) at 13. See also Brian Horrigan, ‘Trust Asset Wars — The Liquidator Strikes Back’ (1988) 15 University of Queensland Law Journal 69. In C B Darvall & Darvall (a firm) v Moloney (No 2) [2007] QSC 337, Muir J mentions several authorities that suggested that Enhill was wrong. See also Lerinda Pty Ltd v Laertes Investment Pty Ltd [2010] 2 Qd R 312; [2009] QSC 251 at [13]–[14]. The debate is discussed in Federal Commissioner of Taxation v Bruton Holdings Pty Ltd (in liq) (2008) 173 FCR 472 at [47]–[58]. Both the CAMAC Report and the CAMAC Discussion Paper (2014), both at [2.2.3], describe the Re Enhill decision as one of two ‘lines of trust law authority’ on this issue. With respect, this accords the decision too high a status. 86. Ford & Lee on Trusts at [14.110]. 87. Where the trustee has not bargained for a liability limitation, under the current state of the law both formulations would necessarily include a promise that if the trust assets are not sufficiently valuable or liquid at the time the debt is due the trustee would pay the difference out of its personal assets. 88. Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107; but cf Anders Utkilens Rederi A/S v O/Y Lovisa Stevedoring Co A/B ‘The Golfstraum’ [1985] 2 All ER 669. 89. Trust Law Committee, ‘Rights of Creditors Against Trustees and Trust Funds — Consultation Paper’ (Tolley Publishing Co, 1997) at [3.12]. Of course, an express power in the instrument of trust would assist greatly, since there would be no need to rely on its implication.

90. Austin W Scott, ‘Liabilities Incurred in the Administration of Trusts’ (1915) 28 Harvard Law Review 725 at 739–40. 91. Helvetic Investment Corp Pty Ltd v Knight (1984) 9 ACLR 773; J A Pty Ltd v Jonco Holdings Pty Ltd (2000) 33 ACSR 691; [2000] NSWSC 147; General Credits Ltd v Tawilla Pty Ltd [1984] 1 Qd R 388. In some specific circumstances, representative capacity is conferred by statute: see Cheques Act 1986 (Cth) s 33; Bills of Exchange Act 1909 (Cth) s 36(5); and Income Tax Assessment Act 1936 (Cth) s 254. The issue is somewhat confused in the case of a responsible entity of a scheme by the reference in the Corporations Act s 601ND(1)(b) to orders obtained by a creditor against ‘the responsible entity in its capacity as the scheme’s responsible entity’. If this expression has any meaning it must be that given by the New South Wales Supreme Court in TFML Ltd v MacarthurCook Fund Management Ltd [2013] NSWCA 291 at [74].

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CHAPTER 6 The Commercial Trust in Insolvency SYNOPSIS This chapter explores the awkward relationship between the commercial trust and Australian insolvency law. Even though they operate as surrogate companies, commercial trusts are essentially invisible to the insolvency regime in the Corporations Act and yet there is no alternative ‘insolvency law’ for them. This chapter exposes the many open questions around insolvent commercial trusts with which the courts are struggling to deal. It provides practical guidance on how commercial trusts may be identified as insolvent and the consequences of that.

INTRODUCTION The differences between trading trusts and registered companies are highly technical and outside the understanding of not only most lay investors but also most professional investment advisers. Only when liquidation in insolvency supervenes will minds be concentrated enough to appreciate the technicalities.1

6.1 This chapter completes the substantive discussion of stakeholder risks by considering the situation when a commercial trust is affected by insolvency. Rather than analysing the position of each class of stakeholder separately, as was undertaken in Chapters 3–5, this chapter considers the structural weaknesses in current laws that render the position of all stakeholders uncertain and prone to unexpected outcomes. It investigates and analyses in particular the critical threshold issues of whether and when a commercial trust, as an economic entity, can be said to be ‘insolvent’, matters that have received relatively little

[page 277] attention, mainly because the cases that have come before the courts have involved trustees that were already insolvent and commercial trusts that had collapsed. The focus is on that which may be regarded as the most serious omission of all: the absence of a sophisticated, policy-based insolvency regime. It concludes with a brief comparative discussion of the way in which United States law extends the benefits and protections of the orderly statutory insolvency regime in the Bankruptcy Code to stakeholders in ‘business trusts’ by aligning them with corporations and treating them as separate entities. 6.2 The relationship between the Australian commercial trust and current insolvency laws is an awkward one. The commercial trust is not a legal entity in its own right, but will have a Corporations Act limited liability company as its trustee — a combination which Ford famously described as a ‘commercial monstrosity’.2 It is clear from the context in which that rather striking description appears that Ford intended it to mean a creature ‘made up of incongruous elements’.3 Much of the content of the preceding three chapters supports the sentiment in that description, but it is in insolvency that the ‘monstrous’ nature of the commercial trust is fully exposed. Because it is not a company, the commercial trust is in effect invisible to the insolvency regime in the Corporations Act despite operating as a surrogate company. Even the regulatory regime for commercial trusts that are MIS, itself contained within the Corporations Act, fails to deal adequately with insolvency. 6.3 Yet there is no established alternative ‘insolvency law’ as such for commercial trusts. Issues of insolvency pertaining to a trust are left to be analysed on a first principles basis, by reference to the financial state of the trustee. This is the point at which the trust’s economic existence as an enterprise entity must yield to its legal nature as a cluster of relationships between the stakeholders and a fund of assets. This statutory vacuum has left modern Australian courts with no choice but to develop a common law of insolvency for commercial trusts in the traditional manner, via the resolution of private disputes between self-interested parties in an

adversarial context, applying an amalgam of trust law, company law and contract law principles. 6.4 This chapter is not an exhaustive conspectus of the ways in which the law deals with (or fails adequately to deal with) commercial trusts affected by insolvency. Many of the issues have been identified and some have been the subject of detailed treatment in official reports, case law and academic [page 278] commentary. The literature is growing rapidly in the aftermath of the global financial crisis. Most recently, some of the key issues have been canvassed by CAMAC in relation to trust-based registered MIS in the CAMAC Discussion Paper (2011), the CAMAC Report and the CAMAC Discussion Paper (2014), and by the New Zealand Law Commission in its ‘Review of the Law of Trusts: A Trusts Act for New Zealand’ (Report 130, 2013). This chapter deals with some issues that have not been traversed in that literature and explores in more detail some that have.

THE HISTORICAL CONTEXT AND BACKGROUND 6.5 As discussed in Chapter 2, a pillar of the underlying hypothesis is that equity’s supervision of trusts and trustees, which manifested in the ‘personal element’ and the ‘proprietary element’, had a constraining effect on trustees’ behaviour in their dealings with trust property and with external counterparties, inclining them to be risk-averse. As a result trusts, as economic entities, were not typically prone to financial distress and so for centuries neither the Chancery courts nor Parliament were challenged to modify the law of trusts to deal with the insolvency of trusts beyond equity’s inherent jurisdiction over the administration of estates. When the commercial trust in the form of the unincorporated joint stock company began to press the issue, the courts proved unable to cope and Parliament’s response was to move to abolish them first, unsuccessfully, by the Bubble Act of 1720 and then, more effectively, by general incorporation legislation in the mid-19th century.

6.6 The contractualisation process that saw the trust evolve into a company-like commercial entity involved, among other things, shielding the trustee from the legal risks imposed by equity by shifting them from the trustee to other stakeholders and this liberated trustees from their traditional constraints. This was not accidental; parties quite deliberately sought to align the role of trustee more closely with that of a board of directors of a trading company. The distinction between these roles was described by the New South Wales Court of Appeal as follows: [W]hile the duty of a trustee is to exercise a degree of restraint and conservatism in investment judgements, the duty of a director may be to display entrepreneurial flair and accept commercial risks to produce a sufficient return on the capital invested.4

6.7 More recently, former High Court justice Gummow put it this way: [T]he primary obligation of directors is to seek profits from speculative activities while that of trustees of a will or settlement is to avoid risks to the trust fund.

[page 279] But, in more recent times, the trust is used extensively in business structures of an entrepreneurial nature.5

6.8 The expression ‘moral hazard’ describes a situation where a person who undertakes an activity that involves taking risks is relieved in whole or in part from adverse financial consequences if those risks materialise because they are borne by someone else. The hazard is that this reallocation of consequences may lead to a tendency of the first person to be less risk-averse and more willing to take those risks. This is an issue of particular concern in the field of insurance, but is not limited to that. In Parsons v Spooner (1846) 67 ER 845, trust beneficiaries agitated what was, in effect, a moral hazard argument when they urged the court to hold that, as a matter of policy, trustees ought not to be permitted to enter into contracts under which their personal liability is excluded, because ‘it deprived, or tended to deprive, the cestuis que trust of the benefit of that security which they would have from the diligence of the trustee himself if he were acting upon his own personal responsibility’. The argument was rejected on the basis that beneficiaries always retained the power to have

trustees’ conduct investigated, reviewed and supervised by the court. More recently, Langbein argued that: Under the liability regime of trust law, the trustee places its … capital at risk in the event that the trustee misperforms its duties. This exposure of the trustee’s capital informs the modern trust deal, effectively insuring the beneficiary against many potential harms … the liability risk creates a further incentive for the trustee to perform the trust deal faithfully.6

6.9 This is undoubtedly true but is subject to a very important qualification. If by contractualisation techniques the content of the trustee’s personal burden is diluted so that the scope for acts or omissions which may constitute ‘misconduct’ under the documentary framework is narrowed, this incentive effect is undermined. 6.10 A more entrepreneurial trustee will have, and indeed be encouraged by investors to have, a different conception of its stewardship of the trust estate, regarding it more as an enterprise entity than as a pool of protected assets, and will engage in activities with those assets that a traditional trustee would not. This includes the pursuit of growth and profits by taking on financing debt to leverage the balance sheet of the entity. This exposes a trust and its stakeholders to a greater risk of financial distress and insolvency. It may be argued that economically this has merely resulted in equity investors and creditors of [page 280] commercial trusts facing the same risk profile as corresponding investors and creditors of trading companies. That may be so in respect of commercial risks but, as has been demonstrated in the preceding chapters, trust stakeholders’ legal risks are not identical to those faced by their counterparts in a company. The framework for allocating legal risks and liabilities under trust law differs from that which governs companies; major components of the latter are entirely missing from the former. 6.11 These risks were realised in England when pre-1844 unincorporated joint stock companies failed, and they were realised again in Australia with the onset of the global financial crisis in 2008 as many large Australian

commercial trusts came under extreme financial stress and collapsed. Chapter 2 described the dramatic growth of the Australian commercial trust in the decades leading up to the GFC. As the scale of the business, trading and investment ventures undertaken by these entities grew, so too did the quantum of the debts they incurred. Trust instruments for commercial trusts empowered the trustee to borrow and otherwise raise debt finance for the purpose of the trust business. Particularly (though not exclusively) in the agricultural, property and infrastructure sectors, commercial trustees borrowed enormous sums in the corporate finance and capital markets to finance expansion, in the process acquiring very substantial financial creditors. As their asset values grew, and perceived high returns attracted inflows of subscriptions from eager investors, so grew the equity base against which the trustee could borrow. Driven, on the one hand, by boom markets and rising asset values as Australia underwent the long boom from the mid-1990s to 2008 and, on the other, by fear of accusations of lazy balance sheet management from investors and market commentators, those who directed and managed large commercial trusts actively took advantage of that borrowing capacity. This fuelled the demand side of the debt financing equation. 6.12 Simultaneously, lending standards and credit criteria were relaxed due to competitive pressures on the supply side, as liquidity flooded the market and the pool of financiers ready to finance such ventures expanded (including by the entry of foreign banks and the emergence and ascendancy of non-bank finance entities such as securitisation vehicles). Financiers became comfortable lending to commercial trustees on an unsecured basis and under borrower-friendly documentation without making particular provision for the fact that they were dealing with trusts, beyond perhaps some basic contractual assurances. In some cases, financings involved the trustee entering into complex structures and products, including derivatives and other instruments that contained a speculative element. Experience shows that some financiers did not fully appreciate the full extent of the additional complexities involved in dealing with trusts when compared to companies, particularly in the context of enforcement and insolvency. [page 281]

6.13 The global financial crisis suddenly brought contracting credit markets, stalling cash flows and diminishing asset values; the viability of these trusts began to suffer under the weight of their debts. Participants found themselves facing the prospect of financial distress, insolvency and, in many cases, complete collapse, but with no comprehensive legal framework to ensure an orderly allocation of risk and losses. The circumstances around some of these collapses are detailed in some of the post-GFC reform reports listed in Appendix 2: ‘Selected reports into the law affecting commercial trusts’. The tide went out and participants were forced to confront the reality that they had, indeed, been swimming naked.7

THE MANY ISSUES ATTENDING COMMERCIAL TRUSTS AFFECTED BY INSOLVENCY 6.14 The absence of a structured statutory regime for dealing with insolvent commercial trusts creates uncertainties and legal lacunae that affect all stakeholders. Some of the issues are quite complex and have begun challenging the creative potential of the courts. By way of brief summary, they include (but are by no means limited to) the following: generally, the extent to which corporate insolvency law principles can and should apply when dealing with commercial trusts, and how trust law interacts or should interact with corporate insolvency law;8 issues that arise when a trustee is in voluntary administration, including specifically whether the affairs of a corporate trustee in voluntary administration should include the affairs of a trust of which it is trustee;9 issues that arise specifically in the winding up of insolvent (or unviable) trusts and trustees;10 [page 282] how and the extent to which laws relating to voidable transactions are

applicable to commercial trusts;11 the rights of unsecured creditors (both trust creditors and general creditors) of a corporate trustee that is or may be insolvent, including legal and practical difficulties faced by unpaid trust creditors in enforcement that are unique to trusts: see generally the discussion in Chapter 5; how trust property is to be distributed among trust creditors, in the absence of a statutorily mandated pari passu rule, where the value of trust assets is insufficient to discharge all trust debts fully;12 the priority as between unsecured trust creditors and trust beneficiaries with respect to trust assets on insolvency: see generally the discussion in Chapter 5; if and the extent to which a corporate trustee’s administrator or liquidator is entitled to be remunerated, and to have its expenses indemnified, out of trust assets;13 the conflicts and other challenges that arise when an administrator or a liquidator is appointed to a corporate trustee and is required to administer trust property, particularly as between his or her duties to general or personal creditors of the corporate trustee, his or her duties as an officer of the trustee as a company and the duties the trustee owes to beneficiaries, as well as his or her own personal interest in protecting their personal liability position and being remunerated out of the trust property;14 [page 283] whether an insolvent corporate trustee should be removed and replaced as trustee and legal and practical impediments in effecting that;15 what happens if a trust instrument has a clause automatically removing the trustee or vacating its office upon insolvency or the appointment of an insolvency official;16 and how these issues are dealt with in situations where the same company

is trustee of multiple trusts or schemes, all of which are affected by financial distress, and the rights of creditors and equity investors if the trustee has failed to segregate the assets and liabilities of a trust from its personal assets and liabilities properly (or, indeed, those of other trusts of which it is trustee).17 6.15 The fact that there is no statutory guidance on these fundamental issues demonstrates that the law which applies when a commercial trust faces insolvency is highly inefficient and in any given case has the potential to frustrate the commercial expectations of stakeholders. In its submission to CAMAC following release of the CAMAC Discussion Paper (2011), the Insolvency Practitioners Association stated that ‘trusts make the insolvency process overly complicated with an outcome not necessarily in line with what would be an expected outcome in the insolvency of a company’.18 To similar effect, the learned authors of Jacobs on Trusts note that ‘conceptually [the trading trust] presents no problem, but it can give rise to practical problems of some magnitude, particularly on insolvency’, at [316]. It is disappointing to observe that many of these very same issues were noted over two decades ago by the Australian Law [page 284] Reform Commission in its ‘General Insolvency Inquiry’ (Report No 45, 1988). The failure of law reform in this area is lamentable.

THE COMMERCIAL TRUST AND INSOLVENCY LAW: AN AWKWARD RELATIONSHIP 6.16 There is abundant case law on the meaning of ‘insolvency’ in relation to companies. However, while a trust or MIS may be described as ‘insolvent’ in certain contexts, it cannot be an insolvent person under the Corporations Act because it is not a person in any relevant sense and so it cannot be subject to (and its stakeholders cannot enjoy the benefit of) the insolvency regime provided under the Act. While it is certainly possible for a corporate trustee, as a company, to be an insolvent person, it is a legal

nonsense to speak of a trust or MIS as being ‘insolvent’ in the sense contemplated by the Act. The analysis for the purposes of the Act must be conducted at the level of the trustee and it is in that process that the financial viability of the trust fund is relevant. At this point, the matter becomes quite complicated, due to the arcane nature of trusts and the resultant complexities when they are used as business vehicles. 6.17 Consistent with the overall investor and creditor protection policy setting of companies law, the insolvency regime which operates when a company incorporated under the Corporations Act becomes insolvent or is near insolvency is detailed, sophisticated, policy-based and highly evolved. The expression ‘insolvency law’ does not describe a doctrinal category, like contract or tort law, but it is a convenient collective label often used to describe the body of law that applies when a company is insolvent or approaches insolvency. Its objective is to ensure orderly dealing with the company and its property, and an allocation of assets and losses among stakeholders which is consistent with policy objectives that are imposed through legislation. The architecture of this body of law is contained mostly in the Corporations Act, but that is not a code; there is significant common law overlay. The history and development of insolvency law has been described elsewhere;19 trusts feature only peripherally. 6.18 Solvency, or its absence, is at the heart of this regime. It is the gateway for the principal insolvency administration regimes available in respect of companies, being voluntary administration in the Corporations Act Pt 5.3A [page 285] and insolvent liquidation or winding up in Pts 5.4 and 5.4B of the Act.20 It engages the laws of voidable transactions in the Corporations Act Pt 5.7B Div 2. It arouses the potential for personal liability of directors for insolvent trading under s 588G of the Act (and thus motivates consideration of whether they should place a company into voluntary administration to shield themselves against that liability).

6.19 By contrast, there is no specific statutory regime for dealing with insolvency in the case of commercial trusts. In relation to MIS, although Ch 5C effected real and substantial change to the regulation of the use of trusts as collective investment vehicles when introduced into the Act in 1998, it has one very obvious deficiency — it does not comprehensively deal with insolvency and the insolvent administration of schemes. Indeed, Ch 5C has been described extracurially by Justice Barrett, then of the New South Wales Supreme Court, as ‘flirting’ with a concept of insolvency of MIS. He went on to say that the provisions ‘do not attempt to deal in any comprehensive way with insolvency’.21 This is, indeed, a most curious omission. Chapter 5C was the final output of a lengthy consultative process, which resulted in recommendations made in the Australian Law Reform Commission and Companies and Securities Advisory Committee, ‘Collective Investments: Other People’s Money’ (Report No 65, 1993) and Financial System Inquiry Committee, ‘Financial System Inquiry: Final Report’ (AGPS, 1997). One suggestion was the inclusion of administration and winding up regimes for insolvent schemes. In a puzzling outcome, these recommendations were not enacted and neither the Second Reading Speech for the Managed Investments Bill 1997 (Cth) which emanated from that report nor the Explanatory Memorandum for that bill explain the reasons for this omission; the result was that Ch 5C was introduced into the Corporations Act with almost no machinery for dealing with insolvent managed investment schemes. 6.20 Thus, while the expressions ‘insolvent trust’ and ‘insolvent managed investment scheme’ are used in commerce, and their use has even been accepted [page 286] in the courts in some contexts (discussed below), these should be understood to be colloquialisms or conveniences of expression rather than legally correct descriptors. An alternative and more neutral terminology has been coined: a trust fund may be ‘financially viable’ or have ceased to be so.22 The meaning of ‘viability’ in this context is discussed below.

6.21 When a company becomes insolvent, the legal options available to stakeholders are clear (if not always simple to apply in complex factual matrices). Unsecured creditors have means available to them to press the company into liquidation and force a break-up of the enterprise in an effort to recoup their debt out of the assets. The directors may place the company into the hands of a voluntary administrator in an effort to salvage the enterprise or, if not, then at least to manage the process in an orderly fashion. There is no such clarity when a trust becomes ‘insolvent’. The interplay between the state of solvency of the trustee as a company and the financial viability of the trust fund as an economic entity creates a degree of complexity that requires careful analysis to divine the rights and obligations of stakeholders. This has an aggravating effect on the already difficult issue, for trust stakeholders, of assessing solvency. The questions of whether a company has become insolvent, the precise point in time at which it became so and who knew or suspected relevant matters at relevant times (or ought to have done so) can be critical to the position of key stakeholders like directors and creditors. 6.22 In 2006, Austin J warned that ‘care must be taken to avoid any unreflective application of company law ideas to enterprises organised as managed investment schemes’, even in the face of the MIS provisions in the Corporations Act, and that ‘the winding up of a trust is quite a different thing from the winding up of a company, in terms of such matters as the rights of “scheme creditors” and investors’.23 Where a corporate trustee is wound up, including in insolvency, there is a point at which company law ends and trust law takes over.24 [page 287] 6.23 The result is that when the shadow of insolvency descends over a trust with a company as trustee, the matter must be dealt with by reference to the trustee, and the question of how its solvency is affected by the financial viability of the trust fund must be considered on a first principles basis. Stakeholders, and those who advise them, are forced to consider an unsettled melange of company law, trust law and contract law. Unfortunately, the courts have not yet been given the opportunity to

explore and clarify these issues comprehensively. Certain of the issues have been considered in the CAMAC Report in relation to registered MIS and some of its recommendations are considered below and in the next chapter.

WHAT IS ‘INSOLVENCY’ WHEN IT COMES TO TRUSTEES? 6.24 To position the analysis concerning whether and when a commercial trust can be said to be insolvent, a brief discussion is required of what is meant by ‘solvency’ and ‘insolvency’ in relation to a company. This is a summary only; the canon is well served in this regard,25 and the concepts are being tested and applied regularly as cases are taken up to the courts in the aftermath of the global financial crisis. Rather than a review of the entire body of law on the meaning of those terms, the focus is on those aspects that are relevant to the issues in this chapter. 6.25 The starting point is that a trustee cannot be solvent or insolvent ‘in its capacity as trustee’ while being solvent ‘in its personal capacity’ (or vice versa). As discussed in 4.21 and 5.40, a ‘trustee’ (or a ‘responsible entity’) is not a distinct legal person having a representative capacity separate from its personal capacity. The law looks at the entire legal person to assess whether it is solvent. The assessment of solvency or otherwise of a company is the same whether it has incurred some or all of its debts in as trustee, or none at all. 6.26 Corporations Act ss 9 and 95A in effect define ‘insolvency’ as the inability of a person to pay all of their debts as and when they become due and payable. The definition implies a cash flow test, as opposed to a balance sheet or assets deficiency test. However, the state of a company’s balance sheet is relevant in the sense that the relationship of assets (particularly income earning and liquid assets) to liabilities (particularly current liabilities) will be a relevant indicator of the company’s ability to generate future income and/or sell assets quickly [page 288]

and/or raise funds through borrowing.26 A company may have an excess of liabilities over assets but still be solvent if it can pay its debts in a timely fashion; conversely it may be ‘asset rich but cash poor’ in that it may have assets of sufficient value to cover the principal value of debts but the fund is comprised mostly of highly illiquid assets (for example commercial or industrial real estate during a severe economic downturn): [I]t is possible that a company might be cash flow insolvent but show a positive balance sheet where assets exceed liabilities. A company may be, at the same time, insolvent and wealthy. It may have wealth locked up in investments that are not easy to realise. Regardless of its wealth (in this sense), unless it has assets available to meet its current liabilities, it is commercially insolvent and therefore liable to be wound up.27

6.27 The courts have said that ‘insolvency is a state of affairs, not an event at a single point of time, and the question of solvency cannot be addressed in a narrow timeframe’.28 In determining the ability of a company to pay debts as and when they become due and payable, the future must be considered.29 Regard should be had to the expected cash flow of the business30 and to anticipated debts.31 Thus analysis is not limited to the resources immediately available to the company, but includes funds that the company could obtain by realising the value of its assets by sale or encumbrance, or by way of loans or subscription of share capital, to meet recurrent and future liabilities as they fall due. However, short-term loans or loans payable on demand will not enhance solvency. 6.28 There is a difference between a ‘surmountable temporary lack of liquidity’ (which is not insolvency) and an ‘insurmountable endemic illiquidity’ or ‘endemic shortage of working capital’ (which is insolvency).32 Thus, just as the availability [page 289] of assets is not conclusive of solvency, lack of liquidity is not conclusive of insolvency.33 From the discussion in the cases, ‘temporary’ illiquidity appears to mean that, even though a company may not be able to pay all of its due debts at a given point in time, there is a reasonable prospect that it will be in a position to pay those debts within a short timeframe by taking steps available to it, such as selling readily realisable assets, raising

further credit on security, more rapid turnover of stock, better collection of outstanding receivables or a capital raising.34 6.29 These issues are of crucial importance to directors. Determining whether a company is insolvent, and when precisely it became so, can be a difficult exercise even in the absence of a trust. Despite (or, perhaps, because of) the quite detailed guidance in the authorities and the literature on the meaning of ‘insolvency’, it is not always easy for directors to assess, in real time, the solvency of a company that is under financial pressure.35 To assist in applying the above in a practical context, ASIC provides a series of guidance notes and ‘information sheets’ on its website for various stakeholders, including directors and creditors.36 This includes the National Insolvent Trading Program Report (REP 213), which is said to be ‘beneficial to directors of companies, company advisers (including accountants and lawyers) and other interested stakeholders to assist them in understanding and complying with their duty under the Corporations Act to prevent insolvent trading’ and Regulatory Guide 217 Duty to prevent insolvent trading: Guide for directors, which contains, among other things, a list of factors to take into account in considering whether a company is insolvent. Somewhat surprisingly, none of this material contains any discussion on the trust-specific issues facing the directors of companies which are trustees or responsible entities, whether with respect to the trustee/responsible entity itself, or the trust or scheme it manages. [page 290]

THE ‘INSOLVENT TRUST’: LEGAL NONSENSE VS COMMERCIAL REALITY 6.30 There is surprisingly little discussion in the authorities of how and when a company that has incurred some or all of its debts in a trustee capacity may be considered to be insolvent. While the collapse of numerous MIS in recent times has generated a growing body of case law, the cases to date have tended to involve responsible entities that were acknowledged as being insolvent, ‘almost certainly insolvent’, ‘hopelessly

insolvent’ or ‘plainly insolvent’.37 The discussion has focused on the financial viability of the fund or scheme for the purposes of assessing whether it should be wound up on just and equitable grounds, pursuant to the Corporations Act s 601ND(1)(a). There is very little consideration, however, of how the viability of a fund or scheme is to be taken into account in assessing the solvency of the responsible entity. 6.31 As mentioned, the concept of ‘insolvency’ as contemplated by the Corporations Act can only be relevant in relation to the trustee as a company. No distinction is made in the statutory definition by reference to the capacity or context in which debts are incurred by a person and so there are no statutory rules or other guidance in the legislation addressing the complexities that arise with respect to a company acting as a trustee. While it is possible for a trustee to become insolvent, the law does not recognise the notion that a trust or MIS, as such, could be insolvent. Unlike a company, a trust cannot, as such, be placed into voluntary administration or liquidation in the sense contemplated in the Act. What legislative and judicial guidance there is to date in relation to commercial trusts is confined to situations involving MIS and that is the focus of the following discussion. 6.32 In contrast to the detailed regime for dealing with insolvency and the winding up of companies under the Corporations Act, Chapter 5C leaves almost all matters to do with insolvency and the winding up of MIS to the discretion of the courts.38 There is no prescriptive regime for ordering priorities and regulating [page 291] the conduct of the process generally; the legislation leaves those matters to the courts, to the extent not dealt with in the scheme constitution. Corporations Act s 601NA contemplates that a scheme’s constitution may provide for the winding up of the scheme in certain circumstances. It does not contemplate circumstances of insolvency. 6.33 The Act neither provides guidance as to when a scheme is to be

regarded as insolvent (or financially unviable), nor does it expressly provide that a scheme that has ceased to be solvent (or viable) may or must be wound up. However, in relation to a registered scheme, s 601ND(1)(a) gives the court the power, on application by the responsible entity, its directors, members of the scheme or ASIC, to direct the responsible entity to wind up the scheme if it ‘thinks it is just and equitable’ to do so. A creditor does not have standing to apply for the winding up of a scheme on the just and equitable ground, but may do so on the basis of an unsatisfied execution or other process against the responsible entity in that capacity: see s 601ND(1)(b) and (3). The power to wind up a scheme on the just and equitable ground is a general power given to the courts to aid them in protecting investors and other stakeholders.39 The body of law relating to the just and equitable ground as applicable to the winding up of companies (in its current emanation, Corporations Act s 461(1)(k)) informs the application of s 601ND(1)(a).40 6.34 Despite reservations expressed extracurially by Justice Barrett in 2008,41 and some uncertainty following a finding in one of the early cases that was unsupported by authority,42 it now appears settled that a winding up order may be given under the just and equitable provision if a scheme is ‘insolvent’.43 In [page 292] this context, however, ‘insolvency’ appears to mean something different from the statutory definition in the Corporations Act, even after allowing for trusts and schemes not being ‘persons’. The courts have not applied a consistent approach or, therefore, developed an alternative definition or formula for trusts and schemes. In Reynolds Wines v Huntley Management Ltd (2004) 50 ACSR 58; [2004] NSWSC 609 at [21] Austin J applied a cash flow test echoing the statutory definition: ‘…it is reasonably clear that the income from those two projects to date has been insufficient to pay expenses of operating the grape growing businesses (including very substantial management fees) and interest on investors’ loans.’ 6.35 To similar effect, in Capelli v Shepard (2010) 29 VR 242; [2010]

VSCA 2, after acknowledging the threshold issue that a trust or scheme is not a legal entity, the court favoured a cash flow test in saying at [93] that: ‘Nevertheless, a scheme may colloquially be characterised as insolvent in the sense that, as in Re Orchard, the liabilities referable to it cannot be satisfied as they fall due from its income or readily realisable assets.’ 6.36 However, in Rubicon Asset Management [2009] NSWSC 1068, the court did not decide whether the test was a cash flow test or assets test, because it did not need to, saying at [22]: ‘…it is clear that each of the schemes is insolvent … in each case the conclusion of insolvency is irresistible; and this is so whether insolvency is assessed on a net asset basis or on a cash flow basis.’ 6.37 In Ex parte PWL Ltd (formerly Palandri Wines Ltd) (admin apptd) (No 2) [2008] WASC 232, in assessing whether any of several schemes was insolvent or unviable for the purposes of the just and equitable ground, the court adopted a ‘first principles’ approach and considered evidence (in the absence of properly kept accounts) from viticultural experts and the administrators of the responsible entity going to various factors including operating expenses, operating losses, future income, capital expenditure requirements to make the scheme commercially viable, the prospects of the scheme being able to trade profitably in the future, and the ability of the responsible entity to fund necessary capital requirements from existing or new members or creditors. This was in contrast to the court’s swift dispatch of the issue with respect to the responsible entity, applying the statutory definition: ‘The plaintiff is unable to pay its debts as and when they fall due for payment and is, therefore, insolvent’ at [86]. 6.38 In Re Environinvest Ltd; Shepard v Downey (2009) 69 ACSR 530; [2009] VSC 33, the court took a broad view and made the following observations at [104]–[105]: Insofar as the scheme is characterised as no more than a trust fund or ‘scheme property’ held on trust for scheme members by the responsible entity, the condition

[page 293]

of insolvency may not easily attach. But in my view the scheme is something more than trust assets or scheme property … By adopting a more generous definition of a scheme, by reference to the scheme documents, relationships, objectives, inputs and outcomes, the concept of insolvency may be applied without much difficulty if the scheme has broken down because the responsible entity has no funds to continue the management and administration of the scheme and no reasonable prospect of getting in those funds. The scheme is, in my view, insolvent; it has failed and it is just and equitable that it should be wound up. (emphasis added)

6.39 Despite the inherent tension with the statutory definition of ‘insolvency’, the courts appear to have taken a pragmatic approach and, in effect, deemed it possible for a scheme, separately from the responsible entity, to be regarded as insolvent, at least for the purposes of the just and equitable ground in s 601ND(1) (a) of the Act. In Capelli v Shepard, the Victorian Court of Appeal supported (at [76]) the conclusion of the judge at first instance that: ‘[T]he insolvency of a managed investment scheme was possible, in a limited sense at least, if a sufficiently broad concept of a scheme and a common sense approach were adopted.’ 6.40 In Bruce v L M Investment Management Ltd (2013) 94 ACSR 684; [2013] QSC 192, the court cited Capelli in relation to ‘the colloquial concept of insolvency of a managed investment scheme’, at fn 10. 6.41 While the courts in these cases appeared to favour the application of a cash flow analysis, they did not base their analyses on the many cases on corporate insolvency, confirming that the statutory definition of insolvency is not applicable or relevant. 6.42 The CAMAC Report, after noting some of the above authorities, proposed that a definition of an insolvent scheme be included in the legislation for the purposes of facilitating the voluntary administration and winding up regimes proposed in that Report.44 Adopting a commercial cash flow perspective, CAMAC suggested that a scheme should be defined as insolvent if: ‘[T]he scheme property is insufficient to meet all the claims that can be made against that property as and when those claims become due and payable.’45 6.43 This definition suffers an inherent defect in the context of trust-based schemes in that, leaving aside creditors whose claims are secured in the

traditional sense against scheme property, the only true claimants ‘against’ scheme property [page 294] are the trustee/responsible entity and the beneficiaries/members — and they are not ‘creditors’ in any meaningful sense. As discussed in Chapter 5, an unsecured trust creditor has no claim against or with respect to trust property unless and until the creditor has successfully navigated the ‘double equity risk’ and secured an order for subrogation to the trustee’s (unimpaired) indemnity. That comes, if at all, at a late stage in the process and involves consideration of material evidentiary matters as to whether the trustee’s indemnity in relation to the debt has been impaired, whether the creditor qualifies for the discretionary relief of subrogation and whether the accounts generally between the trustee and beneficiaries are ‘clear’. Until then, it is not possible to ascertain with certainty whether a given unsecured creditor will be successful in that endeavour or, therefore, whether it has a claim with respect to trust property. The unsecured trust creditor’s claim is a personal one against the trustee, not a proprietary claim ‘against’ the trust property. Further, as acknowledged by CAMAC in the CAMAC Discussion Paper (2014) at [3.3] (but not in the CAMAC Report in which this definition was proposed), the definition of ‘scheme property’ in the Corporations Act may not capture all property held by the responsible entity for the scheme. A more appropriate definition for a trust solvency is now considered.

THE ‘INSOLVENT TRUST’: A PROPOSED DEFINITION 6.44 Although it is legally inaccurate to describe a trust or scheme as being insolvent, the concept has utility in analysing the solvency of the trustee. It might also be relevant if ever Parliament were to seek to tackle the issues directly with legislation. Thus, it is useful to explore the characteristics of a trust that may be said to have become insolvent with a view to proposing a definition.

6.45 As mentioned above, those of a more strictly doctrinal disposition eschew the expressions ‘solvent’ or ‘insolvent’ in relation to a trust. They may even balk at personifying the entity at all and so prefer to speak of the state of the ‘fund’ rather than of the ‘trust’. They tend to use more neutral expressions such as ‘the fund is financially viable’ or ‘the fund is financially unviable’. What does ‘viability of the fund’ mean in this context? Is it the same as solvency or does it mean something else? 6.46 It is useful to bear in mind that these questions can be asked in two separate and quite different contexts: 1. the first is whether a registered MIS ought to be wound up under the Corporations Act on the just and equitable ground, as discussed above; 2. the second is in considering the effect on the solvency of a trustee (whether or not the responsible entity of a MIS), that is, whether the trust assets are able to support payment by the trustee of trust debts as and when they fall due. [page 295] In this respect one would, naturally, consider the cases described above, but it is important to note that those cases were decided in the first context, while the second context appears not to have been discussed by the courts in any detail. 6.47 One consequence of this absence of guidance is that there is little more than oblique reference in the discussion to the difference between ‘balance sheet solvency’ and ‘cash flow solvency’. Certainly, as was the case in Rubicon Asset Management, a conclusion of insolvency is ‘irresistible’ if a trust or scheme suffers both an assets deficiency and endemic illiquidity. However, it is possible for a trust or scheme as an economic entity to have an excess of assets over liabilities but still be unviable in a way that is relevant to the solvency of the trustee. As noted in Chapter 4, a trustee is not obliged to pay trust debts out of its own pocket first then seek reimbursement, but (absent a robust limitation of liability

clause across all debts) it may have no other option where the trust fund is asset rich but cash poor. In these circumstances, the trustee must use its own money and seek to recoup the payments out of the trust fund at a later time, as and when trust assets can be liquidated. If it cannot do this, or otherwise hold off trust creditors, the trustee may find itself facing ‘insurmountable endemic illiquidity’ and, thus, insolvency in the true Corporations Act sense. 6.48 Therefore, whatever viability and/or insolvency may mean for the purposes of winding up a registered scheme under the just and equitable ground, the ultimate question in assessing the solvency of any trustee is whether and how the financial state of the fund affects the ability of the trustee to pay all of its debts, including trust debts, as and when they become due and payable. It is therefore argued that, when it comes to assessing this question, ‘viability’ must mean liquidity. That, in turn, must lead to consideration of whether the effect on the trustee of illiquidity in the fund is a ‘surmountable temporary lack of liquidity’ (which is not insolvency) or an ‘insurmountable endemic illiquidity’ (which is). 6.49 Thus, if and to the extent that a statutory definition would be useful (for example, as a trigger point for placing a commercial trust into voluntary administration or compulsory winding up if legislation was introduced to allow for that), the question of solvency of a trust fund must be considered from the perspective of the ability of the trustee to apply trust assets to discharge trust debts properly incurred rather than (as suggested by the proposed definition in CAMAC Report, noted above) by reference to the claims of creditors against trust assets. In essence, while the law recognises only one legal entity, there exist two economic entities: the trustee and the trust. To assist in analysing the way in which these two economic entities interrelate in relation to the question of solvency, it is appropriate for the law to give some recognition to the trust as an economic entity. [page 296] 6.50 Taking a lead from the authorities, the following definition is

proposed and is supported by the discussion and analyses which follow: A trust is solvent if, and only if, the trustee is able to pay all trust debts as and when they become due and payable out of: (a) its own assets (where it is obliged to do so); and (b) trust assets. A trust which is not solvent is insolvent. A debt of a trustee is a ‘trust debt’ of a trust if the trustee is entitled to apply trust assets of that trust to pay it (even if it is also obliged to pay it out of its own assets), disregarding for the purposes of this definition any application of the clear accounts rule.

6.51 Note, in particular: the test correlates to the definition in the Corporations Act s 95A and reflects elements of the cash flow test for corporate insolvency, which would include the common law gloss regarding ‘liquidity’; the test requires consideration of the personal obligation of the trustee in relation to trust debts. In relation to any given trust debt, that personal liability is unlimited if the trustee has not negotiated for itself, as a matter of contract, a robust limitation of liability clause, or if any such limitation has fallen away for relevant misconduct (as to which, see Chapter 4). Where the trustee has properly limited its liability for any trust debts so that its obligation to pay them is limited in recourse to the trust assets, then the test in relation to those debts is limited to the trust assets. Where a trustee has unlimited personal liability for any trust debts, assessment of the solvency of ‘the trust’ must include consideration of the trustee’s ability to pay those trust debts out of its personal assets if the trust assets are inadequate; and the definition of ‘trust debt’ for these purposes includes all debts properly incurred by the trustee (even if it has not limited its personal liability), but disregards the operation of the clear accounts rule. This is because that rule operates to diminish the trustee’s aggregate claim against trust assets in relation to all trust debts but does not change the status of any specific debt as a trust debt.

THE FOUR POSSIBLE SCENARIOS

6.52 The defects in trust law identified above do not mean that the law is unable to cope with a trust affected by insolvency. The primary focus is on the legal entity (the trustee), rather than the economic entity (the trust or scheme), but the analysis takes into account the effect of trust debts and assets on the trustee’s [page 297] financial position and this, in turn, necessitates a consideration of the solvency of the trust fund. Thus, both entities are to be analysed. If, after conducting the analysis, the trustee is insolvent according to the statutory definition, then the entire body of insolvency law is engaged to deal with the trustee as a company (although the many unresolved issues described above still arise and must be addressed). The critical aspect is that the fact that the trust is insolvent may or may not impact the solvency of the trustee (although, in the case of a registered MIS, may result in the court ordering a winding up of the scheme on the just and equitable ground). 6.53 The analysis will, therefore, yield one of four outcomes, as shown in the following table: Trustee is solvent

Trustee is insolvent

Trust is ‘solvent’ (adopting the definition proposed above)

The trustee is able to discharge both its personal debts and trust debts as and when they become due and payable.

The trustee is insolvent in that it is unable to discharge its personal debts as and when they become due and payable, but the trust is solvent in that the trustee is able to discharge trust debts as and when they become due and payable out of trust assets.

Trust is ‘insolvent’ (adopting the definition

The trustee is able to discharge its personal debts as and when they become due and

Both the trustee and the trust are insolvent in that the trustee is unable to discharge either its personal

proposed above) payable. The trust is insolvent but this has not affected the solvency of the trustee because either it is able to make up any shortfall and pay trust debts out of its own money or it has put in place effective liability limitations for trust debts.

debts or trust debts as and when they become due and payable. The trustee’s insolvency may be due to matters unrelated to the trust. Alternatively, its insolvency may be related to the insolvency of the trust, due to the absence (or loss of) liability limitations and/or impairment of the trustee’s indemnity out of trust assets, which has left the trustee with personal liability for trust debts.

ELEMENTS OF THE ANALYSIS 6.54 In seeking to ascertain which of these outcomes may be applicable in any given circumstances, the following factors must be taken into account.46 [page 298]

The solvency of the trustee in its own right 6.55 The starting point is the solvency of the trustee as a company in its own right, applying the usual tests and guidance. In the first instance, however, this assessment would be made without taking into account trust debts or the trustee’s right of indemnity against trust assets. In normal circumstances, on a balance sheet test trust debts should have a net zero effect on the trustee’s balance sheet because the aggregate value of its indemnity claim should be exactly co-extensive with the aggregate value of those debts and, on a cash flow test, those debts would have a net zero effect on the trustee’s solvency because it can access liquid trust assets via

the indemnity to discharge those debts when due. Asymmetry arises however if the trustee’s indemnity is impaired in relation to any of those debts such that the value of its claim is less than the value of the debts, with the balance comprising personal liabilities of the trustee. 6.56 This initial test is necessarily a theoretical or notional analysis because, as discussed above, solvency of the trustee must include consideration of its relationship with trust debts and assets; the effect of these on the trustee’s solvency, if any, will depend on the matters that follow.

The solvency of the trust fund 6.57 Next, one must consider the solvency of the trust. For this purpose the definition suggested in 6.50 is applied.

The trustee’s proprietary indemnity 6.58 Next, one must consider the state of the trustee’s right of indemnity with respect to the trust fund. The mere fact that the trust is solvent does not, in and of itself, mean the trustee is entitled to access it to pay trust debts; its right of indemnity with respect to those debts must be intact. Therefore, the question of a trustee’s solvency must take into account whether its indemnity out of the trust fund for trust debts is affected by: ‘related breaches’ in respect of any given debts which will leave the trustee to carry those debts on its personal account: see 4.67 and following; or ‘unrelated breaches’ which, via the clear accounts rule, will affect the trustee’s aggregate claim against the trust fund, possibly leaving it personally liable for all or some proportion of the trust debts: see 4.75 and following.

Limitation of the trustee’s personal liability 6.59 Finally, one must consider the extent to which the trustee has limited

its personal liability to trust creditors. As discussed in Chapter 4, limitations are a matter of [page 299] contract and not trust law, and so must be negotiated on a transaction-bytransaction basis; even if a trustee is diligent in securing limitations with its contract creditors it may well have unlimited liabilities to other creditors, for example taxation and other governmental agencies. A trustee that has properly limited its personal liability in respect of a debt has no obligation to pay it out of personal assets and be left to seek reimbursement or recoupment out of the fund; that is indeed the very point of the limitation. Critically, if well drafted and universally applied, limitation clauses effectively insulate the trustee against potential insolvency that might otherwise arise due to trust debts. Equally importantly, however, limitations are typically stated to fall away in certain circumstances, including conduct that impairs the indemnity, which would restore the prima facie position under trust law and leave the trustee exposed personally for the relevant debt(s).

THE SEQUENCE OF INVESTIGATION 6.60 How do these elements interrelate? Bringing them all together, an analysis in relation to a given trust and trustee at any given time may be conducted by testing against the following sequence of questions (where references to the trust’s solvency are to be interpreted by reference to the definition suggested in 6.50):

Question 1: Is the trustee solvent in its own right? 6.61 If the trustee is solvent in its own right (that is, before taking into account trust debts and the trustee’s right of indemnity), the analysis proceeds to Questions 2–5. However, if the trustee is insolvent even before taking into account trust debts and the right of indemnity, or if it has become so because the circumstances described below under Questions 3–5

have arisen which mean it is personally liable for trust debts, this does not, in and of itself, mean that the trust is insolvent. The directors would be advised to place the trustee into some form of insolvent administration. The beneficiaries may be able to replace the trustee under the terms of the trust or with the assistance of the court, so as to enable the business of the trust to carry on; if the trust fund is financially healthy, there should be little difficulty in doing this.47 [page 300]

Question 2: Is the trust solvent? 6.62 This involves applying the definition above, that is, is the trustee able to pay all trust debts as and when they become due and payable out of its own assets (where it is obliged to do so) and trust assets? If the answer is ‘yes’, and the trustee’s indemnity is intact (see Question 3), the trustee need not use its own money to discharge trust debts; it may choose to exercise its exoneration power to apply liquid trust assets directly in discharge of trust debts as and when they fall due. However, if the trustee’s exoneration power has been impaired, that could affect its solvency: in this case the inquiry proceeds to Question 3. If the answer is ‘no’ and the trustee’s exoneration power is unimpaired then the effect on the trustee’s solvency will depend on whether the trustee has properly limited its personal liability in respect of sufficient trust debts: in this case the inquiry proceeds to Questions 4 and 5.

Question 3: Has the trustee committed acts which impair its indemnity? 6.63 If the answer is ‘yes’ and they are ‘related breaches’ of the inexcusable type, then the debts so incurred are personal debts of the trustee and it has no right of recourse to the trust fund. Being personal debts, they must be taken into account in assessing the solvency of the trustee. If the answer is ‘yes’ and they are ‘unrelated breaches’, then the

aggregate claim of the trustee against the trust fund in relation to all properly incurred trust debts is reduced by the value of the claim of the beneficiaries against the trustee for those breaches. By application of the clear accounts rule, the trustee must bear the difference as a personal liability. As such, the amount of that difference must be taken into account in assessing the solvency of the trustee. If the answer is ‘no’ so that the indemnity is intact, then the effect of the trust debts on the trustee’s solvency will depend on whether the trust is solvent. If it is, all is well. If it is not, then the effect will depend on whether the trustee has limited its personal liability in respect of sufficient trust debts: in this case the inquiry proceeds to Questions 4 and 5. [page 301]

Question 4: Has the trustee properly limited its personal liability in relation to trust debts?48 6.64 If the answer is ‘yes’, and the answer to Question 5 is ‘no’, the trustee cannot be made insolvent by the trust debts which are subject to the limitation. If the answer is ‘no’, the trustee is personally liable for the trust debts. If the trust is solvent and the trustee’s indemnity is unimpaired, it may discharge those debts directly out of the fund under the exoneration power. If there is a shortfall, it bears that shortfall personally. If the answer is ‘no’ and the trust is insolvent, the trustee must discharge those debts out of its own money and, if its indemnity is unimpaired, may seek reimbursement out of the trust fund if and when possible. If the answer is ‘no’ and the trustee is unable to discharge trust debts, or any shortfall, out of its own money as and when due, the trustee may be made insolvent by trust debts.

Question 5: If the trustee has the benefit of a

limitation of liability clause which prima facie protects it from insolvency, has the trustee done anything that would engage the exclusions in that clause? 6.65 If the answer is ‘yes’, then the protection of the limitation fails as a matter of contract vis-à-vis the relevant creditor(s), making the trustee personally liable regardless of the solvency of the trust. The conduct that triggered the failure may also have impaired the trustee’s indemnity (see the analysis in Question 3), in which case the trustee will have no recourse to the fund in respect of those debts. If the trustee is unable to discharge those debts when due out of its own resources, it may be insolvent. If the answer is ‘no’, then the trustee cannot be made insolvent by the trust debts.

INDICATORS OF INSOLVENCY OF A COMMERCIAL TRUST 6.66 The above demonstrates the complexity involved in dealing with a commercial trust that has come under the shadow of insolvency. It is acknowledged that this analysis suffers an inherent limitation in its practical application: there is likely to be a material information gap in the hands of any given stakeholder. Even after allowing for the difficulties in assessing solvency generally, the person making the analysis may not have at hand all the information necessary to answer these questions, at least not in real time. For [page 302] example, conduct of the trustee which may have impaired its indemnity and/or negated limitation of liability protections is not always apparent on the face of the record and may only be discovered ex post facto under due diligence, in litigation or under external investigation.49

6.67 This is problematic enough for directors, but can be a daunting challenge for outsiders such as creditors. Still, the cases have highlighted some factors that might serve as early warning indicators of potential trouble and which might encourage concerned stakeholders to initiate preemptive investigations. For example, without exception, recent collapses the subject of reported litigation have not involved established ‘professional’ external trustees or responsible entities, but rather entities which have been managed and controlled by scheme promoters, and which have limited material assets or inherent value beyond the minimum statutory requirements. The risks in those circumstances are exacerbated if the same company operates as responsible entity of several schemes, where a failure to respect separation and segregation has led, among other things, to commingling of invested funds and scheme assets. In an extreme example, the subject of the decision in ASIC v Letten (No 7) (2010) 80 ACSR 401; [2010] FCA 1231, poor management of 21 separate unregistered MIS led to the court to say, at [335], that: [D]istribution of Scheme property in a particular Scheme to those entitled to the property in proportion to their entitlements is practically impossible at a number of levels. Given the manner in which these Schemes were operated and the difficulties identified in unscrambling the affairs of the Schemes, no rational person would undertake or engage in that task.

Instead, on the basis of ‘pragmatism’, the court ordered the pooling of surplus assets and rateable distribution among the various claimants.50 6.68 Further, in a great many of the cases, the financial records and accounts of the schemes have been in a poor state, and have had to be reconstructed by administrators, investigative accountants or other external experts. In some cases, there has been doubt as to whether given assets and/or income were part [page 303] of the trust fund,51 and in one case it was successfully argued that the only way the final position and the assets and liabilities of the responsible entity could be ascertained was through the winding up of its schemes.52 6.69 In some cases the matrix of contracts, relationships and arrangements

entered into by the responsible entity with invested funds, often designed to achieve certain tax objectives, was complex and evidently not wellunderstood or respected by the responsible entity and the individuals who managed the scheme.53 The direction of the cause-and-effect relationship between this indicator and the poor record and account-keeping described above is not always obvious, but they are often found together.54 In other cases losses arose from a failure by those who managed the funds to understand and/or to deal appropriately with conflicts of interest and other failures of governance, risk management and compliance protocols.55 [page 304]

INSOLVENT COMMERCIAL TRUSTS AND THE UNITED STATES BANKRUPTCY CODE 6.70 The laws governing corporate insolvency differ markedly between Australia and the United States: Unlike the [personal] bankruptcy laws of Australia and the United States which have a common English ancestry, the corporate insolvency laws of the two countries developed independently … From their different histories, American and Australian corporate insolvency laws have developed according to very dissimilar objectives.56

Justice Gummow gave several examples of these differences in his judgment in Sons of Gwalia v Margaretic (2007) 231 CLR 160; [2007] HCA 1. The differences manifest also in how the two jurisdictions deal with insolvent commercial trusts. 6.71 As is apparent from the above, in large part the problem with reconciling the Australian commercial trust with existing insolvency law is that, because it is not a person, the trust is in effect invisible to that law. The result is that there is no legal regime as such for dealing with the insolvency of what has become in Australia a substantial and significant commercial entity. 6.72 In the United States, however, a business trust, as such, may qualify for treatment as a ‘person’ under the federal statutory bankruptcy regime.

This is seen as desirable due to the many benefits, conveniences and protections available under the Bankruptcy Code (formally, Title 11 of the United States Code) that do not accrue under state laws that otherwise govern trusts. The Code is a federal statutory regime but is not a specific intervention into the law of trusts in the sense of the Uniform Trust Code or the Uniform Statutory Trust Entity Act. However, the way in which it embraces ‘business trusts’ is interesting to this discussion because it is an archetypical example of the federal legislature adopting law and economics ‘functionalism’ in the treatment of commercial trusts, and highlights differences with the position under Australian law. 6.73 The prima facie position in the United States regarding insolvent trusts and trustees is similar to the position in Australia. As a general proposition, and leaving aside the statutory business trust, because trusts are not legal persons they merit no special treatment as such and do not qualify for the bankruptcy regimes that apply to legal persons. As trusts are creatures essentially of state law, matters dealing with the insolvency of trusts are, except as discussed below, dealt with on first principles under state law, and mostly common law at that. [page 305] In this respect, the landscape is not very different from that which prevails in Australia.57 6.74 However, the benefits and protections offered to stakeholders by the Bankruptcy Code are extended to certain types of commercial trust which are functionally equivalent to corporations. The Code operates in respect of a ‘person’ as defined. This includes a ‘corporation’ which, importantly for present purposes, is defined to include a ‘business trust’: Title 11, §§101(41) and 101(9)(A)(v). 6.75 The expression ‘business trust’ is not defined in the Code, and the cases acknowledge some ambiguity and differences of opinion, but it is clear from the authorities that it is not limited to an entity having

incorporated or quasi-incorporated status.58 In 1982 the federal Bankruptcy Court held that: Generally, trusts are not eligible for relief in the bankruptcy court … The exception to this is the business trust that is in the nature of a corporation … A business trust has been defined as ‘an unincorporated business organization created by an instrument by which properties to be held and managed by trustees for the benefit and profit of such persons as may be or may become the holders of transferrable certificates evidencing the beneficial interests in the trust estate’ … The business trust is a voluntary pooling of capital by a number of people who are the holders of freely transferrable certificates evidencing beneficial interests in the trust estate … Because of the similarity, Congress has afforded the business trust the same privileges in bankruptcy as a private corporation … only trusts that are like corporations qualify as ‘business trusts’.59

6.76 In 1990 the court held that ‘since this entity [that is, the business trust] is defined as a type of corporation, it is logical to assume that this entity should have attributes of a corporation. This is precisely what many bankruptcy courts have held’.60 An earlier decision of the Bankruptcy Court had held that ‘it is the business trust’s similarity to a corporation that permits it to be a debtor in [page 306] bankruptcy’.61 In 1994 the US Court of Appeals for the Second Circuit said that ‘although no court has thus far adopted a clear definition of business trust for purposes of the Bankruptcy Code, courts have looked to see whether the trust at issue has the attributes of a corporation’.62 6.77 While it is clear that only ‘business trusts’ are eligible for Bankruptcy Code treatment, leaving all other trusts to be dealt with under state laws, there remains ambiguity regarding the degree to which a trust needs to engage in ‘active’ trading activities to qualify. The distinction between a business trust and other trusts drawn in the 1994 case cited above, and supported in later authorities, turns on a purpose test: business trusts are those created, or subsequently conducted, for the purpose of carrying on some kind of business with a view to profit, as distinct from those whose purpose is to protect and preserve trust assets, such as for family wealth or estate planning purposes.63 An analysis conducted by the Bankruptcy

Court in 1983 of the legislative history of the Code demonstrates that the distinction was intentional, and was functionally-based: Business trusts are eligible as debtors because Congress recognized the similarity between business trusts and corporations … the congressional intent behind the Code … is to afford its protections to any association having the power or privilege of a corporation.64

6.78 Thus, in any given case, qualification for treatment under the Code necessitates a factual analysis to ascertain the purpose of the trust and the nature of the trustee’s dealings with the trust assets. This distinction exposes a difference in meaning between the expression ‘business trust’ and the broader concept of ‘commercial trust’; not every trust put to a commercial application will be a business trust for Code purposes, particularly if it is passive in function.

CONCLUSION 6.79 The rights of an insolvent Australian company’s stakeholders are regulated by a mature and cohesive regime, much of it statutory. There are established rules to ascertain whether a company is insolvent (even if they are not always easy to apply). Options available to shareholders, directors and creditors as insolvency approaches are clear and critical paths are established and familiar. The voluntary [page 307] administration regime creates an environment in which a company which is or is likely to become insolvent may be placed into the hands of an independent expert who may assess its chances for survival while protecting the interests of the stakeholders. If liquidation becomes inevitable, there are established rules regarding the division of the assets of the company among the various claimants. 6.80 None of this applies in relation to the commercial trust, which is, in effect, invisible to that regime and yet does not enjoy its own insolvency regime. As this chapter has demonstrated, even the threshold issue of

whether and when a trust may be said to be insolvent or financially unviable is a difficult one, to be analysed on first principles. 6.81 As a policy matter and as a matter of law and economics efficiency, it is cause for concern that substantial business entities structured as commercial trusts are permitted, and indeed encouraged, to exist in 21st century Australia without a dedicated policy-based insolvency regime for managing stakeholders’ risks and allocating losses. This is all the more surprising when one considers that these entities are permitted to raise funds from the public. Once again, a comparison with the pre-1844 unincorporated joint stock company is irresistible. It is in many ways disappointing that, almost 170 years after the process of legislating for the winding up of companies began in England, there is no equivalent legislation for Australian entities which are the direct descendants of the unincorporated joint stock company. While the CAMAC Report is the latest in a long history of reports that have considered the issues, it has its limitations — some of which are discussed in the final chapter. 1.

Harold A J Ford and Ian J Hardingham, ‘Trading Trusts: Rights and Liabilities of Beneficiaries’ in Finn (ed), Equity and Commercial Relationships (1987) at 84.

2.

Harold A J Ford, ‘Trading Trusts and Creditors’ Rights’ (1981) 13 Melbourne University Law Review 1 at 1.

3.

Shorter Oxford English Dictionary (6th ed, Oxford University Press, 2007), definition of ‘monster’, item 3.

4.

Daniels v AWA Ltd (1995) 37 NSWLR 438 at 494 (per Clarke and Sheller JJA).

5.

William M C Gummow, ‘The Equitable Duties of Company Directors’ (2013) 87 Australian Law Journal 753 at 755.

6.

John H Langbein, ‘The Contractarian Basis of the Law of Trusts’ (1995) 105 Yale Law Journal 625 at 639.

7.

The well-known American professional investor Warren Buffet is attributed with having said, of risky business behaviour generally during the pre-GFC boom, ‘only when the tide goes out do you discover who’s been swimming naked’: see . The events described in these paragraphs were observed first-hand by the author in legal practice but, in any case, there is now ample legal and commercial literature on the effects of the GFC in this context.

8.

See ASIC v Tasman Investment Management Ltd (2006) 59 ACSR 113; [2006] NSWSC 943; Re Stacks Managed Investments Ltd (2005) 219 ALR 532; [2005] NSWSC 753; Re McPharlin as Liquidator of United Investments Trust (in liq) [2013] FCA 635.

9.

In respect of which there is conflicting authority: see Silvia, in the matter of FEA Plantations

Ltd (admin apptd) [2010] FCA 468 (yes); Owen, in the matter of River City Motorway Pty Limited (admin and rec apptd) v Madden (No 3) [2012] FCA 313 (no). 10. See Caterpillar Financial Australia Ltd v Ovens Nominees Pty Ltd [2011] FCA 677. See also Chapter 5 of the CAMAC Discussion Paper (2011) and Chapter 7 of the CAMAC Report. 11. Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360; Tolcher v John Danks & Son Pty Ltd [2007] NSWSC 1207; Jacobs on Trusts at [2116]. See also the CAMAC Report at [7.5.6]. 12. See ASIC v Commercial Nominees of Australia Ltd (2002) 42 ACSR 240; [2002] NSWSC 576; Lerinda Pty Ltd v Laertes Investment Pty Ltd [2010] 2 Qd R 312; [2009] QSC 251; Adams v Zen 28 Pty Ltd [2010] QSC 36. See also Bruce H McPherson, ‘The Insolvent Trading Trust’ in Finn (ed), Essays in Equity (1985). In Spies v The Queen (2000) 201 CLR 603 the High Court of Australia said (but not in relation to trusts specifically) ‘to give some unsecured creditors remedies in insolvency which are denied to others would undermine the basic principle of pari passu participation by creditors’ at 636; cf Darryl R Williams, ‘Winding Up Trading Trusts: Rights of Creditors and Beneficiaries’ (1983) 57 Australian Law Journal 273 in which the author suggested that the appropriate method for allocation among creditors was the equitable ‘first in time’ principle, at 277. The High Court of Singapore has opted for the pari passu rule: see E C Investment Holding Pte Ltd v Ridout Residence Pte Ltd [2013] SGHC 139. 13. In respect of which there is conflicting authority: see JGM Nominees Pty Ltd v Australvic Pty Ltd (No 2) (2010) 28 ACLC 383; Re Dalewon Pty Ltd (in liq) (2010) 79 ACSR 530; [2010] QSC 311; Re Byrne Australia Pty Ltd (No 2) [1981] 2 NSWLR 364; Re Enhill Pty Ltd [1983] 1 VR 561; Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99; Re Hundy (Liquidator); Enviro Friendly Products Pty Ltd (in liq) [2013] FCA 852. In relation to the complex situation where a company in administration is trustee of several trusts, some of which are insolvent and other which are not, see Trio Capital Ltd (admin apptd) v ACT Superannuation Management Pty Ltd (2010) 79 ACSR 425; [2010] NSWSC 941. 14. Dreiberg v Bettles & Carter as liquidators of Corindi Beach Developments Pty Ltd [2007] NSWSC 1204; Timbercorp Securities Ltd (in liq) v W A Chip & Pulp Co Pty Ltd [2009] FCA 901; Bruce v L M Investment Management Ltd [2013] QSC 192; Alphena Pty Limited (In liq) v P S Securities Pty Ltd as Trustee of the Joseph Family Trust [2013] NSWSC 447. In relation to liquidators and conflicts generally, see Public Trustee (Qld) v Octaviar Ltd (in prov liq) (recs & mgrs appt) (2009) 74 ACSR 109; [2009] QSC 283 at [23]. In relation to registered MIS, see the CAMAC Discussion Paper (2014) at [12.4]. 15. Wells v Wily (2004) 50 ACSR 103; [2004] NSWSC 607; Re French Caledonia Travel Service Pty Ltd (in liq) (2002) 42 ACSR 524; [2002] NSWSC 641; Re Matheson; Ex parte Worrell v Matheson (1994) 49 FCR 454. See also Chapter 4 of the CAMAC Discussion Paper (2011) and Chapter 5 of the CAMAC Report. 16. Re Pleash; Suncoast Restoration Pty Ltd (in liq) (2013) 93 ACSR 606; [2013] FCA 355 and Re Neeeat Holdings (in liq) (2013) 299 ALR 744; [2013] FCA 61. See also A Kawalsky, ‘Lessons from Apostolou v VA Corporation Aust Pty Ltd [2010] FCA 64’ (2012) Jan-Mar Australian Insolvency Journal 32. 17. See, for example, ASIC v Letten (No 7) (2010) 80 ACSR 401; [2010] FCA 1231. Some of the issues are discussed in relation to trust-based registered MIS in the CAMAC Report. 18. Submission by Denise North, Chief Executive, Insolvency Practitioners Association dated 7 October 2011 (available at ) at page 4. In the CAMAC Report, it was acknowledged that ‘where

a scheme or its RE [responsible entity] suffers financial stress, the process of attempting their rehabilitation or orderly winding up can be complicated by the entangling of the affairs of the scheme and of the RE’, at 46. 19. See, for example, Mark G R Gronow, McPherson’s Law of Company Liquidation (Law Book Co, subscription service), at [1.300]–[1.450]; Andrew Keay, Avoidance Provisions in Insolvency Law (LBC Information Services, 1997) at 15 and following; Michael Murray and Jason Harris, Keay’s Insolvency, Personal and Corporate Law and Practice (8th ed, Law Book Co, 2013) at [1.15] and following; Australian Law Reform Commission, ‘General Insolvency Inquiry’ (Report No 45, 1988), Volume 1, Part I. 20. Receivership is also commonly mentioned as included in the category of insolvency administration regimes in respect of companies, but receivership is a private arrangement initiated out of court by a secured creditor in connection with enforcement of its security (although the courts have an inherent jurisdiction to appoint receivers in other circumstances for limited purposes in specific cases: see Supreme Court Act 1970 (NSW) s 67 and equivalents elsewhere, and Uniform Civil Procedure Rules Pt 26). In any case, it is not a prerequisite for receivership that the company be insolvent; it merely needs to be in default under its security. A company may survive receivership if the secured debt can be repaid (or compromised) and the company left with sufficient assets to be viable. 21. Reginald I Barrett, ‘Insolvency of Registered Managed Investment Schemes’ (Paper presented at the Banking & Financial Services Law Association Annual Conference, Queenstown NZ, July 2008). 22. See Reginald I Barrett, ‘Insolvency of Registered Managed Investment Schemes’ (Paper presented at the Banking & Financial Services Law Association Annual Conference, Queenstown NZ, July 2008). The expression has been adopted judicially also: see Capelli v Shepard (2010) 29 VR 242; [2010] VSCA 2; Re Orchard Aginvest Ltd [2008] QSC 2; Re PWL ACN 084 252 488 Ltd; Ex parte PWL Ltd (admin apptd) (No 2) [2008] WASC 232. 23. ASIC v Tasman Investment Management Ltd (2006) 59 ACSR 113; [2006] NSWSC 943 at [18]. 24. See Re Stacks Managed Investments Ltd (2005) 219 ALR 532; [2005] NSWSC 753. The Australian Law Reform Commission noted in 1988 that ‘in theory a direct though archaic method was available to wind up a[n insolvent] trust through an administration action, [and that] it was possible for an imaginative judge to appoint a receiver who would have similar powers to a liquidator’: Australian Law Reform Commission, ‘General Insolvency Inquiry’ (Report No 45, 1988), Chapter 6: ‘Corporate Trading Trusts’ at 109. 25. In Re McLellan; Stake Man Pty Ltd v Carroll (2009) 76 ACSR 67; [2009] FCA 1415, Goldberg J of the Federal Court set out a useful conspectus of the authorities in relation to determining whether a company is insolvent at [106] and [107]. 26. Cooper v Commissioner of Taxation (2009) 76 ATR 91; [2009] NSWSC 880; Bell Group (in liq) v Westpac Banking Corp (No 9) (2008) 225 FLR 1 at [1064] and following. 27. Bell Group (in liq) v Westpac Banking Corp (No 9) (2008) 225 FLR 1 at [1070]. 28. Box Valley Pty Ltd v Kidd (2006) 24 ACLC 471; [2006] NSWCA 26 at [9]. 29. Bank of Australasia v Hall (1907) 4 CLR 1514 at 1528. See also Expo International v Chant [1979] 2 NSWLR 820; Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459. 30. Quick v Stoland Pty Ltd (1998) 87 FCR 371 at 379.

Tru Floor Service Pty Ltd v Jenkins (No 2) (2006) 232 ALR 532 at 544. In Melbase Corp Pty 31. Ltd v Segenhoe Ltd (1995) 17 ACSR 187, Lindgren J stated at 198, that ‘the words ‘as and when they become due and payable’ make it clear that although the issue of prima facie insolvency must be determined at a particular time, the determination calls for a degree of ‘forward looking’.’ Similarly, in Re United Medical Protection Ltd (2003) 47 ACSR 705, Austin J commented at 719, that assessment of solvency may ‘call for a degree of forward analysis’. 32. Southern Cross Interiors Pty Ltd (in liq) v DCT (2001) 53 NSWLR 213 at [54]; Hymix Concrete Pty Ltd v Garrity (1977) 2 ACLR 559 at 566; Sandell v Porter (1966) 115 CLR 666; Re Timbatec Pty Ltd [1974] 1 NSWLR 613; Bell Group (in liq) v Westpac Banking Corp (No 9) (2008) 225 FLR 1 at [1064] and following. 33. Hall v Poolman (2007) 65 ACSR 123; [2007] NSWSC 1330 at [266], citing Expo International Pty Ltd (in liq) v Chant [1979] 2 NSWLR 820 at 837. 34. See Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266; Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd (2010) 77 ACSR 410; [2010] NSWSC 233 at [202]– [205]. Put another way, ‘in some cases a reasonable time must be allowed to a director to assess whether the company’s difficulty is temporary and remediable or endemic and fatal. The commercial reality is that creditors will usually allow some time for payment beyond normal trading terms, if there are worthwhile prospects of an improvement in the company’s position’: Hall v Poolman (2007) 65 ACSR 123; [2007] NSWSC 1330 at [331]. 35. Indeed, it has been noted that, even after the fact, ‘establishing when a company became insolvent is one of the most difficult tasks that confronts an insolvency practitioner’: see Parliamentary Joint Committee on Corporations and Financial Services, ‘Improving Australia’s Corporate Insolvency Laws: Issues Paper’ (2003) at [1.47]. The complexities in ascertaining precisely when a company becomes insolvent are discussed in Michael Murray and Jason Harris, Keay’s Insolvency, Personal and Corporate Law and Practice (8th ed, Law Book Co, 2013). 36. See , under drop-down tab ‘Insolvency’. 37. See, for example, Trio Capital Ltd (admin apptd) v ACT Superannuation Management Pty Ltd (2010) 79 ACSR 425; [2010] NSWSC 941; Great Southern Managers Australia Ltd (in liq) v Thackray [2010] WASC 138; Capelli v Shepard (2010) 29 VR 242; [2010] VSCA 2; Re Rubicon Asset Management Ltd (adm apptd) (2009) 77 NSWLR 96; [2009] NSWSC 1068; Re Great Southern Managers Australia Ltd (ACN 083 825 405) (rec and mgr apptd) (in liq) (2009) 76 ACSR 146; [2009] VSC 557; Re Timbercorp Securities Ltd (in liq) (No 3) (2009) 74 ACSR 626; [2009] VSC 510. 38. For unregistered schemes, see s 601EE and for registered schemes, see Corporations Act s 601NF. The differences in the statutory regime for the winding up of registered and unregistered schemes are discussed in Re Stacks Managed Investments Ltd (2005) 219 ALR 532; [2005] NSWSC 753. The Act is silent with respect to commercial trusts which are not MIS. 39. Trio Capital Ltd (admin apptd) v ACT Superannuation Management Pty Ltd (2010) 79 ACSR 425; [2010] NSWSC 941. 40. Capelli v Shepard (2010) 29 VR 242; [2010] VSCA 2 at [104]. See also ASIC v Knightsbridge Managed Funds Ltd [2001] WASC 339 and ASIC v West [2008] SASC 111 at [139]. 41. ‘An order was made in … Re Orchard Aginvest Ltd [2008] QSC 2. Interestingly, I think, the

view that winding up of the scheme was just and equitable was based on what the judge unambiguously described as the insolvency of the scheme. Despite this, it is too early to say that a concept of insolvency of a managed investment scheme is meaningful or to see the alternative ground in s 601ND as allowing some form of winding up in insolvency’: Reginald I Barrett, ‘Insolvency of Registered Managed Investment Schemes’ (Paper presented at the Banking & Financial Services Law Association Annual Conference, Queenstown NZ, July 2008) at p 4. 42. ‘There is no direct authority cited to me to establish that a mere insolvency makes the winding up one which would be just and equitable but in the absence of any submission to the contrary I am prepared to proceed on the basis that the terms of the section are satisfied by that condition of insolvency’: Re Orchard Aginvest Ltd [2008] QSC 2. 43. Capelli v Shepard (2010) 29 VR 242; [2010] VSCA 2; Rubicon Asset Management Ltd [2009] NSWSC 1068; Re Orchard Aginvest Ltd [2008] QSC 2; Re PWL ACN 084 252 488 Ltd; Ex parte PWL Ltd (formerly Palandri Wines Ltd) (admin apptd) (No 2) [2008] WASC 232; Re Traditional Values Management Limited (in liq) [2010] VSC 339. 44. This definition is proposed for both the suggested ‘separate legal entity proposal’ (where it might possibly be correct depending on the drafting of the enabling legislation) and where the current unincorporated trust-based scheme structure is retained (where, as argued below, it is defective). CAMAC’s ‘separate legal entity proposal’ is discussed in the next chapter. 45. See the CAMAC Report at [3.6], [6.3.2] and [6.4.1]. 46. In discussing these factors it is assumed that any personal indemnity against the beneficiaries has been negated, as is usual for commercial trusts: see Chapter 3. 47. See Trustee Act 1925 (NSW) s 70; Trustee Act 1958 (Vic) s 41; Trusts Act 1973 (Qld) s 80; Trustees Act 1962 (WA) s 77; Trustee Act 1936 (SA) s 36; Trustee Act 1898 (Tas) s 32; Trustee Act (NT) s 27; Trustee Act 1925 (ACT) s 70. In relation to court-assisted replacement of trustees, see Northwest Capital Management v Westate Capital Ltd [2012] WASC 121. For MIS, Corporations Act s 601FL provides a mechanism for members to remove and replace a responsible entity and s 601FP allows the court, on application of the outgoing responsible entity, a member or ASIC, to appoint a temporary responsible entity if the scheme does not have one that meets the statutory requirements. The CAMAC Report discusses the replacement of responsible entities of viable registered MIS in Chapter 5. In this regard, it is interesting to note that in its submission to CAMAC following release of its Discussion Paper (2011), ASIC stated that it ‘has not experienced any situations where an incapacitated responsible entity is operating a clearly viable enterprise scheme, and for this reason does not propose any significant reforms in this situation’ at [23]. 48. The assumption in the use of ‘properly’ is that the limitation clause is drafted so as to protect against both balance sheet and cash flow insolvency: see the discussion in 4.106. 49. Liquidators of Australian companies have extensive powers under the Corporations Act to inspect a company’s books and records and to examine a company’s officers and any other person ‘concerned in the examinable affairs of the corporation’: see Pts 5.6 and 5.9. It has been argued that these powers could be and should be used more vigorously in relation to trading trusts: Kalev J Crossland, ‘Unsecured Creditors and the “Uncorporation”: Issues with Trading Trusts Post Global Financial Crisis’ (2011) 17 Trusts & Trustees 183 at 202–9. 50. The CAMAC Report notes, at [4.1.2], that 61 per cent of all responsible entities of registered MIS operate multiple schemes. The Corporations Act contemplates that the assets and liabilities of two or more companies may be ‘pooled’ in certain circumstances: see Pt 5.6 Div 8.

51. See, for example, ASIC v Letten (No 7) (2010) 80 ACSR 401; [2010] FCA 1231; Trio Capital Ltd (admin apptd) v ACT Superannuation Management Pty Ltd (2010) 79 ACSR 425; [2010] NSWSC 941; Ex parte PWL Ltd (formerly Palandri Wines Ltd) (admin apptd) (No 2) [2008] WASC 232; Re Orchard Aginvest Ltd [2008] QSC 2. 52. Re Environinvest Ltd [2009] VSC 33. By Corporations Act s 588E(4), if it is proved that a company has failed to keep or retain proper financial records in accordance with s 286 (including in a capacity as responsible entity of a registered scheme), the company is presumed to have been insolvent throughout the period of its failure to do so. 53. This was the case, for example, in Re Timbercorp Securities Ltd (in liq) (No 3) (2009) 74 ACSR 626; [2009] VSC 510 and [2010] VSC 50; Re Timbercorp Securities Ltd (in liq) (2010) 77 ACSR 291; [2010] VSC 50; Ex parte PWL Ltd (formerly Palandri Wines Ltd) (admin apptd) (No 2) [2008] WASC 232; Re Orchard Aginvest Ltd [2008] QSC 2. 54. A useful summary of factors, behaviours and practices which led to the collapse of many MIS in the agribusiness sector is contained in the Parliamentary Joint Committee on Corporations and Financial Services, ‘Inquiry on Aspects of Agribusiness Managed Investment Schemes’ (2009) and the CAMAC Discussion Paper (2011). See also Christine Brown, Colm Trusler and Ken Davis, ‘Managed Investment Scheme Regulation: Lessons from the Great Southern Failure’ (2010) 2 FINSIA Journal of Applied Finance 20, where the authors identify a number of inadequacies in current investor protection arrangements. In January 2012 ASIC released a Regulatory Impact Statement entitled Agribusiness Managed Investment Schemes: Improved Disclosure for Retail Investors. 55. See Parliamentary Joint Committee on Corporations and Financial Services, ‘Inquiry into the collapse of Trio Capital’ (2012), particularly at [5.36]. The CAMAC Report noted these issues in relation to registered MIS (both trust-based and common enterprise structures) and suggested reforms to deal with them, including a definitive scheme agreements register and scheme property register to force greater discipline and transparency around identification and segregation of scheme property and affairs: see [4.3.4] and [4.4.3]. 56. Jeffrey S Kinsler, ‘Corporate Insolvency in Australia and the United States: Uncommon Origins, Dissimilar Objectives’ (1997) 3 International Trade & Business Law 129 at 135. 57. See, generally, Bogert on Trusts at §17. 58. Nor is it necessarily limited to entities registered as statutory business trusts in those states that have such legislation, although this point has generated some debate: see Takemi Ueno, ‘Defining a Business Trust: Proposed Amendment of Section 101(9) of the Bankruptcy Code’ (1993) 30 Harvard Journal on Legislation 499. The comment to §101 of the Uniform Statutory Trust Entity Act states that ‘the drafting committee sought to avoid any implication regarding whether a statutory trust would qualify as a “business trust” under federal bankruptcy law’. 59. Re Armstead and Margaret Wayson Trust (1982) 29 BR 58 at 59 (emphasis added). Note the similarity in that definition to the entity which is described as a unit trust in Australia. The requirement for ‘certificates’ is not essential; it is a hangover from the legislation the Bankruptcy Code replaced and was abolished by statute in 1973 as giving undue significance to an evidentiary matter: see Re Tru Block Concrete Products, Inc 27 BR 486 (1983). 60. Re Woodsville Realty Trust 120 BR 2 (1990) at 3. 61. Re Treasure Island Land Trust 2 BR 332 (1980) at 334. 62. Shawmut Bank Conn v First Fidelity Bank (Re Secured Equipment Trust of Eastern Air Lines)

38 F 3d 86 (1994) at 88–9. 63. Re Estate of the Assignment for the Benefit of Creditors of May 405 BR 443 (2008). 64. Re Tru Block Concrete Products, Inc 27 BR 486 (1983) at 491. The court in this case also noted the alignment of corporations and business trusts in a range of federal and state taxation statutes, again on a functional basis.

[page 308]

CHAPTER 7 Conclusion: Reforming The Commercial Trust SYNOPSIS This concluding chapter brings together the various strands of the argumentation and discusses proposals for reform to remedy the issues discussed in the preceding chapters. It is argued that the gap between law and commerce exposed by the commercial trust can be closed without damaging the market or undermining the valuable advantages over the company that have seen the trust transformed into a business association. The first step must be an acknowledgement of the commercial trust’s special status and acceptance that it is an economic entity that is functionally equivalent to a company such that it should be relocated, in a taxonomic and jurisprudential sense, from the domain of property and estates to the family of business associations, to take up residence beside the company. It concludes that the changing role of the trust demands a better framework for allocating stakeholder risk, assembled by the courts and the legislatures working together, guided by the American experience.

FROM GUARDIAN TO ENTREPRENEUR AND BEYOND: REFORMING THE COMMERCIAL TRUST 7.1 Thus ends this brief journey that has touched several continents and traversed a time span of almost a millennium, investigating, in Maitland’s words, ‘the development from century to century of the trust idea’,1 specifically in the commercial context. Despite its origins, the trust as a form of business association is in robust health in 21st century Australia as

an alternative to the Corporations Act company. The two are seen by some as functionally interchangeable or [page 309] substitutable. In many ways they are and it is not inappropriate to describe the commercial trust as a surrogate company. 7.2 But the perception of parity is a myth. Commerce has raced ahead of the law. In using the trust device in this way, participants place themselves within an entity that has no separate legal personality and a legal framework that is not premised on facilitating commercial endeavour. While these differences have permitted flexibility and a degree of regulatory arbitrage, the trade-off is the absence of company-like protections for participants. Trust law does not adequately support participants, particularly if their expectations might be that their legal and insolvency risk position corresponds with that of their counterparts in a Corporations Act company. Even after the application in practice of documentary and structuring techniques to rectify or adjust the trust device for these defects, trust participants can be shown to be materially worse off than their counterparts in a company, both pre- and post-insolvency. There is a limit to the extent to which private measures can neutralise the negative consequences of this regulatory dissonance. 7.3 The challenge for Australian courts and legislatures is how to bridge this gap between commerce and the law. There is no doubt that the authors of the 6th edition of Jacobs on Trusts were right when they observed that ‘the trust was not in its origin and perhaps never has been primarily a device of commerce’.2 But then the commercial trust was not in its origin and perhaps never has been primarily a device of the law of trusts. It was conceived as something of a hybrid; the trust was recruited to assist partnership, contract, agency and other legal devices that were designed for commercial purposes. Through the application of elements of all those devices and a vigorous market-driven process of contractualisation, there has evolved a vehicle which, although at its core a

trust, is an entirely different creature from the inter vivos and testamentary donative arrangements from which it descended. 7.4 An underlying theme of this book is that it is necessary to understand the complex history and nature of the trust, and the issues it raises when used in commerce, to establish a sound basis for remediation in the private context. Similarly, danger lies in not properly appreciating those complexities when formulating proposals for reform. 7.5 It is argued in this concluding chapter that the gap can be closed without damaging the market or undermining the valuable advantages over the [page 310] Corporations Act company that have seen the trust transformed into a business association. Trust law can be refurbished and modernised to accommodate the reasonable expectations of those who wish to use the trust to promote and invest in enterprise. 7.6 The problem, it is argued, is that in the absence of legislative guidance to the contrary, the courts are obliged to apply ancient trust principles to questions of risk allocation among stakeholders in modern commercial trust enterprises.3 The starting point for reform must be a shift in mindset involving an acknowledgment that the commercial trust is ‘special’ and merits specific treatment separate from the general law of trusts as currently configured. The solution, thus, is to develop different rules to deal with those trusts. This has been acknowledged by some in the judiciary and the legal academy, in England and here. 7.7 In Target Holdings Ltd v Redferns [1996] 1 AC 421 Lord BrowneWilkinson of the House of Lords said, at 435: … in my judgment it is in any event wrong to lift wholesale the detailed rules developed in the context of traditional trusts and then seek to apply them to trusts of quite a different kind. In the modern world the trust has become a valuable device in commercial and financial dealings. The fundamental principles of equity apply as much to such trusts as they do to the traditional trusts in relation to which these principles were originally formulated.

But in my judgment it is important, if the trust is not to be rendered commercially useless, to distinguish between the basic principles of trust law and those specialist rules developed in relation to traditional trusts which are applicable only to such trusts, and the rationale of which no application to trusts of quite a different kind.

7.8 In Metro Motor Inns Hotels & Motels Pty Ltd v Strathaven Holdings Pty Ltd [2000] NSWSC 1004, Young J of the New South Wales Supreme Court said, at [10]: The High Court in Bridgewater v Leahy [1998] HCA 66; (1998) 194 CLR 457 made it quite clear that Equity Courts in this century are here to administer practical equity. Equity is not beyond the age of child bearing and must adjust its attitude to changing commercial scenarios. The fact that trading trusts of this nature have been growing in popularity over the last ten years has meant that equity has had to make orders of a type not known since before trading trusts ceased to be popular in about 1840 to preserve peoples’ rights.

[page 311] 7.9 Around the same time, the esteemed English trusts lawyer Professor David Hayton observed that: In the twenty-first century it seems likely that the English trust concept will be seen to be a more flexible obligation than is currently considered to be the case so that out-dated descriptions or definitions of the trust will need to be re-cast.4

7.10 To similar effect, the distinguished Australian trusts academic Professor Michael Bryan urged that: [C]ourts must develop ‘specialist rules’, or at the very least modify settled equitable principle, if the business objectives of the trust are to be properly effectuated [and] must adapt established trust principles to the contemporary reality of the ‘contractual beneficiary’ whose expectations are very different from the traditional object of a settlor’s bounty.5

7.11 An acknowledgement of the commercial trust’s special status requires acceptance that it is an economic entity that is functionally equivalent to a corporation. As such, it should to the fullest extent commensurate with company-like policies around investor and creditor protection, be viewed through the same lens of business associations theory and jurisprudence as the company, much as occurred among the American judiciary and legislatures. This would not require a wholesale adoption of the American law of commercial trusts or the entire body of law and economics theory

which was a driving force behind it, but it would involve a recognition that the commercial trust should be analysed in economic as well as legal terms. Law and economics doctrines such as contractarian theory and enterprise theory, discussed in 1.68 and 1.69, are relevant and helpful in this analysis; commercial trusts are, to a very large extent, ‘a deal, a bargain about how the trust assets are to be managed and distributed’6 and they do operate as enterprise entities. In short, commercial trusts are, and are regarded by those who participate in them as, companies in all but legal form and the laws which regulate them should more closely reflect those which regulate companies, particularly in relation to the rights and risks of stakeholders. CAMAC has acknowledged this, at least in relation to registered MIS, in the CAMAC Discussion Paper (2014); throughout that paper CAMAC states that its general approach is that the regulatory regime for MIS should be aligned with that for companies unless there are compelling reasons for treating [page 312] schemes differently. That is to be applauded but of course the issues extend beyond registered MIS to all commercial trusts.

THE ROAD AHEAD: OPTIONS 7.12 It is apparent that the foundational elements of the trust that initially attracted entrepreneurs and their advisers to it are not adequate or sufficient, even after heavy contractualisation, to cope with the applications to which the modern commercial trust is put. The reflexive response to structural challenges of this nature tends to be a call for rootand-branch statutory reform. The shortcomings of the legislative reform process to date regarding commercial trusts have been canvassed elsewhere.7 Nevertheless, statutory reform of trust law on a national basis is not an entirely fanciful proposition. It could be implemented by the Commonwealth Parliament acting under referrals of power from the states, rather than by separate state and territory legislation. The Corporations

Act itself operates with the benefit of state referrals and is the result of state and Commonwealth cooperation over many years. 7.13 Leaving aside maintenance of the status quo (which is not desirable for the reasons explored in this book), four options for reform present themselves: 1. abolish commercial trusts (or at least those of a certain type or over a certain size) and compel all of those enterprises to be conducted through Corporations Act companies; 2. abolish commercial trusts (or at least those of a certain type or over a certain size), create by statute a new hybrid business entity form as an alternative to the Corporations Act company and compel all existing commercial trusts (of that type or size) to convert into that new entity form; 3. do not abolish commercial trusts but create by statute an optional hybrid business entity form as a voluntary alternative to the Corporations Act company; or 4. do not abolish commercial trusts but implement targeted remediation and regulation through the actions of both the courts and the legislatures. 7.14 The first option is dismissed out of hand as almost certainly unacceptable, given the scale of the Australian market for commercial trusts. It is not discussed further here beyond noting that the abolition attempted by the Bubble Act of 1720 failed to bring about the demise of the commercial trust in large part because of the absence of alternative options that adequately satisfied demand. [page 313] The prohibition on unincorporated associations that came later with companies legislation also failed to eliminate permanently the commercial trust, at least in Australia, because the alternative offered did not meet certain criteria regarded by the market as valuable. In both cases, the

market found ways to circumvent the prohibition in pursuing the perceived advantages that were only available under the trust form. The commercial trust exists today because Corporations Act companies do not satisfy all of the demands of those who use the unincorporated form. 7.15 The second option is not considered to be achievable in the foreseeable future. Something similar to this option was considered with respect to registered MIS in the CAMAC Report. It recommended the abolition of the unincorporated registered scheme and its replacement with a passive separate legal entity acting through a responsible entity as its agent (described as the ‘SLE Proposal’; further detail on the proposal was provided in the CAMAC Discussion Paper (2014)). The proposal would eliminate both of the root causes of the issues the subject of this book: the lack of separate legal personality and the absence of a fully evolved policybased statutory regulatory regime. While it is theoretically workable and undoubtedly has attractions as a conceptual solution, the proposal is inchoate at best and is puzzling in some aspects. It is highly ambitious and, if history is any guide, is unlikely to gain the necessary traction for implementation in the short to medium term. Even if draft legislation could be produced quickly, structural change of this magnitude takes time. The law has so badly lagged behind commerce, and the use of the trust as a surrogate company has become so entrenched, that this kind of paradigmshifting reform at this stage of the process might be regarded as revolutionary rather than evolutionary and would inevitably spark ideological objection and lengthy debates. It would be exposed to the vicissitudes of the legislative and political process. It would become a battleground on which various stakeholder and interest groups with opposing, or at least competing, political and commercial agendas (such as investors, promoters, financiers and other creditor groups, unions, regulators, revenue authorities, consumer bodies and others) would campaign to influence the process in their favour. In addition, there would be inevitable and unavoidable debates around state and federal taxation implications. The CAMAC Report briefly acknowledges at [2.1] and [3.8] that ‘the tax treatment of schemes is an important factor in their use as a collective investment vehicle’ but this understates the issue; in reality, tax would be at the very heart of the debate.

7.16 The third option is a variant of the second but would not be accompanied by abolition or prohibition of the commercial trust in its current form. The alternative business entity form, and its taxation treatment, could [page 314] be structured so as to be highly attractive to entrepreneurs and investors by preserving as much as possible of that which is useful about the commercial trust while rectifying the more fundamental of the inherent legal defects, including those identified in this book, by having separate legal personality and a modern supporting legislative framework. The United States statutory business trust would be a useful starting point for consideration. Incentives could be provided to encourage, over time, participants in existing commercial trusts to convert to the new form. Because taxation is beyond the scope of this book, that proposal is not discussed here but further work on it, including consideration of the United States model, could prove fruitful. 7.17 On balance, the preferred option is the fourth, that is, to continue to permit the use of the trust as a business entity but to remedy the shortcomings with targeted incremental changes, through the actions of the legislature, assisted by the courts. This would be a less radical and therefore less controversial course than the other options and thus would be less likely to arouse the objections and challenges described in relation to the other options above. The objective is to accommodate the reasonable commercial expectations of participants in the modern commercial trust by rectifying those elements that place participants in a materially worse position than their counterparts in a Corporations Act company, while leaving undisturbed the essential benefits accruing to them from use of the trust device. It is acknowledged that this remedial option also has its challenges — the issues are many and complex — however, most of them are now known and, in terms of maximising the chances of early adoption and implementation, this option would be seen as an evolutionary next step along a continuum rather than a revolutionary

structural shift. Reform in this area is a work-in-progress, and this would represent the latest instalment. 7.18 By a comparative analysis against the American law of commercial trusts, litigants could urge the High Court of Australia to take a lead role in reforming this area, much as the United States courts did in the early and mid-20th century and, indeed, much as the High Court has done in other spheres in recent decades. Where the court could not find its way clear in any given case to effect the necessary change then at least the matter would be elevated to a higher level of visibility, thence perhaps to catalyse a legislative response. 7.19 However, it is acknowledged that change through litigation can be slow and unpredictable and, in any case, the judiciary alone cannot effect the more fundamental changes that are required; some legislative action is needed. The statutory interventions into trust law in the United States (and elsewhere) that are discussed in this book provide examples for consideration. [page 315]

STATUTORY REMEDIATION 7.20 It is not an objective of this book to conclude with a model bill setting out detailed and comprehensive reform of Australian trust law as applicable to commercial trusts (even CAMAC declined to do that in relation to MIS in the CAMAC Report). However, there is no doubt that, taking guidance from legislation along the lines of that enacted in the United States and elsewhere, the allocation of legal risk among trust stakeholders could, by statute, be more closely aligned with that for participants in Corporations Act companies. It is contended that improvements could be achieved without abolishing the commercial trust or equating the trust with the company for all purposes or annihilating all of the fundamental differences that make the trust such an attractive entity form for certain endeavours. Here are some general thoughts which bring

together and draw conclusions from the discussion in this book. They are not exhaustive.

Definitional and structural matters 7.21 The first issue to be addressed would be the definitional and scoping question of what precisely is or should be a ‘commercial trust’ for the purposes of remediation and regulation. As discussed above, this would be no simple matter, but the definition proposed in 1.31 would be a workable starting point. The current concept of the ‘managed investment scheme’ would be replaced to embrace entities that are not presently within that definition, but would echo the current distinction between registered and unregistered schemes in a new distinction between ‘public commercial trusts’ and ‘private commercial trusts’ to deal with the higher level of investor protection regulation required for entities which raise funds from the public or those that are otherwise something more than merely the economic equivalent of a private joint venture or partnership embodied in trust form. Some matters would apply to both however, particularly in relation to protection of creditors and other external counterparties. 7.22 Generally, and subject to resolution of the constitutional issues, the changes suggested could be effected by a substantial upgrading or wholesale replacement of Corporations Act Ch 5C and the debt and equity raising provisions of the Act that currently apply to MIS. The benefits of the investor and creditor protection provisions in the current formulation of Chapter 5C could be preserved and extended to a wider range of commercial trusts, and be augmented by the additional changes described below to correct the perceived weaknesses in the Ch 5C regime. [page 316]

Protection of all participants 7.23 To bring them into the regulatory net and to alert external counterparties dealing with them, all commercial trusts (public and private) could be required to register with ASIC and be given a unique

numeric identifier (for example, an Australian commercial trust number or ‘ACTN’). Trustees could be required to comply with certain recordkeeping requirements, for example, strict requirements regarding the maintenance of separate accounts and records and the segregation of trust assets, along the lines of the agreements and property registers suggested in the CAMAC Report at [4.3.4] and [4.4.3], and lodgement and public reporting obligations, much as occurs now with companies. Trustees could be obliged to note the ACTN and the fact that they are acting as trustee in all business documents in which they were so acting.

Protection of equity investors 7.24 The legal risk position of equity investors in commercial trusts could be substantially improved from that described in Chapter 3. First and most fundamentally, legislation could include a statutory guarantee of limited liability along the lines of that provided for shareholders in the Corporations Act s 516. In this, guidance may be taken from the United States, Canadian and Singaporean legislation discussed in 3.90–3.98. 7.25 Further, the legislation could extend to them equivalents of several of the other protections offered to shareholders under the Corporations Act such as minority protection rights corresponding to Pt 2F (‘Members’ rights and remedies’), mandatory financial reporting by trustees along the lines of Ch 2M (‘Financial reports and audit’) and a facility to simplify derivative actions similar to that in Pt 2F.1A (‘Proceedings on behalf of a company by members and others’). 7.26 In recognition of the fact that beneficiaries under all commercial trusts have additional risks due to the nature of the trust, the legislation could extend to them the investor protection provisions of the current Ch 5C, such as the enhanced duties of trustees and their senior personnel as set out in s 601FC (‘Duties of responsible entities’), s 601FD (‘Duties of officers of responsible entities’) and s 601FE (‘Duties of employees of responsible entities’), although trade-offs would need to be resolved in relation to the trustee’s position, as noted in 7.35. These would either be non-negotiable, in that they would operate to impose consequences under both equity and under statute despite anything to the contrary in trust

instruments (which might be appropriate for public commercial trusts), or could be subject to a degree of modification (for private [page 317] commercial trusts) along the lines of ‘replaceable rules’, provided creditors and other external counterparties were protected in the manner described below. 7.27 In terms of trustee supervision, collective decision-making and equity investor ‘democracy’ generally, the legislation could include equity investor meeting provisions corresponding to those in Corporations Act Pt 2G.2 (‘Meetings of members of companies’).8 The risk of unlimited ‘direct’ personal liability via implied agency as described in 3.30 and following would be neutralised by the statutory guarantee of limited liability suggested above, although a statutory cognate of s 588V (‘When holding company liable’) as well as some codification of an equivalent of the common law on piercing or lifting the corporate veil could be included to protect creditors against insolvent trading by commercial trustees. 7.28 Statutory limitations could be placed on commercial trustees’ ability to negotiate exculpation provisions. The opportunity could be taken to expand the common law ‘irreducible core’ beyond a mere duty to act honestly and in good faith for the benefit of the beneficiaries, particularly in relation to remunerated trustees (as trustees of larger commercial trusts invariably are). For example, as a matter of policy such trustees ought not be permitted to seek exculpation for breaches of the duties of care and diligence or, indeed, any of the other investor and protection duties suggested above. In this, guidance could be taken from the Corporations Act s 283DB (‘Exemptions and indemnifications of trustee from liability’) which operates in relation to debenture trustees, the United States Uniform Trust Code §§105 and 1008 and the Singaporean Business Trusts Act (Chapter 31A) s 29, discussed in Chapter 4. Creditors’ protection in this regard would be in the ‘innocent outsider’ and direct access provisions proposed below.

7.29 Finally, because typically the grounds upon which and the methods by which equity investors can remove and replace a trustee are set before equity investors acquire their interests they are sometimes crafted so as to entrench the trustee. These could instead be cast in legislation which achieves an appropriate balance between the equity investors and the trustee. These would be non-negotiable but could allow for additional grounds for replacement to be included in trust instruments as a matter of bargain in any given case. [page 318]

Protection of creditors and other external parties 7.30 The position of creditors and other external parties dealing with commercial trustees could be substantially and economically aligned with that of creditors and counterparties dealing with companies. 7.31 Trust creditors could be given ‘innocent outsider’ protections in relation to internal trust matters, similar in substance to those available to external parties contracting with a company under the Corporations Act Pt 2B.2. In this, guidance may be taken from the United States Uniform Trust Code §§1012 and 1013 and Uniform Statutory Trust Entity Act §504, as discussed in 5.66–5.71. The test for disapplication of those protections could reflect that found in the Corporations Act s 128(4), that is, actual knowledge or suspicion that the assumption was incorrect. The legislation would need to make it clear that it was exhaustive so as to exclude the application of the Barnes v Addy doctrine and other equitable principles that could otherwise undermine the statutory protection. 7.32 As a corollary, the problem of commercial trustees acting beyond power could be addressed by legislation similar to the Corporations Act Pt 2B.2 (‘Company powers and how they are exercised’) by which they would be given plenary or universal powers that operate despite restrictions in the trust instrument. A breach of any such restriction would not invalidate or otherwise impugn transactions entered into by trustees or prejudice creditors or other external parties who did not have actual knowledge or

suspicion of the existence of the restriction. In an acknowledgement that such restrictions should operate primarily as a bargain between trustee and beneficiaries, the legislation would preserve the latters’ rights of action against the trustee personally for breaches. 7.33 The insolvency regime proposed below could give creditors a priority route of access to the value of trust assets in insolvency that is not affected by ‘related breaches’ of which the creditor had no knowledge or suspicion, or by ‘unrelated breaches’ (or, therefore, the clear accounts rule), thus eliminating the ‘double equity risk’. This could be couched in terms of giving all unsecured creditors unambiguous individual standing to seek a judicial order, short of winding up or general administration of the trust, to sell trust assets and apply the proceeds in payment of all trust debts pari passu in priority to the claims of the beneficiaries and, indeed, of the trustee itself.9 In this, guidance may be [page 319] taken from relevant parts of the United States Uniform Trust Code and the Restatement, as discussed in Chapter 5. In an acknowledgement that the rule is designed to protect beneficiaries rather than to punish creditors, the legislation could preserve beneficiaries’ rights of action against the trustee personally for relevant misconduct.

Protection of trustees 7.34 Subject to what is said above in relation to the protection of equity investors, commercial trustees’ position could be more closely aligned with that of company directors. In addition to the plenary powers suggested above, they could be given statutory protection against personal liability to external parties for engagements properly incurred in that capacity, with personal liability to such parties applying only where expressly agreed or for agreed categories of misconduct, a position similar to that currently prevailing for company directors. This would eliminate the need for a trustee to bargain for liability limitation clauses in each and every contract

it enters into in its trustee capacity. It would be drafted widely enough to protect trustees also from non-contractual trust liabilities arising from common law and statutory torts. In this, guidance may be taken from §1010 of the United States Uniform Trust Code and relevant parts of the Restatement, each discussed in Chapter 4. 7.35 In relation to fiduciary duties and trustee duties generally, guidance may be found in the philosophy, if not necessarily the precise text, of the United States Uniform Statutory Trust Entity Act §505, which as the Comment to that section states, ‘model[s] the particulars of the trustee’s fiduciary duties on the corporate fiduciary obligation rather than the more restrictive trust law fiduciary obligation because the statutory trust is used chiefly as a mode of business organization’. There should be some statutory recognition that trustees of commercial trusts, like directors of trading companies, can be expected by their equity investors (and should be permitted by law) to exercise a degree of ‘entrepreneurial flair’ (see 6.6– 6.7) in managing the trust enterprise. Commercial trustees’ duties could be fashioned to align with those imposed on company directors in Corporations Act Pt 2D.1 and the accompanying common law. This would replace and displace expressly the general trust law duties and, at least for ‘private commercial trusts’, could apply instead of the heavier burden currently imposed on responsible entities of registered MIS and their officers by Ch 5C of the Corporations Act. 7.36 Ancillary benefits could include a statutory right to remuneration subject to modification or displacement by the trust instrument or by contract, or by equity investor resolution. [page 320]

Standard (default) trust terms 7.37 The logic of the preceding proposals could be taken further with the inclusion in the legislation of a standard form of commercial trust constitution with ‘replaceable rules’, similar to the regime that operates for companies under the Corporations Act Pt 2B.4.10

Dedicated insolvency regime 7.38 Finally, all stakeholders would benefit from the enactment of a comprehensive, predictable and policy-based statutory insolvency regime with all of the key components of that which is applicable to Corporations Act companies. This would include clarification around the circumstances in which a commercial trust is to be taken to be insolvent (see the definition proposed in 6.50), a facility for placing insolvent commercial trusts, as economic entities, into a form of voluntary administration with the same objectives that apply to company administrations, as described in s 435A of the Act,11 and a comprehensive machinery for the winding up of insolvent commercial trusts.12 This statutory insolvency regime would strive to resolve the many uncertainties currently operating when commercial trusts are affected by insolvency, some of which are described in Chapter 6. Among other things, trust creditors would be placed in a much more secure and certain position than trust law currently provides, particularly in relation to their position vis-à-vis equity investors and other creditors of the trustee (including personal creditors) with respect to trust assets. This regime would replace the current Corporations Act Pt 5C.9 relating to MIS (and some ideas in this regard are discussed in the CAMAC Report). [page 321]

REFORM THROUGH THE COURTS: ‘EQUITY IS NOT BEYOND THE AGE OF CHILD BEARING’13 7.39 Meaningful change could be effected or at least initiated by the High Court of Australia (and it would need to be the High Court because many of the desired changes would be beyond the powers of a single judge or even an intermediate appellate court).14 As evidenced by the different approach taken by them to a range of issues such as innocent outsider protections, issues of trustee liability exclusion and creditors’ direct access to trust assets, the United States courts have shown that, in this area at least, real substantive change can be effected by a watchful judiciary,

attuned to changing commercial exigencies, taking a more flexible approach to equitable principles. 7.40 The debate around the extent to which equity can and should evolve with changing times and circumstances, particularly in the commercial sphere, is a longstanding and vigorous one in Australia. Equity, the home of trust law, has always prided itself on its ability to adapt and modernise as the need arose. In 2003, Justice Gummow, writing extracurially, said that ‘the complex of values which ground equitable doctrines and remedies are an unfailing and inexhaustible source of guidance across new terrain’.15 Justice Kirby said in Burke v LFOT Pty Ltd (2002) 209 CLR 282 at [121]: In developing equitable principles to fit the modern world, courts, including this [High] Court, should look beyond the exposition of the principles in old cases or texts that necessarily reflect the often rigid legal environment and judicial disposition of past times. Instead, they should search for the underlying purpose of the old rule: concepts, not detail. … Our admiration of equity’s past is best expressed by being alert to assure its present operation and future relevance.

7.41 He developed this theme further in the 2008 WA Lee Equity Lecture, arguing for greater flexibility in the Australian equity jurisdiction.16 His position on this was challenged by Justice Keane (then of the Queensland Court of Appeal but now a justice of the High Court of Australia) in the 2009 WA Lee Equity Lecture, when he argued for a more restrained and incremental development of the equity jurisdiction, noting that equitable intervention in commerce has [page 322] historically been exceptional.17 With respect, this latter point must be of very limited relevance in circumstances where commercial parties have consciously adopted equity’s creation to house an enterprise venture. Well over a decade earlier, then Chief Justice of the High Court Sir Anthony Mason had noted, extracurially, that equity had: … extended beyond old boundaries into new territory where no Lord Chancellor’s foot has previously left its imprint … Equitable doctrines and relief have penetrated the citadels of

business and commerce, long thought, at least by common lawyers, to be immune from the intrusion of such principles.18

7.42 Most recently, in Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; [2012] HCA 30 the High Court (French CJ, Gummow, Crennan, Kiefel and Bell JJ) said, at [62], that: It is undoubtedly the case that in fields of private and public law the principles of equity continue to develop by principled advances of traditional doctrine. Sir Anthony Mason has noted that while the common law comprised rules which traditionally existed as a body of customary law, equity ‘made no secret of its evolutionary development’ [citing Mason, ‘The Impact of Equitable Doctrine on the Law of Contract’ (1998) 27 Anglo-American Law Review 1 at 3].

7.43 Flexibility and responsiveness to the equities of a given dispute are the defining characteristics of equity over time. Guided by this lodestar, over the centuries the Chancery courts were active participants in the evolutionary process and molded laws governing the trust concept to suit; in effect, this is largely what the United States courts did in recognition of the commercial trust in the 19th and early 20th centuries. It was not until relatively late in its development that the law of trusts became more rigidly rules-based. Scholars have observed that the notion of trust law as a concrete and unified category of the law of equity was established during the 19th century by writers of texts and treatises seeking to bring order and a manageable structure to what was a series of loosely connected themes.19 It is within the realm of possibility that today’s judicial custodians of the equity tradition could unburden themselves of these constraints to address modern economic imperatives, as they have done elsewhere in the equity jurisdiction. [page 323] 7.44 Some Australian commentators have expressed the view, perhaps more in hope than expectation, that traditional trust law doctrine might not or should not be applied in the adjudication of disputes and insolvencies involving commercial unit trusts and MIS.20 As much as one might have sympathy for what is a reasonable proposition, there is little evidence to date of this occurring in the Australian courts or, indeed, in the

legislatures, in any meaningful way (again, beyond Corporations Act Ch 5C). The case law is thin and still evolving; although evidence is scant beyond the author’s own experience in legal practice, this may be because parties are reluctant to take the issues to the courts for fear of an unexpected or unwanted outcome and so settle disputes privately wherever feasible. Nevertheless, GFC-induced collapses have begun to provoke the issues because administrators, receivers and liquidators, not being commercial participants in the trust enterprise, are more willing to approach the courts to seek guidance and direction in matters of uncertainty for fear of challenge and personal liability if they err in making a decision without it. 7.45 One is always cautious when urging change through the Australian courts, conscious of the warnings of former High Court Justice Heydon who said that: [L]aw in general should only be changed by a process of gradual development, not by violent new advances or retreats or revolutions or ruptures … danger for judicial probity arises where the court deliberately sets out to alter the law … Disloyalty to precedent in effect gives judges uncontrolled discretionary power [which] intrudes into the true role of other arms of government.21

7.46 And yet, the history of change in Australian common law has not always been linear or incremental, particularly in recent decades. Heydon acknowledged that: ‘As business or technical conditions changed, the law could be moulded to meet them. As inconveniences came to light, they could be overcome by modifications.’22 The High Court has, for many years, demonstrated a willingness to make changes in the law (or to make new law) that it considered necessary [page 324] by overruling its own previous decisions.23 Some of the greatest advances of recent times have been effected by leaps forward, in landmark decisions of the High Court.24 Many of these advances have been in the equity jurisdiction, the home of trust law.25 7.47 However, even if the High Court were not to see its way clear to

changing the substantive law in any given case, it is conceivable that a decision in which it chose to endorse the existing (that is, traditional) law of trusts in the context of a large commercial trust, where the outcome was seen as counterintuitive or out of step with market expectations of creditors (for example, where equity investors were effectively preferred over a creditor, as happened to Bank of Australia in the Blackacre Trust hypothetical), or investors (for example, a finding of unlimited personal liability for enterprise debts), could catalyse a legislative response, as happened following the court’s 2007 decision in Sons of Gwalia v Margaretic (2007) 231 CLR 160; [2007] HCA 1: see the discussion in 5.38.

HOW INFLUENTIAL COULD US TRUST LAW BE? We have in the past borrowed, and will continue to borrow, from abroad in the endeavour of making our own law. But to adapt the language of a great Californian Chief Justice and jurist, Roger Traynor, we must, of necessity, ‘subject [foreign decisions] to inspection at the border to determine their adaptability to native soil’.26

7.48 As noted in Chapter 1, in a recent article on accessorial liability for breach of trust, former High Court justice Gummow expressed concern at ‘the persistent failure in the study in Australia (and in England) of many fields of law to look to the development of those fields in the United States’.27 [page 325] 7.49 There is substantial emphasis in this book on comparisons with American trust law. While the scope of this book, as described in Chapter 1, does not include a comprehensive survey of United States trust law or a general comparative study of Australian trust law against its American equivalent, it is important in supporting these analyses to consider the extent to which it is valid to make comparisons between Australian and American trust law and the likelihood that the Australian courts and legislatures might have regard to and be persuaded by the decisions of their American counterparts.

7.50 As in the Australian colonies, the English law of trusts was received into most states as and when they became colonies or dominions of England; Blackstone wrote of the reception of English laws into ‘our more distant plantations in America’.28 However, while they enjoy a common ancestry and a quite high degree of similarity, today American trust law differs from Australian trust law in some material aspects. Some of these differences are ancient, reaching back to the Revolutionary era, but some are of more recent heritage.29 Substantive differences evolved in relation to trusts that engaged in commerce. Without investigating in detail here the many reasons why United States trust laws moved away from their English roots, it does at least appear from the case law and literature that American courts and legislators molded English equity and trust law to suit the needs of a new and expanding country, struggling to establish itself as a federation of states in the post-Revolutionary era unburdened by the historical baggage attached to the English law of trusts. 7.51 The Massachusetts trust provides a paradigm example of this process. It had much in common with the English unincorporated joint stock company and emerged for similar reasons before the ready availability of incorporation. Unlike the English experience, however, the enactment of the first general corporations legislation in Massachusetts and other states in the 19th century did not kill off the use of the trust as a form of unincorporated company. The [page 326] Massachusetts trust continued to flourish and spread to other states even after the enactment of that legislation for three principal reasons. 7.52 First, that and many other states’ legislation was held not to outlaw the trust in that form as an unincorporated business association. Indeed, some states did not seek to outlaw unincorporated business associations at all, leaving incorporation merely as an optional alternative. Maitland expressed the view that this was because ‘laws prohibiting men from forming large unincorporated partnerships would have been regarded as an unjustifiable interference with freedom of contract, and even that the

validity of such a law might not always be beyond question’.30 Many states even passed legislation that facilitated the use of the Massachusetts trust by clarifying uncertainties in relation to their legal status and that legislation ultimately led to the emergence of the statutory business trust. 7.53 Second, corporations legislation imposed regulatory strictures that were undesirable to many entrepreneurs, including limitations on the amount of capital that could be raised, mandatory public reporting and disclosure requirements, specific and targeted taxation regimes and a prohibition on owning and dealing in real estate.31 Being state-based, that legislation was often infused with protectionist sanctions.32 In 1922 James Crotty, President of the American Trust Company of Chicago, published an article in which he advocated vigorously, and somewhat colourfully, for the Massachusetts trust over the incorporated form. He identified the many advantages of the former (and named several very large enterprises conducted under that form) and castigated state legislatures for their failure to support the idea of a national companies law and their eagerness instead to enact laws that were ‘restrictive, regulatory and punitive’ of the corporation; he ‘perceive[d] the spectacle of the parent (the legislature) strangulating its own child (the corporation) to a point beyond all hope of its recovery as an efficient agency of trade’.33 [page 327] 7.54 Third, as part of the protectionism evident in early state-based corporations legislation, some states prohibited local corporations from owning shares in corporations domiciled in other states. While this was a further fillip to the use of the Massachusetts trust as a vehicle for crossborder business activity, it also led to another famous (or, perhaps, infamous) American example of the commercial trust in the mid-to-late 19th century, this time as an instrument for monopolisation — a use which gave rise to the expression ‘anti-trust’ as a generic term to describe legislation and enforcement action designed to break up and prevent monopolies, cartels and other anti-competitive behaviours. Owners of companies in the same or related markets in different states seeking to monopolise the supply side would aggregate their interests by transferring

their shares to common trustees, receiving in exchange ‘trust certificates’ — creating, in effect, a simple form of unit trust. The most notorious of these was John D Rockefeller’s Standard Oil Company, which despite its name was a trust rather than a company. The first federal legislation enacted to combat these arrangements was the Sherman Anti-Trust Act of 1890. 7.55 Australian superior courts are not unaccustomed to referencing American authority generally, and trust law in particular. In 1993 then Chief Justice of the High Court Sir Anthony Mason identified an ‘emerging trend towards a convergence of different national versions of the common law’ and urged Australian lawyers to take a more internationalist view of the common law, to focus beyond the domestic boundaries and embrace an awareness of developments in other legal systems’.34 Historically though, the Australian courts’ attitudes towards United States authority have been mixed. Apart from some constitutional cases in the early years of the High Court (and occasionally since), and some litigation in the years after the enactment of the Trade Practices Act 1974 (Cth) (which imported into Australian law concepts from United States commercial law), Australian courts have not, in the ordinary course, followed United States authorities, although reference to them is not uncommon. In the mid1990s Davies and Cohen argued that this was due in some measure to a perception that, in their search for a solution to a perceived problem, United States courts have tended not to be as constrained as the Australian courts by the need for consistent and gradual development of the law, and consequently have been more willing to find them by processes which may not be acceptable in the Australian courts.35 [page 328] 7.56 It is acknowledged that whenever one considers applying particular foreign law concepts in a domestic context, there are inherent comparative law challenges. It is not sufficient merely to identify the differences; one must consider the broader context within which that foreign law is located. To the extent that the law of a place can be said to reflect its history, it is arguable that the cultural, social, economic and political history of the United States is quite different from that of Australia.36 America’s

separation from England, and her legal institutions, occurred much earlier than, and in circumstances entirely different from, Australia’s. This gave the United States a substantial head start on Australia in developing its own versions of the common law and equity, and some powerful political and economic reasons to do so. 7.57 Despite this, the cases, statutes, academic literature and Restatements on trust law in the United States are expressed in language, and in a framework of doctrines and concepts, that are familiar to a reader versed in Australian trust law. Leaving aside statutory interventions, the development of some indigenous creations like the ‘revocable trust’ and the ‘spendthrift trust’, the reversal of the rule in Saunders v Vautier,37 and, in some cases, idiomatic nomenclature, the taxonomy of American trusts is very similar to the Australian. The American common law (that is, nonstatutory) express trust is, broadly speaking, legally and functionally the same unincorporated creature, and can be put to the same uses and purposes, as its Australian counterpart. The American trust concept is not as different from the Australian equivalent as, say, the English trust is from the German treuhand or salman, a comparison that occupied the minds of great legal historians like Maitland, Ames and Holmes,38 or from trust-like [page 329] devices in other non-common law places, the comparative study of which has produced a rich vein of literature. It is argued that the differences between American and Australian trust law, and the reasons for those differences, are not so fundamental as to render comparisons invalid or inappropriate. There are numerous examples of American trust law authority (including various editions of the Restatement and Scott on Trusts) being referenced by Australian superior courts, including the High Court. 7.58 Davies and Cohen were optimistic about the future use of American authorities in Australian courts. They pointed to the severing of formal ties to the Privy Council and the weakening influence of decisions of the English courts, particularly as the High Court of Australia continues to

develop uniquely Australian versions of the common law and equity. They highlighted also the gradual acknowledgement that judges do make law and in doing so are willing to consider jurisprudence from other common law jurisdictions.39 They concluded that ‘it [is] likely that Australian courts will increasingly turn to United States decisions as sources of persuasive authority’.40 7.59 While it would be incorrect to say that reference to United States authorities in Australian courts has become common or widespread since Davies and Cohen wrote in 1996, Australian superior courts have continued to call upon them to assist in resolving issues in matters as diverse as complex financial transactions, cross-border insolvency, contracts, professional negligence, trade practices, insider trading, taxation, property law and statutory interpretation. The modern High Court has embraced comparative analyses with United States authorities on many occasions, unselfconsciously and without feeling compelled to justify having done so. Recently, Professor Finn noted that ‘for some time now, the citation of United States texts on equity and trusts in decisions of the High Court has been commonplace’.41 [page 330] 7.60 In 2003 Michael Kirby, then a justice of the High Court of Australia, conducted a comparison of that court and the United States Supreme Court against a number of criteria and argued that the differences are less profound than the similarities. He concluded that ‘it is now extremely rare for the High Court of Australia to decide any major issue of constitutional or common law without examining the way in which similar issues have been dealt with in other like common law countries, particularly the United Kingdom, the United States and Canada’.42 In a 2005 tax case before the High Court, Commissioner of Taxation v Linter Textiles Australia Ltd (in liq) (2005) 220 CLR 592, where there was dispute about the applicability of an issue of trust law as applied in the English courts, Kirby J said, at 666–7: … [the issue] appears to have been introduced into these proceedings in a not unfamiliar reaction to keep the Australian waters of equity and trust law unsullied by foreign and

supposedly deleterious intrusions, even where (as here) the intrusions originated in the country from which the law of equity and trusts itself derives. I have no sympathy for such parochial inflexibilities.

Kirby’s support for adopting American commercial law concepts into Australian law was evident in the early 1990s when, as President of the New South Wales Court of Appeal, he urged (unsuccessfully) the importation of the US doctrine of ‘compensated surety’ into the Australian law of surety.43 7.61 For completeness, it is noted that Australian legislatures are similarly disposed to considering American statutes when framing bills. Explanatory Memoranda for federal legislation on corporations law, commercial law, consumer and trade practices law, intellectual property, terrorism and antimoney-laundering and various taxation regimes mention United States examples.

CLOSING: RELOCATING THE COMMERCIAL TRUST TO ITS PROPER PLACE 7.62 The ultimate objective of this book has been to relocate, in a taxonomic and jurisprudential sense, the commercial trust from the domain of property and estates to the family of business associations, to take up residence beside the corporation. Once that relocation and juxtaposition are accepted, it becomes [page 331] readily apparent that the law as it applies to commercial trusts is in need of refurbishment to acknowledge their economic as well as their legal status and to properly accommodate the commercial expectations of those who wish to use the trust form to promote and invest in enterprise. This would bring the law in this area into alignment with commerce. 7.63 The challenges are considerable but not insurmountable. Consistent with other modes of law that are engaged by commercial endeavour, such

as contract and corporations law, and even modern equity itself, it is hardly radical to argue that the law’s emphasis should be on the facilitation of reasonable and legitimate commercial expectations rather than their frustration though rigid application of ancient rules that are of questionable relevance to modern circumstances. The changing role of the trust demands a better framework for allocating stakeholder risk, assembled by the courts and the legislatures working together, guided by the American experience. 1.

Frederic W Maitland, The Unincorporated Body (Collected Papers, 1903).

2.

Roderick P Meagher and William M C Gummow, Jacobs’ Law of Trusts in Australia (6th ed, Butterworths, 1997) at lxxxvii.

3.

It may actually go beyond them feeling ‘obliged’. It has been argued that the courts, at least in New South Wales, seem intent on maintaining a ‘historical, intellectual and, ultimately, doctrinal position which is … purer and closer to the true traditions of equity and trusts’: Andrew Butler and Tim Miller, ‘Thoughts on Equity in New Zealand and New South Wales’ in Jamie Glister and Pauline Ridge (eds), Fault Lines in Equity (2012) at 11.

4.

David J Hayton, ‘Developing the Obligation Characteristic of the Trust’ (2001) 117 Law Quarterly Review 96.

5.

Michael Bryan, ‘Reflections on Some Commercial Applications of the Trust’ in Ramsay (ed), Key Developments in Corporate Law and Trusts Law (2002), at 435.

6.

John H Langbein, ‘The Contractarian Basis of the Law of Trusts’ (1995) 105 Yale Law Journal 625 at 627.

7.

See Nuncio D’Angelo, ‘The CAMAC Report on Managed Investment Schemes: Another Opportunity Missed?’ (2012) 23 Journal of Banking & Finance Law & Practice 253.

8.

The shareholder meeting provisions in Pt 2G.2 are largely replicated for members of registered MIS in Pt 2G.4 of the Act.

9.

Which right could be conditioned on a ‘statutory demand’ mechanism similar to that which applies in respect of debts of over $2,000 owed by companies in the Corporations Act Pt 5.4 Div 2. If the trust was insolvent then the order could be couched in terms of winding up under a dedicated regime proposed below.

10. Corporations Act s 601GA (and associated ASIC regulatory guidance) prescribes mandatory minimum content for constitutions of MIS but it is not exhaustive and does not apply to all commercial trusts. 11. The CAMAC Report recommended the adoption of a voluntary administration regime for registered MIS (acknowledging that such a regime could be enacted even if the SLE Proposal was not accepted, although there would be complexities): see [6.3.5]. Among other things, it would distinguish between situations where the responsible entity was solvent and insolvent and provide for better separation of the affairs of the scheme from the affairs of the responsible entity. It would otherwise operate in a similar fashion to corporate voluntary administration.

12. The CAMAC Report recommended the adoption of a winding up regime for insolvent registered MIS (acknowledging that such a regime could be enacted even if the SLE Proposal was not accepted), noting that ‘the Corporations Act should regulate the winding up of an insolvent scheme in a manner comparable to the regulation of the winding up of an insolvent company’: see [7.3] and [7.4] (cited quote at 183). 13. Metro Motor Inns Hotels & Motels Pty Ltd v Strathaven Holdings Pty Ltd [2000] NSWSC 1004 at [10]. 14. This much was acknowledged by the Federal Court in ASIC v Letten (No 17) (2011) 286 ALR 346; [2011] FCA 1420 at [22] in response to a ‘direct access’ argument along the lines of that described in Chapter 4. 15. William M C Gummow, ‘Equity: Too Sucessful?’ (2003) 77 Australian Law Journal 30 at 42. 16. Michael Kirby, ‘Equity’s Australian Isolationism’ (2008) 8 Queensland University of Technology Law and Justice Journal 444 (note particularly the discussion at 451–66). 17. Patrick A Keane, ‘The 2009 WA Lee Lecture in Equity: The Conscience of Equity’ (2010) 84 Australian Law Journal 92. 18. Sir Anthony Mason, ‘The Place of Equity and Equitable Remedies in the Contemporary Common Law World’ (1994) 110 Law Quarterly Review 238. 19. Robert P Austin, ‘The Melting Down of the Remedial Trust’ (1988) 11 University of New South Wales Law Journal 66 at 68; Gregory S Alexander, ‘The Transformation of Trusts as a Legal Category, 1800–1914’ (1987) 5 Law and History Review 303; Donovan W M Waters, ‘The Role of the Trust Treatise in the 1990s’ (1994) 59 Missouri Law Review 121. 20. For example, see Aakash Desai, ‘Commercial Trusts and Securitisation: Lessons from the Global Financial Crisis’ (2010) 28 Companies & Securities Law Journal 10; Alister Abadee and others, Australian Corporation Law Principles & Practice (LexisNexis, Subscription Service) at [7.12.0040]; Robert Allan Hughes, The Law of Public Unit Trusts (Longman Professional, 1992) at 197; Yuri Grbich and others, Winding up Trusts (CCH Australia Ltd, 1984) at 184. It has been asserted also with respect to English unit trusts: Robert Helm (ed), Practitioner’s Guide to Conflicts of Interest in the Financial Services Industry (2012) at [1.16]. 21. Writing extracurially in John Dyson Heydon, ‘Judicial Activism and the Death of the Rule of Law’ (2003) 23 Australian Bar Review 110 at 116 and 121. See also William M C Gummow, ‘Equity: Too Sucessful?’ (2003) 77 Australian Law Journal 30 but cf Michael Kirby, ‘Precedent Law, Practice and Trends in Australia’ (2007) 28 Australian Bar Review 243. 22. John Dyson Heydon, ‘Judicial Activism and the Death of the Rule of Law’ (2003) 23 Australian Bar Review 110 at 116. 23. See the discussion in Matthew Harding and Ian Malkin, ‘Overruling in the High Court of Australia in Common Law Cases’ (2010) 34 Melbourne University Law Review 519. 24. It is beyond scope to explore those in any detail, but examples may be given readily enough: Commercial Bank of Australia v Amadio (1983) 151 CLR 447 (unconscionable bargains), Muschinski v Dodds (1985) 160 CLR 583, Baumgartner v Baumgartner (1987) 164 CLR 137 and Giumelli v Giumelli (1999) 196 CLR 101 (the remedial constructive trust), Mabo v Queensland (1988) 166 CLR 186 (native title), and Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387, Foran v Wright (1989) 168 CLR 385 and Commonwealth v Verwayen (1990) 170 CLR 394 (estoppel: for an update, see Michael Bryan, ‘Almost 25 Years On: Some Reflections on Waltons v Maher’ (2012) 6 Journal of Equity 131).

See the discussion in Paul Finn, ‘Common Law Divergences’ (2013) 37 Melbourne University 25. Law Review (Advance). 26. Paul Finn, ‘Common Law Divergences’ (2013) 37 Melbourne University Law Review (Advance) at 3. 27. William M C Gummow, ‘Knowing Assistance’ (2013) 87 Australian Law Journal 311 at 311. 28. William Blackstone, Commentaries on the Laws of England (Oxford Clarendon Press, 1765) at 106–7. The United States District Court for the Eastern Southern Districts of New York gave an excellent account of the history of reception of English trust law into the dominion of New York in Re Joint Eastern & Southern Districts Asbestos Litigation v Falise 878 F Supp 473 (1995) at 41 and following. See also Scott on Trusts at §1.9; Lawrence M Friedman, A History of American Law (3rd ed, Touchstone Simon & Shuster, 2005) at 20–1 and 27–8; and Bogert on Trusts at §6. 29. In 2000 Halbach observed that: ‘In the last third of this [the 20th] century … trust law in the United States has experienced a period of rigorous, comprehensive reexamination. Some of this reexamination has involved adaptation to the gradual evolution of trust practice, and of related tax law and planning, over a considerably longer period of time’: Edward C Halbach Jr, ‘Uniform Acts, Restatements, and Trends in American Trust Law at Century’s End’ (2000) 88 California Law Review 1881 at 1881. 30. Frederic W Maitland, Trust and Corporation (1904) at 45. See also Leonard C B Gower, ‘Corporation Law in England and America’ (1955–1956) 11 Business Lawyer 39 at 41. 31. Its use to circumvent the prohibition in Massachusetts against corporations dealing in real estate was noted by the Supreme Judicial Court of Massachusetts in State Street Trust Co v Hall 41 NE 2d 30 (1942). For its subsequent use in other applications, see Leyland S Duxbury, ‘Business Trusts and Blue Sky Laws’ (1923–1924) 8 Minnesota Law Review 465 at 465; Sheldon A Jones, Laura M Moret and James M Storey, ‘The Massachusetts Business Trust and Registered Investment Companies’ (1988) 13 Delaware Journal of Corporate Law 421. 32. See Henry Hansmann, Reinier Kraakman and Richard Squire, ‘Law and the Rise of the Firm’ (2006) 119 Harvard Law Review 1335 at 1394–5. 33. James A Crotty, ‘The Business Trust’ (1922) 15 Lawyer & Banker and Southern Bench & Bar Review 205 at 206. 34. Sir Anthony Mason, ‘Changing the Law in a Changing Society’ (1993) 67 Australian Law Journal 568 at 574. 35. G L Davies and M P Cowen, ‘The Persuasive Force of the Decisions of United States Courts in Australia’ (1996) 15 Australian Bar Review 51. 36. A fact acknowledged by Gleeson CJ in Roach v Electoral Commissioner (2007) 233 CLR 162. By contrast, Justice Kirby, writing extracurially while a judge of the High Court of Australia, said that ‘[t]he high level of similarity of history, culture and law may therefore sometimes make it useful both to the United States and Australia to be aware of what is happening in the courts of the other country’: Michael Kirby, ‘The High Court of Australia and the Supreme Court of the United States — A Centenary Reflection’ (2003) 31(2) University of Western Australia Law Review 171 at 174. In any case, the High Court of Australia has held that the different social and legal history of the United States, in and of itself, is not a bar to consideration and even adoption of United States jurisprudence: Department of Health & Community Services v JWB & SMB (Marion’s Case) (1992) 175 CLR 218. 37. Saunders v Vautier (1841) 4 Beav 115. The rule allows an absolutely entitled beneficiary to

terminate a trust and demand a transfer to them of the trust property regardless of the wishes of the settlor or testator, as expressed in the trust instrument. It was replaced in the United States with the so-called Claflin rule, named after the Massachusetts decision Claflin v Claflin 149 Mass 19 (1889), where the court refused to follow Saunders v Vautier and held that the intentions of the settlor or testator were paramount. This interesting difference is discussed in some detail in Paul Matthews ‘The Comparative Importance of the Rule in Saunders v Vautier’ (2006) 122 Law Quarterly Review 266. 38. See Frederic W Maitland, The Unincorporated Body (Collected Papers, 1903); James Barr Ames, ‘Origin of Uses and Trusts’ (1907–1908) 21 Harvard Law Review 261; Oliver Wendell Holmes, ‘Early English Equity’ (1885) 1 Law Review Quarterly 162. See also J L Barton, ‘The Medieval Use’ (1965) Law Quarterly Review 562. 39. See also Kevin Lindgren, ‘Comment by K E Lindgren QC which introduced a seminar on The Lawmaking Role of the High Court’ (1993) 11 Australian Bar Review 185. Similar arguments were posited by Priestly, writing extracurially while a judge on the Court of Appeal of New South Wales, in relation to Australian and American contract law: L J Priestley, ‘A Guide to a Comparison of Australian and United States Contract Law’ (1989) 12 University of New South Wales Law Journal 4. Note the liberal references made by the High Court of Australia to US decisions and the Restatement (Second) of Contracts in the landmark promissory estoppel case Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387. 40. G L Davies and M P Cowen, ‘The Persuasive Force of the Decisions of United States Courts in Australia’ (1996) 15 Australian Bar Review 51 at 60. 41. Paul Finn, ‘Common Law Divergences’ (2013) 37 Melbourne University Law Review (Advance) at 7 (fn 30). 42. Michael Kirby, ‘The High Court of Australia and the Supreme Court of the United States — A Centenary Reflection’ (2003) 31(2) University of Western Australia Law Review 171 at 193. Kirby pursued this argument with continued vigour several years later in a public dialogue with Justice Scalia of the United States Supreme Court: Michael Kirby, ‘The Internationalisation of Domestic Law and its Consequences’ (2010) Bar News: Journal of the NSW Bar Association 107. 43. See Tricontinental Corporation Ltd v HDFI Ltd (1990) 21 NSWLR 689 and Corumo Holdings Pty Ltd v C Itoh Ltd (1991) 24 NSWLR 370.

[page 333]

Appendices Appendix 1 Appendix 2 Appendix 3 Appendix 4 Appendix 5 Appendix 6

Extracts from the Corporations Act Selected Reports into the Law Affecting Commercial Trusts Protecting Equity Investors Protecting the Trustee Protecting Creditors and Other Counterparties The Blackacre Trust Hypothetical

[page 335]

APPENDIX 1 Extracts from the Corporations Act PART 1 ‘MANAGED INVESTMENT SCHEME’ Corporations Act s 9 provides as follows: Managed investment scheme means: (a) a scheme that has the following features: (i) people contribute money or money’s worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not); (ii) any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders); (iii) the members do not have day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions); or (b) a time-sharing scheme but does not include the following [there follows a range of specific exclusions].

Corporations Act s 601ED provides as follows: When a managed investment scheme must be registered (1) Subject to subsection (2), a managed investment scheme must be registered under section 601EB if: (a) it has more than 20 members; or [page 336] (b) it was promoted by a person, or an associate of a person, who was, when the scheme was promoted, in the business of promoting managed investment schemes; or (c) a determination under subsection (3) is in force in relation to the scheme and the total number of members of all of the schemes to which the determination relates exceeds 20. (2) A managed investment scheme does not have to be registered if all the issues of interests in the scheme that have been made would not have required the giving of a Product Disclosure Statement under Division 2 of Part 7.9 if the scheme had been registered when the issues were made. (3) ASIC may, in writing, determine that a number of managed investment schemes are closely related and that each of them has to be registered at any time when the total number of members of all of the schemes exceeds 20. ASIC must give written notice of the determination to the operator of each of the schemes. (4) For the purpose of this section, when working out how many members a scheme has: (a) joint holders of an interest in the scheme count as a single member; and (b) an interest in the scheme held on trust for a beneficiary is taken to be held by the beneficiary (rather than the trustee) if: (i)

the beneficiary is presently entitled to a share of the trust

estate or of the income of the trust estate; or (ii) the beneficiary is, individually or together with other beneficiaries, in a position to control the trustee. (5) A person must not operate in this jurisdiction a managed investment scheme that this section requires to be registered under section 601EB unless the scheme is so registered. (6) For the purpose of subsection (5), a person is not operating a scheme merely because: (a) they are acting as an agent or employee of another person; or (b) they are taking steps to wind up the scheme or remedy a defect that led to the scheme being deregistered. (7) A person who would otherwise contravene subsection (5) because an interest in a scheme is held in trust for 2 or more beneficiaries (see paragraph (4)(b)) does not contravene that subsection if they prove that they did not know, and had no reason to suspect, that the interest was held in that way. [page 337]

PART 2 INNOCENT OUTSIDER PROTECTIONS FOR THOSE DEALING WITH A COMPANY Section 124 — Legal capacity and powers of a company (1) A company has the legal capacity and powers of an individual both in and outside this jurisdiction. A company also has all the powers of a body corporate, including the power to: [there follows a list of matters not within the capacity of individuals] … (h) do anything that it is authorised to do by any other law (including a law of a foreign country).

Section 125 — Constitution may limit powers and set out objects

(1) If a company has a constitution, it may contain an express restriction on, or a prohibition of, the company’s exercise of any of its powers. The exercise of a power by the company is not invalid merely because it is contrary to an express restriction or prohibition in the company’s constitution. (2) If a company has a constitution, it may set out the company’s objects. An act of the company is not invalid merely because it is contrary to or beyond any objects in the company’s constitution. Section 128 — Entitlement to make assumptions (1) A person is entitled to make the assumptions in section 129 in relation to dealings with a company. The company is not entitled to assert in proceedings in relation to the dealings that any of the assumptions are incorrect. (2) A person is entitled to make the assumptions in section 129 in relation to dealings with another person who has, or purports to have, directly or indirectly acquired title to property from a company. The company and the other person are not entitled to assert in proceedings in relation to the dealings that any of the assumptions are incorrect. (3) The assumptions may be made even if an officer or agent of the company acts fraudulently, or forges a document, in connection with the dealings. (4) A person is not entitled to make an assumption in section 129 if at the time of the dealings they knew or suspected that the assumption was incorrect. [page 338] Section 129 — Assumptions that can be made under section 128 Constitution and replaceable rules complied with (1) A person may assume that the company’s constitution (if any), and any provisions of this Act that apply to the company as replaceable

rules, have been complied with. Director or company secretary (2) A person may assume that anyone who appears, from information provided by the company that is available to the public from ASIC, to be a director or a company secretary of the company: (a) has been duly appointed; and (b) has authority to exercise the powers and perform the duties customarily exercised or performed by a director or company secretary of a similar company Officer or agent (3) A person may assume that anyone who is held out by the company to be an officer or agent of the company: (a) has been duly appointed; and (b) has authority to exercise the powers and perform the duties customarily exercised or performed by that kind of officer or agent of a similar company. Proper performance of duties (4) A person may assume that the officers and agents of the company properly perform their duties to the company. Document duly executed without seal (5) A person may assume that a document has been duly executed by the company if the document appears to have been signed in accordance with subsection 127(1). For the purposes of making the assumption, a person may also assume that anyone who signs the document and states next to their signature that they are the sole director and sole company secretary of the company occupies both offices. Document duly executed with seal

(6) A person may assume that a document has been duly executed by the company if: (a) the company’s common seal appears to have been fixed to the document in accordance with subsection 127(2); and [page 339] (b) the fixing of the common seal appears to have been witnessed in accordance with that subsection. For the purposes of making the assumption, a person may also assume that anyone who witnesses the fixing of the common seal and states next to their signature that they are the sole director and sole company secretary of the company occupies both offices. Officer or agent with authority to warrant that document is genuine or true copy (7) A person may assume that an officer or agent of the company who has authority to issue a document or a certified copy of a document on its behalf also has authority to warrant that the document is genuine or is a true copy. (8) Without limiting the generality of this section, the assumptions that may be made under this section apply for the purposes of this section.

[page 341]

APPENDIX 2 Selected Reports into the Law Affecting Commercial Trusts* AUSTRALIA Queensland Law Reform Commission, ‘A Report of the Law Reform Commission on the Law Relating to Trusts, Trustees, Settled Land and Charities’ (QLRC 8, 1971) Australian Law Reform Commission, ‘General Insolvency Inquiry Report No 45’ (1988) Australian Law Reform Commission and Companies and Securities Advisory Committee report, ‘Collective Investments: Other People’s Money’, (Report No 65, 1993) Companies and Securities Advisory Committee, ‘Report to the Minister for Financial Services and Regulation on Liability of Members of Managed Investment Schemes’ (2000) Report to the Australian Government ‘Review of the Managed Investments Act 1998’ (2001) (often described as the ‘Turnbull Report’) Parliamentary Joint Committee on Corporations and Financial Services, ‘Improving Australia’s Corporate Insolvency Laws: Issues Paper’ (2003) Australian Government Review of Non-forestry Managed Investment

Schemes — Issues Paper and Final Report (2008) [page 342] Parliamentary Joint Committee on Corporations and Financial Services report, Inquiry on Aspects of Agribusiness Managed Investment Schemes (2009) Corporations and Markets Advisory Committee, Discussion Paper on ‘Managed Investment Schemes’ (June 2011) Parliamentary Joint Committee on Corporations and Financial Services, ‘Inquiry into the collapse of Trio Capital’ (2012) Corporations and Markets Advisory Committee, ‘Report on Managed Investment Schemes’ (July 2012) Queensland Law Reform Commission, ‘A Review of the Trusts Act 1973 (Qld) — Discussion Paper’ (WP No 70, December 2012) Queensland Law Reform Commission, ‘Review of the Trusts Act 1973 (Qld) — Interim Report : Preliminary Recommendations’ (WP No 71, June 2013) Victorian Law Reform Commission: on 30 October 2013 the Commission announced a review into the desirability of having legislative remedies in Victoria similar to Corporations Act ss 232–234 to protect the rights of the beneficiaries of trading trusts who may be subject to oppressive conduct by a trustee. The Commission expects to report by 3 February 2015 Corporations and Markets Advisory Committee, Discussion Paper on ‘The Establishment and Operation of Managed Investment Schemes’ (March 2014)

NEW ZEALAND

New Zealand Law Commission, ‘Report on Some Problems in the Law of Trusts’ (No 79, 2002) New Zealand Law Commission, ‘Review of Trust Law in New Zealand: Introductory Issues Paper (No 19, 2010) New Zealand Law Commission, ‘Some Issues with the Use of Trusts: Review of the Law of Trusts Second Issues Paper’ (No 20, 2010) New Zealand Law Commission, ‘Perpetuities and the Revocation and Variation of Trusts: Review of the Law of Trusts Third Issues Paper’ (No 22, 2011) New Zealand Law Commission, ‘The Duties, Office and Powers of a Trustee: Review of the Law of Trusts Fourth Issues Paper’ (No 26, 2011) [page 343] New Zealand Law Commission, ‘Court Jurisdiction, Trading Trusts and Other Issues. Review of the Law of Trusts Fifth Issues Paper’ (No 28, 2011) New Zealand Law Commission, ‘Review of the Law of Trusts. Preferred Approach. Sixth Issues Paper’ (No 31, 2012) New Zealand Law Commission, ‘Review of the Law of Trusts: A Trusts Act for New Zealand’ (Report 130, 2013)

ENGLAND Trust Law Committee, ‘Rights of Creditors Against Trustees and Trust Funds — Consultation Paper’ (Tolley Publishing Co, 1997) Trust Law Committee, ‘Rights of Creditors Against Trustees and Trust Funds’ (Tolley Publishing Co, 1998) Law Commission and Scottish Law Commission, ‘Trustees’ Powers and

Duties’ (Law Com No 260 and Scot Law Com No 172, 1999) Trust Law Committee, ‘Consultation Paper on Trustee Exemption Clauses’ (1999) Law Commission, ‘Consultation Paper No 171: Trustee Exemption Clauses’ (December 2002) Law Commission, ‘Trustee Exemption Clauses, Law Com No 301’ (Cmnd 6874, 2006)

CANADA Ontario Law Reform Commission, ‘Report on The Law of Trusts’ (1984) British Columbia Law Institute, ‘Exculpation Clauses in Trust Instruments’ (BCLI Report No 17, 2002) Saskatchewan Law Reform Commission, ‘Proposals for Reform of the Trustee Act’ (2002)

IRELAND Law Commission (Ireland), ‘Consultation Paper on Trustees’ Powers and Duties’ (No 146, 1997) [page 344] Law Reform Commission (Ireland), ‘Consultation Paper on Trust Law General Proposals’ (No 35, 2005) Law Reform Commission (Ireland), ‘Report on Trust Law: General Proposals’ (No 92, 2008)

SCOTLAND

Law Commission and Scottish Law Commission, ‘Trustees’ Powers and Duties’ (Law Com No 260 and Scot Law Com No 172, 1999) Scottish Law Commission, ‘Breach of Trust’ (No 123, 2003) Scottish Law Commission, ‘Trustees and Trust Administration’ (No 126, 2004) Scottish Law Commission, ‘Nature and Constitution of Trusts’ (No 133, 2006) Scottish Law Commission, ‘Liability of Trustees to Third Parties’ (No 138, 2008) Scottish Law Commission, ‘Supplementary and Miscellaneous Issues relating to Trust Law’ (No 148, 2011) Scottish Law Commission, ‘Consultation Paper on Defects in the Exercise of Fiduciary Powers’ (December 2011) *

This is not an exhaustive list of all reports relating to the law of trusts but includes only those considered for the purposes of this book as having material relevance to the issues.

[page 345]

APPENDIX 3 Protecting Equity Investors* PART 1 EXCLUDING UNIT HOLDERS’ PERSONAL INDEMNITY TO TRUSTEE1 In the trust instrument The liability of a Unit Holder is limited to the subscription amount, if any, which remains unpaid in relation to their Units. Beyond that, a Unit Holder is not obliged to indemnify or otherwise make payment to the Trustee if there is a deficiency in the Trust Assets for any reason or purpose, including to meet the claim of any creditor of the Trustee as trustee of the Trust.

PART 2 EXCLUDING UNIT HOLDERS’ PERSONAL LIABILITY TO EXTERNAL PARTIES2 In each document between the trustee and a counterparty3 No Unit Holder is obliged to indemnify or to satisfy any claim of [Counterparty] in connection with this document or the transactions it contemplates or the Trustee’s conduct in connection with them in any circumstances, including if there is a deficiency in the Trust Assets or the Trustee is insolvent. To the fullest extent permitted by law, [Counterparty] releases each Unit Holder from any claims arising from acts or omissions of the Trustee in connection with this document and those transactions, whether committed before or after the date of

[page 346] this document. The Trustee holds the benefit of this clause on trust for each Unit Holder from time to time severally and [Counterparty] agrees that this clause may be pleaded by a Unit Holder as a complete defence to any claim to which it relates. *

Capitalised terms and concepts should be defined appropriately. The word ‘including’ and cognates is not followed by ‘without limitation’ on the assumption that the document contains a general interpretation clause to that effect. In relation to using the contents of this Appendix, see the Publisher’s Note p ix.

1.

See 3.79 and following.

2.

See 3.79 and following.

3.

This could accompany the trustee limitation of liability clause, if there is one: see Part 4 of Appendix 4: ‘Protecting the trustee’ for a sample clause.

[page 347]

APPENDIX 4 Protecting the Trustee* PART 1 THE PLENARY OR UNIVERSAL POWERS CLAUSE1 X.1 Subject to this document, the Trustee has all the powers and discretions that it is possible by law to confer on a trustee and all the powers and discretions necessary for it to be able to deal with Trust Assets as if it were the absolute owner of them acting personally. [This includes power to distribute Trust Assets in specie to the Unit Holders.]2 To the extent permitted by law but subject to this document, the Trustee may determine whether, when and how to exercise its powers and discretions in its absolute discretion. X.23Without limiting clause X.1 but otherwise subject to this document, in exercising its powers and discretions as trustee of the Trust the Trustee may: [page 348] (a) borrow or raise money for the purposes of the Trust (whether or not secured on Trust Assets and in any manner whatsoever including any form of financial accommodation); (b) enter into any transaction, financial product or investment to protect against or benefit from fluctuations in any rate, currency, value or price, [so long as it is for the purpose of hedging and not

speculation];4 (c) give guarantees and indemnities and otherwise act as surety in connection with the obligations of another person if the Trustee in good faith believes that it is in the best interests of the Unit Holders for it to do so;5 and (d) grant any type of security over Trust Assets.

PART 2 CLAUSES ATTENUATING THE FIDUCIARY BURDEN6 Mixing of Trust Assets7 [While the Trust is not a registered scheme, the/The] Trustee may mix the Trust Assets with its own property or those of any other person or trust.

Power of delegation8 (a) [Subject to the Corporations Act, the/The] Trustee may appoint, engage, terminate or replace: (i) any person as its agent, sub-agent, delegate, attorney or subattorney; (ii) any custodian or nominee or other person (alone, jointly or jointly and severally with other persons) to hold title to any Trust Asset; or (iii) otherwise, any person to exercise or perform (or to assist the Trustee to exercise or perform) any of its powers, discretions, duties and obligations in connection with the Trust. [page 349] (b) An appointment or engagement may be sole, joint, several or joint and several and may include a power in turn for that person to appoint their own agent, sub-agent, delegate, attorney, sub-attorney, custodian or nominee or other person for the relevant purpose.

(c) Any appointment or engagement under this clause may be on any terms that the Trustee determines in its absolute discretion. (d) An agent, sub-agent, delegate, attorney, sub-attorney, custodian or nominee or other person appointed by the Trustee under this clause may be an Associate9 of the Trustee. (e) To the extent permitted by law, the Trustee may waive or excuse on any terms it thinks fit any breach by any such agent, sub-agent, delegate, attorney, sub-attorney, custodian or nominee or other person of their obligations to the Trustee in connection with the Trust.

Relief from conflicts10 Subject to the [Corporations Act11 and] this document: (a) the Trustee and any Associate12 of the Trustee may at any time: (i) acquire, hold, dispose of or otherwise deal with Units;13 (ii) act in a fiduciary capacity in relation to other trusts or managed investment schemes (including as trustee, responsible entity, manager, agent, delegate, attorney, custodian or nominee); (iii) provide any services (including financial services) to the Trustee or the Trust or any Unit Holder; (iv) sell assets to the Trustee to be Trust Assets or acquire Trust Assets personally; and (v) otherwise have an interest in or enter into any contract or transaction or business arrangement with the Trustee (whether as trustee of the Trust or otherwise), an Associate of the Trustee, a Unit Holder, an Associate of a Unit Holder or any entity whose units, shares or other securities are part of the Trust Assets; [page 350] (b) the Trustee may at any time: (i) acquire, hold, dispose of or otherwise deal with, as Trust Assets,

interests in another trust or managed investment scheme in respect of which the Trustee or an Associate of the Trustee acts in a fiduciary capacity (whether as trustee, responsible entity, manager, agent, delegate, attorney, custodian, nominee or otherwise); and (ii) engage an Associate to provide services to the Trustee or the Trust or any Unit Holder; and (c) the Trustee and any of its Associates may retain for their own benefit, and are not liable to account to the Trustee, the Unit Holders or any other person for, any payment, profits or benefits received or accrued in connection with any of the matters described in this clause.

Taking and relying on advice and documents The Trustee may: (a) seek, rely and act on legal opinions or advice in relation to the interpretation of this document or any other document or generally in connection with the Trust; (b) seek, rely and act on opinions, advice, statements or information from any person consulted by the Trustee whom the Trustee believes in good faith is an expert in relation to the matters on which they are consulted; and (c) rely and act on any other document in connection with the Trust on which it is reasonable for the Trustee to rely and act. The Trustee is not liable for anything done or omitted by it in good faith in reliance on any such opinion, advice, statement, information or document.

Exculpation from breaches of trust14 To the extent permitted by law, the Trustee: (a) is not personally liable to any Unit Holder in connection with; and (b) may exercise its indemnity with respect to, and otherwise apply Trust Assets to discharge, liabilities incurred in the proper exercise of its powers as trustee despite,

[page 351] any conduct which constitutes a breach of trust, even if that results in loss or damage to or a reduction in the value of the Trust Assets, so long as that conduct was in good faith and the Trustee honestly believed that it was in the best interests of the Unit Holders.

PART 3 REMUNERATION OF TRUSTEE CLAUSE15 [In relation only to the proper performance of its duties, the/The]16 Trustee is entitled to the fees and other remuneration described in [x].17 The Trustee may take the fees and remuneration out of Trust Assets as and when they fall due. The Trustee’s right to do so has priority over the rights of the Unit Holders.

PART 4 TRUSTEE LIMITATION OF LIABILITY CLAUSES18 In the trust instrument19 The liability of the Trustee to any person (other than a Unit Holder), including in connection with any document or transaction entered into by it as trustee of the Trust, is limited to the Trustee’s ability to discharge that liability out of the Trust Assets, even if there is a deficiency in the Trust Assets. The Trustee may agree the terms of a limitation to include in any document with any person in its absolute discretion so long as the Trustee also procures the inclusion in that document of a provision in the following terms: [here insert a clause along the lines of that shown in Part 2 of Appendix 3: ‘Protecting equity investors’].20 [page 352]

In each document between the trustee and a counterparty21

Defined terms used in this clause The neutral term ‘Obligor’ is used because the trustee may be a borrower, guarantor or other surety or obligor. The expression ‘Obligor’ is preferred to the terms ‘Trustee’ or ‘Responsible Entity’ because some of the assurances and obligations are personal rather than trust: see 4.119. Consider whether any of the Obligor’s representations and warranties and undertakings (see Part 2 of Appendix 5: ‘Protecting creditors and other counterparties’ for examples) should be expressly excluded from the limitation by clause X.3(b) so as to make the Obligor personally liable in connection with a breach. ‘Transactions’ means this document, all transactions contemplated by this document and all conduct and obligations of the Obligor in connection with this document or those transactions. This defined concept is wider than the usual construct which is to limit the assurance by reference to the document(s) only. It removes any doubt that the operation of the clause extends beyond the document(s) to include transactions contemplated by it or them, even if not expressly mentioned in it or them, and all conduct (for example, negotiations) leading up to execution and conduct after execution.

Limitation of liability22 X.1 The Obligor enters into and performs the Transactions only as trustee of the Trust, except where expressly stated otherwise. X.2 In connection with the Transactions: (a) the Obligor’s liability (including for negligence) is limited to the extent it can be satisfied out of the Trust Assets. The Obligor need not pay any such liability out of other assets;23 and (b) another party may only do the following (but any resulting liability remains subject to this clause): (i)

prove and participate in, and otherwise benefit from, the winding up of the Obligor or any form of insolvency administration of the Obligor but only with respect to Trust Assets;

[page 353] (ii) exercise rights and remedies with respect to Trust Assets, including set-off; (iii) enforce any security and exercise contractual rights; and (iv) bring any other proceedings against the Obligor, seeking relief or orders that are not inconsistent with the limitations in this clause X, and may not otherwise: (v) bring proceedings against the Obligor; (vi) take any steps to have the Obligor wound up or placed into any form of insolvency administration (but this does not prevent a party becoming or appointing a controller (as defined in the Corporations Act) in respect of Trust Assets); or (vii) seek by any means (including set-off) to have a liability of the Obligor to that party (including for negligence) satisfied out of any assets of Trustee other than Trust Assets. X.3 Clauses X.1 and X.2 apply despite any other provision in this document but do not apply with respect to any liability of the Obligor to another party (including for negligence): (a) to the extent that the Obligor has no right or power to have Trust Assets applied towards satisfaction of that liability, or its right or power to do so is subject to a limitation, obligation to make good or to clear accounts, in any case because the Obligor has acted beyond power or improperly in relation to the Trust; or (b) in connection with [clauses [ ]24 or] any [other] provision which expressly binds the Obligor other than as trustee of the Trust (whether or not it also binds it as trustee of the Trust). X.4 The limitation in clause X.2(a) is to be disregarded for the purposes (but only for the purposes) of the rights and remedies described in clause X.2(b), and interpreting this document and any security for it, including in determining the following:

(a) whether amounts are to be regarded as payable (and for this purpose damages or other amounts will be taken to be payable if they would have been owed had a suit or action barred under clause X.2(b) been brought); [page 354] (b) the calculation of amounts owing; or (c) whether a breach or event of default has occurred, but any resulting liability will be subject to the limitations in this clause X. *

Capitalised terms and concepts should be defined appropriately. The word ‘including’ and cognates is not followed by ‘without limitation’ on the assumption that the document contains a general interpretation clause to that effect. Some of these clauses are expressly made subject to the Corporations Act or are stated to apply only if the trust is not a registered MIS; an alternative is to include a general interpretation clause in the trust instrument to that effect. In relation to using the contents of this Appendix, see the Publisher’s Note, p ix.

1.

See the discussion in 4.19 and following. Some clauses go on to include a lengthy but nonexhaustive list of specific powers after the plenary powers. This is not necessary nor is it desirable, since it creates the risk of inviting a court to read the plenary power down to those listed. Having said that, clause X.2 is inserted for specific reasons (see fn 3 below) and that risk is managed by the express words at the beginning.

2.

This insert is to deal with the decision in ASIC v Wellington Capital Limited (2013) 94 ACSR 293; [2013] FCAFC 52 in which a plenary powers clause was held not to give the responsible entity the power to distribute trust assets in specie. At the time of writing that decision is on appeal to the High Court. If the appeal is successful on this aspect then this insert should not be necessary.

3.

Despite the grant of plenary powers, when it comes to registered MIS the Corporations Act requires powers to ‘borrow or raise money for the purposes of the scheme’ to be specified in the scheme’s constitution: s 601GA(3) (and see the latest ASIC regulatory guidance for specific requirements). In any case, financiers of a more conservative disposition often like to see express powers like this even for non-MIS commercial trusts. Some registered MIS constitutions go on (usually in a separate clause) to describe expressly ‘the powers of the responsible entity in relation to making investments of, or otherwise dealing with, scheme property’, as contemplated by s 601GA(1)(b).

4.

This paragraph is included because there is doubt as to whether many types of derivative transactions are necessarily within the scope of a general power to borrow and raise money.

5.

See item E3 in the Checklist in Part 1 of Appendix 5: ‘Protecting creditors and other

counterparties’. 6.

See 4.24 and following.

7.

Corporations Act s 601FC(1)(i) requires the responsible entity of a registered MIS to clearly identify, segregate and keep separate scheme property.

8.

The powers of delegation of a responsible entity of a registered MIS are regulated by Corporations Act s 601FB. Transactions by a responsible entity of a registered scheme with related parties are regulated by Pt 5C.7 of the Act.

9.

As defined in Corporations Act s 11.

10. See 4.27–4.31. 11. For registered MIS, see Corporations Act Pt 5C.7. 12. As defined in Corporations Act s 11. 13. For registered MIS, see Corporations Act s 601FG. 14. See 4.32–4.40. 15. See 4.45–4.50. 16. The first option is applicable to responsible entities of registered MIS: see Corporations Act s 601GA(2). 17. The fee and remuneration structure may be described in the trust instrument itself or in a separate document incorporated by reference. If the latter, then that document should be given to (or at least be readily accessible to) each Unit Holder. 18. See the discussion in 4.88 and following. On limitations generally, note that a legal adviser who does not adequately warn an intending trustee (even an experienced one) of the issue of personal liability and the desirability of limiting it runs the risk of a negligence suit: see 4.5. 19. This clause, being in the trust instrument, will not necessarily bind external parties — the next clause is needed for that. While it seems clear that a trustee does not need an express power or permission in the trust instrument to agree a limitation of its personal liability when dealing with external parties (see 4.90) it is not uncommon for trust instruments to contain a provision along these lines for prudence sake. 20. This optional insert is designed to ensure that in limiting its own personal liability, the trustee also protects the Unit Holders and ensures that the trustee cannot purport to expand, whether knowingly or inadvertently, the Unit Holders’ liability as a trade-off with the counterparty. 21. Since this clause can only operate contractually, it only binds those who are party to it. Thus, references in this clause to a ‘party’ are references to persons who are party to the document within which this clause is included. 22. For a clause-by-clause explanatory discussion, see 4.113 and following. 23. In relation to an optional insert regarding certain amounts received by the Obligor from Beneficiaries and others, see 4.126 and following. 24. Insert reference to selected trust representations and undertakings: see the discussion at 4.119 and 4.153. For examples, see the clauses in Part 2 of Appendix 5: ‘Protecting creditors and other counterparties’.

[page 355]

APPENDIX 5 Protecting Creditors and Other Counterparties* PART 1 DUE DILIGENCE CHECKLIST FOR DEALING WITH THE TRUSTEE OF A COMMERCIAL TRUST1 General notes on use of this Checklist This Checklist suggests matters you should investigate and consider before transacting with the trustee of a commercial trust. It assumes that the trust is an Australian ‘commercial trust’ as defined in 1.31 and so it does not deal with issues specific to discretionary trusts or trusts that have a natural person as trustee.2 The matters covered are additional to the normal inquiries that should be made of the Trustee as a company and assumes that all necessary ASIC, PPS Register and land titles searches will be conducted and analysed. Some of the matters dealt with in this Checklist are also the subject of contractual protections described in Part 2 of this Appendix and the opinions described in Part 3 of this Appendix but they are not alternatives; it is always prudent to conduct these inquiries even if those contractual assurances and opinions are obtained. While brief guidance notes are included throughout, the reasons behind most of these inquiries can be found in the discussions in Chapters 3–6. In various places in this Checklist there are suggestions to amend a Trust Instrument to remove or include a provision; income tax and stamp duty implications must always be considered before amending a Trust Instrument.

Defined terms used in this Checklist Beneficiary includes a unit holder of a unit trust and, in the case of a registered MIS, a scheme member. [page 356] MIS means managed investment scheme (including one which is registered). PPS Register means the register of security interests maintained under the PPSA. PPSA means the Personal Property Securities Act 2009 (Cth). Transactions means the documents to be executed by the Trustee, all transactions contemplated by those documents and all conduct and obligations of the Trustee in connection with those documents or those transactions. Trust means the commercial trust you are intending to deal with and includes a MIS. Trust Instrument means the constitutional document(s) of the Trust. It could be a trust deed or, in the case of a MIS, a constitution (as to which, see Corporations Act ss 601GA–601GC). It may comprise more than one document. Trustee means the trustee of the commercial trust with whom you are dealing and includes, in the case of a registered MIS, its responsible entity. A.

The Trust Instrument

Note: when dealing with a Trustee it is prudent practice to be aware of the full terms of the Trust so obtain and review the Trust Instrument. If there are documents amending or supplementing the original Trust Instrument ensure that you obtain all of them and apply the Checklist inquiries, as applicable, to each of them. Ideally you should see originals but copies certified by an officer of the Trustee should normally suffice.

1.

What is the date of the Trust Instrument? Note: the Transactions must not be or have been entered into before the date the Trust is/was established.

2.

Is the Trust Instrument properly executed by all parties to it? Note: the question is applicable to all Trust Instruments but if you are dealing with the responsible entity of a registered MIS, Corporations Act s 601GB expressly requires that the constitution is contained in a document that is legally enforceable as between the members and the responsible entity.

3.

Is the Trust Instrument duly stamped? Note: state and territory stamp duty laws can make an unstamped or partially stamped document unenforceable or otherwise defective. The question is applicable to all Trust Instruments but if you are dealing with the responsible entity of a registered MIS, Corporations Act s 601GB expressly requires that the constitution is contained in a document that is legally enforceable as between the members and the responsible entity. Note that stamp duty liabilities may have arisen as a result of a change of Trustee (see items C4 and D2 below) or an amendment to the Trust Instrument (see item E7 below).

[page 357] 4.

If the Trust is a registered MIS, does the Trust Instrument comply with the formal requirements in Corporations Act Pt 5C.3 and the latest ASIC regulatory guidance? Note: as a matter of practice ASIC will not register a MIS unless it is satisfied that the constitution is compliant but there is a question as to whether and the extent to which parties contracting with the responsible entity may rely on that.

5.

Does the Trust Instrument comply with the rule against perpetuities (where applicable)? Note: although specific formulations vary, Trust Instruments for commercial trusts will usually contain a clause dealing with the rule against perpetuities (where applicable) by reference to a period of 80 years.3

B.

The Trust

Note: it may seem obvious but it is critical to satisfy yourself that the trust actually exists. While the basic question of existence can be resolved very simply for a company by conducting an ASIC search, there is no equivalent for trusts (other than registered MIS). 1.

What is the name of the Trust as shown in the Trust Instrument?

Note: use this name, exactly as set out in the Trust Instrument, in all Transactions. If the Trust has an ABN or ARSN (see item B4 below) check that the name shown in the relevant registration is exactly the same as the name shown in the Trust Instrument. 2.

Is the Trust properly constituted? Note: apart from the matters mentioned above in relation to the Trust Instrument itself, ensure that there is evidence on the face of the Trust Instrument of the three essential certainties for a trust, being: certainty of intention to create a trust; certainty of trust property; and certainty of beneficiaries.

3.

Is there any possibility on the face of the documents or known facts that the Trust is an unregistered MIS which should be registered? Note: see Corporations Act s 601ED. You may need to make further inquiries if you (or your client) have knowledge or a suspicion in this regard, or knowledge of circumstances that would indicate relevant facts to an honest and reasonable person, because the Trustee may be in breach of trust in acting while in contravention of the law. In any case, if the Trust is a registrable but unregistered MIS it is liable to be wound up by the court: s 601EE.

[page 358] 4.

What is the Trust’s ABN or ARSN (if any)? Note: a trust may have an ABN (Australian Business Number) or an ARSN (Australian Registered Scheme Number). An ARSN is allocated by ASIC when an MIS is registered. This information needs to be included in the Transaction documents in the usual way and is also important for PPSA purposes if the Trustee gives a security interest over certain Trust Assets and you wish to perfect it by registration on the PPS Register: see Sch 1 of the Personal Property Securities Regulations 2010 (Cth).

5.

Is the Trust listed on the ASX? Note: the ASX Listing Rules apply to listed MIS: see Listing Rule 19.11B. They do not just bind contractually, they are enforceable under the Corporations Act: see ss 793C and 1101B. If the Trust is listed, consider if anything in the proposed Transactions is affected by a Listing Rule or triggers a disclosure obligation: see, for example, Listing Rules 3 (Continuous Disclosure) and 11 (Significant Transactions). It may also be prudent to consider if the Trustee is in compliance with the current best practice guidelines promulgated by the ASX Corporate Governance Council (which do apply to listed MIS). Under Listing Rule 4.10.3, ASX listed entities are required to benchmark their corporate governance practices against the Council’s recommendations and, where they do not

conform, to disclose that fact and the reasons why in their annual report.

C.

The Trustee

Note: as far as the common law (including much of the law of contract) is concerned, the counterparty is dealing with the Trustee — the Trust has no corporeal existence. Nevertheless, to ensure that the Trust assets support the Transaction, the counterparty must be sure that it is dealing with the right person(s).

1.

What is the name of Trustee you are dealing with? Is it the only Trustee of the Trust? Note: if there are several Trustees, ensure that all of them will be bound to your dealing. Some Trust Instruments with multiple Trustees require that all acts or certain acts must be performed by all Trustees acting jointly. If you are dealing with only one of several Trustees ensure that it has sufficient power to act alone, either under the Trust Instrument or by other express authorisations to act on behalf of and to bind all Trustees.

2.

Does the Trustee you are dealing with have the same name as the Trustee shown in the Trust Instrument? Note: if not, then check if this is an error, a change of name or a different entity. When dealing with a registered MIS you should conduct an ASIC search to ensure that the Trustee you are dealing with is shown as the responsible entity because ASIC’s record is conclusive: see Corporations Act s 601FJ.

3.

If the Trustee you are dealing with is the person named as Trustee in the Trust Instrument, is its date of incorporation earlier than the date of the Trust Instrument?

4.

If the Trustee you are dealing with is not the person named as Trustee in the Trust Instrument (or you are otherwise aware that there has been a change of Trustee) then: obtain the document(s) by which all previous Trustees were removed and new Trustees appointed, to check that they are in order (for example, properly executed and stamped), that there was no breach of the Trust Instrument in doing this, and that the process complied with any procedural requirements in the Trust Instrument and state and territory trust/trustee legislation; [page 359] check that all the Trust Assets were properly transferred to or vested in the new Trustee: see, for example, Trustee Act 1925 (NSW) s 9 (there are equivalents elsewhere) and, for registered MIS, Corporations Act ss 601FS and 601FT;4 search the land titles register and the PPS Register (and any others that might be relevant, for example, registers of mining interests) regarding prior Trustees to ensure that they did not grant any security interest over the Trust assets which has not been

released (PPS Register searches of corporate trustees can often yield numerous security interests unrelated to the Trust in question and so it might be necessary to make direct requests for information from the existing and former Trustees); in relation to registered MIS, you should conduct an ASIC search to ensure that the Trustee you are dealing with is shown as the responsible entity because the company so named in ASIC’s record of registration remains the responsible entity until the record is altered to name another company as the responsible entity: Corporations Act s 601FJ; in relation to registered MIS, see Corporations Act Div 2 and 3 of Pt 5C.2. Note: while Corporations Act ss 601FS and 601FT effect a statutory novation so that both rights (which includes all scheme property: Re Investa Properties Ltd (2001) 187 ALR 462; [2001] NSWSC 1089) and obligations/liabilities are transferred to the incoming responsible entity, the vesting provisions in state and territory trusts/trustee legislation deal only with trust property. This means that outgoing Trustees who are not responsible entities of registered MIS continue to carry any liabilities and obligations (contractual and otherwise) from which they are not expressly released by the obligee. Against this, the outgoing Trustee has rights at general law against the incoming Trustee and the Trust assets which survive its retirement or replacement.5 From the outgoing Trustee’s perspective this leaves it exposed to matters beyond its control. From an intending counterparty’s perspective, these rights represent a potential hazard. Consider whether you should require the Trustee to seek express releases if they are not already contained in the documents above.

[page 360] 5.

If dealing with a registered MIS, does the Trustee as its responsible entity comply with Corporations Act s 601FA? Note: the responsible entity of a registered MIS must be a public company which holds an Australian financial services licence authorising it to operate a MIS. You should obtain and review a copy of its AFSL and check its authorisations.

6.

Are any of the Trust assets held by a nominee or custodian? If so, you should conduct corresponding inquiries in relation to it and each nominee/custody document and consider making the nominee or custodian a party to the Transaction documents (but this is not always feasible). Note: it is not uncommon for some or all of the assets of a Trust to be held by a custodian or nominee rather than in the Trustee’s own name. This provides certain transactional and record-keeping conveniences and means that legal title to the assets does not need to be transferred with each change of Trustee. A custody or nominee arrangement is simply another trust, even if only a relatively simple one, with the Trustee as its only beneficiary.

7.

What is the Trustee’s ACN or ARBN?

Note: this information needs to be included in the Transaction documents in the usual way and may also be important for PPSA purposes if the Trustee gives a security interest over certain Trust Assets and you wish to perfect it by registration on the PPS Register: see Schedule 1 of the Personal Property Securities Regulations 2010 (Cth).

D. Beneficiaries Note: because of the Trust’s unincorporated status, it is prudent to make certain inquiries in relation to the Beneficiaries that would not normally be relevant in relation to shareholders if you were dealing with a company.

1.

What are the names of the Beneficiaries? Consider obtaining a copy of the unit register certified by an officer of the Trustee. Note: As a practical matter, this is only applicable and available for closely-held Trusts. You may need this information to deal properly with the following questions.

2.

Is the Trustee also a Beneficiary? Note: see item E4 below in relation to Trustee personal interests and conflicts. Also, if the Trustee is or is capable of being a Beneficiary, ad valorem stamp duty may be payable in some jurisdictions on a transfer of Trust assets consequent upon a change of Trustee.

3.

If the Trustee is also a Beneficiary, is it the only Beneficiary? If not now, has the Trustee ever been the only Beneficiary? Note: while a person can be a trustee for itself and others, it cannot be a trustee for itself alone; a fixed trust cannot exist with the same person as the only trustee and the only beneficiary. This is explained by reference to both the personal and the proprietary elements of the trust discussed in Chapter 2. First, there is no person to whom the ‘trustee’ owes duties or obligations; it is patently absurd to suggest that equity would assist a person, as beneficiary, to compel itself, as trustee, to perform a trust. Secondly, although it is sometimes described as a consequence of a merger of estates (a concept which derives from property law), the issue is rather more fundamental: there is no person with an interest in the underlying property whom [page 361] equity will intervene to protect as against the legal owner or, therefore, a separate equitable interest in that property. The ownership is absolute — the ‘trustee’ does not hold the legal interest and the ‘equitable interest’. In either case, equity has no role to play and so there can be no trust.6 A highly problematic situation arises where the Trustee of an otherwise properly constituted Trust subsequently becomes the only Beneficiary for a time by acquiring all of the issued units, but then ceases to be so, either by transfer of some or all of its units or by the issue of new units to new Beneficiaries. The Trust may not survive the period during

which the Trustee was the only Beneficiary, but it is not clear what happens once there are other Beneficiaries again. It could be that a new trust is constituted on the terms of the Trust Instrument, in which case there may be serious income tax and stamp duty consequences. This issue is avoided if the units are acquired and held by a separate legal entity, even if related to the Trustee.7 4.

Does the Trust Instrument (or any other instrument of which you are aware) require the Beneficiaries to consent to or pass a resolution in favour of the Trustee entering into the proposed Transactions? Note: if so, ensure that you receive satisfactory evidence of the consent or resolution before transacting. Remember that, to be effective, the consent or resolution must be given or passed on a fully informed basis.

5.

Even if the Beneficiaries are not providing guarantees or security for the Trustee’s obligations under the proposed Transaction, is other contractual support available from them in relation to the proposed Transaction? Note: as a practical matter, this is only applicable and available for closely-held Trusts and even then it may be contentious. If contractual support is available, consider modifying the contractual provisions described in Part 2 of this Appendix for use in a separate deed with them.

6.

Do the Beneficiaries control the Trustee’s decision-making in relation to the Transaction? Note: as discussed in Chapter 3, this may give rise to an agency relationship between the Trustee and the Beneficiary/ies which could make them liable as principals in relation to the Transactions. However, if the counterparty is expecting enforceable support from the Beneficiaries, it would be prudent to provide for it expressly in the Transaction documentation. If the Beneficiaries have day-to-day control over the operation of the Trust then by definition the Trust cannot be a MIS: see paragraph (a)(iii) of the definition of ‘managed investment scheme’ in s 9 of the Corporations Act and 3.54. [page 362] For completeness, note that if the Trustee and the Beneficiaries are in ‘partnership or association’ (which may result from a control or agency relationship between them), and there are more than 20 of them in aggregate, they may contravene Corporations Act s 115 which prohibits unincorporated business associations of that size (and see paragraph (c) of the definition of ‘managed investment scheme’ in s 9 of the Corporations Act): see 2.82.

7.

Does the Trust Instrument negate or exclude any personal indemnity or other payment obligation of the Beneficiaries in relation to Trust liabilities? Note: clauses having this effect are quite usual for commercial trusts and are not of particular concern unless the counterparty is expecting support from the Beneficiaries, in

which case it would be prudent to provide for that support expressly in the Transaction documentation. As to the effect of these exclusion clauses, see the discussion in 3.79–3.89.

E.

Trustee powers

Note: for the reasons described in Chapter 5, it is of crucial importance to a counterparty that the Transactions are not in breach of trust. As discussed in 4.15 a Trustee can be in breach of trust in relation to a dealing in either of two quite different circumstances: it had no power as Trustee to undertake that dealing; or it had the power to undertake that dealing but in doing so it acted improperly, that is it breached or failed to discharge a duty or obligation. Thus, to protect its own position (and the Trustee’s indemnity, to which it may need to subrogate), a counterparty must satisfy itself that the proposed Transaction is both within the Trustee’s power and is a proper exercise of that power. 1.

Does the Trustee have the power to enter into and comply with its obligations in connection with the intended Transactions as trustee of the Trust? Note: it is very common for modern commercial trust instruments to have ‘universal power’ or ‘plenary power’ clauses instead of a list of specific powers.8 However not all do and some trust instruments (particularly older ones) still approach the matter by setting out a list of specific powers, in which case it will be necessary to find a head of power for every element of the Transaction.9 If dealing with a responsible entity of a registered MIS, Corporations Act s 601GA(3) requires borrowing powers to be specified in the scheme’s constitution (see also the latest ASIC regulatory guidance for specific requirements). This requirement operates despite the presence of a plenary powers clause. [page 363] If there is insufficient power, you should not transact with the Trustee until you are satisfied that either: the Trust Instrument is properly amended or supplemented to give the Trustee the necessary power; or all of the Beneficiaries have directed the Trustee to enter into the Transactions (the Trust Instrument may provide for this to be done by a Beneficiaries’ resolution). Remember that, to be effective, the direction (or resolution) must be given on a fully informed basis; or the Trustee has approached the court and obtained appropriate orders under the relevant state or territory trusts/trustee legislation.10

2.

Are there any conditions or matters of internal management to be satisfied in relation to:

the exercise by the Trustee of its powers to enter into and comply with obligations under the Transactions as trustee of the Trust? the exercise by the Trustee of its indemnity against the Trust assets in relation to those obligations? Note: if so, ensure that they are satisfied before transacting. If they include Beneficiary consent/direction/resolution, to be effective that must be on a fully informed basis. 3.

Is there satisfactory evidence that the Transactions are for the benefit of the Beneficiaries and for the legitimate purposes of the Trust? You may need to make further inquiries if you (or your client) know or have a suspicion that they are not, or knowledge of circumstances that would indicate relevant facts to an honest and reasonable person. Note: this is fundamental and goes to the irreducible core of a trustee’s obligation: see 4.33. If there is doubt, you should consider not transacting with the Trustee until you are satisfied that all of the Beneficiaries have consented to the Trustee entering into the Transactions (the Trust Instrument may provide for this to be done by a Beneficiaries’ resolution). Remember that, to be effective, the consent (or resolution) must be on a fully informed basis. This issue is particularly acute if the Trustee is giving a guarantee or third party security or other surety; the presence of a universal powers clause or even an express power to give guarantees etc, is not a complete answer to this question because the issue is one of proper exercise of power rather than a sufficiency of power.

4.

Is the Trustee personally interested in the proposed Transactions (in the sense of taking a personal profit or other personal benefit from it) or does anything which it proposes to do in relation to the Transactions otherwise give rise to a conflict of interest and duty, or of duty and duty, on the part of the Trustee or the Trustee’s directors? You may need to make further inquiries if you (or your client) have knowledge or a suspicion in this regard, or knowledge of circumstances that would indicate relevant facts to an honest and reasonable person. [page 364] Note: as with item E3, this is fundamental. If the answer is yes, is there a clause in the Trust Instrument specifically authorising the Trustee to transact despite the interest or conflict (as to which, see the clause headed Relief from conflicts in Part 2 of Appendix 4: ‘Protecting the trustee’ for an example)? This may or may not be sufficient: see further below. If there is no such clause, you should consider not transacting with the Trustee until you are satisfied that either: the Trust Instrument is properly amended or supplemented to include such a clause; or all of the Beneficiaries have consented to the Trustee entering into the Transactions (the Trust Instrument may provide for this to be done by a Beneficiaries’ resolution). Remember that, to be effective, the consent (or resolution) must be on a fully informed basis; or

the Trustee has approached the court and obtained appropriate orders under the relevant state or territory trusts/trustee legislation.11 Beware however: a relief from conflicts clause will not automatically protect a trustee (or, therefore, a counterparty dealing with it who has the requisite knowledge) in all circumstances: see the discussion in 4.27–4.31. In some situations, it might be prudent despite the presence of such a clause to insist that the Trustee seeks a fully informed waiver or consent from all of the Beneficiaries. In relation to conflicts involving the Trustee’s directors, see Corporations Act ss 182, 184 and 191–195. Note: for Transactions with the responsible entity of a registered MIS see the anti-conflict rules embedded in the duties in Corporations Act ss 601FC–601FE and s 601FG. Also, transactions with related parties are regulated by Part 5C.7 of the Act. In relation to listed MIS, ASX Listing Rule 10.1 regulates disposals of substantial assets to related parties of the responsible entity. 5.

Does the Trustee have an express right to be indemnified out of the Trust assets in respect of its obligations under the Transactions? Note: strictly speaking this is not necessary because an indemnity is implied in equity and (to some extent) by statute, but it would be unusual for the Trust Instrument of a commercial trust not to include an express indemnity to avoid uncertainty. If dealing with a responsible entity of a registered MIS, however, Corporations Act s 601GA(2) requires the right of indemnity to be specified in the scheme’s constitution; see also s 601FH of the Act. Note that a specific provision in a Trust Instrument may expand or contract the default position under general law. The scope of the indemnity may be affected indirectly by other provisions in the Trust Instrument: see 4.13–4.14 and the surrounding discussion.

6.

Is the Trustee’s right of indemnity out of the Trust assets drafted in such a way that it would not be affected by breach of trust by the Trustee on a matter unrelated to the Transactions (that is, the ‘unrelated breach’ risk)? This protection may be in a separate clause in the Trust Instrument. [page 365] Note: see Part 4 of this Appendix for an example. This issue is important if you are dealing with the Trustee on an unsecured basis. Not all Trust Instruments have such a clause but consider if you should require the Trust Instrument to be amended to include such a clause. Even if there is such a clause, an external party cannot directly enforce it so consider including in the Transaction documents a clause along the lines of that shown in Part 2 of this Appendix under Trustee Undertakings — Positive Undertakings clause 4(b) (iii).

7.

Is there an express power in the Trust Instrument for the Trustee to delegate powers and discretions?

Note: if any Transaction document is a power of attorney or has an embedded power of attorney (for example, for enforcement purposes) this may be a real issue. Trust Instruments will usually set out express provisions regarding delegations (see the clause headed Power of delegation in Part 2 of Appendix 4: ‘Protecting the trustee’ for an example), occasionally even if the Trustee is given plenary powers (although a well-drafted plenary powers clause alone would suffice). If there is no power of delegation and you are concerned, you should consider not transacting with the Trustee until you are satisfied that either: the Trust Instrument is properly amended or supplemented to give the Trustee an express power of delegation; or all of the Beneficiaries have consented to the Trustee entering into the Transactions (the Trust Instrument may provide for this to be done by a Beneficiaries’ resolution). Remember that, to be effective, the consent (or resolution) must be on a fully informed basis; or the Trustee has approached the court and obtained appropriate orders under the relevant state or territory trusts/trustee legislation.12 Powers of delegation of a responsible entity of a registered MIS are given and regulated by Corporations Act s 601FB but most MIS Trust Instruments will still usually set out express provisions. Also, transactions by the responsible entity of a registered MIS with related parties are regulated by Pt 5C.7 of the Act. 8.

Will the performance by the Trustee of any of the obligations or undertakings to be assumed by it under the proposed Transaction documents cause or result in a breach of the Trust Instrument? Note: if so, you should consider not transacting with the Trustee until you are satisfied that either: the Trust Instrument is properly amended or supplemented to remove that risk; or all of the Beneficiaries have consented to the Trustee assuming and performing the obligation(s) or undertaking(s) (the Trust Instrument may provide for this to be done by a Beneficiaries’ resolution). Remember that, to be effective, the consent (or resolution) must be on a fully informed basis; or the Trustee has approached the court and obtained appropriate orders under the relevant state or territory trusts/trustee legislation.13

[page 366] F.

Specific provisions of particular concern in Trust Instruments

1.

Is there an express power in the Trust Instrument to vary the terms of the Trust? Note: this question is particularly relevant if the Trust Instrument needs to be amended or supplemented to rectify a matter described in this Checklist. Not all Trust Instruments expressly set out a mechanism for amendment and so it is not always clear how an amendment is to be effected. Some Trust Instruments give the Trustee the power to amend the instrument without the consent or participation of Beneficiaries, but only if the amendments are of a minor or administrative nature. In relation to changing the constitution of a registered MIS, Corporations Act s 601GC mandates certain compulsory procedures. Among other things, changes cannot take effect until a copy of the relevant document has been lodged with ASIC.14 Income tax and stamp duty implications must always be considered before amending a Trust Instrument.15

2.

Does the Trust Instrument contain a borrowing limit or an obligation on the Trustee to maintain certain financial covenants in relation to the Trust? Note: if so, further inquiries are needed to ensure that these are not currently breached and will not be breached by the proposed Transactions. You should also consider whether it is appropriate to include any specific assurances from the Trustee in the Transaction documents.

3.

Is there a clause in the Trust Instrument which allows the Trustee to limit, or purports to limit, the Trustee’s personal liability to external counterparties? Note: see the first clause in Part 4 of Appendix 4: ‘Protecting the trustee’ as an example. If in the negotiations for the proposed Transactions a limitation of Trustee liability has not been agreed (that is, if the Trustee is to be personally liable beyond and regardless of the value of Trust assets) then a clause like this in the Trust Instrument can create confusion and could form the basis of an estoppel argument against the counterparty. Ideally, the Transaction documents should contain a provision expressly negating the operation of that limitation with respect to the Transactions. On the other hand, if commercial agreement has been reached that the Trustee’s personal liability is to be limited to Trust assets, then ensure that you include in the Transaction documents a specific limitation clause like the second clause shown in Part 4 of Appendix 4: ‘Protecting the trustee’ so that the circumstances in which that limitation operates (and, equally importantly, does not operate) are made clear.

[page 367] 4.

Is there a clause in the Trust Instrument which has the effect that the Trustee is automatically disqualified from holding office as trustee or that the office is automatically vacated, or gives the Beneficiaries the power to remove the Trustee as trustee, in the event of insolvency of the Trustee or on the appointment of a controller (for example a receiver), administrator or liquidator to the Trustee? Note: if so, you should consider not transacting with the Trustee until you are satisfied

that the Trust Instrument is properly amended to remove this provision. While these clauses serve a genuine beneficiary protection role, they can seriously impair a creditor’s options in enforcement and can create problems for insolvency officials.16 Note that the law does not automatically require an insolvent corporate trustee to vacate its office, although the court has power to remove it in those circumstances.17 5.

Does the Trust Instrument set out circumstances in which, and a process by which, the Trust may be wound up? Note: if so, ensure that an obligation or right to wind up the Trust has not been triggered, and will not be triggered by the Transactions (including by a breach or an event of default) and that the provisions do not interfere with Trust creditors’ priority over Beneficiaries’ rights with respect to Trust assets. If dealing with a responsible entity of a registered MIS, Corporations Act s 601GA requires the constitution to make adequate provision for winding up the scheme and Part 5C.9 of the Act sets out other provisions relating to winding up a scheme (see the latest ASIC regulatory guidance for specific requirements).

6.

Is the Trustee remunerated out of Trust assets? Note: if so, there must be an express power in the Trust Instrument or otherwise in the terms of Trust permitting the Trustee to take Trust assets for itself: see 4.45–4.49. The absence of such a provision may mean that the Trustee is in breach of trust each time it takes its remuneration out of Trust assets and the obligation to return the unauthorised payments would be deducted against its normal indemnity claims for trust liabilities via the clear accounts rule. If dealing with a responsible entity of a registered MIS, Corporations Act s 601GA(2) requires that any rights to be paid fees out of scheme property must be specified in the scheme’s constitution and must be available only in relation to the proper performance of the responsible entity’s duties (see also the latest ASIC regulatory guidance for specific requirements).

PART 2 CONTRACTUAL PROTECTIONS18 General notes on use of these clauses These clauses are for use when transacting with the trustee of a commercial trust. They assume that the trust is an Australian ‘commercial trust’ as defined in 1.31 and so do not deal with issues specific to discretionary trusts or trusts [page 368] which have a natural person as trustee.19 They are limited to matters

which arise out of the fact that the Obligor is transacting as a trustee and are drafted on the assumption that the Transaction document(s) will also contain all of the usual representations and warranties, undertakings and events of default for a corporate obligor. Some of the matters dealt with in these clauses are also the subject of inquiries in the Checklist set out in Part 1 of this Appendix and the opinions set out in Part 3 of this Appendix but they are not alternatives; it is always prudent to conduct those inquiries even if the contractual assurances and opinions are obtained. The clauses reflect the style of models typically used in the Australian market but have been drafted to accommodate views expressed this book. While brief guidance notes are included throughout, the reasons behind most of them can be found in the discussion in Chapters 4–6. They are framed in terms suitable for financing and security documents and are therefore designed primarily to benefit financiers (which is why they are addressed to a ‘Financier’) but they could be modified to suit any commercial contract (in which case the term ‘Financier’ would be replaced with the defined name of the counterparty). The clauses are numerous but not every clause will necessarily be relevant or applicable to every transaction. These clauses should be regarded as a guide only and as a starting point for consideration; they are all negotiable to a greater or lesser extent. References in these clauses are to ‘this document’. Where these clauses are to apply to a suite of related documents this should be replaced with the appropriate defined term, for example, ‘Finance Documents’ or ‘Transaction Documents’. Where used in the clauses the word ‘including’ and cognates is not followed by ‘without limitation’ on the assumption that the document contains a general interpretation clause to that effect.

Defined terms used in the clauses ‘Corporations Act’ means the Corporations Act 2001 (Cth). If any Trust Assets are held by a separate custodian, appropriate definitions should be included for ‘Custodian’ and ‘Custody Agreement’.

Ideally, the Custodian should be a party to the document and separate, additional assurances should be sought from it (or, if it is not to be a party, from the Obligor) in relation to [page 369] the Custodian and the Custody Agreement. These clauses assume, however, that the Custodian, if there is one, is not a party to the document. Note that some registered MIS also have an investment manager and you may wish to include provisions regarding it and the agreement(s) under which it is appointed and performs its functions. The neutral term ‘Obligor’ is used because the trustee may be a borrower, guarantor or other surety or obligor. The expression ‘Obligor’ is preferred to the terms ‘Trustee’ or ‘Responsible Entity’ because some of the assurances and obligations are personal rather than trust.20 If a trustee limitation of liability clause is included in the document, consider whether breaches of any (or all) of these trustee representations and warranties and undertakings (or, indeed, events of default) should be expressly excluded from the limitation so as to make the Obligor personally liable for breach (or those events): see clause X.3(b) of the second clause in Part 4 of Appendix 4: ‘Protecting the trustee’. ‘Transactions’ should be defined to mean this document, all transactions contemplated by this document and all conduct and obligations of the Obligor in connection with this document or those transactions. This defined concept is wider than the usual construct, which tends to limit the assurance by reference to the transaction document(s) only. It removes any doubt that the benefit to the Financier of the clauses extends beyond the document to include all transactions contemplated by it, even if not expressly mentioned in it, and all conduct (for example negotiations) leading up to its execution and conduct after its execution. ‘Trust Assets’ should reflect the corresponding definition or concept in the Trust Instrument. A well-drafted definition would include all present and

future assets held by the Obligor (directly or through nominee or custodian arrangements) as trustee of the Trust except: (a) application or subscription money or property in respect of which Units have not yet been issued; (b) proceeds of approved redemptions of Units which have been allocated and set aside but not yet been paid; (c) distributions to which a Unit Holder has become presently entitled; and (d) uncalled amounts on partly paid Units (but the right to call for them is a Trust Asset). [page 370] ‘Trust Deed’ should be defined by reference to a description of the trust deed or constitution and include all amendments and supplements so that the defined term embraces all of them. It should also include a reference to each other document which varies or supplements any of them that has been approved by the Financier for the purposes of this definition. ‘Trustee Indemnity’ should be defined generically to mean all rights and interest that a trustee has in relation to trust assets with respect to liabilities, losses and expenses incurred by it as trustee of a trust (excluding any liabilities, losses and expenses that are payable to a beneficiary of the trust in that capacity), including any right of indemnity, lien or charge, whether arising under a trust instrument or at general law. It is not usual to define this concept but doing it this way ensures that the clauses capture the entire bundle of the trustee’s rights, including both limbs of the indemnity, the lien and/or charge and all other associated rights (for example, any other power to apply assets for trust purposes),21 and avoids having to spell it all out each time the concept is used in the clauses. ‘Unit’ should reflect the corresponding definition or concept in the Trust Instrument. ‘Unit Holder’ should reflect the corresponding definition or concept in the

Trust Instrument.

For registered MIS If these clauses are to be used in documents where the Obligor is the responsible entity of a registered MIS, consider some or all of the following changes: ‘as trustee’ could be changed to ‘as responsible entity’ or in some cases ‘as trustee and responsible entity’; ‘Unit Holder’ could be changed to ‘Member’ or ‘Scheme Member’ and an appropriate definition included; ‘Trust’ could be changed to ‘Scheme’ and an appropriate definition included; ‘Trust Deed’ could be changed to ‘Constitution’ (although in some cases the expression ‘Scheme Documents’ should be used) and appropriate definitions included (‘Scheme Documents’ usually includes the Constitution, all Custody Agreements and the compliance plan for the Scheme). [page 371] Be careful if changing the definition of ‘Trust Assets’ to ‘Scheme Property’; the definition of that term in the Corporations Act is not necessarily appropriate because it may be narrower than the concept in the Trust Instrument. If the Trust is listed on the ASX, include a definition for ‘ASX Listing Rules’.

Trustee representations and warranties22 The Obligor represents and warrants as follows: 1.

The Obligor as trustee

(a) The Obligor enters into and performs the Transactions as trustee of the Trust. [Despite that, it retains personal liability in connection with the Transactions except if and to the extent otherwise expressly stated in this document.]23 (b) The Obligor is the only trustee of the Trust and no action has been taken or, to the best of the Obligor’s knowledge and belief, proposed by any relevant person to remove it as trustee of the Trust or to appoint an additional trustee to the Trust. (c) [There are no former trustees of the Trust/No former trustee of the Trust has, in that capacity, a claim against the Obligor or with respect to the assets of the Trust]. (d) The Obligor is not and has never been the only Unit Holder of the Trust.24 2.

The Trust (a) The Trust is fully and properly constituted and no action has been taken or, to the best of the Obligor’s knowledge and belief, proposed to terminate the Trust. (b) The Trust is not a managed investment scheme which must be registered under Part 5C.1 of the Corporations Act. [page 372]

3.

The Trust Deed [and the Custody Agreement] (a) The copy of the Trust Deed [and the Custody Agreement] given to the Financier on or before the date of this document [is a/are] true and up to date [copy/copies] and disclose[s] all the terms of the Trust [and the custody arrangements for the Trust], other than those implied by law. (b) The Trust Deed [and the Custody Agreement] constitute[s] valid, binding and enforceable obligations of the parties to [it/them]. (c) The Trust Deed [and the Custody Agreement] [complies/comply] with all applicable laws, [has/have] been duly executed and [is/are]

duly stamped in accordance with all applicable laws. 4.

Trustee powers and duties (a) The Obligor has power to enter into and comply with its obligations in connection with the Transactions as trustee of the Trust and in doing so it has acted and is acting properly.25 (b) As trustee of the Trust the Obligor is not now and has never been in breach of trust.26

5.

Internal management of the Trust27 All authorisations and other matters of internal management of the Trust necessary for the Obligor properly to: (a) enter into and comply with its obligations in connection with the Transactions as trustee of the Trust; and (b) exercise its Trustee Indemnity with respect to the Trust Assets in respect of those obligations, as required by the Trust Deed or applicable law, have been obtained and undertaken and are in full force and effect. [page 373]

6.

The Trust Assets (a) Except as expressly permitted by this document: (i)

the Obligor is [OR the Obligor and the Custodian are] the only legal owner[s] of the Trust Assets;

(ii) no person other than it [, the Custodian] and the Unit Holders holds or is entitled to hold an interest in the Trust Assets; and (iii) no Trust Asset is subject to an encumbrance.28 (b) Except as expressly permitted by this document, no Trust Asset has been resettled or vested in any other person.29 (c) No Unit Holder is presently entitled to call for the distribution of the Trust Assets.

7.

The Trustee Indemnity (a) The Obligor has and may exercise a Trustee Indemnity with respect to the Trust Assets in complying with its obligations in connection with the Transactions without the consent or approval of any person or court30 and that indemnity is not subject to an encumbrance, limitation or obligation to make good or clear accounts. (b) After taking into account all other present and contingent Trust liabilities, the Trust Assets are sufficiently valuable and liquid to satisfy in full the Obligor’s Trustee Indemnity with respect to its payment obligations in connection with the Transactions as and when they become due and payable. (c) The Obligor’s payment obligations under the Transactions as trustee of the Trust rank at least pari passu with the claims of all its other unsecured [page 374] and unsubordinated Trust creditors, except for obligations mandatorily preferred by law.31 (d) Except to the extent affected by conduct of the Financier, the Financier may subrogate to the Obligor’s Trustee Indemnity to satisfy the Obligor’s obligations in connection with the Transactions.

8.

Compliance with laws32 The Obligor and its officers have at all times complied in all material respects with duties and laws applicable to themselves, the Trust and the Trust Assets.

9.

[The Custodian and Custody Agreement (a) The Custodian is the only Custodian for the Trust. (b) The Obligor is not aware that any party to the Custody Agreement is in breach of it.

(c) The Obligor has given the Custodian all necessary instructions for the Transactions and no instructions which, if complied with, would result in [an Event of Default/a breach by the Obligor of this document].]

Additional representations and warranties where Obligor is the responsible entity of a registered MIS 10. Registration The Scheme is a ‘registered scheme’ (as defined in the Corporations Act). 11. Compliance with Chapter 5C of the Corporations Act No event described in section 601PB of the Corporations Act has occurred. [page 375] 12. Responsible entity powers and duties [Replace Representation and Warranty 4 ‘Trustee powers and duties’ with the following]33 (a) The Obligor has power as trustee and responsible entity of the Scheme to enter into the Transactions and comply with its obligations in connection with them. Doing so is in the proper performance of its duties and otherwise complies with Part 5C of the Corporations Act. (b) The Obligor as trustee and responsible entity of the Scheme and its officers have at all times complied with their statutory and general law duties and the exercise by the Obligor of its powers and discretions has always been in the proper performance of its duties and otherwise compliant with Part 5C of the Corporations Act and applicable regulatory instruments issued by the Australian Securities and Investments Commission. 13. Authorisations for the Scheme34

The Obligor has in full force and effect all authorisations required under the Corporations Act in respect of the Obligor and the Scheme for the entry by the Obligor [and the Custodian] into the Transactions and to comply with [its/their] obligations in connection with them, and is in compliance with all conditions imposed in or by any such authorisation. 14. [ASX Listing Rules The Obligor is in compliance with the ASX Listing Rules and the best practice guidelines promulgated by the ASX Corporate Governance Council.]

TRUSTEE UNDERTAKINGS35 Positive undertakings 1.

The Trust Deed [and Custody Agreement] (a) The Obligor must comply with the Trust Deed [and the Custody Agreement]. (b) The Obligor must give the Financier: [page 376] (i)

an up to date copy (certified by an officer of the Obligor) of the Trust Deed [and the Custody Agreement] promptly on request;

(ii) without limiting clause [Negative Undertaking 2], a copy (certified by an officer of the Obligor) of any document amending or supplementing the Trust Deed [or the Custody Agreement] promptly after execution, regardless of whether the Financier has requested it; and (iii) copies of all notices (other than routine correspondence) received by it from any Unit Holder [or the Custodian], promptly upon receipt, or which it gives to a Unit Holder [or

the Custodian], at the same time as given. 2.

Trustee powers and duties (a) The Obligor must comply with its duties as trustee of the Trust and exercise its trustee powers and discretions properly and in a manner that avoids [an Event of Default/a breach by it of this document]. (b) The Obligor must maintain proper accounts of the Trust which comply with all applicable laws and accounting principles and must give copies of them to the Financier on request.36

3.

Compliance with laws37 The Obligor and its officers must comply in all material respects with laws applicable to themselves, the Trust and the Trust Assets.

4.

The Trustee Indemnity (a) The Obligor must ensure that: (i)

it has a Trustee Indemnity with respect to the Trust Assets in connection with all of its obligations under the Transactions, and that the indemnity is not subject to an encumbrance, limitation or obligation to make good or clear accounts;

(ii) that indemnity can be exercised and enforced at any time without the consent or approval of any person or court;38 [page 377] (iii) its rights under that indemnity have priority over the rights of the Unit Holders with respect to Trust Assets; and (iv) (to the extent within its power or control) the Financier may subrogate to that indemnity in connection with the Obligor’s obligations under the Transactions. (b) Without limiting any other rights the Financier may have at the time, if [an Event of Default/a breach by it of this document] subsists the Obligor must, at the request of the Financier:

(i)

take all steps available to it to exercise its Trustee Indemnity with respect to the Trust Assets in relation to its payment obligations in connection with the Transactions; and

(ii) if the Trust Assets are not sufficiently liquid to enable the Obligor to discharge payment obligations in connection with the Transactions which are due, sell Trust Assets as soon as reasonably practicable for market value if, when sold, they have a market value or otherwise for the best price that is reasonably obtainable, having regard to the circumstances existing when they are sold.39 [; and (iii) enforce clause [X] of the Trust Deed against the Unit Holders.]40 [page 378] 5.

Taxes41 The Obligor must ensure that all taxes levied or assessed on or by reference to the Trust or the Trust Assets are paid when due.

6.

[The Custodian and Custody Agreement (a) The Obligor must comply, and ensure that the Custodian complies, with the Custody Agreement. (b) The Obligor must ensure that instructions it gives to the Custodian are consistent with the Obligor’s obligations under this document and would not, if complied with, result in [an Event of Default/a breach by it of this document].]

Additional positive undertakings where Obligor is the responsible entity of a registered MIS 7.

The Scheme Documents [Replace Positive Undertaking 1 ‘The Trust Deed [and the Custody Agreement]’ with the following] (a) The Obligor must comply [and ensure that the Custodian

complies] with the Scheme Documents. (b) The Obligor must give the Financier: (i)

an up to date copy (certified by an officer of the Obligor) of the Scheme Documents promptly on request; and

(ii) without limiting clause [Negative Undertaking 2], a copy (certified by an officer of the Obligor) of any document amending or supplementing the Scheme Documents promptly after execution, regardless of whether the Financier has requested it; and (iii) copies of all notices (other than routine correspondence) received by it from any Scheme Member [or the Custodian], promptly upon receipt, or which it gives to a Scheme Member [or the Custodian], at the same time as given. [page 379] 8.

Responsible entity powers and duties [Replace Positive Undertaking 2 ‘Trustee powers and duties’ with the following]42 (a) The Obligor must comply with its statutory and general law duties as trustee and responsible entity of the Scheme and must only exercise its trustee powers and discretions in the proper performance of its duties and in a manner that avoids [an Event of Default/a breach by it of this document]. (b) The Obligor must maintain proper accounts of the Scheme which comply with all applicable laws and accounting principles and must give copies of them to the Financier on request.43

9.

Registration The Obligor must ensure that the Scheme remains a ‘registered scheme’ (as defined in the Corporations Act).

10. Compliance with Chapter 5C of the Corporations Act

The Obligor must ensure that no event described in section 601PB of the Corporations Act occurs and must comply with applicable regulatory instruments issued by the Australian Securities and Investments Commission. 11. Authorisations for the Scheme44 The Obligor must ensure that all authorisations necessary for the operation of the Scheme and compliance by the Obligor and the Scheme with the Corporations Act [and ASX Listing Rules] are maintained in full force and effect at all times. 12. [Compliance with ASX Listing Rules The Obligor must comply with the ASX Listing Rules and the best practice guidelines promulgated by the ASX Corporate Governance Council.] [page 380]

Negative undertakings45 1.

The Obligor as trustee The Obligor must not resign or retire as trustee of the Trust or cause or permit any other person to become an additional trustee of the Trust or do anything which could effect or facilitate the retirement, removal or replacement of the Obligor as trustee of the Trust.

2.

The Trust Deed [and Custody Agreement] Unless required by law, the Obligor must not do anything which effects or facilitates a variation of the Trust Deed [or the Custody Agreement], or which supplements the terms of the Trust Deed [or the Custody Agreement].

3.

The Trust (a) The Obligor must not do anything which effects or facilitates the termination or winding up of the Trust (b) The Obligor must not issue any further Units in the Trust, other

than to an existing Unit Holder. 4.

Compliance The Obligor must not do, or fail to do, anything: (a) which could or does disqualify it from holding Trust Assets; or (b) which could or does restrict or impair in any way its ability to comply with its obligations in connection with the Transactions as trustee of the Trust.

5.

The Trust Assets46 The Obligor must not: (a) acquire any assets which are intended to be held as Trust Assets other than in the name of the Obligor [or the Custodian]; (b) do anything which effects or facilitates a resettlement or vesting of any Trust Assets; or (c) mix the Trust Assets, or do anything which could result in the Trust Assets being mixed, with other property if that would be a breach of the Trust Deed or applicable law or would restrict or impair in any way its [page 381] ability to exercise its Trustee Indemnity in respect of its obligations in connection with the Transactions; (d) redeem any Units or do anything else which effects or facilitates a distribution of Trust Assets, [other than in the ordinary course of business of the Trust and in accordance with the Trust Deed and so long as no such act results in [an Event of Default/a breach by it of this document].]

6.

No delegation The Obligor must not delegate any of its powers or discretions other than in accordance with the Trust Deed [or the Custody Agreement] and this document.

7.

Distributions, redemptions and remuneration (a) [Without limiting any other restriction in this document on the making of distributions of Trust Assets to Unit Holders, the/The] Obligor must not make any distribution of Trust Assets to the Unit Holders, or redeem Units, if and for so long as [an Event of Default/a breach by it of this document] subsists. (b) [Without limiting any other restriction in this document on the Obligor taking remuneration out of Trust Assets, the/The] Obligor must not take any remuneration for itself out of Trust Assets if and for so long as [an Event of Default/a breach by it of this document] subsists.

TRUSTEE EVENTS OF DEFAULT47 Each of the following is an Event of Default, whether or not within the control of the Obligor, if it occurs without the prior written consent of the Financier [(which is not to be unreasonably withheld)]: 1.

The Obligor ceases to be the trustee of the Trust or a new or additional trustee of the Trust [including a temporary responsible entity] is appointed or any step is taken to effect or facilitate any of those events.

2.

The Obligor ceases to have an enforceable Trustee Indemnity with respect to the Trust Assets in connection with all of its obligations under the Transactions, or that indemnity becomes subject to an encumbrance or limitation or obligation to make good or clear accounts. [page 382]

3.

An application or order is sought or made in any court by a person other than the Financier to subrogate to or oblige the Obligor to enforce its Trustee Indemnity with respect to Trust Assets.

4.

The Unit Holders resolve to wind up the Trust, an application or

order is sought or made by any person in any court to wind up the Trust, the Obligor becomes obliged to wind up the Trust (whether under the Trust Deed or under applicable law) or the winding up of the Trust commences. 5.

A court holds or the Obligor concedes that the Trust has not been fully or properly constituted, or it is alleged in writing by the Obligor or any Unit Holder [or the Custodian or the Australian Securities and Investments Commission] that the Trust has not been fully or properly constituted.

6.

An application or order is sought or made in any court by any person for any Trust Assets to be brought into court or administered by the court or under its control or for accounts to be taken in respect of the Trust.

7.

The Obligor ceases to be authorised under the Trust Deed to hold in its name [or the name of the Custodian] the assets of the Trust or to comply with its obligations in connection with the Transactions.

8.

[The Custodian ceases to be the custodian for the Trust or a new or additional custodian is appointed for the Trust.]

Additional Events of Default where Obligor is the responsible entity of a registered MIS 9.

The Scheme ceases to be a ‘registered scheme’ (as defined in the Corporations Act) or the Australian Securities and Investments Commission gives a notice under s 601PB(2) of the Corporations Act or anything else is done or is permitted to be done by any person that results or is likely to result in the Scheme ceasing to be a registered scheme.

10. Any auditor engaged to audit the Scheme’s compliance plan notifies the Australian Securities and Investments Commission of a suspected breach of the Corporations Act or the compliance committee for the Scheme lodges a report with the Australian Securities and Investments Commission under s 601JC of the Corporations Act. 11. The Obligor breaches the terms of any authorisation held by it in connection with the Scheme or which is otherwise necessary for it to

be the responsible entity of the Scheme or any such authorisation is revoked. 12. [If any securities of the Scheme are listed on the ASX] Any of the following occur: (a) securities of the Scheme which are listed on the ASX are suspended from trading for a period of [x] continuous trading days; or [page 383] (b) there is a trading halt in relation to any such securities for a period of [x] continuous trading days; or (c) the Scheme is delisted; or (d) anything is done or is permitted to be done by any person that results or is likely to result in the Scheme being delisted.

PART 3 LEGAL OPINIONS48 General notes on use of these materials These materials are for use by legal counsel when issuing a legal opinion in relation to a transaction involving the trustee of a commercial trust. They assume that the trust is an Australian ‘commercial trust’ as defined in 1.31 (which includes a registered MIS) and so do not deal with issues specific to discretionary trusts or trusts which have a natural person as trustee.49 They are limited to matters which arise out of the fact that the addressee of the opinion is transacting with a trustee and are drafted on the assumption that the opinion will also contain all of the usual opinions, assumptions and qualifications for documents executed by a corporate obligor. These materials are designed to dovetail with the Checklist in Part 1 of this Appendix and the clauses in Part 2 of this Appendix and capitalised terms are as defined there. They are drafted on the assumption that you have conducted and received favourable results from the inquiries in that Checklist.

These paragraphs reflect the style typically used in the Australian market but have been drafted to accommodate views expressed this book. They are framed in terms suitable for financing and security documents and are therefore designed primarily to benefit financiers but they could be modified to suit any commercial counterparty. These paragraphs should be regarded as a guide only and as a starting point for consideration; not all of them will be appropriate in all cases. References are to ‘the Document’ which should be defined appropriately. Where the opinion is to apply to a suite of related documents this should be pluralised or replaced with an appropriate defined term for example ‘Finance Documents’ or ‘Transaction Documents’. If the Obligor is not a party to all of the documents the subject of the opinion then the expression throughout should be ‘the [Finance/Transaction] Documents to which [it/the Obligor] is a party’. If there is a Custodian and it is party to the Document(s) some changes and additions will be required to accommodate that. [page 384] *

Opinions, assumptions and qualifications that are marked with an asterisk need only be included if the addressee is unsecured or has security over only some of the Trust’s assets (where it could be left with an unsecured residue if the asset value is insufficient to discharge the debt in full on enforcement).

Opinions We express the following opinions, which are based on the assumptions in paragraph [x] and subject to the qualifications in paragraph [y]: (a) the Obligor has the power under the Trust Deed to enter into and comply with its obligations under the Document as trustee of the Trust; (b) the Obligor’s entry into and compliance with its obligations under the

Document do not contravene the Trust Deed; (c) all actions required under the Trust Deed to authorise the Obligor’s entry into and compliance with obligations under the Document have been taken; (d) *the Obligor has the right to be indemnified out of the assets of the Trust in respect of liabilities properly incurred by it under the Document; (e) *the payment obligations of the Obligor as trustee of the Trust under the Transactions rank at least pari passu with the claims of all its other unsecured and unsubordinated Trust creditors, except for obligations mandatorily preferred by law;50 (f)

[if the Trust is a registered MIS] based on the ASIC searches described in paragraph [z]: (i) the Trust is a ‘registered scheme’ as defined in the Corporations Act; and (ii) the Obligor is the responsible entity of the Trust. [page 385]

Assumptions51 In relation to the Trust and the Obligor, we have assumed the following [(but nothing on the face of the Trust Deed makes any of these assumptions incorrect)52]: (a) the Trust is fully and properly constituted;53 (b) the Trust Deed discloses all of the terms of the Trust (other than those implied by general law) [and is valid, binding and enforceable54]; (c) the Obligor was the only trustee of the Trust at the time it executed the Document, it has been validly appointed as trustee of the Trust and no action has been taken to remove it as trustee of the Trust; (d) the Obligor is not and has never been the only beneficiary of the Trust;55

(e) in entering into the Document and complying with its obligations under it the Obligor has acted and will be acting properly as trustee of the Trust [OR if the Trust is a registered MIS: the entry by the Obligor into the Document and its compliance with the obligations in it are in the proper performance of its duties as responsible entity of the Trust];56 (f)

*the Obligor has done nothing, and will do nothing, which has the effect of releasing or impairing its right to be fully indemnified out of the assets of the Trust in respect of its obligations under the Document or making that right [page 386] subject to an encumbrance, limitation or obligation to make good or clear accounts, or unenforceable, void or voidable;57

(g) the Obligor has not released, abandoned or fettered any other power or discretion conferred on it by the Trust Deed; (h) no action has been taken or proposed to terminate or wind up the Trust or for the assets of the Trust to be resettled or to vest, be brought into court or administered by the court or under its control or for accounts to be taken in respect of the Trust; (i)

the Trust is not a managed investment scheme that is required to be registered under the Corporations Act;58

(j)

[if there is security] the property the subject of the [Security] is held by the Obligor as [an] asset[s] of the Trust;

(k) [if the Trust is a registered MIS] no event described in s 601PB of the Corporations Act has occurred; (l)

[if the Trust is a registered MIS] the Obligor as responsible entity of the Trust and its officers have at all times complied with their statutory and general law duties and the exercise by the Obligor of its powers and discretions has always been in the proper performance of its duties and otherwise in compliance with Pt 5C of the Corporations Act;

(m) [if the Trust is listed on the ASX] the Obligor as responsible entity of the Trust and its officers have at all times complied with the ASX Listing Rules.

Qualifications59 Our opinion is subject to the following qualifications: (a) *we express no opinion on whether the assets of the Trust are sufficiently valuable or liquid to satisfy the Obligor’s right to be fully indemnified out of those assets in respect of liabilities incurred by it under the Document; (b) a former trustee may have claims against a current trustee and the trust assets in relation to trust liabilities properly incurred while it was trustee which remain undischarged;60 [page 387] (c) even if a person has satisfied itself, at the time of entering into a dealing with a trustee, that the trustee is not acting in breach of trust in relation to that dealing, that person may be adversely affected if: (i) *the trustee commits a breach of trust (whether before or after that original dealing) which impairs its indemnity with respect to trust assets, and thus that person’s rights if it seeks to subrogate to it, even if that breach is unrelated to the original dealing and that person was not involved in and has no knowledge of that breach;61 or (ii) in a later dealing (whether or not related to the original dealing) that person knowingly receives trust assets in breach of trust or knowingly assists the trustee in a breach of trust (where knowledge includes culpable indifference as to relevant facts);62 (d) *an unsecured trust creditor’s ability to subrogate to the trustee’s indemnity with respect to trust assets is an equitable remedy and so is subject to equitable discretions and defences;63

*in some circumstances beneficiaries may terminate a trust and (e) require the trustee to transfer the trust assets to them (or as they direct) despite any provision to the contrary in the trust instrument.64 However, that is subject to the superior claim of the trustee against those assets in respect of liabilities properly incurred by it as trustee. That priority benefits the creditors to whom those liabilities are owed if and to the extent they can subrogate to those claims. These outcomes depend on there being no disentitling conduct on the part of the trustee or a relevant creditor; (f)

the law relating to insolvency is complex when a trust is involved. There is no dedicated statutory regime for dealing with trusts (including those which are managed investment schemes) that are affected by insolvency. Among other things, it is not possible for a trust, as such, to be placed into voluntary administration or liquidation in the sense contemplated by the Corporations Act for companies. [*Further, matters concerning the distribution of trust assets among unsecured trust creditors on insolvency and priority as between unsecured trust creditors and trust beneficiaries with respect to those assets are not fully regulated by the Corporations Act or any other statute and involve the application of trust law principles which may result in outcomes that are not consistent with Corporations Act principles];65 [page 388]

(g) having security over all of the assets of a trust does not necessarily mean that a secured party has security over the whole, or substantially the whole, of the property of the trustee for the purposes of ss 436C and 441A of the Corporations Act.

PART 4 CREDITOR PROTECTION AGAINST UNRELATED BREACHES66 To be inserted in the trust instrument

The Trustee may satisfy out of Trust Assets when due a liability incurred in a proper exercise of its powers as trustee despite and before discharging any obligation to make good, or to clear accounts in relation to, any loss or damage to or reduction in the value of the Trust Assets arising from a breach of trust that is not directly related to that liability or the person to whom it is owed. However, this does not release the Trustee from any obligation or liability it may have to the Unit Holders in relation to that loss, damage or reduction. *

In relation to using the contents of this Appendix, see the Publisher’s Note, p ix.

1.

See 5.48 and following.

2.

Nevertheless, leaving aside the elements which are specific to corporate trustees and unit trusts, much of this Checklist can be used when dealing with a discretionary trust.

3.

See Perpetuities Act 1984 (NSW); Perpetuities and Accumulations Act 1968 (Vic); Property Law Act 1974 (Qld); Property Law Act 1969 (WA); Perpetuities and Accumulations Act 1992 (Tas); Law of Property Act (NT); and Perpetuities and Accumulations Act 1985 (ACT). The rule has been abolished in South Australia: see the Law of Property Act 1936 (SA) s 61.

4.

Note that despite the state/territory and Corporations Act statutory vesting, further steps are necessary to perfect the transfer of property that is registered in the name of the outgoing Trustee, for example, land titles, shares or PPSA registered security interests. Further, when it comes to registered MIS, there is an unresolved question as to whether the deed of retirement and appointment in relation to a change of responsible entity should be registered under state or territory trusts/trustee legislation despite Corporations Act ss 601FS and 601FT, so as to engage the benefit of the statutory vesting available there. Section 601FS transfers ‘rights, obligations and liabilities of the former responsible entity in relation to the scheme’ (emphasis added), but s 601FC(2) states that ‘[t]he responsible entity holds scheme property on trust for scheme members’ (emphasis added) and this must condition s 601FS. The definition of ‘scheme property’ in s 9 is prescriptive and exhaustive and may not necessarily embrace all of the trust property in any given case (a point acknowledged by CAMAC in the CAMAC Discussion Paper (2014) at [3.3]), leaving a potential gap in the statutory vesting. Thus, in respect of a registered MIS where the Trust Instrument is governed by a particular state’s or territory’s law and/or where the outgoing responsible entity holds relevant property situated in that state, there may be circumstances where it would be prudent to register the deed on the state or territory deeds register to obtain the benefit of the statutory vesting provisions in the state/territory legislation (although this does not appear to be common market practice).

5.

See Apostolou v VA Corporation Aust Pty Ltd (2010) 77 ACSR 84; [2010] FCA 64; Rothmore Farms Pty Ltd v Belgravia Pty Ltd (2005) 239 LSJS 105; [2005] SASC 117.

6.

See, generally, Adamstoun Holdings Pty Ltd v Brogue Tableau Pty Ltd [2007] WASCA 43 and the authorities cited there, and Ford & Lee on Trusts at [5.510] and [5.530].

7.

There may be an argument that the Trust survives the Trustee’s acquisition of all units on the basis that the beneficial interest is held for a class and equity will support the continued existence of the Trust pending the arrival of new members of that class. There may also be an

argument that the interests do not merge because the legal and beneficial interests are not coextensive or that the Trust Instrument evidences an intention against merger (each of which would depend on the drafting of the Trust Instrument). However, there appears to be no authority on these points in the context of unit trusts, and the arguments would have to overcome substantial authority to the contrary. 8.

See 4.19 and following and the sample clause in Part 1 of Appendix 4: ‘Protecting the trustee’.

9.

Particular caution should be exercised in relation to derivatives and other more exotic transactions that might not be within the scope of a general power to borrow or make investments or a residual incidental/ancillary power: for an example of an express power see clause X.2(b) in Part 1 of Appendix 4: ‘Protecting the trustee’. Also, in relation to distributions of trust assets in specie, see ASIC v Wellington Capital Limited (2013) 94 ACSR 293; [2013] FCAFC 52 (which, as at the time of writing, is on appeal to the High Court).

10. See Trustee Act 1925 (NSW) ss 63 and 81; Supreme Court (General Civil Procedure) Rules 2005 (Vic) O 54 and Trustee Act 1958 (Vic) s 63; Trusts Act 1973 (Qld) ss 94 and 96; Trustees Act 1962 (WA) ss 89 and 92; Trustee Act 1936 (SA) ss 59B and 91; Trustee Act 1898 (Tas) s 47; Trustee Act (NT) s 50A; and Trustee Act 1925 (ACT) ss 63 and 81. 11. Ibid. 12. Ibid. 13. Ibid. 14. In relation to a responsible entity purporting to change the constitution absent a members’ special resolution, see 360 Capital R E Ltd v Watts (2012) 91 ACSR 328; [2012] VSCA 234 and ASIC v Australian Property Custodian Holdings Limited (rec & mgrs apptd) (in liq) (controllers apptd) (No 3) [2013] FCA 1342. In relation to amendment by unit holder resolution, see Cachia v Westpac Financial Services Ltd (2000) 170 ALR 65; [2000] FCA 161. See also ING Funds Management Ltd v ANZ Nominees Ltd (2009) 228 FLR 444; [2009] NSWSC 243. 15. In relation to income tax, see Federal Commissioner of Taxation v Clark [2011] FCAFC 5 and guidance issued by the Australian Taxation Office. As for stamp duty, the laws differ between the states and territories, as do the rulings and guidance issued by the state and territory revenue offices. 16. See Re Pleash; Suncoast Restoration Pty Ltd (in liq) (2013) 93 ACSR 606; [2013] FCA 355 and Re Neeeat Holdings (in liq) (2013) 299 ALR 744; [2013] FCA 61. 17. Wells v Wily (2004) 50 ACSR 103; [2004] NSWSC 607. 18. See 5.48 and following. 19. Nevertheless, with some modification many of these clauses could be used when dealing with the trustee of a discretionary trust. 20. In relation to use of language such as ‘as trustee/in its capacity as trustee of the Trust’ or similar when defining the ‘Obligor’ at the beginning of the document, see 4.119 and representation 1(a) below. 21. See 4.58–4.65 and 5.134–5.139. 22. Financing documents usually provide that representations and warranties are made on the date of the document and are deemed to be repeated periodically. 23. On the relationship between this representation and the use of language such as ‘in its capacity

as trustee of the Trust’ or similar when defining the ‘Obligor’ at the beginning of the document, see 4.119. The first sentence of this clause ensures the gateway to the Trust Assets is open to the Obligor as trustee and to the Financier: see 4.21 and 5.7. The second sentence is intended to remove any implication that the fact that the Obligor engages as trustee limits its personal liability. This sentence is not common (or essential) and will often catalyse discussion about the question of trustee liability limitation if it has not already been had — which is not necessarily an undesirable outcome. If a Trustee limitation of liability is agreed and a clause is included along the lines of that shown in Part 4 of Appendix 4, do not include this representation 1(a) because the subject matter is dealt with in X.1 of that clause: see 4.119. 24. See item D3 in the Checklist in Part 1 of this Appendix. 25. This clause addresses the two ways in which a trustee may be in breach of trust: acting beyond power and acting within power but improperly: see 4.15 and following. The concise expression ‘has acted and is acting properly’ embraces all of the Obligor’s duties and obligations as trustee, including the fundamental ‘no conflict’ fiduciary duty and the best interests and proper purpose duties; there is no need to spell them out individually: see 4.24 and 4.67–4.72. 26. This differs from representation 4(a) because it refers to all trustee conduct, including conduct unrelated to the Transactions. It is directed at the ‘unrelated breach’ problem created by the clear accounts rule: see 5.72 and following. 27. Arguably, this is not necessary in light of representation 4(a) (and may be within the terms of a general representation elsewhere in the document regarding ‘authorisations’) but it serves the purpose of directing the parties’ attention to any beneficiary approval or court order the Obligor might need to be able to engage in the Transactions. The reference to ‘applicable law’ is to deal with provisions such as Trustee Act 1925 (NSW) ss 63, 81 and 83 and equivalents elsewhere. 28. For comfort some parties may seek to add the qualifier ‘, other than as part of the Trustee Indemnity’. This is not necessary. As the High Court of Australia confirmed in Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226, the trustee’s lien or charge is not in the nature of an encumbrance. The term ‘encumbrance’ is deliberately chosen in favour of the increasingly popular ‘security interest’ to avoid any unintended limitation by reference to the definition of that term in the PPSA. This paragraph (iii) may not be necessary if the document contains a negotiated negative pledge prohibiting the creation of encumbrances over Trust Assets (which would also usually contain agreed exceptions). 29. This clause assumes that the document will contain (and so does not include) the usual negative covenants restricting disposals of Trust Assets (which would also usually contain agreed exceptions). 30. The reference to ‘court’ is to deal with provisions such as of the Trustee Act 1925 (NSW) ss 63, 81 and 83 and equivalents elsewhere. 31. A well-drafted document will usually contain a general representation dealing with pari passu ranking of the Obligor’s debts. If so, an option is to modify that general clause to ensure that it deals with both personal and trust obligations rather than include this as a separate representation. While the Corporations Act does not distinguish between personal and trust debts and creditors in an insolvent liquidation of a corporate trustee so that they appear to rank equally, trust creditors and personal creditors of a trustee do not always compete or therefore ‘rank’ vis-à-vis each other. Apart from anything else, trust creditors have access, albeit indirect, to trust assets while the personal creditors do not. However, if the trustee

carries unlimited personal liability for trust debts and they cannot be satisfied in full out of trust assets, then the trust creditors do compete with personal creditors over the trustee’s personal assets in respect of the residue. See also opinion (e) and qualification (f) in Part 3 of this Appendix. 32. A well-drafted document will usually contain a general representation dealing with compliance with laws by the Obligor. If so, an option is to modify that general clause to ensure that it covers the subject matter of this representation rather than include this as a separate clause. 33. These representations include the expression ‘the proper performance of its duties’, which is used in Chapter 5C of the Corporations Act: see s 601GA. This picks up, for example, the duties in s 601FC of the Act. 34. A well-drafted document will usually contain a general representation dealing with authorisations necessary to enter into the Transactions. If so, an option is to modify that to ensure that it covers the subject matter of this representation rather than include this as a separate clause. 35. If any undertaking obliges the Obligor to do something that would put it in breach of the Trust Deed, see item E8 of the Checklist in Part 1 of this Appendix. 36. A well-drafted document will usually contain a general undertaking dealing with the maintenance of accounts and the provision of accounting and other information. If so, an option is to modify that to ensure that it covers the subject matter of this undertaking rather than include this as a separate clause. 37. A well-drafted document will usually contain a general undertaking dealing with compliance with laws by the Obligor. If so, an option is to modify that to ensure that it covers the subject matter of this undertaking rather than include this as a separate clause. 38. The reference to ‘court’ is to deal with provisions such as Trustee Act 1925 (NSW) ss 63, 81 and 83 and equivalents elsewhere. 39. If you use this clause ensure that the Trustee has the power to sell Trust Assets. While imposing an absolute obligation to liquidate Trust Assets on request, the language in this paragraph regarding sale price echoes the duties of a security holder when exercising a power of sale which are imposed by Corporations Act s 420A, Personal Property Securities Act 2009 (Cth) s 131 and Conveyancing Act 1919 (NSW) s 111A (and equivalents in other states and territories), on the basis that an obligation geared to this standard is more likely to withstand challenge. However, this clause does not create a ‘security interest’ within the meaning of the PPSA. The Trustee Indemnity itself is not a security interest (see Nuncio D’Angelo and Helena Busljeta, ‘The Trustee’s Lien or Charge Over Trust Assets: A PPSA Security Interest or Not?’ (2011) 22 Journal of Banking & Finance Law & Practice 251). A right in the hands of the Financier to compel the Obligor to exercise its powers of sale would not be a PPSA security interest because, apart from anything else, it does not give the Financier an ‘interest’ in the Trust Assets in any relevant sense and does not ‘secure’ the Obligor’s payment obligation: see PPSA s 12(1). That characterisation would be more likely if the clause went on to oblige the Trustee to apply the sale proceeds to discharge the Financier’s debt. The issue is, of course, moot if the Financier holds perfected conventional security over the Trust Assets; in that case, the entire clause 4(b) is otiose since a secured creditor does not rely on the trustee’s indemnity: see 5.22. 40. The reference is to a clause in the Trust Deed, if there is one, along the lines of that shown in Part 4 of this Appendix, which addresses the ‘unrelated breach’ problem by overriding the clear accounts rule. This undertaking deals with the privity problem for the Financier.

41. A well-drafted document will usually contain a general undertaking dealing with the payment of taxes by the Obligor. If so, an option is to modify that to ensure that it covers the subject matter of this undertaking rather than include this as a separate clause. 42. In particular, these undertakings include the expression ‘the proper performance of its duties’, which is used in Ch 5C of the Corporations Act: see s 601GA. This taps into, for example, the duties in s 601FC of the Act. 43. The responsible entity of a registered MIS has obligations under both general trust law and the Corporations Act to keep proper records and accounts. A well-drafted document will usually contain a general undertaking dealing with the maintenance of accounts and the provision of accounting and other information. If so, an option is to modify that to ensure that it covers the subject matter of this undertaking rather than include this as a separate clause. 44. A well-drafted document will usually contain a general undertaking dealing with authorisations. If so, an option is to modify that to ensure that it covers the subject matter of this undertaking rather than include this as a separate clause. 45. Although strictly not necessary, negative undertakings are often prefaced with a general qualifier along the lines of ‘except with the prior written consent of the Financier’. 46. This clause assumes that the document will contain (and so does not include) the usual negative covenants restricting disposals of Trust Assets and encumbrances over Trust Assets (which would also usually contain agreed exceptions). 47. Some of these Events of Default appear on their face to cover matters addressed in the representations and warranties and/or undertakings. This is not accidental. These events are so fundamental that they should be considered to be worthy of an immediate default rather than being dealt with under the general Events of Default for false representations or breaches of undertakings, which are often qualified by materiality thresholds and/or give cure or remedy periods. 48. See 5.57 and following. 49. Nevertheless, much of this material can be used when opining in relation to a discretionary trust. 50. Opinions will usually contain a general statement about pari passu ranking of the Obligor’s obligations; this is in addition to that (if you include this then you should limit that other statement to the Obligor’s personal obligations). While the Corporations Act does not distinguish between personal and trust debts and creditors in an insolvent liquidation of a corporate trustee so that they appear to rank equally, trust creditors and personal creditors of a trustee do not always compete or therefore ‘rank’ vis-à-vis each other. Apart from anything else, trust creditors have access, albeit indirect, to trust assets while the personal creditors do not. However, if the trustee carries unlimited personal liability for trust debts and they cannot be satisfied in full out of trust assets, then the trust creditors do compete with personal creditors over the trustee’s personal assets in respect of the residue. See also qualification (f) below. 51. As discussed in 5.59, assumptions are matters on which it is not possible, feasible or appropriate for legal counsel to opine. The gap is filled to some extent by making sure that the opinion addressee has the benefit of assurances from the Obligor itself, usually by way of representations and undertakings: see examples in Part 2 of this Appendix. Thus, best practice is to ensure that the subject matter of every one of these assumptions is dealt with directly or indirectly in a representation or undertaking from the Obligor.

52.

It is common for opinions to include a general statement in respect of all assumptions to the effect that ‘None of the partners or lawyers who have acted in this matter has actual knowledge at the date of this opinion that any of these assumptions is incorrect’. The suggested language here is in addition to that.

53. This is an assumption because it involves questions of fact as well as law. If the issuing firm set up the Trust, however, the addressee may argue that it is inappropriate for it to make this assumption and may even ask for it to be included as an opinion. 54. See Corporations Act s 601GB. If the issuing firm set up the Trust the addressee may argue that it is inappropriate for it to make this assumption in relation to enforceability and may even ask for it to be expressed as an opinion. 55. See item D3 in the Checklist in Part 1 of this Appendix. 56. See 4.15 and following. While the question of power is readily verifiable by reviewing the Trust Deed, the matter of whether it has been properly exercised is not, or at least not exhaustively. Opinion paragraph (c) deals with the matter insofar as it involves anything on the face of the Trust Instrument itself but beyond that there may be facts that are unknown and unknowable that could affect the question. 57. See 5.72 and following. 58. This is an assumption because the question of whether a trust is an MIS that must be registered involves detailed questions of fact: see ss 601ED and 601EE of the Corporations Act. 59. As with assumptions, the gap in coverage created by qualifications can be filled to some extent by making sure that the opinion addressee has the benefit of assurances from the Obligor itself, usually by way of representations and undertakings: see examples in Part 2 of this Appendix. Thus, best practice is to ensure that the subject matter of every one of these qualifications is dealt with directly or indirectly in a representation or undertaking from the Obligor. 60. See item C4 of the Checklist in Part 1 of this Appendix. 61. See 5.72 and following. 62. See 5.16 and 5.63–5.64. 63. See 5.22 and following. 64. This is the so-called rule in Saunders v Vautier (1841) 4 Beav 115; see the discussion in CPT Custodian Pty Ltd v Commissioner of State Revenue (2005) 224 CLR 98; [2005] HCA 53. 65. See, generally, Chapter 6. 66. See 5.72 and following.

[page 389]

APPENDIX 6 The Blackacre Trust Hypothetical* Assume that conditions in the Australian credit and capital markets are ideal for commercial borrowers, with deep liquidity on the supply side leading to vigorous competition between banks and other financiers and a general relaxation of lending standards. A unit trust (not being a MIS) is established by a small group of private investors under the name ‘Blackacre Trust’, with the primary objective of acquiring and holding a particular commercial property comprising land and an office building known as Blackacre, and to carry on real estate investment and development business more generally. They chose the unit trust form because that offered the investors certain tax advantages and the flexibility to structure the equity interests of later entrants in terms of capital, income, ranking and other matters, while providing most of the features of a company for other purposes. The Trust Deed was drafted in quite usual terms, and gave the Trustee plenary powers to carry on the intended business, including an express power to borrow: see Part 1 of Appendix 4: ‘Protecting the trustee’. The Trust Deed included the usual limitations of liability for the Trustee and the Unit Holders: see the first clause in Part 1 of Appendix 3: ‘Protecting equity investors’ and the first clause in Part 4 of Appendix 4: ‘Protecting the trustee’. The Unit Holders appointed as the Trustee a company incorporated under the Corporations Act whose board of directors comprised a subset of the

founding investors. The initial investors subscribed for one million $1 units in aggregate, giving the Trustee total invested equity of $1,000,000. [page 390] The Trust Deed contained the usual provisions supporting the Trustee’s rights of indemnity and related rights with respect to the Trust Assets but, as is usual for such arrangements, negated the Trustee’s indemnity against the Unit Holders personally in respect of trust debts and liabilities: see the second clause in Part 1 of Appendix 3: ‘Protecting equity investors’. The Trustee, acting within power, sought and obtained an interest-only loan of $200,000 from the Bank of Australia which, faced with aggressive competition for the business, was prepared to proceed on an unsecured basis, given the more than adequate asset coverage in the Blackacre Trust and the fact that rental receipts on Blackacre would be sufficient to service interest. Mindful of the risks of dealing with trustees, the Bank took legal advice as a result of which it obtained and reviewed a certified copy of the Trust Deed and conducted comprehensive due diligence inquiries of the type described in Part 1 of Appendix 5: ‘Protecting creditors and other counterparties’. Further, the Loan Agreement contained the usual suite of protective contractual representations, warranties and undertakings from the Trustee in favour of the Bank similar to those set out in Part 2 of Appendix 5: ‘Protecting creditors and other counterparties’. For its part, the Trustee demanded and the Bank agreed to include in the Loan Agreement a limitation of liability clause along the lines of the second clause in Part 4 of Appendix 4: ‘Protecting the trustee’. With the pooled invested equity and bank debt, the Trustee purchased Blackacre for $1,200,000 which it held on the terms of the Blackacre Trust. The Trustee leased Blackacre to a thriving business tenant at market rent. At this stage the Blackacre Trust, as an accounting entity, had a balance sheet comprising $1,200,000 in assets, $200,000 in liabilities and $1,000,000 in unit holders’ equity. The effect of these transactions on the Trustee’s personal balance sheet was the addition of a personal liability of

$200,000 representing the borrowing, and a corresponding asset of the same value representing its right of indemnity out of Trust Assets. Blackacre, being trust property, was not a personal asset of the Trustee and so did not appear as such on the Trustee’s personal balance sheet. Almost immediately, the Trustee began committing breaches of trust, completely unrelated to the loan transaction. Each month, when it received the rental on Blackacre, it serviced the interest due on the loan but the directors then misappropriated the balance to their and the Trustee’s personal use and spent it on current expenditures. The misappropriations accrued to $200,000 before the matter came to the attention of the Bank. [page 391] The misappropriations constituted an event of default under the Loan Agreement and Bank of Australia moved swiftly to accelerate and enforce repayment of its loan. The Trustee, which soon collapsed into insolvency due to mismanagement, was unable to respond to the Bank of Australia’s demands. The Bank ascertained that, despite the Trustee’s insolvency, the Blackacre Trust as an economic entity was financially viable and took advice on accessing the value in Blackacre. The Bank’s legal counsel advised that, as an unsecured creditor, the Bank’s only available course was to subrogate to the Trustee’s indemnity with respect to the Trust’s property. However, while the indemnity against the Trust Assets in relation to the loan was sound, there must first be a taking of accounts as between the Trustee and Unit Holders, as the Trustee is only entitled to the net positive residue, if any, after balancing off what it owes in respect of its breaches. The Bank appointed an investigative accountant to conduct the necessary inquiries and discovered that the balance was nil. *

This hypothetical is highly simplified and does not take into account stamp duty, land taxes, local government rates or transaction costs.

[page 393]

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Non-fiduciary Duties (Hart Publishing, 2010) Cooke, Colin A, Corporation Trust and Company: An Essay in Legal History (Harvard University Press, 1951) Degeling, Simone and Edelman, James (eds), Equity in Commercial Law (Law Book Co, 2005) Derham, Rory, The Law of Set-off (4th ed, Oxford University Press, 2010) Dukeminier, Jesse and others, Wills, Trusts and Estates (8th ed, Aspen Publishers, 2009) Easterbrook, Frank H and Fischel, Daniel R, The Economic Structure of Corporate Law (Harvard University Press, 1991) Finn, Paul D, Fiduciary Obligations (The Law Book Company Ltd, 1977) [page 394] Ford, Harold A J and others, The Law of Trusts (Law Book Co., Subscription Service) Ford, Harold A J and Lee, W A, The Principles of the Law of Trusts (2nd ed, Law Book Co, 1990) Friedman, Lawrence M, A History of American Law (3rd ed, Touchstone Simon & Shuster, 2005) Glister, Jamie and Ridge, Pauline (eds), Fault Lines in Equity (Hart Publishing, 2012) Goode, Roy, Commercial Law (3rd ed, LexisNexis UK, 2004) Grbich, Yuri and others, Winding up Trusts (CCH Australia Ltd, 1984) Greenfield, Kent, The Failure of Corporate Law: Fundamental Flaws & Progressive Possibilities (The University of Chicago Press, 2006)

Gronow, Mark G R, McPherson’s Law of Company Liquidation (Law Book Co, subscription service) Hardingham, Ian J and Baxt, Robert, Discretionary Trusts (2nd ed, Butterworths, 1984) Harris, Ron, Industrializing English Law — Entrepreneurship and Business Organization, 1720–1844 (Cambridge University Press, 2000) Hayton, David, Trusts and Their Commercial Counterparts in Continental Europe (A report for The Association of Corporate Trustees (UK), January 2002) Hayton, David and others, Underhill and Hayton Law Relating to Trusts and Trustees (18th ed, LexisNexis, 2010) Heydon, John Dyson and Leeming, Mark J, Jacobs’ Law of Trusts in Australia (7th ed, LexisNexis Butterworths, 2006) Helm, Robert (ed), Practitioner’s Guide to Conflicts of Interest in the Financial Services Industry (Sweet & Maxwell, 2012) Holmes, Oliver Wendell, The Common Law (Belknap Press of Harvard University Press, 1881) Hughes, Robert Allan, The Law of Public Unit Trusts (Longman Professional, 1992) Hurst, James Willard, The Legitimacy of the Business Corporation in the Law of the United States, 1780–1970 (The Law Book Exchange, Ltd, 1970) Jessup, Alan, Managed Investment Schemes (Federation Press, 2011) Johnson, Paul, Making the Market: Victorian Origins of Corporate Capitalism (Cambridge University Press, 2010) Keay, Andrew, Avoidance Provisions in Insolvency Law (LBC Information Services, 1997)

[page 395] Keeton, George W and Sheridan, L A, The Comparative Law of Trusts in the Commonwealth and the Irish Republic (Barry Rose (Publishers) Limited, 1976) Kershaw, David, The Path of Fiduciary Law (London School of Economics and Political Science, Law Dept, 2011) Klein, William A and others, Business Organisation and Finance (Foundation Press, 2010) Lau, Ming Wai, The Economic Structure of Trusts (Oxford University Press, 2011) Lipton, Phillip, The Evolution of the Joint Stock Company to 1800: A Study of Institutional Change (Monash University Department of Business Law & Taxation Research Paper No 19, 2009) Maine, Henry Sumner, On Early Law and Custom (J Murray, 1890) Maitland, Frederic W, Equity — Also the Forms of Action at Common Law — Two Courses of Lectures (Cambridge University Press, 1929) Maitland, Frederic W, The Unincorporated Body (Collected Papers, 1903) Maitland, Frederic W, Equity — A Course of Lectures (Cambridge University Press, 1936, reprinted 1969) Maitland, Frederic W, Trust and Corporation (1904) Marks, Bernard, Taxation of Trusts (CCH Australia Ltd, 1980) Mattei, Ugo and others, Commercial Trusts in European Private Law (Oxford University Press, 2005) McQueen, Rob, A Social History of Company Law: Great Britain and the Australian Colonies 1854–1920 (Ashgate, 2009)

Meagher, Roderick P and Gummow, William M C, Jacobs’ Law of Trusts in Australia (6th ed, Butterworths, 1997) Meagher, Roderick P and others, Meagher, Gummow & Lehane’s Equity: Doctrines and Remedies (4th ed, Butterworths LexisNexis, 2002) Mowbray, John and others, Lewin on Trusts (18th ed, Thomson Sweet & Maxwell, 2008) Murray, Michael and Harris, Jason, Keay’s Insolvency, Personal and Corporate Law and Practice (8th ed, Law Book Co, 2013) Pollock, Frederick and Maitland, Frederic W, The History of the English Law (Cambridge University Press, 1895) Posner, Richard A, Economic Analysis of Law (8th ed, Wolters Kluwer, 2010) Reynolds, Francis M B, Bowstead and Reynolds on Agency (18th ed, Sweet & Maxwell, London, 2006) [page 396] Schenkel, Kent D, Trust Law and the Title-Split: A Beneficial Perspective (Selected Works, 2009) Scott, Austin W and others, Scott and Ascher on Trusts (5th ed, Aspen Publishers, 2006) Sin, Kam Fan, The Legal Nature of the Unit Trust (Oxford University Press, 1997) Stebbings, Chantal, The Private Trustee in Victorian England (Cambridge University Press, 2002) Story, Joseph, Commentaries on Equity Jurisprudence as Administered in

England and America (13 ed, Melville M Bigelow, Little Brown & Company, 1886) Sykes, Edward I and Walker, Sally, The Law of Securities (5th ed, The Law Book Company Ltd, 1993) Thomas, Geraint and Hudson, Alastair, The Law of Trusts (2nd ed, Oxford University Press, 2010) Walton, Christopher and others, Charlesworth & Percy on Negligence (12th ed, Sweet and Maxwell London, 2010) Waters, Donovan W M and others, Waters’ Law of Trusts in Canada (3rd ed, Thomson Carswell, 2005) Young, Peter W and others, On Equity (Lawbook Co, 2009)

BOOK ARTICLES Bryan, Michael, ‘Contractual Modifications of the Duties of a Trustee’ in Sarah Worthington (ed), Commercial Law and Commercial Practice (Hart Publishing, 2003) Bryan, Michael, ‘Reflections on Some Commercial Applications of the Trust’ in I M Ramsay (ed), Key Developments in Corporate Law and Trusts Law (LexisNexis Butterworths, 2002) Ford, Harold A J and Hardingham, Ian J, ‘Trading Trusts: Rights and Liabilities of Beneficiaries’ in Paul D Finn (ed), Equity and Commercial Relationships (Law Book Co, 1987) Getzler, Joshua and Macnair, Mike, ‘The Firm as an Entity Before the Companies Acts’ in P Brand et al (eds), Adventures of the Law: Proceedings of the Sixteenth British Legal History Conference, Dublin, 2003 (Four Courts Press, Dublin, 2005) Hanrahan, Pamela, ‘The Responsible Entity as Trustee’ in I M Ramsay

(ed), Key Developments in Corporate Law and Trusts Law (LexisNexis Butterworths, 2002) [page 397] Hayton, David, ‘Unique Rules for the Unique Institution, the Trust’ in Simone Degeling and James Edelman (eds), Equity in Commercial Law (Lawbook Co., 2005) Heydon, John Dyson, ‘Are the Duties of Company Directors to Exercise Care and Skill Fiduciary?’ in Simone Degeling and James Edelman (eds), Equity in Commercial Law (Lawbook Co., 2005) Hudson, Alistair, ‘The Regulation of Trustees’ in Martin Dixon and Gerwyn LLH Griffiths (eds), Contemporary Perspectives on Property, Equity and Trusts Law (Oxford University Press, 2007) Lehane, John, ‘Fiduciaries in a Commercial Context’ in Paul D Finn (ed), Essays in Equity (Law Book Co, 1985) Mason, Anthony, ‘Themes and Prospects’ in Paul D Finn (ed), Essays in Equity (Law Book Co, 1985) McPherson, Bruce H, ‘The Insolvent Trading Trust’ in Paul D Finn (ed), Essays in Equity (Law Book Co, 1985)

CONFERENCE PAPERS Barrett, Reginald I, ‘Insolvency of Registered Managed Investment Schemes’ (Paper presented at the Banking & Financial Services Law Association Annual Conference, Queenstown NZ, July 2008) Bergin, Patricia, ‘The Repentant Trustee’ (Paper presented at the Law Society of South Australia and The Adelaide Branch of the Society of Trust and Estate Practitioners Trusts Symposium, Adelaide SA, 2011)

Edelman, James, ‘Fiduciaries and Profit Disgorgement for Breach of Contract’ (Paper presented at the 2012 Journal of Equity Conference ‘Equity & Contract’, Sydney, 30 March 2012) Hill, Graham, ‘The True Nature of a Member’s Interest in a Superannuation Fund’ (Paper presented at the National Superannuation Conference for Lawyers, 2002) Keane, Patrick A, ‘Equitable Doctrines and Financiers’ Liabilities’ (Paper presented at the Banking & Financial Services Law Association Annual Conference, Gold Coast Qld, August 2011) Parker, David, ‘Impact of Board Composition on Australian REIT Performance’ (Paper presented at the 15th Pacific-Rim Real Estate Society Conference, Sydney NSW, January 2009) Slater, Anthony H, ‘Amendment of Trust Instruments’ (Paper presented at the Society of Trust and Estate Practitioners, Sydney NSW, 29 September 2009) [page 398] White, Richard W, ‘The Nature of a Beneficiary’s Equitable Interest in a Trust’ (Paper presented at the Supreme Court of NSW Annual Conference, 2007)

JOURNAL ARTICLES Aaron, Henry J, ‘Massachusetts Trust as Distinguished from Partnership’ (1917–1918) 12 Illinois Law Review 482 Acheson, Graeme G and others, ‘Does Limited Liability Matter? Evidence from Nineteenth-Century British Banking’ (2010) 6 Review of Law & Economics 247 Agardy, Peter, ‘Aspects of Trading Trusts’ (2006) 14 Insolvency Law

Journal 7 Aitken, Lee, ‘A Liability “Properly Incurred”? The Trustee’s Right To Indemnity, and Exemption From Liability For Breach of Trust’ (2011) 35 Australian Bar Review 53 Alexander, Gregory S, ‘The Transformation of Trusts as a Legal Category, 1800–1914’ (1987) 5 Law and History Review 303 Allen, W W, ‘Comment Note — Contract of Trustee As Basis of Suit to Reach the Trust Estate or to Charge the Trustee Personally or as Trustee’ (1942) 139 American Law Reports 134 Ames, James Barr, ‘Origin of Uses and Trusts’ (1907–1908) 21 Harvard Law Review 261 Anderson, Helen, ‘Directors’ Liability to Creditors — What are the Alternatives?’ (2006) 18 Bond Law Review 1 Anderson, Helen, ‘Theory and Reality in Insolvency Law: Some Contradictions in Australia’ (2009) 27 Companies & Securities Law Journal 506 Andrews, Neil, ‘Comment on Corporate Law and Historical Methodology: A Critical Perspective by Rob McQueen’ (1996) 3 Canberra Law Review 15 Austin, Robert P, ‘The Melting Down of the Remedial Trust’ (1988) 11 University of New South Wales Law Journal 66 Bainbridge, Stephen, ‘Community and Statism: A Conservative Contractarian Critique of Progressive Corporate Law Scholarship’ (1997) 82 Cornell Law Review 856 Bant, Elise, ‘Trusts, Powers and Liens: An Exercise in Ground-Clearing’ (2009) 3 Journal of Equity 286 Barton, J L, ‘The Medieval Use’ (1965) Law Quarterly Review 562

Bathurst, Thomas F and Merope, Sienna, ‘It Tolls for Thee: Accessorial Liability After Bell v Westpac’ (2013) 87 Australian Law Journal 831 [page 399] Battaglia, Vince, ‘The Liability of Members of Managed Investment Schemes in Australia: An Unresolved Issue’ (2009) 23 Australian Journal of Corporate Law 122 Bertschy, Timothy L, ‘Personal Liability of an Executor or Trustee — Time for a Change’ (2010) 98 Illinois Bar Journal 140 Birch, Jeremy, ‘Exemplary Damages for Breach of Fiduciary Duty’ (2005) 33 Australian Business Law Review 429 Bottomley, Stephen, ‘From Contractualism to Constitutionalism: A Framework for Corporate Governance’ (1997) 19 Sydney Law Review 277 Brandeis, Louis D, ‘Liability of Trust-Estates on Contracts Made for Their Benefit’ (1881) 15 American Law Review 449 Brown, Christine and others, ‘Managed Investment Scheme Regulation: Lessons from the Great Southern Failure’ (2010) 2 FINSIA Journal of Applied Finance 20 Bryan, Michael, ‘Almost 25 Years on: Some Reflections on Waltons v Maher’ (2012) 6 Journal of Equity 131 Chermside, Herbert B, ‘Modern Status of the Massachusetts or Business Trust’ (2009) 88 American Law Reports 3d 704 Cohen, David L, ‘Theories of the Corporation and the Limited Liability Company: How Should Courts and Legislatures Articulate Rules for Piercing the Veil, Fiduciary Responsibility and Securities Regulation for the Limited Liability Company?’ (1998) 51 Oklahoma Law Review 427 Collinson, Jeffreys Lewis, ‘The Limitation of Liability Under Contracts’

(1915) 27 Juridical Law Review 293 Conaglen, Matthew, ‘Equitable Compensation for Breach of Fiduciary Dealing Rules’ (2003) 119 Law Quarterly Review 246 Cook, William W, ‘Mysterious Massachusetts Trusts’ (1923) 9 American Bar Association Journal 763 Cooper, Jeremy, ‘Piercing the “Veil of Obscurity” — The Decision in Hanel v O’Neill’ (2004) 22 Companies & Securities Law Journal 313 Crossland, Kalev J, ‘Unsecured Creditors and the “Uncorporation”: Issues with Trading Trusts Post Global Financial Crisis’ (2011) 17 Trusts & Trustees 183 Crotty, James A, ‘The Business Trust’ (1922) 15 Lawyer & Banker and Southern Bench & Bar Review 205 Cullity, Maurice C, ‘Liability of Beneficiaries — A Further Rejoinder to Mr Flannigan’ (1986–1987) 8 Estates & Trusts Quarterly 130 Cullity, Maurice C, ‘Liability of Beneficiaries — A Rejoinder’ (1985–1986) 7 Estates & Trusts Quarterly 35 [page 400] Cullity, Maurice C, ‘Personal Liability of Trustees and Rights of Indemnification’ (1996–1997) 16 Estates & Trusts Journal 115 Curtis, Jerome J, ‘The Transmogrification of the American Trust’ (1996) Real Property Probate & Trust Journal 251 D’Angelo, Nuncio, ‘The CAMAC Report on Managed Investment Schemes: Another Opportunity Missed?’ (2012) 23 Journal of Banking & Finance Law & Practice 253 D’Angelo, Nuncio, ‘Indemnities, Gross Negligence and the Accidental

Insurer’ (2009) 37 Australian Business Law Review 7 D’Angelo, Nuncio, ‘Shares and Units: The Parity Myth and the Truth About Limited Liability’ (2011) 29 Companies & Securities Law Journal 477 D’Angelo, Nuncio, ‘The Trust: Evolution from Guardian to Risk-Taker, and How a Lagging Insolvency Law Framework Has Left Financiers and Other Stakeholders In Peril’ (2009) 20 Journal of Banking & Finance Law & Practice 279 D’Angelo, Nuncio and Busljeta, Helena, ‘The Trustee’s Lien or Charge Over Trust Assets: A PPSA Security Interest or Not?’ (2011) 22 Journal of Banking & Finance Law & Practice 251 D’Angelo, Nuncio, ‘The Unsecured Creditor’s Perilous Path to a Trust’s Assets: Is a Safer, More Direct United States-Style Route Available?’ (2010) 84 Australian Law Journal 833 D’Angelo, Nuncio, ‘When is a Trustee or Responsible Entity Insolvent? Can a Trust or Managed Investment Scheme be “Insolvent”?’ (2011) 39 Australian Business Law Review 95 Davies, G L and Cowen, M P, ‘The Persuasive Force of the Decisions of United States Courts in Australia’ (1996) 15 Australian Bar Review 51 Delany, Hilary, ‘Trustee Exemption Clauses — Proposals for Reform in Ireland’ (2009) 23(2) Trust Law International 89 Desai, Aakash, ‘Commercial Trusts and Securitisation: Lessons from the Global Financial Crisis’ (2010) 28 Companies & Securities Law Journal 10 Donald, M Scott, ‘Prudence under Pressure’ (2010) 4 Journal of Equity 44 Donald, M Scott, ‘Beneficiary, Investor, Citizen: Characterising Australia’s Super Fund Participants’ (2009) University of New South Wales Faculty of Law Research Series 8 Duxbury, Leyland S, ‘Business Trusts and Blue Sky Laws’ (1923–1924) 8

Minnesota Law Review 465 Easterbrook, Frank H and Fischel, Daniel R, ‘Contract and Fiduciary Duty’ (1993) 36 Journal of Law & Economics 425 [page 401] Edelman, James, ‘When do Fiduciary Duties Arise?’ (2010) 126 Law Quarterly Review 302 Ehlers, Ashley K, ‘The Inherent Equitable Jurisdiction and the Plenary Power of the Supreme Court of New South Wales to Order the Winding Up of Companies’ (2010) 18 Insolvency Law Journal 52 English, David M, ‘The Uniform Trust Code (2000): Significant Provisions and Policy Issues’ (2002) 67 Missouri Law Review 143 Finn, Paul D, ‘Common Law Divergences’ (2013) 37 Melbourne University Law Review (Advance) Finn, Paul D, ‘Contract and the Fiduciary Principle’ (1989) 12 University of New South Wales Law Journal 76 Firios, Leon, ‘Precluding Prescriptive Duties in Fiduciary Relationships: The Problems With the Proscriptive Delimitation’ (2012) 40 Australian Business Law Review 166 Flannigan, Robert D, ‘Beneficiary Liability in Business Trusts’ (1982– 1984) 6 Estates & Trusts Quarterly 278 Flannigan, Robert D, ‘Business Applications of the Express Trust’ (1998) 36 Alberta Law Review 630 Flannigan, Robert D, ‘Business Trusts — Past and Present’ (1984) 6 Estates & Trusts Quarterly 375 Flannigan, Robert D, ‘The Control Test of Principal Status Applied to

Business Trusts: Part I’ (1986–1987) 8 Estates & Trusts Quarterly 37 Flannigan, Robert D, ‘The Control Test of Principal Status Applied to Business Trusts: Part II’ (1986–1987) 8 Estates & Trusts Quarterly 97 Ford, Harold A J, ‘Trading Trusts and Creditors’ Rights’ (1981) 13 Melbourne University Law Review 1 Ford, Harold A J, ‘Unit Trusts’ (1960) 23 Modern Law Review 129 Fulda, Carl H and Pond, Walter, ‘Tort Liability of Trust Estates’ (1941) 41 Columbia Law Review 1332 Getzler, Joshua, ‘ASIC v Citigroup: Bankers’ Conflict of Interest and The Contractual Exclusion of Fiduciary Duties’ (2007) 2 Journal of Equity 62 Getzler, Joshua, ‘Fiduciary Investment in the Shadow of Financial Crisis: Was Lord Eldon Right?’ (2009) 3 Journal of Equity 1 Geu, Thomas Earl, ‘Understanding the Limited Liability Company: A Basic Comparative Primer (Part One)’ (1991–1992) 37 South Dakota Law Review 44 [page 402] Gower, Leonard C B, ‘Corporation Law in England and America’ (1955– 1956) 11 Business Lawyer 39 Gower, Leonard C B, ‘Some Contrasts between British and American Corporation Law’ (1956) 69 Harvard Law Review 1369 Graham, Toby and Poole, Joanna, ‘Switching Assets from One Shadowy Hand to Another: Piercing The Veil of Company and Trust’ (2010) 16 Trusts & Trustees 705 Griffin, Stephen, ‘Limited Liability: A Necessary Revolution?’ (2004) 25 Company Lawyer 99

Gummow, William M C, ‘The Equitable Duties of Company Directors’ (2013) 87 Australian Law Journal 753 Gummow, William M C, ‘Equity: Too Sucessful?’ (2003) 77 Australian Law Journal 30 Gummow, William M C, ‘Knowing Assistance’ (2013) 87 Australian Law Journal 311 Halbach Jr, Edward C, ‘Uniform Acts, Restatements, and Trends in American Trust Law at Century’s End’ (2000) 88 California Law Review 1881 Hamilton, Robert W, ‘Entity Proliferation’ (2004) 37 Suffolk University Law Review 859 Hanrahan, Pamela F, ‘ASIC and Managed Investments’ (2011) 29 Companies & Securities Law Journal 287 Hansmann, Henry and Mattei, Ugo, ‘The Functions of Trust Law: A Comparative Legal and Economic Analysis’ (1998) 73 New York University Law Review 434 Hansmann, Henry and others, ‘Law and the Rise of the Firm’ (2006) 119 Harvard Law Review 1335 Harding, Matthew and Malkin, Ian, ‘Overruling in the High Court of Australia in Common Law Cases’ (2010) 34 Melbourne University Law Review 519 Harpum, Charles, ‘Book Review’ (1986) 45 Cambridge Law Journal 347 Harris, Jason, ‘Lifting the Corporate Veil on the Basis of an Implied Agency: A Re-Evaluation of Smith, Stone and Knight’ (2004) 23 Companies & Securities Law Journal 7 Hayton, David J, ‘Developing the Obligation Characteristic of the Trust’ (2001) 117 Law Quarterly Review 96

Heydon, John Dyson, ‘Judicial Activism and the Death of the Rule of Law’ (2003) 23 Australian Bar Review 110 [page 403] Hildebrand, Ira P, ‘Liability of the Trustees, Property and Shareholders of Massachusetts Trust’ (1923–1924) 2 Texas Law Review 139 Hildebrand, Ira P, ‘Massachusetts Trust — A Sequel’ (1925–1926) 4 Texas Law Review 57 Hill, Arthur W, ‘Business Trusts: Liability of Shareholders: Regulation and Taxation’ (1930) 19 California Law Review 42 Hilliard, Jonathan, ‘The Flexibility of Fiduciary Doctrine in Trust Law: How Far Does it Stretch in Practice?’ (2009) 23(3) Trust Law International 119 Holmes, Oliver Wendell, ‘Early English Equity’ (1885) 1 Law Review Quarterly 162 Hornstein, George D, ‘Judicial Tolerance of the Incorporated Partnership’ (1953) 18 Law & Contemporary Problems 435 Horrigan, Brian, ‘Trust Asset Wars — The Liquidator Strikes Back’ (1988) 15 University of Queensland Law Journal 69 Hughes, Robert Allan, ‘Public Unit Trusts: Some Regulative Models’ (1999) 3 Journal of South Pacific Law (Working Paper 2) Hughes, Robert Allen, ‘The Right of a Trustee to a Personal Indemnity from Beneficiaries’ (1990) 64 Australian Law Journal 567 Ipp, David, ‘The Diligent Director’ (1997) 18(6) Company Lawyer 162 Isaacs, Nathan, ‘Trusteeship in Modern Business’ (1929) 42 Harvard Law Review 1048

Jones, Sheldon A and others, ‘The Massachusetts Business Trust and Registered Investment Companies’ (1988) 13 Delaware Journal of Corporate Law 421 Judah, Noble Brandon, ‘Possible Partnership Liability under the Business Trust’ (1922–1923) 17 Illnois Law Review 77 Keane, Patrick A, ‘The 2009 WA Lee Lecture in Equity: The Conscience of Equity’ (2010) 84 Australian Law Journal 92 Keay, Andrew, ‘Directors’ Duties to Creditors: Contractarian Concerns Relating to Efficiency and Over-Protection of Creditors’ (2003) 66 The Modern Law Review 665 Keay, Andrew and Zhang, Hao, ‘Incomplete Contracts, Contingent Fiduciaries and a Director’s Duty to Creditors’ (2008) 32 Melbourne University Law Review 141 Kinsler, Jeffrey S, ‘Corporate Insolvency in Australia and the United States: Uncommon Origins, Dissimilar Objectives’ (1997) 3 International Trade & Business Law 129 [page 404] Kirby, Michael, ‘Equity’s Australian Isolationism’ (2008) 8 Queensland University of Technology Law and Justice Journal 444 Kirby, Michael, ‘The High Court of Australia and the Supreme Court of the United States — A Centenary Reflection’ (2003) 31(2) University of Western Australia Law Review 171 Kirby, Michael, ‘The Internationalisation of Domestic Law and its Consequences’ (2010) Bar News: Journal of the NSW Bar Association 107 Kirby, Michael, ‘Precedent Law, Practice and Trends in Australia’ (2007) 28 Australian Bar Review 243

Koker, Louis De, ‘The Limited Liability Act of 1855’ (2005) 26 Company Lawyer 130 Langbein, John H, ‘The Contractarian Basis of the Law of Trusts’ (1995) 105 Yale Law Journal 625 Langbein, John H, ‘The Secret Life of the Trust: The Trust as an Instrument of Commerce’ (1997) 107 Yale Law Journal 165 Langbein, John H, ‘Why Did Trust Law Become Statute Law in the United States?’ (2006–2007) 58 Alabama Law Review 1069 Leeming, Mark J, ‘The Scope of Fiduciary Obligations: How Contract Informs, but Does Not Determine, The Scope of Fiduciary Obligations’ (2009) 3 Journal of Equity 181 Leeming, Mark J, ‘What is a Trust?’ (2008) 31 Australian Bar Review 211 Lindgren, Kevin, ‘The Birth of the Trading Trust’ (2011) 5 Journal of Equity 1 Lindgren, Kevin, ‘Comment by K E Lindgren QC which introduced a Seminar on The Lawmaking Role of the High Court’ (1993) 11 Australian Bar Review 185 Lindgren, Kevin, ‘Fiduciary Duty and the Ripoll Report’ (2010) 28 Companies & Securities Law Journal 435 Lindgren, Kevin, ‘A Superannuation Trustee’s Right of Indemnity’ (2010) 4 Journal of Equity 85 Lipton, Phillip, ‘A History of Company Law in Colonial Australia: Economic Development and Legal Evolution’ (2007) 31 Melbourne University Law Review 805 Lobban, Michael, ‘Nineteenth Century Frauds in Company Formation: Derry v Peek in Context’ (1996) 112 Law Quarterly Review 287 Loxton, Diccon and D’Angelo, Nuncio, ‘Trustees’ Limitation of Liability:

Myths, Mysteries and a Model Clause’ (2013) 41 Australian Business Law Review 142 [page 405] Mahoney, Paul G, ‘Contract or Concession — An Essay on the History of Corporate Law’ (1999–2000) 34 Georgia Law Review 873 Mason, Anthony, ‘Changing the Law in a Changing Society’ (1993) 67 Australian Law Journal 568 Mason, Anthony, ‘The Place of Equity and Equitable Remedies in the Contemporary Common Law World’ (1994) 110 Law Quarterly Review 238 McCall, Christopher, ‘Trustees — Risks They Never Thought They Ran’ (1995) 6 Private Client Business 419 Meagher, Roderick P, ‘Insolvency of Trustees’ (1979) 53 Australian Law Journal 648 Merralls, James D, ‘Unsecured Borrowings by Trustees of Trading Trusts’ (1993) 10 Australian Bar Review 248 Miller, Paul B, ‘The Future for Business Trusts: A Comparative Analysis of Canadian and American Uniform Legislation’ (2010–2011) 36 Queen’s Law Journal 443 Millet, Peter J, ‘Equity’s Place in the Law of Commerce’ (1998) 114 Law Quarterly Review 214 Notes, ‘Liability of Shareholders in a Business Trust — The Control Test’ (1962) 48 Virginia Law Review 1105 O’Sullivan, John, ‘The Roles of Managers and Agents in Syndicated Loans’ (1992) 3 Journal of Banking and Finance Law & Practice 162

Parkinson, Patrick, ‘Chaos in the Law of Trusts: Principles of the Law of Trusts (H A J Ford and W A Lee)’ (1991) 13 Sydney Law Review 227 Pascoe, Janine and Anderson, Helen, ‘Personal Recovery Actions by Creditors Against Company Directors’ (2002) 10 Insolvency Law Journal 205 Pinto, Dale and Karlinsky, Stewart, ‘Darwinian Evolution of the Taxation of Trusts: A Comparative Analysis’ (2007) 10(2) Journal of Australian Taxation 251 Plessis, Jean J du, ‘Corporate Law and Corporate Governance Lessons from the Past: Ebbs and Flows, but Far from “The End of History …” Part 2’ (2009) 30 Company Lawyer 71 Posner, Richard A, ‘The Rights of Creditors of Affiliated Corporations’ (1975–1976) 43 University of Chicago Law Review 499 Priestley, L J, ‘A Guide to a Comparison of Australian and United States Contract Law’ (1989) 12 University of New South Wales Law Journal 4 Qu, Charles Zhen, ‘Australia’s Managed Investment Schemes: The Nature of Relationships among Scheme Participants’ (2004) 12 Asia Pacific Law Review 69 [page 406] Ramsay, Ian M, ‘The Expansion of Limited Liability: A Comment on Limited Partnerships’ (1993) 15 Sydney Law Review 537 Ramsay, Ian M and Noakes, David B, ‘Piercing the Corporate Veil in Australia’ (2001) 19 Companies & Securities Law Journal 250 Ramsay, Ian M, ‘Professor Harold Ford and the Development of Australian Corporate Law’ (2011) 29 Companies & Securities Law Journal 30

Rawlings, Philip, ‘Reinforcing Collectivity: The Liability of Trustees and the Power of Investors in Finance Transactions’ (2009) 23(1) Trust Law International 14 Rickett, Charles, ‘Understanding Remedies for Breach of Trust’ (2008) 11 Otago Law Review 603 Rutledge, Thomas E and Habbart, Ellisa O, ‘The Uniform Statutory Trust Entity Act: A Review’ (2010) 65 Business Lawyer 1055 Sackville, Ronald, ‘The Trustee’s Right of Indemnity and the Creditor’s Right of Subrogation: The Hardening Of Equity’ (2013) 7 Journal of Equity 34 Savirimuthu, Joseph, ‘Governments, Markets and Risk Paradigms: A Case Study of Winsor v Bloom’ (2003) 5 Insolvency Lawyer 186 Schwarcz, Steven L, ‘Commercial Trusts as Business Organizations: An Invitation to Comparatists’ (2003) 13 Duke Journal of Comparative & International Law 321 Schwarcz, Steven L, ‘Commercial Trusts as Business Organizations: Unraveling the Mystery’ (2002–2003) 58 Business Lawyer 559 Scott, Austin W, ‘Fifty Years of Trusts’ (1936–1937) 50 Harvard Law Review 60 Scott, Austin W, ‘Liabilities Incurred in the Administration of Trusts’ (1915) 28 Harvard Law Review 725 Sealy, Leonard S, ‘The Director as Trustee’ (1967) Company Law Journal 83 Seipp, David J, ‘Trust and Fiduciary Duty in the Early Common Law’ (2011) 91 Boston University Law Review 1011 Sin, Kam Fan, ‘Enforcing the Unit Trust Deed amongst Unitholders’ (1997) 15 Companies & Securities Law Journal 108

Sitkoff, Robert H, ‘An Agency Costs Theory of Trust Law’ (2004) 89 Cornell Law Review 621 Sitkoff, Robert H, ‘The Economic Structure of Fiduciary Law’ (2011) 91 Boston University Law Review 1039 Sitkoff, Robert H, ‘Trust as “Uncorporation”: A Research Agenda’ (2005) University of Illinois Law Review 31 [page 407] Sitkoff, Robert H, ‘Trust Law, Corporate Law, and Capital Market Efficiency’ (2002–2003) 28 Journal of Corporate Law 565 Smith, Lionel, ‘Mistaking the Trust’ (2011) 40 Hong Kong Law Journal 787 Spavold, Guy C, ‘The Unit Trust — A Comparison with the Corporation’ (1991) 3 Bond Law Review 249 Steele, David A and Spence, Andrew G, ‘Enforcement Against the Assets of a Business Trust by an Unsecured Creditor’ (1999) 31 Canadian Business Law Journal 72 Stevens, Robert S, ‘Limited Liability in Business Trusts’ (1921–1922) 7 Cornell Law Quarterly 116 Stone, Harlan F, ‘A Theory of Liability of Trust Estates for the Contracts and Torts of the Trustee’ (1922) 22 Columbia Law Review 527 Taylor, Bruce, ‘The Enforceability of Debt Securities Issued by Trustees in Securitisation Programs’ (1998) 9 Journal of Banking and Finance Law & Practice 261 Tepper, Rubin, ‘Liability of the Trust Estate Arising Out of Trustee’s Contracts with Third Persons’ (1950–1951) 2 Hastings Law Journal 53

Thomas, Geraint W, ‘The Duty of Trustees to Act in the “Best Interests” of Their Beneficiaries’ (2008) 2 Journal of Equity 177 Tilley, Gareth, ‘Restitution and the Law of Subrogation in England and Australia’ (2005) 79 Australian Law Journal 518 Trukhtanov, Alexander, ‘The Irreducible Core of Trust Obligations’ (2007) 123 Law Quarterly Review 342 Ueno, Takemi, ‘Defining a Business Trust: Proposed Amendment of Section 101(9) of the Bankruptcy Code’ (1993) 30 Harvard Journal on Legislation 499 Vrisakis, Michael, ‘Co-habitation of Contract and Trust Relationships in Contemporary Investment Trusts’ (2008) 2 Journal of Equity 274 Warburton, Joseph A, ‘Trusts Versus Corporations: An Empirical Analysis of Competing Organizational Forms’ (2010–2011) 36 Journal of Corporate Law 183 Waters, Donovan W M, ‘The Role of the Trust Treatise in the 1990s’ (1994) 59 Missouri Law Review 121 Whincop, Michael J, ‘Liberalism, Conservatism, and Economic Efficiency: Tradition and Change in the Values of Corporate Law’ (2000) 23 University of New South Wales Law Journal 111 [page 408] Whincop, Michael J, ‘Promoters, Prospectuses and Pragmatism: Updating Fiduciary Duties in a Time of Economic Reform’ (1998) 24 Monash University Law Review 454 White, Allen Hunter, ‘Trustee’s Avoidance of Personal Liability on Contracts’ (1928–1929) 3 Temple Law Quarterly 117 Whitehead, Daniel, ‘Corporate Trustees: Pride or Prejudice?’ (2011) 34

International Finance Law Review 32 Wilkinson, H W, ‘Statutes: Companies Act 1967’ (1968) 31 Modern Law Review 183 Williams, Darryl R, ‘Winding Up Trading Trusts: Rights of Creditors and Beneficiaries’ (1983) 57 Australian Law Journal 273

REPORTS1 Australian Financial Centre Forum, ‘Australia as a Financial Centre: Building on Our Strengths (the Johnson Report)’ (2009) Board of Taxation, ‘Review of the Tax Arrangements Applying to Managed Investment Trusts: Discussion Paper’ (August 2008) Companies and Securities Law Review Committee, ‘Forms of Legal Organisation for Small Business Enterprises’ (1984) Corporations and Markets Advisory Committee, ‘Shareholder Claims Against Insolvent Companies: Implications of the Sons of Gwalia decision’ (December 2008) Financial System Inquiry Committee, ‘Financial System Inquiry: Final Report’ (AGPS, 1997) Mees, Bernard T and others, ‘Fifty Years of Managed Funds in Australia: Preliminary Research Report’ (University of Melbourne Centre for Corporate Law and Securities Regulation, 2005) Moodie, Grant and Ramsay, Ian, ‘Managed Investment Schemes: An Industry Report’ (Centre for Corporate Law and Securities Regulation, The University of Melbourne, 2003) 1.

Not including those Reports listed in Appendix 2.

Index References are to paragraphs

A Advantages of commercial trust over company decision-making processes …. 2.107 distributions to equity investors …. 2.104, 2.105 ease of establishment …. 2.101 flexibility …. 2.100, 2.102 lighter regulation …. 2.100 management and governance …. 2.107 privacy of establishment …. 2.101 public reporting …. 2.103 redemption of invested equity …. 2.106 solvent winding up …. 2.108 tax benefits …. 1.83, 2.94, 2.98 trustees, for …. 2.109 Agency bare trust …. 3.37 control test …. 3.35–3.47, 3.52–3.56 creation of agency relationship …. 3.34 definition …. 3.38 discretionary trust …. 3.37 equity investors’ liability and implied agency …. 3.30–3.47

lifting the trust veil …. 3.48–3.56 trust-agency hybrid …. 3.30–3.47 trust-partnership hybrid …. 3.31–3.34 Flannigan’s test …. 3.44–3.47 joint stock companies …. 3.43 Massachusetts trust …. 3.39 nominee trust …. 3.37 trustee as agent …. 3.30–3.47 ASX A-REITs listed on …. 2.89 managed investment schemes listed on …. 2.87, 2.141, 2.156 aligned with companies …. 2.155 Listing Rules …. 1.89, 2.156 public unit trusts listed on …. 2.141 units and shares not distinguished …. 2.155, 3.1 Australian Fixed Trusts …. 2.86 Australian real estate investment trusts (A-REITs) …. 2.88, 2.89

B Bank of New South Wales first Australian company …. 2.79 Bare trust exclusion from scope of book …. 1.34 trust-agency hybrid …. 3.37 Barnes v Addy liability …. 5.50, 5.51, 5.62, 5.63, 7.31 Beneficiary equity investor see Equity investor beneficiaries

equity participant …. 1.43 lack of risk in traditional trust …. 3.3 personal indemnity in favour of trustee …. 3.3 principal participant …. 1.43 trustee’s duties to see Trustees’ duties trustee’s indemnity against see Trustees’ personal indemnity unit holder …. 1.43 Blackacre Trust hypothetical equity investors’ personal liability …. 3.99, 3.100 references to …. 1.93 related breaches by trustee …. 5.63 subrogation by trust creditors …. 5.33–5.47 text …. App 6 Breach of trust accessorial liability of counterparties …. 5.16–5.21 acting beyond power …. 4.15 powers of trustee …. 4.16–4.23 acting improperly …. 4.15, 4.24 duty to act properly …. 4.24–4.26 breach of duty or obligation …. 2.39, 4.15 equity investors allowing …. 3.12 exclusion or exculpation clauses …. 4.13, 4.32, 4.40 exculpation by unit holders …. 3.12, 4.32 honest and reasonable action …. 2.109, 4.33, 4.35 irreducible core …. 4.33–4.40 related benefits …. 4.40

Singapore …. 4.36 Uniform Trust Code (US) …. 4.37 failure to exercise care and diligence …. 4.36 gross negligence …. 4.36, 4.41–4.44 indemnity, impairing right to …. 4.66, 4.86 related breaches …. 4.74 trustee’s intentions, relevance of …. 4.81–4.85 unrelated breaches …. 4.75–4.80 risk for trustee …. 4.13 sanctions for …. 2.39, 2.40 transactions affected by …. 2.39 trust creditors’ liability …. 5.16–5.21 Barnes v Addy …. 5.16–5.18, 5.22, 7.31 companies compared …. 5.20 ignorance of misconduct …. 5.19 knowledge …. 5.16, 5.17 secured creditors …. 5.22 unsecured creditors …. 5.19, 5.22 ultra vires dealings …. 4.15 what constitutes …. 4.15 Bubble Act 1720 …. 2.51, 2.57, 2.67, 6.5, 7.14 Business entity commercial trust as …. 1.4, 1.8 evolution of trust as …. 2.48–2.70, 2.172 trust as …. 1.4, 1.8

C

Canada equity investors’ personal liability limitation by statute …. 3.91, 3.95–3.97 subrogation of trustee’s personal indemnity …. 3.76 Income Trust Liabilities Acts …. 3.96 Quebec Civil Code …. 3.97 trading trust …. 1.77 Trust Beneficiaries’ Liability Act 2004 (Ont) …. 3.95 Charge trustees’ proprietary indemnity, to enforce …. 4.62–4.64 subrogation and …. 5.41 Cherry v Boultbee principle …. 4.78 Circumvention device trading trust as …. 2.93 trust as …. 2.14–2.21, 2.59 feudal rules …. 2.15–2.20 legal, regulatory and fiscal burdens …. 2.14 private objectives …. 2.21 Clear accounts rule creditors’ access to trust estate and …. 5.116–5.120 principle in Cherry v Boultbee …. 4.78 trustee’s indemnity …. 4.66, 4.75–4.80 exoneration power, effect on …. 5.46 subrogation …. 5.45, 5.118 Commercial expectations corporate trustee …. 4.1–4.10

external parties, relationship with …. 4.3, 4.9 law and economics principles …. 4.7 personal liability …. 4.1, 4.2, 4.5, 4.6, 4.93 relationship with equity investors …. 4.3, 4.8 remuneration …. 4.1, 4.2, 4.8 risks not consistent with …. 4.10 scope of duties …. 4.4 definition …. 1.51 equity investors …. 1.45, 3.11–3.13 hypothetical reasonable commercial person …. 1.51 trust creditors …. 1.47, 4.94, 5.9–5.12 secured creditors …. 5.10 trustees’ personal liability …. 4.94 unsecured creditors …. 5.11 Commercial trust abolition as option …. 7.13, 7.14 absence of company-like protections …. 1.7 advantages over company …. 2.98–2.110 alternate forms, options for …. 7.13–7.16 Australian manifestations …. 2.78–2.84 large-scale trusts …. 2.83 MIS see Managed investment scheme (MIS) statistics …. 2.84 trading trust see Trading trust bare trusts excluded …. 1.34 business entity …. 1.4, 1.8

evolution of trust as …. 2.48–2.70, 2.172 certainty of subject, object and intention …. 2.101 circumvention device …. 2.14–2.21 commercial expectations …. 1.51 commercial objectives …. 1.33 company compared see Commercial trust compared to company company, configured as …. 1.3, 1.7 contractarian theory …. 1.69, 2.118 contractualisation see Contractualisation custodian trusts excluded …. 1.34 defining characteristics …. 1.9, 1.31, 2.161 definition …. 1.30–1.32 discretionary trust …. 1.35 distinguishing from other trusts …. 1.33 economic entity …. 7.11 England cessation of use …. 2.71 prohibition by Companies Act 1862 …. 2.66–2.70 trust law …. 1.73–1.78, 2.1–2.4 unincorporated joint stock companies see Joint stock companies enterprise theory …. 1.67, 1.68 ‘entity’, described as …. 1.37, 1.38, 2.154 establishment …. 2.101 exclusions from scope of book …. 1.34, 1.86–1.94 express trust …. 1.31, 1.34 history of …. 2.1–2.9

inefficiency of trust law …. 1.8, 1.19, 1.59 international law …. 1.78 joint stock company …. 1.32, 1.40 large-scale …. 2.83 Massachusetts trust see Massachusetts trust MIS see Managed investment scheme (MIS) no separate legal personality …. 1.7, 1.9, 1.37, 2.161 nominee trusts excluded …. 1.34 options for future of …. 7.13–7.19 origins …. 2.1–2.4 personal element …. 1.37, 2.6, 2.29–2.44, 2.63, 3.2 principal participants …. 1.43, 1.44 roles of …. 1.8, 1.18 proprietary element …. 1.37, 2.6, 2.22–2.28, 2.64, 3.2 public unit trust see Public unit trust reform …. 7.1–7.63 need for …. 7.1–7.11 options …. 7.13–7.19 statutory remediation see Trust law reform relocating to proper place …. 7.62, 7.63 risk …. 1.8, 1.19–1.21 securitisation, in aid of …. 1.34, 1.73 special status …. 7.11 specialist rules, need for …. 7.10 superannuation/pension trust …. 1.36, 1.73, 2.125 trading trust see Trading trust

trust characteristics …. 2.6, 2.7 types …. 1.34–1.36 United States …. 1.22, 1.23, 7.18 comparison with company …. 2.144 Massachusetts trust see Massachusetts trust what constitutes …. 1.30–1.37 Commercial trust compared to company advantages of trust …. 2.98–2.110 decision-making processes …. 2.107 distributions to equity investors …. 2.104, 2.105 ease of establishment …. 2.101 flexibility …. 2.100, 2.102 lighter regulation …. 2.100 management and governance …. 2.107 privacy of establishment …. 2.101 public reporting …. 2.103 redemption of invested equity …. 2.106 solvent winding up …. 2.108 tax benefits …. 1.83, 2.94, 2.98 trustees, for …. 2.109 advisers …. 2.150 beneficiary protection, lack of …. 1.10, 1.45, 3.4 controlling managers …. 2.145 ‘corporate veil’, lack of …. 1.10, 1.45, 3.27 creditor protections, lack of …. 1.12, 1.47 defining characteristics of trust …. 1.9, 1.31, 2.161

disadvantage of trust participants …. 1.9 distinctive features of trust …. 2.144 distributions to equity investors capital returns …. 2.105 profits …. 2.104 economic approach …. 2.143, 2.144, 2.160 efficiency of laws …. 2.164–2.167 fiduciary parallel …. 2.146 flexibility …. 2.100 beneficial entitlements …. 2.102 fiduciary framework …. 2.102 framework for aggregation and management of invested assets …. 2.145 functional similarities …. 2.142–2.146 indoor management rule, lack of …. 5.13–5.21 innocent outsider protections, lack of …. 1.12 insolvency …. 1.13 law and economics theory …. 1.67, 2.146, 2.164 efficiency …. 2.164–2.167 legal approach …. 2.143, 2.160 legal personality, lack of …. 1.7, 1.9, 1.37, 2.147, 2.161 legislators blurring distinction …. 2.142, 2.151–2.158 limited liability …. 3.15 management and governance …. 2.107, 2.145 parity myth …. 1.7, 2.112, 2.141–2.158, 5.2, 7.2 promoters and advisers encouraging …. 2.148–2.151 policy-based statutory regime, lack of …. 1.9, 2.161

principal participants’ roles …. 1.18 promoters …. 2.148–2.151 reform, need for …. 1.16 regulators blurring distinction …. 2.142, 2.151–2.158 regulatory arbitrage …. 2.100, 2.162 regulatory dissonance …. 1.7, 2.159–2.170 regulatory regimes …. 2.99, 2.100 risk …. 1.8, 1.20, 1.21, 1.46, 2.141 similarities …. 2.112, 2.145, 3.1 taxation …. 1.83, 2.94, 2.98, 2.154 trust mimicking company …. 2.142, 2.147–2.150 trustees advantages for …. 2.109 risks and liabilities …. 1.11 uncertainty of law …. 1.13, 1.14 United States …. 2.144 units equating to shares …. 3.1 winding up …. 2.108, 6.1 Commercial trustee see Trustee of commercial trust Company Australia, history in, 2.78–2.80 chartered company …. 2.52–2.54 joint stock company compared …. 2.56 commercial trust compared see Commercial trust compared to company companies law Corporations Act see Corporations Act

diverging from trust law …. 2.71–2.78 efficiency …. 2.164–2.166 contractarian theory …. 1.69 corporate governance principles …. 2.62 corporation/company distinction …. 1.53 fictitious legal person …. 2.49, 2.52 historical development …. 2.48–2.65 incorporation …. 2.48, 2.50 Act of Parliament, by …. 2.52, 2.54 Charter, by …. 2.52–2.54 Letters Patent, by …. 2.52, 2.54 joint stock see Joint stock companies limited liability see Limited liability company network of contractual engagements …. 1.69 regulatory regime …. 2.99 relationship between trust and …. 2.51 separate legal personality …. 1.9, 1.37, 2.52 separation of trust and …. 2.71–2.78 terminology …. 1.53 trust as alternative …. 1.3, 1.6 trust configured as …. 1.3, 1.7 unincorporated see Joint stock companies winding up …. 2.76, 2.77 Conflict of interest trustee’s duty to avoid …. 2.36, 4.27 waiver or consent …. 4.27–4.31

fully informed …. 4.28, 4.30 generic waiver clause …. 4.29 MIS …. 4.31 onus of establishing …. 4.30 substantial transactions …. 4.30 Contractarian theory …. 1.67, 1.69, 2.118, 7.11 Contractualisation addressing commercial exigencies …. 2.116 circumscribing duties and rights …. 2.115 commercial trust …. 1.10, 1.52, 2.82, 2.113–2.140, 2.172, 6.6 contractarian theory …. 1.67, 1.69, 2.113 analysis of trust using …. 2.118–2.130 contractual devices in documentation …. 2.115, 2.121 debenture trust deed …. 2.121 ‘deed of settlement’ company …. 2.59 dilution of trustee’s personal burden …. 6.9 document both contract and trust instrument …. 2.126 documented trust arrangement …. 2.121 equitable contractual principles …. 2.124 fiduciary duties and …. 2.133–2.140 inadequacy of protection …. 1.10 insolvency, implications for …. 6.6, 6.9 law and economics theory …. 2.111, 2.117 limitation of liability …. 3.80–3.88 meaning …. 1.52, 2.111 modification of outcomes …. 2.115

multiple-participant business organisations …. 2.149 phenomenon of …. 2.111–2.140 privity doctrine …. 2.122 promoters choosing trust form …. 2.149 proprietary interests …. 2.120 reallocation of consequences …. 6.8 relationship between trust and contract …. 2.118–2.130 remuneration, trustee’s right to …. 4.45–4.50 special contracts …. 2.129 superannuation or pension trust, 2.125 traditional trust instrument …. 2.121 trust instrument …. 2.121–2.126 trustee–beneficiary relationship …. 2.123, 2.131–2.140, 4.14, 4.87 undocumented trust arrangement …. 2.119 unit trust …. 2.113, 2.127–2.129 Corporate veil legal entity status and …. 3.50, 3.51 lifting …. 3.27, 3.30, 3.50–3.52 development of doctrine …. 3.52 extreme circumstances …. 3.50 insolvent trading …. 3.50 trust not having …. 1.10, 1.45, 3.27 ‘trust veil’ equivalent …. 1.10, 1.45, 3.27–3.29 lifting …. 3.48–3.56 Corporations Act insolvent trusts, not applicable to …. 1.13

limited liability, assuring …. 3.19 limited regulation of trusts …. 3.4 MIS regulated by …. 1.89, 2.78, 2.90, 2.154, 2.155 efficiency …. 2.167 insolvency see Insolvency of MIS limitations …. 3.4 reform proposals …. 7.22 structural criticism of Ch 5C …. 2.167 ultra vires, abolition of …. 4.20 Courts of Chancery equity and …. 2.12, 2.16, 2.20 insolvency cases, dealing with …. 2.75, 2.76 unincorporated companies and …. 2.60, 2.61

D Debenture trust deed, contractual nature …. 2.121 trustee’s duty of care and diligence …. 4.39 Decision-making advantage of trust over company …. 2.107 commercial trust processes …. 2.107 ‘Deed of settlement’ companies abolition …. 2.67 circumvention device …. 2.59, 2.61 commercial trust, as …. 1.32 contractualisation …. 2.59 definition …. 2.58

limitation of liability …. 3.20, 3.83, 3.84 purpose …. 2.58 Submarine Cables Trust case …. 2.68 trustees’ duties and limitations …. 2.59 unincorporated …. 1.7, 1.32, 2.51, 2.58 prohibition by Companies Act 1862 …. 2.66–2.70 Derivative actions exceptional circumstances …. 3.5 unit holders’ ability to take …. 3.5 Discretionary trust features …. 1.35 trading trust …. 1.35, 2.78, 2.92 trust-agency hybrid …. 3.37 Distributions to equity investors capital returns …. 2.105 profits …. 2.104 Duty of care see Trustees’ duties

E England Bubble Act 1720 …. 2.51, 2.57, 2.67, 6.5, 7.14 commercial trusts …. 1.73–1.78, 2.1–2.4 cessation of use …. 2.71 prohibition by Companies Act 1863 …. 2.66–2.70 Companies Act 1862 …. 2.48, 2.66–2.70 international trusts …. 1.73 investment trust …. 2.68, 2.80

joint stock companies see Joint stock companies law and economics theory …. 1.71 limitation of trustees’ liability case law …. 4.161–4.171 repugnancy …. 4.162 Watling v Lewis …. 4.162–4.183 limited liability company evolution of …. 2.48–2.70 trust as progenitor …. 2.49–2.65 management trust …. 2.68 Submarine Cables Trust case …. 2.68 trust law law and economics theory and …. 1.71 origins …. 1.4, 1.8, 2.1 source of Australian law …. 1.73, 7.50 US law diverging from …. 1.56, 7.50, 7.56 unincorporated companies …. 1.7, 1.32, 1.40, 2.51, 2.57–2.65 prohibition by Companies Act 1862 …. 2.66–2.70 unit trusts …. 1.73 Enterprise theory …. 1.67, 1.68, 5.92, 7.11 Equity Chancery courts …. 2.12, 2.16, 2.20 insolvency cases, dealing with …. 2.75, 2.76 unincorporated companies and …. 2.60, 2.61 circumvention of laws …. 2.14–2.21, 2.61 corporate governance principles …. 2.62

discretionary remedies …. 2.16 evolving with times …. 7.40–7.43 flexibility in jurisdiction …. 7.41, 7.43 proprietary remedies …. 2.25 protection of property …. 2.24, 2.25 reform through courts …. 7.39–7.47 suspicion of trustees …. 2.30, 4.11 trust as creation of …. 2.5, 2.11, 2.12, 2.15, 2.133 unconscionable conduct, remedies for …. 2.15, 2.20 unit holder remedies …. 3.6 Equity investor beneficiaries acquisition of interest …. 1.45 arm’s length from trustee and each other …. 1.45, 3.11 commercial expectations …. 1.45, 3.11–3.13 derivative actions …. 3.5 distributions to capital returns …. 2.105 profits …. 2.104 equitable remedies …. 3.6 legal risks borne by …. 1.45, 3.3, 3.101 modification of rights and protections …. 3.12 personal liability for enterprise debts see Equity investors’ personal liability trustee exculpation from breach of trust …. 3.12 waiver of rights and protections …. 3.11 rights, entitlements and benefits …. 3.2 shareholder protections compared …. 1.10, 3.4, 3.13

statutory protection lack of …. 1.10, 1.45, 3.4 reform proposals …. 7.24–7.29 trustee’s personal indemnity against see Trustees’ personal indemnity unit holders agreement …. 2.128 unlimited personal liability see Equity investors’ personal liability Equity investors’ personal liability agency, implication of …. 3.30–3.47 control test …. 3.35–3.47, 3.52–3.56 creation of agency relationship …. 3.34 lifting the trust veil …. 3.48–3.56 trust-agency hybrid …. 3.30–3.47 trust-partnership hybrid …. 3.31–3.34 contractualised solution …. 3.80–3.89, 3.103 Blackacre Trust hypothetical, 3.99, 3.100 direct liability …. 3.83–3.88, 3.103 indirect liability …. 3.80–3.82, 3.103 limitation clauses …. 3.84–3.88 undermining protection …. 3.89 waiver of rights by counterparty …. 3.88 direct liability …. 3.26, 3.30–3.56 contractualised solution …. 3.83–3.88, 3.103 control test …. 3.35–3.47, 3.52–3.56 implied agency …. 3.30–3.47 lifting the trust veil …. 3.48–3.56 limitation clauses …. 3.84–3.88

no protection against …. 3.9 trust and partnership …. 3.31–3.34 trustee’s discretionary powers …. 3.53 indirect liability …. 3.26 contractualised solution …. 3.80–3.82, 3.103 provision in constitution eliminating …. 3.9 trust instrument excluding …. 3.80 trustee’s personal indemnity …. 3.26, 3.57–3.78 limitation clauses …. 3.84–3.88 fraud and …. 3.86, 3.87 limited liability …. 3.8, 3.14, 3.22–3.26 Blackacre Trust hypothetical, 3.99, 3.100 company compared …. 3.15–3.21 equivalence of company and trust …. 3.24, 3.25 no statutory guarantee …. 3.22 private means …. 3.79–3.89 statute, by …. 3.90–3.98 limited liability company as trustee …. 3.9 MIS product disclosure statements not dealing with …. 3.9 modification of rights and protections …. 3.12 not beyond value of invested equity …. 3.13, 3.15 potential for full liability …. 3.14 questions for investors …. 3.22 statutory intervention …. 3.90–3.98 Canada …. 3.91, 3.95–3.97 Limited Liability Act 1855 …. 3.90

Singapore …. 3.91, 3.98 United States …. 3.91–3.94 suggested amendment to limit …. 3.8 trust and partnership …. 3.31–3.34 trust instrument dealing with …. 3.9 ‘trust veil’ …. 1.10, 1.45, 3.27–3.30, 3.45 closely-held trust …. 3.52 control test …. 3.52–3.56 corporate veil equivalent …. 3.50–3.52 lifting …. 3.48–3.56 subsidiaries as trusts …. 3.48, 3.49 trustee as agent …. 3.30–3.47 trustee’s discretionary powers and …. 3.53 trustee’s liability and …. 3.28 trustee’s personal indemnity …. 3.26, 3.57–3.78 contractualised solution …. 3.80–3.82 indirect liability …. 3.26, 3.58 subrogation by creditor to …. 3.74–3.78 trust instrument excluding …. 3.3, 3.80 when arises …. 3.60–3.73 unlimited …. 1.45, 3.7–3.10 Blackacre Trust hypothetical, 3.99, 3.100 direct liability …. 3.9, 3.26 eliminating by private means …. 3.79–3.89 eliminating by statutory intervention …. 3.90–3.98 indirect liability …. 3.9, 3.26

potential for …. 3.14, 3.79 waiver of rights and protections …. 3.11, 3.88 Establishment of trust ease and privacy …. 2.101 Exoneration power clear accounts rule and …. 5.46, 5.117 insolvency and …. 5.125 power to apply trust assets for benefit of creditors …. 5.124–5.127 subrogation and …. 5.30, 5.117 trustee indemnity, limb of …. 4.59, 4.60, 4.89 separating from reimbursement limb …. 5.121–5.123 Expectations see Commercial expectations

F Feudal laws common law courts …. 2.20 equitable remedies …. 2.16–2.20 feoffees’ actions …. 2.20 trust as circumvention device …. 2.14–2.21 coverture …. 2.18 escheat …. 2.17 friars …. 2.19 married women …. 2.18 primogeniture …. 2.17 wardship …. 2.17 unconscionable conduct, remedies for …. 2.15, 2.20 Fiduciary duties see also Trustees’ duties

commercial context …. 2.139, 2.140 company/trust comparison …. 2.146 contract and …. 2.133–2.140 critical feature …. 2.33 extent and nature not fixed …. 2.136 ‘irreducible core’ …. 2.140, 4.27, 4.33–4.40, 5.76, 5.79 key characteristics …. 2.138 malleability …. 2.140 meaning of fiduciary …. 2.32 trustee …. 2.29–2.36, 2.63, 4.25 archetype of fiduciary …. 2.32, 2.35 fiduciary burden …. 2.35, 4.25 reform proposals …. 7.35 Financial transactions trust as aid to …. 1.34, 1.73 Flexibility advantage of trust over company …. 2.100 fiduciary framework and beneficial entitlements …. 2.102 trust characteristic …. 2.7, 2.44–2.47, 2.82

G Global financial crisis commercial trust collapses …. 6.11, 6.13, 7.44 effect of …. 6.13 insolvencies in aftermath of …. 6.24 post-GFC reform reports …. 6.13, App 2 real estate trusts prior to …. 2.89

relaxing of lending standards and credit criteria prior to …. 6.12 Good faith trustee’s duty of …. 2.36 Governance advantage of trust over company …. 2.107 commercial trusts …. 2.107 corporate governance principles …. 2.62 Gross negligence breach of trust …. 4.36, 4.43 examples …. 4.43 exculpation clauses …. 4.36, 4.42–4.44 meaning …. 4.41, 4.42 trustee, by …. 4.36, 4.43

H Hague Convention on Law Applicable to Trusts …. 1.78

I Indemnity trustee of commercial trust personal see Trustee’s personal indemnity proprietary see Trustee’s proprietary indemnity subrogation see Subrogation to trustee’s indemnity Insolvency ASIC information sheets …. 6.29 cash flow test …. 6.26 commercial trust see Insolvency of commercial trusts

companies law …. 2.75–2.77, 6.18 Courts of Chancery dealing with …. 2.75, 2.76 definition …. 6.26 illiquidity distinguished …. 6.28 insolvency law, meaning …. 6.17 insolvent trading duty to prevent …. 6.29 liability for …. 2.157 Joint Stock Companies Winding-up Acts …. 2.76 limited liability companies …. 2.76 meaning …. 6.26–6.29 MIS see Insolvency of MIS National Insolvent Trading Program Report …. 6.29 options for company …. 6.21, 6.79 traditional trusts not prone to …. 2.41 unincorporated joint stock companies …. 2.76, 2.168, 6.5 voluntary administration …. 6.18, 6.79 winding up see Winding up Insolvency of commercial trusts administration of trust property …. 6.14 analysis to determine …. 6.52–6.59 sequence of investigation …. 6.60–6.65 cash flow test …. 6.26, 6.34–6.36, 6.41, 6.51 complications …. 6.15 corporate insolvency laws and …. 1.13, 6.2, 6.14 awkwardness of relationship …. 6.2, 6.16–6.23

MIS, application to …. 2.168, 6.16, 6.19, 6.22 dedicated insolvency regime, proposed …. 7.38 financial viability …. 6.20, 6.30, 6.45 GFC-induced collapses …. 6.11, 6.13, 7.44 historical context and background …. 6.5–6.13 inadequacy of trust law …. 1.13, 6.3, 6.14, 6.52 indicators of …. 6.66–6.69 issues attending …. 6.14 lack of statutory regime …. 6.14, 6.19 law and economics efficiency …. 6.81 legal entity vs economic entity …. 6.52 legal nonsense vs commercial reality …. 6.16, 6.30–6.43 managed investment scheme see Insolvency of MIS meaning …. 6.16, 6.26–6.29 overview …. 6.1–6.4 poor record and account keeping …. 6.68, 6.69 proposed definition …. 6.44–6.51 reform proposals …. 7.38 sequence of investigation …. 6.60–6.65 trust debts definition …. 6.50, 6.51 inability to pay …. 6.50 personal obligation of trustee …. 6.51 trust solvency/insolvency …. 6.53, 6.62 trustee solvency/insolvency …. 6.25, 6.31, 6.53, 6.55, 6.61 trustee’s exoneration power and …. 5.125

trustee’s personal liability …. 6.59 limitation of …. 6.59, 6.64, 6.65 trustee’s proprietary indemnity …. 6.58 impairment of …. 6.58, 6.63 uncertainties and legal lacunae …. 6.14 United States …. 6.70–6.78 Australia compared …. 6.70, 6.71 Bankruptcy Code …. 6.70–6.78 benefits and protections to stakeholders …. 6.74 business trusts …. 6.75–6.78 trust as ‘person’ …. 6.72 use of term in commerce …. 6.20 voidable transactions …. 6.14 voluntary administration not possible …. 6.31 trustee in …. 6.14 winding up see Winding up Insolvency of MIS CAMAC Discussion Paper …. 6.4, 6.15, 6.43, 7.11 CAMAC Report …. 6.4, 6.19, 6.23, 6.42, 6.81 suggested definition …. 6.42, 6.43, 6.49 cash flow test …. 6.34–6.36, 6.41, 6.51 colloquial concept …. 6.35, 6.40 Corporations Act Ch 5C …. 2.168, 6.19, 6.22, 6.32 lack of guidance …. 6.2, 6.33, 6.47, 7.6 discretion of courts …. 2.168, 6.32

distribution of scheme property …. 6.67 endemic illiquidity …. 6.47, 6.48 failure of scheme …. 6.38 financial viability …. 6.20, 6.30, 6.45 first principles approach …. 6.37 indicators of …. 6.66–6.69 meaning …. 6.16, 6.26–6.29, 6.34, 6.39 poor record and account keeping …. 6.68, 6.69 proposed definition …. 6.44–6.51 recent collapses …. 1.93, 6.67 rights of scheme creditors …. 6.22 scheme property insufficient to meet claims …. 6.42, 6.43 solvency of responsible entity …. 6.30, 6.46 winding up …. 6.30, 6.33, 6.34 just and equitable ground …. 6.33, 6.38, 6.39, 6.48 Investment trust Australia …. 2.80, 2.82 Australian real estate investment trusts (A-REITs) …. 2.88, 2.89 England …. 2.68 Smith v Anderson model, 2.68, 2.69, 2.82

J Joint stock companies Australia, 2.78 Bubble Act 1720 …. 2.51, 2.57, 3.18, 6.5, 7.14 Chancery courts, regulation by …. 2.60, 2.61 chartered company compared …. 2.56

circumvention device …. 2.59, 2.61 commercial trust …. 1.32 contractualisation …. 2.59 corporate governance principles …. 2.62 ‘deed of settlement’ company …. 1.7, 1.32, 2.51, 2.58 dispute resolution …. 2.60 evolution of …. 2.56 incorporation by charter …. 2.58 insolvency …. 2.76, 2.168, 6.5 Joint Stock Companies Acts …. 2.48, 2.51 Joint Stock Companies Winding-up Acts …. 2.76 legislative process …. 2.48 limitation of liability …. 3.18, 3.20, 3.21, 3.83 managed investment scheme as descendant of …. 2.78 personal element …. 2.63 proprietary element …. 2.56, 2.64 protection of assets …. 2.64 unincorporated …. 1.7, 1.32, 1.40, 2.51, 2.57–2.65 attempted abolition by Bubble Act …. 2.51, 2.57, 2.67, 6.5, 7.14 prohibition by Companies Act 1862 …. 2.66–2.70, 6.5 resembling incorporated companies …. 2.147 trust-agency hybrid …. 3.43 unlimited personal liability for enterprise debts …. 3.7 unit trust …. 1.40

L Law and economics theory

application to areas of law …. 1.63 company/trust comparison, applied to …. 1.67, 2.146 contractarian theory …. 1.67, 1.69, 2.118, 7.11 contractualisation of commercial trusts …. 2.111, 2.117 criticism of application to trusts …. 1.71, 1.72 efficiency …. 1.65 allocation of risks …. 1.65 company law …. 2.164–2.166 law applicable to commercial trusts …. 1.59, 2.167 trust law …. 2.167 English trust law and …. 1.71 enterprise theory …. 1.67, 1.68, 5.92, 7.11 ‘functionalist’ or ‘legal realist’ school …. 1.60, 1.64 influence in Australia …. 1.62 origins …. 1.60 Posner …. 1.63 scope of book …. 1.94 security interest, definition …. 1.64 substance-over-form methodology …. 1.64 trustee binding trust estate …. 5.92 United States …. 1.58–1.72 corporations law influenced by …. 1.66 Lien creditor’s lien …. 5.102, 5.103 trustees’ proprietary indemnity, to enforce …. 4.62–4.64 subrogation and …. 5.41

transfer to creditor …. 5.103 Limitation of liability clauses agreed allocation of risk …. 4.96, 4.114 bargaining for …. 4.90, 4.97, 4.109 beneficiaries’ personal indemnity …. 4.126–4.129 care in drafting …. 4.99, 4.103 cash flow insolvency, protection against …. 4.107 complexity …. 4.103, 4.104 corporate trustee …. 4.92 courts’ wariness of …. 4.99, 4.106 creditors agreeing to …. 4.94, 4.95 delays in drafting and negotiation …. 4.110 drafting defects …. 4.106, 4.108 imperfect solution for trustee …. 4.105–4.110 imperfect solution for unsecured creditor …. 4.111–4.112 importance of …. 4.90, 4.92 insolvency and …. 6.65 lack of uniformity …. 4.106 legal effect …. 4.96–4.101 limiting creditor’s rights to recourse …. 4.97, 4.101 market experience …. 4.102–4.104 model clause …. 4.113–4.155, 5.120, App 4 beneficiaries’ personal indemnity …. 4.126–4.129 clause X.1 …. 4.115–4.119 clause X.2 …. 4.115–4.143 clause X.3 …. 4.144–4.153

clause X.4 …. 4.154–4.155 detailed clause …. 4.113 exceptions …. 4.144–4.153 inclusions …. 4.115–4.143 indemnity, not referring to …. 4.122, 4.123 limiting liability to extent of trust assets …. 4.120–4.125 set-off …. 4.137–4.139 short clause …. 4.113 ‘transactions’, reference to …. 4.116 trustee capacity, entered in …. 4.117, 4.119 set-off …. 4.137–4.139 specific fund, reference to …. 4.91 standard forms …. 4.102 statutory liability excluded …. 4.97 subrogation and …. 5.24, 5.30 transaction costs …. 4.110 trust assets, to extent of …. 4.120–4.125 trust instrument, inserted in …. 4.98, 4.113 trustee ‘entitled to be indemnified’ …. 4.106 trustee’s personal liability, limiting …. 4.91–4.155 unsecured creditor’s risk …. 4.111–4.112 value of ‘trust assets’, reference to …. 4.108 Watling v Lewis, effect of …. 4.182–4.183 who is bound by …. 4.97 Limited liability benefit of …. 3.16

companies see Limited liability company ‘deed of settlement’ companies …. 3.20, 3.83, 3.84 joint stock companies …. 3.18, 3.20, 3.21, 3.83 privilege conferred by statute …. 3.18 risk to counterparties …. 3.17 trusts …. 3.14, 3.22–3.26 companies compared …. 3.15–3.21 contractualisation …. 3.80–3.88 equivalence of company and trust …. 3.24, 3.25 no statutory guarantee …. 3.22 private means …. 3.79–3.89 questions for investors …. 3.22 statute, by …. 3.90–3.98 suggested amendment to limit …. 3.8 Limited liability company Australia, development in …. 2.79, 2.80 capital maintenance doctrine …. 3.51 dividends, constraints on …. 3.51 evolution of …. 2.48–2.70 incorporation of …. 2.48, 2.50 insolvency …. 2.76 limited liability …. 3.15–3.21 benefit of …. 3.16 Corporations Act assuring …. 3.19 crucial factor …. 3.15 externalisation of risk …. 3.17

inbuilt trade-offs …. 3.51 privilege conferred by statute …. 3.18 risk to counterparties …. 3.17 trust as progenitor …. 2.49–2.65 United States …. 1.57 Liquidation see Winding up

M Managed investment scheme (MIS) abolition of unincorporated scheme, proposal for …. 7.15 ASX listing …. 1.89, 2.141, 2.155, 2.156 CAMAC Discussion Paper …. 6.4, 6.15, 6.43, 7.11, 7.15 CAMAC Report …. 6.4, 6.19, 6.23, 6.42, 6.81, 7.15 case law from recent collapses …. 1.93 commercial trust …. 1.41 company, resembling …. 2.141, 2.154, 2.155 constitution trustee’s right to remuneration …. 4.46, 4.49 unit holders’ rights …. 3.3 Corporations Act provisions …. 1.42 debt and equity raising provisions …. 7.22 insolvency see Insolvency of MIS reform proposals …. 7.22 definition, reform …. 7.21 history in Australia …. 2.85–2.91 insolvency see Insolvency of MIS investor liability, PDS not dealing with …. 3.9

meaning …. 1.41 protection of members’ interests …. 4.31 public unit trusts regulated as …. 1.41, 2.78, 2.85, 2.90 raising funds from public …. 2.141 reform see also Trust law reform debt and equity raising provisions …. 7.22 definition …. 7.21 options …. 7.13–7.19 regulation by Corporations Act …. 1.89, 2.78, 2.90, 2.154, 2.155 efficiency …. 2.167 insolvency see Insolvency of MIS limitations …. 3.4 structural criticism of Ch 5C …. 2.167 responsible entity …. 1.42 approval for giving financial benefits to …. 4.31 duties, reform proposals …. 7.26 duty of care and diligence …. 4.39 duty to act in best interests of members …. 1.49 powers …. 4.23 trustee as …. 1.42, 4.23 scope of book …. 1.89 separate legal entity, proposal for …. 7.15 taxation …. 1.81 trading trust may be …. 2.78 trust-based and contract-based schemes distinguished …. 1.41 trust instrument as constitution …. 2.155

trustee’s indemnity …. 4.70, 4.79 Massachusetts trust commercial trust …. 1.32, 1.56 compared to company …. 2.144 corporations legislation not abolishing …. 7.51 cross-border business activity …. 7.54 development of trust law …. 7.51–7.54 legislation facilitating use of …. 7.52 resembling incorporated company …. 2.147 trust-agency hybrid …. 3.39 unit trust …. 1.40 MIS see Managed investment scheme (MIS) Moral hazard …. 6.8

N Negligence see Gross negligence

P Parity myth …. 1.7, 2.112, 2.141–2.158, 5.2, 7.2 Partnership agency principles …. 3.31–3.34 general …. 2.55 trust compared …. 2.55 trust-partnership hybrid …. 3.31–3.34 Pension trust see Superannuation or pension trust Personal profit trustee no profit rule …. 2.36, 4.27

waiver or consent …. 4.27–4.31 fully informed …. 4.28, 4.30 generic waiver clause …. 4.29 MIS …. 4.31 onus of establishing …. 4.30 substantial transactions …. 4.30 ‘Plenary powers’ clauses duty to act properly …. 4.24–4.26 restriction of powers …. 4.22, 4.23 trust instrument, in …. 4.19–4.23 Practitioners book focussing on …. 1.24–1.29 Private trading trust see Trading trust Promoters choice of trust form …. 2.149 options for …. 2.148 parity myth, encouraging …. 2.148–2.141 Property equity’s role to protect …. 2.24, 2.25 proprietary element of trust …. 1.37, 2.6, 2.22–2.28, 2.64, 3.2 proprietary interest in trust property …. 2.22 proprietary remedies …. 2.25 protection of trust property …. 2.22 traditional role of trust to transfer …. 2.23 trust as concept of …. 2.22–2.28 trustee’s duty to preserve …. 2.26, 2.27

Public unit trust see also Unit trust ASX listing …. 2.141 Australian Fixed Trusts …. 2.86 Australian real estate investment trusts (A-REITs) …. 2.88, 2.89 commercial trust as …. 1.31, 1.32, 1.40, 2.78 company, resembling …. 2.141 contractarian nature …. 2.113 contractualisation …. 2.127–2.129, 2.141 history in Australia …. 2.85–2.91 MIS see Managed investment scheme (MIS) property sector …. 2.88, 2.89 raising funds from public …. 2.141 redemption of invested equity …. 2.106 regulation of …. 2.90 statistics …. 2.86, 2.87 unit holders …. 1.40 agreement …. 2.128 equating to shareholders …. 3.1 rights, entitlements and benefits …. 3.2 risk see Equity investor beneficiaries unit trust, meaning …. 1.40

R Redemption of invested equity advantage of trust over company …. 2.106 unit trust …. 2.106 Regulatory arbitrage …. 2.100, 2.162

Regulatory dissonance …. 1.7, 2.159–2.170 Reporting commercial trustee obligations …. 2.103 Risk allocation …. 1.23 efficient …. 1.65 balance of risk-taking and risk-shifting …. 1.8 beneficiary equity investor see Equity investor beneficiaries lack of risk in traditional trust …. 3.3 commercial trusts and …. 1.8, 1.19–1.21 efficient allocation of …. 1.65 equity investor see Equity investor beneficiaries moral hazard …. 6.8 trading trusts, risks for creditors …. 2.95, 2.96 traditional trusts, aversion to …. 1.8, 1.19, 1.20, 2.42 trustee …. 1.11, 1.46, 4.1 inconsistent with expectations …. 4.10 personal risk …. 2.42, 2.43 risk-tolerant and entrepreneurial …. 1.8, 6.8, 6.10 Royal Charter incorporation of company by …. 2.52–2.54

S Security interest functional definition …. 1.64 Security trust …. 1.34

Separate legal personality commercial trust not having …. 1.7, 1.9, 1.37, 2.147, 2.161, 3.51 company …. 1.9, 1.37, 2.52 corporate veil doctrine and …. 3.50, 3.51 concept of …. 2.52 Singapore breach of trust irreducible core …. 4.36 equity investors’ personal liability limitation by statute …. 3.91, 3.98 Subrogation to trustee’s indemnity asymmetry of trustee’s indemnity …. 5.41 Blackacre Trust hypothetical …. 5.33–5.47 Canadian position …. 3.76 circumstances …. 3.74 clear accounts rule …. 5.45, 5.118 exoneration power and …. 5.46, 5.117 discretionary remedy …. 5.28 double equity risk …. 5.32, 5.33, 5.81, 5.83, 5.84, 7.33 insolvent trustee …. 5.30 law and equity, interplay of …. 5.44 lien or charge enforcing indemnity …. 5.41 limitation of liability clauses and …. 5.24, 5.30 modified subrogation theory …. 5.83, 5.128–5.133 proprietary/personal indemnity distinction …. 3.77 related breaches …. 5.31

secured creditors …. 5.22 separation of ownership …. 5.42 subrogation as equitable remedy …. 5.27, 5.28 trust creditors, by …. 3.74–3.78, 5.22–5.33 trust law lag …. 5.47 trustee not enforcing personal indemnity …. 3.74 trustee’s exoneration power impaired …. 5.30 unrelated breaches …. 5.31, 5.45 unsecured creditors …. 3.75, 5.22–5.33, 5.81 company law compared …. 5.25, 5.28 double equity risk …. 5.32, 5.33, 5.81, 5.83, 5.84, 7.33 only access to trust assets …. 3.57, 5.24, 5.26, 5.81, 5.84, 5.104 US protection compared …. 5.27, 5.80–5.85, 5.95, 5.104 unsuitability for modern commercial trust …. 5.25 Superannuation or pension trust commercial trust, as …. 1.36 English trust law …. 1.73 relationship between contract and trust …. 2.125

T Taxation advantages of trusts …. 1.83, 2.7, 2.94, 2.98 Australian tax laws contemplating trusts …. 1.81 evading, avoiding or minimising …. 1.82 MIS involving trusts …. 1.81 tax-advantaged status of trust …. 1.85 tax-arbitrage …. 1.82

trading trusts and …. 2.94 trust deemed entity …. 2.154 trusts and …. 1.79–1.85 resembling companies …. 2.154 Trading trust alternative to company …. 2.93 Australia …. 2.92–2.97 Australian business number …. 2.154 Canada …. 1.77 cases …. 2.96, 2.97 circumvention device …. 2.93 commercial trust as …. 1.31, 1.32, 1.39, 2.78 corporate trustee of nominal value …. 2.95 definition …. 1.39, 2.92 discretionary trust …. 1.35, 2.78, 2.92 financial reports, 2.154 New Zealand …. 1.77 resembling company …. 2.154 risks for creditors …. 2.95, 2.96 tax effective device …. 2.94 tax file number …. 2.154 unit trust …. 2.78, 2.92 Trust adaptability …. 1.4 business entity, as see Business entity characteristics …. 2.6, 2.7

circumvention device …. 2.14–2.21, 2.59 commercial see Commercial trust definition …. 1.37 different types …. 1.33 equity, creation of …. 2.5, 2.11, 2.12, 2.133 evolution from guardian to entrepreneur …. 1.17–1.23, 7.1–7.11 implications for reform …. 7.1–7.11 legal framework inadequate …. 1.19–1.21 trustee role …. 4.184 US position …. 1.22, 1.23 flexibility …. 2.7, 2.44–2.47, 2.82, 2.100 Germanic law …. 2.10 matrix of relationships …. 1.37 mystery about …. 1.1, 1.3 original purpose …. 1.8, 1.17 origins …. 1.4, 1.8, 2.1, 2.10–2.13 partnership compared …. 2.55 personal element …. 1.37, 2.6, 2.29–2.44, 2.63, 3.2, 6.5 property concept …. 2.22–2.28 proprietary element …. 1.37, 2.6, 2.22–2.28, 2.64, 3.2, 6.5 resilience …. 1.5 risk aversion …. 1.8, 1.19, 1.20, 2.42 Roman law …. 2.10 separation of company and …. 2.71–2.78 taxation and …. 1.79–1.85, 2.7, 2.94 transfer of property …. 2.22

Trust creditors accessorial liability for breach of trust …. 5.16–5.19 Barnes v Addy …. 5.16–5.18, 5.22, 5.50, 7.31 companies compared …. 5.20 ignorance of misconduct …. 5.19 knowledge …. 5.16, 5.17 related breaches by trustee …. 5.50, 5.51, 5.62, 5.63 risk for intending counterparties …. 5.51 secured creditors …. 5.22 unsecured creditors …. 5.19, 5.22 commercial expectations …. 1.47, 4.94, 5.9–5.12 moulding remedy consistent with …. 5.104 secured creditors …. 5.10 trustees’ personal liability …. 4.94 unsecured creditors …. 5.11 contract creditors …. 5.6 direct access to trust estate Australia, theory for …. 5.114–5.140 clear accounts rule, severing nexus with …. 5.116–5.120 exoneration power …. 5.121–5.127 independent power to apply theory …. 5.117, 5.118, 5.134–5.139 modified subrogation theory …. 5.117, 5.128–5.133 reform proposals …. 7.33 suing trustee in representative capacity …. 5.87, 5.90, 5.140 US position …. 5.27, 5.81, 5.86–5.113 adoption in Australia …. 5.114–5.115

double equity risk …. 1.47, 5.32, 5.33, 5.81, 5.83, 5.84, 7.33 lack of protection …. 1.12, 1.47, 5.1, 5.3 no statutory indoor management rule …. 5.13–5.21 lien …. 5.102, 5.103 position of …. 1.47, 5.2 principal participants …. 1.43 protection, reform proposals …. 7.30–7.33 innocent outsider protection …. 7.31 priority access to trust assets in insolvency …. 7.33 trustees acting beyond power …. 7.32 pursuing investors directly …. 1.10 related breaches by trustee assumptions …. 5.59 Barnes v Addy liability …. 5.50, 5.51, 5.62, 5.63, 7.31 Blackacre Trust hypothetical …. 5.63 claim for damages …. 5.57 contractual protections …. 5.54–5.57 due diligence …. 5.53, 5.61, App 5 events of default …. 5.54 legal opinions …. 5.58–5.61 private means of protection …. 5.48–5.65 qualifications …. 5.59 quality of protection …. 5.62–5.65 reform proposals …. 7.33 representations and warranties …. 5.54 risk for intending counterparties …. 5.49–5.52

subrogation to trustee indemnity …. 5.31 undertakings …. 5.54 US protections …. 5.66–5.71, 7.31 risks …. 5.4 secured creditors …. 1.47 access to trust assets …. 5.22 subrogation see Subrogation to trustee’s indemnity suing trustee in representative capacity Australian law not permitting …. 5.140 US position …. 5.87, 5.90 trustees’ personal liability agreement to limitation …. 4.94, 4.95 expectation as to …. 4.94 types …. 5.6 United States see Trust creditors: United States unrelated breaches by trustee clause in trust instrument …. 5.76, 5.77 clear accounts rule …. 5.45, 5.46 severing nexus with …. 5.116–5.120 exoneration power …. 5.46 fiduciary overlay …. 5.73, 5.76 ‘irreducible core’ of trustee’s duty …. 5.76, 5.79 private means of protection …. 5.72–5.79 reform proposals …. 7.33 US protections …. 5.80–5.85 unsecured creditors …. 1.47, 5.11

commercial expectations …. 5.11 company law compared …. 5.25, 5.28 double equity risk …. 1.47, 5.32, 5.33, 5.81, 5.83, 5.84, 7.33 limitation of liability clauses and …. 4.111–4.112 subrogation to trustee’s indemnity …. 3.75, 5.22–5.33, 5.81 trustee misconduct, consequences …. 5.19 trustee powers and …. 4.22 US position …. 5.27, 5.80–5.85 who are …. 5.6–5.8 Trust creditors: United States direct access to trust estate …. 5.27, 5.81, 5.86–5.113 adoption in Australia …. 5.114–5.115 case law …. 5.101–5.105 competing theories …. 5.98 creditor’s expectations …. 5.104 creditor’s lien …. 5.102, 5.103 current US position …. 5.106–5.113 departure from English law …. 5.95 evolution of doctrine …. 5.94–5.100 law and economics ‘enterprise theory’ …. 5.92 Restatement provisions …. 5.98, 5.106–5.113 subrogation theory …. 5.95, 5.101 suing trustee in representative capacity …. 5.87, 5.90, 5.140 trustee binding trust estate …. 5.88–5.92 Uniform Trust Code s 1010 …. 5.90–5.94, 5.106 protections in …. 5.5, 5.13, 5.27

related breaches by trustee …. 5.66–5.71, 7.31 unrelated breaches by trustee …. 5.80–5.85 subrogation theory …. 5.95, 5.101 Trust instrument contractual nature …. 2.121–2.124 drafting to make trust resemble company …. 2.147 ‘plenary/universal powers’ clauses …. 4.19–4.23 primacy as source of law …. 2.36 trust law modified in, 2.45 trustee powers conferred by …. 4.16 trustee to observe terms of …. 2.36 Trust law companies law diverging from …. 2.71–2.78 company law compared …. 2.159–2.170 conservatism …. 1.19, 2.73 default law that can be altered in trust instrument, 2.45 English law law and economics theory and …. 1.71 origins …. 1.4, 1.8, 2.1 source of Australian law …. 1.73, 7.50 US law diverging from …. 1.56, 7.50, 7.56 family and testamentary trusts, roots in …. 2.40 inefficiency for commercial trusts …. 1.8, 1.19, 1.59 insolvency, inadequacy re …. 1.13 landmark cases …. 2.81 modifying or overriding by consent …. 2.45

protective role …. 2.73 reform see Trust law reform risk aversion …. 1.8, 1.19, 1.20 sanctions for breach of trust …. 2.39, 2.40 scholarship on …. 1.27, 1.28 separation of company and trust, effect …. 2.71–2.78 statutory remediation see Trust law reform United States …. 1.57–1.59, 7.48–7.61 Australian bills considering …. 7.61 Australian courts referencing …. 7.55, 7.58–7.60 courts’ role in reform …. 7.18 development of …. 7.51–7.54 divergence from English law …. 1.56, 7.50, 7.56 similarities with Australian law …. 7.57 Trust law reform Australian commercial trust number …. 7.23 courts, through …. 7.18, 7.39–7.47 default trust terms …. 7.37 definitional matters …. 7.21 duties of trustees …. 7.26 irreducible core …. 7.28 equity …. 7.39–7.47 influence of trust law …. 7.48–7.61 insolvency regime …. 7.38 limitation of trustee liability …. 7.34 equity investor protection …. 7.27, 7.28

limit on exculpation power …. 7.28 need for …. 7.1–7.11 options …. 7.13–7.19 protection of all participants …. 7.23 protection of creditors and external parties …. 7.30–7.33 innocent outsider protection …. 7.31 priority access to trust assets in insolvency …. 7.33 trustees acting beyond power …. 7.32 protection of equity investors …. 7.24–7.29 extension of Corporations Act protections …. 7.25, 7.26 limitation of trustee liability …. 7.27, 7.28 removal and replacement of trustees …. 7.29 protection of trustees …. 7.34–7.36 fiduciary duties …. 7.35 limitation of liability …. 7.34 standard trust terms …. 7.37 statutory remediation proposals …. 7.20–7.47 structural matters …. 7.21, 7.22 trustee personal liability …. 7.27, 7.34 trustee supervision …. 7.26 unique numeric identifier …. 7.23 United States …. 7.18, 7.19 Trustee abuse of trust, potential for …. 2.30 archetype of fiduciary …. 2.32, 2.35 commercial see Trustee of commercial trust

duties see Trustees’ duties equity’s suspicion of …. 2.30, 4.11 guardian, traditional role as …. 2.26, 2.29–2.43, 4.11 legal title to property …. 2.31 liability to beneficiaries …. 2.38 liability to third parties …. 2.38 natural person …. 2.42 personal responsibility …. 2.29, 2.41, 2.42, 5.7 personal risk …. 2.42 representative capacity not separate from personal …. 5.7 risk taking …. 1.8, 1.19, 1.20, 2.26, 2.42, 2.43 traditional trust, of …. 2.29–2.43 Trustee of commercial trust agent, as …. 3.30–3.47 breach of trust see Breach of trust commercial expectations …. 4.1–4.10 external parties, relationship with …. 4.3, 4.9 law and economics principles …. 4.7 personal liability …. 4.1, 4.2, 4.5, 4.6 relationship with equity investors …. 4.3, 4.8 remuneration …. 4.1, 4.2, 4.8 risks not consistent with …. 4.10 scope of duties …. 4.4 contracting as principal …. 3.28 contracting capacity …. 5.7 corporation …. 1.44, 1.46

directors of corporate trustee …. 1.49, 1.50 accessorial liability …. 1.49 personal liability …. 1.49 duties see also Trustees’ duties critical features …. 4.12 expectation as to …. 4.4 scope and extent …. 4.13 ex ante protection …. 2.109 fiduciary duties see Trustee’s duties gross negligence …. 4.36, 4.41–4.44 indemnity enterprise assets, against …. 1.11, 3.57 personal see Trustee’s personal indemnity proprietary see Trustee’s proprietary indemnity subrogation see Subrogation to trustee’s indemnity investments …. 4.17 authorised …. 4.17 duty of care, skill and diligence …. 4.17 powers …. 4.17, 4.18 legal capacity of natural person …. 4.21 licensed trustee company …. 1.49 limitation of liability see Trustees’ personal liability limited liability company as …. 3.9 moral hazard …. 6.8 nature of …. 1.46 personal liability see Trustees’ personal liability

powers …. 4.16–4.23 acting beyond …. 4.15 dealing with trust property …. 4.17, 4.21 duty to act properly …. 4.24–4.26 fiduciary burden …. 4.25, 4.26 investments …. 4.17, 4.18 ‘plenary/universal powers’ clauses …. 4.19–4.23 preservation of trust estate …. 4.16 restrictions …. 4.22, 4.23 scope and extent …. 4.13 trust instrument conferring …. 4.16 trust instrument restricting …. 4.23 unsecured creditors and …. 4.22 principal participant …. 1.43 professional trustee companies …. 1.46, 4.6 duty of care, skill and diligence …. 4.38 remuneration, 4.46 protection against personal action by creditors …. 1.11 protection, reform proposals …. 7.34–7.36 relationship with beneficiaries and creditors …. 4.11 breach of trust see Breach of trust contractualisation …. 2.123, 2.131–2.140, 4.14, 4.87 critical features …. 4.12 expectation as to …. 4.3, 4.8 removal and replacement …. 7.29 remuneration

conditional on performance standards …. 4.49 contractualising right to …. 4.45–4.50 debts, liabilities and expenses payable, distinguished …. 4.47 expectation as to …. 4.1, 4.2, 4.8 MIS constitution allowing for …. 4.46, 4.49 personal entitlement …. 4.47 private arrangement …. 4.49 professional trustee company …. 4.46 United States position …. 4.50 risks and liabilities …. 1.11, 1.46, 4.1 inconsistent with expectations …. 4.10 personal risk …. 2.42, 2.43 risk-tolerant and entrepreneurial …. 1.8, 6.8, 6.10 supervision, reform proposals …. 7.27 traditional trustee compared …. 1.46 trust debts as personal debts of …. 3.28 ‘universal powers’ clauses …. 4.19–4.23 duty to act properly …. 4.24–4.26 Trustees’ duties acting properly …. 4.24–4.26 beneficiaries, to …. 2.29–2.36 best interests of beneficiaries …. 2.36, 2.37, 4.25, 4.33 breach see Breach of trust care, skill and diligence …. 2.36, 4.17 debenture issues, trustees for …. 4.39 MIS trustee …. 4.39

professional trustees …. 4.38 categorisation of …. 2.34, 2.37 commercial trustees, application to …. 4.11 delegatus non potest delegare …. 2.32 double personal exposure …. 2.29 duty of care …. 2.36 equitable duties …. 2.35, 2.36, 2.63 expectation as to scope of …. 4.4 fiduciary duties …. 2.29–2.36, 2.63, 4.25 commercial context …. 2.139, 2.140 company/trust comparison …. 2.146 contract and …. 2.133–2.140 critical feature …. 2.33 extent and nature not fixed …. 2.136 key characteristics …. 2.138 malleability …. 2.140 meaning of fiduciary …. 2.32 reform proposals …. 7.35 good faith …. 2.36, 4.25, 4.33 honesty …. 4.32, 4.33 ‘irreducible core’ …. 2.140, 4.27, 4.33–4.40, 5.76, 5.79 Singapore …. 4.36 United States …. 4.37 loyalty …. 2.37, 4.12 MIS trustee …. 4.39 duty of care and diligence …. 4.39

duty to act in best interests of members …. 1.49 reform proposals …. 7.26 no conflict of interest …. 2.36, 4.27 waiver or consent …. 4.27–4.31 no personal profit …. 2.36, 4.12, 4.27 waiver or consent …. 4.27–4.31 overlap …. 2.37 preservation of trust capital …. 2.26, 2.27, 4.12 professional trustees …. 4.38 reform proposals …. 7.26 sanctions for breach …. 2.39, 2.40 scope and extent …. 4.13 terms of trust, observing …. 2.36, 3.28 Trustees’ personal indemnity absolutely entitled beneficiary, enforceable against, 3.61 control of affairs …. 3.67 debt incurred at beneficiaries’ request …. 3.60, 3.62 debt within authority and for benefit of beneficiaries …. 3.60, 3.62 equity investors’ liability …. 3.26, 3.58–3.78 contractualised solution …. 3.80–3.82 indirect liability …. 3.26, 3.58 exclusion by trust instrument …. 3.66, 4.57 lack of agreement in authorities …. 3.73 ‘last recourse’ right …. 3.70 multiple beneficiaries …. 3.69 ordering of proprietary indemnity and …. 3.70

proprietary indemnity distinguished …. 3.57, 3.58, 3.65 questions arising …. 3.59 right against beneficiaries …. 3.58 right not automatically existing …. 3.71 state and territory trusts legislation not recognising …. 3.72 subrogation see Subrogation to trustee’s indemnity trading trusts …. 3.68 trust instrument excluding …. 3.3, 3.80 when arises …. 3.60–3.73 Trustees’ personal liability all debts and liabilities, for …. 5.7 Australian trust law, under, 4.51 cash poor trust estate …. 4.107 contracting capacity …. 5.7 corporate trustee …. 1.46 equity investors, in favour of …. 1.46 exoneration power …. 4.59, 4.60, 4.89, 4.107 power to apply trust assets for benefit of creditors …. 5.124–5.127 reform proposals …. 7.28 separating from reimbursement limb …. 5.121–5.123 expectation as to creditors …. 4.94 trustee …. 4.1, 4.2, 4.5, 4.6, 4.93 external parties, in favour of …. 1.46, 4.88 generally …. 1.11, 1.46, 4.51 indemnity against see Trustee’s proprietary indemnity

limitation of …. 4.5, 4.6, 4.88–4.160 contractual …. 4.90 creditors agreeing to …. 4.94, 4.95 creditors maintaining rights …. 4.95, 4.100 English case law …. 4.161–4.171 insolvency and …. 6.59, 6.64, 6.65 law permitting …. 4.90 limitation clause see Limitation of liability clauses not negated …. 4.100 reform proposals …. 7.27, 7.28, 7.34 reimbursement not necessary …. 4.101 repugnancy …. 4.162, 5.101, 5.119 stapled entity …. 4.94 Watling v Lewis …. 4.162–4.183, 5.101, 5.119 MIS, responsible entity of …. 4.51 overview …. 1.11, 1.46 reform proposals …. 7.27, 7.34 trust debts and liabilities, for …. 4.51–4.53 two layers of …. 1.46 United States …. 4.105, 4.156–4.160 contract protecting against …. 4.159, 5.90, 5.106 Restatement provisions …. 5.106–5.113 trust law protecting against …. 4.156–4.158, 5.90 creditors’ direct access to trust estate …. 5.27, 5.81, 5.86–5.113 unlimited …. 4.1, 4.51, 4.98 Watling v Lewis …. 4.162–4.183, 5.101, 5.119

criticism of decision …. 4.174–4.181 liability limitation clauses, impact on …. 4.182, 4.183 repugnancy doctrine …. 4.162, 5.101, 5.119 Trustees’ proprietary indemnity breach of trust impairment of indemnity …. 4.66, 4.86 related breaches …. 4.74 trustee’s intentions, relevance of …. 4.81–4.85 unrelated breaches …. 4.75–4.80, 5.31, 5.45 bundle of rights …. 4.58 charge to enforce …. 4.62–4.64 subrogation and …. 5.41 clear accounts rule …. 4.66, 4.75–4.80 creditors’ access to trust estate and …. 5.116–5.120 exoneration power, effect on …. 5.46, 5.117 principle in Cherry v Boultbee …. 4.78 subrogation and …. 5.45, 5.118 conditional and fragile …. 1.11 conditions for …. 4.66 clear accounts …. 4.66, 4.75–4.80, 5.45 liabilities properly incurred …. 4.67–4.74 MIS …. 4.70, 4.79 trustee to make good loss …. 4.77 discretion in availability …. 4.66, 4.74 elements of …. 4.58–4.65 equity protecting trustee …. 4.53

exclusion of …. 4.57 exoneration power …. 4.59, 4.60, 4.89 clear accounts rule and …. 5.46, 5.117 insolvency and …. 5.125 power to apply trust assets for benefit of creditors …. 5.124–5.127 separating from reimbursement limb …. 5.121–5.123 gratuitous and onerous services, for …. 4.55 impairment of …. 4.66, 4.86 breach of trust …. 4.86 insolvency and …. 6.63 related breaches …. 4.74 subrogation by creditors …. 5.30 unrelated breaches …. 4.75–4.80, 5.31, 5.45 implied right …. 4.53 insolvency and …. 6.58 lien or charge to enforce …. 4.62–4.64 subrogation and …. 5.41 transfer to creditor …. 5.103 priority of rights …. 4.61, 4.62, 4.65 properly incurred liabilities …. 4.67–4.74 reimbursement limb …. 4.59, 4.60 separating from exoneration limb …. 5.121–5.123 related breaches …. 4.74, 6.58, 7.33 right of …. 3.57, 3.58, 4.53, 4.54 source of right …. 4.54 traditional trust …. 4.55

undischarged debt or liability …. 4.60 unrelated breaches …. 4.75–4.80, 6.58 subrogation and …. 5.31, 5.45

U Ultra vires abolition in Corporations Act …. 4.20 breach of trust …. 4.15 Unconscionable conduct equitable remedies …. 2.15, 2.20 feudal times …. 2.15, 2.20 Unincorporated joint stock company see Joint stock companies Unit holders see also Equity investor beneficiaries agreement …. 2.128 beneficiaries as …. 1.40 derivative actions …. 3.5 equating to shareholders …. 3.1 equitable remedies …. 3.6 rights, entitlements and benefits …. 3.2 risk see Equity investor beneficiaries Unit trust see also Public unit trust contractualisation …. 2.113, 2.127–2.129 definition …. 1.40 English trust law …. 1.73 joint stock company as …. 1.40 Massachusetts trust as …. 1.40 MIS see Managed investment scheme (MIS)

public see Public unit trust redemption of invested equity …. 2.106 special contracts …. 2.129 trading trust as …. 2.78, 2.92 units equating to shares …. 3.1 United States ‘anti-trust’, use of term …. 7.54 breach of trust irreducible core …. 4.37 commercial trust and company compared …. 2.144 ‘common law’ commercial trust …. 1.57 comparisons with …. 1.54–1.59, 1.90, 7.49 courts’ role in law reform …. 7.18 development of trust law …. 7.51–7.54 efficiency of law applicable to commercial trusts …. 1.59 equity investors’ personal liability limitation by statute …. 3.91–3.94 unlimited liability, avoiding …. 3.92 insolvent commercial trusts …. 6.70–6.78 Australia compared …. 6.70, 6.71 Bankruptcy Code …. 6.70–6.78 law and economics theory …. 1.58–1.72 limited liability company (LLC) …. 1.57 limited liability limited partnership (LLLP) …. 1.57 limited liability partnership (LLP) …. 1.57 Massachusetts trusts …. 1.32, 1.40, 1.56, 7.51–7.54

compared to company …. 2.144 corporations legislation not abolishing …. 7.51 cross-border business activity …. 7.54 legislation facilitating use of …. 7.52 resembling incorporated company …. 2.147 trust-agency hybrid …. 3.39 promoters, options for …. 2.148 protectionism …. 7.54 real estate investment trust (REIT) …. 1.57 reform of trust law …. 7.18, 7.19 statutory business trust …. 3.93 statutory hybrid entities …. 1.57, 3.92 trust-agency hybrid …. 3.38, 3.39 trust creditor protections …. 5.5, 5.13, 5.27 adoption in Australia …. 5.114–5.115 direct access to trust estate …. 5.27, 5.86–5.113 related breaches by trustee …. 5.66–5.71, 7.31 unrelated breaches by trustee …. 5.80–5.85 trust law …. 1.57–1.59, 7.48–7.61 Australian bills considering …. 7.61 Australian courts referencing …. 7.55, 7.58–7.60 courts’ role in reform …. 7.18 development of …. 7.51–7.54 divergence from English law …. 1.56, 7.50, 7.56 similarities with Australian law …. 7.57 trustee remuneration …. 4.50

trustees’ personal liability …. 4.105, 4.156–4.160 contract protecting against …. 4.159, 5.90 trust law protecting against …. 4.156–4.158, 5.90 Uniform Statutory Trust Entity Act …. 3.93 Uniform Trust Code …. 1.57, 4.37, 5.67, 5.90, 5.93 use of trusts in commerce …. 1.58 ‘Universal powers’ clauses duty to act properly …. 4.24–4.26 restriction of powers …. 4.22, 4.23 trust instrument, in …. 4.19–4.23 Uses forerunner of trusts …. 2.10 friars …. 2.19 Statute of Uses …. 2.14

W Watling v Lewis criticism of decision …. 4.174–4.181 trustees’ personal liability …. 4.162–4.183, 5.101, 5.119 liability limitation clauses …. 4.182, 4.183 repugnancy doctrine …. 4.162, 5.101, 5.119 Winding up companies law …. 2.75–2.77, 2.108 insolvent commercial trust …. 6.14 administration of trust property …. 6.14 distinguished from company …. 6.1 rights of creditors …. 6.14

voidable transactions …. 6.14 insolvent company …. 2.76, 2.77 managed investment scheme …. 2.168 solvent company …. 2.108 solvent trust …. 2.108 trustee’s right of indemnity company asset …. 5.126 under control of liquidator …. 5.126, 5.127