By John Wojtowicz (Director- Law Central Legal)

Using a limited liability company structure as trustee of a Trust, is generally seen as a great asset protection strategy (we will explore the differences between individual trustees versus corporate trustees in a future Bulletin). A corporate Trustee who incurs a liability in excess of the assets of the trust fund can place itself into administration or liquidation without the directors and shareholders being personally liable.

Under this scenario, the individual directors of the corporate Trustee would not normally be liable for the debts incurred by the corporate Trustee. However, there are exceptions to this principle where the directors have:

1. caused the Trustee to act outside of its powers;
2. signed a guarantee or indemnity in favour of a third party;
3. committed a breach of tort (i.e. negligence) resulting in personal liability;
4. allowed the corporate Trustee to trade whilst insolvent;
5. incurred a personal liability as a result of breach of a statutory obligation;
6. committed a fraud;
7. committed misleading and deceptive conduct;
8. unreasonable director related claims;
9. loss of employee entitlement claims;
10. PAYG taxation debts and superannuation contributions;
11. breached director’s duties;
12. contravened the Competition and Consumer Act 2010;
13. contravened the Work/Occupational Health and Safety (OHS) legislation;
14. contravened state, federal or local environmental protection legislation;
15. contravened state or federal discrimination legislation; or
16. contravened the Federal Criminal Code (as amended on 23 February 2016 by the passing into law of the Crimes Legislation Amendment (Proceeds of Crime and Other Measures) Act 2016 relating to the making, altering, or concealing of accounting documents.

Readers should note the introduction of the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019, introduced to Parliament on 13 February 2019. The Bill will amend the Corporations Act 2001 (Cth) introducing criminal and civil offences for directors and others who engage in or facilitate illegal pheonixing activity.

Section 197 of the Corporations Act 2001 (Cth) also deals with personal director’s liability. This section states that:

(1) A person who is a director of a corporation when it incurs a liability while acting, or purporting to act, as trustee, is liable to discharge the whole or a part of the liability if the corporation:

(a) has not discharged, and cannot discharge, the liability or that part of it; and

(b) is not entitled to be fully indemnified against the liability out of trust assets solely because of one or more of the following:

(i) a breach of trust by the corporation;

(ii) the corporation’s acting outside the scope of its powers as trustee;

(iii) a term of the trust denying, or limiting, the corporation’s right to be indemnified against the liability.

The person is liable both individually and jointly with the corporation and anyone else who is liable under this subsection.

Note: The person will not be liable under this subsection merely because there are insufficient trust assets out of which the corporation can be indemnified.

(2) The person is not liable under subsection (1) if the person would be entitled to have been fully indemnified by 1 of the other directors against the liability had all the directors of the corporation been trustees when the liability was incurred.

(3) This section does not apply to a liability incurred outside Australia by a foreign company.

(3A) This section does not apply to a liability incurred by a corporation that is:

(a) a notified foreign passport fund; or

(b) the operator of a notified foreign passport fund acting in that capacity.

(4) This section does not apply to a liability incurred by a registrable Australian body outside its place of origin.

(5) This section does not apply to a corporation that is an Aboriginal and Torres Strait Islander corporation.

Note:  Section 271-1 of the Corporations (Aboriginal and Torres Strait Islander) Act 2006 deals with the liability of directors of Aboriginal and Torres Strait Islander corporations for debts and other liabilities incurred by those corporations as trustee.

Under the Tax Administration Act 1953 (“the Act”), companies are under an obligation to remit amounts owed to the Commissioner (s 16-70 of Schedule 1 to the Act) or go into voluntary administration or liquidation. Directors of the company must cause the company to comply with its obligation. The directors will continue to be under their obligation until the company complies with its obligation, or an administrator is appointed or the company begins to be wound up:  s 269-15 of Schedule 1 to the Act.

If this obligation is still present at the end of the due day, the directors will be liable to pay the Commissioner a penalty under s 269-20 of Schedule 1 to the Act. The Commissioner cannot commence proceedings against the director/s until a 21 day period has lapsed after the Commissioner has sent the directors a written notice: s 269-25 of Schedule 1 to the Act.

There are several defences in s 269-35 of Schedule 1 to the Act that a director can use in recovery proceedings:

1. Illness (or some other good reason)
   A director will not be liable to a penalty if illness or some other good reason made it unreasonable to expect them to take part (and actually not take part) in the management of the company while they were a director and under the relevant obligations.

2. All reasonable steps
   A director is not liable to a penalty if they took all reasonable steps to ensure that:  the directors caused the company to comply with its obligation; the directors caused an administrator to be appointed; or the directors caused the company to begin to be wound up.  There must also be no reasonable steps that the director/s could have taken to ensure any of the above occurred.

   What are ‘reasonable steps’ is determined with regard to when and for how long the person was a director and took part in the management of the company, as well as all other ‘relevant circumstances’.

3. Reasonably arguable position (as taken from s 269-35(3A) of Schedule 1 to the Act).
   With regards to a superannuation guarantee charge, a director is not liable to a penalty “to the extent that the penalty resulted from the company treating the Superannuation Guarantee (Administration) Act 1992 as applying to a matter or identical matters in a particular way that was reasonably arguable, if the company took reasonable care in connection with applying that Act to the matter or matters”.

New directors may also be liable even if they have not personally seen or heard of the debt or even if the debt precedes their involvement in the company. Directors will be liable if they became a director after the due day and began to be under an obligation (to cause the company to comply with its obligation) and are still under the obligation 30 days later.

Gold and Platinum members read on for cases that illustrate how this provision works in practice.

Disclaimer: The content of this Bulletin is general information only. It is not legal advice. Law Central recommends you seek professional advice before taking any action based on the content of this Bulletin

Related documents:

• Build a Company (ELodgement)
• Change Trustee of family Trust
• Family Trust
• Director’s Indemnity Agreement - Compulsory Insurance
• Director’s Indemnity Agreement - No Insurance

Related webinars:

• Webinar Recording - Fixing Family Trust Deeds
• Webinar Recording - Year End Tax Planning