|It is a common misconception that an independent trustee’s liability is limited to the assets of the trust regardless of the circumstance in which liability arises. However, this is not the case. Trustees act personally. This means that a trustee is personally liable for any debt incurred when acting as a trustee, regardless of whether the trustee can benefit personally from the trust. There is no special status at law that attaches to acting as a trustee such that personal liability can be avoided. Although it is common for a modern deed of trust to include a clause limiting the trustee’s liability to the assets of the trust, what many trustees fail to appreciate is that this limitation of liability applies between the trustee and the beneficiaries, not between the trustee and the world at large. This means that if a trustee contracts with a third party, for example a bank, the trustee must ensure that the terms of that contract limit the trustee’s liability as the limitation of liability in the deed of trust is not binding on third parties such as the trust’s bankers.
Any limitation of liability must be expressly stated. Simply entering into a contract or agreement as a trustee is generally insufficient to ensure limitation of liability. This proposition was confirmed in the recent decision in Williamson v Bennet where a trustee who failed to complete a property purchase entered into on behalf of a trust was found to be personally liable for the subsequent loss on sale. While accepting that the trustee had entered into the agreement on behalf of the trust, the judge hearing the matter re-stated the fact that a trustee is personally liable unless liability is excluded by the terms of the agreement.
Although the most recent ADLS standard agreement for sale and purchase provides that the liability of any independent trustee can be limited to the assets of the trust, there will be no implied limitation if a different form of agreement for sale and purchase is used.
Rights of indemnity
That said, it is not all doom and gloom. A trustee’s personal liability is tempered, at least in part, by the trustee’s statutory right of indemnity (Trustee Act 1956, s 38(2)). By virtue of this right of indemnity a trustee can recoup expenses reasonably incurred in the proper running of the trust. This right of indemnity ranks ahead of any interest a beneficiary has in a trust fund.
However, where the trust’s assets are inadequate the value of any indemnity may be illusory where the trustee must still discharge any personal liability.
Corporate trustee safety net?
A common response to the issue of liability is for a trustee to act as the director of a trustee company, rather than in a personal capacity. The trustee company in question will commonly limit the ability to have recourse to the trust’s assets and will likely have no assets of its own to settle any claim against the trustee.
However, the un-considered interpolation of a trustee company can leave the director of the trustee company liable to suit for failure to meet corporate obligations.
In the decision of Vance & Levin v Lamb & Simpson the director of the corporate trustee was held liable for failing to act in the best interests of the company by not testing the market before selling trust property in a non-arms-length transaction. This case serves to highlight avenues for attack from a third party where a corporate trustee undertakes a transaction that is permissible within the terms of the deed of trust.
The decision to appoint the corporate trustee in Vance & Levin, which was to minimise the trustees’ liability to the trust’s bankers and the Inland Revenue Department, did not take into account any risks that would accrue to the corporate trustee itself. In this regard matters to consider when acting as the director of a corporate trustee where losses are going to arise include whether the director’s actions amount to failure to act in the best interests of the Company (Companies Act 1993, s. 131), reckless trading (s. 135) and breach of duty in relation to obligations (s. 136).
It is important to appreciate that when a corporate trustee is appointed, while the company acts as a trustee and as such has all the powers and discretions of a natural person trustee, the director of the corporate trustee is responsible to the company, not the trust, when it comes to matters such as reckless trading and failure to act in the company’s best interests.
In Vance & Levin the director failed to act in the best interests of the company by failing to ensure that the company fulfilled its duty as trustee to obtain the best possible price. The breach of duty arose not from the sale at a loss, but from the failure to test the market. Importantly, regardless of whether any beneficiaries bring an action against the trustee for the trustee’s failure to obtain the best price, the director is personally liable to third party creditors for the director’s failure to act in the company’s best interests.
Where a transaction leaves the body corporate unable to meet liabilities, regardless of whether those liabilities were incurred as a trustee, the director is responsible for the harm done to the company and it is no defence that the action was carried out by the body corporate acting as a trustee.
There are situations where appointment of a corporate trustee is appropriate. However, a corporate trustee is not the panacea for all and whenever a trustee is a body corporate, care must be taken to ensure compliance with both trust and corporate obligations.
Liability for costs
When trustees get it wrong in court, court costs must be consider in addition to any other losses incurred by the trustee. In most instances where costs are awarded these costs are on a scale basis as provided for in the High Court rules. Significantly for trustees, there are no special rules that apply.
As a general rule scale costs are awarded against trustees unless the trustee has been particularly difficult or has refused to “read the writing on the wall.”
Where there is a basis for increased costs the increased costs can be awarded from the inception of the matter, or from a point in time. See BUPA Care Services NZ Ltd v Gillibrand  NZHC 3067 where scale costs were ordered up the point where the court ordered the removal of a trustee, and indemnity costs beyond that point due to the court’s position that the trustee’s arguments from then on were “hopeless” in the context of Bradbury v Westpac Banking Corporation  3 NZLR 400.
Remedies against trustees
What about liability or risk from the management of the trust? Trustees are obligated to comply with the terms of a trust. Where a trustee does not do so it is not a question of did the loss arise from the trustee’s fault; what matters is that the trustee was doing something that the trustee was not permitted to do.
Where a trustee acts in accordance with the terms of the trust, but does so badly – such as where there is mismanagement, proof of fault becomes relevant.
Where a breach of trust occurs, the three main avenues for compensation for the breach are:
Where to now?
Appointment as a trustee is often viewed as an honour or a privilege. However, many trustees are not sufficiently aware of the risks that confront a trustee, particularly where the trust in question is a trading trust. The solution for many trustees will be to review the number of appointments undertaken as trustee with increasing attention to risk profiles. Many trustees will be wise to leave the appointment as trustee to professional trustees who carry sufficient insurance to take on the role in a considered fashion without every decision being coloured with what risk could be sheeted home to the trustee (and the corollary risk of breach of trust).