August 4

Family/Discretionary Trust – Corporate Trustee versus Individual Trustee

The last 3 decades have seen a substantial growth in the number of people in Australia establishing a family/discretionary trust. The benefits of such an arrangement have been largely touted by professionals around 2 areas – asset protection and tax benefits.

The issue of whether a corporate trustee is best suited as opposed to an individual trustee for a family/discretionary trust is relevant on the area of asset protection and succession planning.

Trustee Liable for Trust Debts

Under trust law, a Trustee is personally liable for trust debts.

To discharge the trust debts the Trustee normally has a right of indemnification against the trust assets. This right of indemnity is established from 3 sources:

  1. Equitable principle as set out by the Courts;
  2. An indemnity clause which is contained in most trust deeds; and
  3. State Statute law – the Trustees Act.

What Liabilities are Covered by the Trustee’s Right of Indemnity?

The cases generally state that the indemnity is limited to liabilities or expenses that have been properly incurred by the Trustee in the execution of the trust. If the Trustee’s action was unauthorised and exceeds his power, there is no right of indemnity.

What Happens if The Trust has Insufficient Assets to Cover the Trust Debts?

Individual Trustee – if there is a shortfall in the assets of the trust fund then the individual Trustee will be liable for the shortfall. This amount, if substantial to the individual Trustee’s personal asset pool, may result in the individual Trustee declaring bankruptcy or entering into a Part X arrangement. If this course of events took place, then this would defeat one of the potential benefits of establishing a discretionary trust in the first place.

Corporate Trustee – In this scenario the corporate Trustee will probably go into liquidation or administration. As the corporate Trustee usually has no or minimal assets, this may not be too detrimental to the parties who had established the trust in the first instance. Under corporation law the individual shareholders are not liable for the debts of the company. There are exceptions. One example is where the shareholders have signed a guarantee/indemnity in favour of a creditor.

The directors of the Trustee company will normally be immune from the debts of the Trustee company.

Can the Appointor of the Trust Sack the Trustee to Allow the Trustee to Avoid Personal Liability?

In short, the answer is no. Once the debt or cause of action is established then the Trustee is liable for the debt. Simply removing the Trustee does not extinguish his liability.

Other Problems Associated with an Individual Trustee – Asset Identification

Should the Trustee be in the unfortunate position of having assets seized by way of court order or by a person exercising rights under a security arrangement, then the situation may arise where there is a dispute as to which assets belong to the trust or the Trustee in his own right. This situation is more likely to occur where the Trustee is an individual as opposed to a company. Inadequate record keeping may simply record assets in the name of the Trustee without reference to the trust, leaving open the issue as to who owns the asset.

Succession Planning

Issues arise as to what happens to the trust should an individual Trustee die. The appointor of the family trust, under most trust deeds, should be able to appoint a new trustee to continue in that position. However, it is possible that the appointor and the individual Trustee are the same person – resulting in the trust being headless.

Under trust law the trust does not fail for want of a Trustee. The above circumstances can be avoided by careful estate planning and having the appropriate backup appointors in place in the trust deed or the appointor’s will.

With a corporate Trustee, the scenario will be easier to resolve as the company will continue to exist. The shareholders, if need be, can appoint a new director – should one director die. Again careful estate planning should be undertaken to contemplate this situation.

June 12

Stopping (Ex) Employees from Stealing your Business

Restraint of trade clauses are now quite commonly used in employment contracts, but this wasn’t always the case.

A covenant in restraint of trade, also sometimes referred to as a ‘non-compete’ clause, is a term in an employment contract that requires an employee, after leaving an employer, not to perform a particular type of work within a geographical area around the current employer’s place of business for a specified period of time.

Traditionally, employers weren’t able to include covenants in restraint of trade in their employment contracts as it was considered contrary to public policy. The law has developed over the years to recognise these clauses as valid, provided they are justified in the circumstances, particularly to protect the employee’s legitimate business interests. It is now well established that an employer may impose restraints on their ex-employees, directed at protecting the goodwill of the business following the employee’s departure.

The employer must demonstrate that, at the time of the agreement regarding the restraint:

· The restraint is required to protect the employer’s legitimate business interests, such as confidential information, goodwill, a stable workforce, customer connections, or commercial interests; and

· The restraint includes no more than is reasonably necessary to protect those interests.

When considering what should be included in a non-compete clause, the basic question is: what is the employer seeking to protect? Common reasons for inserting a non-compete clause are to ensure that employees do not take up employment with a competitor or set up a rival business.

Is the covenant in restraint of trade reasonable?

Whether the restraint is reasonable will be judged at the time the contract is made, in light of all of the surrounding circumstances, including the length of the restraint, the geographical area over which the restraint is to operate and what the employee is being restricted from doing.

Courts are more likely to uphold restraints regarding customers, clients, employees and confidential information, and less likely to uphold restraints against ‘competition’ (e.g. working for a competitor.) A ‘non- compete’ restraint which serves no further purpose than to prohibit employees from working with a rival organisation are unlikely to be enforceable, as this is contrary to public interest.

The circumstances of how the employment contract was terminated will also be relevant in assessing the reasonableness of the restraint clause. For example, if an employee is made redundant following a company restructure, a non- compete clause maybe held to be unreasonable.

The general factors a court will assess in determining the reasonableness of a particular restraint of trade clause include:

· The nature of the ‘protectable’ interest that is the subject of the agreement;

· The duration of the restraint;

· The extent of the restraint; and

· The relevant bargaining power of the parties at the time of entering into the agreement and whether, as a result, it would be unconscionable to enforce the restraint.

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April 24

Trading Names, Business Names, Company Names – Basics

Trading Names, Business Names, Company Names – Basics

A trading name was a name used by an entity or person to trade under, without it being registered as a business name.

Trading names were collected prior to 28 May 2012 by the Australian Taxation Office (ATO). They will be displayed on the Australian Business Register (ABR) until 31 October 2018.

You are still able to maintain the details of your trading name with the Australian Taxation Office for taxation purposes. However any updates will not be displayed on the ABR’s ABN lookup service.