The NSW Law Reform Commission report
Laws relating to beneficiaries of trusts was released at the end of July. Its terms of reference were to 'review certain aspects of the law of trusts in NSW and report on whether'
- there is a need to enact statutory provisions to limit the circumstances if any in which the beneficiaries of trusts, as beneficiaries, should be liable to indemnify the trustee or creditors of the trust, if the trustee fails to satisfy obligations of the trust, or remove such liability
- it is appropriate for the liability of investors in unit trusts to be limited to the amount (if any) unpaid on their units in the same way that the liability of investors in shares is limited to the amount (if any) unpaid on their shares.
The Commission was to have regard to:
- the perceived uncertainty of the case law on the liability of trust beneficiaries in New South Wales and elsewhere
- the widespread use of trusts in commercial contexts as well as in the community generally
- the need for safeguards to ensure that any legislation limiting or removing such liability does not support the avoidance of responsibility for insolvent trading.
The Commission was also to
- propose the terms in which any legislation should be enacted, and
- to consult and report on whether New South Wales should adopt the recommendations of the Victorian Law Reform Commission's 2015 Trading Trusts - Oppression Remedies report.
The report features the following recommendations
Liability of beneficiaries
Recommendation 2.1
The Trustee Act 1925 (NSW) should be amended to provide that:
(1) Unless the beneficiary has otherwise expressly agreed, the beneficiary is not, as a beneficiary, liable for, or to indemnify the trustee in respect of any act, default, obligation or liability of the trustee.
(2) This does not affect a beneficiary’s liability for unpaid calls (if any) under the terms of the trust, or the beneficiary’s liability in any other capacity.
Oppression remedies
Recommendation 3.1
Oppression remedies available to shareholders under company law should not be extended to beneficiaries of trading or other trusts under the law of trusts.
The report states
We published the terms of reference on our website and sought preliminary submissions. We received eight submissions, which are listed in Appendix A and published on our website.
In October 2017, we released a consultation paper (CP 19) setting out preliminary views on the two questions. We received six submissions in response, which are also listed in Appendix A and published on our website.
We convened a roundtable of interested experts in the field on 2 March 2018. A list of participants is set out in Appendix B. Following the roundtable, one further submission was received from a participant, which is also listed in Appendix A.
The Commission outlines the report
Chapter2 addresses the reference on beneficiary liability. The reference is motivated by a long-standing issue arising from a Privy Council decision more than a century ago, under which a beneficiary may be held personally liable to indemnify a trustee. Since then, several proposals for reform or clarification of the law, in the context of managed investments, have been made but not implemented in a number of Australian jurisdictions. We propose that the effect of that decision be reversed by amending the Trustee Act 1925 (NSW) (“Trustee Act”).
Oppression remedies for beneficiaries of trading trusts
Chapter 3 addresses the reference on the remedy for oppression, and considers the recommendation of the Victorian Law Reform Commission (“VLRC”) to extend the oppression remedy available to members of a company under the Corporations Act 2001 (Cth) (“Corporations Act”) to beneficiaries of trading trusts.
We are not persuaded that there is a sufficient case for providing a similar discretionary remedy for oppression in the context of the law of trusts. Such a remedy would be inconsistent with a fundamental feature of a discretionary trust ̶ namely, that the trustee has a discretion to discriminate between beneficiaries. Having such a remedy available for some trusts but not others is not desirable because there would be difficulty in identifying those trusts to which it should apply. Moreover, we consider that the law already provides adequate remedies for control of a trustee.
There are advantages in having consistency across Australian states and territories in laws affecting trading trusts. This is why we carefully considered the VLRC recommendation before declining to adopt it for the above reasons. The VLRC Report has not yet been accepted or adopted in Victoria; so at least at this stage no issue arises from any difference between the law in Victoria and NSW.
We note that, to the extent that consistency is not achieved by an appellate decision, Commonwealth legislation amending the Corporations Act could achieve this outcome.
