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Issue with Capacity of Creditors of Woodcraft Pty Ltd

Added on - 24 Feb 2020

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QUESTION 1Advise the various creditors as to their rights to recover their debts.In the present question, the issue is related with the capacity of the creditors of Woodcraft PtyLtd to recover their money from the company. For example, you need to be seen if ForestProducts Pty Ltd can recover the amount of $20,000 from the company. In the same way, it alsoneeds to be seen if Eastpac Bank Ltd can recover the amount of $500,000 that were borrowed bythe company to purchase a stud. Similarly, it has to be considered a National Finance Ltd. canrecover the amount of $2,500,000 that was used for purchasing a commercial property.The law provides that under certain circumstances, addressing can be held personally liableregarding the debts arising out of first business. Similarly, the beneficiaries of the test can also beheld liable to indemnify the trustee where the trust funds are insufficient to fulfill the liabilities ofthe trustee that have been incurred during the course of those businesses. Although trusts areused extensively for businesses, estate management and charitable purposes, but it is significantto know the risks involved and to seek appropriate legal advice in order to mitigate these risks.Some of the key principles that are related with liability and indemnity and that need to be keptin mind by trustees and beneficiaries are as follows:-The law provides that a trustee (including a corporation) can be held individually accountableregarding the debts that have been incurred during the course of business of the trust.1This alsoprovides that the liability of a trustee towards the creditors is not restricted to the extent of the1Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360
assets of the trust.2According to the Corporations Act, 2001, it has been mentioned in section197 that the directors of corporate trustee to be considered as being jointly and individually liableregarding the discharge of the debts of the Corporation increase the corporation has not and isnot in a position to discharge its debts and where the corporation is not eligible to be indemnifiedfrom the assets of the trust due to (a) breach of trust by the company and/or (b) if the corporationhas acted beyond the scope of its powers as a trustee or if (c) a term of trust denies or limits therights of the company to be indemnified.The court stated in the decision given in RJK Enterprises P/L v Webb3that section 197 of theCorporations Act should not be considered as rendering a director accountable when there is thepride of indemnity in place but insufficient funds are present to fulfill the indemnity. Thisposition is contrary to the position adopted by the court in Hanel v O’Neill.4In this decision, itwas stated by the court that s. 197, Corporations Act can be construed as meaning that thedirectors of corporate trustee's can be held as guarantors for the liability that has been enteredinto by the trustee. However, it was explained by Douglas J that s. 197 has been amended in2005 with a view to amend a perceived anomaly that was present as a result of the interpretationof decision by the Supreme Court of South Australia and also to override the decision given inHanel. In order to make sure that the liability of the directors of the trustee operations extendsonly so far is intended when this section has been set in its original structure in the corporationlaw.The court further stated in TFML Ltd v MacarthurCook Fund Management Ltd.5that a trusteewho enters into a contractual obligation while performing the trust may limit its liability to the2Elders Trustee v Reeves (1987) 78 ALR 1933RJK Enterprises P/L v Webb & Anor [2006] QSC 1014Hanel v O’Neill [2003] SASC 4095TFML Ltd v MacarthurCook Fund Management Ltd [2013] NSWCA 29
extent of the right of indemnity arising from the assets of the trust. However in Yara AustraliaPty Ltd v Oswal6, it was held that the limitation will not follow as a result of the mere descriptionof a party as a trustee.Therefore the law provides that the trustees are entitled to be reimbursed under equity and alsothe legislation, from the assets of trust, regarding all charges and expenses that may be incurredby them while executing the trust. This right of the trustees was to be given priority as againstthe rights and interests of the beneficiaries concerning the enforcement of indemnity. In order tosecure these rights, a trustee as the charge or a lien over the assets.7Under these circumstances and applying the legal principles mentioned above, it can be said thatin this case, Forest Products Pty Ltd can recover $20,000 from the beneficiaries of the trust. Thisamount was due when the company had ordered timber worth $20,000 from Forest Products. Atthe same time, acting on the advice given by the solicitor, the company decided to diversify intoreal estate and horse breeding business. For this purpose, Michael and Claire had taken a loan of$500,000 from Eastpac Bank Ltd as the directors of Woodcraft Pty Ltd. At this time, Eastpacwas advised that Woodcraft Pty Ltd is acting as a trustee and similarly a copy of trust deed wasalso provided to the bank. It had been mentioned in the trust deed that the trustee is authorizedfor involving in wholesale and retail furniture trade. Therefore in this case, the directors of thecorporate trustee can be held personally liable for repaying the amount of $500,000 to EastpacBank Ltd., because in this case a copy of trust deed had also been provided to the bank. At thesame time, another amount of $2,500,000, and also been borrowed by the company fromNational Finance Ltd. for the purpose of producing a commercial property. However, the hopesof earning rental income were also frustrated when the company could not find suitable tenants6Yara Australia Pty Ltd v Oswal (No 2) [2013] WASCA 1877Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360
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