By Matthew Smith

A trustee is personally liable for all debts contracted in his capacity as trustee – Octavo Investments Pty Ltd v Knight (1979).

The common law does not recognise a trustee as having assumed an additional or qualified legal personality. This means that the liability of the trustee for debts he incurs includes those incurred in the course of the performance of the trust. As per Re Johnson (1880), “the debts are his debts.”

A trustee’s liability will not be limited to his right to indemnity from the trust funds simply because the other contracting party knew he was a trustee.

Furthermore, a trustee’s liability to creditors is not limited or quantified by the extent of the assets of the trust.

The Court in Helvetic Investment Corp Pty Ltd v Knight (1984) outlines that the law permits a trustee to contract with third parties on the basis that his personal liability is limited, for example, to the extent of his right to apply trust funds for the discharge of liabilities incurred by him in the performance of the trust.

Nevertheless, third parties may not be prepared to deal with a trustee on such a basis and, in any event, clear words supported by consideration are necessary to limit the prima facie unlimited personal liability of the trustee.

Trustees must therefore exercise diligence and ensure contracts they enter in performance of the trust avoid legal infringements.

If you have an estate or trust related issue, please contact Tim Lynch.