Chapter 7 - Creditors and trading trusts

Introduction

This chapter outlines some potential issues arising for creditors dealing with trading trusts. First, it discusses the point that creditors may not know that a company with which they are dealing is acting as a trustee and that its assets are mainly held on trust. Secondly, issues for creditors are outlined stemming from the trustee’s right of indemnity and creditors’ reliance on that indemnity. Unsecured creditors will usually need to utilise the trustee’s right to indemnity from trust assets if the trustee has insufficient assets of its own to meet its debts. Creditors can be left with no recourse if the right of indemnity is not available.

A number of options for reform are outlined, some of which could work in combination. The options include ways to inform creditors that a company is acting as a trustee; preventing the exclusion of the trustee’s indemnity via the trust instrument; other means of strengthening creditors’ access to the trustee’s indemnity; providing creditors with direct recourse to the trust assets; and the liability of directors of a company that is acting as a trustee. A final option is to retain the status quo and not introduce any new measures for trading trusts. If a strong case cannot be made that there is a problem requiring intervention and that one or more of the other suggested options will address the problem, retaining the status quo may be the best approach.