SECTION 197 - STING IN THE TAIL!
25 06 2007
SECTION 197 - STING IN THE TAIL!
Amendments were made to Section 197 of the Corporations Act several years ago to reduce the exposure to personal liability of directors of Corporate Trustees. However, a recent matter that we have been involved in highlights the real risk that a director of a Corporate Trustee can still have their personal assets at risk from acting in that capacity despite those amendments.
From a Liquidator’s perspective, litigation under Section 197 can be a much easier cause of action against a director personally than the insolvent trading provisions which require the proving of insolvency and, generally therein, the preparation of an expert insolvency report which can be a costly and time consuming task.
Under Section 197, a person who is a director of a Corporate Trustee is personally liable (and jointly liable with the Corporate Trustee) to discharge a liability that is incurred by the Corporate Trustee (but not able to be discharged by that Corporate Trustee) in circumstances where the Corporate Trustee is not entitled to be fully indemnified against the liability out of the trust assets due to:
- a breach of trust by the Corporate Trustee;
- the Corporate Trustee acting outside the scope of its powers;
- a term of the trust denying or limiting the Corporate Trustee’s right to be indemnified against the liability.
The circumstances in our matter were that the director of the Corporate Trustee had transferred assets of the trust to another entity approximately four (4) years prior to our appointment as Liquidators for what was considered to be less than valuable consideration. The business being operated through the trust had not traded for those four (4) years and as the years past the director had accumulated personal wealth through property investment.
We attacked the transfer through Section 197 (and thus the director personally) on the basis that the transfer at under value was a breach of trust and that had valuable consideration been paid the liability would have been able to have been discharged. The director’s personal assets that had accumulated since the ceasing to trade of the business some four (4) years earlier were now available to us in recovering our claim.