Trustee Nearly Bankrupted by the Construction Contracts Act

October 06 2010

Take care when appointed a trustee

Taking on a trusteeship of a family trust has significant responsibilities and can have severe implications, something that many people do not realise when they agree to be appointed to this role. This article looks at a true scenario, the result of which became very serious.

Adam* agreed to act as an independent trustee for his friend Bob’s* family trust. Adam’s involvement in running the trust or being involved in decision-making was minimal and he was not paid for the position. At the time he agreed to take on the role he did not think of the potential risks. However, all was soon to change, and not for the better.

The trust owned a farm with a separate company, operated by the trust’s beneficiaries, conducting the farming operations. The company had a contractor do extensive earth works and ancillary works costing well over $1,000,000 on the property. Unfortunately the 2008 recession arrived and the company was unable to pay fully for the construction work.

The contractor applied for relief against the trust under the Construction Contracts Act 2002. The contractor also sought that the trustees be made personally liable for payment as an ‘associated person’ of the respondent farming company in case the trust was unable to pay them. The matter was sent to adjudication and the adjudicator found in favour of the contractor.

Adam found himself responsible for payment of the construction work and the contractor could pursue Adam to repay all of the debt owed to it. Due to its struggling financial situation, the trust was not in a position to indemnify Adam.

Adam was dismayed at being liable to pay for the construction debts, despite never having derived any benefit from the trust or its assets. He had just wanted to do a friend a favour in agreeing to be the independent trustee for his family trust.

Adam was able to extract himself financially from the situation, but it was only by incurring significant legal costs.

He was lucky: if Bob and the trust had left the scene before matters were resolved then Adam could have been left to repay the entire debt on his own.

This situation illustrates the need for trustees to be aware of s7 of the Construction Contracts Act 2002 and the potential liabilities that can be incurred as an ‘associated person’. Under the trust/operating company structure, Adam was not involved in the decision to have the construction works completed, yet he was found to be associated with the company, and ultimately liable for the unpaid bill.

If you are asked to become a trustee of another person’s family trust, ask yourself the following questions:

  • Is it worth the risk?
  • Will the settlors, or ultimate beneficiaries, keep me fully informed about what the trust and associated parties are up to?
  • What do I know about trust law and my trustee responsibilities? and
  • Should a professional independent trustee be appointed?

* Names have been changed to protect individuals.

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