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Traps for trustees in finance documents

When entering into any agreement, a trustee of a trust needs to consider specific factors, including when entering into the documents for a debt finance transaction, whether as borrower, guarantor, security provider, or lender. In this article, partner Emma Donaghue highlights some key traps for trustees when it comes to finance documents.

Differences between a company and a trust

There are some differences between a company and a trust which impact a finance transaction, including:

  • The assumptions a person is entitled to make about the company. Parties transacting with a trustee must be more informed about the processes and procedures the trustee must follow in entering the transaction.
  • Trustees must have an express power or right (under the relevant trust documents) to enter into the transaction, whereas there is no limitation on a company's powers (except where an express limitation is included in its constitution).
  • While the Corporations Act applies to companies, there is no statutory framework for the insolvency of a trust.

These differences mean finance documents and processes need to be tailored where an entity is acting as trustee of a trust.

Key issues for trustee borrowers

The nature of the clauses required to regulate the relationship between the lender and a trust borrower or obligor are mainly dictated by the results of the lender's due diligence of the trustee and the background of the transaction (including the assets or business being financed).

Where a trustee is a borrower or obligor under a finance document, there are some key issues to keep in mind, including:

  • Is it appropriate to limit the trustee's liability to the assets of the trust, and if so, to what extent?
  • The lender is not afforded the same protections and opportunities to make assumptions about due execution and process if they were lending to an Australian incorporated company in its personal capacity. This means the lender needs to get specific representations and warranties, including:
    • The trustee has full power under the trust deed to enter into the finance documents and perform the transaction contemplated by them and also to carry on the business of the trust.
    • The trustee has taken all necessary action under the trust deed to enable it to enter into the finance documents.
    • The trust deed is validly executed, stamped, and in full force.
    • The trustee is the only trustee of the trust.
    • The transactions contemplated by the finance documents are for the commercial benefit and in the commercial interests of the beneficiaries of the trust.
    • The trustee has the right to be fully indemnified out of the trust assets and the trust assets are sufficient to satisfy the trustee's right of indemnity.
  • Where the trustee is an outsourced trustee and an investment manager is appointed, the trustee may not have the requisite knowledge to provide the representations and warranties related to the assets of the trust.
  • It is important to ensure any obligations around agreements between the trustee and third parties do not fetter the trustee's rights to an extent it is not able to exercise its duties as trustee. For example, we have seen lenders request tripartite agreements with the trustee and investment manager that prevent the trustee from terminating the investment management agreement; this means the trustee will not be able to contractually remove the investment manager, even if it is in the best interests of investors.
  • Whether trust distributions should be made while the finance is owing.
  • Where the trust is a managed investment scheme, whether the finance documents are consistent with any disclosure document provided to investors.

Issues for trustee lenders

Where a trustee is the lender:

  • It should not commit to making a loan where it has not already raised the funds.
  • The lender must also be careful when registering mortgages and security interests as there are specific rules relating to trusts and trustees. For mortgages, the rules differ state by state. A failure to comply with the rules may leave the lender unsecured.

Are there any traps?

Our expertise in funds management and banking and finance means we are uniquely placed to assist trustees in banking and finance transactions to ensure there are no hidden traps that could put the trustee in a difficult position during the term of the loan.


Emma Donaghue

Emma Donaghue


Contact McMahon Clarke

T +61 7 3239 2900
A Level 7, 100 Creek Street, Brisbane Qld 4000