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Lending to Responsible Entities of Managed Investment Schemes

Diccon Loxton

Partner, Allens Arthur Robinson

1. Introduction

Managed Investment Schemes are defined in the Corporations Act, by reference to

concepts of pooled or collective investment. Where such schemes are offered to fewer

than 20 persons, or only into the sophisticated or wholesale market, they are basically

unregulated. They can take any form. Unit trusts are or common, but partnerships and

joint ventures can also be managed investment schemes as defined

They include listed and unlisted property trusts, infrastructure trusts, investment trusts andthe trust half of the "stapled" arrangements seen in infrastructure and in property.

Schemes which are not limited to the wholesale or sophisticated market, are required to be

registered, and to adopt a particular form, with a constitution satisfying certain

requirements, and a "responsible entity". Schemes in which other registered schemes will

invest must themselves be registered.

In days gone by the predecessors to the Corporations Act required these to be in the form

of a unit trust with a separate trustee and manager, but changes to the law in 1998

required that instead there be a single responsible entity. Terms were changed: instead of

"trustees" or "trust deeds", the legislation spoke of "responsible entities" and

"constitutions", but they are still trusts and trust deeds.

The responsible entity, despite its name, is a trustee, and the constitution is a declaration

of trust by the responsible entity in favour of the investor beneficiaries. The Corporations

Act also makes a statutory declaration of trust. Quite often the assets are actually held in

the name of a custodian who is a bare trustee, holding for the benefit of the responsibleentity, in turn holding on behalf of the investors. Anybody lending to a responsible entity is

lending to a trustee.

There are traditionally a number of problems that arise in lending to a trustee, particularly

on an unsecured basis. The imposition of a statutory and registration regime on the top of

trust law, has given some benefits (and some problems) for lenders, but the bedrock

position remains the same, and it is worth examining the position of lenders and creditors

to trustees generally in some detail before looking at what occurs with responsible entities.

From a lender's point of view when you are lending to a trust or some other collective

investment scheme which is not a registered scheme under the Act, it is worth checking as

to whether it should be. Under section 601EE ASIC or a member of the scheme or the

person operating the scheme can apply to the court to have a scheme which is required to

be registered, but is not registered, wound up1. This has been an active jurisdiction.

1 For an example of the operation of this provision and also a discussion of what constitutes a "managed investmentscheme" see the decision of Barrett J in ASIC v Takaran Pty Limited [2002] NSWSC 834

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2. Lending to trustees generally

2.1 Principles to bear in mind – the "Three Nots"

There are 3 key principles that need to be borne in mind whenever lenders and other

creditors are considering dealing with trusts. I call them the "three nots".

(a) A trust is not an entity

A trust is a relationship, or a set of obligations and duties which arise when a

person, the trustee, holds assets on behalf of others, the beneficiaries, or for a

particular purpose (almost always a charitable purpose).

Accountants, and normal business people talk about a trust as an entity, but it is

not. When you deal with a trust, you are dealing with a person, the trustee, with a

set of strictly delineated obligations and rights in respect of the trust assets, not aseparate entity.

The contracting party is always the trustee, who as we will see, is liable personally.

Creditors do not have direct access to the trust assets unless they are secured

creditors. The trustee when trading, is entitled to reimburse itself, or pay liabilities

out of the trust assets, but the liabilities are his own.

(b) A trust is not designed for business

In the talk given last month, it was said that the invention of the limited liability

corporation was one of the two greatest inventions which fuelled modern

capitalism.

The trust in its origins had a very different purpose. It arose in the days of

feudalism to get around some of the rigidities of the feudal system, as a way for

example that a property which would otherwise require its owner to provide a

certain number of knights could be held for other people or the Church.

A lot of the cases defining trust law arose in relation to family settlements in the

18th and 19th Centuries, when people of property would settle assets on trust for

future generations or for children. Therefore an important mental picture when you

think of a trust, is not some sleek modern entity like a company, but a relationship

imposed upon the conscience of businessmen or individuals in the 18th and 19th

Century, to protect widows and children.

It was not designed as a business vehicle. The flexibility of the trust and its tax

advantages have meant that it has become a useful tool, and trustees in some

circumstances can invest trust assets and carry on business with them, but in its

fundamentals, it is not set up as a business vehicle. Business efficacy needs to fit

trust law, not the other way round. Many consequences of trust law may surprise

those who see trusts as a business vehicle. Quite often there will be occasions on

which a normal business person will say "that can't be right". Unfortunately it quite

often is, or worse, it quite often may be, but we're not sure. There is a surprising

amount of debate still open.

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(c) Trust law does not favour creditors

Creditors of trustees should not expect friends at court.

No "indoor management rule" or removal of ultra vires

With limited liability companies, the law has always provided a balance between

the interests of investors and shareholders, and the interests of creditors. The rule

in Turquand's case,2 the" indoor management rule", allowed outsiders dealing with

companies to assume, in the absence of forgery and circumstances which put the

outsider on enquiry, that those acting on behalf of the company correctly followed

procedures.

In the last 30 years, the balance has tipped further in favour of creditors. The

ultra vires rule, which strictly limited what companies could do by reference tospecified objects and powers, has been effectively abolished in a succession of

provisions in companies legislationrequi culminating in section 124 of the

Corporations Act. The indoor management rule has been significantly augmented

by the statutory indoor management rule in section 128 and 129 of the

Corporations Act which allows outsiders dealing with the company to make a large

number of assumptions that the dealing was properly done. It significantly waters

down the "put on enquiry" test, and operates even in the case of forgery. Those

assumptions include that the directors of the company comply with their duties to

the company and its constitution.

The law has provisions designed to maintain companies' capital, and increasing

burdens on directors and officers, but most of the provisions, (such as prohibitions

on financial assistance in connection with the acquisition of a company's shares, in

section 260A, and on directors of public companies giving financial benefits to

related entities under Chapter 2E), have been amended so that breaches do not of

their own invalidate transactions. Those "involved" in contraventions, that is,

effectively knowingly involved, can find themselves liable and transactions

invalidated by orders in court, but the transaction itself is not automatically invalid

simply because there has been a breach. Transactions in breach of directors

duties are voidable but outsiders can rely on the indoor management rule.

Bearing in mind the way the trust law developed, it would hardly surprise you that

there are no such protections for outsiders dealing with trustees. There is still an

equivalent to the ultra vires rule, trustees' powers are very closely confined, and

there is no indoor management rule relating to trustees. Outsiders are not entitled

to make any assumptions as to compliance with the trust powers or duties.

In relation to those who take property from a trustee, or who are sought to be made

liable as constructive trustees, knowledge can be relevant, but the position of an

unsecured creditor of a trustee, who needs to rely on the trustee's right of

indemnity, is particularly parlous, as we will see below That creditor relies on strict

compliance with duties and powers and is entirely dependent on the trustee's

2 Royal British Bank v Turquand (1855) 5 El & Bl 248; 119 ER 474

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position. It should also be mentioned that in a contest between beneficiaries andoutsiders, outsiders should not necessarily expect much judicial sympathy.

Trustee powers are interpreted strictly. For example, a power to give a guarantee

will not allow execution of the usual guarantee and indemnity.

No maintenance of capital requirements

There are also rules in corporations law designed to put checks to the company'scapital, preventing unauthorised returns of capital and requiring dividends to be

paid out of profits. There are no such restrictions on distributions of trust assets or

returns of capital, so the creditors of trusts do not have the small protection

afforded by those provisions.

Uncertainties on insolvency

In addition, because the company was set up as a vehicle for commerce, one and

a half centuries of legislation and experience have led to many clearly defined rules

as to what will occur on the insolvency of the corporation and its winding up.

With trusts the position is not so clear cut. There is not such a clearly defined

procedure and set of rules for winding up of an insolvent trust. Further, because

the debts are those of the trustee, often this intersects with the insolvency of the

trustee itself. In the absence of contractual provisions to the contrary, trust

creditors participate in the insolvent administration of the trustee, but the interaction

of the position of trust creditors in relation to trust assets, and other creditors, isperhaps not as clear as it should be.

COMPARISON BETWEEN COMPANIES AND TRUST

COMPANIES TRUSTS

Directors' duties (including "Corporate benefit")

but indoor management rule for outsiders

allowing assumptions

Very strict duties - no indoor management rule

No ultra vires – no limitation on powers May have limited powers, transactions must be

within power

Non-compliant conduct does not always affect

validity, though often can

Validity and access assets almost always

depends on compliance

Well understood and defined insolvency

administration

Uncertain but flexible insolvency administration

Maintenance of capital rules No maintenance of capital rules

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2.2 Trustee personally liable – with indemnity and lien

Fundamentally, the trustee is personally liable for trust debts.3 Contracts are entered into

with the trustee, not with a "trust".

Provided they have been acting within his powers and duties, trustees are entitled to be

indemnified out of the trust assets. That is, they have a right of "recoupment", so that if he

has paid an amount, he can reimburse themselves out of trust assets, and of "exoneration"so that if they incur a liability, they can use the trust assets to satisfy that liability4. Most

trust deeds and constitutions contain an express indemnity. There are limits on that right of

indemnity discussed in paragraph 2.4 below.

That right of indemnity is backed up by what is usually called a "lien", but is more

accurately a proprietary right in the trust assets to retain them, and dispose of them in

order to reimburse themselves or to pay the necessary trust liability5.

Normally the right of indemnity is contained in the trust instrument, but it exists even if it is

not so contained, and there is some controversy as to whether it can be excluded6.

2.3 Trustee powers and duties

The trustee's main obligation is to hold the assets for the beneficiaries. Normally the trust

instrument, and also to a degree, trustee legislation, gives to the trustee certain powers to

deal with the trust assets, for example, to invest them in certain sorts of property, to carry

on certain types of activities or business, to borrow, to guarantee and the like. The trustee

is required to act in accordance with his powers which are interpreted strictly. Traditionally,

trust deeds, to the extent they specified powers, delineated those powers in detail, so that

those dealing with trustees were often required to make very careful analysis as to whether

or not the dealing was within the express powers of the trust.

In addition, whether or not the duties are in the trust deed, the trustee has a number of

fiduciary duties at general law, which include to act honestly, not to place himself in a

position of conflict, and to exercise the same diligence and prudence as an ordinary

prudent man of business would exercise in conducting that business if it were his own.

If a trustee breached those duties, he would not be entitled to be indemnified out of the

trust assets, and would be liable to the beneficiaries. In addition, the beneficiaries would

be entitled to trace the trust property, and those who knowingly receive trust property inbreach of trust, or who are knowingly assisting in the breach of trust, may be liable as

constructive trustee (under the principles of Barnes v Addy7). In other words, those who

3 Royal British Bank v Turquand (1855) 5 El & Bl 248; 119 ER 478

4 Trustee Act 1925 (NSW) s59(4), Trustee Act 1958 (Vic) s36(2), Trusts Act 1973 (Qld) s72, Trustee Act 1962 (WA) s71,see also the cases mentioned in the previous note and RWG Management v CAC [1985] VR 385, JA Pty Ltd v JoncoHoldings Pty Ltd (2000) 33 ACSR 691

5 Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226, Kemtron Industries Pty Limited vCommissioner of Stamp Duties [1984] 1 QdR 576 at 589

6 See the discussion in JA Pty Ltd v Jonco Holdings Pty Ltd (2000) 33 ACSR 691 at 706

7 [1874] 9 Ch App 244

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are dealing with trustees need to be particularly concerned as to whether or not the actionwas within power, and whether it conformed to the trustee's duties.

2.4 Taking security – the position of secured creditors

It is far better to be a secured creditor of a trustee than an unsecured creditor. Provided

that the security is valid, the secured creditor then has direct access to that asset, and has

a normal suite of remedies against it, a power of sale, receivership and the like.

Of course, the security does need to be given in accordance with the trustee's duties and

within its power. If the trustee purported to give an equitable security in breach of duty, for

example, the rights of the beneficiaries would still prevail against the securityholder. If it

purported to give legal security, then unless the securityholder took for value without

notice, again the rights of the beneficiaries would prevail. If the securityholder had therequisite degree of knowledge, it could also be a constructive trustee in relation to any

proceeds of enforcement or amounts received from the trustee to discharge the security.

Therefore any creditor taking security needs to carry out some degree of due diligence to

make sure that the security was properly given in connection with a loan for a proper

purpose.

Checking due formation

It is worth saying that anyone dealing with a purported trustee, whether secured or

unsecured, needs to ensure that the trust is properly constituted and the trustee property

appointed. That is, that it satisfies the rule against perpetuities, and there is certainty of

property and beneficiaries, and that the trust was properly formed and duly executed. If the

trust is not property constituted, there will be a resulting trust of the trust assets, the trustee

will not have the requisite power, and the relevant dealing may be invalid and constitute a

breach of that resulting trust.

A secured creditor therefore does need to carry out due diligence in relation to that

particular exercise, but it is only exposed to questions relating to the due formation of the

trust and of the due exercise f trust powers and duties in that transaction. It is only

exposed to questions of propriety in relation to that particular transaction.

That contrasts with the position of unsecured creditors, who are exposed to risks arising

from breach of trust not only in relation to the particular transaction in which they deal withthe trustee, but also all other dealings by the trustee, as we will see below.

2.5 Unsecured creditors

Unsecured creditors have more problems, and can be affected by unrelated breaches of

trust.

Reliance on the right of indemnity

As we have seen above, an unsecured creditor is a creditor of the trustee, not of the trust.

An unsecured creditor has no direct rights against the assets. The creditor is not able to

obtain execution against an asset held on trust.8

8 General Credits Ltd v Tawilla Pty Ltd [1984] 1 QdR 388

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An unsecured creditor relies upon the right of indemnity out of the trust assets, and thetrustee's "lien" over those assets and the creditor's right of subrogation against that lien and

indemnity.9 This right of subrogation gives indirect access to trust assets.

It is often said that the creditor can have no greater rights against the trust assets than the

trustee. This places the unsecured creditor in an unenviable position. The creditor is

entirely reliant upon the trustee's right of indemnity with all of its imperfections arising out of

the trustee's activities. The unsecured creditor is not entitled to make any assumptions. If

there is any disentitling conduct on behalf of the trustee which prejudices the right of

indemnity (for example the trustee misapplied the loan funds), then the unsecured creditor

is affected by it, whether it knew, or could have known, about the problem.

At its simplest of course this means that if a trustee incurred a liability outside its trust

powers, or in breach of its duties, then it will not be entitled to be indemnified. The

unsecured creditor who thought it was dealing with the trustee will not have any right of

recoupment against the trust assets.

A possible further difficulty is that it is often said that the indemnity is only available for

liabilities "properly incurred". This on some readings may have required that the trusteehas acted in not only in accordance with its powers and duties, but introduced additional

concepts of "reasonableness", thus putting lenders even more at risk. In the Queensland

and Western Australia trustee legislation10 the statutory indemnity only extends to

expenses "reasonably incurred", though other states do not have that requirement.

In New South Wales at least two members of the Court of Appeal (Meagher JA and

Spigelman CJ) have confirmed that the indemnity can cover any liability incurred in

accordance with powers and duties, even extending to liability for misleading and deceptive

conduct under s52 of the Trade Practices Act,11 and that "reasonableness" and "propriety"

(in a more general sense) did not enter into it. Meagher JA used characteristically vigorouslanguage. A third (Mason P) reserved judgment but still found the indemnity extended to

the liability.

In a recent case12 the Victorian Court of Appeal explained the concept of "properly

incurred" as being no more than an expression that the liability should not be "improperly

incurred" and that the claim for indemnity will be defeated if the trustee acted in breach of

trust or its duties, which will vary in the circumstances. Concepts of "reasonableness" can

be explained as referring no more than to the duty that the trustee must act within power

with the degree of care and diligence that a person of ordinary prudence would exercise in

the conduct of his or her affairs. The Victorian court attacked some of the more general or

colourful language in the Gatsios case, and perhaps misinterpreted its thrust, but broadlycame to a similar result, or perhaps on the particular facts even a more generous one. In

the Nolan case, rather surprisingly, a trustee who held a property as a mere constructive

trustee and gave a mortgage, which inadvertently covered not only direct trust liabilities but

9 Vacuum Oil Pty Ltd v Wiltshire (1945) 72 CLR 319 see the discussion in Nolan v Collie [2003] VSCA 39

10 Trusts Act 1973 (Qld) section 72, Trustee Act 1962 (WA), section 71

11 Gatsios Holdings Pty Ltd v Nick Kritharas Holdings Pty Ltd (2001) 38 ACSR 57

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other liabilities, was held to be entitled to indemnify himself against the full liability underthe mortgage.

Creditors affected by unrelated impropriety – the "clear accounts" rule

There remains the major issue, still not appreciated widely, which was brought into stark

relief in the problems that affected the Estate Mortgage trusts and Burns Philp Trustees.

That is, that the right of indemnity may not only be affected by improper activity by thetrustee in relation to the transaction under which the debt occurred, but also any

impropriety by the trustee in relation to any other transaction or activity. Even if the

transaction involving the unsecured creditor was perfectly above board, history in the form

of some other transaction may affect that right.

That is because before a trustee can be indemnified out of the trust assets, in what is

sometimes known as the "clear accounts rule" it needs to make good any liability or loss

arising out of any previous breach of trust13. In the loosest sense of the word there is a

"set-off" between the trustee's right to indemnify itself, and its liability in relation to previous

excess. It is unlikely that the indemnity can be drafted to get around this. It should be

noted that while this is sound in principle there is a contrary dictum in a case that indicatescreditors are not affected by unrelated breaches.14

The benefits rule

There is one further ray of hope, that is that if the trust estate has benefited from a trustee’s

actions, the trustee is still entitled to be indemnified for liabilities improperly incurred, butincurred in good faith, to the extent of the benefits.15 This is of little comfort in relation to

guarantees but may be of assistance where the lender is providing finance for the

acquisition and development of an asset. It is still probably subject to the "clear accounts"

rule.

What can a lender do?

A lender can take some steps to protect itself against the risk that the loan directly involves

a breach of trust or duty, by checking the trust deed, requisite minutes and the purpose of

the loan and ideally the application of the funds.

There is very little that a prospective lender can do to protect itself by way of due diligence,

other than getting some assurances from the trustee, such as warranties. The value of the

warranties depends on the worth of the trustee. Obviously, with a public trustee company,

or a reputable manager, there may be more assets available and they may be backed with

insurance, and the risk as a matter of practicality may be lower. However, such trustee

companies and professional managers traditionally limit their liability in any borrowing and

12 Nolan v Collie [2003] VSCA 39

13 RWG Investments v Commissioner for Corporate Affairs [1985] VR 385 at 397-398

14 Re Staff Benefits Pty Ltd [1979] 1 NSWLR 207 This is, arguably, obiter. In the United Sates there is a theory of directaccess giving creditors direct access to trust assets but this has not been adopted here.

15 See for example RWG Investments (op cit) and Nolan v Collie [2003] VSCA 39, General Credits Ltd v Tawilla Pty Ltd[1984] 1 Qd R 388

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other contracts that they enter into16. Therefore it is important from the point of view oflenders to ensure that the limitation of liability clause is drafted so as to leave open a

window for claiming should the right of indemnity be prejudiced in some way. Happily,

most limitation of liability clauses do leave that opening, though it can be a struggle.

On the bright side, the right of indemnity exists, whether or not it is expressly contained in

the trust deed17, although the vast majority of trust deeds do contain a sufficiently wide

indemnity. There are suggestions in the first instance decision in the Gatsios 18 case that it

can be wider than the common law indemnity.

2.6 Indemnity against beneficiaries

The general rule is that in certain circumstances beneficiaries of full legal capacity are

personally liable to indemnify the trustee against liabilities incurred19. That can beexcluded in the trust document except where contrary to public policy, or used as a cloak

for fraud.20 Almost universally the indemnity is removed, and so it is of little practical

interest to lenders.

2.7 Liability of directors of trustee companies

Directors of companies which are trustees can be liable for debts incurred where the

trustee has no right of indemnity. This is of some practical comfort to lenders, as it is an

incentive for directors of trustee companies to ensure that the liabilities were properly

incurred, so that there will be no right of indemnity and directors can be personally liable.

This arises under section 197 of the Corporations Act. In predecessors to that section, andin the Explanatory Memorandum, it would be clear that this is only intended to operate

where for some reason, for example, a breach of trust, the trustee is not entitled to be

indemnified. It was not intended to operate where a right of indemnity falls short because

there is a dearth of assets to be indemnified against, in other words it was not intended to

operate in the circumstances where there was a simple shortfall in trust assets.

However, in an attempt to render the language into "plain language" the parliamentary

draftsman has departed from the clarity that one might expect.

In a case that must be wrong, but has sent the fear of God into the directors of every

trustee company and responsible entity, the South Australian Court of Appeal held that

section 197 did indeed apply to make directors liable when there was a shortfall in assets

in the trust even though directors and the trustee had acted properly.21 This is now the

subject of strenuous lobbying for legislative reform. It should be noted that, like directors of

any company, directors of trustee companies that incur liabilities while insolvent can be

16 That usually requires an express limitation clause except in rare cases, simply being described in the contract as "trustee"is not enough. General Credits v Tawilla Pty Ltd [1984] 1 Qd R 388

17 See for example the discussion in JA Jonco, s59(4) of the NSW Trustee Act and the legislation cited in note 4 above

18 See (2001) 38 ACSR 57; [2001] NSWSC 343

19 Hardoon v Belilios [1901] AC118

20 See Wise v Perpetual trustee Co [1911] 2 KB 705 at 711, McLean v Burns Philp Trustees (1983) 9 ACLR 926

21 Hanel v O'Neill [2003] SASC 409

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liable under section 588G of the Corporations Act. That has a number of defences and ismuch less harsh than section 197.

2.8 Insolvent administration of the trustee

While, most certainly in a bankruptcy of an individual, the trust assets are not available for

general creditors, and should not be the subject of sequestration orders22, the right of

indemnity and the lien that a trustee may have in respect of the trust assets is an asset of

the insolvent trustee, and can be the subject of insolvency administration23.

The trustee still has control of the assets, at least in the case of a company. Where the

existing trustee is an individual rather than a company, on the trustee becoming bankrupt

the court will remove him or her as trustee almost as a matter of course. However the

position is different in the case of a corporate trustee in liquidation. The trust property isnot affected by the liquidation, and the operation of the trust not terminated by the

cessation of business, so that the company remains trustee until new trustees are

appointed by the court.24 The liquidator in the company's name has, and is still bound by,

the trustee's duties and powers, and may apply to the court for directions or for the

appointment of a new trustee.

Other parties can apply for orders to replace the trustee, but it is not necessarily automatic

that a new trustee would be appointed if the liquidator wishes the company to continue as

trustee. The court will "approach the question with an open mind, and assess where the

balance of interest lies, in the exercise of its discretion."25

In another case, where there was some uncertainty as to the existence and terms of the

trust, the judge resolved doubts as to the capacity of the liquidator to dispose of property

that the company held as trustee, by appointing the liquidator also receiver and manager of

the trust assets, and continued that appointment even after it was disclosed that the

company's appointment as trustee was terminated under the terms of the trust.26

Recoupment

Where the trustee is exercising its rights of recoupment or reimbursement, that is, where

the trustee has paid a debt out of its own pocket and is now seeking reimbursement, the

position is quite clear. That amount is due to the trustee personally and if received by

virtue of the lien and indemnity, it should be available to all creditors, not just trust creditors.

Exoneration

It should also be clear where the trustee is exercising a right of exoneration, where there is

a debt due by the trustee which needs to be paid, and the trustee is entitled to pay that

22 Bankruptcy Act 1966 (Cth) section 116(2)(a)

23 Octavo Investments Pty Limited v Knight [1979] 144CLR360. Though see the discussion in Horrigan "Trust Asset Wars –The Liquidator Strikes Back" UQld Vol 15 No 1 6P

24 re Crest Realty Pty Ltd (in liq) [1977] 1NSWLR664

25 Wells v Wily [2004] NSW SC607 per Austin J

26 Bastion v Gideon Investments Pty Ltd (in liq) [2000] 35ACSR466 and Bastion v Gideon Investments Pty Ltd (in liq) (No2)[2000] NSWSC 939

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debt out of the trust assets. That is the position most relevant to creditors of trustees, as itis that right to which they have indirect access through their right of subrogation. The

position should be that the trust assets remain trust assets, and should only be available to

meet trust liabilities, not other liabilities of the trustee. Otherwise there is, in effect, a

breach of trust. Further, one would think that because trust creditors are subrogated to the

trust assets, the assets realised in order to pay trust liabilities should not be available for

other creditors.

That was the result in a New South Wales decision of Needham J.27 However this is not

what the Victorian Full Court thought in Re Enhill Pty Limited28, a decision which in the

words of the authors of Jacob's Law of Trust is "obviously wrong"29. The South Australian

Full Court refused to follow it in their decision in Re Suco Gold Pty Limited30. The VictorianCourt of Appeal in a much later decision described it as "controversial" but expressly

passed up the opportunity to decide whether the court could, or should, refuse to follow its

predecessor. 31

Equal ranking on distribution?

If the trust creditors are to be paid out of trust assets then it is not firmly established thatthey should all be paid equally.

In one early article by Daryl Williams QC, when he was a humble QC and not a humble

politician, it was suggested that trust creditors should be paid in the order of which they

arose (totally unlike company creditors) because that was the order in which their priority

claims arose32.

Generally there seems to be agreement that this is not right, and trust creditors should be

paid out equally, though the reasons given by judges and text writers differ33.

If the trustee company is insolvent, then on principles analogous to those in Octavo

Investments Pty Limited v Knight [1979] 144 CLR 360, the provisions in s588FG relating to

the setting aside of voidable transactions will apply. In examining whether a transaction

was a voidable preference in that context, it is necessary to examine the position that

would have applied in winding up. If there is only one trust creditor, then the application of

trust assets towards that trust creditor could not constitute a preference, as it would have

27 Re Byrne Australia Pty Limited [1981] 1 NSWLR 394

28 [1983] 1VR 561

29 Jacob's Law of Trust in Australia Sixth Edition RP Meagher, WMC Gummow page 641

30 [1983] 33 SASR 99. In NSW, McLelland J has gone both ways. In Grime Carter & Co Pty Limited v Whytes Furniture(Dubbo) Pty Ltd (1983) 7 ACLR, (decided before Suco Gold) he felt constrained to follow Enhill. In Re ADM Franchise PtyLimited (1983) 7 ACLR he felt liberated from that constraint by the then new decision in Suco Gold.

31 Nolan v Collie [2003] VSCA 39

32 [1983] 57 ALJ 273 at 276

33 See Re Suco Gold Pty Limited [1983] 33 SASR 99 (suggesting that the liability should be paid out in the statutory orderset out in the predecessor to s556 of the Corporations Act), Macpherson, "the insolvent trading trust" in Finn, Essays inEquity, 1985 (suggesting that it arises out of a general principle of equity) and Jacob's Law of Trust in Australia SixthEdition, RP Meagher and WMC Gummow at page 642, suggesting that the equality arises because it is similar to the caseof different trusts tracing into a mixed fund.

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been entitled to application of the assets in the winding up. If there is a surplus of trustassets, and more trust creditors, even though the company was insolvent, the same would

apply. Where the payment favoured one trust creditor over another, then it may be set

aside.

2.9 Replacement of trustees

Where a trustee is being replaced, there is some capacity for it to take over property

automatically under trustee legislation (sections 6, 70, 71 and 78 Trustee Act (NSW)), but

in the main, property needs to be transferred to the new trustee. Also at common law it is

not possible to assign liabilities: liabilities have to be "novated", that is, assumed by the

incoming trustee under a new contract with the counterparty. In order for a trustee to take

over the obligations of the old trustee, there will need to be a laborious process of novation.

The old trustee, even though it has been removed from the trust, may still have some

liabilities, including under existing contracts. For that it is still entitled to be indemnified and

has a lien34 and the successor trustee takes subject to that lien35. The new trustee will take

property subject to any existing mortgages over existing property but it is normal practice

for the new trustee to create a new mortgage, particularly so in relation to equitable

charges over future property, which operate by way of in part by contract - lenders will want

to make sure that the new trustee is bound by the charge over future property.

2.10 Winding up

There is no set procedure for winding up of a trust, the normal remedies would be to have

to replace the trustee, or to have an order for administration of assets, or to have the trust

wound up or to appoint a court appointed receiver over the assets36. In the absence of

insolvency, a trust can simply be wound up under its terms.

The court has wide powers in relation to the orders it can make in the winding up of a

trust37.

Quite often of course the winding up of the trust is caught up with the winding up or other

insolvency administration of the trustee (see paragraph 2.8 above). If the trustee itself is

not insolvent (for example, because it operated on a limited recourse basis), then many of

the provisions that otherwise might apply in the winding up of a company, for instance,

allowing the setting aside of voidable preferences, will not apply. The full protectiondepends on insolvency of the trustee, not the trust, an arbitrary result.

34 Global Funds Management (NSW) v Burns PhilpTrustees [1990] 3 ACSR 183

35 Xebec v Taylor [1982] 87 ATC

36 Although this is a traditional remedy and a traditional jurisdiction, at least one judge (Rolfe J) has thought that the decisionin Bond Brewing Holdings (1989-1990) 1 ACSR 445, which limited the circumstances in which courts could appointreceivers over companies, constrained him from appointing a receiver over an insolvent trust with an insolvent trustee,Global Funds Management (NSW) Ltd v Burns Philp Trustee Co Ltd (1990) 3 ASCR 183. See by contrast Bastion v GideonInvestments Pty Ltd (In Liq) (2000) 35 ACSR 468

37 See for example the decision of Barrett J in ASIC v Takaran [2002] NSWSC 834

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2.11 Voluntary administration

Companies which are trustees can be subject to the voluntary administration regime in Part

5.3A of the Corporations Act with the relevant freeze on creditor actions. There may be

some room for discussion as to whether or not an administrator, when it takes control of

the company's property, should take control of the property subject to a trust, and whether

those should be subject to the freeze. At least by analogy with the position in winding up,

the administrator should have full access to them at least to the extent that the company

may have a lien over them for its right of indemnity, and should have possession of them

with the duties and powers of trustee. That seems to happen in practice. A reported case

in which an administrator does seem to have taken possession of trust property is JA Pty

Ltd v Jonco Holdings Pty Ltd38 ([2000] NSWSC 147), which concerned whether a companyshould proceed with a deed of company arrangement, or go into liquidation. In that case a

comparison was made as to the likely return to creditors, and the effect of the indemnity

and took account of the trust assets.

Where lenders take security from a company in the normal way, they quite often take a

fixed and floating charge over the whole or substantially the whole of the property of the

company so as to preserve their right to enforce the charge should the chargee wish to

enforce within the decision period under section 441A of the Corporations Act if a voluntary

administrator is appointed. This can take the form of the traditional fixed and floating all

assets charge, or the "feather-weight floater", a floating charge over remaining assets toback up a fixed charge over a specific asset. If the lender is dealing with a company as

trustee, and the company has other assets besides those it holds as trustee, or is a trustee

of other trusts, then the chargee will not be able to take advantage of this provision even

though it has security over all of the assets of the trust.

3. Lending to Managed Investment Schemes

As you can see from the above, the position of lenders and other creditors to trustees is not

as one might hope.

Does this improve when one is dealing with the responsible entity of a registered managed

investment scheme? The answer is that in some respects there are some improvements

and some disadvantages but with one possible exception, the fundamental problems

remain.

This analysis deals only with registered schemes, that is those managed investment

schemes that are required to be, and are, registered under Chapter 5C of the Corporations

Act. Those that are not required to be registered can take any form, and all issues that

arise in relation to trusts generally arise in relation to them. Partnerships and joint ventures

are topics on their own.

38 (2000) 33 ACSR 691, [2000] NSWSC 147)

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3.1 Governance requirements and regulation

One aspect which may give lenders more practical comfort in dealing with responsible

entities of registered schemes, as opposed to trustees in general is that they are more

tightly regulated and monitored. While those regulations will not of course remove the

possibility of the "bad trustee" (and may generate much ineffective paperwork) they do give

some comfort.

Some features include the following:

(a) There is supervision in a number of respects by ASIC, which is given the ability to

intervene in a number of provisions.

(b) The responsible entity is required to hold an Australian financial services licence

(section 601FA) and be a public company. That licence must authorise it tooperate a managed investment scheme. (The requirement that it is a public

company and holds a licence does give rise to difficulty in relation to the possible

work-out of an insolvent trustee and insolvent trust, see below in paragraph 3.3).

Licenses are subject to a number of general obligations under law as well as the

license conditions, and are obliged to comply with the loan and notify breaches.

Licenses can also contain financial requirements.

(c) The responsible entity does have set statutory duties under section 601FC. It is

arguable as to whether these statutory duties extend in a practical sense the

fiduciary duties of a trustee but there is a danger they might. They include duties

to act honestly, to exercise a degree of care and diligence that a reasonable

person would exercise if they were to be in the responsible entity's position, and to

act in the best interests of members, and if there is a conflict between the

members' interests and its own interests, to give priority to its members' interests

(see the discussion below in paragraph 3.4). To the extent they do impose higher

duties, that is of course a two-edged sword to lenders who bear the risk of default

by the trustee.

(d) The officers of the responsible entity also have direct duties under section 601FD

and employees have a set of duties under section 601FE. It should be mentioned

that these duties are in addition to their duties as directors at common law and in

the Corporations Act (although the duties of a director are overridden if the duties

conflict (s601FD,(2) and s601FE(2)).

(e) The duties of responsible entities, officers and employees are backed up with civil

and in some cases criminal potential liability. This again can be in extreme cases a

two-edged sword for lenders, as those "involved", that is effectively knowinglyinvolved in the contravention, can also be liable, in most cases this would not

extend potential liability beyond the situations in which lenders would be liable as

constructive trustees, but there may be criminal consequences of breach.

(f) The constitution of the responsible entity must contain certain requirements. Also,

more importantly the registered scheme is required to have a compliance plan

(section 601HA) which is required to be lodged together with the scheme's

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constitution with ASIC. Compliance with the compliance plan must be audited by aregistered company auditor (section 601HG).

(g) If less than half the directors of the responsible entity are external directors, it is

also required to have a compliance committee to monitor compliance

(section 601JA).

(h) There are restrictions on the responsible entity dealing with its related parties,similar to those contained in relation to public companies under Chapter 2E of the

Corporations Act (section 601LA).

3.2 Winding up procedures

Part 5C.9 of the Corporations Act contains a number of provisions relating to the winding

up of a registered scheme, allowing the responsible entity, directors of the responsible

entity, an members of the scheme or ASIC to apply to the court for winding up. The

scheme is to be wound up in accordance with its constitution (which usually will contain

provisions saying how the assets are to be applied) and orders under section 601NF(2).

The court is able to make orders. In practice, save for empowering ASIC and directors,

this may not add much to the general power of the court to supervise the winding up of

trusts.

3.3 5.3C replacement of responsible entities - statutory novation

Replacement of responsibility entity

Of greater significance is the ability of parties to replace the responsible entity. This may in

a practical sense give a way round the difficulties which arise from the fact that lenders to a

trustee on an unsecured basis are infected not only with breaches of trust arising out of the

particular transaction, but all other transactions, because the trustee's right of indemnity is

affected (see paragraph 2.4 above).

If a responsible entity is insolvent, is breaching the constitution or otherwise needs to bereplaced, section 601FM gives the members the power by extraordinary resolution

(ordinary if the trust is listed), to remove the responsible entity. If its licence is removed,

then ASIC or a member of a registered scheme can apply to the court for the appointment

of a temporary responsible entity under section 601FN. There are other provisions that

allow for the appointment of a temporary responsible entity, see section 601FL, FN and FP.

The temporary responsible entity must still be a company (section 601FP(1)).

It is relatively easy for a temporary responsible entity to be appointed to replace an entity

that is insolvent. However, on the current state of the law, a director of a possible

replacement responsible entity may think twice before taking on the liability, given that the

director may be responsible for a shortfall of assets (see paragraph 2.7 above),. This mayraise a practical difficulty, which is shown in the litigation arising out of the collapse of

Estate Mortgage (Global Funds Management (NSW) Ltd v Burns Philp Trustee Co Ltd

(1990) 3 ASCR 183). In that case the Estate Mortgage Trusts were in difficulties, the

existing trustee Burns Philp Trustee was also in difficulties, and the court ordered its

removal. The question then arose as to who would administer the trusts. It was said that

no corporate trustee would agree to being trustee of the trusts. The judge (probably on a

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misreading of the Bond Brewing case (1989) 1 ACSR 445) said he was unable to appoint areceiver. However it was open to him under the trust deed to appoint an individual as

trustee and so he appointed two experienced insolvency practitioners from Arthur

Anderson. Under current legislation this would not be open to the court, or to anyone else.

The responsible entity must be a company. However, ASIC is given the power to modify

the provisions in section 601QA. It is to be hoped that it would do so.

Of course it would be open to the liquidator of the responsible entity to continue as

responsible entity (see paragraph 2.8 above) but that would not achieve the "cleansing"

achieved of statutory novation.

Statutory novation

The most important feature of the replacement of a responsible entity is that there is now a

statutory transfer procedure in section 601FS. That section provides that the rights,

obligations and liabilities of the former responsible entity become automatically those of the

new responsible entity39. Section 601FT provides that the new responsible entity

automatically becomes a party to documents in place of the old. This would have the effect

of novating contracts entered into properly by the outgoing responsible entity, providedthey are governed by Australian law. Where they are governed by foreign law, an issue

would still remain.

There are a number of advantages to this procedure. The first is of course that it makes

removal of problem trustees so much easier. The second arises where problems arise

under the "clear accounts" rule (see paragraph 2.5 above). That is where a lender lends

on an unsecured basis to a responsible entity consistently with the responsible entity's

powers and duties, so that the responsible entity would have been entitled to be

indemnified against the indemnity, but the right of indemnity has been prejudiced by some

other activity (for example a breach of trust not directly relating to the obligation) so thatthere is a "set-off". The new RE takes on the liability free of that taint. Section 601FS(2)

provides that the new RE takes only those obligations for which the RE is entitled to be

indemnified. That is, "tainted" improper liabilities are left behind and the "set-off" is

removed.

Section 601FT effects the statutory novation of the contract. Again, because of

section 601FT(2) on contracts for which the RE can be indemnified are taken over.

Therefore the easiest method to wind up a trust in some difficulties would be to appoint a

new responsible entity, however that responsible entity can only be a company. Where it is

necessary to wind up the scheme which is deep in insolvency, it may be necessary to have

a receiver appointed or an order for administration. See 2.10 above.

One further glitch is that the statutory novation only applies to assets and liabilities of, and

contracts with, responsible entities. It does not apply to custodians (see the discussion in

3.7 below). Custodians hold many of the assets.

39 Barrett J in Re Investa Properties Ltd ([2001] NSWSC 1089) has suggested that this may not be sufficient to transferproperty to a new RE, but that section 601FC(2) does the trick

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3.4 Right of indemnity

As mentioned above, the responsible entity does have duties under section 601(FC)(1) in

addition to those that it has under general law and any that may be specified under the

constitution. In practice these may be coextensive with the general law duties but there are

a couple of provisions which indicate there may be a higher standard. There is the

requirement in paragraph (b) that the responsible entity "exercise the degree of care and

diligence that a reasonable person would exercise if they were in the responsible entity's

position". Note the introduction of the word "reasonable". The common law test is simply

to refer to "an ordinary prudent person of business". This may be a distinction without a

difference, but it may be relevant to the debate as to what is or is not covered by the

indemnity (see the discussion in paragraph 2.5 above, and the discussion below). Further,in paragraph (c) there is a bald statement that the responsible entity must act "in the best

interests of the members" – a purely objective test which may be judged with the benefit of

hindsight.

If the tests are more onerous, the circumstances in which a trustee may be indemnified

(and thus unsecured creditors have access) may be more limited.

The indemnity is required to be contained in the constitution. Section 601GA(2) requires

the constitution to set out the right of indemnity. It provides that "any other agreement or

arrangement has no effect to the extent that it purports to confer such a right". This

probably does not affect the statutory right of indemnity, as that is not an "agreement or

arrangement". It might affect the indemnity that arises simply by virtue of the holding of the

office.

The section does provide (in paragraph (b)) that the rights to indemnity must be available

only in relation to the "proper performance of those duties". This may limit all other

indemnities.

This raises again the question as to whether "proper" means anything other than in accord

with duties or powers or whether it has a more narrow meaning40. Clearly, if the statutory

duties extend the common law duties as discussed above, then "properly" must at least be

judged in terms of those statutory duties and restrict the indemnity. The "reasonableness

test" has resurfaced.

Section 601FH provides that where a responsible entity is being wound up, is under

administration or has executed a deed of company arrangement, the administrator or

liquidator can enforce the right of indemnity, and the right of indemnity cannot be removed.

This entrenchment of the right of indemnity may actually do no more than reflect the

current law. See 2.5 above.

3.5 Powers in the constitution

Although it is not a requirement of the Corporations Act, most constitutions for registered

schemes give extremely wide powers to the responsible entity, often very simply put in the

40 See the discussion in paragraph 2.5 above and Gatsios Holdings v Kritharas Holdings (in liquidation) [2002] NSW CA29and Nolan v Collie [2003] VSCA39

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most broad and general terms. It is still necessary to provide expressly that it has power toborrow or raise money under section 601GA(3) of the Corporations Act.

In registered schemes, it is now therefore less common to have a problem which used to

bedevil those dealing with private trusts. That is the powers were so limited and specific

that it needed anxious and unpopular checks as to whether or not the transaction complies

with the express powers of the trustee.

The powers in the constitution are normally cast so widely as to permit any transaction. Of

course, lenders still have to consider whether the transaction would comply with the

fiduciary duties of the trustee and such requirements as the related party transactions

provisions in Part 5C.7.

There is one minor cloud on this horizon. That is traditionally the product disclosure

statement issued by the responsible entity which accompanies the launch of the trust, and

accompanies the offer of units in the relevant trust, often goes into great detail as to the

particular activities that the responsible entity may undertake. It might be argued that in

some way that confines the trust's powers despite the breadth of the constitution. This

would seem unlikely, given the scheme of the Corporations Act, in that powers are set outin the constitution (section 601GA), and in any event a well drafted PDS will confirm that

the trustee has wide powers. It should be noted that section 601MB may allow investors to

terminate their obligation to pay instalments on partly paid units if the responsible entity

breached the disclosure requirements in Division 2 of Part 7.9.

3.6 Limitation clauses

Virtually all responsible entities will ensure that any contract they enter in that capacity,

particularly any relating to the borrowing or raising of money, will contain a limitation of

liability clause. This reflects the obvious concern of the relevant companies, and those

who manage them, that the personal assets of the trustee companies or the responsible

entities should not be put at risk in relation to the activities of the relevant trust.

This concern has only been heightened since the decision in Hanel v O'Neill [2003] SASC

409 referred to above, increasing the liability of directors. These clauses are becoming

longer, and tend to be put forward on a "non-negotiable" basis by the relevant companies

whose lawyers have understandably laboured long and hard to analyse and limit the

relevant risk. Typically the clauses provide that liability is restricted to the trust assets, and

contain waivers and releases and covenants not to sue by parties dealing with the trustee,

not only under contract but related liabilities, like under section 52 of the Trade Practices

Act (the prohibition on misleading and deceptive conduct) and the similar section 12DA of

the Australian Securities and Investments Commission Act 2000. Whether it achieves the

latter purpose is doubtful.

Clauses often also go on to restrict the rights of creditors to seek and prove in the

liquidation of the RE and to ensure that any contract entered into in the exercise of any

power under a security given by the responsible entity does not involve personal liability.

From the point of view of lenders it is important that there is an exception to this principle.

If they are unsecured, the lenders' entire access to the trust assets rests on the right of the

trustee to be indemnified out of them (see paragraph 2.5 above). If for the reasons

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discussed above, that indemnity is removed or reduced, then creditors may be left withnothing - not a very enticing prospect when the reason that the right of indemnity would be

lost arises out of misconduct by the responsible entity itself.

It is therefore normal for the clause to permit full recourse against the responsible entity

personally to the extent that its right of indemnity has been removed because of its

misconduct, variously described, and sometimes including negligence as well as breach of

duty. The responsible entity may not have may assets but it may have insurance.

A well advised responsible entity with an eye to Hanel v O'Neill may now seek to limit the

responsible entity's obligations as well as its liability.

3.7 Custodians

It is very common for the assets of the trust to be held for the responsible entity by yet

another trustee, a custodian. Often these are large global custodian companies or

Australian trustee companies who are licensed under the Corporations Act to act as

custodians. They are normally bare trustees operating at the express direction of the

responsible entity.

There are a few reasons for this:

(a) the custodians may have the systems to hold the relevant investments, and to

collect and account for income and to distribute it appropriately, and the requisite

connections with trading and clearing systems and depositaries. The responsible

entity may not have these or may not see the relevant functions as part of its core

business and may want to outsource them; or

(b) the responsible entities may not be able to, or may not wish to, satisfy the

requirements of ASIC to have a custodial capacity under their Australian financial

services licence, which requires, among other things, a certain level of net assets.

The responsible entity is still liable for the actions of the custodian (section 601FB(3)).

The question then arises: where assets are in the name of the custodian, should lenders

dealing with responsible entities get direct security and direct undertakings from

custodians?

Custodians who hold assets only

Where the custodians only hold assets and have no relevant liabilities, it is very common,but not universal, in practice to obtain security or some form of confirmation, and

sometimes undertakings from the custodian. As to whether it is necessary, it is highly

desirable, but not absolutely necessary, unless the banks want the protection of having a

legal mortgage.

It is desirable as a level of protection, because the assets are held in the name of the

custodian, and it is better to have direct rights against the custodian. If the security is to be

legal security, it is essential to get a mortgage from the custodian. In other cases if the

security is to be merely equitable, or the transaction is unsecured, it may not be strictly

necessary. The custodians are usually large institutions and highly reputable, and they are

bare trustees, that is they act entirely according to the directions of the responsible entity.Covenants from the responsible entity, or security from the responsible entity over its

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interest in the scheme assets, would indirectly give lenders ability to control those assets.Whether they regard that as sufficient will depend on a number of circumstances. In some

cases, direct recourse to the custodian can be limited, for instance, lenders could take

mortgages from custodians with few covenants and no undertaking to pay.

Custodians who incur liabilities

The above assumes the custodian is simply a bare custodian, one who holds assets butincurs no liabilities. Particularly where the responsible entity is not licensed to hold assets,

the practice is growing for custodians to enter contracts and thus incur liabilities (on the

basis that the contract is property and therefore should be held by the custodian). In that

case even though the custodian still acts only as directed, direct access against the

custodian is essential and lenders should try to obtain the full suite of rights against the

trustee. Otherwise they will be "structurally subordinated" to creditors of the custodian.

Complications which arise from the use of custodians

It will be seen that some of the advantages described above, particularly the statutory

novation, assume that assets and liabilities are in the name of the responsible entity.

Where contracts and assets are in the name of a custodian, and it is necessary to replace

the custodian, there will not be the advantages of the statutory novation procedures in

s601FS and 601FT. Given the nature of most companies that act as custodians, this may

not be such a problem on insolvency and enforcement. It makes easier the replacement of

the responsible entity if the contracts and property are at the custodian level. It is unlikely

that the custodian itself will be insolvent, or affected by the insolvency or action of the

responsible entity.

If the custodian does as directed, and the lender is relying on recourse to the custodian,

there is an advantage that the custodian may not be as infected by breaches of trust

committed by the responsible entity.

3.8 Deregistration

It can be seen that the lenders do get some extra protection and comfort from the fact that

the managed investment scheme is registered. In some limited circumstances (set out in

sections 601PA and 601PB) it can be deregistered, in which case the protection is lost.

Lenders will be well advised to obtain some comfort (such as an event of default or an

undertaking) to operate so as to prevent the registered scheme becoming deregistered, or

to give the lender rights to act should that occur.

3.9 Borrowing restrictions and buyback obligations

In the late 80s and early 90s, a number of managed investment schemes were placed

under stress by the requirement that investors have the right to have their units boughtback by the manager. This obviously placed severe liquidity strains particularly in a

forming market.

That is no longer a requirement, though Part 5C.6 does allow constitutions to make

provisions for members to withdraw the scheme, wholly or partly while the scheme is liquid,

and to allow responsible entities of non-liquid schemes to make offers to members.

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Listing rules used to make requirements for constitutions of schemes to have restrictionson borrowing, this is no longer the case.

It is important for lenders to check the power to borrow.

3.10 The stapled security

One common phenomenon now is the "stapled security". This arises when investors invest

in a company, and also in a managed investment scheme. The units and shares in the

trust and the company are "stapled" and linked together, that is they can only be sold

together and not individually.

This arises in 2 main areas:

(a) Infrastructure projects like motorways. The investors invest directly in the hard

asset, like a motorway or coal loader, through a trust, and because the trust is able

to claim depreciation and other capital allowances, effectively distributions are free

of tax or have a reduced tax burden. The trustee leases the asset to a company

which actually carries on the relevant business, and is taxed in the normal way.

The investors also invest in that company. This split is made so that the trust can

avoid being a trading trust and taxed as a company. It is the company that trades,the trustee merely holds the asset.

(b) In property trusts where investors invest in the management as well as in the

actual asset. An early example of this was Stockland, a more recent example is

the Westfield Group, where investors take shares in Westfield Holdings Limited,

which manages the assets for two trusts, the Westfield America Trust and the

Westfield Trust. The split is similar, the trust holds the assets, the company

manages them.

Often, lenders to the trust or the company will require a guarantee from the other. This

raises the issues described above, but one particular issue to watch is chapter 2E in

relation to the company, and section 601LA in relation to the trust. Chapter 2E forbids a

public company from giving financial benefits (including guarantees) for the benefit of

related parties, with a "whitewash" procedure from shareholders allowing shareholders to

pass a resolution allowing it. Section 601LA imports the same prohibition in relation to

dealings by the responsible entity with its own related parties with a "whitewash" procedure

for unitholders, but with some quirks that may require ASIC modification.

One issue that does commonly arise is that ASIC is able to, and does often, give

modifications allowing the responsible entity to give financial benefits to the company and

its subsidiaries without having to have the "whitewash" procedure. It would be useful to

have similar modifications in relation to Chapter 2E for financial benefits, like guarantees,

given by the company or its subsidiaries for the benefit of the trust and its subsidiaries.

However, while there is a power to give modifications of part 5C.7, there is no power to

modify Chapter 2E, and so the "whitewash" procedure or some other exemption is

necessary each time. One way of simplifying the procedure, so as to avoid repetition, is to

have the shareholders of the company bless the entering into of a document like a stapling

deed which requires the company to give the relevant financial benefits in the future.