Tuesday, April 13, 2021

Sometimes** unit holders do have liability – another lesson from the leading case


Last week’s post featured a detailed look at the decision in JW Broomhead (Vic) Pty Ltd (in liq) v JW Broomhead Pty Ltd & Anor (1985) 3 ACLC 355 with reference to disclaimers. 

Previously the decision has also featured in posts in relation to the fact that a trustee of a unit trust will have a right of indemnity for the liabilities of the trust against both the trust assets and the unitholders, unless this is excluded by the trust deed. 

Where a trust deed is not crafted to exclude unitholder liability the question becomes the basis on which unitholders are liable. That is jointly, or severally. 

Broomhead addresses the question bluntly by confirming (unlike a partnership) the liability is several, capped at each unitholder’s percentage interest in the trust. 

In particular, the court confirmed that there is no justification for treating any one beneficiary as liable to pay the full amount of the trustee's indemnity. The beneficiaries are not jointly entitled to the whole trust fund. Each one is separately entitled to a separate part. 

Thus, the proportionate liability of a separate beneficiary (is) the same as (their) proportionate right to benefit. 

Further, each beneficiary bears the proportion of the trustee’s indemnity for liabilities incurred, correspond(ing) to the proportion of (their) beneficial interest when the liabilities were incurred. (Each unitholder’s) share of liability is limited to that proportion, even though other beneficiaries are not liable to indemnify or are unable through insolvency to meet their liability. 

As usual, please contact me if you would like access to any of the content mentioned in this post. 

** for the trainspotters, ‘Sometimes’ is a song by Yello. Listen hear (sic): 

Tuesday, April 6, 2021

How soon is now? ** – effective trust disclaimers


The decision in JW Broomhead (Vic) Pty Ltd (in liq) v JW Broomhead Pty Ltd & Anor (1985) 3 ACLC 355, is arguably most well known for the lesson that in relation to unit trusts, beneficiaries (or unit holders) can be personally liable for the debts of the trust. 

In particular the case confirms the general principle that unless specifically excluded by the trust deed, the trustee of a unit trust will have a right of indemnity for the liabilities of the trust against both the trust assets and the unitholders. 

One of our earlier posts explores this aspect of the decision. 

The decision however is also important due to its comments in relation to arguably one of the most critical aspects of disclaimers (following on from recent posts), namely whether they are made ‘within time’. 

Relevantly the case confirms that the test to apply is ‘whether in the circumstances (a beneficiary) has accepted by words or other conduct or has remained silent for so long that the proper inference is that (they have) determined to accept the interest’. 

The other ways in which the court explained this concept included the following statements: 
  1. Acceptance may be presumed unless the donee disclaims the gift.
  2. Knowing of the gift, the donee, unless he disclaims it, is ordinarily treated as tacitly accepting it.
  3. During the period that the donee remains entitled to disclaim, the gift is treated as vested in the donee subject to repudiation.
  4. What is a reasonable time for (a disclaimer) depends on the nature of the property with respect to which it is given and all the circumstances.
  5. By remaining silent beyond the time when he would be expected to decline the gift if not accepting it, the donee has tacitly accepted.
  6. While there is no limit to the acts which may constitute a disclaimer, an effective disclaimer must be intentional and show unequivocally that the beneficiary rejects the beneficial interest.
  7. A disclaimer is to be established by the party alleging it.
  8. The consequence of (a) disclaimer … is that in law (the donee) is treated as retrospectively disentitled to the interest declared for (their) benefit in the trust deed (and thus) … freed from all burdens which would have gone with acceptance of the interest.
  9. (The donee’s interest is) described as a right "defeasible by the beneficiary's own act of disclaimer”.
While ultimately the test is obviously subjective, it also is clearly based on other disclaimer cases that unless a properly crafted disclaimer is signed within weeks of a beneficiary being made aware of their entitlement it will likely be held to have been made out of time. 

As usual, please contact me if you would like access to any of the content mentioned in this post. 

** for the trainspotters, ‘How soon is now?’ is a song by The Smiths. View a more recent version by Morrissey hear (sic):