A related issue in this regard relates to whether a company as trustee of two different trusts can contract with itself.
Generally there are potentially prohibitions against this style of structure under the various state based Property Law Acts. These prohibitions are analogous to the common law ‘self-dealing’ rule, which prevent a trustee conveying or selling property to itself because it places the trustee’s personal interest in conflict with the duty to the beneficiaries.
That is, at common law, there must be at least two parties to a contract. Therefore it is the case that a party cannot contract with a nominee for itself or with its own agent, if that agent is contracting with its principal in that capacity - and two agents of the same principal cannot contract with each other, see Infigo II v Linmas Holdings [2023] NSWSC 75. This case also succinctly confirms that:
- A trustee, in its personal capacity and in its capacity as a trustee, remains the same legal person.
- Except as permitted by statute, whilst a trustee can contract in two different capacities, it cannot contract with itself.
- The assumption that a trustee in its personal capacity and in its trustee capacity are different persons is false (see MacarthurCook Fund Management Ltd v Zhaofeng Funds Ltd [2012] NSWSC 911).
- A legal person cannot act as agent for itself (see McCausland v Surfing Hardware International Holdings Pty Ltd [2013] NSWSC 902).
The decision in Leximed Pty Ltd v Morgan [2016] 2 Qd R 442 provides some context in this regard. This case involved a partnership agreement between 2 trusts with the same trustee. The court confirmed that the partnership agreement was likely to be unenforceable at common law on the basis that the partnership was a nullity under the ‘self dealing’ rule, although a concluded position was not reached on the issue. Part of the reason the issue of invalidity due to self dealing was not determined was because the relevant Property Law Act overruled the common law position and therefore would have created the requisite ability to enforce the arrangements.
Similar to the Property Law Acts, under the Tax Act, section 960-100(3) confirms 'A legal person can have a number of different capacities in which the person does things. In each of those capacities, the person is taken to be a different entity' (see Re David Christie as trustee for The Moreton Bay Trading Company [2004] AATA 1396).
In this regard, there are two exceptions to the self-dealing rule as it relates to the trustee of a trust:
- it is authorised or contemplated by the trust instrument; or
- it is authorised by each of the beneficiaries (who are of legal age) and the transaction occurs at arm’s length terms.
Practically, there is often also utility in having an appointor or principal power in each trust deed, to facilitate a change of trustee if required of any partner, without terminating the partnership.
As usual, please make contact if you would like access to any of the content mentioned in this post.
** For the trainspotters, the title of today's post is riffed from the Strokes song ‘Hard to explain'.
View here: