Trust structures are common in Australian business — family discretionary trusts, unit trusts, and hybrid structures are used extensively for tax, asset protection, and succession planning. When one of your debtors operates through a trust, recovering the debt requires understanding how trust law affects your rights, who you are entitled to pursue, and what assets are available to satisfy the debt.
The basic legal position
A trust is not a legal entity — it is a relationship between a trustee (who holds assets) and beneficiaries (who are entitled to the benefit of those assets). The trustee is the legal entity that enters contracts and incurs liabilities. When you contract with "XYZ Family Trust," you are contracting with the trustee of that trust — typically an individual or a company — in their capacity as trustee.
A trustee who incurs a liability in the administration of the trust is personally liable for that liability, but they have a right of indemnity out of the trust assets. The practical consequence is that a creditor can generally sue the trustee personally, and the trustee can then satisfy the judgment from trust assets (if the trust assets are sufficient).
Identifying the correct defendant
The starting point is to identify who the trustee is. Check your credit application, invoices, and contract documentation. If the trust name is "Smith Family Trust," you need to know whether the trustee is John Smith as an individual, or Smith Holdings Pty Ltd as corporate trustee. ASIC Connect will show corporate trustee details; the title to trust assets may be registered in the trustee's name. A trust deed will name the trustee.
Proceedings should be commenced against the trustee personally (and, if applicable, against the trust by name as well). Suing the trust without naming the trustee is technically incorrect and may require amendment.
What assets can be reached
If the trustee is personally liable and you obtain a judgment, you can enforce against both the trustee's personal assets and (through the trustee's right of indemnity) the trust assets. However, if the trustee is a bare shelf company with no assets, and the trust assets have been distributed or are protected by other means, practical recovery may be difficult.
A trustee who has misapplied trust assets, or who has acted outside the scope of the trust, may lose their right of indemnity — meaning they remain personally liable without the ability to satisfy the liability from trust assets. This can make enforcement against an insolvent corporate trustee very difficult.
Practical steps
- Obtain a copy of the trust deed if possible — it will confirm the trustee's identity and the trustee's powers to enter the type of contract giving rise to the debt.
- Check whether the trustee is a company and whether that company is current on ASIC's register.
- Name the trustee correctly in any demand letter, proceedings, or credit bureau listing.
- Consider whether any individual guarantors have given personal guarantees in their individual capacity — this is common where a corporate trustee is used.
Contact Merion if your debtor operates through a trust — we can advise on the appropriate recovery structure and help identify the correct entity to pursue.