Introduction:

A Company is an entity owned by shareholders and managed by directors. It is

governed by a set of rules called a constitution or replaceable rules contained by the
company Law. Company is a separate legal entity and once created, is an entity in its
own right. Company has continual existence. In a company transfer of ownership is
simply done by transferring shares in the company to someone else. The Company can
make contracts with Shareholders since they are separate.

The definition of director given at section 741(1) of the Companies Act 1985 ‘includes
any person occupying the position of director by whatever name called. This definition
can also be found in the Insolvency Act 1986 section 251 and the Company Directors
Disqualification Act 1986 section 22, where it is extended to include shadow directors.

An individual or organization which holds or manages and invests assets for the benefit
of another. The trustee is legally obliged to make all trust-related decisions with the
trustee's interests in mind, and may be liable for damages in the event of not doing so.
Trustees may be entitled to a payment for their services, if specified in the trust deed. In
the specific case of the bond market, a trustee administers a bond issue for a borrower,
and ensures that the issuer meets all the terms and conditions associated with the
borrowing.

Trusts

A Trust is composed of three (3) parties: the Settlor, who creates the trust by drawing
up a deed and entrusts property or money to a trustee; the trustee, who then manages
the property or money; and thirdly, the beneficiaries, who receive the benefit of the
capital and income of the Trust. The Trustee and the Settlor are in a contractual
relationship, whereas, the trustee is in a fiduciary relationship with the beneficiaries.

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Discretionary (Family) trusts generally established for the benefit of a family and its
members. It allows the Trustee to obtain discretion as to the distribution of both income
and capital for the benefit of a family, to beneficiaries who can be both specified in the
trust deed and general. The trust operates according to a trust deed.

The trustee has decision making power which is at his discretion. This is in contrast to
unit trusts where the trustee has less real decision making power. Flexible because
profits are distributed in accordance with the trustee's discretion.

A trust must be run according to the rules of the trust deed, though the common law of
trusts will imply many rules. A trust has no separate legal entity from the trustee. Thus,
the trustee is liable for all the liabilities of the trust. Since the trustee is personally liable,
a trustee may be a company to protect personal assets.

Unit trust is usually a trading trust where capital is divided into units, and each unit
holder owns units according to their contribution, similar to shares. A trustee invests the
money into a business venture and the profits are then paid back to the unit holders
who are the beneficiaries of the unit trust, similar to shareholders receiving dividends.
The unit trust is run according to a trust deed. The investors are initial 'Settlors' who
contribute capital to a fund; the Trustee is usually a company which appoints a manager
to invest the funds.

The trustee has limited liability if a corporate entity. Unit holders can pool their small
amounts of capital to achieve a viable investment. Unit trusts are a means of spreading
the risks of an investment. A unit holder owns units, which are usually readily
transferable and can be sold, similar to shares. Unit holders directly own the property of
the trust. Unit holders can wind up the trust.

Unit trusts have a disadvantage in that they are only as good as the way they are
managed. A unit trust may have a deed which allows for shortfalls to be paid for by the
unit holders. A unit holder might lose all their capital as well as their earnings. Unit trusts

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are limited in flexibility because profits are distributed in accordance with the fixed
percentage outlined in the trust deed.

Duties and Liabilities of Trustees

This Act may be cited as the Trustee Companies Act 1968.

In this Act— administration with the will annexed includes administration with
exemplification of probate or letters of administration with the will annexed or duplicate
or copy probate of the will annexed. books includes any register or other record of
information and any accounts or accounting records, however compiled, recorded or
stored, and also includes any document. Corporation means anybody corporate,
whether formed or incorporated within or outside the State, and includes any company
and any foreign company but does not include—

(a) A body corporate that is incorporated within Australia or an external Territory of the
Commonwealth and is a public authority or an instrumentality or agency of the crown;
(b) A corporation sole.

Director includes a local director. Estate includes all real and personal property of
whatever nature or kind committed to the administration or management of a trustee
company. Trustees are appointed in the manner provided by the business trust’s
governing instrument. The governing instrument dictates the trustees’ duties, rights, and
powers and may provide for one or more series of trustees with different duties and
powers. A trustee may be a natural person or another entity, and may include a
beneficial owner. If a governing instrument does not provide otherwise, a trustee shall
choose and supervise the officers and employees of the business trust, and shall direct
the management of the business trust’s business and affairs.

With respect to trustee liability, it provides that the standard of care of business trust
trustees shall be the same as the standard of care provided for directors. It states that
except as otherwise provided in the governing instrument, a trustee is not personally

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liable to third parties when acting in his capacity as trustee. In addition, a trustee’s
liability to the business trust and its beneficial owners is limited to that of directors or
officers, and may be further limited by the articles of trust or governing instrument. A
business trust may purchase insurance for and indemnify a trustee, and such trustee is
entitled to mandatory indemnification to the same extent as a director.

Company is a trustee of the shareholders

Although it is uncommon, courts are prepared in some cases to hold that the company
holds property in trust for some shareholders.

A corporation works trough living persona not by itself. The human agencies that mainly
run the company’s business are called directors. According to Companies Act—1994,

“Director includes any person occupying the position of director by whatever name
called” and according to section 90(1), every public company must have at least three
directors and every private company shall have at least two directors.

The companies Act tries to distinguish the area of proper management control and
proper shareholders control. But even, there is always conflict between shareholders
and directors as to their respective powers which is the agency problem as in Automatic
Self –Cleansing Filter Syndicate Co. Ltd vs. Cunningham—1906

It is a well establish principle that directors are the agents of the company. Where the
directors contact in the name of the company and on behalf of the company, it is the
company which is liable on it, not the directors personality as in Ferguson vs. Wilson—
1866, “ The company has no person; it can act only through directors, merely the
ordinary case of principal and agent.”

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The leading case on the point is Solomon Vs Solomon Company.

Solomon was an owner of a boot and shoe manufacturing business and later converted
his business into a limited liability Company under the companies Act 1862. The
memorandum of Association contained the names of subscribers- Solomon the
appellant, his wife, a daughter and four sons, each of them subscribing one share. The
company named Avon Solomon and Co. was incorporated on July 20 1892. Then the
appellant sold his business to the company with fir a ₤10,000 in debentures and
₤20,000 in full paid up shares. Solomon was appointed the managing director of the
company. Because of the depression in the show market, Solomon borrowed money on
the security of the debentures and lent it to the company. Thereafter, the company was
wound up by the court and the assets of the company were not enough to pay back the
debentures in full leaving nothing for the unsecured creditors. The Liquidator of the
company claimed that the company was entitled to be indemnified by Solomon against
the company’s unsecured liabilities on the ground that the company was “mere nominee
and agents” of Solomon. The trial judge made the declaration in favor of the company.
Solomon then filed an appeal at the Court of Appeal. The court of Appeal agreed with
the Trial judges and dismissed the appeal. Solomon appealed to the house of lord and
then the order was ultimately reversed in order of Solomon. The point of consideration
by the House of Lords in a very technical word was that

“ when the memorandum is duly signed and registered, though there be only seven
shares taken, the subscriber are a body corporate capable forthwith of exercising all the
functions of an incorporated company… The company is at law a different person
altogether from the subscribers of the memorandum; and though it may be that after
incorporation the business is precisely the same as before, the same persons are
managers, and the same hands receive the profits, the company is not in law their
agent or trustee. There is nothing in the act requiring that the subscribers to the
memorandum should be independent or unconnected, or that they should have one
mind or will of their own, or that there should be anything like a balance of power in the
constitutions of the company”

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 See also In Motor Trades Association of Australia Superannuation Fund Pty Ltd v
Rickus (No 3) [2008] FCA 1986, Mr Rickus had formerly been the chairman and a
director of the Motor Trades Association of Australia Superannuation Fund Pty Ltd (the
Trustee).

In that capacity, Mr Rickus provided documents relating to the Trustee to the Australian
Prudential Regulation Authority (APRA) in response to a notice to produce. He gave the
board of the Trustee a schedule listing those documents, but declined to provide the
board with a copy of some of the documents, because he considered the documents
were confidential and did not want them being made available to directors whom he
considered had a conflict of interest.

The Principal Executive Officer of the Trustee considered that APRA may have reached
adverse conclusions about the operations, functioning and governance of the Trustee,
based at least in part on documents provided by Mr Rickus.

The court held that Mr Rickus was under a duty to provide a copy of the documents that
had been given to APRA to the Trustee. This duty arose because of the following
circumstances:

APRA was undertaking a review of the Trustee and had requested documents in that
context Mr Rickus was a director when he provided the documents to APRA the
Trustee needed to be informed as to the documents provided to APRA so it could
properly respond the Trustee had committed to use the documents, if produced, only for
the purposes of its dealings with APRA.

The court noted that fiduciary duties are usually proscriptive rather than prescriptive,
and accordingly rejected a general submission that it was part of the fiduciary duty
owed by a director to make full disclosure. However, the court found a duty to produce
a copy of the documents to the Trustee on these facts, at least where a request to do
so was made of Mr Rickus by the Trustee, as this was in the best interests of the
Trustee. His duty was to respond to a request properly made of him by the Trustee to
place the board in a position where it could respond to an investigation being pursued

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by a statutory regulator (including responding to information provided to the regulator by
Mr Rickus).

This has been affirmed in later cases, such as in The King v Portus; ex parte Federated
Clerks Union of Australia, where Latham CJ while deciding whether or not employees of
a company owned by the Federal Government were not employed by the Federal
Government ruled that:

"The company…is a distinct person from its shareholders. The shareholders are not
liable to creditors for the debts of the company. The shareholders do not own the
property of the company…shareholders cannot be treated as agent or trustee of the
company.""

Shareholders are the actual owner of the company. But when a company is formed and
registered in the stock exchange under the company Act—1994 it becomes a separate
legal entity or personality. Then everything (ownership and liabilities) goes under the
name of the company. No one is liable for any kind of act done by the company. It is
totally a different entity. On the other hand directors are in the duty of managing the
corporation. These directors may be form the shareholders or they can be employed as
well. We can say the directors as employee of the corporation. They cannot be treated
as agent or trustee of the company.

Directors are always considered to be trustees of the property or assets of the

company, which comes to their hand and which is actually under their control. They are
to make good of moneys which they have misapplied as if they were trustees. Again in
the case of exercising their powers, they are bound to act like a trustee for the benefit of
the company only.

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Conclusion

Some person have categorized those cases as being either advantageous or

disadvantageous, this obviously will depend on the standpoint from which the value
judgment is made. Is it from the standpoint of the company, its shareholders or an
unpaid creditor? We can say that the corporate personality has empowered a company
to great extent ultimately for the purpose of the law and the benefit of all people and
subscribers and persons and stakeholders and creates a legal situation which is easy to
evaluate and judge under the eye of the law. Significant Director and Trustee
Duties may also be relevant depending on your preferred structure.

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Bibliography:

1. Text Book - Commercial Law and Industrial Law

2. Companies & Securities Law By Dr. M Zahir
3. www.lawtel.com
4. www.mondaq.com