It is common for a commercial borrower to be the trustee of a unit trust or a discretionary or family trust.
In many cases, the trust owns the assets which the lender wishes to secure.
It is critical that the ownership of the assets is confirmed. If the security assets are owned by the trust, then the trustee must give security over them, in its capacity as trustee of the trust. If this is not done, the loan can be effectively unsecured.
In a recent matter, we were asked to review trust securities. On examining the documents, it became apparent that the security had been given by the wrong company - a company which purported to be trustee of the trust, but which had never been appointed as such. Confusion had arisen because two companies in a group had similar names.
The trust position needed to be rectified. New securities were prepared and executed.
In addition, it is important that the trust deed (and any variations) are checked to ensure that the trustee has appropriate power, to enter into the transaction. It is not unusual to find that some trust deeds do not give the trustee appropriate powers.
Powers which are normally required in standard lending situations include power to:
- conduct bank accounts;
- draw and accept negotiable instruments;
- conduct business activities;
- invest;
- mortgage and charge property;
- borrow and raise money;
- provide guarantees and indemnities;
- vary the trust deed; and
- be indemnified out of the trust assets.
If a trust deed does not contain the necessary powers, it should be varied to include them before the security documents are executed and funds advanced.
FURTHER ENQUIRIES
