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Reform needed in the area of trust law?

In a recent decision of BNZ v Rowley and Skinner [2012] NZHC 3540, the High Court has declined to appoint liquidators to the family trusts set up by the defendants.  The High Court confirmed that the creditors of a trust do not have a direct claim on a trust’s assets. 

In this case, receivers were appointed in respect of all the assets of the trusts.  Notably, the Courts appointment of the receivers was on the terms that they were empowered to exercise in respect of each trust the powers conferred upon liquidators pursuant to sections 261 to 267 of the Companies Act 1993 as if the trusts were a company in liquidation and the settlor and trustees were the directors of a company and the beneficiaries of the trust were the shareholders of a company in liquidation.  The judicial solution was a pragmatic one.  The question now is how the approach taken to address the unusual facts of this case will apply to other trusts.

The Court held that there was no jurisdiction to appoint a liquidator despite the fact that the creditor’s entitlement to relief sought was made out and substantiated.  The difficulty, according to his Honour, was the jurisdictional basis for such a relief.  Section 17A of the Judicature Act 1908 gives the Court jurisdiction to appoint a liquidator of an association.  This could not be invoked here as it would have been forced and artificial to describe the trustees of the trusts as “associations”.  According to the Court, Parliament did not intend trusts to come within this section. 

Despite there being compelling evidence in this case that the defendants had used the trusts as a vehicle for conducting fraudulent transactions, the Court was of the view that even though trusts were increasingly being used by unscrupulous debtors to separate assets from those liable for debts incurred, there was no jurisdiction for the Court to address that mischief via the appointment of a liquidator to the assets of the trust. 

This lack of jurisdiction to appoint a liquidator represents a gap in the current law.

Interestingly, the Court placed weight on the Law Commission’s Issues Paper that was released in November 2012 Review of the Law of Trusts: Preferred Approach in which it proposes that the law should be amended to provide that the Court can appoint a liquidator to deal with a trust and the trust fund.  The paper recognises that at the moment there is no mechanism to liquidate a trust.  Although, it is possible to liquidate a company acting as a trustee, there is nothing to prevent serial appointments of new trustees which would, in turn, require new proceedings to liquidate.  The Commission considers that provision should be made in trust legislation for a court to appoint a liquidator to deal with a trust and the trust fund.  This proposal would have a broad application and apply to all trusts.

It remains to be seen whether the legislation will be made clearer in this respect.  Until such time as changes to the legislation are made, creditors will continue to have to assert subrogation to the rights of indemnity that the trustees have in respect of liabilities assumed by the trustees in relation to the conduct of the business of the trust. 

If you would like to discuss the above further or have any questions, please contact:

Kirsty Keating
Executive Director – Tax Controversy (Auckland)
Contact
Tel: +64 9 377 7073

Sinead Hart
Senior Manager – Tax Controversy (Auckland)
Contact
Tel: +64 9 377 4790

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