Contents

Chapter 16
Interaction of trusts with other policy areas

Standing of the Official Assignee

Proposal
P58 Legislation should provide that the Official Assignee has standing to challenge a trust regardless of whether the bankrupt could have done so prior to the bankruptcy.

Please give us your views on this proposal.

Current law

16.39Prior to the Court of Appeal’s decision in Official Assignee v Wilson,357  the position, as commonly understood, was that the Official Assignee was able to allege sham structures, whether or not the bankrupt could have done so. However in Wilson the Court held that the Official Assignee could not challenge a trust structure if the bankrupt himself could not have challenged it. The Official Assignee was standing in the shoes of the bankrupt, who was the settlor of the trust (but not a trustee or beneficiary). Since the bankrupt himself could not have challenged the trust (because he was settlor and therefore challenging the existence of the trust would have been for his own benefit and would have concerned transactions to which he was an active party), the Official Assignee could not challenge the trust either.358

Issues

16.40The issue is whether legislative amendment is required to override the decision of the Court of Appeal in Wilson that the Official Assignee is unable to challenge a trust when the settlor is the bankrupt.

16.41The Court’s decision has been criticised by New Zealand and international commentators as incorrect.359  For example, Guest (who acted for the Official Assignee in the case) has argued that the position of the Official Assignee is not to be equated with the position of the bankrupt for all purposes, because there is no broad statutory declaration that this is the case or any case law comment.360  Further, the Wilson case was not about property that vested in the Official Assignee, but rather was about the Official Assignee’s allegation that property held by third parties in reality was held by them on trust for the bankrupt to the point of the adjudication.361  He argued that it ought to be open to the Official Assignee to claim that third parties hold property on trust for the bankrupt estate, and the result of such claim ought not to depend on whether the bankrupt could have pursued such a claim prior to the bankruptcy.362

Options for reform

16.42The options are for legislative reform to override the Court’s decision in Wilson and provide that the Official Assignee does have standing; or to retain the status quo and have no reform in this area. If legislative reform is favoured, there is a further question as to what form this would take.

Discussion

16.43The Second Issues Paper did not address this issue directly, and submitters were not directly asked to comment on it. Despite this, two submitters (the NZLS and the MED) raised the point, and both considered that the Court of Appeal’s decision was incorrect in this respect and legislative change was required to correct it.363

16.44The NZLS noted that the Court of Appeal in Wilson did not receive the benefit of proper argument on this issue, and the Court did not consider section 412 of the Insolvency Act 2006, which allows the court to look at the “real nature of the transaction”. It considered that the Official Assignee should not be constrained from doing something that a creditor could do, this being consistent with broader principles of insolvency law. The Official Assignee is likely to be the plaintiff in many cases where a trust structure is being used as a shield against the payment of debts. The NZLS considered that Wilson confuses the principle that the Official Assignee takes property subject to equities, with the notion that the Official Assignee generally stands in the shoes of the bankrupt. The MED agreed that the Official Assignee must have standing where the settlor is the bankrupt, and legislative recognition of that is required.

16.45Our preferred approach is to amend the position through legislation to provide that the Official Assignee has standing to challenge a trust regardless of whether the bankrupt could have done so prior to the bankruptcy. The provision could potentially involve a leave application for the Official Assignee to obtain standing. The provision could be effected as part of trusts legislation, or as a separate amendment to the Insolvency Act.

16.46Such a provision would clarify and provide more certainty about the position of the Official Assignee, in light of the criticism both in New Zealand and overseas about the decision in Wilson and the need for a legislative response. This issue is still somewhat uncertain given that there was only limited argument heard on this issue in the Court of Appeal, and the decision was not appealed to the Supreme Court.

16.47We agree wtih the NZLS that a clear benefit of altering the position through a legislative provision would be the protection of creditors, since the Official Assignee is their main representative in proceedings and is likely to be the plaintiff in many cases alleging a sham trust. It would also be consistent with principles of insolvency law that the Official Assignee not be constrained from doing something that a creditor could do.

357Official Assignee v Wilson [2008] NZCA 122.
358Official Assignee v Wilson [2008] NZCA 122 at [18]−[25]. This issue was touched upon in Official Assignee v Sanctuary Propvest Ltd HC Auckland CIV-2009-404-852, 11 June 2009 in the context of an application by the Official Assignee that a caveat not lapse. There the Court held that the Official Assignee did have a reasonable argument that he had an interest in the property and could challenge the trust as a sham, since the bankrupt person in question was a beneficiary (unlike the bankrupt in Wilson).
359J Guest “Is the trust fortress strong enough? … Or ‘one door shuts and another door opens’” (paper presented to the New Zealand Law Society Trusts Conference, June 2009) at 98. See Anthony Grant “New Zealand’s sham trusts – facing international criticism” NZLawyer (online ed, 19 September 2009) referring to comments by Justice David Hayton at the 2009 Transcontinental Trusts Conference in Geneva, that on the facts in Wilson the Assignee should have been able to make the trust property available to the creditors, and that a more objective test should be used for establishing a sham: see <http://nzlawyermagazine.co.nz/Archives/Issue121/121N5/tabid/1971/Default.aspx>.
360Guest, above n 359, at 100.
361At 100.
362At 101.
363The NZLS emphasised this point in its submissions on both the Introductory Issues Paper and the Second Issues Paper.