8.29At present there is no requirement for a company that is acting as a trustee to disclose this fact to prospective creditors or the public at large. As a result creditors may be unaware that they are interacting with a trust. They may deal with the trustee under a misapprehension that assets are held both legally and beneficially by the company, when in fact they are held on trust and the company itself has very limited assets.
8.30The lack of disclosure means that creditors and other third parties may potentially deal with trustees on the basis of a belief – potentially mistaken – about the extent of the assets available to creditors, which may affect creditors’ prospects of recovering their debt. This is a circumstance that may arise with other trusts where it is not clear that property is held on trust by the trustee, but it is more significant here because the trust may be actively involved in carrying on business and is incurring liabilities on an ongoing basis.
8.31Without transparency about the fact that the company is acting as trustee, the creditor is not aware of the need to take greater precautions to protect its position, such as requiring security, guarantees, or making enquiries about the nature of the trust arrangement, the authority of the trustee to incur liabilities, the status of the trustee’s right to indemnity, and the value of the company’s assets owned outright. There is also an argument to be made that if there continues to be no disclosure requirement, widespread use of the assetless corporate trustee structure could impact on the integrity of the Companies Register as it would only show an incomplete picture of the company.
8.32Several submitters acknowledged the problems of lack of knowledge and understanding among third parties about trustees’ capacities, and how to protect oneself contractually. Most submitters agreed that lack of disclosure was a problem. However, KPMG considered that it is not difficult for creditors to identify from the Companies Register where the shares are likely held by a trust (for example a professional corporate trustee may note this status in the company name or have shareholder and directors who are lawyers or accountants using their own business addresses). KPMG thought that if anything, rather than under-reporting of trusteeships to the disadvantage of trust creditors, the problem was around over-reporting of ownership. In other words individuals who are trustees are believed to hold assets in companies when they are merely trustees for other parties, to the disadvantage of trustees’ personal creditors. The NZLS considered there was not necessarily enough of a problem with non-disclosure to warrant intervention, but thought it seemed likely that there will be situations where a contracting party is unaware they are dealing with a trust.
8.34Submitters had mixed views about whether disclosure should be required and if so, how this should be achieved, but most submitters were in favour of requiring disclosure in some form. Submitters particularly supported some sort of documentary disclosure obligation.
8.35Several submitters raised concerns presented by a disclosure requirement. KPMG considered that overall, disclosure through the Companies Register would not hinder business. However, they queried whether the disclosure methods would be sufficient to provide protection to a potential creditor; the extent of the obligations; the question of requiring disclosure on an ongoing or one-off nature; compliance monitoring and penalties for breach. A number of submitters noted that disclosure alone was unlikely to give adequate warning or assist unsophisticated creditors.
8.36Since the majority of submitters consider lack of disclosure about trustee status to be a problem, we consider that introducing some form of disclosure requirement would be helpful. We consider that considerations of privacy or convenience should not outweigh the need for parties to have sufficient information about the nature of the vehicle so they can decide whether and on what terms they should deal with it.
8.37We acknowledge that disclosure would only be a partial measure, effective only for counterparties that understand the implication of the disclosure, and is unlikely to assist unsophisticated creditors who fail to appreciate the significance of what is being disclosed, as the Fifth Issues Paper and several submitters noted. It still leaves the onus on the creditor to make any further enquiries as necessary such as the trustee’s power to enter into the transaction in question. Additional options for reform aside from disclosure still need to be considered. However, our view is nonetheless that it would be a valuable starting point to allow parties to be informed, so that they are on notice and (in some cases at least) may be able to take steps to protect themselves. We acknowledge that it is important for any disclosure requirement to be brief and easy to comply with and administer.
8.39As an alternative to option (a), the Inland Revenue suggested it could ask via its forms whether a company is a trustee company at the time that an IRD number is applied for. However, since this capacity might change over time, the Inland Revenue considered that it would be more straightforward if the information formed part of a public register, such as the Companies Office, which would benefit other creditors aside from the Inland Revenue, and was updated at least annually.
8.41Little comment was received in respect of option (c) specifically.
8.42Option (d), requiring disclosure of trustee status on written communications and contracts, received the most support from submitters. We agree that it is a desirable reform and should be the preferred approach. It could be effected through amendment to the Companies Act 1993, most likely section 25. It could be more effective than disclosure through the Companies Register, as it does not rely on the creditor to check the Register to obtain notification. Chapman Tripp has noted it is not uncommon to see this type of legal disclaimer on communications from business vehicles in England or the United States. It is accepted that there would be some expense and inconvenience involved in making changes to documentation, but this would be a relatively minor and one-off cost; there would also be some slight cost associated with the need to comply with the disclosure requirement on an ongoing basis.
8.44It should be noted that there is no intention for this proposed amendment to have the effect of automatically limiting liability to the trust assets; the trustee would still assume personal liability unless the contract expressly provides that liability is limited.
8.45As with other proposals it will be necessary to consider how the provision would impact existing trusts.
8.46A further issue is what the consequences should be, if any, for failing to comply with the new disclosure requirement. Chapman Tripp and the MSD expressly supported penalties for failure to disclose (the MSD adding, even where that failure has not resulted in direct or identified loss). We agree that there should be penalties for failure to disclose, and we favour Chapman Tripp’s proposal that there be a pecuniary fine of the same level currently imposed on companies and directors in section 25(5) for failing to include the name of the company ($5,000 for the company and $5,000 for a director). However, we do not consider it is necessary also to extend the application of section 25(2) to this proposal, whereby failure to comply with the disclosure obligation in a document creating a legal obligation would result in the personal liability of every person who signed the document.