Corporate trustees and insolvent trusts
Insolvent corporate trustees
It is proposed that the Ministry of Business, Innovation and Employment should review and clarify the following areas in insolvency legislation:
(a)whether an insolvent corporate trustee should be liquidated;
(b)whether liquidators are entitled to claim fees and expenses from trust assets;
(c)the distribution of assets and priority of creditors on liquidation.
Please give us your views on this proposal.
8.89The Fifth Issues Paper considered three areas of uncertainty regarding trusts in the context of insolvency: whether an insolvent corporate trustee should be liquidated; whether liquidators are entitled to claim fees and expenses from trust assets; and the distribution of assets and priority of creditors on liquidation.
8.90After submissions closed on the Fifth Issues Paper, the Court of Appeal released its decision in CIR v Newmarket Trustees Ltd. This allowed the appeal by the Commissioner against the High Court’s decision not to order the liquidation of the respondent, Newmarket Trustees Ltd, an insolvent trustee company which was established and operated by a law firm. It was the trustee of over 100 trusts. Notably the Court of Appeal commented that the Associate Judge should not have taken into account, in his decision not to liquidate the company, the propriety of lawyers providing trustee services through trustee companies, and the practical consequences of having to replace the trustee for the other trusts affected. As the Court noted, the NZLS is responsible for whether and, if so, how such trustee companies should be able to operate, and there is some legislation in place already around this.
8.91Submitters to the Fifth Issues Paper told us that the problems referred to were correctly identified, and most agreed that these areas required legislative clarification or reform, however there was little comment on the preferred direction or nature of the reform required. The view of the NZLS was that all the issues identified by the Commission in the paper in respect of insolvent trading trusts are ones that in practice may cause problems in the future, although to what degree and in how many situations is unclear. The NZLS supported some narrow, targeted amendments in the problem areas identified by the Commission. Taylor Grant Tesiram argued that whilst these issues have not been significant in New Zealand litigation so far, they are likely to increasingly emerge; this area of law is too fundamental to have so much uncertainty. It considered that issues apply to any insolvent trust, not just trading trusts.
8.92Particular areas that submitters mentioned as requiring statutory clarification or amendment were:
- priority between trust creditors and general creditors of an insolvent trustee, as well as priorities between trust creditors;
- whether and how trust creditors have a claim over general assets (if trust assets will not satisfy the debts);
- the application of the insolvent transaction regime to trust creditors;
- whether trust assets are available to meet the expenses of winding up; and
- a more flexible, discretionary rule that allows, at a judge’s discretion, for the non-liquidation of a corporate trustee in circumstances of the type described in Newmarket Trustees where the circumstances leading to the particular debt default were not the fault of anyone involved with the corporate trustee (though taking care not to encourage softer stewardship).
8.93We agree with submitters that it would be desirable to provide greater certainty in these areas, through clarification in legislation. However, these amendments are likely to involve issues of interaction with existing company and insolvency law regimes, which would involve going beyond the scope of the Commission’s trusts review. It may be an inquiry with some complexities which could delay other parts of this package of proposals. For these reasons we consider that it is preferable that the review in these areas be carried out by the government department responsible for the company and insolvency legislation, and we recommend accordingly.
8.94The Newmarket case has provided some further guidance on the appropriate factors to consider when deciding whether an insolvent corporate trustee should be liquidated. However, it has highlighted the problem that can occur when there is a professional corporate trustee administering multiple trusts, and an issue with one trust causes the company to become insolvent, so that it is unfit to be a trustee and requires removal, creating numerous practical difficulties for the remaining trusts. The risk of this predicament arising can be reduced by proper administration or avoided by using a structure of a single corporate trustee for a single trust, as the Auckland District Law Society has noted previously.
8.95This issue is one that may need consideration by the NZLS and the Auckland District Law Society, as to what responses are appropriate in light of the Court of Appeal’s decision. It is also an area that the Commission may examine more closely in in the context of stage three of the review of trust law on the trustee companies legislation.