8.76A potential problem in respect of beneficiaries of a corporate trustee is that if the business fails, the beneficiaries’ only recourse is against a trustee who may be assetless. Therefore in an action against a corporate trustee, for example if it commits a breach of trust, the beneficiaries will be unable to recover funds (in the absence of insurance cover). Beneficiaries do not have any special protection in these circumstances, and may be vulnerable. However the key question in this area is whether the law adequately protects beneficiaries already through the existing heads of liability referred to above.
8.77The NZLS and Chapman Tripp did not consider there were any problems or disadvantages relating to beneficiaries that were sufficiently serious to warrant intervention. They considered that the cases in which a beneficiary suffers loss are likely to be rare and that there are already sufficient legal remedies available. Taylor Grant Tesiram noted that beneficiaries are unlikely to have the same prospects of a recovery against the trustee as beneficiaries of a trust with individual trustees, which is arguably unfair, but beneficiaries are generally volunteers, and settlor choice is important. The remaining submitters who commented on this perceived that lack of protection for beneficiaries was a problem that needed to be addressed.
8.80In terms of reform options, several submitters supported making directors personally liable if the corporate trustee cannot pay. The NZLS considered the proposal to be sensible, but of a lower priority than other trust reforms. KPMG favoured a provision based on section 27 of the Unit Trusts Act, and Taylor Grant Tesiram favoured requiring disclosure to the settlor client by the professional trustee about the implications of appointing such a trustee, as set out in [8.78] above.
8.81KPMG raised a further question as to the ranking of the beneficiaries’ claim against a corporate trustee for breach of duty: it was considered unclear whether the claim should be in priority to other unsecured creditors, rank pari pasu, or be deferred to other creditors (with the latter being KPMG’s preferred option).
8.82Based on the response from submitters, it appears that this issue is finely balanced in terms of the necessity of reforms in relation to beneficiaries. Submitters were divided about the adequacy of current measures and about the existence and extent of a problem in this area.
8.83Although there are several existing routes by which directors could be held liable to beneficiaries, there have been few such claims in New Zealand. As such these possible avenues are uncertain, and it is difficult to assess whether they are in practice sufficient, but it is likely they would involve high thresholds to succeed. The lack of claims cannot necessarily be taken to indicate that there is no problem in this area.
8.84We have considered the advantages and disadvantages that direct liability on directors would bring. Several submitters argued that imposing a direct relationship between directors of corporate trustees and beneficiaries would provide accountability and an incentive to directors to ensure that trading trusts are run properly. It is effectively the case that the directors of the company are to all intents and purposes the trustees, and so should be treated as such. It would seem sensible for the law to recognise the practical reality of the arrangement, notwithstanding the conventional protection of the corporate veil – and one submitter noted that the corporate veil ought to be for the protection of investors rather than directors.
8.85On the other hand, there are various disadvantages to the proposal. Extending liability of directors in this way could discourage third parties from acting as directors of corporate trustee companies. One submitter commented that a law that imposed a direct relationship could be considered to cut across and complicate fundamental aspects of company and trust law; such an intervention would be difficult to design and could create problems in the interaction between the two areas of law. A submitter commented that the corporate veil should not be pierced and directors should continue to be protected from liability, provided that they have acted in accordance with their duties.
8.86On balance, we have concluded that it is preferable to introduce a direct look-through with directors of companies acting as trustees being directly accountable to beneficiaries. We are concerned about the precarious position of beneficiaries and the difficulties involved in attempting to hold a corporate trustee to account through the indirect mechanisms that are currently available. We consider that there is potential for the corporate trustee structure to be used as a means to avoid liability to beneficiaries, and that direct liability on directors is the most straightforward and effective means of addressing this. We believe there is some merit in KPMG’s suggestion involving section 27 of the Unit Trusts Act and a provision in new trusts legislation could in part draw on this provision. An alternative formulation is found in clauses 130 to 132 of the Financial Markets Conduct Bill, which will repeal the Unit Trusts Act. Clause 130 provides that the manager of a registered scheme established under a trust deed has the same duties and liability in the performance of its functions as manager as it would if it performed those functions as a trustee, within the context of the wider civil liability scheme of the bill.
8.87Since we are elsewhere proposing liability to creditors for directors of corporate trustees, it is also desirable to have consistency in the approach taken. We acknowledge that there may be some issues arising over interaction with the company law scheme. We are interested in submitters’ views about how this proposal would operate in practice. We particularly invite comment on whether the proposal is suitable for all corporates and how it would impact on different types of corporate.