Law Commission signals shakeup for corporate trustees

POSTED BY Andrew Wallace
09 December 2012

posted in Trusts | Company Law | Law Commission

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A couple of years ago the Law Commission kicked off a comprehensive review of the law of trusts in New Zealand. The Commission has recently released a paper explaining its preferred approach to deal with the issues that it's looked into to date, including the rules around how trusts are created, and trustees' powers and duties. One particular set of proposals worth focussing on is those in store for corporates that act as trustees. Those proposals, if ultimately carried through into law, will affect the companies themselves, their boards and the trusts they're connected with, as well as anyone dealing with them.

In an issues paper released this time last year the Commission looked at structures where the trustee of a trust is a company rather than a natural person. The Commission noted that a particular feature of these arrangements is commonly that the corporate trustee holds few or no assets in its own right, with the assets instead held on trust for the beneficiaries of the trust. This can cause difficulties for both the trust's beneficiaries and for creditors. If there's a breach of trust, the company may have insufficient assets to compensate the beneficiaries, who would then be left to try and claim against the directors personally. Creditors can be disadvantaged for similar reasons if the company breaches any of its obligations.

The Commission has come up with a number of proposals which it says are aimed at enhancing the fairness of the law of trusts. These proposals would improve transparency and allow for clearer and more direct liability of directors of corporate trustees. The proposals include:

  • Requiring a company when acting as a trustee to clearly describe its status as a trustee in all communications and contracts, for example, "X Limited acting as trustee for Y trust”. This would put people dealing with the company on notice that they're dealing with a trust. It would also serve as a prompt to get them to consider whether there's anything they ought to be doing to protect their interests, such as requiring guarantees or taking additional security. 

    As an aside, this serves as a useful reminder to businesses to always think about who it is that they're contracting with. Often it would be advisable to take these sorts of additional precautions, not just where trusts are involved.
  • In certain circumstances making directors liable to discharge debts incurred by the company acting as a trustee. This would be based on a provision of Australian law and provide greater rights to creditors.
  • Requiring directors to have the same obligations to beneficiaries as they would have had if they were the trustees personally. There are existing avenues through which claims can be made against directors, but it was thought that these avenues are uncertain and, on balance, it would be better to introduce a direct look-through for liability.
  • Providing a mechanism for the appointment of a liquidator/receiver of a trust. This would clarify and expand on existing law (and apply generally, not just to trusts with corporate trustees).

The Commission has also suggested that the new Ministry of Business, Innovation and Employment should review and clarify certain aspects of insolvency law as it relates to corporate trustees.

The Commission is seeking feedback by 22 February 2013 before releasing its final set of recommendations. If your lawyer or accountant acts as a professional trustee for you through a company, don't be surprised to hear from them when those recommendations arrive.

This article was first published in the Your Law column in the Sunday Star Times on 9 December 2012.

POSTED BY Andrew Wallace
09 December 2012

posted in TrustsCompany LawLaw Commission

VIEWED 3335 TIMES

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