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Trustee liability

Trustees can get bankrupted too

It is not often appreciated that trustees act personally.  This means that if a trustee defaults on a financial obligation, if the trustee is a natural person, that person can be bankrupted.  This point was considered by the High Court in the recent decision in the Bankruptcy of Thomas Joseph Brown where the Court confirmed that a person who is a trustee does not have a separate trustee “entity”.  Although a trustee will likely have a right of indemnity from the trust’s assets, if the trust’s assets are insufficient to meet the trustee’s liability, unless the trustee’s liability has been limited to the assets of the trust, the trustee will remain personally liable  for the shortfall.  In this regard it is important to appreciate that any limitation of liability is generally a matter of contract and cannot be presumed.

It is also worth noting that when a person is bankrupted, any assets held on trust do not generally form part of the bankrupt’s estate.

The fact that a person remains personally liable for debts incurred as a trustee, was confirmed in an unsuccessful application to annul a bankruptcy in Page v Wanganui District Council.  In this case it was noted that:

[11] As to the first objection, Mr Page claims that the abatement notices, interim enforcement orders, and final enforcement orders issued by the Council did not correctly identify the Waikupa Trust (the correct registered proprietor at the time) as the owner of the property in queston. Therefore, he contends that any legal liability in respect of those notices before 9 October 2009 when ownership was transferred to Mr Page must lie against the trust and not Mr Page (and Ms Wilson) personally. Costs (if any) should have been ordered against the Trust, and thus Mr Page maintains he is not personally liable for the $12,000 personally.

[12] On this aspect, I am satisfied that this objection was before this Court and effectively taken into account when it heard Mr Page’s application to set aside the initial bankruptcy notice, its final adjudication orders, and its hearing of his first application for annulment. Therefore, in my view it does not amount to a material omission from the Court’s consideration in any of those instances.

[13] For completeness I will go on to assess, however, that even if this objection alleged by Mr Page was not before the Court at first instance, whether in light of it, bankruptcy orders should have been made. Throughout as I understand it, the Council identified the trustees of the Waikupa Trust (including Mr Page and Ms Wilson) as owners of the property and against whom judgment was entered and costs ordered. A trustee who conducts business for a trust in question is liable to creditors for the debts of the trust to the same extent as if the trustee had been carrying on business on his/her own account. (Any provision in a Trust Deed whereby the Trust itself indemnifies its Trustees for any debt liability incurred is another matter and one entirely between the Trust and its Trustees alone). The creditor of the trustees in this case, here the Council, has provable debts for the purposes of bankruptcy, whether those debts are incurred in the bankrupt’s personal capacity or in his capacity as trustee. Therefore, this costs award against what may have been effectively the Trust is also a debt of Mr Page’s and can be the basis of the bankruptcy application against him personally.

References:

Page v Wanganui District Council [2012] NZHC 2622

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