Insolvent trustees should be liquidated

The Court of Appeal has overturned the High Court decision of Commissioner of Inland Revenue v Newmarket Trustees Limited. 

Ed note: Newmarket Trustees Limited was placed into liquidation on 12 October 2012.

Newmarket Trustees is a corporate trustee that acts for a number of trusts.  Newmarket Trustees is insolvent due to unmet tax liabilities in respect of one if the many trusts of which it is a trustee.  Despite the company’s insolvency the High Court elected to exercise the residual discretion under s 241(4) of the Companies Act and dismissed the application.

The Court of Appeal disagreed with the approach of the High Court, finding that the factors relied upon did not provide any “sufficiently compelling ground of principle or justice to overcome the general policy of the Companies Act with regard to insolvent companies.”

The Court of Appeal took a principled approach to support of its position that an insolvent company, whether or not it is a trustee, should almost invariably be liquidated.  It was also noted that:

• the Court has an overriding duty to ensure that trusts are properly administered
• an insolvent trustee company, like a bankrupt trustee, will normally be considered unfit to be a trustee
• the appointment or retention of a bankrupt trustee or an insolvent trustee company will not normally be in the best interests of the beneficiaries
• a fundamental proposition of the law of trusts is that a trustee must be fit to discharge its functions or be liable to be discharged from office
• wider public interests require the deterrence and removal of insolvent trustees

The Court also considered the position in England and Australia and also referred to the fifth paper in the Review of the Law of Trusts, which considers the fitness of insolvent trustees to act as trustees.

This decision, follows the earlier 2003 Court of Appeal decision in Chester Trustees Limited.

The decision does not condemn the use of corporate trustees.  However, it is clear, given comments made about the directors of Newmarket Trustees and the company’s failure to meet accepted trustee practices, that the casual and ill-considered use of corporate trustees needs to be re-thought.

References:

• Commissioner of Inland Revenue v Newmarket Trustee Limited [2012] NZCA 351 available at Judicial Decsions Online
• Commissioner of Inland Revenue v Chester Trustee Services Limited [2003] 1 NZLR 395