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Trustee liability

Professional trustee bankrupted

It is commonly believed that professional or independent trustees operate in a different capacity than  trustees who can benefit from the trust; and that liability, if it arises, should only be borne by trustees who can benefit from the trust (see Rubber stamp alert). 

This is not the case.

A professional trustee was recently bankrupted by the Inland Revenue in circumstances that will give many trustees of trading trusts (that is trusts carring on a business activity) something to think about.

The trust was GST-registered and a GST fraud was carried out by the professional trustee’s co-trustees.  This was done, without the knowldge of the professional trustee.  However, trustees are jointly and severally liable for GST, regardless of how the GST liability arose.  The professional trustee was not able to settle the GST debt and as a consequence has been bankrupted.

The professional trustee did not benefit from the GST-fraud and was not a beneficiary of the trust.  There was no evidence of misconduct on the part of the professional trustee.  The court recognised that the bankruptcy would impose hardship on the trustee.  However, a consistent approach is required and accordingly, as the trustee was insolvent a bankruptcy order was made.

Being a trustee is a serious business with serious risks attached.  Any trustee of a GST-registered trading trust, needs to ensure suitable mechanisms are in place to confirm that GST liabilities are being met and that the correct approach is being taken to each GST claim.

Discussion

3 thoughts on “Professional trustee bankrupted

  1. The Trustee in this case was a lawyer in practice and could well have protected himself through the incorporation of a company to act as trustee. Further, the other lesson is clearly that accepting appointment as a trustee does involve responsibiities and operating in name only is fraught with risk particularly in the case of a trading trust.

    IRD have gained nothing from this case other than financially destroying a partner in a law firm, who may have acted without full recognition of the risks (which is entirely his own fault). What economic benefit does their action serve therefore – certainly not the creation of new law!

    Posted by Keith Goodall | October 23, 2012, 11:57 pm
    • I was of the understanding that the trustee in this case was an incorporated company? – “Commissioner of Inland Revenue v [X] Trustees Ltd [2012] NZCA 351 (6 August 2012)”.

      Posted by K Jacobs | November 28, 2012, 9:07 pm
      • The case you are referring to involved a corporate trustee (Newmarket Trustees Limited (in liquidation)). However, the proceedings I referred to, which are unreported, involved a lawyer acting as a trustee in his personal capacity.

        Posted by vickiammundsen | November 28, 2012, 11:48 pm

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