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Trustee liability, Trustees

Liquidation of trusts – more clever ways to winkle assets from trusts?

Although liquidation is generally thought of in the context of companies, it may be possible for a trust to be liquidated.  In what appears to be the first proceedings of their kind the Bank of New Zealand (BNZ) has made an application for liquidators to be appointed to two insolvent trusts.  As a starting point BNZ argued that the court has jurisdiction in accordance with s 17A of the Judicature Act, which provides for the liquidation of associations and unincorporated bodies.  Although there is no definition of association in the Judicature Act, an association or unincorporated body of persons is defined to include the trustees of a trust.  The court having satisfied itself that the trusts were insolvent, indicated that it was minded to appoint a liquidator once it was satisfied as to whether it was more appropriate for the Official Assignee to be appointed (the Official Assignee being responsible for administering the bankruptcy of the trusts’ trustees).

The background facts of the case are complicated and involve the trustees’ convictions for fraud.  However, the case serves to illustrate the difficulties that can exist when debts are owed by a trust in circumstances where the identity of trustees is unclear or trustees are unable to act.  The case also highlight the practical difficulties involved when attempting to recover debts owing by trustees due to the fact that trust creditors have no right to claim directly from trust assets, instead having only a right to subrogate to the trustee’s rights of indemnity.  Where that right of indemnity has been lost, say through a trustee acting in breach of trust, creditors can be practically constrained and somewhat disadvantaged.  The corollary being that the position of the beneficiaries can be somewhat advantaged.

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