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Trusts

Freezing orders and trust property

A freezing order is not a solution to a problem, but rather acts in the nature of ensuring assets cannot be disposed of so that a future judgment might be of no value.

Given the propensity of New Zealanders to have assets held in trusts, it is perhaps refreshing to be able to discuss a case where the existence of the trust meant that assets were not able to be frozen pending the resolution of a claim against the trust’s settlor.

However, it is important to appreciate that the outcome in this case was due in large part to the fact that apart from a nominal $100 settlement when the trust was settled, the settlor had made no advances to the trust and had forgiven no debts.  As this could be considered somewhat rare, care should be taken to appreciate when a freezing order could have application to a “related” trust.

The facts of the case in question can be summarised as follows:

  • Medtronics New Zeland Limited (Medtronics) has alleged that Mr Finch owes it more then $1 million
  • Mr Finch’s defence is that he didn’t contract with Medtronic personally and that a Company, now in liquidation  owes the debt
  • an intermim freezing order was made by consent pending a  full hearing of that application.  Amongst other things the interim freezing orders required that an amount equal to the debt had to be retaiend from the sale proceeds from the sale of the family home; shares owned by Mr Finch could not be dealt with by him; Mr Finch’s bank account was frozen.

To obtain a freezing order the applicant must:

  • establish a good arguable case
  • demonstrate a risk that the assets will be dissipated or disposed of so that a judgement in the applicant’s favour would be defeated in whole or in part
  • provide a meaningful undertaking as to damages 

In this case, Mr Finch conceded that there was  an arguable case against him and a risk of dissipation. However, the question for the court was whether the assets in question were available to Medtronics as the assets were, it ws submitted, held on trust.

As a starting point is is well established that there is jurisdiction for the court to grant freezing orders against assets  held on trust, in appropriate cases:  “third parties who have become mixed up in a defendant’s attempt to defeat execution of any later judgment are likely to receive scant sympathy in the context of a freezing order application”.

However, as Mr Finch had made no loans or gifts to the Trust (arguably a somewhat rare circumstance), this was not a case that allowed an order against the Trust.  By way of aside the writer wonders whether Mr Finch provided personal gurantees for the Trust’s 100% borrowings for the purchase of the family home equate to a transfer of value; and whether the shares held on trust that produced $15,000 of income a month to meet the mortgage repayments, were in fact of no value (the Court accepted the Mr Finch did not pay anything for the shares – but does this equate to the shares being of no value when the declaration of trust was made?

The result was that the freezing order could not be maintained as there was insufficient nexus between Mr Finch and the assets owned by the Trust.

While it may be difficult to reconcile this case with those involving Mr Hotchin and the Finacial Markets Authority, it is important to appreciate that it is the legislative background to that case that brings trust assets into consideration, not the freezing order mechanism.  It is also important to appreciate that cases where no dispositions have been made to a trust may be somewhat rare in the context of “standard” New Zealand asset and estate planning.  That said, where the opportunity arises to settle a trust structure on such a basis there can be demonstrable reasons to do so provided that the settlor will not ever want to be able to have any right of recourse back to the assets (say by calling up a loan).

Reference:

  • Medtronics New Zealand Limited v Finch [2013] NZHC 1253
  • Judicature Act 1908
  • High Court Rules, part 32
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Discussion

2 thoughts on “Freezing orders and trust property

  1. It is a good article, but I could not find the case in Lexis Nexis.

    Posted by paul | January 12, 2017, 7:30 pm

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