It is easy to think of trusts as magical places to hide things. However, the fortress that the trust may appear can be somewhat less so when assets are being transferred to a trust to avoid creditors getting their hands on them.
Dispositions, whether gifts or sales for inadequate value, made to defeat creditors can be set aside. This can be the case even where there is an intervening transfer. For example, daughter buys Mum and Dad’s house (while they are suffering creditor issues on account of unpaid tax) for $25,000 down and a debt owing for the balance and then transfers the property to a trust.
While there was an acknowledgment of debt for the balance of the purchase price, the absence of any “real” liability being incurred meant that this did not suffice as valuable consideration. Importantly the vendors did not advise the CIR of the sale.
Where both the vendor and the purchaser have knowledge that the disposition is to defeat creditors, and the purchaser transfers the property to trustees (and the purchaser is one of the trustees), the trustees are held to have the same knowledge as the purchaser (Regal Castings v Lightbody). So there is no hiding behind – well no-one told me …
It is also no defence to an application to overturn the disposition that the purchaser could have paid the balance owing under the acknowledgment of debt.
Importantly, when such a disposition is overturned, while the purchaser is “credited” for any consideration paid, the purchaser cannot retain any capital gain.
This is a very simplistic overview of how dispositions that prejudices a creditor’s rights is treated. The requirements to satisfy the relevant provisions of the Property Law Act 2007 are precise and require careful consideration on a case by case basis.
The message to remember is that trusts are not always vaults and where a disposition to a trust has been prejudicial to a creditor’s rights, the trustees may lose more than they bargained on.
- CIR v Ly & Ors  NZHC 443
- Regal Castings v Lightbody  NZSC 87
- Property Law Act 2007, sub-part 6