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Notional trust

The Supreme Court decision in Jennings Roadfreight Ltd (in liq) v CIR is an interesting example of a “notional trust”.  The question to be determined in this case was whether money held by a company in liquidation (that owed PAYE to Inland Revenue) was held on trust for the CIR or was available to other creditors in accordance with the usual priorities set out in sch 7 of the Companies Act 1993.


Jennings Roadfreight Ltd (Jennings) was placed into liquidation on 24 March 2011. It owed approximately $50,000 in PAYE for the month ended 28 February 2011. $14,076.38 held in Jennings’ bank account at the time Jennings was placed in liquidation was paid by the bank to the CIR.

The liquidators made applications under ss 251 and 291 of the Companies Act 1993 to recover the funds from the CIR.

The High Court held that the CIR was not entitled to retain the $14,076.38 but must prove in the liquidation and recover that amount in order of the priorities set by sch 7 of the Companies Act.

That decision was appealed to the Court of Appeal.  The majority of the Court of Appeal held that, under s 167(1) of the Tax Administration Act 1994, any credit balance in Jennings’ bank accounts at the time of liquidation was held in trust for the Commissioner. As such, it did not form part of Jennings’ estate in liquidation and therefore did not need to be refunded by the Commissioner.

The matter was then appealed to the Supreme Court to determine, whether:

  • the trust arising under s 167(1) of the Tax Administration Act continues in existence upon the liquidation of a company, in respect of funds held in the company’s account, or
  • the trust is extinguished upon the liquidation, so that the funds held are dealt with in accordance with sch 7 of the Companies Act.

The Supreme Court’s decision

The Supreme Court allowed the appeal and ordered the Commissioner to repay the $14,076.38. The Supreme Court holding that upon the liquidation of Jennings, the unpaid (and overdue) PAYE fell subject to sch 7 of the Companies Act by virtue of s 167(2)(b) of the Tax Administration Act. As a result, the unpaid PAYE was to be ranked in accordance with sch 7 of the Companies Act.

Notional Trust

On the subject of a notional trust it was noted that:

  • it has never been general practice to segregate the PAYE deductions in New Zealand
  • there was support for the proposition that a trust created in accordance with s 167(1) was intended to be a notional statutory trust over the employer’s assets generally
  • in the context of what can be deemed or notional deductions of PAYE, the notional statutory trust under s 167(1) would not be limited to funds in bank accounts
  • a notional s 167(1) trust does not come to an end when there is a failure to pay PAYE on the due date
  • but, on liquidation, any such notional trust is brought to an end not by any action of the company but by virtue of the legislation under s 167(2).  See Commissioner of Inland Revenue v Smith

See further at: Supreme Court reverses “super priority” for Inland Revenue on insolvency


  • Jennings Roadfreight Limited (in liq) v C of IR [2014] NZSC 160
  • Jennings Roadfreight Ltd (in liq) v C of IR (2012) 25 NZTC ¶20-135
  • Jennings Roadfreight Ltd (in liq) v C of IR (2014) 26 NZTC ¶21-062
  • Commissioner of Inland Revenue v Smith [2000] 2 NZLR 147


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