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Beneficiaries, breach of trust, insolvency, liquidation

Directors pinged trustees “safe”

However, as the directors and trustees are one and the same, perhaps a difficult pill to swallow nevertheless.  The case of Owens v Shaw is a little hard to make sense of given that the trustees of a trading trust, also traded through a company (on behalf of the trust) on account of one supplier who was unhappy dealing with a trust.

The decision is worth persevering with as the reveal finds the directors liable for reckless trading in circumstances where the company in question did not pay for supplies where it was not in the interests of the beneficiaries of the trust to do so.  Confused?  You should be.  The case demonstrates the slippery slope we descend when we lose sight of what a trust is, what a trustee is, and what a company is.  This is not a case about a plot so clever you could put a tail on it and call it a weasel; but it is a case where the left hand and right hand parted company.

Some facts:

  • trading trust
  • one supplier supplies a company that on-supplied the trust
  • the company did not have a bank account but filed nil GST returns to show the “pass through”
  • all fine until it wasn’t
  • the company via its directors released the trust from its informal agreement to fund the company’s purchases
  • demand against company lead to its liquidation
  • liquidator has a crack at the trust and the directors
  • trustees ok – the court says no breach of obligation by the trustees to pay the company as the agreement was at an end
  • but what about the directors who agreed to abandon the only method by which the company could pay for goods received?
  • in agreeing to release the trust from its obligations the directors acted recklessly and breached s 135 of the Companies Act 1993

As a result the directors were liable for the company’s loss including liquidation costs.  Brown J noting at [65] that:

“The Company went into liquidation because Mr and Mrs Shaw decided to prefer the interests of the beneficiaries of the Trust over the Company and its creditors.  The liquidation of the Company was a likely consequence of the abandonment of the purchase and supply agreement.  I do no consider that in the circumstances of this case the recovery for the creditors should be diluted by the [liquidator’s] costs and disbursements.”

A lesson on structure.

The decision was largely up-held on appeal, although the Court of Appeal did not allow the liquidator’s costs(leaving a judgment sum of $106,505.03).  As noted in the Supreme Court decision regarding application for leave, at [9]:

[9] The Court of Appeal was satisfied that Mr and Mrs Shaw’s decision in December 2013 to release the Trust from its obligations was in breach of their duty to exercise the care, diligence and skill expected of reasonable directors, given that the inevitable and immediate consequence was to render Aluminium Plus insolvent.

An application for leave to appeal to the Supreme Court was denied.

References

  • Owens v Shaw [2016] NZHC 1400
  • Shaw v Owens [2017] NZCA 315
  • Shaw v Owens [2017] NZSC 160

 

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