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Acknowledgement of Debt, appointment and removal of trustees, breach of trust, Cases, sham, trust, Trustee liability

The trustee did it

One of the stated purposes behind the proposed new Trusts Act (currently in the form of a draft bill) is to make trust law clearer and more accessible.  Laudable,  but is it realistic?  The naysayers need not go much further than the decision in NZ Natural Therapy Limited (in Liquidation) v Little. 

A little bit of background to whet the appetite. NZ Natural Therapy Limited (prior to its liquidation) was to the outside observer, a trading company.  The wheels fell off and in due course a liquidator was appointed.  The liquidators then went about investigating the demise of the company focussing their interest, as liquidators are inclined to do, on payments made to the director that had the appearance of defeating the interests of creditors.

The matter ended up in the High Court before Brewer J, who made short work of matters.   The question for his Honour was whether NZ Natural Therapy Limited was a corporate trustee or simply a trading company.

The case largely focusses on how the appointment of the trustee is to be proven. The liquidator was somewhat at a disadvantage handicapped as it was by a lack of documentation and the absence of any documents confirming the appointment of NZ Natural Therapy Limited as a trustee.

No evidence was given as to the appointment of the company as a trustee other than the assertions of its director.

Mr Little, the company’s director, gave evidence that he did not know whether there was any document recording the company’s appointment as trustee.  Surprisingly nothing turned on this.  [Editor’s note: at [9] it is noted that the trust originally had two trustees, Mr Little and “another”. However, if there is no record of the retirement of the other trustee and the appointment of the company as trustee, it is difficult to understand how, given the terms of s 45 of the Trustee Act, there has been the retirement of the original trustee and the appointment of the company in its place.  Also see Cadman v Visini, where the failure to record the retirement of a trustee in a deed meant that the retirement was not effective.  Evidence given in the case that Mr Little was sure the matter was recorded but that the previous adviser had likely disposed of the relevant documents, as was their policy is also difficult to accept given that trust documents including deeds of appointment and retirement are retained indefinitely (and at the very least for the life of the trust) as there is no “7 year” or “10 year” rule relating to the retention of deeds.]

The fact that Mr Little continued to act for the trust after the company’s liquidation was considered more determinative as to his lack of knowledge regarding the operation of a trust and his lack of trust sophistication, rather than any evidence that the company was not in fact the trustee.

The bank account was in the name of the company not the trust. Expert evidence given on this point was that this is not unusual.  The writer questions this and invites comment from any banks or similar as to how common such a practice is.  The writer’s experience is that trust bank accounts are in the name of the trust (not the trustees) and the trustees are named as signatories in the banking mandate.  This does of course pre-suppose that the bank is aware that the company acts as a trustee.

The failure for accounts to be prepared for the company (evidence was given on this point) is consistent with the company being a corporate trustee as commonly accounts are not prepared for a corporate trustee that has not derived any income on its own account and does not own assets on its own account.

His Honour noted that criticism could be levelled at Mr Little, for what might be considered a somewhat casual approach to the management of the company and by implication the trust.  Whether it is sufficient to suggest that all responsibility is deferred to advisers perhaps is best answered by considering what Mr Little’s role is – director, trustee or some hybrid of these.

While the court was satisfied that the company was acting as a trustee, it is difficult to understand, that being the case, why there does not appear to have been the subsequent appointment of a solvent trustee.  Perhaps the answer to these musings might be forthcoming in the fullness of time as the matters relating to this trust and trustee are fully canvassed.

Again I am reminded of advice I have given my children – “don’t eat it if it is bigger than your head”.  Trusts might be considered in this category.  One wonders how well the trust in question has been managed and what the beneficiary’s position might be regarding the management of the trust – particularly following the company’s liquidation.

Also see When the Trust outlives the love



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