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Corporate trustees

A trust with a corporate trustee, rather than a natural person trustee is often referred to as a trading trust. This name, when used, is a misnomer as a trading trust is simply a trust that carries on a business.

Regardless of the nomenclature used, the use of corporate trustees is increasing. The reasons for this include:

1. To address concerns surrounding trustee liability
2. Because the use of a corporate trustee can reduce the costs associated with retirement and appointment of trustees, and
3. Attempts to limit rights of indemnity.

Liability

Trustees act personally. This means that a trustee is liable for losses incurred, even if the trustee cannot benefit from the trust. Although a trustee will have a right of indemnity from the trust, if the trust is insolvent the trustee can be left meeting the cost of any shortfall.

The common response is to act as a director of a trustee company, rather than to act as a trustee. Although this approach can reduce the risk of personal liability, if loss has occurred because the director acted recklessly or otherwise in breach of the Companies Act, the director can be liable for the same. Where the director suffers loses as a result the director, unlike a natural person trustee, does not have a right to indemnity from the trust.

Costs of trustee changes

If a trust owns real property, any appointment or retirement of trustee will require a legal conveyance of the title. Where the title is subject to a mortgage a discharge and registration of mortgage may also be required.

However, if the trustee is a corporate trustee, while it may be necessary to obtain bank consent for the change of director, no conveyancing will be required.

Limiting rights of indemnity

Some corporate trustees act under terms that provide the company has no right of indemnity from the trust. The reasoning being that if there is no right of indemnity, the trust’s assets are protected from any liability incurred by the trustee company. While the company might be subject to liquidation proceedings, the trust’s assets are protected. Whether it is possible at law to waive or otherwise negate indemnity from a trust is not clear. Further, as some trusts trade in circumstances where trading partners are unaware of the existence of a trust, or of the negation of any rights of indemnity, such practices have come to the attention of the Law Commission, which is reviewing the use if corporate trustees as part of the on going review of the law of trusts. See http://www.lawcom. govt.nz

Governance mechanisms

One of the complications with corporate trustees is that while aspects of the company models such as limited liability and perpetual existence are desirable attributes of the corporate trustee the economic and traditional governance attributes can be less appealing. It is important to consider the history of the modern company – the following quote from James E. Post, Lee E. Preston & Sybille Sachs, Redefining the Corporation: Stakeholder Management and Organizational Wealth (Stanford, California: Stanford Business Books, 2002) provides that:

“For more than a century the business corporation has been a successful and widely adopted institutional arrangement for creating and distributing wealth. But the power and purpose of corporations and of the entire corporate system has been continuously questioned and debated. The interaction between global economic growth and global social challenge has led to changes in the character and behaviour of corporations and in public expectations about the role and responsibility of corporations within society.”

The paradigm under which the corporate trustee acts is equally in need of challenge and contemplation given that the wealth in question belongs not to the shareholders as is normally the case – but to the beneficiaries who are in effect de facto stakeholders of the company.  A further complication arises when succession issues are considered.  Shares in a trustee company generally ought not “join” with the shareholder’s “personal” estate.

On the concept of stakeholders generally see http://docs.business.auckland.ac.nz/Doc/Corporate-governance-symposium-paper-Corporate-stakeholders-in-New-Zealand.pdf

Discussion

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