16.4The Fifth Issues Paper and the Preferred Approach Paper discussed the problem of unsecured creditors that interact with a trust potentially being left without recourse to recover a debt. This could occur when the trustee has few or no assets of its own, and the creditor’s subrogation claim is impaired because the trustee’s indemnity is likewise impaired (for reasons that may be unrelated to the dealings with that creditor). This would leave the beneficiaries with what might be perceived as a windfall at the expense of creditors. This problem was initially approached in the context of trading trusts, and then corporate trustees, because it was perceived that creditors are particularly vulnerable where their only recourse is to an assetless corporate trustee.
16.6Submitters were strongly opposed to this proposal and raised a number of issues with it. They argued that companies legislation already imposed sufficient obligations on directors and that there were no problems with the status quo. Submitters also said it was inappropriate to modify the fundamental principle of limited liability of companies and separate legal personality. They argued that the proposal would be impractical and ineffective and considered that significant numbers of people could become unwilling to act as directors of corporate trustees, due to the expansion of liability. In addition, submitters emphasised the prevalence and usefulness of corporate trustees, and expressed the view that they are generally established for legitimate purposes. Submitters emphasised to us that natural persons who act as trustees may be just as unable to fulfil their obligations due to an impairment of the trustee’s indemnity as corporate trustees. They argued that corporate trustees should not be singled out.
16.7We acknowledge the concerns raised by submitters about the proposal. We believe that more consideration of the proposal’s wider implications needs to occur before we form any final views on its efficacy. We intend to consider the use of corporations as trustees more broadly in the corporate trustee review, which may also consider related issues such as directors’ duties.
16.8However, the Commission remains of the view that reform is needed to strengthen the position of creditors and prevent unfairness to those dealing with trusts who have given value to the trust. Therefore, while we are deferring consideration of the position of directors, we are recommending some changes that do fit more appropriately within this Report.
16.10For the reasons discussed already we are deferring further consideration of the issue of directors’ liability until the corporate trustee review. We will consider the position of beneficiaries of trusts with corporations as trustees more generally in that review.
16.12This proposal was supported by the majority of submitters who commented on it. Submitters generally agreed that this proposal would put creditors (and others) on notice as to the status of the company that they were interacting with. It would enable voluntary creditors to choose whether to deal with the company or to require additional security or guarantees.
16.13A small number of submitters opposed the proposal on the basis that the mischief that disclosure purports to remedy was unclear, that there is no difference for creditors between dealing with a company in its own right or as a trustee, and that it would impact negatively on trusts’ confidentiality and privacy. Several submitters raised practical points about the form of words to describe trustee status and questions over the appropriate consequences where there was a breach of the disclosure requirement.
16.14This feedback from submitters was useful and has again raised various issues that require further consideration. This reform would involve a change to the Companies Act, rather than forming part of a new Trusts Act. Accordingly it will be more appropriate to address this recommendation in the corporate trustee review.
16.15Some submitters raised issues with the disclosure proposal in terms of its relationship with other legislative regimes, including the property law and companies regimes. The Auckland District Law Society considered that the proposal should be extended to apply to ownership of land, so that there was an automatic requirement to state on the land register when land was held by trustees on trust. Other submitters suggested that trustee status be noted on the companies register or in the company name itself. However, as another submitter acknowledged, this is likely to be impractical because many companies also act or own assets in their own right, or act as a trustee of various different trusts.
16.17There are a number of areas where the law of trusts interacts with insolvency law. The Preferred Approach Paper identified issues that are currently uncertain and could be resolved by clarification in statute:
16.18Submitters supported the need for a review and statutory clarification of the matters referred to in this recommendation. Review of these areas will involve significant interactions with the company and insolvency regimes and the policy and statutory schemes in these areas. Accordingly we consider that it is desirable they be examined as part of the Commission’s later corporate trustee review.
16.19Submitters also requested that the following matters be reviewed and clarified: