Chapter 16
Trustee’s indemnity, corporate trustees and insolvency

Proposals from Preferred Approach Paper

Liability of directors of corporate trustees

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.

16.5The Preferred Approach Paper included a proposal to impose personal liability on directors of corporate trustees for liabilities incurred when acting on behalf of the trust. This would have applied in certain circumstances where the liability could not be discharged through the trustee’s indemnity. The proposal was based on the Australian provision in section 197 of the Corporations Act 2001 (Cth).307

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.

Liability of directors to beneficiariesTop

16.9The Preferred Approach Paper also included a proposal that directors (or equivalent) of a corporate acting as a trustee have the same obligations to the beneficiaries of the trust as if they had been the trustee.308 That proposal was again strongly criticised by submitters for similar reasons to the proposal discussed above. The point was also made that it cut across the principle that directors owe a duty to the company but not to the beneficiaries of the trust, and that the proposed change would interfere with the settlor’s ability to set up the trust as the settlor wished. Some argued that it would negate the use of a corporate trustee.

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.

Disclosure of trustee status of corporate trusteesTop

16.11 The Preferred Approach Paper included a proposal that section 25 of the Companies Act 1993 be amended to require a company acting as a trustee to disclose its trustee status in communications and contracts. This recommendation was directed at the problem that third parties, particularly creditors, may not be aware that a company they are dealing with is a trustee, and therefore may be misled into thinking that assets of the company are owned outright, when in fact they are being held on trust. As the Fifth Issues Paper discussed, disclosure would only be a partial solution. It would act as a flag to creditors about the capacity in which the company is acting, but would not provide any additional information about the company’s asset base, and it would still fall to the creditor to make enquiries and take steps to protect its position if required.309

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.

Relationship with companies and land transfer registers

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.

16.16The Commission considered the notation of trusts on the land register and noting trustees as registered owners in its 2010 review of the Land Transfer Act 1952.310 The Commission took the view that optional noting of trusts on the register would not necessarily lead to more transparency. Noting trusts could affect the ease and speed of land transfers, and could increase compliance costs and delay. It would bring in matters of trustees’ duties and other trust law issues that are not the appropriate concern of a land registration statute. The Commission was not persuaded that an optional right or a mandatory obligation for trustees to register in their capacity as trustees was warranted. Having recently considered this matter in depth, the Commission has decided not to revisit it in the context of this review.

Insolvent corporate trusteesTop

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:

(a) whether an insolvent corporate trustee should be liquidated;
(b) whether liquidators are entitled to claim fees and expenses from trust assets; and
(c) the distribution of assets and priority of creditors on liquidation.

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:

307Preferred Approach Paper, above n 306, at P34.
308At P36.
309At [8.29]–[8.46]; Fifth Issues Paper, above n 306, at [7.14].
310Law Commission A New Land Transfer Act ( NZLC R116, 2010) at [3.33]–[3.39].