Contents

Chapter 16
Trustee’s indemnity, corporate trustees and insolvency

Standing of the Official Assignee to challenge a trust

RECOMMENDATION

R45 The Insolvency Act 2006 should be amended to provide that the Official Assignee has standing to apply to the court to challenge the validity of a trust regardless of whether the bankrupt could have done so prior to the bankruptcy.

Discussion

16.20 Prior to the Court of Appeal’s decision in Official Assignee v Wilson,311 the commonly understood position was that the Official Assignee was able to allege sham structures,312 whether or not the bankrupt could have done so. However, in Wilson the Court held that the Official Assignee could not challenge a trust structure if the bankrupt himself could not have challenged it. The Official Assignee was standing in for the bankrupt, who was the settlor of the trust, not a trustee or beneficiary. Since the bankrupt himself could not have challenged the trust because he was the settlor, the Official Assignee could not challenge the trust either.313
16.21 The Court’s decision has been criticised by New Zealand and international commentators.314 It has been argued that the position of the Official Assignee is not to be equated with the position of the bankrupt for all purposes. It ought to be open to the Official Assignee to claim that third parties hold property on trust for the bankrupt estate, and the result of such a claim ought not to depend on whether the bankrupt could have pursued such a claim prior to the bankruptcy. The benefit of the application would pass to the creditors, rather than the bankrupt.
16.22Submitters to previous issues papers, including the New Zealand Law Society and the (then) Ministry of Economic Development, considered that legislative change was required to address the Court of Appeal’s decision.315 Nearly all submitters to the Preferred Approach Paper also supported this recommendation. The New Zealand Law Society noted the relevance of section 412 of the Insolvency Act 2006, which allows the court to look at the “real nature of the transaction”. It considered that the Official Assignee should not be constrained from doing something that a creditor could do, this being consistent with broader principles of insolvency law. The Official Assignee is likely to be the plaintiff in many cases where a trust structure is being used as a shield against the payment of debts.

16.23The recommendation would clarify and provide more certainty about the position of the Official Assignee. A clear benefit of altering the position through a legislative provision would be the protection of creditors, since the Official Assignee is their main representative in proceedings and is likely to be the plaintiff in many cases alleging a sham trust or challenging the trust on another basis. The Wilson decision has made the current position highly inconvenient.

Scope and form of provision

16.24Our recommendation is to amend the position to provide that the Official Assignee has standing to challenge a trust, regardless of whether the bankrupt could have done so prior to the bankruptcy. It should apply whether the bankrupt is a settlor, trustee, or both. The intention of the provision is that the Official Assignee ought to be able to challenge the validity of a trust, for example on the basis that one of the three certainties are not met (such as certainty of intention to create a trust) or alleging that it is a sham.316 It would be up to the court to decide the claim, and the legal consequences if the trust is not valid. For instance, the court may find that the legal owner of the property is also the beneficial owner, or that he or she holds the property on a resulting trust for the settlor.

16.25However, the recommendation is only intended to provide standing for the Official Assignee for claims involving challenging the validity of a trust. It is not intended to broadly equate the position of the Official Assignee with that of creditors for all purposes. There may also be other questions as to the role of the Official Assignee in the administration of a bankrupt trustee’s estate. However, these are outside the scope of this Report.

16.26The Preferred Approach Paper noted that the provision could potentially involve a leave application for the Official Assignee to obtain standing.317 This point was not commented on by submitters. It is considered that it is unnecessary to require the Official Assignee to apply for leave. Such a requirement would add time and expense to the process and the Official Assignee as an officer of the court has a general obligation to act in good faith, which should prevent inappropriate claims.318

16.27One submitter commented on the need to provide safeguards for the protection of the rights of beneficiaries. In our view additional safeguards for beneficiaries are not required as part of this recommendation. It would still be up to the court to decide whether a claim would succeed and the effect of a successful claim by the Official Assignee. The court is able to consider the position of any beneficiaries in this process and decide whose interests are to prevail. In addition, this provision will not affect section 104 of the Insolvency Act, which provides that property held by the bankrupt in trust for another person does not vest in the Official Assignee.

16.28We have considered whether the provision should be effected as part of trusts legislation, or as a separate amendment to the Insolvency Act. We consider it is preferable for the amendment to be located in the Insolvency Act because that is where the other powers and duties of the Official Assignee are found. An appropriate location might be Schedule 1 of that Act, which sets out the Official Assignee’s general powers, including the power in (b) to “begin, continue, discontinue, and defend legal proceedings relating to the property of the bankrupt”, or as a separate stand-alone provision.

Application to existing trusts and proceedingsTop

16.29This provision should not apply to proceedings commenced before the amendment comes into force. Once it comes into force it will apply to existing trusts as well as new trusts.

311Official Assignee v Wilson [2007] NZCA 122, [2008] 3 NZLR 45 at [18]−[25].
312That is, that the trust was merely a façade and the settlor did not truly intend to create a trust.
313This issue was discussed in the Preferred Approach Paper, above n 306, at ch 16 and Law Commission Some Issues with the Law of Trusts: Review of the Law of Trusts − Second Issues Paper (NZLC IP20, 2010) at ch 4.
314See J Guest “Is the trust fortress strong enough? … Or ‘one door shuts and another door opens’” (paper presented to the New Zealand Law Society Trusts Conference, June 2009) at 98; Paul Heath and Michael Whale Heath & Whale on Insolvency (online looseleaf, LexisNexis) at [4.65]; David Hayton “Current Trust Law Issues” (paper presented to 24th Annual Conference on Transcontinental Trusts, Geneva, June 2009).
315The New Zealand Law Society emphasised this point in its submissions on both the Introductory Issues Paper and the Second Issues Paper.
316There is some indication that courts may consider the argument that a trust is illusory as a basis for challenging a trust: see Financial Markets Authority v Hotchin [2012] NZHC 323; Clayton v Clayton [2013] NZHC 309.
317Preferred Approach Paper, above n 306, at [16.45].
318Galdonost Dynamics (NZ) Ltd (in liq) [1994] 2 NZLR 605 (HC); Re Condon, ex parte James (1874) LR 9 Ch App 609, [1874-80] All ER Rep 388; Re Wigzell, ex parte Hart [1921] 2 KB 835 at 858.