Chapter 6 - Introduction to trading trusts


It is important to view trading trusts in the context of the conventional historical and legal distinctions between a company and a trust.179 In brief, the limited liability company was established as a way to protect those wishing to invest in commercial trading activities. The aim was to limit the risk taken by investors putting money into a sphere that would provide economic and social benefits.180 In contrast, trusts are formed to enable a person to hold assets for the benefit of another, for reasons such as estate planning or protection of assets.181

Companies are entities in their own right and allow greater protection for the individual or individuals involved when their business incurs debts.182 They are governed by the Companies Act 1993, which provides the process for incorporation and the requirement for registration on the Companies Register.183 The company name must end with the word “Limited”,184 to warn potential creditors that the assets from which they may recover debts are limited to those of the company. The company name must be clearly stated in written communications and signed documents.185 Unlike companies, trusts are not separate legal entities and there is no public register of trusts.186 Trustees are also fully personally liable for their actions as trustees, though this can be limited through contract or the trust instrument. As observed in a recent article, “[h]aving regard to the nature of the relationship between trustee and beneficiary, it is plain that a responsible person is needed to manage assets on behalf of another.”187

Trust structures have become increasingly popular for commercial purposes.188 This chapter discusses a particular form of such a trust. Trading trusts are trusts under which the property is used to carry on business. They often have a structure that involves a company acting as a trustee, holding property on trust for certain beneficiaries, where the company has very few or no assets owned outright. The trust does not have a separate legal personality, so creditors contract with the company, and accordingly it is the company that is liable for trust debts including debts incurred in trade.

Such a structure can cause problems for creditors, particularly if the company that is a trustee becomes insolvent. Unsecured creditors must rely on the trustee’s right of indemnity from trust assets to satisfy their claims, and there are many circumstances in which the indemnity may be impaired or unavailable altogether, potentially leaving creditors with no recourse. There are several areas of uncertainty in regard to insolvent corporate trustees. Another issue arising is whether beneficiaries of a trading trust require further protection in the event of breach of trust by the corporate trustee.

Other forms of trust are used in business as well. This chapter will not cover investment trusts, unit trusts, or statutory trustee companies.189

Paul Heath “Bringing Trading Trusts into the Company Line” [2010] NZ L Rev 519 at 519–522.

Ibid, at 520.  See also the long title to the Companies Act, which states at (a) that it is an Act: “To reaffirm the value of the company as a means of achieving economic and social benefits through the aggregation of capital for productive purposes, the spreading of economic risk, and the taking of business risks.”

Heath, above n 179, at 521.

Salomon v Salomon [1897] AC 22 (HL) and Heath, above n 179, at 520.

Companies Act 1993, ss 11–14.

Or “Tapui (Limited)”: see Companies Act 1993, s 21.

Companies Act 1993, s 25.

On the registration of trusts, see further ch 8.

Heath, above n 179, at 523.

Law Commission Review of Trust Law in New Zealand: Introductory Issues Paper (NZLC IP19, 2010) at [2.43]–[2.45] and [2.67]–[2.72].

Trustee company legislation will be addressed in the third stage of the Law Commission’s Review of the Law of Trusts project.