Chapter 6 - Introduction to trading trusts

Overview of issues with trading trusts

In 1982, Australian authority on trust law, Professor Ford, said of trading trust that the “fruit of this union of the law of trusts and the law of limited liability companies is a commercial monstrosity”.240 He considered it had considerable scope for frustrating creditors, and the potential to undermine the utility of the company as an entity through which business is carried on.241 Heath J has recognised the choice of a company as trustee as counter-intuitive:242

… trust law has developed on an underlying expectation that a settler would want a responsible trustee to be appointed, to protect the interests of the beneficiaries. A solvent trustee can be sued if he or she were to commit a breach of trust. However, a trading trust is premised on the opposite assumption: namely it is preferable to trade through a corporate trustee with limited liability and no assets other than the right of indemnity.


The Law Commission has identified some potential problem areas stemming from the use of trading trusts but, as indicated above, is uncertain about whether these problems are arising in practice in New Zealand. The problems fall into four categories:

1.Definitional issues: whether and how a trading trust should be defined;

2.Issues for beneficiaries: in the event of a breach of trust, a corporate trustee may have insufficient assets to compensate the beneficiaries, so the beneficiaries may need to try to claim against the directors directly, which may be difficult;243

3.Issues in insolvency, including the liquidation of a corporate trustee; the payment of the liquidator’s fees and expenses from trust assets; the priority of creditors on liquidation; and the application of the insolvent transaction regime;

4.Issues for creditors: while creditors will know if they are dealing with a limited liability company from the company name, they may not be aware that if company is a trustee of a trust; the corporate trustee’s main or only asset will often be its indemnity again the trust assets, which can disadvantage creditors if the indemnity is limited or not available, or if assets have been distributed to beneficiaries.

The following two chapters discuss these areas in more detail along with some possible options for reform. However, it should be emphasised that the Commission recognises trading trusts can be a legitimate commercial vehicle, and is not suggesting that their use be prohibited. The issue is more one of whether there is any possible misuse or uncertainty that needs to be addressed by specific statutory measures.

HAJ Ford “Trading Trusts and Creditors’ Rights” 13 Melb UL Rev 1 at 1.


Levin v Ikiua [2010] 1 NZLR 400 (HC) at [115].

Butler Equity and Trusts, above n 192, at 416.