Chapter 7 - Creditors and trading trusts


Creditors not aware of the trust

The first main issue in relation to trading trusts is that creditors may be unaware that they are dealing with a trust. The creditors may therefore assume that assets are held both legally and beneficially by the company, when in fact they are held on trust and the company itself has very limited assets, which may affect the creditor’s prospect of recovering their debt. This is a circumstance that may arise with other trusts where it is not clear that property is held on trust by the trustee, but it is more significant here because the trust is actively involved in carrying on business.

A submitter in 2002 stated that they saw specific problems “where creditors have no idea that they are dealing with only a trustee company.”244 Blanchard J has also commented extrajudicially on the lack of transparency in trusts, and queried whether trustees ought to be required to reveal the existence of the trust.245 The Commission has been informed by the Insolvency and Trustee Service that they have encountered at least one case where creditors have thought they were dealing with a company but where the assets were in fact held on trust.246 This issue was also raised by another submitter in 2002.247

Without disclosure of the fact that the company is acting as trustee, the creditor is not aware of the need to take greater precautions to protect its position, such as requiring security, guarantees, or making enquiries about the nature of the trust arrangement, the authority of the trustee to incur liabilities, the status of the trustee’s right to indemnity, and the value of the company’s assets owned outright. There is also an argument to be made that if there continues to be no disclosure requirement, widespread use of the trading trust structure could impact on the integrity of the Companies Register as it would only show an incomplete picture of the company.

Option 1: Disclosure of trustee status to creditors

The company could be required to disclose that it acts as a trustee for a trust in respect of which it carries on business in New Zealand. This would allow creditors to be informed of the nature of the entity with which they are dealing, so that they can take steps to protect themselves against the attendant risks. Disclosure would only need to be in a brief format, so that it is easy to comply with. Disclosure requirements would be limited to those companies acting as trustees of trusts that “carry on business” and would not affect passive trusts that happen to have a corporate trustee. “Carrying on business” is an established term that is used in relation to overseas companies which could readily be adapted for this context.248

Disclosure could be effected by one of several means. A register of trusts could potentially address this issue. Registration of trusts is discussed in chapter 9, including the option of a register for trading trusts only, at [9.45]–[9.47]. Alternatively, rather than creating a separate register for trusts, disclosure of the company’s status as a trustee could be made public through the Companies Register, via the Annual Return.249 This would be likely to require an amendment to the Companies Act 1993, as well as the subordinate legislation containing the information required by the Annual Return. There would be a potential time-lag, however, if a trust commences trading some months before the trustee’s Annual Return is due. In our view it would be more prudent to require the trustee to make disclosure prior to the trust “carrying on business”.

Potential difficulties with this proposal include:

(a)inconsistency with existing Companies Register disclosure requirements: there is no requirement to disclose other risks to solvency, such as leasing of assets or indebtedness;

(b)the effect of the disclosure requirement on the overall scheme of the Companies Act: disclosure about the fact that a company is acting as a trustee of a trading trust would be novel, and outside the matters that are usually recorded on the Companies Register;

(c)in practice, creditors may not use the Companies Register to check the status of the company.

Instead, disclosure could be effected by other means, such as a positive obligation on the director(s) of the company to inform creditors and prospective creditors that the company is acting as a trustee. A suggestion along these lines was made in a submission in 2002.250

Another option would be a requirement for disclosure that a company is acting as a trustee on company documents, and perhaps contracts entered into, in the same way that the company name must be displayed on all written communication and documents issued by or signed by the company that create a legal obligation.251 A submitter in 2002 favoured adopting this practice, so that any literature from the trust or company contained “____ Trust trading through ____ Limited”.252

A comparable proposal was mooted in Australia in the mid-1980s, at the same time as other reforms aimed at trading trusts, but did not go ahead, due to concerns that the likely cost and uncertainty of the proposal outweighed the possible benefits.253 However Gardiner, writing in 1987, considered that the proposal had “continuing merit as an additional protective measure for creditors and is worthy of reconsideration”;254 again in 2004 Cooper agreed that “[i]n retrospect, this was a salutary package and should have proceeded”.255

The lapsed proposal was to impose an additional obligation upon corporations and their directors to advertise their representative status by noting on any relevant documentation256 that the corporation was acting as trustee of a trust, in order to put prospective creditors on notice of the nature of the entity with which they might transact. Indeed this proposal went further than mere notification, and proposed also that a person would not be taken to have constructive notice of the terms of a trust merely because there had been a notification of its existence.257 The intention was to prevent the need for creditors to insist on reviewing the trust deed before dealing with a trustee, or at least to protect those who did not do so from having a presumption of knowledge raised against them.258

Either of these options might be more effective in informing a prospective creditor than disclosure through the Companies Register, as they do not require the intermediary step of the creditor actively checking the Register to obtain notification. There is a further question to consider of what the consequences should be, if any, for failing to disclose trustee status to a creditor, which could involve personal liability for the director, or the commission of an offence, as was the case under the Australian proposals.

The problem remains with all of the options discussed that even if creditors do learn that the company involved is a trustee, they may not make any further inquiries as to the company’s assets or indebtedness, or inspect the trust deed. It follows that perhaps disclosure of trustee status by itself is insufficient, and a statement should also be given about assets held on trust and any restriction or exclusion of the trustee’s indemnity in the trust deed.259 Disclosure of more detailed information of this nature would probably not be practical on business correspondence and would be best achieved through the Companies Register or informing the creditor directly. The greater the extent of the disclosure required, the more onerous it would be for corporate trustees to comply with; more extensive disclosure would also reduce the privacy currently afforded to trust arrangements.

Finally, disclosure about trustee status and potentially other relevant information is still likely to be insufficient in and of itself in protecting creditors, especially unsophisticated ones who do not appreciate the implications of dealing with a trustee. Disclosure would probably need to be considered in conjunction with other possible reform options.

Submission of Reeves Middleton Young on Preliminary Paper 48: Some Problems in the Law of Trusts (submission dated 4 March 2002), at 1.

Peter Blanchard “Towards a modern law of trusts” (paper presented to New Zealand Law Society Trusts Conference, 2001) at 8.

Meeting with Grant Slevin, Insolvency and Trustee Service and Ministry of Economic Development, 7 September 2011.

See para [6.26].

See Companies Act 1993 (NZ), s 332

Companies Act 1993 Regulations 1994.

Submission of the Institute of Chartered Accountants of New Zealand (ICANZ) on Preliminary Paper 48: Some Problems in the Law of Trusts (submission dated 21 March 2002), at 9.

Companies Act 1993, s 25.

Submission of Reeves Middleton Young, above n 244, at 1.

Proposed new s 504B was to be introduced by the Companies and Securities Legislation (Miscellaneous Amendments) Bill (No 2) 1984, but was not proceeded with: see Explanatory Paper to the Companies and Securities Legislation (Miscellaneous Amendments) Bill 1985 (Exposure Draft 2), June 1985, at [484]–[485].

DG Gardiner “Trading Trusts and Straw Trustees (Principles and Problems Reconsidered)” (1987) 3 QIT Law Journal 17 at 44.

Jeremy Cooper “Piercing the ‘veil of obscurity’ – the decision in Hanel v O’Neill” (2004) 22 C&SLJ 313 at 316.

Defined widely under proposed s 504A to include business letters, statement of accounts, invoices, orders for good or services, official notices and bills of exchange.

Proposed sections 504A and 504B.

Cooper, above n 255, at 317.

Lang Thai “Recent amendment to section 197 – is it acceptable?” (2006) 14 Insolv LJ 22 at 34.