Chapter 7 - Creditors and trading trusts

Summary

A number of options have been outlined in this chapter. They are as follows:

  • Option 1: Disclosure of a company’s status as a trustee, for example through the Companies Register or through business documents.
  • Option 2: Preventing the exclusion in the trust instrument of the trustee’s right to indemnity from the trust assets.
  • Option 3: Strengthening the creditor’s access to the right to indemnity, for instance providing that the creditor can still rely on indemnity from the trust fund irrespective of whether the trustee acted in breach of trust in incurring the liability or was otherwise indebted to the trust fund.
  • Option 4: Giving trustees the power to grant charges for creditors over trust assets.
  • Option 5: Providing creditors with direct recourse to trust assets in some situations.
  • Option 6: Providing for liability of directors of companies acting as trustees for trust liabilities in some situations.
  • Option 7: Retaining the status quo.

There are also other options that have not been put forward. The possibility of restricting whether limited liability companies can act as express trustees did not receive a favourable response during the 2002 review and so has not been taken further in this chapter. Other options that have not been explored include requiring a minimum paid-up capital for companies acting as trustees, and the proposal put forward in 2002 to apply the solvency test to distributions to beneficiaries.382

Finally, submitters to a previous Issues Paper in the present review suggested that it would be useful for trusts legislation to clarify certain matters relating to the liability of trustees, the trustee’s right to indemnity, the subrogation of creditors and the exclusion of the right of indemnity.383 These relate to trading trusts but also apply in trust law more broadly. The general principles have been set out above at paragraphs [7.16] to [7.36]. The Law Commission is interested in views on whether it would be beneficial to clarify these matters in legislation. It would not be intended to change the common law, but only to restate the essential principles in legislation. It would still be open for settlors to vary the position in the trust instrument.

See para [7.70].

Submission of Vicki Ammundsen, Ayres Legal on Review of Trust Law in New Zealand: Introductory Issues Paper (submission dated 28 February 2011) at 3; Submission of Taylor Grant Tesiram, above n 350, at 8.