Chapter 8 - Beneficiaries, insolvent corporate trustees and definitions

Liability to beneficiaries

There is a question about the rights of beneficiaries of a trading trust. The position of a beneficiary under a trading trust is the same as it is in any other trustee-beneficiary relationship. In the event of a breach of trust, the beneficiaries may have a claim against the company, assuming liability has not been excluded by the trust instrument.384 However, if the company has insufficient assets of its own with which to compensate the beneficiaries, pursuing remedies against the company will be pointless.385 The beneficiaries may therefore need to try to claim against the individuals responsible for causing the company to breach the trust, generally the directors of the company.

Claiming against the directors is more difficult than bringing a claim against the corporate trustee, because there is no direct fiduciary relationship between the directors of corporate trustees and the beneficiaries of the trust for which the company is a corporate trustee.386 Trustees owe a direct fiduciary duty to beneficiaries, and directors owe a duty to the company. But directors are not automatically liable to beneficiaries for the actions of a corporate trustee, including breaches of trust committed by the company.387 The position has been described thus:388

It is the company which is trustee, not the individual members or officers of the company. While directors owe a fiduciary duty to their company, it is not consistent with the acknowledged separateness of the corporate entity that they should share the responsibilities owed by the corporate trustee to the beneficiaries.

However, directors may be liable to beneficiaries based on other claims.389 Where the corporate trustee has committed a breach of trust, a director may be liable for providing dishonest assistance in that breach of trust. Equity and Trusts in New Zealand states that “[i]n a corporate trading trust where directors play an active decision-making role it will not be difficult to prove assistance by them in the breach of trust”,390 by showing either active assistance or passive participation in not objecting to the actions that were in breach of trust.391

The test for whether the director was acting dishonestly is objective: although there is no leading case in New Zealand on this issue, the authors of Equity and Trusts in New Zealand consider that the law was probably settled in Barlow Clowes International Limited v Eurotrust International Limited.392 The question is whether, given the director’s knowledge of the relevant facts, their participation in the breach of trust was objectively dishonest, with no requirement that they realise that they were acting dishonestly.393 However, negligence alone by the director will not amount to dishonesty.394

Another possible claim beneficiaries may have is in knowing receipt. Such liability is “receipt-based”:395 if a director receives trust property in breach of trust, they are liable to return that trust property to the trust. Otherwise the director might be liable for unjust enrichment. Another possibility is that that director may be liable as a trustee de son tort (literally, a trustee of his own wrong).396 This arises when a person assumes the position of trustee, without being properly appointed, and proceeds to administer the trust and control the assets, as if he or she were a trustee.397 It appears that no claim against a director as a trustee de son tort has yet been brought successfully in a reported case in New Zealand.398

There is also the possibility of other claims such as through an indirect fiduciary duty, or “dog-leg” claim. This is the idea that liability may be indirectly attributed to the directors of a corporate trustee. The directors owe a duty of care to the company; if breached this creates a chose in action against the directors, which is trust property that may be available to the beneficiaries.399 However, most of these heads of liability are uncertain, being untested in New Zealand, and unlikely to succeed except in limited circumstances.

In 2002 the Law Commission was concerned with the risks to beneficiaries of a trading trust: if the business fails, the beneficiaries’ only recourse is against an assetless trustee. For protection of beneficiaries, the Commission recommended an extension to the liability of directors. It proposed that there should be imposed on the directors of the trust company the same obligations to beneficiaries to which they would have been subject if they personally had been the trustees.

This recommendation received little comment from submitters but those who did comment were divided. Some considered that the law adequately protects beneficiaries already through the existing heads of liability referred to above,400 and that extending liability in the way recommended would discourage third parties from acting as directors of corporate trustee companies. Others saw some merit in such a “direct look through” for beneficiaries.401

The Commission is not aware of whether problems in relation to beneficiaries of trading trusts are arising in practice in New Zealand. The Commission is interested in hearing views on this issue. Unless a particular concern is demonstrated, there does not seem to be a need for reform. However, the Commission again invites comments on the option of imposing the same obligations on directors as they would have had if they, and not the corporate trustee, had been the trustees of the trust. The Commission also invites any alternative proposals if reform is needed in this area.

For a full discussion of trustee exemption clauses, see Law Commission The Duties, Office and Powers of a Trustee: Review of the Law of Trusts Fourth Issues Paper (NZLC IP26, 2011) at ch 3 [The Duties, Office and Powers of a Trustee].

HAJ Ford and IJ Hardingham “Trading Trusts: Rights and Liabilities of Beneficiaries” in PD Finn Equity and Commercial Relationships (Law Book Company, Sydney, 1987) 48 at 58.

Andrew S Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) at 422 [Equity and Trusts].

Bath v Standard Land Company Ltd [1911] 1 Ch 618. Ibid, at 421.

Ford and Hardingham, above n 385 at 58; see also Salomon v Salomon [1897] AC 22.

For further discussion of the liability of directors, including other heads of liability not covered here, see Chris Kelly and Greg Kelly “So you want to be trustee” (paper presented to New Zealand Law Society Trusts Conference, 2009) at 52–54.

Butler Equity and Trusts, above n 386, at 423.

Ibid; Royal Brunei Airlines v Tan [1995] 2 AC 378.

Barlow Clowes International Ltd v Eurotrust International Ltd [2006] 1 All ER 333 at [15].

Butler Equity and Trusts, above n 386, at 423–424.

Ibid, at 425.

Twinsectra v Yardley [2002] 2 AC 164 at [105].

Butler Equity and Trusts, above n 386, at 426.

Ibid; Ford and Hardingham, above n 385, at 64.

Butler Equity and Trusts, above n 386, at 426.

See HR v JAPT [1997] PLR 99; but see Gregson v HAE Trustee [2008] EWHC 1006 (Ch); Chris Kelly and Greg Kelly “So you want to be trustee”, above n 389, at 53.

For example, Submission of Pravir Tesiram on Preliminary Paper 48: Some Problems in the Law of Trusts (submission dated  21 March 2002) at 3; John Hart “Trading Trusts” (paper presented to New Zealand Law Society Trusts Conference, 2003) at 158.

For example, 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 10.