The Court finds a new way to take assets from Trusts

Today’s article records a new way by which a stranger can take the assets of a Trust. The mechanism to achieve it arises from a Statute as remote from the law of Trusts as you could imagine – the Judicature Act 1908.

Two fraudsters – Mr Rowley and Mr Skinner – used a Company, TPS Accounting Ltd (TPC), for “tax advisory” work. The Company borrowed moneys from the BNZ and Rowley & Skinner

The two men guaranteed repayment of the loans both in their personal capacity and in their capacity as trustees of two Trusts. One of the Trusts was established for Mr Rowley’s wife and family and the other was established for Mr Skinner’s wife and family. Mr Rowley and Mr Skinner appear not to have been beneficiaries of the Trusts.

The men were convicted of fraud, tax evasion and attempting to pervert the course of justice and are currently in Rimutaka Prison where they are likely to stay for a long time

The BNZ made demand on the trustees, pursuant to their guarantees. and obtained judgment against them for $509,700.

TPS is in liquidation and the men have both been bankrupted.

In reliance on s.17A of the Judicature Act the BNZ asked the High Court to appoint a liquidator to take ownership of the Trust’s assets. Section 17A says that the Court can appoint a liquidator to take charge of the assets of an “association” – a term that includes an “unincorporated body of persons.”

The Act does not define the terms “association” and “unincorporated body of persons” Dobson J said that “in other contexts the expression is defined as including trustees of a trust” [9] and he has held that “Provisionally therefore I accept that s 17A of the Act creates the jurisdiction to appoint a liquidator” to a Trust [9]. See BNZ v Rowley & Skinner [2012] NZHC 2835.

It appears from the Judgment that neither of the men attended the hearing before Justice Dobson.

Two days before the case was due to be heard, Mr Rowley wrote to the Court and said that he and Mr Skinner had been replaced as trustees by a corporate trustee that I will call St George.

Dobson J directed that St George should be served with the court documents and given 10 days to file and serve any grounds of opposition to the orders that were sought by the BNZ.

St George was duly served but didn’t file any grounds of opposition.

Dobson J has held that “the appropriate course to adopt, until the lawfulness of any change of trustees is clarified, is to treat Messrs Rowley and Skinner and St George as the trustees of the two trusts for the time being.” [20]

Creditors of a Trust do not have a direct claim on its assets. They need to be subrogated to the right of indemnity that the trustees have to the assets of the Trust.

Dobson J has decided that it is appropriate to appoint liquidators to exercise Rowley’s and Skinner’s right of indemnity. The liquidators are to investigate:

“the assets and liabilities held by all or any of the trustees of the trusts …. [and] ascertain promptly the status of trustees of the Trusts; the status of assets and liabilities of the Trusts; the pattern of any distributions from the Trusts to creditors and beneficiaries of the Trusts; and the identify and ages of the beneficiaries of each Trust.” [25]

The liquidators have been ordered to report to the Court on the identity of creditors and/or beneficiaries who ought to be served with the proceedings; their recommendation for future steps in the liquidation; and any additional initiatives that the liquidators consider appropriate and for which additional Court orders may be required.

A pathway has therefore been found by which the Courts can circumvent the provision in the Insolvency Act which says that the OA can’t take property that is held by a bankrupt in his/her capacity as a trustee.

This is a judgment of considerable significance for people who establish Trusts for the purpose of shielding assets from future creditors.

The BNZ’s claim was not defended and it is unfortunate that the Court has not had detailed submissions on s 17A from the defendants. The argument that a Trust is an “association” appears to be based solely on the wording of s.2 of the GST Act 1985 and s.2 of the Child Support Act and there must be a plausible ground for contending that analogies from these two Statutes ought not to prevail. Having said that, the case reeks of dishonesty and most judges would want to find a pathway to achieve what Dobson J has achieved by his judgment.

Because of the provisional nature of the Court’s conclusions, the full significance of this decision is not yet known.

In the meantime, the Courts have found a new way to extract assets from Trusts and it does not appear from the reasoning in the Judgment to be confined to Trusts of which a Trustee is a bankrupt.