Trading Trusts and Insolvency

POSTED BY
Graham Jordan
04 April 2013

posted in Asset Planning | Trusts | Insolvency

VIEWED 9360 TIMES

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Trusts have become a common vehicle for undertaking business ventures in New Zealand. It is not surprising therefore that we are seeing an increasing number of trading trusts experiencing solvency issues and consequently an increasing frequency of liquidations of corporate trustees of such trading trusts. The liquidation of a corporate trustee of a trading trust raises unique issues for both professional advisers and business people who have operated businesses through trading trusts.

A trading trust is not a specific type of trust, it is simply a trust that actively carries on business. Commonly, the sole trustee of a trading trust is a limited liability, assetless company. There is a common misconception that the use of such a company provides a further layer of insolvency protection for the trust assets. This is not necessarily the case. A corporate trustee of a trading trust incurs liability for all contracts entered into in the course of the trust's business. While, the assets to which the corporate trustee has title are beneficially owned by the beneficiaries of the trust and not by the corporate trustee, all trustees have a statutory right to an indemnity against the trust assets to satisfy trading debts properly incurred.

A trustee's right of indemnity gives rise to an equitable interest of the trustee in both the capital and income of the trust. The equitable interest arises by operation of law, so it is not required to be registered on the Personal Property Securities Register (PPSR). The trustee's right of indemnity has priority over claims of beneficiaries and unsecured third parties but ranks behind registered security interests. In addition, the equitable interest in the capital and income of the trust remains attached to trust assets even if the trust assets leave the possession of the trustee. As the interest is equitable, not possessory, even if a trustee is removed from office, such an interest will remain attached to the trust assets (and may remain so if a replacement trustee distributes the trust assets to the beneficiaries).

For this reason, removal of a corporate trustee and the appointment of a liquidator does not enable a trading trust to avoid liability for trading debts. Creditors in the liquidation of a corporate trustee have the right, through the liquidator, to pursue the trustee's statutory right of indemnity against the trust assets. Further, a liquidator can refuse to transfer legal title to assets that remain vested in a replaced trustee until those indemnity rights are satisfied.

A further practical issue is that under the Personal Property Securities Act 1999, a trust is specified as an organisation against which financing statements can be registered. It is therefore prudent for businesses extending credit to a corporate trustee of a trading trust to register a financing statement on the PPSR against both the trading trust itself and the corporate trustee(s).

POSTED BY
Graham Jordan
04 April 2013

posted in Asset PlanningTrustsInsolvency

VIEWED 9360 TIMES

PERMALINK

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