Trusts:  The Courts find two more ways to winkle assets out of Trusts

Section 60H of the Securities Act

On 9 December 2010 Winkelmann J made an Order that “froze” the assets of what appear to be two Trusts that are associated with an Auckland businessman, Mr Mark Hotchin.  She did this pursuant to s 60H of the Securities Act, which empowers the Court, at the request of the Securities Commission, to “freeze” the assets that a person either “holds” or “controls”.  This is a new power.

The properties that have been frozen are owned by KA Trustee (No 3) Limited and KA Trustee (No. 4) Limited.  A Mr Tony Thomas is the sole shareholder and director of both Companies.

As the properties are registered in the name of two Companies, it is obvious that the Court was persuaded that Mr Hotchin somehow “controls” them – notwithstanding the fact that he is neither a shareholder nor director of them.

At the time of writing this article, I cannot say how Winkelmann J was persuaded that Mr Hotchin controls the properties since I understand that she has not yet given a reasoned Judgment for doing so and, in addition, the Court has sealed the file.

The Order that she made on 9 December 2010 requires the defendants to provide a copy of any Trust Deed that may exist in relation to the properties.  This strongly suggests that the Commission does not even have a copy of the Trust Deeds that may exist in relation to the two Trusts.

I do not propose to speculate on how the Court was satisfied that Mr Hotchin “controls” properties that appear to be owned by two Trusts of which he is not a Trustee.  In a Judgment that Winkelmann J delivered on 21 December 2010 she said that the Commission claims that the two corporate Trustees “hold assets in which Mr Hotchin has some sort of beneficial interest”.  But having “some sort of beneficial interest” would not constitute “control”.

What is important for practitioners to note is that s 60H of the Securities Act enables the Court to look behind a Trust’s structure and determine whether a person may somehow be able to “control” the Trust, even though he or she is not a Trustee.  Where such “control” exists it seems that the Court may have power to take the asset and make it available to non-beneficiaries.

“Suggesting” that Trustees should pay a loan account

The second way that the Courts have recently used to extract monies from a Trust occurred in the sentencing of a man who was convicted of two charges under the Resource Management Act.  The case is Taranaki Regional Council v Mouland, District Court, New Plymouth CRI-2008-021-001238, 16.11.10 - a decision of His Honour Judge Dwyer.  The District Court has kindly supplied me with a copy of his sentencing notes and I will put them on my website in association with this article.

Mr Mouland failed to pay fines and costs of more than $50,000.  He couldn’t pay them because he and his wife had transferred their substantial assets to a family Trust.  The Trust owed him approximately $163,000.  It appeared that the Trustees could afford to repay the loan since they owned two properties that had an equity of about $460,000.

Mr Mouland was the Settlor of the Trust and had the power to appoint Trustees.  The original Trustees were Mr Mouland, his wife and, what is commonly referred to as an “independent” Trustee.  Following a separation between Mr and Mrs Mouland, she agreed to resign as a Trustee and it appears that at the time of sentencing, there were two Trustees, Mr Mouland and the independent Trustee.

The Court was told that the independent Trustee had “genuine concerns as to the ability of the Trust to service any borrowing necessary to pay out monies owing to Mr Mouland”.  [Para 17].

This is how Judge Dwyer dealt with the situation.

“… there is no dispute that the Trust owes you a substantial sum of money which would enable you to meet payment of your fine.  When you appeared before me in September you advised that no demand had been made of the Trust for repayment of the money owed to you. …. Accordingly, the trustees have not had to formally consider how the Trust’s affairs might be ordered to enable that to happen.  As responsible trustees exercising their obligations, they would be required to do that if they received demand for repayment …. In view of the very substantial equity the Trust has, and its ownership of two properties, it clearly has that financial capacity.  The reality is that the Trust is being used to shelter not only the assets contained within the Trust itself (which is a legitimate function of a Trust) but also your own personal asset, namely the debt which the Trust owes to you.”  [Para 20].

He ordered Mr Mouland to make a formal demand of the Trustees for repayment of the monies that they owed him and extended the time for payment of the fines by nine months.

I suspect that few Trust lawyers would have any difficulty with this decision.

The interesting question that this case poses is what will happen when Gift Duty is abolished?  A person in Mr Mouland’s case will typically gift the full value of the properties to a Trust, leaving no outstanding debt so that a person in Judge Dwyer’s position will, I suspect, have to search for a more adventurous solution.

Correction

My last article in NZ Lawyer was titled “Overseas Court says Court of Appeal Decision is ‘illogical’ and ‘unfair’”.  Due to an error for which NZ Lawyer was entirely innocent, an incorrect version of the article was published.  The correct version is now on both my website and the NZ Lawyer website.