The practical problems of having a Corporate Trustee for several Trusts
A service that some solicitors provide to clients is the use of a Corporate Trustee. To reduce the costs involved with having a separate Company for each of the Trusts, one Company is sometimes used as Trustee for all of the Trusts.
The case of Newmarket Trustees Ltd v CIR CIV-2009-404-8108, 14.4.10, illustrates the problems that can result from this practice.
An Auckland firm created a corporate Trustee to act as a Trustee for its clients. At the time of the hearing the Company was a Trustee for 118 different Trusts. It was a registered proprietor of 145 different properties and owned shares in many listed and unlisted Companies.
One of the firm’s clients decided to conceal the fact that a Trust had debts it couldn’t pay, leaving the Corporate Trustee with a liability to pay tax of $293,251.
The IRD proceeded to serve a statutory demand on the Corporate Trustee seeking payment of the sum. The firm of solicitors applied to set aside the demand on the grounds that the Company was a bare Corporate Trustee; it had no assets in which it held a beneficial interest; and the cost of transferring all of the different properties and assets of the 118 different Trusts to new Trustees would be too burdensome.
Associate Judge Faire refused the application. As a result, the firm has been left with the task of organising for the appointment of new Trustees and making arrangements to transfer all of the assets of the 118 Trusts to new Trustees.
Faire AJ was not sympathetic to the law firm. He thought that the Corporate Trustee should have “take[n] a more active interest in the affairs” of the Trust.
“No information is provided as to what attempts were made by the Company as Trustee to have the [particular] Trust pay the tax from its assets. No information is provided as to the personal circumstances of the other Trustee. No information is before the Court which would enable any assessment to be made as to what prospects a liquidator if appointed, would have in pursuing the indemnity rights provided by the Trust Deed … against the … Trust’s assets.” [11].
“… the fact that … the Applicant Company took no active part in the day-to-day management of the Trust cannot, in my view, be advanced as an excuse justifying the exercise of a discretion under the Companies Act …”.
The case can be viewed as a criticism by the Courts of a casual approach to Trusteeship. In saying this I should add that the solicitors may not have been casual in how they operated the Corporate Trustee but this is not how the Court saw things.
I think there is an increasing trend for the Courts to show a lack of sympathy to Trustees who are not perceived to be diligent and efficient in the way they manage the Trusts which they control.
The trend can be seen from another recent case – the decision of Abbott AJ in Wiltshire Investments Ltd v Halstead [2010] NZHC 691, 10 May 2010. There, Trustees have been ordered to attend Court and be examined on the income and expenditure of a Trust and its means of satisfying a Judgment. Among other things, the investigation will consider whether the Trustees treated fee income properly in the accounts of the Trust; whether some items of “expenditure” should have been classified as distributions; and whether the trustees received fair market value for an asset that they sold.
Going back to the Newmarket Trustees case, solicitors who wish to provide a corporate Trustee service to their clients will in many cases be better advised to establish a different corporate Trustee for each Trust that they are to administer, despite the administrative inconvenience of having to create and maintain so many Companies.