Insolvency and trust law – a legislative solution is needed regardless of the High Court’s views

While the High Court no doubt gave special leave to appeal in Amerind under the statutory criterion of resolving legal uncertainty, two recent papers suggest that legislative reform will be required regardless of what the High Court decides.

The High Court is not being called upon to decide an unsettled legal point, or the interpretation of a difficult section.  The issue involves the intersection between trust law and insolvency, which, except in basic terms, is not the subject of statute law or of accepted general law principles.

And even if the High Court were to resolve the issues, these may not be in accord with good policy.

As to the two papers, the New Zealand authors of one say,[1] problems with the insolvency of a trading trust and the proper distribution of trust assets are

‘difficult because they involve the intersection of company, insolvency, and trusts regimes.   The decisions in Re Amerind and Jones v Matrix provide some certainty in some areas but ultimately leave a confused landscape’.

They concede that “New Zealand has fared better but not by much”.

As to the detail, the author of the other paper, Justice Reg Barrett, says,[2]

“The basic problem is one of conflation.  The Corporations Act compels an unhappy blending of the statutory process of winding up of the company and the non-statutory administration of the financially deficient trust estate.  But the tools a liquidator has are inadequate and unsuitable for the second of these tasks.  The two distinct administrations need to be separated, but in such a way that a single liquidator can conduct them in parallel”.

He then offers this outline of a resolution of the difficulties, as paraphrased.

If a company subject to winding up is a trustee, the liquidator should have a clear and distinct power to get in and realise the trust property – not just the trustee’s preferred beneficial interest – as well as any non-trust property.  The question whether the trustee’s preferred beneficial interest is itself “property of the company” should be made irrelevant.

The proceeds of realisation of the trust property should be applied by the liquidator in paying trust debts and not be available to meet the claims of non-trust creditors.

By contrast, the proceeds of realisation of non-trust assets should be available to meet the claims of both trust and non-trust creditors rateably, but with trust creditors participating at that stage only to the extent to which the trust property has left their claims unsatisfied.

There will thus be two distinct funds administered together by the liquidator.

The proceeds of any liquidator recovery actions will be allocated to one fund or the other according to whether the money committed to the particular voidable transaction was or was not trust property.

Each fund will bear any expenses solely referable to it, while shared expenses (such as the liquidator’s remuneration) will be borne by both funds in proportion to some relevant comparative measure.

In the application of each fund for the benefit of those creditors entitled to share in it, the statutory order of priorities will apply.

If either fund results in a surplus, that surplus will go to the relevant residual constituency, being the trust beneficiaries in the one case and the shareholders in the other.

Indeed, in the former eventuality, the solution would logically be for the surplus in the liquidator’s hands to continue to be subject to the relevant trusts but under appropriate new trusteeship.

Justice Barrett says this would “no doubt throw up a myriad of questions”, and he accepts there may be better options.

The High Court is yet to say when the Amerind appeal will be heard. But while Justice Barrett says that there is a need to await the High Court decision, the also says that “the clear need is to start somewhere on a legislative solution”.

The policy and legal issues should be discussed and decided upon sooner than later, with a view to putting a law reform case to government. Any decision of the High Court can be taken into account as may be necessary.

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[1] Trust me: does trust property go where it should after insolvency? A New Zealand Review, Butler, Shahbaz and McVeagh, BFSLA Conference 2018

[2] Trust me: Does trust property go where it should after insolvency? Barrett AJA, BFSLA Conference 2018

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