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Michael Murray’s on-going commentary on issues in corporate and personal insolvency law and related policy and law reform, in Australia and internationally. Given the scope of insolvency, this extends to business, consumer and professional conduct, and ethics, governance and regulation, criminal, tax, environmental and administrative law, and the courts and government.

 

Challenges to trusts by bankruptcy trustees – New Zealand law reform

A recent change to the New Zealand Insolvency Act 2006 (Schedule 1, new para (x)) has given power to the Official Assignee to bring a proceeding challenging the existence or terms of a trust, “even if the bankrupt could not have brought the proceeding if the bankrupt was not bankrupt and even if the bankrupt is a settlor, trustee, or beneficiary of the trust”: Regulatory Systems (Commercial Matters) Amendment Act 2017.

This change in the law effectively reverses the decision of the NZ Court of Appeal in Official Assignee v Wilson [2008] NZCA 122 where it was held that the Official Assignee only stood in the shoes of the bankrupt and if the bankrupt did not have the right to challenge the trust then it followed that the Official Assignee also did not have that right. 

A trust may be challenged by a trustee because it purports to determine property of the bankrupt as trust property and therefore not available as divisible property. In relation to challenges of trusts as shams, the allegation in Official Assignee v Wilson, the Court of Appeal said that a high threshold of proof was involved – “a court will only look behind a transaction’s ostensible validity if there is a good reason to do so, and ‘good reason’ is a high threshold, since a premium is placed on commercial certainty”: Official Assignee v Wilson [2007].  It must be shown that the parties did not intend to give legal effect to the legal arrangements set out in the apparent sham agreement; their subjective intentions must be shown.  An intention to mislead must be a common intention of all the parties to the transaction: Coshott v Prentice [2014] FCAFC 88.

The issue of sham trusts was the subject of comment by the NZ Law Commission’s Review of the Law of Trusts and there was some hesitation in setting criteria by which a sham trust would be determined, rather than the matter being left to case law. 

The one issue that has been attended to is to allow the Official Assignee to step out of the bankrupt’s shoes and challenge a trust in its own right. But the high threshold in proving the elements of a sham trust remain.

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