Commissioner of Inland Revenue v Newmarket Trustees Ltd HC Auckland Civ-2010-404-3913
[2011] NZHC 107
•22 February 2011
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2010-404-003913
AND IN THE MATTER OF THE Companies Act 1993
BETWEEN COMMISSIONER OF INLAND REVENUE
Plaintiff
AND NEWMARKET TRUSTEES LTD Defendant
Hearing: 10 December 2010
Counsel: K L Pihama for Plaintiff
M J Fisher for Defendant
Judgment: 22 February 2011 at 4:30 PM
JUDGMENT OF ASSOCIATE JUDGE BELL
This judgment was delivered by me on 22 February 2011 at 4:30 pm pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date: ………………….
Solicitors:
Inland Revenue Dept., PO Box 76 198, Manukau
D B Hickson, PO Box 56613, Dominion Road, Mt Eden, Auckland
Commissioner of Inland Revenue v Newmarket Trustees Ltd HC AK CIV-2010-404-003913 22 February 2011
[1] This is a creditor’s liquidation application. The Commissioner of Inland Revenue says that Newmarket Trustees Ltd owes $316,232.56 in taxes - $129,844.45 for goods and services tax, and $186,388.11 for income tax (both including interest and penalties). The defendant contests the amounts of tax but does not deny that it owes some income and goods and services taxes. It opposes the application because it says that no useful purpose would be served by it being put into liquidation and such an order would cause considerable hardship. The decision turns on the discretion whether to make a liquidation order.
[2] Newmarket Trustees Ltd is a trustee company, through which a Newmarket law firm, Castle Brown, offers trustee services to its clients. Aside from the trust in this case, Newmarket Trustees Ltd is a trustee of 118 trusts. It does not have any beneficial interest in any of the assets owned by those trusts. It does not own any other property. It is effectively assetless.
[3] Peng Hock Goh, also known as Tony Goh, was a client of Castle Brown. Under a deed dated 6 October 2004, Mr Goh is the settlor of a trust called the Southern Lights Trust. The trustees are Mr Goh and Newmarket Trustees Ltd.
[4] The deed provides for a typical discretionary trust. Aaron Kean Fei Goh and Daphne Pei Hoong Goh, their relatives and trusts associated with them are discretionary beneficiaries. The assets of the trust vest in the discretionary beneficiaries on the vesting date (80 years from the date of the deed). There is power to make interim distributions of income and capital. The trustees are given wide managerial powers, including the power to carry on business. As settlor, Mr Goh has the power to appoint and remove trustees.
[5] There is a standard provision for indemnifying the trustees. In addition, Mr Goh personally indemnifies his co-trustees against all costs, claims, losses, actions and proceedings of whatsoever nature arising out of the administ ration of the trusts. Under clause 24, which relates to the carrying on of any business, there is a further right of indemnity from the trust fund.
[6] Mr Brown, a director of Newmarket Trustees Ltd and one of the partners of
Castle Brown, says:
As with all of the trusts of which Newmarket Trustees is a corporate trustee, Newmarket Trustees endeavours to fulfil its role as corporate trustee cost effectively by leaving it to the co-trustee to be responsible for the day to day affairs of the trust but to keep Mr Castle or me informed of anything material or of consequence in the administration of its affairs.1
He also refers to Newmarket Trustees Ltd as a ―bare trustee‖.
[7] In October 2006, an application for an IRD number (form IR596) was lodged with the Inland Revenue. It is not clear who signed the form. Newmarket Trustees Ltd did not sign the form. The signature on the form does not match the signature of Mr Goh on the trust deed. Probably Mr Goh arranged for the form to be filed with the Inland Revenue.
[8] The form included the following information:
(a) The organisation for whom the application was made was the
Southern Lights Trust;
(b) The organisation was identified as a trust;
(c) The main business activity was said to be non-trading; (d) An annual turnover of over $40,000 was expected;
(e) The street address of the trust was given as the same street address as for Mr Goh; and
(f) The name of an accounting practice was given as the contact person for the trust.
[9] It is common ground that the Inland Revenue was provided with a copy of the trust deed for the Southern Lights Trust. There is no explanation reconciling (c)
1 Paragraph 5, affidavit of 13 July 2010.
and (d) above, that is, how the trust could have a turnover more than $40,000 without trading. The form indicated that if turnover was over $40,000, GST registration was also required. However, the trust did not register for GST. Newmarket Trustees Ltd apparently knew nothing about these tax matters.
[10] On 26 March 2009, the Inland Revenue wrote to Mr Goh. Among other things, the letter said that information available to the Commissioner showed that the Southern Lights Trust had received assessable income which had not been returned for either goods and services tax or income tax. The Commissioner assessed the Southern Lights Trust as having received taxable income in the years ending 31
March 2005 to 31 March 2008, totalling $346,000.
[11] The letter noted that the trust had not been registered for GST and gave notice that the Commissioner was force registering the trust for GST under s 51(4)(b) of the Goods and Services Tax Act 1985 with effect from 1 April 2004.2 The letter also advised that the Commissioner made default assessments of income tax and GST for those income years, totalling $152,624.45. It advised that default assessments would be sent within the next 14 days. The letter advised that the trustees could challenge
the forced registration and the GST and income tax default assessments under the dispute resolution provisions of the Tax Administration Act.
[12] Mr Goh did not reply to the letter and did not take any steps to challenge the assessments. Nor did he tell Newmarket Trustees Ltd about the letter or the assessments.
[13] A schedule put in evidence by the Commissioner headed ―Movement of properties associated to Mr Peng Hock Goh‖ shows that the Commissioner relied on transactions involving 10 properties which had been bought and sold. Mr Goh was a party to the transactions for all the properties. However, there are three properties where Newmarket Trustees Ltd was not involved. Counsel for the Commissioner
advised that the Department had obtained the information as to the transactions from
2 The date is premature. Under s 51(4)(b), the Commissioner can backdate registration ―with effect from the date on which that person first became liable to be registered under the Act‖. The earliest possible date when the Southern Lights Trust could become liable to be registered is the date of the trust deed – 6 October 2004.
an investigation of bank accounts in the name of Southern Lights Trust. Apparently funds not connected with transactions by the trustees had been paid into the account.
[14] Newmarket Trustees Ltd first learnt that the Commissioner considered that the trustees of Southern Lights Trust owed goods and services tax and income tax when the Department wrote to its directors on 9 October 2009. The Department’s letter made a simple demand for unpaid tax, which now amounted to $288,787.88 including further interest and penalties. It advised that a statutory demand would be issued unless payment was made within seven days.
[15] Newmarket Trustees Ltd has seen the default assessments and the Commissioner’s movement of properties schedule only during this proceeding. Newmarket Trustees Ltd has shown that there are grounds for questioning the Commissioner’s assessments of income tax and GST. The Commissioner assessed the trustees of the Southern Lights Trust for goods and services tax on the basis that in buying and selling properties the trustees were carrying on a taxable activity. Similarly, he assessed the trustees for income tax on the basis that properties had been bought and sold with the purpose or intention of resale, presumably under s CB5 of the Income Tax 2004.
[16] The grounds for questioning the Commissioner’s assessments:
(a) Newmarket Trustees Ltd had no part in transactions for these properties:
(i) 106 Shifnal Drive; (ii) 131 Shifnal Drive (iii) 8 Priscilla Crescent.
(b) A property at 2/34 Kempthorne Crescent was owned by Mr Goh and Newmarket Trustees Ltd as trustees of the Koru Trust, established under a deed of 16 October 2006. That property was sold by a bank
in the exercise of its power of sale under a mortgage at a price lower than had been paid for it.
(c) The Commissioner assessed income as the difference between the purchase prices and sale prices of the properties. The evidence of Newmarket Trustees Ltd shows other deductible costs and inputs (real estate agents’ commission, legal fees, rates).
(d) All purchases were financed in part by loans from banks and finance companies. The Commissioner made no allowance for interest on those loans.
(e) It is uncertain whether Newmarket Trustees Ltd concurred in the purchase of 566 Weymouth Road. Mr Goh arranged the conveyancing for that property through another law firm. All trustees need to concur in a decision for the sale or purchase of a property (the trust deed does not have any provision relaxing this requirement). While Newmarket Trustees Ltd’s concurrence in other transactions to which it is a party is clear, it is not so readily inferred in the case of
566 Weymouth Road.
[17] While Newmarket Trustees Ltd might invoke all these matters, they might not all be available to Mr Goh, as he was a party to transactions for all the properties in issue. Leaving aside 566 Weymouth Road and financing costs, on which there are not adequate records in evidence, Newmarket Trustees Ltd suggests that the amounts of GST and income taxes due (before interest and penalties) come to $42,765.17.
[18] Neither party provided evidence how the trustees serviced the loans taken out to buy the properties. I suppose that Mr Goh saw to that.
[19] Settlement statements put in evidence by Newmarket Trustees Ltd show that any surpluses from sales were paid into the bank account of the Southern Lights Trust. There is no evidence what became of those surplus funds. The surplus proceeds of sale of 127A Shifnal Drive, 146 Shifnal Drive, 148 Shifnal Drive, 12
Serano Avenue and 2/11 Harding Avenue come to about $145,000. A settlement statement for the sale of 566 Weymouth Road is not in evidence.
Present position of Southern Lights Trust
[20] According to Newmarket Trustees Ltd, the last transaction the Southern Lights Trust entered into was the sale of 2/11 Harding Avenue. The proceeds of sale were distributed during May 2007. There are no assets held under the trust. The Commissioner appears to be the only creditor of the trustees. No one else has entered an appearance claiming to be a creditor of Newmarket Trustees Ltd. Mr Goh is also liable for taxes incurred as a trustee. In addition to his liability as trustee, he may also have personal liability for tax on transactions to which Newmarket Trustees Ltd was not a party. Mr Goh was adjudicated bankrupt on 6 May 2010. Newmarket Trustees Ltd is assetless.
Procedural matters
[21] On 16 November 2009, the Commissioner served a statutory demand under s 289 of the Companies Act on Newmarket Trustees Ltd, demanding payment of
$293,251.23 for GST and income tax. Newmarket Trustees Ltd applied under s 290 of the Companies Act to set aside the statutory demand. Briefly, its grounds were that as it was a bare trustee with no assets and has never traded, no useful purpose would be achieved by liquidating it, but liquidation would cause considerable and unnecessary inconvenience and disruption.
[22] On 14 April 2010, Associate Judge Faire dismissed the application. He noted that the application was made under s 290(4)(c). Newmarket Trustees Ltd did not assert that there was a substantial dispute about the debt under s 290(4)(a) or that the company had a counterclaim, set-off or cross-demand under s 290(4)(b). In dismissing the application, Associate Judge Faire followed the decision of the Court of Appeal in Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003]
1 NZLR 395. He made an order requiring Newmarket Trustees Ltd to pay the debt
under the statutory demand within 20 working days of the date of their decision and awarded costs.
[23] Newmarket Trustees Ltd did not pay and the present application followed.
[24] After the present proceeding started, Newmarket Trustees Ltd applied under r 31.9 for a stay of proceedings and a restraint of advertising. The ground given for the application was that the proceeding was an abuse of process and unconscionable. Before that application could be heard, the Commissioner advertised the proceeding. The matter came before Williams J on 3 August 2010. The Commissioner accepted that the advertising was mistaken, apologised, and offered to pay costs. Williams J stayed the proceeding with the stay to be rescinded on the Commissioner meeting Newmarket Trustees Ltd’s costs in the matter to date. Those costs have now been paid. The matter was then set down for hearing before me as an opposed application for stay. The advertising by the Commissioner is no longer a live issue.
[25] After I reviewed the papers before the hearing, I proposed to the parties that the matter proceed as a hearing of the liquidation application on the merits, rather than as a stay application. The parties agreed and the hearing went ahead as an opposed application on the merits. The stay application has not been argued.
Effect of s 109 Tax Administration Act
[26] The Commissioner submits that Newmarket Trustees Ltd cannot not now contest the amounts of taxes demanded. The Commissioner’s argument is that Newmarket Trustees Ltd was assessed for tax when the Commissioner wrote to Mr Goh in March 2009. That notice to Mr Goh was also notice to Newmarket Trustees Ltd. The response period for the Commissioner’s notices of disputable decision was 2 months – s 89AB(4) and 89D of the Tax Administration Act. No steps were taken in time.
[27] The Commissioner relies on s 57(4) of the Goods & Services Tax Act 1985 as authority that an assessment of goods and services tax sent to one trustee is notice to all trustees. Under s 2, an unincorporated body is defined as meaning an
unincorporated body of persons, including a partnership, a joint venture, and the trustees of a trust. Under s 57(4):
For the purposes of this Act, any notice served in accordance with this Act which is addressed to an unincorporated body by the name in which it is registered pursuant to this Act, shall be deemed to be served on that body and all members of that body.
Under the Commissioner’s argument, this provision may be invoked after a forced
registration under s 51(4)(b) of the GST Act.
[28] Section 14 of the Tax Administration Act regulates the giving of notices by the Commissioner. Under s 14(3) The Commissioner must give a notice either to the applicable person or to a representative authorised to act on behalf of the person. Newmarket Trustees Ltd delegated managerial and administrative matters to Mr Goh. Having left him to attend to matters of tax compliance, it can hardly complain if the Commissioner gave notice to the trustees in accordance with arrangements made on Mr Goh’s behalf.
[29] Assuming that Newmarket Trustees Ltd is bound by the default assessments sent to Mr Goh and that the assessments were not challenged in time, the Commissioner invokes s 109 of the Tax Administration Act to say that it is now too late for Newmarket Trustees Ltd to query the amounts of unpaid taxes in this proceeding:
109 Disputable decisions deemed correct except in proceedings
Except in objection proceedings under Part 8 or a challenge under Part
8A,—
(a) No disputable decision may be disputed in a court or in any proceedings on any ground whatsoever; and
(b) Every disputable decision and, where relevant, all of its particulars are deemed to be, and are to be taken as being, correct in all respects.
[30] On its face, s 109 is subject only to the exceptions set out within it. However, there are other limits to its operation. One of those is the Commissioner ’s power to amend assessments under s 113 of the Tax Administration Act:
113 Commissioner may at any time amend assessments
(1) Subject to sections 89N and 113D, the Commissioner may from time to time, and at any time, amend an assessment as the Commissioner thinks necessary in order to ensure its correctness, notwithstanding that tax already assessed may have been paid.
(2) If any such amendment has the effect of imposing any fresh liability or increasing any existing liability, notice of it shall be given by the Commissioner to the taxpayer affected.
[31] It is an everyday occurrence for the Commissioner to issue an amended assessment after a taxpayer has filed returns following a default assessment. Counsel for the Commissioner accepts that the Commissioner has the power to amend and that s 113 could potentially be used in this case, on the taxpayer filing returns. I am sure that the Commissioner would take into account arguments as to the extent of Newmarket Trustees Ltd’s tax liabilities, particularly as it did not in fact receive the Commissioner’s default assessments and did not have the opportunity to object in time. Notwithstanding the apparent conclusiveness under s 109, I treat the Commissioner’s default assessments as potentially open to amendment and correction under s 113.
Not a bare trustee
[32] Newmarket Trustees Ltd claims to be a bare trustee. Randerson J discussed what is meant by ―bare trustee‖ in Burns v Steel [2006] 1 NZLR 559 at [41]-[49]. At [62], he said:
Although consideration of whether the trustees are ―bare trustees‖ may be helpful in some contexts, but there is a risk of becoming overly concerned with nomenclature to the point where the nature of the duties and discretions of the trustees may be obscured. Where the expression
―bare trustee‖ is used in statute, the Courts are of course obliged to give some meaning to it. But in the absence of a statutory reference of this kind, the real task is to ascertain the nature and extent of the trustees’ obligations and discretions by reference to the terms of the instrument establishing a trust, assessed in the context of all the relevant surrounding circumstances and the obligations imposed on trustees by the general law or by statute.
[33] As that case shows, discussions whether a trustee is a bare trustee usually lead to a consideration whether the trustees acts passively or has active duties. Under the trust deed in this case, Newmarket Trustees Ltd was more than a mere
nominee or cypher. As trustee of the Southern Lights Trust, Newmarket Trustees Ltd has more to do than hold the legal title to assets until called upon to transfer them to beneficiaries. The trust deed confers wide discretionary powers on the trustees, both as to management of the trust assets and as to disposition. Newmarket Trustees Ltd’s concurrence is required for all transactions and businesses the trustees might engage in. The trustees might delegate administrative and managerial tasks, as under s 29 of the Trustee Act, but both Mr Goh and Newmarket Trustees Ltd, as trustees, retained overall responsibility for complying with the duties and exercising the powers and discretions conferred on the trustees under the trust deed. Newmarket Trustees Ltd is more than a bare trustee.
[34] Newmarket Trustees Ltd left the day-to-day running of the trust to Mr Goh. Where trustees are simply holding assets, that may be appropriate. In hindsight, it can be seen that the trustees did not deal adequately with tax compliance. Newmarket Trustees Ltd does not appear to have appreciated that the buying and selling of properties could give rise to the tax liabilities which it has incurred.
Prima facie case established
[35] The Commissioner has proved that he is a creditor of Newmarket Trustees Ltd. Although the amounts of the taxes due are contested, it is accepted that Newmarket Trustees Ltd incurred both income tax and goods and services tax on those sales in which it concurred as trustee, and that the amounts due exceed the prescribed amount of $1,000. Because Newmarket Trustees Ltd did not comply with the statutory demand within the 20 working days fixed by Associate Judge Faire in his judgment of 14 April 2010, Newmarket Trustees Ltd is presumed to be unable to pay its debts under s 291(2) of the Companies Act 1993. Newmarket Trustees Ltd does not claim that it is solvent. As the Commissioner has standing as a creditor and has proved the insolvency of Newmarket Trustees Ltd, whether an order should be made that Newmarket Trustees Ltd be put into liquidation turns on the exercise of the Court’s discretion under s 241(4) to appoint a liquidator.
Exercise of the discretion
[36] In Commissioner of Inland Revenue v Chester Trustee Services Ltd, Tipping J
referred to the discretion at [3]:
… the general policy of the (Companies) Act that insolvent companies should be put into liquidation, if a creditor seeks such an order, should not be departed from lightly. To justify such departure there must be some other factor, be it policy, principle or simply the justice of the particular case, which outweighs the prima facie entitlement of the creditor to an order putting the insolvent company into liquidation. If the focus is on the justice of a particular case, the discretion must always be exercised on a principled basis and not on some ad hoc conception of what individual justice might require. All cases involving s 290(4)(c) must in the end come down to a judgment by the Court as to whether the creditor’s prima facie entitlement is outweighed by some factor or factors making it plainly unjust for liquidation to ensue. The ground advanced by the insolvent company must be sufficiently compelling to overcome the general policy of the Act with regard to insolvent companies.
[37] Chester was a decision under s 290(4)(c) – an application to set aside a statutory demand on ―other grounds‖. If a statutory demand is not set aside and is not complied with, a presumption of insolvency arises – s 287(a). So on an application to set aside under s 290(4), the Court is required to consider in its discretion whether it is unjust to allow the presumption to arise. S 290(4)(a) and (b) give specific grounds why it may be unjust – substantial dispute whether debt is due and counterclaim, set-off or cross-demand respectively. S 290(4)(c) provides a wider, more general ground for not allowing the presumption to arise. In Re a debtor, ex parte the Royal Bank of Scotland [1989] 1 WLR 271, Nicholls LJ at 276 said about the corresponding provision under the English Insolvency Rules 1986:
... the circumstances which normally will be required before a court can be satisfied that the demand ―ought‖ to be set aside, are circumstances which would make it unjust for the statutory demand to give rise to those consequences of the particular case. The court’s intervention is called for to prevent that injustice.
[38] As the Court is considering only whether it would be unjust to allow the presumption of insolvency to arise, the discretion under s 290(4)(c) is a narrower discretion than that on the hearing of a liquidation application on the merits – the ultimate discretion. As one example only, acknowledged insolvency will doom an application under s 290(4), but will be simply one of the matters, admittedly a strong
one, to take into account on the hearing of the liquidation application. The passage from the judgment of Tipping J is directed at the exercise of the ultimate discretion, albeit in the context of a s 290(4) application. It is important guidance on the exercise of the ultimate discretion, so long as it is kept clear that the Court of Appeal was not exercising the ultimate discretion in that case.
[39] The decision whether Newmarket Trustees Ltd should be put into liquidation needs to be seen in the context of trustees who no longer hold any or sufficient assets on trust to satisfy debts they have incurred as trustees. In cases of trustee insolvency, bankruptcy or liquidation can serve a useful purpose. Whereas external creditors have remedies by exercising rights of subrogation to a trustee’s right of indemnity from trust assets or from beneficiaries, bankruptcy or liquidation may provide more efficient remedies. In addition to realising the assets of the company in liquidation, a liquidator can exercise a corporate trustee’s rights to seek indemnity out of trust assets or from beneficiaries. The Supreme Court of South Australia explained this in Re Suco Gold (1983) 7 ACLR 873 at 877:
It is clear from the Octavo case that the trustee company’s right of indemnity is a right which passes to the liquidator. It is important in the resolution of the problem under consideration to maintain a clear distinction between the beneficial interest of the trustee and the trust fund, which is no more and no less than the right of indemnity and supporting lien, and the trust fund itself which is and remains trust property subject only to the trustee’s beneficial interest. The beneficial interest of the trustee company, that is to say the right of indemnity and supporting lien, passes to the liquidator and is properly divisible among the creditors; the residual beneficial interest remains property held in trust for another within the meaning of s 116(2) of the Bankruptcy Act and is excluded, by virtue of that section, from the property which vests in the liquidator and is divisible among the creditors.
[40] The enquiry is whether liquidation is appropriate in the circumstances of this case. The Commissioner accepts that Newmarket Trustees Ltd does not hold any assets as trustee of the Southern Lights Trust. He acknowledges that there are no assets beneficially owned by Newmarket Trustees Ltd that could be made available to creditors in a liquidation. The Commissioner also acknowledges that there has been no conduct on the part of the directors of Newmarket Trustees Ltd which could lay a foundation for claims against them for breach of their duties as directors of the company. This concession lays to rest any concern at possible failure of the directors to be alive to the company’s tax liabilities.
[41] It has been held that even when a company apparently holds no assets, it may be appropriate to make a winding-up order to allow the affairs of the company to be investigated. In Re Robert Raymond Associates Ltd [1975] NZ Recent Law 294, Chilwell J said:
Justice requires that creditors who cannot get paid by an obviously insolvent company should be given the opportunity of having the company’s affairs investigated by a liquidator.
[42] See also Re Marlborough Ceiling Ltd (1986) 3 NZCLC 99,501 and Westgold Finance Ltd v Pan Pacific Cameras Ltd 11 May 1989, Master Hansen, HC Christchurch M644/88.
[43] Newmarket Trustees Ltd argues that there is nothing to investigate. The Commissioner does not press for an order on the basis that there is some aspect requiring investigation or that liquidation is required to enable investigation generally.
[44] There is one matter that might raise a basis for requiring investigation – where the surplus sale proceeds went. It has not been raised in argument. It may be that the Commissioner already has the information but has not put it before the Court. I noted above at [19] that there is no evidence where the surplus moneys available from the sales of the properties were applied after they were paid into the trust bank account. Apparently the Department’s officers have investigated the bank accounts and may accordingly already know what became of the funds.
[45] It may be that the funds were paid out to Mr Goh. To the extent that those payments were repayments of funds he had advanced to the trust, for example, loans he had serviced for the trust, there can be no complaint. Mr Goh is now bankrupt. His assets are to be realised and distributed to creditors, including the Commissioner. If any proceeds of sale of trust properties paid to Mr Goh are more than the amounts he advanced to the trust, then any funds still in his hands passed to the Official Assignee as trustee in bankruptcy and will be available to creditors. If the surplus funds from the sales were paid to external creditors, it is unlikely that there could be any basis for disturbing those payments. It is only if payments were made to beneficiaries that any question of further recovery is likely to arise. They might be
recovered under the trustee’s right of indemnity - Hardoon v Belilios [1901] AC 118 (PC). That might provide reason to require further investigation.
[46] However, Mr Goh’s adjudication in bankruptcy provides the means by which any disposal of the surpluses sale can be investigated. Mr Goh operated the trust’s bank account and made payments from the bank account. The Official Assignee as trustee in his bankruptcy is more likely to have access to those records so as to trace payments. Under s 101 of the Bankruptcy Act 2006 Mr Goh’s right of indemnity as a trustee and any associated equitable lien have passed to the Official Assignee on his adjudication in bankruptcy. Mr Goh’s right of indemnity can be invoked to recover any payments from beneficiaries. There is no reason to think that Newmarket Trustees Ltd’s right of indemnity as trustee is more extensive than Mr Goh’s. It is not necessary to put Newmarket Trustees Ltd into liquidation to enable an investigation and recovery of any payments made from the proceeds of sales.
[47] Given that the Commissioner does not press for investigation as a ground for a liquidation order, I cannot see that putting Newmarket Trustees Ltd into liquidation will usefully open up any lines of inquiry or give trust creditors any remedies which are not already available as a result of Mr Goh’s bankruptcy.
[48] The Commissioner relies on the acknowledged insolvency of Newmarket Trustees Ltd and its inability to pay the taxes, whatever their amount, as adequate grounds for a liquidation order. It is appropriate to consider the insolvency in the light of current practice for corporate trustees operated by professionals. Many legal and accounting practices offer trustee services to their clients. Clients find it useful to have a professional, such as a lawyer or accountant, assisting by providing trustee services for their trusts. Lawyers and other professionals are not prepared to offer their services as trustees if they run the risk of personally incurring liabilities. One way by which they avoid liabilities is to ensure that whenever the trustees enter into a contract, there is a provision that the professional trustees will not have any personal liability and that any liability will have to be met by the trust assets or by other trustees. This has become so common that many standard form contracts now contain terms to that effect. As an example, condition 14.1(2) of the agreement for
sale and purchase by the Real Estate Institute of New Zealand, the Auckland District
Law Society, 8th ed, 2006(2) says:
If any person enters into this agreement as trustee of a trust then: …
If that person has no right or interest in any of the assets of the trust except in that person’s capacity as a trustee of the trust, that person’s liability under this agreement shall not be personal and unlimited but shall be limited to an amount equal to the value of the assets of the trust that are available to meet that person’s liability unless the right of that person to be indemnified from the assets of the trust has been lost and as a result the other party to this agreement is unable to recover from that person that amount.
[49] Loan agreements, mortgages and similar documents of banks and other financial institutions have comparable provisions. Any summary judgment list will give a number of examples. Those who contract with trustees on these terms know that they have no recourse against the trustees personally.
[50] There is no general expectation that professionals who are independent trustees should expose themselves to personal liability for trust debts. No-one suggests that independent trustees who contract so as to exclude personal liability are for that reason unfit to be trustees.
[51] It is not possible for a trustee to contract out of many non-contractual liabilities. Taxes and rates are but two examples. So trustees use a corporate structure to shield themselves from personal liability. This is part of the accepted allocation of risk between the professional and other trustees. While professionals are prepared to offer their services as trustees, they do so on the basis that they will not be personally exposed to liabilities. Instead, creditors are limited to recourse against other trustees, and through a trustee’s right of indemnity, against any available trust assets and, in some cases, against beneficiaries. Again, there is no expectation that professionals who are prepared to act as trustees should be exposed to the risks of personal liability for debts of trusts in which they or their families have no personal or beneficial interest. Structures for professionals to avoid personal liability are the rule, not the exception. When it incorporated Newmarket Trustees
Ltd as an assetless trustee, Castle Brown was following a recognised and accepted practice3.
[52] Does Newmarket Trustees Ltd’s admitted insolvency make a difference? One view is that assetless corporate trustees are all well and good, but once they fall into insolvency, there is no longer good reason for their continued existence and they should be wound up. This was the position taken by members of the Court of Appeal in Chester but was developed most by Baragwanath J, as in paragraphs [41]- [44]. He placed emphasis on the long title to the Companies Act 1993:
(e) To provide straightforward and fair procedures for realising and distributing the assets of insolvent companies
[53] He described a company’s ability to carry on business as a privilege, and held that it was a condition of that power that the company be able to pay its debts. Once a company is unable to pay its debts, the emphasis is on the position of creditors. He referred to the settled rule of a creditor being able to demand a liquidation order ex debito justitiae and limits on exercising the discretion not to order a liquidation. Again it is appropriate to note that the Court of Appeal was dealing with an application under s 290(4)(c) and accordingly was not required to exercise the ultimate discretion. While there is no gainsaying these statements as matters of general principle, they derive from cases dealing with companies that have operated commercially. Applying those principles, courts have ordered companies to be wound up to allow their assets to be realised and distributed to creditors. Clause (e) in the long title presupposes that there are assets to be distributed. The Companies Act provides for liquidation when there may be assets to be realised. That does not mean that liquidation is required in the absence of assets.
[54] It is more helpful to consider the matter as a case of finding the right remedy when debts incurred by trustees cannot be satisfied in full from trust assets. As with so much debt recovery, that will turn on the facts in each case. It is to a large extent a matter of what is practicable. Possible avenues are recovery from trust assets,
beneficiaries and trustees. The procedures do not necessarily match the Companies
3 Although not relevant to this case, another reason for professional practices to use corporate trustees is to provide continuity of service following changes in membership of the practice without the costs of changing trustees.
Act for straightforwardness or fairness. But liquidation of a corporate trustee is only one remedy. As noted above it offers efficiency in allowing a liquidator to exercise the trustee’s right of indemnity. But the Companies Act has to deal with practicalities. If no benefit from liquidation will arise, there is no principle that requires liquidation.
[55] In Commissioner of Inland Revenue v Chester Trustee Services Ltd Baragwanath J considered the moral risk if a trustee were insolvent. At [64], he quoted from an address by R P Meagher QC, Insolvency of Trustees (1979) 53 ALJ
648 about the insolvency of trustees. The address refers to two areas of risk for beneficiaries:
The reason why the retention of such a trustee is not usually in the
beneficiaries’ interest is two-fold:
(a) The fact of bankruptcy of prima facie evidence that the bankrupt is a person who has been unwise or improvident in the conduct of his own affairs, and is therefore probably unfit to conduct another person’s affairs; and
(b) A bankrupt is ex hypothesi a person of small or no means and ―a necessitous man is more likely to be tempted to misappropriate funds than one who is wealthy‖.
The cases show that neither of these two presumptions is conclusive, but both may be rebutted, and if rebutted one has the exceptional case where the trustee is not removed. However, the cases where both presumptions are rebutted and the trustee has confirmed in office are rare indeed.
[56] The passage is directed at the interests of beneficiaries, not the interests of trust creditors, the matter in question in this case. Creditors who contract with trustees decide whether to give credit. Non-contractual creditors take the trustees as they find them.
[57] In the case of beneficiaries, the settlor and the person holding the power to appoint new trustees knowingly take the risk when they appoint an assetless corporate trustee. The beneficiaries can hardly complain of prejudice. The trust assets ultimately answer for trust liabilities. A creditor’s lack of effective recourse to a trustee without assets may mean that the creditor is more likely to seek subrogation to the trustee’s right of indemnity, but that is not a proper cause for complaint for beneficiaries. They are no worse off than if the corporate trustee were not appointed.
[58] The suggested risk of misappropriation is directed at the risk from bankrupt persons, not corporate trustees. That suggested risk cannot be extended to professionals, who use a company to offer trustee services. As a matter of day-to- day practice, solicitors responsibly and faithfully hold funds on trusts for clients. The fact that a trustee company associated with the solicitors might not be able to pay its non-contractual liabilities does not create any risk that those solicitors or a trust company run by them might not properly handle assets held on trust. Any supposed moral risk does not arise as a factor in the discretion in this case.
[59] Perhaps preparing for the worst, Castle Brown incorporated a new trustee company, Newmarket Trustees (2009) Ltd, no doubt intending to use it as a replacement trustee company, if the defendant were placed in liquidation. Aside from a matter of company name, the Commissioner does not suggest that there is any concern over Castle Brown having another trustee company also without assets. If there is no objection to the law firm offering trustee services with a replacement company without assets, there can hardly be any objection to the firm continuing to offer trustee services with its existing trustee company without assets
[60] The defendant says that if it is ordered into liquidation, the remaining 118 trusts of which it is now trustee will need to remove it as trustee, including arranging for records of title in Land Information New Zealand and share registries to be amended. There will be many hours of work. Mr Brown estimates that the total disbursements are likely to be in the region of $15,000.
[61] The Commissioner wrote to Castle Brown about the incorporation of the new trustee company. He reminded them of s 386A and 386B of the Companies Act. These are phoenix company provisions. Because of the similarity of names, if the defendant were placed into liquidation, the partners of Castle Brown will be allowed to be involved in the formation or operation of the new company only with the permission of the Court. So there could also be the costs of an application in this Court if Castle Brown wishes to use its replacement trustee company. These costs will not be required if Newmarket Trustees Ltd is not put into liquidation, as it will not be a failed company under s 386B(1).
[62] This work and the associated expenses will only arise if there is an order for liquidation. The costs are considerable. They are relevant effects. They cannot be ignored. It does not matter whether the costs are carried by Castle Brown, their clients or the Commissioner. They could be avoided if there is no order for liquidation. To that extent they are an unnecessary cost and give rise to inefficiency. They are a factor against an order being made.
[63] The Commissioner ’s response is that Castle Brown could have avoided these costs if it had incorporated a number of trustee companies (a practice followed by some law firms), so that the impact of one going into liquidation could be reduced. That response does not address the issue in this court – whether these unnecessary costs should be imposed. A victim’s failure to wear protective clothing does not justify an assault. The response also shows the Commissioner ’s equanimity to assetless corporate trustees.
[64] In Chester at [84], Baragwanath J said of a similar hardship submission in that case:
The combination of the presumptive desirability of liquidation of a company that has incurred debt through trading and of the position of the beneficiaries under the numerous trusts outweighs in my opinion the cost of the conveyancing necessary to remove the continuing trusts from Chester’s hand.
[65] In this case, there is no presumptive desirability of liquidation as there was in that case under s 290(4). Whether a liquidation order should be made is an exercise of discretion, in which a number of factors are weighed. Insolvency of the company is a very significant factor, but it does not override all others. There is no moral risk to beneficiaries of other trusts, certainly greater no moral risk than one arising from the appointment of another Castle Brown company as a replacement trustee.
[66] It is also helpful to consider the possible conduct and cost of the liquidation. When an assetless taxpayer is put into liquidation on the Commissioner’s application, the Commissioner pays the liquidators’ remuneration. Where it is clear that the company has no assets and there is no need for further inquiries and investigation, I am advised that the liquidators’ remuneration is typically in the range
of $4,000 to $8,000. In this case I cannot see any benefit to the Commissioner in spending this money on a liquidation.
[67] If there were other creditors and there were assets to be realised and distributed, the amounts of unpaid taxes the Commissioner proves for could be very important in the liquidation. A liquidator could see it as worthwhile to ensure that the debt claimed by the Commissioner is correct and to invite reassessment under s
113 of the Tax Administration Act. Here, where there are no assets to realise and no competition among creditors, no-one would judge a liquidator too harshly who did not raise the accuracy of the default assessments with the Commissioner. On the other hand, declining the application gives the defendant’s directors the opportunity to file returns with the Inland Revenue to allow the taxes to be correctly determined.
[68] On the exercise of the ultimate discretion, the insolvency of the defendant carries considerable weight. If there were no other factors, there would be an order for liquidation. However, in the circumstances of this case, I cannot see t hat any benefit would arise from ordering the defendant into liquidation. There are no assets held by the company that could be made available for creditors. The only potential line of inquiry is to pursue the surpluses from the sales of trust properties. The Commissioner does not rely on that as requiring liquidation in this case. Any inquiries can be undertaken more easily through the administration of Mr Goh’s bankruptcy. Moral risk concerns do not arise. In addition to the lack of benefits, there are the costs of liquidation that will fall on the Commissioner. There are also the costs of removing the defendant from the 118 trusts, appointing a replacement trustee (which might involve an application to this Court under the phoenix company provisions of the Companies Act) and changing records of title. The work and expenses will be considerable. Also relevant but carrying less weight is the greater opportunity for the defendant to seek adjustments of the Commissioner’s assessments. The costs arising from the company going into liquidation and the lack of benefit outweigh the insolvency factor. The company should not be put into liquidation.
[69] I have come to this decision on the particular facts of this case. Insolvency law is a mix of principle and pragmatism. The Companies Act is to be used in a
practical way. It does not require liquidation when that will not serve any useful purpose.
[70] In cases of an insolvent corporate trustee, it will be useful to consider not just the company but the remedies of the creditor against trustees, trust assets and beneficiaries generally. While liquidation can be a useful remedy, creditors should be alive to other remedies. When a trustee is also a trustee of other trusts, the impact of liquidation on those trusts is relevant. When a trustee is insolvent, it will not generally be useful to try to resolve matters by an application under s 290 of the Companies Act or by an application for stay. Instead the success of any liquidation application is likely to rest on the exercise of the ultimate discretion.
[71] I make these orders:
(a) The application that Newmarket Trustees Ltd be put into liquidation is dismissed.
(b) The Commissioner will pay Newmarket Trustees Ltd costs on a 2B
basis plus disbursements approved by the Registrar. If the parties cannot resolve costs, they may file memoranda for my decision.
R M Bell
Associate Judge
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