Sovereign Homes Limited v Meurant HC Auckland CIV 2006-404-7394
[2007] NZHC 1732
•15 May 2007
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2006-404-7394
UNDER the Insolvency Act 1967
IN THE MATTER OF the Bankruptcy of Patricia Marie Meurant
BETWEEN SOVEREIGN HOMES LIMITED Judgment Creditor
ANDPATRICIA MARIE MEURANT Judgment Debtor
Hearing: 9 May 2007
Appearances: Mr Mercer for Judgment Creditor
Mr P Teei for Judgment Debtor
Judgment: 15 May 2007 at 3 p.m.
JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE
This judgment was delivered by me on
15 May 2007 at 3 pm, pursuant to
Rule 540(4) of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors:
Joyce Spence Teei, Henderson
Pearl Butler, Gellert Ivanson, P O Box 25239, St Heliers, Auckland
Counsel: Mr P Teei Mr G Mercer.
SOVEREIGN HOMES LIMITED V MEURANT HC AK CIV 2006-404-7394 15 May 2007
Background
[1] The applicant, Ms Meurant applied on 21 December 2006 to set aside a bankruptcy notice dated 30 November 2006. The grounds stated in the application were:
1.The Judgment Debtor seeks to have the bankruptcy notice set aside on the basis that no judgment has ever been entered against her although she admits that judgment has been entered against the Maioro Trust of which she is a trustee.
2.The Judgment Debtor has not in her personal capacity or otherwise committed any act of bankruptcy as outlined under s 16 or any of the other sections of the Insolvency Act 2006.
3.As judgment has been entered against the Maioro Trust, enforcement proceedings should be commenced against the Trust and not the Trustees personally.
4. The Maioro Trust does not hold any assets.
[2] In November 2006 the judgment debtor filed a request for issue of a bankruptcy notice and produced as part of that application a certified copy of a final judgment obtained against the judgment debtor in the District Court at North Shore
20 September 2006. The judgment was given in proceedings in the North Shore District Court which were intituled with the judgment creditor as plaintiff and the following defendants:
KERRY JOHN MEURANT AND PATRICIA MARIE MEURANT OF
1559 Mangawhai Road, RD 5, Wellsford, as trustees of the Maioro Trust and
carrying on business as earth moving contractors
Defendants
[3] The judgment debtor filed an affidavit in support of her application which records the following matters. She accepts that she is a trustee of the Maioro Trust which previously carried on business as an earth moving contractor. She annexes a copy of the trust deed, to which I will make further reference in a moment. She deposes that as a trustee of the trust:
I have only held property on behalf of the Trust as trustee and in no other role.
[4] Then in paragraph four she states:
The Judgment Creditor has obtained Judgment against the Trust of which I am a trustee but has not obtained a Judgment against me personally. In any case, I do not believe that I am personally responsible for the debts of the Trust. At all times, I was acting only as a trustee of the Trust.
[5] She also records her belief that she is entitled to the “protection afforded to me as a trustee under the Deed of Trust” and refers to clause 18 of the trust deed.
[6] Clause 18 reads as follows:
Liability and Indemnity of Trustees:
18. NO Trustee hereunder shall be liable for any loss suffered by the Trust Fund or by any beneficiary hereunder arising from any action taken by him as a Trustee hereunder PROVIDED ALWAYS that such action is not attributable to his own dishonesty or to the wilful commission by him of an act known to him to be a breach of trust AND no Trustee shall be bound to take any proceedings against a co-Trustee or former Trustee for any breach or alleged breach of trust committed by such co-Trustee or former Trustee for any breach of trust committed by such co-Trustee or former Trustee AND each of the Trustees shall be entitled to full and complete indemnity from the Trust Fund and every part thereof for any personal liability he may incur in any way arising out of or in connection with his acting or purporting to act as a Trustee hereunder subject however to the foregoing proviso.
Issues
[7] The issues that this case raises are these:
a) Are trustees personally liable for the debts of the trust?
b)What is the effect of the judgment being entered against the individuals as trustees rather than personally?
c) What is the effect of clause 18 of the trust deed which purports to limit the liability of the trustees?
Submissions
[8] Mr Teei in his submission emphasised that the applicant believed that she was contracting only as trustee and had no personal liability under the contract. He
pointed out that the latest Auckland District Law Society standard form agreement now includes an optional provision which a trustee is able to have inserted into his/her agreement, to the effect that the trustee warrants authority to enter into the contract as trustee, and limiting liability to the assets of the trust. Mr Mercer said the need for such a clause proved that without it, the opposite effect followed.
[9] Mr Teei relied up clause 18 of the trust deed of the Maioro Trust which I have set out in paragraph [6] above as excluding liability on the part of the defendant. Mr Mercer in response made the point that the judgment creditor is not a party to the deed and nor was there any evidence that at any time prior to the filing of the judgment debtor’s affidavit in support of the present application the judgment creditor was aware of the trust deed or clause 18.
[10] Mr Mercer said that there had been a regularly obtained judgment and the fact that the applicant entered the transaction as trustee did not relieve her from liability. He referred to some of the authorities that I mention in the next section of my judgment.
Authorities on personal liability of trustees
[11] The issues in this case have been considered in previous decisions of this
Court. I propose to refer to three decisions.
[12] The first is Bhana v Commissioner of Inland Revenue Abbott AJ, HC Rotorua, CIV2004-463-719, 11 September 2006. In that case the Judgment Debtor, Mr Bhana, opposed the Commissioner of Inland Revenue’s petition for bankruptcy on the grounds that the judgment on which the bankruptcy notice was based was not obtained against him personally, as required, but only against him “as trustee”. At para [12] of his judgment, His Honour stated the position of Counsel for the Commissioner in the following terms:
Counsel for the Commissioner relied on well established common law principles that a trustee is liable personally for all debts incurred in the conduct of the trust, and the personal assets of the trustees are available to meet the liabilities of the trust. A trustee may be sued, have personal assets applied to meet any judgment, and even adjudicated bankrupt, in respect of trust debts.
[13] The judge made reference to the case of Ex parte Garland (1804) 10 Ves Jun
111 to support his statement of the law. He said, at para [14]:
13. Counsel relied on Ex parte Garland (1804) 10 Ves Jun 111. That was a decision of Lord Chancellor Eldon on a petition by creditors to have recourse to the assets of a deceased estate for debts incurred by one of the executors who had been authorised by the will to continue the running of a business which formed part of the estate. The issue in the case was whether the creditors could have recourse to assets of the estate other than the asset being traded and a fund which had been set aside for that purpose. The Lord Chancellor held that the creditors could not access other assets. In weighing the competing interests, the Lord Chancellor stated:
“On the other hand, the case of the executor is very hard. He becomes liable, as personally responsible, to the extent of all his own property; also, in his person; and as he may be proceeded against, as a bankrupt; though he is but a trustee. But he places himself in that situation by his own choice; judging for himself, whether it is fit and safe to enter into that situation, and contract that sort of responsibility.”
14. Counsel pointed out that this onerous responsibility is alleviated by a trustee’s right of indemnity against trust assets in respect of obligations incurred on behalf of the trust, but nevertheless a trustee remains personally liable in contract unless that personal liability has been excluded by the terms of the contract: Muir v City of Glasgow Bank & Liquidators (1879) 4
AppCas 337 (HL).
[14] In reliance on the principles stated above, His Honour adjudicated Mr Bhana bankrupt.
[15] The second decision I propose to refer to is Niak & Somerville v Davidson & Macdonald, a judgment of Master Venning, HC Dunedin, CP15/98, 2 June 1999. One of the issues in that case was the liability of a trustee of the McDonald Family Trust for a debt owed to the Aldeburgh Family Trust by that Trust. It was submitted for the defendants that as trustee, Ms Somerville did not have any personal liability for the trust’s debts. The relevant clause in the trust deed which was said to justify that conclusion read:
No trustee of these presents shall be liable for any loss not attributable to his or her own dishonesty or to the wilful commission by him or her of any act known by him or her to be a breach of trust and in particular no trustee shall be bound to take any proceedings against a co-trustee for any breach or alleged breach of trust committed by such co-trustee.
[16] Master Venning stated at para [23] that:
“clause 7 only operates to protect the trustee from a claim brought by a beneficiary of the trust and does not protect the trustee from liability incurred to third party creditors.”
[17] I observe that the clause under consideration in that case was very similar to the one in the case at hand.
[18] The third decision to which I refer is that of Baragwanath J, NZHB Holdings Ltd v Bartells (2005) 5 NZCPR 506. The defendants were trustees of the Louden and Tennessee trusts. They signed a deed of indemnity. Included in the document signed were the following clauses:
[5] Persons, except independent trustees, who sign this document shall at all times remain personally liable for all obligations of the persons on whose behalf they have signed. An independent trustee is a person who is not a settlor of the trust or has no rights to an interest in or assets of the trust except as trustee of the trust. Where two or more persons have signed this document their liability shall be joint and several. [6] References to “persons” include individuals, companies, trusts, partnerships and other groups or association of persons (whether incorporated or not). “Purchasers”, “Covenantors”, “NZHB” and “HIH” include their respective successors, nominees and assigns. Purchasers shall include any person for whom a Purchaser listed in schedule B signs an Agreement or a Bond application form, whether as agent, trustee, personal representative or in any other capacity. [7] Any Purchaser or Covenantor who signs this document shall be bound whether or not any other Purchaser or Covenantor signs.
[19] The issue was whether such a clause was capable of excluding the personal liability that normally falls on trustees.
[20] The document was expressed to be signed by the trustees of the Louden Trust. The trustees of the Tennessee Trust executed a similar document. Upon default, the plaintiff sought to recover from the trustees personally. The trustees resisted the plaintiff’s claims on a number of bases. The basis of one argument was that the form of execution of the documents signified exclusion of personal liability of the trustees beyond the assets of the trusts.
[21] Baragwanath J accepted that trustees can stipulate the extent of their liability. Citing In re Robinson’s Settlement [1912] 1 Ch 717, 728-9, his Honour noted that if the trustees contract “as such trustee but not otherwise” they will achieve that result. At [43] the legal position in New Zealand was summarised as follows:
So in New Zealand law, and in that of England and of New South Wales, in the absence of more limiting language the description of a contracting party simply as “trustee” renders that party personally liable. There is a presumption in favour of personal liability which must be refuted if a person contracting as “trustee” is to be relieved of liability beyond the extent of the trust assets.
[22] The Judge found against the trustees. NZHB Holdings Ltd shows that the presumption is that trustees are personally liable unless the terms of the arrangement expressly exclude such liability.
[23] Mr Mercer referred me to the Laws of New Zealand, title “Trusts” where at paragraph 429 the following statement is found:
429. Circumstances in which a trustee is personally liable.
A trustee is personally liable on the contracts into which he or she enters, unless personal liability is excluded by express stipulation; the knowledge of those who deal with the trustee that he or she is contracting as a trustee is immaterial. Accordingly, where a trustee trades or otherwise deals with trust property, he or she is deemed, as against all persons other than the beneficiaries, to do so on his or her own account. Consequently the trustee is personally liable for all debts incurred in the course of the trade or dealing, and may be made bankrupt in respect of it. If a trustee holds shares in a company, he or she has the same liabilities in respect of them as if he or she were the beneficial owner, even though the fact of the trusteeship is noted in the company’s books, but the trustee is entitled to indemnity. A trustee may be liable in tort in certain cases.
[24] I consider that to be a correct statement of the law.
The provision of the trust deed limiting liability
[25] In the decision of Niak & Somerville v Davidson & Macdonald (Master Venning, High Court Dunedin, C.P. 15/98) the Master considered a clause that was similar to clause 18 of the Maioro Trust Deed. He concluded:
“clause 7 only operates to protect the trustee from a claim brought by a beneficiary of the trust and does not protect the trustee from liability incurred to third party creditors.”
[26] I take the same view of the effect of clause 18. It cannot shield the trustees from liability.
[27] The issue in this case regarding the entering of judgment against the individual personally is the same as that in Bhana and the reasoning in that case applies equally. The judgment supporting the bankruptcy notice was entered against Kerry John Meurant and Patricia Marie Meurant “as trustees of the Maioro Trust”. In line with the judgment in Bhana this satisfies the requirement that the judgment be entered against Patricia Marie Meurant personally, and merely describes that she is being sued for debts incurred by the trust.
Discussion and result
[28] It is clear from the above cases that trustees are personally liable for trust liabilities, and that the remedies of bankruptcy are available against them. This follows from the nature of trusteeship, where the rights and obligation incurred attach to the trustee personally as opposed to the trust, which has no legal personality for these purposes.
[29] The application to set aside the bankruptcy notice is dismissed. The applicant is to pay costs to the respondent on a 2B basis together with disbursements to be fixed by the Registrar. The proceeding is to be called in my Bankruptcy Court
Wednesday 6 June 2007 at 10.45 a.m.
J.P. Doogue
Associate Judge
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