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Additional obligations of corporate trustees

By Alden Ho - 21 Jun 2018

It's no secret that New Zealanders love trusts. At its simplest, a trust is a legal relationship where someone (the settlor) gives property to another (the trustee) to look after it and use if for the benefit of another person (the beneficiary).

The relationship creates legal obligations on the trustee. As a trust is not a separate legal entity, and trustees are personally liable for the trust's debts, it has become popular to appoint companies as trustees.

In addition to limited liability, the additional benefits of a corporate trustee are that there is a more visible separation of the trust's assets and personal assets and simpler succession and control of the trust via the appointment of directors.

However, the use of the corporate personality also comes with an additional layer of legal obligations under the Companies Act which applies in the same way that it would to all companies. Complications may arise especially if the corporate trustee becomes insolvent.

A trustee is personally liable for all liabilities incurred in performing the trust including debts to third parties unless liability has been contractually limited to trust assets. If a liquidator is appointed, the liquidator may look to the directors for payment of those debts pursuant to their director's duties under the Companies Act.

If the company was removed as a trustee before or after liquidation, the liquidator is also able to claim against the assets of the trust via its right of indemnity under the Trustee Act so long as the debt was incurred in performing the trust.

It is therefore important for directors of corporate trustees to understand their obligations under the Companies and Trustee Act.

Contacts

Alden Ho

Andrew Steele

 

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