Exercise of Court discretion to liquidate insolvent trustee company
2012 case note - exercise of Court discretion to liquidate insolvent trustee company – responsibilities of corporate trustees.
Tax Administration Act 1994, Companies Act 1993, Trustee Act 1956
The Court of Appeal held that the Associate High Court Judge had exercised his discretion under section 241(4) of the Companies Act 1993 ("the Companies Act") on an erroneous basis. He overlooked the wider public interest considerations and well-established principles of trustee law, which meant that as a matter of principle, the respondent, as an insolvent trustee company, ought to have been put into liquidation.
Impact of decision
This is an important decision as it clarifies the responsibilities of corporate trustees and also clarifies the matters to be taken into account when considering whether an insolvent corporate trustee should be put into liquidation.
This decision will inevitably be of interest to law firms that provide trustee services to their clients under a similar legal structure.
Castle Brown (a law firm) established Newmarket Trustees Ltd ("Newmarket") to offer trustee services to its clients. It was a trustee of over 100 trusts. It did not have any beneficial interest in the trust assets nor did it own any other property.
Newmarket was a trustee of the Southern Lights Trust ("SLT") whose settlor, Mr Goh, was the other trustee of SLT and a client of Castle Brown.
The trustees of SLT had been default assessed for goods and services tax (GST) and income tax on assessable income derived from ten property transactions. Castle Brown was unaware of these assessments and they were not disputed. Mr Goh was adjudicated bankrupt in 2010.
The Commissioner of Inland Revenue (the Commissioner) took steps to obtain payment of the $293,251.23 owing. In November 2009 a statutory demand was served on Newmarket under section 289 of the Companies Act. An application by Newmarket to set aside the statutory demand was dismissed and an order was made requiring Newmarket to pay the debt within 20 working days (Newmarket Trustees Ltd v Commissioner of Inland Revenue (2010) 24 NZTC 24,176 (HC)).
The debt was not paid and the Commissioner applied under section 241 of the Companies Act for an order for the liquidation of Newmarket. The High Court stayed the proceeding with the stay to be rescinded on the Commissioner meeting Newmarket's costs (Commissioner of Inland Revenue v Newmarket Trustees Ltd (2010) 24 NZTC 24,397 (HC)).
Following payment of the costs by the Commissioner, the application proceeded as a hearing of the liquidation application on the merits rather than as a stay application. Associate Judge Bell dismissed the Commissioner's application for the liquidation of Newmarket (Commissioner of Inland Revenue v Newmarket Trustees Ltd (2011) 25 NZTC 20-030 (HC)). This decision was appealed by the Commissioner.
The Commissioner in the appeal submitted that the High Court erred in:
- finding that the default assessments were potentially open to amendment and correction under section 113 of the Tax Administration Act 1994 contrary to the decision of the Supreme Court in Tannadyce v Commissioner of Inland Revenue  NZSC 158,  2 NZLR 153;
- failing to take into account that Newmarket, as co-trustee of SLT, was jointly and severally liable for SLT's unpaid tax liability and not entitled to delegate payment of its tax liabilities to its co-trustee, Mr Goh;
- taking into account the costs of making alternative arrangements for other trusts of which Newmarket was trustee; and
- failing to recognise that wider public interest considerations of deterrence and removal of risk for Castle Brown's other trusts, as well as principles of trustee law, meant that Newmarket, as an insolvent trustee company, should be put into liquidation.
Newmarket submitted that the Associate Judge had correctly exercised the Court's unfettered discretion and that the Associate Judge had appropriately distinguished Commissioner of Inland Revenue v Chester Trustee Services Ltd  1 NZLR 395 (CA). Newmarket further submitted that the Associate Judge had not erred because:
- he accepted that the underlying tax debt was indisputable for the purpose of the liquidation proceeding;
- he correctly accepted that Newmarket was jointly and severally liable for the tax debts of SLT as this was the basis of his finding that a prima facie case had been made out; and
- he was entitled to take into account the impact that liquidation would have on the other trusts for which Newmarket acted as trustee. It was appropriate for the Court to have regard to the substantial work required and costs incurred in organising a replacement trustee.
The Court of Appeal accepted that the default assessments could not be challenged by Newmarket in this proceeding. However, this was not accepted as being a ground for overturning the decision of the High Court. The Court stated that there was an error of law, but noted that this was not a significant point in the High Court decision.
The Court of Appeal accepted Newmarket's submission that the Associate Judge correctly accepted that Newmarket was jointly and severally liable for the tax debts of SLT. This was the basis of his finding that a prima facie case had been made out.
The Court of Appeal further stated that Newmarket was not entitled to delegate payment of its tax liabilities to its co-trustee, Mr Goh. The Court noted the general rule that trustees may not delegate their duties or powers. This general rule against delegation extends to a prohibition on delegation to a co-trustee. The fundamental breaches by Newmarket of its trustee responsibilities and its failure to meet its tax liability, which led to its insolvency, ought to have been taken into account by the Associate Judge and he did not do so when he declined to exercise the Court's ultimate discretion.
The Court of Appeal noted that while it was not wrong for the Associate Judge to refer to the cost of making alternative arrangements, it overlooked the key point being that the end result was that Castle Brown's other trusts would be left with an insolvent trustee. The general policy of the Companies Act is that insolvent companies should be liquidated and there must be a good reason why in a particular case the insolvent company should not be put into liquidation.
The Court held that it was not satisfied that there was any sufficiently compelling ground of principle or justice to overcome the general policy of the Companies Act with regard to insolvent companies. However, the Court found there were good reasons why Newmarket should be put into liquidation, these being that:
- trusts should be properly administered and an insolvent trustee company is unfit to be a trustee; and
- the principles of trustee law, reflected in section 51(2) of the Trustee Act 1956, are that an insolvent trustee company should, as a general rule, almost invariably be put into liquidation. This would enable the Court to ensure that the trust is properly administered either by the liquidator or a replacement trustee.
The Court ultimately held the Associate Judge had wrongly exercised the discretion under section 241(4) of the Companies Act. He had overlooked the wider public interest considerations and well-established principles of trustee law, which meant, as a matter of principle, Newmarket as an insolvent trustee company ought to have been put into liquidation.
The Court of Appeal remitted that application for the appointment of a liquidator back to the High Court to make an appointment under section 241(4)(a) of the Companies Act.