Appointing a receiver to a trust under the Trusts Act 2019
The Trusts Act 2019 (Act) came into force on 1 January 2022. As noted in a previous article, the Act applies to most existing and new trusts and signifies the first significant legislative change to trust law in New Zealand in over 60 years. The new Act is designed to make trust law more accessible by clarifying and simplifying core trust principles and essential obligations for trustees.
Many trust disputes involve trustees falling out with each other, or with the beneficiaries in whose best interests they are supposed to be acting. In most cases, beneficiaries or other trustees may look to remove a poorly performing trustee, often to be replaced by a professional trustee, and will seek a High Court judge’s assistance to do so. However, instead of having a trustee removed, in some cases it may be preferable to ask the Court to appoint a receiver to the trust, which is the focus of this article.
Section 138
Section 138 of the Act is a new provision and states:
138 Court may appoint receiver for trust
The court may, on an application by an interested person or on its own motion, appoint a receiver to administer a trust.
The court must be satisfied that the appointment of a receiver to administer the trust is—
Reasonably necessary in the circumstances of the trust; and
Just and equitable.
Only a person qualified to be a trustee may be appointed under subsection (1).
When appointing a receiver under this section, the court (having regard to the terms of the trust and the interests of justice) must determine—
the extent of the duties and powers of the receiver; and
the duration of the receivership; and
the principles that the receiver is to apply in determining priorities; and
whether the receiver is to be paid from the trust assets.
If a court determines under subsection (4) that a receiver has a power in relation to a trust, the trustee of the trust cannot exercise that power for the duration of the receivership.
Analysis
The first point to note is that if a receiver is appointed, the practical effect is similar to having a trustee (or trustees) removed because under s 138(5) any power given to the receiver is thereby removed from a trustee for the duration of the receivership.
Second, it is commonplace for receivers to be appointed by creditors of companies, most often under the terms of a debenture, where their function is to receive income and pay outgoings, realise the business’s assets, and distribute them in accordance with the terms of the debenture. The ongoing viability of the company itself is often secondary. However, the function of a Court-appointed receiver is to preserve a company’s assets and its potential for earning profits in the future. Court-appointed receivers are officers of the Court, answerable to the Court, and not controlled by either the company or its creditors. Similar considerations apply to any Court appointed receiver to a trust.
In its Review of the Law of Trusts: Preferred Approach (NZLC IP31, 2012) the Law Commission considered that providing for the appointment of a receiver to a trust “has the potential to be a very useful process; the receiver can take charge of the fund, deal with and if necessary realise some assets, conduct a managed distribution, and if appropriate, hand back the fund to the trustees.” It noted that while the High Court can already appoint a receiver in respect of trust property under its inherent jurisdiction, it rarely does so, probably due to a lack of awareness or understanding that the jurisdiction exists. The Law Commission recommended that the power to appoint a receiver should apply not only to trusts that have a corporate trustee, but to all trusts and that applications could be made by trustees and beneficiaries, not just creditors.
The first decision to consider s 138 was that of Jagose J in Reaney v Reaney [2021 NZHC 784, which concerned a family trust dispute. The context was a hearing on the papers of a without notice interlocutory application for an order appointing a receiver to trust property in a proceeding seeking the defendant husband’s removal as trustee.
Traditionally, a Court-appointed receiver, particularly in relation to a company, is seen as an option of last resort when there is no other adequate legal or equitable remedy available, or when the Court is satisfied that the existing law and contractual arrangements are such that no other means of achieving the desired object can be obtained.
However, at least in relation to trusts, Jagose J considered that the s 138’s “new and explicit provision suggests such receivers’ appointment may not now be as much ‘a matter of last resort’ as formerly was the case.” A slightly different view was expressed by Walker J in Armani v Armani [2021] NZHC 3145, when she stated that “the ordinary meaning of ‘reasonable necessity’ [in s 138(2)(a)] does not precisely equate with a measure of ‘last resort’ but neither is it widely different.”
In that case, involving an acrimonious breakdown of the personal and business relationship, Walker J considered whether s 138 provides a new, broader basis for appointment of a receiver than under the inherent jurisdiction and concluded that:
“There is nothing in the Law Commission report pointing to an intention to alter the approach under the inherent jurisdiction but there is some flexibility in the express connection with the ‘circumstances of the trust’. In its context, reasonably necessary means something more than expedient or desirable, falling closer to ‘required’ or essential to achieve a particular outcome or purpose, but is not necessarily restricted to measures of a last resort. Even so, the availability of alternative, less drastic remedies will be a factor going to the ‘just and equitable’ requirement.”
In both those cases, the applications to appoint a receiver were declined. In contrast, a receiver was appointed in Re Cameron and Robertson-Brown [2022] NZHC 2495, where all trustees supported the appointment of a receiver to wind up a failed property development project. Although the application was unopposed, Cooke J called for further information addressing the requirements of s 138(4), which are directed toward the justification for the appointment of a receiver.
Cooke J referred to the decision in Armani v Armani and agreed that the approach under the inherent jurisdiction does not set the required threshold for appointment under s 138:
“The applicant needs to show that appointment is reasonably necessary, not that it is needed as a last resort. This will involve consideration of what is sought to be achieved by the appointment of a receiver, and why this step is thought to be necessary to achieve that outcome in the circumstances.”
Cooke J also noted that any application under s 138 should explain why the appointment of a receiver is reasonably necessary, why it is just and equitable, and address the matters set out in s 138(4) in that context. It will usually be helpful to provide the Court with draft orders of appointment setting out the powers that the receiver will have (usually including those under s 14 of the Receiverships Act), his or her reporting obligations, and addressing remuneration, as well as which of High Court Rules 7.60 to 7.67 will apply to the appointment.
An application to appoint a receiver, instead of one seeking removal of a trustee, may well be appropriate where, as in Re Cameron and Robertson-Brown, the expertise of an insolvency specialist will help to maximise the return on realising trust assets, or where an independent person is required to manage trust assets pending resolution of an existing trust dispute.
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