Down And Out In New Zealand: Opening The Discretionary Trust For A Bankrupt’s Creditors

Abstract

The discretionary trust in New Zealand is a prolific and effective shield against the effects of personal bankruptcy. This paper discusses the interaction between New Zealand discretionary trusts and insolvency law. It analyses the obvious policy problem, that trusts allow settlors to avoid the statutory bankruptcy scheme at will.

Fundamentally, the paper seeks to better protect creditors by bringing trust powers into the insolvency property pool. It begins by addressing the illusory trust debate in the literature, concluding that the illusory trust doctrine is relevant, but distinct. The paper then presents a form-over-substance, or functional, approach to identifying trust powers by looking through otherwise opaque drafting practices. To determine which powers are “property”, the paper looks to what bundle of a settlor’s rights would best vindicate the social and statutory purposes of insolvency law. Ultimately, it argues that Bennett and Barkley’s unlimited self-benefit criteria would best support these purposes. The paper’s analysis uses a property law framework to formalise the reasoning in the “trust busting” cases of Tasarruf Mevduati Sigorta Fonu v Merrill Lynch Bank and Trust Co (Cayman) Ltd [2011] UKPC 17, [2011] 4 All ER 704 and Clayton v Clayton [2016] NZSC 29, [2016] 1 NZLR 551. The paper recognises there are trade-offs due to New Zealand’s weak sham regime. However, it concludes the new pathway is a promising model to open discretionary trusts for creditors, to advance Parliament’s intention, and to support a principled approach to trust law.