MinterEllisonRuddWatts Special Counsel Shane Johnstone discusses the Justice Committee’s report on the Trusts Bill, which is now at the Second Reading stage in Parliament. The Bill originated from the perception that private trusts were improperly administered, misunderstood and failing to protect beneficiary rights, he writes. The Bill will replace the Trustee Act 1956 and the Perpetuities Act 1964 to make trust law more accessible, clarify and simplify core trust principles and essential obligations for trustees, and preserve the flexibility of the common law to allow trust law to continue to evolve through the courts.
The Justice Committee has reported back on the Trusts Bill.
A link to the final report (together with a copy of the marked-up revised Bill) is available here.
Who needs to read it? Why?
The Bill is of interest to anyone who is a trustee, settlor or beneficiary of a trust (whether private or commercial in nature) or who transacts with or through trusts for any business activity or structured transaction purpose. Financial market participants often fall into one of these categories.
The Bill is not limited to private trusts, despite various submissions to this effect, and impacts on all express trusts (as defined in the Bill) – in short, the Bill impacts on most trusts.
The Bill has its genesis in concerns arising out of private trusts and their significant use in New Zealand (estimates suggest between 300,000 and 500,000 trusts are in use in New Zealand), with the perception that private trusts weren’t being properly administered, weren’t properly understood and beneficiary rights weren’t necessarily being protected.
What does it cover?
The intention of the Bill is to replace the existing Trustee Act 1956 and Perpetuities Act 1964 which are considered “outdated and overly complex” and to “take the most fundamental principles from the common law [relating to trusts] and put them in accessible legislation”.
For financial market participants, some key points of interest are:
- The transition period for introduction of the Bill remains at 18 months from the date on which it receives the Royal assent, despite some submissions suggesting a longer lead time might be appropriate.
- A new provision has been included requiring persons who are paid to advise on the creation of a trust (which would include legal advisers) to ensure that the initial settlor is aware of the meaning and effect of any modification or exclusion of a default trustee duty – this is an interesting addition for those operating in the commercial trust area, who are generally experienced and sophisticated market participants (and for their advisers too).
- Following various submissions suggesting some concerns around the concept of “gross negligence” the Bill includes a new provision setting out the factors a court must have regard to when considering whether a trustee has been grossly negligent. These include the seriousness of the breach, the trustee’s knowledge and intentions relating to the breach and the type of trust, including the degree to which the trust is part of a commercial arrangement.
- Those in the retirement village space will be pleased to see new provisions (by way of amendment to the Retirement Villages Act 2003) allowing regulations to be made exempting any trust, trustee, statutory supervisor, operator or other person from the application of any provision of the Bill.
- Various amendments have been made to the definition of “specified commercial trust”, although it remains a term fraught with potential interpretation difficulties, with more than 15 separate defined terms provided for the purpose of determining whether a specified commercial trust exists.
It is an exceedingly difficult task to modernise and improve an area of law that has evolved through hundreds of years of common law. The Bill generally achieves its stated purpose of making the law of trusts more accessible and the Committee should be commended on its work.
However, financial market participants who are commercially experienced and sophisticated and are generally well advised and able to negotiate appropriate protections or otherwise mitigate their exposure may be frustrated that large parts of the Bill remain applicable to them.
The Bill will now go back to Parliament for debate and it will decide whether it will incorporate the Committee’s amendments.
If you have any questions in relation to the Bill or this article, please contact the author.
Shane Johnstone, Special Counsel – Financial Services, has more than 25 years’ experience in the financial services area, with particular expertise in advising corporate trustees. He regularly advises licensed trustee companies on all facets of the corporate trustee role, including retail, wholesale, listed and un-listed debt issues, establishing and administering managed investment schemes and securitisation structures covering residential mortgage receivables, asset-backed receivables and motor vehicle receivables. Shane also advises on compliance issues arising under the Financial Markets Conduct Act 2013 and recently has assisted trustee companies with analysing (and submitting on) the new Trusts Bill. Shane is a Special Counsel in our managed funds team, having joined us in mid-2016 from Guardian Trust where he was Head of Legal – Corporate Trusts. Shane joined Guardian Trust after 23 years at another national law firm, where he was Special Counsel from 2008 to 2015. Shane is recognised by the New Zealand market as one of the market-leading corporate trustee lawyers, with excellent and long-standing relationships with each of the licensed supervisor/trustee companies: Guardian Trust, Covenant, Public Trust and Trustees Executors. Contact Shane at [email protected] or connect via LinkedIn