From time to time we receive questions in respect of the trustee provisions in our home loan/business banking documentation, particularly around the liability of professional trustees and trustee companies. A summary of our position and our responses to frequently asked questions are set out below.
The trustee provisions in our home loan/business banking documentation have been drafted to be commercially reasonable and consistent with the law, taking into account feedback received from a number of solicitors. We will not agree to amendments to the trustee provisions, unless you can show us that we’ve got an aspect of the law wrong or your specific situation is different to an extent that amendment is required. In particular, we will agree to changes to the provisions relating to limited liability trustees only in exceptional circumstances as, in our view, the exceptions to limited liability are very limited, and are within the control of a prudent trustee.
We note that no amendments are to be made to the trustee provisions in our home loan/business banking documentation, and no attempt is to be made to alter the trustee provisions in any other way (for example, purporting to deliver the documents to us subject to any condition), unless we have expressly agreed in writing. We are under no obligation to check that you have complied with this requirement and will not be bound by any such amendment or attempted alteration unless we have expressly agreed in writing. Attempting to make changes without our consent may result in delay to drawdown.
Limited Liability Trustees
Kiwibank’s position in respect of professional trustees and trustee companies is as follows:
- Where a person does not have any interest or right in relation to the assets of the trust (including as a beneficiary) other than as a trustee of the trust, we consider that person to be a limited liability trustee. This is a test which is commonly used in the market, and is a question of fact. In most cases, a professional trustee or trustee company will clearly be a limited liability trustee under our home loan/business banking documentation. If you are concerned about particular circumstances and whether they affect your characterisation as a limited liability trustee (now or in the future) please discuss it with us.
- Subject to narrow exceptions, our home loan/business banking documentation provides that a limited liability trustee’s liability is limited to the assets of the trust.
- The limitation on a limited liability trustee’s liability does not apply where we are not able to recover all amounts owing under the home loan/business banking documentation from the trust assets due to either:
- dishonesty, wilful default or breach by the limited liability trustee in respect of its obligations under the trust or any Kiwibank document; or
- the breach of certain specific warranties or undertakings by that limited liability trustee.
The majority of queries we receive in respect of the limitation on a limited liability trustee’s liability relate to the warranties and undertakings. Specifically:
- limited liability trustees are concerned that the limitation on liability might be at risk by warranting or undertaking to do something that is outside their control or knowledge; and
- why those warranties and undertakings are required from the limited liability trustee.
In relation to the first concern, we note that a number of the warranties and undertakings given by a limited liability trustee under our home loan/business banking documentation are limited to things within that trustee’s awareness after making due enquiry. So, to the extent that these warranties or undertakings are breached by another trustee and the limited liability trustee is not aware of that breach, the limited liability trustee will not be personally liable for any loss we suffer as a result of that breach by the other trustee. If you are aware of any breach of warranty or undertaking, we would expect you to let us know.
Where we have not specifically limited a warranty or undertaking given by a limited liability trustee to matters within the trustee’s awareness, we believe that the matter being warranted or undertaken is something that a prudent limited liability trustee should know or have control over when asking Kiwibank to accept a material financial exposure to the trust.
In relation to the second concern, namely why we require those warranties and undertakings in the first place, please see our responses to the frequently asked questions set out below. We also set out why Kiwibank does not allow an independent trustee to amend Kiwibank’s documents by stamping a professional trustee stamp (or similar) on the documents or limit their liability in any other way.
Frequently asked questions
As discussed above, whether or not a trustee is considered a limited liability trustee under Kiwibank's documents is a matter of fact and is determined by the definition of limited liability trustee in those documents. That definition provides that a limited liability trustee is a trustee who does not have any interest or right in relation to the assets of the trust (including as a beneficiary) other than as a trustee of the trust.
This position is muddied where a customer attempts to unilaterally limit their liability in any other way (such as having a professional trustee stamp inserted into the documents). It is possible that such drafting changes to the document could be deemed to imply that Kiwibank agreed that that person to whom those additional words or stamp applied was to be considered a limited liability trustee under the documents. The risk for Kiwibank if it expressly or impliedly agrees that someone is or signed the documents as a 'limited liability trustee' is that if it eventuated that the trustee in question was, in fact, beneficially interested in the assets of the trust (for example), then that trustee might enjoy the limitation on personal liability when that was never the commercial intention. This is problematic for Kiwibank as it cannot and could not be aware of all of the circumstances surrounding each trustee's status. It has no way of knowing whether or not someone is truly an independent trustee either at the time the documents are entered into or at any time during their term.
The best way to protect Kiwibank's position and to protect the position of truly independent trustees is to deem someone to be a limited liability trustee if that is in fact what they are. This is what the definition of limited liability trustee does. Using a test of fact rather than an express or implied determination in the document should make no difference to an independent trustee who does not have a right or interest in the assets of the trust other than as trustee. If this is the case, they will fall within the definition of limited liability trustee and receive the limitation on liability provided for in the documents for those trustees.
The trustees of a trust are the legal owners of the trust property, and are the persons with the legal capacity to enter into contracts on behalf of the trust.* Subject to certain exceptions**, the trustees of a trust must act unanimously.***
As a consequence, there is a risk that if the home loan/business banking documentation is not entered into by all the trustees of the trust, we may not be able to enforce the documentation.****
* See Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) at [3.1.4].
** For instance, charitable trusts. The trust deed may also provide otherwise.
*** See Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) at [5.3.1].
**** See for example the Court of Appeal judgment of ASB Bank Ltd v Davidson (2005) 8 NZBLC 101,597 where the Court held that ASB was unable to enforce the letters of credit issued to the trustees of a trust in circumstances where only one trustee signed the relevant documents.
We are contracting with the trustees on the basis they are entitled to a full indemnity out of the assets of the trust, and that we have a full right of subrogation to that indemnity.
The risk of the trustee's right of indemnity being lost or impaired is an important issue for us. This is because we need to be able to take advantage of the trustee’s right of indemnity by way subrogation for recovery purposes, particularly if its rights of recovery are to be limited to the trust assets.
Our right of subrogation to the trustee's right of indemnity is entirely derivative (i.e. we can only claim via the trustee's rights). As a consequence if the trustee's right of indemnity is lost or impaired, then our subrogation claim is likewise lost or impaired.
For this reason we require the trustees to warrant that they have the right to be fully indemnified out of the trust assets in priority to the interests of the beneficiaries in respect of the obligations under the home loan/business banking documentation. Because the right of indemnity should always be there in accordance with established principles of trust law, unless a trustee has done something to lose or impair it, our position is that the trustees, and not us, should carry responsibility for any resulting losses we incur in those circumstances.
Any confirmations by trustees in respect of any trustee other than themselves is only so far as they are aware. If another trustee has done something to compromise their right of indemnity, and you do not know about it, you have nothing to be concerned about.
The courts have an equitable jurisdiction to entitle our right of subrogation to the trustee's indemnity. However, in order to remove any doubt we would expect the trustee to exercise its right of indemnity against the trust assets or any beneficiary to our benefit upon request. As long as a trustee does what it can to assist us, they have nothing to be concerned about.
The permitting by a trustee of any restriction, limitation, set-off or counterclaim against the trustee's right of indemnity out of the trust assets or from a beneficiary would effectively impair our right of subrogation via the trustee’s right of indemnity.
Because the rights of indemnity and subrogation should always be there in accordance with established principles of trust law, unless a trustee has done something to lose or impair it (i.e. it is within their control and knowledge), our position is that the trustees, and not us, should carry responsibility for resulting losses we incur in those circumstances.
When dealing with a trust, Kiwibank's first concern is to ensure that there are sufficient trust assets to meet the obligations the trustees have incurred.
Effectively this is a balance sheet solvency certification as to the assets and liabilities of the trust at the date the obligations are incurred. It is up to the trustees to ensure they can give this warranty. To do so they will need to consider all of their liabilities as trustees, not just those to us, and all of the things they may have done which may have impaired their rights of indemnity.
Trustees should note that this is not an ongoing promise that the assets of the trust will not fall below the value of the obligations to Kiwibank at some time in the future.
If a trustee has a particular concern as to why this warranty may not be correct (i.e. a factual matter, rather than a refusal to give the warranty) please let us know and we can agree an appropriate way to deal with the concern raised.
Distributions and vesting of trust assets reduce the pool of trust assets available to satisfy the trustee(s) obligations to us under the indemnity and on which we have made our decision to deal with the trustee(s). Once distributed or vested, the assets may be taken out of Kiwibank's reach. As a consequence it is important that we are aware of, and have agreed to any such distributions or vesting.
If this provision is too restrictive in practice, please feel free to raise with Kiwibank whether there are certain exceptions that may be permitted. For example, Kiwibank may agree to allow distributions of assets which are not subject to particular security (as long as there is no event of default) or provided certain other conditions are met.
The termination, winding up or liquidation of the trust are fundamental actions that could have adverse implications for us (as above, trust assets may be distributed and placed out of Kiwibank's reach) so it is essential that if any such action is taken or proposed we are notified immediately so we can assess our position.
As long as a limited liability trustee notifies Kiwibank of any such action immediately upon becoming aware of it, there will be no adverse implications for their limited liability (unless they also breach some other fundamental requirement).
As noted above, if the trustee(s) derogate from the terms of the trust deed then they may not be entitled to full indemnity against the assets of the trust. This would compromise the ability for us to rely on the right of subrogation to the trustee(s) indemnity.
Even where the specific dealings with Kiwibank constitute a proper exercise of trust power by the trustees, which will be indemnified under the terms of the trust, there is a risk that the right of indemnity may be impaired or lost if the trustee has in the past committed, or in the future commits a breach of trust in a completely unrelated manner. For example, if the trustee incurs an obligation of $1,000,000 with Kiwibank but through an unrelated breach has a claim of $500,000 owing to the beneficiaries, then the risk is that Kiwibank can only claim through the trustee’s right of indemnity an amount up to $500,000.
As a consequence it is important that the trustee(s) have always been, and continue to remain, in compliance with the trust deed. This is the case with respect to all of the trustee(s) actions as even unrelated breaches can adversely affect Kiwibank.
Any confirmations by trustees in respect of any trustee other than themselves is only so far as they are aware. If another trustee has done something to compromise their right of indemnity, and you don't know about it, you have nothing to be concerned about.
A trustee will be in breach of trust if the trust property is mixed with personal property. As a consequence the trustees’ personal assets and income must be kept separate from the trust’s assets and income.
Moreover where the trustee has mixed their own money with the trust fund the beneficiaries have a first claim in respect of the trust fund and the trustee has only a subsequent claim in respect of their own money. This has the potential to impair Kiwibank’s right of subrogation to the trustee(s) indemnity in any recovery proceedings.
From a practical perspective it is important for Kiwibank that if it is required to enforce the trustee’s indemnity through its right of subrogation then it can do so without being brought into a dispute on whether the subject of the indemnity is in fact the assets of the trust or not and or whether those assets are available to satisfy Kiwibank’s claim.
By way of example once money is paid into an overdrawn account it becomes generally impossible to trace. This is a risk that the trustees should be able to manage given their requisite knowledge and control.
Kiwibank would expect that a prudent trustee would keep the trust assets separate to any other property that it may hold in its personal capacity.
Any confirmations by trustees in respect of any trustee other than themselves is only so far as they are aware. If another trustee has mixed trust property, and you don't know about it, you have nothing to be concerned about.