New Zealand: The Role Of Discretionary Trusts for Asset Protection - A Survey of Australian And New Zealand Practice

Last Updated: 18 September 2002
Article by Bill Patterson


The normal rule of law is that a third party is not responsible for the wrongdoings of another. See for example this statement from Anderson. The Treatment of Trust Assets in English Insolvency Law in Commercial Aspects of Trusts and Fiduciary obligations, Clarendon Press, Oxford 1992 pp 171-172. "It is a fundamental principle of English insolvency law that assets belonging to third parties do not constitute part of the property divisible amongst creditors of the insolvent party. Trust assets are merely one example of this principle in operation. …the application of the general principle to trust assets is particularly interesting because such interests may arise not only through the express agreement of the parties but also through the intervention of equity imposing constructive trusts and through the presumed intention of the owner in the case of implied or resulting trusts."


Where the "wrongdoer" is an individual who has alienated assets to the trustees of a trust, are the trustees third parties in the sense used above? What if the trustees are the wrongdoer and, say, his spouse, friend or trusted business associate? As Parker and Mellows The Modern Law of Trusts 5th Edition P111 put it "For almost as long as the trust has been invented, it has repeatedly been used in an attempt to achieve protection from their creditors by those who contemplate the actual or potential threat of financial ruin. If a man effectively transfers his property to another upon trust for his wife, or other friend or relative, and goes bankrupt, on general principles that man’s trustee in bankruptcy will not be able to claim the property subject to the trust. … Not surprisingly statutory restrictions have long been placed on the use of the trust for this purpose … but nevertheless the basic principle remains true that where the statutory provisions do not operate the trust may be an effective means of preventing creditors from laying their hands upon a person’s property."

Clearly, if a trust is established for a fraudulent purpose then the Court will not enforce it on behalf of the beneficiary. See for example Ford and Lee Principles of the Law of Trusts 3rd edition 1996 para 7220. The position is the same where the transfer to a trust is not genuine but merely appears to create an illusion of a change in beneficial ownership. Martin v Martin (1959) 110CLR 297; Noack v Noack [1959] VR137; Re Emery’s Investment Trusts [1959] 1 All ER 577.

There is, however, an intermediate situation where a trust is a genuine trust and the assets transferred are not obviously transferred for a fraudulent purpose but creditors are, never the less, prejudiced either as a result of the transfer (existing creditors) or at a later time (future creditors). The former situation seems likely to be caught even where the transfer is for consideration. The latter is probably not caught whether the assets are transferred without consideration, or, as in New Zealand, sold for value with the price being paid over time by gifting.

The Statutory Response

Both Australia and New Zealand have developed statutory responses to the problem of transfers of assets (not necessarily just to trusts) which defeat the claims of creditors. In New Zealand the statutory provision is section 60 of the Property Law Act 1952 which reads as follows:

(1) Save as provided by this section, every alienation of property with intent to defraud creditors shall be voidable at the instance of the person thereby prejudiced.

(2) This section does not affect the law of bankruptcy for the time being in force.

(3) This section does not extend to any estate or interest in property alienated to a purchaser in good faith not having, at the time of the alienation, notice of the intention to defraud creditors.

Each Australian State has similar legislation eg Conveyancing Act 1919 (NSW) s 37A; Property Law Act 1958 (VIC) s 172 etc. In addition, in Australia, s 121 of the Bankruptcy Act 1966 covers similar territory by providing that a disposition of property made at any time with intent to defraud creditors (other than one made for valuable consideration to a bona fide purchaser) is void as against the trustee in bankruptcy. It appears to be Australian practice to use the State legislation if the disponor is not likely to become bankrupt, see Ford & Lee, para 7090. As can be seen both the New Zealand and Australian statutory provisions are similar in scope.

Where the traditional sections differ from the bankruptcy provisions is that there is no specific clawback period eg the five year period in the Bankruptcy Act 1966, s 120 or the roughly equivalent two to five year period in the Insolvency Act 1967 (NZ) s 57 for voidable gifts and so the potential liability is extended indefinitely. Nevertheless, as a short survey of the relevant cases shows the section is of quite limited effect in the context of prudent asset protection planning by professionals on both sides of the Tasman.

New Zealand cases

Re Hale. The leading New Zealand authority is the Court of Appeal decision in Re Hale [1974] 2 NZLR 1 (HC); [1989] NZLR 503 (CA) which related to a mortgage given by a bankrupt to his wife prior to the New Zealand Insolvency Act of 1967 coming into force. The bankrupt had in 1965 guaranteed an obligation of a company. The company went into receivership in 1967. His wife had made advances to him which he attempted to secure by a mortgage given in 1968. In 1972 he became bankrupt. The Court of Appeal held that s 60 did not apply so as to enable the mortgage to the wife to be avoided. The head note to the report reads as follows:

"No alienation of property can be caught by s 60 unless it is first shown to fall within subs (1) as being one made with intent to defraud creditors. With the possible exception of a voluntary alienation made by an insolvent debtor, the existence of an intention to defraud is a question of fact to be decided by a consideration of the alienation in the light of all the circumstances. However, the fact that a charge has been given to secure a past debt without any present consideration does not make the alienation a voluntary one. There will be an intent to defraud if there is an intention to prejudice creditors by putting an asset wholly or partly beyond their reach, provided that in the circumstances the debtor is acting in a fashion which is not honest in the context of the relationship of debtor and creditors. Section 60 is not directed to an intent merely to prefer one creditor against another; but if the real object of the alienation is to defraud creditors then the fact that one creditor incidentally gets a preference as a result of the alienation will not prevent the transaction from being voidable. In this case, the fact that the bankrupt intended to prefer his wife to other creditors was, in itself, insufficient to render the mortgage voidable under s 60(1). The onus of proving an intent to defraud lay on the party attacking the transaction. On the evidence it had not been established that the mortgage was a means of achieving a benefit to the bankrupt rather than a genuine transaction intended to protect his wife."

In the course of its decision the Court of Appeal made some important observations which have been reflected in subsequent New Zealand decisions. They are:

  • with the possible exception of a voluntary alienation by an insolvent debtor, the existence of an intention to defraud is a question of fact to be determined by a consideration of the alienation of the light of all the circumstances;
  • an intent to prejudice creditors by putting an asset wholly or partly beyond reach is sufficient to amount to an intent to defraud if, in the circumstances, the debtor is not acting in a fashion which is honest in the context of the relationship of debtors and creditors;

The required level of proof

In the case of voluntary alienation by an insolvent debtor, a presumption of fraudulent intent is raised which must be discharged by the debtor. Further, the state of insolvency required has been interpreted so as to encompass insolvency both at the time of the disposition or as a result of the disposition (Freeman v Pope (1870) 5 LR Ch App 538), and insolvency resulting a short time after the disposition (Townsend v Westacott (1840) Beav 340). The existence of contingent debts could therefore be relevant to the issue of insolvency, if they later ripened into actual liabilities.

With regard to alienation voluntary or for consideration by one who is not insolvent, actual intent must be established. Under New Zealand law the onus of establishing an intent to defraud rests on the party who attacks the transaction although as a general rule the existence of an intent to defraud is a question of fact to be decided by a consideration of the transaction in the light of the relevant circumstances. It is not sufficient that the consequences of defeating creditors should have been recognised as likely to flow. There must be an actual intent. See Swann v Secure land Mortgage Investment Nominees Limited [1992] 2 NZLR 144. However if the evidence demonstrates that a debtor must have known that an alienation would cause a loss to some person it is very likely that an actual intent will be found to exist by a court.

Gray v Wilson

The point is neatly illustrated in Gray v Wilson (1998) 8 NZCLC 261530, 261, 546 per Elias J (now Chief Justice of New Zealand) as follows:

All causes of action alleged by the plaintiff require proof of fraud. For all, the court must be satisfied, to a standard commensurate with the seriousness of the allegation, by the party alleging it … that the defendant directors acted with actual dishonesty … In the circumstances here alleged, an intention to prejudice creditors by putting assets beyond their reach will amount to intention to defraud; "provided that in the circumstances the debtor is acting in a fashion which is not honest in the relationship of debtor and creditor" (quoting re Hale) … In the case of a voluntary alienation of property made by a debtor who is insolvent, inference of insolvency is readily drawn; … Where an alienation is not, however, voluntary, inference as to fraudulent intent turns on examination of all the circumstances. I accept that care needs to be taken in drawing inferences of dishonesty from an alienation, particularly in a situation where directors act under pressure to save the business by restructuring it. It is important to be realistic …. For the purposes of misfeasance, it is enough that the directors appreciated or ought to have appreciated that the consequence of defeating creditors is likely as a result of the actions they proposed. But for the purposes of intent to defraud, loss to creditors must be a consequence consciously undertaken by the directors, although it need not be the governing motive."

The "badges of fraud"

The cases, to a large extent, reflect but do not explicitly refer to the practice of the Courts over the centuries, which have evolved certain indicators of fraud to assist in their determination. Essentially, these "badges of fraud" are common to both voluntary dispositions and those for consideration. The strength of these indicators is greater where the disposition is voluntary.

These badges of fraud include:

  • the initiating or even likelihood of litigation against the debtor;
  • the entry by the debtor into a "hazardous activity" soon after the disposition;
  • where the disposition comprises all or substantially all of the settlor’s assets;
  • where the disposition is made in secret;
  • where it is made pendente lite;
  • where there is a trust between the parties for the grantor’s benefit;
  • where the deed contains unusual statements such as that the disposition was made honestly, truly and bona fide;
  • where the deed grants the settlor a general power of revocation;
  • where the deed contains false statements as to the consideration etc; and
  • where the consideration is grossly inadequate.

Cases involving trusts

In New Zealand there have been two reported decisions involving the application of the statute to dispositions to trusts.

The first is Springfield Acres Limited v Abacus (HK) Limited [1994] 3 NZLR 502. In this case a plaintiff had obtained judgment against Springfield for over $700,000. While the claim had been pending Springfield’s assets were transferred to Zamora Limited a BVI company and then from Zamora to Abacus a Hong Kong company. Both Abacus and Zamora were acting as trustees of discretionary trusts the beneficiaries of which were family members of a director and major shareholder of Springfield. Abacus advanced the funds to Kanad Holdings Ltd by journal entries in the trust account of New Zealand Solicitors and Kanad subsequently repaid most of the advance to Abacus which then advanced the funds to several other parties. The plaintiff’s judgment against Springfield was not paid and Springfield was wound up in December 1991. It, its liquidator and the plaintiffs all sought to set aside the dispositions to the trusts. They also claimed breaches of constructive trust. The trustees, as overseas companies, protested the jurisdiction of the New Zealand Court. One argument was that section 60 applied only to persons within New Zealand and could not be invoked against the overseas trustee company.

The Court held that the ambit of section 60 was not determined by a consideration of the parties but by the character of the transaction and the fact that one or even all of the parties to the transaction were outside New Zealand did not prevent the section applying. It also held that the section could also apply to transactions partly or even wholly effected outside New Zealand. In relation to Abacus, although it was acting as a trustee, it acted as owner of the funds received and exercised the right of control over them. The fact that it had fiduciary obligations in accounting for the use of the funds did not make it merely an agent. At the time it received the funds it knew facts sufficient to indicate to an honest and reasonable person that Springfield was being wrongfully deprived of assets. The Judge concluded that section 60 was, as a matter of law, available to the plaintiffs in respect of the transactions in question. As the matter was a preliminary proceeding he was not called upon to make the decision whether the transactions were made with the requisite fraudulent intent.

Gray v Brooklee Holdings Ltd

In an unreported decision Grey v Brooklee Holdings Limited Auckland CP2-SD/99, 17 December 1999 Justice Fisher has recently had to consider an application by plaintiffs seeking to avoid dispositions by Mr and Mrs Grey. There had been a history of litigation between the Greys and the plaintiffs and as at June 1998 it was clear that they owed a substantial amount to the plaintiffs. On 29 July 1998 the Greys settled a conventional New Zealand discretionary family trust of which they were two of the discretionary beneficiaries. They also had powers of appointment and other powers in the trust deed which gave them a high measure of control over the trust and assets transferred to it. A month later they sold their farm and associated chattels to the trust for full market value. The price was evidenced by a deed of acknowledgement of debt the terms of which left the purchase price unpaid, unsecured and irrecoverable for a minimum of eight years. The deed also contained a relatively unusual provision that provided that the power reserved to the lenders to make demand for repayment could only be exercised by either of the lenders personally and not by their executors or representatives.

The obvious intention was to ensure that the Official Assignee in bankruptcy would have no power to call up the debt. There was evidence of a letter from the solicitor to the Greys explaining the transaction and commenting that the debt document had been provided to protect them in the event that the debt was open to attack by creditors.

Almost simultaneously the Greys purchased a shelf company of which they were sole shareholders and directors. It became the sole trustee of the family trust.

At paragraph 13 of the judgment the judge noted that the plaintiff had to prove that the disponor had an actual intent to defraud creditors but noted that as with all questions of fact the court was entitled to draw logical inferences from a directly proven set of circumstances such as the consequences of the disposition, its effect on creditors, the foreseeability of that effect at the time of the transaction and the likelihood that that effect must have been appreciated by the disponor at the time of transaction. He observed that if the disposition was made for good consideration then that would be a relevant circumstance in favour of the disponor but it could not preclude the plaintiff from going on to prove an intent to defraud creditors whether in the form of direct and specific evidence or inferences to be drawn from the nature of the transaction or a combination of both. He also observed that the standard of proof was a high one even though on the balance of probabilities.

Predicably there was some evidence that the transaction was a normal family transaction but the judge found signs of intent to defraud. He noted that the first and simple consequence of the transactions was that if upheld they would preclude a successful execution by the plaintiffs of their judgment. The judge thought that was a powerful consideration. There was also the nature of the discussions between the Greys and their solicitors where the context was clearly asset protection. That, in a normal course of events might not have been unusual or inappropriate. Given the background of the existing debt, this took on a rather more sinister context, particularly as the solicitor in correspondence referred to the clawback provisions of the relevant insolvency legislation and noted that as there were also a number of other legitimate reasons to form the trust, the requisite intention would be difficult to prove. Finally the judge concluded that the settlement of the trust and the sale of the assets to it "had the purpose of protecting those assets against potential execution by the plaintiff". He held that the Greys knew perfectly well that that was the dominant purpose and that the letters from the solicitors, while expressed in discreet terms did not conceal the dominant purpose. His conclusion was that the requisite intent to defraud creditors had been established.

The order was that the sales be set aside. It appears that no attempt was made to argue that only the debts should be the subject of an order. It is doubtful if s60 can be interpreted in such a way as to enable the debts to be re-categorised as on demand debts. Had this been possible then any increase in value of the assets sold would have remained with the trust.

Conclusion on New Zealand authority

So far as New Zealand law is concerned, what these cases and others seem to make plain, is that an alienation of assets at a time when the disponor is solvent and where there are no "clouds on the horizon" is most unlikely to be upset under the statute. Clearly if the transaction occurs a relatively short time before insolvency the clawback provisions of the insolvency or bankruptcy legislation may well operate but assuming that those clawback times have passed and there were no other relevant factors at the time of the original transaction, the requirement for positive proof of intent to defraud is most unlikely to be capable of being satisfied. It is invariable practice in New Zealand for transfers of assets to discretionary trusts to be made for full consideration, usually with a deed of acknowledgement of debt evidencing the purchase price and being expressed as being repayable upon demand and free of interest. In some cases it is common for the debt to be repayable after a fixed period eg 10 to 15 years with a provision for interest to be payable if demanded annually. Under New Zealand gift duty law if demand is not made for interest at the relevant time then the right to interest for that year is lost but this is not a dutiable transaction. From a commercial point of view there is nothing particularly uncommon about either of these procedures.

In the Grey case the relevant issues were clearly that the existed at the time of the settlement and the effect of the settlement was to make it difficult, if not impossible, for the creditor to enforce payment of the debt.

While there have been no reported decisions on whether the section can operate retrospectively, where a transfer of assets to a trust takes place when there is no actual or even contingent prospect of financial difficulty it is submitted that such a transaction would, under New Zealand law, not be capable of attack under the statute.

Position in Australia

It seems that the position would not be different in Australia provided the transfer of assets was made for full valuable consideration. As Australia, unlike New Zealand, does not have a gift duty regime it is perhaps more common for assets to be transferred without consideration between spouses or to family entities. On the other hand the application of Australian capital gains tax (again something which is absent in New Zealand) has the effect that transfers of assets to family trusts need to be considered more carefully. For the purposes of this paper it will be assumed that there are no adverse income tax or capital gains tax issues present to prevent a transfer of assets to a trust and that the transfer would be at full value. It does not appear that the principles enunciated in the New Zealand cases or the earlier English authorities are any different in relation to the statutory provisions to those which would be held applicable in Australia. It therefore appears that unless there is an actual creditor or a real prospect of an actual liability maturing, that a transfer of assets to a trust would be immune from attack (assuming that the clawback provisions of the bankruptcy legislation were also excluded).

The Springfield case in New Zealand demonstrates that if there is an active intent to defraud, the use of an offshore trust will not be effective to the extent that assets remain within the grasp of the Court. One possible example of the contrary position is found in Nelson v Nelson (1995) 132ALR 133 where a person arranged for her children to acquire a house in their names, although she had paid for it, so that she could obtain certain subsidised advances under an Australian Act. When the house was sold she claimed the proceeds on the basis of a resulting trust but one of the children objected. The court held that it would enforce a resulting trust in favour of her for the proceeds of sale provided that she repaid any benefits she had received from her unlawful conduct. While the general rule is that the court would not assist an action based on illegal or immoral acts it was thought in this particular case that the statutory scheme did not preclude the court upholding the trust subject to her making restitution. This is probably on the border line of these types of cases.

Transfer for value – bona fide exception?

It is unresolved whether trustees receiving a transfer of assets in this way could claim to come within the exception under the statute for a transferee taking in good faith and without notice of the intention to defraud. Logically there seems no reason why the benefit of this exception should not be available if the transferor was clearly solvent. In the Springfield Acres case it was clear that the trustee was aware of facts sufficient to indicate to an honest and reasonable person that Springfield was being wrongfully deprived of its assets. That seems to be an exceptional case. In Ford and Lee at para 7070 reference is made to some of the earlier cases and it is stated that although, if a disponee has constructive knowledge of a disponor’s dishonest intent the benefit of the exception will not be available, this can hardly mean that knowledge on the part of the disponee that the disponor has debts is equivalent to notice of dishonest intent See Coghlan v Alexander (1905) 5 SR (NSW) 441. See also Jacobs Law of Trusts in Australia 5th edition para 960 "Fraudulent intent will not be presumed from the mere fact that the settlor was in debt at the time of the settlement and it is not sufficient merely to show that the effect of the settlement has been to defeat a creditor"

Is there an exception for fixed trusts? – Broomhead’s Case

Broomhead v Broomhead [1985] VR 891 raises the question of the position of beneficiaries under a fixed trust, the trustee of which has carried on business as trustee and the interface with the rule in Hardoon v Belilios [1901] AC118 (where it was held that an adult beneficiary can be liable to indemnify a trustee in respect of losses to the trust estate.).

While there was some argument in Broomhead’s case as to whether or not the company concerned was acting as a trustee, the Court held that it was so acting and the focus of the case then turned to the question whether the adult beneficiaries of the trust were liable to indemnify the claimant trustee. The Court held that apart from one beneficiary who had successfully disclaimed her beneficial interest, the other beneficiaries had determined to accept the beneficial interest made available under the trust and the principle in Hardoon v Belilios entitled the plaintiff to indemnity for the liabilities incurred notwithstanding that there was more than one beneficiary. The rationale was that the beneficiaries were between them the absolute beneficial owners of the trust fund and therefore were liable to indemnity the plaintiff.

The principle of Hardoon v Belilios is set out at page 936 of the judgment and it is stated that the basis of the principle is that a beneficiary who receives the benefit of a trust should bear its burdens unless he can show some good reason why the trustee should bear the burdens itself. It appears now to be settled law that this applies where there is more than one beneficiary so long as all of the beneficiaries collectively are sui juris and entitled effectively as absolute owners.

The consequence of this decision seems to be that where all the beneficiaries of a trust are adult and able to put an end to the trust then they will be liable personally to indemnify the trustee (and in effect to enable creditors to be subrogated to the trustee’s right of indemnity). In New Zealand the use of fixed trusts as an estate planning or asset protection structure is virtually unknown. The New Zealand practice strongly favours the use of discretionary trusts. The New Zealand tax system also makes this an attractive planning opportunity for clients. The position is less satisfactory in Australia but the question that must be posed is whether, even if there are tax disadvantages, there are nevertheless other advantages which make the use of the discretionary family trust an appropriate structure for asset planning purposes. The answer clearly seems to be yes.

Offshore Trusts

The domestic rules of Australia and New Zealand are likely to be applied quite strictly by the courts. This is one reason why there has been increasing consideration given to the use of offshore trusts particularly in jurisdictions which severely restrict the ability of a claimant to access trust information let alone trust assets. Neither New Zealand nor Australian contain the type of anti-creditor provisions that are commonly found in tax haven jurisdictions such as those in the Cook Islands, Samoa, Vanuatu the Caimans, Bermuda etc. A comment about this practice is found in an article in 1995 Canadian Tax Journal 314 by Kyres, The Use of Non Resident Trusts for estate planning and asset protection. He says "Offshore trusts are increasingly being established with the object of putting the settlors and the beneficiary’s assets beyond the reach of their creditors. Although this object is viewed as morally reprehensible by some, we submit that the criticism aimed at this use is unjustified in most cases. In effect, when asset protection trusts are viewed as a method of creating a fund by inter vivos to be used for the future welfare of one’s family and descendants, or as an alternative to a corporation for insulating property from business liability, this use may be viewed as praiseworthy. Accordingly, while it is obvious that any plan that involves the defrauding of creditors must be rejected by the tax professional, a plan consistent with legitimate asset protection or conservation in circumstances where no actual, future, or contingent creditors exist or where the settlor retains assets in sufficiently liquid form to pay such creditors is perfectly legitimate and should be free from attack and criticism"


Effective asset protection by use of a family trust with discretionary beneficiaries is clearly possible. It is probably unwise for such a course of action to be undertaken for no other reason than asset protection since there are some "badges of fraud" of the entry into a hazardous activity, the use of a trust for the grantor’s benefit which creditors might point to (though it is submitted, without much hope of success). There are many other good reasons for the use of a trust, among them protection from matrimonial claims, protection of minor or dependent children, succession planning and taxation savings to name a few. The key seems to be to act early when clearly solvent and under no threat of litigation and to be able to demonstrate other reasons for the settlement than pure asset protection.

If the facts are such that the statute will operate there seems little scope to argue that the original translation, assuming it was for full consideration, should stand, with only the debt created on sale being set aside. This, probably, is an inevitable consequence of the operation of the statute. While it might be thought that it is unjust that any increase in value of the assets transferred should be available to creditors, the fact that this is so, may, conversely, furnish further strength to the argument that if the transfer or was clearly solvent before and after the translation, the section cannot apply. They would leave only the clawback provisions of insolvency legislation to operate on gifts (in New Zealand by way of reduction of the original debt) made within the vulnerable period.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.