Professional trustee seeks contribution for tax bill
Selkirk v McIntyre  NZHC 575
Mr Selkirk is a lawyer who accepted appointment as a trustee of a trust of which his client, Mr McIntyre, was a co-trustee. The trust undertook property transactions which gave rise to GST obligations but it failed to file GST returns and eventually it was assessed for GST for a substantial sum. Mr McIntyre disappeared to Australia leaving Mr Selkirk to carry the can.
As a trustee Mr Selkirk was jointly and severally liable for the tax obligations incurred by the Trust. The IRd proceeded against him solely because Mr McIntyre was out of NZ. Mr Selkirk settled his liability for $200,000 and then brought proceedings against his co-trustee for reimbursement of that sum on the basis that the GST defaults of the Trust had been caused entirely by Mr McIntyre. The issue was whether such contribution or indemnity could be required.
The matter proceeded as one formal proof based on Mr Selkirk’s affidavit evidence because there was no appearance by Mr McIntyre.
The High Court noted that trust debts are owed by the trustees because a trust is not a separate legal entity. That is true as a general proposition, but it is a separate person for GST purposes. However its tax liability is visited on the trustees by statute and because they are jointly and severally liable the IRD could choose against whom to proceed when there was more than one trustee.
The joint and several liability resolved the question of Mr Selkirk being entitled to a 50% contribution from his co-trustee, but the issue of total indemnity was more difficult to resolve. The Court summarized certain rules that have emerged from the few cases about full indemnity between co-trustees.
Mr Selkirk argued that Mr McIntyre had breached his obligations as a trustee by failing to meet GST obligations and stripping the trust of its funds. He argued that had that not been done he would not have been required to fund the tax bill. The Judge said that if this was proved then it met one of the rules she identified, namely that full indemnity might follow if one trustee had personally benefited and left another to meet an obligation. But on the available evidence (Mr Selkirk’s affidavit only) there was insufficient foundation for the Court to conclude that Mr McIntyre had made away with trust funds and so the rule allowing for full indemnity could not engage. Had that here been such evidence it seems clear that the Judge would have been prepared to find in Mr Selkirk’s favour.
However, the difficulty that Mr Selkirk faced was that he had been an essentially passive trustee. He did not have information about what Mr McIntyre had actually done which could be provided in evidence. He was left, therefore, having to argue that he should be indemnified by Mr McIntyre because of his lesser culpability as a passive trustee.
The Court gave this argument short shrift, noting on the basis of long standing and robustly expressed authority that the law does not recognize the concept of an active or a passive trustee. All trustees must be accountable for the proper administration of their trust and in this case the Judge noted that there was no evidence of systems and procedures which might have ensured that GST was properly accounted for.
In the result Mr Selkirk succeeded in obtaining judgment for a 50% contribution to his tax payment and legal costs but no more.
The case is a reminder of the need for trustees, especially those who as professional advisers take on trusteeships for their clients, that they cannot afford to leave oversight of the trust to the “client” trustee. That is especially so if the trust is undertaking active business in the context of which liabilities may arise.
It seems that had Mr Selkirk been able to show that procedures were in place to review the activities of the trust and to provide for the application of funds to meet tax obligations, he might have been successful in obtaining a full indemnity. That is because he could then have pointed to something more than his own passivity as a justification: he could have shown active dishonesty on the part of his co-trustee. As it was, the evidence he was able to raise related to his efforts to try to have the tax issue resolved by Mr McIntyre after the event, ie when the liability had already arisen and that was insufficient to show that McIntyre had converted trust funds.
The picture might have been very different had the trustees:
(a) Met regularly in person or by telephone to review the property transactions;
(b) Resolved that completed GST returns be copied to Mr Selkirk as they were completed so that he could verify what was being done or be alerted to non-action;
(c) Required funds to be placed in an account that was actionable by the trustees jointly or at least required statements to be supplied to both trustees.
These are minimum requirements that might have alerted Mr Selkirk to his co-trustee’s defaults or could have provided a sounder basis to his claim for full indemnity.
© G D Clews