Court opens way to seize trust assets

Shonky business people can no longer hide their assets in family trusts to protect their wealth from regulators and other claimants.

In a judgement one trust expert said broke new ground, a court decided that two directors still had access to funds in their family trusts, despite being bankrupted in February last year.

The Christchurch District Court last week ordered two directors of Balmoral Homes, which lied to customers about having a Master Build Guarantee, to pay $15,000 each in fines and a total of $107,000 in reparation and "emotional harm" payments to clients, despite all their wealth being held in family trusts.

Perhaps fortunately for the two directors, Master Build Services, the company that offers the guarantee Balmoral pretended to have, made more than $350,000 in ex gratia payments to people who had paid deposits to Balmoral, but whose homes were not built before Balmoral went into liquidation in April 2008.

Lawyer John Brown, the author of The New Zealand Master Trusts Guide, said, as far as he was aware, this is a first case of its kind where people had pleaded guilty to criminal charges, though such trust-busting by the courts is not entirely new.

The Family Courts, when dealing with family break-ups, have been aggressive in making awards to spouses and children that take into account property held in trusts, in some cases ordering assets be removed from trusts.

"Section 182 of the Family Protection Act 1980 does give the court powers over trusts, but that is limited to relationship property matters," Brown said.

That, Brown acknowledged, appeared to result in two sets of rules for property in trust – one pertaining to family disputes and quite another for civil proceedings, and in the Balmoral case, criminal proceedings where reparation can be ordered.

The Balmoral case appears to have eroded some of that dividing line, perhaps giving some hope for creditors in civil proceedings.

The Commerce Commission issued a statement saying it placed before the court information about the two directors' financial positions, leaving it in little doubt the two men had access to money to pay fines and damages awarded by the court.

"The commission is not always able to achieve financial redress for consumers who have been harmed by breaches of the Fair Trading Act," it said. "However, in appropriate cases, the commission does seek reparation orders on behalf of affected consumers.

"The commission's thorough analysis of the defendants' means in this case received praise from the judge."

Balmoral built homes in places like Christchurch, Reefton, Rangiora and Nelson.

The latest liquidator's report shows that secured creditors of the firm, including the IRD, have been paid back just over $1.5 million from the sale of Balmoral showhomes, leaving an estimated shortfall of some $150,000, but there is another $2.67m of claims from unsecured creditors, who look likely to get nothing.

- © Fairfax NZ News