Defrauding creditors by transferring assets to trusts

The Supreme Court has provided further guidance on when it will rule that the transfer of assets to a trust constitutes intent to defraud creditors.

In this case¹, the Supreme Court considered a transfer of property by a debtor to his family trust, which was said to have been made with intent to defraud creditors. The court found that the transfer of property was void.

A creditor loaned a substantial sum to provide capital for an individual's business. Without telling the creditor, the debtor transferred his house, which was his only substantial asset, to a family trust. When he subsequently defaulted on the loan, the creditor obtained judgment against him and brought a claim under section 60 of the Property Law Act 1952 (PLA 1952) to set aside the transfer of the property as having been made with an intent to defraud.

It was suggested during the hearing that a transfer of property for no monetary consideration gave rise to a presumption of an intention to defraud. The majority of the court found it unnecessary to decide whether this was correct. Instead, they held that the question of intent remains one of fact, but accepted that an inference of fraudulent intent may be drawn from the facts.

Counsel for the creditor argued that the debtor's financial circumstances were precarious, and the creditor's position was inevitably prejudiced by the transfer of the debtor's only substantial asset. In those circumstances an intention to defraud was established.

The court agreed that the circumstances showed an intention by the debtor to defraud his creditors.

In our view, this conclusion has lowered the bar for conduct sufficient to trigger section 60 of the PLA 1952. The debtor knew that one of the effects of the trust arrangement was to protect assets, but there was nothing untoward in the terms of the trust deed. The house had been transferred at value (by virtue of a deed of acknowledgment of debt), and the gifting programme was standard. To find the debtor intended to defraud the creditor ultimately required the court to infer a level of calculation and sophistication on the part of the debtor that may not have existed.

The effect of the decision

Since implementation of the Property Law Act 2007 (the PLA 2007) on 1 January 2008, it is no longer necessary to prove that the debtor disposed of the relevant property with intent to defraud creditors. A transaction may be set aside if the relevant property was disposed of:

• as a gift; or
• without receiving reasonably equivalent value in exchange.

However, this case is still relevant because section 346 of the PLA 2007 provides that a disposition of property may be void if it is made with intent to defraud creditors. Also, transfers of property to trusts prior to 1 January 2008 are still governed by section 60 of the PLA 1952 and the decision in this case.

¹ Regal Castings v Lightbody [2008] NZSC 87; [2009] 2 NZLR 433

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