Family trusts are often marketed as a great way to protect family assets. Although trusts can be useful, they are not ‘get-out-of-jail-free’ cards, as Mr Lightbody discovered when his trust was considered by the Supreme Court in Regal Castings Ltd v Lightbody.
Mr Lightbody owned his own jewellery business, Capro Three Limited, and he purchased most of his supplies from Regal Castings Limited. The debt owing by Capro Three to Regal Castings grew over time and the two companies negotiated a repayment plan. Mr Lightbody personally guaranteed the debt. He and his wife then transferred their family home to a family trust. At that time, Mr Lightbody’s only significant asset was his interest in the family home.
Nearly five years after the Lightbodys transferred their home to the trust, Capro Three was placed into liquidation. Regal Castings was unable to recover the amount it was owed from Capro Three and it sued Mr Lightbody personally under his personal guarantee. He could not pay the debt so Regal Castings then applied to the High Court for the family home transfer to be set aside. This application was made under s.60 of the Property Law Act 1952 which allows courts to set aside transfers made with an “intention” to defeat creditors.
The Supreme Court accepted that at the time of the property transfer, Capro Three was meeting its obligations to Regal Castings. However, the Court held that Mr Lightbody knew he had a potential liability to Regal Castings under his personal guarantee and that the only way he could pay that liability would be to use his interest in the family home. When transferring his interest in the home, the Court said, he must have known that he would not be able to meet his payment obligations if called upon to do so. The Court decided that this knowledge was sufficient to constitute an intention to defeat his creditors. On that basis the Court ordered the trust to transfer half of the home property (the half share it received from Mr Lightbody) to the Official Assignee to be used to repay Mr Lightbody’s debts.
If you want to protect your assets by transferring them to a family trust, you need to work out whether you will be left with sufficient assets to meet all of your personal obligations, including liabilities under personal guarantees. If you will not, your attempts to protect your assets may be unsuccessful.
As published in the Waikato Times’ supplement ‘The Biz’ on February 22, 2010.
Published: 22 February 2010