Josh’s article covers possible avenues of attack by creditors against insolvent gifters; what the definition of “insolvent” might be in that context, and what gifters (and their lawyers) can do to protect themselves:
A cautionary note about dispositions to trusts (to some practitioners, a full-blooded bellow) was signalled by the Supreme Court in Regal Castings v Lightbody  2 NZLR 433. Most practitioners will be familiar with the case, which found that the transfer of the family home to the family trust had been made with intent to defraud creditors, as the transaction was at under value….and the settlor was unable to meet his debts, including his guaranteed debts, as and when they fell due at the time of the transaction.
…the ‘take home’ point for practitioners in the area is straightforward enough: exercise caution when advising clients to transfer assets into trusts, as the transfer can be attacked if the client was insolvent at the time.
In my view, and despite this cautionary tale, demonstrating solvency under the old gifting regime was relatively easy. Typically, the adherence to a gifting programme meant that the settlor’s financial position did not dramatically change overnight. On a balance sheet basis, the settlor would usually have the benefit of a large loan back from the trust. If necessary, that loan could be called up, the trustees would have to sell the house, and the proceeds would revert to the settlor. This would typically allow settlors to show that they were balance sheet solvent at the time they sold their home to the trust. And on a cash flow basis, settlors would usually be meeting their repayment obligations to their bank and any other creditors. Any subsequent gifts under the gifting programme would be subject to the usual protections for creditors under the Insolvency Act.
Now, however, large gifts to trusts are inevitable. There will be a significant change in the financial position of settlors. They will almost certainly be balance sheet insolvent, as they will no longer own any assets, but will still have to meet any loan commitments to their bank.
Yep, that’s right. Give away several hundred thousand dollars, or several million for that matter, while still having the bank breathing down your neck for the loan, and are you not an insolvent bankruptcy waiting to happen? Well, maybe….maybe not:
Does this gift mean [the client] is insolvent, and can a creditor set the transfer aside under section 346(1)(b)? Elizabeth Toomey, in the New Zealand Law Society October 2010 “Update on Land Law”, suggests that a client who cannot “at once put his hands” on the amount for which he is indebted is insolvent.
I respectfully disagree. Debtors are only insolvent under the Property Law Act if they are unable to pay all their debts, as they fall due, from assets other than the property disposed of.
For what it is worth I concur, although there are some important caveats well set out in Josh’s article. On the hard-line view espoused by Ms Toomey, a business person who purchased a initially fast depreciating capital asset (for example, an expensive piece of construction machinery or vehicle) on credit could shortly thereafter be insolvent (as the value of the machinery depreciated below the amount owed to the lender…let’s pretend for the sake of argument that they don’t own anything else), notwithstanding that the business owner was perfectly capable of meeting the monthly payments. Intuitively it doesn’t make sense.
A recommended read for everyone in business….and the NZ Lawyer site in general is a useful resource, particularly for non-lawyers that don’t get the hardcopy version direct.