A court ruling that $227,000 be repaid by a family trust following bankruptcy was reversed on appeal when the bankrupt argued that payments were not made fraudulently. The bankrupt said she had been suffering from depression and there was no intent to defraud creditors.
Auckland accountant Bronwyn Taylor set up a family trust in 2000 to protect the family home from business creditors. In what is normal commercial practice, the family home was transferred to the Trust and the value of her equity in the home was left as a loan owing by the Trust to her personally. This loan was not repayable until 2030, but interest could be demanded on the outstanding balance and the loan was immediately repayable if any interest was not paid. Further money was later lent to the Trust to finance the purchase of a replacement family property.
She was bankrupted in 2006. Two creditors claimed $207,700: the tax department $123,100 and her failed accounting business Bronwyn Taylor Accounting Services Ltd claiming about $84,600.
The High Court ordered her family trust to repay $227,000 of the outstanding loan to cover the amount claimed from Taylor by creditors plus an extra $20,000 to cover administrative costs of her bankruptcy.
Being under the impression that Taylor had no income from the date the family trust was set up, the High Court considered the act of transferring her home to the Trust as being a fraudulent scheme intended to cheat creditors.
In fact, household income at the time the Trust was established totalled some $200,000. For the first two years after the Trust was established all personal debts were able to be paid. Arrears began to accumulate after that period.
There was evidence that Taylor developed depression lasting several years following an acrimonious breakup with her business partner. During this time she did not keep proper business records and took money out of the business as and when needed, leaving creditors unpaid. Taylor’s depressive state was compounded by falling ill with hepatitis.
The Court of Appeal ruled the evidence did not amount to fraud. Her disturbed mental condition meant she did not focus on the practicalities of the business. And when the extent of debts due to the tax department became apparent Taylor presumed she would be able to negotiate a deal, though no deal ever eventuated.
While reversing the earlier court ruling that Taylor’s family trust pay $227,000 to the Official Assignee, the Court of Appeal pointed out that the Official Assignee could still recover some money for creditors by calling for interest to be paid on her loan to the Trust.
Taylor v. Official Assignee – Court of Appeal (9.12.11)
(12.11.001)