The Facts of the Petricevic case

Rod Petricevic is the former Managing Director and Majority Shareholder of the failed finance company Bridgecorp. The collapse of Bridgecorp has left 15,000 investors, many of whom are elderly retirement fund investors, having lost their life savings. Mr Petricevic is now facing seven criminal charges laid by the Serious Fraud Office.
The R M Petricevic Family Trust (“the Trust”) was settled in July 1983. The Trust has net assets of up to $5.2 million and had advanced over $3.8 million to Mr Petricevic personally. However, Mr Petricevic himself was declared bankrupt in 2008.
The Trust is a relatively conventional discretionary family trust:

“The trustees of the trust are Mr Petricevic and
his wife. There is no independent trustee. Mr
Petricevic was the settlor. He has the power to
remove either trustee and to appoint new
trustees. The discretionary beneficiaries are,
in general terms, Mrs Petricevic, any of Mr
Petricevic’s children, and any grandchildren or
great grandchildren he and his wife may have.
The trustees are directed to hold the capital of
the trust fund and any income until the date of
distribution (which is 80 years from the date of
execution of the trust deed) upon trust to pay or
apply the same as the trustees shall, from time
to time, think fit to all or any of the discretionary
beneficiaries… Mr Petricevic is not a beneficiary
under the trust deed”, [paragraph 8(b) of the
judgment].

The Relevant Law

A discretionary beneficiary is someone to whom distribution from the Trust’s assets may be made.
It is at the discretion of the trustee as to whether the beneficiary receives any interest/benefit. For
example: ‘When your grandfather dies, the farm is to be given to one of his (several)  grandchildren.’
A discretionary beneficiary has no legal interest in the property.
Section 4(1) of the Legal Services Act states that “any resource of a person’s spouse or partner must be treated as the person’s resource”. Further, a resource includes any interest in any trust or other fund, which is assessed in accordance with the particulars of that particular trust or other fund:
see Regulation 8(4) of the Legal Services Regulations. This means that Parliament is in effect
eroding the distinction between separate spousal assets because it does not allow for a circumstance where, as is the present case, Mrs Petricevic refuses to pay the legal costs of Mr Petricevic’s defence from criminal prosecution.
The recent decision of the New Zealand High Court in the case Petricevic v Legal Services Agency CIV-2011-404-2633 (“the Petricevic case”) highlights one of the dangers of having a spouse as a discretionary beneficiary in a family trust settled by another spouse, or jointly by both matrimonial partners. This danger is where a bankrupt spouse, who is applying for legal aid to defend court proceedings (either civil or criminal), can be held to have access to the financial resources of the other spouse – if that spouse is a discretionary beneficiary of a family trust.
His Honour Justice Wylie upheld the Legal Services Agency’s decision to refuse the legal aid application because of Mr Petricevic’s access to Mrs Petricevic’s resources – primarily being a discretionary beneficiary of the Trust. This raises a contentious issue of law as it is strictly beyond the power of distribution to distribute to a beneficiary for the benefit of a non-beneficiary. However, as was held in the case Kain v Hutton [2008] 3 NZLR 589, a trust can make a distribution for the benefit for a non-beneficiary if the distribution is also benefitting
the beneficiary.

The Lessons Learnt…

The decision of the High Court in Mr Petricevic’s case illustrates a significant disadvantage of having a spouse as beneficiary of a family trust settled by the other spouse, which erodes the benefit of the trust to provide protection from creditors. This is particularly relevant for debtors who undertake significant financial risk as legal aid will likely not be available to fund any personal litigation to defend civil or criminal court proceedings.

Fraser King

Written by Fraser King – Staff Solicitor
www.denniskinglaw.com

Disclaimer: This newsletter discusses its topic in general terms and should not be relied upon as legal advice.