KAM LIN NIAK AND LYNDA ANNE & ANOR v STEPHEN MACDONALD & ANOR [2001] NZCA 101 (5 April 2001)

IN THE COURT OF APPEAL OF NEW ZEALAND

ca97/00

	between	KAM LIN NIAK AND LYNDA ANNE SOMERVILLE
		Appellants

	and	STEPHEN MACDONALD
		First Respondent

	AND	THE BANK OF NEW ZEALAND
		Second Respondent

Hearing:	19 March 2001
Coram:	Keith J Fisher J Paterson J
Appearances:	L A Andersen for the Appellant T J Shiels for the First Respondent D W Parker for the Second Respondent
Judgment:	5 April 2001

judgment of the court delivered by PATERSON J

Introduction

[1] This is an appeal from a High Court judgment which decided that the second respondent (the BNZ) held a valid security over the yacht "Prime Concern" at the time of its sale and, as such, was entitled to the sale proceeds.The appellants (the Trustees), in their capacity as trustees of the Aldburg Family Trust (the Trust), alleged the first respondent (Mr Macdonald) purchased "Prime Concern" by the unauthorised use of funds belonging to the Trust.It was also alleged that when Mr Macdonald subsequently gave a chattel security in favour of the BNZ over "Prime Concern", the bank had imputed to it knowledge of Mr Macdonald's unauthorised use of funds, and, as such, the Trust's claim to the yacht took priority over the BNZ's security interest.

[2] Justice John Hansen in the High Court determined that Mr Macdonald's use of trust funds was not unauthorised and consequently the chattel security to the BNZ was valid.Thus, despite the BNZ's solicitor's knowledge of the Trust's claim to the yacht, which the Judge held must be imputed to the BNZ, the BNZ was entitled to the sale proceeds.

[3] The Trustees appeal the finding that Mr Macdonald was authorised to use trust funds to purchase "Prime Concern."The BNZ cross-appeal against the finding that the knowledge of the BNZ's then solicitor must be imputed to the BNZ.In reality this is not a cross-appeal but an attempt to uphold the judgment on another ground.

Background

[4] Ms Somerville, one of the Trustees, and Mr Macdonald, were formerly husband and wife.They married in 1971, subsequently came to New Zealand from England, and separated on 1 October 1994.

[5] In 1988, Ms Somerville received a substantial inheritance.This inheritance was administered by a company and trust domiciled in Jersey.The Trust was one of two trusts formed in New Zealand from which funds were advanced from the Jersey entities.Because of a lack of evidence, the Judge was not able to determine the manner in which these trusts operated.At the relevant times, the trustees of the Trust were Ms Somerville, Mr Macdonald and a Dunedin solicitor, (Mrs Weatherall).Mrs Weatherall was replaced as a trustee by Ms Niak in July 1994 and Mr Macdonald was removed as a trustee on 26 March 1997.

[6] The Trust was established by a deed dated 4 April 1991.On 16 April 1994, Mr Macdonald signed an agreement to purchase "Prime Concern" for $84,500.A deposit of $8500 was paid on 19 April 1994 and the balance of $75,000 paid on 21 April 1994.The evidence did not explain the discrepancy between the price of $84,500 and the aggregate payments of $83,500.

[7] It is common ground that the funds used to purchase "Prime Concern" were from the Trust.Funds from the Trust's bank account were paid to the joint bank account of Mr Macdonald and Ms Somerville and cheques were drawn on that account by Mr Macdonald and paid to the vendor of the yacht.

[8] On 5 March 1997, well after Mr Macdonald and Ms Somerville had separated, Mr Macdonald executed in favour of the BNZ a security over both "Prime Concern" and a motor vehicle.When on 26 March 1997 Mr Macdonald was removed as a trustee of the Trust, the Trustees took possession of the yacht.They subsequently sold it.The sale proceeds of $54,912.99 are not sufficient to discharge the indebtedness to the BNZ under the chattel security.

The judgment

[1] In the High Court, the Judge preferred the evidence of Mr Macdonald to that of Ms Somerville and Mrs Weatherall.He found that neither Mr Macdonald nor Ms Somerville understood the operations of the Trust's structure which held the family assets.Further, he made adverse findings against the Trustees because of their failure to produce certain relevant documents.One matter which the Judge could not resolve was whether the funds which came from overseas into the Trust bank account, and which were the source of the funds used to purchase the yacht, represented an advance to the Trust from the overseas entities or whether they were distributions to the beneficiaries of the Trust, who included both Mr Macdonald and Ms Somerville.

[10] The Judge found that Ms Somerville was quite content to allow Mr Macdonald to deal with money matters.She was content with the way Mr Macdonald conducted the business of the various entities and trusts and gave Mr Macdonald a general authorisation to deal with money and businesses.The money referred to was Trust money.Further, the Judge was satisfied that all transactions were discussed with Ms Somerville and approved by her.He was satisfied that she was aware of Mr Macdonald's intention to purchase a yacht, she took part in inspecting yachts and details of the yacht were discussed with her.A further finding was that Ms Somerville knew that the only source of funds to purchase the yacht was the Trust's money.The Judge also determined there had "in fact, been express agreement by Ms Somerville, who was aware that Mr Macdonald was buying the yacht, and transacting the business in the way the family had operated in the past."

[11] The evidence of the solicitor trustee on the manner in which she had carried out her duties was not accepted.The Judge was quite satisfied, despite her hindsight protestations, that the solicitor trustee by her activity and conduct, gave authority to Mr Macdonald to effectively manage the affairs of the Trust and that is what occurred over an extended period.A further finding in respect of the solicitor trustee was that "while there was no specific request and agreement regarding the yacht, I am satisfied that the evidence established she gave a general authority to Mr Macdonald and Ms Somerville to transact trust business the way they did."

[12] Although the Judge stated the matter somewhat differently, it is clear that he determined that s29(2) of the Trustee Act 1956 (the Act) allowed trustees to employ an agent or other person to transact business including the making of a loan under the powers given to the Trustees by the Trust deed.Mrs Weatherall, for the reasons stated in paragraph 11 above, was held to have given to Mr Macdonald and Ms Somerville a general authority to transact business the way they operated and Ms Somerville delegated to Mr Macdonald that authority by allowing him to conduct the family and trust business in the manner in which it had been conducted in the past.In the light of other findings, the finding that there had "been express agreement by Ms Somerville, who was aware that Mr Macdonald was buying the yacht ..." must be interpreted as an express agreement to make decisions on behalf of the Trust in the manner in which Mr Macdonald had in the past.It was not a finding that Ms Somerville had expressly approved a specific loan from the Trust to Mr Macdonald to enable him to purchase "Prime Concern".

[13] As a result of an alternative submission made on behalf of the BNZ, the Judge considered whether the Trustees were estopped from denying Mr Macdonald was entitled to utilise Trust funds to purchase the yacht.For reasons already stated in paragraphs 10 and 11 above, the Judge held that the actions of Ms Somerville and Mrs Weatherall amounted to a representation to Mr Macdonald that he might use the Trust funds in the way he used them.He said:

Those trustees were aware of how advances were treated in the annual accounts, and at the very least, they acquiesced in it.Mr Macdonald's purchase of the yacht relying on this representation was held to establish the estoppel.

[14] The finding that the knowledge of the solicitor who acted for both Mr Macdonald and the BNZ must be imputed to the bank was brief.It read:

Clearly Ms Davidson's knowledge must be imputed to the bank.I am surprised she did not communicate the challenge to ownership to the bank.But perhaps it is understandable.First, the yacht was put up as Mr Macdonald's personal property.Then as the dispute between the parties and the advisors turned progressively more acrimonious, the claim was made the yacht was trust property.In those circumstances one can, perhaps, understand her actions that relied on Mr Macdonald's and her belief that the yacht was Mr Macdonald's.

Trustees' delegation

[15] The Judge based the finding that Ms Somerville and Mrs Weatherall had authorised Mr Macdonald to make a loan on behalf of the Trust on s29(2) of the Act.The subsection reads:

A trustee may appoint any person to act as his agent or attorney for the purpose of selling, converting, collecting, getting in, and executing and perfecting assurances of, or managing or cultivating, or otherwise administering any property, real or personal, movable or immovable, subject to the trust in any place outside New Zealand, or executing or exercising any discretion or trust or power vested in him in relation to any such property, with such ancillary powers and with and subject to such provisions and restrictions as he may think fit, including a power to appoint substitutes, and shall not, by reason only of his having made any such appointment, be responsible for any loss arising thereby

[16] It is an established rule of trust law that a trustee must not delegate his or her duties or powers, not even to co-trustees.Delegation is, however, allowed where such delegation is specifically permitted by the trust instrument, is specifically permitted by statute, or is practically unavoidable and is usual in the ordinary course of business and the particular agent is employed in the ordinary scope of his or her business - see Law of Trust and Trustees, Garrow and Kelly's 5^th ed, p 256.A trustee has a duty to act personally and this duty requires trustees to be unanimous in any decision they make.In Duncan v McDonald [1997] 3 NZLR 669, this Court said at p 679:

It can be accepted that the power of attorney was legally ineffective in so far as it purported to authorise someone to exercise a co-trustee's powers, for a trustee may not make a general delegation of powers and duties;and, as Mr Simmonds gave no authority for the carrying into effect of the specific transaction, Mr Duncan was not acting in terms of section 29(1) of the Trustee Act 1956.

Section 29(2) of the Act relied upon by the Judge in this case, does not empower trustees to make a general delegation of their powers.It is an empowering section which enables trustees to appoint agents to implement decisions once the trustees have, in accordance with the powers conferred by the trust instrument or law, made the appropriate decisions.The law as it applies in this case, is that unless the Trust deed provided otherwise, the Trustees were required to unanimously make a decision and had no authority to delegate to one of their number a general authority to make decisions on their behalf.

[17] The Trust deed in this case authorised the Trustees to lend money to beneficiaries.It also gave the Trustees the power:

TO EMPLOY for the whole or any part of the purposes of these presents any person or persons as Solicitor Accountant Agent Servant or Workman or in any other capacity at such salaries wages commission or rates of remuneration upon such terms in all respects as the Trustees shall think fit and to suspend or dismiss any such person or persons employed in any capacity as aforesaid in their unfettered discretion.

This clause is clearly an empowering clause which authorised the Trustees to appoint agents to implement decisions made by them.It does not permit the Trustees to delegate to an agent a decision making authority which was reserved to the Trustees.

[18] In our view, the factual findings made by the Judge do not lead to the conclusion that Mr Macdonald was authorised consistently with the law (including the Trustee Act) and the deed by his co-trustees to lend money to himself to finance the purchase of the yacht.The finding in respect of Mrs Weatherall "while there was no specific request and agreement regarding the yacht, I am satisfied that the evidence established she gave a general authority to Mr Macdonald and Ms Somerville to transact trust business the way they did", cannot amount to a finding that Mrs Weatherall was either made aware of the intention to purchase the yacht or that she approved a loan to Mr Macdonald to enable him to purchase the yacht.This is a finding that Mr Macdonald proceeded on the basis of a general non-specific delegation.Such a delegation cannot at law be valid.It follows Mrs Weatherall did not authorise the advance from the Trust to Mr Macdonald to purchase the yacht.As the then trustees of the Trust did not give authority for such a loan in the manner required by law, the use by Mr Macdonald of the Trust funds was unauthorised.

[19] As trustees must act unanimously the finding that Mrs Weatherall did not authorise a specific loan to Mr Macdonald obviates the need to determine whether Ms Somerville gave specific authority for the loan.We note however, that on the findings made by the Judge, we have also concluded that she did not give the necessary authority.The facts that she was content to allow Mr Macdonald to deal with trust money matters and she was aware he intended to purchase a yacht do not establish that she gave specific authority to the specific transaction as the law required her.She was not entitled to delegate to Mr Macdonald the Trustees' power to approve loans and a general delegation of the type found to have existed, leads to the inevitable conclusion she too failed to exercise her powers and discretions in accordance with her requirements as a trustee under the Trust deed.Neither of Mr Macdonald's co-trustees at the relevant time legally authorised use by him of Trust funds to purchase the yacht, certainly not for him personally, as distinct from or on behalf of the Trust.

[20] For the reasons given, our conclusion is that Mr Macdonald's use of the Trust funds to purchase the yacht was an unauthorised use of those funds.He may have believed it was in order to utilise the funds, because no objection had been taken to past dealings, but the fact remains that the Trustees did not in the manner required authorise a loan to him.On the evidence Mr Macdonald clearly purchased the yacht in his own name but in doing so, utilised money which was the property of the Trust which he was not entitled to use.The Trustees did not subsequently authorise or ratify the unauthorised use of the funds.

Estoppel

[21] The unauthorised use of funds by a trustee is a breach of trust.An action for breach of trust is normally brought by a beneficiary.No representation by one trustee to another can amount to an estoppel relieving a trustee from his or her obligations as trustee.Further, no assumption of powers which are ultra vires of any person can be validated by raising an estoppel - see Laws of New Zealand:Estoppel para 58.

[22] Mr Macdonald was a trustee.He should have known that approval of all Trustees was required to any loan to a Trustee.In such circumstances an estoppel cannot authorise what is unauthorised.The Trustees cannot therefore be estopped from alleging the loan was unauthorised.

The knowledge of the BNZ

[23] The finding made in respect of the knowledge of the BNZ is set out in paragraph 14 above.The only other reference to Ms Davidson's knowledge was in a summary of the Trustees' claims where the Judge said:

Further, that Ms Davidson acted for both Mr Macdonald in relation to his matrimonial affairs and the bank in relation to the chattel security.She was actually aware of the Trust's claim to the yacht and that knowledge is imputed to the bank.

The Judge in the judgment did not refer to the evidence of Ms Davidson's knowledge of the Trust's claim to the yacht and it is necessary to examine that evidence.

[24] Ms Davidson acted for Mr Macdonald in his matrimonial property dispute with Ms Somerville.In a letter of 8 May 1996 from Ms Somerville's solicitor to Ms Davidson, the yacht was shown as the property of Mr Macdonald.However, in a later letter of 5 July 1996, Ms Somerville's solicitor alleged that the yacht was Trust property.Under cross-examination Ms Davidson acknowledged that by 23 October 1996, it was clear to her that there was a real dispute as to the ownership of the yacht although she had been advised by Mr Macdonald that it had been purchased in his name. The evidence indicates that neither Mr Macdonald nor his advisors accepted the Trust's claim to the yacht.In subsequent correspondence, Mr Macdonald's solicitors alleged that Mr Macdonald was the owner of the yacht because the agreement for sale and purchase had been in his name, the insurance was in his name as was the registration under the Radio Communications Act and Radio Regulations.In addition, the yacht had remained in Mr Macdonald's possession since its acquisition.However, Ms Davidson knew in March 1997, when she received instructions from the BNZ to prepare the chattel security over the yacht, that the Trust was claiming an interest in it.

[25] The factual position may be summarised by saying that Ms Davidson knew prior to receiving instructions from the BNZ, that the Trust claimed an interest in the yacht.Mr Macdonald disputed the Trust's claim.Ms Davidson did not advise the BNZ of the Trust's claim.

[26] The knowledge of an agent is not automatically imputed to that agent's principal.A general statement of the legal position in Fridman's Law of Agency (7^th ed)at p 349 is:

... the knowledge must relate to the transaction under which the agent can bind the principal and the agent must be under a duty to communicate the information to the principal... But the cases show the general rule to be that the knowledge of the agent must be acquired by him in connection with the principal's business, if it is to affect the principal.

[27] The position was considered by this Court in Jessett Properties Ltd v UDC Finance Ltd [1992] 1 NZLR 138.Hardie Boys J giving the judgment of the Court, said at p 143:

The general principle that notice given to or knowledge acquired by an agent is imputed to his principal only if the agent was at the time employed on the principal's behalf is recognised in the texts and the cases: ... This accords with good sense and justice.Thus if notice is given to an agent in reliance on his ostensible authority to receive it, the principal will be estopped from denying receipt of the notice: ... But there is no reason to prevent the principal from denying receipt in the absence of such reliance.

After considering various statements as to the basis of the rule the Judge said:

Whichever be the true basis, it is apparent that knowledge acquired before the agency began, or probably during its currency but outside the scope of the engagement, should not in general be imputed to the principal.

Two exceptions to the general rule were noted.First, where the principal "purchases the previously obtained knowledge of the agent" in relation to the particular subject-matter, and secondly, where the agent is "an agent to know." Neither exception applied in this case.

[28] A case with some similarity to the present case was Halifax Mortgage Services Ltd v Stepsky [1996] Ch 207 (CA).In that case the same solicitor acted for the borrowers and the lender.Information received by the solicitors prior to being instructed by the lender was relevant in the Court action.In giving judgment, which was concurred in by the other two Judges, Morritt LJ, when referring to the allegation that the knowledge previously obtained was imputed to the principal, said at p 216:

That knowledge once acquired remained with the solicitors and cannot be treated as coming to them again when they were instructed on behalf of the lenders.As counsel for the wife accepted, their knowledge cannot be treated as divided or disposed of and reacquired in that way.The conclusion seems to me to be inescapable, namely, that knowledge of the relevant matters, facts or things did not come to the solicitors as the solicitor for the lenders.

[29] There was a further consideration in this case.Ms Davidson became aware of the Trust's claim to the yacht in her capacity as solicitor for Mr Macdonald in his matrimonial property dispute.She was under a duty not to disclose to any other person the information without Mr Macdonald's consent.Her knowledge could not be imputed to the BNZ without Mr Macdonald's consent to convey that knowledge to the bank.

[30] In our view, the knowledge which Ms Davidson had of the Trust's claim should not have been imputed to the BNZ.It was not acquired by her in connection with the BNZ's business and was acquired before her agency with the BNZ began.Her duty to Mr Macdonald precluded her from passing that information on to the BNZ.In continuing to act, she may have been in breach of her duty to the BNZ, but it is not possible at law to impute to the BNZ the knowledge she had of the Trust's claim.If she had declined to act for the BNZ, because of a conflict of interest, the BNZ would have no doubt instructed another firm of solicitors to prepare the securities and it would have then been extremely unlikely that the knowledge would have come to the bank's attention.

[31] It is therefore our view that as the BNZ did not have imputed knowledge of the Trust's claim, the chattel security which Mr Macdonald gave over the yacht would have taken priority over any equitable claim which the Trust may have had to the proceeds of sale of the yacht under any equitable tracing remedy.

Result

[32] We therefore uphold the judgment but for different reasons to those expressed in the High Court.In our view, Mr Macdonald's use of the funds taken from the Trust was an unauthorised use.However, he acquired the yacht in his own name and gave security for it to the BNZ.The legal security took priority over the equitable interest of the Trust of which the BNZ did not have knowledge.Ms Davidson's knowledge could not be imputed to it.Consequently, the BNZ is entitled to the sale proceeds.

Costs

[33] In the High Court both Mr Macdonald and the BNZ were awarded costs against the Trustees.In view of our finding, Mr Macdonald is not entitled to costs against the Trustees and that award is set aside.The award of costs in favour of the BNZ is undisturbed.

[34] The BNZ is entitled to costs and these are fixed at $5000 plus reasonable disbursements, including travel and accommodation expenses of counsel, as fixed by the Registrar if the parties are unable to agree.

Solicitors

Kam Niak, Dunedin for the Appellants

Cook Allan Gibson, Dunedin for the First Respondent

Anderson Lloyd, Dunedin for the Second Respondent