Trustees of the McElroy Trust v Objectors [2003] NZCA 28; [2003] 2 NZLR 289 (20 February 2003)

Last Updated: 18 December 2011

IN THE COURT OF APPEAL OF NEW ZEALAND

CA78/02

	BETWEEN	THE TRUSTEES OF THE MCELROY TRUST
		Appellants

	AND	THE OBJECTORS
		Respondents

Hearing:	4 February 2003
Coram:	Keith J Tipping J Anderson J
Appearances:	J G Miles QC and J Shackleton for Appellants A R Galbraith QC and B W Morley for Respondents M A Soper for Attorney-General
Judgment:	20 February 2003

JUDGMENT OF THE COURT DELIVERED BY TIPPING J

[1] This appeal concerns an application by the trustees of a charitable trust for approval of a scheme under Part III of the Charitable Trusts Act 1957 (the Act). Section 32 of the Act allows the High Court to approve a scheme of variation of a charitable trust if it is impossible or impracticable or inexpedient to carry out the purpose of the trust. In a judgment delivered on 27 March 2002 ([2002] 3 NZLR 99), O’Regan J declined to approve the scheme proffered by the trustees, notwithstanding the Attorney-General’s favourable report upon it. The trustees now appeal.
[2] By deed dated 15 June 1956 two brothers, William and Arthur McElroy, established the McElroy Trust. They transferred to the trust farm land near Warkworth comprising some 404 acres, together with specified sheep, machinery and tools. The terms upon which the trust property was to be held by the trustees were specified in clauses 1 and 2 of the deed in the following way:

1. THE Trustees shall hold the Trust property upon trust for the application of the nett income thereof in perpetuity

(a) As to one-half thereof for the establishment erection maintenance management and endowment of homes or hostels for elderly persons in need of such accommodation.

(b) As to one-quarter thereof at the Trustees discretion for the establishment erection maintenance management and endowment of homes or hostels for young children in need of such accommodation or alternatively at such discretion for the purposes set forth in clause 1(a) thereof but with special preference for the accommodation therein of elderly persons of any denomination living or formerly living within the Rodney County.

(c) As to one-quarter thereof for the general purposes of the Warkworth Parochial District, within the Auckland Diocese of the Church of England PROVIDED THAT should the boundaries of the said Parochial District be changed the part thereof in which Christ Church, Warkworth, is situated shall be deemed to be the beneficiary hereunder.

2. THE homes or hostels referred to in the preceding clauses 1(a) and 1(b) may either be homes or hostels erected on the trust property or if in the opinion of the trustees this shall not be found practicable then the Trustees may select as beneficiaries respectively under clauses 1(a) and 1(b) any home or homes hostel or hostels respectively maintained for the separate objects aforesaid by agencies of or within the Church of England within the Auckland Diocese and if in the opinion of the Trustees there shall be no such suitable homes or hostels maintained by agencies of or within the Church of England then the Trustees may select as beneficiaries respectively under clauses 1(a) and 1(b) hereunder any home or homes hostel or hostels maintained by any other Church denomination or charitable body for the respective purposes aforesaid.

[3] The trustees were empowered to carry on the farming business previously conducted by the settlors. They were given the necessary associated powers. They also had both a general and a more specific power of sale as set out in clauses 15 and 18 respectively:

15. THE Trustees shall have the power and be at liberty to dispose of lease exchange or sell by public auction or private contract all real and personal property held by them at any time whether or not such property has been acquired since the date hereof under the powers or trusts hereof and they shall hold all moneys received by them under this power for the purposes and with the objects and subject to the trusts hereof but the trustees shall not have power to subdivide any part of the land described in the Schedule hereto into building lots or sections nor shall any native bush or timber on the said land be cut or sold.

18. IT shall be lawful for but not obligatory upon the Trustees in their absolute discretion to sell the trust property if the Trustees in their absolute discretion shall decide that it is impossible or impracticable to carry out effectually the purposes of the donors without such sale and the nett proceeds arising from such sale shall be given to the beneficiaries set forth in clauses 1 and 2 hereof in the proportions therein set forth.

[4] In February 1998, prior to making their application to the High Court, the trustees sold the farm and associated stock and plant. The farming operations had not produced much income over the years and indeed in many years losses were incurred. The trustees had made the decision to sell in 1995 on the basis that, as Mr C T Horton, the Chairman of trustees, put it:

Despite our best efforts at managing the farm property, insufficient income was likely to be produced by the farm to support the farm as a going concern in the short to medium term, and certainly would not enable the Trust to finance the erection of hostels for the elderly or for the young.

[5] Mr Horton also deposed that the annual income produced by the sale proceeds would far exceed any annual income the trust had made over the past four decades. There is no formal evidence as to whether the trustees sold pursuant to clause 15 or clause 18. It was implicit, however, both in the High Court and in this Court, that the sale was based on clause 18 either alone or in conjunction with clause 15. The appellants’ submissions in this Court stated that the trustees’ authority to sell was derived from clause 15 and clause 18. That duality seems necessarily to invoke or involve the consequences attendant on a sale pursuant to clause 18. Mr Miles did not argue to the contrary.
[6] It follows that at the time the application to the High Court was made, the proceeds of sale referred to in clause 18 were held, subject to the application, upon the trusts declared by that clause, namely to “be given to the beneficiaries set forth in clauses 1 and 2 hereof in the proportions therein set forth”. Clauses 1 and 2 do not in terms name specific beneficiaries, save for the Warkworth Parochial District in respect of one quarter of the trust fund. In the events which have happened, ie. a sale pursuant to clause 18, that beneficiary has a prima facie right to its one quarter share. There can be no question of varying that aspect of the trust by any scheme under s32 of the Act. Nothing has happened to make it impossible, impracticable or inexpedient to give effect to the plain terms of clause 18 in that respect.
[7] The issue whether the terms of clause 18 should be varied by a s32 scheme therefore becomes confined to the remaining three quarters of the sale proceeds. In that respect, while no specific beneficiary is named in either clause 1 or clause 2 (the two clauses necessarily being read together), it was common ground that the Selwyn Foundation was the only organisation providing facilities answering the first alternative in clause 2, namely a home or hostel for the elderly maintained for the objects of the trust by an agency of or within the Church of England within the Auckland Diocese.
[8] The Selwyn Foundation must therefore be entitled under clause 18 to the one-half share referred to in clause 1(a) unless it is inexpedient (impossibility and impracticability being disclaimed) in terms of s32 of the Act for the trustees to make payment to it of the sum representing that fraction of the trust fund. So far as the remaining one quarter share is concerned, clause 1(b) specifies as its destination, homes or hostels for young children or, at the trustees’ discretion, homes or hostels for the elderly. The latter necessarily leads back to the Selwyn Foundation as the only candidate in that respect. It follows, depending again on the question of variation on account of inexpediency, that the trustees hold the remaining quarter of the trust fund for such homes or hostels for the young as qualify under clause 1(b), read in conjunction with clause 2, or the Selwyn Foundation as the only organisation answering the alternative set out in clause 1(b).
[9] It is apparent from the foregoing analysis and from reading the judgment under appeal that much greater emphasis was placed in this Court upon clause 18 and its effect following sale than appears to have been the position in the High Court where the Judge’s approach was rather different, no doubt in terms of the submissions presented to him. For that reason we do not think it would be helpful to traverse in any detail the process of reasoning which O’Regan J adopted. We agree with his conclusion but on a somewhat different basis.
[10] The structure of the trust was to distribute income in perpetuity but if the trustees found that impossible or impracticable without a sale they were empowered, albeit not obliged, to sell and to hold the proceeds of sale (ie. capital) for the beneficiaries identified in terms of clause 18. Hence, following a clause 18 sale, the settlors obviously intended a capital distribution which would have the capacity effectively to wind up the trust.
[11] The essential question is whether the trustees have shown in terms of s32 of the Act that it is inexpedient to proceed as clause 18 dictates, and therefore appropriate to re-settle the trust fund upon the new trusts proposed by the scheme. It is unnecessary at this stage to set out the terms of the proposed new trusts described respectively as the McElroy 1999 Trust and the McElroy Anglican Trust, the latter being intended to take the place of the trust for the Warkworth Parochial District. To set out the terms of the proposed new trusts would be to invite a comparative approach between them and the trusts created by clause 18 of the 1956 deed. It is not a question of comparing the utility or expediency of the different trusts as the appellants’ submissions in places suggested. The s32 inquiry is whether the clause 18 trusts are inexpedient. The essential question is whether those trusts are inexpedient rather than whether the settlors’ purpose, as evidenced by the 1956 deed, can now be achieved in a better manner.
[12] There was debate in both the written and the oral submissions concerning the meaning of the word “inexpedient” in s32(1) of the Act. As noted above a scheme cannot be approved thereunder unless it has become impossible, impracticable or inexpedient to fulfil the original charitable purpose. That state of affairs will usually result from a change in circumstances since the trust was originally established.
[13] The power to vary a charitable trust was first enacted by the Charitable Trusts Extension Act 1886. The criteria for variation were then limited to impossibility and impracticability. Inexpedience was added as a criterion by the Religious Charitable and Educational Trusts Amendment Act 1928. The amendment was prompted by the decision of Reed J in Methodist Theological College Council v Guardian Trust and Executors Co of New Zealand Ltd [1927] GLR 394 where an obviously inexpedient purpose could not be varied because it was neither impossible nor impracticable to carry it out.
[14] The general connotation of the word “inexpedient” in its present context is of the original charitable purpose or purposes having become unsuitable, inadvisable or inapt. Parliament’s wish to expand the concepts of impossibility and impracticability should not be inhibited by too narrow an interpretation of the word “inexpedient”. Clearly Parliament wished to give the Courts power to approve a scheme of variation in circumstances beyond those where the original purpose could no longer be carried out. The concept of inexpediency introduced a value judgment rather than simply an assessment of feasibility. It may remain possible and practicable to carry out the original purpose but it may have become inexpedient to do so. If that is so, a scheme of variation may be approved so long as it keeps as close as reasonably possible in the new circumstances to the original intention of whoever established the trust: see Re Twigger [1989] 3 NZLR 329 and the various cases there surveyed, and in particular the influential decision of Tompkins J in Re Whatman (Wellington Registry, 16 July 1965). It may be worth repeating here that the question is not whether the scheme carries out the purposes of the trust better. Rather it is whether it is now inexpedient to carry them out.
[15] In this case the question is whether it is inexpedient, in the sense discussed, for payment to be made to the Selwyn Foundation of the one-half governed by clause 1(a) and to a qualifying home or homes for the young or alternatively again to the Selwyn Foundation of the one-quarter governed by clause 1(b). The essence of the trustees’ case for the necessary inexpediency in relation to the Selwyn Foundation is that social conditions have changed over the years from institutional care of the elderly to care in their own homes, as far as may be possible. While we accept that this is the case, as the Judge found, we are unable to see that this social change makes it inexpedient for the terms of clause 18 to be carried out in favour of the Selwyn Foundation. The Foundation is an organisation operated by the Anglican Church within the Diocese of Auckland, which provides accommodation for the elderly along the lines the McElroy brothers had in mind nearly half a century ago. Clearly the construction of homes or hostels on the farmland vested in the trustees has not proved practicable. Hence the general destination of the trust is governed by the first alternative in clause 2.
[16] The fact that society’s approach to the care of the elderly has developed over the intervening years in the way we have described, cannot be regarded as making it inexpedient – unsuitable, inadvisable, inapt – to give effect to the settlors’ wishes as expressed in clause 18. Those wishes in short were to provide homes for the elderly. That is what the Selwyn Foundation does. Furthermore, the circumstance that the accommodation of the elderly within such facilities as the Selwyn Foundation provides is now subsidised by central Government does not make it inexpedient for the money in question to be paid to an organisation which is providing the very kind of accommodation which the McElroy brothers wished to endow.
[17] Nor do we see the trust deed as exhibiting such a general local preference for those in the Warkworth and Rodney Districts as to make it inexpedient to benefit an organisation which clearly fulfils the first alternative in clause 2. The only direct geographical constraint appears in the alternative dimension of clause 1(b) which is at least one step away from the general tenor of clause 1(a) and the geographically unconfined part of clause 1(b).
[18] In coming to this view we do not overlook the fact that the first part of clause 2 contains an implicit geographical constraint in the idea of constructing homes or hostels on the McElroy farmland. It is significant, however, that if that was not found practicable, as was the case, the next step in geographical terms goes straight to the whole of the Auckland Diocese. All in all we can see nothing inexpedient in the trustees implementing clause 1(a) in favour of the Selwyn Foundation as directed by clause 18.
[19] That brings us to clause 1(b). As foreshadowed above, this provision constitutes a trust to provide accommodation for the young or alternatively the elderly. To the extent that the trustees may favour the alternative, our conclusion that there is no inexpediency in payment to the Selwyn Foundation necessarily applies. To the extent that the trustees may favour payment to a home or hostel providing accommodation for the young, we are quite unable to see any inexpediency in the making of such a payment. If there is no suitable home within the Auckland Diocese the trustees are empowered by the second alternative in clause 2 to select a home or homes on the wider basis there set out. If there are no homes or hostels anywhere in New Zealand fulfilling the first part of clause 1(b), the trustees would be obliged to act under the alternative.
[20] As the necessary inexpediency has not been shown, there is no basis upon which the proffered scheme can be approved under s32 of the Act. It is therefore unnecessary to examine the substitute trusts which the scheme proposes. We add simply that had we reached the point of doing so, we would have held, as discussed at the hearing, that in certain material respects those trusts would have been wider than appropriate.
[21] For the reasons given the appeal is dismissed. The appellants are to pay out of the trust property to the objectors for their costs in this Court the sum of $5000, together with disbursements including the reasonable travel and accommodation expenses of two counsel, to be approved, if necessary, by the Registrar. There will be no order for costs either for or against the Attorney-General.

Solicitors
Simpson Grierson, Auckland for Appellants
Hesketh Henry, Auckland for Respondents