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Court of Appeal of New Zealand |
Last Updated: 16 December 2011
IN THE COURT OF APPEAL OF NEW ZEALAND
CA86/03BETWEEN DOREEN MARY
FITZGERALD AND RODNEY ARTHUR MILLS
Appellant
AND ARNOLD GERARD FITZGERALD,
MARIE ROSE MILLS, DANIEL ANTHONY FITZGERALD, THERESE MARY MUGGERIDGE, ANGELA
MARY KISER, PATRICIA MARY MUGGERIDGE
AND LOUISE MARY
BUGLER
Respondent
Hearing: 18 August 2003
Coram: Anderson J Glazebrook J Paterson J
Appearances: P J H Jenkin
QC and R A Bedford for Appellants
R T Wilson for Respondents
Judgment: 17 December 2003
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JUDGMENT OF THE COURT DELIVERED BY GLAZEBROOK J
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[1] This appeal concerns the interpretation of the trust deed of a family trust known as the Maryland Trust. The deed is an example of the danger involved in cobbling together clauses from a number of precedents without due regard for ensuring internal coherence and consistency.
[2] The appellants, Mrs Doreen Fitzgerald and Mr Mills, are the trustees of the Maryland Trust (the current Trustees). They brought proceedings in the High Court to determine questions about interpretation of the trust deed. Effectively they are arguing for an interpretation that accords with the manner in which the Trust has been administered to date.
[3] The respondents are the beneficiaries of the Trust, being the seven children of Daniel James Fitzgerald (now deceased) and Mrs Doreen Fitzgerald. Three of these beneficiaries, however, in fact support the interpretation of the deed propounded on behalf of the Trustees.
[4] The others support an opposing interpretation. They argue that all the accumulated income of the Trust has vested in the beneficiaries and therefore that all the assets funded from that accumulated income are held by the current Trustees on bare trust for the beneficiaries. Salmon J found in favour of that opposing interpretation on 14 April 2003 and the current Trustees now appeal against that decision.
The Trust Deed
[5] The Maryland Trust was created by deed of trust dated 16 November 1966. As indicated above, the deed is not well drafted. For ease of reference the relevant provisions of the deed are set out in full in the appendix to this judgment but we summarise those provisions below.
[6] The recitals set out that Mr Arnold Engelberger (the nominal settlor) paid £50 to the Trustees to create the Trust for the benefit of the seven children of Daniel James Fitzgerald and Doreen Mary Fitzgerald. Clause 1 of the deed provides that the Trustee is to stand possessed of the Trust Fund, both capital and income, upon the trusts set out in the subclauses following.
[7] Clause 1(a) is expressed as being subject to the remainder of the deed. It provides that the income and capital of the Trust is held for the beneficiaries:
or such one or more of them to the exclusion of the others as my Trustee in his absolute discretion shall think fit.
It also provides that, on termination of the Trust, the shares of the beneficiaries “in the corpus of the Trust Fund” shall vest absolutely in them. There is provision again for the Trustee to appoint one or more beneficiaries to the exclusion of the others.
[8] Clause 1(b) is a provision relating to gift overs in the event of a beneficiary dying and leaving issue. This clause has its complexities but is not at issue in this appeal.
[9] Clause 1(c) is stated to operate notwithstanding the foregoing sub-clauses and provides for “the net annual income arising from the Trust Fund and from any accumulations of income therefrom” to be held on the trusts set out in the following paragraphs.
[10] Clause 1(c)(1) provides for the deduction of an annual sum of £200 from the net annual income arising from the Trust Fund. This can be used for trust administration expenses and for such other purposes as the Trustee thinks fit and any excess can be held as a reserve for the purpose of the Trust.
[11] Clause 1(c)(2) provides that the balance of the net annual income may be applied in whole or in part for the benefit, maintenance, education or advancement of any one or more of the beneficiaries. Any residue is to be invested and held on trust for any one or more of the beneficiaries as the Trustee thinks fit. The clause then goes on to provide that the accumulations can be used for the benefit, maintenance, education or advancement of any of the beneficiaries. It finishes by providing the Trustee with a power of appointment in relation to both capital and income. If this power of appointment is not exercised the clause provides that the Trust Fund shall vest in the beneficiaries as tenants in common in equal shares. It is common ground that this power of appointment has not to date been exercised.
[12] The next relevant clause is clause 1(c)(4). That clause provides that the Trustee holds the:
share of the said children in the said net annual income arising after the said children have respectively attained the age of twenty-one (21) years UPON TRUST for the said children in equal shares absolutely.
It can be seen that this clause is not immediately reconcilable with cl 1(c)(2).
[13] Clause 1(c)(5) provides that the foregoing provisions shall not operate to vest the share of any child in the corpus of the Trust Fund before such share is vested in that child as provided in clause 1(a).
[14] Clause 1(c)(6) provides that:
Before and after the said children have respectively attained the age of twenty-one (21) years the shares of the said children in the said net annual income shall indefeasibly and absolutely vest in the said children or such one or more of them as the Trustee may appoint as aforesaid and otherwise as tenants in common in equal shares.
This clause is not immediately reconcilable with clause 1(c)(4).
[15] Clause 2 of the deed sets out the powers of the Trustee. Under clause 2(a) the Trustee has the power to carry on farming operations. In order to manage and improve farmland held by the Trustee, the Trustee has the power to employ and expend such part of the capital and income of the Trust Fund as the Trustee thinks desirable. It is further provided that the Trustee has the power to decide which part of the funds arising from the farming operation is to be treated as capital and which part as income. Such a determination is binding on the beneficiaries. There is also the power to create reserves for depreciation and for the replacement of personal property.
[16] Clause 2(g) authorises the purchase of real or personal property out of the Trust Fund or out of accumulated income therefrom or from borrowed funds. Clause 2(j) allows the Trustee to carry on any business and to employ any part of the Trust Fund as capital in the business. Any losses from the business are to be borne by the capital of the Trust Fund. We note, however, that clause 2(k) gives the Trustee a general power to decide whether moneys are income or capital and what expenses or deductions are to be paid out of income or capital respectively. There could thus be some conflict between this provision and the preceding one.
[17] Clause 2(l) provides a power to maintain, repair, improve or develop any trust property and the ability to apply any of the capital or income of the Trust Fund for these purposes. Clause 2(m) gives a general power to borrow. Clause 2(r) allows funds to be lent to a beneficiary and clause 2(t) allows the Trustee to exercise the statutory powers of maintenance and advancement, but as if the proviso to s41(a) were omitted. In exercise of this power the Trustee may advance money inter alia for the purchase of land or motor vehicles or for the cost of studies or for loss of earnings during any period of illness or disability.
[18] Clause 3 provides that the income which is to become vested absolutely in accordance with the deed is deemed to include all income from the Trust Fund as finally determined for each financial year but subject to payment of trust administration expenses and the retention of any sum “for a reserve fund for any of the purposes of these presents”.
[19] Clause 4 provides that, after the end of each financial year, the Trustee is to determine:
the amount of income derived from the Trust Fund and what part (if any) of such income shall be available for distribution in terms of these presents and what part or parts (if any) are to be accumulated or retained pursuant to the powers herein contained.
Background facts
[20] The parties filed an agreed statement of facts in the High Court. Affidavit evidence was also filed and there was some limited cross-examination. This section is based on the agreed statement of facts and the evidence given, to the extent that evidence is not controversial. The affidavits filed in the High Court are discussed in more detail below.
[21] The Maryland Trust was formed by deed dated 16 November 1966. The initial trustee was Mr Robert Cann of Hawera, Chartered Accountant. He retired on 1 April 1970 and was replaced by another accountant, Mr Gavin O’Dea of Hawera. Mr O’Dea was joined as a trustee in June 1996 by a solicitor, Mr Grant Smith. Mr O’Dea resigned as trustee on 5 August 1997 and Mr Rodney Mills was appointed in his place on 29 September 1997. Mrs Doreen Fitzgerald was appointed an additional trustee on 1 February 2001 and Mr Smith resigned as trustee on 18 May 2001.
[22] As indicated above, the beneficiaries of the Trust are the children of Mrs Doreen Fitzgerald and the late Daniel Fitzgerald. The names and dates of birth of those children are as set out in the trust deed in the Appendix. Of those children Mrs Mills, Mrs Kiser and Mrs Buhler support the interpretation advanced by the Trustees. Mr Daniel Fitzgerald, Mr Arnold Fitzgerald, Mrs Therese Muggeridge and Mrs Patricia Muggeridge support the opposing interpretation.
[23] The Trust was formed with an initial contribution of £50 ($100) by the nominal settlor of the Trust, Mr Arnold Engelberger. On 1 July 1967 the Trust purchased a deferred payment licence over 53 acres of land (the 53-acre block). A final payment was made to freehold that land in September 1991. The agreed statement of facts states that it is not clear from the information available whether the payments under the deferred payment licence were met from the net income of the Trust or from capital sources.
[24] A further 60-acre block was purchased in June 1996. This land was part of a block of land previously owned by Daniel James Fitzgerald’s late grandmother. A dispute had arisen over this land. This was settled and part of the settlement involved the Trust purchasing the 60-acre block. The purchase was funded in part from accumulated income ($36,500) with the balance being funded by loans from TSB Bank ($210,000) and from Mrs Doreen Fitzgerald ($150,000). The agreed statement of facts says that the bank loan was repaid from income derived from the Trust’s farming operations between 1997 and 2000 and that partial repayment of Mrs Fitzgerald’s loan was made in 2001 from income derived from the Trust’s farming operations.
[25] The agreed statement of facts deals with the question of the retention of £200 ($400) as required under clause 1(c)(1). It states that this amount was allocated in the 1980 and 1981 accounts and that it is likely that this had been also done in previous years. It went on to say that it is not clear on the information available to the parties the extent to which the balance of the income after retention of the $400 per annum had been, under clause 1(c)(2), divided or allocated for the benefit, maintenance, education or advancement of the beneficiaries.
[26] In terms of Clause 3 of the trust deed the agreed statement of facts states that, from the available information, there is no evidence of any sums having been deducted and retained as a reserve fund under that clause “by any formal actions of any trustees of the Trust”.
Judgment of Salmon J
[27] In brief, Salmon J held that the trust deed provides for discretionary application of trust funds during the minority of a beneficiary (as to income) and upon termination (as to corpus). He held further that clause 1(c)(2), which is discretionary as to income, applies to beneficiaries who are under 21 and that clause 1(c)(4) provides for vesting of income in equal shares once the beneficiaries turn 21.
[28] He also held that, as no power of appointment of accumulated income had been exercised in accordance with the last part of clause 1(c)(2) before the last of the beneficiaries turned 21, then that accumulated income had vested in the beneficiaries as tenants in common in equal shares. As a consequence he held that the 60-acre block was held on bare trust for the beneficiaries. This is because it had been funded from income that had vested absolutely in the beneficiaries. No conclusion was reached on the status of the 53-acre block as the parties had not been able to ascertain the extent to which it had been funded out of income.
The parties’ submissions
[29] Mr Jenkin QC, for the current Trustees, contended that the correct interpretation of the deed is that, until the Trustee exercises the power of appointment of income, no beneficiary has a vested interest in the income derived by the Trust. No such exercise of the power of appointment has been made and therefore none of the beneficiaries has an interest in the 60-acre block. He submitted that clause 1(c)(4) is irreconcilable with clause 1(c)(2) and (6). Clause 1(c)(4) was, he said, a standard provision in trust deeds current in Hawera at the relevant time for non-discretionary trusts and has, in Mr Jenkin’s submission, been included in error in this trust deed for a trust which is clearly meant to be discretionary. He submitted that there is no discernible reason why the deed should have limited the Trustee’s discretionary powers, including the power to accumulate income, to the period before the children attained 21 years.
[30] In the event this Court upholds the High Court’s interpretation of clause 1(c)(4), Mr Jenkin submitted that the trustees for the time being of the Trust had in fact retained income under clause 4 of the deed to create a reserve pursuant to clause 3, even if that was not their conscious intention. It was submitted, therefore, that the beneficiaries have no vested interest in any assets equating to the Trustees’ Reserve as set out in the Trust accounts.
[31] Further it was submitted that the vesting can only apply to so much of the purchase money as was derived from accumulated income, agreed to be $36,500 at most. Even that amount, it was submitted, came from a mixed fund which included capital items.
[32] In Mr Jenkin’s submission, the vesting cannot apply to the borrowed funds. In this regard it was submitted by the Trustees that, pursuant to clause 2(k) of the deed, the Trustees had power to repay borrowings from income. Although there is no record of formal determinations having been made to this effect, the actions of the Trustees of the Trust have constituted informal determinations to do so. If that is not so, Mr Jenkin submitted that the result becomes extremely artificial. This is, he submitted, because the Deed clearly gives power to the Trustee to purchase land with borrowed money and the power to borrow must carry with it both the power and the obligation to meet the payments required under the borrowing contract. If income received by the Trustee is insufficient to cover the annual interest payable then the Trustee must resort to capital and conversely if free capital sources are insufficient to cover repayments then the Trustee may resort to income. Repayments from income are, in terms of clause 3, excluded from the income that becomes vested in the beneficiaries and, in terms of clause 4, would be unavailable for distribution. Once income is expended in this manner Mr Jenkin submitted that the beneficiaries have no interest in it as income. The money becomes merged in the capital of the trust fund. If this were not so then a number of significant powers available to the Trustee would be unavailable as far as assets purchased with income are concerned, for example the power of sale in clause 2(c) which is a power to sell property comprising the trust fund.
[33] Mr Wilson for the opposing beneficiaries contended that a proper interpretation of the deed means that (since all beneficiaries are now over 21) all net income of the Trust vests absolutely and equally in those beneficiaries, except to the extent that the Trustee has (under clause 3) deducted sums to hold as a reserve. There have been no reserves created, as Mr O’Dea deposed in relation to his years as Trustee. This means, in Mr Wilson’s submission, that all the net income of the Trust has vested in the beneficiaries (apart from the small amounts of income that were allocated to beneficiaries while they were under 21).
[34] In his submission clause 1(c)(4) limits the application of clause 1(c)(2) to income arising while the beneficiaries were respectively under the age of 21. He argued that there is no inconsistency between clause 1(c)(4) and clause 1(c)(6). The latter provides no new discretion and they serve different purposes. The former deals with how the income is to be divided and the latter provides for absolute and indefeasible vesting. In addition, clause 1(c)(6) serves to divide income equally unless the Trustee has exercised the discretion to divide income unequally. This must be done on an annual basis. In Mr Wilson’s submission, even if clause 1(c)(4) is disregarded, clause 1(c)(6) would still apply to vest all unallocated income in the children as tenants in common in equal shares.
[35] Mr Wilson submitted that a meaning must, however, be given to clause 1(c)(4) if possible. It is clearly expressed and easily understood. In his submission, there is nothing to suggest that a hybrid form of discretionary trust was not intended. The evidence was that discretionary trusts were relatively new in Hawera in the 1960s. In his submission this hybrid form of trust (discretionary as to both income and capital before the beneficiaries are 21 and fixed as to income afterwards) may have been seen as incorporating the best of both worlds. It cannot in any event in his submission be seen as irrational to consider beneficiaries who are over 21 as capable of managing their own share of income.
[36] In his submission, the 60-acre block, which was funded out of that vested income, is held by the current Trustees on bare trust for the beneficiaries. Mr Wilson rejected the alternative contention that any of the trustees of the Trust had retained income as a reserve pursuant to clause 3. Mr Wilson said that there is no evidence that this was the case. Indeed, in his submission, the evidence from Mr O’Dea was to the contrary. Mr O’Dea stated specifically in his second affidavit that his intention from 1983 onwards was simply to accumulate all income and that he did not intend to create reserves under clauses 1(c)(1) and (3) of the deed. Mr O’Dea was not challenged on this in cross-examination. Mr Wilson also pointed to the fact that, even though the income may have been characterised as “Trustees Reserve”, Mr O’Dea specifically said that this was not a reference to clause 1(c)(1) or clause 3 of the deed.
[37] Mr Wilson next submitted that the argument that the $36,500 came from a mixed fund cannot be sustained in the light of the agreed statement of facts. Finally he submitted that Mr Jenkin’s argument that the borrowings were repaid from income in accordance with clause 2(k) has three fatal flaws. The first is that there is no evidence whatsoever of any of the trustees having made any determination under clause 2(k) of the deed, either formally or informally. Secondly he submitted that voluntary reductions of a loan are not “expenses and deductions” in terms of clause 2(k) and furthermore that it is impossible to see how any trustee acting in good faith could determine that an obvious capital item such as a capital repayment of a loan used to buy land could ever be repaid out of income. To do so would, in his submission, be unreasonably to favour the capital beneficiaries at the expense of the income beneficiaries. Thirdly he submitted that the effect of clause 3 is that, unless the Trustee retains income and holds it as a reserve (which did not happen), all income is deemed to vest in the children subject to payment of expenses and outgoings. Repayment of capital debt is, in his submission, not payment of an “expense” or an “outgoing” for this purpose.
Evidence in the High Court
[38] There were two affidavits sworn by Mr O’Dea before the High Court and he was also subject to cross-examination. As indicated above, Mr O’Dea was a trustee of the Maryland Trust from 1970 to 1997 and until June 1996 was the sole trustee. Mr O’Dea’s affidavits deal with the administration of the Trust during his time as trustee. We will set out his affidavit evidence in some detail. It is not necessary to set out matters arising in cross-examination as that largely dealt with details of the accounts.
[39] We note that, in his second affidavit, Mr O’Dea had to resile from a number of the matters deposed to in his previous affidavit as that had been sworn at a time when he did not have access to all of the annual accounts of the Trust.
[40] In Mr O’Dea’s first affidavit he deposed that he had recently had drawn to his attention the complex provisions as to the treatment of income in clauses 1(c), 3 and 4 of the trust deed. We comment that it may be thought somewhat odd that he had not examined these provisions of the deed while he was a trustee.
[41] Mr O’Dea then went on to deal with a number of the matters at issue. In his first affidavit he said, that during his time as trustee, the £200 ($400) referred to in clause 1(c)(1) was never retained as it had never been necessary to do so in order to meet any payments on behalf of the Trust. He modified this statement in his second affidavit. He deposed that the $400 does appear to have been retained and separately accounted for at least until the 1981 accounts. However, from 1983 income was allocated each year to “trustees reserve” without any separate accounting for the $400.
[42] He also deposed in his first affidavit that he never made any allocations of income for or towards the benefit, maintenance, education or advancement of the beneficiaries. Nor did he make any appointment of income in favour of one or more of the beneficiaries in terms of clause 1(c)(2) of the deed. This, he said, also applied to his predecessor trustee. However, later in the affidavit he indicated that occasionally, for tax reasons, income of the trust was allocated to beneficiaries.
[43] He recognised this inconsistency in his second affidavit and deposed that, in the years prior to 1983, there had been allocations of income for the benefit, maintenance, education and advancement of beneficiaries, both while he was trustee and by his predecessor trustee. However, he reiterated that there had never been any appointment of capital or income in terms of the last part of clause 1(c)(2) of the deed.
[44] Mr O’Dea also referred in his first affidavit to payments of $15,000 made to five of the seven beneficiaries. These were shown as distributions in the accounts. He deposed that these distributions were not authorised by him as trustee but were recorded as distributions for convenience. In his second affidavit he deposed that it was his intention to ratify the distributions, subject to all beneficiaries being treated equally. This was in response to a joint affidavit from three of the beneficiaries saying that they had understood the sum of $15,000 to be a distribution and not a loan and were at a loss to see why Mr O’Dea would have recorded the amounts as distributions in the accounts if that were not the status he intended to afford them.
[45] Moving to the processes followed by Mr O’Dea in relation to the Trust, he deposed in his first affidavit that, in terms of clause 4 of the deed, he ascertained the income derived from the Trust each year by means of completing annual accounts. Net income was always accumulated and held upon trust for the beneficiaries. He said that, on occasions, the income was allocated to beneficiaries but, during his time as trustee, the “vast majority of the accumulated income was allocated as trustees income for tax purposes”.
[46] He also deposed in his first affidavit that, during his time as trustee, he never made deductions of any sums to a reserve fund in terms of clause 3 of the deed. He said there was never any need for such a reserve fund and that he never turned his mind to the making of any such deductions. He said further that the term “Trustee’s Reserve” as used in the accounts of the trust:
is used in the accounts simply to indicate accumulated income, which has not been allocated to beneficiaries. It is not a reference to the reserves referred to in either clauses 1(c)1 or 3 of the Deed of Trust and was certainly never intended by me as such a reference.
[47] He expanded upon that in his second affidavit. He reiterated that the term “Trustee’s Reserve” was not intended to be a reserve in terms of clause 1(c)(1) and clause (3) of the deed. He said:
My intention from 1983 onwards was simply to accumulate all income and the only effective way of doing this was to allocate all income in each year to ‘trustees reserve’. By treating income in this way however, I did not intend to create reserves in terms of clauses 1(c)(1) and 3 of the Deed. There was no need to allocate the income as beneficiaries’ income and so treating the income as trustee’s income and allocating it to ‘trustees reserve’ was simply the most convenient way of dealing with it.
[48] Referring to the accounts for the year ended 31 March 1997 (which had been prepared by him but not finally completed by the time of his resignation), he deposed in his first affidavit that the “trustee’s reserve” of $154,778.07 and the “beneficiaries accounts” of $4562.50 indicated that over the years $4,562.50 of income has been allocated to beneficiaries for tax purposes whereas $154,778.07 has been treated as trustees’ income. In his second affidavit he had to modify these statements. He deposed that the $154,778.07 may not have been solely derived from income, there being arguably some capital items involved such as capital gains on the sale of a farm, freezing company shares and the Maryland Trust Partnership. He indicated too that the amount shown in the “beneficiaries accounts” was not the total amount allocated to beneficiaries over the years but rather the undrawn amounts remaining after allocations to individual beneficiaries.
[49] In Mr O’Dea’s second affidavit, he deposed that he had never recorded any formal decisions relating to allocations of income, appointments, retentions, reserves and/or appropriations of income to capital as that was not standard practice at the time he was trustee. He also said that, although he prepared all the annual accounts, he never formally adopted them but provided them to Mr Fitzgerald and, after his death, to Mrs Fitzgerald who ran the Trust on a day-to-day basis. Discussion on the accounts would take place and alterations would possibly be made, after which Mr O’Dea would attend to the tax returns. He deposed that there “was no formal acceptance of the accounts by anyone however”. He also said that, during his time as trustee, he never made a careful distinction between capital and income as he had never focused upon the distinction between the capital beneficiaries and the income beneficiaries of the Trust.
[50] There was also before the High Court a joint affidavit of Mrs Kiser, Mrs Mills and Mrs Buhler, the three beneficiaries who support the interpretation of the deed contended for by the current Trustees. This affidavit dealt with the $15,000 distributions referred to above. It also set out their understanding of the terms of the Trust. They deposed that they had all understood as they were growing up that they were all discretionary beneficiaries, as opposed to having an equal interest in the trust property. They said that they were led to believe by their mother and father that there was a possibility that they could at any time be excluded form the Trust. We note at this point that what the beneficiaries understood to be the position is irrelevant to the interpretation of the trust deed.
[51] There was evidence also from a partner in the firm of Welsh McCarthy who had practised as a barrister and solicitor in Hawera since 1970. He had been asked to investigate the form of trust deed that was used by legal firms in Hawera during the 1960s. Mr McCarthy deposed that, during the relevant period, trusts and their constituent deeds were relatively unsophisticated and many did not contain the significant discretionary powers now given to trustees under modern deeds. He also deposed that, because family trusts were still relatively new to the legal profession in the early 1960s, there appears to have been an attempt by the legal firms in Hawera to achieve a degree of consistency in the wording of key provisions.
[52] Mr McCarthy deposed that there were five firms operating at the time for trust work in Hawera. Included in that number was the firm that was responsible for the Maryland Trust, O’Dea and O’Dea. Annexed to his affidavit are various forms of trust deed for what he terms non-discretionary trusts prepared by all of the five firms. He deposed that he had not been able to locate any discretionary trust deeds prepared in the period at issue by the firms other than the firm of O’Dea and O’Dea. He said that, as far as his own firm was concerned, he believed that this was because at that time his firm was taking a conservative view of this kind of trust and was not recommending them to clients. He also reports a similar comment by the principal of another firm. This latter comment is of course hearsay. It is likely that the comment about his own firm is likewise hearsay as he did not start practice until 1970, some four years after the Maryland Trust deed was prepared.
Discussion
[53] We indicated above that there are certain clauses of this trust deed that are not immediately reconcilable. It is convenient to begin the discussion with clauses 1(c)(2) and 1(c)(4). We accept Mr Wilson’s submission that each clause must be given a meaning if possible, particularly as each, separately, is in clear terms.
[54] The only sensible manner of reconciling the two provisions is in the way the judge did. Clause 1(c)(4) is clear. After the children have attained the age of 21 the share of the children in the net annual income, arising after they have attained that age, is held upon trust for those beneficiaries as tenants in common in equal shares. By necessary implication the discretionary powers relating to net annual income in clause 1(c)(2) cannot apply to net annual income arising after the children turn 21.
[55] This interpretation can in our view be reconciled with clause 1(c)(6). We accept Mr Wilson’s submission that this clause deals with the vesting of income that has already been allocated in accordance with clauses 1(c)(2) and 1(c)(4). Clause 1( c)(6) refers to “before and after the said children have respectively attained the age of 21 years” because it envisages the possibility of a vesting by way of distribution in terms of clause 1(c)(2) before a child should have attained majority. The reference to the discretionary powers in respect of net annual income in clause 1(c)(6) thus only refers to net annual income arising before the children attain 21.
[56] The judge went further, however, and held that the whole of clause 1(c)(2) ceased to apply once the beneficiaries turned 21. We agree that, once the youngest child attains the age of 21, most of this clause has no application. It is unnecessary to interpret the clause as totally superceded, however, in order to reconcile it with clause 1(c)(4). The latter only applies to net annual income arising after the children turn 21. It has no application to income arising before the children turn 21. There is no reason therefore why the provisos to clause 1(c)(2) cannot continue to apply, with one caveat. The power of appointment over income and capital contained at the end of that clause obviously cannot apply to net annual income arising after the beneficiaries turn 21 as that income vests in the beneficiaries as tenants in common in equal shares under clause 1(c)(4). Ideally, we consider that the power of appointment at the end of clause 1(c)(2) should have been put in a separate clause, rather than as a subparagraph of para 1(c) which purports to deal only with net annual income and not income generally. The fact that it was not may be inept drafting but does not affect the interpretation.
[57] This means that, in accordance with clause 1(c)(2), the Trustee still has the ability to resort to all or any of the accumulations made during the period of minority of the beneficiaries for the benefit, maintenance, education or advancement of the beneficiaries. The Trustee also continues to have the power of appointment over capital and income contained at the end of clause 1(c)(2), apart from in respect of the net annual income arising after the beneficiaries turn 21. This interpretation is more in keeping with the first part of clause 1(a), which states that both the income and capital of the Trust Fund are held for the beneficiaries or “such one or more of them to the exclusion of the others as my trustee in his absolute discretion shall think fit”. It is also more in keeping with the provisions in clause 1(a) dealing with termination of the Trust. We acknowledge that clause 1(a) is expressed to be subject to the later clauses but this does not mean that those later clauses must be assumed to have stripped it of meaning.
[58] There remains one slightly puzzling aspect. This is one that exists whether or not the whole of clause 1(c)(2) ceases to apply after the children turn 21. Clause 1(c)(5) provides that the earlier provisions shall not operate to vest the share of any child in the corpus of the Trust Fund before such share shall be vested in such child under clause 1(a). In our view, this merely means that the vesting of income, whether under the trustees’ discretionary power before a child attains the age of 21 years or under the provisions of clause 1(c)(4), does not vest in a child a share of the capital. The use of the term “corpus of the Trust Fund” was unnecessary because the exclusion of s40 of the Trustee Act and the terms of the Trust Deed mean that the Trust Deed does contain power to appoint both the capital of the Trust Fund as well as net annual income and income accumulated prior to the youngest child turning 21 and, consequently, a vesting of income either under the power of appointment or under clause 1(c)(4) could not vest the capital of the Trust. In our view the clause is there to remove doubts but does not add to or detract from the powers of the Trustee.
[59] For completeness, we indicate that the equal vesting of capital and income provided for in the second proviso at the end of clause 1(c)(2) can only come into play at termination of the Trust as it is a necessary consequence of the interpretation we favour that the power of appointment can be exercised at any time during the currency of the Trust. It is in our view a default provision if, at termination of the Trust, the Trustees do not exercise their discretion for unequal distribution. It can thus be seen as supplementing clause 1(a) in this regard. At termination of the Trust that equal vesting would also of course include the corpus without offending against clause 1(c)(5). We also consider that the equal vesting provision at the end of clause 1(c)(6) similarly serves as a default provision.
[60] This is not, however, the end of the matter. We now turn to the argument advanced by the current Trustees as to the effect of clauses 3 and 4, an argument that, we understand, was not advanced in this form before Salmon J. The starting point is that clause 1(c) applies to “net annual income arising from the Trust Fund and from any accumulations of income therefrom”. It is thus necessary to ascertain what is meant by those terms. The latter appears to apply to accumulations in respect of the net annual income as provided for in clause 1(c)(1) and clause 1(c)(2). Because it may have significance later we note here that the term “accumulated income” is not used in this regard.
[61] The important term, however, in clause 1(c) is “net annual income” as the clauses in contention between the parties, being clauses 1(c)(2), 1(c)(4) and 1(c)(6), all refer to net annual income. That term is not defined in the deed. Both parties appear to accept that the provisions of clause 3 are relevant in this regard. Clause 3 provides that the income that is to vest absolutely in terms of these presents (a reference in our view to income which vests either under clauses 1(c)(2) or 1(c)(4) and clause 1(c)(6) of the Deed) is deemed to include all income “received and finally determined for each financial year”, subject to payment of expenses and outgoings and the deduction of any amount the Trustee decides to retain as a reserve fund for any of the purposes of the Trust.
[62] The outgoings and expenses referred to in clause 3, in Mr Wilson’s submission, cannot include expenditure or outgoings on capital account. This submission runs into difficulty, however, in the face of the clearly expressed power in clause 2(k) to determine what expenses and deductions ought to be paid out of income and capital respectively and the power in clause 2(a) which authorises the Trustee to expend the income of the Trust Fund for the carrying on of farming operations and for the management and improvement of the farmland, the latter clearly possibly including capital expenditure. Indeed much of the expenditure in a farming context (for example, on machinery or dairy herds) would be capital in nature. A similar power to expend income on the development (again clearly including possible capital expenditure) of real or personal property is found in clause 2(1). It may be that there are limits on these powers but they clearly exist.
[63] Mr Wilson submitted (in another context) that it would be improper for the Trustee to use these powers, at least once the beneficiaries turned 21, as that would improperly favour the capital beneficiaries and defeat equal vesting of income. There seems to us no reason why these powers should cease to be able to be used once the beneficiaries have turned 21, in the absence of that limitation being explicitly set out in clause 2. Indeed, if Mr Wilson had been correct in his wider argument on the purport of clause 1(c)(6), such powers would never have been able to be used as equal vesting could only have been defeated by appointment to one or more of the beneficiaries.
[64] Mr Wilson accepted that it is open to the Trustee to deduct any sum or sums that the Trustee thinks fit and to retain these for a reserve fund. He pointed, however, to the evidence of Mr O’Dea with regard to his time as trustee that he never intended the creation of a reserve pursuant to clause 3 of the deed. This, in Mr Wilson’s submission, means that sum identified as “trustee’s reserve” in the accounts has vested in the beneficiaries to the extent that the sum represents income of the Trust, at least to the extent that income arose after the beneficiaries turned 21.
[65] We first make the point that Mr O’Dea deposed that, in his time as Trustee, he did not record any formal resolutions. The decisions of Mr O’Dea as Trustee must therefore be inferred from what he did in that capacity. We remark that what Mr O’Dea now says he intended to do is also of limited relevance if that is in conflict with what he actually did. We refer in particular to his evidence that he did not intend to create a reserve under clause 3 of the deed. We note in this regard his evidence that he was not familiar with at least some of the provisions of the trust deed.
[66] The next point we would make is that, in our view, the term “reserve” in clause 3 is not a term of art and is not necessarily restricted to what accountants may understand by the term. It must be understood in the context of the deed. Clauses 3 and 4 must in our view be read together, clause 4 explaining the process that must be undertaken to create a reserve fund under clause 3. The first step in clause 4 is to determine after the end of each financial year the income derived from the Trust Fund. This is clearly required to be done before clause 3 can operate, as clause 3 applies to income which has been finally determined. It may be that the reference to income in clause 4 was intended as a reference to net income rather than gross income. Certainly clause 3 recognises that expenses and outgoings must be deducted.
[67] The next stage in clause 4 is for the Trustee to decide what portion of such income shall be available for distribution “in terms of these presents” (in our view clearly a reference to the “net annual income” that is the subject of clause 1(c) of the deed) and what part or parts (if any) are to be accumulated or retained pursuant to the powers herein contained, the latter in our view clearly a reference to the power to create a reserve fund in clause 3. There is nothing in clause 4 that limits its operation, as regards these last two stages, to the period when the beneficiaries are under 21 and it is not necessary to imply such a restriction into the clause to reconcile it with the remainder of the deed.
[68] This means that, even if Mr O’Dea did not intend to create a reserve fund under clause 3, he in fact did so by virtue of the decisions he clearly took as to what part of the income was to be distributed to beneficiaries and what was to be retained. It is clear, as Salmon J accepted, that the determination of income and the powers in relation to it are to be exercised on an annual basis. While Mr O’Dea asserts that the trust accounts were not formally adopted by anyone, there is no suggestion that he, in his capacity as Trustee, disagreed with the work he had done in the preparation of the accounts, in his capacity as accountant. In addition, he, as Trustee, completed the Trust tax returns (and presumably paid the resulting income tax on the basis of those accounts), treating the retained funds (quite properly) as Trustee income for that purpose.
[69] Analysed in this manner, any payments from the Trustee’s Reserve Account (since the 1998 accounts renamed Capital Account) are not payments from income that has vested in the beneficiaries. Given this, it may not be strictly necessary for us to comment on the final argument raised by the current Trustees, being that it was legitimate for successive trustees of the Trust to repay borrowings from income and accumulated income. We would, however, be inclined to accept Mr Jenkin’s analysis on this point. We also note the power in clause 2(g), which allows the Trustee to purchase any real or personal property out of the Trust Fund or accumulated income therefrom or from borrowed money. If land can be purchased out of accumulated income it is difficult to see why such income could not be used to repay borrowings that had in turn been used to acquire land. This is, of course, subject to the powers being used for their proper purpose in terms of the deed. On the information currently available, however, there is no evidence that this was not the case; nor is there evidence of bad faith by any of the successive trustees of the Trust.
Summary
[70] In summary, we consider the process under the trust deed to be as follows:
- (a) the determination of the annual income of the Trust by the Trustee (in accordance with clause 4);
- (b) deduction of expenses and outgoings (as referred to in clause 3);
- (c) the determination of the amount available for distribution and the amount to be retained (in accordance with clause 4), the latter forming a reserve fund (as provided for in clause 3).
[71] The amount the Trustee has determined is available for distribution is what is referred to in clause 1(c) as the “net annual income” of the Trust and it is that which has been subject to the equal sharing regime set out in clause 1(c)(4) since the last of the beneficiaries turned 21.
[72] Income which is retained in terms of clauses 3 and 4 is, however, available, for example, for the purchase of real or personal property, as provided for in clause 2(g). We also consider that it is included in the term “income” as used elsewhere in clause 2.
[73] Arguably, along with the accumulations referred to in clauses 1(c)(1) and 1(c)(2), it is also included in the term “income” in the power of appointment contained at the end of clause 1(c)(2). This is, however, not entirely clear because of the positioning the grant of that power of appointment in para (1)(c) which, as indicated earlier, purports to deal with net annual income only. We have noted above, however, that clause 1(a) can also be seen as arguably creating a power of appointment with regard to income, which would clearly include income retained in terms of clauses 3 and 4.
Result
[74] For the reasons given, the appeal is allowed and the orders of Salmon J are set aside (apart from order (i) which was made by consent and order (iv) relating to the defendants’ costs).
[75] We make no substitute orders at present as the order suggested by the current Trustees does not reflect the purport of this judgment. If further orders are required the parties have leave to file memoranda (preferably joint) setting out proposed draft orders on or before 5pm, 30 January 2004.
Costs
[76] The reasonable costs of both the opposing beneficiaries and the Trustees in this appeal should be met from the Trust Fund.
[77] The opposing beneficiaries sought an order, if the appeal were dismissed, that the current Trustees pay the costs of this appeal personally and that they not be reimbursed out of Trust property. Obviously such an order is not appropriate, given the result of the appeal. We doubt, however, that such an order would have been appropriate even if the appeal had been dismissed. Given the complexities of the Trust deed it could not be deemed unreasonable for the current Trustees to appeal against a decision that did not accord with their genuine view as to the proper interpretation of that deed.
Solicitors:
Welsh McCarthy, Hawera for Appellants
Till
Henderson King, New Plymouth for Respondents
APPENDIX
THIS DEED is made the 16th day of November One thousand nine hundred and sixty-six (1966) BETWEEN ARNOLD ENGELBERGER of Hawera, Retired Farmer (hereinafter called “the Settlor”) of the one part AND ROBERT OLIVER CANN of Hawera, Accountant (who or other the Trustee or Trustees for the time being of the Trust Fund or any part thereof where not inconsistent with the context is referred to and included in the term (“the Trustee”) of the other part.
WHEREAS the Settlor is desirous of creating a trust (hereinafter called “the Maryland Trust”) for the benefit of MARIE ROSE FITZGERALD born on the 7th day of September 1949, DANIEL ANTHONY FITZGERALD born on the 19th day of January 1951, ARNOLD GERARD FITZGERALD born on the 2nd day of November 1952, THERESE MARY FITZGERALD born on the 9th day of November 957, ANGELA MARY FITZGERALD born on the 9th day of February 1959, PATRICIA MARY FITZGERALD born on the 17th day of March 1962 and LOUISE MARY FITZGERALD born on the 15th day of March 1964 being the children now living of DANIEL JAMES FITZGEDRALD of Kaponga, Farmer and DOREEN MARY FITZGERALD of Kaponga his wife, (hereinafter called “the said children”) AND WHEREAS for the purposes of these presents the Settlor has paid to the Trustee the sum of FIFTY POUNDS (£50.0.0) NOW THIS DEED WITNESSETH that the Settlor doth hereby direct and the Trustee doth hereby acknowledge and declare that the Trustee shall stand possessed of the said sum of Fifty Pounds (£50.0.0.) and also any moneys or property hereafter paid or transferred to the Trustee or in any manner acquired by the Trustee to be held upon the trusts hereof and all moneys investments and property from time to time representing the same (hereinafter referred to as “the Trust Fund”) UPON THE TRUSTS and with the powers following namely:-
1(a) Subject as hereinafter appears UPON TRUST for the said children or such one or more of them to the exclusion of the others as my Trustee in his absolute discretion shall think fit AND IT IS HEREBY DELCARED that the Trust hereby created shall terminate on the expiration of Twenty-one (21) years next after the date of the death of the survivor of them the said Daniel James Fitzgerald and Doreen Mary Fitzgerald OR in the absolute and unfettered discretion of the Trustee shall terminate at such earlier date as the Trustee shall determine AND upon the determination of the Trust hereby created the shares of the said children or such one or more of them to the exclusion of the others as my Trustee in his absolute discretion thinks fit in the corpus of the Trust Fund shall forthwith absolutely vest in them accordingly.
1(b) In the event of any of the said children dying before attaining a vested interest hereunder leaving children or a child him or her surviving who being male shall attain the age of twenty-one (21) years or who being female shall attain that age or marry then such children or child shall take and if more than one equally among them the share and every accruing share that their parent would have taken had he or she attained a vested interest hereunder AND IN THE EVENT of any of the said children dying before attaining a vested interest hereunder leaving no child who shall attain a vested interest hereunder then and in such case the share of the child so dying, both capital and income shall go and belong to the survivors of the said children upon him or her respectively attaining the age of twenty-one (21) years or such earlier date as the Trustee in his unfettered discretion shall decide or his or her children or child as aforesaid according to stocks or families as tenants in common in equal shares absolutely.
1(c) Notwithstanding the foregoing trusts the Trustee shall stand possessed of the net annual income arising from the Trust Fund and from any accumulations of income therefrom upon the trusts following namely:-
1(c)(1) The Trustee shall in each year during the continuance of the Trust hereby evidenced retain from the net annual income arising from the Trust Fund an annual sum of TWO HUNDRED POUNDS (£200.0.0) in his own name and shall in his discretion apply the same in payment of any debts in connection with the Trust Fund or in payment of premiums on any life insurance policy or policies the property of the Trust irrespective of whose life is assured thereunder and also may apply the same to such other purpose or purposes as the Trustee shall in his discretion think fit in connection with the said Trust AND as to any part of the said annual sum of Two Hundred Pounds (£200.0.0.) in any year not so applied as is hereinbefore provided the Trustee shall have full authority to hold the same as a reserve to be applied by him for the purpose of the Trust and to invest such part if any and the resulting income so as to accumulate the same at compound interest and to stand possessed of such accumulations for the like purposes PROVIDED ALWAYS that the Trustee may at any time or times thereafter resort to all or any of the said accumulations and apply the same in his discretion for the purpose of the Trust.
1(c)(2) As to the balance of the said net annual income arising from the Trust Fund after the Trustee has retained the annual sum of Two Hundred Pounds (£200.0.0.) for the purposes hereinbefore defined UPON TRUST to divide or allocate the whole or any part thereof for or towards the benefit maintenance education or advancement of the said children or such one or more of them to the exclusion of the others as my Trustee in his absolute discretion thinks fit whether or not there is any other fund applicable or any other person liable and able to provide for the same with liberty to pay such income to the guardian or the guardians of the said children for all or any of the purposes aforesaid without being liable to see to the application thereof and subject thereto to invest the residue if any of the said income and the resulting income so as to accumulate the same at compound interest and to stand possessed of such accumulations upon trust for the said children or such one or more of them to the exclusion of the others as my Trustee in his absolute discretion shall think fit absolutely PROVIDED ALWAYS that the Trustee may at any time or times thereafter resort to all or any of the said accumulations and apply the same for or towards the benefit maintenance education or advancement of the said children. The Trustee shall have power in his sole and unfettered discretion to appoint in favour of one or more of the said children to the total or partial exclusion of the others the whole or any part of the capital or income of the Trust Fund PROVIDED HOWEVER that if the Trustee shall not exercise this power of appointment then the Trust Fund shall vest in the said children as tenants in common in equal shares.
1(c)(3) AND IT IS HEREBY DECLARED that the provisions as to the destination of accumulations of income contained in Section 40 of the Trustee Act 1956 and of any statute amending or replacing the same shall not apply to the said accumulations.
1(c)(4) As to the share of the said children in the said net annual income arising after the said children have respectively attained the age of twenty-one (21) years UPON TRUST for the said children in equal shares absolutely.
1(c)(5) PROVIDED ALWAYS that the foregoing provisions shall not operate to vest the said share of any child in the corpus of the Trust Fund before such share shall be vested in such child as is hereinbefore provided by Clause 1(a) of this Deed.
1(c)(6) Before and after the said children have respectively attained the age of twenty-one (21) years the shares of the said children in the said net annual income shall indefeasibly and absolutely vest in the said children or such one or more of them as the Trustee may appoint as aforesaid and otherwise as tenants in common in equal shares.
(2)(a) To carry on farming operations on any freehold or leasehold land forming part of the Trust fund and to manage and improve the same and for that purpose from time to time to employ and expend such part or parts of the capital and income of the Trust Fund as the Trustee shall think desirable and to permit and allow the beneficiaries or any of them to manage and operate the said business so long as he she or they shall manage; the same in a businesslike and proper manner and the Trustee shall have power to determine what part of the moneys arising from the carrying on of such operations shall be treated and applied as capital and what part as income and such determination shall be binding and conclusive on all persons beneficially entitled hereunder and the Trustee shall have power in his discretion from time to time to provide reserves for depreciation of any real or personal property forming part of the Trust Fund and for the replacement of personal property forming part of the Trust Fund and generally to act in all matters relating to any such operations as if the Trustee were the absolute beneficial owner of the Trust Fund and the Trustee shall be fully indemnified out of the Trust Fund in respect of any loss arising in relation thereto....
(2)(g) To purchase out of the Trust Fund or out of accumulated income therefrom or out of moneys borrowed by the Trustee (at such price as the Trustee may consider proper) any real or personal property of any description or any interest therein and whether in New Zealand or elsewhere as may in the opinion of the Trustee be beneficial to the Trust Fund or any beneficiary having a vested or contingent interest therein with power to allow the whole or any portion of the purchase money to remain owing and whether secured on mortgage of the property so acquired or other property or unsecured and in the exercise of this power the Trustee may purchase or acquire any such property from any Trustee hereof....
(2)(j) To carry on any business (whether in partnership or otherwise) in which the Trust Fund may at any time hereafter be concerned or interested or for which the assets or any of the assets of the trust Fund may be adapted for such time or times as the Trustee shall think fit with power in the case of any partnership business to become a partner therein and with further power to use and apply any part of the Trust Fund as capital in such business and with further power to employ or join in employing in such business all such managers agents servants clerks workmen and otherwise as the Trustee shall from time to time think fit AND IT IS HEREBY DECLARED that the Trustee shall be absolutely indemnified by and out of the Trust Fund for and in respect of any loss or liability which he may sustain or incur by reason of him so carrying on any such business or businesses as aforesaid AND IT IS HEREBY DIRECTED that if in any year any losses shall be sustained by the Trustee in carrying on any such business then and in every such year such losses shall (but subject always, however, in the case of a partnership business to the terms and conditions contained in any agreements or articles affecting the same) be borne by the capital of the Trust Fund and such losses shall not (subject always as aforesaid) be recouped to such capital out of profits made by the Trustee in any subsequent years or year in carrying on such business.
(2)(k) To determine whether any moneys for the purpose of these presents are to be considered as income or capital and what expenses and deductions ought to be paid out of income and capital respectively and also to apportion blended funds AND EVERY such determination or apportionment shall be final and binding on all persons beneficially interested in the Trust Fund.
(2)(l) Generally to maintain manage repair improve and develop any real or personal property which or an interest in which for the time being forms part of the Trust Fund in such manner as the Trustee shall think fit and for that purpose to apply and pay such of the capital and income of the Trust Fund as the Trustee shall think fit.
(2)(m) For the purpose of repaying or rearranging mortgages or improving repairing or developing any property or for commencing or carrying on any business or for the purpose of any such business or management as aforesaid or for assisting any company in which the Trust Fund has an interest or for the purpose of making any investments authorised by these presents or for any other purposes whatsoever deemed by the Trustee to be in the interests of the Trust Fund or of any person who is or may be a beneficiary therein to borrow or raise any moneys on mortgage or overdraft or otherwise with or without security by way of mortgages charges instruments by way of security liens or other securities over land plant or chattels from any person firm company bank or corporation at such rate of interest and for such term and generally on such conditions as the Trustee shall think fit and to sign any mortgage deed agreement or other document in connection therewith AND any person firm company bank or corporation lending money to the Trustee shall be in no manner concerned to enquire as to the application of such moneys or as to the purposes for which such moneys may be borrowed and any Trustee hereunder may lend money to the Trust at such terms and interest as the Trustee shall think fit...
(2)(r) To advance and lend moneys to any beneficiary hereunder whether only contingently interested or otherwise and to any Trustee hereof for any purpose and for such terms at such rate of interest or free of interest with or without security (and if security be provided with or without margin of security) and generally as the Trustee in his sole discretion thinks fit AND the Trustee shall be absolutely indemnified in respect of any advance or loan made in pursuance of this sub-clause...
(2)(t) To exercise the statutory powers of maintenance and advancement contained in the Trustee Act 1956 PROVIDED ALWAYS AND IT IS HEREBY DECLARED that Section 41 of the said Act, in its application to the powers of the Trustee under these presents shall be construed in all respects as if the proviso in paragraph (a) of the said Section 41 were omitted AND IT IS FURTHER DECLARED that in the exercise of his powers of maintenance and advancement the Trustee may advance moneys for the purchase of lands stock and plant for the development of or erection of buildings on lands for the purchase of any business or business assets or professional practice the purchase and furnishing of a home the purchase of a motor vehicle the cost of studies whether in New Zealand or out of it and travel and accommodation associated with such studies and for loss of earnings during any period of sickness and disablement AND may pay any moneys so advanced to the beneficiary concerned without being liable to see to the application thereof.
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URL: http://www.nzlii.org/nz/cases/NZCA/2003/305.html