DNZ Property Fund Limited v Argosy Property Management Limited HC Auckland CIV-2011-404-004220 [2011] NZHC 1334 (29 July 2011)

Last Updated: 3 November 2011

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

_{CIV-2011-404-004220}

UNDER the Declaratory Judgments Act 1908 and the Unit Trusts Act 1960

BETWEEN DNZ PROPERTY FUND LIMITED Plaintiff

AND ARGOSY PROPERTY MANAGEMENT LIMITED

First Defendant

AND NEW ZEALAND GUARDIAN TRUST COMPANY LIMITED

Second Defendant

Hearing: 26 July 2011

Counsel: JG Miles QC and GK Holm-Hansen for Plaintiff

MD Smith and MC Harris for First Defendant

AJ Horne and BA Thompson for Second Defendant

Judgment: 29 July 2011

_{JUDGMENT OF ASHER J}

This judgment was delivered by me on Friday, 29 July 2011 at 1pm pursuant to r 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Solicitors/Counsel:

Simpson Grierson, DX CX10092, Auckland. Email: [e-mail]

Gilbert Walker, DX CP20524, Auckland. Email: [e-mail]

Minter Ellison Rudd Watt, DX CP24061, Auckland. Email: [e-mail]

_{JG Miles QC, DX CX10258, Auckland. Email: [e-mail]}

DNZ PROPERTY FUND LTD V ARGOSY PROPERTY MANAGEMENT LTD HC AK CIV-2011-404-004220

29 July 2011

Table of Contents

_{Para No}

Introduction [1] The trust and the parties [2] The internalisation proposal [10] The DNZ’s alternative proposal [15] The DNZ resolutions [22] DNZ’s claims [27] The duty to hold a meeting [35] The time for a meeting [41] The extent of a manager’s duty [48] Were the manager’s actions a breach of trust or statutory duty? [58] Injunctive relief [70] Conclusion on the various causes of action [71] Result [72] Costs [73]

Introduction

[1] In this proceeding the plaintiff DNZ Property Fund Ltd seeks orders directed against the first defendant Argosy Property Management Ltd requiring that company to promptly summon a meeting of unit holders in the Argosy Property Trust to consider various resolutions that have been proposed.

The trust and the parties

[2] The entity that is the subject of these proceedings is the Argosy Property

Trust (―the Argosy Trust‖). It is a unit trust established under the Unit Trusts Act

1960 by a trust deed dated 30 October 2002. It has been previously known as the

Paramount Property Trust and the ING Property Trust.

[3] The Argosy Trust was listed on the New Zealand Stock Exchange on

4 December 2002. It is now listed on the New Zealand Exchange Main Board (―NZSX‖). It is the third largest NZSX-listed property trust by market capitalisation. As at 31 March 2011 its property portfolio had a total value of $961 million and had generated $72.3 million in net property income in the preceding 12 months.

[4] At 10 June 2011 there were 7,243 unit holders in the Argosy Trust holding a total of 549,185,775 units. There are 20 large unit holders. Unit holders include the

Accident Compensation Corporation which holds 6.78 per cent of the units and Westpac Banking Corporation, SuperLife Trustee Nominees Ltd and Albany Power Centre Ltd.

[5] The Argosy Trust is governed by the unit trust deed amended and restated as at 1 October 2010 (―the trust deed‖). Under the trust deed there is to be a manager and a trustee of the trust.

[6] Argosy Property Management Ltd (―Argosy‖) is the manager of the trust under the trust deed. Its role is to manage the trust and its property portfolio on behalf of the unit holders in accordance with the trust deed. The trust deed sets out the basis on which the manager is entitled to receive base and incentive fees. Based on the gross value of the Argosy Trust as at 31 March 2011 of $962 million, the base fee for the 2011 financial year would be $5.8 million.

[7] Argosy is wholly owned by OnePath (NZ) Ltd (―OnePath‖) which is a subsidiary of ANZ National Bank Ltd (―ANZ National‖). The board of Argosy comprises five directors, of whom two are categorised as independent directors being Peter Brook and Trevor Scott. The independent directors are elected by the unit holders.

[8] The trustee of the trust is the second defendant New Zealand Guardian Trust Company Ltd (―the Guardian Trust‖). The Guardian Trust is a trustee corporation within the meaning of the Trustee Companies Act 1967 and the Trustee Act 1956 and is permitted to act as a trustee of a unit trust under s 5 of the Unit Trusts Act 1960 (―the Act‖). Its role entails it acting as an independent custodian of the Argosy Trust’s assets, representing the interests of unit holders of the trust in accordance with the trust deed and the Act, and monitoring the manager’s compliance with its responsibilities under the trust deed, the Act and other documents.

[9] DNZ Property Fund Ltd (―DNZ‖) is a portfolio investment company listed on the NZSX. It owns a large diversified investment property portfolio. DNZ is a unit holder and owns 0.09 per cent of the units in the Argosy Trust. The chairman of DNZ is Timothy Storey.

The internalisation proposal

[10] There were expressions of interest by third parties to acquire the right to manage the Argosy Trust late last year. In response, the board of Argosy formed the view that it would be more beneficial to unit holders if the management of the trust was ―internalised‖. Rather than the manager, or the right to manage the trust, being sold by ANZ National to an unknown third party, the management would be assumed by the Argosy Trust’s own management team at cost.

[11] Argosy and those connected with it were in a conflict of interest position when it came to deciding whether to terminate the management contract and what payments should be made in that regard. A committee of two independent directors was set up by the board of Argosy to develop and evaluate the proposal. It was agreed that the independent directors would negotiate with ANZ National and OnePath to pursue the internalisation proposal in preference to any sale to a third party.

[12] The internalisation proposal was announced in a release to the NZSX on

19 April 2011. It was proposed that there be a payment of $32.5 million to Argosy

―reflecting the fair value of the current management arrangements being relinquished‖. Argosy was to retire and support the appointment of a new manager, being a newly formed company to which key employees, systems and infrastructure of the existing manager would be transferred.

[13] Grant Samuel is a firm that specialises in independent advice and appraisal reports in New Zealand and Australia. It was engaged to provide an independent report on the merits of the proposal for the benefit of the independent directors, the unit holders and the trustee. The Grant Samuel report was to be distributed to unit holders in due course with the notice of the annual general meeting.

[14] On 14 July 2011 Messrs Brook and Scott reached agreement with ANZ National/OnePath on the internalisation of the management of the trust in exchange for a reduced payment to OnePath by the trust of $20 million. The agreement is subject to approval by unit holders and to certain other conditions. It is to be put to

the unit holders at the annual general meeting in late August or early September. Messrs Brook and Scott have determined that they will recommend the internalisation proposal to unit holders provided that the price is assessed by Grant Samuel as falling within a fair value range. However, they have the ability to terminate the agreement with OnePath and abandon the internalisation proposal without penalty, if it is determined that any other proposal provides greater value to unit holders than the internalisation proposal.

DNZ’s alternative proposal

[15] DNZ acquired a 0.09 per cent interest in the Argosy Trust. After Argosy’s announcement to the NZSX on 19 April 2011 Mr Storey of DNZ contacted Mr Brook to request a meeting to discuss an alternative proposal. Mr Brook met with Mr Storey and a DNZ executive at the offices of DNZ’s investment banker. DNZ advanced its alternative proposal.

[16] DNZ’s alternative proposal involves in substance a DNZ takeover of Argosy with the two vehicles merging. The unit holders of Argosy would receive shares in DNZ at a fixed rate based on the relative value of each entity at the time of the transaction. External management of the trust would be terminated with the manager receiving a compensatory payment. At this point no final merger proposal has been put forward. If it is to be progressed it will have to be voted on by both DNZ shareholders and the unit holders in the Argosy trust.

[17] Messrs Books and Scott have instructed Grant Samuel to consider DNZ’s alternative proposal. DNZ has provided a report from PricewaterhouseCoopers on the options available to Argosy unit holders referring to the advantages and disadvantages of internalisation, and the advantages of DNZ’s alternative proposal.

[18] On 8 June 2011 Argosy received a letter from a group of institutional investors that did not include DNZ which proposed certain resolutions involving the termination of Argosy’s role as manager. This proposal was different from DNZ’s alternative proposal.

[19] Through May 2011 there were email and telephone conversations between DNZ and the independent directors. On 6 May 2011 the independent directors wrote to DNZ’s solicitors advising that the independent directors were pursuing the internalisation proposal and that the independent directors did not wish to meet or enter into further discussions with DNZ at that time. DNZ’s solicitors responded expressing concern that the independent directors had made assumptions regarding DNZ’s alternative proposal without giving DNZ a reasonable opportunity to discuss them and that the independent directors had not properly considered the impact of the internalisation proposal and the appropriateness of the ―exclusivity arrangements‖ in the best interests of unit holders.

[20] Information was sought as to how the price of $32.5 million was negotiated with Argosy. To this the independent directors’ solicitors responded that they were not in a position to provide the information requested ahead of information being provided to all unit holders. Argosy made an NZSX announcement of the approach made by DNZ.

[21] Exchanges continued between the independent directors and DNZ. In a letter of 17 May 2011 the independent directors advised they were considering DNZ’s alternative proposal. They stated that much of the information they needed for this was available from public sources and to the extent there were gaps their advisors would be in contact. They stated that their central focus remained the initiative to internalise OnePath management. DNZ in the meantime, through its solicitors, was in touch with the Guardian Trust concerning its proposals. Correspondence continued through June 2011.

The DNZ resolutions

[22] On 24 June 2011 DNZ served on Argosy a notice requesting a meeting of unit holders to consider and vote on six resolutions. The notice was signed by the Accident Compensation Corporation and other significant unit holders as well as DNZ, totalling 11.21 per cent of the unit holders (―the notice‖). The resolutions are lengthy but can be summarised as follows:

(a) Resolution 1 is to amend cl 28.3 of the trust deed with the effect that Resolutions 2-6 if passed would be binding on the trustee and the manager.

(b) Resolution 2 is that the unit holders ―request‖, and if Resolution 1 is passed ―direct‖, the manager acting through its independent directors to take all reasonable steps to engage co-operatively and negotiate in good faith with appropriate third parties who provide credible alternative proposals (including DNZ’s alternative proposal and the

8 June 2011 proposal) and to co-operate and consult with any independent advisor appointed pursuant to Resolution 3.

(c) Resolutions 3 and 4 direct and otherwise request the trustee to appoint an independent advisor (not being Grant Samuel or anyone else who had been previously engaged in relation to the internalisation proposal) to report to the trustee and the unit holders on the merits of the alternative proposals (Resolution 3) and to advise whether it is in the interests of the unit holders that the manager should cease to hold office and whether the trustee should certify to that effect (Resolution

4).

(d) Resolution 5 requests or directs the manager to refrain from convening a meeting of unit holders to consider the internalisation proposal until it can put before unit holders (a) full information in relation to the internalisation proposal as well as information provided by third parties providing alternative proposals and information resulting from the passage of Resolutions 2 and 3; and (b) for their vote at the same meeting to progress either the internalisation proposal or any alternative proposal.

(e) Resolution 6 requests or directs the manager to immediately disclose to unit holders and the trustee full details of any exclusivity arrangements entered into with OnePath and any formal or informal voting arrangements, and full copies of all arrangements relating to

the management of the Argosy trust or the management of its properties and all related management and other charges.

[23] The Argosy Trust’s annual general meeting is usually held in August or September, and must be held by the end of September. At the time of the first market announcement of the internalisation proposal on 19 April 2011 the annual general meeting was provisionally scheduled for 8 August 2011. Argosy now expects that meeting to be held in late August with a reserve date in early September. The date has not been fixed at this point because it is necessary to obtain regulatory approvals.

[24] On receipt of the notice the independent directors concluded that those proposals should be considered at the Argosy Trust’s annual general meeting, together with DNZ’s alternative proposal and the 8 June 2011 proposal. The notice and accompanying documents will be subject to the approval of the trustee and NZSX and will include Grant Samuel’s appraisal report. That report is to include an evaluation of the proposed price to be paid to the manager under the internalisation proposal, and the DNZ and other proposals that are presently put forward. It is proposed that the trustee will appoint an independent chair to run the meeting. Voting will be held in one sitting at the end of the meeting. Unit holders will not be called upon to vote on any set of resolutions until after presentations and debate on all sets of resolutions has taken place.

[25] The Guardian Trust firmly supports the course of action proposed by the independent directors, and considers that the manager is carrying out its duties and obligations to unit holders, and that its conduct to date and proposed course of conduct.

[26] DNZ has brought this proceeding alone, and the other unit holders who signed the notice requesting a meeting are not plaintiffs.

DNZ’s claims

[27] DNZ relies on three causes of action. The first cause of action is breach of the trust deed. It is alleged that the manager should have called a meeting of the unit

holders on receipt of the notice, and that a meeting to consider DNZ’s resolutions should take place prior to the annual general meeting. As developed by Mr Miles QC in submissions, DNZ asserts that the delay of (at least) approximately two months is unreasonable, and that it is necessary for there to be a staged series of meetings so that if the DNZ resolutions are passed there is sufficient time for DNZ to formulate a final proposal for presentation to the unit holders, before the internalisation proposal is considered. The second cause of action is a breach of statutory duty relying on certain sections of the Act. The third cause of action is for declaratory relief under the Declaratory Judgments Act 1908.

[28] In the first two causes of action the relief sought is an injunction requiring Argosy to summon a meeting of the unit holders to consider the resolutions. The meeting is to take place as soon as reasonably possible and in any event before

1 August 2011, but not less than 10 business days before written notice of the meeting is sent to the unit holders and prior to the date of the scheduled annual general meeting. It is to be at a time that will enable the resolutions in the notice (if passed) to be complied with. An injunction was also sought restraining Argosy from holding any meeting of unit holders to discuss, consider or vote on the resolutions to adopt the internalisation proposal, until the meeting to consider the resolutions in the notice first takes place.

[29] No relief was sought against the Guardian Trust. For that reason the Guardian Trust has not filed a statement of defence but only a notice of appearance. However, Mr Horne has appeared for the Guardian Trust and made submissions in which the Guardian Trust actively supports the position of Argosy. It submits that Argosy’s decision as to when the resolutions will be put is proper and reasonable in the circumstances.

[30] Although there is no pleaded breach of fiduciary duty, Mr Miles emphasised the fiduciary duty of the manager and the innate conflict between the manager’s interest and those of unit holders. He emphasised that the resolutions would require an analysis of the alternative proposals to the internalisation proposal. He submitted that there was no significant cost or inconvenience to unit holders in holding the meeting sought.

[31] Mr Harris for Argosy submitted that the best way forward for unit holders is for all proposals to be considered at the annual general meeting. He emphasised the independence of the two independent directors who form the committee considering the proposals, and the independence of Grant Samuel. He submitted that it was entirely reasonable for all proposals to be considered together at the annual general meeting and that there are severe practical disadvantages in directing sequential meetings to consider the resolutions.

[32] The proceedings were filed on 14 July 2011. At a conference on 18 July 2011

Dobson J allocated a one-day fixture for 26 July 2011 and set out a timetable. The parties have been content to proceed on the basis of the affidavit evidence. There has been no contest as to the primary facts, although there have been some differences in position in the submissions in relation to the inferences that can be drawn from those facts. It is necessary for a decision to be given as soon as possible so that the parties know where they stand, with the annual general meeting pending.

[33] There have been wide ranging criticisms by DNZ of the actions of the independent directors. It is clear that DNZ is entirely dissatisfied with the approach taken by the independent directors, and explicitly queries the independence of Grant Samuel.

[34] However, the essential point is relatively narrow. It is whether Argosy (through the actions of the independent directors) is in breach of its obligations under the trust deed and the Act in refusing to hold an immediate separate meeting to consider and vote on the Argosy resolutions, rather than put them to unit holders together with the internalisation proposal and the 8 June 2011 proposal at the annual general meeting in late August or early September.

The duty to hold a meeting

[35] Clause 28.1 of the trust deed provides:

Request for meeting: The Manager shall summon a meeting of Unit Holders upon the request in writing of the Trustee, or of one tenth in number of the Unit Holders, or of a Unit Holder or Unit Holders holding (at the date of the receipt by the Manager of the request) not less than one tenth of the

value of the interests of the Unit Holders in the Trust Fund. The Manager shall in accordance with section 12(d)(ii) of the Act lay before any such meeting copies of the last statements and summaries filed with the District Registrar of Companies in accordance with section 20(1)(b) and section

20(2) of the Act.

[36] Clause 3.1 of the schedule to the trust deed provides that the manager shall provide at least 10 business days’ written notice of any meeting called. Clause 31.5 of the trust deed provides:

Operation of Trust: The Manager shall use its best endeavours to ensure that the Trust is carried on in a proper and efficient manner.

[37] Section 12 of the Act implies certain terms into the trust deed. Section

12(1)(a) provides:

12 Implied provisions in trust deed

(1) The following provisions shall be implied in every trust deed relating to a unit trust, notwithstanding anything to the contrary in the deed:

(a) That the manager of the unit trust shall use its best endeavours to ensure that the unit trust is carried on in a proper and efficient manner:

[38] Section 12(1)(d) of the Act implies a provision:

That the manager of a unit trust shall,—

(i) On request in writing of the trustee, or of either one-tenth in number of the unit holders, or of a unit holder or unit holders holding (at the date of the receipt by the manager of the request) not less than one-tenth of the value of the interests in the unit trust then held by unit holders, summon a meeting of unit holders to be held in accordance with section

18 of this Act, by sending by post a notice specifying the time and place of the meeting to every unit holder at his last known address not later than 14 days before the date of the proposed meeting:

...

[39] Section 24(1) of the Act provides that the trustee of a unit trust and the manager shall each have the same duty to observe care and diligence in the performance of its duties as any other trustee.

[40] The trustee has a distinct role from that of the manager and must be independent from the manager. Section 12(1)(c) implies a provision that the trustee

shall not act on any direction of the manager to acquire any property for the unit trust or dispose of any property if in the trustee’s opinion the proposed acquisition or disposal is manifestly not in the interests of the unit holders. The general manager of the Guardian Trust has set out his views on what the Guardian Trust’s role involves. The function of a trustee was considered in Re Flat Rock Forests Trust.1 The trustee’s function is to formally hold and act as independent custodian of the trust assets. It represents the interests of the unit holders of the trust in accordance with the trust deed and the Act. It monitors the manager’s compliance with its responsibilities under the trust deed and the Act,2 and maintains impartiality as between unit holders. It must not profit from its position or put itself in a position where its interests conflict with its duty as a trustee.3

The time for a meeting

[41] There is something of a non sequitur in DNZ’s primary claim in its first and second causes of action. The provisions in the trust deed that oblige the manager to call a meeting are set out and it is then stated that in breach of these provisions the manager has failed to call a meeting. However, the trust deed and the terms implied by the Act do not require a meeting to be held within a certain period of time. Mr Miles in his submissions echoing the headings in the statement of claim put DNZ’s claims more broadly, on the basis that Argosy had breached its duty as manager to call a meeting within a reasonable time. He submitted that there was a conflict of interest between the manager’s interests and the manager’s duties to the unit holders and asserted the manager did not have a discretion whether to call a meeting, and that any discretion as to timing was not unfettered. He relied on company law cases which stated that shareholders’ meetings must be held within a reasonable period of time.

[42] Clause 28.1 and the term implied by s 12(1)(a) of the Act do not set out a time limit for the holding of a meeting. Moreover, the trust deed confers a wide

_{discretion on the manager and trustee. Clause 31.4 states that except as otherwise}

1 _{Re Flat Rock Forests Trust [2000] 3 NZLR 207 (HC).}

2 _{Re Flat Rock Forests Trust at [6].}

3 Jones v AMP Trustee Co NZ Ltd [1994] 1 NZLR 690 (HC) at 710.

expressly provided the manager and trustee shall, in relation to their powers and authorities, have absolute and uncontrolled discretion as to their exercise whether ―in relation to the manner or as to the mode of or time for their exercise‖. It is also provided that no unit holder shall be entitled to interfere with or question the exercise or non-exercise by the manager or trustee of any of the powers or authorities or discretions conferred upon them (cl 4.2).

[43] These wide provisions must be read with the obligation on the manager in cl 31.5 (implicit in any event from its duties) to use its best endeavours to ensure that the trust is carried on in a proper and efficient manner. To carry on the business of a trust in a proper and efficient manner, where a meeting is properly requisitioned by unit holders under cl 28.1 of the trust deed, a manager must call that meeting within a reasonable period of time. A failure to do so would not be proper and efficient, and in the ordinary course of events would not be consistent with the manager’s duty to act in the best interests of the unit holders.

[44] Mr Miles submits that support for this proposition can be drawn from two decisions in the company law context.

[45] In WEL Energy Group Ltd v Hawkins4 there was a request for a meeting of shareholders to consider whether two directors should be removed. The board failed to call a meeting and instead suggested a compromise. Over two months after the request had been made Smellie J considered whether he should grant relief by way of interim injunction requiring the two directors to be effectively stood down. Smellie J granted the interim injunction. He considered that it was ―beyond argument in my view that if the meeting which should have been called, was held

today, [the directors] would cease to be directors‖.5

[46] In Browse Petroleum Pty Ltd v Cue Energy Resources Ltd6 Wild J considered an alleged failure to hold a special general meeting. Seven weeks had elapsed from the notice of requisition until the defendants’ first response and the delay by the time

_{of the hearing was almost three months. Wild J observed that s 121 Companies Act}

4 _{WEL Energy Group Ltd v Hawkins [2001] 3 NZLR 374 (HC).}

5 _{At 376}

6 Browse Petroleum Pty Ltd v Cue Energy Resources Ltd HC Wellington CP37/01, 1 March 2001.

1993 did not state the time frame within which directors are required to call a meeting requisitioned by shareholders and that it was common ground that it must be within a ―reasonable time‖. He referred to WEL Energy Group Ltd v Hawkins7 and determined that the meeting ought to have been convened ―long ago‖, by mid- January at the latest (the notice of requisition was dated 1 December). He granted interim relief to maintain the plaintiff’s position until a meeting could take place.

[47] Mr Miles submitted that the period of approximately two months between the notice on 24 June 2011 and the meeting in late August or early September was unreasonable. It was a central part of his submission that there are particular circumstances which require DNZ’s proposed resolutions to be considered and voted on earlier. He argued that there should be a time lapse between this first meeting and the meeting to actually consider and vote on the various proposals. He submitted that this made it all the more unreasonable to defer the consideration of the resolutions to the annual general meeting when the internalisation and alternative proposals would be heard at the same time. He submitted that it was fair to unit holders that there be a time gap between the vote on the DNZ resolutions and the vote on the internalisation proposal.

The extent of a manager’s duty

[48] The manager is a party to the trust deed. It owes a fiduciary duty in the discharge of its duties. This is common ground. The manager has the same liability for its acts and omissions in the exercise of its powers and functions as it would if exercised those powers and functions as a trustee.8 The manager shares the trustee’s duty to observe care and diligence in the performance of its duties.9 Every manager

must be a company.10 In terms of the Act and the trust deed Argosy is responsible for

_{the day-to-day and strategic management of the trust assets.}11 _{It is its role to make}

7 _{WEL Energy Group Ltd v Hawkins HC Auckland CL5/98, 28 May 1998.}

8 _{Unit Titles Act 1960, s 3(2)(c).}

9 _{Unit Titles Act 1960, s 24(1).}

10 _{Unit Titles Act 1960, s 4.}

11 Re Flat Rock Forests Trust at [6].

the active commercial decisions. The manager must treat the unit holders’ interests as paramount.12

[49] Thus, the duties of the manager are both contractual and fiduciary. Mr Harris submits that the issues must be approached from the perspective of whether the manager is in breach of the exercise of its discretion as trustee. He accepts that the discretion is not unfettered and accepts the meeting must be held within a period of time that is reasonable in all the circumstances.

[50] There is no express contractual provision as to when a meeting should be held. The trustee’s obligations must be assessed against the obligation in cl 28.1 to summon a meeting and in cl 31.5 to use its best endeavours to ensure that the trust is carried on in a proper and efficient manner. It must also be assessed against the duty of the trustee to act diligently and in the interests of unit holders. The absence of any express statement in the deed as to the timeframe for a meeting following the receipt of a request for a meeting means that it falls within the trustee’s discretionary powers as to when the meeting will be held. However, those discretionary powers are not unlimited. The usual requirements for the valid exercise of a trustee’s power will apply.

[51] There are established limits on the exercise of a trustee’s discretion. This is not the occasion to endeavour to summarise the relevant principles but it is clear that a trustee must not exercise its discretion in a manner which is arbitrary or capricious.13

[52] Mr Harris referred to the approach adopted by Tipping J in Craddock v Crowhen.14 There is no general duty on a trustee to act reasonably in the exercise of a discretion. However, in Craddock v Crowhen the administrative law concept of Wednesbury unreasonableness was applied. There a former member of a superannuation plan brought proceedings seeking a share of the surplus remaining in

_{the fund. In the course of his decision Tipping J considered the question of when the}

12 _{Cowan v Scargill [1985] 1 Ch 270 (Ch).}

13 Re Manisty’s Settlement [1974] Ch 17 (Ch) at 26; Gailey v Gordon [2003] 2 NZLR 192 (HC) at

_[89].

14 Craddock v Crowhen (1995) 1 NZSC 40,331 (HC).

Court will review the exercise by trustees of their discretionary powers. He observed that members joined the fund on the faith of the terms of the trust deed. He stated:

As I have said, it is generally understood that beneficiaries cannot complain about the exercise by trustees of a discretionary power unless they have acted ultra vires or in bad faith.

[53] Tipping J went on to observe that unreasonableness in that context was analogous with unreasonableness in administrative law, referring to the Wednesbury concept. A decision would not be regarded as unreasonable unless it was such that no reasonable trustee could rationally have made it in all the circumstances. He observed:

The Court will not intervene simply because it would or might have made a different decision. To be impugned the decision must be one which can fairly be said to be beyond the bounds of reason.

[54] This approach was adopted by Wild J in Blair v Vallely.15 However, in Gailey v Gordon O’Regan J did not go as far, observing that for a Court to intervene on the basis of Wednesbury unreasonableness involves some relaxation of the normal reluctance of courts to intervene, except where a trustee’s decision has been exercised in bad faith or is ultra vires.16 He commented that bad faith included a decision made with an ulterior motive, taking into account of irrelevant considerations and refusal to take into account relevant considerations and acting capriciously. In the absence of any Court of Appeal authority mandating the broader

approach adopted in Craddock v Crowhen and Blair v Vallely, he preferred the limited approach which ―recognises the traditional reluctance of the Courts to intervene in the exercise of a discretion by trustees unless it is in bad faith (as broadly defined above), or ultra vires‖.

[55] The concept of Wednesbury unreasonableness in this context does not appear to have been embraced by overseas authority. It is rejected in Underhill and Hayton

_{Law of Trusts and Trustees.}17 _{In New Zealand leading commentators have expressed}

15 _{Blair v Vallely HC Wanganui CP8/98, 23 April 1999 at 21.}

16 _{Gailey v Gordon [2003] 2 NZLR 192 (HC) at [89].}

17. David Hayton (ed) Underhill and Hayton Law of Trusts and Trustees (18th ed, LexisNexis, London, 2010) at [57.13]-[57.17].

reservations about its application.18 These reservations have real force insofar as the notion of Wednesbury unreasonableness has now accrued a considerable elasticity ill suited to the trust context.19

[56] However, the narrow original notion of Wednesbury unreasonableness is encompassed by the traditional statements of the limits to the exercise of a trustee’s discretion. Templeman J commented in Re Manisty’s Settlement:20

The court may also be persuaded to intervene if the trustees act

―capriciously‖, that is to say, act for reasons which I apprehend could be said

to be irrational, perverse or irrelevant to any sensible expectation of the settler; for example, if they chose a beneficiary by height or complexion or by the irrelevant fact that he was a resident of Greater London.

A decision so unreasonable that no reasonable trustee could have rationally made it in all the circumstances (the narrow original Wednesbury notion of unreasonableness) can be seen as equating to an irrational or capricious decision. As is observed in Equity and Trusts in New Zealand21 this does not necessarily involve any expansion of the existing law. It is a useful elaboration of the notions of irrationality and capriciousness in this context that it would be capricious for a

trustee to make a decision that no reasonable trustee could have rationally made. This is not going beyond the limited approach preferred by O’Regan J in Gailey v Gordon. In relation to these facts, the question would be whether the proposed course of action of the trustee to not call a specific meeting, but to have the proposed resolutions put at the annual general meeting, was a decision that no reasonable trustee could rationally have made.

[57] There is no doubt that intervention would be warranted if a trustee categorically refused to call a meeting after notice was given, or where the trustee’s response was clearly dictated by the trustee’s interests rather than those of the unit

_{holders. As a general proposition a trustee or manager carrying out its duties should,}

18. Noel C Kelly, Chris Kelly and Greg Kelly Garrow and Kelly Law of Trusts and Trustees (6th ed, LexisNexis, Wellington, 2005) at [19.7.5]; Andrew Butler (ed) Equity and Trusts in New Zealand (2nd ed, Brookers, Wellington, 2009) at [6.5.5](4–6).

19 See the commentary in GDS Taylor Judicial Review: A New Zealand Perspective (2nd ed, LexisNexis, Wellington, 2010) at [14.41]-[14.46] and Philip A Joseph Constitutional and Administrative Law in New Zealand (3rd ed, Brookers, Wellington, 2007) at ch 23.

20 _{Re Manisty’s Settlement [1974] 1 Ch 17 at 26.}

21 Equity and Trusts in New Zealand at [6.5.6](6).

if a notice is received, promptly proceed to call a meeting. The decisions of WEL Energy Group Ltd v Hawkins and Browse Petroleum Pty Ltd v Cue Energy Resources Ltd indicate that in a trustee context as in a company law one, two months’ delay in responding to a notice to call a meeting could be regarded as irrational or capricious so as to warrant the intervention of the Court. However, practicalities must be taken into account and there is no rule of thumb. It is necessary to examine the relevant facts more closely.

Were the manager’s actions a breach of trust or statutory duty?

[58] First, it is necessary to deal with some general criticism made of the manager’s conduct. I do not accept there is a basis for the plaintiff’s submission that the manager is in a conflict of interest position. Inevitably conflicts will arise between the manager and the trust when matters concerning the terms of the management agreement arise. It has not been shown that the step taken of setting up a committee consisting of the independent directors to deal with the proposals was an unsatisfactory way of resolving that conflict, given the overall supervision of the trustee. There is nothing in the evidence that impugns the independence of those two directors, or indeed the Guardian Trust.

[59] Further, I do not accept that there is anything in the material before the Court which could lead it to uphold the criticisms of the independence of Grant Samuel. Grant Samuel specialises in the preparation and presentation of independent reports. It has been approved by NZSX as an independent appropriately qualified person, able to provide an appraisal report. It has not acted for ANZ National or related parties since 2005. The fact that it initially had before it only the internalisation proposal does not mean that its independence has been lost. It cannot be suggested that professional advisors lose their ability to objectively consider a proposal if it is not the first they receive. In any event, the decision as to what independent expert is retained is for the manager. It is not for this Court to second guess that decision unless the decision to retain that firm is a breach of duty.

[60] It was suggested that the independent directors had been unresponsive to

DNZ’s efforts to pursue its proposal. While it is clear that the independent directors

have, after the initial discussions, been limiting their communications with DNZ and that they have maintained their support for the internalisation proposal, I am not able to infer from the material before me any failure on their part to properly entertain and understand DNZ’s alternative proposal. This submission and the other allegations of lack of independence smacked of a complaint that the manager was not entertaining to DNZ’s satisfaction its alternative proposal. However, the pleaded allegations are of a failure to exercise the discretionary powers to call a meeting and these complaints have only peripheral relevance to them.

[61] I turn to the course of conduct adopted by the manager. The manager has not proceeded to call a meeting immediately upon receipt of the requisition and it is now over four weeks since the notice was received. However, it has not refused to call any meeting to consider the resolutions or neglected the request. It is prepared to put the resolutions at the pending annual general meeting. Its reasons for not doing so earlier are: (a) the extra cost for the unit holders; and (b) that it would be confusing for unit holders and unnecessary.

[62] The annual general meeting will be eight to 10 weeks from the receipt of the requisition. It is preferable in the manager’s view for there to be one meeting in which all management options are considered, and that should be the annual general meeting. The Guardian Trust agrees.

[63] Indeed, it became clear during the hearing that on DNZ’s proposed course of action, the manager would have to call three meetings in short succession. First, there would be the meeting to consider DNZ’s proposed resolutions. Secondly, there would be the annual general meeting. Thirdly there would be the meeting to consider the internalisation proposal and the substance of any proposal from DNZ or any other party. This would occur over a two-month timeframe. The reason for this is that it would not be possible, if DNZ’s proposed resolutions are passed, for DNZ’s alternative proposal to be ready in time for the annual general meeting. The necessary regulatory approvals will take until October. The annual general meeting must be held in September. October would be too late. Thus, there must be a third meeting.

[64] DNZ’s argument as it developed through the hearing was that it was not fair for the trustee to avoid the staged process that an immediate holding of a meeting and consideration of DNZ’s proposals alone would entail. Mr Miles explained there was a need for a different advisor to evaluate a considered DNZ proposal, and that the resolutions would direct that this occurred. He submitted that DNZ needed to obtain further information to enable it to put together its proposal and it needed for the resolutions to be passed and the meeting summoned so that it could obtain this information before it put its final proposal together, and before that proposal was considered.

[65] I am not satisfied that even if the resolutions were put to a meeting prior to the annual general meeting and passed that DNZ’s ability to present an informed proposal would be greatly improved from an information point of view. The proposed resolutions do not involve the provision of detailed information about Argosy’s affairs (although full information as to Argosy’s internalisation proposal is sought). In any event, it will be open to DNZ to move at the annual general meeting, if it wishes, that consideration of all proposals be deferred while further information is provided.

[66] On the other hand, the decision of the independent directors will avoid costs. There is some argument as to the amount of those costs, which I accept may be less than the $80,000 per meeting suggested as the maximum. But there will be a cost factor, ultimately met by the unit holders, and that is a reason not to hold unnecessary meetings.

[67] More importantly, both the manager and the Guardian Trust consider that many unit holders will find a sequence of three meetings an inconvenient imposition and confusing. I do not accept Mr Miles’ criticism of the views of both the independent director Mr Brook and Mr Connor for the Guardian Trust in this regard. They say that unit holders may be confused as to whether they should attend all the meetings (being used to only annual general meetings). They may have difficulty understanding the proposed sequence and the mutually exclusive nature of DNZ’s alternative proposal and the internalisation proposal. They may assume some sort of preference for DNZ’s alternative proposal, as a consequence of it being put to them

in the first meeting. It has not been shown that the views of the independent directors and the Guardian Trust are wrong. I note that Mr Connor records that there have already been communications from unit holders expressing confusion. DNZ’s proposed sequence of meetings, dictated by its wish to successfully pursue a takeover, are going to be difficult for those who are not expert in commercial matters to follow.

[68] DNZ will be able to put the existing proposed resolutions and any other resolutions it wishes to put at the annual general meeting. It can if it wishes vigorously pursue its alternative proposal, but there is nothing to show that the independent directors and Guardian Trust are in all the circumstances acting in breach of their duties in refusing to respond to the requisition by calling a meeting immediately.

[69] I conclude that the decision made by Argosy and supported by the Guardian Trust to not call a special meeting and rather to put the resolutions at the annual general meeting has not been shown to be capricious or irrational, or beyond the bounds of reason. Indeed, I go further and observe that it is an understandable decision in the circumstances. It is not a failure to carry on the trust in a proper and efficient manner. I conclude that it has not been shown that there has been any breach of duty under the trust deed, or breach of statutory duty.

Injunctive relief

[70] In the circumstances it is not necessary to determine Argosy’s submission that injunctive relief should be refused in the exercise of the Court’s discretion because the resolutions if passed could only express the view of the unit holders at the meeting and could not direct the trustee or manager to act. That factor in itself is not fatal to DNZ’s claim. I accept Mr Miles’ submission that the resolutions if passed would have considerable force, even if they were in the end recommendatory. However, the claim fails for the more fundamental reasons that have been outlined.

Conclusion on the various causes of action

[71] I conclude that there has been no breach of the trust deed or of statutory duty. As to the third alternative cause of action seeking declaratory relief, this is not the sort of claim that can be brought under the Declaratory Judgments Act. The case does not involve an interpretation of any statute or document. Indeed, there is little doubt about the meaning of the relevant clauses in the trust deed and the Act. The issue is not the interpretation of those sections. Rather, it has been the assessment of whether the proposed actions of Argosy amount to a breach of trust, or a breach of the Act. The issues have been the test for assessing breach of trust and the facts of the alleged breach. Such considerations are unsuited to the Declaratory Judgments Act procedure. The third cause of action also fails.

Result

[72] The plaintiff’s claim fails and judgment is entered for the defendants.

Costs

[73] This has been a straightforward case, brought to court with expedition. Unnecessary complexity has been avoided, and the parties are to be commended for that. However, the plaintiff has failed and costs would normally follow the event. If there is an issue as to costs the defendants are to file submissions within seven days, and the plaintiff within a further seven days.

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Asher J