Gough v Strahl [2012] NZHC 2338 (11 September 2012)

Last Updated: 18 September 2012

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV 2012-485-1574 [2012] NZHC 2338

BETWEEN HARCOURT DAVID GOUGH Plaintiff

AND JOHN RUSSELL STRAHL AS TRUSTEE OF THE O T GOUGH FAMILY TRUST Defendant

Hearing: 10 September 2012

Counsel: N Ingram QC with M Kyriak for Plaintiff

R J B Fowler for Defendant

J W A Johnson for A B E McKinnon (beneficiary) Judgment: 11 September 2012

_{JUDGMENT OF THE HON JUSTICE KÓS}

Introduction

[1] An interim injunction presently constrains the defendant, the sole remaining trustee of the OT Gough Family Trust, from exercising any trustee powers other than appointment of new trustees or applying to this Court for directions. New trustees are being recruited. The injunction is about to expire. The plaintiff (who is one of the four beneficiaries of the trust) seeks extension of the injunction until the next Judge’s Chambers List, or until the requisite complement of three trustees are in place. Whichever comes sooner. The defendant trustee seeks discharge or variation of the injunction to allow him to administer the trust in certain respects. Another

_{beneficiary, the plaintiff’s sister, seeks to be joined as a defendant.}

GOUGH v STRAHL AS TRUSTEE OF THE OT GOUGH FAMILY TRUST HC WN CIV 2012-485-1574 [11 September 2012]

An Argument

[2] The OT Gough Family Trust was settled in 1987. The background to its creation is as follows. The sole assets of the trust are 42 per cent of the shares in the holding company of Gough Gough and Hamer Limited. That company deals in farm and industrial equipment. In particular, it is the New Zealand dealer for Caterpillar earthmoving equipment. The value of the shareholding is said to be substantial.

[3] Mr Tracy Gough was one of the three founders of that company. He died in

1954. In the aftermath of his demise sadness was replaced, as is sometimes the case, with much litigation. Ultimately a deed of family arrangement was entered into in

1962. It provided for the assets of the estate to be held in trust. Approval to that arrangement was given by Richmond J in a decision in the High Court at Christchurch on 26 June 1962. Thereafter arrangements were restructured in 1987. In that year the OT Gough Family Trust was settled. There are four beneficiaries, the plaintiff Harcourt Gough, his brothers Tracy and Antony Gough, and their sister, Avenal McKinnon. Their interests under the trust are equal.

[4] The trust deed requires three trustees, who may act by majority. None of the original trustees remain. The defendant, Mr Strahl, replaced Mr Bacon at a date not apparent in the evidence. On 31 March 2012 Mr Farrant retired as trustee, at the end of his term. Mr Hagen retired mid-term, on 20 July 2012. That resignation was initially conditional, but has since been made unconditional. Mr Strahl has continued as sole remaining trustee. He says in an affidavit that he and Mr Hagen had been “struggling to sort out replacement trustees” since Mr Farrant's retirement in March.

[5] A difficulty lying in the way of appointment is that new trustees must first be approved by a majority (i.e. three) of the four adult beneficiaries. There has been disagreement among the beneficiaries. The three brothers appear now to agree upon the appointment of Messrs Burrows and Bijl. The brothers’ approval is conditional on both being appointed. It seems the consents of Messrs Burrows and Bijl are themselves conditional on indemnities being given. These have not yet been finalised. The fourth beneficiary, Mrs McKinnon, has proposed two other trustees.

But her brothers do not agree to these two. The majority requirement means they will not be appointed. Mr Strahl says that all four are acceptable to him, but he is in the hands of the beneficiaries as to approval and indemnities (so that the consents of the new trustees are forthcoming). He is hopeful that this will all be resolved within the next two weeks. But not confident.

[6] Against this background (or at least that part of it that existed five weeks ago), the plaintiff applied ex parte for an injunction to restrain Mr Strahl, the defendant trustee, from exercising any power other than trustee appointment. In a lengthy affidavit the plaintiff made a number of complaints about the way in which Mr Strahl has conducted his role as trustee since March 2012. Mr Strahl is a senior legal practitioner of very high repute. Through his counsel, Mr Richard Fowler, he very strongly rejects these complaints. They relate to a perceived preference for the wishes of Mrs McKinnon over the brothers, and an alleged failure to act adequately to preserve the assets of the trust. Mrs McKinnon’s counsel, Mr Jeremy Johnson, associated himself with Mr Fowler’s submissions on this point.

[7] Be all that as it may, this is clearly a case with substantial governance issues affecting the trust. These may or may not be resolved by the appointment of a full panel of trustees.

An injunction

[8] On 3 August 2012 Mallon J convened a telephone conference to consider the injunction application on a Pickwick basis. Counsel for the plaintiff, Mr Noel Ingram QC, and Mr Strahl (who was at the time holidaying in Italy) participated. Mr Strahl’s position was that he would not be doing anything under the trust anyway before returning from holiday on 26 August 2012. So he would consent to an order in the terms sought by the plaintiff for a period of two weeks.

[9] As a result, on that day, Mallon J made an order in these terms:

Until 20 August 2012 the defendant be restrained from exercising any trust power, express or implied, under a Trust Deed ... dated 28 May 1987 in respect of the OT Gough Family Trust save for the power to appoint new

and/or replacement trustees pursuant to clause 4 of the Trust Deed and the power to seek directions from the Court.

Leave was reserved to either party to apply to the Court in the meantime. The injunction subsequently was extended to 10 September.

Four applications

[10] Before me are four applications:

(a) By the plaintiff to extend the injunction for two weeks (to 5.00 pm on

24 September 2012) save that if the requisite number of three trustees are in place before then, the injunction shall thereupon lapse.

(b) By the defendant trustee for discharge or variation of the interim orders “to permit the necessary continuing administration of the trust”, together with directions concerning funding of the defendant’s legal costs in these proceedings (a Beddoe order), his ongoing costs in the trusts administration and indemnification of retiring trustees.

(c) By Mrs McKinnon to be joined as a defendant to the proceeding.

(d) By the defendant, for directions as to service of his statement of defence and counterclaim. He seeks that it be served on each of the four beneficiaries and on the two retired trustees. There is no practical reason why such orders sought should not be made. And there is no opposition. So orders will be made as sought by the defendant for service.

A conflict?

[11] I was unaware of the participation of Mrs McKinnon in this case until I read the file on Sunday afternoon. Her husband, Mr John McKinnon, is a friend of mine. I do not, however, know Mrs McKinnon very well. Having disclosed that potential issue, I stood the matter down for an hour to enable counsel to take instructions.

When the hearing resumed before me, at 11.00 am, Mr Ingram respectfully requested that I recuse myself from dealing with the applications to the extent they affected Mrs McKinnon’s position particularly. That clearly would include the application by her for joinder.

[12] In the end what was agreed was that I would deal with application (a) – the plaintiff’s application for extension of the injunction, Mr Strahl’s application (b) – to the extent that a case could be made that it was necessary to now vary or discharge the injunction application. I would not however deal with the applications for funding (Beddoe order) or indemnity. These matters, together with Mrs McKinnon’s application (c) for joinder, are reserved for consideration by Miller J on Monday

24 September 2012. Without opposition I also dealt with application (d).

Extension of injunction?

[13] Mr Ingram submits that progress has been made by the defendant on the appointment of two new or replacement trustees. A little more time is required to put that in place. Mr Strahl deposes to essentially the same effect. Mr Ingram’s estimate is that seven to ten days will be required for that period. Mr Strahl is less confident, but is at least “hopeful”.

[14] Subject to the next application, relating to discharge or variation, I was satisfied that grounds existed to extend the existing injunction for a period of two weeks, to 5.00 pm on Monday 24 September 2012. At the end of the hearing I advised the parties that I was making that order.

Discharge or variation of the injunction?

[15] Mr Strahl seeks discharge or variation of the injunction to enable him to perform his duty under clause 7(a) of the trust deed. It provides:

The trustees shall use their best endeavours to ensure that directors appointed to Gough Holdings Limited obtain the maximum distribution of dividends from operating companies under their control and make such distributions and dividends, repayments of debt or redemptions of equity securities as the

case may be, as is consistent in maintaining the financial viability of the operating companies.

[16] Mr Strahl has reported to the beneficiaries (including the plaintiff and Mrs McKinnon) that the directors of Gough Holdings Limited are proposing a “several million dollar reduction” in the “usual dividend”. Mr Strahl disagrees with that proposal. The proposal would need to be ratified in due course by ordinary shareholders. As a 42 per cent shareholder, the OT Gough Family Trust has a significant voice in that decision, although it may not be in a position to turn back the proposal. But Mr Strahl says he needs to effect share transfers from the retired trustees, lodge proxies and examine the possibility of filing a shareholder proposal before the annual general meeting of the company, which is to take place soon. On Wednesday 26 September 2012 in fact. Mr Fowler submits that if Mr Strahl remains hamstrung, and cannot commence these steps, the permanent loss to the value of the shares may potentially be tens of millions of dollars. That is not a state of affairs for which Mr Strahl could incur liability, to the extent that he is restrained from acting by injunction.

[17] Mr Johnson, while generally supporting the submissions made by Mr Fowler, departs in one respect. He submits that Mr Strahl still has legal power to deal with the assets of the trust (share transfers and voting) as these are arguably powers inherent in legal ownership of the shares, as opposed to being vested by the trust. Mr Johnson could not immediately point to authority in support, the point being one of recent impression. Plainly it is not shared by Mr Fowler or Mr Strahl. Whether or not the argument is correct as a matter of law, and I have real doubt that it is, the operative restraint in this case is the injunction directed by Mallon J. It would not be within the terms or spirit of that injunction for Mr Strahl to exercise such powers. To the extent he wishes to do so, therefore, he must obtain a discharge or variation to that injunction.

[18] Mr Ingram for the plaintiff opposes discharge or variation. In the first place his opposition is based on a jurisdictional argument. First, that the application for variation (if made pursuant to High Court Rule 7.49) is out of time. Secondly that any application for directions should begin under Part 18 by a statement of claim rather than by interlocutory application in the present case.

[19] I do not accept these objections. The terms on which the injunction was made, as I have already noted, reserved leave to either party to apply to the Court. I do not regard that position as time-bound by 20 August 2012, when the original orders were extended. As to the second basis of objection, s 66(1) of the Trustee Act

1956 permits any trustee to bring an application for directions. Plainly in a situation of deadlock or insufficiency of trustees, a single trustee may exercise that power. Although Part 18 of the High Court Rules applies, I am satisfied there is no jurisdictional objection to initiating the application by way of counterclaim. That is consistent with Part 18 procedure, which is intended appropriately to simplify procedure within the equitable jurisdiction and to avoid undue technicality.

[20] I therefore set aside these jurisdictional objections and turn to Mr Ingram’s substantive objection. It is fair to say that with the jurisdictional objection put to one side, and the issues of funding (Beddoe order) and indemnity reserved for another day, Mr Ingram’s objections on behalf of the plaintiff were now more subdued. He could not point to any significant vice likely to arise from Mr Strahl taking the steps he suggests be taken in relation to the proposed dividend reduction. Of course, if new trustees are appointed, Mr Strahl will not take those steps alone. And he will be subject to majority determination. Mr Ingram submitted that as the trust has only 42 per cent of the shares, Mr Strahl’s steps are likely to be futile. But they may not be. There is nothing on the evidence before me to suggest that Mr Strahl should not be released to do his clause 7(a) duty. Indeed Mr Ingram was prepared to accept there could be no objection to the transfer of shares to Mr Strahl from the retired trustees being completed. In due course retransfer to the new trustees collectively will need to occur. In the end Mr Ingram was unable to point to any material disadvantage in Mr Strahl being released to do his duty in terms of clause 7(a) of the trust deed.

[21] It also seems to me that it is preferable that the final selection and appointment of trustees is disengaged from this issue. The need to take steps to protect the position of the trust qua the holding company need not form part of these selection or appointment processes, and need not generate any leverage for any participant in that process.

Disposition

[22] Accordingly there will be orders varying the injunction to permit the defendant (either alone or together with new trustees duly appointed) to take such steps as he or they consider necessary to protect the interests of the trust assets, under of clause 7(a) of the trust deed, in relation to the forthcoming company annual general meeting.

[23] Save for that variation, the existing injunction is confirmed and (as has already been ordered orally) it is extended to 5.00 pm on Monday 24 September

2012.

[24] Leave is reserved to any party to apply on 24 hours’ notice.

[25] Orders are also made for service in accordance with Mr Strahl’s second

application.

[26] The unresolved applications, together with all questions of costs, are reserved for consideration on 24 September 2012.

Stephen Kós J

Solicitors:

Kyriak Law, Auckland for Plaintiff

DLA Phillips Fox, Wellington for Defendant

Wynn Williams, Christchurch for A B E McKinnon (beneficiary)