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Nichols v Racey Constructions Pty Ltd [2014] NZHC 2995 (28 November 2014)

Last Updated: 11 December 2014


IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY



CIV-2013-404-3606 [2014] NZHC 2995

BETWEEN
RHONDA MARIE NICHOLS
Plaintiff
AND
RACEY CONSTRUCTIONS PTY LTD First Defendant
DAVID GEOFFREY PUNTER Second Defendant


Hearing:
20 October 2014
Appearances:
C K Lyon for the Plaintiff
D G Punter on behalf of the Defendants
Judgment:
28 November 2014




JUDGMENT OF BROWN J





This judgment was delivered by me on 28 November 2014 at 10 am, pursuant to r 11.5 of the High Court Rules


Registrar/Deputy Registrar



















Solicitors: Law Direct, Kerikeri Counsel: C K Lyon, Auckland Copy To: Defendants

NICHOLS v RACEY CONSTRUCTIONS PTY LTD [2014] NZHC 2995 [28 November 2014]

[1] Mrs Rhonda Nichols as trustee of the Eungella Trust (“the Trust”) brought a proceeding to recover the sum of $359,120 together with accrued interest of

$163,300, from the first and second defendants on the grounds that the principal sum was a loan advanced to them by the Trust which has not been repaid. The defendants resist the claim on the bases that first, there was no relationship at any material point in time between them and the plaintiff and secondly, the nature of the transaction was not a loan advance but instead a direct investment by the Trust in a property development undertaken by Calliope Resort Developments Pty Ltd.

[2] In the course of the hearing a question arose as to whether the consent of the other trustee, Mrs Nichols’ former husband Mr Roy Nichols, to the bringing of the proceeding had been obtained. An application was then made for leave to amend the pleading to delete Mrs Nichols as a plaintiff in her trustee capacity and to add her as a plaintiff in her personal capacity.

[3] Consequently the following issues fall for determination: (a) Was the claim validly brought by Mrs Nichols?

(b) If not, should the application to amend the pleadings be allowed? (c) If the answer to (a) or (b) is yes, is the claim made out?

Was the claim validly brought by Mrs Nichols?

[4] The Eungella Trust was established by a Deed of Trust dated 21 April 1996. The beneficiaries of the Trust included Mrs Nichols and Mr Nichols. A minimum number of trustees was provided for in clause 13 as follows:

13. (a) THE minimum number of Trustees shall be two PROVIDED HOWEVER that there shall at all times be at least one Trustee who is not a beneficiary nor a relative of a beneficiary within the meaning of Section 96 of the Income Tax Act 1976.

(b) THE Trustees right to exercise discretionary powers under this Deed of Trust shall be suspended during periods of non-compliance with Clause

13(2) hereof.

Clause 13 of the Schedule of Powers and Conditions provided that all decisions of the trustees were to be unanimous.

[5] By a Deed of Settlement dated 12 March 2004 the then trustees of the Eungella Trust were removed and replaced as trustees by Mrs Nichols and Mr Nichols.

[6] On or about 26 July 2007 the trustees obtained from the National Bank of New Zealand (“National Bank”) a loan of $400,000. In the letter of offer to the trustees the National Bank recorded that it had approved the loan structure “to purchase investment property”.

[7] The minutes of the meeting of the trustees of the Trust held on 26 July 2007 stated:

Eungella Trust

Held at the office of Law Direct, First floor, Unit 2, 98 Kerikeri Road, Kerikeri on the 26th day of July 2007

Present: Rhonda Nichols and Roy Nichols

National Bank Borrowings

Resolved: “that the trustees borrow from the National Bank the sum of

$400,000.00, being a $360,000.00 term loan agreement and $40,000.00 flexible loan facility in order to assist the beneficiaries and further the aims of the Trust

Trustees Duties

Having read the Trust Deed that the trust activities accord with the objectives and that the Trustees have met their obligations under the Trustee Act 1956.

Powers of Trustees

The Trustees acknowledge that they have power pursuant to clause 12 (x) of the Trust Deed to borrow money and that it is in the best interests of the Trust to do so.

Payment of Funds

Resolved: “that the Trust authorises Law Direct to pay the funds from the National Bank draw down to the account of Rhonda and Roy Nichols to their Westpac Account in Kiparing, Queensland, Australia.

Signed by all trustees

Rhonda Nichols

Roy Nichols

[8] The brief of evidence which Mrs Nichols read made reference to the trustees of the Trust seeking judgment against the defendants. However Mr Nichols was not a plaintiff in the proceeding. When I asked Mrs Nichols whether there was a reason for his not participating, she replied that Mr Nichols did not want to take Mr Punter to court. She then confirmed that there was not a unanimous resolution of the trustees agreeing to commence the current proceeding.

[9] In response to a question to Ms Prosser, the solicitor for the Trust, as to her awareness of any resolution of the two trustees to commence the proceeding, reference was made to their relationship property agreement. That document, which was obtained during the luncheon adjournment, contained clause 6 which read as follows:

THE PARTIES acknowledge and agree that there are outstanding claims which may be resolved and paid out on that are as a result of claims being made through the Courts or otherwise monies owed to them. Rhonda and Roy both agree that if any are successful and monies received that any such monies or payments in any form whatsoever to benefit them be split equally between them.

[10] Decisions of the trustees of the Eungella Trust must be unanimous. It is not necessary however for both trustees to be plaintiffs in a proceeding brought on behalf of the Trust provided that the trustee who does not participate has consented to the proceeding. As the Court of Appeal stated in Visini v Cadman:1

[17] The flaw in Mr Lawn’s argument is that it proceeds on a premise which equates the existence of Mr Wood’s consent to the proceeding with a requirement that he be joined as a party. As Mr Steele concedes, trustees must agree unanimously to issue a proceeding. Mr Wood has now given his express consent to the Cadmans’ decision to issue the proceeding. The judgment of Romilly MR in Messeena v Carr is settled authority for the proposition that one trustee can subsequently approve another trustee’s exercise of a discretion. Mr Wood’s retrospective consent confirms the trustees’ unanimous decision to issue the proceeding. ...

[11] In the present case there is no evidence that Mr Nichols has consented, or does consent, to the proceeding against the defendants. Clause 6 of the relationship

property agreement does not amount to such a consent. The responses by




1 Visini v Cadman [2012] NZCA 122, (2012) 21 PRNZ 70 (footnotes omitted).

Mrs Nichols both to Mr Punter’s questions and to questions from me suggested that

Mr Nichols has not consented to the proceeding.

[12] While those matters are sufficient to warrant the conclusion that there is an absence of consent by Mr Nichols to the proceeding, his position is made abundantly clear in an affirmation made by him on 16 January 2014 in Australia and which Mr Punter sought to have adduced in evidence.

[13] Mr Lyon objected to the receipt of that affirmation as constituting a hearsay statement. While the objection may be valid insofar as the substantive dispute is concerned, nevertheless I consider that it is appropriate to receive that affirmation as a communication to the Court on the issue of Mr Nichols’ stance as a trustee of the Trust. In particular, in that document Mr Nichols states:

... I have not asked or instructed Rhonda Nichols or the Eungella Trust to act on my behalf with this matter that she is now pursuing against David Punter and Racey Constructions Pty Ltd, I have spoken to Rhonda Nichols on a number of occasions in the last few months and advised her that she has no authority or reason to take action against David Punter and Racey Constructions Pty Ltd and to date she has chosen to ignore my requests.

[14] In these circumstances the proceeding has not been brought in accordance with the requirement of the Trust Deed that the trustees be unanimous. Hence the proceeding is not validly commenced and, subject to the issue of amendment, is one which should be struck out.

Should the application to amend the pleadings be allowed?

[15] On 7 November 2014 Mrs Nichols lodged a proposed amended statement of claim together with a memorandum in support of an application for leave to amend the pleading.

[16] In essence the nature of the amendment is that throughout the pleading all references to the trustees of the Eungella Trust are substituted with references to Mr and Mrs Nichols. So, for example, the key introductory paragraph in the statement of claim stated:

1.1 In July 2007, the Plaintiff as a trustee of the Eungella Trust and the First and Second Defendants concluded a joint venture agreement [JVA] which involved:

(i) The trustees of the Eungella Trust mortgaging a property at

Whananaki, Northland for the sum of NZD400,000;

(ii) Advancing the sum of NZD359,120 (AUD300,000) to the First and Second Defendants in Queensland, Australia, for the purposes of financing a property development;

(iii) That the terms upon which the advance was made by the Plaintiff as a trustee of the Eungella Trust, included a requirement that the monies advanced by the Plaintiff as a trustee of the Eungella Trust, to the First and Second Defendants would be repaid when a plan of subdivision was registered in Queensland, Australia and with the Department of Natural Resources & Water and, in any event, would be repaid no later than three years from the date of the JVA and loan advance, i.e. by 28 July 2010.

(iv) That the First and Second Defendants failed to repay the loan advance by 28 July 2010 and thereafter dealt with the funds in a manner inconsistent with the proprietary interest of the Plaintiff as a trustee of the Eungella Trust, in the amount of the advance, together with accrued interest.

(emphasis added)

In the proposed amended statement of claim the equivalent paragraph states:

1.1 In July 2007, the Plaintiff and her then husband, Roy Sydney Bruce Nichols [RSBN] and the First and Second Defendants concluded a joint venture agreement [JVA] which involved:

(i) The Plaintiff and RSBN mortgaging a property at Whananaki, Northland [the Whananaki block] for the sum of NZD400,000;

(ii) Advancing the sum of NZD359,120 (AUD300,000) to the First and Second Defendants in Queensland, Australia, for the purposes of financing a property development;

(iii) That the terms upon which the advance was made by the Plaintiff and RSBN, included a requirement that the monies advanced by the Plaintiff and RSBN, to the First and Second Defendants would be repaid when a plan of subdivision was registered in Queensland, Australia and with the Department of Natural Resources & Water and, in any event, would be repaid no later than three years from the date of the JVA and loan advance, i.e. by 28 July 2010.

(iv) That the First and Second Defendants failed to repay the loan advance by 28 July 2010 and thereafter dealt with the

funds in a manner inconsistent with the proprietary interest of the Plaintiff and RSBN, in the amount of the advance, together with accrued interest.

(emphasis added)

[17] In the memorandum in support of the application for leave to amend the pleading it was suggested that, while r 7.77 of the High Court Rules is the primary rule under which amendments may be made, that rule was not available given that the amendment was sought in the course of trial. Here reliance was placed on r 1.9.

[18] However in my view the primary application here is the proposed substitution as a plaintiff of Mrs Nichols in her personal capacity because all the proposed amendments drive off that course. Consequently it is necessary to consider the grounds for adding a party in r 4.56(1)(b):

4.56 Striking out and adding parties

(1) A Judge may, at any stage of a proceeding, order that—

...

(b) the name of a person be added as a plaintiff or defendant because—

(i) the person ought to have been joined; or

(ii) the person’s presence before the court may be necessary to adjudicate on and settle all questions involved in the proceeding.

...

[19] The practical difficulty which Mrs Nichols faces in seeking to be the sole plaintiff in her personal capacity is that the proposed amended pleading, which deletes any reference to the Eungella Trust or to actions taken by Mr and Mrs Nichols as trustees of the Eungella Trust, is entirely at odds with the evidence and the documentary record.

[20] That documentary record includes the following:

(a) A letter of offer from the National Bank dated 25 July 2007 for a loan “to purchase investment property” addressed to “The Trustees, The Eungella Trust C/- Mr & Mrs Nichols”;

(b) Instructions to Law Direct dated 25 July 2007 from the National Bank to act on its behalf related to advances and/or banking accommodation to Mr and Mrs Nichols “as trustee(s) for The Eungella Trust (“the Customer”)”;

(c) A loan agreement with the National Bank dated 26 September 2007 signed by Mr and Mrs Nichols as trustees of the Trust;

(d) The minutes of the meeting of the trustees on 26 July 2007 recording the resolutions in respect of the loan from the National Bank;2

(e) The National Bank’s deposit/settlement confirmation dated 26 July

2007 to Law Direct, Kerikeri which stated in the subject line, “The

Eungella Trust”;

(f) The statement from Law Direct recording the receipt of funds from the National Bank addressed to Mr and Mrs Nichols as trustees of the Trust;

(g) The invoice from Law Direct in respect of the National Bank mortgage addressed to Mr and Mrs Nichols as trustees of the Trust; and

(h) Subsequent correspondence from Law Direct in October 2008 addressed to “The Trustees, Eungella Trust C/- Mr & Mrs R & R Nichols”.

[21] Furthermore the synopsis of opening submissions for the plaintiff, the brief of evidence read by Mrs Nichols and the brief of evidence read by Ms Prosser all

faithfully reflected the allegations in the statement of claim that the relevant transactions were undertaken by the trustees for the Eungella Trust. It is against the background of that documentary record and that evidence that the proposed amended statement of claim would fall to be considered.

[22] Although the proposed amended statement of claim contains no reference to the Eungella Trust or to Mr and Mrs Nichols’ role as trustees of the Eungella Trust, I did not understand Mrs Nichols to make any challenge to the documentary record referred to above. Rather, as the memorandum in support of the application for leave to amend explained, the essential amendment sought is that Ms Nichols, who sued in the original pleading as a trustee of the Eungella Trust, now seeks to pursue her claim in her personal capacity on the basis that, while she purported to exercise her powers as a trustee of the Eungella Trust, those powers were not operative at the time when the transaction with the first and second defendants took place.

[23] The memorandum stated:

3.3 The plaintiff initiated this proceeding in her capacity as a trustee of the Eungella Trust. There were, however, legal impediments to her proceeding, namely:

(i) The plaintiff has become estranged from her former husband, Roy Sydney Bruce Nichols, who was not prepared to join in the action to retrieve the money owed by the first and second defendants. This offends the principle of the need for unanimity as trustees which forms the basis of the Court of Appeal decision in Visini v Cadman [2012] NZCA

122.

(ii) In any event in terms of the deed of trust of the Eungella

Trust dated 21 April 1996 clause 13(a) provides:

[Quoted at [4] above]

[24] It was submitted for Ms Nichols that it is clear from the decision of the Court of Appeal in Wong v Burt that trustees who act without the authority conferred on them in terms of the trust deed are liable personally for the consequences of transactions they have undertaken purportedly in the name of the trust.3

[25] While it is true that trustees have personal liability to account to beneficiaries for actions taken in breach of trust, it does not follow that a person, who is a trustee in breach, derives a personal right of action against third parties in relation to trust property or the recovery of same.

[26] The parties to the alleged loan agreement were the trustees of the Eungella Trust. It is the Trust, through the medium of the trustees, which has the rights of enforcement pursuant to the alleged agreement. That remains the position whether or not the transaction was undertaken in breach of the requirements of the Trust Deed.

[27] As Waller LJ of the English Court of Appeal stated in Montrose Investments

Ltd v Orion Nominees Ltd (No 2):4

I cannot see save on some ground of public policy which has not been suggested why a breach of trust as between beneficiary A and trustee B, precludes B from enforcing such trust obligations as may arise between B and a transferee of the trust property C. Indeed, it seems to me that where it is the very transfer of the trust property from B to C which constitutes the breach of trust, public policy positively requires that B should be in a position to assert a claim for the recovery of the trust property or its proceeds from C.

[28] Similarly in the present case, where the alleged advance of the funds, borrowed in the name of the Eungella Trust, constituted the breach of trust as asserted by Mrs Nichols, it is for the trustees who acted in breach of trust to pursue a claim for recovery of the trust property or its proceeds from the third parties. The individuals, who as trustees acted in breach of trust, do not have a personal right of claim against such third parties. The third parties who are the recipients of the funds the subject of the alleged advance have no liability to such individuals in their personal non-trustee capacity.

[29] Consequently Mrs Nichols’ reliance on Wong v Burt is misplaced. In view of the evidence, the documentary record and the relevant law, Mrs Nichols in her personal capacity is not a person who ought to have been joined as a plaintiff,5 nor is

she a person whose presence before the Court may be necessary to adjudicate upon

4 Montrose Investments Ltd v Orion Nominees Ltd (No 2) [2004] EWCA Civ 1032 at [24].

5 High Court Rules, r 4.56(1)(b)(i).

and settle all questions involved in the proceeding.6 Any claim that she may have is in her trustee capacity. Consequently the application for leave to file an amended statement of claim with Mrs Nichols as the substituted plaintiff in her personal capacity is declined.

Disposition

[30] In view of my conclusions on issues (a) and (b), the third issue does not fall for determination. The proceeding is dismissed. The defendants are entitled to one

set of costs on a 2B basis.







Brown J








































6 Rule 4.56(1)(b)(ii).


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