Powell v Powell [2014] NZHC 476 (14 March 2014)

High Court of New Zealand

[Index] [Search] [Download] [Help]

---

Powell v Powell [2014] NZHC 476 (14 March 2014)

Last Updated: 25 March 2014

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2013-409-001371 [2014] NZHC 476

BETWEEN JOHN WILLIAM POWELL Plaintiff

AND DANIEL JOHN POWELL Defendant

AND CHARLOTTE TERESA GAVIN (NEE POWELL)

Interested Party

Hearing: 3 March 2014

Appearances: J V Ormsby, C L Webber and J P Bell-Connell for Plaintiff

S M Grieve and S A Woods for Defendant

J Moss for Interested Party

Judgment: 14 March 2014

_{JUDGMENT OF DUNNINGHAM J}

Introduction

[1] This is an application by the plaintiff to remove the defendant, his son, as trustee of the Daniel Powell Family Trust (the Trust) and appoint an independent trustee in his place. It is made on the basis that the plaintiff, too, would step down as trustee on the appointment of an independent trustee, to replace the existing trustees.

[2] There is also a cross-application by the defendant to remove the plaintiff as a trustee of the Trust and have the defendant remain as trustee, either alone, or in

_{combination with an independent trustee.}

POWELL v POWELL AND ANOR [2014] NZHC 476 [14 March 2014]

[3] The plaintiff also seeks an ancillary order that the express powers to appoint and remove trustees contained in cl 12 of the Trust Deed are suspended pending further order of the Court.

Basis of Application and Cross-Application

[4] The plaintiff’s application is made under the Court’s inherent jurisdiction although reference was also made in submissions to the Court’s power to remove and appoint new trustees under s 51 of the Trustee Act 1956. No party suggested there was any practical difference to the outcome depending on which route was relied on. Implicitly, the defendant’s cross-application is made on the same basis.

[5] In his statement of claim the plaintiff alleges that:

(a) the defendant is putting his personal interests ahead of the Trust’s and the beneficiaries’ interests,

(b) the trustees are unable to properly administer the Trust and make decisions because of the state of deadlock, and

(c) the defendant has reacted violently towards the plaintiff when the plaintiff has attempted to address the issues in relation to properly administering the Trust and between the trustees.

[6] The defendant’s counter-claim seeking to remove the plaintiff as a trustee, alleges that:

(a) the plaintiff is being obstructive in the administration of the Trust,

(b) the plaintiff has demonstrated he does not intend to act in the best interests of the beneficiaries,

(c) the plaintiff’s concerns about the motivations and ability of the defendant in the administration of the Trust are not valid, and stem from personal issues between the plaintiff and defendant.

[7] An extensive amount of factual material was put before me, including

11 affidavits from seven witnesses, most of whom were members of the Powell family. That is understandable. In cases such as this, the relevant legal principles are well settled. It is the factual circumstances of the case which will determine how the Court’s discretion should be exercised. As was said in Letterstedt v Broers,¹ the Court’s main guide must be the welfare of the beneficiaries and its decision is “essentially dependent on details often of great nicety” requiring the Court to “look carefully into the circumstances of the case”.²

[8] Furthermore, the factual background in which these applications was made was hotly contested. All witnesses were cross-examined to a greater or lesser extent because their perceptions of past events differed so markedly. In order to arrive at a decision I had to make a number of factual findings and then weigh up whether those circumstances warranted the Court’s intervention to replace one or both of the trustees. I have endeavoured to limit my outline of the factual background to events which are directly relevant to the allegations made and my findings on them.

Background

[9] The Trust was established at the instigation of the plaintiff, John Powell (John), in late 1998. The Trust was in the name of his son, Daniel Powell (Daniel), and, at around the same time, John set up another trust in the name of his daughter Charlotte, the Charlotte Powell Family Trust. John and his wife Lyn Powell (Lyn) were the original trustees of the Trust.

[10] John was a self made businessman. Although his professional qualification was in quantity surveying, he had established substantial business interests owning commercial cool stores under various company structures. Through his hard work and business acumen, he had amassed significant wealth by the time he established

_{the trusts for his two adult children.}

¹ _{Letterstedt v Broers (1884) 9 App Cas 371 (PC).}

² At 387.

[11] The main asset of each trust was a shareholding in one of two companies established by John. The Trust received a parcel of shares in Kensal Investments Limited (Kensal)³ which owned a commercial cold store at 16 Braeburn Drive in Christchurch. The Charlotte Powell Family Trust received a parcel of shares in Investment Southland Limited (Southland), which owned a cold store at Bluff.

[12] The terms of each trust mirrored the other, with Charlotte’s Trust including Daniel’s family as beneficiaries, and Daniel’s Trust including Charlotte’s family as beneficiaries. It was accepted that this allowed:

(a) each sibling’s family to benefit if the other sibling died and had no surviving children; and

(b) each sibling and his or her families to have recourse to the other’s

trust if his or her trust should fail for any reason.

[13] It was also suggested this was to enable an “evening up” of trust assets should a disparity in value ensue. I am not convinced of this for two reasons. First, there is nothing in the terms of the Trust Deed which indicates this was intended. Second, John explained it was his intention that Daniel and Charlotte would each be responsible for growing the investment portfolios of the trust which was in their name, for the benefit of the beneficiaries, with John’s oversight and guidance. I think it unlikely that he intended their individual efforts would then have to be split with the less successful sibling as of right.

[14] It seems that Daniel and Charlotte accepted that the settlement of the trusts was effectively their inheritance from their father, with Daniel saying “John made it very clear from the inception of the trusts that this was all that my family was to receive from his estate and that I was to make the best I could from the company resources. Charlotte was to do the same with Southland. The rest of John’s estate was to go to charity and, as part of this, John later set up the Belfast Community

_{Trust and the Taylors Mistake Rescue Trust”.}

³ Which at the time was known as Bowker Holdings No. 112 Limited.

[15] Daniel was living overseas when the Trust was established, pursuing a successful career as a computer systems engineer. In April 1999, when he returned to New Zealand on holiday, his mother, Lyn, stepped down as trustee and Daniel was appointed in her place. Daniel, using funds earned while overseas, also subscribed for a significant shareholding in Kensal at that time.

[16] In late 2001 Daniel returned from London to New Zealand on a permanent basis and commenced employment with a local computing firm. Relationships between Daniel and his father were on a good footing at that time.

[17] Daniel met his wife Hayley in March 2002. In June 2002 he joined his father John as a director of Kensal, and in August 2002 he was offered a fulltime job by the Trust to manage Kensal. From 2001 onwards, Kensal and the Trust purchased Daniel’s shares in Kensal in a series of transactions. He made a profit on the sale of the shares which, in 2005, enabled Hayley and him to purchase a substantial house at

50 Johns Road, within a rural residential development known as Devondale Estate (Devondale) which his father had been instrumental in developing. Daniel’s parents, and his sister Charlotte and her husband also owned homes there. In the same year, Daniel married Hayley. Around this time Hayley left her job at Telecom and began working at another of John’s companies, Latimer Holdings Limited (Latimer).

[18] On 31 March 2007 John resigned as director of Kensal and Mark Rountree (Mark), who had been working for Latimer since 1991, was appointed as a director in his place.

[19] In 2008, Hayley and Daniel’s first child was born and Hayley ceased working for Latimer.

[20] It is at this point that one of the key disputed events arises. Hayley began receiving a salary from Kensal on 4 August 2008. Mark and Daniel’s evidence is that, in July 2008, discussions were had with John and it was agreed that Hayley would be employed either by the Trust or Kensal after her period of maternity leave with Latimer ended.

[21] Mark says he recorded the outcome of those discussions to Daniel and Hayley by email on 24 July 2008 where he states that “JP and I now believe Hayley should be remunerated from Kensal not the DPT”. The total for Hayley and Daniel’s salaries referred to in that email was $175,000, which was the combination of Daniel’s then salary from the Trust of $120,000, plus a continuation of a $55,000 salary which Hayley had been paid by Latimer.

[22] John’s recollection was that there was only a discussion with Mark about “income splitting of Daniel’s wages with Hayley”. He is adamant that he did not approve Hayley being paid by Kensal and that it was a complete surprise to him when, in late 2011, he picked up that a salary was being paid to Hayley from a review of Kensal’s annual accounts.

[23] However, up until 2011, the affairs of the Trust and Kensal seemed to progress without incident. Modest distributions were made to Daniel’s family for pre-school fees, and for costs of Hayley’s cancer treatment following her diagnosis in August 2010 with aggressive melanoma, where those were not covered by medical insurance.

[24] From Daniel’s perspective, relations with his parents broke down shortly after the Canterbury earthquake of 22 February 2011 and this is what he says led to the impasse between his father and him over the Trust’s administration.

[25] His evidence is that his mother telephoned him on 24 February 2011 asking him to get her car refuelled because she needed to drive her mother to hospital the following day. Because he was looking after their two young children, he offered instead either his, or his wife’s vehicle, to use, but she “unexpectedly abused me”. It then appears further abusive calls between John and Daniel took place over this incident. Daniel acknowledges that it may have seemed like a “trivial altercation” but he considers the current animosity between the families dates back to that incident. John and Lyn deny Daniel’s recollection of this event, or that it precipitated the current difficulties with the Trust.

[26] John’s evidence is that the problems began when he reviewed Kensal’s 2011 financial statements just before Christmas 2011. He says that he had not been aware that Hayley was receiving a salary from Kensal before this, and he was not happy that such a large payment had been made to her. Discussions about that payment were clearly heated, with Hayley sending an email on 21 December 2011 expressing anger at being accused of being “fraudulent” saying “you have been privy to the Kensal accounts for the last three years and now you bring this up?”. The email also said Daniel’s family would not be joining the rest of the family on Christmas Day and that “we will be moving out of Devondale”.

[27] From this point John began a particularly close review of the affairs of Kensal and the Trust, and decided he was concerned about the increasing mismatch between the management fee paid by Kensal to the Trust and the salary paid to Daniel from the Trust. He also expressed concerns about the level of dividend paid by Kensal to the Trust in 2011 and 2012.

[28] There followed a series of communications between John’s solicitors and the

directors of Kensal, and then, critically, a letter from John’s solicitors to Daniel dated

23 August 2012 writing to him in his “capacity as a Trustee of the Trust”. That letter said it raised “various concerns your father has in relation to the Trust and its assets”. The letter then set out:

(a) a concern about delay in provision of the 2012 financial statements, (b) a complaint about the company paying no dividend in 2011;

(c) a complaint about the payment of wages to Hayley and Daniel for management fees.

It concludes by saying that “the Trust payments to you should be reviewed” and asks Daniel to “ensure that those payments are not made from the Trust bank account until the matter is resolved”.

[29] That letter was received by Daniel on 26 August 2012. Its contents, including the demand that the family’s income be stopped, prompted a significant argument between Daniel and Hayley with Daniel saying “we ended up in a battle that I felt to be the last straw for our marriage. John’s repeated attacks on me had simply worn Hayley and me down”.

[30] Daniel accepts that he then took a kitchen knife and drove to his parent’s place, initially leaving the knife outside. He banged on the front door and his mother let him in. When his father came out, Daniel ran at him and, although John tried to shut himself in his bedroom, Daniel hit the door before John could close it and the door came off the frame. Daniel exited the house again and returned with the knife saying “What are you doing to my family”? Daniel pinned his father for about 10 to

20 seconds, then let him go and left through the front door. Daniel went to the police later that night and was subsequently charged with intentional damage and assault on a person with intent to use a weapon.

[31] Daniel sought medical assistance after the attack and was diagnosed as suffering from acute anxiety, depression, ADHD and PTSD. He has since undertaken counselling sessions with a psychologist and medical evidence provided to this hearing was that he was now mentally settled and not clinically depressed or suffering from any other mental health problems. Daniel was ultimately discharged without conviction.

[32] After the August incident, Hayley and Daniel hoped to move out of Devondale given the tensions between the families and the fact their house was earthquake damaged. They asked for either a distribution or a loan of $700,000 to assist them to buy an alternative property while their home was repaired or rebuilt. If it was a loan they would repay it when their Devondale house was repaired and sold. That request was declined by John in his capacity as trustee on the basis that the Trust had no ability to invest in residential property.

[33] In addition, after December 2011, John refused distribution requests for medical treatment for Hayley’s cancer or for the children’s school fees, even though, prior to December 2011, distributions totalling $36,337 had been approved by John

for these expenses. The reason given was that, with Hayley’s salary, the family had

ample resources to meet these costs themselves.

[34] From December 2011 onwards John also resisted signing Trust PAYE and ACC cheques. During this period, Mark effectively acted as “go between” between John and Daniel as they were no longer on speaking terms. His emails urged John to sign cheques for these purpose, in order to avoid the Trust incurring unnecessary IRD interest and penalties. Eventually cheques were signed by John or were paid by Latimer, but IRD interest and penalties of approximately $6000 have been incurred by the Trust for late payment of these obligations.

[35] Despite attempts at mediation, the issues between Daniel and John have not been resolved, and both parties accept that the trustees are in a situation of deadlock.

The Trust Deed

[36] There are several terms of the Trust Deed which are relevant to the issues arising in this case.

[37] Clause 1.2 defines the beneficiaries as: (a) Charlotte and Daniel Powell;

(b) the spouse or widower of Daniel;

(c) any child born to, or adopted by Daniel; (d) any child of Charlotte;

(e) any grandchild or more remote issue of Daniel or Charlotte; (f) any spouse of those children or grandchildren; and

(g) any charitable trust, charitable purpose or charitable institution as the trustees, in their absolute discretion, think fit.

[38] Clause 4 gives the trustees the power to pay from the income of the Trust fund, the “expenses of administering the Trust Fund” and to “pay, apply or appropriate the same to, for or towards the personal support, maintenance, comfort, education, advancement in life or otherwise for the benefit of such of the discretionary beneficiaries as may from the time to time be living ...”.

[39] Clause 5 provides that “any income of any income year not so paid, applied or retained during or within six months from the end of that income year shall be accumulated ... and added to and form part of the capital of the Trust Fund ...”.

[40] There are powers to resettle all or any part of the Trust Fund during the Trust

Period in cl 6, and to partition the Trust Fund under cl 9.

[41] Clause 12 provides particular powers to appoint new trustees to John and to Daniel. John is able to appoint a practicing solicitor or Chartered Accountant to replace him as trustee and, if Daniel is a trustee, he can “nominate his successor to replace him as a trustee upon his vacation of office for any reason whatsoever”.

[42] Clause 13.4 provides that there will be “no less than two continuing Trustees

of the Deed ...”.

[43] Clause 14 allows trustees to act notwithstanding certain conflicts by providing that “[a]ny Trustee may participate in the exercise by the Trustees of the powers conferred upon the Trustees by this Deed notwithstanding that such Trustee is associated as director, Trustee or otherwise, or is in any other way interested in any company, trust or other entity to which the Trustees sell or lease any property forming part of the Trust Fund, or in which the Trustees hold or propose to acquire shares or other investments as part of the Trust Fund, or with which the Trustees otherwise deal as Trustees of these presents; and notwithstanding that the interests or duty of such Trustee in any particular matter or matters may conflict with his or her or its duty to the Trust Fund or the Discretionary Beneficiaries”.

[44] Clause 15 permits a trustee to act as a “director, officer or employee of ... any company ... [forming] part of the Trust Fund ...” and to retain any remuneration which the trustee receives from that role.

[45] Clauses 20 to 20.4 place specific constraints on how the trustees may invest the trust fund. Under cl 20 the trustees may only invest in the following forms of property:

(a) Government Bonds;

(b) Call or Term Deposits through a registered trading bank in New

Zealand; and

(c) Commercial property.

[46] Clause 20.1 provides that the trustees may only invest in commercial property if, at the time of acquisition:

(a) The property is tenanted to the extent of 75 percent; or

(b) If the property is bare land upon which the Trustees intend to erect a building and that proposed building is fully let under unconditional agreements,

and if the trustees are to borrow money for such acquisition, such money will be fully repaid within the initial term of any leases in respect of such property.

[47] Clauses 20.2 and 20.3 restrict the extent of indebtedness which the Trust may incur in relation to the total value of assets either of the Trust Fund, or which a body corporate can have at the time of acquisition by the Trust.

[48] Finally, as is usual, there is a requirement at cl 21 that trustees’ decisions are unanimous.

Issues

[49] The key issues from John Powell’s perspective are as follows:

(a) The payment of a salary from Kensal to Hayley of initially $55,000, rising to $70,000, when Hayley did no, or very little work for her salary. John considers this to be a serious breach of trust, because it was not a salary for paid work, but was, in essence, a distribution to a beneficiary, which he says was paid by Kensal without the trustees’ knowledge.

(b) The low level of dividends paid by Kensal to the Trust, suggesting that Daniel, in his capacity as director, is failing to ensure the Trust fund is maximised.

(c) The fact that the management fee paid by Kensal to the Trust, does not meet or exceed the salary the Trust pays to Daniel of $150,000 for managing the Trust’s assets, when John says it was understood that it should.

(d) Daniel has not been as forthcoming with information about the Trust assets as is required of a responsible trustee.

(e) Daniel’s conduct in attacking him which he says demonstrates that

Daniel is unfit to be a trustee.

(f) Daniel’s request for a $700,000 loan or distribution to fund the

purchase of a new home which John says is in breach of trust.

(g) Whether Daniel has done sufficient to maintain and increase the value of the Trust assets, particularly noting that the current lease on the Braeburn Drive cool store is due to expire shortly, and it is not certain that the tenant will renew that lease.

[50] Charlotte appeared as an interested party. Generally Charlotte supported her father’s view of what had occurred, but was at some pains to explain that she was participating in her capacity as a discretionary beneficiary of the Trust (along with her children) and not simply there to support her father.

[51] Aside from agreeing with her father’s concerns, she also raised the following issues:

(a) she believes that Daniel considers the Trust is his property to the exclusion of the other beneficiaries, being Charlotte and her children. In particular, she considers Daniel is jealous towards her and has a sense of entitlement from the Trust which she does not have in respect of her own Trust,

(b) she is concerned about the “excessive expenses” of Kensal, which goes beyond the concern John raises about the payment to Hayley,

(c) she believes that if Daniel is allowed to remain as Trustee alongside an independent Trustee then a state of deadlock could arise again because the Trustees are required to be unanimous in order to do anything.

[52] Daniel’s position was that:

(a) the Trust structure and its relationship to Kensal had been put in place by his father through the Trust Deed. While this put Daniel in a position of conflict, the conflict was contemplated and authorised by the Trust Deed, so he was not in breach of the Trust because of his dual role with Kensal and the Trust;

(b) Hayley’s employment with Kensal was discussed with John and, although John may not recall it, it was authorised by him. Her salary payments were recorded in the financial statements John received, but

only became of concern to John after there was a falling out between the two families;

(c) Daniel’s current management fee was approved by John in 2010 and was a continuation of his paid employment by the Trust which was set in place with John’s approval in 2002;

(d) The policy for setting the management fee was also a continuation of a policy that had been agreed when John and Daniel were both trustees and directors of Kensal, in order to maximise taxation benefits for the Trust. That policy continued to be implemented by Mark. There had been no agreement that it needed to meet or exceed the amount of Daniel’s salary and the Trust had no difficulty meeting Daniel’s salary;

(e) Dividends had always been set by directors taking into account what was prudent for Kensal at that time. Some years they were high and in other years they were not, but there was always a rational explanation for the decision as to whether or not to declare and pay a dividend;

(f) The criticisms of how the Trust fund were being managed were unfounded. The Trust fund had continued to grow throughout the period, and all reasonable steps were being taken to ensure that the current tenant would renew at the end of the tenancy. Furthermore, the Trust’s investment vehicle, Kensal, had invested in a second property in Tamaki Drive in Auckland, in a way which met the Trust’s requirements for prudent investment in commercial property;

(g) It was John who had created the deadlock by his obstructive and adversarial behaviour, in particular, by threatening to stop Daniel’s salary and by refusing to sign PAYE and ACC cheques, or to approve reasonable requests for distribution such as for Hayley’s medical costs and the children’s school fees;

(h) While acknowledging that the attack on John was wrong and unacceptable, Daniel says it was the result of reaching breaking point because of his stresses of the previous few months, including the threats to withdraw his salary, and is not behaviour that is likely to be repeated given the medical and counselling assistance he has received.

Legal principles applying

[53] In this unhappy mire of accusation and counter-accusation, the Court’s principal duty is to “see that the Trusts are properly executed”.⁴ The Court has both inherent jurisdiction to remove and appoint trustees, as well as the statutory power to do so under s 51(1) and (2) of the Trustee Act 1956, which provides as follows:

51 Power of Court to appoint new trustees

(1) The Court may, whenever it is expedient to appoint a new trustee or new trustees, and it is found inexpedient, difficult, or impracticable so to do without the assistance of the Court, make an order appointing a new trustee or new trustees, either in substitution for or in addition to any existing trustee or trustees, or although there is no existing trustee.

(2) In particular and without prejudice to the generality of the foregoing provision, the Court may make an order appointing a new trustee in substitution for a trustee who-

(a) Has been held by the Court to have misconducted himself in the administration of the trust; or

(b) Is convicted of a crime involving dishonesty as defined by section 2 of the Crimes Act 1961; or

(c) Is a mentally disordered person within the meaning of the

Mental Health (Compulsory Assessment and Treatment) Act

1992], or whose estate or any part thereof is subject to a property order made under the Protection of Personal and Property Rights Act 1988; or

(d) Is a bankrupt; or

(e) Is a corporation which has ceased to carry on business, or is in liquidation, or has been dissolved.

⁴ Letterstedt v Boers, above n1, at 386.

[54] Importantly, while the grounds set out in s 51 include misconduct, a trustee does not need to have committed a breach of trust in order to be removed. As was stated in Attorney-General v Ngati Karewa and Ngati Tahinga Trust⁵

[66] As our Court of Appeal pointed out in Hunter v Hunter (1938) NZLR 520, 529, the primary question is not whether the impugned trustees have committed breaches of trust. The jurisdiction to remove trustees is merely ancillary to the principal duty of the Court to see that the trusts are properly executed: Letterstedt v Broers (1884) 9 App Cas 371 (PC). While the specific grounds enumerated in s 51(2)(a)-(e) plainly form a basis upon which the Court may exercise its discretion, the section makes it clear that those particular grounds are without prejudice to the generality of the Court’s discretion under subs (1).

[55] Further relevant considerations when the Court is exercising its power to appoint new trustees include those articulated in Mendelssohn v Centrepoint Community Growth Trust,⁶ which are: consideration of the settlor’s intentions, neutrality between beneficiaries and promotion of the purposes of the trust.

[56] It is important to note, though, that “the Court will not however make an order removing a trustee lightly”,⁷ and “Courts are reluctant to remove trustees if other avenues can be found to remedy the perceived risk. This is particularly so in the case of a father where the beneficiaries of his trust are his infant children, both present and future”.⁸

[57] A number of High Court cases concerning deadlocks in the context of family disputes were referred to in submissions. It was urged on me that a reasonable conclusion from these cases was that, if the trusts are deadlocked, the Court would usually intervene to remove both trustees and appoint an independent trustee or trustees. However, many of these cases concerned separated spouses who were also both beneficiaries of the trust, meaning it would be difficult to retain just one or other trustee and still be confident that the welfare of all beneficiaries would be promoted by that course of action. That will not necessarily be the case where there

_{is a deadlock between trustees who are not both beneficiaries.}

⁵ _{HC Auckland M2073/99 and CP 242/00, 5 November 2001.}

⁶ _{Mendelssohn v Centrepoint Community Growth Trust [1999] 2 NZLR 88 (CA) at 97.}

⁷ _{Vincent v Stewart HC Auckland M671-IM02 and M1248-SD02 17 April 2003 at [31].}

⁸ Clifton v Clifton HC Auckland CIV-2004-404-4185, 5 November 2004 at [35].

Discussion of allegations

[58] Although relationships within the family were strained prior to

19 December 2011, I accept that the precipitating event for the breakdown between the trustees, and the ensuing situation of deadlock, was the discovery by John that Hayley was being paid a salary from Kensal in addition to Daniel receiving a salary from the Trust. Up until this date, the Trust still seemed to function as distributions for school fees and medical costs were paid in this period.

[59] As was explained in closing submissions, John considered the payment by Kensal of Hayley’s salary to be “a serious breach of trust both in a legal sense and also in a personal sense, because it was not in fact a salary for paid work, but was in essence a distribution to a beneficiary”. John was clearly of the view that this should have been done in a more transparent way.

[60] However, I am satisfied that the payment to Hayley was discussed with John, albeit in happier times, and that the email by Mark to Daniel and Hayley on

24 July 2008, accurately records what was discussed between Mark and John.

[61] At that time Mark was a long serving and trusted employee of John and there is no reason to suggest that he would inaccurately record that John had agreed that Hayley should be remunerated from Kensal and not the Trust. Mark impressed me as someone with a good grasp of detail and not likely to make a mistake in recording such a decision. While John was not copied into the email that was because, on John’s acknowledgment, he did not send or use emails at that time.

[62] I am, though, also satisfied that John honestly does not recall such discussions and was genuinely surprised when he realised that the wages listed in the financial statements for Kensal were, in fact, being paid to Hayley.

[63] While the propriety of the Company paying a fulltime salary to Hayley when she had minimal involvement in the running of Kensal, is questionable, I do not consider that this arrangement reflects any intention to hide this income from John as Trustee as was suggested. Indeed, Hayley and Daniel’s genuine sense of indignation

when John characterised it as such, supports the fact that they thought this was an

arrangement that had John’s blessing.

[64] I consider that some of the difficulties arose from the interrelationship between the Trust and Kensal which was envisaged in the initial structure of the Trust. The Company is an asset of the Trust and, at times, it was viewed by John, and Daniel as synonymous with the Trust, then at other times, when it suited, they sought to maintain the distinction between the two entities.

[65] I am not satisfied that the fact of the payment from Kensal demonstrates misconduct by Daniel in his duties as a trustee, which is at risk of being perpetuated in the future. Rather, it reflects a decision made by the Trustees in a period where Daniel and his father were working together, and were considerably more relaxed in the way they viewed systems for management of Kensal and the Trust. That said, if a payment to Hayley is to be continued, it will need to be put on a more robust and defensible footing. More rigour will inevitably be introduced to the management of those entities if an independent trustee is brought on board.

[66] The second criticism was that, while the Kensal paid a dividend of just over

$1.1 million dollars to the Trust in 2010, it paid no dividend in 2011, and a dividend of only $262,500 in 2012. It should be noted that dividends of $125,000 and

$120,000 approximately were paid in 2008 and 2009 respectively, and no dividends were paid prior to that.

[67] This is a surprising accusation. John had never made a dividend payment to the Trust when he was director. Mark explained that the 2010 dividend was unusually high to achieve taxation advantages before a change to the imputation credit regime was introduced and Daniel explained there was no dividend in 2011 because of the uncertainty caused by the 22 February 2011 earthquake. Similarly no dividend was declared for the year ended 31 March 2013 because of uncertainty regarding Kensal’s earthquake insurance claim. The directors also thought it was relevant that the Trust had ample funds and was not itself making use of the dividends for investment purposes and Kensal could (and did) use profits to reinvest

in expanding its commercial property portfolio. I accept Daniel and Mark’s

explanations of the dividend payment decisions.

[68] The next point of contention was over the management fee the Trust should charge Kensal for Daniel’s management of Kensal. John has expressed the view that the management fee must equate with Daniel’s salary.⁹ He refused to sign off on the accounts which set a management fee which was less than the salary. This came to a head when the 2011 accounts set a management fee of $132,000, when Daniel’s salary, as agreed by John, was $150,000.

[69] However, the evidence of both Mark and Daniel was that the management fee was set to minimise tax liability and this benefited both the Trust and Kensal. The policy for setting the management fee was the policy approved and used by John until he queried it in early 2012.

[70] As Ms Grieve pointed out for Daniel, money that is not part of the management fee is retained by Kensal so still forms part of the Trust assets. It is not lost to the Trust, nor was the Trust in a position where it would struggle to pay John’s salary without a higher management fee being set. Kensal paid $132,000 to the Trust “on account” of its obligation to pay a management fee, but because of the deadlock between the Trustees, no further discussion of this issue ensued and the matter was not resolved.

[71] I consider that John chose to query the policy for setting the management fee, despite his previous acceptance of this being done in the most tax effective way possible, because he sought to maximise the grounds of complaint he had against Daniel. It is therefore unsurprising that Daniel and Mark resisted John’s change of heart on this.

[72] John criticises Daniel for failing to provide certain information he requested, including financial statements and information relating to Kensal’s investment

_{proposals. He complains that when he wrote to Kensal seeking information about}

⁹ Importantly, he does not challenge the salary paid by Daniel and, indeed expressed the view, through counsel, that Daniel’s salary from the Trust should continue even if Daniel and John ceased to be trustees.

the affairs of Kensal on 23 April 2012, that was responded to on 27 April 2012, but the directors failed to provide the financial statements for the year ended 31 March

2012. He implicitly rejects the reason given for not providing it, which was that the accounting firm, Deloitte, had not completed its accounting and tax review of it and says it was “entirely inappropriate” that Daniel had knowledge of its contents, which he did not have.

[73] Daniel responded, saying that a formal request 23 days after balance date for the financial statements for that year was premature. In any event, John was present at Kensal’s annual meeting held on 24 April 2012 where he was able to make whatever queries he wanted from the directors and or Kensal’s auditor. As soon as the 2012 audit was completed and the directors signed off the accounts and resolutions, he sent John a copy of those financial statements. I am satisfied with that explanation.

[74] The other accusation about non-provision of information was in relation to a proposed purchase by Kensal of a property in Birmingham Drive, Christchurch. John said “there has been a lot of correspondence between Mark and I with regards to the company’s proposed investment. I have not received answers to all of my questions to a satisfactory standard ... particularly, I wanted the directors to provide me with a risk analysis for the investment proposal”.

[75] Both Daniel and Mark respond to that accusation, saying that they did endeavour to answer John’s query thoroughly and they provided him with a large volume of material. While they did not supply the risk analysis that John had requested, that was because the vendor cancelled the contract before that was done, making a requirement to provide it redundant. Both Daniel and Mark say that had that not occurred, the formal risk analysis would have been completed and provided.

[76] In all the circumstances, I am satisfied that Daniel and the other director of Kensal have endeavoured to provide information to John as trustee as and when it was requested. Where there has been a delay in providing information, that is reasonably explained.

[77] The next issue is, of course, the circumstances of Daniel’s confrontation with John on the night of 26 August 2012. There is no escaping that this was a reprehensible and destructive action. The ill will and animosity between the parties which led to this event, and the lack of reconciliation after it, make it clear that it is impossible for John and Daniel to work effectively as trustees together.

[78] However, the real issue for me is whether the confrontation with John is likely to be repeated with another trustee if Daniel was allowed to remain as a trustee. On this issue, I had the benefit of two reports by clinical psychologists prepared for Daniel’s sentencing, and heard evidence from another clinical psychologist, Paul Neilson.

[79] The key conclusions of Mr Neilson’s evidence was that “the main source of potential stresses in the coming months is likely to be linked to his relationship with his father, and more specifically with the stresses related to the legal proceedings that John Powell is taking against his son”, but, “there would appear to be no mental health based reasons why Daniel cannot function effectively and close to his full potential in his current area of occupational interest”. He explained that Daniel now has “a better understanding of factors contributing to his high levels of stress and how he has managed them [and] he is in a much better position to be able to tackle stresses as they come on, and to identify them sooner than in the past”. In response to questions, he did not agree that it would be good for Daniel to get away from the Trust.

[80] Importantly, there was no evidence before the Court that Daniel had acted in such a way with any other business associate in his adult life. While the evidence pointed to there having been some violent and angry behaviour in his childhood, Mr Neilson said that it was relevant to consider the age Daniel was when those events occurred and it would be important to take into account “what has been learned since then”.

[81] Mark, who had worked with John’s various businesses from 1991 until December 2012, when he was made redundant, speaks highly of Daniel and says that he acts “with professionalism in his business interactions with both myself and in his

dealings with third parties. I have no concerns about his continuing ability to capably manage the affairs of Kensal and the Trust and to effectively work with others to achieve this”.

[82] Mark struck me as a reasonable person, who fairly acknowledged both John’s and Daniel’s strengths and weaknesses. He does not agree that it would be difficult for another trustee to work with Daniel. He is aware of the incident between Daniel and John but says “I know Daniel regrets it greatly”.

[83] Overall, while the confrontation on August 2012 satisfies me that Daniel and John cannot continue together as trustees, it does not amount to evidence that it would be unwise to put Daniel in a position of working with any other professional trustee.

[84] There is, in my view, minimal risk of future deadlocks if an independent trustee was appointed. Indeed, I expect that Daniel will go out of his way to work constructively and professionally with an independent trustee in order to demonstrate that the friction of the past was generated by inter-family dynamics, and not any broader personal shortcomings.

[85] The next issue is whether the request for $700,000, either by way of distribution or loan, to enable Daniel’s family to relocate from their earthquake damaged house in Devondale Estate, was an example of his inability to recognise a conflict and was potentially a breach of the Trust.

[86] John’s response at that time was that the terms of the Trust did not permit the trustees to invest in a residential property. However, it was clear from the request that this proposal was not a Trust investment, but a request for a “straight distribution of up to $700,000 from the Trust’s accumulated income which stands at over $1.5 million or, alternatively, “an interest free advance from the Trust’s accumulated income, repayable in full on the disposal of 50 Johns Road, Belfast”.

[87] There can be no doubt that the object of the request was within the Trust’s powers as being for the “benefit of ... Discretionary Beneficiaries”. However, at the

hearing it was pointed out that the only power to make distributions was from income of the Trust in any one year. In accordance with cl 5, any income not used within 6 months from the end of an income year was to be added to the capital of the Trust fund. Given that the Trust did not have $700,000 in income in that year, it technically could not have made such a distribution or loan at the time of the request.

[88] However, to suggest that the request was therefore inappropriate and potentially in breach of trust goes too far in my view. The Trust did have various powers to partition the Trust funds, to set up sub trusts of capital and or income for any beneficiaries, or to resettle part or all of the Trust fund. Had there been a willingness to assist Daniel and Hayley in this way, the trustees did have power to deal with the Trust fund to achieve the object of Hayley and Daniel’s request.

[89] It was also relevant to note that when John was a trustee alongside Daniel, he did not exercise such scruples against lending money from the Trust fund. For example, the Trust used the 25 March 2010 dividend to lend $255,000 to Latimer. In summary, I cannot see that this request reflects negatively on Daniel’s ability to remain as a trustee.

[90] The last major criticism of Daniel is that he has not properly managed the assets of the Trust for the benefit of the beneficiaries. Various accusations have been made about the failure to maximise the value of Kensal’s assets, the failure to do sufficient to secure a renewal of the lease of the Braeburn Drive cool store, the lack of success of Kensal’s foray into the share market, and a failure to grow and diversify Kensal’s investments.

[91] The starting point however is that the value of Kensal’s net assets has grown from $6,989,387 in 2006, to an estimated $11,225,000 in 2014. Equally the Trust’s net assets in that time have almost doubled from $1,841,280 in 2006 to $3,342,410 in 2013. Even if that was just achieved by maintaining a steady hand on the tiller, it is a creditable achievement.

[92] John however asserted that the cold store he owned in a separate company

was about 10 percent higher value than Kensal’s investment in cold storage, even

though they were identical leases, suggesting Kensal could have done better. However, later, under cross-examination he acknowledged that that was because the insulation of such buildings has an economic life of about 30 years and his cold store had been largely rebuilt following earthquake damage, renewing its life expectancy, which was the primary reason for the discrepancy in values.

[93] John and Charlotte also suggested that Kensal had done insufficient, particularly in terms of ensuring maintenance was completed, to secure a renewal of the current lease which was due to expire in 2016. However, Daniel’s evidence was that discussions with the tenant were positive and he produced a recent email from the tenant expressing satisfaction at the resolution of outstanding maintenance issues and the building’s ability to continue to meet the requirements of the Ministry for Primary Industries. In my view, Kensal’s management appeared to be doing all that was reasonably necessary to ensure the tenant would renew the lease.

[94] The next criticism of Daniel’s investment skills was that, through Kensal, there was an investment in the share market which had not been successful. Specifically, in April 2007 Kensal purchased shares based on broker recommendations for a total of $125,525 and further shares were purchased in 2008 and more recently in 2013. In total it seems at least $300,000 was invested in the share market and the current share portfolio is valued at $264,962.

[95] However, John confirms that he “encouraged” the investment in the share market and he baldly says that it was “investment incompetence” which led to those losses. I do not accept that. The Company took investment advice from a reputable firm of share brokers. In hindsight, it is unsurprising that some losses occurred in the period following the initial investment given the global financial crisis. There was no evidence put before me to support a conclusion that the fault was of the directors, rather than as a consequence of external circumstances beyond the directors’ control.

[96] In any event, John must take some responsibility for this himself. As a Trustee, I do not think he had the power to sanction Kensal investing in the share market, as cl 20.3 of the Trust Deed says that investment in commercial property

may be made by the Trustees “indirectly through the purchase of shares in a body corporate which only owns commercial property ...”. There is no facility for the Trust to invest in shares, either itself, or through a body corporate.

[97] Finally, there is criticism of Daniel, presumably in his capacity as director, for not properly diversifying the investment portfolio. However, Kensal has recently purchased a commercial property in Auckland, thus diversifying a geographical location of its investments. The purchase accords with the terms of the Trust Deed, including debt to equity ratios, and the loan on this purchase is projected to be fully paid off within four years. The impression I gained was that Mark and Daniel, in their capacity as directors, were approaching investments in a conservative way and in compliance with the Trust Deed’s requirements. This criticism was unjustified.

[98] In addition to the matters raised by John as discussed above, Charlotte raised concerns about Daniel’s use of the company accounts for his personal use, for example, “hire cars being used overseas when Daniel has been competing in his off- road racing events and directors meetings held at No. 4 Bar in Merivale”. Daniel gave evidence of why these were reasonable company expenses and, without more, I could not be satisfied that these were unjustified expense claims. In any event, they related to his role as a director, which no party was challenging, and not to his role as trustee.

[99] The more important concern raised by Charlotte was her concern if either she or her children were to make a request for distribution from the Trust, it would be rejected out of hand by him if he remained a trustee. If correct, that would be a compelling reason for him to be removed as trustee. While she said that she did not “currently have any intention of making a request”, she correctly pointed out that her father set up the two trusts at the same time, with the same beneficiaries, “to allow for the possibility that if one or other of the trust’s failed or did substantially worse than the other, the successful trust could still provide support for all of the (same) beneficiaries”.

[100] Daniel frankly acknowledged in evidence that he and Charlotte had never been particularly close, in part, because of their very different personalities.

However, he seemed well able to articulate his obligations, as a trustee, if Charlotte or her family was to make a request as a beneficiary of the Trust or was in need of support. He acknowledged that Charlotte “would most certainly ... be given consideration” if she made a request, but that relevant considerations would include her level of need and the ability of the Charlotte Powell Family Trust to provide for her.

[101] Daniel had clearly made attempts to reach out to Charlotte and her family, including by involvement in triathlons which she and her children were training for, but the tensions created by this litigation have, I suspect, made real reconciliation impossible. That said, my overall impression is that Daniel, with a moderating influence of an independent Trustee, would be perfectly able to consider the needs of Charlotte and her family fairly, if they required, or requested, financial assistance or support.

Outcome

[102] It is noted at the outset, John seeks the removal of Daniel as a trustee and an independent trustee appointed in his place. If Daniel is removed he will agree to resign as well. Daniel seeks removal of John and accepts that an independent trustee can be appointed in his stead. He does not agree to resign as well if John is removed.

[103] John’s case has proceeded on the assumption that a single independent Trustee, including a corporate trustee could be appointed to run the Trust. However, that is precluded by cl 13.4 of the Trust Deed, which envisages a minimum of two continuing Trustees. While cl 11.2 makes provision for the circumstance of there being a sole trustee for a period of time, there are restrictions on that trustee’s exercise of discretionary powers, with the presumed intention that there should normally be two trustees or more before the full suite of discretionary powers can be exercised. Of course this concern could be met by appointing two independent trustees and I have considered that option.

[104] It is clear from the evidence, and is recognised by all parties, that Daniel and John cannot remain as trustees together. If one of them is to go, then the question is whether it is to be John or Daniel.

[105] I am satisfied that John has sufficient animosity towards Daniel that it would be inappropriate for him to remain as trustee. I do not think that he would fairly and impartially consider requests by Hayley or Daniel for assistance given the events that have occurred. While John has acknowledged business skills, I do not consider that those, alone, justify him staying on in the role as trustee when his primary duty is to act fairly and impartially for the benefit of all beneficiaries of the Trust.

[106] However, as the above discussion above makes clear, there are allegations that Daniel, too, is unsuited to be a trustee because of his previous mental instability, his hostility to Charlotte’s family, his lack of understanding of a trustee’s obligations, and his lack of business skills.

[107] Daniel may well have the personal flaws that his family assert in evidence, including a tendency to exaggerate things and an unfounded sense of grievance that his sister has been favoured by the family in the past. However, in terms of his business acumen, there is no evidence that he cannot make appropriate decisions with a Trust of such significant assets. Indeed the fact that all parties were content to leave him as a director of Kensal, which ironically is the role in which most of the criticisms arose, suggest that the concerns are not that significant.

[108] Both John and Daniel had demonstrated some lack of knowledge of the Trust Deed’s terms, but the culpability on that part appears to be shared equally. I have no doubt that, with an independent professional trustee, either of them would be more diligent about ensuring decisions were made in strict accordance with the terms of the Trust Deed.

[109] In considering whether it is appropriate to leave Daniel as a trustee, alongside an independent trustee, I have also had regard to perceived intention of the settlor, which is to allow the family of the child after whom the Trust is named to have some responsibility in managing and growing the Trust assets. This is evidenced by

Daniel being invited early on to be a trustee of his Trust and similarly Charlotte to be a trustee of her Trust. The Trust Deed, too, anticipates that Daniel would be a trustee through the provisions of cl 12.

[110] I have also had regard to the principle that the Court should intervene to the minimum extent necessary to ensure the Trust is properly executed.

[111] I am satisfied that there is no particular reason to be concerned by the inherent conflict between Daniel being a trustee, beneficiary, and director of Kensal, for those conflicts are inherent in the original deed and must be taken to reflect the intention of the settlor. They are not of themselves reasons to remove a trustee.

Furthermore, as was said in Dever v Knoblock,¹⁰ “in the family trust context, it may

be that appointment of trustees by a settlor including family member/beneficiaries could be taken to infer recognition of the prospect that such trustees will participate in decisions in which they have a personal interest”.

[112] Here I am satisfied that, with the independence and the rigour brought by a professional trustee working alongside Daniel, there will be sufficient oversight of the Trust’s decisions and investments to ensure the welfare of the beneficiaries, which, of course, include Charlotte and her family.

[113] Accordingly, I order the removal of John Powell as a trustee, to be replaced by an independent professional trustee. I do not order the removal and replacement of Daniel Powell.

[114] I also do not see the need to suspend the operation of cl 12 in the circumstances. John’s power of appointment is rendered redundant by this decision and I see no need to restrain Daniel’s power of appointment in the event he should resign in the future.

[115] The parties did not place any firm proposal before me at the hearing as to an appropriate professional Trustee to be appointed in the place of either trustee. While

¹⁰ Dever v Knobloch HC Napier CIV-2008-441-537, 29 October 2009 at [47].

inquiries had been made of corporate trustees such as the Public Trust, the parties preferred to leave firm proposals until receipt of this decision.

[116] I therefore invite counsel to confer on an appropriate appointment. If agreement can be reached, a consent memorandum can be filed for my consideration. If not, the parties are to report to the Court in writing on their respective proposals by no later than Friday 2 May 2014. I will decide then if the matter can be dealt with on the papers or the hearing reconvened.

[117] Costs are reserved and directions for dealing with them can be issued, if required, following resolution of the identity of the independent trustee to be appointed.

Solicitors:

Wynn Williams, Christchurch

Duncan Cotterill, Christchurch

J Moss, Barrister, Christchurch