|
|
Home
| Databases
| WorldLII
| Search
| Feedback
High Court of New Zealand Decisions |
Last Updated: 27 May 2019
|
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
|
|
CIV-2016-404-1636
[2019] NZHC 1124 |
|
UNDER
|
Part 18 of the High Court Rules
|
|
IN THE MATTER
|
of the J.J. Enright Trust
|
|
BETWEEN
|
TERRENCE JOHN ENRIGHT,
CATHERINE ANN NEWTON, WILLIAM JAMES YOUNG, WAYNE MICHAEL
ENRIGHT, GENE HERSCHEL ENRIGHT
Plaintiffs
|
|
AND
|
SHANE ANTHONY ENRIGHT
First Defendant
.../cont
|
|
Hearing:
|
11-21 February 2019
|
|
Appearances:
|
T M Molloy and S L McColgan for the Plaintiffs
D A T Chambers QC, I T F Hikaka and C Upton for the First, Third and Fourth
Defendants
S L Robertson QC and A H H Choi for the Fifth Defendant
|
|
Judgment:
|
22 May 2019
|
JUDGMENT OF PALMER J
This judgment was delivered by me on 22 May 2019 at 11.30 am, pursuant to
r 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
Counsel/Solicitors:
T M Molloy & S L McColgan, Barristers, & Spencer Legal, Auckland D A T Chambers QC & I T F Hikaka, & LeeSalmonLong, Auckland
S Robertson QC & A H H Choi, Auckland & Glaister Ennor, Auckland
ENRIGHT v ENRIGHT [2019] NZHC 1124 [22 May 2019]
THE NEW ZEALAND GUARDIAN TRUST COMPANY LTD
Second Defendant
SHANE ANTHONY ENRIGHT
Third Defendant
ERIC JOHN THOMSON
Fourth Defendant
SOUTHERN LAKES HOLDINGS LTD
Fifth Defendant
Contents
Summary
[1]
What happened? [4]
The Family [4]
Jack fell out with the children other than Tony
[7]
The J J Enright Trust
[14]
The trustees and early events in the life of the Trust [15]
Appointment of Trust capital to Tony [18]
Purchase of Southern Lakes Holdings Ltd, Wye Creek and Dunstan Burn Station [19]
Distribution of the Trust [23]
A further falling out and Jack’s final years [30]
The proceeding
[35]
The meaning of the Trust Deed
[41]
Interpretation of trust deeds
[42]
The Deed [47]
Capital and income under the Deed
[49]
Income and income beneficiaries
under the Deed [51]
Capital and capital beneficiaries under the Deed [66] Issue 1: Did income vest in the income beneficiaries and can it be traced to SLH? [70] The sub-issues [70]
Sub-issue 1: Did the trustees reserve income unanimously, each year, by the time
Sub-issue 2: Were reservation decisions made in breach of the trustees’ duty of
Phase 2: Were Tony’s and Jack’s reservation decisions improperly made? [90] Phase 3: Were Mr Thomson’s and Jack’s reservation decisions improperly made? [99] Sub-issue 3: What income was reserved? [118]
Sub-issue 4: Can the
vested income be traced into SLH’s hands? [130] Issue 2: Did SLH unconscionably receive vested
income? [137] Relevant law of
unconscionable receipt and unjust enrichment [137]
Submissions [142]
Did SLH unconscionably
receive payments? [144] Issue 3: Did
Jack, Tony and Mr Thomson breach their fiduciary duties? [153] The three sub-issues [153]
Relevant law of trustees’ duties
[154]
Sub-issue 1: Did Jack breach his fiduciary duties? [161]
Sub-issue 2: Did Tony breach his fiduciary duty against conflicts of interest? [165]
Sub-issue 3: Did Jack and Mr Thomson breach their duties by making a distribution
Issue 4: Limitation
[177]
Relevant law [177]
Submissions [181]
The siblings’ knowledge of the Trust
[184]
Are the plaintiffs out of
time? [194]
Defence of honest and
reasonable trustees [204]
Issue 5:
What remedies should be granted? [209]
Law of remedies [209]
Submissions [21]]
What remedies are just? [214]
Result [224]
ANNEX: KEY CLAUSES OF THE J J ENRIGHT TRUST DEED
Summary
[1] Mr Jack Enright raised six children after his wife died in 1974 at the age of 42. A few months later, he established the J J Enright Trust (the Trust) with all his six children as discretionary income beneficiaries. But he became estranged from four of his children. He cut five of them, the plaintiffs here, out of his will. In 1985, he named the sixth and youngest, the third defendant Mr Tony Enright, as the sole capital beneficiary of the Trust. Through a company owned by the Trust, Southern Lake Holdings Ltd (SLH), Jack acquired and expanded Dunstan Burn Station around St Bathans, Central Otago. In 2007, Jack distributed to Tony the Trust capital, including the shares in SLH, valued at about $2.5 million then, and at $11.5 million as at 30 June 2009. The other children did not know they were income beneficiaries and were not allocated income from the trust. They sue Jack’s estate, Tony, Mr Eric Thomson (Jack’s solicitor and a trustee) and SLH for breach of trust and fiduciary duty, tracing funds into the Station, and they sue SLH for knowing receipt and unjust enrichment. The defendants oppose the claim and raise affirmative defences of limitation, delay and fair excuse of the trustees.
[2] I am satisfied, on the balance of probabilities, Mr Thomson did not sufficiently consider and exercise the discretionary power to reserve the residue of net annual income each year he was a trustee, from 1994 to 2008. To the extent he did consider it, his discretion was fettered by Jack’s overriding intention. For those reasons he also breached his duty of impartiality. Accordingly, the purported decisions to reserve
$2,219,854 of income for the years ending 30 June 1994 to 30 June 2008 were not made unanimously and were invalid. Instead, the residue of net annual income vested in the income beneficiaries on the balance date each year. That includes income:
(a) from the sale of sub-divided properties at Wye Creek, near Queenstown, from 1999 to 2002, $1,495,646 of which was loaned to SLH for the development and purchase of part of Dunstan Burn Station, which can be traced into SLH’s hands and which SLH unconscionably received; and
(b) of $888,869 paid by SLH as a dividend to the Trust and immediately distributed to Tony as capital in September 2007.
[3] The plaintiffs are not out of time in pursuing their claims, except for one, Mr Terry Enright, who knew there was a legal issue with the Trust in 2008. I order, as equitable relief:
(a) SLH must pay equitable compensation of $995,859 plus interest, in equal shares, to the four successful plaintiffs: Mrs Cathie Newton; the estate of Mr Adrian Enright; Mr Wayne Enright; and Mr Gene Herschel Enright.
(b) Tony must account to the successful plaintiffs, equally, for $711,095 for the dividend payment in 2007.
(c) Jack’s estate, or alternatively Mr Thomson, must pay $8,303 for their breach of fiduciary duties as trustees in distributing that amount to Jack as a beneficiary in 2005 when he was not.
(d) Tony must account to the successful plaintiffs for the $492 of vested income he reserved as trustee in 1991, in breach of his fiduciary duty to avoid conflicts of interest.
What happened?
[4] Mr John James Enright, known as Jack, grew up as one of 10 children in St Bathans in Central Otago. As a young man he worked in an Inuit settlement in the Arctic, in the Northwest Territories of Canada. He met Jean in Canada and their first four children were born there. They moved to New Zealand in the 1960s, to Queenstown and Dunedin and then Queenstown again where two more children were born and Jack worked in various businesses including as: plumber; service station manager; and electrical repair. He built two buildings in Queenstown, became
involved in two property developments and then bought, and later expanded, Dunstan Burn Station which surrounds St Bathans, Central Otago.
[5] The six children of Jack and Jean were born in the 1950s and 1960s:
(a) Mr Terrence Enright (known as Terry) was born in 1955. He has lived in Australia and Canada and is an electrician. He is currently living in Christchurch and is a plaintiff.
(b) Mrs Catherine Newton (nee Enright), known as Cathie, was born in 1956, and has lived in Canada. She is a teacher living in Wanganui and is a plaintiff.
(c) Mr Adrian Enright was born in 1957. From around 1977 he lived with his family as a business manager in Canada, where he died in November 2015.1 The executor of his estate, Mr William Young, is one of the plaintiffs.
(d) Mr Wayne Enright was born in 1961. He moved to Canada in 1985 where he is still living with his wife and children managing a variety of successful business interests. He is a plaintiff.
(e) Mr Gene Herschel Enright, known as Shell, was born in 1962. He has lived in England and now lives in Auckland as a builder. He is a plaintiff.
(f) Mr Shane Anthony Enright, known as Tony, born in 1965, has a PhD in medical research. He has lived in Australia, Canada, Singapore and is now living in Brisbane, Australia. He is a defendant.
[6] In March 1974, after a battle with cancer, Jean died at the age of 42. Jack brought up their six children. Jack suffered two significant accidents, including one
in 1998 when he was thrown off, run over and virtually disembowelled by a front-end loader, and another in 1999 when a tractor rolled.2 Jack died on 10 October 2014. Because of their common last names, I refer to the Enrights by their first names.
Jack fell out with the children other than Tony
[7] There are significant differences between the siblings’ recollections of their relationships with Jack, their father. The children all attended boarding school for their secondary education.
[8] Wayne’s evidence is that Jack was strict and dominating and that arguing or not responding was not tolerated, leading to Jack getting angry, reactive or quickly disciplinary.3 At the age of 17, Wayne says he travelled to Australia and told Jack he had joined an evangelical non-Catholic Church there. He says Jack told him not to come home, he was no longer part of the family, he was not welcome in Otago, and that he was cut out of Jack’s will. Wayne says Jack refused to see him for 25 years, primarily because Wayne had left the Catholic Church.4 Shell corroborates that and says Jack told him and Tony not to have contact with Wayne.5 A letter of 2 August 1985 from Jack to Wayne suggests their relationship was strained, though it ends “if you need help, contact me”.6 Cathie says, when she asked if Wayne could come to Shell’s 21st birthday, Jack said sometimes you had to hurt people to get them to come back to you.7 Terry says Jack told him he banned Wayne from coming home because he had rejected the Catholic religion.8 Wayne moved to Canada in 1985 and reconnected with Jack for the first time in 2003.9 After that he visited Jack approximately once a year, with his wife and two children, until Jack’s death in 2014.
4 At [4]–[5].
6 CB 1/62 and Exhibit 4.
9 Wayne’s Brief, above n 3, at [6].
[9] Cathie’s evidence is she felt her father always had to be right and would not listen to or tolerate others’ views if they differed from his own.10 She says, around 1984 at the age of 26, she told Jack she wanted to marry someone who had been previously married.11 Jack told her she had rejected all he had taught her and wanted nothing further to do with her. Shell corroborates that.12 Jack refused to attend the wedding and forbade Shell and Tony from attending the ceremony, which Shell did but Tony did not, though Jack said it was okay to go to the reception.13 In 1988, when Cathie attended a family wedding, she says Jack told her she had no right to be there. In 2006, he refused to visit relatives because Cathie was there. Cathie reconnected with Jack in 2010 when she visited Tony in Australia and Jack was in a rest home. She visited him there a couple of times but says Jack had dementia.14
[10] Terry’s evidence is that Jack was forceful about him and his siblings following the Catholic religion and threatened to cut them from his will if they did not follow his expectations.15 He says Jack had no tolerance for those who held a different opinion from his own and was forceful in his opinion on all matters and overbearing, wanting to control all aspects of Terry’s life.16 He lost contact with Jack when he was around 30 years old.17
[11] Shell’s evidence is that he worked for Jack upon leaving school, helping to build a factory and manufacturing furniture and, initially, their relationship was good.18 However, he says it became increasingly uncomfortable to be in Jack’s company as he was often frustrated, quickly and frequently becoming angry.19 Shell found other employment though he continued to live in the family home for a while.20 After that he became more and more uncomfortable when he visited Jack.21 He says on his last visit to Jack before going overseas in 1985, Jack told him he was not
10 Cathie’s Brief, above n 7, at [18].
11 Cathie’s Brief, above n 7, at [25]–[26].
12 Shell’s Brief, above n 5, at [21]–[22].
13 Cathie’s Brief, above n 7, at [28]; Shell’s Brief, above n 5, at [23].
14 Cathie’s Brief, above n 7, at [35]–[36].
15 Terry’s Brief, above n 8, at [15].
16 Terry’s Brief, above n 8, at [19].
17 Terry’s Brief, above n 8, at [19].
18 Shell’s Brief, above n 5, at [18].
19 Shell’s Brief, above n 5, at [19].
20 Shell’s Brief, above n 5, at [20].
21 Shell’s Brief, above n 5, at [30].
welcome in his home and he was out of the will.22 From 2008, after returning to New Zealand, Shell had two amicable visits with Jack.23
[12] Tony, on the other hand, remembers happy family times during his childhood.24 He considers Jack was a dedicated and devoted father.25 He agreed Jack had strong views on many matters,26 and he was aware of Jack’s disagreements with some of his siblings, especially Wayne and Cathie.27 His evidence is that they were all bred to be competitive and independent and to speak their minds.28 Tony does not agree with any portrait of Jack as a religious zealot and considers his estrangement from Wayne was not related to Catholicism but to a sudden change in Wayne’s life and personality.29 Tony’s evidence is that Jack encouraged him to stay in contact with his siblings.30 He considers Jack was faithful to his family, which he put first and foremost, and that Jack showed compassion to him over marriage break-ups.31 His evidence is that he was always in touch with Jack, including while Tony was overseas, by fax, phone and email and on holidays.
[13] From an affidavit in 2015, before he died, it appears that Adrian did not fall out with Jack, who he loved. Adrian lived in Canada for his adult life but would visit Jack every two years during the last four years of Jack’s life.32
[14] The J J Enright Trust (the Trust) was settled by Jack on 25 July 1974, some four months after Jean’s death. The full horror of the drafting of key clauses of the Trust Deed is reproduced in an annex to this judgment. The next part of the judgment analyses the meaning of the key clauses. For the moment, it suffices to say that the Trust was to benefit Jack’s children and they were all income beneficiaries. The
22 Shell’s Brief, above n 5, at [31]; NOE 157/27–31, 164/1–3.
23 Shell’s Brief, above n 5, at [34]–[36].
25 NOE 282/24.
26 Tony’s Brief, above n 24, at [7]; NOE 285/20.
27 Tony’s Brief, above n 24, at [12].
28 NOE 288/21–24.
29 Tony’s Brief above n 24, at [8]; NOE 299/25–300/7.
30 Tony’s Brief, above n 24, at [14].
31 Tony’s Brief, above n 24, at [6] and [9].
32 Adrian’s Affidavit, above n 1, at [30]–[36], [45].
trustees were empowered to reserve income and to divide the residue of (unreserved) annual income each year between the children, otherwise it was deemed to be apportioned to them equally.
The trustees and early events in the life of the Trust
[15] Jack was a trustee throughout the life of the Trust. Tony, as executor of his estate, is the first defendant. The other trustees were:
(a) From 25 July 1974 to 11 September 1990, the New Zealand Insurance Company Ltd, which was amalgamated with New Zealand Guardian Trust Ltd (NZGT) from 1983.33 NZGT was the second defendant but the claim against it was abandoned due to a paucity of evidence.
(b) From 7 November 1986 until 7 June 1994, Tony who is the third defendant.
(c) From 7 June 1994 until termination of the Trust in 2007, Mr Eric Thomson, Jack’s personal solicitor at Bodkin, Sunderland and Depree (Bodkins) from the early 1970s. Mr Thomson is the fourth defendant.
[16] On 13 November 1974, Jack settled one of his Queenstown properties, at 9 Athol Street, on the Trust. Consideration of $17,500 was secured by a second mortgage for $13,500 and $4,000 was forgiven.34 Jack made gifts to the Trust in 1976, 1977 and 1979, which appears to have forgiven the remaining debt.35 The Trust obtained further mortgage finance, apparently for erection of a building on the Athol Street property and to acquire property at Wye Creek.36
[17] The Trust received rent on the Athol Street property, incurred mortgage interest and other minor expenditure and made distributions for school fees for the children.
33 I refer to them both as NZGT.
34 David Boyce, Brief of Evidence, dated 8 February 2019 [Boyce Brief] at [26]–[29].
35 At [30]–[31].
36 At [32]–[38].
The Athol Street property was sold in 1997 for $745,000.37 I examine the net annual income available for reservation each year later in the judgment.
Appointment of Trust capital to Tony
[18] By around 1985, Jack had fallen out with all his children other than Tony and, apparently, Adrian. On 12 August 1985, Jack executed a deed appointing all the capital of the Trust to Tony.38 Mr Thomson prepared the deed. Mr Thomson’s evidence is that he had concerns about this allocation, which he thought was “problematic”, and about Jack’s intention to leave his estate solely to Tony. He often discussed it with Jack, sometimes heatedly, but he believed Jack would change his mind over time.39 Mr Thomson considered the decision was that of the settlor so it was out of his control.40
Purchase of Southern Lakes Holdings Ltd, Wye Creek and Dunstan Burn Station
[19] Jack incorporated SLH in 1969 with 45,000 shares.41 He was the sole shareholder until one share was allocated to Mr Thomson by October 1985. At some point between 1 July 1986 and 31 March 1988, perhaps before 7 January 1987, the Trust purchased 98 per cent of the shares in SLH in return for a debt back to Jack of
$495,869.42 Jack retained 1,000 shares in SLH until his death.43 Jack was the sole director of SLH until 25 September 2007. SLH held a one-third partnership in a property development business, Larchwood Heights, in Queenstown from 1985 to the early 1990s.44 SLH also owned a joinery factory and a spray painting business.45 There were various debts in both directions between the Trust and SLH.
37 CB 2/414.
38 CB 1/64.
39 Thomson Brief, above n 2, at [25].
40 NOE 384/26–28.
41 Tony Enright, Brief of Evidence, dated 18 January 2019, given in evidence on 15 February 2019, [Tony SLH Brief], at [3]–[7].
42 Karen Greenwood, Brief of Evidence, dated 12 November 2018, given in evidence on 13 February 2019, [Greenwood Brief], at [55]–[57] (a loan for the same amount of the value of the shares was provided by Jack to the Trust on 1 July 1986); CB 5/1542 (deed of acknowledgement of debt of 7 January 1987).
43 Jack’s 1,000 retained shares were the only voting shares until May 1997. After that, all shares were ordinary shares. Tony’s SLH Brief, above n 41, at [7].
44 Tony’s Brief, above n 24, at [42].
45 Tony’s SLH Brief, above n 41, at [11].
[20] In late 1988, the Trust purchased a property at Wye Creek, on the shore of Lake Wakatipu, south of Queenstown, for $200,000, financed by an increased mortgage from NZGT over the Athol Street property.46 The Trust subsequently received funds from the sale of individual Wye Creek sections from 1999 to 2002, which I outline in more detail below.
[21] In 1996, SLH acquired the Dunstan Burn Station in two blocks. One, much of which is pastoral lease, surrounds the town of St Bathans and the other is freehold.47 In 2001, SLH purchased a second farm nearby, Two Mile Station, which was also in two blocks, one of which adjoins the freehold land of Dunstan Burn and connects its two blocks. Together, the properties are over 10,000 hectares and are known as Dunstan Burn Station. They run mainly sheep as well as some cattle and deer. The Station included land on which Jack’s ancestors had settled but which had been lost to the family, which Tony says was Jack’s motivation for purchasing it.48
[22] Jack moved to live on Dunstan Burn. It required substantial investment including equipment, fencing and irrigation. Tony’s evidence is that all revenue and reserves from SLH were re-invested into the development of Dunstan Burn Station.49 SLH borrowed funds from the Trust, and $600,000 from the Southland Building Society, to purchase Two Mile Station.50 Mr Thomson’s evidence is that purchase improved the position of the farm immeasurably.51 Mr Cooney’s evidence is investment in SLH for the purchase of Two Mile Station would have been impossible if Trust income had been paid out to income beneficiaries, and Dunstan Burn Station would likely not have survived without injections of funds.52 Of 200-250 rural trusts he was involved with in his career, he does not believe any paid out income to beneficiaries on an annual basis.53 Mr Dykes considers Dunstan Burn Station “would have risked failure during the 1980s and 1990s given the extreme climatic and market conditions” without funds to enable development.54 He says, while “Jack no doubt
46 Boyce Brief, above n 34, at [84]–[90].
47 Tony’s SLH Brief, above n 41, at [29]–[32], sch 1, Figure 2.
48 Tony’s Brief, above n 24, at [40]–[41].
49 Tony’s SLH Brief, above n 41, at [61].
50 William Cooney, Brief of Evidence, dated 8 February 2019 [Cooney Brief], at [27].
51 NOE 449/27–28.
52 Cooney Brief, above n 50, at [28].
53 Cooney Brief, above n 50, at [32].
54 Campbell Dykes, Brief of Evidence, dated 8 February 2019 [Dykes Brief] at [11].
envisaged that he would build the Farm up to become a high-yielding agricultural enterprise”, “in the economic and climatic conditions of the time, that was unlikely to eventuate before the Trust was wound up”.55
[23] On 22 April 2002, the Trust’s accountants, Ibbotson Cooney Ltd (ICL) wrote a letter to Jack, which was copied to Tony by fax, summarising the proposed winding up of the Trust.56 It mentioned ICL had revalued the shares in SHL to approximately
$2.5 million which it considered a reasonably accurate figure though possibly less than the realistic sale price of the properties.57 That gave the Trust an equity value of
$3.5 million. The letter mentioned “Jack’s specific intention is to wind the trust up in favour of Tony” which would mean the transfer of the trust assets directly to him.58
[24] By 2007, Tony’s evidence is that Jack was having difficulty with blindness and agreed to handover the farm and company directorship to Tony, who was then living in Singapore.59 He says they agreed on September 2007 on a handover.60 Mr Thomson’s evidence is the distribution of the capital in the Trust to Tony came about “because Jack was concerned that he would no longer be able to manage the Farm and SLH”.61 He says he asked for the accountants’ advice as to how to structure the distribution and the trustees followed that advice.62
[25] On 25 September 2007, Tony became a director of SLH and Jack resigned two days later. On 28 September 2007, a dividend payment was made by SLH of
$909,070.15, including imputation credits of $299,993.15.63 $888,869 went to the
Trust, which held 44,000 of the 45,000 shares, and the rest to Jack. I accept the reason
55 Dykes Brief, above n 54, at [14].
56 CB 3/711.
57 At 2.
58 At 3.
59 Tony’s SLH Brief, above n 41, at [74]–[75]. In a letter dated 8 October 2005, Jack proposed Tony take over the Station at the end of that year, CB 8/2422. In a letter dated 8 July 2006 to ICL, Jack indicated he wished to set up a new will and organise it so Tony could take over either ownership or control of his assets, CB 8/2428.
60 Tony’s SLH Brief, above n 41, at [75].
61 Thomson Brief, above n 2, at [34].
62 Thomson Brief, above n 2, at [34].
63 CB 4/1074.
for the dividend distribution was to take advantage of SLH’s imputation credits and avoid a significant tax liability on winding up.64
[26] On the same day, the capital of the Trust was distributed to Tony. The Deed of Distribution authorised the distribution of Trust assets set out in a schedule, which listed only the 44,000 shares in SLH.65 In the Trust’s Statement of Financial Position as at 30 September 2007, the 44,000 shares in SLH owned by the trustees were valued at $2,495,880 and SLH’s debt to the trustees was valued at $1,506,226, giving total assets of $4,002,115.66 In the Trust’s draft balance sheet as at 30 June 2007, SLH’s debt to the trustees was valued at $1,253,106.67 In the Trust’s Statement of Financial Position dated 30 June 2009, the SLH shares were valued at $11,523,600.68
[27] Clause F of the Deed distributing the Trust funds to Tony records that the trustees declared the date of distribution to be 28 September 2007.69 Clause G records Jack “acknowledges that he has received advice from the Trustees and from his solicitors, Bodkins of Alexandra, as to the potential for claim from remaining beneficiaries that may arise as a consequence of the sole distribution” to Tony “and has, having given due consideration to that advice, instructed the Trustees to distribute”.
[28] Mr Thomson was not only the solicitor but a trustee at the time. Under cross- examination Mr Thomson said he signed off on the transaction because the distribution itself did not indicate a breach of trust and he was not aware of any specific action that would lead to a claim.70 He said repeatedly that he considered Jack “by his tireless efforts for the trust, had earned the moral right to make that decision”.71 He said he was obliged to maintain the capital of the Trust and he felt it was under severe threat because Dunstan Burn was getting beyond Jack “to the point of no return”.72 Mr Thomson said his only alternative resort was to resign as trustee which he did not
64 Thomson Brief, above n 2, at [34]; Dykes brief, above n 54, at [43].
65 CB 4/1065.
66 CB 4/1078.
67 CB 4/1030.
68 CB 4/1227.
69 CB 4/1065.
70 NOE 415/5–24.
71 NOE 416/15–16.
72 NOE 419/15–34.
do because he felt an obligation to continue.73 Mr Thomson resisted the proposition that he bent to Jack’s will, capitulated or rolled over.
[29] Mr Thomson’s evidence is he did not advise the income beneficiaries the Trust had been distributed because he did not believe he had an obligation to do so.74 Under cross-examination, Mr Thomson maintained there was no duty on trustees of automatic disclosure to beneficiaries of their status unless they have a vested interest in the trust assets.75 Once Tony was appointed as the sole capital beneficiary, Mr Thomson accepts there was a duty on the trustees to act fairly and disinterestedly between the income and capital beneficiaries and to consider the interests of both when making decisions.76
A further falling out and Jack’s final years
[30] Once the Trust, including Dunstan Burn Station, had been distributed to Tony, Tony hired a farm manager in early 2008. In July 2008, Tony transferred his 44,000 shares in SLH to Tarbert Trustees (2008) Ltd.
[31] In January 2008, after the handover of Dunstan Burn Station to Tony, Tony and his son helped move Jack out of one farm cottage, to allow the new farm manager to move in, and into another.77 Tony invited Terry to help, which he did. Terry’s evidence is that, once the new manager was hired, Jack seemed to realise he had lost control of the farm and became very angry, saying he wanted it back and Tony had stolen it.78 Wayne corroborates that Jack was ranting in 2008 about Tony having stolen the farm.79 So does Shell.80 Adrian’s affidavit corroborates that.81
[32] Jack instructed Mr Griffin at Ross Dowling Marquet Griffin.82 Terry assisted Jack, who then had difficulty reading and writing, to communicate with Mr Griffin.
73 NOE 416/22–24.
74 NOE 423/1.
75 NOE 378/15–16.
76 NOE 379/5–21.
77 Tony’s SLH Brief, above n 41, at [76].
78 Terry’s Brief, above n 8, at [26]; NOE 111/30–112/3.
79 NOE 33/10–16, 44/14.
80 NOE 160/30–34.
81 Adrian’s Affidavit, above n 1, at [42].
82 Terry’s Brief, above n 8, at [27].
In March 2008, Mr Thomson wrote to the firm in response to questions over the distribution to Tony.83 He said Jack “has been nothing but difficult over the years” and is “eccentric to say the least” but “is possibly the most intelligent man the writer has known”. He was completely mystified about Jack’s memory lapse regarding the distribution of the Trust to Tony, which was done after two visits to Jack specifically to discuss the issue and after exhaustive discussion with Jack, Tony and Mr Dykes of ICL. Tony does not accept Jack went to a lawyer saying Tony had taken over the farm without Jack knowing what was going on.84 However, on 6 June 2008, Mr Griffin wrote to Tony saying Jack “seemed genuinely unaware” he was no longer a director of SLH and was “extremely concerned” the shares were no longer held by him and Mr Thomson, presumably as trustees.85 On 9 June 2008, Tony explained the situation to Mr Griffin. I traverse evidence about the parties’ interactions with Mr Griffin later, in relation to Issue 5.
[33] In 2008, Terry helped Jack move to Christchurch into an over 60s unit but says Jack’s ranting about Tony stealing the farm meant making friends difficult.86 Later in 2008, Tony moved Jack into a care home for the elderly in Christchurch and in June 2009 to Australia, where Tony lived. Jack remained there, in Tony’s care, until he died in October 2014.87 He left everything to Tony and nothing to his other children. Evidence of the siblings’ knowledge of Jack’s testamentary intentions is only relevant as context but, in summary:
(a) Wayne says that Jack once told him he wanted half of his estate to go to the church and, another time, he wanted half a million to one million dollars to go to each of his siblings, except Wayne because Wayne was wealthy.88 Wayne recalls, on other occasions, Jack saying he wanted half of his estate to go to Tony and half to the other siblings.89
83 CB 4/1172.
84 NOE 353/12.
85 CB 4/1104.
86 Terry’s Brief, above n 8, at [34].
87 Tony’s SLH Brief, above n 41, at [78].
88 NOE 19/26–30.
89 NOE 21/3–11; CB 7/2084 at [74].
(b) Terry said, when he was in his teens, Jack threatened to take him out of his will, and that Jack did not talk about his estate once they reconnected but he did mention Tony was going to get the farm.90 He was “a little dumbfounded” when Tony told him in 2007 Jack had given it all to him but he did not do anything about it and did not tell his siblings till much later, after Jack died.91
(c) Tony says he did not tell his siblings he would be inheriting the farm because he would never provoke them in that sense and, while there was a definite expectation of that, he never structured his life banking on that.92 In response to a question under cross-examination about why he had never shared any of “the $12 million” in assets with his siblings, Tony said he was never given any opportunity to understand their grievances and they never took up his invitation to have a discussion.93 Tony maintained under cross-examination he has no significant assets other than his “obligations” to the farm, which he looks after as a sort of legacy in a caretaker role, and explained he put the farm up for sale in 2015 partly in order to test its market value and partly due to personal stress.94
(d) In Adrian’s 2015 affidavit, he said Jack once told him, while living in Queenstown, he wanted all of the children to get $1 million after his death.95
[34] In his letter to Ross Dowling Marquet Griffin in March 2008, Mr Thomson said he “has resolutely and consistently advised Mr Enright since 1985 that to disinherit his remaining children was morally and legally questionable” but that Jack “has never wavered from his original intention, and has effectively refused to discuss it”.96 Under cross-examination, Mr Thomson said he did everything he could, under
90 NOE 105/6–11, 106/11–13.
91 NOE 107/20–108/19.
92 NOE 349/5–350/2.
93 NOE 354/30–355/5.
94 NOE 359/32–360/31.
95 Adrian’s Affidavit, above n 1, at [41].
96 CB 4/1172.
the circumstances, regarding the disinheritance. But he accepted “I probably should have resigned”.97 Under re-examination, he said his statement about resignation was to do with the Trust, not the will, as he had renounced being an executor.98
[35] A proceeding under the Family Protection Act 1955 was commenced, around 2015, but I am advised it is currently stayed pending the outcome of this proceeding. This proceeding was commenced in July 2016. The trial was held over nine days in February 2019. I took the briefs as read unless counsel otherwise preferred (which the plaintiffs did). In order to ensure the siblings gave evidence of the same events independently of each other, I excluded them from hearing each other’s evidence before each had given theirs. Ms Chambers objected to some sentences in Shell’s brief which were omitted by consent. Mr McColgan objected to some sentences in Tony’s brief and I ruled some of them irrelevant.
[36] The witnesses for the plaintiffs were:
(a) Wayne, Cathie, Terry and Shell;
(b) Ms Karen Greenwood as an expert accountant; and
(c) Mr Tim MacAvoy as an expert in trust administration.
[37] The witnesses for the defendants, whose briefs were taken as read as their evidence-in-chief, were:
(a) Tony, the first defendant, as administrator and trustee of Jack’s estate and the third defendant;
(b) Mr Thomson, Jack’s solicitor and the fourth defendant;
(c) Ms Raeleen Hunter, an accountant at McCullochs from 1992 to 2000;
97 NOE 425/34.
98 NOE 50/18–22.
(d) Mr Bill Cooney, an accountant and partner at ICL for around 45 years until 2003;
(e) Mr Campbell Dykes, an accountant and director at ICL from 2001 to present;
(f) Mr Chris Spargo, as an expert on trust administration;
(g) Mr David Boyce, from New Zealand Guardian Trust Ltd; and
(h) Ms Tina Payne, as an expert accountant.
[38] There are six causes of action:
(a) The first cause of action alleges Jack breached his fiduciary duties as trustee by not avoiding conflicts of interest.
(b) The second cause of action alleges Tony breached his fiduciary duties as trustee by not avoiding conflicts of interest.
(c) The third cause of action alleges Jack and Mr Thomson breached the Trust by distributing funds to Jack as a beneficiary although he was not.
(d) The fourth cause of action alleges SLH received vested income as loans, as well as interest payments and management fees, knowing they were paid in breach of trust or, alternatively, the sixth cause of action alleges SLH was unjustly enriched in receiving those payments.
(e) The fifth cause of action, the plaintiffs’ principal claim, alleges Jack, Tony and Mr Thomson as trustees breached the Trust by: failing to advise the plaintiffs they were beneficiaries or that income had vested in them; or failing to pay vested income to them; failing to consider whether an income distribution should be made to them; breaching their duty of impartiality; failing to act jointly; advancing vested income to SLH; and paying interest, salary and management fees to SLH. The
plaintiffs seek to trace the vested income into the purchase price paid by SLH for Two Mile Station.
[39] Tony, Mr Thomson and SLH pleaded limitation as an affirmative defence and SLH pleaded change of position. Mr Thomson and Tony also pleaded relief on the basis they acted honestly and reasonably under s 73 of the Trustee Act 1956. Tony, as executor, claimed an indemnity from SLH on the basis of unjust enrichment though that was not pursued in submissions.
[40] Counsel’s closing submissions were structured very differently. After interpreting the meaning of the Trust deed, I analyse the issues as follows:
(a) Did income vest in the income beneficiaries and should it be traced to SLH (the fifth cause of action)?
(b) Did SLH unconscionably receive, or was it unjustly enriched by, vested income (the fourth and sixth causes of action)?
(c) Did Jack, Tony or Mr Thomson breach their duties in authorising payments (the first, second and third causes of action)?
(d) Limitation
(e) What remedies should be granted?
The meaning of the Trust Deed
[41] The meaning of the Trust Deed is central to the first three of these issues. Before dealing with them, I outline the relevant principles of interpreting trust deeds, and my interpretation of the meaning of this Deed and the status of the beneficiaries.
[42] In general terms, there is a trust at law when a person, the trustee, controls property subject to an obligation to deal with it for the benefit of another, the beneficiary. The trustee has legal ownership of the property, but the beneficiary has a
beneficial interest in the property. Where the trustee has a discretion to distribute income or capital, it is known as a discretionary trust. It is common in New Zealand for a discretionary trust to be settled by a settlor, by deed, giving trustees power to pay income and/or capital to family members.
[43] The obligations on trustees, and entitlements of beneficiaries, are governed by the terms of the relevant trust deed. There used to be a difference in the approach to interpreting a trust deed depending on whether it was “executed”, where the rights and obligations were completely specified, or “executory”, where they were not.99 Deeds creating executed trusts were interpreted strictly and deeds creating executory trusts were interpreted so as to carry out the settlor’s intention.
[44] That distinction between the two interpretative approaches is similar to the distinction between the old “plain meaning” approach to the interpretation of contracts and the contemporary approach of ascertaining “the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract”.100 That contemporary approach was adopted in New Zealand by the Court of Appeal in 1998 in relation to contract interpretation.101 The language used must be read in the context of the document as a whole and the surrounding circumstances, where relevant, even when there is no ambiguity.102 The authorities do not require the interpretive steps be approached in a particular sequence in relation to contracts, let alone trusts.103
[45] After 1998, trust deeds also began to be interpreted in New Zealand using the same approach, on the basis of the knowledge available at the time the trust deed was entered into.104 In Congregational Christian Church of Samoa (Westmere) Trust
101 Boat Park Ltd v Hutchinson [1999] 2 NZLR 74 (CA).
102 Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR at [60]–[61]. See David McLauchlan “Continuity, Not Change, in Contract Interpretation” (2017) 133 LQR 546 at 547–548 (regarding use of extrinsic materials).
103 Simon Connell “Prescriptive and Holistic Contextualism: Emerging Variants of Modern Contract Interpretation” (2018) 28 NZULR 317.
104 Manukau City Council v Lawson [2001] 1 NZLR 599 (HC) at [13].
Board v Tilaima Andrews J summarised the substantive propositions in Baragwanath J’s elegant prose in Inglis v Dunedin Diocesan Trust Board as follows:105
(a) The purpose of a Trust must be derived from its deed.
(b) Where there is no express intention, extrinsic evidence is admissible.
(c) Factors to consider include the language of the deed, its nature and the circumstances both of its execution and at the present time.
(d) The Court’s role is interpretation, not creation.
(e) Past practice based on error cannot justify breach of trust.
[46] The Supreme Court has observed that the scope for resort to background knowledge is itself, to some extent, dependent on context.106 Similarly, as Clifford J observed in Bulley v Attorney-General, there may be a difference in context between a will or trust, which is usually a unilateral document, and a contract where a common intention must be sought, though in that case the trust deed was the outcome of the interactions of several parties.107 As Kós J held in New Zealand Māori Council v Foulkes, “similar principles should apply to the construction of trust deeds as the construction of contracts”.108
[47] Here, the Trust was settled by one settlor, Jack, after the death of his wife. There is no evidence others were involved in the formulation of the Deed. It is a unilateral document. I take some notice of the evidence, largely from Tony, that Jack had long-intended to buy back the family farm, Dunstan Burn Station, where he grew up and which was apparently lost through financial failure.109 But, otherwise, I rely
105 Congregational Christian Church
of Samoa (Westmere) Trust Board v Tilaima (2010) 3
NZTR
20–047 (HC) at [25] citing Inglis v Dunedin Diocesan
Trust [2011] NZAR 1 (HC) at [29]–[33].
106 Firm PI 1 Ltd v Zurich Australian Insurance Ltd t/a Zurich New Zealand, above n 102, at [62].
107 Bulley v Attorney-General [2012] NZHC 615 at [51]–[52].
108 New Zealand Māori Council v Foulkes [2014] NZHC 1777, [2015] NZAR 1441 at [71].
109 Tony’s Brief, above n 24, at [40]–[41].
primarily on the text of the Deed to discern its meaning and purpose. It is important to read the Trust Deed as a whole in interpreting the meaning of a particular clause.
[48] The purpose of the Trust was clearly stated in the preamble of the Deed to be “for the benefit of the children” of Jack. An outline of the provisions is:
(a) Clause 2 empowered the trustees to pay business and trust administration expenses out of the net annual income (called “the annual income”) they received “other than of a capital nature” (cl 2).
(b) Clause 3 empowered the trustees to divide the “residue of the annual income each year” between the children. Failing any apportionment of the residue within six months of the balance date, it is deemed to have been apportioned in equal shares as at the balance date.
(c) Clause 4 empowered the trustees to pay income allocated to and vested in a child to that child and to apply it towards maintenance, education or the benefit of the child as they thought fit.
(d) Clause 5 empowered the trustees to invest “any income not expended by them” as they thought fit and to apply any accumulated income or investment income as if it were part of the income allocated to a child on whose behalf the accumulation was held “or in the case of accumulations resulting from the creating of reserves by the trustees” as if it were income derived in the then current year (cl 5).
(e) Clause 6 provided the trustees stood possessed of the capital of the Trust fund upon trust for the children living at the date of distribution, in such shares and proportions as Jack, as settlor, by deed or will appoints or otherwise in equal shares (except that the share of a son is twice that of a daughter). The distribution date would be 25 July 2024 or such earlier date as the trustees by deed, in their absolute discretion declared.
(f) Clause 8 empowered the trustees to invest money in securities, life insurance, purchase of freehold or leasehold or personal property, debentures or shares of New Zealand companies on such terms as the trustees thought fit.
(g) Clause 12 empowered the trustees to expend the trust fund to acquire and carry on any business which would, in their opinion, be to the advantage of the beneficiaries, including to set “aside out of the income derived from any business such reserves for any other purpose as they shall think fit with power to use such reserves ... in the said business” and to use and apply the reserves as if they were income of the current year with the residue at the date of distribution to be applied as directed in relation to the capital.
(h) Clause 14 empowered the trustees to effect improvements to any capital assets which they acquired to carry on a business or hold as part of the capital, and to set aside reserves.
(i) The trustees were also empowered to:
(i) let or sell freehold or leasehold land “either in one lot or in several lots or real property” and to “have power conclusively to determine settle or agree upon the manner of apportionment of the proceeds of any such sale” (cl 9);
(ii) manage any farmland purchased and reserve its revenue for expenditure and developing productivity (cl 10);
(iii) borrow for a variety of purposes (cl 11); and
(iv) do miscellaneous other things.
(j) Clause 22 entitled a trustee who was a solicitor, accountant or engaged in any profession, business or trade to charge and be paid for all acts
done or time expended by him, any employee or partner of his in connection with the Trust.
Capital and income under the Deed
[49] Clause 1 provided the trustees “stand possessed” of the original $100 paid by Jack as settlor and any additional property or other assets given or transferred to the trustees, and property and investments representing that. That was defined as the “trust funds”. Clause 1 also provided the trustees stood possessed of the “income arising therefrom”. I interpret cl 1 as distinguishing between the trust funds and the income generated from it. The trust funds were capital, by implication of cl 1 and by reading that clause in the light of cls 2, 3 and 6.
[50] Modern discretionary trusts tend to be drafted to avoid the earlier mysterious legal distinction between income and capital. The law has held tax and accounting treatments as potentially relevant but not determinative of the distinction between capital and income in trust law.110 A modern approach to interpreting a trust deed using the terms “capital” and “income”, drafted in today’s world of comprehensive accounting standards, might simply invoke those standards as the default context which gives them meaning. Not necessarily so with a deed from 1974. I later outline more of the case law in applying it. For the moment, a sufficient taste of the legal context is provided by Ronald Young J in Wong v Burt:111
The essential duty of a trustee on receiving money from a company is to ascertain the intention of the testator as to the division of the funds between capital and income where there are different capital and income beneficiaries. Typically, consideration of the relevant provisions in the trust will be appropriate. The trustees will need to keep in mind their duty to the lifetenant(s) and the remaindermen and the need for impartiality. It is also clear that trustees are not obliged to follow either tax law as to the classification of income and capital, or accountancy classification of income and capital.
Income and income beneficiaries under the Deed
[51] The full text of cl 2 was:
110 Garrow and Kelly, above n 99, at [22.7]–[22.13].
111 Wong v Burt [2003] 3 NZLR 526 (HC) at [37].
[52] The archaic drafting of cls 2 and 3 of this Deed, and the determined omission of commas, is unhelpful to interpreting its meaning. But it is tolerably clear that the purpose of cl 2 was to empower the trustees to pay expenses from income.
(a) The “net annual income” received by trustees was said be:
(i) “from the investments of the trust funds”; or
(ii) “derived ... from any business which the Trustees may carry on or be engaged in”; or
(iii) “which the Trustees may receive from any other source and be other than of a capital nature”.
(b) The phrase “other than of a capital nature” qualifies the third of those sources of annual income. But the first two are also implicitly other than of a capital nature.
(c) “Out of” that net annual income, the trustees are empowered to pay:
(i) “all expenses of and incidental to these presents”; and
(ii) “all costs and expenses incurred by them in or about the administration of the trust”
[53] Clause 2 explicitly reinforced the intention to distinguish between capital and income and provides some definition to that distinction. It provided the expenses to be paid out of income should be “all expenses of and incidental to these presents” and those incurred in the administration of the Trust. I do not accept Mr Molloy’s submission that the phrase “net annual income” was a mistake. The clause functioned
effectively without having to conclude that. The Court will endeavour to give meaning to the words of a deed.
[54] There is currently a general rule in trust law that “expenses of an income nature are borne by income beneficiaries while expenses of a capital nature are borne by capital beneficiaries”.112 What is “of a capital nature” and “of an income nature” can be more complex to determine, as we will see later. But, in the context of this Trust Deed, I interpret the phrase “these presents” in cl 2 to refer to the three different sorts of income there specified. So the usual rule applies in this Trust, that the costs incidental to the generation of income are paid out of income. By implication, capital expenses are not to be deducted from income.
[55] There is no general clause in this Deed empowering the trustees to contract out of the general rule. The closest is cl 9 which specifically empowers the trustees “conclusively to determine, settle or agree upon the manner of apportionment of the proceeds of any such sale [of real or personal property acquired by them]”.
[56] With cl 2 having defined income, cl 3 created the income beneficiaries. The full text of cl 3 was:
[57] Having regard to the meaning apparent (though not plainly) from the words, I read the clause as containing the following elements:
112 Law Commission Review of the Law of Trusts (NZLC R130, 2013) at [7.24].
(a) The trustees held the “residue of the annual income ... each year” on trust. The residue was what was left after the costs and expenses of generating income were deducted from the net annual income under cl 2.
(b) The trustees were required to divide the residue among Jack’s children “in such manner and in such shares and proportions” as the trustees “in their absolute discretion from time to time” determined.
(c) The “share taken or to be taken by each child” was to be determined by the trustees by the Trust’s balance date, set by the trustees.
(d) If the trustees did not apportion the residue of the annual income in that way within six months of the balance date, the income was “deemed to have been apportioned among and vested in the said children in equal shares as at the balance date”.
[58] Clause 3 clearly places upon the trustees a duty to divide the residue among Jack’s children by the balance date, which was 30 June each year, if they were going to apportion it specifically. If any of the residue of the annual income each year had been specifically apportioned by the trustees it would have vested in the specified income beneficiaries at that time. But there is no suggestion that the trustees did ever specifically apportion the residue of the annual income among Jack’s children.
[59] If the trustees did not specifically apportion the residue among the children within six months after the balance date, it was deemed to be apportioned equally. However, if specific apportionment had occurred after the balance date but within six months of it, it is implicit the apportionment would have been effective because the deeming provision would not be activated. Any residue that was deemed to be divided equally among the children as at the balance date, vested in them at the balance date. If the children were still in their minority, the trustees could apply it for their benefit under cl 4. Otherwise, under cl 5, the trustees had power to invest income not expended by them, that had accumulated on behalf of a child. In the absence of specific apportionment here, and other things being equal, cl 3 deemed the annual
income to be divided equally as at the balance date each year, and the residue vested in the children equally at that date.
[60] But other things were not necessarily equal. Two clauses empowered the trustees to reserve income:
(a) Clause 12 empowered the trustees to acquire any business which would, in their opinion, be to the advantage of the beneficiaries. It further empowered them “generally to do all things which may be necessary or expedient” including “the setting aside out of income derived from any business such reserves for any other purpose as they shall think fit”. It empowered them to use those reserves as if they were income of the current year, with the residue at the date of distribution to be applied as directed in relation to the capital.
(b) Clause 14 empowered the trustees to effect improvements to, or to hold as part of the capital of the trust fund, any capital assets they may acquire for the purpose of carrying on or extending any business. It further empowered them to set aside reserves from time to time “out of the income derived by them whether from the continuation of any business or otherwise”. It empowered them to use and apply any part of the reserves as if they were income derived during the current year, with “any reserve or reserve fund ... or residue thereof” remaining unapplied on the termination of the trusts, forming part of the capital.
[61] Reading these clauses in light of cl 3, I consider the Deed required the trustees to reserve income under cls 12 and 14 within six months of the balance date for the relevant year if they wished to do so. Under cl 3, if it was not reserved or specifically apportioned within six months of the balance date, the residue of annual income vested in the children equally as at the balance date. The reason for it vesting as at balance date was to avoid it being taxed at a higher rate, according to the evidence of Mr Boyce and Mr Thomson and as supposed by the expert witness Mr Spargo, which I accept.113
As a matter of logic, and the scheme and purpose of the Deed, the trustees’ powers under cls 12 and 14 to reserve income under those clauses, and use it as if it were income of the current year with the residue forming part of the capital (or to be applied as directed in relation to the capital) on termination of the trust, could not apply to income which had vested in the income beneficiaries.
[62] In Johns v Johns, for the purpose of interpreting the Limitation Act 1950, the Court of Appeal analysed three sorts of interests of a child beneficiary of a trust:114
(a) As a discretionary beneficiary, because he had the prospect of receiving distributions of capital and income solely in the discretion of the trustees.
(b) Having a future interest, a right to the residue of the trust at the date of distribution, contingent upon survival. The Court indicated there are, in general, three kinds of future interests:
(i) interests which are indefeasibly vested but of which possession is postponed to let in an intermediate interest;
(ii) interests which are vested subject to divesting in favour of a substitute interest; and
(iii) interests which are contingent.115
The Court considered it was unnecessary to discuss the “subtle distinctions” which can arise between conditions precedent to which an interest is subject (making the interest contingent) and conditions subsequent (which makes the interest vested subject to divesting).
(c) Having income vested in him during the income year subject to a proviso that the trustees may expressly pay or apply the income to any
114 Johns v Johns [2004] NZCA 42; [2004] 3 NZLR 202 (CA) at [26]–[29].
115 At [46].
beneficiary “in priority to and in precedence over” this beneficiary. The Court considered this “rather strange way of expressing the matter” left some difficulty in determining whether the interest vested subject to being divested or does not vest until it is known what discretionary payments or allocations are made each year. The Court did not determine which was the case.
[63] Here, if the residue of annual income was specifically apportioned within six months of the balance date, it would have vested in the beneficiary to whom it was apportioned, at the date of apportionment. But that did not occur.
[64] The children were equal beneficiaries of the residue of annual income, if it was not specifically apportioned, and not reserved under cls 12 or 14, by the trustees in their discretion within six months of the balance date. If the trustees took no such steps, the children’s interests vested in them as at balance date. They were discretionary beneficiaries to the income because whether the interest vested depended on the exercise, or non-exercise, of two discretions by the trustees.
[65] If the residue of annual income was reserved within six months of the balance date, under cls 12 or 14, it either became part of the capital on termination of the trust (cl 14) or was applied as directed in relation to the capital on distribution of the trust (cl 12). So reserved income vested in the capital beneficiaries at the date of reservation. Theirs was a future interest contingent upon survival until the date of distribution and upon other conditions on the capital beneficiaries as explained next.
Capital and capital beneficiaries under the Deed
[66] Clause 6 created the capital beneficiaries:
6 THE trustees shall stand possessed of the capital of the trust fund UPON TRUST for such of them the children of the settler as shall be living at the date of distribution in such shares and in such proportions as the settlor by deed (revocable or irrevocable) or by last Will and testament appoint and failing any such appointment as aforesaid for such aforesaid children as shall be living at the date of distribution as tenants in common in equal shares except that the share of each son shall be twice the share of each daughter and the words “the date of distribution” where they appear in this deed shall be the date of the fiftieth anniversary of the execution of this deed or such earlier
date as the trustees may at any time by deed in their absolute discretion declare to be the date of distribution.
[67] Some other clauses are also relevant to the capital of the Trust:
(a) Where the trustees have purchased farmland, cl 10(a) invests them with “the fullest discretionary powers in all matters relating to [its] management”, “as if they were the absolute proprietors thereof”. Clause 10(b) empowers the trustees to set aside out of the farming business such sums as they think fit “in their absolute discretion” for paying mortgages or other liabilities, to provide additional capital for the working of the farm and to provide for a fund “to enable the said business to be developed by bringing the land into a higher state of cultivation” as the trustees think fit. Clause 10(b) explicitly provides that such sums set aside “shall be added to the capital of the trust funds and shall follow the destination thereof”.
(b) The first part of cl 12 empowers the trustees to “expend any part or parts of the trust fund in the acquisition of any business which in their opinion would be to the advantage of the beneficiaries hereunder”. This is a power to spend capital. The reserves that may be set aside out of the income from any such business are explicitly stated to be used and applied as if they were income. The residue of such reserves is required to be applied in the same manner as the capital.
(c) Clause 14 also contains a power to reserve income, as noted above. But it also empowers the trustees to effect improvements to capital assets which they may acquire for the purpose of carrying on or extending any business or holding as part of the capital of the trust fund. And the unapplied residue of those reserves is stated to “form part of the capital of the trust fund”.
(d) Clause 20 empowers the trustees to apply any part of the capital of the trust fund towards payment of calls on any share that is subject to the trust.
[68] The capital beneficiaries were stated to be the children living at the date of distribution. The shares and proportions in which the capital vested in the children living at the date of distribution were those appointed by Jack as settlor by deed or in his will. So, from July 1974 to August 1985, all the children were capital beneficiaries as at the date of distribution. Their future interests in the capital, including the reserved income, vested in them, contingent upon their survival and subject to divestment because Jack might alter the shares and proportions of vesting (as he did). They would have all shared equally in the capital as tenants in common, with the odious exception, according to the Deed, that Cathie as a daughter would have received half the share of her brothers.
[69] But, on 12 August 1985, Jack appointed Tony as sole capital beneficiary. From that date, the capital vested in Tony, subject to the possibility that Jack could divest him of it by revoking his Deed and appointing the capital to the children in different proportions in either a new deed or in his Will. The Deed did not provide explicitly it was revocable. Clause 6 explicitly admitted of the possibility that such a deed could be revocable or irrevocable. But, unless it was explicitly made irrevocable, I consider a Court exercising its supervisory jurisdiction over the Trust would have very likely upheld a revocation. So, while the other children were discretionary capital beneficiaries after August 1985, Tony had a vested interest in the capital from then, subject to the contingency of surviving until the date of distribution and subject to possible divestment by Jack revoking the deed apportioning the capital to Tony and making a new deed.
Issue 1: Did income vest in the income beneficiaries and can it be traced to SLH?
[70] Mr Molloy, for the plaintiffs, submits their principal claim is that the Trust’s net annual income each year from 30 June 1991 and 30 June 2008, totalling
$2,084,578, vested in the income beneficiaries, as at the balance date each year, in equal shares by operation of cl 3 of the Trust Deed. He submits the property can be traced into SLH’s hands. Ms Chambers QC, for Tony and Mr Thomson, submits the separate claim under the Family Protection Act 1955 is the correct mechanism to address any issues of fairness between the siblings. She submits the substantive
decisions made in running the trust were reasonable and proper and not undermined by the lack of resolutions or meetings, which I discuss below. Ms Robertson QC, for SLH, submits the property cannot be traced into SLH’s hands.
[71] There are four sub-issues:
(a) Did the trustees reserve income unanimously, each year by the time required by the Trust deed?
(b) Did the trustees’ reservation decisions breach their duty of impartiality?
(c) What, if any, income was reserved?
(d) Can the income be traced into SLH’s hands?
[72] I outline the law and submissions in relation to the first two of these sub-issues. I then apply the law to the trustees’ decisions in the three different phases of the Trust’s life, corresponding to the three periods of different trustees before dealing with the third and fourth sub-issues.
Sub-issue 1: Did the trustees reserve income unanimously, each year, by the time required?
[73] Have the plaintiffs proved, on the balance of probabilities, the trustees did not validly reserve income as required by the Trust Deed? There are three respects in which the plaintiffs say the trustees did not reserve income as required, because their decisions:
(a) were not unanimous;
(b) were not made each year but were fettered by a general policy; and
(c) were not made within six months of the balance for that year, under cls 3 and 14 of the Trust Deed.116
[74] Mr Molloy, for the plaintiffs, submits at least some of the trustees’ decisions here were not made unanimously. He submits the power to allocate net annual income under cl 3 had to be exercised by balance date of the year in which it was earned, otherwise it was deemed to vest in the income beneficiaries within six months of the balance date. He submits that created vested interests in the income beneficiaries, defeasible by a valid exercise of the power to reinvest. He submits the power to reserve income was never validly exercised at all because there are no contemporaneous trust documents recording such decisions and Mr Thomson’s evidence to the contrary is unreliable.
[75] Ms Chambers, for Tony and Mr Thomson, submits evidence the trustees acted unanimously is not displaced by a lack of records after so long. She submits the trustees adopted a general policy but did not bind themselves to it. She submits the proper reading of the Deed, consistent with its drafting, reality, purpose and context is that automatic vesting of any residue of annual income only occurs six months after the balance date.
[76] The relevant law is straightforward and agreed. There is no clause in the Deed allowing trustee decisions to be made in any special manner. Accordingly, the law requires trustees’ decisions must be made unanimously. As with any trust, the trustees must actually consider and intend to exercise a discretionary power in order for it to be validly exercised. Otherwise a purported exercise of the power will be void.117 And trustees’ decisions which are required to be exercised at a particular time cannot be fettered in advance by a general policy. They must be exercised at the relevant time, in the circumstances as they exist then.118
116 The parties proceeded on the basis reservation decisions, if they were made, were made under cl 14 rather than cl 12. Clause 14 was explicitly referenced in the Trust accounts prepared by NZGT eg CB 1/15 in 1976.
117 Andrew S Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2013) at [6.5.1]
118 Garrow and Kelly, above n 99, at [19.14]; Lynton Tucker, Nicholas Le Poidevin and James Brightwell Lewin on Trusts (19th ed, Sweet & Maxwell, London, 2015) at [29–227]; Geraint Thomas Thomas on Powers (2nd ed, Oxford University Press, Oxford, 2012) at [1.46].
[77] In my analysis of the Trust deed above, I found that cls 3 and 14 required the trustees to reserve income under cls 12 and 14 within six months of the balance date for the relevant year. Given income was not specifically apportioned, if it was not reserved by then it would have vested in the children as income beneficiaries as at the balance date of the Trust.
[78] If the plaintiffs prove, on the balance of probabilities, that any of the three requirements were not met, then the income for that year would not have been reserved lawfully and would have automatically vested in the income beneficiaries under cl 3 as at the balance date of that year. I determine that below by traversing the evidence regarding the decision-making in each phase of the Trust’s life.
Sub-issue 2: Were reservation decisions made in breach of the trustees’ duty of impartiality?
[79] Trustees are under a duty of impartiality, in particular, to “act fairly in making investment decisions which may have different consequences for different classes of beneficiaries”.119 The duty has been described as “no more than the ordinary duty which the law imposes on a person who is entrusted with the exercise of a discretionary power: that he [or she] exercises the power for the purpose for which it is given, giving proper consideration to the matters which are relevant and excluding from consideration matters which are irrelevant”.120 The terms of the trust deed are crucial and can modify the duty.121 The common law duty of impartiality is preserved by s 13F of the Trustee Act 1956 (the Act).
[80] In Kain v Hutton, discretionary beneficiary grandchildren complained that farm income was reinvested in breach of trust, including breach of the duty of impartiality, because there was clear need, and requests, for help with their education.122 The Court of Appeal observed that, “under a discretionary trust, there is no right to distributions but only a right to be considered” and stated “[a]ny duty of impartiality must be viewed against the limited rights of discretionary
119 Nestle v National Westminster Bank plc [2000] WTLR 795 (Ch) at 803.
120 Edge v Pensions Ombudsman [2000] Ch 602 (EWCA) at 627.
121 Manukau City Council v Lawson, above n 104, at 617.
beneficiaries”.123 The Court held the trustees were entitled to ask for further information about the financial position of the beneficiaries and the fact they did so provided an evidential basis for the proposition they were prepared to comply with the duty to consider distribution.124 So, while trustees must avoid taking into account “irrelevant, irrational or improper factors”,125 they are otherwise able to exercise their discretion in making decisions regarding discretionary beneficiaries.
[81] The duty of impartiality can bite harder where there is a life tenant and capital beneficiaries but, even then, trustees still have a wide discretion. In Re Mulligan (Deceased), the High Court emphasised the concept of fairness, the importance of discretion and the width of competing considerations in any case.126 Pankhurst J held:127
It is elementary that a trustee must act with strict impartiality and endeavour to maintain a balance between the interests of life tenant and remaindermen. Put another way, a trustee must be even-handed as between income and capital beneficiaries.
[82] Pankhurst J found trustees had not acted impartially between the capital and income beneficiaries in investing trust capital in low-yielding fixed interest investments, rather than the sharemarket, from 1965 to 1990, which benefited the settlor’s life tenant widow at the expense of his 10 nephews and nieces in whom the capital had vested. He found the professional trustee was not entitled to defer to the wishes of the trustee widow, treating her view as the last word on the matter of share investment, especially when she was self-evidently affected by a conflict of interest.128 The professional trustee was obliged to exercise independent judgement and not defer to her. The trustees were found liable to place the trust estate in the same position as if no breach had been committed and the performance that might have been achieved by a prudent trustee.
[83] Here, Mr Molloy submits for the plaintiffs, if reservation decisions were improperly made in terms of the Deed, they should be set aside. The submission
123 At [243].
124 At [245].
125 Edge v Pensions Ombudsman [1998] Ch 512 (EWHC) at 533, 567.
126 Re Mulligan (Deceased) [1998] 1 NZLR 481 (HC) at 501.
127 At 502.
128 At 505.
appears to apply primarily to the period when Mr Thomson was trustee. That is because Mr Molloy submits Mr Thomson was aware the decisions would benefit Tony, he never turned his mind to his duty of impartiality, and reservation of all annual income, including the dividend, was perverse or capricious when Tony received
$11.5 million of assets and the income beneficiaries received nothing.
[84] Ms Chambers, for Tony and Mr Thomson, submits the amounts set aside were prudently, properly and validly reserved under the discretionary power in cl 14 of the Deed, to ensure the trust portfolio was sensibly balanced as far as capital and income growth was concerned, taking into account its terms, purposes and distribution requirements including the discretionary nature of the income beneficiaries’ interest. She submits the trustees were entitled to take into account the settlor’s wishes to reacquire the Enright family land at St Bathans and to take a long-term view of investment, rather than be judged on the basis of hindsight. There is no basis for the Court to intervene in those decisions. There is no evidential basis the trustees acted capriciously in their reservation decisions.
[85] Clause 21 of the Trust Deed provided that the Trustees “shall have the fullest powers of deciding or determining (so far as the law permits) all matters and subjects as to which any doubt difficulty dispute or question may arise at any time”, “in relation to the administration or execution of the trusts”. But that does not displace the trustees’ duty of impartiality. I consider a duty of impartiality did bear on the trustees’ decisions whether to reserve income. But its force varied with the varying nature of the beneficiaries’ respective interests. And what was required to discharge the duty varied depending on the circumstances of the Trust. So whether the plaintiffs have proved, on the balance of probabilities, the trustees breached their duty of impartiality must also be examined according to the different phases of the Trust’s life.
[86] The three phases of the Trust’s life are when
(a) NZGT and Jack were the trustees;
(b) Tony and Jack (and, for some of that time, NZGT) were the trustees; and
(c) Mr Thomson and Jack were the trustees.
[87] Jack was a trustee throughout the life of the Trust. NZGT was a trustee, and did the Trust accounts, from 1974 to 1990. This included the period when Tony was also a trustee, from 1986. The plaintiffs’ case originally had NZGT as second defendant. By the time of trial, that had been abandoned, understandably, because of a lack of evidence. The plaintiffs’ submissions targeted the period from 1990 to 2008, the next two phases of the Trust’s life. However, as context, I outline the evidence regarding trustee decision-making during the period NZGT was trustee.
[88] Mr Boyce worked at NZGT and its predecessor firms from 1977 and is still there. Although he was responsible for the file for this Trust, among many others for a period in 1990 to 1991, he does not now have any specific recollection of the Trust or its administration.129 NZGT’s files relating to the Trust were destroyed in the ordinary course of business around 2010 so Mr Boyce’s evidence is based on his knowledge and recollection of NZGT’s practices in general and on his analysis of documents discovered in this proceeding.130 His evidence is:
(a) It would have been NZGT’s usual practice to minute retirement decisions in a detailed decision sheet, to execute a Deed of Retirement and to produce accounts for the final period, paying outstanding bills and delivering core trust documents to the successor or continuing trustees.131
(b) NZGT had a robust decision-making process: virtually all trustee decisions affecting trust assets or beneficiaries were made at Assistant General Manager level or higher, or with oversight from the Board; any decision regarding acquisition of assets or improvement of land would have been carefully analysed and thoroughly documented.132
129 Boyce Brief, above n 34, at [3]–[5].
130 At [6]–[8].
131 At [14].
132 At [16]–[17].
(c) It was NZGT’s practice at the time to first decide if discretionary distributions of income should be made to income beneficiaries and then set aside the balance so investment or other decisions could be made later.133 Mr Boyce considers whether a distribution to income beneficiaries would be made would have been governed by the level of income received, the needs of the beneficiaries and whether it was necessary or appropriate to grow the capital. He expects NZGT would have relied on a co-trustee to report the beneficiaries’ situation.134 NZGT invested otherwise uninvested cash balances in a Client Deposit Fund to earn interest.135
[89] Mr Boyce recollects the reason for a Trust Deed provision automatically vesting unapplied income was to avoid it being taxed at a higher rate as trustee income, because income tax legislation had required beneficiary income to vest within the income year.136
Phase 2: Were Tony’s and Jack’s reservation decisions improperly made?
[90] Tony was trustee from 1986 until 7 June 1994. Jack was a trustee throughout that period and NZGT was a trustee from 1986 to 1990. The plaintiffs’ case regarding reservation decisions is focussed on the period from the financial year ended 30 June 1991 onwards, due to evidential issues before that. Tony ceased to be trustee, and Mr Thomson took over, before 30 June 1994, the end of that financial year. The evidence is that was because Tony was overseas and unable to carry out his duties as trustee.137 The minutes of the meeting of trustees for the year ended 30 June 1994 (signed only by Jack) are dated 13 July 1995.138 I proceed on the basis Tony was trustee in relation to the decisions to reserve income up to the year ended 30 June 1993. Mr Thomson was trustee when the purported reservation decision for the years ended 30 June 1994 and following were made.
133 At [22].
134 At [22].
135 At [57]–[58].
136 At [21].
137 Thomson Brief, above n 2, at [31].
138 CB 2/377.
[91] Tony’s evidence is:
(a) When he became a trustee, as a student, he was given the Trust deed which he studied.139 Jack regularly arranged meetings with Tony, Mr Thomson and the accountants.140 He discussed several Trust transactions with Jack and signed some documents, but he has no particular memory of a number of events relating to the Trust while he was a trustee.141
(b) It was very clear that Jack’s view, with which he agreed, was that Trust revenue should be reinvested into the Trust.142 He says he has a clear recollection of the decision-making process when income was set aside as reserves: he reviewed the financial statements each year, discussed them with Jack on the phone or at meetings, and the residue was reinvested.143 Tony does not recall the dates on which those decisions were made and whether they were made before or after the Trust’s balance date.144
(c) Tony was aware of the financial situations of his siblings when he was trustee and afterwards. He made Jack aware of these at his enquiry and made Mr Thomson aware of them at his enquiry and he took his obligations to his siblings seriously.145 Tony says he understood all his siblings except Terry were well off financially but he did not enquire with them every year because, in some years, they were not contactable.146 Under cross-examination, he said he was never motivated by money but by obligations.147
139 NOE 312/3–4.
140 Tony’s Brief, above n 24, at [47].
141 Tony’s Brief, above n 24, at [49].
142 Tony’s Brief, above n 24, at [48]; NOE 326/24–327/3.
143 NOE 328/1–11, 329/4–5.
144 NOE 328/19–22.
145 Tony’s Brief, above n 24, at [57]; NOE 327/7–11.
146 Tony’s Brief, above n 24, at [58]; NOE 327/16–20.
147 NOE 314/28–29.
[92] McCulloch and Partners (McCullochs), in Queenstown, were Jack’s accountants from 1991 to 2000, who he also used for SLH and for the Trust accounts. Ms Raeleen Hunter was an employee at McCulloch’s from 1992 to 2000 and worked to a partner, Mr Bryan Collie, on the Enright file. Her recollection is that McCullochs’ instructions came from Jack and she does not know whether instructions came from other trustees as well.148
[93] Mr McColgan submits, for the plaintiffs, that Tony’s evidence was “loquacious, tailored, self-serving and, where counter to his interests in the assets of the trust and SLH, untruthful”. He submits I cannot trust any answer from Tony in response to any question that runs counter to his personal interests.
[94] As I examine later, there are inconsistencies in Tony’s evidence in relation to what he knew about the allocation of capital to him from 1985. And the clarity of his recollection about the decision-making process regarding reinvestment of the residue of income, at issue here, is noticeably greater than other decisions made by the trustees. But I do not consider there is a factual basis for me to conclude, on the balance of probabilities, that the trustees failed properly to make decisions reserving income while Tony was trustee. Tony’s evidence was clear about the process of decision- making in participating in decisions to set aside income as reserves. The fact he does not recall dates, or whether they were made before or after the Trust’s balance date is understandable, so long after the event. That adds to, rather than detracts from, the credibility of his evidence in this regard.
[95] I do not consider the plaintiffs have proven, on the balance of probabilities, that the trustees’ decisions for the years ended 30 June 1990 to 1993, while Tony was a trustee, were other than unanimous, or made with discretion inappropriately fettered, or made after six months from the balance date.
[96] The question of whether the trustees breached their duty of impartiality in not reserving income during this period, and while Tony was a trustee more generally, is not as clear. As I found above, all six children, including Tony, were discretionary
income beneficiaries. They were discretionary contingent capital beneficiaries. But, from August 1985, the capital of the trust had vested solely in Tony, subject to possible divestment by Jack. Tony faced a conflict of interest in this regard, as I examine in Issue 3 below. But despite Mr Molloy’s attempts to argue the contrary, the income beneficiaries’ interests had not vested. They were discretionary beneficiaries, depending upon the trustees exercising their discretions as to whether specifically to allocate income to them and whether to reserve income from them.
[97] I have already accepted that Tony was involved in making reservation decisions while he was trustee. I accept the trustees, during his tenure, considered whether to exercise the discretion. In the years ended 30 June 1992 and 1993 the Trust made losses so there were no income reservation decisions then.
[98] That leaves the year ended 30 June 1991 to scrutinise. In that year, the gross income was $37,472 in rent and $567 in interest. The plaintiffs submit $492 vested in the income beneficiaries. In the financial circumstances of the Trust at that time, I do not consider reserving that sum to reinvest in the Trust breached the trustees’ duty of impartiality. I accept it would have been reasonable for the trustees to seek to build up the Trust’s reserves by that amount. But that does not deal with Tony’s alleged conflict of interest, which is considered in Issue 3.
Phase 3: Were Mr Thomson’s and Jack’s reservation decisions improperly made?
[99] Mr Thomson was trustee, with Jack, during the years ended 30 June 1994 until distribution of the trust in September 2007. The evidence about reservation decisions in this period was more specific than that of the earlier periods.
[100] There are “minutes of meetings of trustees”, at McCullochs’ offices, attended by Jack and Mr Collie and (from 1997) Ms Hunter. The minutes were apparently drafted by McCullochs and signed by Jack but not Mr Thomson, for the years ended 30 June 1994 to 30 June 2000.149
149 CB 1/332; CB 2/377; CB 2/382; CB 2/385; CB 2/400 and CB 2/401 (there are two versions, both signed by Jack, for 1997, differing only in whether they record a resolution to pay interest to SLH); CB 2/431; CB 2/455; CB 2/509; and CB 2/529.
[101] ICL, an accounting firm in Alexandra, became the accountants for Jack, the Trust and SLH during the 2000/01 financial year until its termination in 2007. There are no minutes for the year ending 30 June 2001. For the years ending 30 June 2002 to 2007,150 ICL drafted trustee resolutions “by way of entry in the minute book of the Trust” relating to allocation of any net income as trustees income or receipt of losses, accepting financial statements and in 2005 (in error) allocating $10,379 to Jack as a beneficiary.151 Those in evidence for the years ending 2002 to 2003 were signed by both Jack and Mr Thomson.152 Those for the years ending 30 June 2004 and 2005 were signed separately and retrospectively after August 2006 by both of them.153 Those for the years ending 31 March 2006 (sic) and 30 June 2007 were not signed by anyone.154 There is no explanation of these differences or whether these are authoritative versions of the minutes.155 There is an annotation suggesting no minute was prepared for the year ending 30 June 2008.156
[102] In his answers to interrogatories, Mr Thomson said he does not recall whether the meetings occurred, who prepared the minutes, why his signature is not on them, whether he attended the meetings, whether he subsequently approved the resolutions recorded or whether there were written agreements for the loans mentioned in the minutes prepared by McCullochs from 1994 to 2000.157 He does not recall whether a meeting was held in respect of the 2001 year and either does not recall the meetings, or when he signed minutes prepared by ICL (for the years ending 30 June 2002 to 2004), or whether he ever signed minutes (for the years ended 30 June 2005 to 2007).158
[103] Under cross-examination, Mr Thomson said the accountants prepared the trustee minutes and provided them to the trustees.159 He did not concede there was
150 It is agreed the minutes for the year ended 30 June 2002 are misstated to be for 31 March 2002.
152 CB 3/742, CB 3/835.
153 CB 3/848; CB 3/967; CB 4/1013-1020.
154 CB 4/1018; CB 4/1077; Dykes Brief, above n 54, at [34].
155 Dykes Brief, above n 54, at [28]–[30].
156 CB 4/1077.
158 Thomson Interrogatories, above n 157, at (k) to (r).
159 NOE 422/13.
no meeting or proper consideration of matters concerning the 2002 financial year.160 But otherwise, for the years he was a trustee, he accepted he was not at the meetings, he should have been present and should have signed the resolutions, and he did not know about the meetings.161 He accepted he was not involved in approving transactions, such as approving interest payments to SLH in 1997 and 1998 and payment of salary to Jack in 2000, and he did not recall whether he was involved with other transactions. He agreed he was not involved in the recorded decision to allocate trust funds to Jack as a beneficiary in 2005. Mr Thomson acknowledges it was an error to do that and said Jack would not have turned his mind to the decision.162 He also acknowledged that he subsequently signed the minute allocating the funds to Jack as a beneficiary in June 2005, at the request of ICL in August 2006.163 He says he did not sign any cheques for the Trust. He was not aware of Jack attempting to authorise his signing authority on the Trust bank accounts in 2002.164
[104] The existence of minutes indicating income was reserved in particular years would ordinarily tend to support the proposition that income was reserved in those years. But Mr Thomson’s evidence that he was not at many of the meetings and did not know about them undermines that. So does his evidence he did not know about a number of the transactions recorded in those minutes. So does the fact he signed minutes that had been drafted retrospectively and included a blatant legal error of making a distribution to Jack as beneficiary, which he was not. Because of that, I do not consider, on the balance of probabilities, that Mr Thomson was involved in the decisions purportedly recorded by these minutes. The other evidence about decision- making while Mr Thomson was a trustee, which I now outline, reinforces that.
[105] Mr Thomson was admitted as a solicitor around 1969 and retired in 2015. Jack was one of his first clients and they became friends. Mr Thomson was Jack’s personal solicitor from, he thinks, 1971. He describes Jack as “extremely capable and self- taught”, a “wilful and determined man”,165 “incredibly resourceful”, “a bit obstinate
160 NOE 406/12–28.
161 NOE 393/21–404/13.
162 NOE 408/26–409/5, 411/1–3.
163 NOE 411/13–24.
164 NOE 436/6–10.
165 Thomson Brief, above n 2, at [7].
at times”, hardworking, driven, single-minded, task-oriented, difficult and formidable.166 Mr Thomson assisted in drafting the Deed of Trust and witnessed its execution.167 Jack asked Mr Thomson to become a trustee in 1994, to which he agreed out of concern for Jack, though it was one of only two client trusts for which he was a trustee, that he can recall, during his career.168 Mr Thomson does not have specific memories of trust business but says he would meet with Jack regularly for specific trust business, other business and family matters.169 His evidence-in-chief is: 170
When there was disagreement between Jack and me, my only options were either to continue in the role of trustee and influence trustee decisions, or abandon the Trust. I felt it was my duty to continue in the role. That said, I believe that as trustees Jack and I did act jointly and with due consideration of the necessary matters. I did tend to come to agreement with Jack’s views as to the administration of the Trust given he was the person tirelessly working for the benefit of the organisation.
I did not permit Jack to run the trust as he saw fit, but it was a matter of reaching a position of agreement between the trustees. Jack had strong views and I expressed my views to him. I am sure he would have considered those views, and ultimately we made the best decisions we could together.
[106] Mr Thomson’s evidence is that “very early” in Mr Thomson’s trusteeship, Jack communicated to him his preference, as trustee, for any surplus to be set aside as reserves and applied where necessary.171 He recalls that he was conscious at all times of Jack’s intention, as settlor, for trust income to be set aside as reserves rather than to be distributed to the beneficiaries, with which he, Mr Thomson, agreed.172 He did not think there was anything wrong in doing this and Jack did not say anything suggesting he did either.173 In his evidence in chief, Mr Thomson stated:174
As trustees, we were fully aware that there were provisions for distribution of income to beneficiaries, but we also knew that income could be set aside and applied when needed, and that was what was done. The Trust’s accountants also knew that that was the standing instruction they were to operate by. Any departure from that position would of course have been resolved by the trustees and communicated to the accountants.
166 NOE 372/31–373/22.
167 Thomson Brief, above n 2, at [8].
168 Thomson Brief, above n 2, at [13]–[14].
169 Thomson Brief, above n 2, at [15]–[16].
170 Thomson Brief, above n 2, at [37]–[38].
171 Thomson Brief, above n 2, at [17].
172 Thomson Brief, above n 2, at [18] and [20].
173 NOE 371/18, 317/28.
174 Thomson Brief, above n 2, at [18].
[107] Mr Thomson’s evidence is that he was conscious setting aside trust revenue meant resolutions were not being made to distribute income to beneficiaries and he discussed that with Jack on many occasions.175 He said reservation decisions “were made by Jack and I as a matter of general practice”, that it was not necessary for formal resolutions to be taken and the decisions were given effect in the annual accounts as “trustees capital” by McCullochs or “trustees income” by ICL because “the accountants also, as a matter of practice, were aware of the overriding intention to reserve and apply trust income”.176
[108] Under cross-examination Mr Thomson acknowledged there were not a lot of records but maintained he did have those discussions with Jack about reservation, in a variety of locations.177 He said reservation was a general position which was always under discussion and they came to that conclusion every year.178 In answers to interrogatories, Mr Thomson said that for the years in which there were profits, from the years ended 30 June 1994 to the winding up of the Trust, he and Jack did not resolve to allocate or divide the Trust’s income amongst the beneficiaries but did agree to set all of it aside as reserves as recorded in the annual accounts.179 Under cross- examination, Mr Thomson agreed that the power to reserve income could not be exercised in advance for future years but had to be decided each year by the Trust balance date, which they did.180 Under re-examination he said he and Jack did not write down their decisions but communicated them to the accountants.181
[109] Mr Thomson considers it is likely that distributions of income to beneficiaries would only be made where the trustees believed there was a real need on the part of a beneficiary and that, otherwise, it made no sense to distribute income to them and the trustees reached agreement that the Trust was served best by this approach.182 He understood there was sufficient contact with the beneficiaries other than Tony for any needs of the children to be brought to the trustees’ attention and he remained informed
175 Thomson Brief, above n 2, at [24]
176 Thomson Brief, above n 2, at [17] and [29].
177 NOE 386/34–387/10.
178 NOE 390/3–11.
179 Thomson Interrogatories, above n 157, at (c), (d), (e), (i), (j), (k), (m), (t).
180 NOE 382/24–383/6.
181 NOE 439/17.
182 Thomson Brief, above n 2, at [19], [24] and [27].
of their life situations through discussions with Tony.183 He said he was comfortable with Tony’s attitude to those questions and Tony never struck him as giving wrong information.184 Mr Thomson says, in his mind, there would have been a point in the future where farm income from Dunstan Burn Station would have been paid out to the Trust as a dividend and passed onto the beneficiaries as Trust income, but the farm was not very profitable during his time as trustee.185
[110] Mr Bill Cooney and Mr Campbell Dykes, who worked at ICL, the Trust’s accounting firm from 2000 to 2007, gave evidence about decision-making. Mr Cooney, who got on well with Jack, was the principal accountant for the years ending 2001 to 2003 and Mr Dykes thereafter.186 Both say ICL took its instructions from Jack and it was not unusual in their practice for one trustee to communicate instructions to accountants on behalf of all trustees.187 Mr Cooney says “by-and-large the instructions I received from Jack were more implied than explicit instructions”.188 Neither remembers having any knowledge of the administration or management of the Trust but Mr Cooney remembers record-keeping was not Jack’s forte so Jack eventually agreed to transfer all the clerical and accounting work to ICL.189
[111] Mr Cooney’s evidence is “I do remember quite clearly that Jack told me as a standing instruction that none of the income of the Trust was to be allocated to beneficiaries”.190 That made the accountants’ job simpler because there was no question but that the surplus revenue was to be placed into the reserve fund, which was recorded in the Trustees Income Account (which was the same as McCullochs’ “Trustee Capital Account”).191 Mr Dykes similarly considers it would be “quite normal” for the income of a trust to be retained rather than paid out to beneficiaries and notes it made losses in the years ending 2004, 2006 and 2007, which were set off against the trustees income account.192
183 Thomson Brief, above n 2, at [21].
184 NOE 388/13–16.
185 Thomson Brief, above n 2, at [26].
186 Cooney Brief, above n 50, at [3]–[4]; Dykes Brief, above n 54, at [3].
187 Cooney Brief, above n 50, at [10]; Dykes Brief, above n 54, at [5].
188 Cooney Brief, above n 50, [17].
189 Cooney Brief, above n 50, at [11]–[12]; Dykes Brief, above n 54, at [7]–[8].
190 Cooney Brief, above n 50, at [18].
191 Cooney Brief, above n 50, at [18], [19] and [22].
192 Dykes Brief, above n 54, at [12].
[112] Mr Thomson says that the trustees did not retain a distinction between income of a capital nature and income of a revenue nature for the purposes of the Trust, and that “it would have been more appropriate to retain a distinction”.193 He refers to the sale of sections at Wye Creek as an example of the trustees not turning their minds to the question.
[113] Wayne’s evidence, corroborated by a contemporaneous file note and emails is that, in August 2015, Mr Thomson told him he did not recall doing annual resolutions for the Trust or having minutes and had very intermittent contact with Jack.194 Mr Thomson does not recall saying that but says, ordinarily, he would expect resolutions to be done by the accountants.195 In his two statements of defence, Mr Thomson did not plead that income was set aside as reserves. On 10 February 2016, Mr Thomson emailed Wayne saying he could not recall the Trust making any profit distribution but it had to be considered that Tony was the sole beneficiary since the mid-1980s and the Trust did not generate much or anything in the way of income.196 Mr Thomson repeated the sole beneficiary point in another email to Wayne on 28 February 2016.197 Several years earlier, in February 2002, he had also said in an email to ICL that Tony had been appointed the sole beneficiary.198 He acknowledged under cross-examination these statements were not correct, that at the time he was “well aware” that Tony was not the sole beneficiary of the Trust, and that he was not trying to deceive Wayne.199
[114] Having heard and considered the evidence, especially Mr Thomson’s, on the balance of probabilities, I do not consider he sufficiently considered and exercised the discretionary power of whether to reserve income each year to discharge his obligation as trustee. Mr Thomson was Jack’s friend. Mr Thomson “did tend to come to agreement with Jack’s views as to the administration of the Trust given he was the person tirelessly working for the benefit of the organisation”.200 He describes
193 Thomson Brief, above n 2, at [39].
194 Wayne’s Brief, above n 3, at [44]; CB 6/1682, 6/1684.
195 NOE 434/29–435/14.
196 Wayne’s Brief, above n 3, at [53]; CB 6/1768.
197 CB 6/1837.
198 CB 8/2396.
199 CB 8/2396; NOE 430/5–24, 432/14.
200 Thomson Brief, above n 2, at [37]–[38].
reservation as “a general position” which was “always under discussion”.201 Mr Thomson may well have come to regard Tony as the sole beneficiary in practice, as he later characterised it to Wayne, following Jack’s wishes.
[115] To the extent Mr Thomson did consider the exercise of the discretion, I consider, on the balance of probabilities, the discretion was fettered by Jack’s “overriding intention”,202 manifested by “the standing instruction” by which Mr Thomson says the accountants knew they were to operate.203 The accountants, McCulloch’s and then ICL, acted on the basis of Jack’s standing instruction in preparing the accounts. They only dealt with Jack. Mr Thomson’s evidence about the minutes of the meetings suggests he did not attend the meetings or even know about them. That is consistent with what Mr Thomson told Wayne in 2015, evidenced by Wayne’s contemporaneous file note, and by Mr Thomson not pleading that income was reserved in his two statements of defence.
[116] It follows that I am satisfied, on the balance of probabilities, that the trustees did not make these reservation decisions unanimously. Accordingly, the income was not reserved in those years when it was recorded as reserved. Instead, it vested in the income beneficiaries equally, as the balance date each year from 30 June 1994 to 30 June 2007, in accordance with cl 3 of the Deed.
[117] Because I am satisfied these reservation decisions were not validly taken, and Mr Thomson was not involved with them, I do not need to assess whether Mr Thomson acted consistently with his duty of impartiality. If I did have to assess that, I would conclude he did not act consistently with his duty of impartiality for the same reasons: because he did not consider and intend to exercise a discretionary power for the purpose for which it was given and did not give proper consideration to all relevant considerations. Only if I had found Mr Thomson had validly made reservation decisions would I have considered he satisfied his duty of impartiality. That would have been on the basis there is insufficient evidence to prove, on the balance of probabilities, that each of the specific decisions taken to reserve income unreasonably
201 NOE 390/3–11.
202 Thomson Brief, above n 2, at [17] and [29].
203 Thomson Brief, above n 2, at [18].
disadvantaged the discretionary income beneficiaries in favour of the vested capital beneficiary in the specific financial circumstances of the Trust in each of those years.
Sub-issue 3: What income was reserved?
[118] I have concluded above that the residue of annual income was not validly reserved by the trustees from 1994 to 2007. But what was that income?
[119] Mr Molloy submits:
(a) The use of “net annual income” in cl 2 of the Deed appears to be a mistake. Irrespective of that, cl 2 did not change the general legal rule, that capital costs must be deducted from capital revenue. The trustees were not entitled to deduct capital costs from the Trust’s income receipts and so loan repayments should have been made from capital, not income. This means the trustees were not entitled to advance the Wye Creek sales proceeds, which were income, for a capital purpose of repayment of loans from SLH. And they were not entitled to advance or invest income receipts without reserving them.
(b) An analysis of what income was earned each year, rather than over the life of the trust, is required. The rental from the Athol Street property and interest on investment are income to the trust. Mr Molloy accepts the sales proceeds of Athol Street are capital but contends sales proceeds from the Wye Creek development are income because the Trust’s business at that time was property development, subdividing land for profit from sale, so the properties constituted stock in trade. He submits the dividend paid by SLH to the Trust was an income receipt which belonged to the income beneficiaries and should have been paid to them.
[120] Ms Chambers QC, for Tony and Mr Thomson, submits:
(a) Clause 2 of the Deed requires the “net annual income” be identified first, by removing: the costs associated with acquiring income-
producing assets; any funds of a “capital nature” such as the proceeds of Wye Creek; the costs associated with the assets held by the Trust (interest and management fees); and the costs of administering the Trust. Under cl 3, distribution of only the “residue of annual income” to the income beneficiaries can be considered, which is net annual income that has not otherwise been reserved. The income beneficiaries had an interest contingent upon the favourable exercise, or non- exercise, of trustee discretions: they were subject to a discretionary trust.
(b) The best way of analysing the amount of the residue of annual income is by starting with the total income received by the Trust during its operation, net of expenses, capital account expenses and distributions, totalling $2,002,115. From that, Ms Chambers submits a total of
$2,182,747 should be deducted, comprising:
(i) capital from the sale of Athol Street;
(ii) gifts by Jack by way of capital settlements on the Trust;
(iii) repayments of Jack’s loans to purchase shares in SLH, and of SLH’s loans for the purchase of Wye Creek, representing the cost of acquiring those shares and Wye Creek;
(iv) accumulated credits and debits to Jack over time; and
(v) profits where the source is unknown (minus the distribution to Jack of $10,379 if that was not corrected).
That results in there being negative net annual income of $180,632. Removing the proceeds of sale of Wye Creek as well, which Ms Chambers submits was capital in nature, results in the residue of annual income totalling negative $2,597,689. Accordingly, she submits there was no residue of annual income.
(c) Under cl 14, funds reserved do not vest in the income beneficiaries and are not capital of the trust. Reservation does not create or alter any beneficial interest in trust property. So those amounts could be used as income in any particular year and were still available to the income beneficiaries so there was no breach of duty in reserving it. The reserved funds would be capitalised only upon winding up and being used in part as a loan to SLH does not change that. In any case, some of it was properly capital and not available to the income beneficiaries.
(d) Case law about the income/capital distinction for tax or accounting purposes is of little assistance in determining what was capital and what was income. What is required is to interpret the terms of this Trust. Jack’s intention was to build up the capital of the Trust and it is his intention that is most important in distinguishing between capital and income under trust law and otherwise the intention of the trustees in acquiring the asset is relevant. There is no case law default on whether subdividing land is capital or income but, by analogy in relation to Wye Creek, it involves selling the tree (in smaller pieces) rather than its fruit so it is capital rather than income. That is consistent with its treatment as capital in the Trust’s accounts.
[121] As Ms Chambers submitted, it is necessary to interpret the terms of this Trust to answer this question. As I have found above, that means capital costs were required to be deducted from capital, not income. I consider, as Mr Molloy submitted, the question of what income was reserved must be addressed in respect of each year. I do not consider the approach of analysing the Trust over the whole of its life, urged on me by Ms Chambers, is sound. For a start, it does not allow distinctions to be made between years. Neither is it consistent with the Trust Deed which provides for income not reserved to vest in income beneficiaries at the balance date of each year. And Ms Chambers’ calculations produce a surprising result of $2 million of negative income over the life of a trust valued at $4 million on termination.
[122] The parties agree the rental from the Athol Street property and interest on investment was income and the sales proceeds from the Athol Street property was
capital. The major issue concerns the sales proceeds from the Wye Creek development. Were they income or capital?
[123] The nature of the Wye Creek development, as a business, was to acquire property, develop it, subdivide it and sell off smaller properties, paying for the development expenses and, hopefully, yielding a profit. The property acquired at Wye Creek was land, which is usually considered to be a capital asset. When acquired by the trustees in 1988, the Wye Creek property was a capital asset of the Trust. That status continued once the property was subdivided, while the sections were still held by the Trust. Consistently with that, the Wye Creek properties, before and after subdivision, like the Athol Street property, were treated as assets in the Trust’s accounts and transactions relating to them were recorded in the capital, not the income account, of the Trust.204 I accept the intention of the trustees in buying the Wye Creek property was to generate profit. But was that to be treated as income or capital gain by the Trust? I do not identify extrinsic evidence that satisfies me Jack’s intention, as settlor, was that such funds were to be classified as income or capital. I turn to the terms of the Trust deed.
[124] The wording of cl 9 specifically empowered the trustees to sell real property they acquired, including in conjunction with the settlor, “either in one lot or in several lots of real property”. It also specifically empowered the trustees to “conclusively to determine, settle or agree upon the manner of apportionment of the proceeds of any such sale”. That suggests the business of subdivision, where sale of properties is the income from ordinary operating activities, was envisaged. And it was clearly possible, under the Deed, for the trustees to determine the proceeds of sale were either capital or income. So, the Trust Deed does not militate in favour of the Wye Creek proceeds being treated as income or capital. It simply left it to the trustees to determine, if they wished. Apparently, they did not wish. There is no evidence of trustee resolutions or decisions regarding the specific apportionment of the proceeds of Wye Creek properties as income or capital and no suggestion such decisions were made. And the
204 Boyce Brief, above n 34, at [84]–[90]. Under NZGT’s single entry accounting, the “capital account” did not record assets and liabilities but the statement of assets and liabilities does. Whether a transaction appeared in the income or capital accounts maintained by NZGT depended on whether the transaction related to the income or capital position of the Trust. See Boyce Brief, above n 34, at [43]–[49], particularly [51].
sales proceeds from Wye Creek appear to fall within the definition of “net annual income” in cl 2 as including that “derived ... from any business which the Trustees may carry on or be engaged in”.
[125] The individual Wye Creek sections were sold between 1999 and 2002. The Trust’s accounts recorded the sales proceeds of Wye Creek in the Statement of Financial Performance, which is usually income from an entity’s ordinary operating activities, and the net proceeds were treated as income for tax purposes.205 Ms Greenwood’s expert opinion is that the net income from the sale of the Wye Creek properties was a revenue, rather than capital, item.206 I consider that was a reasonable way of treating the proceeds for the purposes of the Trust Deed. With nothing in the Trust Deed indicating whether the proceeds of sale of the properties were to be treated as income or capital, I consider the way they were treated in the Trust’s account provides the answer. There was no suggestion the application of accounting principles here was inconsistent with generally accepted accounting practice. Accordingly, I consider the sales proceeds of the Wye Creek properties were income. And that income was not specifically allocated or validly reserved, as I found earlier. So, it is deemed by cl 3 to have been apportioned among, and therefore vested in, the income beneficiaries as at the balance date for each year it accrued. Accordingly, the trustees should not have advanced the vested income for capital purposes and should have paid it out to the beneficiaries on distribution of the Trust.
[126] Mr Molloy also submits the $888,869 of dividend paid by SLH to the Trust in September 2007 was an income receipt which should have been paid to the income beneficiaries. The dividend was declared to the Trust as owner of the SLH shares. It was not paid in cash, it remained on the Trust’s books as a debt owed by SLH to the Trust.207 It was recorded as “sundry income” in the Statement of Financial Performance.208 Ms Greenwood’s expert evidence is that the Trust assets were “transferred” at some point between 27 September 2007 and 30 June 2008.209 The
206 Greenwood Supplementary Brief, above n 205, at [11].
207 Greenwood Brief, above n 42, at [241]–[248].
208 Greenwood Supplementary Brief, above n 205, at [12].
209 Greenwood Brief, above n 42, at [249]–[257].
debt owing by the Trust to Jack appears to have been offset against the debt owing by SLH to the Trust.210 The share transfer to Tony was registered on 2 October 2007 yet the shares remained recorded as an asset of the Trust in the Trust’s draft 30 June 2008 financial statements.211 Mr Thomson’s evidence is that the advice of the accountants was followed regarding the dividend.212 They suggested declaring a fully imputed dividend proportionately to the Trust and Jack as the shareholders.213
[127] A dividend must be treated as income as it is earned from a capital asset but not from its sale.214 There is authority that a dividend paid by a company after the commencement of its winding up is treated as capital but it was not the company paying the dividend, SLH, which was wound up here; it was the Trust which received it which was wound up.215 Ms Greenwood’s expert opinion is that the dividend here was a revenue, rather than capital, item.216 The fact the dividend was not paid in cash does not make a difference to whether it should have been treated as income or capital in the Trust’s accounts. It was income.
[128] The consequence is that the dividend of $888,869 paid to the Trust on 28 September 2007 was income in the hands of the trustees. It was not specifically apportioned or validly reserved in the year ended 30 June 2008. Accordingly, it vested equally in the income beneficiaries. Yet the dividend was immediately distributed as capital of the Trust to Tony.
[129] Otherwise, there is little disagreement about what was income, what expenses should have been deducted from income, and what was capital, as identified in the Trust’s annual financial statements and in the expert evidence of Ms Greenwood.217
210 Greenwood Brief, above n 42, at [246]–[248].
211 Greenwood Brief, above n 42, at [251]–[252].
212 Thomson Brief, above n 2, at [34].
213 CB 4/1063. The accountants also identified two alternatives (of paying the dividend on to Jack from the Trust or allocating the dividend to Tony as beneficiary) but these appear not to have been pursued.
214 Wong v Burt, above n 111, at [40]; Hill v Permanent Trustee Co of New South Wales Ltd [1930] AC 720 (PC) at 730–732; Kelly and Kelly, above n 99, at [22.101].
215 Wong v Burt, above n 111, at [41].
216 Greenwood Supplementary Brief, above n 205, at [12].
217 There is a difference between these figures and the figures used by the plaintiffs in their closing submissions, which appear to omit interest income in 1991 and 1999–2002. Also, there are records of the residue of net annual income but not the total income and expenses for the years ended 30 June 1994, 1995 and 1998.
The only change I make is to include, in the year ended 30 June 2001, proceeds of sale of a section, of $145,000, that should have been Trust income but was paid direct to SLH.218 The following table identifies those figures for each year ended 30 June from 1991. The last column is the residue of net annual income that, if positive, was available for reservation and otherwise vested in the income beneficiaries.
|
Year ended 30 June
|
Income
|
Expenses
|
Residue of Net Annual Income
|
|
1994
|
|
|
$2,654
|
|
1995
|
|
|
$32,847
|
|
1996
|
$56,814
|
$20,826
|
$35,988
|
|
1997
|
$57,772
|
$70,336
|
($12,564)
|
|
1998
|
|
|
($60,373)
|
|
1999
|
$191,607
|
$136,455
|
$55,152
|
|
2000
|
$566,966
|
$511,319
|
$55,647
|
|
2001
|
$1,535,859
|
$604,251
|
$931,608
|
|
2002
|
$337,029
|
$130,319
|
$206,710
|
|
2003
|
$632
|
$1,402
|
($770)
|
|
2004
|
$5
|
$1,854
|
($1,849)
|
|
2005
|
$10,529
|
$150
|
$10,379
|
|
2006
|
$50
|
$183
|
($133)
|
|
2007
|
$45
|
$138
|
($93)
|
|
2008
|
$888,869
|
$0
|
$888,869
|
|
Total
|
|
|
$2,144,072
|
|
Total of positive years
|
|
|
$2,219,854
|
Sub-issue 4: Can the vested income be traced into SLH’s hands?
[130] Strictly speaking, tracing is a process rather than a claim or remedy but it is convenient to treat it as part of Issue 1.219 A plaintiff, who is entitled to an identifiable
218 Lot 6 (the table also reflects the $9321.63 in costs of the sale); Greenwood Brief, above n 42, at
[170] and [166].
219 James Every-Palmer “Equitable Tracing” in Butler, above n 117, at ch 35.
piece of property by breach of equitable duty, can “trace” it through different forms of property and ownership. That can include tracing of money through bank accounts, where withdrawals are attributed in a manner most favourable to a claimant, though there has historically been more doubt if money is used to repay a loan.
[131] Tracing can be defeated where property is received by a bona fide purchaser for value, acting in good faith and without actual, constructive or imputed knowledge, at the time, of the adverse interest in the property. That includes where a purchaser failed to make reasonable inquiries and has knowledge of suspicious circumstances indicative of wrongdoing.
[132] Mr Molloy submits the trustees advanced $1,336,347 of vested income to SLH in breach of trust and applied it to the purchase price for Two Mile Station in March 2001. He submits five-sixths of that should be traced into 63.64 per cent of the purchase price of Two Mile Station.
[133] Ms Robertson submits SLH is a third party to any alleged wrongdoing and the plaintiffs have failed to establish what was received by SLH, what SLH did with any money received or that SLH had the knowledge necessary to found liability. She submits the trustees paid money to SLH based on accounting advice and without any notion there was anything wrong in doing that. She submits the largest transfers were motivated by the commendable purpose of improving the profitability of SLH’s major asset, which would benefit both SLH and the Trust.
[134] I have found above that Mr Thomson did not sufficiently consider and exercise the discretionary power to reserve income each year. Rather, the decisions were driven by the strong-willed Jack. He did know about the purported decisions to reserve income. He is recorded as having attended all the meetings from 1997 to 2000. The resolutions from 2002 onwards do not record meetings. But the evidence is the accountants at McCullochs and ICL, who prepared the minutes and the accounts, acted according to Jack’s expectations and instructions. On the balance of probabilities, I consider Jack knew Mr Thomson was not involved with these decisions and knew he should have been involved in these decisions. Tony’s evidence suggests Jack knew Tony should be involved in trustee decisions when he was a trustee. I consider it is
equally likely that Jack did not care much about involving Mr Thomson, from all of the evidence I have heard about his personality and the decision-making of trustees. He was determined that what he said went. I am satisfied Jack knew the reservation decisions were not taken according to proper process. And Jack was a shareholder, creditor and the sole director of SLH. Jack’s knowledge must be imputed to SLH. At the least, SLH had knowledge of suspicious circumstances indicative of wrongdoing and there is no evidence it made reasonable inquiries about that.
[135] Regarding the figures:
(a) Above, I have found the residue of net annual income of $2,219,854 vested in the income beneficiaries in the years ended 30 June 1994 to 2007, though there was $2,144,072 of net annual income across all of those years. That income includes the sales proceeds from Wye Creek and the 2007 dividend.
(b) I find, on the basis of Ms Greenwood’s expert evidence and taking into account the other evidence, that $1,935,492 of income from the proceeds of Wye Creek was advanced by the Trust to SLH in the years ended 30 June 1999 to 2002.220
(c) I accept Ms Greenwood’s evidence that Two Mile Station was purchased by SLH on 30 March 2001 for $1,750,000 plus $521,660 for plant, stock and winter feed.
(d) On the basis of Ms Greenwood’s evidence, and taking into account the other evidence, I find SLH funded the purchase of Two Mile Station from:221
(i) $175,000, as a deposit, from SLH’s bank account on 15 December 2000;
$524,286 in 2000; $1,134,768 in 2001; and $100,000 in 2002.
221 Greenwood Brief, above n 42, at [185]–[201].
(ii) $336,000 from Bodkins trust account, from the sale of Wye Creek properties in 2000;
(iii) $154,265.18 from the balance in SLH’s account;
(iv) $1,000,768.13 from SBS, including $789,000 from the sale of Wye Creek properties by the Trust in 2001, plus interest of
$17,139,222 and $194,208 from the sale of Wye Creek properties
by the Trust in 2000 including interest; and
(v) $598,800 from a further loan from SBS.
(e) Accordingly, of the Trust’s income from the sales proceeds of Wye Creek, on a conservative estimate, I find the Trust advanced
$1,495,646 to SLH for the purposes of developing Dunstan Burn Station and purchasing Two Mile Station.223
(f) I also note all SLH’s loans to the Trust had been repaid by 30 June 2001. From the year ended 30 June 1999 to 30 June 2008, a net total of
$1,506,226 was loaned by the Trust to SLH.
[136] The plaintiffs seek to trace the Trust’s income that should have vested in the income beneficiaries, into the acquisition by SLH of Two Mile Station. I have found SLH cannot defeat a tracing claim as a purchaser without knowledge, because of Jack’s knowledge. In all the circumstances, I find the $1,495,646 of the Trust’s income from the sale of Wye Creek that was advanced to SLH as capital sums can be traced into SLH’s hands. How it should be dealt with from there, I consider in Issue 5 on remedies.
222 Greenwood Brief, above n 42, at [182] and KAG10.
Issue 2: Did SLH unconscionably receive vested income?
Relevant law of unconscionable receipt and unjust enrichment
[137] There is no disagreement between the parties about the essence of the law of unconscionable or knowing receipt, which developed as part of the law of equity. A person who knows, or is taken by the Court to have known, that he or she has received funds in breach of trust or a fiduciary duty, may be liable to repay those funds.
[138] But there has been uncertainty in New Zealand law about the sort of knowledge that is required to sustain a claim of knowing receipt.224 And this test of knowledge is different to the test of notice in tracing.225 In 2017 in McLennan v Livaja, the Court of Appeal noted there have been various High Court decisions with varying views on whether the basis for knowing receipt is unconscionability or unjust enrichment.226 The Court of Appeal found the forms of imputed knowledge required to establish a claim of knowing receipt are those set out by the Supreme Court in Westpac New Zealand Ltd v MAP and Associates Ltd regarding dishonest assistance:227 a dishonest state of mind which may consist in wilful blindness or “shutting one’s eyes to the obvious”.228
[139] The Court of Appeal in McLennan v Livaja also noted unjust enrichment has not found academic favour as a conceptual foundation of knowing receipt.229 The Court considered the correct basis for the doctrine is unconscionability and accordingly labelled it unconscionable receipt. This was on the basis that it amounted to personal liability to account in equity to the beneficiaries by restoring the property lost by the unconscionable receipt. It considered “the core duty of that liability is to
224 Tim Clarke “Knowing Receipt and Accessory Liability” in Andrew Butler (ed), above n 117, at 575, 584–585.
225 Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2010] EWHC 1614 (Ch) at [83]– [88]; the English Court of Appeal left this point open in Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347, [2012] Ch 453 at [106]–[107].
226 McLennan v Livaja [2017] NZCA 446, [2018] NZAR 405 at [39].
227 At [45].
228 Westpac New Zealand Ltd v MAP and Associates Ltd [2011] NZSC 89, [2011] 3 NZLR 751 at [27].
229 McLennan v Livaja, above n 226, at footnote 20 to [39] citing, for example: Charles Mitchell, Paul Mitchell and Stephen Watterson (eds) Goff & Jones: The Law of Unjust Enrichment (9th ed, Sweet & Maxwell, London, 2016) at [8–201]–[8–203]; Alastair Hudson Equity and Trusts (9th ed, Routledge, Milton Park, 2017) at [19.3.6]; and Rohan Havelock “The battle over knowing receipt” [2015] 26 NZULR 587 at 600–609.
restore misapplied assets, or their equivalent, to the beneficiaries”.230 As the Supreme Court characterised it in declining leave to appeal, the Court of Appeal “treated knowing receipt as met by unconscionability”.231 I am bound by, and also agree with, unconscionability being the foundation for such receipt actions. It is important to understand the conceptual foundations of such doctrines, which can affect their application to particular cases. That may well be so here.
[140] Counsel acknowledged there is significant academic literature on the nature and scope of unjust enrichment in the common law world. Without delving into that, as they did not, I record that I do not accept the submission that unjust enrichment cannot be a separate cause of action in New Zealand law. Unjust enrichment has different conceptual foundations than unconscionability, focussing more on defects in a plaintiff’s consent to a transaction, entitling restitution, rather than on the quality of the defendant’s conscience or conduct in retaining resulting enrichment.232 But neither do I consider the boundaries of unjust enrichment are clear in relation to knowing or unconscionable receipt as clarified by the Court of Appeal (or many other aspects of New Zealand law).233 In the United Kingdom, I interpret the authors of Goff & Jones: The Law of Unjust Enrichment as suggesting the different conceptual foundations of unjust enrichment and knowing receipt mean a knowing recipient’s liability may be more difficult to establish, but yield a greater measure of liability, than that of personal liability for unjust enrichment.234
[141] Finally, on this issue, SLH invokes a defence under s 74B of the Property Law Act 2007, which states:
74B Payments made under mistake of law or fact not always recoverable
Relief, whether under section 74A or in equity or otherwise, in respect of any payment made under mistake, whether of law or of fact, must be denied wholly or in part if the person from whom relief is sought received the payment in good faith and has so altered his or her
230 At [40].
231 McLennan v Livaja [2018] NZSC 1 at [4].
232 Jessica Palmer “Restitution” in Butler, above n 117, at ch 42.
233 Susan Glazebrook, Judge of the Supreme Court of New Zealand “Unjust enrichment: the platypus of private law” (paper following speech to 35th Annual Conference of the Banking & Financial Services Law Association, Queenstown, 1 September 2018).
234 Goff & Jones: The Law of Unjust Enrichment, above n 229, at [8-201]–[8-203].
position in reliance on the validity of the payment that in the opinion of the court, having regard to all possible implications in respect of other persons, it is inequitable to grant relief, or to grant relief in full, as the case may be.
[142] In the fourth cause of action, Mr Molloy submits SLH received payments from the Trust of $257,701 in interest, $104,000 in management fees and $1.4 million of vested income. He submits SLH knew, through Jack as sole director of SLH, it had been paid in breach of trust. He submits SLH therefore holds those amounts as constructive trustee for the plaintiffs or, alternatively and very briefly, SLH has been unjustly enriched by the amounts received and the plaintiffs seek restitution.
[143] Ms Robertson QC, for SLH, submits the plaintiffs failed to establish what was received by SLH, that any receipts were tainted by a breach of trust or fiduciary duty or that SLH had the knowledge necessary to found liability. She acknowledges SLH had knowledge of the transactions through Jack but submits there is absolutely no evidence Jack knew they were in any way unlawful or in breach of trust or fiduciary obligations. She submits SLH was entitled to be paid the interest on loans to the Trust, and management fees for SLH providing significant assistance in relation to the Wye Creek subdivision. She disputes the $1.4 million difference in the loan account from June 2000 to September 2007 being income to the Trust or vested income in particular income years. In relation to gross proceeds of sale of the Wye Creek properties of
$1,000,768.13, Ms Robertson submits it was not vested income because: it was loaned to SLH in the same year it was received by the Trust; it extinguished the Trust’s debt to SLH of $810,588 so SLH provided consideration; and any profit or income element of it was of a capital nature as it was proceeds of sale of a capital asset. She submits unjust enrichment is not a separate cause of action in New Zealand and the plaintiffs must be relying on “money had and received”, in respect of which she submits SLH was entitled to the change of position defence under s 74B of the Property Law Act 2007 and common law.
Did SLH unconscionably receive payments?
[144] I consider the evidence does establish what SLH received from the Trust. SLH received payments from the Trust, purportedly authorised by resolutions of trustees prepared by ICL, of:235 $254,745.68 in interest on loans to the Trust in the years ending 30 June 1997 to 30 June 2000; and $104,000 in management fees in the year ending 30 June 2000. As I found in Issue 1, the Trust advanced $176,438 to SLH to develop Dunstan Burn Station and, at least, another $1,319,208 to SLH for the purchase of Two Mile Station.
[145] As explained in Issue 1, on the balance of probabilities, I am satisfied Mr Thomson did not sufficiently consider and exercise the discretionary power to reserve income for the years ended 30 June 1994 to 2008, so the trustees did not make reservation decisions unanimously. The evidence of Mr Thomson’s involvement in decision-making on reservation decisions is also relevant to his involvement in the decisions on salary, management fees and loans challenged here.
[146] Mr Thomson did not concede there was no meeting or proper consideration of matters concerning the 2002 financial year.236 But, in his interrogatories, he did not recall resolutions, whether the meetings occurred or whether he attended them. He accepted he was not at the meetings concerning the 1993–2000 financial years, that he should have been present and should have signed the resolutions, but he said he did not know about the meetings.237 He accepted he was not involved in approving some transactions, such as approving interest payments to SLH in 1997 and 1998.238 For the 2000 financial year, he accepted that he had no input into the payment of a salary to Jack, or of interest to SLH, but did not accept that he had no input in the payment of a management fee to SLH.239 The evidence is not as clear in respect of the payment decisions as it is in respect of the reservation decisions. There is no evidence of a standing instruction by Jack to make these payments which are, of their nature, one- off decisions. But, on the balance of probabilities, I am satisfied the trustees did not
235 CB 2/400, CB 2/431, CB 2/455, CB 2/509 (interest payments); CB 2/509 (management fees).
236 NOE 406/12-28.
237 NOE 394/8–403/16.
238 NOE 399/3; NOE 399/28.
239 NOE 403/20–30.
unanimously approve the payments of interest, management fees and loans by the Trust to SLH either.
[147] And, again, I consider the decisions were driven by Jack and his knowledge that they were not taken according to proper process must be imputed to SLH. As Ms Robertson submits, Jack did not likely think there was anything wrong in the transactions themselves. Rather, he was determined they should occur. He was so determined, he by-passed his fellow trustee, Mr Thomson. Jack surely knew Mr Thomson should have been fully involved in the decision-making but he clearly was not. Through Jack, SLH shut its eyes to the obvious.
[148] Was it unconscionable for SLH to receive these funds? On one view of it, in terms of the decision-making process by which they were all advanced, and which SLH knew about through Jack, it was. But I consider there is a distinction between the interest payments and management fees, on the one hand, and the loans on the other.
[149] I accept Ms Robertson’s submission that SLH was entitled to be paid the interest on its loans to the Trust and the management fees for assistance in relation to Wye Creek. These payments were appropriately deducted from the Trust’s income rather than its capital. They were deducted before the residue of net annual income was reserved, as in those figures above. While the decision-making process for these payments was flawed, the funds paid had not vested in the income beneficiaries and there was reason for them. I do not consider receipt of the interest and management fee payments by SLH can properly be regarded as unconscionable, despite the process flaws.
[150] The loans were different. The loans were capital payments. But to the extent they were paid from Wye Creek proceeds, they were paid from income, which is a clear breach of the substantive terms of the Trust. That income vested in the income beneficiaries and Jack knew of the defects in decision-making which established that. It was not available to paid to SLH, as I found above. In all the circumstances, I consider it was unconscionable for SLH to have received and kept the loan payments from the proceeds of the Wye Creek properties. The cause of action of unconscionable
receipt by SLH is made out to that extent. The question of what discretionary remedy should be awarded is a separate matter, which I analyse under Issue 5.
[151] In terms of the sixth cause of action, I consider it unlikely that unjust enrichment would deliver the parties anything materially different from the way I have applied unconscionable receipt. That is also how counsel treated it in argument. If anything, fully analysed, unjust enrichment may be easier to establish. Given my conclusions on unconscionable receipt and, in Issue 5, on remedies, I do not need to deal with unjust enrichment. If I did, treating it as summarily as counsel did, I would find that SLH had been unjustly enriched, by the receipt of the proceeds of the Wye Creek properties, as loans, based on the same facts on which I base my conclusion about unconscionable receipt.
[152] While SLH pleaded the s 74B defence generically, Ms Robertson pursued it in closing submissions only in relation to the sixth cause of action. I do not consider SLH can claim the benefit of the defence of change of position under s 74B of the Property Law Act 2007 and its common law equivalent. With my findings above, I find Jack’s knowledge of the breaches, and his status as shareholder and director, means SLH did not receive payments in good faith. SLH did alter its position in reliance on the validity of the payments, but I do not consider that means it is inequitable to grant relief to the plaintiffs for that reason. The reliance by SLH on the the payments is reflected in its value as a company. That accrued to Tony as shareholder by virtue of having the entire capital of the Trust distributed to him.
Issue 3: Did Jack, Tony and Mr Thomson breach their fiduciary duties?
[153] I examine the plaintiffs’ first, second and third causes of action in terms of three sub-issues:
(a) Did Jack breach his fiduciary duties as trustee in approving payments?
(b) Did Tony breach his fiduciary duty as trustee to avoid conflicts of interest, in failing to reserve income?
(c) Did Jack and Mr Thomson breach their fiduciary duties as trustees by making a distribution to Jack as beneficiary?
Relevant law of trustees’ duties
[154] Because of their special positions of power in relation to beneficiaries, trustees owe them fiduciary duties of loyalty as well as ordinary equitable duties of care. Whether a duty is fiduciary in nature or not matters because fiduciary duties involve relatively stricter liability and have traditionally been seen to allow a wider range of potential remedies, among other things. Dr Andrew Butler summarises fiduciary duties at New Zealand law in this way:240
- (1) Core duties imposed by fiduciary law
The core duties that fiduciary law imposes are the duties:
(a) To avoid unauthorised personal profit or benefit from the relationship;
(b) To avoid conflict between personal interest and duty to the beneficiary;
(c) To avoid divided loyalties; and
(d) To report to the beneficiary the fact a breach of fiduciary duty has been committed by the fiduciary (albeit this duty appears to be still in its infancy).
...
(2) Duties of good faith and proper purpose not fiduciary duties as such
In addition to the specific duties noted above, it is often said that fiduciaries are required to:
(a) Act in good faith and for the interests of the beneficiary; and
(b) Use their powers for a proper purpose.
These latter two duties will clearly be breached by a violation of the more specific rules. Making a personal profit involves using a power for the improper purpose of self-interest, while divided loyalties mean that the interests of the beneficiary will be subordinated to the interests of another.
[155] Dr Butler summarises the prohibition on personal interest or profit in this way:241
240 Butler, above n 117, at [17.2.2] (footnotes omitted).
241 At [17.3.1](1) (footnotes omitted).
It is a breach of fiduciary duty for a trustee to make any profit (direct or indirect) from the trusteeship for himself or herself or a third party, whether made honestly or dishonestly, and whether or not the trustee’s profit-making actions produce a benefit for the beneficiaries. The no-profit rule is applied very strictly to trustees. A trustee is not entitled to receive remuneration for his or her trust work, unless authorised by the trust instrument (such an authorisation being strictly construed), or by a special agreement made between the beneficiaries (being sui juris) and the trustees.
[156] Garrow and Kelly quotes Vinelott J’s reference, in Re Thompson’s Settlement, Thompson v Thompson, to:242
... the wider principle that a man must not put himself in a position where duty and interest conflict or where his duty to one conflicts with his duty to another.
...
The principle is applied stringently in cases where a trustee concurs in a transaction which cannot be carried into effect without his concurrence and he also has an interest in or holds a fiduciary duty to another in relation to the same transaction. The transaction cannot stand if challenged by a beneficiary because in the absence of an express provision in the trust instrument beneficiaries are entitled to require that the trustees act unanimously and that each brings to bear a mind unclouded by any contrary interest or duty in deciding whether it is in the interests of the beneficiaries that the trustees concur in it.
[157] Professor Matthew Conaglen has made a persuasive academic case that the purpose of the fiduciary doctrine, rather than being moralistic, is to insulate the fiduciary from situations that involve a heightened risk of breach of non-fiduciary duties, thereby seeking to increase the likelihood of their performance.243 He analyses lines of Commonwealth authorities to characterise the “profit principle” (that a fiduciary must not make a profit out of a trust) as related to and drawing justification from a wider “conflict” principle (that a trustee must not be in a position where duty to the beneficiaries and personal interest conflict, without consent).244 As he says, in most cases where a profit has been made, there will have been a conflict.
[158] In Stevens v Premium Real Estate Ltd, a real estate agent case where there was no trust deed, a majority of the Supreme Court cited Bristol and West Building Society
243 Matthew Conaglen Fiduciary Loyalty: Protecting the Due Performance of Non-Fiduciary Duties
(Hart Publishing, Oxford, 2010) at ch 5.
244 At 114–125
v Mothew for the classic statement of the obligation of loyalty on fiduciaries that “[a] fiduciary ... must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal”.245 It also noted the duty of loyalty could be modified by the informed agreement or consent of the principal.246 This is a form of authorisation of the conflict.247
[159] Of course, a trust deed may expressly override the rule that trustees cannot deal with trust property for their own benefit. And a trust deed might do the same thing by implication. That is the best way of viewing the English line of authority that, where a settlor appoints a trustee knowing the trustee would thereby be placed in a situation of conflict between duty and interest, the conflict may be authorised.248 That is the law in New Zealand too, most directly recognised in Dever v Knoblach in a family trust context.249 Dobson J stated that appointment of beneficiaries as trustees by the settlor could be taken to infer recognition that they would participate in decisions in which they have a personal interest.250 But if that inference were not sustainable, then, he observed, “appointment as a trustee and the obligation for unanimous participation may require exclusion from benefit as a beneficiary, unless the trust deed permits otherwise”.251
[160] As the Garrow and Kelly text discusses, such an inference is unlikely to be sustainable in relation to trustees who are subsequently appointed by persons other than the settlor.252 Underhill and Hayton goes as far as to say it is not possible for a new trustee to rely on such an inference.253 Lewin on Trusts considers it does not apply to successor trustees apart from in exceptional circumstances.254 That makes sense.
246 At [72].
248 Conaglen, above n 243, at 204.
250 Dever v Knoblach (2009) 2 NZTR 19-042 (HC) at [47].
251 At [47]. See Garrow and Kelly, above n 99, at [20.183].
252 Garrow and Kelly, above n 99, at [20.184].
254 Lewin on Trusts, above n 118, at [20–177] and [20–181].
Appointment of the original trustees by the settlor when settling the trust may justify interpretation of the trust deed as authorising a conflict by implication, depending on the circumstances. The same rationale is not available in relation to subsequent trustees not appointed by the settlor, other than in exceptional circumstances.
Sub-issue 1: Did Jack breach his fiduciary duties?
[161] Mr Molloy, for the plaintiffs, submits Jack breached fiduciary duties to the plaintiffs by causing, or agreeing to, the Trust not charging interest on large sums of funds it advanced to SLH and paying or crediting to SLH: $254,745.68 of interest;
$104,000 of management fees; and at least $1.4 million of income (including vested income). He submits Jack had a material personal interest in SLH as a shareholder, the sole director and substantial creditor, and because he received regular salary and director fees and lived on a property owned by SLH. He submits Jack breached his duty to act in the best interests of the beneficiaries, including the income beneficiaries. He also submits the salary payments made to Jack breached cl 22 of the Trust Deed.
[162] Ms Chambers, for Tony as administrator and trustee of Jack’s estate, submits the steps complained of are usual practice in the way trusts are run in New Zealand, are often seen as prudent, and can obtain advantage for the Trust as a whole and, accordingly, the beneficiaries. She submits the plaintiffs are taking an artificial view of the distinction between the Trust and SLH, since the Trust owned 98 per cent of SLH and benefits for SLH flowed directly to benefitting the Trust.
[163] “Usual practice” is an unreliable guide to legal obligations. But here, Jack was not the direct receiver of the profit. Jack held 1000 of the 45,000 shares in SLH – just over two per cent. The rest were held by the trustees on behalf of the beneficiaries. The extent to which Jack profited personally from the impugned transactions has not been quantified, but the relative size of his interest was small. The vast majority of the benefit to SLH of transactions with the Trust accrued to the beneficiaries of the Trust, however that was distributed amongst them. Mr Molloy’s argument would rule out Jack’s involvement as trustee with any transaction that profited SLH. And I cannot be satisfied of the amount of any “profit” accruing to Jack personally from each of these decisions, taking into account the extent of his efforts on behalf of the Trust and
SLH. In these circumstances, I do not consider Jack breached his fiduciary duties as trustee in not charging interest on sums advanced by the Trust to SLH or by making payments or credits to SLH. If I am wrong, and he did, I would not award relief for these decisions.
[164] Jack did profit directly from the salary payments of $115,000, credited to him by the Trust in 2000 and 2001.255 He could only do that lawfully, contrary to the profit principle, if the Trust Deed allowed it. That depends on whether Jack was, in the words of cl 22, an “other person engaged in any profession business or trade”. The salary payments related to periods when the Trust was engaged in business of property development at Wye Creek and farming at Dunstan Burn Station. I accept the evidence shows that, at the relevant times, Jack was engaged in those businesses.256 I consider he was authorised by the Trust deed to draw a salary accordingly.
Sub-issue 2: Did Tony breach his fiduciary duty against conflicts of interest?
[165] Mr Molloy, for the plaintiffs, submits Tony breached his fiduciary duties as trustee by having an acute conflict of interest between his own interests as capital beneficiary, in the capital of the Trust, and the interests of the plaintiffs as income beneficiaries. He submits Tony should never have accepted appointment and the conflict manifested in the failure to set aside any income to income beneficiaries and purporting to reserve net income in the years ended 30 June 1991 and 1994. He submits Tony should account for the net income in those years to the plaintiffs.
[166] Ms Chambers submits the claims about Tony reserving income add nothing to the claims treated in Issue 1 above and there was no obligation on the trustees to distribute income as that was a decision for the trustees in their absolute discretion.
[167] I agree Tony’s appointment as trustee gave rise to an acute conflict of interest between his interests as sole capital beneficiary, which had vested, and the interests of the income beneficiaries. Tony’s appointment as trustee on 7 November 1986, when the capital had been appointed to him on 12 August 1985, put him in an impossible
255 CB 2/509, CB 2/610.
position. The income reservation decisions during Tony’s trusteeship benefited him directly, since he had a vested interest in the Trust’s capital. It is insufficient for him to say he was assiduous in bearing in mind the circumstances of the other income beneficiaries. He should not have been in a position where his personal interest conflicted with his duty to exercise his discretion by considering the interests of the other income beneficiaries. The conflict principle of the fiduciary duty of loyalty is strict in requiring such situations be avoided, in order to ensure trustees are able to perform their duties.
[168] Although it was not suggested, I do not consider the fact the conflict was known before Tony was appointed makes any difference to the conflict or his duty to avoid it. He was not appointed by the settlor as an original trustee. His subsequent appointment does not colour the interpretation of the meaning of the Trust deed. No such inference is sustainable.
[169] Tony’s evidence is that he does not recall being aware the capital of the Trust was appointed to him until the days leading up to the distribution of the capital to him in September 2007.257 But I do not find his evidence credible in this regard. Tony sought to convey an impression of diligence in reviewing the Trust documents when he became a trustee in 1986.258 He said, under cross-examination, he does not recall knowing in 1986 he had been appointed the sole capital beneficiary, that it was not the focus of his responsibilities which was his siblings, he was idealistic about his obligations and he has a clear recollection of being aware he had to consider the other beneficiaries as part of the ongoing aspect of the Trust.259
[170] Yet, on 9 June 2008 Tony wrote to Mr Griffin of Ross Dowling Marquet Griffin to explain the distribution. Tony stated the distribution of the Trust had been Jack’s plan “for around 25 years or more” and “[a]ll steps taken were designed by my father for many years prior and re-enforced to myself, his lawyer, accountant, members of his own immediate family, and others for these many years”.260 He went on to say in the letter that the formal process of handover began on 2 October 2006 with a meeting
257 Tony’s Brief, above n 24, at [56].
258 NOE 312/3–4.
259 NOE 313/8–9, 314/4–12.
260 CB 4/1107.
at Bodkins in Alexandra and “we” met again in 2007 and then at ICL. And, in 2002, ICL had copied to Tony its advice about the winding up of the Trust which would clearly involve transfer of the assets to Tony as sole capital beneficiary. Under cross- examination, Tony stated he was aware of Jack’s intent in relation to the farm but he had not analysed the implication of him being a capital beneficiary and the letter was written in hindsight on the basis of the documents at the time.261 This is not credible. And Mr Thomson cannot say for sure whether Tony was aware of the allocation but said he “would be surprised if he was not told” and, under cross-examination, said he was surprised Tony said he did not know.262
[171] The only reason why the profit and conflict principles would not void the reservations decisions while Tony was a trustee is if he made full disclosure to the beneficiaries who were fully informed and consented. Here, there is conflicting evidence of what Tony’s siblings knew about the Trust and their status as beneficiaries under it. If it were necessary, I would find that Tony’s siblings did not know they were beneficiaries of the Trust until after Jack’s death, except for Terry being told by Mr Griffin in 2008, for the same reasons I traverse in relation to Issue 5 below. But it is not necessary, because there is no suggestion that Tony’s siblings, the plaintiffs, ever consented to Tony’s conflict of interest.
[172] I consider the plaintiffs have proved, on the balance of probabilities, Tony had a conflict of interest that should have been avoided, when he was a trustee while also being capital beneficiary. Accordingly, the purported decision of Jack and Tony, as trustees, to reserve income of $492 in the year ended 30 June 1991, was invalid for that reason. That amount was not validly reserved and, as such, vested in the income beneficiaries.
Sub-issue 3: Did Jack and Mr Thomson breach their duties by making a distribution to Jack?
[173] It is a clear breach of trust for trustees to authorise distribution of trust funds to a non-beneficiary, as a beneficiary. Yet that is what Jack and Mr Thomson are recorded as having done for the year ending 30 June 2005 in allocating $10,379 to
261 NOE 352/7–24.
262 Thomson Brief, above n 2, at [23]; NOE 426/20
Jack as a beneficiary.263 Mr Thomson agreed he was not involved in the recorded decision to allocate trust funds to Jack as a beneficiary in 2005 and he did not consider Jack would have turned his mind to it. To make matters worse, this is one of the few resolutions that is recorded as being signed by both of them but it appears to have been signed retrospectively in late 2006.264 Mr Thomson concedes that was an error. The distribution was not paid but was treated as an advance by Jack to the Trust.
[174] Mr Molloy submits this was a breach of trust, which benefited Jack. He seeks an order for equitable compensation on the basis it would have vested in the income beneficiaries if it had not been paid to Jack. Ms Chambers acknowledges the distribution was a breach of duty but submits it was later corrected.
[175] In Issue 1 above, I did not consider the decision to make a distribution to Jack was properly made by Mr Thomson and Jack in 2005. The legal error is so blatant I do not consider Mr Thomson was involved in the decision at the time it was purportedly made. I consider it was most likely driven by Jack and the accountants. But, if it had been made, it would have been a clear breach of trust.
[176] I do not accept the breach was corrected. Mr Dykes’ evidence was the beneficiary account wrongly created for Jack was subsequently reduced to zero but he did not know how that figure was then treated in the accounts and guessed it would have been debited against Jack’s name through his loan account.265 Jack received the benefit of the distribution through the loan recorded as owing to him, including this amount, being paid off.
Issue 4: Limitation
[177] The parties agree the Limitation Act 1950 applies to the causes of action in this proceeding. The usual limitation period, after which claims to recover trust property or in respect of a breach of trust may not be brought, is six years under s 21(2). Claims
264 CB 3/967; CB 4/1013–1015; CB 4/1019-1020.
265 Dykes Brief, above n 54, at [27].
for equitable relief are subject to an analogous time bar under s 4(9), unless that is inequitable.266 The plaintiffs here rely solely on s 28 as postponing the limitation period for fraud or mistake. It provides, relevantly:
28 Postponement of limitation period in case of fraud or mistake
Where, in the case of any action for which a period of limitation is prescribed by this Act, either—
(a) the action is based upon the fraud of the defendant or his agent or of any person through whom he claims or his agent; or
(b) the right of action is concealed by the fraud of any such person as aforesaid; or
...
the period of limitation shall not begin to run until the plaintiff has discovered the fraud or the mistake, as the case may be, or could with reasonable diligence have discovered it:
Provided that nothing in this section shall enable any action to be brought to recover, or enforce any charge against, or set aside any transaction affecting, any property which—
(d) in the case of fraud, has been purchased for valuable consideration by a person who was not a party to the fraud and did not at the time of the purchase know or have reason to believe that any fraud had been committed; ...
[178] In relation to s 28:
(a) The parties agree references to “fraud” includes equitable fraud, including breach of fiduciary duty.267
(b) Concealed fraud requires something unconscionable on the part of the defendants. All the facts constituting the cause of action must be discovered for time to start running including, in respect of a fiduciary duty to disclose, “[k]nowledge of the circumstances giving rise to a duty to disclose and a failure to disclose”.268
266 Johns v Johns [2004] NZCA 42; [2004] 3 NZLR 202 (CA).
267 Official Assignee of Collier v Creighton [1993] 2 NZLR 534 (CA) at 538.
268 At 538–539.
(c) In the United Kingdom, the equivalent to s 28(a) has been interpreted to include, as a person through whom a defendant claims, “an innocent volunteer, receiving payment from a fraudulent trustee”, such as a company receiving stolen funds from a fraudster.269
[179] Where periods of limitation are not prescribed by the Act, an analogous postponement of limitation applies under the law of equity. The traditional rule required the plaintiff to have had actual knowledge of the fraud (or the facts establishing fraud) or, at the least, to have had suspicions aroused but deliberately failed to inquire further. Butler and Every-Palmer suggest that the less strict test in s 28 should apply by analogy, so that the limitation period starts to run when the plaintiff discovers the fraud, or could have discovered it with reasonable diligence.270 I agree.
[180] Section 31 of the Act preserves the Court’s “equitable jurisdiction to refuse relief on the ground of acquiescence or otherwise”. The prejudice to a defendant by a plaintiff allowing time to pass is referred to, anachronistically by lawyers, as laches and falls within the “otherwise” in s 31. Whether laches is made out depends on the overall balance of justice on the basis of the facts of a case.271 Relevant factors include the nature of the remedy sought, the position of the plaintiff, prejudice to the defendant or a third party, evidential difficulties and the nature of the transaction involved.
[181] Mr Molloy submits the limitation period against all defendants started running on 18 December 2015, when the plaintiffs received copies of the financial statements or, at the earliest, by 4 February 2015 when they received a copy of the trust deed. He submits the causes of action against Tony, Mr Thomson and SLH were extended under s 28(a) or (b). He submits limitation for the causes of action against SLH are extended because those provisions include third parties even if they did not commit or conceal the fraud. Failure to disclose a cause of action where there is a fiduciary duty of
269 Lewin on Trusts, above n 118, at [44-142] (discussing s 32(1)(a) of the Limitation Act 1980 (UK));
G L Baker Ltd v Medway Building and Supplies Ltd [1958] 1 WLR 1216 (Ch) at 1223.
270 Andrew S Butler and James Every-Palmer, in Butler, above n 117, at [38.1.3(6)].
271 At [38.1.4].
disclosure amounts to fraudulent concealment under s 28(b). Mr Molloy submits the doctrine of laches does not apply as the defendants have not been prejudiced by the delay.
[182] Mr Upton, for Tony and Mr Thomson, submits any breaches of trust by them were entirely innocent and inadvertent and only while acting in ways they honestly believed to be appropriate and in the best interests of the Trust. He submits the evidence is clear that, with reasonable diligence, the plaintiffs could have discovered their claims in or around 2008, in light of the context of their childhood knowledge of the Trust. He submits that put them on notice to make reasonably diligent enquiries, which they did not because they consciously chose to delay the proceeding until their father had died. Regarding laches he submits the delay has been inordinate and calculated and has caused significant but knowable prejudice because documents are missing, Jack has died and Mr Thomson and Mr Cooney are now elderly.
[183] Ms Robertson, for SLH, submits s 28 does not extend the limitation periods of the causes of action against it because SLH’s actions are not based on fraud or concealment of fraud. She submits, in relation to s 28(b), concealment must be wilful, where the defendant knows all the facts constituting the cause of action. She submits SLH did not have sufficient knowledge of any equitable fraud to conceal it. At most, she submits, SLH was passive in not disclosing facts, rather than actively and dishonestly concealing. She submits the evidence is that Jack believed he was complying with, and exercising his powers under, the deed. Ms Robertson also submits the proviso to s 28 applies to SLH as it provided valuable consideration, was not a party to any alleged fraud and did not know or have reason to believe that any fraud had been committed (and that was not pleaded). She submits SLH purchased Two Mile Station in good faith, without notice of breach of trust, has spent considerable time and money on it. In relation to laches she submits a remedy against SLH is completely unworkable after all this time, there has been a significant change of position which would prejudice SLH, there is significant evidentiary prejudice and the delay of 12 to 19 years is significant.
The siblings’ knowledge of the Trust
[184] Mr Thomson’s evidence is that he always understood the plaintiff siblings were aware of the Trust and their status as beneficiaries. He never considered they would not know and said he would be extremely surprised if they did not but, in retrospect, he does not have clear evidence of their knowledge.272 There is a conflict in the evidence of Wayne, Terry, Cathie and Shell, on the one hand, and Tony on the other, as to the extent Tony’s siblings were aware of the Trust.
[185] Wayne’s evidence is that he recalls, as an early teenager around 1976, knowing a building had been put in a trust for Jack’s children but he did not understand what a trust was or that he was a beneficiary.273 Under cross-examination, Wayne said he knew there was a trust for the children and understood he had an interest in the Athol Street property, but did not know what a “beneficiary” was.274 He recalls Jack talking about the assets and the farm and property but not about the Trust.275 Wayne did not feel he was in a position to talk to Jack about the Trust, due to the nature of their relationship and Jack’s paranoia.276 It did not occur to him the farm was in the Trust.277 In 2008, Wayne, who was living in Canada, knew that Terry was assisting Jack to get legal advice but Wayne did not instruct a lawyer himself and says, at the time, he did not see a reason to do so.278 In November 2008, Wayne learned the farm had been given to Tony and was not comfortable with that.279 Wayne first learned the Trust had been distributed to Tony in November 2014 when Mr Thomson gave him and his siblings the will and documents about the Trust and Terry gave him documents he had received from Mr Griffin in 2008.280 Wayne first obtained a copy of the Trust Deed from Ross Dowling Marquet Griffin in February 2015.281
272 Thomson Brief, above n 2, at [35].
273 Wayne’s Brief, above n 3, at [30].
274 NOE 30/15–27.
275 NOE 31/26–30.
276 NOE 33/27–34.
277 NOE 38/31
278 NOE 46/18–21, 79/4–5.
279 NOE 25/5–6, 26/12-14
280 Wayne’s Brief, above n 3, at [33]–[35].
281 Wayne’s Brief, above n 3, at [42].
[186] Cathie’s evidence is that she had no knowledge of the Trust growing up and was unaware of it, its assets and how it was administered.282 She says Tony never expressly referred to the Trust and, while he used to talk about himself as trustee, when he was in Australia and afterwards, she thought that was because he was managing things or had power of attorney for Jack.283 Cathie was aware Jack thought Tony had taken the farm off him in 2007 or 2008 and that Jack was going to a lawyer but did not consider she had enough information to make a judgement about it and did not think she should get a lawyer.284 She says Tony, NZGT, Jack, and Mr Thomson never told her she was a beneficiary and she had never received any information about the Trust until Mr Thomson provided the siblings with information after Jack’s death.285
[187] Terry’s evidence is that he had limited information about the Trust prior to Jack’s death.286 He remembered Jack saying he had given a building in Queenstown to the children, but could not recall Jack ever telling him it was in a trust.287 In evidence-in-chief he said, in 2007, he did not know anything about the Trust aside from the fact it existed and even after he received the documents from Mr Griffin in 2007 he “still had very little knowledge of the Trust and how it operated”.288 Under cross-examination, Terry acknowledged he remembered a truck on the farm with the Trust name on it in 2007, but he didn’t know what a trust or a beneficiary was or the difference with a will.289 Terry says he was never contacted by any of the trustees about the Trust or his position as a beneficiary.290
[188] There is a suggestion in a file note by Mr Griffin of a conversation with Terry on 9 April 2008 that Terry was thinking of getting his own lawyer to look into the situation “from his point of view”.291 Under cross-examination Terry said he was not considering doing that in the immediate future, he could not afford it and he asked Mr Griffin to hold the documents because he thought there might be a legal dispute
282 Cathie’s Brief, above n 7, at [37], [44].
283 Cathie’s Brief, above n 7, at [39]; NOE 92/1–20, 93/5.
284 NOE 95/6–10, 96/12–97/13.
285 Cathie’s Brief, above n 7, at [39], [42].
286 Terry’s Brief, above n 8, at [6].
287 Terry’s Brief, above n 8, at [37].
288 Terry’s Brief, above n 8, at [24] and [39].
289 NOE 102/33–103/9.
290 Terry’s Brief, above n 8, at [44].
291 CB 8/2389.
after his father passed away.292 On 29 September 2008, Mr Griffin wrote to Terry, saying Jack had approved sending copies of various documents to Terry and enclosing letters about the current legal situation.293 The letter summarised that the 1974 Deed of Trust provided the income was to be divided among Jack’s children but stated that in 1985 Jack signed a deed appointing all of the capital to Tony, that in 2007 Jack entered a deed of distribution providing all the capital would vest in Tony and that Jack’s will left everything to Tony, concluding “[a]s you can see Terry there are some very major problems”.294
[189] Terry did nothing about this. Under cross-examination he explained he did not know what a trust was, or the legal jargon. He was sceptical at the time of whether the trust assets had been given to Tony, because of what Jack was saying.295 He acknowledges he knew there were major problems in Mr Griffin’s view but says the letter did not alarm him much and he did not tell his siblings with whom he was not in regular contact. He did not think it was right to interfere in his father’s affairs. He just figured he would have to seek advice later on, particularly about the will, after Jack had died.296 Terry says he was not trying to aggressively pursue his father’s money in 2008, which he felt would be a disrespectful thing to do. He was worried that if Jack got control of the property back he would go back to the farm which would not be good for anybody.297 Wayne’s evidence is that Terry did not talk to him about any of this before Jack’s death, aside from talking about 44,000 shares in SLH being transferred.298 Wayne says Terry did not seem to have a good grasp of it. Shell’s evidence under cross-examination corroborates that.299
[190] Shell’s evidence is that, in one conversation when he was young, Jack referred to a trust he had set up for the children, but he did not understand trusts, what this one owned or how it was managed.300 He says Jack, maybe twice, mentioned something about a trust and he thought it had something to do with the Athol Street building and
292 NOE 114/7–29.
293 CB 4/1160.
294 CB 4/1161.
295 NOE 119/26–27, 120/20–23, 123/12–17.
296 NOE 121/2, 122/4–123/8.
297 NOE 139/29–32, 140/29–141/4.
298 NOE 78/5–15.
299 NOE 160/25–34.
300 Shell’s Brief, above n 5, at [12]–[13]; NOE 149/1–6, 151/31.
another building, but he does not remember Jack explaining what the Trust was.301 He says Jack talked about his property, not the Trust’s property and also talked about SLH and by 2008 he knew SLH owned the farm.302 It never occurred to Shell that the farm was owned by a trust.303 Shell says he was never contacted by any trustee about his position as beneficiary of the Trust.304 Shell says the first time he received any documents and specific information about the Trust was from Mr Thomson after Jack’s death.305 Shell says he understood from Tony that Tony would inherit SLH which owned all of Jack’s assets.306
[191] There is no evidence of Adrian’s knowledge of the Trust.
[192] Tony’s evidence is there were many occasions on which Jack talked to the children about the Trust when he was growing up, they could not be unaware of it and were fully aware they were beneficiaries.307 He says he and his siblings were present at some lunches Jack had with Mr Thomson when business, including the Trust, was discussed.308 None of the other siblings recall such lunches. Tony says his siblings inevitably asked about the Trust on family gatherings, such as Christmas 1993 and with Wayne in September 2006 when he was asked a barrage of questions about earnings and financial details and he did not have the answers, felt stupid and described the basics of Jack’s activities and investments.309 The other siblings do not recall such discussions.310
[193] Tony says Jack told him that he had made Terry aware of the winding up of the Trust in December 2007, had made Wayne aware of it in January 2008, and had made Shell aware of it in January 2008.311 Terry says that was later, after Jack had moved to Christchurch, which he guessed was March 2008.312 Wayne says Tony never
301 Shell’s Brief, above n 5, at [38]–[39].
302 Shell’s Brief, above n 5, at [42]; NOE 157/20, 158/18–19.
303 NOE 165/10–11
304 Shell’s Brief, above n 5, at [49].
305 Shell’s Brief, above n 5, at [44].
306 Shell’s Brief, above n 5, at [45].
307 Tony’s Brief, above n 24, at [16]–[23].
308 Tony’s Brief, above n 24, at [17].
309 Tony’s Brief, above n 24, at [20], [23]; NOE 333/1–26.
310 NOE 14/13–18.
311 Tony’s Brief, above n 24, at [24], [26], [27].
312 NOE 128/15–129/1; NOE 143/9–12
discussed the Trust with him until after Jack died.313 Shell says there was no information or communication about the Trust between 1985 and 2014.314 Tony considers his siblings were quite clear they understood they were beneficiaries of the Trust, without using that particular term.315 He says he did not talk to them about the beneficiary side of the Trust because there was nothing he felt he needed to make them aware of.316 He finds the claim his siblings did not know about the Trust extraordinary and considers there is no truth to that whatsoever.317
Are the plaintiffs out of time?
[194] Whether the plaintiffs are out of time in bringing their claims depends primarily upon whether there was a fraudulent breach of trust or the right of action has been fraudulently concealed under s 28, and whether the proviso to s 28 applies.
[195] Breaches of fiduciary duty amount to equitable fraud, which satisfies s 28(a). These include the first, second and third causes of action against Jack, Tony and Mr Thomson for breaching their fiduciary duties (though I have found the first failed). To the extent I have found it successful, the fourth cause of action against SLH, unconscionable receipt, also qualifies because it is based on unconscionability. And Mr Thomson’s breach of the duty of impartiality in relation to reservation decisions, under the fifth cause of cause, also qualifies as equitable fraud for the purposes of s 28(a).
[196] In any case, I am satisfied all the rights of action were fraudulently concealed under s 28(b). The duty of disclosure on trustees is a fiduciary duty. But there is a question as to its extent. Lewin on Trusts considers trustees have “a duty to take reasonable steps to inform an adult beneficiary with a future vested, vested defeasible or contingent interest under the settlement of its existence and the general nature of his interest under it, as soon as reasonably practicable after the interest comes into existence, unless the trustees reasonably believe that by reason of the remoteness of the interest the beneficiary has no reasonable prospect of successfully asserting rights
313 Wayne’s Brief, above n 4, at [32].
314 Shell’s Brief, above n 6, at [41]–[44].
315 NOE 325/29–326/2.
316 NOE 332/7–11.
317 NOE 340/5–6.
to information on demand ...”.318 The authors then say that “generally similar considerations apply to discretionary beneficiaries ... In the case of discretionary trusts and powers which are presently operative or exercisable, there is an additional reason for disclosure, in that a proper consideration of an exercise of discretion from time to time may well involve communication with discretionary beneficiaries who have a realistic prospect of benefiting under the trust and power so that account can be taken of the beneficiaries’ needs and requests for consideration”.319 They consider disclosure should normally be limited to those discretionary beneficiaries who are, in the circumstances, real potential candidates for benefit in the proper exercise of discretion under the trust. They consider the information that should be given is information about the general nature of the beneficiary’s interest, including the conditions attached to it, but not advice or explanations about the legal implications or effect.320
[197] The extent of the duty of automatic disclosure has not yet been clearly determined in New Zealand. But, in considering an argument about disclosure in response to requests by a discretionary beneficiary, in Erceg v Erceg, the Supreme Court stated “[i]n the normal run of things, trustees will provide [copies of trust documents demonstrating how the trust has been administered and managed and what has become of the trust property] to close beneficiaries on request or proactively, without the need for a request”.321
[198] The plaintiffs here may have had some dim awareness there was a trust, in their childhood, but I do not consider they were aware of what that meant as far as their own status or beneficial interests were concerned. I am satisfied, on the evidence, none of the defendants took steps to advise the plaintiffs they were beneficiaries with an interest in the Trust property, the nature of their interest or, in 2007, that the Trust property was distributed. I consider the duty of disclosure on trustees does extend, at least in the circumstances of a family trust where there are a limited number of identified beneficiaries, to advising discretionary beneficiaries of those matters, even when property has not yet vested in them. In any case, I have found income vested in
318 Lewin on Trusts, above n 118, at [23-008].
319 At [23–009].
320 At [23-012].
321 Erceg v Erceg [2017] NZSC 28, [2017] 1 NZLR 320 at [62].
the plaintiffs in 1991, 1994 to 1996, 1999 to 2002, 2005 and 2008. And furthermore, until 1985, all the children were capital beneficiaries with vested future interests, subject to divestment. There was also a duty of disclosure for these reasons. The plaintiffs’ rights of action here were concealed by equitable fraud under s 28(b) and equitable analogies.
[199] In the absence of any clear information about the trust, and their interest in it, I do not consider it is reasonable to expect the plaintiffs to have discovered the fraud with reasonable diligence until November 2014. Having seen, heard and considered the evidence, I accept the plaintiffs’ evidence, rather than Tony’s, as to whether and when they knew about the Trust. The plaintiffs did not know enough about the Trust to know they were beneficiaries or to have any real appreciation of what that meant. Neither did they know of trustee decisions that impacted on their interests as income beneficiaries or, even, of the distribution of the Trust in 2007.
[200] On 21 November 2014, the plaintiff siblings received from Mr Thomson the deed of appointment, deed of distribution, schedule of deeds and statement of financial position of the trust as at 30 September 2007.322 On the same date, Wayne also received from Terry the Ross Dowling letter of 29 September 2008, which he emailed to Shell and Cathie. The limitation period started running for them in November 2014. But I consider the documents Mr Griffin sent to Terry on 29 September 2008 put Terry on notice then that he was a beneficiary of a trust, the capital of which had been distributed to Tony and in respect of which there were legal issues. That was sufficient to start the limitation period running for Terry then. He should have made inquiries about the situation, if he wanted to. But I am satisfied the other plaintiffs were not told of that information until November 2014 at the earliest. So while Terry’s claim is out of time, the claims of the other plaintiffs are not.
[201] In relation to the proviso to s 28, I consider SLH did have reason to believe equitable fraud had been committed because of Jack’s knowledge. This is for the same reasons I found the income from the sales proceeds of Wye Creek can be traced into
322 Wayne’s Brief, above n 3, at [33].
SLH’s hands under the fifth cause of action and SLH unconscionably received the loans of those proceeds.
[202] Laches is primarily relevant to the breach of trust in relation to the reservation decisions under the fifth cause of action. I am not persuaded the defendants have suffered such prejudice from delay as would justify refusing relief under s 31 of the Act. That is particularly so given the defendants’ failure to take any steps to advise the plaintiffs of the circumstances which ground their causes of action. While it is true that three sets of financial statements are missing, and Jack’s testimony is not now available, net annual profit and loss figures are available and the testimony of the other trustees and accounting experts is available and is the basis for my judgment. If there had been insufficient evidence on which to assess the claims, that would have disadvantaged the plaintiffs, as it did in relation to their claims against NZGT, which they abandoned.
[203] I do not consider the claims of the plaintiffs, other than Terry, are out of time.
Defence of honest and reasonable trustees
[204] Section 73 of the Trustee Act 1956 provides, relevantly:
73 Power to relieve trustee from personal liability
If it appears to the court that a trustee ... is or may be personally liable for any breach of trust ... but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the court in the matter in which he committed the breach, then the court may relieve him either wholly or partly from personal liability for the same.
[205] The parties agree s 73 grants the Court a discretion to relieve a trustee from personal liability who has acted honestly and reasonably and it is fair to excuse the trustee for breach of trust and for not seeking directions from the Court. Honesty is assessed on the basis of whether the trustee knew the relevant terms of trust and that the impugned conduct amounted to a breach of trust.
[206] In relation to s 73, Mr Molloy submits the non-payment of income vested in the plaintiffs is a fundamental breach of the terms of the Trust. Mr Thomson, as a
professional trustee, failed to consider income beneficiary interests, never considered the capital/income distinction and never contacted the plaintiffs even when the Trust was finally wound up.
[207] Ms Chambers submits the defendants acted honestly and reasonably throughout their trusteeship. The decision to allocate reserves was based on a reasonable interpretation of their powers under the Trust deed and was an appropriate financial decision. Any breaches of trust were committed innocently and only while acting in ways they honestly believed to be appropriate and in the best interests of the Trust. Setting aside reserves did not build up the capital asset of the Trust but retained funds available for use, so Tony’s actions were not self-interested. This is not a case of calculated or deliberate wrongdoing but, if liability is made out, a case where trustees have acted in accordance with a reasonable but incorrect understanding of their obligations.
[208] I do not consider any of the trustees deserve the benefit of the s 73 defence. Tony’s conflict of interest was palpable. Jack and Mr Thomson must have been quite clear Jack was not a beneficiary. Mr Thomson’s participation in the trustee decision- making, in respect to which I have upheld challenges, was entirely unsatisfactory and Jack knew, and likely engineered, that.
Issue 5: What remedies should be granted?
[209] Remedies were developed piecemeal in the law of equity in relation to different causes of action, especially in response to particular gaps in the common law. But I consider the law of equity in New Zealand is now so mingled with common law that a range of remedies is available, whatever the cause of action.323 Relevantly, that may include orders for equitable compensation or damages. In general, the judicial discretion to grant equitable remedies should be exercised so as to do justice in the circumstances of the particular case. To the extent reasonable and practical, the purpose of equitable damages, in particular, is to restore successful plaintiffs to the
real position in which they would have been if the inequitable wrongdoing had not occurred.324
[210] In this case, the parties agree interest is payable on the whole or part of any judgment sum under the Judicature Act 1908, for the whole or part of the period from when the cause of action arose and the date of judgment, at the discretion of the judge. Exercise of that discretion will depend on what is just in the circumstances. I note s 87 of the Judicature Act 1908 allows for the Court to award interest until the date of judgment but does not extend to “interest upon interest”. In its equitable jurisdiction, the Court may award compound interest anyway, if the money claimed has been used in trade or commerce and profit equal to, or greater than, the compound interest, was made.325
[211] Mr Molloy submits:
(a) If the net annual income, which he submits totals $2,084.578, vested in the plaintiffs but was not paid to them, the plaintiffs should receive five- sixths of that plus compound interest from the date it vested. If it was capital or reserved, but the duty of impartiality was breached, they should receive equivalent equitable compensation.
(b) Tony must account to the plaintiffs for reserves purportedly set aside while he was trustee, as he benefitted from them as sole capital beneficiary.
(c) The plaintiffs are entitled to equitable compensation for the $10,379 wrongly paid to Jack as beneficiary, from Tony, as executor of Jack’s estate and from Mr Thomson.
324 Butler, above n 117, at [32.3.1]; Chirnside v Fay [2004] NZCA 111; [2004] 3 NZLR 637 (CA) at [67].
(e) Five-sixths of the $1,336,347 of vested income advanced to SLH, applied to the purchase price for Two Mile Station and traced into 63.64 per cent of that purchase price, should now be held as that percentage of the value of Two Mile Station on constructive trust for the plaintiffs.
[212] Mr Molloy submits interest should be charged on a compound basis, relying on Re Emmet’s Estate.326 Ms Chambers submits any interest should only be awarded from the date proceedings were commenced, or there should be some other reduction in the period over which interest is charged. She submits there was an exceptional delay to the plaintiffs bringing their claim, given they knew about the Trust as children and ought to have known about it, at the latest, in 2007/2008. She submits any interest should be awarded on a simple rather than compounding basis because the Trust property has never been in the direct possession of the defendants and the tracing claim already takes into account the time value of money.
[213] Ms Robertson submits there is no valid claim to a constructive trust in respect of the Trust money that was used by SLH for purchase of Two Mile Station.
[214] Cathie, Adrian, Wayne and Shell are successful plaintiffs, as income beneficiaries, and deserve relief. Terry was unsuccessful in his claim because he was out of time. Tony was also an income beneficiary and the plaintiffs do not seek to deprive him of the share he would have been entitled to as an income beneficiary. What remedies should I grant, in the interests of justice in the circumstances of this case and, to the extent possible, to restore them to the position in which they should have been?
326 Re Emmet’s Estate (1881) 17 Ch D 142 (Ch).
[215] There is a question of principle about what to do in relation to the share of the income that should have vested in Terry, his claim to which has failed. If the total vested income is split into sixths, and Terry’s is allocated to the successful plaintiffs, then they gain more than they should. But if it is not allocated to them, then Tony is left with more than he should. In general, where I order payment by Tony or entities owned by, or for the benefit of, Tony, I consider it most equitable to divide the vested income into fifths and to allocate four-fifths of it to the successful plaintiffs, leaving one fifth with Tony. Where I order payment by others, such as by Jack’s estate or Mr Thomson, I allocate four-fifths to the successful plaintiffs. Because Tony has made no claim to those amounts, and resisted them, I do not allocate any to him (and, in the case of the estate, he may inherit the other one-fifth anyway).
[216] First, in Issue 3, I found Tony breached his fiduciary duty as trustee to avoid a conflict of interest in participating in a decision to reserve $492 of income in 1991 to his sole advantage. That amount was not validly reserved. It vested in the income beneficiaries in equal shares. The amount is negligible, but I do not consider Tony should retain any of it. I order Tony to account for that amount, equally, to the successful plaintiffs: Cathie, Adrian’s estate, Wayne and Shell.
[217] Second, Mr Thomson and Jack purported to distribute $10,379 to Jack as a beneficiary of the Trust in the year ending 30 June 2005. In Issue 3, I found this decision was made invalidly and would have been a breach of trust if it had been. Jack should not have had the benefit of the $10,379 allocated to him by way of a credit to him in 2005. Ms Greenwood’s evidence is that was the amount reported as a profit in the year ended 30 June 2005, it was allocated to trustees’ income and then added to the funds available for distribution.327 If it had not been (wrongly) distributed, it would have been unreserved income and vested in the income beneficiaries. It can be dealt with by an order that Jack’s estate, through Tony as executor and first defendant, pay equitable compensation of four-fifths of the $10,379, or $8,303, to the four successful plaintiffs, in equal shares. If there are insufficient sums remaining in the estate because they have been distributed (a matter on which I have insufficient evidence)
327 Greenwood Brief, above n 42, at [219]–[220].
Mr Thomson, as the other trustee at fault, should pay equitable compensation of that amount to Cathie, Adrian’s estate, Wayne and Shell.
[218] Third, in relation to Issue 1,
(a) I found Mr Thomson and Jack as trustees did not validly reserve, and Mr Thomson failed to fulfil his duty of impartiality in respect to, income totalling (in positive years) $2,219,854 in the financial years from 30 June 1994 to 1996, 1999 to 2002, 2005 and 2008. The net residue of annual income in those years vested in the income beneficiaries equally, at the balance date of each year. Because the residue of net annual income in other years was negative, the total residue of net annual income over all years from 30 June 1994 to 2008 was $2,144,072.
(b) I have already dealt with the $10,379 of income that vested in 2005.
(c) The 2007 dividend was paid by SLH to the Trust and immediately distributed to Tony as sole capital beneficiary. I order Tony to account, equally, to Cathie, Adrian’s estate, Wayne and Shell for four-fifths of the $888,869 dividend, or $711,095, he effectively received through distribution of the Trust.
(d) I found the $1,495,646 of the Trust’s income from the sale of Wye Creek, a subset of the vested income, was advanced to SLH for the development of Dunstan Burn Station and the acquisition of Two Mile Station, and can be traced into SLH’s hands. Under the fourth cause of action, I also found SLH unconscionably received that amount.
[219] I do not consider the vested income or the loan of the Wye Creek sale proceeds should be the subject of a constructive trust over Two Mile Station or other SLH property. Too much water has passed under SLH’s bridge since 2007. Trusts have caused too many problems in this family already. And the evidence is Two Mile
Station has been integrated into the wider Dunstan Burn Station. Subjecting it to a constructive trust may distort the economic value and practical use of that Station as a part of the wider Dunstan Burn Station. Instead, I consider the successful plaintiffs should be awarded equitable compensation against SLH.
[220] Other things being equal, I would be prepared to order equitable compensation equivalent to the appropriate shares of $1,495,646 of income loaned by the Trust to SLH for the capital purchase of Two Mile Station. But the successful plaintiffs will recover their shares of $888,869 from Tony and $10,379 from Jack’s estate (or Mr Thomson). If they were to recover the loans as well, that would amount to their shares of $2,394,894. That would do more than restore to the plaintiffs the total residue of net annual income of $2,219,854 that vested in the income beneficiaries in positive years between 1994 and 2008 or the total residue of net annual income over all those years of $2,144,072. To reflect the Trust’s years of negative income in that period, I consider it would be fair to limit the successful plaintiffs’ total recovery under the fifth cause of action to the latter amount. Accordingly, I order SLH to pay equitable compensation of four-fifths of $1,244,824 (being $2,144,072 less $888,869 and
$10,379), which is $995,859, to the successful plaintiffs in equal shares. That relief will reflect their success in the fourth and fifth causes of action.
[221] Standing back, I consider that package of relief equitably restores the plaintiffs to the position in which they should have been if they had not suffered these inequities. It recovers the various amounts of money from where they went. Of course, the successful plaintiffs may wish to divide the compensation they have been awarded in some other way, after they have received it. Despite the application of the law, they may consider Terry should share in what they have recovered. That is up to them.
[222] I do not consider it necessary to order Mr Thomson to pay more equitable relief than I have ordered. He did not benefit financially from the inequities he caused. Some of his actions as a professional trustee have been sanctioned by this judgment. And my impression is that he regrets what happened and may not be unhappy with the outcome of this judgment though not, perhaps, the reasoning.
[223] The time value of money component of what the successful plaintiffs seek can be reflected in interest on each of the above sums. It follows from my decision on limitation that I do not accept the claims of the successful plaintiffs have been exceptionally delayed. But neither is there evidence as to whether the profit made from the various sums awarded were equal to, or greater than, compound interest. In the interests of equity, I award simple interest on the sums ordered until the date on which the judgment debt is paid in full.
Result
[224] I order:
(a) Mr Tony Enright must account for $711,095 (for the dividend) and $492 (for income reserved in conflict of duty), plus simple interest from 30 June 2008 and from 30 June 1991 respectively, in equal shares, to:
(i) Mrs Cathie Newton;
(ii) Mr William Young as executor of the estate of Mr Adrian Enright;
(iii) Mr Wayne Enright; and
(iv) Mr Gene Herschel Enright.
(b) Mr Tony Enright, as administrator of the estate of Mr Jack Enright, must pay equitable compensation of $8,303 plus simple interest from 30 June 2005, in equal shares, to:
(i) Mrs Cathie Newton;
(ii) Mr William Young as executor of the estate of Mr Adrian Enright;
(iii) Mr Wayne Enright;
(iv) Mr Gene Herschel Enright.
Or, alternatively, if there are insufficient funds now remaining in Mr Jack Enright’s estate for that purpose, Mr Eric Thomson must pay equitable compensation to them for that sum.
(c) SLH must pay equitable compensation of $995,859, plus simple interest from 30 June 2008, in equal shares, to:
(i) Mrs Cathie Newton;
(ii) Mr William Young as executor of the estate of Mr Adrian Enright;
(iii) Mr Wayne Enright; and
(iv) Mr Gene Herschel Enright.
[225] The parties agreed costs should be awarded on a 2B basis.328 On the face of the result of the judgment, four-fifths of the plaintiffs’ costs should be awarded against the defendants to the four successful plaintiffs and one fifth of the defendants’ costs should be awarded against Terry. But counsel requested leave to file submissions to deal with unknown complexities depending on the result of this judgment. I grant leave for the plaintiffs to file submissions of no more than 10 pages on costs within 15 working days of the judgment and the defendants to file submissions of the same length within ten working days of that.
Palmer J
328 Consistent with counsel’s joint memorandum of 10 November 2017.
ANNEX: KEY CLAUSES OF THE J J ENRIGHT TRUST DEED
... WHEREAS the Settlor has paid to the Trustees the sum of ONE HUNDRED DOLLARS ($100.00) to be held by the Trustees for the benefit of the children of the said JOHN JAMES ENRIGHT upon the trusts and with the powers and authorities and discretions hereinafter declared and conferred concerning the same NOW THEREFORE THIS DEED WITNESSETH: ...
...
...
8 THE trustees may invest any money for the time being subject to the trusts of these presents in any securities for the time being authorised by law for the investment of trust funds in the acquisition of any life insurance policy or policies issued by a reputable insurance company carrying on business in New Zealand in the purchase of any freehold or leasehold land or personal property in New Zealand in any mortgage of freehold or leasehold land in debentures debenture stock or in preference or ordinary shares or stock of any public or private company carrying on business in New Zealand by advancing the same or any part thereof to any person limited company or institution either with or without security at such rates of interest and upon such terms as to repayment and otherwise as the trustees shall think fit and the trustees may from time to time vary and transpose such investments for others of any nature hereby authorised without responsibility for any loss or losses occasioned by such investments whether original or substituted.
...
12 THE trustees may expend any part or parts of the trust fund in the acquisition of any business or a share in any business which in their opinion would be to the advantage of the beneficiaries hereunder or any one or more of them to acquire and carry on or join in carrying on such business in such manner as they shall think fit and as if they were the absolute owners thereof and may employee and engage any person or persons in or about each business as manager agent servant or otherwise at such wages or salaries in all respects as the trustees shall think fit without the trustees being liable or responsible for the acts or defaults or any such person or persons or losses incurred in carrying on or otherwise in relation to such business and with power to acquire all such assets whether of a capital nature or otherwise as may be required in connection with such business and generally to do all things which may be necessary or expedient including in addition to the creation of any depreciation or replacement fund the setting aside out of the income derived from any business such reserves for any other purpose as they shall think fit with power to use such reserves and also any depreciation reserve in the said business and to use and apply all or any part of such reserves created pursuant hereto or in accordance with the provisions contained in The Trustee Act 1958 or any amendments thereto in the same manner as if the amount so used and applied were income of the then current year the residue of any such reserves or reserve or depreciation or replacement fund existing at the date of distribution to be applied in the same manner as is hereinbefore directed in respect of the capital of the trust fund.
...
14 THE trustees shall have power to effect improvements to any capital assets which they may acquire for the purpose of carrying on or extending any business or hold as part of the capital of the trust fund and shall further have power to set aside from time to time out of the income derived by them whether from the continuation of any business or otherwise such sum or sums as they may think necessary or desirable as reserves with power to employ or invest the fund so reserved in such manner as they may think fit with further power to use and apply any part or parts of any reserve or reserves created by them in the same manner as if the amount so used and applied were income derived during the then current year and any reserve or reserve fund so created or the residue thereof remaining unapplied on the termination of the trusts hereby created shall accrue to and form part of the capital of the trust fund.
NZLII:
Copyright Policy
|
Disclaimers
|
Privacy Policy
|
Feedback
URL: http://www.nzlii.org/nz/cases/NZHC/2019/1124.html