Buczowski v Attorney-General HC Auckland CIV 2010-404-2966

[2010] NZHC 1666

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2010-404-002966

BETWEEN  MICHAEL JOSEPH BUCZOWSKI, WILLIAM CAIRNS, JAMES ALBERT CARMICHAEL, WARREN JAMES KYD, KAREN ANNETTE SHERRY

Applicants

ANDTHE ATTORNEY-GENERAL Respondent

Hearing:         13 September 2010

Appearances: Mr A P Molloy QC and Mr D Bigio for applicants Mr G M Illingworth QC for the income beneficiaries Ms A M Halloran for the Auckland City Council

Judgment:      15 September 2010 at 4.30 pm

JUDGMENT OF LANG J

This judgment was delivered by me on15 September 2010 at 4.30 pm, pursuant to Rule

11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date……………

Solicitors:
Lowndes Jordan, Auckland
McLeod & Associates, Auckland
Auckland City Council, Legal Services Group, Auckland
Counsel:

Mr A P Molloy QC, Auckland

Mr D Bigio, Auckland

Mr G M Illingworth QC, Auckland

BUCZOWSKI & ORS  V ATTORNEY-GENERAL HC AK CIV-2010-404-002966  15 September 2010

[1]      The applicants in this proceeding are the trustees of the Auckland Energy Consumer Trust (“the Trust”), which was formed as part of the reform of the New Zealand energy sector in the 1990’s.   That reform was accomplished principally through  the  enactment  of  the  Energy  Companies  Act  1992  and  the  Electricity Industry Reform Act 1998.   The latter required electricity lines businesses to be owned separately from electricity retail and generation businesses.

[2]      The combined effect of the two statutes for present purposes is that the lines business that the Auckland Electric Power Board formerly operated is now owned by Vector Limited, a company listed on the New Zealand Stock Exchange.   Vector derives some of its income from operating the electricity line network in Auckland City, Manukau City and Northern Papakura.  The Trust owns approximately 75.1 per cent of Vector’s share capital and derives most of its income from dividends that it receives from Vector.

[3]      The Trust was created by Deed dated 27 August 1993.  Its termination date must occur by 27 August 2073.  Up until that date all of the Trust’s income must be distributed to the income beneficiaries of the Trust.  The income beneficiaries are the consumers who use and ultimately pay for the electricity line services that Vector provides to electricity retailers.

[4]      On the termination date, the capital beneficiary of the Trust’s assets will be those local authorities that have within their districts any part of the district within which the Auckland Electric Power Board formerly operated.   At present the Auckland  City  Council,  the  Manukau  City  Council  and  the  Papakura  District Council fall within that definition.  Shortly, however, the sole capital beneficiary will be the so-called Super City that is to replace those local authorities.

[5]      The trustees now seek the approval of the Court to amend the trust deed in two significant respects.  They also wish to use this opportunity to obtain the Court’s approval for other less significant amendments that are designed to restructure and rationalise the trust deed so that it becomes a more cohesive and coherent document.

[6]      The provisions of the current Deed, and the amendments that the trustees propose, are annexed to this judgment as Appendix A and B respectively.

The proposed changes

[7]      At present, the trustees are required to distribute the net income of the trust to the income beneficiaries within 12 calendar months of the previous distribution being made.  The trustees seek to vary this requirement so as to relax the obligations imposed by the trust deed in two respects.   The first of these relates to the time within which each distribution to consumers is to be made.  The second relates to the manner in which the payments to consumers may be made.

Timing of distributions

[8]      At present the consumers comprise approximately 300,000 households and businesses, each of which is entitled to share in any distribution by the Trust.  The sheer number of entities who are entitled to participate in a distribution means that every distribution is a time consuming and costly exercise for the Trust.

[9]      The Trust is also subject to legislation that imposes significant accounting and  auditing  requirements  upon  it.    Within  four  months  after  the  end  of  each financial year (30 June), the trustees must prepare financial statements and have them  audited.    They must  then  make  the  audited  financial  statements  available publicly.  They are also required to prepare Group Financial Statements because of the  fact  that  Vector  is  classed  as  a  subsidiary  of  the  Trust  for  accounting  and reporting purposes.  The Group Financial Statements must also be audited.

[10]     The Trust’s Executive Officer must also consult with the Trust’s tax advisers for the purpose of settling the terms of the beneficiary tax certificates and preparing a distribution recommendation for the trustees’ consideration.  Once the consolidated accounts have been approved, the Trustees must finalise the details of the projected dividend distribution to the income beneficiaries.   Using records supplied by Vector, they must compile a “Distribution Roll” containing the names and details of every

entity entitled to share in the proposed distribution.   Approximately 300,000 distribution advice notices must then be prepared and printed.

[11]     Some consumers prefer to receive their payment by direct credit to their bank accounts.  Where that is the preferred option, the Trust currently carries out a cross- check to ensure that the name of the owner of the bank account to which the payment is to be made matches the name of the consumer on the distribution roll.  Where the two names do not match, the Trust will decline to deposit the payment into the nominated account.   Instead, it will send a cheque to the consumer by post.   This occurred in more than 5,000 cases in 2008.

[12]     Once the distribution roll has been prepared, the trustees must arrange for the distribution to be made through direct deposits to the consumers’ nominated bank accounts or by mailing out cheques.  That process is a cumbersome exercise given the number of payments that need to be made.

[13]     All of these steps must be taken against the backdrop of the mandatory requirement in the Deed that each distribution is to be made within 12 calendar months of the date of the previous distribution.

[14]     The trustees have found that this requirement places an onerous burden on them.  If a delay occurs in completing any of the steps referred to above, it means that the trustees will confront a very tight deadline to ensure that the distribution is completed within the period that the Deed stipulates.   Any significant delay will mean that they run the very real risk of being in breach of the terms of the Deed.

[15]     The  trustees  can  circumvent  the  problem  to  some  extent  by  making  an interim distribution within the 12 month period and then a final distribution some time later.  The cost involved in making each distribution, however, runs to several hundred thousand dollars.  This means that any extra distribution is to the ultimate financial detriment of the income beneficiaries.

[16]     The trustees therefore wish to amend the Deed by removing the requirement that each distribution must be completed within 12 calendar months of the last

distribution.  In its place they propose to insert a requirement that the trustees must make each distribution no later than the end of the financial year following the year in which the previous distribution was made.  They believe that this will remove the pressures that they currently have to contend with in making distributions within an extremely tight time frame.

The manner in which payments can be made

[17]     At  present  the  Deed  only permits  the  trustees  to  make  payments  to  the consumers named in the distribution roll or to bank accounts in the names of those consumers.   Often, however, a consumer may want the payment to be made to a bank account in the name of another person or entity.

[18]     In 2007 and 2008 the trustees conducted polls in which they asked consumers how they would to receive their payments.  The polls showed significant support for a payments system that permitted the trustees to make a payment to a bank account nominated by the consumer but not necessarily in the name of the consumer.  The trustees therefore wish to be able to make payments in that way so that they can meet the wishes of their consumers.  They seek to do this by amending the deed so as to permit  distributions  to  be  paid  “for  the  benefit  of  consumers”  as  well  as  to consumers.

How should the application be approached?

[19]     The trustees rely upon ss 64 and 66 of the Trustee Act 1956 and upon clause

13 of the Deed of Trust as providing the Court with the necessary power to approve the proposals that they have made.

[20]     Section 64 of the Trustee Act 1956 permits the Court to confer powers on trustees to deal with trust property in a manner that is not expressly authorised by the instrument creating the trust.  It provides as follows:

Jurisdiction to make other orders

64Power of Court to authorise dealings with trust property and variations of trust

(1) Subject to any contrary intention expressed in the instrument (if any) creating  the  trust,  where  in  the  opinion  of  the  Court  any  sale,  lease, mortgage, surrender, release, or other disposition, or any purchase, investment, acquisition, retention, expenditure, or other transaction is expedient in the management or administration of any property vested in a trustee, or would be in the best interests of the persons beneficially interested under the trust, but it is inexpedient or difficult or impracticable to effect the same without the assistance of the Court, or the same cannot be effected by reason of the absence of any power for that purpose vested in the trustee by the trust instrument (if any) or by law, the Court may by order confer upon the trustee, either generally or in any particular instance, the necessary power for the purpose, on such terms, and subject to such provisions and conditions (if any) as the Court may think fit, and may direct in what manner any money authorised to be expended, and the costs of any transaction, are to be paid or borne, and as to the incidence thereof between capital and income:

Provided that, notwithstanding anything to the contrary in the instrument (if any) creating the trust, the Court, in proceedings in which all trustees and persons  who  are  or  may  be  interested  are  parties  or  are  represented  or consent to the order, may make such an order and may give such directions as it thinks fit to the trustee in respect of the exercise of any power conferred by the order.]

…

(4) An application to the Court under this section may be made by the trustees, or by any of them, or by any person beneficially interested under the trust.

[21]     Trustees often rely upon s 64 when they wish to obtain powers that are not vested in them by the instrument creating the trust.  Section 64 is, however, subject to any contrary intention expressed in the trust instrument.   The proviso to the section removes that limitation where all interested persons are represented at the hearing of the trustees’ application or where they consent to the order being sought.

[22]     In   Winter   v   Attorney-General   HC   Auckland   CP609/01   Nicholson   J considered an application for approval of an amendment to clause 3.1(h) of the same Deed that is the subject of the present application.  The proposed amendment in that case empowered the trustees to make payments to the credit of accounts in the name of consumers.   It thereby removed the previous requirement that the payment of distributions could only be made to the consumer directly.   Nicholson J took the view that the Court should provide the trustees with that power under s 64(1).

[23]     A possible alternative to the use of s 64 lies in clause 13.1 of the Deed coupled with s 66 of the Act.  They provide as follows:

66   Right of trustee to apply to Court for directions

(1)  Any  trustee  may  apply  to  the  Court  for  directions  concerning  any property subject to a trust, or respecting the management or administration of any such property, or respecting the exercise of any power of discretion vested in the trustee.

(2) Every such application shall be served upon, and the hearing may be attended by, all persons interested in the application or such of them as the Court thinks expedient.

13       VARIATION OF TRUST DEED

13.1     Variation of Deed

Except as authorised by the High Court of New Zealand, or by Rule 22 of

the Schedule, this Deed may not be altered or amended by the Trustees.

[24]     Harrison J adopted this approach in Sherry v Attorney-General HC Auckland M517/02 21 June 2002.  That case, too, involved the same Deed of Trust.  Harrison J proceeded on the basis that clause 13.1 gave the trustees the power to amend the Deed.  It was therefore open to the Court to approve proposed amendments to the Deed by way of directions given under s 66 of the Act.  Harrison J recorded at [34] that all parties agreed that that was the appropriate way in which to determine the application.   For that reason Harrison J did not analyse that issue further.   It also appears that counsel did not refer him to the approach that Nicholson J had taken in Sherry notwithstanding the fact that that case had been decided just six months earlier.

[25]     I respectfully prefer the approach that Nicholson J adopted in Winter.  I do not consider that clause 13.1 provides the trustees with the power to amend the Deed. Rather,  it  expressly prohibits  the  trustees  from  taking  that  step  unless  they are authorised by this Court or by Rule 22 of the Rules attached in the Schedule to the Deed.  Rule 22 has no application in the present context.

[26]     If clause 13 provided the trustees with the power to amend the Trust Deed, one would expect to see it located in clauses 6 and 7 of the Deed, which set out the “General Powers” and “Specific Powers” that the Deed of Trust provides to the trustees.  The fact that clause 13 does not appear within these sections of the Deed suggests that it does not confer a power on the trustees.

[27]     I consider that in clause 13.1 the words “except as authorised by the High Court of New Zealand” refer to the Court’s ability to grant the trustees power to deal with  trust  property  under  s  64,  to  authorise  variations  of  trust  in  certain circumstances (none of which apply here) under s 64A and to make directions under s 66 of the Trustee Act 1956.

[28]     The orders that the trustees seek could arguably be made under s 66 because they concern trust property and are in respect of the administration of trust property. Section 64, on the other hand, is specifically designed to be used in situations where the trustees seek to be able to administer the trust property in an expedient manner but  where  they  are  hindered  or  prevented  from  doing  so  by  the  absence  of appropriate powers in the trust instrument.  That is precisely what the trustees are endeavouring to achieve in the present case. For that reason I consider that the present application is most appropriately determined under s 64.

Should the application be granted?

[29]     It is necessary for the Court to form its own view as to whether the trustees have satisfied the cumulative criteria specified in s 64(1).     I have reached the conclusion that they have, for the following reasons.

[30]     First, the distribution of the Trust’s income to consumers clearly amounts to a disposition or transaction (or a series of dispositions or transactions) for the purposes of s 64(1).

[31]     Secondly, I am satisfied that the two principal proposals are expedient in the management and administration of the trust’s property (its income) and also that they are in the best interests of the persons beneficially entitled to that income under the Deed of Trust.  The income beneficiaries are the only parties who are beneficially interested in the income derived by the Trust.

[32]     The only argument that could be mounted to the contrary is that the proposed relaxation of the period within which distributions must be made will mean that some income beneficiaries who would have received a distribution under the existing

terms of the Deed of Trust will now miss out.  Persons who fall within that category will include those who sell their houses or businesses during the period between 12 months after the date of the last distribution and the date upon which the next distribution roll is compiled.  Under the current terms of the Deed the distribution would have been made during the 12 month period following the previous distribution.    It  would  therefore  have  been  made during the  period  when  those persons owned their houses or businesses, and would they therefore have qualified to share in the distribution.   Under the proposed scheme they would miss out because they would have sold their houses or businesses before the distribution roll was compiled.

[33]    There is however, always going to be an element of arbitrariness when distributions of this type are made.   The same problem arises under the present system, albeit involving a different sub-set of consumers.     As both counsel acknowledged, it is impossible to eliminate this factor.   It is inherent in any distribution process in which the right to participate is determined solely by the fact that a person owns a property or business in a particular area on a specified date.

[34]     Thirdly, the trustees cannot at present distribute funds outside the 12 month period stipulated in the Deed, and they cannot make payments to bank accounts that are not in the names of consumers identified on the distribution roll.  Both of those restrictions on the ability of the trustees to deal expediently with trust property arise because of the absence in the Trust Deed of any power enabling them to take those steps.

[35]     Fourthly, the only persons who have any interest in the outcome of this proceeding are the income beneficiaries.  They are represented by counsel, and he supports the proposals as being in the best interests of the income beneficiaries. Counsel accepts that they are sensible and are for the benefit of the parties whom he represents.   He does not see any disadvantage to the income beneficiaries if the proposals are approved by the Court.  As a result, it is open to the Court to make orders under s 64(1) notwithstanding any contrary intention expressed in the Trust Deed.

[36]     Although the capital beneficiaries have no direct interest in the proceeding they have been served with it and each has responded by advising the Court that it either supports the trustees’ proposals or that it abides the decision of the Court. None has raised any objection to the orders that the trustees seek.

[37]   Finally, the minor amendments that the trustees seek have no practical consequence.  They do not alter or increase the powers of the trustees in any way. They merely re-structure the Deed in certain respects to make it more coherent and cohesive.

[38]     Taken together, these conclusions mean that the trustees have established that the Court should make orders under s 64(1) to enable the trustees to give effect to their proposals.

Orders

[39]     I make  an  order  under  s  64(1)  of  the  Trustee  Act  1956  authorising  the amendment of the Deed of Trust in the manner set out in  Appendix  B to this judgment so as to confer upon the trustees the powers set out in those amendments.

Lang J

APPENDIX A

3. EXISTING PROVISIONS

3.        TRUSTS OF INCOME UNTIL TERMINATION DATE

3.1      Trusts and Powers

The Trustees shall stand possessed of the income arising from the Trust Fund upon the following trusts and with and subject to the powers contained in this clause 3.1:

(a)     Remuneration and Expenses

The Trustees shall from such income first meet and defray the costs of administering the Trust, and shall be entitled to such remuneration, allowances and expenses as are payable to the Trustees in terms of this Deed:

(b)     Discretion as to Distribution of Income

(i)        From time to time, but not less frequently than once in each Year, the Trustees shall arrange for the preparation of a Distribution Roll;

(ii)       The Trustees shall distribute the net income to the Consumers listed on the Distribution Roll at such time or times as the Trustees may determine but not less frequently than once in each Year unless the income then in the Trustees’ hands is in their opinion insufficient to justify a distribution to Consumers:

(iii)      In deciding upon the allocation of the net income, as amongst Consumers, the Trustees shall, in exercising their discretion, nevertheless be entitled to take account (to the extent to which they may see fit) of the relative contribution which Consumers in different tariff categories (as prescribed by the Company from time to time) have made to the Company’s gross profit.

The Trustees shall, however, retain an absolute discretion as to the proportions in which Consumers shall share in a distribution, and in this respect the Trustees’ decision shall be final and binding.

(c)     Retention of Dividends

The Trustees are authorised to retain any Dividends received for such period not exceeding a Year as they consider to be proper.

(d)     Vesting

All Consumers to whom any income is paid, applied, or appropriated by the Trustees pursuant to the provisions of this Clause 3.1 shall, as from the date of such payment, application, or appropriation, take and receive an absolute and indefeasibly vested interest in such income.  Such vesting of income shall not, however,

operate to vest any part of the corpus of the Trust Fund in any of the Consumers.

(e)     Accumulation

So far as any part or parts of the income derived by, or credited to, or to be derived by or credited to the Trust Fund, in any Financial Year, is not paid, applied or appropriated to Consumers pursuant to this Clause 3.1, the same shall be accumulated and held upon the trusts for income but not for more than a Year.

(f)     Trustees not Disqualified

Notwithstanding the provisions of this Deed or any rule or law or equity, a Trustee shall be entitled, as a Consumer, to participate in any distribution or income.

(g)     Receipt by Joint Consumers

If more than one person is liable for the payment of any amount payable to the Company for the provision of line function services, any such person may give an effectual receipt for any income received from the Trust, Amended 10/10/01.

(h)     Method of Payment

Any distribution of income to a Consumer may be paid or credited

by the Trustees in any manner which they may determine (including by credit to the account of the Consumer with the Company or with any third party who charges the Consumer for the availability or use of the Company’s electricity lines business) or may be made by

cheque sent through the post to the address of the Consumer appearing on the Distribution Roll, or in the case of joint Consumers to any one of such joint Consumers at his or her address as aforesaid, or to any such person at such other address as the Consumer or such joint Consumers, as the case may be, may direct

in writing, with the Trustees not being responsible for any loss arising from the making of a payment as aforesaid.  A distribution to the members of an Incorporated body may be made by payment to a nominated representative of that body.  Amended 10/12/01

(i)     No interest payable

No payment to the Consumers shall bear interest against the Trust.

(j)     Unclaimed Payments

Any payments forwarded to a Consumer or to another person at that Consumer’s direction which shall be unclaimed after having been sent to any such person shall be held by the Trustees in an unclaimed moneys account and any income arising from the investment of such unclaimed moneys shall be treated as income of the Trust.

(k)     Forfeiture of Unclaimed Payments

Any payment forwarded to a Consumer or to another person at that Consumer’s direction which remains unclaimed for two years after having been despatched to such person shall, at the expiry of such

period, be forfeited, and any unclaimed moneys so forfeited shall then be credited to the income of the Trust Fund.

(l)     Receipt or Discharge Not Required

The Trustees shall not be required to obtain any receipt or discharge for any income paid, applied, or appropriated by them to any Consumer.

(m)   Trusts of Income on Termination Date

Upon the Termination Date, any undistributed income, whether accrued or accruing, shall be held upon trust for those persons who at the Termination Date are Consumers in the proportions to which they would have been entitled if the Trustees had resolved to establish a Distribution Roll as at that date.

APPENDIX B

PROPOSED AMENDMENTS

3         TRUSTS OF INCOME UNTIL TERMINATION DATE

3.1      Income Trusts and Powers in the Ordinary Course

The Trustees shall stand possessed of the income derived from the Trust

Fund during each Financial Year on, and subject to, the trusts and powers set out in this clause 3.

(a)       Powers in Respect of Remuneration and Expenses

To make provision for the payment of, and to pay therefrom, the costs of administering the Trust, including the remuneration, allowances, and expenses payable to the Trustees under this Deed.

(b)      Trust for Distribution of Income Generally

At such time or times, up to the end of the next succeeding Financial Year, and in such manner, as they determine: the Trustees shall pay, appropriate, or apply the net balance, to, or for the benefit of, the Consumers severally and absolutely.

(c)       Powers in Respect of Distribution of Income Generally

In, and for the purposes of, making any such distribution, the Trustees may:

(i)Differentiate as they think fit between Consumers, or groups of  Consumers,  including,  for  example,  by reference  to  the relative contributions to the Company’s profit of Consumers in each of the tariff categories prescribed by the Company.

(ii)Identify the Consumers, and categories thereof, by arranging for the preparation of a Distribution Roll as at such date as they shall specify, provided that date shall be no more than three calendar months before the date of each such payment, appropriation, or application.

3.2      Income Trusts and Powers in Extraordinary Situations

The  provisions  of  sub-clause  3.1  shall  be  modified  or  supplemented  as follows in the following situations:

(a)     Where  Distribution  not  in  the  Interests  of  Consumers Notwithstanding sub-clause 3.1, if they consider it to be insufficient to justify the costs of distribution, the Trustees may retain and accumulate any, or any part of any, otherwise distributable income, and treat it as income derived in the next succeeding Financial Year.

(b)       Unclaimed Payments

Any payment of income which shall have been returned unclaimed, and which shall have remained unclaimed for two years, shall be forfeit and held on the income trusts of sub-clause 3.1. Pending such

forfeiture it shall be held in an unclaimed moneys account by the Trustees, and the income arising from that account shall be treated as income derived by the Trust Fund.

(c)      Income Trusts and Powers on Termination Date

At the Termination Date, the Trustees shall hold any undistributed income derived at, or accruing to, that date, and, notwithstanding sub- clause 3.2(b), shall hold also any unclaimed but not  yet forfeited income: on trust for payment, appropriation, or application to, or for the benefit of, the Consumers on the same terms, mutatis mutandis, as appear in sub-clause 3.1(b).

3.3      Provisions Applicable in all Situations

(a)      Trusteeship no Disqualification

The holding of office as a Trustee shall not debar any Consumer from participation in, or receipt of, any payment, appropriation, or application of income to, or for the benefit of, Consumers.

(b)      Joint Consumers

Where any Consumers are entitled jointly to the benefit of any resolution by the Trustees to pay, appropriate, or apply any income, the Trustees may pay, appropriate, or apply that income  to, or for the benefit of, such one or more of those Consumers as they shall think fit.

(c)      No Interest Payable

No Consumer shall have any right to interest in respect of any payment, appropriation, or application of income to, or for the benefit of, Consumers.

(d)      Receipt or Discharge Not Required

The Trustees shall not be required to obtain any receipt or discharge in respect of any income paid, applied, or appropriated to, or for the benefit of, any Consumer.

(e)      Exoneration of Trustees

For the purposes of sub-clause 3.1, the Trustees will not be liable to any Consumer in respect of any form of distribution for which the Consumer shall have given them, and shall not have revoked, a written authority.