Burnside v Burnside
[2017] NZHC 595
•29 March 2017
IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY
CIV-2015-441-000043 [2017] NZHC 595
BETWEEN ALEXANDER CRAIG BURNSIDE
Plaintiff
AND
ROBERT JAMES BURNSIDE Defendant
Hearing: 28 - 30 November 2016 Appearances:
H N McIntosh and K H Lawrence for the Plaintiff
H B Rennie QC and L C Ord for the DefendantJudgment:
29 March 2017
JUDGMENT OF PALMER J
This judgment is delivered by me on 29 March 2017 at 2 pm pursuant to r 11.5 of the High Court Rules.
..................................................... Registrar / Deputy Registrar
Counsel/Solicitors:
H N McIntosh, Barrister, Wellington
Greg Kelly Law Limited, Wellington
H B Rennie QC, WellingtonOrd Legal, Wellington
BURNSIDE v BURNSIDE [2017] NZHC 595 [29 March 2017]
Summary
[1] Mr Jim Burnside, who built substantial business holdings, died in 2003. His family has fallen out over aspects of administration of his estate. Mr Alec Burnside seeks to remove both himself and his brother, Mr Robert Burnside, as trustees of the estate. Alec also seeks a declaration about Robert’s obligations to distribute the net proceeds of a forestry harvest and orders that Robert pay $173,321 to the estate. Robert counterclaims seeking directions that the estate’s shareholding in Burnside Forests Ltd and Ravensdown be transferred to Robert.
[2] I consider the dysfunctionality between the brothers is impeding the administration of the estate and I remove them both as trustees. I order the appointment of independent trustees through a specified process. I do not consider any order is required regarding the net proceeds of the forestry harvest. I order the estate’s shareholding in Burnside Forests Ltd to be transferred to, and vest in, Robert. I find the Ravensdown shares form part of the residue of the estate.
[3] Behind the animosity created by mutual suspicion and resentment regarding the estate, I discern a wish for reconciliation on all sides. I encourage the Burnsides to put these issues behind them and move forward as a family.
Factual context
Jim’s Will
[4] Jim Burnside was a successful businessman. He died on 11 July 2003. Under the key provisions of his will and a codicil, he left:
(a) to his eldest son, Alec Burnside, a farm called Muritai;
(b)his other son Robert Burnside, another farm called Crownthorpe and his 50 per cent shareholding in Burnside Forests Ltd (BFL), after completion of the next harvest;
(c) to his daughters, Ms Lynn Burnside, Ms Wendy Wilson and Ms Maree
Paterson, a leased commercial property;
(d)to his widow Mrs Shirley Burnside, aged 87, a life interest in either the family home or another property and a monthly income from William and Kettle Ltd shares or other investments (W&K Fund); and
(e) the W&K Fund would also be used, at the discretion of the trustees, for the education of the grandchildren and, upon Shirley’s death, the balance would go to the grandchildren.
[5] Robert and Alec, and Mr Matthew Magill, were appointed executors and trustees. Mr Magill subsequently resigned as trustee due to distrust and confusion between the trustees.
The Deed of Family Arrangement.
[6] There was a sense in the family that the allocation under the Will was not fair, particularly to Shirley and the daughters. Commendably, they agreed a different allocation in a Deed of Family Arrangement dated 8 April 2004. Among other things this involved, relevantly, distributing the net income from harvesting a forest by BFL to Wendy, Lynne, Maree and Robert according to a specified formula.
[7] All the required distributions have now been made from Jim’s estate except:
(a) Alec says more money is owing from the 2005 forestry harvest under the Deed;
(b) the W&K Fund, with a value of some $2.4 million as at April 2016,
will not be distributed until Shirley’s death;
(c) the 50 per cent shareholding in BFL has not been transferred to
Robert, due to disagreement between Alec and Robert; and
(d)Ravensdown shares have not been distributed due to disagreement between Alec and Robert.
The parties’ general positions
[8] Alec says he has difficulty working with Robert as trustee who, he says, insists Alec agree with him. Alec seeks orders:
(a) removing Robert and Alec as trustees and replacing them with independent trustees; and
(b)requiring payment by Robert from the forestry harvest of further funds Alec says he was required to pay out.
[9] Robert resists removal as a trustee. He accepts there is family disharmony but says that is not all his fault. He says Alec has obstructed the distribution of funds from the W&K Fund to the grandchildren and obstructed good investment decisions regarding the Fund. He says he could not pay out a greater dividend from the forestry harvest because of the need to retain sufficient funds in the company to meet known company expenses. As a counterclaim Robert seeks orders:
(a) transferring the 50 per cent BFL shares from the estate to him, as provided for under the Will and Deed; and
(b)transferring Ravensdown shares, associated with Crownthorpe farm, from the estate to him.
[10] At trial Alec, Lynne, Mr Paddy Clark and Mr Ewan Gardiner gave oral evidence for the plaintiff and were cross-examined. Wendy, Sophie Osborne, Mr Grant Barron a valuer, and Mr Philip Stevenson an investment banker provided affidavit evidence for the plaintiff. Robert also gave oral evidence and was cross- examined.
First issue: Removal of trustees
Facts
[11] Alec points to previous litigation in 2009 in which the High Court ordered summary judgment against Robert and Alec in proceedings seeking distribution of
$450,000 of the harvest proceeds to the three sisters and transfer of a property to Wendy under the Deed.1 Robert had refused for three years to release the funds without an “indemnity”, a release from any claim against him as director relating to retained harvesting income. He refused to transfer the property because of a dispute regarding an easement. In the subsequent costs judgment, Associate Judge Gendall ordered Robert to pay all of the costs and to pay them personally, saying:2
I have already found that the first defendant was not entitled to the “indemnity” that he was seeking and that rather than protecting himself as trustee of the estate, as counsel makes out, he was endeavouring to protect his private interests over and above his clear and obvious legal obligations as trustee. The first defendant in my view stubbornly pursued an argument which lacked merit (r 14.6(3)(b)(ii)) and failed, without reasonable justification, to accept the legal argument that he was obligated to act in accordance with the Deed (r 14.6(3)(b)(iii)).
[12] In the substantive judgment, Associate Judge Gendall observed:
[4] Linked to the present dispute, it also needs to be noted in passing that there appears to be an impasse on the matters in question here between the first defendant and the second defendant as trustees of the deceased’s estate. The first defendant [Robert] opposes the present summary judgment application but his brother and co-trustee, the second defendant [Alec] does not oppose and appears to support his sisters in the application. He has simply filed an appearance.
[13] On Alec’s behalf, Mr McIntosh submits:
(a) Robert’s conduct giving rise to these proceedings was a clear conflict of interest. Irrespective of the second issue treated below, Robert is conflicted in relation to making decisions on the BFL shares as trustee because he has benefitted and would benefit from net income from BFL being used to fund future expenses.
(b)Alec and Robert cannot work together as trustees, the family is divided in two and none of Robert’s siblings support his remaining a trustee. Robert has shown himself unable to work with other trustees or professionals if they obstruct his personal goals, with aggressive or
offensive communications.
1 Martin v Burnside HC Napier CIV 2009-4410230, 7 July 2009.
2 Martin v Burnside HC Napier CIV 2009-441-230, 29 September 2009 at [13].
(c) The administration of the estate and ongoing management of the W&K Fund have halted almost entirely. Robert would not agree to long-time investment adviser Forsyth Barr be engaged to provide personalised investment advice. Robert’s actions have put the Fund at risk of not performing as well as it could.
(d)Section 13F of the Trustee Act 1956 preserves and applies the duty on trustees to take advice in the exercise of any power of investment. Robert refused to engage personalised professional advice from Forsyth Barr. That, and his directive approach to Alec, means the Fund is not being managed in the best interests of the beneficiaries.
[14] On Robert’s behalf, Mr Rennie QC submits:
(a) Any impasse in the administration of the trust monies arises from the conscious inaction and obstruction of Alec and he cannot create a situation as the basis for removing Robert. Alec had difficulty making decisions and, in 2004 or 2005, adopted a position of requiring any communication from Robert about trustee matters to come to him through a solicitor.
(b)Alec obstructed the payment to grandchildren from the W&K Fund by not agreeing to proposed payouts.
(c) Alec refused to agree to the BFL shares being transferred from the estate to Robert as the Will and Deed provided. Alec refused to agree to the Ravensdown shares, associated with Crownthorpe, being paid from the estate to Robert.
(d)Robert is a competent, responsible and experienced businessman and investor. The Trust and Estate and BFL are up to date with their financial compliance obligations. When he was able to deploy them, on the basis of Robert’s investment skills, supported by Forsyth Barr, the W&K Fund has outperformed even Forsyth Barr’s funds. In the
15 months before trial no new investments of the W&K Fund have been made because Alec would not agree to decisions proposed by Robert. Removing Robert as trustee risks him being removed as director of BFL.
Law of removal of trustees
[15] There is no dispute between the parties about the law governing removal of trustees. The Court has an inherent jurisdiction to remove trustees as part of its general jurisdiction to supervise the administration of trusts. In addition, s 51 of the Trustee Act 1956 empowers the Court to appoint new trustees, in substitution for or in addition to any existing trustees:
51 Power of court to appoint new trustees
(1) The court may, whenever it is expedient to appoint a new trustee or new trustees, and it is found inexpedient, difficult, or impracticable so to do without the assistance of the court, make an order appointing a new trustee or new trustees, either in substitution for or in addition to any existing trustee or trustees, or although there is no existing trustee.
(2) In particular and without prejudice to the generality of the foregoing provision, the court may make an order appointing a new trustee in substitution for a trustee who—
(a) has been held by the court to have misconducted himself in the administration of the trust; or
…
(3) An order under this section, and any consequential vesting order or conveyance, shall not operate further or otherwise as a discharge to any former or continuing trustee than an appointment of new trustees under any power for that purpose contained in any instrument would have operated.
…
(5) Every trustee appointed by the court shall, as well before as after the trust property becomes by law, or by assurance, or otherwise, vested in him, have the same powers, authorities, and discretions, and may in all respects act as if he had been originally appointed a trustee by the instrument, if any, creating the trust.
[16] As Winkelmann J clarified in Green v Green¸ the jurisdiction may be exercised where there is a dispute as to facts or where a trustee is willing and able to continue.3 She also stated:
[604] In considering whether a trustee should be removed it is not necessary to establish that there has been a breach of trust,4 but equally establishing a breach of trust will not necessarily be sufficient to justify the removal of a trustee. Inconsequential mistakes should not be allowed [to] undermine a settlor’s intention.5 Nor will a trustee be removed simply because of a position of conflict between duty and interest. Whether or not a position of conflict will justify removal depends on the nature of the conflict and the other circumstances of the case.6
…
[607] As to appointment of a replacement trustee, the jurisdiction to appoint a new trustee under s 51 only arises if it is “expedient to do so”, and it is “[inexpedient], difficult or impracticable” to appoint a trustee without the assistance of the Court.
[17] In a recent case involving an application to remove an executor and trustee,
Vlaar v Van Der Lubbe, Clark J stated:7
… the Court’s significant discretion is guided by five essential principles:8
(a) The starting point is the Court’s duty to see estates properly
administered and trusts properly executed.
(b) The wishes of the testator/settlor (evidenced by the appointment of a particular executor or trustee) are to be given considerable weight.
(c) The welfare of the beneficiaries is the “litmus” test.
(d) Hostility between administrators/trustees and beneficiaries is not by and of itself a reason for removal. Such hostility assumes relevance if and when it risks prejudicing the interests of the beneficiaries.
(e) The Court will consider the circumstances of the case in a macroscopic not microscopic fashion.9
3 Green v Green [2015] NZHC 1218, (2015) 4 NZTR 25-017 at [599].
4 Hunter v Hunter [1938] NZLR 520 (CA) at 529, applying Letterstedt v Broers [(1884) 9 App
Cas 371 (PC) at 387].
5 Kain v Hutton [2007] NZCA 199, [2007] 3 NZLR 349 at [267].
6 Wales v Wales [2013] VSC 569 at [43].
7 Vlaar v Van der Lubbe [2016] NZHC 2398 at [26].
8 Operative principles have been conveniently summarised in, for example, Crick v McIlraith
[2012] NZHC 1290 at [16] cited in Harsant v Harsant [2012] NZHC 3390 at [57].
9 Hunter v Hunter, above n 4, at 528.
[18] Although it is implicit in these principles, I add that the security of trust property is also a guiding principle.10
What the parties seek
[19] Given the dysfunction, Alec asks me to remove Robert and Alec as trustees and to appoint Mr Anthony Mossman, an accountant, and Mr Todd Hanson, a solicitor, as trustees, or to appoint a company formed by them for the purpose.
[20] Mr Rennie observes it would be open to me to remove Alec and leave Robert in place but recognises that would likely inflame the situation. Robert questioned the qualifications of Mr Mossman and Mr Hanson and did not receive answers. Neither are they in evidence. Mr McIntosh sought to put their curriculum vitae in evidence at the end of the trial, after closing submissions. That was too late to be the basis for submissions or cross-examination and I denied the application. Mr Rennie submits Alec completely failed to support their candidacy to the Court and their appointment is plainly not an option.
[21] Mr Rennie also submits Robert must not be removed as trustee because that would defeat his legacy of the 50 per cent holding of BFL shares. If he does not hold the legal interest, as trustee, when the beneficial ownership of the shares transfers to him, pre-emptive provisions under the BFL Constitution would entitle Mr Clark to purchase those shares.
[22] Mr Rennie submits any deficiency in the administration of the Trust would be met by appointment of Mr Clothier or Forsyth Barr as investment manager for the W&K Fund until distribution, with power of decision jointly with Robert, and Alec being kept informed. Mr Rennie acknowledges this would not remedy the failure to provide education assistance to the grandchildren but observes the period before the Fund is distributed may be brief. I note that I have been advised, since trial, that
Mr Clothier has now retired from Forsyth Barr.
10 Miller v Cameron (1936) 54 CLR 572 at 580-581 cited in Green v Green, above n 3, at [602].
Decision
[23] Alec and Robert clearly have very different personal styles in approaching trustee matters. Alec is cautious and conservative and concerned to ensure he discharges his role as trustee properly, sometimes at the expense of decisiveness. He is not as comfortable in the world of finance as Robert and his instinct is to seek professional advice. Robert is more familiar with financial matters and manages his own share portfolio himself, apparently with success. He is more used to making decisions quickly, having them implemented quickly and getting his own way, sometimes being abrasive in demanding that. It is not surprising the difference in their personal styles produced clashes between them in relation to trustee issues.
[24] There is ample evidence of dysfunction between Alec and Robert in relation to trustee matters. I do not understand that to be contested though there is contest as to whose fault that is and what effect it has had. In summary:
(a) As found in the 2009 proceedings, Robert used meritless arguments to obstruct distributions he was obliged to implement as a trustee in order to protect private interests. Robert would not agree to engage Forsyth Barr as a personalised investment adviser because he considered their services were not worth the fee given his own investment expertise. He proposed solutions to the Ravensdown share distributions contrary to solicitors’ advice.
(b)Alec has been unable to agree to payments to grandchildren from the W&K Fund on the puzzling basis that he could not identify a mechanism that would ensure equality between the grandchildren.11
Alec would not agree to individual investment decisions for the Fund recommended by Robert. Alec has held up the transfer of the BFL shares from the estate to Robert and has opposed decisions resolving
the transfer of the Ravensdown shares for 13 years.
11 Notes of Evidence at pp 82–83; Letter from Alec Burnside to Beneficiaries of W J Burnside
Estate (2 February 2006).
[25] I accept little remains to be done in administering the estate. After this judgment, all that will remain is making investment decisions for the W&K Fund and making payouts to grandchildren from that Fund, until it is distributed on Shirley’s death. Also, after this judgment, Robert’s legacy will not impede his removal as trustee. I consider new independent trustees are unlikely to seek to remove him as director of BFL given the terms of cl 12 of the Will.
[26] Despite the limited range of the trustees’ future duties, I do not consider the conduct of Robert and Alec as trustees to date warrants allowing them to continue as trustees. The dysfunction is materially impeding administration of the W&K Fund in both its investments and its payouts to the grandchildren. Even if the returns on investments have been relatively good to date, the current dysfunction will leave the Fund unable to respond quickly, if at all, to a change in circumstances and unable to perform a key role under the Will and Deed, of providing for Jim’s grandchildren’s education. Allowing that to continue would not be in the interests of the beneficiaries. It would not protect the security of the W&K Fund. It would not be consistent with the Court’s duty to see the estate properly administered and the trust properly executed. Accordingly, I consider it is expedient to make an order appointing three new trustees in their place.
[27] The question of who should replace them is more difficult. Ideally the trustees should be independent, but command the confidence and respect, of all beneficiaries including Alec and Robert. Because of this, I do not agree Mr Mossman or Mr Hanson should be appointed, even if I did have information about their qualifications. It is clear Robert would not see them as independent.
[28] I direct Alec and Robert, and invite Lynne, Wendy and Maree, each to file memoranda within 15 working days of the date of this judgment, with the names and brief biographical professional details of up to three nominees, who are willing to serve as trustees, together with a very brief (one paragraph) explanation of why they are nominated. Those who provide nominations will then have the opportunity, within a further five working days, to file a memorandum with their views of the acceptability or non-acceptability of the others’ nominees. I am likely to give preference to any nominee supported by both Alec and Robert.
Second issue: The forestry harvest proceeds
Facts
[29] Clause 12 of the Will, dated 1 November 2002, provided:
IT IS MY WISH that my sons ROBERT JAMES BURNSIDE and ALEX CRAIG BURNSIDE be appointed as Directors of BURNSIDE FOREST LIMITED representing the shareholding held by me in that Company.
[30] A codicil to Jim’s Will, dated 13 November 2002, added to the Will this clause:
To my said son ROBERT JAMES BURNSIDE all my shares in BURNSIDE FORESTS LIMITED however such bequest shall not be effected until completion of the harvest of the mature pine trees currently growing on the land leased by the company.
[31] Robert was appointed as a Director but his evidence, corroborated by Mr Clark, is that Alec declined to accept the Directorship offered to him under cl 12 as he had no wish to be involved in the company.12
[32] The 2004 Deed of Family Arrangement used the funds from that harvest to even up the provisions for the beneficiaries under the Will. Robert’s evidence is that using the funds from the forestry harvest was his initiative.13 Clause 15 of the Deed added to, and amended, cl 8 of the Will so that it reads:
MY TRUSTEES shall hold the residue of my estate upon trust to retain or sell it and:
a Of the first $650,000 of net income from harvesting by Burnside
Forests Limited, Wendy shall be paid 4/13ths, Lynne 4/13ths, Maree
4/13ths and Robert 1/13th.
b The next $75,000 of net income from harvesting by Burnside Forests
Limited shall be paid to Lynne.
cThe balance of the net income from harvesting by Burnside Forests Limited after the first $725,000 shall be paid to Shirley, Wendy, Lynne and Maree.
dTo apply the remaining income and capital of the trust for the use and benefit of my wife SHIRLEY VALENTINE BURNSIDE as my
12 Affidavit of Robert Burnside of November 2015 at [23]. Notes of Evidence at p 33, lines 17 -32.
13 At [12].
trustees think fit until her death. My trustees may exercise their discretionary powers when and how they think fit, they may elect to accumulate income and augment capital and they shall be under no obligation to make payments to or for the benefit of my said wife.
eupon the death of my wife SHIRLEY VALENTINE BURNSIDE to divide the balance equally between such of my children as survive me and if more than one in equal shares.
[33] Clauses 18 and 19 of the Deed stated:
18It is noted with reference to clause 12 of the Will that Robert has been appointed as a director of Burnside Forests Limited with PADDY CLARK.
19The provisions of clause 1 of the Codicil are to be modified, and it is agreed that, if within 12 months of the completion of the harvest the directors of Burnside Forests Limited in their absolute discretion elect to sell the shareholding in Burnside Forests Limited owned by the Estate, the net proceeds of such sale shall be distributed to Wendy, Lynne and Maree as tenants in common in equal shares, but if they do not so elect the provisions of clause 1 of the Codicil shall stand.
[34] The distributions from BFL were usefully summarised by Associate Judge
Gendall in the 2009 litigation, consistent with the evidence here:14
[21] After the death of the deceased on 11 July 2003, the mature pine trees growing on the company’s leased land were harvested by the company between about January 2005 and March 2006 (“the harvesting”).
[22] The company then distributed some of the income from the
harvesting by way of dividends to the deceased’s estate as follows:
(a) On 14 April 2005 $88,775.00 (b) On 19 May 2005 $125,000.00 Total $213,775.00
[23] By 20 May 2005 the above dividends were distributed by the defendants [Robert and Alec] as trustees of the deceased’s estate in accordance with clause 8 of the Will (as amended by clause 15 of the Deed) as follows:
(a) Lynne (first plaintiff) 4/13 $65,777 (b) Wendy (second plaintiff) 4/13 $65,777 (c) Maree (third plaintiff) 4/13 $65,777 (d) Robert (first defendant) 1/13 $16,444 TOTAL $213,775
[24] In March 2006, the company distributed further income from the harvesting as dividends to its shareholders. That dividend income paid to the
14 Martin v Burnside above n 1, at [21]-[25].
defendants, as trustees of the deceased’s estate amounted to $450,000.00. The distribution was made following a Directors Resolution of the company dated 24 March 2006 declaring the dividend. That resolution was signed by both Mr. Clark and the first defendant [Robert] as directors of the company and included an accompanying certificate signed by them both as to the company’s solvency after the distribution was made.
[25] Pursuant to clause 8 of the Will (as amended by clause 15 of the Deed), it would seem the defendants [Robert and Alec], as trustees of the deceased’s estate were to distribute the dividends of $450,000 in the following proportions:
(a) Lynne (first plaintiff) 4/13
(plus amount over $650,000 and up to $725,000) $147,998
(b) Wendy (second plaintiff) 4/13 $134,223 (c) Maree (third plaintiff) 4/13 $134,223 (d) Robert (first defendant) 1/13 $33,556 Total $450,000
[35] Associate Judge Gendall ordered that the $450,000, plus accrued interest (minus any reasonable deduction for the estate solicitor’s fees on proper administration matters), to be distributed according to the formula in cl 15. Associate Judge Gendall also noted:
[28] In addition to this $450,000 dividend income, as I understand the position there is possibly other income from the harvesting that the company has not as yet distributed as dividends. Indeed a letter dated 29 September
2008 (exhibited to the first plaintiff’s 24 April 2009 affidavit) from Mr Clark to the estate solicitors, accountants and trustees, the first and second defendants, would seem to suggest that a further $346,648 would be available from the harvest for additional dividend distribution to the company’s shareholders. But, as I understand it, this is disputed by the first defendant. The present application for summary judgment does not relate to this allegedly retained income however, and I leave this aspect on one side.
[36] Mr Ewan Gardiner’s evidence at trial here was that $169,342.47 was not paid to the estate for distribution from the net proceeds of the harvest.15
The law relating to interpreting the Deed
[37] There is no dispute between the parties about the relevant legal principles governing interpretation of the Deed. Relevantly, in summary, the Supreme Court made the following clear in Firm PI 1 Ltd v Zurich Australian Insurance Ltd:16
15 Affidavit of Ewan Gardiner of 22 June 2016 at [2]-[3], referring to a letter of 6 November 2008 containing the figure.
16 Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [60]- [63] as I previously summarised in Clode & Anor v Sullivan & Ors [2016] NZHC 1561 at [108].
(a) “[T]he proper approach is an objective one, the aim being to ascertain
‘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’”.17
(b)The context “may point to some interpretation other than the most obvious one and may also assist in determining the meaning intended in cases of ambiguity or uncertainty”18 though there does not have to
be ambiguity.19
(c) But “the text remains centrally important” as its ordinary and natural meaning, construed in the context of the contract as a whole, “will be a powerful, albeit not conclusive, indicator of what the parties meant”.20
(d)In the interests of certainty, a more restrictive approach to the use of background might be justified if the parties are aware that their contract might be relied upon by a third party.21
(e) “[I]n interpreting commercial contracts the courts should have regard to their commercial purpose and to the structure of the parties’ bargain, to the extent that they can reliably be identified”, though there are “some dangers” in the approach.22
(f) If there is a “strong case”, persuading a court that something must
have gone wrong with the language,23 it is not required “to attribute to
17 At [60], citing Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1
WLR 896 (HL) at 912 per Lord Hoffmann. See also Chartbrook Ltd v Persimmon Homes Ltd
[2009] UKHL 38, [2009] 1 AC 1101 at [14] per Lord Hoffmann.
18 At [63].
19 At [61] citing Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444 at
[4] per Blanchard J, at [23] per Tipping J, at [64] per McGrath J and at [151] per Gault J.
20 At [63] and see [88].
21 At [62].
the parties an intention which they plainly could not have had”,24 and “a conclusion that it produces a commercially absurd result should be reached only in the most obvious and extreme of cases”.25
The parties’ submissions
[38] Mr McIntosh, for Alec, submits there are two possible interpretations of the
meaning of “net income from harvesting” as inserted by cl 15 of the Deed:
(a) First, it might mean all proceeds of the first harvest minus the costs associated with the harvest and tax. That would be given effect by Robert ensuring that amount is paid through dividends, topped up by him personally to the extent some proceeds were retained for further costs of the company. That would mean Robert was personally obliged to ensure the estate received another $169,000 for distribution according to the Deed.
(b)Alternatively, it might mean all dividends declared by BFL in respect of the first harvest and received in respect of the estate’s shares. That would rest on Robert procuring a dividend in respect of all surplus proceeds. That would mean Robert was obliged, as director, to ensure all excess funds available were declared as a dividend and paid out which he did not do.
[39] Mr McIntosh submits the first interpretation is the more literal and obvious interpretation and is supported by the context and purpose of the Deed. He says a deed designed to compensate the sisters would hardly provide for their funding Robert’s future interests. He points to a 2007 letter from Wendy and Lynne to Robert in support. He acknowledges it appears the parties did not turn their minds to how the money to be distributed was to be procured. But he says the “sensible answer” in the circumstances is that Robert should be personally liable to ensure the estate received the net income from harvesting irrespective of the amount of the dividend. Mr McIntosh submits that where the words are clear, but one of the parties
(Robert) has done something not contemplated by the document, the approach should be to determine the parties’ intention with respect to the unforeseen event and then determine whether effect can be given to that intention without undue violence to the words used.26 He says the parties’ intention was clear and if I do not construe the Deed accordingly I should imply a term into the Deed to fill the gap.
[40] Mr McIntosh submits that if the second interpretation is preferred, it must have been premised on the understanding that all available funds after the first harvest would have been declared as a dividend. He says the parties would not have understood that Robert was free to prefer his own interests in the BFL shares over the obligation to make available to the estate the maximum return from harvesting. He points out that Robert accepted under cross-examination that if no funds were
retained by BFL shareholders would be called upon for a capital injection sooner.27
In September 2007 Mr Clark proposed a dividend of $180,000 (with $90,000 going to the estate).28 Accordingly, Alec seeks a declaration of Robert’s obligation and an order for specific performance or a direction under s 66 of the Trustee Act 1956 that Robert pays the estate $90,000 for distribution under cl 15.
[41] Mr Rennie, for Robert, submits:
(a) The Deed is a statement of the interests of the parties inside the estate.
Robert accepted an adjustment to his interests under the Will of a deferral for 12 months of having the BFL shareholding transferred. Each of the brothers made similar contributions under the Deed.
(b) The Codicil contained no requirement of payment of dividends.
When the Deed used the phrase “net proceeds of harvesting” it
provided no means of controlling BFL so that phrase can only mean such proceeds as were received by the Estate by way of dividend.
26 Citing Aberdeen City Council v Stewart Milne Group [2011] UKSC 56 at [22].
27 Notes of Evidence, at page 159, lines 19-23.
28 Second Affirmation of Patrick Clark, of 16 June 2016; Email from Paddy Clark to Robert Burnside, Alec Burnside and Kevin Osborne (9 September 2007); Letter from P. A. Clark to Robert Burnside (11 September 2007).
(c) All parties to the Deed knew there were additional assets in BFL because they agreed that if the directors sold the shares the proceeds of that sale would be paid to the sisters, which would be meaningless unless there was value in the continuing company. Alec’s evidence was that he does not think there was any thought given to the
additional monies.29 At the time of the Deed, 22 May 2005, the
harvest was still to be completed. Robert knew there had been a decision by the shareholders of the company on 5 September 2002 as to how the proceeds would be allocated.
(d) The dividends that were paid were determined in relation to solvency.
No company director complying with his or her statutory duties, to be satisfied the expenses expected to fall due could be met, could have paid out all post-harvest cash from the company because of the guarantees provided by the estate to the Māori owners of the land and because of BFL’s liability to Robert for harvest management. The constitution does not enable shareholders to be compelled to provide funds.
(e) There are elements of judgment in what dividend should be declared but no other dividend decision was open to Robert. When Mr Clark proposed a $90,000 dividend to each of the two shareholders there was $144,000 of cash, including GST refunds, available. Mr Clark’s evidence was the shareholders would have had to commit an equivalent funding of the company and the estate would have been exposed, via the guarantee, to an equivalent liability so the sisters would not get the money in any case.
(f) Finally, Alec has no entitlement to any of these funds anyway so it is
not open to him to pursue what is effectively his sisters’ claim, though an outcome based on that technical point would be unsatisfactory.
29 Second Affidavit of Alexander Burnside of 22 June 2016, at [18].
Decision
[42] Clause 15 of the Deed states the identified recipients “shall be paid” but does not say who is do the paying or by what mechanism the funds are to make their way from BFL to the beneficiaries.30 Objectively, what meaning would the Deed convey to a reasonable person having all the background knowledge reasonably available to the parties at the time of the Deed?
[43] There was unhappiness within the family about the fairness of the Will. The purpose of the Deed was to remedy that. Robert and Alec both agreed to share some of the benefits to which they were entitled under the Will. Alec sold stock to repay estate debt. Robert shared the increase in value in the BFL shares to which he was otherwise entitled by virtue of his legacy under the Codicil. Otherwise, there is little evidence of pre-contractual negotiations which casts light on the meaning placed on cl 15 by those who signed the Deed.
[44] Clause 15 of the Deed amended cl 8 of the Will – the clause providing for the trustees to hold the residue of the estate upon trust to retain or sell it. Awkwardly, in that context, sub-cls 15 (a)–(c) refer to “the net income from harvesting by Burnside Forests Limited”. And as amended by cl 15, after sub-cls (a)–(c), cl 8(d) goes on to instruct application of “the remaining income and capital of the trust”. This suggests the drafters of the Deed essentially conceived of the net income from harvesting effectively being part of the estate and neglected to consider how those funds were going to get to the estate. Although BFL is directly referred to in each of the sub-cls (a)–(c), as both parties agree, there is no reference or requirement as to how the money would get from the company to the estate.
[45] Payment of a dividend is the obvious mechanism. Both parties appear to agree this was the appropriate mechanism. The Deed noted, in cl 18, that Robert was
a Director. He was also a trustee. And Robert and Alec together, as trustees, held
30 There is another difficulty with cl 15 on its face, which is that its reference to “harvesting” is not time-limited in any way. However, the interaction between the Codicil and cls 15 and 19 make clear that cl 15 only concerns the first harvest. No one argued anything else. In addition, sub-cls
15 (a) to (c) do not identify the expenses that the “income from harvesting” is “net” of. Is it the expenses of the first harvest or also the expenses of replanting after the first harvest? But that was not argued and it is not necessary to address given the conclusion I reach.
just over 50 per cent of the shares. They would do so until after the harvest because of the operation of cl 19. I consider cl 15 of the Deed contemplated: Robert, in his roles as trustee and Director, would authorise payment of a dividend by the company to the shareholders, including the estate; and Robert and Alec, as trustees, would ensure payment of the dividend from the estate to the specified beneficiaries.
[46] But Robert’s role as trustee did not entitle him to ignore his duties as a company director. Before authorising a dividend, s 52 of the Companies Act 1993 required the board of directors be satisfied, on reasonable grounds, that the company, immediately after the distribution, could satisfy a solvency test. The directors were required to sign, and did sign, a certificate to that effect. The same requirement is reflected in cl 10.1 of BFL’s Constitution. Section 4 of the Act provided a company satisfied the solvency test if it “is able to pay its debts as they become due in the normal course of business” and “the value of the company’s assets is greater than the value of its liabilities, including contingent liabilities”. A director who fails to
comply commits a criminal offence. As Heath J has stated:31
The Act requires the board of directors of a company to determine whether it is solvent before returning wealth to its shareholders. As shareholders stand behind creditors in the priorities in which they are paid on insolvency, it is inappropriate for a shareholder to receive benefits, ahead of creditors, at a time when the company is insolvent. The need for a company to be solvent before distributions are made to shareholders is underscored by provisions in the Act by which a company may seek recovery of amounts distributed from shareholders and directors: see s 56(1), (2) and (4) of the Act.
[47] There is conflicting evidence as to what was agreed at a shareholders’ meeting on 5 September 2002, before Jim’s death but which Robert attended as Jim’s proxy. This concerned a dividend from a small first forestry harvest. Robert says the meeting’s minutes, taken by his wife Deborah and circulated at the time, support reforestation and pruning costs being deducted from future dividends. Mr Clark’s evidence in 2016, supported by notes he says he took at the meeting in 2002, is that
that no decision was made.32
31 Re DML Resources Ltd (in liq) [2004] 3 NZLR 490 (CA) at 492.
32 Third Affirmation of Paddy Clark of November 2016, at [7](b) and [8]; handwritten notes of
Paddy Clark titled “Special Meeting Burnside Forests Ltd” (5 September 2002).
[48] Robert’s evidence is that in 2006:33
Further monies from harvesting were retained by the company to meet its ongoing obligations to replant the trees and yearly lease payments to the Maori land owners. As a Director I consider it proper for funds to be held by the Company to meet these expenses as unlike other subscriber forestry companies, Burnside Forests Ltd had an obligation to leave the land with a fully established forest at the end of the lease term.
[49] Mr Clark clearly had a different view to Robert of the appropriate dividend amount. And Mr McIntosh submitted, for Alec, that a further capital injection would be required in any case before the second harvest so the only question was how big that should be.
[50] I regard Robert’s evidence as to what happened at the 2002 meeting, supported by the official minutes, as more credible but I do not consider much turns on that. I also regard Robert’s expressed reasons for retaining earnings in the company as valid. I do not accept the implications of Mr McIntosh’s submission that the prospect of relying on further voluntary shareholder injections meant Robert, as a director and trustee, was legally obliged to authorise a larger dividend than he did. The amount that was authorised kept sufficient funds in the company to meet its ongoing expenses. If BFL had authorised a higher dividend, and required an earlier capital injection, it had no ability under its Constitution to require that to come from its shareholders. Absent other funding, if BFL had authorised a higher dividend, it could have put at risk its replanting obligations. In the extreme, that could lead to the guarantee regarding replanting to be called upon, at the expense of the estate.
[51] Clause 15 envisages the total dividend paid might be anything above
$650,000, which it was. I do not agree this or any other clause of the Deed puts a personal obligation on Robert to inject funds into BFL to fund a higher payment of dividends to his sisters. It is conceivable the drafters of the Deed may have thought this a “sensible answer” as Mr McIntosh submits but, if so, they could be expected to have reflected it in the Deed. It is more likely Robert would have objected to such a clause – which would put his personal finances at the mercy of vicissitudes in BFL’s
finances. I can see no basis on which to impute such an intention to the parties. This
33 Affidavit of Robert Burnside of November 2015, at [31];
is not an obligation which can be read into cl 15 of the Deed. I do not consider there is any basis on which to imply such a term into the Deed. Accordingly, I do not grant the orders sought by Alec.
[52] Finally I note Mr Rennie may be correct to question Alec’s entitlement to pursue funds that are not his but his sisters’. But, given the conclusion I have come to, I do not rest my decision on such a technical point.
Third issue: The Burnside Forestry shares
Facts
[53] Jim Burnside owned 50 per cent of the shares of BFL. There appears to be no dispute that the shares in BFL were intended, under the Will and Deed, to transfer to Robert. They have not been transferred. Robert seeks transfer. Alec says, before transfer can occur, the question of Mr Clark’s pre-emptive rights needs to be resolved.
[54] BFL’s latest Constitution was adopted on 19 March 2004. It was signed by Robert and Alec, as trustee shareholders for the estate; by Mr Clark and his wife as trustee shareholders for their own family trust and by Mr Clark as shareholder of one share in his own right. The evidence is that Robert received independent advice as
the provisions of the constitution before it was adopted by the trustees.34
[55] Part 4 of the Constitution deals with the transfer of shares which is effected by a signed share transfer form. It may be refused or delayed by the board before registration. Relevant clauses provide:35
4.6 Pre-emptive rights on transfers. Except as provided in clauses
4.14 (transfer not subject to pre-emption) and 4.15 (transfer approved by all shareholders) no shares may be sold or transferred by any shareholder, liquidator, official assignee or personal representative of any shareholder, unless and until, the rights of pre- emption conferred in this constitution have been exhausted.
…
34 Letter Kevin Osborne to Alec and Robert of 14 July 2008 at p 3.
35 Constitution of Burnside Forests Limited. Reference to s 86 in cl 4.17 is in square brackets in the original.
4.17 Transmission of shares
Shares may pass by operation of law notwithstanding the provisions of clauses 4.1 to 4.16 above. [Cross reference: Section 86 of the Act].
Submissions
[56] Mr Rennie, for Robert, submits Alec as trustee must retire as shareholder to effect Robert’s legacy. The legal and beneficial interests will then merge. That is not a transfer of shares that triggers the pre-emption rights. And the matter can be dealt with by court directions.
[57] Mr McIntosh, for Alec, submits the issue lies between Mr Clark, Robert and the trustees. Alec’s concern is that there be no further litigation against the estate. He does not seek to support Mr Clark. But he goes on to submit the Constitution expressly provides for the current situation since Robert and Alec hold the shares as Jim’s personal representatives. He submits the Court cannot declare the shares vested in Robert irrespective of the Constitution and the Court should not do so without Mr Clark and BFL being parties.
Law
[58] Section 86 of the Companies Act 1993, entitled “Transfer of shares by operation of law”, provides “[s]hares in a company may pass by operation of law notwithstanding the constitution of the company.”
[59] The courts have considered the transfer of shares in companies by virtue of a change in trustees before:
(a) In 2004, in Ord v Calan Healthcare Properties Ltd, the Court of Appeal determined that a share transfer did not trigger pre-emptive rights in a company’s constitution.36 It found “it was regarded on all sides as so obvious that cl 8.4 did not apply to mere changes of trustee
that no such carve-out was required”.37 It commented that the
36 Ord v Calan Healthcare Properties Ltd [2005] 2 NZLR 96 (CA).
plaintiff was “unable to cite a single case in which a change of trustee has been held to trigger rights of pre-emption”.38 It cited, but did not express an opinion on, commentary by Dr Borrowdale that the term “transfer” “catches neither the beneficial nor the legal title in isolation, but only the two together; i.e. a transfer of the whole interest in a share”.39
(b)In 2005, in Burns v Steel, Randerson J examined the scope of a beneficiary’s and trustees’ powers in relation to shares that both parties appear to have assumed to be subject to a pre-emption clause.40
(c) In 2008, in Parkinson v James Products Ltd, Andrews J applied the Court of Appeal’s reasoning and concluded “‘every change in the ownership of shares’ in cl 12 means a change of both legal and beneficial interests occurring together”.41 There was no change in the beneficial interest there, only a transfer of legal title from one trustee to another. The separation of legal and beneficial interest “was known
to both shareholders and must be taken to have been in the shareholders’ minds at the time the constitutions were adopted”.42 No new and unknown party was introduced into the shareholding and the transfer could not be seen as having defeated the purpose of the pre- emptive provision.43
Decision
[60] Robert and Alec are currently the holder of the shares in trust, as trustees. They had that status when the BFL Constitution was adopted. Mr Clark knew that. And Robert and Alec, of course, knew that too. If cl 14.6 of the BFL constitution
meant what Mr McIntosh suggests it might, and that had been understood by the
38 At [47](a).
39 Andrew Borrowdale “Share Transfers and Pre-emptive Rights” [2004] CSLB 64 at 67.
40 Burns v Steel [2006] 1 NZLR 559 at [14].
41 Parkinson v James Products Ltd [2009] NZCCLR 8 at [46].
42 At [52].
parties, Robert and Alec would have been obliged, as trustees administering the estate, not to sign it. The interpretation posed by Mr McIntosh would be inconsistent with the Will and, therefore, would be contrary to the presumed intention of Robert and Alec, as trustees under the Will, in signing the Constitution.
[61] I construe this constitution in the same way as did the Court of Appeal in Ord and the High Court in Parkinson. The wording of cl 4.6 does not suggest “sold or transferred” is meant to distinguish legal from beneficial ownership of shares. It only captures sale or transfer of both together. I do not consider the inclusion of personal representatives in the list of those who sell or transfer under 4.6 make a difference to that. The retirement of one trustee means the legal ownership merges with the beneficial ownership. No new owner is introduced into the company. The purpose of the pre-emptive provision is not defeated. Rather the legacy, which was known to the shareholders at the time the new constitution was adopted, is effected.
[62] I have dealt with this issue even though it is not a true affirmative defence to the counterclaim. Any concern about this issue might have been reason to seek legal advice or to seek directions from the Court under the Trustee Act 1956. But it is not a good reason to oppose the transfer of shares for 13 years after the Deed. Mr Clark knew of these proceedings and appeared as a witness in them. He was aware his testimony could affect any pre-emptive rights he had.44 He did not seek to intervene in, or to be joined to, the proceedings. The potential that he may wish to take other legal proceedings is not a reason for the transfer of shares envisaged by Jim’s Will to
be further delayed.
[63] I direct, under ss 59, 66 and 68 of the Trustee Act 1956, the legal title in the shares in BFL currently held on trust by Jim Burnside’s estate be transferred to, and vest in, Robert Burnside. Any actions required by the trustees to implement these
directions should be taken immediately.
44 Notes of Evidence at p 18, line 33 – p 19, line 14.
Fourth issue: the Ravensdown shares
Facts
[64] When farmers buy qualifying fertiliser from Ravensdown they receive rebate entitlements, partly in cash and partly in shares. Shares can be surrendered for value after five years from the last fertiliser purchase. Shares can be used for further fertiliser purchases by the same farmer.
[65] Ravensdown shares were associated with the Muritai farm and were in Alec’s name. Some 19,677 $1.00 Ravensdown shares, in Jim’s name, were associated with the Crownthorpe farm inherited by Robert. With Alec’s agreement as trustee, Robert continued to use those shares to purchase more fertiliser. Rebates were paid out to Robert’s family trust. The last payment however, of $4,004, was retained by the estate solicitor because Alec would not consent to it. Alec says he had understood the Ravensdown shares had no value but, now he realises they did, he considers he was wrong to agree to the transfer of the shares connected to each of the farming businesses.
[66] The estate solicitors suggested the shares were part of the residue of the estate. They also suggested an equal split of the Ravensdown shares between the two farms. Robert and Alec, as trustees, agreed but then issues arose as to whether they should be split by farm or split by value. Two different proposals were discussed, but not implemented:
(a) First, in November 2004, when it was understood the shares had no value to anyone else, the trustees agreed the shares be transferred to the beneficiary who received the land to which they were connected.
(b)Second, in May 2005, Robert offered to either split them according to which shares were associated with each property or to split them equally by value. A week later, he withdrew the offer.
Submissions
[67] Mr Rennie, for Robert, submits the farms were left to Alec and Robert as going concerns. He seeks implementation of the first agreement between the trustees. He says the second agreement to split the shares by value was conditional on implementation which never occurred and is denied by Robert. He seeks enforcement of that and payment of the $4,004.
[68] Mr McIntosh, for Alec, submits correctly that Crownthorpe was not bequeathed to Robert as a going concern but the stock and machinery went to Alec and the shares do not run with the land. He submits there was no binding agreement between the trustees and any agreement was based on mistaken beliefs about value and quantum. He also submits Ravensdown rules allow personal representatives of a deceased shareholder to redeem shares where they have ceased to be a transacting shareholder.
Decision
[69] The rebate for $4,004 from Robert’s use of the Ravensdown shares should be paid to Robert and any shares generated from Robert’s use of those shares should also be Robert’s.
[70] However, the Will does not provide explicitly for the Ravensdown shares held by Jim. As the estate solicitors advised, they form part of the residue of the estate and should be distributed accordingly for the benefit of Shirley and all the children under cl 8 of the Will. The new trustees will have to determine whether the shares have value in the hands of anyone other than Robert:
(a) If the shares can be redeemed for value by the estate, as Mr McIntosh submits, then that should occur and distribution according to the Will should occur.
(b)If the shares prove to have no value to anyone other than Robert, then the trustees should consider offering the shares to Robert to purchase,
if that is feasible, so their value can be distributed as part of the
residue of the estate.
Result
[71] I direct:
(a) Under ss 59, 66 and 68 of the Trustee Act 1956, the legal title in the shares in BFL currently held on trust by Jim Burnside’s estate be transferred to, and vest in, Robert Burnside. Any actions required of the trustees to implement these directions should be taken immediately.
(b)Alec and Robert, and invite Lynne, Wendy and Maree, each to file memoranda within 15 working days of the date of this judgment, with the names and brief biographical professional details of up to three nominees, who are willing to serve as trustees, together with a very brief (one paragraph) explanation of why they are nominated. Those who provide nominations will then have the opportunity, within a further 5 working days, to file a memorandum with their views of the acceptability or non-acceptability of the others’ nominees. I am likely to give preference to any nominee supported by both Alec and Robert.
(c) The rebate for $4,004 from Robert’s use of the Ravensdown shares should be paid by the estate to Robert and any shares generated from Robert’s use of those shares should also be Robert’s. Otherwise, the Ravensdown shares held by Jim form part of the residue of the estate and should be distributed accordingly for the benefit of Shirley and all the children under cl 8 of the Will. The new trustees will have to determine whether the shares have value in the hands of anyone other than Robert:
(i)If the shares can be redeemed for value by the estate, as Mr McIntosh submits, then that should happen and distribution according to the Will should occur.
(ii)If the shares prove to have no value to anyone other than Robert, then the trustees should consider offering the shares to Robert to purchase, if that is feasible, so their value can be distributed as part of the residue of the estate.
[72] Alec has succeeded in his application to remove the trustees. Robert has succeeded in his counterclaim for the transfer of the BFL shares. Both sought costs. I am inclined to let costs lie where they fall. But I reserve leave for either side to file and serve brief written submissions on costs within 20 working days of the date of this judgment, to which the other party may respond within 10 working days.
Palmer J
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