Carmine v Ritchie
[2012] NZHC 1514
•29 June 2012
JUDGMENT FOR PUBLIC RELEASE: SEE ADDENDUM
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2011-404-6375 [2012] NZHC 1514
IN THE MATTER OF a Deed of Trust dated 9 February 2001
AND IN THE MATTER OF the JMC and RA Ritchie Family Trust created by that Deed
AND IN THE MATTER OF a claim under r 18.1(a)(ix) for the determination of a question that arises in
the administration of that Trust, viz whether a Deed of Removal of Trustee signed by the Second Respondent and dated 13
December 2010 is of any, or no effect
BETWEEN VINCENT JOHN CARMINE Plaintiff
ANDANDREW JOHN RITCHIE, RACHEL ANNE RITCHIE AND WARWICK KENT PURDIE AS TRUSTEES OF THE JMC & RA RITCHIE FAMILY TRUST
Defendants
Hearing: 2 April 2012
Appearances: A P Molloy QC and D Spencer for plaintiff
R B Stewart QC and S Gollin for first and second-named defendants
K Davenport for third-named defendant
Judgment: 29 June 2012
JUDGMENT OF GILBERT J
This judgment was delivered by me on 29 June 2012 at 3.00 pm pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date: ………………….
Counsel: A P Molloy QC, Auckland: [email protected]
R B Stewart QC, Auckland: [email protected]
K Davenport, Auckland: [email protected]
CARMINE V RITCHIE HC AK CIV 2011-404-6375 [29 June 2012]
Solicitors: Smith & Partners: [email protected]
Introduction
[1] This proceeding concerns the validity of the removal of the plaintiff, Mr Carmine, as trustee of the JMC and RA Ritchie Family Trust (the Trust) which was established by John and Rachel Ritchie in 2001. Mr Carmine is a solicitor who previously acted for John and Rachel Ritchie. Following John’s death on
14 July 2010 Rachel changed solicitors and executed a deed dated
14 December 2010 removing Mr Carmine as a trustee. She appointed the third-named defendant, Mr Purdie, in his place.
[2] The Trust’s main asset is a 44.83% shareholding in Ritchie Transport Holdings Limited (the Company). The remaining shares in the Company are held by interests associated with other family members. Mr Carmine claims that the trustees have a duty to commence proceedings under s 174 of the Companies Act 1993 to obtain full value for the trust’s shareholding in the Company. The other trustees do not support such an action being taken.
[3] Mr Carmine considers that his removal as a trustee in these circumstances is contrary to the interests of the Trust and the protection of its assets. He contends that the purported exercise of the power of removal was therefore a nullity with the result that he remains a trustee with an ongoing duty to protect the Trust’s estate. He seeks a direction accordingly.
Background
[4] To set the current dispute in context, it is necessary to trace the background of the Company and its ownership. The Company, now the largest privately-owned bus company in Australasia, was incorporated in 1972 to take over a business that had been started by the late Donald Ritchie, possibly as early as 1937. The business was initially quite small and involved only two or three buses doing school runs and charters for sports groups in and around Timaru.
[5] Donald had three sons, John, Donald and Glenn. Following his father’s death, John resigned from his employment as a wool buyer/grader to take over the business. His brothers were not initially interested in working in the business but they subsequently did so. Donald, Glenn and John were equal shareholders in the Company when it was formed to take over the business. Glenn took responsibility for the management of the Company and was the company secretary. John looked after sales and marketing and tour coaching. The three brothers pursued an aggressive growth strategy, with all profits being retained in the business and no dividends being paid.
[6] John got into financial difficulty as a result of a failed property transaction and declared bankruptcy in about 1985. Prior to doing so, he transferred his shareholding in the Company to his wife Rachel. Donald and Glenn subsequently increased their shareholdings by subscribing for new shares. Mr Carmine, who was then John and Rachel’s solicitor, issued proceedings challenging the inequality of the shareholding. The proceedings were settled at mediation in February 1997, by which time Donald had died. In terms of the settlement, Rachel and Glenn purchased the shares previously held by Donald, and Glenn agreed to sell sufficient shares to Rachel to reduce his shareholding to 51%. 4.17% of the shares were subsequently transferred to John and Rachel’s son, Andrew.
[7] The board commissioned a business appraisal report from KPMG in March 1998 which was to be provided to Westpac. KPMG reported that the financial performance of the Company had not been satisfactory and that net profit after tax for the year ended 31 March 1998 was forecast to be only [ ]. The return on assets was [ ] per annum, which compared with borrowing costs of [ ] per annum. Bank borrowings were [ ] as at December 1997 and further investment in fixed assets of [ ] was budgeted for the next financial year, requiring substantial increased funding. Using Westpac’s suggested asset realisation assumptions, the bank had inadequate security for its existing facilities. Nevertheless, KPMG recommended that the bank continue to support the Company provided that there was an increase in equity or profitability in line with budget.
[8] KPMG considered that the management structure was inappropriate for an organisation having a turnover of [ ] and projected borrowing in excess of [ ]. It was concerned that there was insufficient accountability because family members were the shareholders and directors and also occupied the senior management and operational roles in the Company. KPMG recommended that there should be a clean break in the chain from shareholder to operational management and that board members should be selected on the basis of skills and ability with a balance of independent directors and family members.
[9] The board prepared a business plan in March 1998. The long-term objective was to achieve a level of profitability which would allow possible future disposal of the Company to an outside interest or to other family members within a 10 year period. The shareholders committed to developing a strategy to enable younger family members to become more actively involved in the day to day operation of the Company. This would allow those family members to decide whether they wished to remain involved in the Company on a long-term basis.
[10] The long-term objectives of the Company were reconfirmed in successive business plans. The 2001-2002 business plan was considered at a board meeting in February 2002. The board agreed that the existing growth strategy should continue for the next five years or so. At that time the Board would review the structure of the Company and consider whether all, or part, of the business should be retained for younger family members, or at least a place preserved for them in any sale of the business.
[11] Andrew had served his apprenticeship at Newmans Coachlines before commencing employment with the Company in 1989. He took responsibility for managing the Auckland workshop in 1994 and progressed to a senior management role in the Company in 1998. John and Rachel’s daughter, Belinda, also works in the Company. In recent years she has managed the Intercity operations. Their only other son, Simon, had initially worked in the business but is now a chef in Timaru and has no interest in working in the Company in the future.
[12] At the February 2002 meeting the board noted that the shareholders were currently investigating the possibility of transferring the shares to family trusts. This would enable family members who were not actively working in the business to share in the wealth generated. The board further noted that this exercise would require consideration of a fair price for the shares. It appears that about this time the shareholders transferred their respective shareholdings to family trusts. Rachel’s shares were transferred to the Trust as part of this restructure and Andrew was appointed a director of the Company.
[13] John and Rachel signed the trust deed as settlors. The trustees were Rachel, John, Andrew and Mr Carmine. The discretionary beneficiaries were John and Rachel, their children and grandchildren, John and Rachel’s parents and any other person appointed by John and Rachel in terms of the trust deed. Andrew is not married and has no children. Simon has two children and Belinda has one child.
[14] In the following years, the board continued to pursue its growth strategy and its long-term objectives remained unchanged. Dividends continued not to be paid.
[15] In August 2006, the board considered an approach from [a potential purchaser] to acquire the Auckland network business assets of the Company. This was the most significant part of the business and offered the greatest growth potential. [The potential purchaser] offered to pay [ ] for these assets, with the possibility of the price increasing to between [ and ], based on an earn- out formula. The board recognised that the offer included a premium reflecting the value that this part of the business could deliver to an existing market participant. However, the offer was declined following a meeting of shareholders in late August 2006.
[16] At the shareholders’ request, a capital restructuring report was commissioned from Joe Butterfield, the Company accountant and a trustee of Glenn’s trust. This report was prepared in late 2006 or early 2007 and was endorsed by John, Glenn and Andrew. It recorded four objectives identified by the shareholders. The first was to enable John and his trust to receive an early payment of [ ] and for Andrew to increase his equity stake to better reflect his contribution to the value of the business.
The second objective was [ ]. The third objective was for the Ritchie family to retain majority control of the business, if possible. The fourth objective was to ensure that any restructuring did not impede the Company’s ability to retire debt and continue to grow.
[17] Mr Butterfield noted that John and the other trustees of the Trust had agreed to sell 10% of their stake in the Company to Andrew. This sale would increase his shareholding to 8.65%. Glenn would waive his pre-emptive rights to enable this transaction to proceed. Mr Butterfield recommended that Deloitte be commissioned to determine a fair market value for the shares. For the purposes of his report and to illustrate the possible financial implications, Mr Butterfield anticipated that 4.48% of the shares, being 10% of the Trust’s holding, would be likely to generate [ ]. This assumed a multiple of 5 on EBITDA of [ ] and debt of [ ]. In arriving at this assessment, Mr Butterfield took into account that the sale would involve a minority stake in an illiquid security.
[18] Mr Butterfield proposed that Andrew settle the purchase by paying [ ] in cash immediately and the balance over time. Mr Butterfield noted that Andrew would have to fund any purchase through salary or dividends. His recommendation was that this be done through an increased salary commensurate with his role as the director of the Auckland urban bus service which then employed over 250 staff. He suggested that Andrew’s salary be reviewed by an independent recruitment consultant. Mr Butterfield recognised that this would result in a departure from the historical practice of all working shareholders receiving the same remuneration.
[19] In the longer term Andrew would have the opportunity to acquire up to 49% of the shares in the Company, should the other members of his family wish to sell. He would then need to acquire a further 2% from Glenn to achieve majority ownership. Mr Butterfield noted that Glenn’s immediate family did not intend to participate in the business in the future.
[20] Deloitte was asked to provide indicative valuations of the shares in two scenarios, one where all of the shares were offered for sale and the other, a parcel of between 5% and 15%. This valuation was carried out as at 31 March 2007 and
provided in a report dated 23 October 2007. Deloitte assessed the fair value of 100% of the shares to be in the range of [ ] to [ ] and considered that a discount of between [ ] and [ ] would be appropriate to reflect a minority interest.
[21] John was concerned that Mr Butterfield had somehow manipulated the financial information and instructions provided to Deloitte so as to achieve a low value assessment. He did not proceed with the proposed sale of further shares to Andrew.
[22] By this time, Andrew had six titles in the Company, including Auckland area manager. John had difficulty adjusting to Andrew’s progression to this more senior role, and their working relationship suffered. This led to Andrew tendering his resignation in June 2008. John and Glenn persuaded him to reconsider on the basis that the management structure would be reviewed. At its July 2008 meeting the board agreed that Andrew would be appointed Auckland regional manager. John did not oppose this appointment and said that he would be retiring in two years’ time.
[23] At this same meeting, the board approved the 2008/2009 business plan which confirmed that the Ritchie family members currently involved in the business intended to continue that involvement. The board noted that the Company remained in expansion mode and that any eventual disposal could be by way of a full or a partial sale to an outside investor or to family members.
[24] In April 2009, Sheffield Limited was asked to advise on the current market remuneration for someone in Glenn’s position as managing director, Andrew’s position as Auckland regional manager and John’s position as tours, sales and marketing manager. Sheffield recommended salary ranges for each of these three positions with midpoints of approximately [ ], [ ] and [ ] respectively.
[25] This report was considered by the board at a meeting in June 2009. It was
agreed that Glenn’s salary be increased by [ ] to [ ] per annum from
1 April 2009. John requested a similar increase but this was not agreed. Andrew’s
salary remained unchanged. John clearly resented this decision. By this time his
health was deteriorating and his role in the business was diminishing but he considered that the long-standing practice of paying equal salaries should be maintained. Mr Carmine said that he was angry about this decision which he interpreted as an attempt by the other directors to exploit John’s vulnerability. Mr Carmine took this issue up with Tony Shaw, a director and the Company solicitor.
[26] Mr Shaw wrote to Mr Carmine in August 2009 advising that Glenn and
Andrew had agreed to increase John’s and Glenn’s salaries to [ ] backdated to
1 April 2009. This was on the basis that the parties would use their best endeavours to reach agreement regarding John’s exit from a management role in the business and the sale, or partial sale, of his shares. Andrew’s salary was to remain unchanged.
[27] Mr Carmine persuaded John and Rachel that they should seek expert assistance. Colin Theyers of Staples Rodway was approached for this purpose. He met with a number of the board members in August 2009 and was engaged to assist in preparing a cohesive plan that would accommodate the disparate requirements of each shareholder group and help formulate an appropriate business strategy.
[28] Staples Rodway carried out a share valuation as at 31 August 2009 which it completed in draft form in late November 2009. Staples Rodway valued the Company using the discounted cashflow methodology and assessed the value of
100% of the share capital as being in a range from [ ] to [ ], with a midpoint of [ ]. This valuation was never finalised because the draft assumptions underpinning it were never confirmed.
[29] Mr Theyers met with Mr Butterfield and Mr Shaw, the two independent Company directors, on 30 November 2009. Mr Theyers noted that the Company’s profitability had improved markedly in recent years and that EBITDA was expected to reach [ ] in the 2011 financial year. Bank borrowings stood at approximately [ ]. He advised them of Staples Rodway’s valuation conclusions and discussed three options outlined in a position paper which he presented at the meeting. These options were to maintain the business in its current ownership structure, introduce a new equity partner, or sell the business in a single transaction,
or series of transactions. Mr Butterfield and Mr Shaw considered that option 3 was preferable and asked Mr Theyers to recommend a sale process. Mr Theyers discussed his position paper with Glenn and his wife later that day. They said they would consider it.
[30] Mr Shaw wrote, on Glenn’s trust’s behalf, to Mr Theyers in February 2010 setting out a proposal to purchase the Trust’s shares for $20 million. Mr Shaw relayed Glenn’s perspective that John and Rachel should recognise Andrew’s significant contribution to the Company in recent years. To that end he proposed that the Trust allocate Andrew’s one-third entitlement to him immediately, on the basis that Andrew would have no future expectation as a beneficiary of the Trust. On that assumption the amount payable for the remaining two-thirds of the shares held by the Trust would be $13,333,333. This price would be paid over time but would be structured to produce $1 million to $1.5 million in cash each year, which they anticipated would be sufficient to meet John and Rachel’s needs. Mr Shaw recognised that the proposed price was below the value indicated by Staples Rodway in its draft valuation but he said that it took into account that the sale would involve a minority shareholding with no guarantee of dividends for some years.
[31] John’s health was failing at this time and he was concerned for Rachel’s welfare after his death. He decided to engage Andrew Harmos, a specialist commercial lawyer, to provide independent advice on the proposal and to recommend how the Trust should extract fair value for its shareholding. Mr Harmos responded to Mr Shaw’s proposal in late April 2010 claiming that the board was deadlocked. He drew attention to the fact that all of the Company’s shareholders were trustees and that each owed obligations to beneficiaries when considering buying or selling shares in the Company. In view of the Staples Rodway valuation, Mr Harmos did not consider that the trustees of the Trust could meet these obligations by accepting the offer from Glenn’s trust. He pointed out that the offer did not include security for any deferred component of the purchase price nor did it provide for interest. He advised that a price and transaction terms, determined by a proper market-tested process, would be likely to satisfy trustee obligations. Mr Harmos concluded by saying that unless the parties were able to reach agreement, court action could be necessary.
[32] Mr Shaw responded in May 2010 rejecting the deadlock allegation. He confirmed that Glenn’s trust would not in any way frustrate a sale of shares by the Trust and indeed would welcome such a sale. He expressed the view that the price offered for the Trust’s shares was more than could be achieved by a sale to a third party. He pointed out that the Staples Rodway valuation was for the entire enterprise. He invited the Trust to initiate the pre-emptive rights provisions in the Company’s constitution if it was unable to negotiate a satisfactory sale to the other shareholders.
[33] Mr Harmos wrote again to Mr Shaw on 1 June 2010 reiterating that the best way of determining the value of the Company, and realising that value for the benefit of all the shareholders, was by a conventional sales process offering a majority, or preferably 100%, of the shares in the group. Mr Harmos relayed John’s view that there had been a lack of equity and fair dealing for some time and that absent a fair approach from all shareholders, requiring compromise on all sides, court action might be required. He invited an improved offer for the Trust’s shareholding at a realistic price, taking into account the Staples Rodway valuation, and suggested various commercial terms to protect the trustees of the Trust.
[34] Mr Harmos followed up with a draft proposal to Mr Shaw on 6 July 2010. He proposed an immediate pro rata share cancellation at an aggregate buyback price of $2 million utilising available imputation credits. After the share cancellation, the Trust would make a distribution of shares to Andrew’s trust, taking his shareholding from 4.2% to 9.2%. Andrew would relinquish any claim or entitlement under the Trust to that number of shares equivalent to two times the number of shares he received from the Trust. In this way Simon and Belinda would continue to benefit from the same number of shares as Andrew would receive. The Trust would retain a further 16% of the shares so that it would have an aggregate holding of 26%. The balance of its holding, being 13.8% of the shares, would be sold to the Company in three tranches over a three year period at a price to be determined by an updated valuation from Staples Rodway.
[35] John died on 14 July 2010, before any response to this proposal was received.
[36] Following John’s death, Rachel and Andrew discussed the matter. They decided that “a war” with Glenn’s family should be avoided. They considered that the best way to look after the family fortune for the benefit of them all was to continue to grow the Company under Andrew’s stewardship and to find a way of releasing sufficient funds to support Rachel in her retirement.
[37] Mr Carmine met with Rachel, Andrew and Belinda on 2 August 2010 for the purpose of executing probate documentation. Company issues were also discussed. It became clear that Mr Carmine and Andrew had diametrically opposed views as to what should occur. Mr Carmine’s view was that the Company’s shares should be sold in their entirety and that the Trust’s shares would be likely to realise [ ] in that event. He advocated that the Trust take court proceedings against Glenn to force a sale of the shares. Andrew strongly disagreed. He was opposed to the Trust resorting to litigation, which he considered would be lengthy, expensive and unproductive. He did not believe that the shares were worth anything like the amount suggested by Mr Carmine and he did not accept that the family should have to divest itself of its interest in the business which had been in the family for generations. Mr Carmine accused Andrew of preferring his own interests and disregarding his responsibilities as a trustee to the beneficiaries of the Trust. This led to Andrew suggesting he would resign as a trustee.
[38] Mr Carmine described this as a distressing meeting. It marked the end of any prospect of Mr Carmine and Andrew being able to work constructively together. The strength of Mr Carmine’s opinion about Andrew is illustrated by his description, in his affidavit of Andrew’s reaction to his proposal. He said it was “like the strike of a snake. It was without mercy; with total self-interest, and with no regard for anything but his own position”. I am not persuaded that Mr Carmine’s view was fair but I have no doubt that it was genuine. Andrew and Mr Carmine had firm and polarised views which were unlikely to be able to be reconciled.
[39] Mr Carmine sent a lengthy email to Belinda the following day urging her to support the process initiated by John with Mr Harmos and Mr Theyers. He suggested that she and Rachel should meet with Mr Theyers to discuss how this
might be progressed. Belinda responded that she and Rachel could meet with
Mr Theyers the following week.
[40] This meeting took place on 11 August 2010. Mr Theyers was authorised to arrange for Mr Shaw to engage in confidential discussions with Mr Harmos to see if progress could be made. These discussions took place on 25 August and concluded on the basis that Mr Shaw would discuss the matter with Glenn before responding.
[41] Mr Shaw wrote to Mr Harmos on 1 September 2010 advising that the directors had agreed to pay John’s salary to Rachel for a period of 12 months. He advised that Glenn and Andrew were prepared to consider the purchase of all of the Trust’s shares, but only at a discounted price. He said that they would not agree to amend the long-standing policy of not paying dividends, nor would they agree to the immediate pro rata share cancellation that had been proposed.
[42] Rachel sent an email to Mr Carmine on 7 September 2010 asking him to “put on hold” any further meetings with Mr Harmos in the meantime. She said that she was “not up to it at the moment” but would be in touch in due course. Despite this request, on 13 September, Mr Carmine sent Rachel a draft response to Mr Shaw’s letter which had been prepared by Mr Harmos. On 15 September, Rachel left a message for Mr Carmine again asking him not to give any further instructions to Mr Harmos and to take no further action.
[43] The issue which ultimately triggered Rachel’s decision to remove Mr Carmine as a trustee concerned a guarantee that the trustees were required to provide to the bank to support Company borrowings. Such guarantees had been given routinely in the past. However, Mr Carmine did not consider that he had sufficient information to make a fully informed decision on whether to commit the Trust to the guarantee. By this time, he had sought independent legal advice on his own position from another solicitor, David Spencer, who in turn had instructed Anthony Molloy QC. Mr Spencer sought further information, including copies of the loan documents and the proposed guarantee.
[44] This prompted Mr Shaw to write to Rachel on 29 September 2010 in the following terms:
I understand from Glenn that he has received loan documentation from the Bank of New Zealand in relation to the purchase of further buses. As part of the usual banking arrangements, the Bank requires a guarantee from the three shareholding trusts in Ritchies Transport Holdings Limited.
Andrew tells me that the trustees of your trust may not be prepared to sign. Could you please advise me whether or not this is the case.
My advice to the company is that if your trust will not sign the guarantee then the company will have to renegotiate terms with the Bank. I anticipate that the Bank may accept guarantees just from Andrew’s trust and Glenn’s trust, but in that event I believe it would be appropriate for Andrew’s and Glenn’s trusts to be paid a guarantee fee from the company.
I would appreciate your prompt response. I note that this is an issue which you will have to discuss with Vince and I am sending a copy of this letter to him.
[45] Mr Spencer responded to Mr Shaw in the following terms on 7 October 2010:
We have been instructed by Vincent Carmine in his capacity as the independent trustee of the J M C & R A Ritchie Family Trust. He has handed to us a copy of your letter dated 29 September 2010 addressed to Mrs R A Ritchie (a co-trustee) and copied to him.
We are instructed that you are aware of the present inability of the three trustees of the Trust to reach unanimous agreement in relation to trust matters stemming from, in particular, but not entirely, conflict of interest.
We have in turn instructed Dr Anthony Molloy QC to advise Vincent Carmine in relation to his fiduciary obligations towards the Trust and its beneficiaries including what steps he is required to take to protect the beneficiaries other than his co-trustees.
Your letter enquires whether or not the trustees of the Trust will provide their guarantee to BNZ which is apparently providing facilities for the purchase by the Company of a number of buses. Vincent Carmine informs us that he has not received copies of all relevant documentation to enable him in his position as a trustee to give appropriate consideration to the transaction. It is therefore premature to enquire whether or not the trustees will sign a guarantee.
We accordingly request that you furnish copies of the following documents:
1. The purchase agreement for the buses.
2. BNZ’s facility offer letter.
3. Board Resolution approving the purchase.
4. Any other documents that are relevant to the purchase
and the Board’s approval of the purchase.
We also request that you advise whether any director or shareholder has or will acquire any benefit from the transaction which should be disclosed and, if so, full particulars of that benefit.
With regard to our instruction to Dr Molloy QC, we would add that there is a likelihood that an application will be required to be made to the High Court for a “Beddoe order” together with any other relevant orders should the trustees of the Trust continue to be unable to reach unanimous agreement in relation to Trust matters.
We look forward to hearing from you.
[46] Further correspondence passed back and forth between the solicitors on this issue through to November 2010 without any resolution being reached. Rachel and Belinda were sufficiently concerned about the developing conflict between the shareholders over this issue that they decided to take the facility documents to Mr Carmine at his office and ask him to sign them. This was on 5 November 2010. He declined to do so. He said that it was his obligation, as a trustee, to ensure that the Trust did not guarantee borrowing until he was able to be satisfied that it was appropriate and that all the necessary formalities had been carried out. Mr Carmine followed up with a letter to Rachel on 8 November 2010 enclosing a further lengthy letter he had written to Mr Shaw and advising:
I am happy to execute roll over loan documentation for the above as guarantor provided there is sufficient information to enable the Trustees to have an appreciation of the purpose of the Loans and securities as well as sufficient information to enabler [sic] the Trustees to have an understanding of the Companies [sic] financial wellbeing.
[47] Rachel was not comfortable with the way this issue was being dealt with. She said that the issue over the guarantee was “the straw that broke the camel’s back”. She decided to seek advice from another solicitor, Peter Smith, and to remove Mr Carmine as trustee and appoint Mr Purdie in his place. Mr Purdie has had considerable experience in the transport industry. He first met John and Rachel in 1974 and has been a family friend for many years. He is a shareholder of Coachline Holdings Limited as a trustee of Andrew’s trust.
[48] Mr Smith wrote to Mr Carmine on 16 November 2010 advising that he had
been instructed by Rachel to request Mr Carmine’s retirement. Mr Smith enclosed a
deed of retirement for Mr Carmine to sign and return. He also enclosed an authority to uplift Trust documents. Mr Carmine was not prepared to resign, nor was he prepared to release the documents. He considered that if he did so he would be “depriving the Trust estate, and, in particular the infant and unborn members of the class of beneficiaries, of any independent, non-conflicted, guardianship of the rule that the Trustees must not dissipate the trust assets at an undervalue”. Mr Molloy had advised him that his resignation could itself be a breach of trust and that even if the adult beneficiaries all supported Rachel’s decision he could be vulnerable to a claim on behalf of infant, unborn and adoptive discretionary beneficiaries. Mr Carmine accordingly advised Mr Smith that he could not resign and that Mr Molloy was settling a Beddoe application to the Court.
[49] Rachel decided to exercise her power under the trust deed. She executed a deed removing Mr Carmine as trustee on 13 December 2010. Mr Carmine did not receive this until 23 December 2010 because it was initially sent to the wrong address. Mr Carmine immediately applied for an order restraining any disposition of the Trust’s shares or, in the alternative, that he be appointed receiver and manager of the Trust pending disposition of the Beddoe application he intended to file in February 2011. The application was referred to Priestley J who declined to make any order on an ex parte basis.
[50] On 4 February 2011, Mr Spencer sent Mr Smith a 23 page opinion prepared by Mr Molloy in which he concluded that the purported removal of Mr Carmine was vitiated by unconscionability, conflict of interest and was, in any event, in excess of power. Mr Molloy considered that the Trust would be oppressed if the Company or its business was not sold immediately. He suggested that an application to the Court should be made if Mr Carmine’s removal was not voluntarily reversed.
[51] Mr Smith responded on 17 February 2011 maintaining that the removal had been validly effected and seeking confirmation that no further action would be taken by Mr Carmine. Mr Spencer replied on 1 March 2011 advising that Mr Carmine was obliged to apply to the Court for directions and that the application would be filed within the next week or so. Mr Smith wrote back on 3 March confirming that he was authorised to accept service on behalf of Rachel and Mr Purdie.
[52] Nothing further was heard from Mr Carmine’s advisors until Mr Spencer wrote on 5 August 2011 advising that proceedings would be filed within the next two weeks. Mr Smith responded expressing Rachel’s dismay that Mr Carmine would issue proceedings challenging his removal eight months after she had removed him. He advised that the trustees would oppose any application made by Mr Carmine and that they had the support of all of the adult beneficiaries.
[53] The present proceeding was not commenced until 10 October 2011. In the meantime, Rachel and her family had sought advice from Price Waterhouse Coopers and Mr Smith. With their assistance, and with the assistance of Mr Purdie as the independent trustee, the following transactions were completed on 19 August 2011:
(a) The Trust sold, for [ ], $2,100,840 shares in the Company to the
A J Ritchie No.2 Trust which was established by deed dated
17 August 2011. The beneficiaries of this trust are substantially the same as the beneficiaries of the Trust but do not include Simon and Belinda’s children. As noted, Andrew has no children. The price was based on the draft valuation completed by Staples Rodway in November 2009 and was satisfied by an immediate payment of [ ] and the execution of two loan agreements, one for [ ] and the other for [ ]. This transaction enabled funds to be released to Rachel to provide for her financial security and comfort.
(b)The Trust sold its one-third shareholding in Coachline Properties Limited to the A J Ritchie No.2 Trust for nominal consideration on the basis that the debt carried by that company was equal to, or more than, the value of its assets. This company owns some of the depots from which the Company operates.
(c) The Trust resettled the balance of its shares in the Company, being
5,520,807 shares, on the A J Ritchie No.2 Trust. This resettlement occurred in exercise of the powers vested in the trustees under the Trust’s trust deed to resettle all, or any part, of the trust fund on any
trust which includes among its beneficiaries any one or more of the discretionary beneficiaries under the Trust.
[54] Rachel, Andrew, Simon and Belinda all supported these transactions. Mr Purdie consulted with Belinda and Simon before committing the Trust to the transactions. Rachel explained that the transactions reflected her family’s decision to remain in the passenger transport business and “to nail its colours to the mast of Andrew’s ship”. She and the other members of her family have confidence in Andrew’s ability to protect and increase the value of the family’s interest in the Company. Rachel credits Andrew for having been instrumental in the very significant growth of the Company in Auckland in recent years and for developing the school bus business throughout New Zealand. The Company is now the largest privately owned bus company in Australasia operating approximately 900 buses and coaches from 14 depots throughout New Zealand. Andrew is clearly well regarded in the industry having recently been elected president of the New Zealand Bus and Coach Association.
[55] The trustees of the new trust are Andrew, and Donald McBeth, a chartered accountant who has had a long association with the Company. Rachel is confident that these trustees will look after the interests of the beneficiaries in the same manner she and John intended when they established the Trust. As for her own position, Rachel said that she only needs sufficient money to be comfortable; she does not require anything like the sort of money that Mr Carmine wanted to go into battle for.
The claim
[56] Mr Carmine alleges that:
(a) The Company was at all material times a quasi-partnership founded on a personal understanding and a personal relationship of trust and confidence between John and Glenn.
(b)The shareholders’ mutual objective was always to build the business to a size and value that would attract a high-priced takeover offer from “outside interests”.
(c) The shareholders agreed not to take dividends and to reinvest all profits to build the Company in scale and value.
(d)The Company appeared to have achieved the shareholders’ objective by 2009 in that a takeover offer in excess of $110 million could then have been expected from outside interests. John had become fatally ill. The quasi-partnership had therefore run its course save for the sale of the business and distribution of profits.
(e) Glenn, in breach of his understanding with John, conducted the affairs of the Company in a manner unfairly prejudicial to the interests of the Trust.
(f) In these circumstances the trustees of the Trust had a duty to make a Beddoe application for approval to claim relief under s 174 of the Companies Act 1993 so as to realise proper value for its shares.
(g)He is the only trustee prepared to make such an application and accordingly his removal as a trustee is not in the interests of the Trust and is therefore a nullity.
[57] Mr Carmine claims that in these circumstances Rachel failed validly to exercise the power of removal conferred on her by the trust deed and that her purported exercise of this power was void. He seeks a direction to this effect, and costs.
The trust deed
[58] The deed of trust conferred the power of removal and appointment of trustees on John and Rachel, or the survivor of either of them in the event of death of the
other. Following John’s death, the power of removal and appointment vested solely
in Rachel. The relevant provision is clause 18 which provides:
Removal and Appointment of New Trustees
The power of removal of trustees (“power of removal”) and the power of appointment of new trustees (“power of appointment”) shall be vested in:
(a) The Principal Family Members jointly; or
(b) The survivor or other of the principal Family Members in the event of the death or incapacity of one of them; or
(c) Such other person or persons:
(i) As the Principal Family Members jointly may by deed
(revocable or irrevocable) nominate;
(ii) As the Principal Family Member mentioned in clause
18.1(b) may by deed (revocable or irrevocable) or by will nominate.
[59] “Principal Family Members” as defined means Rachel and John. There was no dispute that Rachel held the sole power of removal and appointment of trustees following John’s death.
Discussion
[60] Mr Molloy QC, for Mr Carmine, submitted that because there is no description or definition of the terms or scope of either of these powers in the trust deed, the power of appointment “meshes” with s 43(1) of the Trustee Act 1956. This provision empowers the holder of a power of appointment to appoint a new trustee in place of any trustee who is dead, or has remained out of New Zealand for 12 months without having made any delegation under s 31, or wishes to be discharged, or refuses or is unfit to act, or is incapable of acting. Mr Molloy argued that Mr Carmine did not fit into any of the categories listed in s 43(1). I agree with this but I cannot accept that s 43 limits the scope of the power conferred on Rachel under the trust deed.
[61] Mr Molloy submitted that the only other possible source of power in the Trustee Act is contained in s 51(1). This provision empowers the Court to replace a trustee in various circumstances including where the trustee has misconducted
himself in the administration of a trust, been convicted of a crime involving dishonesty, is mentally disordered, or is bankrupt. The Court may exercise this power only where it would otherwise be inexpedient, difficult or impractical to appoint a new trustee. Mr Molloy submitted that this section could not justify Rachel’s purported removal of Mr Carmine. Once again, I agree. However, in my view, s 51 has no relevance in this case.
[62] Finally, Mr Molloy referred to the Court’s inherent jurisdiction to remove a trustee and to the observations of Sir Owen Dixon in Miller v Cameron as follows:[1]
The jurisdiction to remove a trustee is exercised with a view to the interests of the beneficiaries, to the security of the trust property and to an efficient and satisfactory execution of the trusts and the faithful and sound exercise of the powers conferred upon the trustees. In deciding to remove a trustee the Court forms a judgment based upon considerations, possibly large in number and varied in character, which combine to show that the welfare of the beneficiaries is opposed to his continued occupation of the office. Such a judgment must be largely discretionary. A trustee is not to be removed unless circumstances exist which afford ground upon which the jurisdiction may be exercised.
[1] Miller v Cameron (1936) 54 CLR 572 at 580-581.
[63] I do not consider that it is helpful to examine whether it would have been proper for the Court to exercise its inherent jurisdiction to remove a trustee. The circumstances in which Rachel would be entitled to exercise her power of removal would include, but are not limited to, those which would justify the exercise of the Court’s inherent jurisdiction to remove a trustee.
[64] While rejecting the above analysis as unhelpful, I do need to consider whether there were any constraints on Rachel’s power to remove a trustee under clause 18. As a trustee, Rachel undoubtedly owed fiduciary obligations to the beneficiaries of the Trust. However, it does not necessarily follow that her power of removal of trustees was a fiduciary power. This is because the power was conferred on her personally, not as an incident of her office as a trustee to which any future trustee would succeed.
[65] Mr Molloy submitted that in the ordinary course, powers of removal and appointment of trustees are fiduciary powers. Given that Rachel is a trustee,
Mr Molloy submitted that the powers were self-evidently held in a fiduciary capacity. Mr Stewart QC, for Rachel and Andrew, submitted that the powers in clause 18 are personal powers, not fiduciary powers. Ms Davenport, for Mr Purdie, supported Mr Stewart’s submissions and argued that the removal power did not attract a fiduciary duty.
[66] The power to appoint new trustees is generally acknowledged to be a fiduciary power even though it may not have been conferred on trustees or the holder of any other office.[2] Equally, a power to remove a trustee and replace him with a new trustee is almost always considered to be a fiduciary power to be exercised in the best interests of the beneficiaries. This is because the subject matter of the power is the office of the trustee which lies at the core of the trust and carries fundamental and onerous obligations to act in the best interests of the beneficiaries as a whole.[3]
[2] Geraint Thomas Thomas on Powers (2nd ed, Oxford University Press, Oxford, 2012) at [1.52]; John McGhee Snell’s Equity (32nd ed, Sweet & Maxwell, London, 2010) at [27-011].
[3] David Hayton (ed) Underhill and Hayton Law Relating to Trusts and Trustees (18th ed, LexisNexis, London, 2010) at [70.20] and [71.11].
[67] I conclude that the powers vested in Rachel to remove and appoint trustees are fiduciary powers. If Rachel chose to exercise these powers, she would have to do so in good faith and in the interests of the beneficiaries.
[68] Mr Molloy submitted that Rachel had no proper grounds for removing Mr Carmine and therefore could not do so. He argued that the real reason for Mr Carmine’s removal was because he “took his responsibility to John Ritchie’s hard won wealth seriously, and he was not prepared to be a lackey of out-of-control beneficiaries ‘hell-bent’ on destroying what John spent his working life working to produce”. He submitted that the removal was beyond the power vested in Rachel and therefore a nullity.
[69] For the reasons already given, I do not consider that Rachel’s removal power could only be exercised in circumstances that would justify the exercise of the Court’s powers under the Trustee Act or in its inherent jurisdiction. I therefore reject the submission that absent such “proper grounds” Rachel could not remove
Mr Carmine. I consider that this conclusion is supported by a proper construction of
the trust deed, interpreted in the light of the circumstances in which it was created. Rachel and John no doubt appointed Mr Carmine as a trustee because he was their solicitor. It is reasonable to assume that John and Rachel would have wanted to reserve the right to appoint another independent professional trustee if, for example, the solicitor/client relationship between them and Mr Carmine came to an end. This is likely to form part of the explanation for their decision as settlors to reserve to themselves the right to remove trustees and appoint new trustees.
[70] However, this does not mean that Rachel was free to exercise the power in bad faith or contrary to the interests of the beneficiaries. To do so would be a fraud on the power. It is therefore necessary to consider whether Rachel exercised her power of removal for a proper purpose, consistent with the object of the power, acting in the best interests of the beneficiaries as a whole. Mr Carmine has the onus of showing that she did not.
[71] Having considered the voluminous submissions and affidavits that have been filed, and having reflected on the matter for some time, I have reached the conclusion that Rachel was entitled to remove Mr Carmine as a trustee and did not do so for any improper purpose. I am unable to accept Mr Molloy’s submission that her reasons for removing Mr Carmine are “risible” or “so transparently inadequate as to speak loudly of undue influence”.
[72] Following John’s death, Rachel gave careful consideration to how best to protect her financial position and that of her family as the beneficiaries of the Trust. She did not act alone. She consulted with the other adult beneficiaries, Andrew, Simon and Belinda. She also took advice from Mr Smith, her new solicitor. She was not persuaded that litigation, pitching her family against Glenn’s family, in an attempt to force a sale of the shares in the Company to outside interests, was the best course. She was concerned about the cost and delay likely to attend any such litigation. She was also concerned that a major conflict between the shareholders could be very damaging to the Company. In my view, there were sound reasons why she, and the other adult beneficiaries, concluded that their interests would be better served by retaining their interest in the Company and supporting Andrew in his ongoing efforts to grow it. In any event, I consider that this was a decision that was
open to Rachel to take. She was not motivated by any improper purpose. Her sole motivation was to protect the interests of the beneficiaries as a whole, her own family.
[73] Mr Carmine had made his position quite clear. He considered that the only available course for the trustees involved litigation. This meant that the trustees were unable to reach a consensus, without which it could not function properly. The relationship between Andrew and Mr Carmine was clearly unworkable. John and Rachel had discussed changing solicitors prior to John’s death. Following the guarantee incident, Rachel no longer wished to continue with Mr Carmine in a solicitor/client relationship. The relationship between Andrew and Rachel on the one hand and Mr Carmine on the other had become dysfunctional and this was unlikely to change given the acrimony that had developed.
[74] Mr Carmine may well have acted in what he genuinely perceived to be the best interests of the Trust and in accordance with what he considered to be his duty as trustee. However, I am not persuaded that litigation seeking relief pursuant to s 174 of the Companies Act 1993 was the only available course to follow. It is clear that the shareholders always considered the possibility of a sale to third party interests at some time in the future. However, they equally wished to preserve the option for younger family members, including Andrew and Belinda, to take over the Company in due course. It is significant, in my view, that the shareholders unanimously rejected the premium price offered by the [prospective purchaser] in August 2006. Their rejection of this very attractive offer shows that they wished to retain the business in family ownership. This prospect was confirmed as recently as July 2008 when the shareholder directors considered the business plan for
2008-2009.
[75] I consider that an application under s 174 would have faced some difficulty. It would not have been a straightforward exercise to demonstrate that Glenn’s trust was acting oppressively in declining to sell its shares or in maintaining the longstanding policy of not paying dividends. Having regard to the long-term objectives repeatedly affirmed by the shareholders, it would be difficult to argue that these policies represented a departure from what the parties intended, either when
they formed the Company, or subsequently. Further, the trustees of Glenn’s trust had made it clear that they would not stand in the way of any sale by the Trust of its shares. On the contrary, they said that they would welcome this.
[76] I also do not accept Mr Carmine’s claim that Rachel exercised her power of removal under Andrew’s undue influence. Rachel is a qualified school teacher and taught before marrying John. She was a director of the Company for a time. She is aged 67 and is in good health. She sought independent legal advice before exercising her power of removal. Although she, and John, had considered removing Mr Carmine prior to John’s death in July, she left it until November before making any final decision. I do not consider that there is any basis for the undue influence allegation.
Conclusion
[77] In all of these circumstances I consider that Rachel was entitled to remove Mr Carmine as trustee. Rachel took this step in what she perceived to be the best interests of her family, the beneficiaries of the Trust. She did not act capriciously or in bad faith or for any improper purpose. She did not exceed the power vested in her and she did not breach any duty to the beneficiaries in removing Mr Carmine. Rachel is clearly a strong and capable woman, well able to make her own decisions, and she took independent legal advice before acting. Her decision was not vitiated by any undue influence.
[78] Mr Carmine has failed to discharge the onus on him of establishing that his removal as a trustee was a nullity. I consider that the deed of removal was valid and effective according to its terms.
Result
[79] Judgment is entered for the defendants on the plaintiff’s claim.
[80] If the question of costs cannot be agreed, any party seeking costs should file and serve a memorandum within 30 days of the date of this judgment. Any
memorandum in reply should be filed and served within 14 days thereafter.
M A Gilbert J
Addendum
[81] The complete version of this judgment was released only to the parties, their solicitors and counsel on 29 June 2012 to enable them to advise whether there were any parts of the judgment which they sought to have redacted from the public version of the judgment on grounds of confidentiality.
[82] The parties have sought redactions for reasons of confidentiality and commercial sensitivity to aspects of the following paragraphs of the judgment: [7], [8], [15], [16], [17], [18], [20], [24], [25], [26], [28], [29], [37], [53] and [74].
[83] The Court accepts that these redactions should be made to the judgment for reasons of confidentiality and commercial sensitivity.
[84] The judgment with these redactions may now be released and published.
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