Chambers v New Zealand Guardian Trust Company Limited

[2023] NZHC 3826

IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY

I TE KŌTI MATUA O AOTEAROA WHAKATŪ ROHE

CIV-2021-442-036

[2023] NZHC 3826

UNDER

the equitable jurisdiction, Law Reform (Testamentary Promises) Act 1949 and Family Protection Act 1955

IN THE MATTER

of the estate of DENIS EDWIN CHAMBERS Deceased formerly of Richmond, Nelson

BETWEEN

CINDY MARY CHAMBERS

Plaintiff

AND

THE NEW ZEALAND GUARDIAN TRUST COMPANY LIMITED

Defendant

LYNETTE ANN CHAMBERS

Interested Party

Hearing:

On the Papers

Counsel:

J C Ironside and S W Sansom for Plaintiff A R Gilchrist for Defendant

G Pearson for Interested Party

Judgment:

20 December 2023

JUDGMENT (NO 2) OF McQUEEN J

[1]                  By judgment dated 7 August 2023, I upheld the claim made by the plaintiff (Cindy) under the Law Reform (Testamentary Promises) Act 1949 (the TPA) and, in the alternative, her claim based on a common intention constructive trust.1 I was satisfied she is entitled to the shares held by her father (Denis) in each of Chambers and Jackett Ltd (CJL) and Chambers and Jackett Equipment Ltd (CJEL) (or

1      Chambers v The New Zealand Guardian Trust Company Ltd [2023] NZHC 2084.

CHAMBERS v THE NEW ZEALAND GUARDIAN TRUST COMPANY LIMITED [2023] NZHC 3826 [20

December 2023]

collectively, the companies), subject to a requirement to provide an income to the interested party (Lynette) during her lifetime, by reference to a 10 per cent share of the annual net profits earned by CJL.2 I outlined some possible approaches about how that relief should best be implemented.3 In the event that counsel were unable to agree between themselves as to how to give effect to my decision on liability, I sought submissions from counsel.4 Counsel have since filed submissions.

Cindy’s position

[2]                  Counsel for Cindy, Mr Ironside, submits that Cindy is prepared to meet an obligation to pay Lynette a set amount each year for the rest of Lynette’s life, from dividends generated from her shareholding, or otherwise from her current account if the dividend payments are insufficient to meet this obligation. Cindy proposes that the annual payment should be set at $45,000, this being the halfway position between the

$40,000 and $50,000 indicated by Denis.

[3]                  Alongside his submissions, Mr Ironside has filed a memorandum written by the companies’ accountant, Mr Gilbert Robertson, which states:

In looking at providing a structure for making a payment to Lynette, I have considered the profitability of both companies due to the nature of the intercompany transactions and the effect this connectivity can have on the profitability of the main trading company, Chambers and Jackett Limited.

Normally when looking at the distribution from a company, I consider an amount of profit is required to be retained to ensure the company has sufficient equity for such transactions as asset purchases and loan repayments. The retained earnings I would recommend could range from 30-50% of profits depending on the requirements of the company.

However, based on the discussions held with Denis prior to his death, and limited by not having a more detailed discussion with Denis prior to his passing, I have made my calculations based on 100% of profits being paid out of the group, with the view of providing Lynette a gross income of $40,000 to

$50,000 as per Denis’ wishes.

I note the net dividend payments (after deduction of company tax of 28% plus [dividend withholding tax] of 5%) that would be received from a gross income of $40,000 to $50,000 are $26,800 and $33,500 respectively. The mid-point being $45,000 gross amounts to $30,150 net.

2      Above n 1, at [115] and [150].

3      At [153]–[157].

4 At [159].

To assist, I have prepared a table outlining the profits of the group for the last three years (based on the annual financial statements to March 2021 and 2022, and the draft financial statements to March 2023) and what a 10% dividend from the company might look like.

…

Given Cindy is to receive Denis’ shares increasing her shareholding in the companies to 50%, I have considered what I believe is a simple and reasonable way to move forward although subject to my comments below about affordability in non-profit years. I suggest Lynette is paid out from Cindy’s share of dividends from the company, as a Capital Compensation payment for the shares in the group.

Where Lynette receives the payment based (approximately) on a net dividend amount as a Capital Compensation payment, this payment would come to Lynette without the need to include it in her personal tax return. Cindy will have accounted for the tax when the dividend she receives is included in her (or her trust’s) tax return.

However, I do raise a concern around the affordability of this arrangement should the company have non profitable years and is having cash flow difficulties. I do not believe it would have been Denis’s intention to place the companies, nor Cindy, in a position where they would struggle to meet the payments.

Therefore, a suggested prudent way forward is for Cindy to provide Lynette with a payment equal to 10% of any profit’s [sic], net of tax, each year in line with the second option of J McQueen [sic].

[4]                  Thus, Mr Robertson envisaged that, had Denis lived, in implementing Denis’ intention to provide annual payments to Lynette, a discussion would have occurred confirming the annual  payment would be  subject to tax  as income  for Lynette.    Mr Robertson would also have advised that the companies retain a certain level of profits for future investment or contingencies.

[5]                  However, rather than calculating an annual payment based on a percentage of profits, to give certainty to Lynette and to be consistent with Denis’ intention, Cindy commits to:

…pay Lynette $30,150 per annum from the total dividends that she receives each year from the company (for her 50% shareholding), or otherwise from her current account if there is any shortfall from dividend distributions for her 50% shareholding.

Cindy can facilitate this payment from the company directly to Lynette’s nominated account by way of an irrevocable Dividend Distribution Agreement of Shareholders which would be subject to company solvency rules (the Distribution Agreement) whereby the company pays Lynette the regular

annual compensatory payment which is to be deducted from Cindy’s annual dividend distributions or otherwise from her current account with the C&J companies.

Further, Cindy is prepared to facilitate a personal property security over her shares in favour of Lynette to secure these payments.

[6]                  Cindy proposes that the distribution agreement would include the usual provisions including (but not limited to):

(a)the annual payment is subject to the directors confirming the companies satisfy the solvency test;

(b)in the event of Cindy’s death, a lump sum payment to be made by Cindy’s estate and/or the companies to Lynette for an amount calculated as a capitalisation of her lifetime entitlement based on an actuary valuation;

(c)in the event of Lynette’s death, the distribution agreement (and annual payments) to terminate;

(d)in the event Cindy wishes to sell her shares, a lump sum payment to be made by Cindy and/or the companies to Lynette for an amount calculated as a capitalisation of her lifetime entitlement based on an actuary valuation; and

(e)the shareholders and directors of the companies to consent to registration of a personal property security over Cindy’s shares in favour of Lynette to secure the annual payments.

[7]                  Cindy also commits to making testamentary provisions consistent with her obligations pursuant to a distribution agreement.

The Guardian Trust’s position

[8]                  Counsel for the defendant (Guardian Trust), Mr Gilchrist, says that the Guardian Trust has no issue with continuing to hold some of the shares in the

companies and managing the income distribution to Lynette, particularly given that it will remain involved in the administration of Denis’ estate due to the administration of the life interest in Denis and Lynette’s home. However, the Guardian Trust sees the issue of relief as primarily being between Cindy and Lynette.

Lynette’s position

[9]Counsel for Lynette, Mr Pearson, submits that:

(a)the quantum of any payment cannot fairly be determined on the basis of actual profits or dividends resulting from the trading of the companies given that in a family business, both are entirely dependent on the management of the companies, and it is common and legitimate to reduce profits to nil in a closely held company by paying shareholder salaries determined after the end of the year;

(b)the obligation to make yearly payments to Lynette must be a personal obligation of Cindy, as otherwise there is no security assuring recourse for default in payments;

(c)the payments, if they are periodic income payments, will be taxable when Lynette receives them, and it is not open to Cindy to say she will pay tax on Lynette’s income; and

(d)whatever Cindy receives in enforcement of the testamentary promise must be reasonable having regard to all the circumstances and need not be arrived at “by a meticulous monetary calculation”.5

[10]              When assessing  the  reasonableness  of  relief  under  s 3(1)  of  the  TPA,  Mr Pearson highlights the effect of my judgment on the total share of assets respectively received by Cindy and Lynette from Denis’ estate, as well as reiterating submissions he made in relation to the substantive matter as to the value of services provided by Cindy, as compared to the value of the shares in the companies. He

5      Law Reform (Testamentary Promises) Act 1949, s 3(3)(b); Gartery v Smith [1951] NZLR 105 (CA) at 119; and Re Welch [1990] 3 NZLR 1 (PC).

submits that what Lynette is entitled to receive from Denis’ estate is not related to her financial position, but only concerns what is reasonable under the testamentary promise, and that there needs to be considerable adjustment to create a reasonable outcome.

[11]Mr Pearson then says:

25.It seems unrealistic for Ms Cindy Chambers to make periodic payments that can offset the excess over the value of the services, less the provision made for her inter vivos and in the Will.

26.The starting point can be made more realistic by an order for the transfer of the CJL shares with a value of $2,031,000 is ordered on terms that the residual interest in the Cushendall Rise property valued at $1,000,000 is transferred to the widow Ms Lynette Chambers instead of going to Ms Cindy Chambers as provided in the Will.

[12]              Mr Pearson prefers a solution where Cindy receives the shares in the companies, makes periodic income payments to Lynette, but also gives up the life interest in the Cushendall Rise property. He explains the adjustment as follows:

(a)the value of the shares received by Cindy as a result of the substantive judgment is $2,031,000;

(b)the total value of the services provided by Cindy on her own evidence was $474,657.43;

(c)the excess of share value over services is therefore $1,556,342.57;

(d)Cindy has already been provided with $1,253,875 (through Denis gifting Cindy shares in the companies during his lifetime valued at

$252,875, and the residual interest in the Cushendall Rise property given to Cindy in Denis’ will valued at $1,000,000); and

(e)thus an adjustment of $2,810,217.57 is required in order for there to be a reasonable outcome.

[13]              Mr Pearson submits that having found that there is an enforceable testamentary promise, it is not open to the Court to mandate a different outcome, as equity (in the form of a constructive trust), cannot overrule statute.6

Submissions in reply for Cindy

[14]              In submissions in reply, Mr Ironside submits that Mr Pearson has not engaged with the direction to make submissions about how the relief ordered should best be implemented. He says that the submissions on behalf of Lynette engage in a selective summary of the evidence and case law, and seek to resurrect the unpleaded relief originally sought by Lynette.7

[15]              Mr Ironside also provided a further letter from Mr Robertson, as well as a draft ‘Declaration of Acknowledgement of Liability’. Mr Ironside says  in  response  to Mr Pearson’s submissions:

[Mr Robertson] makes the valid point that a practical and tax efficient outcome pursuant to what is essentially a family arrangement is a reasonable expectation. The [amount of any periodic payment] is a matter for the Court to determine, but the plaintiff contends that a gross sum of $45,000 is within the paraments of the Court’s fundings as to the annual payment to be made to Mrs Chambers, and is just and reasonable based on the evidence. This produces a net annual capital compensation payment of $30,150 to Mrs Chambers. A figure of $50,000 gross would result in a net annual capital compensation payment of $33,500 to Mrs Chambers.

[16]              Mr Robertson’s position is that taxation is a relevant consideration. He says that if Lynette was to retain a shareholding or a life interest in a shareholding, then any income derived from that shareholding would be subject to tax, with dividends received net of tax. He says that Denis’s intention was for Lynette to receive a gross income of $40,000 to $50,000 per year and that he would not have expected Cindy to carry the burden of the relevant tax payment on that sum. He explains that his suggestion of the capital nature of the transaction was to remove the need for both parties to account for the transaction in their personal tax returns, as that is prudent accounting practice. Mr Robertson says that if the payments were taxable in the hands of Lynette and deductible for Cindy, the net result would be the same as above, but he

6      Fortex Group Ltd (in rec & liq) v Macintosh [1998] 3 NZLR 171 (CA) at 175.

7      Above n 1, at [38].

does not see how such payments could be classified as income to Lynette and deductible to Cindy where Lynette is not providing any services to the company. He agrees that to remove the risk associated with the management of the companies and other influences on profitability, it makes sense for Cindy to take personal responsibility for the proposed payments and to provide security.

[17]              The terms of the draft Declaration of Acknowledgement of Liability are as follows:

1Declaration of acknowledgement of liability

On transfer to Cindy of the shares in Chambers & Jackett Limited and Chambers & Jackett Equipment Limited (the companies) owned by Denis Edwin Chambers at the date of his death (the transferred shares), Cindy acknowledges and obligation to pay to Lynette a capital sum of $30,150 per annum (the annual principal payment) for the remainder of Lynette’s life in accordance with the final judgment of the High Court in proceeding CIV 2021-442-036.

2Terms of payment and security

2.1Cindy agrees to pay the annual principal payment on the first day of July of each year commencing on 1 July 2024 until the date of Lynette’s death.

2.2In the event that Cindy fails to make payment of an annual principal payment, interest shall accrue at the prescribed rate pursuant to the Interest on Money Claims Act 2016.

2.3In the event of Cindy’s death, a lump sum capital payment to be made by Cindy’s estate to Lynette for an amount calculated as a capitalisation of Lynette’s lifetime entitlement pursuant to this Deed from the date of Cindy’s death based on an actuary valuation from a registered actuary appointed by Cindy’s executor and Lynette, and failing agreement an actuary appointed by the President of the New Zealand Law Society.

2.4In the event of Lynette’s death, the annual principal payments to terminate and an adjustment payment made to Lynette’s estate for any unpaid portion of the year up until the date of Lynette’s death for which the annual principal payment applies.

2.5Cindy will obtain the consent of the directors and shareholders of the companies to registration of a personal property security over the transferred shares in favour of Lynette to secure the annual principal payments, and such security shall be registered within 14 says of the transfer of the shares to Cindy pursuant to the final judgment referred to at clause 1.

2.6In the event that Cindy wishes to sell any of the transferred shares, a lump sum payment shall be made by Cindy to Lynette for an amount calculated as a capitalisation of Lynette’s lifetime entitlement pursuant to this Deed (calculated from the date of sale of the shares) based on an actuary valuation from a registered actuary appointed by Cindy and Lynette, and failing agreement an actuary appointed by the President of the New Zealand Law Society.

2.7This deed binds Cindy’s executors and administrators.

[18]              Mr Pearson also filed a further memorandum dated 18 October 2023 in which he clarified that Lynette’s position is that any payments should commence from the date of Denis’ death, rather than from 1 July 2024.

Discussion

[19]              It is unfortunate that Cindy and Lynette, through their counsel, were unable to agree on the implementation of the relief ordered as this would have provided the best opportunity for a detailed arrangement to be put in place to the advantage of both parties.

[20]              Mr Pearson’s submissions on relief primarily focused on adjustments he considers necessary following the conclusion in my judgment that all of Denis’ shares in the companies should be vested in Cindy. Mr Pearson wants to revisit the reasonableness of that decision as a reward for the testamentary promise I found was made by Denis. He seeks instead an arrangement whereby Cindy gives up her residual interest in the Cushendall Rise property. It seems to me that this position is more appropriately advanced on an appeal of my judgment, rather than in submissions that were sought by the Court in relation to implementation of that decision through relief. For this reason, I found Mr Pearson’s submissions of limited assistance in the task presently before me.

[21]              Mr Pearson did, however, express the clear view that the only order that would be of value to Lynette would be one that imposed a personal obligation on Cindy to make annual payments to Lynette. Cindy is willing to agree to this. Such a personal obligation on Cindy provides certainty to both parties and avoids the risks relating to management of the companies and other influences on profit. I agree that it is an appropriate requirement.

[22]              As to the sum to be payable, Cindy considers a gross payment of $45,000 each year for the duration of Lynette’s life is just and reasonable, although she acknowledges that the sum is a matter for the Court to determine. As Lynette’s overall view is that Cindy’s interest in Denis’ estate should be reduced, it is difficult to assess what sum she might think appropriate. Mr Pearson says that a gross payment of

$50,000 yearly over Lynette’s life plus giving up the residual interest in the Cushendall Rise property is still too little for Lynette to receive. He identified a further concern that the value of the payments may be eroded through inflation.

[23]I consider that the appropriate sum for Lynette to receive is a gross payment of

$45,000. Both parties have identified concerns that affect the amount, and I am satisfied that settling on this mid-range figure takes those concerns into account. I am reassured by the calculations provided by Mr Robertson in relation to company profits that show that the calculations for the years 2021, 2022 and 2023, based on a 10 per cent shareholding (or 20 per cent of Cindy’s 50 per cent shareholding) would have been $25,473, $38,970 and (provisionally) $17,271 respectively. The average of these sums is $27,238 (net of tax) or $40,653 (gross of tax) which is not far from the gross

$45,000 payment proposed in its net of tax form of an annual payment of $30,150.

[24]              In the absence of information offering an alternative to Mr Robertson’s proposal that the payments to Lynette be capital compensation payments, I intend to proceed on this basis with the effect that Cindy’s obligation will be to pay Lynette the net of tax sum of $30,150 per year.

[25]              I also consider that the draft Declaration of Acknowledgement of Liability entered into as a deed provided with the reply submissions filed on Cindy’s behalf provides a helpful and concrete way forward. It provides for Cindy’s personal obligation to pay Lynette on a yearly basis and deals with security and what should happen on the death of either Cindy or Lynette in a manner that respects Denis’ intention and Cindy’s obligation. In the absence of other submissions proposing a viable alternative, I have decided to adopt this approach.

[26]              The final question is to consider the date at which these arrangements are to commence. Cindy’s draft Declaration of Acknowledgement of Liability contemplates

that the first payment be made to Lynette on 1 July 2024 whereas Mr Pearson says that payments should start from the date of Denis’ death. No information is available to me about what has happened to the earnings of the companies since Denis’ death (although it appears from Mr Robertson’s calculations mentioned above is that earnings have been identified).

[27]              The premise of my substantive judgment is that Cindy was entitled to Denis’ shares in the companies from his death, but these proceedings have necessarily taken time. The important point to my mind is that Lynette should not receive both a 10 per cent share of the annual net profits earned by CJL and a payment from Cindy, and on the other hand, if Cindy receives those profits, she should make a payment to Lynette. Given the other orders I am making in this judgment, it may be that counsel will be able to resolve this issue. I will reserve leave to the parties to revert to the Court should that not be the case.

[28]Accordingly, I make the following orders as to relief:

(a)the plaintiff, Cindy Mary Chambers, shall execute a Declaration of Acknowledgement of Liability in the form attached to her reply submissions within 14 days of this order;

(b)the interested party, Lynette Ann Chambers, is to transfer all shares in Chambers & Jackett Limited and Chambers and Jackett Equipment Limited that were owned by Denis Edwin Chambers at the date of his death to the plaintiff, Cindy Mary Chambers, on execution of the Declaration of Acknowledgement of Liability referred to in (a) above;

(c)leave is reserved for the parties to seek further orders of the Court if required in relation to a 10 per cent share in the annual net profits of CJL over the period between the death of Denis Chambers and 30 June 2024.

Costs

[29]              Costs are yet to be determined. If the parties cannot agree on costs, I direct that counsel file memoranda of no more than five pages in length together with a schedule, within ten working days. Any brief reply submissions may be filed within a further five working days. I will then determine costs on the papers.

McQueen J

Solicitors:

Richmond Law, Nelson for Plaintiff

Perpetual Guardian, Wellington for Defendant