Clarkson v Brady

[2013] NZHC 437

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV 2012-485-2612 [2013] NZHC 437

UNDER  the Trustee Act 1956, s 64A

IN THE MATTER OF     the R M Clarkson Family Trust

BETWEEN  ROBERT MONCRIEFF CLARKSON AND J K HAMILTON TRUSTEE SERVICES LIMITED

Plaintiffs

ANDALEECE MAREE BRADY, MARTHA ELIZABETH CLARKSON, ANTHONY WALTER CLARKSON, SHIRLEY ALISON BROCKLEHURST, VALMA LOUISE MONCRIEFF, CAPRICE MICHELLE POWDRILL AND MEGAN JENNIFER BUCKLEY

Defendants

CIV2012-485-2614 [2013] NZHC 437

AND UNDER                 the Trustee Act 1956, s 64A

IN THE MATTER OF     the M E Clarkson Family Trust

BETWEEN  MARTHA ELIZABETH CLARKSON AND J K HAMILTON TRUSTEE SERVICES LIMITED

Plaintiffs

ANDALEECE MAREE BRADY, ROBERT MONCRIEFF CLARKSON, ALEXANDER JOHN MOORE, ROSANNA COOK, FLORENCE JEANETTE DOUGLAS, DOROTHY MAY MOORE, ANTHONY WALTER CLARKSON, SHIRLEY ALISON BROCKLEHURST

CLARKSON AND J K HAMILTON TRUSTEE SERVICES LIMITED v BRADY & ORS HC WN CIV 2012-

485-2612 [6 March 2013]

ANDVALMA LOUISE MONCRIEFF, CAPRICE MICHELLE POWDRILL AND MEGAN JENNIFER BUCKLEY Defendants

Hearing:         6 March 2013

Counsel:         T D Smith for Plaintiffs

L Theron for Minor, Unborn and Unknown Beneficiaries

Judgment:      6 March 2013

ORAL JUDGMENT OF THE HON JUSTICE KÓS

[1]      Before me this morning are consolidated applications brought under s 64A of the Trustee Act 1956.  By these applications approval is sought to vary two trusts, the R M Clarkson Family Trust and the M E Clarkson Family Trust, which I will call the Clarkson Trusts.

[2]      The Clarkson Trusts were settled in each case by the nominee settlors in

1993.  The trusts are near mirror in nature, although there are some differences in the range of interested beneficiaries.

[3]      The trustees of each trust are the settlor, Mr or Mrs Clarkson as the case may be, together with J K Hamilton Trustee Services Limited.

[4]      The following are discretionary beneficiaries as to income and capital of the R M Clarkson Family Trust: Mrs Clarkson (or Mr Clarkson’s wife for the time being), Mr Clarkson’s children, Mr Clarkson’s grandchildren and Mr Clarkson’s mother, father, brother and sisters.  Those sui juris are: Martha Elizabeth Clarkson (wife), Caprice Michelle Powdrill (daughter), Megan Jennifer Buckley (daughter), Aleece Maree Brady (granddaughter, daughter of Megan Buckley), Valma Louise Moncrieff (sister), Shirley Alison Brocklehurst (sister) and Anthony Walter Clarkson (brother).

[5]      Discretionary beneficiaries as to income and capital of the M E Clarkson Family Trust are Mr Clarkson (or Mrs Clarkson’s husband for the time being), Mr Clarkson’s  children,  Mr  Clarkson’s  grandchildren,  Mrs  Clarkson’s  husband’s children  and  grandchildren,  Mrs  Clarkson’s  brother,  Mrs  Clarkson’s  sister  and Mrs Clarkson’s  mother-in-law,  father-in-law,  brother-in-law  and  sisters-in  law. Those sui juris at present are:  Robert Moncrieff Clarkson (husband), Alexander John Moore  (brother),  Rosanna  Cooke  (sister),  Florence  Jeanette  Douglas  (sister), Dorothy May Moore (sister), Valma Louise Moncrieff (sister-in-law), Shirley Alison Brocklehurst (sister-in-law), Anthony Walter Clarkson (brother-in-law), Caprice Michelle Powdrill (husband’s daughter), Megan Jennifer Buckley (husband’s daughter), Aleece Maree Brady (husband’s granddaughter).

[6]      Three  minors  are  beneficiaries  of  each  trust.    They  are  Max  William Powdrill-Clarkson (grandson, son of Caprice Powdrill), Maya Grace Powdrill- Clarkson (granddaughter, daughter of Caprice Powdrill) and Moncrieff Dean Powdrill-Clarkson (grandson, son of Caprice Powdrill).

[7]      The deeds provide for distribution in 2073 unless the settlor appoints an earlier date for distribution.  On distribution the beneficiaries of each of the trusts are to   be   Mr   and   Mrs   Clarkson,   Mr   Clarkson’s   children   and   Mr   Clarkson’s grandchildren.    In  the  event  that  a  grandchild  has  died  prior  to  the  date  of distribution, a child of a grandchild (i.e a great grandchild) may take their parent’s share on attaining the age of 25 years.

[8]      Mr and Mrs Clarkson are in their 70s.  Mr Clarkson’s daughters are in their

40s.    The  evidence  before  me  is  it  is  unlikely  but  not  inconceivable  that  the Clarksons will remarry or that they will have further grandchildren.  Nonetheless the classes of future potential beneficiaries are as follows:

(a)      In the case of the R M Clarkson Trust:

(i)in respect of income and capital, any further children or grandchildren   of   Mr   Clarkson   and   any   future   wife   of Mr Clarkson;

(ii)in respect of income and capital at the date of distribution if any of the grandchildren have died leaving a child or children, that child or those children (i.e. great grandchildren) on attaining the age of 25 years;

(iii)in respect of income and capital in the event of the trust failing at any time prior to distribution, such blood relatives of Mr and Mrs Clarkson (within the third degree) as the settlor (during his life) or trustees (after his death) may appoint.

(b)      In the case of the M E Clarkson Family Trust:

(i)in respect of income and capital any children or grandchildren of  Mrs  Clarkson,  any  further  children  or  grandchildren  of Mr Clarkson, any future wife of Mr Clarkson and any future husband of Mrs Clarkson;

(ii)in respect of income and capital at the date of distribution the same position applies as in the case of  the R M Clarkson Family Trust;

(iii)in respect of income and capital the same position applies as in the case of the R M Clarkson Family Trust.

[9]      Significantly the terms of the Clarkson Trusts do not contain a power to add to or vary the classes of beneficiaries of either trust.  That limitation has necessitated the present applications.

Reasons for application

[10]   The two Clarkson Trusts have operated in partnership since settlement, undertaking commercial property acquisition, construction development and leasing. They have done so very successfully.

[11]     A further  trust  settled  by  Mr  and  Mrs  Clarkson  in  2005  has  been  less successful.   It is called the BOMA 2 Trust.   The trustees of that trust are Mr and Mrs Clarkson  and  J  K  Hamilton  Trustees  Services  Limited.    The  discretionary beneficiaries  of  that  trust  at  present  are  members  of  the  Clarkson  family, Mrs Clarkson, Mr Clarkson, his children and grandchildren, any person related by blood or marriage to Mr and Mrs Clarkson and any residuary beneficiaries on the last will of Mrs Clarkson.

[12]     The BOMA 2 Trust has invested in land.  The success of its investments are dependent on rezoning.   To date such rezoning efforts have not been successful, although the trustees remain confident that ultimately those efforts will succeed.  It has substantial borrowings.  Its undertakings to its bank have been cross-guaranteed by trustees of the Clarkson Trusts on a reciprocal basis.  However the BOMA 2 Trust is not generating sufficient income to meet its bank loan commitments. As a result it has had to borrow funds from the Clarksons and from another family trust.

[13]     In the event that the BOMA 2 Trust defaults on its borrowings there will be a shortfall to the bank and the guarantee given by the Clarkson Trusts will be called in. As Mr Hamilton puts it in his evidence in support of the application:

Depending on the size of the outstanding obligation owed by [the BOMA 2

Trust], this may lead to a serious dissipation of both income and capital of the Clarkson Trusts. The trustees consider this risk to be material and live.

[14]     To address this difficulty the trustees of the Clarkson Trusts consider the best course available is for the Clarkson Trusts to be able to distribute income (but not capital) to the BOMA 2 Trust.  This will provide the BOMA 2 Trust with a source of income  capable  of  surviving  the  Clarksons  who,  in  their  70s,  are  the  principal funders of the BOMA 2 Trust after the bank.   Further, it reduces the threat of enforcement of the Clarkson Trusts’ bank guarantees.  In addition there are perceived tax advantages in distributing Clarkson Trust income to the BOMA 2 Trust in its current indebted state.

[15]     Mr Hamilton in his evidence emphasises that the proposed variation to the trust deeds will not require distributions of income to be made to the BOMA 2 Trust.

Rather that trust will become a discretionary beneficiary and each distribution of income will have to be considered by the trustees on its merits at the time.

[16]     The variations proposed will enable distributions of income only to a new class of beneficiaries not currently provided for in the Clarkson Trusts, namely any trust which has only beneficiaries who are also beneficiaries of the distributing trust. Such a modification was approved by this Court in McKnight v Craig.[1]   To meet that constraint  the trustees  and  settlors  of the  BOMA 2 Trust  will  exercise existing powers  of  modification  of the  objects  of that  trust  to  limit  beneficiaries  to  the

[1] McKnight v Craig [2010] 3 NZLR 860 (HC) at [12b].

children and grandchildren of Mr Clarkson.   They are also beneficiaries of both

Clarkson Trusts.

[17]     In addition the perpetuity period of the new beneficiary class must not be longer than the distribution date of the Clarkson Trusts.   That means that the arrangement cannot be used to defer the distribution of the Clarkson Trusts.

[18]     All adult beneficiaries of the Clarkson Trusts have signified their consent to the proposed arrangement.

Law

[19]     Section  64A places  the  Court  in  the  shoes  of  any  minor,  unascertained, unborn or unknown persons who are or may become beneficiaries of the trust in its current form.  It empowers the Court to consent on their behalf to an arrangement varying or revoking the relevant trust. The Court may not do so if the arrangement is to the detriment of any such person.  In assessing that the Court:

... may have regard to all benefits which may accrue to him directly or indirectly in consequence of the arrangement, including the welfare and honour of the family to which he belongs.

[20]     As Tipping J put it in Re Greenwood:[2]

[2] Re Greenwood [1988] 1 NZLR 197 (HC) at 211–212.

The purpose of s 64A is in my view to put the court into the shoes of a beneficiary who is, by reason of infancy or other incapacity, incapable of

assenting to the variation, revocation or enlargement of powers proposed. Similarly the Court is put in the shoes of unborn and unknown persons.  The Court, as one part of its consideration of the application, should ask itself whether, if the person on whose behalf it is acting had been alive and of full capacity and properly advised, that person would have been likely to have approved the arrangement on his or her own behalf and with or without conditions or amendment to the scheme.

[21]     The principles expounded in that decision and in others such as Re Byrne[3] and Ewington v Schultz[4]  have been collected usefully by French J in McKnight v Craig in these terms[5]:

[3] Re Byrne HC Wellington CIV 2003-485-16, 25 May 2004.

[4] Ewington v Schultz HC Auckland CIV 2008-404-6596, 5 May 2009.

[5] McKnight v Craig [2010] 3 NZLR 860 (HC).

The following principles may be distilled from the authorities ... (i) The power to approve a variation is discretionary.

(ii)       The  court  may  consider  any  proposal  which  varies  or revokes any, or all, of the trusts or a proposal which enlarges the powers of the trustees in managing or administering the property subject to the trust.

(iii)      The discretion is exercised in the interests of the person on whose behalf the court is asked to approve the variation and from their point of view.   The court should therefore ask itself whether the person would have given approval if that person were alive, of full capacity and properly advised.

(iv)      The court can approve a scheme which conflicts with the intentions of the settlor but should not do so light.

(v)       The   court   considers   the   trust   provisions   afresh   if circumstances have arisen which were not foreseen or may not have been foreseeable at the time the trust was established.

(vi)      The court cannot approve an arrangement to the detriment of any person on whose behalf the court is giving consent.

(vii)     But the court is to take a wide approach to benefits and detriments in arrangements and must consider the arrangements  as  a  whole in  a  practical  and  business-like way.   Indirect and intangible benefits and detriments are relevant including the welfare and honour of the family.

(viii)    Difficulties may be met by amendments to the proposal or covenants by persons benefitting to make good losses to the disadvantage of other beneficiaries.

(ix)     An order approving a proposed variation may be conditional.

[22]     The  current  minor  beneficiaries  and  the  classes  of  potential  unborn  or unknown beneficiaries (“relevant interests”) on whose behalf the Court’s sanction is to be granted or withheld have been identified already at [6] and [8].  It is for present purposes a relevant consideration that all sui juris beneficiaries consent to the proposed arrangement.[6]

[6] Re Cohen’s Will Trusts [1959] 3 All ER 523 (Ch D) at 524; Tatham v Tatham HC Wellington CIV

2010-435-152, 20 December 2010 at [18].

[23]     The present application is rather more sophisticated than the one advanced in McKnight v Craig where the arrangement proposed effectively resettled two existing mirror family trusts into a single trust.   That enabled the two original settlors to become discretionary beneficiaries of the whole corpus of the assets held by the two trusts, rather than half each.

[24]     In this case Ms Theron was appointed by the Court as counsel to represent the relevant interests.  I am indebted to her for her submissions, as I am to Mr Smith for his.

[25]     Ms Theron has identified three relevant effects of the proposed variations.

(a)      To expand the beneficiaries of the Clarkson Trusts to include trusts the beneficiaries of which are also beneficiaries of the Clarkson Trusts.

(b)To make it possible for the Clarkson Trusts to distribute income to another family trust (the BOMA 2 Trust), which is in financial difficulty.

(c)       Tax benefits.

[26]     As Ms Theron submits, the primary effect of the proposed variation is to expand the beneficiaries of the Clarkson Trusts to include a trust whose beneficiaries are  limited  to  the  existing  beneficiaries  of  both  the  Clarkson  Trusts.     The beneficiaries of the Clarkson Trusts are not co-extensive with those of the BOMA 2

Trust.   The BOMA 2 Trust beneficiaries will exclude persons who are not beneficiaries of the Clarkson Trusts.  But there are beneficiaries of those trusts who are not beneficiaries of the varied BOMA 2 Trust.

[27]     However, as Ms Theron points out, it is already the case that the trustees of the Clarkson Trusts are able to distribute income for the benefit of only some of the existing beneficiaries.  Indeed that applies also to capital. As she puts it:

The fact that there is another means by which this may be done ... is not necessarily to the detriment of the other beneficiaries.   The only issue is whether an additional vehicle for distributing income [and I add capital] to some beneficiaries and not others will, as a practical matter, be disadvantageous to the others.

[28]     I accept that this aspect of the proposed arrangement is not detrimental to the relevant interests Ms Theron represents.  The variation does not increase the risk of uneven or accelerated distribution of income or capital, because any distribution for the benefit of an existing beneficiary could be made to that beneficiary directly.

Enabling distribution of income to another family trust in financial difficulties

[29]     As Ms Theron points out, empowering payment of income (and here it is income only) to a new beneficiary in financial difficulties is likely to result in more money being paid out of the Clarkson Trusts.  However she makes five points.

[30]     First, she submits that the trust is already able to distribute income for the benefit of some only of the beneficiaries.

[31]     Secondly,  she  submits  that  the  existence  of  the  guarantees  given  by  the

Clarkson Trusts exposes all beneficiaries to the risk that those trusts will be required

to pay large amounts owed by the BOMA 2 Trust.  It is in the interests therefore of all beneficiaries that the risk of this exposure be managed appropriately.

[32]     Thirdly, Ms Theron submits that the sustainability of the family trust is in the interests of all beneficiaries, and particularly those who stand to benefit from the trusts presently in existence.

[33]     Fourthly, Ms Theron submits that the beneficiaries of the Clarkson Trust who cannot be beneficiaries of the BOMA 2 Trust are limited and highly contingent. They are a future spouse, a great grandchild (on final distribution  (who has an interest contingent on the prior death of their own parent) and blood relatives who may be appointed if the Clarkson Trusts fail altogether because there are no other beneficiaries alive).

[34]     Ms Theron submits that in assessing the effect of a proposed variation, the Court in Re Bryant[7] placed somewhat less value on contingent interests when balancing  the  effect  of  the  proposed  variation  on  those  interests  against  direct benefits that the proposed arrangements would provide.  I accept that that is a correct reading of the decision in Re Bryant, but it is not, I think, the right way to address that issue.  The Court cannot approve an arrangement if it would be detrimental to the interests of any relevant interest.  However, the assessment that has to be made is whether, if that relevant interest were present before the Court, sui juris, reasonably

[7] Re Bryant [1964] NZLR 846 (HC).

minded and properly advised, the interest would approve the proposal.  In predicting what the response of that interest in that context would be, the fact that their expectation is highly contingent will of course be a material consideration. Contingency affects evaluation rather than status for the purposes of s 64A.

[35]     Fifthly, Ms Theron submits that the financial and emotional welfare of the family is a material consideration.[8]   Here Ms Theron submits that the financial stress on the family of a large increasing liability can be presumed to be detrimental to the children and other family members.  The Court can, she submits, take into account

[8] See Re Byrne HC Wellington CIV 2003-485-16, 25 May 2004 and Re Bryant [1964] NZLR 846 (HC) at 848-849..

that  the  distributions  are  for  the  benefit  of  the  family  as  a  whole  given  the

relationship of these trusts, the BOMA 2 Trust’s financial difficulty and the fact that the trustees  of each  of  the Clarkson Trust  and  the  BOMA 2 Trust  have  cross- guaranteed the moneys owed by each to the bank.

[36]     As to these submissions,  I have already reached the same conclusion  as Ms Theron on her first point.   I accept the second, third, fourth (but modified as indicated) and fifth submissions that she makes.

Perceived tax benefits

[37]     Ms  Theron  submitted  that  tax  benefits  arise  in  this  case  as  a  result  of distributed income being taxed in the hands of the BOMA 2 Trust, rather than in the hands of the trustees of the Clarkson Trusts.  The proposal allows the BOMA 2 Trust tax losses to be off-set against BOMA 2 Trust’s tax liability and less tax would thus be paid on that income.

[38]     At the end of the day I do not think this consideration really adds anything to the first perceived effect.  It is a consequence of it.

Conclusion

[39]     I conclude that the proposed arrangement is not detrimental to the relevant interests when compared to their status quo ante.

[40]     It  is  in  the  interests  of  the  beneficiaries  of  the  Clarkson Trusts  that  the sustainability of the BOMA 2 Trust is enhanced in the manner proposed.   That assessment is reflected in the unanimous support of the present sui juris beneficiaries of those Trusts.

[41]     I am satisfied that the relevant interests, if sui juris, properly advised and considering  the  matter  reasonably,  would  approve  the  arrangement,  as  those presently sui juris have already done.

Result

[42]     Orders are made in accordance with the applications.  Approval is given to the insertion of the following subclause in clause 1 of each trust deed:

AND as to income of the trust fund only (and not the capital) to, for or towards the benefit of, any Beneficiary Trust: (For this purpose, a “Beneficiary Trust” is any trust which, as at the date of such the payment, application or appropriation of income (a) has a perpetuity period at that time which is not longer than the perpetuity period applicable to this deed, (b) only has beneficiaries who are also persons entitled or eligible to benefit under this Trust, and (c) is on terms that either contain no express power to add further beneficiaries or any such express power is limited to the addition of beneficiaries who are also persons entitled to benefit under this Trust), AND IN ANY SUCH CASE

in the manner set out in the applications.

[43]     No question of costs arises.

Stephen Kós J

Solicitors:

Chapman Tripp, Wellington for Plaintiff ([email protected])

And to:

Thorndon Chambers, PO Box 1530, Wellington 6140 ([email protected])