Enright v Enright
[2019] NZHC 1124
•22 May 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2016-404-1636
[2019] NZHC 1124
UNDER Part 18 of the High Court Rules IN THE MATTER
of the J.J. Enright Trust
BETWEEN
TERRENCE JOHN ENRIGHT,
CATHERINE ANN NEWTON, WILLIAM JAMES YOUNG, WAYNE MICHAEL
ENRIGHT, GENE HERSCHEL ENRIGHT
PlaintiffsAND
SHANE ANTHONY ENRIGHT
First Defendant
…/cont
Hearing: 11-21 February 2019 Appearances:
T M Molloy and S L McColgan for the Plaintiffs
D A T Chambers QC, I T F Hikaka and C Upton for the First, Third and Fourth Defendants
S L Robertson QC and A H H Choi for the Fifth DefendantJudgment:
22 May 2019
JUDGMENT OF PALMER J
This judgment was delivered by me on 22 May 2019 at 11.30 am, pursuant to
r 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
Counsel/Solicitors:
T M Molloy & S L McColgan, Barristers, & Spencer Legal, Auckland D A T Chambers QC & I T F Hikaka, & LeeSalmonLong, Auckland
S Robertson QC & A H H Choi, Auckland & Glaister Ennor, Auckland
ENRIGHT v ENRIGHT [2019] NZHC 1124 [22 May 2019]
THE NEW ZEALAND GUARDIAN TRUST COMPANY LTD
Second Defendant
SHANE ANTHONY ENRIGHT
Third Defendant
ERIC JOHN THOMSON
Fourth Defendant
SOUTHERN LAKES HOLDINGS LTD
Fifth Defendant
Contents
Summary [1]
What happened? [4]
The Family [4]
Jack fell out with the children other than Tony [7]
The J J Enright Trust [14]
The trustees and early events in the life of the Trust [15]
Appointment of Trust capital to Tony [18]
Purchase of Southern Lakes Holdings Ltd, Wye Creek and Dunstan Burn Station [19]Distribution of the Trust [23]
A further falling out and Jack’s final years [30]
The proceeding [35]
The meaning of the Trust Deed [41]
Interpretation of trust deeds [42]
The Deed [47]
Capital and income under the Deed [49]
Income and income beneficiaries under the Deed [51]
Capital and capital beneficiaries under the Deed [66] Issue 1: Did income vest in the income beneficiaries and can it be traced to SLH? [70] The sub-issues [70]
Sub-issue 1: Did the trustees reserve income unanimously, each year, by the time
required? [73]Sub-issue 2: Were reservation decisions made in breach of the trustees’ duty of
impartiality? [79]
Phase 1: NZGT and Jack [87]Phase 2: Were Tony’s and Jack’s reservation decisions improperly made? [90] Phase 3: Were Mr Thomson’s and Jack’s reservation decisions improperly made? [99] Sub-issue 3: What income was reserved? [118]
Sub-issue 4: Can the vested income be traced into SLH’s hands? [130] Issue 2: Did SLH unconscionably receive vested income? [137] Relevant law of unconscionable receipt and unjust enrichment [137]
Submissions [142]
Did SLH unconscionably receive payments? [144] Issue 3: Did Jack, Tony and Mr Thomson breach their fiduciary duties? [153] The three sub-issues [153]
Relevant law of trustees’ duties [154]
Sub-issue 1: Did Jack breach his fiduciary duties? [161]
Sub-issue 2: Did Tony breach his fiduciary duty against conflicts of interest? [165]Sub-issue 3: Did Jack and Mr Thomson breach their duties by making a distribution
to Jack? [173]
Issue 4: Limitation [177]
Relevant law [177]
Submissions [181]
The siblings’ knowledge of the Trust [184]
Are the plaintiffs out of time? [194]
Defence of honest and reasonable trustees [204]
Issue 5: What remedies should be granted? [209]
Law of remedies [209]
Submissions [21]]
What remedies are just? [214]
Result [224]
ANNEX: KEY CLAUSES OF THE J J ENRIGHT TRUST DEED
Summary
[1] Mr Jack Enright raised six children after his wife died in 1974 at the age of 42. A few months later, he established the J J Enright Trust (the Trust) with all his six children as discretionary income beneficiaries. But he became estranged from four of his children. He cut five of them, the plaintiffs here, out of his will. In 1985, he named the sixth and youngest, the third defendant Mr Tony Enright, as the sole capital beneficiary of the Trust. Through a company owned by the Trust, Southern Lake Holdings Ltd (SLH), Jack acquired and expanded Dunstan Burn Station around St Bathans, Central Otago. In 2007, Jack distributed to Tony the Trust capital, including the shares in SLH, valued at about $2.5 million then, and at $11.5 million as at 30 June 2009. The other children did not know they were income beneficiaries and were not allocated income from the trust. They sue Jack’s estate, Tony, Mr Eric Thomson (Jack’s solicitor and a trustee) and SLH for breach of trust and fiduciary duty, tracing funds into the Station, and they sue SLH for knowing receipt and unjust enrichment. The defendants oppose the claim and raise affirmative defences of limitation, delay and fair excuse of the trustees.
[2] I am satisfied, on the balance of probabilities, Mr Thomson did not sufficiently consider and exercise the discretionary power to reserve the residue of net annual income each year he was a trustee, from 1994 to 2008. To the extent he did consider it, his discretion was fettered by Jack’s overriding intention. For those reasons he also breached his duty of impartiality. Accordingly, the purported decisions to reserve
$2,219,854 of income for the years ending 30 June 1994 to 30 June 2008 were not made unanimously and were invalid. Instead, the residue of net annual income vested in the income beneficiaries on the balance date each year. That includes income:
(a)from the sale of sub-divided properties at Wye Creek, near Queenstown, from 1999 to 2002, $1,495,646 of which was loaned to SLH for the development and purchase of part of Dunstan Burn Station, which can be traced into SLH’s hands and which SLH unconscionably received; and
(b)of $888,869 paid by SLH as a dividend to the Trust and immediately distributed to Tony as capital in September 2007.
[3] The plaintiffs are not out of time in pursuing their claims, except for one, Mr Terry Enright, who knew there was a legal issue with the Trust in 2008. I order, as equitable relief:
(a)SLH must pay equitable compensation of $995,859 plus interest, in equal shares, to the four successful plaintiffs: Mrs Cathie Newton; the estate of Mr Adrian Enright; Mr Wayne Enright; and Mr Gene Herschel Enright.
(b)Tony must account to the successful plaintiffs, equally, for $711,095 for the dividend payment in 2007.
(c)Jack’s estate, or alternatively Mr Thomson, must pay $8,303 for their breach of fiduciary duties as trustees in distributing that amount to Jack as a beneficiary in 2005 when he was not.
(d)Tony must account to the successful plaintiffs for the $492 of vested income he reserved as trustee in 1991, in breach of his fiduciary duty to avoid conflicts of interest.
What happened?
The Family
[4] Mr John James Enright, known as Jack, grew up as one of 10 children in St Bathans in Central Otago. As a young man he worked in an Inuit settlement in the Arctic, in the Northwest Territories of Canada. He met Jean in Canada and their first four children were born there. They moved to New Zealand in the 1960s, to Queenstown and Dunedin and then Queenstown again where two more children were born and Jack worked in various businesses including as: plumber; service station manager; and electrical repair. He built two buildings in Queenstown, became
involved in two property developments and then bought, and later expanded, Dunstan Burn Station which surrounds St Bathans, Central Otago.
[5]The six children of Jack and Jean were born in the 1950s and 1960s:
(a)Mr Terrence Enright (known as Terry) was born in 1955. He has lived in Australia and Canada and is an electrician. He is currently living in Christchurch and is a plaintiff.
(b)Mrs Catherine Newton (nee Enright), known as Cathie, was born in 1956, and has lived in Canada. She is a teacher living in Wanganui and is a plaintiff.
(c)Mr Adrian Enright was born in 1957. From around 1977 he lived with his family as a business manager in Canada, where he died in November 2015.1 The executor of his estate, Mr William Young, is one of the plaintiffs.
(d)Mr Wayne Enright was born in 1961. He moved to Canada in 1985 where he is still living with his wife and children managing a variety of successful business interests. He is a plaintiff.
(e)Mr Gene Herschel Enright, known as Shell, was born in 1962. He has lived in England and now lives in Auckland as a builder. He is a plaintiff.
(f)Mr Shane Anthony Enright, known as Tony, born in 1965, has a PhD in medical research. He has lived in Australia, Canada, Singapore and is now living in Brisbane, Australia. He is a defendant.
[6] In March 1974, after a battle with cancer, Jean died at the age of 42. Jack brought up their six children. Jack suffered two significant accidents, including one
1 Affidavit of Adrian Enright, 15 September 2015, Common Bundle [CB] 7/2178 [Adrian’s Affidavit]; Notes of Evidence [NOE] 48/15.
in 1998 when he was thrown off, run over and virtually disembowelled by a front-end loader, and another in 1999 when a tractor rolled.2 Jack died on 10 October 2014. Because of their common last names, I refer to the Enrights by their first names.
Jack fell out with the children other than Tony
[7] There are significant differences between the siblings’ recollections of their relationships with Jack, their father. The children all attended boarding school for their secondary education.
[8] Wayne’s evidence is that Jack was strict and dominating and that arguing or not responding was not tolerated, leading to Jack getting angry, reactive or quickly disciplinary.3 At the age of 17, Wayne says he travelled to Australia and told Jack he had joined an evangelical non-Catholic Church there. He says Jack told him not to come home, he was no longer part of the family, he was not welcome in Otago, and that he was cut out of Jack’s will. Wayne says Jack refused to see him for 25 years, primarily because Wayne had left the Catholic Church.4 Shell corroborates that and says Jack told him and Tony not to have contact with Wayne.5 A letter of 2 August 1985 from Jack to Wayne suggests their relationship was strained, though it ends “if you need help, contact me”.6 Cathie says, when she asked if Wayne could come to Shell’s 21st birthday, Jack said sometimes you had to hurt people to get them to come back to you.7 Terry says Jack told him he banned Wayne from coming home because he had rejected the Catholic religion.8 Wayne moved to Canada in 1985 and reconnected with Jack for the first time in 2003.9 After that he visited Jack approximately once a year, with his wife and two children, until Jack’s death in 2014.
2 Eric Thomson, Brief of Evidence, dated 11 February 2019 [Thomson Brief], at [11]; Affidavit of Tony Enright, 26 February 2016, CB 8/2274 at [200]–[210].
3 Wayne Enright, Brief of Evidence, 11 November 2018, given in evidence 12 February 2019, [Wayne’s Brief], at [17].
4 At [4]–[5].
5 Gene Herschel Enright, Brief of Evidence, given in evidence 13 February 2019 [Shell’s Brief], at [15]–[17].
6 CB 1/62 and Exhibit 4.
7 Catherine Newton, Brief of Evidence, dated 11 November 2018, given in evidence 12 February 2019 [Cathie’s Brief] at [24].
8 Terrence Enright, Brief of Evidence, dated 15 November 2018, given in evidence 12 February 2019 [Terry’s Brief], at [20].
9 Wayne’s Brief, above n 3, at [6].
[9] Cathie’s evidence is she felt her father always had to be right and would not listen to or tolerate others’ views if they differed from his own.10 She says, around 1984 at the age of 26, she told Jack she wanted to marry someone who had been previously married.11 Jack told her she had rejected all he had taught her and wanted nothing further to do with her. Shell corroborates that.12 Jack refused to attend the wedding and forbade Shell and Tony from attending the ceremony, which Shell did but Tony did not, though Jack said it was okay to go to the reception.13 In 1988, when Cathie attended a family wedding, she says Jack told her she had no right to be there. In 2006, he refused to visit relatives because Cathie was there. Cathie reconnected with Jack in 2010 when she visited Tony in Australia and Jack was in a rest home. She visited him there a couple of times but says Jack had dementia.14
[10] Terry’s evidence is that Jack was forceful about him and his siblings following the Catholic religion and threatened to cut them from his will if they did not follow his expectations.15 He says Jack had no tolerance for those who held a different opinion from his own and was forceful in his opinion on all matters and overbearing, wanting to control all aspects of Terry’s life.16 He lost contact with Jack when he was around 30 years old.17
[11] Shell’s evidence is that he worked for Jack upon leaving school, helping to build a factory and manufacturing furniture and, initially, their relationship was good.18 However, he says it became increasingly uncomfortable to be in Jack’s company as he was often frustrated, quickly and frequently becoming angry.19 Shell found other employment though he continued to live in the family home for a while.20 After that he became more and more uncomfortable when he visited Jack.21 He says on his last visit to Jack before going overseas in 1985, Jack told him he was not
10 Cathie’s Brief, above n 7, at [18].
11 Cathie’s Brief, above n 7, at [25]–[26].
12 Shell’s Brief, above n 5, at [21]–[22].
13 Cathie’s Brief, above n 7, at [28]; Shell’s Brief, above n 5, at [23].
14 Cathie’s Brief, above n 7, at [35]–[36].
15 Terry’s Brief, above n 8, at [15].
16 Terry’s Brief, above n 8, at [19].
17 Terry’s Brief, above n 8, at [19].
18 Shell’s Brief, above n 5, at [18].
19 Shell’s Brief, above n 5, at [19].
20 Shell’s Brief, above n 5, at [20].
21 Shell’s Brief, above n 5, at [30].
welcome in his home and he was out of the will.22 From 2008, after returning to New Zealand, Shell had two amicable visits with Jack.23
[12] Tony, on the other hand, remembers happy family times during his childhood.24 He considers Jack was a dedicated and devoted father.25 He agreed Jack had strong views on many matters,26 and he was aware of Jack’s disagreements with some of his siblings, especially Wayne and Cathie.27 His evidence is that they were all bred to be competitive and independent and to speak their minds.28 Tony does not agree with any portrait of Jack as a religious zealot and considers his estrangement from Wayne was not related to Catholicism but to a sudden change in Wayne’s life and personality.29 Tony’s evidence is that Jack encouraged him to stay in contact with his siblings.30 He considers Jack was faithful to his family, which he put first and foremost, and that Jack showed compassion to him over marriage break-ups.31 His evidence is that he was always in touch with Jack, including while Tony was overseas, by fax, phone and email and on holidays.
[13] From an affidavit in 2015, before he died, it appears that Adrian did not fall out with Jack, who he loved. Adrian lived in Canada for his adult life but would visit Jack every two years during the last four years of Jack’s life.32
The J J Enright Trust
[14] The J J Enright Trust (the Trust) was settled by Jack on 25 July 1974, some four months after Jean’s death. The full horror of the drafting of key clauses of the Trust Deed is reproduced in an annex to this judgment. The next part of the judgment analyses the meaning of the key clauses. For the moment, it suffices to say that the Trust was to benefit Jack’s children and they were all income beneficiaries. The
22 Shell’s Brief, above n 5, at [31]; NOE 157/27–31, 164/1–3.
23 Shell’s Brief, above n 5, at [34]–[36].
24 Tony Enright Brief of Evidence, dated 11 February 2019, given in evidence 15 February 2019, [Tony’s Brief], at [5]; NOE 305/9–10.
25 NOE 282/24.
26 Tony’s Brief, above n 24, at [7]; NOE 285/20.
27 Tony’s Brief, above n 24, at [12].
28 NOE 288/21–24.
29 Tony’s Brief above n 24, at [8]; NOE 299/25–300/7.
30 Tony’s Brief, above n 24, at [14].
31 Tony’s Brief, above n 24, at [6] and [9].
32 Adrian’s Affidavit, above n 1, at [30]–[36], [45].
trustees were empowered to reserve income and to divide the residue of (unreserved) annual income each year between the children, otherwise it was deemed to be apportioned to them equally.
The trustees and early events in the life of the Trust
[15] Jack was a trustee throughout the life of the Trust. Tony, as executor of his estate, is the first defendant. The other trustees were:
(a)From 25 July 1974 to 11 September 1990, the New Zealand Insurance Company Ltd, which was amalgamated with New Zealand Guardian Trust Ltd (NZGT) from 1983.33 NZGT was the second defendant but the claim against it was abandoned due to a paucity of evidence.
(b)From 7 November 1986 until 7 June 1994, Tony who is the third defendant.
(c)From 7 June 1994 until termination of the Trust in 2007, Mr Eric Thomson, Jack’s personal solicitor at Bodkin, Sunderland and Depree (Bodkins) from the early 1970s. Mr Thomson is the fourth defendant.
[16] On 13 November 1974, Jack settled one of his Queenstown properties, at 9 Athol Street, on the Trust. Consideration of $17,500 was secured by a second mortgage for $13,500 and $4,000 was forgiven.34 Jack made gifts to the Trust in 1976, 1977 and 1979, which appears to have forgiven the remaining debt.35 The Trust obtained further mortgage finance, apparently for erection of a building on the Athol Street property and to acquire property at Wye Creek.36
[17] The Trust received rent on the Athol Street property, incurred mortgage interest and other minor expenditure and made distributions for school fees for the children.
33 I refer to them both as NZGT.
34 David Boyce, Brief of Evidence, dated 8 February 2019 [Boyce Brief] at [26]–[29].
35 At [30]–[31].
36 At [32]–[38].
The Athol Street property was sold in 1997 for $745,000.37 I examine the net annual income available for reservation each year later in the judgment.
Appointment of Trust capital to Tony
[18] By around 1985, Jack had fallen out with all his children other than Tony and, apparently, Adrian. On 12 August 1985, Jack executed a deed appointing all the capital of the Trust to Tony.38 Mr Thomson prepared the deed. Mr Thomson’s evidence is that he had concerns about this allocation, which he thought was “problematic”, and about Jack’s intention to leave his estate solely to Tony. He often discussed it with Jack, sometimes heatedly, but he believed Jack would change his mind over time.39 Mr Thomson considered the decision was that of the settlor so it was out of his control.40
Purchase of Southern Lakes Holdings Ltd, Wye Creek and Dunstan Burn Station
[19] Jack incorporated SLH in 1969 with 45,000 shares.41 He was the sole shareholder until one share was allocated to Mr Thomson by October 1985. At some point between 1 July 1986 and 31 March 1988, perhaps before 7 January 1987, the Trust purchased 98 per cent of the shares in SLH in return for a debt back to Jack of
$495,869.42 Jack retained 1,000 shares in SLH until his death.43 Jack was the sole director of SLH until 25 September 2007. SLH held a one-third partnership in a property development business, Larchwood Heights, in Queenstown from 1985 to the early 1990s.44 SLH also owned a joinery factory and a spray painting business.45 There were various debts in both directions between the Trust and SLH.
37 CB 2/414.
38 CB 1/64.
39 Thomson Brief, above n 2, at [25].
40 NOE 384/26–28.
41 Tony Enright, Brief of Evidence, dated 18 January 2019, given in evidence on 15 February 2019, [Tony SLH Brief], at [3]–[7].
42 Karen Greenwood, Brief of Evidence, dated 12 November 2018, given in evidence on 13 February 2019, [Greenwood Brief], at [55]–[57] (a loan for the same amount of the value of the shares was provided by Jack to the Trust on 1 July 1986); CB 5/1542 (deed of acknowledgement of debt of 7 January 1987).
43 Jack’s 1,000 retained shares were the only voting shares until May 1997. After that, all shares were ordinary shares. Tony’s SLH Brief, above n 41, at [7].
44 Tony’s Brief, above n 24, at [42].
45 Tony’s SLH Brief, above n 41, at [11].
[20] In late 1988, the Trust purchased a property at Wye Creek, on the shore of Lake Wakatipu, south of Queenstown, for $200,000, financed by an increased mortgage from NZGT over the Athol Street property.46 The Trust subsequently received funds from the sale of individual Wye Creek sections from 1999 to 2002, which I outline in more detail below.
[21] In 1996, SLH acquired the Dunstan Burn Station in two blocks. One, much of which is pastoral lease, surrounds the town of St Bathans and the other is freehold.47 In 2001, SLH purchased a second farm nearby, Two Mile Station, which was also in two blocks, one of which adjoins the freehold land of Dunstan Burn and connects its two blocks. Together, the properties are over 10,000 hectares and are known as Dunstan Burn Station. They run mainly sheep as well as some cattle and deer. The Station included land on which Jack’s ancestors had settled but which had been lost to the family, which Tony says was Jack’s motivation for purchasing it.48
[22] Jack moved to live on Dunstan Burn. It required substantial investment including equipment, fencing and irrigation. Tony’s evidence is that all revenue and reserves from SLH were re-invested into the development of Dunstan Burn Station.49 SLH borrowed funds from the Trust, and $600,000 from the Southland Building Society, to purchase Two Mile Station.50 Mr Thomson’s evidence is that purchase improved the position of the farm immeasurably.51 Mr Cooney’s evidence is investment in SLH for the purchase of Two Mile Station would have been impossible if Trust income had been paid out to income beneficiaries, and Dunstan Burn Station would likely not have survived without injections of funds.52 Of 200-250 rural trusts he was involved with in his career, he does not believe any paid out income to beneficiaries on an annual basis.53 Mr Dykes considers Dunstan Burn Station “would have risked failure during the 1980s and 1990s given the extreme climatic and market conditions” without funds to enable development.54 He says, while “Jack no doubt
46 Boyce Brief, above n 34, at [84]–[90].
47 Tony’s SLH Brief, above n 41, at [29]–[32], sch 1, Figure 2.
48 Tony’s Brief, above n 24, at [40]–[41].
49 Tony’s SLH Brief, above n 41, at [61].
50 William Cooney, Brief of Evidence, dated 8 February 2019 [Cooney Brief], at [27].
51 NOE 449/27–28.
52 Cooney Brief, above n 50, at [28].
53 Cooney Brief, above n 50, at [32].
54 Campbell Dykes, Brief of Evidence, dated 8 February 2019 [Dykes Brief] at [11].
envisaged that he would build the Farm up to become a high-yielding agricultural enterprise”, “in the economic and climatic conditions of the time, that was unlikely to eventuate before the Trust was wound up”.55
Distribution of the Trust
[23] On 22 April 2002, the Trust’s accountants, Ibbotson Cooney Ltd (ICL) wrote a letter to Jack, which was copied to Tony by fax, summarising the proposed winding up of the Trust.56 It mentioned ICL had revalued the shares in SHL to approximately
$2.5 million which it considered a reasonably accurate figure though possibly less than the realistic sale price of the properties.57 That gave the Trust an equity value of
$3.5 million. The letter mentioned “Jack’s specific intention is to wind the trust up in favour of Tony” which would mean the transfer of the trust assets directly to him.58
[24] By 2007, Tony’s evidence is that Jack was having difficulty with blindness and agreed to handover the farm and company directorship to Tony, who was then living in Singapore.59 He says they agreed on September 2007 on a handover.60 Mr Thomson’s evidence is the distribution of the capital in the Trust to Tony came about “because Jack was concerned that he would no longer be able to manage the Farm and SLH”.61 He says he asked for the accountants’ advice as to how to structure the distribution and the trustees followed that advice.62
[25] On 25 September 2007, Tony became a director of SLH and Jack resigned two days later. On 28 September 2007, a dividend payment was made by SLH of
$909,070.15, including imputation credits of $299,993.15.63 $888,869 went to the
Trust, which held 44,000 of the 45,000 shares, and the rest to Jack. I accept the reason
55 Dykes Brief, above n 54, at [14].
56 CB 3/711.
57 At 2.
58 At 3.
59 Tony’s SLH Brief, above n 41, at [74]–[75]. In a letter dated 8 October 2005, Jack proposed Tony take over the Station at the end of that year, CB 8/2422. In a letter dated 8 July 2006 to ICL, Jack indicated he wished to set up a new will and organise it so Tony could take over either ownership or control of his assets, CB 8/2428.
60 Tony’s SLH Brief, above n 41, at [75].
61 Thomson Brief, above n 2, at [34].
62 Thomson Brief, above n 2, at [34].
63 CB 4/1074.
for the dividend distribution was to take advantage of SLH’s imputation credits and avoid a significant tax liability on winding up.64
[26] On the same day, the capital of the Trust was distributed to Tony. The Deed of Distribution authorised the distribution of Trust assets set out in a schedule, which listed only the 44,000 shares in SLH.65 In the Trust’s Statement of Financial Position as at 30 September 2007, the 44,000 shares in SLH owned by the trustees were valued at $2,495,880 and SLH’s debt to the trustees was valued at $1,506,226, giving total assets of $4,002,115.66 In the Trust’s draft balance sheet as at 30 June 2007, SLH’s debt to the trustees was valued at $1,253,106.67 In the Trust’s Statement of Financial Position dated 30 June 2009, the SLH shares were valued at $11,523,600.68
[27] Clause F of the Deed distributing the Trust funds to Tony records that the trustees declared the date of distribution to be 28 September 2007.69 Clause G records Jack “acknowledges that he has received advice from the Trustees and from his solicitors, Bodkins of Alexandra, as to the potential for claim from remaining beneficiaries that may arise as a consequence of the sole distribution” to Tony “and has, having given due consideration to that advice, instructed the Trustees to distribute”.
[28] Mr Thomson was not only the solicitor but a trustee at the time. Under cross- examination Mr Thomson said he signed off on the transaction because the distribution itself did not indicate a breach of trust and he was not aware of any specific action that would lead to a claim.70 He said repeatedly that he considered Jack “by his tireless efforts for the trust, had earned the moral right to make that decision”.71 He said he was obliged to maintain the capital of the Trust and he felt it was under severe threat because Dunstan Burn was getting beyond Jack “to the point of no return”.72 Mr Thomson said his only alternative resort was to resign as trustee which he did not
64 Thomson Brief, above n 2, at [34]; Dykes brief, above n 54, at [43].
65 CB 4/1065.
66 CB 4/1078.
67 CB 4/1030.
68 CB 4/1227.
69 CB 4/1065.
70 NOE 415/5–24.
71 NOE 416/15–16.
72 NOE 419/15–34.
do because he felt an obligation to continue.73 Mr Thomson resisted the proposition that he bent to Jack’s will, capitulated or rolled over.
[29] Mr Thomson’s evidence is he did not advise the income beneficiaries the Trust had been distributed because he did not believe he had an obligation to do so.74 Under cross-examination, Mr Thomson maintained there was no duty on trustees of automatic disclosure to beneficiaries of their status unless they have a vested interest in the trust assets.75 Once Tony was appointed as the sole capital beneficiary, Mr Thomson accepts there was a duty on the trustees to act fairly and disinterestedly between the income and capital beneficiaries and to consider the interests of both when making decisions.76
A further falling out and Jack’s final years
[30] Once the Trust, including Dunstan Burn Station, had been distributed to Tony, Tony hired a farm manager in early 2008. In July 2008, Tony transferred his 44,000 shares in SLH to Tarbert Trustees (2008) Ltd.
[31] In January 2008, after the handover of Dunstan Burn Station to Tony, Tony and his son helped move Jack out of one farm cottage, to allow the new farm manager to move in, and into another.77 Tony invited Terry to help, which he did. Terry’s evidence is that, once the new manager was hired, Jack seemed to realise he had lost control of the farm and became very angry, saying he wanted it back and Tony had stolen it.78 Wayne corroborates that Jack was ranting in 2008 about Tony having stolen the farm.79 So does Shell.80 Adrian’s affidavit corroborates that.81
[32] Jack instructed Mr Griffin at Ross Dowling Marquet Griffin.82 Terry assisted Jack, who then had difficulty reading and writing, to communicate with Mr Griffin.
73 NOE 416/22–24.
74 NOE 423/1.
75 NOE 378/15–16.
76 NOE 379/5–21.
77 Tony’s SLH Brief, above n 41, at [76].
78 Terry’s Brief, above n 8, at [26]; NOE 111/30–112/3.
79 NOE 33/10–16, 44/14.
80 NOE 160/30–34.
81 Adrian’s Affidavit, above n 1, at [42].
82 Terry’s Brief, above n 8, at [27].
In March 2008, Mr Thomson wrote to the firm in response to questions over the distribution to Tony.83 He said Jack “has been nothing but difficult over the years” and is “eccentric to say the least” but “is possibly the most intelligent man the writer has known”. He was completely mystified about Jack’s memory lapse regarding the distribution of the Trust to Tony, which was done after two visits to Jack specifically to discuss the issue and after exhaustive discussion with Jack, Tony and Mr Dykes of ICL. Tony does not accept Jack went to a lawyer saying Tony had taken over the farm without Jack knowing what was going on.84 However, on 6 June 2008, Mr Griffin wrote to Tony saying Jack “seemed genuinely unaware” he was no longer a director of SLH and was “extremely concerned” the shares were no longer held by him and Mr Thomson, presumably as trustees.85 On 9 June 2008, Tony explained the situation to Mr Griffin. I traverse evidence about the parties’ interactions with Mr Griffin later, in relation to Issue 5.
[33] In 2008, Terry helped Jack move to Christchurch into an over 60s unit but says Jack’s ranting about Tony stealing the farm meant making friends difficult.86 Later in 2008, Tony moved Jack into a care home for the elderly in Christchurch and in June 2009 to Australia, where Tony lived. Jack remained there, in Tony’s care, until he died in October 2014.87 He left everything to Tony and nothing to his other children. Evidence of the siblings’ knowledge of Jack’s testamentary intentions is only relevant as context but, in summary:
(a)Wayne says that Jack once told him he wanted half of his estate to go to the church and, another time, he wanted half a million to one million dollars to go to each of his siblings, except Wayne because Wayne was wealthy.88 Wayne recalls, on other occasions, Jack saying he wanted half of his estate to go to Tony and half to the other siblings.89
83 CB 4/1172.
84 NOE 353/12.
85 CB 4/1104.
86 Terry’s Brief, above n 8, at [34].
87 Tony’s SLH Brief, above n 41, at [78].
88 NOE 19/26–30.
89 NOE 21/3–11; CB 7/2084 at [74].
(b)Terry said, when he was in his teens, Jack threatened to take him out of his will, and that Jack did not talk about his estate once they reconnected but he did mention Tony was going to get the farm.90 He was “a little dumbfounded” when Tony told him in 2007 Jack had given it all to him but he did not do anything about it and did not tell his siblings till much later, after Jack died.91
(c)Tony says he did not tell his siblings he would be inheriting the farm because he would never provoke them in that sense and, while there was a definite expectation of that, he never structured his life banking on that.92 In response to a question under cross-examination about why he had never shared any of “the $12 million” in assets with his siblings, Tony said he was never given any opportunity to understand their grievances and they never took up his invitation to have a discussion.93 Tony maintained under cross-examination he has no significant assets other than his “obligations” to the farm, which he looks after as a sort of legacy in a caretaker role, and explained he put the farm up for sale in 2015 partly in order to test its market value and partly due to personal stress.94
(d)In Adrian’s 2015 affidavit, he said Jack once told him, while living in Queenstown, he wanted all of the children to get $1 million after his death.95
[34] In his letter to Ross Dowling Marquet Griffin in March 2008, Mr Thomson said he “has resolutely and consistently advised Mr Enright since 1985 that to disinherit his remaining children was morally and legally questionable” but that Jack “has never wavered from his original intention, and has effectively refused to discuss it”.96 Under cross-examination, Mr Thomson said he did everything he could, under
90 NOE 105/6–11, 106/11–13.
91 NOE 107/20–108/19.
92 NOE 349/5–350/2.
93 NOE 354/30–355/5.
94 NOE 359/32–360/31.
95 Adrian’s Affidavit, above n 1, at [41].
96 CB 4/1172.
the circumstances, regarding the disinheritance. But he accepted “I probably should have resigned”.97 Under re-examination, he said his statement about resignation was to do with the Trust, not the will, as he had renounced being an executor.98
The proceeding
[35] A proceeding under the Family Protection Act 1955 was commenced, around 2015, but I am advised it is currently stayed pending the outcome of this proceeding. This proceeding was commenced in July 2016. The trial was held over nine days in February 2019. I took the briefs as read unless counsel otherwise preferred (which the plaintiffs did). In order to ensure the siblings gave evidence of the same events independently of each other, I excluded them from hearing each other’s evidence before each had given theirs. Ms Chambers objected to some sentences in Shell’s brief which were omitted by consent. Mr McColgan objected to some sentences in Tony’s brief and I ruled some of them irrelevant.
[36]The witnesses for the plaintiffs were:
(a)Wayne, Cathie, Terry and Shell;
(b)Ms Karen Greenwood as an expert accountant; and
(c)Mr Tim MacAvoy as an expert in trust administration.
[37] The witnesses for the defendants, whose briefs were taken as read as their evidence-in-chief, were:
(a)Tony, the first defendant, as administrator and trustee of Jack’s estate and the third defendant;
(b)Mr Thomson, Jack’s solicitor and the fourth defendant;
(c)Ms Raeleen Hunter, an accountant at McCullochs from 1992 to 2000;
97 NOE 425/34.
98 NOE 50/18–22.
(d)Mr Bill Cooney, an accountant and partner at ICL for around 45 years until 2003;
(e)Mr Campbell Dykes, an accountant and director at ICL from 2001 to present;
(f)Mr Chris Spargo, as an expert on trust administration;
(g)Mr David Boyce, from New Zealand Guardian Trust Ltd; and
(h)Ms Tina Payne, as an expert accountant.
[38]There are six causes of action:
(a)The first cause of action alleges Jack breached his fiduciary duties as trustee by not avoiding conflicts of interest.
(b)The second cause of action alleges Tony breached his fiduciary duties as trustee by not avoiding conflicts of interest.
(c)The third cause of action alleges Jack and Mr Thomson breached the Trust by distributing funds to Jack as a beneficiary although he was not.
(d)The fourth cause of action alleges SLH received vested income as loans, as well as interest payments and management fees, knowing they were paid in breach of trust or, alternatively, the sixth cause of action alleges SLH was unjustly enriched in receiving those payments.
(e)The fifth cause of action, the plaintiffs’ principal claim, alleges Jack, Tony and Mr Thomson as trustees breached the Trust by: failing to advise the plaintiffs they were beneficiaries or that income had vested in them; or failing to pay vested income to them; failing to consider whether an income distribution should be made to them; breaching their duty of impartiality; failing to act jointly; advancing vested income to SLH; and paying interest, salary and management fees to SLH. The
plaintiffs seek to trace the vested income into the purchase price paid by SLH for Two Mile Station.
[39] Tony, Mr Thomson and SLH pleaded limitation as an affirmative defence and SLH pleaded change of position. Mr Thomson and Tony also pleaded relief on the basis they acted honestly and reasonably under s 73 of the Trustee Act 1956. Tony, as executor, claimed an indemnity from SLH on the basis of unjust enrichment though that was not pursued in submissions.
[40] Counsel’s closing submissions were structured very differently. After interpreting the meaning of the Trust deed, I analyse the issues as follows:
(a)Did income vest in the income beneficiaries and should it be traced to SLH (the fifth cause of action)?
(b)Did SLH unconscionably receive, or was it unjustly enriched by, vested income (the fourth and sixth causes of action)?
(c)Did Jack, Tony or Mr Thomson breach their duties in authorising payments (the first, second and third causes of action)?
(d)Limitation
(e)What remedies should be granted?
The meaning of the Trust Deed
[41] The meaning of the Trust Deed is central to the first three of these issues. Before dealing with them, I outline the relevant principles of interpreting trust deeds, and my interpretation of the meaning of this Deed and the status of the beneficiaries.
Interpretation of trust deeds
[42] In general terms, there is a trust at law when a person, the trustee, controls property subject to an obligation to deal with it for the benefit of another, the beneficiary. The trustee has legal ownership of the property, but the beneficiary has a
beneficial interest in the property. Where the trustee has a discretion to distribute income or capital, it is known as a discretionary trust. It is common in New Zealand for a discretionary trust to be settled by a settlor, by deed, giving trustees power to pay income and/or capital to family members.
[43] The obligations on trustees, and entitlements of beneficiaries, are governed by the terms of the relevant trust deed. There used to be a difference in the approach to interpreting a trust deed depending on whether it was “executed”, where the rights and obligations were completely specified, or “executory”, where they were not.99 Deeds creating executed trusts were interpreted strictly and deeds creating executory trusts were interpreted so as to carry out the settlor’s intention.
[44] That distinction between the two interpretative approaches is similar to the distinction between the old “plain meaning” approach to the interpretation of contracts and the contemporary approach of ascertaining “the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract”.100 That contemporary approach was adopted in New Zealand by the Court of Appeal in 1998 in relation to contract interpretation.101 The language used must be read in the context of the document as a whole and the surrounding circumstances, where relevant, even when there is no ambiguity.102 The authorities do not require the interpretive steps be approached in a particular sequence in relation to contracts, let alone trusts.103
[45] After 1998, trust deeds also began to be interpreted in New Zealand using the same approach, on the basis of the knowledge available at the time the trust deed was entered into.104 In Congregational Christian Church of Samoa (Westmere) Trust
99 Greg Kelly and Chris Kelly Garrow and Kelly Law of Trusts and Trustees (7th ed, LexisNexis, Wellington, 2013) at [11.3]–[11.24].
100 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL) at 912.
101 Boat Park Ltd v Hutchinson [1999] 2 NZLR 74 (CA).
102 Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR at [60]–[61]. See David McLauchlan “Continuity, Not Change, in Contract Interpretation” (2017) 133 LQR 546 at 547–548 (regarding use of extrinsic materials).
103 Simon Connell “Prescriptive and Holistic Contextualism: Emerging Variants of Modern Contract Interpretation” (2018) 28 NZULR 317.
104 Manukau City Council v Lawson [2001] 1 NZLR 599 (HC) at [13].
Board v Tilaima Andrews J summarised the substantive propositions in Baragwanath J’s elegant prose in Inglis v Dunedin Diocesan Trust Board as follows:105
(a)The purpose of a Trust must be derived from its deed.
(b)Where there is no express intention, extrinsic evidence is admissible.
(c)Factors to consider include the language of the deed, its nature and the circumstances both of its execution and at the present time.
(d)The Court’s role is interpretation, not creation.
(e)Past practice based on error cannot justify breach of trust.
[46] The Supreme Court has observed that the scope for resort to background knowledge is itself, to some extent, dependent on context.106 Similarly, as Clifford J observed in Bulley v Attorney-General, there may be a difference in context between a will or trust, which is usually a unilateral document, and a contract where a common intention must be sought, though in that case the trust deed was the outcome of the interactions of several parties.107 As Kós J held in New Zealand Māori Council v Foulkes, “similar principles should apply to the construction of trust deeds as the construction of contracts”.108
The Deed
[47] Here, the Trust was settled by one settlor, Jack, after the death of his wife. There is no evidence others were involved in the formulation of the Deed. It is a unilateral document. I take some notice of the evidence, largely from Tony, that Jack had long-intended to buy back the family farm, Dunstan Burn Station, where he grew up and which was apparently lost through financial failure.109 But, otherwise, I rely
Congregational Christian Church of Samoa (Westmere) Trust Board v Tilaima (2010) 3 NZTR
¶20–047 (HC) at [25] citing Inglis v Dunedin Diocesan Trust [2011] NZAR 1 (HC) at [29]–[33].
106 Firm PI 1 Ltd v Zurich Australian Insurance Ltd t/a Zurich New Zealand, above n 102, at [62].
107 Bulley v Attorney-General [2012] NZHC 615 at [51]–[52].
108 New Zealand Māori Council v Foulkes [2014] NZHC 1777, [2015] NZAR 1441 at [71].
109 Tony’s Brief, above n 24, at [40]–[41].
primarily on the text of the Deed to discern its meaning and purpose. It is important to read the Trust Deed as a whole in interpreting the meaning of a particular clause.
[48] The purpose of the Trust was clearly stated in the preamble of the Deed to be “for the benefit of the children” of Jack. An outline of the provisions is:
(a)Clause 2 empowered the trustees to pay business and trust administration expenses out of the net annual income (called “the annual income”) they received “other than of a capital nature” (cl 2).
(b)Clause 3 empowered the trustees to divide the “residue of the annual income each year” between the children. Failing any apportionment of the residue within six months of the balance date, it is deemed to have been apportioned in equal shares as at the balance date.
(c)Clause 4 empowered the trustees to pay income allocated to and vested in a child to that child and to apply it towards maintenance, education or the benefit of the child as they thought fit.
(d)Clause 5 empowered the trustees to invest “any income not expended by them” as they thought fit and to apply any accumulated income or investment income as if it were part of the income allocated to a child on whose behalf the accumulation was held “or in the case of accumulations resulting from the creating of reserves by the trustees” as if it were income derived in the then current year (cl 5).
(e)Clause 6 provided the trustees stood possessed of the capital of the Trust fund upon trust for the children living at the date of distribution, in such shares and proportions as Jack, as settlor, by deed or will appoints or otherwise in equal shares (except that the share of a son is twice that of a daughter). The distribution date would be 25 July 2024 or such earlier date as the trustees by deed, in their absolute discretion declared.
(f)Clause 8 empowered the trustees to invest money in securities, life insurance, purchase of freehold or leasehold or personal property, debentures or shares of New Zealand companies on such terms as the trustees thought fit.
(g)Clause 12 empowered the trustees to expend the trust fund to acquire and carry on any business which would, in their opinion, be to the advantage of the beneficiaries, including to set “aside out of the income derived from any business such reserves for any other purpose as they shall think fit with power to use such reserves … in the said business” and to use and apply the reserves as if they were income of the current year with the residue at the date of distribution to be applied as directed in relation to the capital.
(h)Clause 14 empowered the trustees to effect improvements to any capital assets which they acquired to carry on a business or hold as part of the capital, and to set aside reserves.
(i)The trustees were also empowered to:
(i)let or sell freehold or leasehold land “either in one lot or in several lots or real property” and to “have power conclusively to determine settle or agree upon the manner of apportionment of the proceeds of any such sale” (cl 9);
(ii)manage any farmland purchased and reserve its revenue for expenditure and developing productivity (cl 10);
(iii)borrow for a variety of purposes (cl 11); and
(iv)do miscellaneous other things.
(j)Clause 22 entitled a trustee who was a solicitor, accountant or engaged in any profession, business or trade to charge and be paid for all acts
done or time expended by him, any employee or partner of his in connection with the Trust.
Capital and income under the Deed
[49] Clause 1 provided the trustees “stand possessed” of the original $100 paid by Jack as settlor and any additional property or other assets given or transferred to the trustees, and property and investments representing that. That was defined as the “trust funds”. Clause 1 also provided the trustees stood possessed of the “income arising therefrom”. I interpret cl 1 as distinguishing between the trust funds and the income generated from it. The trust funds were capital, by implication of cl 1 and by reading that clause in the light of cls 2, 3 and 6.
[50] Modern discretionary trusts tend to be drafted to avoid the earlier mysterious legal distinction between income and capital. The law has held tax and accounting treatments as potentially relevant but not determinative of the distinction between capital and income in trust law.110 A modern approach to interpreting a trust deed using the terms “capital” and “income”, drafted in today’s world of comprehensive accounting standards, might simply invoke those standards as the default context which gives them meaning. Not necessarily so with a deed from 1974. I later outline more of the case law in applying it. For the moment, a sufficient taste of the legal context is provided by Ronald Young J in Wong v Burt:111
The essential duty of a trustee on receiving money from a company is to ascertain the intention of the testator as to the division of the funds between capital and income where there are different capital and income beneficiaries. Typically, consideration of the relevant provisions in the trust will be appropriate. The trustees will need to keep in mind their duty to the lifetenant(s) and the remaindermen and the need for impartiality. It is also clear that trustees are not obliged to follow either tax law as to the classification of income and capital, or accountancy classification of income and capital.
Income and income beneficiaries under the Deed
[51]The full text of cl 2 was:
110 Garrow and Kelly, above n 99, at [22.7]–[22.13].
111 Wong v Burt [2003] 3 NZLR 526 (HC) at [37].
2 THE Trustees shall out of the net annual income received by them from the investments of the trust funds or derived by the Trustees from any business which the Trustees may carry on or be engaged in or which the Trustees may receive from any other source and be other than of a capital nature (hereinafter called “the annual income”) pay all expenses of and incidental to these presents and all costs and expenses incurred by them in or about the administration of the trust hereby created.
[52] The archaic drafting of cls 2 and 3 of this Deed, and the determined omission of commas, is unhelpful to interpreting its meaning. But it is tolerably clear that the purpose of cl 2 was to empower the trustees to pay expenses from income.
(a)The “net annual income” received by trustees was said be:
(i)“from the investments of the trust funds”; or
(ii)“derived … from any business which the Trustees may carry on or be engaged in”; or
(iii)“which the Trustees may receive from any other source and be other than of a capital nature”.
(b)The phrase “other than of a capital nature” qualifies the third of those sources of annual income. But the first two are also implicitly other than of a capital nature.
(c)“Out of” that net annual income, the trustees are empowered to pay:
(i)“all expenses of and incidental to these presents”; and
(ii)“all costs and expenses incurred by them in or about the administration of the trust”
[53] Clause 2 explicitly reinforced the intention to distinguish between capital and income and provides some definition to that distinction. It provided the expenses to be paid out of income should be “all expenses of and incidental to these presents” and those incurred in the administration of the Trust. I do not accept Mr Molloy’s submission that the phrase “net annual income” was a mistake. The clause functioned
effectively without having to conclude that. The Court will endeavour to give meaning to the words of a deed.
[54] There is currently a general rule in trust law that “expenses of an income nature are borne by income beneficiaries while expenses of a capital nature are borne by capital beneficiaries”.112 What is “of a capital nature” and “of an income nature” can be more complex to determine, as we will see later. But, in the context of this Trust Deed, I interpret the phrase “these presents” in cl 2 to refer to the three different sorts of income there specified. So the usual rule applies in this Trust, that the costs incidental to the generation of income are paid out of income. By implication, capital expenses are not to be deducted from income.
[55] There is no general clause in this Deed empowering the trustees to contract out of the general rule. The closest is cl 9 which specifically empowers the trustees “conclusively to determine, settle or agree upon the manner of apportionment of the proceeds of any such sale [of real or personal property acquired by them]”.
[56] With cl 2 having defined income, cl 3 created the income beneficiaries. The full text of cl 3 was:
3 UNTIL the distribution in accordance with the provisions hereinafter contained of the whole of the capital of the trust funds the Trustees shall stand possessed of the residue of the annual income received by them during each year ending upon a date to be selected by the Trustees (hereinafter called “the balance date”) UPON TRUST to divide such net annual income among them the children of the Settlor in such manner and in such shares and proportions as the Trustees shall in their absolute discretion from time to time determine the share taken or to be taken by each child in such income by the Trustees to be determined by the balance date and failing any apportionment of the residue of the annual income by the trustees under the foregoing provisions hereof being made within six months of the said balance date such income shall be deemed to have been apportioned among and vested in the said children in equal shares as at the balance date.
[57] Having regard to the meaning apparent (though not plainly) from the words, I read the clause as containing the following elements:
112 Law Commission Review of the Law of Trusts (NZLC R130, 2013) at [7.24].
(a)The trustees held the “residue of the annual income … each year” on trust. The residue was what was left after the costs and expenses of generating income were deducted from the net annual income under cl 2.
(b)The trustees were required to divide the residue among Jack’s children “in such manner and in such shares and proportions” as the trustees “in their absolute discretion from time to time” determined.
(c)The “share taken or to be taken by each child” was to be determined by the trustees by the Trust’s balance date, set by the trustees.
(d)If the trustees did not apportion the residue of the annual income in that way within six months of the balance date, the income was “deemed to have been apportioned among and vested in the said children in equal shares as at the balance date”.
[58] Clause 3 clearly places upon the trustees a duty to divide the residue among Jack’s children by the balance date, which was 30 June each year, if they were going to apportion it specifically. If any of the residue of the annual income each year had been specifically apportioned by the trustees it would have vested in the specified income beneficiaries at that time. But there is no suggestion that the trustees did ever specifically apportion the residue of the annual income among Jack’s children.
[59] If the trustees did not specifically apportion the residue among the children within six months after the balance date, it was deemed to be apportioned equally. However, if specific apportionment had occurred after the balance date but within six months of it, it is implicit the apportionment would have been effective because the deeming provision would not be activated. Any residue that was deemed to be divided equally among the children as at the balance date, vested in them at the balance date. If the children were still in their minority, the trustees could apply it for their benefit under cl 4. Otherwise, under cl 5, the trustees had power to invest income not expended by them, that had accumulated on behalf of a child. In the absence of specific apportionment here, and other things being equal, cl 3 deemed the annual
income to be divided equally as at the balance date each year, and the residue vested in the children equally at that date.
[60] But other things were not necessarily equal. Two clauses empowered the trustees to reserve income:
(a)Clause 12 empowered the trustees to acquire any business which would, in their opinion, be to the advantage of the beneficiaries. It further empowered them “generally to do all things which may be necessary or expedient” including “the setting aside out of income derived from any business such reserves for any other purpose as they shall think fit”. It empowered them to use those reserves as if they were income of the current year, with the residue at the date of distribution to be applied as directed in relation to the capital.
(b)Clause 14 empowered the trustees to effect improvements to, or to hold as part of the capital of the trust fund, any capital assets they may acquire for the purpose of carrying on or extending any business. It further empowered them to set aside reserves from time to time “out of the income derived by them whether from the continuation of any business or otherwise”. It empowered them to use and apply any part of the reserves as if they were income derived during the current year, with “any reserve or reserve fund … or residue thereof” remaining unapplied on the termination of the trusts, forming part of the capital.
[61] Reading these clauses in light of cl 3, I consider the Deed required the trustees to reserve income under cls 12 and 14 within six months of the balance date for the relevant year if they wished to do so. Under cl 3, if it was not reserved or specifically apportioned within six months of the balance date, the residue of annual income vested in the children equally as at the balance date. The reason for it vesting as at balance date was to avoid it being taxed at a higher rate, according to the evidence of Mr Boyce and Mr Thomson and as supposed by the expert witness Mr Spargo, which I accept.113
113 Boyce Brief, above n 34, at [21]; Thomson Brief, above n 2, at [22]; Christopher Spargo, Brief of Evidence, dated 8 February 2019, at [21].
As a matter of logic, and the scheme and purpose of the Deed, the trustees’ powers under cls 12 and 14 to reserve income under those clauses, and use it as if it were income of the current year with the residue forming part of the capital (or to be applied as directed in relation to the capital) on termination of the trust, could not apply to income which had vested in the income beneficiaries.
[62] In Johns v Johns, for the purpose of interpreting the Limitation Act 1950, the Court of Appeal analysed three sorts of interests of a child beneficiary of a trust:114
(a)As a discretionary beneficiary, because he had the prospect of receiving distributions of capital and income solely in the discretion of the trustees.
(b)Having a future interest, a right to the residue of the trust at the date of distribution, contingent upon survival. The Court indicated there are, in general, three kinds of future interests:
(i)interests which are indefeasibly vested but of which possession is postponed to let in an intermediate interest;
(ii)interests which are vested subject to divesting in favour of a substitute interest; and
(iii)interests which are contingent.115
The Court considered it was unnecessary to discuss the “subtle distinctions” which can arise between conditions precedent to which an interest is subject (making the interest contingent) and conditions subsequent (which makes the interest vested subject to divesting).
(c)Having income vested in him during the income year subject to a proviso that the trustees may expressly pay or apply the income to any
114 Johns v Johns [2004] 3 NZLR 202 (CA) at [26]–[29].
115 At [46].
beneficiary “in priority to and in precedence over” this beneficiary. The Court considered this “rather strange way of expressing the matter” left some difficulty in determining whether the interest vested subject to being divested or does not vest until it is known what discretionary payments or allocations are made each year. The Court did not determine which was the case.
[63] Here, if the residue of annual income was specifically apportioned within six months of the balance date, it would have vested in the beneficiary to whom it was apportioned, at the date of apportionment. But that did not occur.
[64] The children were equal beneficiaries of the residue of annual income, if it was not specifically apportioned, and not reserved under cls 12 or 14, by the trustees in their discretion within six months of the balance date. If the trustees took no such steps, the children’s interests vested in them as at balance date. They were discretionary beneficiaries to the income because whether the interest vested depended on the exercise, or non-exercise, of two discretions by the trustees.
[65] If the residue of annual income was reserved within six months of the balance date, under cls 12 or 14, it either became part of the capital on termination of the trust (cl 14) or was applied as directed in relation to the capital on distribution of the trust (cl 12). So reserved income vested in the capital beneficiaries at the date of reservation. Theirs was a future interest contingent upon survival until the date of distribution and upon other conditions on the capital beneficiaries as explained next.
Capital and capital beneficiaries under the Deed
[66]Clause 6 created the capital beneficiaries:
6 THE trustees shall stand possessed of the capital of the trust fund UPON TRUST for such of them the children of the settler as shall be living at the date of distribution in such shares and in such proportions as the settlor by deed (revocable or irrevocable) or by last Will and testament appoint and failing any such appointment as aforesaid for such aforesaid children as shall be living at the date of distribution as tenants in common in equal shares except that the share of each son shall be twice the share of each daughter and the words “the date of distribution” where they appear in this deed shall be the date of the fiftieth anniversary of the execution of this deed or such earlier
date as the trustees may at any time by deed in their absolute discretion declare to be the date of distribution.
[67]Some other clauses are also relevant to the capital of the Trust:
(a)Where the trustees have purchased farmland, cl 10(a) invests them with “the fullest discretionary powers in all matters relating to [its] management”, “as if they were the absolute proprietors thereof”. Clause 10(b) empowers the trustees to set aside out of the farming business such sums as they think fit “in their absolute discretion” for paying mortgages or other liabilities, to provide additional capital for the working of the farm and to provide for a fund “to enable the said business to be developed by bringing the land into a higher state of cultivation” as the trustees think fit. Clause 10(b) explicitly provides that such sums set aside “shall be added to the capital of the trust funds and shall follow the destination thereof”.
(b)The first part of cl 12 empowers the trustees to “expend any part or parts of the trust fund in the acquisition of any business which in their opinion would be to the advantage of the beneficiaries hereunder”. This is a power to spend capital. The reserves that may be set aside out of the income from any such business are explicitly stated to be used and applied as if they were income. The residue of such reserves is required to be applied in the same manner as the capital.
(c)Clause 14 also contains a power to reserve income, as noted above. But it also empowers the trustees to effect improvements to capital assets which they may acquire for the purpose of carrying on or extending any business or holding as part of the capital of the trust fund. And the unapplied residue of those reserves is stated to “form part of the capital of the trust fund”.
(d)Clause 20 empowers the trustees to apply any part of the capital of the trust fund towards payment of calls on any share that is subject to the trust.
[68] The capital beneficiaries were stated to be the children living at the date of distribution. The shares and proportions in which the capital vested in the children living at the date of distribution were those appointed by Jack as settlor by deed or in his will. So, from July 1974 to August 1985, all the children were capital beneficiaries as at the date of distribution. Their future interests in the capital, including the reserved income, vested in them, contingent upon their survival and subject to divestment because Jack might alter the shares and proportions of vesting (as he did). They would have all shared equally in the capital as tenants in common, with the odious exception, according to the Deed, that Cathie as a daughter would have received half the share of her brothers.
[69] But, on 12 August 1985, Jack appointed Tony as sole capital beneficiary. From that date, the capital vested in Tony, subject to the possibility that Jack could divest him of it by revoking his Deed and appointing the capital to the children in different proportions in either a new deed or in his Will. The Deed did not provide explicitly it was revocable. Clause 6 explicitly admitted of the possibility that such a deed could be revocable or irrevocable. But, unless it was explicitly made irrevocable, I consider a Court exercising its supervisory jurisdiction over the Trust would have very likely upheld a revocation. So, while the other children were discretionary capital beneficiaries after August 1985, Tony had a vested interest in the capital from then, subject to the contingency of surviving until the date of distribution and subject to possible divestment by Jack revoking the deed apportioning the capital to Tony and making a new deed.
Issue 1: Did income vest in the income beneficiaries and can it be traced to SLH?
The sub-issues
[70] Mr Molloy, for the plaintiffs, submits their principal claim is that the Trust’s net annual income each year from 30 June 1991 and 30 June 2008, totalling
$2,084,578, vested in the income beneficiaries, as at the balance date each year, in equal shares by operation of cl 3 of the Trust Deed. He submits the property can be traced into SLH’s hands. Ms Chambers QC, for Tony and Mr Thomson, submits the separate claim under the Family Protection Act 1955 is the correct mechanism to address any issues of fairness between the siblings. She submits the substantive
decisions made in running the trust were reasonable and proper and not undermined by the lack of resolutions or meetings, which I discuss below. Ms Robertson QC, for SLH, submits the property cannot be traced into SLH’s hands.
[71]There are four sub-issues:
(a)Did the trustees reserve income unanimously, each year by the time required by the Trust deed?
(b)Did the trustees’ reservation decisions breach their duty of impartiality?
(c)What, if any, income was reserved?
(d)Can the income be traced into SLH’s hands?
[72] I outline the law and submissions in relation to the first two of these sub-issues. I then apply the law to the trustees’ decisions in the three different phases of the Trust’s life, corresponding to the three periods of different trustees before dealing with the third and fourth sub-issues.
Sub-issue 1: Did the trustees reserve income unanimously, each year, by the time required?
[73] Have the plaintiffs proved, on the balance of probabilities, the trustees did not validly reserve income as required by the Trust Deed? There are three respects in which the plaintiffs say the trustees did not reserve income as required, because their decisions:
(a)were not unanimous;
(b)were not made each year but were fettered by a general policy; and
(c)were not made within six months of the balance for that year, under cls 3 and 14 of the Trust Deed.116
[74] Mr Molloy, for the plaintiffs, submits at least some of the trustees’ decisions here were not made unanimously. He submits the power to allocate net annual income under cl 3 had to be exercised by balance date of the year in which it was earned, otherwise it was deemed to vest in the income beneficiaries within six months of the balance date. He submits that created vested interests in the income beneficiaries, defeasible by a valid exercise of the power to reinvest. He submits the power to reserve income was never validly exercised at all because there are no contemporaneous trust documents recording such decisions and Mr Thomson’s evidence to the contrary is unreliable.
[75] Ms Chambers, for Tony and Mr Thomson, submits evidence the trustees acted unanimously is not displaced by a lack of records after so long. She submits the trustees adopted a general policy but did not bind themselves to it. She submits the proper reading of the Deed, consistent with its drafting, reality, purpose and context is that automatic vesting of any residue of annual income only occurs six months after the balance date.
[76] The relevant law is straightforward and agreed. There is no clause in the Deed allowing trustee decisions to be made in any special manner. Accordingly, the law requires trustees’ decisions must be made unanimously. As with any trust, the trustees must actually consider and intend to exercise a discretionary power in order for it to be validly exercised. Otherwise a purported exercise of the power will be void.117 And trustees’ decisions which are required to be exercised at a particular time cannot be fettered in advance by a general policy. They must be exercised at the relevant time, in the circumstances as they exist then.118
116 The parties proceeded on the basis reservation decisions, if they were made, were made under cl 14 rather than cl 12. Clause 14 was explicitly referenced in the Trust accounts prepared by NZGT eg CB 1/15 in 1976.
117 Andrew S Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2013) at [6.5.1]
118 Garrow and Kelly, above n 99, at [19.14]; Lynton Tucker, Nicholas Le Poidevin and James Brightwell Lewin on Trusts (19th ed, Sweet & Maxwell, London, 2015) at [29–227]; Geraint Thomas Thomas on Powers (2nd ed, Oxford University Press, Oxford, 2012) at [1.46].
[77] In my analysis of the Trust deed above, I found that cls 3 and 14 required the trustees to reserve income under cls 12 and 14 within six months of the balance date for the relevant year. Given income was not specifically apportioned, if it was not reserved by then it would have vested in the children as income beneficiaries as at the balance date of the Trust.
[78] If the plaintiffs prove, on the balance of probabilities, that any of the three requirements were not met, then the income for that year would not have been reserved lawfully and would have automatically vested in the income beneficiaries under cl 3 as at the balance date of that year. I determine that below by traversing the evidence regarding the decision-making in each phase of the Trust’s life.
Sub-issue 2: Were reservation decisions made in breach of the trustees’ duty of impartiality?
[79] Trustees are under a duty of impartiality, in particular, to “act fairly in making investment decisions which may have different consequences for different classes of beneficiaries”.119 The duty has been described as “no more than the ordinary duty which the law imposes on a person who is entrusted with the exercise of a discretionary power: that he [or she] exercises the power for the purpose for which it is given, giving proper consideration to the matters which are relevant and excluding from consideration matters which are irrelevant”.120 The terms of the trust deed are crucial and can modify the duty.121 The common law duty of impartiality is preserved by s 13F of the Trustee Act 1956 (the Act).
[80] In Kain v Hutton, discretionary beneficiary grandchildren complained that farm income was reinvested in breach of trust, including breach of the duty of impartiality, because there was clear need, and requests, for help with their education.122 The Court of Appeal observed that, “under a discretionary trust, there is no right to distributions but only a right to be considered” and stated “[a]ny duty of impartiality must be viewed against the limited rights of discretionary
119 Nestle v National Westminster Bank plc [2000] WTLR 795 (Ch) at 803.
120 Edge v Pensions Ombudsman [2000] Ch 602 (EWCA) at 627.
121 Manukau City Council v Lawson, above n 104, at 617.
122 Kain v Hutton [2007] NZCA 199 at [242]. This judgment was reported several years later at [2015] 3 NZLR 349 but the editors of NZLR decided to omit paragraphs relevant here.
beneficiaries”.123 The Court held the trustees were entitled to ask for further information about the financial position of the beneficiaries and the fact they did so provided an evidential basis for the proposition they were prepared to comply with the duty to consider distribution.124 So, while trustees must avoid taking into account “irrelevant, irrational or improper factors”,125 they are otherwise able to exercise their discretion in making decisions regarding discretionary beneficiaries.
[81] The duty of impartiality can bite harder where there is a life tenant and capital beneficiaries but, even then, trustees still have a wide discretion. In Re Mulligan (Deceased), the High Court emphasised the concept of fairness, the importance of discretion and the width of competing considerations in any case.126 Pankhurst J held:127
It is elementary that a trustee must act with strict impartiality and endeavour to maintain a balance between the interests of life tenant and remaindermen. Put another way, a trustee must be even-handed as between income and capital beneficiaries.
[82] Pankhurst J found trustees had not acted impartially between the capital and income beneficiaries in investing trust capital in low-yielding fixed interest investments, rather than the sharemarket, from 1965 to 1990, which benefited the settlor’s life tenant widow at the expense of his 10 nephews and nieces in whom the capital had vested. He found the professional trustee was not entitled to defer to the wishes of the trustee widow, treating her view as the last word on the matter of share investment, especially when she was self-evidently affected by a conflict of interest.128 The professional trustee was obliged to exercise independent judgement and not defer to her. The trustees were found liable to place the trust estate in the same position as if no breach had been committed and the performance that might have been achieved by a prudent trustee.
[83] Here, Mr Molloy submits for the plaintiffs, if reservation decisions were improperly made in terms of the Deed, they should be set aside. The submission
123 At [243].
124 At [245].
125 Edge v Pensions Ombudsman [1998] Ch 512 (EWHC) at 533, 567.
126 Re Mulligan (Deceased) [1998] 1 NZLR 481 (HC) at 501.
127 At 502.
128 At 505.
appears to apply primarily to the period when Mr Thomson was trustee. That is because Mr Molloy submits Mr Thomson was aware the decisions would benefit Tony, he never turned his mind to his duty of impartiality, and reservation of all annual income, including the dividend, was perverse or capricious when Tony received
$11.5 million of assets and the income beneficiaries received nothing.
[84] Ms Chambers, for Tony and Mr Thomson, submits the amounts set aside were prudently, properly and validly reserved under the discretionary power in cl 14 of the Deed, to ensure the trust portfolio was sensibly balanced as far as capital and income growth was concerned, taking into account its terms, purposes and distribution requirements including the discretionary nature of the income beneficiaries’ interest. She submits the trustees were entitled to take into account the settlor’s wishes to reacquire the Enright family land at St Bathans and to take a long-term view of investment, rather than be judged on the basis of hindsight. There is no basis for the Court to intervene in those decisions. There is no evidential basis the trustees acted capriciously in their reservation decisions.
[85] Clause 21 of the Trust Deed provided that the Trustees “shall have the fullest powers of deciding or determining (so far as the law permits) all matters and subjects as to which any doubt difficulty dispute or question may arise at any time”, “in relation to the administration or execution of the trusts”. But that does not displace the trustees’ duty of impartiality. I consider a duty of impartiality did bear on the trustees’ decisions whether to reserve income. But its force varied with the varying nature of the beneficiaries’ respective interests. And what was required to discharge the duty varied depending on the circumstances of the Trust. So whether the plaintiffs have proved, on the balance of probabilities, the trustees breached their duty of impartiality must also be examined according to the different phases of the Trust’s life.
[86]The three phases of the Trust’s life are when
(a)NZGT and Jack were the trustees;
(b)Tony and Jack (and, for some of that time, NZGT) were the trustees; and
(c)Mr Thomson and Jack were the trustees.
Phase 1: NZGT and Jack
[87] Jack was a trustee throughout the life of the Trust. NZGT was a trustee, and did the Trust accounts, from 1974 to 1990. This included the period when Tony was also a trustee, from 1986. The plaintiffs’ case originally had NZGT as second defendant. By the time of trial, that had been abandoned, understandably, because of a lack of evidence. The plaintiffs’ submissions targeted the period from 1990 to 2008, the next two phases of the Trust’s life. However, as context, I outline the evidence regarding trustee decision-making during the period NZGT was trustee.
[88] Mr Boyce worked at NZGT and its predecessor firms from 1977 and is still there. Although he was responsible for the file for this Trust, among many others for a period in 1990 to 1991, he does not now have any specific recollection of the Trust or its administration.129 NZGT’s files relating to the Trust were destroyed in the ordinary course of business around 2010 so Mr Boyce’s evidence is based on his knowledge and recollection of NZGT’s practices in general and on his analysis of documents discovered in this proceeding.130 His evidence is:
(a)It would have been NZGT’s usual practice to minute retirement decisions in a detailed decision sheet, to execute a Deed of Retirement and to produce accounts for the final period, paying outstanding bills and delivering core trust documents to the successor or continuing trustees.131
(b)NZGT had a robust decision-making process: virtually all trustee decisions affecting trust assets or beneficiaries were made at Assistant General Manager level or higher, or with oversight from the Board; any decision regarding acquisition of assets or improvement of land would have been carefully analysed and thoroughly documented.132
129 Boyce Brief, above n 34, at [3]–[5].
130 At [6]–[8].
131 At [14].
132 At [16]–[17].
(c)It was NZGT’s practice at the time to first decide if discretionary distributions of income should be made to income beneficiaries and then set aside the balance so investment or other decisions could be made later.133 Mr Boyce considers whether a distribution to income beneficiaries would be made would have been governed by the level of income received, the needs of the beneficiaries and whether it was necessary or appropriate to grow the capital. He expects NZGT would have relied on a co-trustee to report the beneficiaries’ situation.134 NZGT invested otherwise uninvested cash balances in a Client Deposit Fund to earn interest.135
[89] Mr Boyce recollects the reason for a Trust Deed provision automatically vesting unapplied income was to avoid it being taxed at a higher rate as trustee income, because income tax legislation had required beneficiary income to vest within the income year.136
Phase 2: Were Tony’s and Jack’s reservation decisions improperly made?
[90] Tony was trustee from 1986 until 7 June 1994. Jack was a trustee throughout that period and NZGT was a trustee from 1986 to 1990. The plaintiffs’ case regarding reservation decisions is focussed on the period from the financial year ended 30 June 1991 onwards, due to evidential issues before that. Tony ceased to be trustee, and Mr Thomson took over, before 30 June 1994, the end of that financial year. The evidence is that was because Tony was overseas and unable to carry out his duties as trustee.137 The minutes of the meeting of trustees for the year ended 30 June 1994 (signed only by Jack) are dated 13 July 1995.138 I proceed on the basis Tony was trustee in relation to the decisions to reserve income up to the year ended 30 June 1993. Mr Thomson was trustee when the purported reservation decision for the years ended 30 June 1994 and following were made.
322 Wayne’s Brief, above n 3, at [33].
SLH’s hands under the fifth cause of action and SLH unconscionably received the loans of those proceeds.
[202] Laches is primarily relevant to the breach of trust in relation to the reservation decisions under the fifth cause of action. I am not persuaded the defendants have suffered such prejudice from delay as would justify refusing relief under s 31 of the Act. That is particularly so given the defendants’ failure to take any steps to advise the plaintiffs of the circumstances which ground their causes of action. While it is true that three sets of financial statements are missing, and Jack’s testimony is not now available, net annual profit and loss figures are available and the testimony of the other trustees and accounting experts is available and is the basis for my judgment. If there had been insufficient evidence on which to assess the claims, that would have disadvantaged the plaintiffs, as it did in relation to their claims against NZGT, which they abandoned.
[203]I do not consider the claims of the plaintiffs, other than Terry, are out of time.
Defence of honest and reasonable trustees
[204]Section 73 of the Trustee Act 1956 provides, relevantly:
73 Power to relieve trustee from personal liability
If it appears to the court that a trustee … is or may be personally liable for any breach of trust … but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the court in the matter in which he committed the breach, then the court may relieve him either wholly or partly from personal liability for the same.
[205] The parties agree s 73 grants the Court a discretion to relieve a trustee from personal liability who has acted honestly and reasonably and it is fair to excuse the trustee for breach of trust and for not seeking directions from the Court. Honesty is assessed on the basis of whether the trustee knew the relevant terms of trust and that the impugned conduct amounted to a breach of trust.
[206] In relation to s 73, Mr Molloy submits the non-payment of income vested in the plaintiffs is a fundamental breach of the terms of the Trust. Mr Thomson, as a
professional trustee, failed to consider income beneficiary interests, never considered the capital/income distinction and never contacted the plaintiffs even when the Trust was finally wound up.
[207] Ms Chambers submits the defendants acted honestly and reasonably throughout their trusteeship. The decision to allocate reserves was based on a reasonable interpretation of their powers under the Trust deed and was an appropriate financial decision. Any breaches of trust were committed innocently and only while acting in ways they honestly believed to be appropriate and in the best interests of the Trust. Setting aside reserves did not build up the capital asset of the Trust but retained funds available for use, so Tony’s actions were not self-interested. This is not a case of calculated or deliberate wrongdoing but, if liability is made out, a case where trustees have acted in accordance with a reasonable but incorrect understanding of their obligations.
[208] I do not consider any of the trustees deserve the benefit of the s 73 defence. Tony’s conflict of interest was palpable. Jack and Mr Thomson must have been quite clear Jack was not a beneficiary. Mr Thomson’s participation in the trustee decision- making, in respect to which I have upheld challenges, was entirely unsatisfactory and Jack knew, and likely engineered, that.
Issue 5: What remedies should be granted?
Law of remedies
[209] Remedies were developed piecemeal in the law of equity in relation to different causes of action, especially in response to particular gaps in the common law. But I consider the law of equity in New Zealand is now so mingled with common law that a range of remedies is available, whatever the cause of action.323 Relevantly, that may include orders for equitable compensation or damages. In general, the judicial discretion to grant equitable remedies should be exercised so as to do justice in the circumstances of the particular case. To the extent reasonable and practical, the purpose of equitable damages, in particular, is to restore successful plaintiffs to the
323 See, for example, Andrew S Butler “Equitable Remedies in the Future” in Butler, above n 117, at ch 37.
real position in which they would have been if the inequitable wrongdoing had not occurred.324
[210] In this case, the parties agree interest is payable on the whole or part of any judgment sum under the Judicature Act 1908, for the whole or part of the period from when the cause of action arose and the date of judgment, at the discretion of the judge. Exercise of that discretion will depend on what is just in the circumstances. I note s 87 of the Judicature Act 1908 allows for the Court to award interest until the date of judgment but does not extend to “interest upon interest”. In its equitable jurisdiction, the Court may award compound interest anyway, if the money claimed has been used in trade or commerce and profit equal to, or greater than, the compound interest, was made.325
Submissions
[211]Mr Molloy submits:
(a)If the net annual income, which he submits totals $2,084.578, vested in the plaintiffs but was not paid to them, the plaintiffs should receive five- sixths of that plus compound interest from the date it vested. If it was capital or reserved, but the duty of impartiality was breached, they should receive equivalent equitable compensation.
(b)Tony must account to the plaintiffs for reserves purportedly set aside while he was trustee, as he benefitted from them as sole capital beneficiary.
(c)The plaintiffs are entitled to equitable compensation for the $10,379 wrongly paid to Jack as beneficiary, from Tony, as executor of Jack’s estate and from Mr Thomson.
324 Butler, above n 117, at [32.3.1]; Chirnside v Fay [2004] 3 NZLR 637 (CA) at [67].
325 Equiticorp Industries Group Ltd (in stat man) v The Crown (No 3) [1996] 3 NZLR 690 (HC) at 701.
(d)If the trustees did not act jointly in paying interest and management fees to SLH then those payments of $361,701 were void and they should receive equitable compensation of that amount or an order should be made that SLH accounts to the plaintiffs as constructive trustee for those amounts plus interest.
(e)Five-sixths of the $1,336,347 of vested income advanced to SLH, applied to the purchase price for Two Mile Station and traced into 63.64 per cent of that purchase price, should now be held as that percentage of the value of Two Mile Station on constructive trust for the plaintiffs.
[212] Mr Molloy submits interest should be charged on a compound basis, relying on Re Emmet’s Estate.326 Ms Chambers submits any interest should only be awarded from the date proceedings were commenced, or there should be some other reduction in the period over which interest is charged. She submits there was an exceptional delay to the plaintiffs bringing their claim, given they knew about the Trust as children and ought to have known about it, at the latest, in 2007/2008. She submits any interest should be awarded on a simple rather than compounding basis because the Trust property has never been in the direct possession of the defendants and the tracing claim already takes into account the time value of money.
[213] Ms Robertson submits there is no valid claim to a constructive trust in respect of the Trust money that was used by SLH for purchase of Two Mile Station.
What remedies are just?
[214] Cathie, Adrian, Wayne and Shell are successful plaintiffs, as income beneficiaries, and deserve relief. Terry was unsuccessful in his claim because he was out of time. Tony was also an income beneficiary and the plaintiffs do not seek to deprive him of the share he would have been entitled to as an income beneficiary. What remedies should I grant, in the interests of justice in the circumstances of this case and, to the extent possible, to restore them to the position in which they should have been?
326 Re Emmet’s Estate (1881) 17 Ch D 142 (Ch).
[215] There is a question of principle about what to do in relation to the share of the income that should have vested in Terry, his claim to which has failed. If the total vested income is split into sixths, and Terry’s is allocated to the successful plaintiffs, then they gain more than they should. But if it is not allocated to them, then Tony is left with more than he should. In general, where I order payment by Tony or entities owned by, or for the benefit of, Tony, I consider it most equitable to divide the vested income into fifths and to allocate four-fifths of it to the successful plaintiffs, leaving one fifth with Tony. Where I order payment by others, such as by Jack’s estate or Mr Thomson, I allocate four-fifths to the successful plaintiffs. Because Tony has made no claim to those amounts, and resisted them, I do not allocate any to him (and, in the case of the estate, he may inherit the other one-fifth anyway).
[216] First, in Issue 3, I found Tony breached his fiduciary duty as trustee to avoid a conflict of interest in participating in a decision to reserve $492 of income in 1991 to his sole advantage. That amount was not validly reserved. It vested in the income beneficiaries in equal shares. The amount is negligible, but I do not consider Tony should retain any of it. I order Tony to account for that amount, equally, to the successful plaintiffs: Cathie, Adrian’s estate, Wayne and Shell.
[217] Second, Mr Thomson and Jack purported to distribute $10,379 to Jack as a beneficiary of the Trust in the year ending 30 June 2005. In Issue 3, I found this decision was made invalidly and would have been a breach of trust if it had been. Jack should not have had the benefit of the $10,379 allocated to him by way of a credit to him in 2005. Ms Greenwood’s evidence is that was the amount reported as a profit in the year ended 30 June 2005, it was allocated to trustees’ income and then added to the funds available for distribution.327 If it had not been (wrongly) distributed, it would have been unreserved income and vested in the income beneficiaries. It can be dealt with by an order that Jack’s estate, through Tony as executor and first defendant, pay equitable compensation of four-fifths of the $10,379, or $8,303, to the four successful plaintiffs, in equal shares. If there are insufficient sums remaining in the estate because they have been distributed (a matter on which I have insufficient evidence)
327 Greenwood Brief, above n 42, at [219]–[220].
Mr Thomson, as the other trustee at fault, should pay equitable compensation of that amount to Cathie, Adrian’s estate, Wayne and Shell.
[218]Third, in relation to Issue 1,
(a)I found Mr Thomson and Jack as trustees did not validly reserve, and Mr Thomson failed to fulfil his duty of impartiality in respect to, income totalling (in positive years) $2,219,854 in the financial years from 30 June 1994 to 1996, 1999 to 2002, 2005 and 2008. The net residue of annual income in those years vested in the income beneficiaries equally, at the balance date of each year. Because the residue of net annual income in other years was negative, the total residue of net annual income over all years from 30 June 1994 to 2008 was $2,144,072.
(b)I have already dealt with the $10,379 of income that vested in 2005.
(c)The 2007 dividend was paid by SLH to the Trust and immediately distributed to Tony as sole capital beneficiary. I order Tony to account, equally, to Cathie, Adrian’s estate, Wayne and Shell for four-fifths of the $888,869 dividend, or $711,095, he effectively received through distribution of the Trust.
(d)I found the $1,495,646 of the Trust’s income from the sale of Wye Creek, a subset of the vested income, was advanced to SLH for the development of Dunstan Burn Station and the acquisition of Two Mile Station, and can be traced into SLH’s hands. Under the fourth cause of action, I also found SLH unconscionably received that amount.
[219] I do not consider the vested income or the loan of the Wye Creek sale proceeds should be the subject of a constructive trust over Two Mile Station or other SLH property. Too much water has passed under SLH’s bridge since 2007. Trusts have caused too many problems in this family already. And the evidence is Two Mile
Station has been integrated into the wider Dunstan Burn Station. Subjecting it to a constructive trust may distort the economic value and practical use of that Station as a part of the wider Dunstan Burn Station. Instead, I consider the successful plaintiffs should be awarded equitable compensation against SLH.
[220] Other things being equal, I would be prepared to order equitable compensation equivalent to the appropriate shares of $1,495,646 of income loaned by the Trust to SLH for the capital purchase of Two Mile Station. But the successful plaintiffs will recover their shares of $888,869 from Tony and $10,379 from Jack’s estate (or Mr Thomson). If they were to recover the loans as well, that would amount to their shares of $2,394,894. That would do more than restore to the plaintiffs the total residue of net annual income of $2,219,854 that vested in the income beneficiaries in positive years between 1994 and 2008 or the total residue of net annual income over all those years of $2,144,072. To reflect the Trust’s years of negative income in that period, I consider it would be fair to limit the successful plaintiffs’ total recovery under the fifth cause of action to the latter amount. Accordingly, I order SLH to pay equitable compensation of four-fifths of $1,244,824 (being $2,144,072 less $888,869 and
$10,379), which is $995,859, to the successful plaintiffs in equal shares. That relief will reflect their success in the fourth and fifth causes of action.
[221] Standing back, I consider that package of relief equitably restores the plaintiffs to the position in which they should have been if they had not suffered these inequities. It recovers the various amounts of money from where they went. Of course, the successful plaintiffs may wish to divide the compensation they have been awarded in some other way, after they have received it. Despite the application of the law, they may consider Terry should share in what they have recovered. That is up to them.
[222] I do not consider it necessary to order Mr Thomson to pay more equitable relief than I have ordered. He did not benefit financially from the inequities he caused. Some of his actions as a professional trustee have been sanctioned by this judgment. And my impression is that he regrets what happened and may not be unhappy with the outcome of this judgment though not, perhaps, the reasoning.
[223] The time value of money component of what the successful plaintiffs seek can be reflected in interest on each of the above sums. It follows from my decision on limitation that I do not accept the claims of the successful plaintiffs have been exceptionally delayed. But neither is there evidence as to whether the profit made from the various sums awarded were equal to, or greater than, compound interest. In the interests of equity, I award simple interest on the sums ordered until the date on which the judgment debt is paid in full.
Result
[224]I order:
(a)Mr Tony Enright must account for $711,095 (for the dividend) and $492 (for income reserved in conflict of duty), plus simple interest from 30 June 2008 and from 30 June 1991 respectively, in equal shares, to:
(i)Mrs Cathie Newton;
(ii)Mr William Young as executor of the estate of Mr Adrian Enright;
(iii)Mr Wayne Enright; and
(iv)Mr Gene Herschel Enright.
(b)Mr Tony Enright, as administrator of the estate of Mr Jack Enright, must pay equitable compensation of $8,303 plus simple interest from 30 June 2005, in equal shares, to:
(i)Mrs Cathie Newton;
(ii)Mr William Young as executor of the estate of Mr Adrian Enright;
(iii)Mr Wayne Enright;
(iv)Mr Gene Herschel Enright.
Or, alternatively, if there are insufficient funds now remaining in Mr Jack Enright’s estate for that purpose, Mr Eric Thomson must pay equitable compensation to them for that sum.
(c)SLH must pay equitable compensation of $995,859, plus simple interest from 30 June 2008, in equal shares, to:
(i)Mrs Cathie Newton;
(ii)Mr William Young as executor of the estate of Mr Adrian Enright;
(iii)Mr Wayne Enright; and
(iv)Mr Gene Herschel Enright.
[225] The parties agreed costs should be awarded on a 2B basis.328 On the face of the result of the judgment, four-fifths of the plaintiffs’ costs should be awarded against the defendants to the four successful plaintiffs and one fifth of the defendants’ costs should be awarded against Terry. But counsel requested leave to file submissions to deal with unknown complexities depending on the result of this judgment. I grant leave for the plaintiffs to file submissions of no more than 10 pages on costs within 15 working days of the judgment and the defendants to file submissions of the same length within ten working days of that.
Palmer J
328 Consistent with counsel’s joint memorandum of 10 November 2017.
ANNEX: KEY CLAUSES OF THE J J ENRIGHT TRUST DEED
… WHEREAS the Settlor has paid to the Trustees the sum of ONE HUNDRED DOLLARS ($100.00) to be held by the Trustees for the benefit of the children of the said JOHN JAMES ENRIGHT upon the trusts and with the powers and authorities and discretions hereinafter declared and conferred concerning the same NOW THEREFORE THIS DEED WITNESSETH: …
2 THE Trustees shall out of the net annual income received by them from the investments of the trust funds or derived by the Trustees from any business which the Trustees may carry on or be engaged in or which the Trustees may receive from any other source and be other than of a capital nature (hereinafter called “the annual income”) pay all expenses of and incidental to these presents and all costs and expenses incurred by them in or about the administration of the trust hereby created.
3 UNTIL the distribution in accordance with the provisions hereinafter contained of the whole of the capital of the trust funds the Trustees shall stand possessed of the residue of the annual income received by them during each year ending upon a date to be selected by the Trustees (hereinafter called “the balance date”) UPON TRUST to divide such net annual income among them the children of the Settlor in such manner and in such shares and proportions as the Trustees shall in their absolute discretion from time to time determine the share taken or to be taken by each child in such income by the Trustees to be determined by the balance date and failing any apportionment of the residue of the annual income by the trustees under the foregoing provisions hereof being made within six months of the said balance date such income shall be deemed to have been apportioned among and vested in the said children in equal shares as at the balance date.
…
5 THE trustees may invest in such manner as they shall think fit in accordance with the powers of investment herein contained any income not expended by them and shall have power to apply any accumulation of income or any part thereof and of the income arising from the investment thereof in the same manner as if it were part of the income allocated to the child on whose behalf the accumulation is held or in the case of accumulations resulting from the creating of reserves by the trustees in accordance with the provisions hereinafter contained as if it were income derived by the trustees for the then current year.
6 THE trustees shall stand possessed of the capital of the trust fund UPON TRUST for such of them the children of the settler as shall be living at the date of distribution in such shares and in such proportions as the settlor by deed (revocable or irrevocable) or by last Will and testament appoint and failing any such appointment as aforesaid for such aforesaid children as shall be living at the date of distribution as tenants in common in equal shares except that the share of each son shall be twice the share of each daughter and the words “the date of distribution” where they appear in this deed shall be the date of the fiftieth anniversary of the execution of this deed or such earlier date as the trustees may at any time by deed in their absolute discretion declare to be the date of distribution.
…
8 THE trustees may invest any money for the time being subject to the trusts of these presents in any securities for the time being authorised by law for the investment of trust funds in the acquisition of any life insurance policy or policies issued by a reputable insurance company carrying on business in New Zealand in the purchase of any freehold or leasehold land or personal property in New Zealand in any mortgage of freehold or leasehold land in debentures debenture stock or in preference or ordinary shares or stock of any public or private company carrying on business in New Zealand by advancing the same or any part thereof to any person limited company or institution either with or without security at such rates of interest and upon such terms as to repayment and otherwise as the trustees shall think fit and the trustees may from time to time vary and transpose such investments for others of any nature hereby authorised without responsibility for any loss or losses occasioned by such investments whether original or substituted.
…
12 THE trustees may expend any part or parts of the trust fund in the acquisition of any business or a share in any business which in their opinion would be to the advantage of the beneficiaries hereunder or any one or more of them to acquire and carry on or join in carrying on such business in such manner as they shall think fit and as if they were the absolute owners thereof and may employee and engage any person or persons in or about each business as manager agent servant or otherwise at such wages or salaries in all respects as the trustees shall think fit without the trustees being liable or responsible for the acts or defaults or any such person or persons or losses incurred in carrying on or otherwise in relation to such business and with power to acquire all such assets whether of a capital nature or otherwise as may be required in connection with such business and generally to do all things which may be necessary or expedient including in addition to the creation of any depreciation or replacement fund the setting aside out of the income derived from any business such reserves for any other purpose as they shall think fit with power to use such reserves and also any depreciation reserve in the said business and to use and apply all or any part of such reserves created pursuant hereto or in accordance with the provisions contained in The Trustee Act 1958 or any amendments thereto in the same manner as if the amount so used and applied were income of the then current year the residue of any such reserves or reserve or depreciation or replacement fund existing at the date of distribution to be applied in the same manner as is hereinbefore directed in respect of the capital of the trust fund.
…
14 THE trustees shall have power to effect improvements to any capital assets which they may acquire for the purpose of carrying on or extending any business or hold as part of the capital of the trust fund and shall further have power to set aside from time to time out of the income derived by them whether from the continuation of any business or otherwise such sum or sums as they may think necessary or desirable as reserves with power to employ or invest the fund so reserved in such manner as they may think fit with further power to use and apply any part or parts of any reserve or reserves created by them in the same manner as if the amount so used and applied were income derived during the then current year and any reserve or reserve fund so created or the residue thereof remaining unapplied on the termination of the trusts hereby created shall accrue to and form part of the capital of the trust fund.
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