Enright v Newton

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IN THE COURT OF APPEAL OF NEW ZEALAND

I TE KŌTI PĪRA O AOTEAROA

CA284/2019
[2020] NZCA 529

BETWEEN	SHANE ANTHONY ENRIGHT First Appellant SOUTHERN LAKES HOLDINGS LIMITED Second Appellant
AND	CATHERINE ANN NEWTON, WILLIAM JAMES YOUNG, WAYNE MICHAEL ENRIGHT, GENE HERSCHEL ENRIGHT First Respondents/First Cross-Appellants SHANE ANTHONY ENRIGHT AS SOLE ADMINISTRATOR AND TRUSTEE OF THE ESTATE OF JOHN JAMES ENRIGHT Second Respondent ERIC JOHN THOMSON Third Respondent TERRENCE JOHN ENRIGHT Second Cross-Appellant

Hearing:	4 March 2020
Court:	Courtney, Ellis and Brewer JJ
Counsel:	DAT Chambers QC and C Upton for First Appellant S L Robertson QC and AHH Choi for Second Appellant T M Molloy and S L McColgan for First Respondents and Second Cross-Appellant No appearance for Third Respondent
Judgment:	29 October 2020 at 9.30 am

JUDGMENT OF THE COURT

AThe first appellant’s appeal is allowed in part. The Judge’s order requiring Tony Enright to account to the first respondents to the extent of $711,095 (four-fifths of $889,869) is quashed and substituted with an order that he account to the first respondents and the second cross-appellant to the extent of $496,285 (five-sixths of $595,542).
BThe second appellant’s appeal is allowed in part.

C The cross-appeals are allowed in part.

DThe Judge’s order that SLH, the second respondent, pay equitable compensation of $995,859 is quashed and substituted with an order that SLH account as a knowing recipient for $382,288, being five-sixths of the total of the interest and management fee ($358,745.68) and 2002 payment ($100,000).
EWe remit the case to the High Court for determination of the following questions:
(a)What are the terms of the declaration required to be made to recognise the respondents’ equitable proprietary interest in Two Mile Station?
(b)What is the correct legal and factual basis on which to determine how SLH’s improvements to Two Mile Station might be recognised?

FAs between the first appellant and the first respondents and second cross-appellant, costs will lie where they fall.
G The first respondents and second cross-appellant are entitled to costs from the second appellant for a standard appeal on a band A basis, with the usual disbursements.

____________________________________________________________________

REASONS OF THE COURT

(Given by Courtney J)

Table of Contents
Para No
Introduction	[1]
General background	[10]
The Enright family	[11]
The terms of the Trust	[13]
The administration of the Trust	[17]
Dunstan Burn Station and Two Mile Station	[23]
The Trust is wound up	[27]
The aftermath of the handover	[30]
Was Terry’s claim time-barred?
The case in the High Court	[34]
The issue on appeal	[40]
The relevant circumstances	[56]
With reasonable diligence, could Terry have discovered the facts giving rise to the cause of action in 2008?	[66]
Apportionment of the vested income between Tony and the respondents (Tony’s appeal)	[79]
The SLH dividend (Tony’s appeal)
The issue	[82]
What amount vested in the income beneficiaries and what was the benefit to Tony?	[86]
Interest and the management fee paid to SLH (cross-appeal)	[93]
Calculation of the vested income received by SLH (SLH’s appeal)
Accounting for the proceeds of the Wye Creek sales	[103]
The total amount of vested income received by SLH	[109]
Two Mile Station — can the respondents trace into it and with what result?
The case in the High Court	[112]
Issues on appeal	[118]
Has the right to trace been lost?	[120]
A constructive trust over Two Mile Station?	[130]
Conclusion	[146]
Interest payable on judgment sum	[149]
Summary and result	[153]
Costs	[157]

Introduction

In 1974 Jack Enright’s wife died leaving him with six children aged between nine and 19. Jack settled the J J Enright Trust (the Trust) for the benefit of his children a few months later.
Although the purpose of the Trust was to benefit all the children, in 1985 Jack appointed the capital of the Trust to the youngest, Shane Anthony Enright (known as Tony).
In about 1986, the Trust purchased the majority of the shares in Southern Lakes Holdings Ltd (SLH), a company that Jack controlled. SLH purchased two farms. The second, Two Mile Station, was paid for, in part, with trust money received from the proceeds of a sub-divisional development (Wye Creek) undertaken by the Trust.
In 2007 the Trust was wound up and its capital distributed to Tony without the other children ever having been advised of their status as income beneficiaries or receiving either income or capital from the Trust.
After Jack’s death in 2014 the five older siblings commenced proceedings against the former trustees of the Trust, who included Jack (for the whole life of the Trust), an independent trustee, Eric Thomson, and Tony (both for only some of the time).[1] The focus of the claim was the Trust’s income; it was alleged that under the terms of the Trust Deed income had vested in the six children equally but never been accounted for.
[1]The New Zealand Insurance Company Ltd (later New Zealand Guardian Trust Ltd or “NZGT”) was also a trustee for some of the time and was named as a defendant but the claim against it failed.
Palmer J found that more than $2 million of trust income had vested in the income beneficiaries but that some had wrongly been advanced to SLH, some to Tony and a small amount to Jack.[2] The Judge found in favour of four of the siblings, Catherine Newton (Cathie), the late Adrian Enright (by his executor William Young), Wayne Enright (Wayne) and Gene Herschel Enright (Shell). He made findings of breach of fiduciary duty against Jack, Mr Thomson and Tony. Tony was ordered to account to the successful plaintiffs in amounts that totalled $711,587.[3] Jack’s estate, or alternatively Mr Thomson, was ordered to pay equitable compensation of $8,303.[4] The Judge found that $1,495,646 of vested income could be traced into SLH’s hands and that SLH received that amount unconscionably.[5] SLH was ordered to pay equitable compensation totalling $995,859.[6]
[2]Enright v Enright [2019] NZHC 1124 [High Court decision] at [135(a)].
[3]High Court decision, above n 2, at [224(a)]. This was comprised of $711,095 paid to Tony as a beneficiary and $492 income not accounted for in a year in which Tony was a trustee.
[4]At [224(b)]. This order was made against Tony in his capacity as the executor of Jack’s estate and related to a payment of $10,379 made to Jack by the Trust to which he was not entitled because he was not a beneficiary. $8,303 is four-fifths of $10,379.
[5]At [218(d)].
[6]At [220] the Judge did not order SLH to compensate for the total amount of vested income it received because he considered that this would “do more than restore to the plaintiffs the total residue of net annual income … that vested in the income beneficiaries”.
The Judge dismissed the claim brought by Terrence Enright (Terry) as time‑barred.[7]
[7]At [200].
Tony and SLH do not challenge the liability findings but appeal various aspects of the quantum.[8] The four successful siblings cross-appeal on issues of quantum and one aspect of liability. Terry cross-appeals on those same issues, as well as on the question of limitation.[9]
[8]Mr Thompson is not an appellant.
[9]The successful siblings are both respondents and cross-appellants. Terry is a cross-appellant only. For convenience, however, we refer to Terry and the respondents collectively as “the respondents”.
The issues to be determined are whether the Judge erred in:
(a)finding that documents sent to Terry on 29 September 2008 started time running so that his claim is time-barred (cross-appeal);
(b)apportioning the equitable compensation payable to the respondents on a four-fifths rather than four-sixths basis (Tony’s appeal);
(c)treating the benefit to Tony from a dividend declared by SLH in 2007 as being the gross amount rather than the after-tax amount (Tony’s appeal);
(d)finding that it was not unconscionable for SLH to retain the management fee and interest payments that it received from the Trust (cross-appeal);
(e)calculating the amount of vested income received by SLH from the sale of the Wye Creek sections (SLH’s appeal);
(f)dismissing the claim by the cross-appellants to a constructive trust over Two Mile Station (cross appeal); and
(g)ordering SLH to pay interest from 30 June 2008 rather than from 30 June 2001 (cross-appeal).

General background

We draw on the Judge’s unchallenged findings of fact and liability for essential background information.

The Enright family

Jack grew up in Central Otago. He met his wife, Jean, in Canada. The couple had four children there before moving to New Zealand, where the younger two children were born. Jack worked in a variety of businesses and acquired property in Queenstown. He incorporated SLH in 1969 and was the sole shareholder and director. The company held a number of business interests in the area.
Jack remained in Queenstown after Jean’s death. The younger children were educated locally and then went to boarding school. By the mid-1980s Jack was estranged from four of his children, Cathie, Wayne, Shell and Terry. The reasons for this were canvassed at trial but have only limited relevance in this appeal. Most of the children did later resume contact with Jack but the relationships appear not to have been especially close. Adrian, however, maintained an amicable relationship with Jack. Tony had a very close, stable relationship with his father throughout.

The terms of the Trust

The purpose of the Trust was stated in the preamble of the Trust Deed to be “for the benefit of the children” of Jack.
Initially, the trustees were Jack and the New Zealand Insurance Co Ltd. Jack settled a property in Athol St, Queenstown, that he owned on the Trust with a mortgage back (though the debt was ultimately forgiven).
Under the terms of the Trust Deed 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 the settlor by deed or will might appoint, or otherwise in equal shares (except that the share of a son was twice that of a daughter). The distribution date was to be 25 July 2024 or such earlier date as the trustees by deed, in their absolute discretion, declared.
As for income, the trustees were to pay the costs and expenses of administering the trust from the net annual income and had the power to divide the residue of the annual income after costs and expenses among the children as they (the trustees) determined. They could decide to reserve the income rather than apportion it. But if they failed to either apportion or reserve the residue within six months of balance date (30 June) the income was deemed to have been apportioned equally and to have vested in the children at the relevant balance date. Specifically, the relevant clauses provided that the trustees were empowered to:
(a)pay business and trust administration expenses from the annual income of the Trust that was not of a capital nature (cl 2);[10]
(b)divide “the residue of the annual income received by them during each year” between the children but if they did not do so within six months of balance date, the residue was deemed to have been apportioned among and vested in the children in equal shares as at the balance date (cl 3);
(c)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); and
(d)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 purposes 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 the situation to be applied as directed in relation to the capital (cl 12).

The administration of the Trust

[10]The identification of expenses as either income or capital was an issue at the trial but the Judge’s determination of that aspect is not under challenge.

In the mid-1980s Jack began making changes to the administration and business of the Trust. In August 1985 he executed a deed appointing all the capital of the Trust to Tony. The deed was prepared by Mr Thomson, who was the solicitor to SLH and the Trust and who acted for Jack personally. Mr Thomson also acquired one share in SLH. Mr Thomson was concerned about the decision to appoint all the capital of the Trust to Tony and also about Jack’s expressed intention to leave his estate solely to Tony but considered the former a decision for the settlor and the latter as one that would change over time.
In 1986 Tony was appointed a trustee. He was then 21 years old, a student at Canterbury University. It is evident from Jack’s letter to Mr Thomson of 4 July 1986 that Jack instigated this appointment in anticipation of a contest over his will (which would favour Tony exclusively) and to avoid the Trust being wound up on his death.
Some time between 1986 to 1988 the Trust borrowed $495,868.73 from Jack which it used to buy 98 per cent of the shares in SLH.[11] Jack retained 1,000 shares.
[11]This loan was evidenced by a deed of acknowledgement of debt dated 7 January 1987 but Tony’s evidence was that the debt was incurred prior to him becoming a trustee.
In 1990 NZGT retired, leaving Jack and Tony as the trustees. In 1994 Tony retired as a trustee; by then he had moved overseas for work and, apart from 14 months in Invercargill around 1994, did not live in New Zealand again. Mr Thomson replaced Tony as the second trustee.
Jack had made it clear that he wished to reserve all the Trust income and instructed the Trust’s accountants, McCulloch and Partners and later Ibbotson Cooney Ltd (ICL), to treat the income accordingly. Mr Thomson did not see any reason that income should not be reserved, particularly later, when it was needed to support the development of the rural property (Dunstan Burn Station) that SLH acquired in 1996. But the decisions to reserve income each year were made informally, during discussions between Jack and Mr Thomson.
The Judge found that the decisions to reserve income were not the result of a proper exercise of the trustees’ discretion but, rather, reflected Mr Thomson’s acquiescence to Jack’s “overriding intention” evidenced by the standing instructions given to the Trust’s accountants.[12] In the circumstances they were not unanimous decisions and, consequently, were invalid. The Judge accordingly found that during the period that Jack and Mr Thomson were trustees (1994–2007) they had failed to validly reserve income, with the result that it had vested in the children equally.[13]

Dunstan Burn Station and Two Mile Station

[12]High Court decision, above n 2, at [115].

[13]At [116].

In 1988 the Trust purchased a development property at Wye Creek on the shore of Lake Wakatipu. Over the next ten years it developed Wye Creek as a subdivision.
In 1996 SLH acquired two blocks of rural land known as Dunstan Burn Station. This property had once been owned by Jack’s family and he was strongly motivated to see it back in the family. The sections in the subdivision were sold over the period 1999 to 2002.
In 2001, the Trust advanced funds from the sale of the Wye Creek sections to SLH to apply towards the purchase of another farm, Two Mile Station. Two Mile Station was also in two blocks, one of which connected the two Dunstan Burn Station blocks. Together, Dunstan Burn Station and Two Mile Station cover more than 10,000 hectares. They were (and still are) run as a single farm under the name Dunstan Burn Station.
Jack lived on Dunstan Burn Station until 2007. All the revenue and reserves from SLH were reinvested in Dunstan Burn Station. The evidence, accepted by the Judge, was that the acquisition of Two Mile Station significantly improved Dunstan Burn Station’s value and viability and would not have been possible had the Trust’s income been paid out to the income beneficiaries of the Trust. Moreover, without ongoing investment by the Trust there was a real risk that the farm would have failed as a result of difficult climatic and market conditions in the 1980s and 1990s.

The Trust is wound up

As early as 2002 Jack began planning to wind up the Trust and transfer all its assets to Tony. This proposal was the subject of a letter from ICL to Jack dated 22 April 2002. It referred to ICL having revalued the shares at approximately $2.5 million and to “Jack’s specific intention … to wind the trust up in favour of Tony”.
By 2007 Jack’s eyesight was too poor for him to continue running the farm. According to Tony, who was then living in Singapore, they agreed that he would take over the farm and the directorship of SLH. He sought advice on how to structure the handover and, on that advice, the following occurred over the course of four days in September 2007:
(a)On 25 September 2007 Tony became a director of SLH and Jack resigned as a director two days later.
(b)On 28 September 2007 SLH declared a dividend of $909,070.15 (including imputation credits of $299,993.15) to the Trust. Of that, $888,869 went to the Trust and the rest to Jack personally, who still held 1,000 shares in SLH.
(c)On 28 September 2007 the capital of the Trust was distributed to Tony. The assets of the Trust at that point were listed in the Deed of Distribution as being only the Trust’s shares in SLH valued at $2,495,880.[14] SLH also owed a debt to the trustees of $1,506,226, producing total assets worth $4,002,115. However, the Trust’s statement of financial position dated 30 June 2009 put the value of the SLH shares at $11,523,600.
[14]Tony later transferred the shares in SLH he acquired as part of the distribution to a trust company, Tarbert Trustees (2008) Ltd.
The other income beneficiaries, Tony’s siblings, were not told of these developments. Mr Thomson did not consider that there was any obligation to do so.

The aftermath of the handover

In 2008 Tony hired a farm manager for Dunstan Burn Station and moved Jack from the homestead to a cottage on the farm to make way for the new manager. Tony asked Terry to help with this process, which Terry did.
Within a short time Jack began making angry statements to the effect that Tony had “stolen the farm” from him.[15] He sought legal advice, instructing the firm of Ross Dowling Marquet Griffin (RDMG). Terry assisted him in his correspondence with RDMG. Mr Griffin wrote to Terry providing information about Jack’s affairs. He added comments about the Trust and Jack’s will, including the observation that there were “some very major problems”. This correspondence was the basis of the Judge’s finding that Terry’s claim was out of time and we discuss it detail when we come to that issue.
[15]High Court decision, above n 2, at [31].
By late 2008 Jack had moved to Christchurch to live close to Terry, initially in an independent unit and later in a care home. But in 2009 Tony moved Jack to Australia, where he was living. Jack lived with Tony until his death in 2014.

Jack’s estate went entirely to Tony. It was only after the terms of Jack’s will became known that the respondents began to press Tony and Mr Thomson for information about Jack’s assets, which led to questions about how the Trust had been administered.

Was Terry’s claim time-barred? (cross-appeal)

The case in the High Court

The proceedings were commenced in 2016. Tony and SLH both asserted that the claims against them were statute-barred by virtue of either ss 21 or 23B of the Limitation Act 1950. Under s 21 claims in respect of trust property and breaches of trust may not be brought more than six years from the accrual of the cause of action. Section 23B imposes a long-stop period of 15 years after the date of the act or omission on which the action is based, subject to extensions in the case of fraud (among other things).
The respondents maintained that their causes of action had been concealed by equitable fraud. They said that, with reasonable diligence, the necessary facts could only have been discovered on or about 18 December 2015 when they received copies of the Trust’s financial statements or, alternatively, on 4 February 2015 when they received a copy of the Trust Deed.
The assertion of fraudulent concealment engaged s 28 of the Limitation Act, which relevantly provides:
Where, in the case of any action for which a period of limitation is prescribed by this Act, either—
(a)the action is based upon the fraud of the defendant or his agent or of any person through whom he claims or his agent; or
(b)the right of action is concealed by the fraud of any such person as aforesaid; or
(c)the action is for relief from the consequences of a mistake,—
the period of limitation shall not begin to run until the plaintiff has discovered the fraud or the mistake, as the case may be, or could with reasonable diligence have discovered it:
…
The Judge approached the limitation issue on the basis that the breaches of fiduciary duty that he had found to have been committed by Tony and Mr Thomson and SLH’s unconscionable receipt and retention of the advances amounted to equitable fraud for the purposes of s 28(a). He also found that the rights of action being asserted were fraudulently concealed for the purposes of s 28(b). Neither finding is challenged.
The Judge held that time began to run against the respondents other than Terry on 21 November 2014, a few weeks after Jack’s death. Mr Thomson met with the respondents on that date. He provided them with a copy of Jack’s will, the Trust’s statement of financial position as at 30 September 2007, a schedule of deeds relating to the Trust, and copies of the Deed of Distribution of Trust Capital dated 28 September 2007 and Deed of Appointment dated 12 August 1985. The Judge found that the respondents other than Terry had not known enough about the Trust prior to the meeting to know that they were beneficiaries or to have any real appreciation of what that meant, nor did they know of the trustees’ decisions that impacted on their interests as income beneficiaries or of the distribution of the trust assets in 2007.
But the Judge found that Terry’s claim was time-barred because a letter he received from RDMG in September 2008:[16]
… put Terry on notice then that he was a beneficiary of a trust, the capital of which had been distributed to Tony and in respect of which there were legal issues. That was sufficient to start the limitation period running for Terry then. He should have made inquiries about the situation, if he wanted to.

The issue on appeal

[16]High Court decision, above n 2, at [200].

The essence of Terry’s cross-appeal on the limitation point was that the Judge failed to take account of the context in which Terry received the documents said to have put him on notice such that a reasonable person in his position would have made enquiries. In particular, Terry’s contact with RDMG at the time was in relation to Jack’s complaint about Tony and Terry did not have a sufficient understanding of what a trust was to appreciate the implications of the information RDMG had provided.
Tony and SLH say that the evidence supported the Judge’s finding. They also say that the Judge’s finding is one of fact that ought not to be interfered with unless it is plainly wrong.[17] We do not accept the latter proposition; whether a person is on notice for the purposes of s 28 is a mixed question of fact and law and it is unclear whether the Judge considered the legal standard applicable to the assessment of whether Terry exercised reasonable diligence.
[17]In support of this submission the appellants cite Rangatira Ltd v Commissioner of Inland Revenue [1997] 1 NZLR 129 (PC) at 138; and Rae v International Insurance Brokers (Nelson Marlborough) Ltd (CA) [1998] 3 NZLR 190 at 197.
Two issues arise for consideration. The first is to identify what facts Terry had to know for time to start running. The second is when, with reasonable diligence, Terry could have discovered those facts.
A cause of action is simply the existence of a factual situation that entitles one person to obtain from the court a remedy against another person.[18] A cause of action accrues when all the necessary facts exist. In the context of a claim for breach of fiduciary duty, time does not start to run for limitation purposes until all the facts which together constitute the cause of action have been, or could with reasonable diligence have been, discovered. In Official Assignee of Collier v Creighton this Court noted that:[19]
The real point at issue in this case is whether Mr Collier discovered the breach of fiduciary duty more than six years before the proceeding was commenced or whether he could with reasonable diligence have discovered it. What must be discovered or known are all the facts which together constitute the cause of action …
…
Knowledge of the circumstances giving rise to a duty to disclose and a failure to disclose is essential.
[18]Letang v Cooper [1965] 1 QB 232 (CA) at 242–243; and Paragon Finance plc v DB Thakerar & Co [1999] 1 All ER 400 (CA) at 405–406.
[19]Official Assignee of Collier v Creighton [1993] 2 NZLR 534 at 538–539.
This position is reflected in the commentaries in Halsbury’s Laws of England and Laws of New Zealand, both of which state that in order to prove that a person might have discovered a fraud with reasonable diligence at a particular time, it is not sufficient to show that he might have discovered the fraud by pursuing an enquiry into some collateral matter. Rather, it must be shown that there was something to put him on enquiry as to the matter itself and that if enquiry had been made it would have led to the discovery of the real facts.[20]
[20]Halsbury’s Laws of England (5th ed, 2016, online ed) vol 68 Limitation Periods at [1223], citing Peco Arts Inc v Hazlitt Gallery Ltd [1983] 1 WLR 1315 (QB); and JCD Corry Laws of New Zealand Limitation of Civil Proceedings at [306], citing Inca Ltd v Autoscript (New Zealand) Ltd [1979] 2 NZLR 700 at 712–713.
There were six causes of action pleaded. The gist of the complaints were breach of trust and breach of fiduciary duties by Jack, Tony, Mr Thomson and NZGT, and knowing receipt or money had and received by SLH.[21] The breaches of fiduciary duty alleged against Jack, Tony and Mr Thomson can be summarised broadly as: failing to advise the respondents that they were beneficiaries or that income had vested in them and failing to consider paying the vested income to them; failing to actually pay vested income to them; failing to act impartially between the income and capital beneficiaries and administering the Trust for Tony’s benefit; and advancing vested income to SLH.[22] The allegation against SLH related to its receipt of vested income, some of which it applied towards the purchase of Two Mile Station.
[21]The allegations made against NZGT failed and are not relevant in this appeal.
[22]There were also allegations of breach in making payments of interest, salary and management fees to SLH. These payments were found to have been valid but, for the reasons we come to later, we disagree with that aspect of the decision.
The essential facts giving rise to these causes of action were:
(a)the existence of the Trust and the identity of the trustees at the relevant dates;
(b)that all the siblings were income beneficiaries;
(c)that the Trust received income;
(d)that under the terms of the Trust the trustees were required to divide the net annual income among the income beneficiaries in such manner and shares as they deemed appropriate and that failure to do so would see the net annual income vest automatically in the income beneficiaries in equal shares;
(e)that the trustees failed to allocate any income to the income beneficiaries with the result that the net income vested in the income beneficiaries; and
(f)that the trustees advanced vested income to SLH.
All these facts existed by September 2008, when Terry received the letter from RDMG. The question is whether Terry could, with reasonable diligence, have discovered them at that time.
There is no contest over what is required for a plaintiff to show that he or she could not, with reasonable diligence, have discovered relevant facts earlier. In Amaltal Corp Ltd v Maruha Corp[23] this Court explicitly approved the approach set out in Paragon Finance plc v DB Thakerar & Co:[24]
The question is not whether the plaintiffs should have discovered the fraud sooner; but whether they could with reasonable diligence have done so. The burden of proof is on them. They must establish that they could not have discovered the fraud without exceptional measures which they could not reasonably have been expected to take. In this context the length of the applicable period of limitation is irrelevant. In the course of argument May LJ observed that reasonable diligence must be measured against some standard, but that the six-year limitation period did not provide the relevant standard. He suggested that the test was how a person carrying on a business of the relevant kind would act if he had adequate but not unlimited staff and resources and were motivated by a reasonable but not excessive sense of urgency. I respectfully agree.
[23]Amaltal Corp Ltd v Maruha Corp [2007] 1 NZLR 608 (CA) at [155]–[161].
[24]Paragon Finance plc v DB Thakerar & Co, above n 18, at 418 (emphasis in original).
On the basis of Paragon, reasonable diligence is to be assessed against an objective standard. But Paragon was decided in the context of commercial dealing. That is not the case here. The context in this case is domestic; a dispute between adult siblings over a family trust where the administration of the Trust was dominated throughout by the parent/settlor/trustee (notwithstanding the presence of an independent trustee for part of the time) and where the other trustee for part of the relevant period was the sibling who ultimately received the entire capital of the Trust. What is the standard in these circumstances?
There are two decisions of some assistance on this question. In Peco Arts Inc v Hazlitt Gallery Ltd the question was whether the buyer of a drawing from a reputable art gallery could with reasonable diligence have discovered that the drawing was actually a reproduction.[25] The buyer was described in evidence as “an enlightened amateur” who could not have been expected to identify the true nature of the drawing herself.[26] Further, there was evidence that where the purchase was made from a reputable gallery it was not customary to take steps to independently authenticate it. Webster J considered that:[27]
… reasonable diligence means not the doing of everything possible, not necessarily the using of any means at the plaintiff’s disposal, not even necessarily the doing of anything at all, but that it means the doing of that which an ordinarily prudent buyer and possessor of a valuable work of art would do having regard to all the circumstances, including the circumstances of the purchase.
[25]Peco Arts Inc v Hazlitt Gallery Ltd, above n 20.
[26]At 1324.
[27]At 1323.
Applying that approach to the evidence the Judge concluded that a prudent purchaser in the position of the claimant would not normally obtain an independent valuation or authentication and so could not, therefore, with reasonable diligence have discovered the mistake earlier than she did.
This approach was referred to with approval in Registrar-General of Land v Burmeister, which involved a claim under s 172 of the Land Transfer Act 1952 for compensation for mistake or misfeasance by the Registrar-General of Land.[28] Section 180(2) of that Act provides that the date when the right to bring an action against the Crown accrues is the date “on which the plaintiff becomes aware, or but for his own default might have become aware, of the existence of his right to make a claim”. On the question whether some personalisation of the characteristics of the reasonable person were permitted and what characteristics might be relevant, the Court referred to Peco Arts and observed that:
[51] It is, we consider, fairly self-evident that the nature and extent of inquiries to be made by a person with commercial or business expertise dealing with a stranger would be different from the reasonable inquiries expected of the Burmeisters. …
[28]Registrar-General of Land v Burmeister [2012] NZCA 340, (2013) 13 NZCPR 504.
The Court went to conclude that the claimants’ “naivety and trust of [the fraudster]” were relevant to the assessment of whether they could, with reasonable diligence, have discovered the true position.[29] The Court found that the inquiry they did make (which produced a reassurance from the fraudster) was sufficient.[30]
[29]At [64].
[30]At [67].
Whilst the reference in s 180(2) to the plaintiff’s “own default” might be seen as introducing a level of subjectivity, the Court did not draw that distinction when it cited Peco Arts and we do not consider that the Court’s comments in Burmeister are inconsistent with the approach endorsed in Amaltal. The point is that, in determining what constitutes a reasonable enquiry, the context in which the enquiry falls to be made is to be taken into account.[31] It is evident from Peco Arts and Burmeister that, in terms of reasonable diligence, commercial dealings require something different from what is expected of a lay person in a non-commercial setting.
[31]At [47].
In the circumstances of the present case, reasonable diligence means the enquiries that could reasonably be expected to be made by an ordinary prudent person in the circumstances of the claimant and having regard to the relevant family dynamics. We turn to consider Terry’s knowledge and his actions against that standard.

The relevant circumstances

Terry was the oldest of the siblings, aged in his mid-50s in 2008. He describes himself as an electrician. In his early adulthood he lived in Australia for a short time and in Canada for some years. He returned to settle in New Zealand in about 1999. Although, like most of his siblings, he found his father difficult to deal with, Terry seems to have had a reasonably amicable relationship with him following his return to New Zealand. In evidence he described visiting Jack at the farm about once a year until the end of 2007. In cross-examination, it was put to Terry that Jack often talked to him about “what would and wouldn’t happen with his estate”. Terry said that Jack did not talk to him about that and “[t]he only thing he did mention was that Tony was going to get the farm”.
In 2007 Tony asked Terry to help move Jack to a different home on the farm so that a new farm manager could be moved into the main house. As we have seen, this move was a consequence of Jack having transferred control of the farm to Tony. Terry described a conversation with Tony at this time: “I asked him, you know, ‘What’s gonna happen to the farm?’ And he said ‘Oh Dad’s given it all to me’”. Terry said he was “dumbfounded” at that news.
After Jack had moved out of the farmhouse he spoke frequently and angrily about Tony having stolen the farm and also complained about Mr Thomson, suggesting that there had been “skulduggery” in terms of dating documents. As noted already, Terry tried to assist his father, who had sought legal advice from RDMG. On 9 April 2008 Terry telephoned Mr Griffin of that firm to tell him that Jack had gone to Rarotonga for a time. Mr Griffin’s file note recorded:
He then said that his father had told him (Terry) what was going on, but Terry Enright said with all respect to his father, Jack Enright is not capable of running the farm any longer. I asked the reasons for him saying that and he said because of his health and also his father’s memory has got very poor and he gets very confused. He said the comments about his father should be kept confidential. He said he wants to get control of the farm back and he is doing it this way. He said he understands his brother Tony has got control of it now and that is wrong. He said that it is not a matter for us as he said he might be getting a lawyer to look into it from his point of view.
Terry was cross-examined on this conversation. In response to the suggestion that he was considering instructing a lawyer to look at it from his point of view because he suspected he had a right of action he responded that it “was more I had a suspicion that there might have been some skulduggery going on”. When challenged as to why he did not then engage a lawyer he said that “I simply couldn’t afford it”. It was put to him that he could have approached Wayne, who lived in Canada and was comfortably off, for help but responded that he talked to Wayne very rarely by telephone because he had a company phone and could not ring overseas.
Terry went on to explain that part of the reason he did not do anything was the advice of one of his uncles:
I said to him, “Are you aware that Dad’s given the farm to everything – going to give the farm to Tony?” And he seemed to think yes, yes he knew that was going to happen. I said, “Do you think that’s fair?” And my Uncle Paddy, who I have great respect for, his comment was “Well, we should just wait and see until after Dad’s death”, therefore I did nothing else until that time.
He added:
I never thought about getting anything done about it now because I was more concerned about Dad’s welfare at the time …
I didn’t consider getting a lawyer at the time. All I did was ask Les Griffin to hang on to the paperwork that Dad – that had been generated through Dad to his …
He explained that he had asked Mr Griffin to hold the documents because “I felt there may be a legal dispute after Dad passed away”.
Later it was put in cross-examination that “you decided that you probably had some right of action but you’d rather leave it until your father had died?”, to which he answered “Correct”.
Some months after that conversation Mr Griffin wrote to Terry, enclosing copies of various correspondence and a schedule of deeds (though not the deeds themselves), to bring Terry up to date with the information that RDMG had found. This was the letter that the Judge found had put Terry on notice that he was the beneficiary of a trust, the capital of which had been distributed to Tony and in respect of which there were legal issues which the Judge considered sufficient for Terry to have made inquiries about the situation if he wanted to.[32] Towards the end of the letter Mr Griffin said:
Regarding the Deed of Trust which Jack made on 25 July 1974 it provided that the income from it was to be divided among his children as the trustees of his Trust may determine and that the capital was to be divided amongst the children except that each son was to get twice as much as a daughter.
On 12 August 1985 Jack apparently signed a Deed of Appointment, however, appointing all the capital of the Trust Fund to Tony and not to his children as provided under the original Deed of Trust.
Then, on 28 September 2007 he entered into a Deed of Distribution of Trust which provided that all the capital of the Trust Fund was to vest in Tony.
Under Jack’s last Will he apparently gave everything to Tony.
As you can see Terry there are some very major problems.
You mentioned about new Enduring Powers of Attorney and we can prepare these but it is quite a bit more complicated now than it was a week ago. If he is to have new Enduring Powers of Attorney then we would need to know the full names, occupations and full addresses of the Attorney or Attorneys. Furthermore, to find out what all of Jack’s assets are at this stage we would have to have some more detailed information or authority to get this from the accountants or whatever. We have given the information in the enclosed correspondence about his company and shareholding of it, but what other assets he has or income producing assets we do not know.
We therefore look forward to hearing from you or Jack again about his instructions in this matter.
[32]High Court decision, above n 2, at [200].

Terry was cross-examined about the letter:
Q        Okay. And as a result of this letter you obviously, from September         2008, knew there was a trust?
A        Didn’t know what a trust was, that’s the problem.
Q        No, but you knew there was a trust.
A        As I said, I assumed it was the same as having a Will or anything like      that.
Q        Okay. But the answer’s yes you knew there was a trust?
A        I guess, yes. Yes.
QAnd you knew that under that trust deed the income from the trust was to be divided among Jack’s children?
…
AOkay well I presumed this would be, as I said, the same as a Will and that this would happen after my father’s passing.
QOkay. But just to answer my question; you knew that the trust deed provided that the income from the trust was to be divided amongst Jack’s children?
A        Yes. But what I read that to be is as Dad’s will. …
…
Q… so you knew in 2008 that that trust of which the income was to go to you had been distributed to Tony?
AAnd I thought that that might be within their legal right to do so. I didn’t know any better.

With reasonable diligence, could Terry have discovered the facts giving rise to the cause of action in 2008?

Mr McColgan, for Terry, argued that the Judge’s finding was not supported by the evidence because, although the letter referred generally to the Trust Deed and the trustees’ discretion to divide income among the children, there was no reference to the fact that income vested automatically if the trustees failed to allocate it within six months of balance date, nor that the Trust had actually generated significant income, nor that the trustees had failed to deal with that income in accordance with the terms of the Trust. To the contrary, the fact that one of the trustees (Mr Thomson) was a solicitor meant that someone in Terry’s position was entitled to assume that the Trust had been properly administered.
Lady Chambers QC carried the argument on this point for Tony and SLH. She submitted that the letter, read together with the enclosures, conveyed that Terry was both a capital and income beneficiary, that the Trust owned valuable assets and made an income, that the Trust’s assets on winding up comprised shares in SLH and a debt from SLH of $1,506,226 and that the Trust had been wound up in favour of Tony. In addition, it made clear that Mr Griffin considered that there were “some very major problems” with the situation and that Mr Thomson described the situation as “morally and legally questionable” and had advised Jack of the likelihood of a claim by the beneficiaries.[33]
[33]In fact, this statement was made in relation to Jack’s will, not the administration of the Trust and the letter did not contain a reference to potential claims by beneficiaries.
She argued that Terry could simply have asked Mr Griffin for copies of the documents listed in the schedule to the letter and for copies of the Trust’s financial statements and could have sought a legal opinion. She supported her submission with reference to the fact that Terry had already formed the view that there had been “skulduggery” in relation to the distribution to Tony and that he had acknowledged that it was common sense to consult a lawyer. She dismissed as irrelevant Terry’s evidence that he did not know what a trust was and did not know the difference between being the beneficiary of a trust and the beneficiary of a will or even between a trust and a will on the basis that the Judge must have taken this evidence into account in reaching his conclusion that Terry was on notice.
We see a number of problems with these submissions. As this Court confirmed in Burmeister, the starting point must be the context in which Terry received Mr Griffin’s letter. Terry only became involved to assist Jack in addressing his concern that Tony had “stolen the farm”. It is apparent from the evidence referred to earlier that Terry understood that Jack owned the farm and that the disposition of it and of the Trust’s income was a matter for Jack’s will. Before receiving the letter, there is no evidence that Terry realised a trust existed or that the farm, Dunstan Burn Station, had not been owned by Jack but instead by SLH, in which the Trust held the majority shareholding. In the context of Jack’s complaint, which is what Terry was concerned with, the Trust, its assets and how it had been administered were not matters that Terry was, or needed to be, thinking about.
Nor do we consider that the letter itself had the effect attributed by the Judge. The letter was written to give Terry “a better background to the whole situation”, which can only have been a reference to Jack’s complaint about Tony having taken over the farm. But the ownership structure of the farm was not clear from Mr Griffin’s letter of 29 September 2008, which made no reference at all to it. Nor did it explain the significance of any of the attachments sent with the letter. The only explicit reference to the farm appeared in the letter from Bodkins (Mr Thomson’s firm) to RDMG on 13 March 2008 in which Mr Thomson referred to the “recent distribution of his trust to his son, Tony Enright” and noted that “[t]he distribution was in part prompted by the chaotic situation at existing at Dunstan Burn, and the severe and continuing profit losses, coupled with stock and plant disappearances on the farm”.[34] These comments were too oblique to convey to a lay person such as Terry that the distribution referred to might have some relevance to him.
[34]A letter from RDMG to Jack on 20 February 2008 was also attached to the letter sent to Terry. This refers to the purchase of Dunstan Burn and Two Mile Stations by SLH. However, the farms are not identified by name but by reference to the certificates of title.
It was only in the second part of Mr Griffin’s letter that specific mention was made of the Trust; it squarely addressed the Trust Deed and the Deeds of Appointment and of Distribution. But it also addressed Jack’s will. A person who understood what a trust was, what trustees were, what they were supposed to do and the difference between a will and a trust, would have grasped the general facts that a trust had existed, that the beneficiaries of the trust had been entitled to the income from it had the trustees determined accordingly but that all the capital in the trust had now been distributed. In our view, however, an ordinary person with average education and experience would have been very unlikely to have understood these concepts. It is clear from the evidence that Terry did not know or understand any of these concepts.
Moreover, although this part of the letter conveyed that there was a basis for Jack’s children to be concerned (which was not what Mr Griffin had been instructed to advise on), the general statement that “there are some very major problems” failed to make clear whether the problems lay with the Trust or the will or both. Realistically, for an ordinary lay person such as Terry, who could not distinguish between an inter vivos trust and a will, this letter did not adequately identify the problems being alluded to. Nor did it give any indication that there may have been wrongdoing by anyone other than Jack. Consequently, nor did it suggest that the problems were of a kind that needed to be addressed promptly rather than waiting until after Jack’s death.
Finally, the letter’s closing words, indicating that Mr Griffin was seeking further instructions from either Jack or Terry “in this matter”, conveyed that all the matters canvassed in the letter related to the issue on which Mr Griffin had been instructed, namely the question of Tony wrongly taking the farm from Jack.
In these circumstances we are not satisfied that an ordinary prudent person in Terry’s position could reasonably have been expected to make enquiries about the terms of the Trust and the administration of it. Simply asking Mr Griffin for copies of the documents in the schedule would not have advanced Terry’s understanding much; the complexity of the Trust issues could only have been understood with the benefit of professional advice. But given his financial position it is unrealistic to suggest that he should have obtained a legal opinion; the relative complexity of the matter, evident from the trial, means that would have involved substantial expense.
We make a further observation; even if Terry had made such enquiries as reasonable for a person in his situation, with limited financial resources and not in close contact with his siblings, it seems very unlikely that he would have learned the essential facts needed to understand that a cause of action existed. We say this because of the events that followed Jack’s death.
Disappointed at the terms of Jack’s will, the respondents contemplated action under the Family Protection Act 1955. Wayne took on the responsibility for obtaining the documents relating to Jack’s estate and the Trust. Counsel was engaged. It took over a year to obtain the documents being requested in relation to Jack’s estate. In cross-examination Tony said that he did not fully understand his obligations and regretted not providing them earlier.
Wayne also sought documents relating to the Trust from RDMG, from Bodkins and from ICL. Those enquiries started in February 2015. He obtained documents and information progressively throughout the year. Many documents were no longer held. It was not until March 2016 that he finally received confirmation that there had never been any allocation of income by the trustees, a critical piece of information for the cause of action ultimately pleaded.
It is reasonable to expect that any enquiries Terry might have made in 2008 would have met with a similar level of response and, given that Wayne had greater resources that Terry, it is also reasonable to expect that Terry would simply not have obtained sufficient information to conclude that there had been wrongdoing that was actionable. In these circumstances we consider that time did not start to run against Terry in 2008 but, rather, at the same time as for the other respondents.

Apportionment of the vested income between Tony and the respondents (Tony’s appeal)

Having concluded that Terry’s claim was time-barred, the Judge turned to the problem of how to deal with the share of the income that vested in Terry. If the vested income was split into sixths and Terry’s share allocated to the successful plaintiffs, they would receive more than they were entitled to. Conversely, if Terry’s share was not allocated to the successful plaintiffs, Tony would receive more than he should.
The Judge determined that the most equitable approach was to divide the vested income into fifths and allocate four-fifths to the successful plaintiffs and one‑fifth to Tony. Payments required to be made by Tony or entities owned or controlled by him in respect of income that had vested in the income beneficiaries should be divided into fifths, with four-fifths allocated to the successful plaintiffs and one‑fifth to Tony.[35]
[35]High Court decision, above n 2, at [215].
Tony’s argument on appeal was that each sibling made an individual claim for his or her share of the vested income. In the event of one such claim failing there is no basis on which to allocate that share among the successful plaintiffs. Rather, Tony would simply be required to account to them for their share. However, this ground of appeal falls away as a result of our conclusion on the limitation issue; Terry is entitled to his share and the payments will therefore be allocated on the basis of one sixth to each income beneficiary.

The SLH dividend (Tony’s appeal)

The issue

This ground of appeal requires some explanation of the imputation credit regime, which was pithily described by Clifford J in Commissioner of Inland Revenue v Albany Food Warehouse Limited:[36]
[6] In very general terms the imputation credit account regime … seeks to avoid double taxation between a company and its shareholders. When a company pays tax it records the payments as credits in its imputation credit account. When it pays a dividend, it can attach those imputation credits to the dividend. Whilst individual shareholders must then return the dividend as income, they can use the imputation credits to satisfy their income tax liability.
[36]Commissioner of Inland Revenue v Albany Food Warehouse Limited (2009) 24 NZTC 23,532.
In September 2007, as part of the restructuring that preceded the winding up of the Trust and the consequent change in SLH’s shareholding, ICL advised that SLH held imputation credits that would be lost once its shareholding changed and that a dividend should be declared prior to the share transfer to avoid that outcome. SLH accordingly declared a dividend. ICL also advised that the dividend should be left in the Trust, which was to be wound up in favour of Tony. The trustees followed that advice. The dividend was retained in the Trust. The imputation credits were used to meet the tax liability.
The Trust’s share of the dividend was $888,869, which included imputation credits of $293,327.[37] The Judge found that the dividend was Trust income and, because it was neither specifically apportioned nor validly reserved, it vested in the income beneficiaries.[38] There is no challenge to that finding. However, the Judge treated the amount that had vested in the beneficiaries as the gross amount and directed Tony to account to the siblings for that amount.[39] Tony says that this was an error because the imputation credits were used to pay tax on the dividend in the hands of the trustees and he only received the benefit of the net amount, being $595,542.
[37]The total dividend declared was $909,070.15 including imputation credits of $299,993.15 and was allocated proportionately between the trustees who held 97.8 per cent of the shares in SLH and Jack who owned 2.2 per cent.
[38]High Court decision, above n 2, at [128].
[39]At [218(c)].
This ground of appeal raises questions about whether the amount that vested in the income beneficiaries was the gross or net amount of the dividend when the Trust was wound up, whether Tony received the benefit of the gross or net amount and whether the Judge’s order will result in an unfair windfall for the respondents. Although there was evidence about the tax treatment of the dividend, these questions were not addressed in the High Court.

What amount vested in the income beneficiaries and what was the benefit to Tony?

The way the dividend was dealt with can be discerned from the financial statements of the Trust and of SLH, which were the subject of evidence by the expert witness, Karen Greenwood, and by Mr Dykes of ICL. Their evidence was that the dividend was not actually paid but instead formed part of the debt that SLH owed the Trust and when the Trust was distributed that debt was transferred to Tony as part of the assets of the Trust.
As at 30 June 2007 SLH owed the Trust $1,253,106. As at 28 September 2007, the day the Trust was distributed and thereby wound up, SLH owed the Trust $1,506,226. Ms Greenwood and Mr Dykes agreed that the increase of $253,120 comprised the gross amount of the dividend of $888,869 less the imputation credits of $293,327 and less a debt of $342,422 that the Trust owed Jack.
The Trust’s financial statements for the year ending 30 June 2008 showed its only income as the SLH dividend of $888,869. But the IR6 Income and Tax Summary for the Trust attached to the financial statements showed the dividend of $888,869 being allocated to the trustees with the tax on that income of $293,252.19 being met by imputation credits.
Lady Chambers, for Tony, argued that because the dividend was retained in the Trust, it became trustee income and the trustees were entitled to, and did, pay the tax on the income using the imputation credits. Lady Chambers submitted that awarding the beneficiaries the gross amount of the dividend without recognising the tax liability satisfied by the Trust through the use of the imputation credits would be a windfall for the respondents and result in a greater recovery than they would have achieved had there been no breach of duty. This argument is based on the premise that, had the trustees distributed the income, the beneficiaries themselves would have had to pay the tax and would have used the imputation credits to do so. So, the beneficiaries could never had had the benefit of the gross amount.
Mr McColgan, for the respondents, argued that the trustees were not entitled to retain the dividend nor to use the imputation credits to pay the tax on it. The purpose and effect of cl 3 of the Trust Deed was to vest pre-tax profits in the beneficiaries so the pre-tax dividend should have been distributed.[40] Further, under the Income Tax Act 2004, which applied at the time, the amount of a dividend was required to be calculated with any imputation credits included, so any distribution of a taxable dividend would have been required to be made with the imputation credit attached.[41] Therefore, the retention of the gross dividend by the trustees and the payment of the tax on it by utilising the imputation credits was a breach of trust. Nor did Mr McColgan accept that compensation equivalent to the after-tax amount would put the respondents in the same position as if there had been no breach because they are now at risk of being assessed for tax on that sum and they ought not to bear that risk.
[40]It was common ground that the original purpose of cl 3 had been to take advantage of the lower beneficiary tax rates that existed when the Trust was settled.
[41]Income Tax Act 2004, s CD 9(1)(a).
We accept Mr McColgan’s analysis of the effect of the Income Tax Act 2004. We also accept that the respondents are at risk of being taxed on the amount of their recovery under the judgment. Money received from any source representing items of a revenue account is regarded for tax purposes as having been received by way of revenue.[42] However, in our view the question as to who should bear that risk depends not on the position of the respondents but rather on the basis on which Tony received the benefit of the dividend.
[42]Egmont Co-operative Dairies Ltd (in liq) v Commissioner of Inland Revenue [1996] 2 NZLR 419 at 425–426.
It is evident from the financial statements of both the Trust and SLH for the year ending 30 June 2008 that Tony took the benefit of the dividend in the form of the debt that SLH had previously owed to the Trust. That debt came to him as the recipient of the capital of the Trust and with the tax already paid on it. He was not a trustee when the dividend was paid and was therefore not responsible for the wrongful decision to retain the dividend and use the imputation credits to pay the tax on it. The basis for the order that Tony account for the amount of the dividend is not explicit.[43] Since there was no breach of trust by him it was, presumably, knowing receipt, based on his knowledge of the Trust and SLH.[44] In these circumstances there is no basis on which to find that Tony was liable to account for a greater amount than he actually received. This ground of appeal succeeds. Tony must account to the respondents to the extent of $496,285, being five-sixths of $595,542.

Interest and the management fee paid to SLH (cross-appeal)

[43]High Court decision, above n 2, at [218(c)].

[44]The basis for the order to account made against Tony was not the subject of argument before us, though it is implicit from the Judge’s factual findings about Tony’s knowledge of the Trust that he regarded Tony’s receipt and retention of the money as unconscionable.

Minutes of trustees’ meetings prepared for the years 1997–2000 recorded resolutions under which the Trust would pay SLH a total of $254,745.68 in interest on loans made by SLH to the Trust. In addition, the minute for 2000 recorded a resolution that the Trust would pay SLH a management fee of $104,000 in respect of its work in developing the Wye Creek subdivision. The minutes were signed by Jack alone. The respondents alleged that these resolutions were invalid and that SLH was liable in knowing receipt for the interest and management fee.

The evidence suggested that the resolutions were motivated by a desire to minimise the Trust’s taxable income. Mr Molloy, for the respondents, submitted that the reduction of the Trust’s taxable income had a significant effect on the income beneficiaries, who were entitled to receive the net annual income each year. Had the Trust not committed itself to the interest and the management fee, those amounts would have formed part of the Trust’s residue of net annual income and vested in the beneficiaries.
The Judge found that the resolutions were not unanimous and knowledge of that fact was imputed to SLH:[45]
I consider the decisions were driven by Jack and his knowledge that they were not taken according to proper process must be imputed to SLH … Jack did not likely think there was anything wrong in the transactions themselves. Rather, he was determined that they should occur. He was so determined, he by‑passed his fellow trustee, Mr Thomson. Jack surely knew Mr Thomson should have been fully involved in the decision-making but he clearly was not. Through Jack, SLH shut its eyes to the obvious.
[45]High Court decision, above n 2, at [147].
The Judge proceeded on the basis that unconscionability was the correct basis for knowing receipt and the wrongdoer would be liable to restore misapplied assets or their equivalent to the beneficiaries.[46] However, he considered that receipt by SLH of interest and the management fee was not unconscionable because SLH was entitled to be paid interest on its loans to the Trust and a management fee for the work it had done in relation to Wye Creek:[47]
These payments were appropriately deducted from the Trust’s income rather than its capital. They were deducted before the residue of net annual income was reserved … While the decision-making process for these payments was flawed, the funds paid had not vested in the income beneficiaries and there was reason for them. I do not consider receipt of the interest and management fee payments by SLH can properly be regarded as unconscionable, despite the process flaws.
[46]At [139], citing McLennan v Livaja [2017] NZCA 446, [2018] NZAR 405 at [40].
[47]High Court decision, above n 2, at [149].
Mr McColgan argued that these findings were not open to the Judge. The resolutions had not been made unanimously and were therefore invalid. They had not been ratified. SLH had benefited from them with actual knowledge of the breach of trust. Nor was there any factual basis on which to find that SLH was entitled to expect these payments. The advances by SLH to the Trust had been made on an on‑demand basis, with no obligation to pay interest and no demand ever having been made for interest. There was no agreement between the Trust and SLH to pay a management fee.
SLH did not challenge the finding that the resolutions were not unanimous, nor that knowledge of this fact was to be imputed to it. It resisted this ground of appeal solely on the basis that it had never actually received the interest payments or management fee and argued that the Judge’s finding that it had received them was wrong. It asserted that the only evidence relating to the interest and management fee were the minutes of trustees’ meetings signed by Jack. There was no evidence of actual payment of those amounts; instead they were simply reflected in the loan balances between the Trust and SLH.
Ms Greenwood gave evidence about the loan balances between the Trust and SLH. Her evidence was to the effect that SLH made advances to the Trust from 1991 onwards and by 30 June 1997 the Trust owed SLH $1,218,119. The Trust reduced the amount owing to $684,287, likely using the proceeds from the sale of Athol St. As at 30 June 2000 the Trust owed SLH $810,588. This comprised both actual advances from SLH and the interest and management fee. By then SLH itself owed the Trust $96,258.
By 30 June 2001, however, the Trust did not owe SLH anything. That outcome was due to two things: SLH’s debt to the Trust was netted off against the Trust’s debt to SLH and the Trust had advanced to SLH a significant portion of the Wye Creek sale proceeds. We accept that, on the basis of this evidence, it was open to the Judge to find that SLH had received the interest and management fee.
We also accept that it was an error to find that SLH’s receipt of the interest and the management fee was not unconscionable. The payments were made to SLH in breach of trust and, through Jack, SLH received them with actual knowledge of that breach. This knowledge made it unconscionable for SLH to retain the benefit of the payments.[48] It is irrelevant that SLH might have justified retention of the payments on some other basis. Compensation of the wrongdoer is not a consideration.
[48]McLennan v Livaja, above n 46, at [38], citing Bank of Credit and Commerce (Overseas) Ltd v Akindele [2001] Ch 437 (CA) at 455.
The effect of this error is to increase the amount of vested income received by SLH by $358,745.68 (interest of $254,745.68 plus management fee of $104,000). The consequences of this increase are dealt with later.

Calculation of the vested income received by SLH (SLH’s appeal)

Accounting for the proceeds of the Wye Creek sales

The Judge held that from the sale proceeds of the Wye Creek sections, the Trust advanced $1,495,646 to SLH.[49] Of this amount, $176,438 was spent on developing Dunstan Burn Station and $1,319,208 was applied towards the purchase of Two Mile Station.[50] Three issues arise.
[49]High Court decision, above n 2, at [135(e)].
[50]At [135(e)], n 223.
First, it is common ground that the Judge double‑counted the sale proceeds of Wye Creek Lot 6 when calculating the Trust’s income in the 2001 financial year. This reduces the amount of vested income that SLH received in 2001 from the Wye Creek sales by $135,768.[51]
[51]This figure represents a sale price of $145,000 less costs deducted from sale proceeds for commission, rates, lawyers and disbursements of $9,232. Any subsequent references to the vested income received by SLH have been adjusted to reflect this correction.
Secondly, the Judge calculated the amount of vested income SLH received by reference to gross income receipts i.e. he did not take into account the costs of developing the Wye Creek lots before sale, or tax paid by the Trust.
The correct amount of vested income, according to SLH, is $661,077. The respondents accept that the reference to gross income receipts was an error. However, they submit that the taxable amount vested in the income beneficiaries. As noted, it was common ground that the purpose and effect of cl 3 of the Trust Deed was to vest pre-tax profits in the beneficiaries to ensure that unapplied Trust income was taxed at generally lower beneficiary tax rates. SLH’s position is that only residue could become vested income; residue comprises the income less expenses; tax is an expense; therefore only the after-tax amount received by the Trust from the Wye Creek sales could have vested in the income beneficiaries.
Even if tax were properly treated as an expense, however, SLH’s argument fails to address the fact that the difference between the pre-tax and after-tax amounts was still trust income and was wrongly paid to SLH. Upon receipt of the money SLH came under an obligation to repay it to the Trust. Had it done so, it is clear from the evidence as to the way the Trust was being managed that the full amount would have vested in the income beneficiaries by the expiry of six months after the balance date. It does not lie with SLH to say now that the beneficiaries ought not to have the benefit of the money that it has kept and used.
Thirdly, the respondents say that the calculation of the vested income should include a payment of $100,000 that SLH received from the Trust in 2002. The Judge accepted that $100,000 was paid by the Trust to SLH in 2002.[52] Although Ms Greenwood could not be completely sure that this amount was sourced from the sale of the Wye Creek lots, she considered this the most likely explanation. The respondents now say that this payment needs to be factored in when calculating the amount of vested income received by SLH from the Wye Creek sales. We agree. We find that the correct amount of vested income received by SLH from the Wye Creek sales was $1,006,639. This comprises $906,639 (the proceeds received by SLH between 1999 and 2001 less expenses but before tax) plus the $100,000.

The total amount of vested income received by SLH

[52]High Court decision, above n 2, at [135(b)], n 220.

Overall we find that SLH received $1,365,384.68 of vested income. This comprises the interest payments totalling $254,745.68, the management fee of $104,000 and the $1,006,639 from the Wye Creek sales.
We have concluded that SLH’s receipt of the interest and management fee was unconscionable. SLH must therefore account as a knowing recipient for these amounts.[53] The payment of $100,000 in 2002 also falls to be dealt with as part of the knowing receipt claim.
[53]The remedy for knowing receipt is the restoration of what was unconscionably received: McLennan v Livaja, above n 46, at [40], citing Williams v Central Bank of Nigeria [2014] UKSC 10, [2014] AC 1189 at [31]. A knowing recipient is described as being personally liable to account as a constructive trustee, with his or her core duty being to restore the misapplied trust property: Charles Mitchell and Stephen Watterson “Remedies for Knowing Receipt” in Charles Mitchell (ed) Constructive and Resulting Trusts (Hart Publishing, Oxford, 2009) 115 at 130 and 132. However, the reference to constructive trusteeship is generally regarded as confusing because no trust actually arises in the true sense: see Paragon Finance, above n 18, at 409 per Millett LJ.
The $906,639 that was applied towards the purchase of Two Mile Station forms the basis of a proprietary claim against SLH. We discuss this claim in the next section.

Two Mile Station — can the respondents trace into it and with what result?

The case in the High Court

The Judge found that the money paid to SLH by the Trust from the proceeds of the Wye Creek sales was vested income belonging to the income beneficiaries. The advances were not authorised by the trustees and were therefore a breach of the trustees’ fiduciary duties.[54] As a result of Jack’s knowledge as a trustee and as a director and shareholder of SLH, the company is taken to have known that that the advances were made in breach of trust or, at least, to have known that the circumstances in which it received the money were suspicious and failed to make reasonable enquiries.[55] SLH was not a bona fide purchaser for value without notice.[56]
[54]High Court decision, above n 2, at [125].
[55]High Court decision, above n 2, at [134]
[56]This finding is not challenged.
The respondents advanced two causes of action in relation to the funds. One was in knowing receipt; the respondents sought an order that SLH account as constructive trustee for the vested income and an order for an equitable lien or charge over Two Mile Station in the amount of the vested income applied to its purchase.[57] The Judge found that this cause of action had been made out.[58]
[57]The fourth cause of action, which also included the interest and management fee payments already dealt with.
[58]At [150]. The Judge described this cause of action as unconscionable receipt.
The other, which was advanced as the primary cause of action, was styled “breach of trust and tracing”.[59] The respondents sought to trace the vested income into Two Mile Station and asserted a proprietary interest in that property to the extent of 63.64 per cent, being the percentage that five-sixths of the vested income bore to the purchase price.[60] They sought a declaration that SLH held Two Mile Station or its proceeds on constructive trust in that proportion.
[59]The fifth cause of action, which also included the interest and management fee payments. The plaintiffs also sought equitable compensation in the alternative.
[60]This proportion was based on the Judge’s (and the appellants’) erroneous calculation of the amount of vested income received by SLH.
The Judge approached the issue of remedy in the round and as matter for his discretion:[61]
[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. 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 real position in which they would have been if the inequitable wrongdoing had not occurred.
[61]High Court decision, above n 2 (footnotes omitted), citing Andrew S Butler “Equitable Remedies in the Future” in Andrew Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington 2009) 1029.
The Judge found that the respondents could trace the funds into Two Mile Station[62] but declined to recognise their claim to a proprietary interest in the property through the declaration of a constructive trust:
[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.
[62]High Court decision, above n 2, at [136].
The Judge said that, all other things being equal, he would have been prepared to order equitable compensation equivalent to the appropriate shares of the income loaned by the Trust to SLH for the purchase of Two Mile Station. However, the fact that the respondents would recover their share of the dividend from Tony and the $10,379 from Jack’s estate meant that recovering the full amount of those advances would do more than restore the vested income over the relevant years.[63] He concluded that SLH should pay equitable compensation of $995,859 on the following basis:[64]
… I order SLH to pay equitable compensation of four-fifths of $1,244,824 (being $2,144,072 [the total residue of net annual income over the relevant years] 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.
… Standing back, I consider that package of relief equitably restores the plaintiffs to the position in which they would have been if they had not suffered these inequities. It recovers the various amounts of money from where they went. …

Issues on appeal

[63]At [220].

[64]At [220]–[221].

The respondents submit that, having found that they could trace the vested income into SLH’s hands, the Judge was not entitled to refuse the declaration of a constructive trust in respect of their interest in Two Mile Station.
SLH, however, argues that the respondents could not trace into Two Mile Station because the property no longer exists as a traceable asset. It was purchased for the specific purpose of improving Dunstan Burn Station and the two properties have (as the Judge found) effectively been amalgamated. SLH also says that the respondents failed to establish the value of their claimed share and there was therefore insufficient evidence on which to declare a constructive trust.

Has the right to trace been lost?

The respondents’ claim to a constructive trust depends on their right to trace the vested income into Two Mile Station so we deal with the tracing issue first. Tracing is the process by which a claimant asserting an equitable interest in property can identify where the property is, by whom it has been handled and by whom it is now held.[65] The tracing process also allows a claimant to identify property that has been substituted for the claimant’s property, including property acquired partly with the claimant’s property and partly with the trustee’s own property.[66] However, tracing is neither a claim nor a remedy — it is a process. The fact that the value of a claimant’s property can be identified as having been used to acquire another asset does no more than set the scene for determining the basis for the defendant’s liability and what remedy is available, as Lord Millett explained in Foskett v McKeown: [67]
[Tracing] enables the claimant to substitute the traceable proceeds for the original asset as the subject matter of his claim. But it does not affect or establish his claim. That will depend on a number of factors including the nature of his interest in the original asset. He will normally be able to maintain the same claim to the substituted asset as he could have maintained to the original asset. ... The successful completion of a tracing exercise may be preliminary to a personal claim … or a proprietary one, to the enforcement of a legal right … or an equitable one.
[65]Foskett v McKeown [2001] 1 AC 102 (HL) at 127 and 128.
[66]At 130–131.
[67]At 128.
Ms Robertson QC, for SLH, submitted that the property was purchased specifically for the purpose of improving Dunstan Burn Station by amalgamating the two and, as a result, any right to trace the value of the vested income into the property was lost. The argument rested on the following statement in Boscawen v Bajwa:[68]
If the plaintiff’s money has been applied by the defendant, for example, not in the acquisition of a landed property but in its improvement, then the court may treat the land as charged with the payment to the plaintiff of a sum representing the amount by which the value of the defendant’s land has been enhanced by use of the plaintiff’s money.
[68]Boscawen v Bajwa, [1996] 1 WLR 328 (CA) at 335 per Millett LJ.
Browne-Wilkinson LJ made the same point in Foskett v McKeown:[69]
Cases where the money of one person has been expended on improving or maintaining the physical property of another raise special problems. The property left at the end of the day is incapable of being physically divided into its separate constituent assets, i e the land and the money spent on it. Nor can the rules for tracing moneys through a mixed fund apply: the essence of tracing through a mixed fund is the ability to re-divide the mixed fund into its constituent parts pro rata according to the value of the contributions made to it.
[69]Foskett v McKeown, above n 65, at 109.
These statements need to be considered in light of the rationale for them. The reason for treating improvements to the wrongdoer’s property as not traceable is that money used to improve a property is not necessarily identifiable. This problem was canvassed at length in In re Diplock, a case involving the payment by mistake by the trustees of a will trust of trust monies to a number of charities in the belief that the testator had no next of kin entitled to benefit from the estate.[70] One of the issues was whether the next of kin claimants were entitled to a charge where the money had been innocently received and applied to improve the charities’ properties. It was held that they were not so entitled because it could not be said that the property was still identifiable:[71]
In the case of the purchase of an asset out of a mixed fund, both categories of money are, as we have said, necessarily present throughout the existence of the asset in an identifiable form. In the case of an adaptation of property of the volunteer by means of trust money, it by no means necessarily follows that the money can be said to be present in the adapted property. The beneficial owner of the trust money seeks to follow and recover that money and claims to use the machinery of a charge on the adapted property in order to enable him to do so. But in the first place the money may not be capable of being followed. In every true sense, the money may have disappeared. A simple example suggests itself. The owner of a house who, as an innocent volunteer, has trust money in his hands given to him by a trustee uses that money in making an alteration to his house so as to fit it better to his own personal needs. The result may not add one penny to the value of the house. Indeed, the alteration may well lower its value, for the alteration, though convenient to the owner, may be highly inconvenient in the eyes of a purchaser. Can it be said in such cases that the trust money can be traced and extracted from the altered asset? Clearly not, for the money will have disappeared leaving no monetary trace behind: the asset will not have increased (or may even have depreciated) in value through its use.
[70]In re Diplock [1948] Ch 465 (CA).
[71]At 546–547.

We do not accept, however, that monies received in breach of a trust obligation and used to improve the wrongdoer’s property necessarily lose their character as a traceable asset. To the contrary, as Lionel Smith observes, in many cases the money spent on an improvement can be clearly seen to have increased the value of the property.[72] An example is the Privy Council’s decision in Akita Holdings Ltd v Attorney General of the Turks and Caicos Islands in which the right to trace into the proceeds of sale of a property was recognised, notwithstanding that the property had been substantially developed following its purchase by a knowing recipient.[73]
[72]Lionel D Smith The Law of Tracing (Oxford University Press, New York, 1997) at 241.
[73]Akita Holdings Ltd v Attorney General of the Turks and Caicos Islands [2017] UKPC 7, [2017] AC 590.
In this case, there was evidence that SLH had purchased Two Mile Station for the express purpose of creating greater capacity for Dunstan Burn Station, which lacked sufficient feed resources to complete the summer growth of lambs and calves to bring them up to market weight. Two Mile Station was intended to improve Dunstan Burn Station’s profitability. SLH integrated the two properties and expended a substantial amount (including on Two Mile Station itself) for that purpose.[74]
[74]This evidence and the related submissions were, however, made in the context of SLH’s arguments (which were rejected) that it was a bona fide purchaser for value without notice and had changed its position. The current argument that the right to trace had been lost was not advanced.
We do not accept that these facts extinguished the right to trace. At the date of purchase Two Mile Station was discrete. It was purchased in two blocks that comprised a number of identifiable titles. At that point it had not yet been used to improve Dunstan Burn Station. SLH’s intended use of the property was just that. The income beneficiaries would certainly have been entitled to trace the funds into Two Mile Station at the time of the purchase.
But more than a decade passed before there was an attempt to trace the funds into Two Mile Station. By then, although Two Mile Station was still identifiable by reference to the specific titles, SLH had expended significant amounts combining the two farms and improving the quality of Two Mile Station for the overall benefit of the composite operation. The operations of both farms had been amalgamated so that there was (and still is) one workshop, one shearing shed and yards, one vehicle shed and one homestead. Only one set of accounts is produced for the amalgamated farm. This approach has meant that some features of Dunstan Burn Station, such as the homestead, workshops and buildings, were not maintained and are now derelict and beyond use.
Conversely, Two Mile Station, which was in poor condition, has been much improved, particularly the pasture and irrigation. Tony gave evidence that SLH spent some $837,000 on capital assets for the purposes of improving cultivation and some $1.375 million on improving the irrigation system, with most of the work undertaken on the Two Mile Station blocks.
Did this work mean that Two Mile Station lost its identity as a traceable asset? We think not. The property itself remains discrete in a legal sense, still identifiable by reference to specific titles. It is at an operational level that it has been integrated, as was the case in Akita Holdings. The combined value of Two Mile Station and Dunstan Burn Station is likely greater than their value as separate units. But that, too, is a function of the operational decisions that have been made.

A constructive trust over Two Mile Station?

Having demonstrated that the vested income is represented in Two Mile Station, the respondents seek a proprietary remedy in the form of a constructive trust to the extent of their interest. This claim was advanced solely on the basis of their equitable interest in the vested income. The claim relied entirely on the decision in Foskett v McKeown, which concerned the misappropriation of assets held on an express trust.[75]
[75]Foskett v McKeown, above n 65, at 133.

Foskett v McKeown applied a long-standing equitable principle that where trust moneys are applied toward the acquisition of an asset, the beneficiary is entitled claim a proportionate share of that asset. In Frith v Cartland the principle was stated thus:[76]
The guiding principle is that a trustee cannot assert a title of his own to trust property. If he destroys a trust fund by dissipating it altogether, there remains nothing to be the subject of a trust. But so long as the trust property can be traced and followed into other property into which it has been converted, that remains subject to the trust. A second principle is that, if a man mixes trust funds with his own, the whole will be treated as the trust property, except so far as he may be able to distinguish what is his own.
[76]Frith v Cartland (1865) 2 H&M 417 at 420, cited in Foskett v McKeown, above n 65, at 133.
Foskett v McKeown concerned an insurance policy over the life of a property developer. Investors in the property development had paid money to be held on trust pending completion of the development within a specified time. But two years’ worth of premiums for the life insurance policy were paid with investors’ funds. The premiums for two other years were paid by the developer from his own money. The source of a fifth year’s premiums were uncertain. Originally the policy was held on trust for the developer himself. Later, it was held on trust for his family, including his three children. Following his death the insurers paid over one million pounds to the trustees of the policy. In a contest between the children and the investors the House of Lords held that the investors were entitled to trace their misappropriated funds into the policy and assert a proprietary interest in the proceeds payable under it. The sole basis of the (majority) decision was that the investors’ money had been held on an express trust and used, in breach of that trust, to pay some of the premiums. This meant that the investors’ beneficial interest in the investment monies were represented in the policy. The children were “mere volunteers under the policy trust” so there was no question of a bona fide purchaser for value without notice.[77]
[77]Foskett v McKeown, above n 65, at 109 per Lord Browne-Wilkinson.
In describing the nature of the claim, Lord Millett noted that:[78]
… a plaintiff who brings an action like the present must show that the defendant is in receipt of property which belongs beneficially to him or its traceable proceeds …
[78]At 129.
Acknowledging that the case before him was one of mixed substitution and more complicated than the case where a trustee simply misappropriates trust property and uses it exclusively to purchase a new asset, Lord Millett nevertheless confirmed that:[79]
… if a trustee buys property partly with his own money and partly with trust money, the beneficiary should have the option of taking a proportionate part of the new property or a lien upon it, as may be most for his advantage. In principle it should not matter (and it has never previously been suggested that it does) whether the trustee mixed the trust money with his own and buys the new assets with the mixed fund or makes separate payments of the purchase price (whether simultaneously or sequentially) out of the different funds. In every case the value formerly inherent in the trust property has become located within the value inherent in the new asset.
[79]At 130, citing James Barr Ames “Following Misappropriated Property into its Product” (1906) 19 HarvLRev 511; and Samuel Williston “The Right to Follow Trust Property when Confused with other Property” (1888) 2 HarvLRev 28,29.
He later stated the law to be as follows:[80]
… the beneficiary’s right to elect to have a proportionate share of a mixed substitution necessarily follows once one accepts, as English law does, (i) that a claimant can trace in equity into a mixed fund and (ii) that he can trace unmixed money into its proceeds and assert ownership of the proceeds.
Accordingly, I would state the basic rule as follows. Where a trustee wrongfully uses trust money to provide part of the cost of acquiring an asset, the beneficiary is entitled at his option either to claim a proportionate share of the asset or to enforce a lien upon it to secure his personal claim against the trustee for the amount of the misapplied money.
[80]At 131 (emphasis in original).
The Judge also noted that “[t]he primary rule in regard to a mixed fund, therefore, is that gains and losses are borne by the contributors rateably”.[81] Further, similar principles apply to following into physical mixtures.
[81]At 132.
Discussing the nature of the plaintiff’s interest and the remedial response Browne-Wilkinson LJ observed that:[82]
The first step is to identify the interest of the purchasers: it is their absolute equitable interest in the moneys originally held by Mr Deasy on the express trusts of the purchasers trust deed. … Under those express trusts the purchasers were entitled to equitable interests in the original moneys paid to Mr Deasy by the purchasers. Like any other equitable proprietary interest, those equitable proprietary interests under the purchasers trust deed which originally existed in the moneys paid to Mr Deasy now exist in any other property which, in law, now represents the original trust assets. Those equitable interests under the purchasers trust deed are also enforceable against whoever for the time being holds those assets other than someone who is a bona fide purchaser for value of the legal interest without notice or a person who claims through such a purchaser. … If, as a result of tracing, it can be said that certain of the policy moneys are what now represent part of the assets subject to the trusts of the purchasers trust deed, then as a matter of English property law the purchasers have an absolute interest in such moneys. There is no discretion vested in the court. There is no room for any consideration whether, in the circumstances of this particular case, it is in a moral sense “equitable” for the purchasers to be so entitled. The rules establishing equitable proprietary interests and their enforceability against certain parties have been developed over the centuries and are an integral part of the property law of England. It is a fundamental error to think that, because certain property rights are equitable rather than legal, such rights are in some way discretionary. This case does not depend on whether it is fair, just and reasonable to give the purchasers an interest as a result of which the court in its discretion provides a remedy. It is a case of hard-nosed property rights.
[82]At 108–109.
Recognition of this principle is seen in the Privy Council’s decision in Arthur v Attorney General of the Turks & Caicos Islands.[83] The case concerned the purchase of Crown land at an undervalue (with the benefit of inside information from a corrupt Crown Minister). The purchaser on-sold the land to a developer at a profit. The Crown sought to trace its interest into the proceeds of the sale received by the purchaser.[84] The Privy Council recognised both the proprietary and the personal remedies that were available:
34.When considering relief for the consequences of knowing receipt it is necessary to distinguish between proprietary and personal remedies. The beneficiaries or innocent trustees will pursue a proprietary claim by following the trust property wrongly transferred or tracing its inherent value into something substituted for it: Foskett v McKeown [2001] 1 AC 103, 127-129 (Lord Millett). The claim for personal liability is for the recipient to account as a constructive trustee and will usually only be necessary where following or tracing is not possible because, for example, the property has been acquired by a bona fide purchaser for value without notice or has been dissipated and is otherwise no longer identifiable. …
[83]Arthur v Attorney General of the Turks & Caicos Islands [2012] UKPC 30. Although the land was not actually trust property, a claim nevertheless lay in knowing receipt and the context is therefore similar to the present case.
[84]The purchaser maintained that he was a bona fide purchaser for value without notice and that the claim was precluded by registration of the transfer under the local Torrens system of land registration. That issue does not affect the relevant principles stated as to the availability of a proprietary remedy.
The principle discussed and applied in Foskett v McKeown has been acknowledged (we think correctly) as part of New Zealand law in commentary and in a handful of High Court decisions.[85] We therefore summarise the position as follows. Where misapplied trust money is traced into the hands of a third party who is not a bona fide purchaser for value without notice, the equitable owner of the money is entitled to the return of the property (where a new asset has been purchased entirely with trust money) or to the proportion of the property that the value of its equitable interest bears to the whole (in the case of mixed substitution). Given that this response is one occurring by operation of the principles of equity, it is not a matter for the Judge’s discretion but for the claimant to elect.
[85]James Every-Palmer “Equitable Tracing” in Butler (ed) Equity and Trusts in New Zealand, above n 61, 997 at [35.3.3]; Emerald Shores Ltd (in liq) v Cameron [2015] NZHC 2103; Herbert Equities Ltd v Mamfredos HC Auckland CIV-2005-404-3679, 18 September 2009; Official Assignee v Sanctuary Propvest Ltd HC Auckland CIV-2009-404-852, 11 June 2009, (2009) 2 NZTR 19-017.
We return to the present case. The income beneficiaries undoubtedly had an equitable interest in the vested income. At the point SLH received the money they were entitled to assert their rights and reclaim the money. If SLH had paid that money into another bank account or mixed the money with its own in another bank account, the income beneficiaries would have been entitled to trace into the account and reclaim their money. On the same basis, they are entitled to trace into Two Mile Station and claim the proportion of that property to the extent to which it represents the vested income.
The respondents seek a declaration of a constructive trust. It will, however, be apparent from our discussion of Foskett v McKeown that such a trust could not be characterised as an “institutional” constructive trust as it is commonly understood in New Zealand.[86] This is not a case where previous consent or (deemed) intention makes it unconscionable for the defendant to deny the claim.[87] Rather, the constructive trust in this context is best described as a remedial response to recognise a pre-existing proprietary interest.[88] Lord Millett, writing extra‑judicially, explained that:[89]
… when used in a remedial sense the constructive trust is only one of the forms of proprietary remedy which equity makes available. The equitable charge and subrogation are others. Thus the expression “constructive trust” may either be used in an institutional sense, when it is used in contradistinction to other kinds of trust such as the express or resulting trust, or in a remedial sense, when it is used in contradistinction to other proprietary remedies such as a charge or subrogation or to purely personal remedies such as equitable compensation or a liability to account. …
[86]Fortex Group Ltd (in rec and in liq) v MacIntosh, Cox & Forde [1998] 3 NZLR 171 at 172 per Tipping J; see also Jessica Palmer “Constructive Trusts” in Butler (ed) Equity and Trusts in New Zealand, above n 61, 335 at [13.2.1].
[87]For example, where a fiduciary profits from the position (e.g. Attorney-General for Hong Kong v Reid [1994] 1 NZLR 1 (PC)), or where one person contributes to the property of another in circumstances where there was a reasonable expectation of the contribution being recognised (e.g. Lankow v Rose [1995] 1 NZLR 277 (CA)).
[88]Not to be confused with the remedial constructive trust, which is imposed as a remedy to create a proprietary interest where none previously existed. Its existence as part of New Zealand law is doubtful; although the question was left open in Fortex, above n 86, this Court expressed strong reservations about the basis for it and its effect on existing proprietary interests. In Re Polly PeckInternational plc (in administration) [1998] 3 All ER 812 (CA) at 827 the United Kingdom Court of Appeal described the prospect of a court imposing such a trust as “inconceivable”. See also the discussion in Palmer, above n 86, at [13.3].
[89]P J Millett “Restitution and Constructive Trusts” (1998) 114 LQR 399 at 402.
Millett LJ had described this remedial response earlier in Boscawen v Bajwa:[90]
If the plaintiff succeeds in tracing his property, whether in its original or in some changed form, into the hands of the defendant, and overcomes any defences which are put forward on the defendant’s behalf, he is entitled to a remedy. The remedy will be fashioned to the circumstances. The plaintiff will generally be entitled to a personal remedy; if he seeks a proprietary remedy he must usually prove that the property to which he lays claim is still in the ownership of the defendant. If he succeeds in doing this the court will treat the defendant as holding the property on a constructive trust for the plaintiff and will order the defendant to transfer it in specie to the plaintiff. …
[90]Boscawen v Bajwa, above n 68, at 334–335.
This use of the constructive trust has also been described as a direct means of vindicating a claimant’s equitable property rights in the original asset.[91] As such, it is viewed simply as part of property law.[92] Professor Jessica Palmer has expressed the view that:[93]
Where a claimant already has established equitable interests in property, whether, for example, by means of an express trust or a fiduciary duty, and that property passes unauthorised into the hands of another who is not a bona fide purchaser for value and without notice (or is used in an unauthorised manner by the legal owner), the transferee takes legal title subject to the equitable title vested in the claimant, recognised by the means of a constructive trust. …
… The explanatory basis for the constructive trust in this context is simply that it is acknowledging and giving effect to the claimant’s subsisting title where the property is sitting in the hands of another without authorisation.
In this sense the constructive trust is merely a remedial consequence of the claimant’s equitable interest. It vindicates the claimant’s title in a way that the Common Law cannot and in a way that is more effective than a personal equitable remedy.
[91]In Foskett v McKeown the investors’ equitable property rights in the insurance proceeds derived from their rights in the money originally held for them on trust. Thus, the trust on which the insurance proceeds would be held has been described as “not a constructive or resulting trust, but the same express trust as that upon which the original trust money had been held.”: Ross Grantham and Charles Rickett “Tracing and Property Rights: The Categorical Truth” (2000) 63 MLR 905 at 906 (emphasis in original).
[92]Rather than, for example, a remedy for knowing receipt, which has a restitutionary basis: McLennan v Livaja, above n 46, at [40]. See also Mau Whenua Inc v Shelley Bay Investments Ltd [2019] NZHC 3222, (2019) 20 NZCPR 923 at [50], citing Charles Mitchell and Stephen Watterson ‘Remedies for Knowing Receipt”, above n 53, at 130.
[93]Jessica Palmer “Attempting Clarification of Constructive Trusts” (2010) 24 NZULR 113 at 115–116. Professor Palmer refers at 116–118 to Foskett v McKeown, above n 65; and, in New Zealand Official Assignee v 15 Insoll Ave Ltd [2001] 2 NZLR 492 (HC); Official Assignee v Sanctuary Propvest Ltd, above n 85; and Herbert Equities Ltd v Mamfredos, above n 85; as examples of cases where a constructive trust was used in this way (At 116–118). It is, however, notable that the latter two New Zealand cases did in fact involve unconscionability on the part of the defendant.

However, Professor Palmer views the description “constructive trust” as detracting from the real basis of the claim and causing unnecessary confusion.[94] This is an understandable observation; treating the constructive trust as a means purely of vindicating property rights is conceptually inconsistent with the requirement of unconscionability arising where the parties have or can be taken to have agreed that they will conduct themselves conscientiously.
[94]Palmer, above n 86, at [13.5]. Charles Rickett proposed that it might be preferable to describe this remedy by a Latin tag “vindicatio” rather than a constructive trust, for clarity as to the real nature and purpose of the proprietary remedy: Charles Rickett “The Classification of Trusts” (1999) 18 NZULR 305 at 321.
It is notable that the declaration actually made in Foskett v McKeown was not a declaration of constructive trust; it was simply that the plaintiffs were entitled to share in the fund in accordance with the proportion of premiums paid out of their money. For clarity we think that this would be the preferable form of declaration ultimately made.

Conclusion

We have found that the Trust advanced $1,006,639 to SLH from the proceeds of the Wye Creek sales. Of this amount, $906,639 was applied towards the purchase of Two Mile Station and can be traced into that property. Five-sixths of $906,639 is $755,532.50. This sum represents 43.17 per cent of the purchase price of $1,750,000. The respondents are entitled to assert a proprietary interest to this extent.
The respondents have sought a declaration as to the proportion of Two Mile Station in which they have a proprietary interest. But such a declaration ought to be made by reference to the certificates of title that constitute the property. Although counsel for the respondents handed up a supplementary bundle of copies of certificates of title said to now constitute Two Mile Station there was no evidence regarding them. We consider that it preferable the precise terms of the declaration be determined in the High Court on the basis of our findings.
There is a further aspect of this case that requires remittal to the High Court. The development of Two Mile Station raises questions as to the extent to which SLH’s improvements have increased the value of the property, whether its contribution might be recognised and, if so, the form that recognition should take.[95] We do not accept SLH’s position that the respondents’ failure to adduce valuation evidence that might assist in determining these issues should be fatal to their claim. To the contrary, the onus is on SLH to demonstrate the extent of its interest, having wrongly used trust assets to acquire the property.[96] But these issues were not considered at all in the High Court, nor in this Court and counsel should have the opportunity to address them.

Interest payable on judgment sum

[95]The general principle is that a constructive trustee of property who has spent money improving that property is entitled to an allowance for his or her efforts: Rowley v Ginnever [1897] 2 Ch 503 at 507, applied in New Zealand in Russell v Durie [1920] NZLR 91 (SC). The allowance cannot exceed the amount actually expended: In Re Cook’s Mortgage [1896] 1 Ch 923.

[96]In re Tilley’s Will Trusts [1967] Ch 1179 at 1183.

In the fourth cause of action against SLH for knowing receipt of the vested income, interest payments and management fee, the respondents sought compound, or alternatively simple, interest on the amounts that SLH was liable to account for. In respect of the equitable compensation directed, the Judge ordered SLH to pay simple interest from 30 June 2008, even though the money had been advanced to SLH by 30 June 2001 at the latest.[97] On the question of interest, the Judge said:
[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. 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.
[97]High Court decision, above n 2, at [224(c)].
The respondents say that, in relation to the knowing receipt cause of action, interest ought to be payable from the date the cause of action accrued which had happened by 30 June 2001. Ms Robertson did not accept that. She submitted that the determining factor is when the respondents would have had the use of the money had it not been transferred to SLH. Because the trustees did not pay out income annually but instead retained it in the Trust, and the Trust made losses in many years, it was unlikely that any of the income would have been credited to the beneficiaries’ current accounts until the last financial year. On that basis interest would run only from 2007. But, in any event, she argued that the Judge was entitled to exercise discretion over the date on which interest ran and the date he selected, 30 June 2008, was open to him.
Although s 87 of the Judicature Act 1908, which applied to this case, allowed the Judge discretion as to the period for which interest would run, the generally recognised rule is that interest is payable from the date the cause of action accrues.[98]The Judge gave no reason for departing from this general rule and indeed the approach taken to this cause of action is inconsistent with that taken in relation to the order made against Tony personally and as executor of Jack’s estate to pay interest from the dates the causes of action accrued.[99]
[98]Equiticorp Industries Group Ltd (in statutory management) v R (No 3) (Judgment No 51) [1996] 3 NZLR 690 at 692, citing Westdeutsche Landesbank Girozentrale v Islington London BoroughCouncil [1996] AC 669 at 717 per Lord Browne-Wilkinson (this principle is now reflected in s 9 of the Interest on Money Claims Act 2016).
[99]High Court decision, above n 2, at [224(a)] and [224(b)].
Particularly given that SLH is to be treated as having received the money with knowledge of the breach of trust under which it was paid, we consider that the Judge did err in failing to follow the usual practice. We do not accept Ms Robertson’s approach; the hypothetical position is of no assistance given that the cause of action simply rests on SLH’s wrongful receipt of the vested income. What might have happened to it had it remained in the hands of the trustees is not relevant.

Summary and result

We have concluded that:
(a)Terry’s claim is not time-barred.
(b)Compensation payments are to be allocated on the basis of one-sixth to each income beneficiary.
(c)Tony received the 2007 dividend net of imputation credits and is only liable to account for $496,285.
(d)SLH received interest and management payments totalling $358,745.68 and it was unconscionable for it to retain them.
(e)SLH received $1,006,639 of vested income from the Wye Creek sales, $906,639 of which was applied towards the purchase of Two Mile Station.
(f)The respondents are entitled to trace their share of the vested income into Two Mile Station and assert their proprietary interest in it to the extent of 43.17 per cent.
(g)Interest on money payable to the respondents under the knowing receipt cause of action should run from 30 June 2001.
Accordingly,
(a)Tony’s appeal is allowed in part: the Judge’s order requiring Tony to account to the respondents to the extent of $711,095 (four-fifths of $888,869) is quashed and substituted with an order that he account to the extent of $496,285 (five-sixths of $595,542).
(b)SLH’s appeal is allowed in part.
(c)The cross-appeals are allowed in part.
The Judge’s order that SLH pay equitable compensation of $995,859 is quashed and substituted with an order that SLH account as a knowing recipient for $382,288, being five-sixths of the total of the interest and management fee ($358,745.68) and 2002 payment ($100,000).
We remit the case to the High Court for determination of the following questions:
(a)What are the terms of the declaration required to be made to recognise the respondents’ equitable proprietary interest in Two Mile Station?
(b)What is the correct legal and factual basis on which to determine how SLH’s improvements to Two Mile Station might be recognised?

Costs

Tony and the respondents have each succeeded to some extent in their respective appeals. SLH’s only success was on the minor (and undisputed) issue of double counting. Given the outcome of the cross-appeal in relation to Two Mile Station it has to be said that SLH was the unsuccessful party overall.
We therefore make orders that:
(a)as between Tony and the respondents, costs will lie where they fall; and
(b)the respondents are entitled to costs from SLH for a standard appeal on a band A basis, with the usual disbursements.

Solicitors:
LeeSalmonLong, Auckland for First Appellant
Glaister Ennor, Auckland for Second Appellant
Spencer Legal, Auckland for First Respondents and Second Cross-Appellant

[2020] NZCA 529

29 October 2020 at 9.30 am