Hartley-Greig v Lilian
[2012] NZHC 797
•27 April 2012
IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY
CIV 2011-488-68 [2012] NZHC 797
UNDER THE TRUSTEE ACT 1956 and THE COMPANIES ACT 1993
IN THE MATTER OF THE ESTATE OF SANDRA HARTLEY BETWEEN REUBEN HARTLEY-GREIG AND
DAVID JOHN STEPHEN MCNICHOLAS
AS EXECUTORS AND TRUSTEES OF THE ESTATE OF SANDRA HARTLEY Plaintiffs
ANDLILIAN Defendant
Hearing: 21 and 23 February 2012
Appearances: D Hollings QC for plaintiffs
M B Dodds for defendant
Judgment: 27 April 2012
JUDGMENT OF ALLAN J
In accordance with r 11.5 I direct that the Registrar endorse this judgment with the delivery time of 4 pm on Friday 27 April 2012
Solicitors/counsel :
R C Mark, Kerikeri, [email protected]
D Hollings QC, Auckland [email protected]
A J Kennedy, KerikeriM B Dodds, Kerikeri, [email protected]
HARTLEY-GREIG V LILIAN HC WHA CIV 2011-488-68 [27 April 2012]
[1] This proceeding is concerned with the administration of the estate of the late
Sandra Hartley (Sandra), who died on 10 April 2010. She left a will dated
23 September 2009. In it, Sandra directed that her chattels be distributed in accordance with wishes already made known by her, that all loans to her children, Reuben and Fleur, be forgiven and that the balance of the estate be divided equally between them.
[2] The will appointed three executors and trustees. They are Reuben Greig, Mr David McNicholas (an independent trustee who currently resides in the United Kingdom), and Lilian, the defendant, with whom Sandra had been living in a de facto relationship.[1]
[1] Lilian is known by that name alone.
[3] In the present proceeding, as constituted in a second amended statement of claim, the plaintiffs seeks the following relief:
(a) A declaration that cl 8 of a relationship property agreement entered into between Sandra and Lilian requires that $450,000 of the proceeds of a life policy (the Asteron Policy) is to be used to repay the estate’s share of business debt;
(b)An order that $450,000 of the proceeds of the Asteron Policy be used to repay the estate’s share of the business debt;
(c) An order removing the defendant as an executor and trustee of the estate;
(d) An order appointing Reuben Hartley-Greig as a director of Hone
Heke Lodge (2005) Ltd (Hone Heke); and
(e) Costs.
[4] The plaintiffs no longer seek an order appointing Reuben Greig as a director of Hone Heke, Lilian having given her consent to that appointment.
[5] Accordingly, the issues for determination in this judgment are:
(a) whether Lilian ought to be removed as an executor and trustee of the estate;
(b)the proper disposition of the sum of $450,000 representing part of the proceeds of the Asteron Policy paid by the insurer upon Sandra’s death; and
(c) costs.
Should Lilian be removed as executor and trustee?
[6] The plaintiffs seek Lilian’s removal as executor and trustee on two inter- related grounds. The first is that she has a personal interest in certain matters with which the estate is concerned, which places her in conflict with her obligations as an executor and trustee. The second is that the plaintiffs, in their capacity as co- executors and trustees on the one hand, and Lilian on the other, have lost the mutual trust and confidence in each other which is a necessary ingredient of a relationship in which the parties must work together and reach unanimous decisions.
[7] In order to place these arguments in context, it is necessary to outline the factual background in brief detail. Sandra died in April 2010. Previously she had been in a de facto personal relationship with Lilian which had endured for 22 years. There is a dispute about whether the relationship still existed at a personal level at the time of Sandra’s death. Lilian says it did. The plaintiffs say it had ended some months earlier. Sandra’s two children, Reuben and Fleur, are the beneficiaries in her estate. Mr McNicholas was a mutual friend of Sandra and Lilian.
[8] Sandra and Lilian were not only life partners; they were also in business together. Each held a 50% interest in Hone Heke, which owns and operates a
backpackers’ accommodation business in Kerikeri. The land and buildings from which the business operates are owned by a partnership known as Black Camel Co Partnership (Black Camel), also owned equally by Sandra and Lilian. They were also each 50% owners in an olive block at Midgley Road, Mangonui and in a residential section at Rarere Terrace, Kerikeri. Further, each of them owned a
17/60ths share in a leasehold property at Tapuaetahi. The remaining shares were owned by third parties. Lilian’s share was subject to an ANZ Bank mortgage. They also owned a 50% share in an ice cream vending business known as “Rollin’ Cones”.
[9] In addition to the claimed interest in the Asteron life insurance policy,
Sandra’s estate was entitled to the proceeds of an AXA life insurance policy worth
$179,000. Lilian also owed $50,000 to the estate.
[10] Sandra and Lilian owed about $900,000 to the ANZ Bank in respect of the backpackers’ accommodation business. The estate was directly responsible for one- half of this sum, and was contingently liable to pay Lilian’s share if she did not, pursuant to a guarantee to the bank. There were further contingent liabilities under both a guarantee of a mortgage advanced to the third parties who owned the greater part of the Tapuaetahi property, and in respect of the ANZ Bank mortgage over Tapuaetahi which secured the funds contributed by Lilian to purchase her share in that property.
[11] The plaintiffs argue that in a number of clearly identifiable respects, Lilian’s duties to the estate in her capacity as executor and trustee are in direct conflict with her personal interests. First, they point to the current dispute concerning the proper application of the proceeds of the Asteron Policy. In the present proceeding, the plaintiffs contend that on a proper construction of the relationship property agreement made between Sandra and Lilian in September 2009, the proceeds of that policy paid on Sandra’s death ought to be applied for the benefit of the estate in paying off Sandra’s share of the debt owed to the ANZ Bank in respect of the backpacker accommodation business. Lilian, on the other hand, argues that the agreement requires that the proceeds be applied in reduction of her one-half share of that debt, leaving the estate principally liable for the rest.
[12] Next, the plaintiffs identify Lilian’s indebtedness, both to the estate and to Sandra’s mother, as a point of further conflict. It is common ground that Lilian was, at the date of Sandra’s death, indebted to her in the sum of $50,000. The estate is unable to make demand for, or otherwise enforce repayment of, that debt other than by a joint decision of the executors. The plaintiffs say Lilian declined to give that consent for well over a year. Ultimately, agreement was reached that a portion of that sum would be paid and the balance accounted for at a later stage when Lilian was in funds. But that agreement came only at a point long after the issue of this proceeding and in the context of a hearing presided over by Heath J, who in an oral judgment given on 27 October 2011, recorded a partial agreement reached for the purpose of freeing up certain funds in order that both the estate and Lilian could discharge certain debts. Until then there appeared to have been a stalemate. Heath J’s judgment also dealt with a joint debt of $100,000 owed by Sandra and Lilian to Sandra’s mother. The plaintiffs say that Lilian declined to join with them in taking steps to ensure that that debt was repaid by the estate.
[13] There was a further dispute between the plaintiffs and Lilian regarding her alleged use of Sandra’s personal funds for her own benefit. Lilian rejects any such allegations, but again they constitute a point of disagreement among the executors and trustees to the extent that the plaintiffs say there is a conflict of interest for Lilian.
[14] Another matter in dispute concerns the desirability of the appointment of a director to Hone Heke. Upon Sandra’s death Lilian was the sole director, even though the business was owned by the estate as to a half share. For some time the plaintiff sought to have Reuben appointed as a director of that company. For a considerable period Lilian resisted any such appointment and declined to participate in a resolution of the remaining executors seeking the calling of a meeting to consider the appointment of a further director. Lilian pointed out that she could outvote the plaintiffs by relying both upon her 50% interest in the company, and upon what she regarded as her one-third of the shares held by the estate. In other words, she considered herself able to control the company by relying, not only on her own 50% shareholding, but by her entitlement to control one-third of the estate’s shareholding.
[15] Lilian’s position, set out in writing, involves of course a complete misconception of her role as an executor. But for present purposes, it is sufficient to observe that her interest as the sole director of the company was plainly in conflict with that of the estate which, through the plaintiffs, was endeavouring to have Reuben appointed a director. In her capacity as an executor she was endeavouring to achieve an objective (the maintenance of the status quo) which she desired in her personal capacity. The plaintiffs point to this situation as constituting a clear conflict of interest.
[16] There is also a dispute between Lilian and the plaintiffs about the circumstances in which the Asteron Policy was cancelled, following Sandra’s death. The policy continued in force because it provided cover over Lilian’s life after Sandra’s death. There is a dispute as to the circumstances in which the policy lapsed. Lilian says the lapse occurred because the estate was obliged to pay the premiums if it wished to maintain the policy. The plaintiffs say it lapsed at Lilian’s express direction. It is unnecessary to resolve that dispute. For present purposes the point is that Lilian’s interest on the one hand and that of the estate on the other were quite different.
[17] Finally, there is a question concerning the Tapuaetahi property. Clause 9 of the relationship property agreement confers on the survivor of Lilian and Sandra a life interest in the Tapuaetahi property, if the pair were living in a de facto relationship or civil union with each other immediately prior to the death of the first of them.
[18] There is a dispute as to whether they were still living together at the time of Sandra’s death. Lilian says they were, and so she qualifies for the life interest. The plaintiffs say they were not and that the couple had ceased living together some months earlier. The dispute is unresolved. That provides a further source of conflict, the plaintiffs allege.
Loss of mutual trust
[19] The plaintiffs say that they are simply unable to work with Lilian because, on certain important issues, they cannot reach unanimity. The result is a mutual loss of trust and confidence. I will refer briefly to three examples.
[20] Lilian’s view of the role of the executors of Sandra’s estate is that their obligation to get in the assets and to distribute them in accordance with the will does not entitle them to inspect any documents other than those evidencing the financial position of the estate as at the date of death of the deceased. The plaintiffs had asked to see documents, and in particular accounts, relating to the activities of the Black Camel partnership prior to the date of Sandra’s death. Lilian considered that request to be out of order. Through her solicitor, Ms Amanda Kennedy, she advised the plaintiffs in an e-mail sent on 22 February 2011, that:
It is surmised that the request for disclosure is in the nature of a personal investigation of my client’s affairs, rather than to advance the requirements of the office of Executors.
[21] It might have been thought that, in their capacity as executors, the plaintiffs were entitled to stand in the shoes of the deceased, and to call for past financial records of the partnership in order to satisfy themselves as to the true position as at the date of death. Lilian disagreed, and through her solicitor in the same e-mail advised that:
In short, Lilian has asked me to confirm her instructions that she does not consent, in any capacity, to the release of information to either of the co- executors of information prior to the death of her partner.
[22] About a month later, on 18 March 2011, in relation to the same topic (the provision of earlier financial records), Ms Kennedy wrote to the plaintiffs’ solicitor as follows:
Given the relationship between the parties my client distrusts your client’s need for the information, given that it is wholly irrelevant to the current financial position of the estate.
[23] Later, in June 2011, the plaintiffs sought to convene a meeting of Hone Heke. Lilian advised Reuben by e-mail dated 19 June 2011 as follows:
As 50% of the shares of the company are held by the Executors of the Estate of Sandra Hartley, jointly, any notice for a meeting would of necessity require the agreement of all of the executors to attain a 5% voting right. At this point I am not comfortable to agreeing to a request to call a special meeting, and would not consider voting to elect Reuben as a Director of the company. I feel therefore that it would be a waste of time and funds to call such a meeting, when I cannot see any requirement for the company to appoint another director.
[24] So this was another occasion upon which, the plaintiffs say, Lilian was using the need for unanimity among the executors to advance her interests in her capacity as sole director of Hone Heke in a manner calculated to further damage the relationship between the executors.
[25] Against that background, I turn to the plaintiffs’ argument for Lilian’s
removal.
Should Lilian be removed as executor and trustee?
[26] Section 21 of the Administration Act 1956 empowers the Court to discharge or remove an administrator (including an executor) if he or she becomes incapable of acting, or is unfit to act, or it becomes expedient that he or she is removed.
[27] Section 51 of the Trustee Act 1956 provides:
51 Power of Court to appoint new trustees
(1) The Court may, whenever it is expedient to appoint a new trustee or new trustees, and it is found inexpedient, difficult, or impracticable so to do without the assistance of the Court, make an order appointing a new trustee or new trustees, either in substitution for or in addition to any existing trustee or trustees, or although there is no existing trustee.
[28] The Court also has an inherent supervisory jurisdiction in relation to the administration of trusts generally.[2] The approach of the Court was helpfully
[2] See Farnsworth v Farnsworth HC Auckland M1767/97, 12 January 1999 at 5.
summarised by Eichelbaum J in Re O’Reilly (deceased):[3]
[3] Re O’Reilly (deceased) (1992) 9 FRNZ 51 (HC) at 53-54.
The broad principle is that the Court must be guided by the welfare of the beneficiaries, Letterstedt v Broers (1884) 9 AC 371, 386. In Miller v Cameron (1936) 54 CLR 572 Dixon J said:
The jurisdiction to remove a trustee is exercised with a view to the interests of the beneficiaries, to the security of the trust property and to an efficient and satisfactory execution of the trusts and to faithful and sound exercise of the powers conferred upon the trustee. In deciding to remove a trustee the court forms a judgment based upon considerations, possibly large in number and varied in character, which combine to show that the welfare of the beneficiaries is opposed to his continued occupation of the office. Such a judgment must be largely discretionary. A trustee is not to be removed unless circumstances exist which afford ground upon which the jurisdiction may be exercised. (pp 580-581).
Two factors well recognised in case law, in point here, are hostility between the trustee and the beneficiaries, and the existence of actual or potential conflict of interest. By way of authority it is sufficient to refer to Hunter v Hunter [1938] NZLR 520, 530, 531 and Preston v Preston [1960] NZLR
385, 402, both decisions of the Court of Appeal.
[29] Earlier, in Hunter v Hunter, Myers CJ pointed out that the approach of the Court was grounded upon the need to ensure that the interests of the estate, and those entitled to it,[4] are protected. He said:[5]
[4] Hunter v Hunter [1938] NZLR 520 (CA).
[5] At 529.
I could not help feeling, in listening to the lengthy argument submitted by counsel for the appellants, that they were seeking to have the case dealt with as if it depended on the question as to whether or not the various grounds urged for the removal of the appellants from their office constituted breaches of trust. That, however, as I understand the law, is not the true position. The principle to be applied in a proceeding for the removal of trustees is laid down by their Lordships of the Privy Council in Letterstedt v Browers [(1884) 9 APP Cas. 371]. It is said that the jurisdiction is merely ancillary to the principal duty of the Court to see that the trusts are properly executed, and that, therefore, though it should appear that the charges of misconduct are either not made out, or are greatly exaggerated, so that the trustees are justified in resisting them, and the Court might consider that in awarding costs, yet if satisfied that the continuance of the trustees would prevent the trusts being properly executed, the trustees may be removed [(ibid 386)]. It must always be borne in mind that trustees exist for the benefit of those to whom the creator of the trust has given the trust estate.
And further:[6]
[6] At 530.
As I understand the principle, it is sufficient if the evidence shows, (i) that there is a conflict between interest and duty; (ii) that the trustees have failed to recognise this conflict and to take steps to ensure that their interest should
not prevail as against their duty, and have disregarded the interests of the infant cestui que trust; and (iii) that a state of hostility exists between the trustees and the immediate possessor of the trust estate which is calculated to work against the true interests of the estate. In my opinion, that is the position in this case irrespective of any other grounds, though there are here other grounds found by the learned trial Judge which make all the more necessary the removal of the trustees from their office.
[30] In circumstances where a conflict of interest exists, it is incumbent upon an executor or trustee to resign his or her office in order to facilitate the appointment of a new trustee, or to enable the remaining trustees to carry on alone. Only in that way is it possible that the respective rights of the resigning trustee on the one hand and the estate represented by the remaining trustees on the other, can be determined
appropriately.[7] In my opinion, there cannot be the slightest doubt in this case about
the proper outcome. Lilian ought not to continue as an executor or trustee in the administration of Sandra’s estate, by reason of the inter-related character of the business and financial interests held jointly by her and Sandra (and now the estate). It was inevitable that Lilian’s interests would diverge from those of the estate. There is substance in all of the examples of conflict of interest identified by Ms Hollings for the plaintiffs. The present proceeding provides perhaps the clearest of them. The dispute over the proceeds of the Asteron Policy provides as clear an example as any of a conflict of interest which simply disqualifies Lilian from maintaining her role as executor and trustee in the estate. At a personal level, her interest lies in obtaining a ruling that she is beneficially entitled to the proceeds. In her capacity as an executor and trustee of Sandra’s estate, her interest lies in obtaining an order that the proceeds form part of Sandra’s estate. She simply cannot undertake both roles.
[7] Preston v Preston [1960] NZLR 385 (CA) at 389.
[31] Although Mr Dodds submits that, having embarked upon her duties as an executor she was in law precluded from resigning, there is ample authority to the effect that an executor or trustee is entitled to retire in circumstances where a conflict of interest exists: Preston v Preston is an example.
[32] I make an order removing Lilian from her office as an executor and trustee of
Sandra’s will. In doing so, I should emphasise that the order is not based in any
respect upon moral or personal shortcomings on Lilian’s part. It is founded purely
and simply upon the need to ensure that the interests of the estate are represented by persons who are not hampered by a conflict of interest which they are unable to avoid.
Should the plaintiffs also be removed as executors and trustees?
[33] Mr Dodds submits that, if Lilian is removed from office, then the plaintiffs ought likewise to be removed. He instances a number of occasions upon which differences have arisen between Lilian and the plaintiffs:
(a) The plaintiffs’ decision to retain the policy proceeds in a solicitor’s trust account pending determination of this proceeding rather than to pay down business debt in the interim;
(b)A delay in determining whether the plaintiffs would make an issue of Lilian’s alleged entitlement to a life interest in the Tapuaetahi property;
(c) Mr Greig’s personal interest as beneficiary in the outcome of the
dispute over the policy proceeds;
(d)The plaintiffs’ desire to see bank accounts of the various business entities for periods prior to the date of Sandra’s death;
(e) A delay in the sale of the ice cream vending business.
[34] But it does not follow from those differences that the plaintiffs’ acts and
omissions have been contrary to the best interests of the estate.
[35] As Ms Hollings argues, the fact that Mr Greig may benefit from some of the positions adopted by the plaintiffs is simply a consequence of the fact that he is a beneficiary of the estate. His interests are aligned with those of the estate. They are not in conflict with it. Mr McNicholas is independent in that he is not a beneficiary
in the estate. He and Mr Greig are plainly able to reach decisions together. The fact that Mr McNicholas supports Mr Greig does not render him unfit to remain in office.
[36] In short, Mr Greig’s interests are allied with those of the estate, and nothing advanced by Mr Dodds remotely suggests that either of the plaintiffs is in breach of his duty to the estate. This is, therefore, no basis for the claim that the plaintiffs should also be removed from office.
The Asteron Policy proceeds
[37] Prior to the execution of their relationship property agreement on
23 September 2009, Sandra and Lilian had taken out a joint life policy with Asteron Life Limited. Each insured the life of the other, and so under the policy the survivor was entitled to the proceeds upon the death of the first of them. The policy could be maintained by the executors of the deceased insured at their discretion with the result that the estate would become entitled in due course to receive a payment upon the eventual death of the survivor.
[38] The relationship property agreement made express provision for the Asteron Policy. It is common ground that the agreement had the effect, so far as was possible, of keeping separate the respective interests of Sandra and Lilian. Each had children and each was naturally concerned to ensure that those children were provided for upon their respective deaths.
[39] The Asteron Policy presented a particular problem in the relationship property context. It was the subject of detailed provisions in the agreement, plainly intended on their face to affect the ordinary disposition of the proceeds of the policy. In other words, the proceeds were to be applied in terms of the policy, but subject to the terms of the agreement.
[40] The relevant provisions in the relationship property agreement are as follows:
Hone Heke Lodge Business
8.1Lilian and Sandra acknowledge that their business borrowing and all other commercial obligations in connection with their commercial
undertaking in the names of the Black Camel Partnership and Hone Heke Lodge 2005 Ltd (the Business Debt) is a company obligation guaranteed by themselves jointly and severally. As between themselves and for the purposes of this agreement, it is agreed between Lilian and Sandra that, if their guarantees are called up, or they are held personally liable for the Business Debt, then each of them will pay one half the Business Debt, and to the extent either of them is obliged to pay more than one half of the Business Debt, she will be indemnified by the other for that payment and all consequential losses and expenses.
8.2Lilian and Sandra each own, at the date of this agreement, the Asteron Life insurance policy described in Schedules A and B on the life of each other (the Asteron Policy). Their purpose in effecting the Asteron Policy was to ensure the availability of funds to repay their respective half shares of the Business Debt if one or both of them dies, and it is not their intention that the application of Asteron Policy proceeds to Business Debt pursuant to this clause create indebtedness or liability between either of them, or their respective estates, and either the Black Camel Partnership or Hone Heke Lodge
2005 Ltd. They record that it is not possible for them to assign their respective Asteron Policy interests to each other or to their business entities, but that each holds their respective interests on trust on the terms set out in this agreement.
8.3Lilian and Sandra agree to instruct their respective executors to apply the proceeds of the Asteron Policy in repaying or reducing their respective shares of the Business Debt for so long as the Business Debt is owed, to the extent of $450,000, and to pay
$50,000 to the operating account of Hone Heke Lodge 2005 Ltd. If the proceeds of the Asteron Policy exceeds the Business Debt, or
there is no Business Debt at the date of their respective deaths, then the proceeds of the Asteron Policy on the life of the first party to die
(or the balance remaining after application of the proceeds of the Asteron Policy to Business Debt) will become the separate property of the survivor. The continuation or cancellation of the Asteron
Policy on the life of the survivor owned by the estate of the deceased party will be a decision entirely within the discretion of the
executors of the estate of the party who has died.
8.4.If Lilian and Sandra are no longer in business together and the Business Debt has been repaid, they may cancel the Asteron Policy, but in any event each will be the beneficial owner of the interests owned by her on the life of the other.
8.5Lilian and Sandra acknowledge, if one of them dies while they own and operate Hone Heke Lodge, the survivor will be paid for her management duties as a director and/or employee of Hone Heke Lodge 2005 Ltd.
[41] The argument for the plaintiffs is that the proceeds of the policy, paid upon
Sandra’s death, must be held in trust by Lilian and paid by her to the executors of
Sandra’s estate, to enable the estate to pay off its one-half share of the business debt of approximately $900,000 owed to the ANZ Bank.
[42] For Lilian, Mr Dodds submits that, on its true interpretation, the agreement requires Lilian to hold the funds in her own right and to use them to repay her own share of that debt.
[43] Counsel are agreed that the agreement is capable of interpretation without resort to extrinsic evidence. I also agree. I consider that it is possible to identify the common intention of the parties from the language used in cl 8 of the agreement. Nevertheless, I heard extensive argument from counsel in respect of the various judgments in Vector Gas Ltd v Bay of Plenty Energy Ltd, as to the extent to which prior negotiations and surrounding circumstances might be considered in interpreting
the agreement.[8]
[8] Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5; [2010] 2 NZLR 444.
[44] It is common ground that Sandra and Lilian first consulted Ms Wooldridge, a Kerikeri solicitor, in about March 2008 with a view to executing wills and a relationship property agreement. At that time, the business borrowings of the pair totalled about $900,000.
[45] Clause 8.1 of the agreement provides that Sandra and Lilian are each to be liable for one-half of that business debt, and each is entitled to be indemnified by the other, in the event that one is obliged to pay more than half. The first sentence of cl 8.2 records that each owns the Asteron Policy “on the life of each other”. That is simply a reflection of the terms of the life policy itself.
[46] The second sentence of cl 8.2 declares the joint intention of the parties to ensure that the proceeds of the Asteron Policy were to repay the respective half- shares of the business debt “ …if one or both of them dies …” and that it is not the intention that such application of the proceeds create indebtedness or liability between either of them or their respective estates. The agreement does not explicitly provide that the survivor is to pay off the business debt of the deceased. However,
the provision to the effect that it was not intended that any liability arise by virtue of
that payment strongly suggests, in my view, that the survivor was to pay off the share of the business debt for which the deceased was responsible. There would be no need for any such provision if the survivor was entitled (or even bound) to pay off her own share. That could not possibly give rise to a debt or liability.
[47] In the last sentence of cl 8.2, the parties record the fact that it is not possible for them to assign their respective Asteron Policy interests to each other, or to their business entities. It is common ground that that provision reflects earlier advice obtained by them through Ms Woolridge from the insurance company, when an inquiry had been made of the company as to whether the policy could be varied so that each could insure her own life. The insurance company advised that such an amendment was not possible. The last sentence of cl 8.2 provides that each holds their respective interests “on trust” on the terms set out in the agreement. Although the terms of the trust are not set out, I accept Ms Hollings’ submission that the word “but” in the last sentence, was intended to indicate that beneficial ownership of the proceeds of the policy is not the same as legal ownership of the policy itself. Hence the introduction of the expression “on trust”. Accordingly, in my view, the last sentence of cl 8.2 is consistent with an interpretation that creates a trust whereby legal ownership of the policy rests with the survivor, but beneficial ownership in the proceeds is held by the estate of the deceased.
[48] The opening words of cl 8.3 require each of Lilian and Sandra to instruct their executors to apply the proceeds in reducing their share of business debt. This provision is otiose unless the proceeds are to be paid to the executors. That would occur only if the estate of the deceased partner, and not the survivor, is beneficially entitled to the proceeds. In my view, the intention of the parties was that the survivor would hold the proceeds “on trust” to pay them to the executors of the deceased party, who would be instructed by the deceased to pay those proceeds in reduction of the deceased’s share of the business debt. Notably, cl 8.3 goes on to provide that, if the proceeds of the policy exceed the business debt, then the balance goes to the survivor. If the whole of the proceeds were for the benefit of the survivor in any event, then this part of cl 8.3 would be redundant.
[49] Clause 8.4 provides that where Lilian and Sandra are no longer in business together, and the business debt has been repaid, then the Asteron Policy may be cancelled. But unless and until it is, each will be the beneficial owner of the interest owned by her on the life of the other. In other words, the trust arises only where there is a business debt for which the estate is liable, and then only to the extent of that business debt. If there is no such debt there is no trust and the survivor is entitled to take the proceeds in accordance with the policy itself.
[50] In his submissions, Mr Dodds refers to a number of other provisions in the relationship property agreement, and argues that cl 8 must be interpreted in the light of those other provisions. I agree at once that the agreement must be read as a whole, and cl 8 must be interpreted consistently with the remainder of the agreement, if that is possible.
[51] Mr Dodds refers in particular to cl 6.1, which provides that separate property used to improve the separate property of the other will, in the absence of any written agreement, be deemed to be a debt. However, cl 8.2 makes it clear, in my view, that the application of the Asteron Policy proceeds pursuant to the agreement is not to create any indebtedness or liability. I accept Ms Hollings’ submission that the specific provision in cl 8 with respect to the Asteron Policy proceeds must be taken to override the general provisions of cl 6.1.
[52] Mr Dodds also submits that cl 8.2 ,where it provides that the application of the policy proceeds will not create a debt or liability, simply underscores the entitlement of the owner of the policy to the proceeds and ensures that “there is no clawing back” from the provision. But that submission overlooks the distinction between legal ownership of the policy on the one hand, and the application of the proceeds to business debt on the other. On the plaintiffs’ argument this provision plays a necessary role. It seems to be unnecessary, however, if the defendant’s argument is correct.
[53] Mr Dodds refers to the possibility of a drafting error at the commencement of cl 8.3, in respect of the requirement that Lilian and Sandra agree to instruct their respective executors as to the application of the proceeds of the Asteron Policy. But
it seems to me that such an error arises only on the interpretation for which Mr Dodds contends. In my view, the requirement for instructions to executors is intended to ensure that those executors do indeed use the policy proceeds paid over by the survivor to reduce or extinguish the estate’s share of the business debt. It is important to the survivor that the proceeds are so applied because the survivor’s contingent liability on the guarantee is thereby extinguished. But the provision becomes otiose on Mr Dodds’ interpretation. It is trite that an interpretation is to be preferred which gives meaning and effect to every provision in an agreement.
[54] It is also submitted for the defendant that the option conferred on the estate of the deceased partner by the last sentence in cl 8.3 is illogical if the plaintiffs’ interpretation of the agreement is adopted, because the estate of the deceased partner would have benefited from the payment made by the survivor pursuant to her trust obligations, and would also be entitled to recover on the death of the survivor, if the estate chose to continue making premium payments.
[55] I do not agree that outcome is as illogical as Mr Dodds submits. The estate would remain liable to the bank for Lilian’s share of the business debt if she did not pay it herself. Upon her death, Sandra’s estate might be called upon to make good the deficiency. Sandra’s executors would be entitled if they chose to maintain the policy to guard against that contingency.
[56] Mr Dodds refers to a number of other provisions in the agreement, which he argues bear upon the interpretation of cl 8, but in my view the clause is intended to stand on its own feet, and to make specific provision for a particular situation. None of the other matters mentioned by him is capable of affecting the proper construction of the clause. I conclude that on its proper interpretation cl 8, read as a whole, requires Lilian as survivor to hold the policy proceeds payable to her as legal owner of the policy in trust for Sandra’s estate, and to pay those proceeds to the executors of that estate to enable them to carry out the terms of cl 8 by using them to repay the estate’s share of the business debt owed to the ANZ Bank. I consider this accords with the intention of the parties, ascertained from the language used in the agreement..
[57] I reach that conclusion without reference to extrinsic evidence. But it so happens that the Court did hear evidence of the common intention of the parties. It was provided by Ms Woolridge, the Kerikeri solicitor who acted for Lilian and Sandra jointly from at least early 2008 through to September 2009 when their mutual wills and the relationship property agreement were executed. Ms Woolridge was called by the plaintiffs, but without any objection by Mr Dodds, who cross-examined her extensively. Ms Woolridge impressed me as a methodical and careful solicitor, who gave accurate and reliable evidence. She said that when she was consulted by Sandra and Lilian in the early part of 2008 about their affairs, they were agreed that, if possible, the existing Asteron Policy should be altered so as to reflect their desire that each would become the owner of the policy on her own life. That objective was in keeping with the general theme of the relationship property agreement under which the parties, although jointly in business, desired to keep their financial interests separate in the long term interests of their respective children.
[58] As noted earlier, the insurance company was unable to amend the policy as desired. Accordingly, MsWoolridge said, she was instructed by Sandra and Lilian to include in the eventual relationship property agreement a provision under which each of them, although entitled in law to the proceeds of any payment upon the death of the other, would hold those proceeds in trust for the estate of the deceased partner, but on the understanding that the proceeds would be applied in reduction of the deceased’s share of the business debt. That would provide an indirect, but very real benefit, to the survivor who would be relieved of a contingent liability for repayment of the deceased’s share of the debt in the event that payment was not made by the estate. Ms Woolridge said that she endeavoured to reflect that joint instruction in cl 8 of the relationship property agreement.
[59] In my view, cl 8, although somewhat complex, achieved her drafting objective. I reiterate, however, that I have reached my conclusion as to the true interpretation of the agreement by reference to the language of the document alone and without reference to the extrinsic evidence.
Result
[60] For the foregoing reasons, I conclude that the plaintiffs are entitled to the relief sought in the second amended statement of claim. I accordingly make:
(a) an order removing the defendant as executor and trustee of the estate of Sandra Hartley;
(b)a declaration that cl 8 of the relationship property agreement between Sandra and Lilian requires that Lilian pay the sum of $450,000, being part of the proceeds of the Asteron Policy, to the plaintiffs as executors and trustees of the estate of Sandra Hartley; such sum to be applied by them in reduction of the estate’s share of the joint business debt of the deceased and Lilian with the ANZ Bank;
(c) an order directing that the plaintiffs pay the said sum of $450,000 in
reduction of the estate’s share of the business debt accordingly.
[61] The costs of the proceeding are reserved. Counsel may file memoranda if they are unable to agree.
C J Allan J
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