Kain v Hutton
[2016] NZHC 1436
•29 June 2016
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2000-409-000962 [2016] NZHC 1436
BETWEEN GEORGE CHARLES KAIN, GEORGE
HARRY KAIN, GEORGINA KAIN, GEORGE MICHAEL KAIN Plaintiffs
AND
JONATHON RHODES HUTTON First Defendant
AND
WILLIAM ALEXANDER XAVIER COUPER
Second Defendant
AND
ANNETTE ELIZABETH COUPER Third Defendant
AND
WAYNE KEITH STARTUP Fourth Defendant
AND
GEORGE THOMAS CARLTON KAIN Fifth Defendant
AND
MARY HUTTON Sixth Defendant
Hearing: 26 May 2016 Appearances:
B D Gray QC, A E Ferguson and R E Baillie for Applicant M D O'Brien QC and J B Orpin for Plaintiffs and Fifth Defendant
RJB Fowler QC for Second Defendant
S M O'Sullivan for Third Defendant
T C Weston QC and J P Forsey for Sixth DefendantJudgment:
29 June 2016
Reissued:
29 June 2016
JUDGMENT OF DUNNINGHAM J
KAIN v HUTTON [2016] NZHC 1436 [29 June 2016]
[1] This application for directions by the Public Trust arises out of a long running interfamily dispute concerning the way assets, comprising predominantly farmland and livestock, held in numerous family trusts, were being managed. The framework for resolving those issues was set out in a judgment of Panckhurst J issued in December 2004.1
[2] The path to implementing that resolution has not been straightforward. Appeals and further applications followed. However, the fundamental framework for resolution has remained essentially intact. It involves:
(a) the various family trusts and associated entities being transferred to, and now held by, the Public Trust;
(b)an “unwind” process being implemented for the purpose of allocating farming profits to the entities within the group upon the basis of net assets contributed by them to the group’s farming operations, whether in the form of land, stock or funds, or a combination of those.
[3] The “unwind” process was required because, for many years, the various entities were run in an interdependent way, as a partnership. The partnership moved to a trust structure in 1997 under the Couper Farming Trust and, in 1999, it came under the umbrella of a company, the WAX Couper Farming Company Limited (WAXCFCL). This operating structure led to there being a significant number of inter-entity advances which were recorded in the entities’ current accounts, and which needed to be unravelled.
[4] The unwind process has been overseen by Mr Grant Graham of KordaMentha, a Court appointed expert.2 He was able to begin implementing the unwind process in 2012, after the last appeals against orders made by Panckhurst J in
relation to the unwind process were abandoned at the end of 2011.
1 Kain v Hutton and Ors HC Christchurch M198/00, 3 December 2004.
2 Appointed in terms of r 324 of the High Court Rules on 13 November 2003. The equivalent rule under the current High Court Rules is r 9.36.
[5] The unwind process is now well underway. All principles of how the unwind process is to proceed have been settled, and draft accounts for all entities for the year
1 July 1996 to 30 June 1997 have been prepared. However, the Public Trust has funded all work to date and that process has already cost $1,500,000. At no stage did the directions or other orders made by the Court deal with responsibility for, and allocation of, the costs of the unwind process. It is that issue which has prompted Public Trust’s present application.
The Public Trust’s application
[6] The orders sought by the Public Trust are as follows:
(a) the profit reallocation and unwind proposals approved by the High Court on 4 December 2004 (“unwind model”) are amended to meet the cost of executing the unwind model (“unwind cost”) by:
(i)apportioning the cost to preparing financial statements for each entity to each entity individually in accordance with the estimated time spent; and
(ii)treating the collective partnership costs as an expense of the farming partnership to be paid out of the profits of WAX Couper Farming Company Limited (WAXCFCL) before profits are distributed to entities that participated in the farming partnership;
(iii)where the assets of an entity are insufficient to meet its costs, the costs will be met by:
1. treating that entity’s cost as a partnership cost; or
2. another partnership entity; or
3. if the entity is a trust, the beneficiaries of the trust; or
4. in the manner outlined in the affidavits of Campbell Brenton-Rule and dated 7 December 2015, and Grant Robert Graham, dated 8 December 2015 filed with this application;
(iv)in the alternative, such variation of order (a) or other orders as the Court considers just.
[7] The grounds on which the orders are sought are as follows:
(a) the High Court decision expressly reserved leave to amend the unwind model;
(b)the unwind model requires accounts to be prepared for partnership entities that have no assets or are not within the Public Trust trusteeship, but it does not address how the unwind expenses are to be paid;
(c) the execution of the unwind model is in the best interests of the beneficiaries; and
(d) the Public Trust’s indemnification:
(i) takes priority over any claims of beneficiaries and; (ii) extends to future and contingent liabilities;
(e) it is unjust to require the Public Trust to bear the burden of the unwind costs when it is to the benefit of the beneficiaries;
(f) it is impractical to require Public Trust to continue to fund the unwind model and then seek compensation from the beneficiaries in a piecemeal fashion and without security.
What the Public Trust proposes
[8] Mr Simeon Wright, the Chief Financial Officer at the Public Trust, explains in his evidence that, initially, the cost of the unwind model was paid by allocating the fees to the participating entities in proportion to their net assets as recorded in the most recent version of the 2003 or 2004 accounts at the time. Entities that had sufficient cash paid those fees themselves or, where they did not, the Public Trust advanced an overdraft facility to them. However, since June 2014, the Public Trust has met the individual costs and partnership costs of the unwind exercise itself, without allocating the costs to the individual entities.
[9] Because the fees incurred to date and the estimated fees are significant, the Public Trust says it needs clarity about the basis on which the fees are to be allocated and how the fees are to be met when an entity does not have sufficient assets to meet its allocated share of costs. Mr Wright says that “if the Public Trust does not have certainty of its ability to recover the costs allocated to entities with insufficient assets, it will not be in a position to continue to fund the unwind model”. It is for this reason that the application for directions is pursued.
[10] The Public Trust, itself, is neutral as to how costs are allocated, as long as there is a clear methodology for doing this and it is fair and reasonable. The costs allocation model it proposes has been devised by the accountants advising the Public Trust and is intended to meet these objectives. In summary, it provides that:
(a) the costs that can be attributed to individual entities (i.e. the cost of preparing each entity’s accounts) should be met by those entities;
(b)the collective costs which cannot be attributed to any particular entity, should be met by the partnership collectively, by deducting those costs from the partnership profits;
(c) where an entity has insufficient funds to meet their share of the costs, then the options are:3
3 The order in which these options are set out differs from the order they are given in the application but represents the preferred order of the Public Trust.
(i) the costs are met by the beneficiaries; or
(ii)if the costs cannot be met by the beneficiaries, the costs are treated as collective partnership costs and paid in the same manner; or
(iii)if the costs cannot be met as outlined in (i) and (ii) above, the costs are to be met by an entity that has sufficient funds.
[11] The Public Trust notes that if the cost allocation method proposed is adopted it is likely that the only costs outstanding for an entity with insufficient funds will be the cost of preparing individual accounts.
[12] The rationale for the proposal is set out in affidavit evidence of Mr Campbell Brenton-Rule, a chartered accountant and director of the accounting firm PKF Carr and Stanton Limited which is undertaking the revision of accounts to implement the unwind proposal. He explains that there are two types of costs from the unwind exercise that need to be met by the participating entities, being individual costs and partnership costs. He says that his firm has separately recorded the time taken to prepare each entity’s financial statements and it can therefore estimate what proportion of the fees can be to attributed as work done for each entity and bill that entity for the work. However, he says some of the work cannot be allocated to a particular entity, or it is undertaken for the benefit of the partnership generally, so it would be unfair to allocate it to a particular entity. For example, KordaMentha’s fees in devising the unwind model and Denham Martin’s fees in relation to taxation issues, is work that was “done on behalf of and for the benefit of all the unwind entities collectively”.
[13] His conclusion is that the method proposed is fair:
because it reflects the general principle that entities in a partnership should bear costs in proportion to the share of income they receive. The unwind is conducted for the benefit of entities who will receive the profits of the partnership, so it is equitable that those entities are responsible for the general partnership costs.
[14] He also considers that it is “the most pragmatic and cost efficient means of
allocating costs”.
[15] While he acknowledges that some costs will not be able to be met by the entities responsible for them because they may have no assets at the end of the unwind exercise, he says “it has not been possible to predict with sufficient accuracy whether any entities will be in that position because the unwind model is subject to many variables and there are still nine years of adjustments to complete”.
[16] Mr Graham concurs with Mr Brenton-Rule and, in his capacity as the Court appointed expert, he confirms that the proposal “represents a fair and equitable treatment of the costs and recommends to the Court that directions are put in place to implement that proposal”. He therefore recommends to the Court that directions are made which implement Mr Brenton-Rule’s proposal.
The parties’ positions in the application
[17] Some of the parties to the proceedings have no particular interest in this application. Others have appeared and their positions vary from actively supporting the orders proposed, through to opposing them and suggesting alternate ways of allocating the costs.
[18] The first defendant, Mr Hutton, has no continuing interest in the litigation. He was a previous trustee, as was the third and fourth defendants, and all three of them resigned as trustees and were replaced by the Public Trust during the course of this litigation. He and the fourth defendant took no part in this hearing.
[19] The second defendant, Mr Couper, supports the approach to allocation of costs of the wind-up suggested by the Public Trust and advances reasons why the approach advocated by the plaintiffs and the fifth defendant should be rejected.
[20] The third defendant, Ms Couper, is the former wife of the second defendant. She no longer has an interest as a trustee, but does as a beneficiary. She does not oppose the orders sought by the Public Trust and accepts the rationale behind the
apportionment of the costs of executing the “unwind” model, as set out in the application.
[21] The sixth defendant, Ms Hutton, also does not oppose the Public Trust’s applications. Her interest mainly concerns the plaintiffs’ opposition, which she does not accept.
[22] The proposal is opposed by the plaintiffs and the fifth defendant (“the opponents”).
[23] There are two themes to their opposition. They are that:
(a) they presently have insufficient information to determine whether the proposed orders relating to the costs of executing the unwind model are appropriate, so the application should not proceed until they do; and
(b)they are provisionally opposed to the orders sought in any event, and say there are fairer ways of apportioning costs.
[24] Those general concerns are set out in more detail in their notice of opposition, although not all of the issues were pursued at hearing. To the extent they were pursued, I address each of them below and set out my conclusions on them.
Should the application be adjourned?
[25] The opponents’ first submission at the hearing was that the appropriate course of action was to adjourn the hearing. The opponents said they did not consider they had sufficient information about the outcome of the unwind process to endorse the costs allocation model proposed. An adjournment would allow the various parties’ experts (Mr Graham, Mr Benton-Rule, Mr Phillip Foubister (an accountant) and Mr John Hagen (also an accountant)) to confer, once there has been further disclosure of information as to the likely outcome of the unwind proposal, and make a more informed decision on the proper method of costs allocation. Mr O’Brien QC emphasised that the application may only need to be adjourned for a short period and
there seemed to be no objection, in principle, from the experts working with the
Public Trust, to such a proposal.
[26] The opponents also point to the fact that amendments to the unwind model were approved by the Court in 2011 after the practical effect of one aspect of the proposal, being the payment of commercial rates of interest by certain entities on funds linked by other partner entities, had been tested. Once the outcome of this aspect of the proposal was tested, and dollar values were calculated, this demonstrated the “commercial unacceptability of the original proposal” and changes were made. The opponents rely on this to demonstrate the utility of “reality testing a proposed methodology by use of actual numbers”, saying the same approach should be taken to costs allocation.
[27] However, the Public Trust saw little utility in this approach. First, it noted the complaint about lack of disclosure seemed to assume that there had been “changes” to the approved unwind model, which there had not been. More importantly, even if more time was afforded, the Public Trust’s advisors say it would be insufficient to know, with any confidence, what the outcome of the unwind process for each entity will be. The complexities inherent in the unwind process meant it was difficult to predict the outcome of the exercise accurately. If the opponents required some certainty about the outcome, that would not be available until the unwind process was complete or nearly complete. Given the level of costs which will be incurred in doing that, the Public Trust says it could not responsibly incur those costs without having a process for recouping those costs from the entities involved.
[28] In respect of the example given by the opponents of the changes made to the unwind model in 2011, the Public Trust says those changes were not prompted by an unexpected practical result but instead by logical and conceptual considerations. The proposed changes were subsequently tested as to their practical effect, which confirmed their appropriateness. Similarly, in this case, the directions sought are prompted by considerations of logic and fairness. They do not need to be tested as to the actual outcome for the individual parties because they are designed to cater for the full range of likely outcomes. Furthermore, such reality testing cannot be done
with accuracy so early in the process of revising the accounts in accordance with the unwind model.
Conclusion on request for adjournment
[29] I accept the evidence for the Public Trust that there is little utility in trying to estimate the practical effect of the costs allocation model at this stage because the actual financial position of the entities will not be clear until the unwind process is concluded. In any event, the proposed directions take account of the expected range of outcomes, including the possibility that an entity may not have sufficient assets to meet the costs. In light of this, I see no practical benefit in deferring the application for a short period when the practical effect of implementing the costs allocation model will not be better understood as a consequence, and when I do not consider it needs to be known in any event.
[30] Indeed, it seems as though the opponents are attempting to defer confirming the costs allocation method until they know whether they are beneficially or adversely affected by it. That, in my view, is an approach which is likely to incentivise further litigation. My preference is to consider the application now on a theoretical basis and, if it is sensible to do so, make directions so that the Public Trust can proceed to complete the unwind process with confidence that it can recoup its reasonable costs on doing so.
[31] For this reason, I decline to adjourn the application and I proceed to deal with
it on the basis of the parties’ submissions.
The relevance of the opponents’ concerns about costs and delay
[32] The unwind process has proved expensive. It has involved developing a framework for implementing the unwind, which has now been done. It also involves revising the accounts of up to 28 entities involved in the WAXCFCL partnership structure for each financial year from 1996 to 2006. To date the cost of this exercise has been approximately $1,500,000. That includes the costs of engaging:
(a) PKF Carr and Stanton to implement the unwind model;
(b)KordaMentha to review the revised accounts to confirm that they comply with the unwind model and to address issues arising which have not been anticipated in developing the model;
(c) Denham Martin to advise on tax issues arising;
(d) PriceWaterhouseCooper to negotiate with the IRD regarding tax and
GST issues; and
(e) Wilson Harle to provide legal advice about the administration of the unwind.
[33] Mr Wright, from the Public Trust, says that estimates for the further professional fees expected to be incurred total approximately $750,000, plus there are Public Trust’s own professional trustee fees to take into account.
[34] The opponents raise concerns about this level of cost. They also question the time it has taken to get to this point which, by implication, they suggest has added to the cost.
[35] While the opponents do not suggest that the unwind exercise should not proceed, (indeed they accept it should be completed sooner rather than later), they say the significant costs mean the Court should be satisfied it has sufficient information to make a proper assessment of whether the orders proposed are appropriate, and should not be sanctioning the level of costs in this process.
[36] The Public Trust’s position is that the costs and time taken are proportionate to the complexity of the exercise, which is not simply a profit reallocation that can be modelled in a spreadsheet. It entailed the complete redesign of a partnership from the way it was operated, to the way the parties, now they are divided, considered it should be operated. That now requires revising the financial statements in accordance with those principles for every participating entity and for every year of the unwind model. As a consequence, a total of approximately 280 sets of accounts
will have to be prepared and 280 sets of tax returns or restated tax positions will have to be filed.
[37] The opponents also refer, in evidence, to there being 12 years of delay since
2004 when the Court determined an unwind process should proceed. However, the Public Trust points out that the unwind process could only get underway in 2012 when all appeals had been resolved or withdrawn. The unwind process has progressed diligently since that position was reached. Given there is agreement that the unwind process must proceed, and the application for directions is not seeking to sanction particular costs, these factors should not affect the decision to approve the directions sought.
My conclusions on relevance of costs of costs and delay to this application
[38] I accept that the apparent delay is explicable when it is realised that the unwind process could not get underway until 2012. I also accept that the present application is not seeking approval of the costs which have or will be incurred, but simply of the process for the allocation and recovery of costs reasonably incurred in the unwind process. For these reasons, I do not consider these issues are relevant to, or affect, the present application.
Request for further disclosure
[39] The lack of disclosure of information which the opponents raised in relation to their request for the application to be adjourned, was also relied on to oppose the orders sought being granted. The opponents have also filed a separate application seeking further disclosure, although they have agreed that can be “parked” for now.
[40] The opponents listed the further information they say is required in an appendix to their notice of opposition to the interlocutory application. Specifically, they seek:
(a) the latest version of the unwind model referred to in the notice of application;
(b)information as to whether the entities will have the ability to pay such costs;
(c) what steps the Public Trust is taking to secure money that will need to be repaid;
(d) the current financial position of the trusts;
(e) legal advice taken by the Public Trust in relation to the administration of the unwind; and
(f) details of all distributions and vestings made since the Public Trust assumed office.
[41] To the extent these requests are relevant to the present application and have not been considered in relation to the application for an adjournment, I address them in the following discussion.
The latest version of the unwind model
[42] The request for the “latest version” of the unwind model was advanced on the opponents’ understanding that the unwind model had undergone changes from the proposals that were approved by the Court, and so this should be shared with the parties before considering this application.
[43] However, the Public Trust refers to Mr Graham’s affidavit evidence which explains that what is described as the “unwind model” is really just a term used for the unravelling of accounts and profit reallocation in accordance with the principles set by the Court. There have been no changes to the principles of the unwind model. Rather, there have been adjustments to how particular items found in the details of the accounts are dealt with in order to ensure consistency with the unwind principles. Thus, there is no “latest version” to provide for the parties. There is, however, an updated spreadsheet showing the effects of applying the unwind principles to the entities in light of the revised accounts for the 1996/1997 financial year.
[44] I accept that the principles of the unwind have not been changed and the revised profit allocations using the principles are too provisional to be of any utility to this process. I therefore consider that this concern has no bearing on the decision as to how the cost of the unwind process should be allocated.
Ability of the entities to pay, including security for payment
[45] The opponents also sought information as to whether the entities would have the ability to pay the costs that were allocated to them, along with information about steps the Public Trust had taken to secure the payment of such sums. However, this was not a matter which was pursued at the hearing.
[46] Again, I think this information does not need to be known to approve the costs allocation methodology, including because the costs allocation proposal anticipates that some entities will not be able to meet those costs and makes provision for such circumstances.
Information about administration of unwind
[47] In submissions, the opponents placed particular weight on the need for the Public Trust to ensure that the parties were properly informed about the process being adopted so that they can be satisfied that the way the unwind principles are being applied, and the adjustments are being made, are appropriate. That had been done in the past and, if it was not continued, there was a risk of later challenge and a wasted cost, which could be avoided.
[48] It says that the Public Trust has responded to their request for further disclosure in the context of this application in a variety of ways, saying:
(a) all relevant information has been provided;
(b)further information is not needed because approval has only been given to a methodology and that can be done without investigation of the detail; and
(c) the further information requested is confidential.
[49] I have already explained why I see little utility in providing predictions, at this early stage, of what entities are likely to be required to pay once the unwind process is complete for the purpose of this application. However, there is a more widely expressed concern by the opponents that the Public Trust is now resisting sharing information on the implementation of the unwind process, in contradiction to the way the unwind process had been conducted initially. Specifically, the opponents are concerned that the Public Trust now takes the view that it can only provide information about adjustments “insofar as they affect entities in which the plaintiffs or fifth defendant have an interest” and that any information beyond that is “financial information about entities that they have no interest in”.
[50] As the opponents explain, they consider, as a matter of law, they have the same interest in the unwind model and all associated information as they did when it was constructed, consented and directed in 2004. In particular, they say:
(a) the purpose of the unwind is to ensure that the benefits of the farming operation are distributed fairly among all of the participants and a necessary basis for consent to the process was disclosure;
(b)the process can only verifiably be done if there is transparency for all entities about how the benefits are distributed;
(c) even if there was a right to confidentiality (which they doubt in the context of litigation) in the circumstances it must have been waived;
(d)to date the unwind exercise has been conducted in an open and consultative basis, for example as early as June 2005, Mr Graham advised that, as issues with the unwind arose, he would seek the agreement of the parties and he has progressively provided the parties with access to a spreadsheet which sets out details of the proposed implementation of the unwind for all entities;
(e) the opponents cite other examples of how all the entities have shared all information and so it cannot be said that they are seeking information about entities in which they have no interest.
[51] They asked the Court to order disclosure of the information sought. While I saw this as a matter which, strictly speaking, arose in the separate application for further disclosure, I nevertheless, granted the opponents leave to file a further memorandum setting out more precisely, the terms of the information disclosure sought. This was because it seemed to me that there were aspects of their concerns which could be addressed by agreement between the parties.
[52] The further memoranda filed asked for a direction:
That Mr Graham and the Public Trust provide or facilitate the provision of all documents, including spreadsheets, and other information required for and relevant to the identification, explanation and understanding of all changes and adjustments made to the 2012 spreadsheet model provided by Mr Graham in March 2012.
[53] The opponents then elaborated that this request included, but was not limited to:
(a) the “updated spreadsheet model” (as referred to in paragraph 12 of Mr Graham’s reply affidavit of 19 May 2016), any iteration used in the preparation of the revised 1997 financial statements provided to the parties in January 2016 (revised 1997 financial statements) and any iteration developed subsequently;
(b) the revised 1997 financial statements for all entities (except those already provided);
(c) any material changes (effecting any entity) made to the original
1997 draft financial statements (i.e. those that have been restated and the revised 1997 financial statements), including any changes to the
opening balances, and the reasons for any such changes;
(d) any material changes made since March 2012 for the farming entity/partnership profit to be reallocated (dated in 2012 spreadsheet model to be approximately $18.2m) and the reasons for any such changes; and
(e) any other material changes (effecting any entity) required to reconcile the 2012 spreadsheet model to the revised 1997 financial statements and the reason for any such changes.
[54] The opponents also sought a direction that the Public Trust make disclosure of the details of all capital and income distributions and vesting made since the Public Trust assumed the office of trustee, including of what, when and to whom.
[55] The Public Trust’s response to this request was that the first part of the request could be expressed as “provision of all documents relevant to changes made to the 2012 spreadsheet”, and for “the revised financial statements for all the unwind entities”. It is noted that this formulation is “consistent with the views on appropriate disclosure expressed by counsel for the other parties”.4
[56] I agree that the parties to the hearing accepted that such documents could, and would, be disclosed and therefore do not consider that a formal direction needs to be made. I simply record that it is agreed that all documents relevant to the changes made in the 2012 spreadsheet, and the revised financial statements for all entities can be disclosed to all parties, including the opponents. The Public Trust can act in reliance on this agreed position.
[57] For completeness, though, the Public Trust notes that, to the extent the request goes beyond the disclosure of such documents, and is, for example, a request for evidence, that should not be directed. Furthermore, in respect of the request for disclosure about distributions and vesting of trusts, again it is said that is beyond the scope of leave granted and would require disclosure of information “personal to the beneficiaries affected and this should be a matter for them to address directly”.
[58] I accept that the request for a direction requiring disclosure beyond those documents which are agreed, is a matter which would need to be pursued in the interlocutory application for further disclosure. While I understand the opponents’ position that the unwind process should be conducted in an entirely transparent manner, it is not clear to me that this requires information to be provided as to distributions made to beneficiaries of trusts that the opponents have no interest in. In the circumstances, I consider the Public Trust is simply taking a properly
conservative approach to carrying out its duties as trustee. In order to release such
4 Counsel for the other parties represented at hearing all expressed no objection to sharing this information.
information, it would need either the consent of the affected beneficiaries, or a direction from the Court arising from the separate application for further disclosure, where any contrary view of the beneficiaries can be explored.
The opponents concerns about the orders sought by the Public Trust
[59] If the Court is minded to proceed and consider the Public Trust’s application then the opponents take issue with the orders sought and say there are fairer ways of allocating costs, particularly in allocating the “partnership costs”.
Order a(i)
[60] The opponents accept the appropriateness of order (a)(i) which provides for the cost of executing the unwind model to be met by:
(i) Apportioning the cost of preparing financial statements for each entity to each entity individually in accordance with the estimated time spent;
[61] However, they note that the cost of preparing financial statements is not the only cost that could be allocated to individual entities. By way of example they say that negotiation with IRD regarding the ability to claim GST input tax on legal fees for particular entities, is for the benefit of those particular entities and it would seem appropriate for them to pay the associated costs of that. Similarly, the Public Trust engaged a tax specialist to negotiate with IRD on the proportion of legal fees which were deductible for income tax purposes. Given that those negotiations would result in tax savings for the trading entities, it seems appropriate for those entities to bear the costs.
[62] The only evidence I have of costs that can be attributed to individual entities, is the cost of preparing their revised financial statements. In the absence of evidence to demonstrate that attendances such as negotiation with IRD can be attributed to individual entities, I cannot direct that such costs be allocated in this way. I therefore decline to vary order (a)(i) in the manner proposed by the opponents.
Order a(ii)
[63] Order (a)(ii) provides that the costs of executing the unwind model are met by:
(ii) Treating the collective partnership costs as an expense of the farming partnership to be paid out of the profits of WAXCFCL before profits are distributed to entities that participated in the farming partnership;
[64] The opponents say that this means that if an entity is not entitled to any reimbursed profit as a result of the unwind, it will not meet any of the collective partnership costs of the unwind, even though it may have been:
(a) a beneficiary of and/or cause of the arrangements being unwound; or
(b) a sizeable participant in the overall farming enterprise.
[65] The opponents say it would not be equitable for such a participant to avoid payment for the collective unwind costs. The opponents are at pains to emphasise this is not an attempt to allocate “blame”, but rather, to achieve equity and fairness in the allocation of costs. They say that there are a range of alternative options to avoid the inequity. These include:
(a) the unwind costs being allocated on the basis of a percentage of each entity’s contribution to the overall farming operation;
(b)allocating costs to those entities that benefited from the arrangements being unwound, or which caused the need for the unwind; or
(c) funding all or some of the costs of the unwind from post 2007 interest income.
[66] The first proposal is explained in an affidavit of Mr Foubister, and is supported by the affidavit of Mr Hagen. Mr Foubister says that the way each entity’s assets are treated in terms of allocation of profit, should not be applied so far as the allocation of cost is concerned. Specifically, the unwind model currently deducts inter-entity funding from the calculation of the net farming assets. That,
Mr Foubister explains, is a deliberate anomaly in the unwind model to compensate lending entities for the fact they do not receive interest on the amounts lent. However, Mr Foubister says that allocating profits and costs on the same basis means that entities that borrowed money from other entities:
(a) are not required to pay interest on the amounts borrowed; and in addition
(b)because the amount of borrowing is deducted from the calculation of the entities net farming assets, they are allocated a reduced share of the collective partnership costs.
[67] What the opponents say is that it is inequitable that, under the unwind process, borrowing entities are both relieved of an obligation to pay interest, and allocated a reduced share of the collective partnership costs. To combat that inequity, Mr Foubister proposes that, for the purpose of allocating costs, inter-entity funding should not be deducted from the calculation of net farming assets.
[68] However, Mr Graham explains in reply that:
I am not in favour of the adjustment he proposes, which effectively ignores inter-entity lending for the purposes of allocating costs. The proposal would result in the entities that contributed funds to the business or participants receiving profits but paying no costs and entities that contributed other assets (such as livestock or land) paying a disproportionate share of costs, regardless of whether they receive any profit. I consider that this is inconsistent with the principle that contributing entities are treated the same, regardless of the form of their contributions.
[69] Mr Graham also considers that his approach is more consistent with the principles of the 4 December 2004 decision saying that:
Mr Foubister says that the principles of the unwind that are designed to compensate entities that lent money will not adequately compensate those entities if they are required to pay a portion of the cost. It is implicit in Mr Foubister’s assertion that he considers lending entities would have received a better return if they had charged interest, rather than a share of partnership profits (and a portion of the cost). I do not think this is an appropriate comparison because the use of partnership profits rather than interest for inter-entity advances was ordered in Justice Panckhurst’s decision on 4 December 2014.
[70] While, inevitably, there will be defensible alternatives for the allocation of costs, my preference is to adopt Mr Graham’s approach, given his familiarity with the principles of the unwind model and his view that what is being proposed by the opponents is inconsistent with the principle that contributing entities are treated the same, regardless of the form of their contributions. I think it would be unsafe to allocate costs on a different basis, without a uniformly accepted reason for doing so.
[71] Similarly, in relation to the second option, which is to allocate costs to those entities that benefited from the arrangements being unwound or caused the need for it, my concern is that this requires decisions to be made, which will make the unwind process more protracted and contentious.
[72] The opponents say that, this is not “an attempt to re-litigate issues from the
2004 judgment”, simply because the allocation of costs of the unwind has never been before the Court. They say that the proposal to allocate costs to those parties that benefited from the arrangements being unwound, or caused or contributed to the need for it:
simply reflects the fact that many of the entities involved in the unwind are participating despite having played no role in the arrangements now being unwound and receive no benefits from those arrangements. For those entities it seems quite inequitable that they should now pay the costs of receiving a share of profits that the parties are agreed they should always have received.
[73] However, it is not clear from the evidence how it is intended to determine which party are said to have “benefited” from the unwind, or to have “caused or contributed to the need for it”. Even if they could be identified with specificity, it is not clear to me how their relative contributions to the need for the unwind would be calculated. While it may be true that the practical effect of the unwind is that some parties will be required to pay the costs of receiving a share of profits that the parties are agreed they should always have received, the reality is that unless the unwind is undertaken (with its attendant costs), the agreed reallocation of profits would not take place. I therefore accept that it is fair and reasonable, and consistent with the unwind principles, to allocate the costs in the way proposed by the Public Trust’s advisers.
Order a(iii)
[74] The Public Trust proposes that, if an entity has insufficient funds to meet its calculated share of the unwind costs, because it was vested or fully distributed, then the beneficiaries who receive those distributions should bear the cost in proportion to the value of the trust assets they received.
[75] The opponents say however, there is a “real issue” over whether there is jurisdiction to do this. They say it is “questionable that beneficiaries who have received distributions can be required to make payment of cost (which are unknown at this stage)”. Even if there is jurisdiction to do this, and “no breach of natural justice”, it is not known if such beneficiaries would be in a position to pay. Once again, the opponents seek “information about distributions from entities that are now insolvent in order to assess the appropriateness of such orders”.
[76] I deal first with the issue of jurisdiction. The Public Trust relies on the principles enunciated in Hardoon v Belilios,5 which it says is authority for the proposition that a trustee can recoup an expense or cost incurred in the administration of the trust from the beneficiary, where there is no trust property available to indemnify the trustee. This was explained by Lord Lindley in Hardoon as follows:6
… The plainest principles of justice require that the cestui que trust who gets all the benefit of the property should bear its burden unless he can shew some good reason why his trustee should bear them himself. The obligation is equitable and not legal, … the right of the trustee to indemnity by [the cestui que trust] against liabilities incurred by the trustee by his retention of the trust property has never been limited to the trust property; it extends further, and imposes upon the cestui que trust a personal obligation enforceable in equity to indemnify his trustee. This is no new principle, but is as old as trusts themselves.
[77] That principle has been applied in New South Wales,7 where trustees successfully proceeded against beneficiaries for reimbursement of a tax liability relating to the trust property which the trustees had paid out of their own funds, and
where the trust property had been sold and the net assets distributed.
5 Hardoon v Belilios [1901] AC 118 (PC).
6 At 123.
7 Balkin v Peck (1998) 43 NSWLR 706.
[78] Similarly, in Perpetual Trust Ltd v Capital + Merchant Finance Ltd, Woolford J acknowledged that “in trust law, where a trust fund is insufficient to indemnify a trustee, it is the beneficiaries that are required to indemnify trustees personally”.8 However, what was in issue in that case, was the ability of the Court to make an order requiring a retiring trustee to indemnify a replacement trustee for the ongoing maintenance and administration of the trust, rather than the beneficiaries
being required to indemnify the trustee.
[79] Mr O’Brien submitted that the cases cited were not authority for the proposition that the Court could tax or charge a distribution to a beneficiary, (noting that the beneficiaries were not all before the Court), although he considered it would be different if a beneficiary received payment with the caveat that costs may be payable from it.
[80] However, I do not consider the principle articulated in Hardoon, or in Balkin, as being limited in that way. If the cost is properly incurred by the trustee in the administration of the trust (and here that cannot be doubted as the trustee has been charged with ensuring the Court’s orders are implemented) then the beneficiaries can be required to indemnify the trustee for costs properly incurred in that process. There is therefore no jurisdictional impediment to requiring beneficiaries of a trust entity to meet that entity’s allocation of the costs of the unwind process where there are no longer sufficient assets in that entity to meet them.
[81] The other concern regarding order (a)(iii) was that it could not be assessed without further information. I have already discussed that in [39]-[58] above and have concluded that is not a ground for declining to make the orders.
[82] However, it appears to me that the order in which the options should be considered, should be altered to reflect the order proposed in the Public Trust’s submissions. These are that:
(a) first, the costs should be met by the beneficiaries;
8 Perpetual Trust Ltd v Capital + Merchant Finance Ltd [2013] NZHC 2320 at [30].
(b)second, if the costs cannot be met by the beneficiaries, the costs are to be treated as collective partnership costs and paid in the same manner;
(c) third, if the costs cannot be met as outlined in (a) and (b) above, the costs are met by an entity that has sufficient funds.
[83] However, it was not clear to me that the third option would ever be required or, if it was, how the Public Trust would determine which entity should meet those costs. There is no mechanism in the direction sought which would provide certainty to the parties as to how the Public Trust would identify the paying entity and then apportion costs to it in that situation. As it seems an unlikely scenario, and is one that is fraught with difficulties, my preference is that the Public Trust returns to Court for directions in such circumstances rather than to authorise the Public Trust to exercise such a wide discretion.
Should the orders by the Public Trust be made?
[84] I am satisfied that it is appropriate that orders and directions should be made in relation to allocating the cost of executing the unwind model, and that these should largely reflect the orders that are sought by the Public Trust. The fact that the orders have the general support of the Court appointed expert Mr Graham, reinforces that view. That said, leave will be reserved to the parties to revert to the Court for further assistance should any aspect of the orders prove unworkable, or should unanticipated issues arise.
Outcome
[85] I therefore direct that:
(a) the profit reallocation and unwind proposals approved by the High Court on 4 December 2004 (unwind model) are amended to meet the cost of executing the unwind model (unwind cost) by:
(i)apportioning the cost of preparing financial statements for each entity to each entity individually in accordance with the estimated time spent; and
(ii)treating the collective partnership costs as an expense of the farming partnership to be paid out of the profits of WAX Couper Farming Company Limited before profits are distributed to entities that participated in the farming partnership; and
(iii)where the assets of an entity are insufficient to meet its costs, the costs will be met by:
1. if the entity is a trust, the beneficiaries of the trust; or
2. treating that entity’s costs as a partnership cost;
(b)leave is reserved to seek further or amended directions on these issues should that be required.
[86] The question of costs is reserved.
Solicitors:
B D Gray QC, Auckland
Wilson Harle, Auckland
M D O’Brien QC, Auckland
J B Orpin, Barrister, AucklandRJB Fowler QC, Wellington
Succeed Legal, Wellington
DLA Piper New Zealand, WellingtonT C Weston QC, Christchurch
Duncan Cotterill, Christchurch
Grove Darlow & Partners, Auckland
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