Kain v Hutton HC Christchurch M198/00

[2001] NZHC 929

IN THE HIGH COURT OF NEW ZEALAND
CHRISTCHURCH REGISTRY M198/00

UNDER the Trustee Act 1956

IN THE MATTER of an application to remove trustees and related orders

BETWEEN G KAIN and ORS
Plaintiffs

AND J R HUTTON
First Defendant

AND WAX COUPER
Second Defendant

AND A E COUPER
Third Defendant

AND W K STARTUP
Fourth Defendant

AND G T KAIN
Fifth Defendant

Date of Hearing: 30 August 2001

Judgment Released: 3 October 2001

Counsel: S P Rennie for Plaintiffs
T C Weston QC for First, Third and Fourth Defendants
M R Camp QC for Second Defendant
G D Jones for Fifth Defendant
G M Brodie for Mr Springford
R A Osborne for Mrs Couper and Mrs Hutton

RESERVED JUDGMENT OF PANCKHURST J

Solicitors:
Rhodes & Co, Christchurch for Plaintiffs
Chapman Tripp, Christchurch for First, Third and Fourth Defendants
(Counsel - T Weston QC, Christchurch)
Phillips Fox, Wellington for Second Defendant[
(Counsel - M Camp QC, Wellington)
Lane Neave Ronaldson, Christchurch for Fifth Defendant
Rudd Watts & Stone, Auckland for Mr Springford
Duncan Cotterill, Christchurch for Mrs Couper and Mrs Hutton

INTRODUCTION:

[1] These are two further interlocutory applications in the context of this litigation. On the one hand, the First, Third and Fourth Defendants in their capacity as trustees of various trusts seek directions from the Court “as to the conduct of the litigation and related and consequential orders”. Such application was supported by the Second Defendant, Mr Couper, but actively opposed by the Plaintiffs.

[2] The second application is brought on behalf of the Plaintiffs for “various orders”, namely further discovery, removal of the Defendants and certain of the Plaintiffs as trustees of all the affected trusts in favour of the Public Trustee as sole trustee, a consequent restraint order upon Mr Couper and Mr G T Kain from exercising any power of appointment in relation to the trusts, and the transfer of certain trust lands to various of the Plaintiffs. The Plaintiffs’ father, Mr G T Kain (the Fifth Defendant), supported this application but did not otherwise actively involve himself. Unsurprisingly, the other four Defendants, and Mrs Couper and Mrs Hutton (in their capacity as beneficiaries), actively opposed the orders sought.

[3] Mr Springford, in his capacity as trustee of one trust, was represented by Mr Brodie at the commencement of the hearing. However, counsel sought and was granted leave to withdraw. Likewise, Mr Jones appeared as counsel for Mr G T Kain. He was concerned to ensure that certain issues referable to Mr Kain’s personal affairs which are raised in the proceeding because of a connection with the trust issues would not be canvassed in this interlocutory context. Other counsel accepted this point and accordingly Mr Jones also obtained leave to withdraw. The issue of costs with reference to the abbreviated appearances of these parties was reserved.

THE TRUSTEES’ APPLICATION:

[4] The background to the present application is largely apparent from my judgments of 21 December 2000 (declining an order for removal of trustees) and 11 May 2001 (concerning costs on the removal application). I do not repeat the matters contained in those decisions. This judgment should be read alongside the two which have preceded it.

[5] By their application Mr Hutton, Mrs Couper, and Mr Startup, sought directions in four parts:

[a] “as to the steps they should take in relation to the litigation and the costs thereof”

[b] “as to the management and control of the nine trusts of which they are trustees”, in particular whether they should implement certain proposals made by Mr Hadlee in reports dated in May and July 2001 to pay inter entity advances and debts within the group,

[c] whether with reference to the farming operation presently conducted by WAX Couper Fanning Company Ltd they should incorporate a new company to conduct such operation, again as proposed by Mr Hadlee, and

[d] whether they should take certain steps with reference to the affairs of Mr G T Kain senior.

This final aspect gave rise to the assurance sought by Mr Jones before he withdrew. Thereby it became common ground that it was inappropriate to confront Mr Kain’s situation in the present context given his objection to that course.

[6] In regard to the first aspect, their role in this litigation, the Applicants sought a direction that they “actively (defend) such allegations as are made against them personally (eg personal hostility), leaving the active defence of all other matters to such other parties as are now defending those allegations”. With reference to costs incurred to date, a further direction was sought that the sum of $155,349.13 associated with disclosure of trust documents be divided into eight parts payable by the eight trusts of which the Applicants are trustees, excluding the Richmond Trust. It was also proposed that their other costs being general costs of about $400,000 not associated with disclosure, be left to lie with the WAX Couper Farming Company Ltd until final order of this Court. That is the Farming Company shall bear such costs from its farming returns on behalf of the trustees in the meantime. Finally with reference to their role in the litigation the Applicant trustees sought a direction that their costs from 1 July 2001 be met by an advance from Mr Couper, but reserving rights of indemnity against the trusts until final order of this Court.

[7] Turning to the second aspect Mr Hadlee’s reports confirm the existence of a “complex maze of current accounts and advances” within the group. Specifically the trusts, various farm companies, other trading companies, and individuals (including Mr Couper and several of the Plaintiffs) are either owed or owe monies to one or more entities within the group. In all there are 43 entities who on a consolidated basis have an entitlement to a sum slightly over $7 million. There is, therefore, a corresponding liability for that sum. In order to effect what was referred to as an “unwind” Mr Hadlee considers that about $2.4 million will have to be borrowed from an external source. On a defined day a complicated process of payments and receipts will then be required in order to unravel the web of borrowings and advances within the extended group.

[8] It is neither necessary nor possible to describe the detail of this exercise. Importantly, it is dependent upon the availability of external finance (which may be obtainable subject to the provision of suitable security), acceptance of the historical information contained in the accounts which evidence the inter entity advances and borrowings, and of course the co-operation and involvement of all entities who either owe or are owed monies. I note in passing that Mr Couper must assume a central role in order for the unwind to proceed. His personal indebtedness is calculated at almost $700,000, and a number of the companies with which he is associated also have very significant liabilities to meet. On the basis of the accounts three of the Plaintiffs must likewise accept liability for significant sums, ranging from over $600,000 to $88,000.

[9] With reference to the third part of the application the very extensive farming operation has been conducted through the medium of the WAX Couper Farming Company Ltd over the last few years. The Plaintiffs hold serious concerns as to this, as mentioned in my December judgment. Hence Mr Hadlee proposed a fresh start. In essence he suggested that a new company be formed to conduct the farming enterprise as from 1 July 2001, the start of the new accounting year. Shares in the company would reflect the number of stock units provided by the trusts and other entities for the benefit of the farming operation as a whole. The new company would pay market rentals for land provided by those trusts which hold land. Trusts which own and provide stock would participate in the farming profit (or loss) according to their shareholding. Thereby, business opportunity and risk would lie with the shareholding entities, as opposed to with the present Farming Company established by Mr Couper. He (it was proposed) would continue to manage the farming operation and be paid a fee for his services. In broad terms, this was the gist of the proposal. Many of the details remained to be discussed and settled assuming the proposal found favour in general terns.

[10] Against this brief outline it is possible to turn to the three discrete aspects of the directions application. I think the convenient course is to consider the directions referable to the litigation itself first, and then the unwind and company proposals together but as a separate issue.

THE LIGITATION DIRECTIONS:

[11] In the course of the earlier interlocutory and cost hearings the trustees were criticised for their failure to pursue what is referred to as a Beddoes application. That is an application to the Court seeking a direction whether to bring or (in this case) defend proceedings, a procedure recognised in Re Beddoe [1893] 1 Ch 547, 557. The purpose of such an application is to protect a trustee with reference to his or her general entitlement to an indemnity for costs incurred in the performance of trust duties provided such costs are reasonable.

[12] The cases which are illustrative of the procedure are generally English ones. Based on the judgment of Kekewich J in Re Buckton, Buckton v Buckton [1907] 2 Ch 406, 413-415 there is often an endeavour to divide trust litigation into one of three categories. First is what is called “a trust dispute”. That is a dispute as to the trusts on which trustees hold the assets of the trust. Sometimes this may be friendly litigation where the construction of the trust instrument or some other question arising in the course of administration of the trust is at stake. However, a so called “trust dispute” may also be hostile litigation where, for example, there is a challenge by a creditor or other third party to the settlement of property by which the trust was created. It is acknowledged in the cases that the line between friendly and hostile litigation may not be easy to draw. The trustee’s costs in relation to a friendly trust dispute are invariably payable out of the trust assets. With a hostile trust dispute, however, an indemnity may not be available and a Beddoes application may be a warranted safeguard.

[13] Second is a “beneficiary’s dispute”. That is a case in which a beneficiary (or beneficiaries) challenge the propriety of action taken or not taken by the trustees as the case may be. Hence there may be allegations of breach of trust and the relief sought may extend to removal of the trustees or perhaps a claim for damages for such breach. In my view the authorities demonstrate that the right of trustees to be indemnified for their costs out of the trust assets in such cases is dependent upon the outcome, or put another way, the merits of the case. Moreover, since a beneficiary’s dispute is obviously hostile litigation costs follow the event, that is will be awarded against the beneficiaries or the trustees in terms of the outcome.

[14] The third category is “a third party dispute”. That is a dispute where claimants, not being beneficiaries, sue the trustees (typically in contract or tort) in relation to some act of the trustees in the course of their administration of the trust. In relation to this category:

“Trustees (express and constructive) are entitled to an indemnity against all costs, expenses and liabilities properly incurred in administering the trust and have a lien on the trust assets to secure such indemnity. Trustees have a duty to protect and preserve the trust estate for the benefit of the beneficiaries and accordingly to represent the trust in a third party dispute. Accordingly their right to an indemnity and lien extends in the case of a third party dispute to the costs of proceedings properly brought or defended for the benefit of the trust estate.”

Alsop Wilkinson (a firm) v Neary [1995] 1 All ER 431, 434

[15] Alsop Wilkinson contains a helpful discussion relevant to the Beddoes process, including reference to the procedure to be followed. A number of points emerge. The trustees should make the application before they sue or embark upon the defence of a claim. Their right to an indemnity will usually extend to the cost of the Beddoes application itself. Such application is a separate proceeding in which all the beneficiaries of the trust should be parties. Hence, the judge who hears the application will exercise his or her discretion to grant or refuse the application with the benefit of the beneficiaries’ views. The trustees are required to make full disclosure of the strengths and weaknesses of their case, but to a Judge other than the one who is to determine the substantive merits. It is interesting to note that the Beddoes application in Alsop Wilkinson was characterised as “fundamentally flawed” on the grounds that it was not made in a separate proceeding and because all necessary parties were not before the Court (the beneficiaries were not represented).

[16] Mr Weston QC, alive to the substantive and procedural requirements of this type of application, argued that it was appropriate to make directions protective of the trustees in this case. He submitted that all interested parties were before the Court and represented, that there was no need in the particular circumstances for a separate proceeding before another judge, that the timing of the application although late was justified in the particular circumstances, and that the strengths and weaknesses of the case had been adequately explored in the course of the hearing in December 2000 when summary removal of the trustees was sought. In the final analysis he accepted that the trustees faced some allegations which were both personal to them and hostile in nature. But others of the causes of action, he submitted, were of the kind where it was appropriate to accord the trustees the comfort of a direction of entitlement to costs from the trust assets.

[17] Mr Weston accepted that “it (was) difficult to see how a bright line can be drawn”, given the wide ranging and interlocking nature of the allegations. He concluded on the note that “presumably” the issue could be “addressed by a direction that the trustees are to limit their involvement in the litigation - and the consequent incidence of costs - to the extent reasonably possible and consistent with an adequate defence of the allegations”. Specifically with reference to the costs of the litigation to date and in the future directions were sought in terms of the notice of application, as summarised earlier in paragraph 6.

[l8] I am not persuaded that it is appropriate to make any of the directions sought with reference to the trustees’ role in the litigation generally. In the first place and despite the obvious difficulty of categorisation the multiple allegations and causes of action asserted by the Plaintiff beneficiaries overwhelming give rise to a beneficiary’s dispute. In essence then this is hostile litigation. That in itself indicates it would be inappropriate to direct that the trustees are entitled to an indemnity at this stage. As noted in Alsop Wilkinson at 435:

“A beneficiaries dispute is regarded as ordinary hostile litigation in which costs follow the event and do not come out of the trust estate (see Hoffmann LJ in McDonald v Horn [1995] 1 All ER 961).”

[19] In light of my earlier judgments I do not propose to explain this conclusion by reference to the various causes of action. To my mind it was revealing that Mr Weston had such difficulty in defining the direction he sought in relation to the trustees’ continued defence of the Plaintiffs’ case. I agree with him that it is not possible to draw a defining line between allegations made against the trustees in their personal capacities and allegations concerning, for example the Te Mata and Mangaheia resettlements, where the trustees may well legitimately have a responsibility to confront issues of interpretation in the interests of beneficiaries generally.

[20] Secondly, aside from categorisation of this as a hostile beneficiaries’ dispute, I am influenced by a number of matters well illustrated in the case of Evans v Evans [1985] 3 All ER 289. The facts of that case were rather more straightforward than the present. It was in the nature of a trust dispute, although hostile, in which one beneficiary claimed a beneficial interest greater than that of the other beneficiaries (based on alleged promises made by the settlor during his lifetime) and hence the trustee was called upon to decide whether to defend in order to protect the position of such other beneficiaries or not. Even in that situation an order for indemnity of the trustee was considered inappropriate by the Court of Appeal upon a consideration of all the circumstances. Nourse LJ, delivering the judgment of the Court, at 292 stressed:

“First and foremost, every application of this kind depends on its own facts and is essentially a matter for the discretion of the master or judge who hears it.”

[21] The Judge then noted aspects of the process, including that the merits of the case are considered in the absence of the plaintiff, often in an informal manner, and that it was “quite natural” for the Judge to act on a view of the case which was “not fully expressed in a judgment delivered in open Court”. It was also noted that where the merits were clear, for example that the claim was a “blackmailing one” such would be a powerful reason for making an order in favour of the trustees. In the event an order was not made for essentially pragmatic reasons. The plaintiff sought the right to occupy a farm property for the balance of his lifetime, yet were an indemnity order made and were the plaintiff to succeed, his victory may be rendered pyrrhic by the need to sell the farm in order to pay the trustee’s costs. Hence it was considered appropriate to refuse the application and place the risk of the litigation upon the beneficiaries who were adult and sui juris.

[22] Returning to this case, I hold a number of concerns which dictate against the making of a Beddoes order assuming it was otherwise appropriate. In the first place this proceeding is considerably advanced. A very considerable sum has already been incurred with reference to litigation costs. Hence it is not a situation where the trustees have come to the Court at the outset as is usual. I am also influenced by the circumstance that two of the trustees, Messrs Hutton and Startup, with Mr Couper are directors of the Farming Company (although I note Mr Hutton’s recent resignation from that position and from his trusteeship of all but two of the trusts). The farming operation conducted through this company is obviously centrally important to the various trusts, or at least to their income positions. Control of the Farming Company has enabled the trustees to provisionally cover their litigation costs until the end of June 2001 anyway. I regard the ongoing involvement of one of the trustees in management of the Farming Company with Mr Couper as a complicating factor in relation to the present application. Put shortly, a trustee or trustees who undertake only that role impresses me as better placed to secure the comfort of a Beddoes order than one who fulfils a mixed role.

[23] Although for these reasons the application is refused, I would not wish to depart from this aspect without saying that I am in agreement with certain of the matters mentioned in support of the application. The background to the matter was that Mr Hutton has resigned as trustee of most of the trusts, and Mr Startup and Mrs Couper are likewise prepared to do so if a suitable trustee can be found. To that end, a recent approach was made to Perpetual Trust Ltd but that company was not prepared to become involved. It is now apparent that the Plaintiffs would have protested at the involvement of Perpetual Trust anyway. Nonetheless for reasons which I have previously endeavoured to explain I am in no doubt that retirement of the present trustees in favour of an independent professional trustee is an entirely desirable course.

[24] I am also in agreement with Mr Weston’s submission that there is significant scope for the trustees to limit their involvement in the litigation by identifying those causes of action where their personal actions and performance are challenged, as opposed to claims where such is not the case. Any survey of the causes of action brings home the extent to which complaint is directed at Mr Couper (in his personal capacity) as a central theme. So much so that the carriage of the litigation would seem to me to rest much more with him than the trustees. Finally, although the application has not succeeded, it should be said that the trustees’ right to indemnity is not thereby determined. Rather the question is postponed to be finally determined in light of the outcome, including the way in which the trustees conduct themselves in the course of the litigation.

[25] It remains to mention the directions sought with reference to costs already incurred to the end of June 2001 and the future costs of the trustees. Firstly, I accept Mr Rennie’s submission that there is insufficient information before the Court to justify a direction that costs associated with disclosure be fixed at $155,349.13 and be divided between the eight trusts of which the First, Third and Fourth Defendants are trustees (save for the Richmond Trust). The better course in my view is that both the issues of quantum and incidence remain at large in the meantime until this proceeding is resolved. Nor am I persuaded it is appropriate to direct that the balance of the trustees’ costs to June 2000 be “left in” the Farming Company until the final order of the Court. As I understand it the extent of this cost, at least in part, has prevented the Company from making rental and bailment payments to various of the trusts. I am by no means satisfied at this point of the justification for the trustees incurring costs on this scale and obtaining payment of them from the Company with this result. Finally, I note that there was no opposition to the proposal that Mr Couper fund the trustees’ costs incurred since the end of June until a final determination on costs was made. But a direction approving that course is hardly necessary.

THE UNWIND/FUTURE CONDUCT OF THE FARMING OPERATION:

[26] As I indicated to counsel in the course of submissions, I was most disappointed that these aspects were not more constructively addressed. It was apparent that for either initiative to proceed the active involvement and cooperation of the Plaintiffs was required. Neither was forthcoming although there may have been reasons for that. In the result there is now no scope for me to make directions in terms of the application with reference to either aspect.

[27] My disappointment reflected the view that an unwind of the inter entity indebtedness must occur at some point. Moreover, it seemed to me there were significant advantages for everyone if this was to be now rather than later. Likewise, the proposal to form a new company in which the trusts would participate in the shareholding was a potential significant step forward. Control of the farming operation by Mr Couper and two of the trustees whom he appointed comparatively recently gave rise to one of the more stinging criticisms advanced on behalf of the Plaintiffs. Yet a proposal which offered the real prospect of a restructuring came to nothing.

[28] Neither the unwind nor the formation of a new farming company were straightforward issues. It is apparent from the affidavits that there were differences which had to be resolved, but that will be so whether the present impasse is resolved between the parties or by way of an imposed solution. I think it a great pity that a way was not found for these two proposals to be positively considered before the present application for directions was determined.

THE PLAINTIFFS’ CROSS-APPLICATION:

[29] By notice of application dated 17 August 2001 the Plaintiffs sought various orders. In the end result only two aspects were actively pursued. These were renewal of the initiative to remove the First, Third and Fourth Defendants (together with Mr Kain senior and the Plaintiffs) as trustees in favour of appointment of the Public Trustee, and an order that the Defendants provide an itemised list of those documents withheld from disclosure.

[30] Mr Osborne on behalf of Mrs Couper and Mrs Hutton in their capacity as beneficiaries strongly opposed any endeavour to relitigate the question of removal of the trustees. Counsel referred to r 265:

“265. Limitation as to second application

(1) Where a party fails on an interlocutory application from a substantial defect in his evidence, he shall not apply again on other or additional evidence unless, under special circumstances, leave to do so is given by the Court.

(2) Such leave may be on such terms as the Court thinks just.”

Since the Plaintiffs had failed to secure summary removal of the trustees in December 2000 it was submitted leave was required to enable them to revisit that question.

[31] Mr Rennie on the other hand resisted any suggestion that r 265 applied in the present circumstances. He in effect argued that the exercise of the Court’s supervisory jurisdiction to remove trustees was not susceptible of curtailment in terms of r 265. Alternatively, as I understood him, he contended that if leave were required there was additional evidence of changed circumstances which dictated in favour of this second application. The essential change relied upon was the trustees’ own recognition that it was appropriate for them to resign, as evidenced by the approach which they had made of their own accord to Perpetual Trust.

[32] In view of the conclusion which I have reached I do not find it necessary to resolve the difference between counsel as to the application or not of r 265. In short, I am not persuaded that the circumstance of the present trustees having resolved to relinquish in favour of a trust company, if one willing to act could be found, constitutes such a significant change as to justify appointment of the Public Trustee.

[33] In my December judgment I found that it was not possible to reach a sufficiently clear view as to the merits of removal and, secondly, that the complexity of the relationship between the trusts and the farming company and of the farming operation itself, was such that I could not be satisfied appointment of the Public Trustee was an appropriate course. In a sense the trustees’ acceptance of the proposition that the level of hostility between them and the Plaintiffs in itself indicates the need for them to resign in favour of a professional trustee renders my first reason of much less moment. However, complexity remains as alive as it did earlier.

[34] As to that Mr Rennie stressed that it was administration of the trusts, management of their assets, which was the function of the trustees, not management of the farming operation. That distinction, I agree, is an important one and not one which had previously been emphasised. However, I doubt that in practice it is so easy to draw a line between the two aspects. The evidence suggests that the interrelationship between the farming, operation and the trusts, both historically and now, is such that separation of the two is no straightforward matter. I think it is highly significant that the Farming Company as presently structured has as its directors Messrs Couper, Hutton and Startup, all of whom are also trustees to various degrees. The evidence also suggests that others of the trustees are unable to exercise meaningful control over the assets of the various trusts because of the extent to which they are employed in a global farming operation.

[35] In these circumstances I remain unpersuaded that it would be in the interests of the beneficiaries as a whole for the Court to intervene and appoint the Public Trustee at the instance of the Plaintiffs. Nonetheless, it seems to me that a significant shift has occurred, in particular on the part of the trustees. It is now a striking feature that both camps accept the desirability of appointment of an independent and professional trustee. Unsurprisingly, perhaps, there has been no dialogue as to who or how.

[36] Further I think it essential that responsibility for the conduct of the farming operation be properly defined, before anyone is asked to assume the trustee role. It is apparent from the affidavit provided on behalf of the Public Trustee that the farming operation was seen as an essential part of the trustee responsibility. On the other hand Mr Camp QC made it quite plain that Mr Couper is adamant he will continue “to farm”. It is not apparent to me on what basis Perpetual Trust Ltd were approached by the present trustees.

[37] In my view who is responsible for the conduct of the farming operation must be properly defined. Assuming that, the involvement of a professional trustee would appear to be an attainable end. But in the absence of any such proper definition it would not be appropriate for the Court to endeavour to impose an answer. In short I remain of the view that appointment of the Public Trustee (or anyone else) without resolution of the surrounding issues would not be advantageous to the beneficiaries generally.

[38] The Plaintiffs’ application for better discovery was opposed by both Mr Weston and Mr Camp, essentially on the grounds that the time, trouble and expense of providing a list of those documents in relation to which privilege has been claimed cannot be justified. Apparently the documents fill over a dozen Eastlite files, and relate back to about the 1950s. It is estimated that perhaps three days will be needed to compile a list.

[39] It seems to me that there is little option but to make the order as sought. Rule 298 contemplates a list which is specific as to individual documents, unless documents may be grouped for the purpose of description. In this instance I understand there is a significant difference of opinion concerning the extent to which professional legal privilege may be claimed on behalf of trustees against the beneficiaries whom those trustees serve. In that situation, at least on the basis of the submissions I heard, I do not think anything less than a list will suffice.

[40] I add that I think it is highly regrettable that a better way cannot be found, since the cost entailed will obviously be significant in light of the figures mentioned earlier with reference to disclosure costs already incurred. It seems to me that the major issues in this case relate to relatively recent events from about the time of Mr Couper’s marriage. One is left to wonder what purpose may be served by nondisclosure of documents (albeit they may arguably be privileged) from earlier times. Perhaps then there is still scope for compromise in an endeavour to minimise cost.

[41] There shall be a telephone conference on 24 October at 9.15 am to consider a substantive timetable. Costs in relation to this hearing are reserved until then. If sought, I shall make directions in relation to the filing of memoranda.