Kapa-Watane v Latimer HC Whangarei CIV-2009-488-000504
[2011] NZHC 785
•27 July 2011
IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY
CIV-2009-488-000504
BETWEEN MIHI MAY KAPA-WATENE, RAWSON SIDNEY AMBROSE WRIGHT, THOMAS BENJAMIN DE THIERRY, RUKU LUCY WAIPOURI EACH OF WHOM IS A TRUSTEE OF TE URI O HAU SETTLEMENT TRUST
Plaintiffs
ANDGRAHAM STANLEY LATIMER First Defendant
ANDRUSSELL RATA KEMP Second Defendant
ANDRBT ENTERPRISES LIMITED Third Defendant
ANDJAMIE BRUCE LLOYD PAIKEA Fourth Defendant
ANDGABRIEL OLIVER BLOY THOMPSON Fifth Defendant
Hearing: 4-8 April 2011
Appearances: H Thompson for the Plaintiff
N J Russell and J Dunne for First, Second and Third Defendants
No appearance for Fourth and Fifth Defendants
Judgment: 27 July 2011 at 4:00 PM
JUDGMENT OF VENNING J
This judgment was delivered by me on 27 July 2011 at 4.00 pm, pursuant to Rule 11.5 of the High
Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors: McMahon Butterworth Thompson, PO Box 106073, Auckland
Chen Palmer, PO Box 2160, Wellington
KAPA-WATENE & ORS AS TRUSTEE OF TE URI O HAU SETTLEMENT TRUST V LATIMER & ORS HC WHA CIV-2009-488-000504 27 July 2011
Introduction
[1] At all material times Sir Graham Latimer and Mr Kemp were trustees of the Te Uri o Hau Settlement Trust (the Settlement Trust). As part of a Treaty of Waitangi settlement negotiated with the Crown a block of land at Mangawhai was transferred to Te Uri o Hau and held by the Settlement Trust.
[2] Te Uri o Hau entered a joint venture with a developer, New Zealand Land Trust Holdings Ltd (NZLT) to develop the Mangawhai land. A joint venture company, Te Arai Coastal Lands Ltd (TACL) was incorporated and a trust, the Te Arai Coastal Lands Trust (TACL Trust) established to carry out the joint venture. Sir Graham and Mr Kemp served as directors of TACL.
[3] In September 2007 TACL Trust paid Sir Graham and the third defendant (on behalf of Mr Kemp) approximately $250,000 plus GST each by way of consultancy fees for services to the joint venture.
[4] The plaintiff trustees of the Settlement Trust say that Sir Graham and Mr Kemp were in breach of fiduciary duties they owed to the Settlement Trust by taking the consultancy fees of $250,000. The plaintiffs seek to recover those sums from Sir Graham and Mr Kemp and the third defendant.
The issues
[5] It is not in dispute that Sir Graham and Mr Kemp, as trustees of the
Settlement Trust, owed fiduciary duties to the Settlement Trust. [6] What is in issue is:
(a) the scope of the fiduciary obligations owed to the plaintiff Settlement
Trust in the particular circumstances of this case;
(b)whether there was a nexus between the fiduciary obligations the defendants owed as trustees of the Settlement Trust and the
consultancy fees received by Sir Graham and Mr Kemp‟s interests
from the TACL Trust;
(c) if the consultancy fees were received in breach of the fiduciary obligations owed to the Settlement Trust, were they authorised or made with the knowledge and consent of the beneficiaries?
(d)if the consultancy fees were received in breach of the fiduciary obligations, are the defendants entitled to relief, either under s 73 of the Trustee Act 1956 or the provisions of the Trust Deed?
(e) if the consultancy fees were received in breach of the fiduciary obligations, are the defendants entitled to relief in whole or in part to recognise their input, skill and labour as consultants?
Background
[7] The essential facts are largely not in issue. Te Uri o Hau is a hapu of Ngati
Whatua. Their rohe is mainly within the Kaipara District. By Settlement Deed dated
13 December 2000 Te Uri o Hau settled certain historic grievances with the Crown. The Te Uri o Hau Settlement Act 2002 was passed for the purpose of conveying the Crown‟s apology for historic grievances and to implement provisions of the deed of settlement.
[8] The Settlement Trust was established by deed dated 3 May 2001. It was established for the purpose of receiving the assets to be settled on Te Uri o Hau by the Crown. Mr Wright, Sir Graham Latimer and Mr Kemp, together with others, were the original trustees of the Settlement Trust. The other named plaintiffs and the fourth and fifth defendants have subsequently become trustees of the Settlement Trust. The fourth and fifth defendants do not wish to take any part in the proceeding. They were joined to bind them to the outcome. Future references to defendants are a reference to Sir Graham, Mr Kemp and, where appropriate, the third defendant only.
[9] The Settlement Trust deed contemplated the formation of a company and commercial trust to maximise the returns on the assets settled on the Settlement Trust. The Renaissance Group Trust was formed as the commercial trust. Renaissance Group Ltd (RGL) was incorporated as the corporate trustee of the Renaissance Group Trust. Between 7 March 2003 and 16 August 2004 Mr Kemp was a director of RGL. Between 16 August 2004 and 29 January 2009 Sir Graham was a director of RGL. RGL‟s shareholders are the trustees for the time being of the Settlement Trust. The Settlement Trust is the primary beneficiary of the Renaissance Group Trust.
[10] One of the assets settled on the Settlement Trust was a property of approximately 616 hectares at Mangawhai North (the Mangawhai land). The trustees of the Settlement Trust decided to commercially develop the Mangawhai land using RGL to do so. They set about finding an experienced property developer to become involved as a joint venture partner for that purpose.
[11] Ultimately John Darby, a South Island property developer, was identified as the most suitable joint venture partner. On 31 August 2003 RGL, the trustees of the Settlement Trust and New Zealand Land Trust Holdings Ltd (NZLT), (an entity controlled by Mr Darby), entered a heads of agreement (the 2003 heads of agreement) providing for the proposed joint venture to develop the Mangawhai land.
[12] Under the 2003 heads of agreement:
the Mangawhai land was to be transferred to RGL by distribution;
NZLT would settle a new trust, the TACL Trust to hold and develop the
Mangawhai land;
the sole trustee of the TACL Trust would be the corporate trustee, (TACL);
the beneficiaries of the TACL Trust and shareholders of the corporate trustee, TACL, would be RGL as to 25 per cent and NZLT as to 75 per cent;
after RGL had obtained the relevant planning consents, it would sell the
Mangawhai land to NZLT on NZLT exercising a put option;
NZLT would contemporaneously on-sell the land to TACL Trust;
NZLT would fund the TACL Trust purchase of the Mangawhai land by an interest free, on demand loan, for one-half of the purchase price and an
interest bearing loan for the other half;
NZLT advances were to be secured by first mortgage over the Mangawhai
land;
in due course the TACL Trust was to use the Mangawhai land as security for
borrowing to fund the development;
NZLT was to be responsible for funding and managing the resource consent process. It was to engage two of the trustees of the Settlement Trust (agreed to be Sir Graham Latimer and Mr Kemp) to assist with applications for
resource consent;
the parties would negotiate and conclude a detailed joint venture agreement
and detailed management agreement;
[13] For a number of reasons, it was not possible to implement the arrangements proposed under the 2003 heads of agreement. In particular there were complications in relation to a Crown forestry licence held by Carter Holt Harvey over the Mangawhai land. The transfer of the land to the trustees of the Settlement Trust was delayed until April 2004. In the meantime, the parties renegotiated the 2003 heads of agreement. On 16 August 2004 RGL, NZLT and the Settlement Trust completed a new heads of agreement (the 2004 heads of agreement) which superseded the 2003 heads of agreement. The principal differences were:
had provided for the Settlement Trust to distribute the Mangawhai land to the
Renaissance Group Trust);
NZLT agreed to purchase the forestry licence from Carter Holt Harvey for a down payment of $1,832,000. NZLT would nominate RGL as the purchaser so that the forestry licence would merge with the freehold title on transfer of
the Mangawhai land to RGL;
the down payment for the forestry licence was built into the purchase price of
$21,832,000 payable by NZLT to RGL;
the put option in the 2003 heads of agreement was removed. Instead it provided for the preparation and lodgement of a resource consent application for a forest farm park of up to 77 residential allotments, as a fall-back to the proposed variation to the Rodney District Plan for a proposed coastal
settlement with up to 400 residential allotments;
it provided for payment by the TACL Trust of an additional $12,000,000 to
RGL if the planned variation was achieved.
[14] The sale of the Mangawhai land by the Settlement Trust to the Renaissance Group Trust was subsequently completed. RGL became the registered proprietor of the Mangawhai land.
[15] However, as matters progressed, the parties continued to renegotiate the terms of the joint venture. In part that was necessitated by changes to the forest farm park provisions of the Rodney District Plan. With effect from 21 December 2005, the 2004 heads of agreement was itself replaced by a further revised heads of agreement between the Settlement Trust, RGL and NZLT (the 2005 heads of agreement). It was decided to pursue a proposed variation to the Rodney District Plan. The principal differences from the previous 2004 heads of agreement were:
pending settlement of the purchase of the Mangawhai land by the TACL Trust NZLT agreed to lend, or procure a third party to lend, $400,000 to
RGL, repayable to NZLT on settlement;
NZLT was required to use its best endeavours to obtain the variation to the
District Plan to enable the proposed development of the Mangawhai land by the joint venture;
NZLT was required to direct and fund all resource planning applications for resource consents, legal and planning development costs and to bear all those
costs if TACL Trust did not acquire the Mangawhai land;
if the TACL Trust acquired the Mangawhai land, certain identified costs incurred by NZLT with third parties would become expenses of the TACL Trust and repayable in full by the Trust to NZLT, but otherwise the party‟s costs up to the date of the 2005 heads of agreement were to lie where they
fell.
[16] In accordance with the 2005 heads of agreement, on 13 April 2006 NZLT and RGL incorporated TACL to be the corporate trustee of the TACL Trust. Seventy-five of TACL‟s 100 shares were held by NZLT and 25 by RGL. Mr Darby, Richard Hanson, NZLT‟s development manager, Sir Graham and Mr Kemp were appointed as directors of TACL. Sir Graham and Mr Kemp were RGL‟s appointees.
[17] Shortly afterwards, on 27 April 2006, the TACL Trust was established. RGL, NZLT and TACL entered a shareholders‟ agreement in relation to TACL. TACL, NZLT, Darby Partners Ltd and RGL also entered a management services agreement. RGL and TACL then completed an agreement for the sale and purchase of the Mangawhai land. The sale and purchase settled on 1 May 2006. The land was then transferred by RGL to TACL.
[18] On or about 14 September 2007, the TACL Trust, through TACL, paid
$249,993.60 plus GST to Sir Graham and the same sum to the third defendant on the
services and expenses between 12 December 2002 and 12 December 2006. I note here that it does not seem to be in issue that if Mr Kemp was not entitled to retain the consultancy fee, the third defendant, which received the fee at his direction would, on the basis of “knowing receipt”, be jointly and severally liable to account to the plaintiffs for the fees.
The plaintiff ’s case
[19] The plaintiff‟s case against the defendants is:
as trustees of the Settlement Trust they owed fiduciary duties to that trust not
to make an unauthorised pecuniary profit;
the payments of $250,000 were not authorised and were not disclosed;
as directors of RGL they owed it a duty to act in good faith and in its best interests;
as directors of TACL they owed it a duty to act in good faith and in its best
interests;
under the provisions of the shareholders‟ agreement they owed the TACL
Trust and RGL a duty to act in their best interests.
the duties owed to TACL, the TACL Trust and RGL were consistent with an extension of the duties owed by the defendants as trustees to the beneficiaries of the Settlement Trust as the Settlement Trust was the primary and final beneficiary of the Renaissance Group Trust and RGL‟s interest in the TACL Trust. As Mr Thompson put it in opening “effectively those obligations were
owed back to the Settlement Trust and its beneficiaries”.
inthe circumstances the receipt of the payments was a wilful and dishonest breach of trust.
The background to the payment of the consultancy fees
[20] Sir Graham is the chairman of the New Zealand Maori Council. He successfully challenged the Government of the day on a range of issues during the
1980‟s, and later, to the benefit of Maori generally. Both he and Mr Kemp were
instrumental in achieving the Treaty settlement on behalf of Te Uri o Hau.
[21] Mr Kemp initially filed a claim as a Te Uri o Hau claimant in 1991 primarily directed at land at Mangawhai. Mr Wright‟s father had also been involved in advancing a claim on behalf of another group identified with the Pouto Marae. Sir Graham was instrumental in bringing the groups within Te Uri o Hau together. Mr Kemp‟s claim was amalgamated with the claim initiated by Mr Wright‟s father. A company, Te Uri o Hau Company Ltd was incorporated to conduct negotiations with the Crown.
[22] Sir Graham and Mr Kemp negotiated extensively with the Crown during the late 1990‟s in order to resolve the Te Uri o Hau claim. The negotiations were lengthy. The sum of $1.8 million was borrowed to fund the claim process. During the treaty negotiation process, Sir Graham and Mr Kemp identified the development potential of the Mangawhai land. They were both extensively involved in pursuing that issue, including identifying appropriate joint venture partners.
[23] It is convenient to clear away one matter at this point. In both Sir Graham‟s and Mr Kemp‟s evidence they emphasised the work carried out prior to 2003 to “bring the settlement home”. Mr Wright also recognised the work that had been required to achieve the settlement with the Crown. The $250,000 consultancy fees at issue were not for that paid work. Both Sir Graham and Mr Kemp were paid separate “recognition payments” by the Settlement Trust. No claim is made in relation to those payments or the other substantial payments that Sir Graham and Mr Kemp received for their respective employment roles with the Settlement Trust from time to time (in Mr Kemp‟s case as Chief Executive Officer, and in Sir Graham‟s as managing director and later commercial director), nor for trustee‟s fees received by them. The claim is solely concerned with the $250,000 paid to each of them for consultancy services provided to the joint venture.
[24] From the outset, the joint venture partner, Mr Darby and his corporate interest NZLT, wanted Sir Graham and Mr Kemp involved as consultants to the joint venture. Mr Darby and NZLT recognised the extensive knowledge that Sir Graham and Mr Kemp had of the relevant background concerning the issues surrounding the land, their particular knowledge of the land and the valuable contacts they had with the Crown and local authorities. In a letter of 3 July 2003 from Mr Hanson, the development manager of NZLT, to Mr Walters, then acting for Te Uri o Hau, Mr Hanson noted:
The New Zealand Land Trust is currently finalising its proposal to the Te Uri O Hau Trust. As part of our proposal we have requested the assistance of Sir Graham Latimer and Russell Kemp for the government and local body issues, amongst other tasks.
Should New Zealand Land Trust be selected, we wish to request your availability to assist with the project planning phase. A co-ordination role will be required in order to drive the specialist resource team which draws upon the assistance of Sir Graham and Russell. An involvement is expected for the duration of the project planning period. ...
While directed to Mr Walters the letter confirms NZLT‟s desire to have Sir Graham and Mr Kemp involved with the development of the land.
[25] The initial heads of agreement negotiated in 2003 apparently sought to provide for that in cl 2.14:
2.14NZLT will engage 2 of TUOH‟s trustees to assist NZLT with the applications for resource consent. NZLT will agree separate commercial terms for the remuneration of those trustees, to be discussed separately to TUOH.
[26] At the meeting of the Settlement Trust at which it was resolved to complete the 2003 heads of agreement it was recorded that:
There is a need for continuity of people ... to assist Darby ... – two required Sir Graham and Russell have extensive knowledge/experience and have developed relationships with the relevant local authorities and Government departments as well.
Mr Walters later wrote to NZLT‟s solicitors on 19 December 2003 noting that:
... the two TUOH Consultants are Sir Graham Latimer and Russell Kemp. Please arrange for [NZLT‟s] solicitors to forward a draft consultant‟s contract including proposed terms of remuneration for our consideration.
[27] It appears NZLT did not respond on that issue. The proposed terms of remuneration for Sir Graham and Mr Kemp unfortunately were never clarified. Nor was the scope of their role expressly provided for, and agreed, at least not in writing. While the basis of the work and remuneration was not formalised, Sir Graham and Mr Kemp continued to act as consultants to the proposed joint venture from 2003 through until the end of 2006.
[28] Clause 2.14 was not repeated in the two subsequent heads of agreements negotiated in 2004 and 2005. The 2004 heads of agreement recorded that Environs Holdings Ltd (Environs) was to be engaged to assist with applications for resource consent. Environs was the corporate trustee of Environs Trust, the Settlement Trust‟s environmental committee. The 2005 heads of agreement also provided that NZLT would engage Environs on separate commercial terms to be agreed between NZLT and Environs.
[29] It is apparent from the evidence that cl 2.14 did not accurately reflect the work it was contemplated that Sir Graham and Mr Kemp would, and actually did, carry out for NZLT and the joint venture in any event. The work carried out by Environs in relation to resource management matters was quite different to the consultancy work carried out by Sir Graham and Mr Kemp. Environs assisted with transactional Resource Management Act issues, such as drafting applications for consent. While Sir Graham and Mr Kemp‟s involvement was also directed at the development of the land for the purposes of the joint venture, it was at a different, higher level.
[30] Both Mr Hanson and Mr Kemp confirmed that the roles Mr Kemp and Sir Graham undertook as consultants for the ultimate benefit of the joint venture very quickly expanded beyond resource consent issues.
[31] It is fair to record that the defendants‟ position in relation to cl 2.14 of the heads of agreement changed during the course of the hearing. Although initially the defendants relied on the clause to support the payment of the consultancy fees, and as notice of the arrangement with the joint venture, in the course of cross- examination Mr Kemp accepted the clause did not relate to the consultancy work
carried out by him and Sir Graham. In closing Mr Russell emphasised that the consultancy services provided by Mr Kemp and Sir Graham were quite separate to the resource management work contemplated by the clause. The evidence supports that submission.
[32] The minutes of a TACL board meeting on 14 June 2007 provide the best description of the nature of the consultancy work carried out by Sir Graham, Mr Kemp and Mr Darby for the joint venture. Attached to the minutes is a schedule detailing the consulting activities for which Sir Graham and Mr Kemp sought payment:
The value added consulting services is representative of time, travel, lobb[y]ing government, community and personal costs to assist JD of Darby Partners Limited, the development of the Project provided by RK/SGL during the period December 2002 thru [sic] December 2006
To liaise with Department of Conservation with the objective of securing understanding for mutually beneficial outcomes.
... to liaise with Government to ensure support of appropriate ministers is achieved.
Continued relationship with office of Prime Minister is an important consideration.
It is anticipated that a revision of the designs will be needed to achieve buy-in from affected parties and especially government agencies.
To lobby Rodney District Council with objective of securing understanding for mutually beneficial outcomes
To lobby Auckland Regional Council with objective of securing understanding for mutually beneficial outcomes
Attend public meetings of the community to secure mutually beneficial outcomes for the Project
Personal costs and preparation of reading project information and responding to project requests.
Travel
This programme represents time set aside of 20 hours pre-month [sic] to provide value added services to the project.
[33] Mr Hanson confirmed that, in his view the above was an accurate summary of the work undertaken by the defendants as consultants for the benefit of the joint venture.
[34] The minutes record the board resolved to provide for payment of the services:
Project is at a value creation phase and remuneration of officers resolved to in relation to consulting works and value creation services. This is to recognise works undertaken by Darby Partners, Sir Graham Latimer and Russell Kemp during the period 2003 – 2006.
[35] The minutes also record that, in addition, directors‟ fees were to be paid:
Directors fees [sic] to become payable after successful resource consent/zone change.
The payments for the consulting services provided by Sir Graham and Mr Kemp were quite different and distinct to the payments due to them for acting as directors of TACL (which in fact were never paid).
[36] Following the meeting, Sir Graham and Mr Kemp submitted invoices for their consultancy services from December 2002 to December 2006. The invoices claimed $249,993.60 (plus GST) calculated at 20 hours a month over four years from December 2002 to December 2006 at $260.41 an hour. Initially the invoices were incorrectly addressed. They were re-issued on 1 November 2007 to the TACL Trust.
[37] Mr Hanson said that before making payment of the invoices TACL sought and received approval from the other shareholder, RGL, to make the payments. Mr Edmonds, general manager of RGL, wrote and confirmed on 1 November 2007:
Further to your request, ... (RGL) would like to acknowledge that:
1. „Te Arai Coastal Lands Trust‟ is the joint venture company between
RGL and Equity Partners Ltd (EPL).
2.The „Board of Directors‟ for Te Arai Coastal Lands Trust are Sir Graham Latimer of G S Latimer, John Darby and Richard Hanson of Equity Partners Limited and Russell Kemp of RBT Enterprises.
As a „Joint Venture‟ partner, [RGL] grants approval for Te Arai Coastal Lands Trust to pay all fees due to its directors and/or their nominees and all other fees payable by Te Arai Coastal Lands Trust.
[38] For present purposes the evidence satisfies the Court that Sir Graham and Mr Kemp provided consultancy services on behalf of the joint venture which ultimately was incorporated as the TACL Trust. Neither of them were seriously challenged in cross-examination about the claim for 20 hours work a month each month over the four year period or the rate of $260 an hour (which, I have to observe, seems high).
The scope of the fiduciary obligations owed to the plaintiff and the nexus between those obligations and the consultancy fees
[39] The plaintiffs claim that as trustees of the Settlement Trust, the defendants owed the beneficiaries of the Settlement Trust a duty in equity and under cl 18 of the amended Settlement Trust deed, not to make an unauthorised profit from the trust.
[40] Clause 18 provides:
18. REMUNERATION AND EXPENSES
18.1 No private pecuniary profit may be made by any person from the
Trust. However, each Trustee shall be entitled:
(a) in each income year, to remuneration for his or her services as a Trustee as may be reasonable having regard to his or her duties and responsibilities. The amount of such remuneration shall not exceed the amount recommended by the Trustees and approved by the auditor appointed in accordance with clause 9.5 hereof as representing a fair and reasonable remuneration for trustees or non-executive directors of organisations similar to and/or with responsibilities, businesses and activities similar to the Trust.
(b) to be reimbursed for fair and reasonable expenditure incurred by him or her on behalf of the Trust, subject in every case to approval by the Trustees;
(c) if any Trustee is engaged in a profession or business, to charge fees for work done by that Trustee or that Trustee‟s firm (whether or not the work is of a professional or business nature) on the same basis as if that Trustee was not one of the Trustees but employed to carry out the work on their behalf.
18.2The Trustees must show the amount of any remuneration or fees charged by any Trustee or any Trustee‟s firm and the amount of any premiums paid out of the Trust Fund for any Trustees‟ indemnity insurance separately in the financial statements including any gifts received as referred to in clause 22.
[41] Clause 18 is not directly relevant. The defendants do not rely on cl 18 to justify the payments. Rather, they emphasise the consultancy fees were paid by the TACL Trust, not the Settlement Trust. The question (to which I return shortly) remains whether the consultancy fees are to be regarded as profits made from the defendants‟ position as trustees.
[42] Mr Thompson referred to the case of Guinness plc v Saunders1 as a leading example of application of the principle the plaintiffs rely on. In the course of his opinion in Guinness Lord Templeman noted and approved the following statement of principle:2
The 28th edition of Snell's Principles of Equity, first published in 1868, contains the distilled wisdom of the author and subsequent editors, including Sir Robert Megarry, on the law applicable to trusts and trustees. It is said, at p. 244, that:
"With certain exceptions, neither directly nor indirectly may a trustee make a profit from his trust. . . . The rule depends not on fraud or mala fides, but on the mere fact of a profit made."
[43] To similar effect, in Boardman v Phipps3 Lord Upjohn said:
The relevant rule for the decision of this case is the fundamental rule of equity that a person in a fiduciary capacity must not make a profit out of his trust, which is part of the wider rule that a trustee must not place himself in a position where his duty and his interest may conflict.
[44] It is established law that trustees owe a duty to the beneficiaries of a trust not to make a profit from their trust. The defendants accept that. The issue is whether that is what has occurred in the present case in relation to the consultancy fees.
[45] Mr Thompson submitted the facts of Guinness were not dissimilar to the present case. Guinness had paid $5.2 million dollars to Mr Ward for his services in connection with a takeover bid being made by the plaintiffs at a time he was a director of the plaintiff. The payment was not authorised by the Board of Directors. Mr Ward relied on an authorisation for the payment by a sub-committee of the Board
of Directors (of which he was one). However, the payment was not properly
1 Guinness plc v Saunders [1990] 2 AC 663.
2 At 689 - 690.
3 Boardman v Phipps [1967] 2 AC 46, 123.
authorised in terms of the articles of association of the plaintiff company, which had a specific provision for remuneration in addition to the annual payment of directors‟ fees. Such remuneration required the approval of the board. Approval by a sub- committee was not sufficient. Mr Thompson argued that similarly the trustees of the Settlement Trust had not approved payment of the consultancy fees in this case so that the defendants were obliged to repay the consultancy fees.
[46] Mr Thompson accepted that, in his words, in one respect Guinness was more “straightforward” than the present because Ward was a director of the plaintiff Guinness. In my judgment that, however, is a significant distinction and is a major point of difference in this case. It is particularly relevant when considering the scope of the fiduciary obligations in this case and whether there is a nexus between the fiduciary obligations the defendants owed the Settlement Trust and the receipt by them of the consultancy fees.
[47] The principal issue for determination in the present case is the effect at law of the fact that the plaintiff claims for breach of duties owed to the Settlement Trust when the payments were made by TACL.
[48] As trustees of the Settlement Trust Sir Graham and Mr Kemp undoubtedly owed the Settlement Trust fiduciary obligations arising from their position as trustees. At the same time, and in addition to the duties owed to the Settlement Trust, as directors of TACL, the defendants owed that company fiduciary obligations as well (as indeed they did to RGL during the time they were directors of it).
[49] The nature of the obligations imposed on trustees and the obligations imposed upon directors may be similar, and even identical in some cases. Both arise out of a fiduciary relationship. As Lord Templeman said in Guinness citing from
24th ed (1987) at Palmer’s Company Law confirming that at pp 943-944 of that text:4
"Like other fiduciaries directors are required not to put themselves in a position where there is a conflict (actual or potential) between their personal interests and their duties to the company. ... he is, like a trustee, disqualified from contracting with the company and for a good reason: the company is entitled to the collective wisdom of its directors, and if any director is interested in a contract, his
4 At 690.
interest may conflict with his duty, and the law always strives to prevent such a conflict from arising."
[50] However, while the particular fiduciary obligations owed by directors to the company of which they are directors, and the fiduciary obligations a trustee owes to the trust may be similar, in nature, they are owed to different parties. The particular obligations in each case may also be altered or affected by statute, the company‟s articles, statute or the provisions of the trust deed. The obligations are not necessarily co-extensive. It is important to bear in mind that the plaintiffs‟ claim is for breach of the fiduciary obligation owed by them to the Settlement Trust.
[51] Despite that, Mr Thompson sought to support the plaintiffs‟ claim against the defendants on the basis that the defendants were in breach of the fiduciary obligations they owed TACL and RGL as well as the obligations owed to the Settlement Trust. He noted that TACL‟s constitution provided for the remuneration of directors at cl 94:
The Board may authorise:
94.1a. The payment of remuneration or the provision of other benefits by the company to a director for services as a director, or in any other capacity;
...
if the board is satisfied that to do so is fair to the company.
94.2The payment of remuneration or the giving of any other benefit to a director in accordance with a contract authorised pursuant to clause
94.1 of this constitution need not be separately authorised by the board.
94.3 The board must ensure that forthwith after authorising any payment,
... pursuant to clause 94.1 ... particulars of the payment ... are entered in the interests register.
94.4The directors who vote in favour of authorising a payment ... under clause 94.1 of this constitution must sign a certificate stating that, in their opinion the making of the payment ... is fair to the company and the grounds for that opinion.
[52] Clause 94.1(a) could apply to the payment by TACL and the TACL Trust of the consultancy fees, as they were payments to directors “for services ... in any other
capacity”. The Board were apparently satisfied the payments were fair to the
company.
[53] However, Mr Thompson is correct in noting that cl 94.3 was not complied with in relation to the payments. Particulars of the payments were not entered in the interests register. It is fair to record that such procedures do not seem to have been generally adhered to by the Trust, RGL or TACL. The matter was the subject of review and advice by solicitors and accountants in 2004, a matter to which I return later in this judgment. For example, a similar requirement in RGL‟s constitution does not seem to have been generally followed by the directors of that company either. Mr Smith, who was called as a witness for the plaintiffs, accepted that he had received payments while acting as a director of RGL which had not been entered in the interests register.
[54] More relevantly perhaps, cl 94.4 has not been complied with in relation to the payments. There was no certificate as required by the clause.
[55] Mr Thompson also referred to cl 95 of TACL‟s constitution. It provides for
payment for professional services:
95. OTHER OFFICES WITH COMPANY HELD BY DIRECTOR
95.1Any director may act by himself or herself or by the director‟s firm in a professional capacity for the company, and the director or the director‟s firm will be entitled to remuneration for professional services as if the director were not a director...
[56] Mr Thompson submitted that neither Sir Graham nor Mr Kemp sought to describe themselves as professionals as such. He also noted that in Guinness the House of Lords had rejected an argument that the payment to Mr Ward was authorised pursuant to a clause (similar to cl 95.1 of TACL‟s constitution) permitting a director to act in a professional capacity. Although Mr Ward was a partner of a law firm which advised Guinness on the deal, the House of Lords considered the services for which he claimed $5.2 million dollars were not professional legal services. The services which had led to the payment in that case were not any different from those expected of any member of a committee appointed by the Board.
[57] Non compliance with the constitution does not of itself lead to the avoidance of the payments but s 161(5) of the Companies Act 1993 is relevant. Under that section, the directors are liable to repay the payments unless they prove that the payments were fair to the company at the time they were made.
[58] Mr Thompson concluded that TACL would have a claim against Sir Graham and Mr Kemp under s 161 of the Companies Act 1993 and/or for failure to comply with cl 94.
[59] It is unnecessary to resolve the application of cls 94 and 95 of TACL‟s constitution and s 161 of the Companies Act 1993 to the defendants‟ actions and the effect of any breach of those provisions in this case. If there are breaches, they are issues for TACL and the TACL Trust. Neither has chosen to take any issue with the consultancy fees. The claim before the Court is by the trustees of the Settlement Trust. The question remains whether, in receiving the consultancy fees the defendants were in breach of their obligations to that Trust.
[60] Mr Thompson also submitted that the payments had been made without approval from RGL and in breach of fiduciary obligations owed to that company. He also suggested, although did not place great emphasis on it, that the payments were made in breach of the obligation under cl 6.14 of the TACL shareholders‟ agreement to make all payments to the RGL appointed directors direct to the Settlement Trust‟s bank account. Mr Thompson was right not to place much emphasis on that provision. It is essentially a procedural requirement. When read in context, the clause is directed at the payments of the RGL appointed directors‟ fees for acting as directors of TACL rather than at consultancy payments which are of a quite different nature. In any event, the point again is that while that could arguably be an issue for RGL, it does not advance the plaintiffs‟ claim for breach of trust by the defendants as trustees of the Settlement Trust.
[61] Mr Thompson submitted that the defendants‟ fiduciary responsibilities effectively described a neat circle. First, they were trustees of the Settlement Trust. They were also directors of TACL, a corporate trustee owing fiduciary obligations to TACL Trust‟s beneficiaries. RGL was one of those beneficiaries. RGL was itself a
corporate trustee and the sole trustee of the Renaissance Trust. The Settlement Trust was the primary beneficiary of the Renaissance Trust. Sir Graham was a director of RGL and hence, Mr Thompson argued, TACL‟s only purpose was to be the sole trustee of the TACL Trust. The funds from which the consultancy payments were made were trust funds, in which RGL had a beneficial interest. Ultimately, so too did the Settlement Trust itself because RGL held its beneficial interest in the TACL Trust as trustee for the benefit of the Settlement Trust.
[62] However, I do not accept that the particular obligations owed by the defendants in their various roles to different legal entities can be bundled together in that way to lead to the conclusion Mr Thompson argues for. If TACL has a claim against the defendants to recover the payment of consultancy fees on the basis of breach of the fiduciary duties owed to it by them as directors, that is a claim which TACL must bring. Even if the defendants were in breach of their duties to TACL (and/or RGL), it does not necessarily follow that they are also in breach of the fiduciary obligations owed to the Settlement Trust as trustees of that Trust. While undoubtedly the defendants as directors of TACL owed duties to that company (and its shareholders) that duty does not necessarily equate with or extend to the duty the defendants owed the Settlement Trust to the trust (and its beneficiaries) arising from their position as trustees of the Settlement Trust.
[63] Mr Thompson argued that as the proceeding was brought in the Court‟s equitable jurisdiction, the plaintiffs have a good claim against the defendants for an account of profit for breach of trust and it does not matter whether or not TACL (and perhaps RGL) may also have a claim against the defendants. I accept that proposition to the extent that the fact others may have a claim against the defendants does not exclude a claim by the plaintiffs for breach of the co-existing obligations the defendants owe them arising from their position as trustees. However, it does not, in my judgment address the ultimate issue, which is whether the defendants were in breach of the fiduciary obligations owed to the Settlement Trust in receiving the consultancy fees.
[64] To determine whether the defendants are liable to account to the Settlement
Trust for the consultancy fees it is necessary to identify the particular duty owed by
the defendants to the Settlement Trust. To bring the case within the general principles confirmed in Guinness, the plaintiffs must establish that the defendants received payment of the consultancy fees because of their role or position as trustees of the Settlement Trust.
[65] Conceptually there are two principal ways in which a trustee‟s obligation to account may arise. The first is where the benefit or gain has arisen from a conflict of interest and the second is where the benefit or gain has been achieved by the trustee taking advantage of their position as trustee or knowledge resulting from it. The classic example of the first is where the fiduciary (often a company director) takes advantage of an opportunity that he or she should have taken or offered to the beneficiary (or company). The second is where the fiduciary has received a benefit or gain by use or reason of or arising out of his or her fiduciary position.
[66] Deane J helpfully discussed the distinction between these two categories in Chan v Zacharia.5 After reviewing the basis for the general principles of equity that required a person in a fiduciary relationship to account for personal benefit or gain Deane J summarised the position:6
Stated comprehensively in terms of the liability to account, the principle of equity is that a person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain (i) which has been obtained or received in circumstances where a conflict or significant possibility of conflict existed between his fiduciary duty and his personal interest in the pursuit or possible receipt of such a benefit or gain or (ii) which was obtained or received by use or by reason of his fiduciary position or of opportunity or knowledge resulting from it. Any such benefit or gain is held by the fiduciary as constructive trustee. (See Keith Henry & Co. Pty. Ltd. v Stuart Walker & Co. Pty. Ltd. [1958] HCA 33, (1958) 100
CLR 342, at p 350). That constructive trust arises from the fact that a personal benefit or gain has been so obtained or received and it is immaterial that there was no absence of good faith or damage to the person to whom the fiduciary obligation was owed.
Deane J also confirmed that liability does not arise:7
in circumstances where it would be unconscientious to assert it or ... there is no possible conflict between personal interest and fiduciary duty and it is plainly in the interests of the person to whom the fiduciary duty is owed that
5 Chan v Zacharia [1984] HCA 36.
6 At [24].
7 At [30].
the fiduciary obtain ... rights or benefits which [the fiduciary] is absolutely precluded from seeking or obtaining for the person to whom the fiduciary duty is owed. ... In that regard, one cannot but be conscious of the danger that over-enthusiastic and unnecessary statement of broad general principles of equity in terms of inflexibility may destroy the vigour which it is intended to promote in that it will exclude the ordinary interplay of the doctrines of equity and the adjustment of general principles to particular facts and changing circumstances and convert equity into an instrument of hardship and injustice in individual cases. ... There is “no better mode of undermining the sound doctrines of equity than to make unreasonable and inequitable applications of them”...
[67] Further, it is clear that there must be a clear nexus between the fiduciary relationship under consideration and the transaction. As Fisher J observed in Cook v Evatt (No. 2):8
The existence and scope of fiduciary obligations are not to be determined by placing the instant case into a preconceived category and then invoking the duties thought to attach to that category; they must be tailored to the particular case after a meticulous examination of its own facts.
And later:9
If a fiduciary had acquired property in trust for his or her beneficiary, any profit subsequently derived from dealing in the trust property necessarily belongs to the beneficiary. That must be so whether the profit is made on a sale to the beneficiary or to a stranger. But if the original acquisition had been free of any trust, I can see no theoretical justification for giving the beneficiary the profit. ... A remedy requiring the fiduciary to disgorge profit is a proprietary remedy, not a compensatory one. If the beneficiary cannot demonstrate a proprietary interest, nor any loss flowing from the breach, an account of profits could only be punitive. If punitive measures are warranted, exemplary damages are available as an independent remedy in any event.
...
(emphasis added)
[68] Put another way, there must be a real and substantial connection between the breach of fiduciary duty alleged and the gain made: Estate Realties Ltd v Wignall,10
Cook v Evatt (No. 2). These authorities are consistent with the proposition a
fiduciary must not make a profit out of his or her position of trust.
8 Cook v Evatt (No. 2) [1992] 1 NZLR 676 at 685.
9 At 692.
10 Estate Realties Ltd v Wignall [1992] 2 NZLR 615.
[69] The particular facts of each case will be determinative. In Chirnside v Fay
the Supreme Court said:11
... we observe that while there may be some rare cases where it is necessary in the overall interests of justice to have a rigid or near rigid equitable rule, the original purpose of equity was to modify the rigor and rigidity of the common law. We would certainly not wish to encourage rigidity in equity, save in cases where the justification for that rigidity is compelling.
[70] It is not enough in the present case for the plaintiffs to identify the fiduciary obligations the defendants owed the Settlement Trust as trustees of that trust and then to claim that the duties owed to TACL and others were an “extension” of that duty. The plaintiffs must show either that the consultancy fees were received by the defendants in circumstances of conflict between the defendants‟ duty as trustees of the Settlement Trust and their personal interest or that the consultancy payments were obtained or received by reason of the defendants‟ position as trustees of the Settlement Trust.
[71] The plaintiffs‟ claim does not appear to be advanced in reliance on the first category identified by Deane J in Chan v Zacharia. Mr Thompson submitted the plaintiffs relied on the rule that a trustee must not profit from his or her trust. The plaintiffs‟ case must be that were it not for their position as trustees of the Settlement Trust the defendants would not have been appointed as consultants to TACL and received the consultancy fees.
[72] So while the plaintiffs‟ claim falls more readily into the second category identified by Deane J, for completeness I address the first category, the duty/interest conflict.
[73] There is no apparent conflict in the defendants acting as consultants to the joint venture while holding positions as trustees of the Settlement Trust. Indeed, both the original trust deed and the amended trust deed contemplated that the Settlement Trust itself could engage its trustees to work as contractors or consultants to it. The original trust deed provided in cl 16 that, subject to proper disclosure the
trustees could contract or otherwise deal with the Trust in their personal capacity
11 Chirnside v Fay [2006] NZSC 68 at [136].
even though their personal interest might conflict with their duty to the beneficiaries of the trust fund. The amended trust deed made on 27 July 2005 also provided expressly in cl 16 that the trustees could act as consultants to the Trust, again on conditions including disclosure, and that such consultancy was not to detract from the trustee‟s obligation to act in the best interests of the beneficiaries.
[74] The starting point then is that the Settlement Trust‟s own trust deed provided the defendants as trustees could act as consultants to the Settlement Trust itself on condition of disclosure. It can hardly be said that by acting as consultants to the joint venture the defendants were acting in conflict between their position as trustees and consultant.
[75] The full disclosure that may have been required if the defendants sought to act as consultants to the Settlement Trust was not, in the circumstances, required. The defendants were not acting as consultants to the Settlement Trust. The other trustees were, in any event, aware of the defendants‟ consultancy to the joint venture, at least generally. At the Settlement Trust‟s meeting on 31 August 2003 at which it was agreed to confirm the original heads of agreement and to pursue the joint venture with NZLT it was expressly acknowledged that Sir Graham and Mr Kemp, even though they were trustees, would act as consultants to the joint venture.
[76] While the 2003 heads of agreement provided for the defendants‟ engagement in relation to resource management issues, it is acknowledged that the consultancy extended beyond that role. It was always contemplated that it would be a broader role. That is confirmed in part by the fact the particular clause was not repeated in the 2004 and 2005 revised heads of agreement, which provided for Environs to address resource management issues, while at the same time the defendants remained as consultants on that wider basis.
[77] At meetings during the relevant periods Sir Graham in particular advised of the defendants role and that he was not doing it for free, or words to that effect.
[78] It was always understood in a general sense by the trustees that Sir Graham and Mr Kemp would be paid for the consultancy services to the joint venture. Mr Wright accepted in cross-examination that:
Q. And [Sir Graham and Mr Kemp] are going to say that in fact they frequently during meetings of Settlement Trust or RGL, raised complaints that they had not been paid for the work that they were doing and that they expected to be paid for the work they were doing for the joint venture. Do you recall that?
A. I remember a lot of people saying a lot of things about payments and that, um, not necessarily payments for this particular joint venture.
Q. So you do remember they saying that they expected payment?
A. Well the, um, people say a lot of things in a meeting and it‟s not being given as a formal notice. I expect a formal notice to be given in some, in a correct manner rather than just in the middle of a discussion. I don‟t indicate that as being a formal notice.
Q. So there may have been notice but it wasn‟t formal?
A. May have been.
[79] Next, while both Sir Graham and Mr Kemp were employed or had contracts of employment with the Settlement Trust during the material time period, save for one aspect of Sir Graham‟s work description the work they carried out for the Settlement Trust in those paid capacities were unrelated to the development of the Mangawhai land. Sir Graham‟s employment by the Settlement Trust did not require him to act as a consultant to the joint venture. Mr Kemp‟s job description made no reference to work in relation to the joint venture. The consultancy services provided to the joint venture were on top of, or additional to the roles they had with the Settlement Trust.
[80] Mr Thompson sought to submit that cl 15 of the Amended Settlement Trust deed required disclosure of interests because the Settlement Trust, as a beneficiary of the Renaissance Group Trust had a beneficial interest in the funds from which the consultancy payments were made and the consultancy fees were therefore transactions involving the Settlement Trust.
[81] I am not able to accept that submission. Clause 15.1 reads:
15.1 A Trustee is interested in a transaction involving the Trust if the
Trustee:
(a) is a party to, or will derive a material financial benefit from that transaction;
(b) has a material financial interest in another party to the transaction;
(c) is a director, officer or Trustee of another party to, or person who will or may derive a material financial benefit from the transaction, not being a party that is wholly owned by the Trust;
(d) is the parent, child or spouse of another party to, or person who will or may derive a material financial benefit from, the transaction; or
(e) is otherwise directly or indirectly interested in the transaction.
On my reading of cl 15.1 a transaction involving the trust means one in which the Settlement Trust was a party in the sense that it was directly involved as one of the transacting parties. Clause 15.3 confirms that the obligation to disclose arises where the proposed transaction is “with the trust”. It does not apply to the consultancy services arrangements between the defendants and the TACL Trust to which the Settlement Trust was not a party.
[82] Next, it is apparent from the shareholders‟ agreement that when on the board of TACL and acting in that capacity, the defendants were not representing the interests of the Settlement Trust but rather were representing the interests of the joint venture TACL Trust and RGL.
[83] The 2004 heads of agreement that established TACL provided for five directors, three to be appointed by NZLT and two by RGL. When sitting on the Board as directors of TACL, Sir Graham and Mr Kemp owed obligations to their appointee, RGL and to the TACL Trust. At 6.12 of the shareholders‟ agreement for TACL it was recorded:
The Directors shall act in the best interests of [TACL Trust] and each of their respective appointers and the Shareholders shall procure that the Directors appointed by them shall adhere to the terms of this Agreement.
The shareholders‟ agreement also confirmed that the directors appointed by RGL
could, at any time, be removed and replaced by RGL. Although Sir Graham and Mr
Kemp were appointed as directors of TACL by RGL there was, however, no requirement for the directors of TACL to be trustees of the Settlement Trust.
[84] Given the consultancy fees were for work outside any employed role the defendants had in relation to the Settlement Trust, was not paid by the Settlement Trust but rather was paid by TACL, and absent evidence that it prevented or even hindered their acting as trustees of the Settlement Trust, it cannot be said that the consultancy fees were received in circumstances where there was a conflict between the defendants‟ duty as trustees of the Settlement Trust and their personal interest.
[85] I turn to consider whether it can be said the defendants received the consultancy fees by reason of their position as trustees of the Settlement Trust or because of opportunities or knowledge arising or resulting from that position.
[86] Both Mr Kemp and Sir Graham Latimer had extensive background knowledge in relation to the Mangawhai land prior to the establishment of the Settlement Trust. The Settlement Trust was not established until May 2001. They had been involved in the claim for approximately 10 years before that. The defendants used the knowledge they had gained for the benefit of both the Settlement Trust initially, and later, for the joint venture. It cannot, however, be said that they obtained the knowledge and particularly the contacts as a consequence of their position as trustees. Their knowledge and their contacts which NZLT was anxious to retain were both obtained in the years before they became trustees of the Settlement Trust.
[87] Nor can it be said that the defendants were appointed as consultants by reason of their position as trustee of the Settlement Trust. While they were appointed to the board of TACL as RGL‟s nominees, whether they were directors of TACL or not, NZLT as a majority shareholder in TACL was anxious to secure their services as consultants to the joint venture. Further, as noted, there was no requirement for the directors of TACL to be trustees of the Settlement Trust.
[88] Mr Hanson‟s evidence about NZLT‟s position was clear, and was supported
by the contemporaneous correspondence. As a condition of the joint venture
proposal NZLT requested the appointment of trustees to the board of TACL and also the appointment of Sir Graham and Mr Kemp as consultants. In his view the reasons for the appointments were separate. First, the appointment of directors to the board of TACL was for governance reasons, because Te Uri O Hau were partners in the project but second, as regards the consultancy, NZLT wanted to take advantage of the skills, experience and knowledge that Sir Graham and Mr Kemp had built up over the years. Mr Hanson said it was considered appropriate that Sir Graham and Mr Kemp be paid separately as consultants because they would be undertaking specialist work in addition to and outside their responsibilities as directors.
[89] Mr Hanson confirmed that Sir Graham and Mr Kemp were considered to be the best candidates as consultants given their key involvement in progressing the land development, including settling protocols between Te Uri O Hau and the Department of Conservation regarding the management of the land and the memoranda of understanding between Te Uri O Hau and the Auckland Regional Council, Rodney District Council and Kaipara District Council, relating to good faith discussions between the trust and those authorities. They also had strong contacts with Government and regulatory authorities at all levels. In short, Sir Graham and Mr Kemp were not appointed as consultants to TACL Trust because they were trustees of the Settlement Trust, but because of their personal knowledge and contacts, gained before the Settlement Trust was established. Neither Sir Graham nor Mr Kemp was under any duty, arising from their role as trustee of the Settlement Trust, to work as consultants to TACL.
[90] Further, effect must be given to the structure the parties chose to operate under. For their own reasons (and it seems it was after taking taxation advice from accountants) the trustees of the Settlement Trust chose to put in place the particular structures of a commercial trust: the Renaissance Group Trust with its corporate trustee, RGL. RGL then entered the joint venture with NZLT as a minority shareholder. The parties then provided for a further and commercially independent joint venture the TACL Trust and its corporate trustee TACL. Effectively, the parties, including the plaintiffs chose to put a structure in place that meant the defendants, as directors of TACL reported to RGL, their appointer, rather than
directly to the Settlement Trust and accepted that when acting as directors of TACL
their obligation was to the TACL Trust.
[91] The beneficiaries of the TACL Trust were stated by the deed of trust to be NZLT, RGL and any other company as a related company of an existing beneficiary and any other beneficiary appointed by deed. The Settlement Trust was not referred to.
[92] I conclude that the defendants did not receive the consultancy fees by reason of their position as trustees of the Settlement Trust nor because of any opportunities or knowledge arising from that role. The plaintiffs‟ claim must be dismissed.
Alternatively, were the consultancy fees authorised or made with the informed consent of the beneficiaries?
[93] In the event I am wrong in concluding that the defendants did not breach any fiduciary obligation in receiving the consultancy fees, I consider the remaining issues on the basis there was a prima facie breach of the fiduciary obligation owed to the Settlement Trust.
[94] The rule against a trustee benefiting from their position of trust is not an absolute rule. The trustee can avoid its effect where the trustee obtains the principals‟ fully informed consent: Ex Parte Lacey,12 Sanderson v Walker.13
[95] However, for the trustee to be relieved from his or her obligations the consent must be freely given and based on full disclosure of relevant information: Ex Parte James.14 The obligation is on the trustee to show that the principal knew of the transactions and, with full knowledge of them, consented to them: Boardman v
Phipps,15 New Zealand Netherlands Society “Oranje” Inc v Kuys.16
12 Ex Parte Lacey (1802) 6 Ves 625 at 630.
13 Sanderson v Walker (1807) 13 Ves 601.
14 Ex Parte James (1803) 8 Ves 337.
15 At 109.
16 New Zealand Netherlands Society “Oranje” Inc v Kuys [1973] 2 NZLR 163 at 168.
[96] Mr Thompson conceded that NZLT gave its informed consent to the payment of the consultancy fees but argued that RGL did not. He submitted the defendants were not able to rely on the consent provided by Mr Edmonds as RGL‟s general manager. He suggested that TACL and, a fortiori, the defendants could not reasonably rely on Mr Edmonds‟ correspondence as providing properly authorised consent from RGL for the consultancy payments, particularly when cl 6.14 of the TACL shareholders‟ agreement required all payments to be made to the account of the Settlement Trust.
[97] However, as noted above, when cl 6.14 is read in context, it is directed at the payment of directors‟ fees provided for in the preceding cl 6.13. It provides how the payments made to the RGL directors (qua directors) were to be dealt with. It does not apply to the payments made to Sir Graham and Mr Kemp for their consultancy fees.
[98] Next Mr Thompson argued that as Mr Edmonds had acted for Sir Graham in the past, he could not consent to the payment of Sir Graham‟s fees. But while Mr Edmonds may have acted on Sir Graham Latimer‟s behalf in the past, he was the duly appointed general manager of RGL and had implied authority on behalf of RGL to authorise payment of accounts by the joint venture entity TACL.
[99] There are some unusual features surrounding payment of the consultancy fees. Mr Hanson accepted that Equity Partners Ltd, an entity related to Mr Darby had also claimed consultancy fees of exactly the same amount as the combined total of Sir Graham and Mr Kemp‟s fees. Equity Partners had then subsequently written those fees out of the accounts.
[100] However, at the end of the day, Mr Hanson‟s evidence confirms that NZLT and TACL approved the payment of consultancy fees to the defendants and RGL also authorised payment of the fees.
[101] But again, whether RGL consented to payment of the consultancy fees or not is not directly relevant. Consideration of whether there was informed consent to the fees is premised on the basis the plaintiffs have established a prima facie breach by
the defendants of the obligations they owed the Settlement Trust arising from their position as trustees of the Settlement Trust. On that premise the question is whether the defendants obtained the fully informed consent of the other trustees of the Settlement Trust to the payment of the consultancy fees.
[102] The defendants would not be able to satisfy the onus on them to show the other trustees of the Settlement Trust authorised the consultancy fees in this case. The defendants rely on general statements made at various meetings of the Settlement Trust that they expected to be paid for the work they carried out as consultants to the joint venture. The defendants also called Mr Shelford in support of this aspect of the case. But Mr Shelford‟s evidence was very general. His evidence was:
5.I never took a close interest in the joint venture, because I thought it was in good hands because of the involvement of Sir Graham Latimer and Russell Kemp. I knew that they were providing consultancy services.
6.To the best of my recollection, it was always known and understood among the Trustees while I was on the Settlement Trust that Sir Graham and Mr Kemp were working as consultants for the joint venture company, and that they would be paid for that work above and beyond any remuneration they received from the Trust or its subsidiaries. Sir Graham reminded the Trustees from time to time that the work on the joint venture was putting a significant burden on him, and that he expected to be paid for it. I do not recall that any Trustee objected to this.
7.However, I do not recall the Trust ever passing a resolution regarding consultancy fees.
[103] In cross-examination Mr Shelford accepted that amounts were never mentioned and that he missed a number of meetings.
[104] A fundamental aspect of the requirement for fully informed consent is that the quantum of the consultancy payments would have had to be advised to and approved on behalf of the Settlement Trust prior to payment. That did not occur.
[105] So on this point, if the defendants were prima facie in breach of their obligations to the Settlement Trust, they could not excuse such breach on the basis
the other trustees gave their fully informed consent to the payment of the consultancy fees.
Would the defendants be entitled to relief?
[106] The next issue is whether, assuming the defendants to be in breach, they are entitled to relief.
[107] Section 73 of the Trustee Act 1956 provides for relief from a breach of trust in certain circumstances:
73 Power to relieve trustee from personal liability
If it appears to the Court that a trustee, whether appointed by the Court or otherwise, is or may be personally liable for any breach of trust, whether the transaction alleged to be a breach of trust occurred before or after the commencement of this Act, but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the Court in the matter in which he committed the breach, then the Court may relieve him either wholly or partly from personal liability for the same.
[108] It is for the trustee seeking relief to satisfy the Court that he or she has acted honestly and reasonably and ought fairly to be excused for the breach of trust. If the preconditions are met, it is then for the Court to determine the extent of the appropriate relief. The nature of the breach must be relevant to determination of the issue of relief. The breach in this case would be the making of a profit from the defendants‟ position as trustees.
[109] Mr Thompson initially submitted s 73 could not apply as it only applied to cases where directions of the Court should or could have been sought. However, in a supplementary memorandum he accepted that the case he relied on, Re Mulligan Deceased17 is not authority for the proposition at all. Where the trustees could or
should have sought directions then the failure to seek them may be relevant18 but
where, as in the present case, an application would not have been appropriate, the trustees cannot be expected to apply for directions. The failure to do so is not
relevant.
17 Re Mulligan Deceased [1998] 1 NZLR 481 (HC).
18 Wong v Burt [2005] 1 NZLR 91 (CA).
[110] In the present case the following factors support the defendants‟ argument
that they acted honestly and reasonably in charging for the consultancy services:
from an early stage – the start of 2003 – Sir Graham and Mr Kemp had been appointed as consultants to the proposed joint venture and considered they
were entitled to charge for their services;
they believed and expected they would be paid for their work as consultants and carried out the work in expectation of payment. They frequently made
comments at Settlement Trust meetings they were not working for free;
the payments were made with the knowledge and consent of the TACL Board and with the knowledge and consent of the majority shareholder and major
beneficiary of the TACL Trust, NZLT;
TACL sought and received RGL‟s consent before making payments;
neither sought to hide the fact they were paid. When Mr Kemp was asked about the payments at a Settlement Trust meeting in August 2008, he referred
to payments of $50,000 a year;
Sir Graham and Mr Kemp left it to others to disclose the detail of the
payments;
the payments were disclosed in TACL‟s annual financial accounts and also in
a letter sent to RGL by NZLT on 2 April 2008.
[111] Against that, the factors that point against a finding the defendants acted
honestly and reasonably in accepting the consultancy fees are:
neither of the defendants at any stage disclosed the quantum or basis of the consultancy fees to the Settlement Trust even after the payments had been made;
both Sir Graham and Mr Kemp should arguably have been aware of the need to fully inform other trustees about such payments – the Settlement Trust had received strong advice from solicitors Lowndes & Associates and accountants, the Gibson Report in 2004 regarding the remuneration of
trustees and the obligations on trustees to account;
the disclosure obligations of trustees were discussed at the Annual General
Meeting of the Settlement Trust in November 2004;
the other trustees of the Settlement Trust only discovered the payments when Anderson Lloyd wrote to Mr Thompson‟s firm on 2 April 2008 to seek the TACL Trust‟s approval of NZLT funded payments to 28 February 2008. When asked about the payments, Mr Kemp referred generally to directors receiving $50,000 per year but when asked for further explanation the
response was made through solicitors.
[112] There is the additional issue of how the fee of $250,000 for four years‟ work was arrived at, and the timing of the claim for payment. The fee was rendered at the conclusion of the four year period, apparently because bank funding was available to pay it. But such financial information as there is, suggests that TACL was not in a strong financial position at the time. Indeed, on one analysis, and depending on the valuation of the land, it may have been a situation of negative equity.
[113] On balance, I am unable to accept that the defendants‟ actions and the way they approached the matter can objectively be described as reasonable (although I accept they acted honestly) so as to satisfy the onus on them under s 73. The fee itself and the circumstances in which it was paid were not reasonable.
[114] Mr Russell next submitted the defendants could rely on the indemnity in cl
21.1 of the Settlement Trust deed for relief. Mr Thompson took the point the defendants had not pleaded this clause as a defence, but as it is essentially a question of interpretation I propose to consider it.
[115] Clause 21.1 of the Settlement Trust‟s trust deed provides:
Each Trustee or former Trustee is entitled to a full and complete indemnity from the Trust Fund for any personal liability which that Trustee may incur in any way arising out of or in connection with that Trustee acting or purporting to act as a Trustee of the Trust, provided such liability is not attributable to that Trustee‟s own dishonesty, or to the wilful commission or omission by that Trustee of an act known by that Trustee to be a breach of trust.
[116] Mr Russell submitted that unless the Court was satisfied the defendants acted dishonestly or wilfully in accepting the payments knowing that to do so was a breach of trust the Court should decline to order an account of profit as cl 21.1 provided exoneration for the trustees.
[117] An exclusion clause such as this is to be construed narrowly against trustees seeking to rely on it.19 On that approach, in its terms, the clause could only apply where the trustee was acting or purporting to act as a trustee. In the present case, the defendants‟ obligation to account arises from their status as trustee, but not because they were acting as trustees. Indeed, as they have been at pains to point out, they provided the consultancy services in their personal capacity. The clause does not
apply.
[118] As Mr Thompson submitted, the defendants‟ liability in this case arises because they failed to act as trustees in relation to the payments.
[119] In conclusion on this point, if the defendants were otherwise held to be in breach of trust, they would not be entitled to relief under s 73 or cl 21.1.
What allowance, if any, should be provided for the defendants’ work and effort
as consultants?
[120] The last issue is whether, assuming liability, the defendants are entitled to some payment in recognition for their work as consultants. Even in a case where the fiduciary has been held to have received a payment in breach and the payment is
held on a constructive trust for the trust, the fiduciaries‟ duty to account may,
19 Wong v Burt at [51].
however, still be subject to a fair and reasonable accounting: Estate Realties Ltd v
Wignall.20
[121] In Estate Realties Ltd Tipping J confirmed there was no absolute rule against allowing costs, expenses and other deductions for allowances even in favour of a fraudulent or morally blameworthy fiduciary. The exercise was essentially to define fairly the profit made or the gains derived from the transaction impugned. The nature of the breach of the duty and the circumstances in which it occurred were considered relevant as were the circumstances in which the gains or profits were derived and the amount of personal input from the fiduciary necessary to enable the gains or profits to be achieved.
[122] Tipping J‟s approach was approved by the majority of the Supreme Court in Chirnside v Fay. In responding to criticism in Butler‟s Text Equity and Trusts21 of Tipping J‟s approach in Estate Realties Ltd v Wignall the Supreme Court said:
[138] It is inherent in what has already been written that we do not consider the approach taken in Estate Realties is unsound. Nor is it incompatible with the approach of equity in this field. To apply the Guinness plc v Saunders case in the rigid way which the learned author of Equity and Trusts seems to favour is not, in our view, an appropriate use of equitable doctrine. ...
[139] We observe, finally, that a survey of other recognised texts demonstrates broad acceptance of what we might call the Estate Realties/Warman International approach, which commended itself to the trial Judge in the present case.22 What is said in Snell‟s Equity23 exemplifies the general approach of the text writers in other common law jurisdictions. Indeed it is somewhat more restrictive than some of them. Snell says that a fiduciary who has acted in breach of fiduciary duty, and against whom an account of profits is ordered, may nevertheless be given an allowance for the
20 Above n 10.
21 Andrew Butler (gen ed) Equity and Trusts in New Zealand (Brookers, Wellington, 2003).
22 See Dal Pont and Chalmers, Equity and Trusts in Australia and New Zealand (2nd ed, LBC Information Services, Sydney, 2000), p 121; Hanbury and Martin, Modern Equity (17th ed,
Sweet and Maxwell, London, 2005), para [21-005]; Hudson, Equity and Trusts (4th ed,
Cavendish, London, 2005), para [12.5.3]; Ford and Lee, Principles of the Law of Trusts (3rd ed, LBC Information Service, Sydney, 1996), para [22640]; Waters, Law of Trusts in Canada (3rd ed, Carswell, 2005); and, in particular, the detailed and thoughtful review in Glover, Equity, Restitution & Fraud (LexisNexis, Sydney, 2004), para [7.55] and following which, inter alia, expressly endorses the Estate Realties/Warman International approach and is sympathetic to the view that, although appropriate to the facts of Guinness plc v Saunders, the reasoning of their Lordships in that case was too rigidly expressed. To the same effect is the casenote on Murad v Al-Saraj written by Professor Mitchell McInnes of the University of Alberta in (2006) 122 LQR
11, p 15.
23 Edmund Snell Snell’s Equity (31st ed, Sweet and Maxwell, London 2005).
skill and effort employed in obtaining the profit which he has to disgorge. This will be done when, as it was put by Wilberforce J at first instance in Boardman v Phipps,24 it would be inequitable for the beneficiaries to step in and take the profit without paying for the skill and labour which produced it.
(emphasis added).
[123] In the present case the evidence satisfies the Court that Sir Graham and Mr Kemp did carry out valuable work in providing consultancy services for the benefit of the joint venture the TACL Trust and ultimately, through RGL‟s interest in that, to the Settlement Trust.
[124] In applying themselves as consultants for the benefit of the TACL Trust the defendants made significant personal inputs. As noted there was no serious challenge to the claim the defendants provided 20 hours a month over four years. A commercial entity, and majority shareholder, NZLT was prepared to accept the defendants‟ claim for such work.
[125] The rate of $260 an hour approximately is, however, difficult to justify, where the parties themselves accept they were not acting in a professional capacity.
[126] Mr Thompson argued that any allowance should only apply for work after the date of the 2005 heads of agreement when it was agreed that expenses would lie where they fell and would not be borne by the joint venture, and even after that should be at $50 an hour as the rate for trustee‟s meeting attendances. There is some force in the second point, but I am not able to accept the first. The consultancy work was carried out over the full four year period. Further, cl 3.16 of the heads of agreement authorised payments by NZLT for the purposes of obtaining resource consent. The defendants‟ consultancy services, although involving just more than consent applications, were ultimately directed at that objective. Further, the parties agreed to the payments.
[127] Mr Russell argued that, in the event of a breach, the defendants should be compensated for the work they did and emphasised that the Settlement Trust only
had a 25 per cent interest in TACL (through RGL) and the plaintiffs should not be
24 [1964] 1 WLR 993 at p 1018.
entitled to a greater share of the profit than the Settlement Trust‟s investment in the joint venture. He submitted the defendants should not have to account for anything more than 25 per cent of the consultancy fees.
[128] However, if the defendants were to be held liable to account in this case, it would be on the basis they received a benefit or advantage they should not have received at all. The actual percentage of the Settlement Trust‟s interest is not relevant to that issue.
[129] The Court is required to do equity. A broad approach is required.
[130] In my view it is relevant that at a meeting of the Settlement Trust attended by
Sir Graham to address governance issues it was agreed that trustees would be paid
$50 an hour for time worked (and to be charged to the Trust) outside trustee meetings. The trustees, including Sir Graham, put a value of $50 an hour on their services at that time.
[131] Applying that rate to the hours worked by the defendants in this case leads to an allowance of $48,000 each. If they were otherwise liable to the Settlement Trust, they would have to account to the plaintiffs for the balance of approximately
$202,000 each.
Result
[132] However, for the reasons given previously, I have found the receipt by the defendants of the consultancy fees in the circumstances of this case was not an actionable breach of the obligations the defendants owed the Settlement Trust as trustees of that Trust. The plaintiffs‟ claim must be dismissed.
Costs
[133] Costs to the defendants on a 2B basis.
Venning J
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