Mackintosh v Thomas
[2020] NZHC 860
•30 April 2020
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2016-409-171
[2020] NZHC 860
BETWEEN JOHN BOWDEN MACKINTOSH and MATTHEW CHADLOW HALL
PlaintiffsAND
PHILIP DEAN THOMAS
First Defendant
ALISON MARGARET SYME
Second DefendantSIMON THOMAS REED and MARK WREFORD REED
Third and Fourth Defendants
ELEANOR MARY MARR
Fifth Defendant
Hearing: 2-5 December 2019
Further submissions 13, 17, 18, 20 December 2019,
20 and 22 January 2020Counsel:
C A McVeigh QC, G M Brodie and R Cooper for Plaintiffs H A Evans and D Weatherley for First Defendant
R J B Fowler QC and B R D Burke for Second Defendant J Johnson for Third and Fourth Defendants
K W Clay for Fifth Defendant
Judgment:
30 April 2020
JUDGMENT OF CHURCHMAN J
JOHN BOWDEN MACKINTOSH and MATTHEW CHADLOW HALL v PHILIP DEAN THOMAS [2020] NZHC 860 [30 April 2020]
TABLE OF CONTENTS
Summary of the case [1]
Background [7]
The Will [20]
Indemnities [23]
Heads of Agreement [26]
Justification for the application [32]
The orders sought [38]
Jurisdiction of the Court to make the orders sought [39]
Mediation Heads of Agreement [44]
Frustrated contract? [57]
Approach to giving directions [61]
Column One – Issues between trustees and one or more respondents [63] The true meaning and effect of clauses 34 and 35 in the HOA [63] Halkett water agreement [85]
Halkett water meter [96]
Nordean indemnity [104]
Apportionment of costs of administration [123]
Trustees’ indemnity and securities [141]
Credit line [157]
Transactions [171]
Release of securities for indemnities [180]
Indemnity for the respondents [186]Gross negligence and wilful misconduct [192]
Indemnity to Philip [197]Any other land? [199]
Appeal rights [203]
Shortfall payments [210]
Consent order for varying Will [220]
Clause 29 transactions [225]
Distributing assets and finalising the estate [280]Column Two – Applications for directions that are consented to by the
respondents and are workable [303]
Consent declarations [303]
Column Three – Consented to by the parties but need to be made workable [348]
Column Four – Issues disputed between the parties [351] The $94,444.14 payment [351]
“Other beneficial interest” [368]
Clause 10 – Debts claimed by Philip [394]
Money owed to the estate on account of NT Farming [396]
Interest on accounts [398]
Malley & Co debt [404]
Court of Appeal payments [415]
Contentious submissions [437]
Conclusion [442]
Costs [444]
Summary of the case
[1] This is an application by trustees in relation to the administration of an estate. The application sought declarations in respect of over 30 separate topics.
[2] Initially there were also applications by three of the respondents seeking multiple directions. Many of the issues raised by the respondents have been subsumed into the declarations sought by the trustees, others have been abandoned and a small number remain to be determined.
[3] This is the ninth time that the trustees have had to come to the Court for directions. There are a number of reasons for this extensive litigation history. The affairs of the testator were complex and complicated by the fact that he had fallen out with his son before his death, and there was unresolved litigation in relation to that.
[4] However, the main reason is the attitude and actions of the respondents. With one exception, they have, on many occasions been disputatious, unreasonable and uncooperative. When it suited them, they have ignored commitments that they have either agreed to or which result from Court orders.
[5] The trustees have displayed considerable patience, forbearance and professionalism in dealing with the behaviour of the respondents and the many difficulties they encountered in administering this estate.
[6] It is my hope that this decision will permit the trustees to finally wind the estate up without any further delay.
Background
[7] The late Norman Dean Thomas (Norman) was a successful Canterbury farmer. He died aged 86 on 24 May 2012.
[8] As at the date of his death, Norman had interests in some 11 farm properties, as well as stock, plant and other farming and general assets. The net value of his estate was estimated to exceed $20 million.
[9] At the date of his death, Norman owned three properties in his own name, one of which was his home which has been sold. The other two were:
(a)“Chesmars” which he farmed himself under the name NT Farming, although much of the farming operation was outsourced to Riverfields Sprayers Ltd, a company of which his grandson, Simon Thomas Reed (Simon), is the director, and shareholder along with a family trust; and
(b)“Yaldhurst” which was farmed in conjunction with Hannor Farm Ltd, a company of which his grandson Mark Wreford Reed (Mark) is the director and shareholder along with his family trust.
[10] Norman also owned half the shares in Nordean Farm Ltd which owns Nordean Farm. At the date of his death, Nordean Farm was occupied by his daughter, Alison and her husband Ian Syme, trading as the Syme Partnership.
[11] The remaining eight properties were in the joint names as tenants in common of Norman and his son, Philip Thomas (Philip), the pair having farmed together since 21 April 1983 as the ND and PD Thomas Partnership (the Partnership). The formal Partnership agreement provided that the term of the Partnership would be for three years from 1 April 1983 and would continue thereafter until determined by three months’ notice in writing.
[12] The farming partnership proved beneficial for both Philip and Norman. However, in later years, tensions arose between Norman and Philip, and on 3 December 2010, Norman gave Philip a notice of dissolution which provided that the Partnership would be dissolved at 3 March 2011. The parties could not agree on a division of Partnership assets and the dissolution did not occur as at 3 March 2011.
[13] On 16 April 2012, Norman applied to the Court for a declaration that the Partnership was dissolved and an order pursuant to s 42 of the Partnerships Act 1908 for the sale of Partnership assets. Those proceedings were unresolved as at Norman’s death a month later.
[14]Clause 14 of the Partnership agreement provided:
Where the partnership is terminated by death or otherwise the surviving partner may purchase the share of his former partner in the capital and assets of the business by giving THREE (3) months’ notice in writing of his intention to complete such purchase during the term or at the conclusion of such notice to the former partner or his representative as the case may be …
[15] On 3 November 2010, prior to Norman’s notice of dissolution, Philip had lodged a caveat over the eight Partnership farms alleging an interest beyond a half- share in the Partnership assets by virtue of a constructive trust. The proceedings in relation to the caveat were also unresolved as at the date of Norman’s death.
[16] Norman unilaterally took over two of the eight Partnership properties prior to his death. The first, “Halkett”, was farmed in conjunction with Hannor Farm Ltd under the same arrangement as Yaldhurst. The second, “Cridges”, was farmed by Norman as NT Farming with the same arrangement with Riverfields Sprayers Ltd as Chesmars.
[17] From Norman’s death to the present time, Chesmars and Cridges have been occupied (apart from the cottage on Cridges) by Riverfields Sprayers Ltd or a successor company, Hitcham Farming Ltd, a company also associated with Simon.
[18] Yaldhurst (apart from the house) and Halkett have been occupied by Hannor Farm Ltd, while Nordean Farm Ltd (apart from the cottage) has been occupied by the Syme Partnership.
[19] The remaining six Partnership properties (“Cranmore”, “Middlewoods”, “Wilsons”, “Steeles”, “McCauslands” and “Mays”) were farmed by the Partnership to 31 March 2014 and subsequently farmed by Philip as a sole trader from 1 April 2016 down to the present time.
The Will
[20] Norman’s Will was made on 22 December 2011. The Will left the entire estate to Norman’s daughters, Alison and Eleanor Mary Marr (Eleanor), equally. Eleanor, Alison and Simon were appointed trustees. The Will forgave all monies owing to Norman by the ND Thomas Family Trust and directed his trustees to pay his debts, including estate administration expenses and to hold the residue for Eleanor and Alison in equal shares.
[21] On 1 October 2013, by consent, Associate Judge Osborne removed Eleanor, Alison and Simon as trustees and, in their place appointed professional trustees, John Bowden Mackintosh of Christchurch, solicitor and Matthew Chadlow Hall of Ashburton, chartered accountant.1
[22] At the time of their appointment, Messrs Mackintosh and Hall were aged 69 and 70 years respectively. They anticipated that as a result of a pending Court hearing scheduled for May 2014 that they would have the estate wound up within 12- 18 months thereafter. They are now aged 75 and 76 and the prospect of resolution is still some 18 months away.
Indemnities
[23] The retiring trustees were specifically indemnified in the 1 October 2013 consent order for any personal liability as trustees including personal liability in connection with three then current sets of proceedings: CIV-2012-409-754, CIV-2013- 409-01213, and CIV-2013-409-1233. The only form of activity that was specifically excluded from the concept of “personal liability” was “dishonest breach of trust”.
[24] The consent order specifically appointed the new trustees on the basis that their fees were ordered to be paid from the estate in the first instance or otherwise as ordered by the Court and that they were indemnified for personal liability. Specifically, the order said:
1 Marr & Ors v Thomas HC Christchurch CIV-2012-409-754, 1 October 2014.
“Personal liability” in the indemnity above includes the new trustees acting in good faith, including where s 73 of the Trustees Act 1956 would be applicable, but does not refer to dishonest breach of trust.
[25] Philip brought proceedings asserting an entitlement to the beneficial ownership of all of the Partnership lands on the basis of testamentary promises, binding contractual commitments, in equity, proprietary estoppel and on other grounds.2 Mark and Simon, who are two of Alison’s children, each brought claims under the Law Reform (Testamentary Promises) Act 1949.3 Philip’s and Eleanor’s children also brought claims under the Family Protection Act 1955 (FPA).4
Heads of Agreement
[26] One of the initiatives taken to resolve the competing claims of the respondents was a four-day mediation in September 2015 before Hon Robert Fisher QC. It resulted in a Heads of Agreement (HOA) which was entered into on 20 September 2015 by the respondents, who are the deceased’s three children, Alison, Eleanor and Philip, and two of his grandchildren, Mark and Simon (together “the Reeds”). Under the settlement, the parties agreed to allocate the deceased’s farming properties and other assets in the manner set out in the HOA. Broadly, this provides that:
(a)Alison and the Reeds or their nominee are to receive Halkett, Cridges, Chesmars and a part of McCauslands referred to as the Pitts Road Block;5
(b)Eleanor is to receive the proceeds of the sale of Yaldhurst;
(c)Philip is to receive the estate’s half share of Cranmore, Middlewoods, Wilsons, Steeles, McCauslands (less the Pitts Road Block), and Mays; and
(d)Eleanor and Philip are to receive half the shares in Nordean.
2 See Mackintosh v Thomas [2015] NZHC 823 at [1].
3 Mackintosh v Thomas, above n 2, at [2].
4 Mackintosh v Thomas, above n 2, at [3].
5 The Pitts Road Block is on a separate title.
[27] The HOA was expressed to be subject to the parties entering into a formal deed of settlement and procuring a consent order of the High Court to formalise and confirm settlement. It had a proposed settlement date of 30 March 2016. Unfortunately, due to disagreements between the parties, the formal deed of settlement and court order have never been finalised. There has been further litigation including a Court of Appeal decision directing Philip, Alison and Eleanor to pay substantial lump sums and ongoing quarterly payments of $52,000 each to the trustees to keep the estate solvent.6
[28] The trustees were not parties to the HOA. At the time of its execution, they were not bound by it. Their legal obligation was to administer the estate in accordance with the terms of the Will. Discharging that obligation would see them simply sell the estate assets, pay its debts and divide the residue to be paid equally to Alison and Eleanor.
[29] However, that is not a course that any of the other parties wanted. The trustees have therefore done their best to accommodate the preferences of the other parties. That they have not been able to achieve the outcome outlined in the HOA is the result of a number of factors including:
(a)that the HOA did not address a number of the practical matters which the trustees had identified and had notified to the respondents prior to the mediation as needing to be dealt with in any settlement agreement;
(b)that although the parties profess to want to implement the HOA, they have failed to take necessary steps or make required payments (including those directed by the Court of Appeal in 2017) to achieve that outcome;7 and
(c)the high level of antagonism and non-cooperation as between the parties and their self-interest in maximising outcomes that advantage them and minimising outcomes that advantage others.
6 Thomas v Mackintosh (No 2) [2017] NZCA 610.
7 Other than Eleanor who made her payments in full and on time.
[30] Given the actions and attitudes of the other parties to these proceedings, the trustees had no option but to make this application.
[31] The objective of this application is to bring about a final resolution to these protracted proceedings and to allow final distribution of the estate including payment of all the estate’s liabilities and the obtaining of a tax clearance. It is important to record that the issues the Court is being invited to adjudicate upon are not just issues between the trustees and the respondents but also, in some cases, issues as between the respondents themselves where the trustees are agnostic as to the outcome.
Justification for the application
[32] The trustees justifiably submit this is a complex and difficult estate to administer due to the nature of the assets and liabilities, the attitude of the parties, numerous tax issues that arise, and the time it has taken to try and resolve matters. They contend that the point has been reached in the administration of the estate where the trustees urgently require access to significant cash resources, first to meet the tax obligations the estate is liable for and, secondly, to fund the ongoing costs of the administration before the residue of the estate can be established. They have, therefore, taken the initiative to seek the Court’s direction on in excess of 30 issues, the resolution of which they believe will allow administration of the estate to finally be completed. During the course of the hearing, and as a result of the memoranda filed after the hearing had concluded, the number of matters in issue was able to be refined. The first two of the directions sought (Beddoes orders) were resolved by the Court on 10 July 2019.8
There were originally four applications before the Court:
(a)an application by the Reeds, dated 17 April 2018;
(b)an application by Alison, dated 6 June 2018;
(c)an application by Philip, dated 1 March 2019; and
8 Mackintosh v Thomas [2019] NZHC 1585.
(d)an amended application by the trustees for directions dated 20 May 2019 (the trustees’ amended application).
[34] Counsel for the Reeds, by way of memorandum dated 31 October 2019, advised that their application had been discontinued as the matters it raised are dealt with in the trustees’ amended application.
[35] Counsel for Philip, by way of memorandum dated 5 November 2019, advised that his application had been discontinued, noting that one of the orders he sought directions on, that concerning interest on shortfall payments, had been subsumed within the trustees’ amended application.
[36] Counsel for Eleanor, in a synopsis of submissions dated 14 November 2019, advised that she supports the application for direction by the trustees.
[37] Alison’s application for directions remains on foot, although it is noted that a number of the orders she seeks are similar to those sought in the trustees’ amended application.
The orders sought
[38] The trustees state that, of the remaining applications, the various orders sought fall into one of four categories:
(a)where the trustees have a clear personal interest in the subject matter which is opposed by one or more of the respondents. Within the trustees’ amended application, at the start of the hearing, 10 issues came within this category. Subsequently agreement seems to have been reached on at least two of these issues;
(b)where the parties are in agreement and, in all probability, consent orders can be made. These are ones which the trustees consider to be workable. Within the trustees’ amended application (other than issues of a procedural nature only which were not controversial), some 10
issues come within this category. Most can now be resolved by consent;
(c)where the parties are in agreement except that, in the trustees’ view, the orders need to be made workable. Within the trustees’ amended application, at the start of the hearing, two issues came within this category. One issue has been resolved, the other possibly resolved; and
(d)orders which are disputed but where the issues are predominantly between parties and do not involve the trustees. Within the trustees’ amended application, 18 issues came within this category. There seems to have been at least substantial agreement on half of those issues although in a number of cases the respondents have reached agreement between themselves, the trustees seek some modification of that agreement.
Jurisdiction of the Court to make the orders sought
[39]Section 66 of the Trustee Act 1956 relevantly provides:
66 Right of trustee to apply to court for directions
(1) Any trustee may apply to the court for directions concerning any property subject to a trust, or respecting the management or administration of any such property, or respecting the exercise of any power or discretion vested in the trustee.
[40] The scope of the Court’s jurisdiction pursuant to this section was discussed by the Court of Appeal in Chambers v SR Hamilton Corporate Trustee Ltd:9
[32] There has been some difference between High Court decisions as to the type of issue that is suited to a s 66 application. It has been stated in some decisions that the jurisdiction should not be used to determine substantive issues, but rather is reserved for points of minor importance. If that was so, this application should not have been entertained as the issue is undoubtedly of substantial importance. However, we agree with the observation of Kós J in New Zealand Māori Council v Foulkes that there is nothing to indicate that this was the intention behind the section. Section 66 was an enactment of the broad Equitable jurisdiction that had long resided in the Chancery Courts. The
9 Chambers v SR Hamilton Corporate Trustee Ltd [2017] NZCA 131, [2017] NZAR 882 (citations omitted).
nature of that English jurisdiction was summarised by Lord Oliver in Marley & Ors v Mutual Security Merchant Bank and Trust Co Ltd where he said:
A trustee who is in genuine doubt about the propriety of any contemplated course of action in the exercise of his fiduciary duties and discretions is always entitled to seek proper and professional advice and, if so advised, to protect his position by seeking the guidance of the court.
[33] The key issue in this case is whether the Trustees’ application for directions involved a surrender of their discretion to the Court. Mr Gudsell argued that an explicit surrender of discretion was required. It has been suggested that Marley stands for the proposition that upon applying for directions trustees necessarily surrender their discretion to the court. If that were so, this appeal could not succeed. We question whether Marley stands for that proposition, and we would not go that far. Trustees do not necessarily surrender their discretion to the court simply by seeking directions for orders that they act in a certain specified way. They are entitled to come to court on the limited basis of seeking particular directions. Nevertheless it is clear that trustees may come into a court and say that they are in doubt as to how they ought to exercise their discretion, and surrender that discretion.
[34] Applications under s 66 will not usually be appropriate where important facts are contested. This application was for directions on a substantive issue that was in dispute (what the Trustees should do in relation to the property), but which in the end did not involve any significant disputes of fact. We do not regard any differences about the correct value of the property as being significant, because in the end, as we will set out, the property has to be sold at a fair market value and the proceeds divided equally. The issues in the Directions Proceedings did not therefore involve contentious facts, and the separate ordinary proceeding for removal of the Trustees was effectively neutralised by the sensible and practical steps taken by the Judge.
[41] Declaratory orders are provided for in s 3 of the Declaratory Judgments Act 1908:
3 Declaratory orders on originating summons
Where any person has done or desires to do any act the validity, legality, or effect of which depends on the construction or validity of any statute, or any regulation made by the Governor-General in Council under statutory authority, or any bylaw made by a local authority, or any deed, will, or document of title, or any agreement made or evidenced by writing, or any memorandum or articles of association of any company or body corporate, or any instrument prescribing the powers of any company or body corporate; or
Where any person claims to have acquired any right under any such statute, regulation, bylaw, deed, will, document of title, agreement, memorandum, articles, or instrument, or to be in any other manner interested in the construction or validity thereof,—
such person may apply to the High Court by originating summons for a declaratory order determining any question as to the construction or validity
of such statute, regulation, bylaw, deed, will, document of title, agreement, memorandum, articles, or instrument, or of any part thereof.
[42] The scope of the Court’s jurisdiction under the Declaratory Judgments Act was reviewed by the Supreme Court in Mandic v Cornwall Park Trust Board (Inc):10
[8] Declaratory judgments are available to make “binding declarations of right” whether or not “any consequential relief is or could be claimed”. The effect of a declaratory order is to the same effect “as the like declaration in a judgment in an action”. It is binding “on the person making the application and on all persons on whom the summons has been served, and on all other persons who would have been bound by the said declaration if the proceedings wherein the declaration is made had been an action”. A declaratory judgment may be given “by way of anticipation with respect to any act not yet done or any event which has not yet happened”. The High Court may direct service of the summons on such persons as it thinks fit, to ensure that any person affected has notice and may take part in the determination.
[9] The jurisdiction under the Declaratory Judgments Act enables anyone whose conduct or rights depend on the effect or meaning of an instrument, including an agreement, to obtain an authoritative ruling. … Access to the jurisdiction does not depend on there being an existing dispute. Nor is it necessary that there be a lis. …
[43] Based on the principles set out in these cases, I am satisfied that the Court has jurisdiction to entertain the applications.
Mediation Heads of Agreement
[44] At this point, it is useful to summarise the relevant parts of the HOA entered into by the respondents on 20 September 2015. Norman’s Will had not bequeathed an interest in any particular property to any specific person. The Will provided for only one gift (the forgiveness of monies owed to Norman by the ND Thomas Family Trust) and, after payment of all debts and the estate administration expenses, directed the trustees to hold the residue equally for Eleanor and Alison.
[45] What, in fact, happened after Norman’s death was that the respondents occupied all of the properties that Norman had either owned or had an interest in and treated those properties as if they owned them. They did the same with the associated vehicles, stock and plant. The HOA essentially divided up the various properties and
10 Mandic v Cornwall Park Trust Board (Inc) [2011] NZSC 135, [2012] 2 NZLR 194 (citations omitted).
assets between the respondents. It set out a framework which was designed to achieve the ultimate goal of legal title to the properties being vested in the respondents who had occupied them.
[46] The arrangements were all predicated upon the transactions necessary to implement the HOA taking place on 31 March 2016.
[47] On that assumption, the HOA provided for the respondents occupying various properties and farming them for their own benefit and paying rental for various periods between 24 May 2012 and the proposed settlement date of 31 March 2016.
[48] The HOA also provided for the respondents in occupation of the various properties paying certain outgoings such as rates, water rates and insurance on, or before, 31 March 2016.
[49] Because of the HOA did not contemplate matters continuing unresolved after 31 March 2016, there was no express provision as to who paid rental or other outgoings beyond that period of time.
[50] Unfortunately, not even the rent and other payments specified in the HOA as being payable up until 31 March 2016, were in fact paid. This created severe cashflow problems for the trustees.
[51] Effectively the respondents had divided up the assets of the estate among themselves, leaving the trustees with virtually nothing to pay the estate’s liabilities. The estate’s taxation liabilities were substantial. This included tax on the deemed income that the trustees were supposed to be receiving by way of rental on the estate assets but which they were not, in fact, receiving from several of the respondents.
[52] There are a number of provisions of the HOA where the respondents cannot agree what they mean, and the Court has been asked to determine the meaning.
[53] The HOA also specifically contemplated that there would be further agreement which recorded the “precise mechanisms, to give effect to the intentions of this agreement”.
[54] As the terms of the HOA substantially varied the provisions of Norman’s Will, the HOA also acknowledged that to give effect to its terms, there would need to be a Court order. The HOA recorded, wildly optimistically as it turned out, that such an order could be made by consent.
[55] Self-interest appears to have been the primary driver of the respondents’ actions since the HOA was entered into. It is in Philip’s interest to maximise the costs and liabilities to be borne by the trustees because he will not share in the residue, if any, of the estate. Conversely, it is in Alison’s interest to maximise the liabilities and debts that are the responsibility of the Partnership rather than the estate. The more liabilities that fall on the Partnership, the less that fall on the estate.
[56] Eleanor is the only one of the three children of Norman who appears to be motivated to act responsibly and put the objective of co-operating to achieve finalisation of the estate ahead of her own self-interest. She is the only one who has consistently honoured her obligations and complied with the various Court rulings.
Frustrated contract?
[57] During the course of the hearing, I put it to counsel for all of the respondents that the many instances of failure by the respondents to carry out the terms of the HOA and the impossible position that this put the trustees in meant that effectively, the HOA had been frustrated. As a result, the various questions posed by the trustees should be answered on the basis that, while the trustees had done their best to carry out the wishes of the beneficiaries and implement a resolution of all the various claims that had been raised by the respondents against the estate, the point had been reached where the trustees should be relieved of any obligation to attempt to try and accommodate the wishes of the respondents as embodied in the HOA, and should be instructed to administer the estate in accordance with the Will.
[58] All of the respondents were opposed to such a course and submitted that the best prospect of resolving all outstanding issues was for the Court to proceed on the basis that the terms of the HOA should be enforced.
[59] While counsel for the trustees accepted that there could be a basis for a finding of frustration, they did not urge me to adopt such a position.
[60] I am persuaded, by a narrow margin, to proceed on the basis that the terms of the HOA are still capable of being enforced, and proceed with perhaps naive optimism, that the respondents will stop blaming the trustees for the length of time that has been taken to resolve this estate or the costs incurred in the process, accept personal responsibility to put self-interest to one side, and to co-operate to achieve the outcome envisaged by the HOA.
Approach to giving directions
[61] In accordance with the approach set out in [38] above, counsel for the trustees appended to their application a spreadsheet with four columns. The columns corresponded to the four different categories of issue:
(a)directions that were sought by the trustees but were disputed between the parties and the trustees;
(b)directions that were consented to by the parties on the basis that the trustees considered workable;
(c)directions sought by the trustees, consented to in principle by the parties, but which the trustees believed needed some modification in order to be made workable; and
(d)directions sought by the trustees (and in respect of one direction Alison) but where there was dispute between the parties.
[62] As counsel followed this format in their submissions, it is convenient to adopt it in this decision. Where issues are referred to by a number, that number is drawn from the schedule attached to the trustees’ amended application dated 20 May 2019 and refers to the numbered paragraphs in that schedule that the various topics are addressed in.
Column One – Issues between trustees and one or more respondents
The true meaning and effect of clauses 34 and 35 in the HOA
[63]Paragraph 1(e) of the trustees’ amended application seeks:
A declaratory order as to the true meaning and effect of clauses 34 and 35 of the Heads of Agreement entered into by the various parties in this litigation and dated 20 September 2015.
[64] There has been no agreement between the trustees and respondents as to the meaning of these clauses.
[65]The trustees submit that:
(a)The word “claims” should bear its ordinary meaning, as being “a demand for something as due; a statement of one’s right to something; a demand for payment in accordance with law; a right to make a demand”.11
(b)Clause 34 appears in a contract freely entered between sui juris beneficiaries. Presumably they had their own good reasons for covenanting not to bring any future claims against the trustees. It is to be contrasted with a trustee’s exclusion of liability clause/indemnity clause in a trust instrument.
(c)It does not derogate from the core of a trustee’s duties. A trustee would still owe his fundamental duties to beneficiaries. Clause 34 would be invoked to avoid the monetary consequences of any breach of duty owed to a beneficiary.12
[66] The trustees submit that, pursuant to s 17 of the Contract and Commercial Law Act 2017, a trustee would be entitled to rely on cl 34 as a defence to any claim brought against him by any signatory to the agreement. Therefore, full effect should be given
11 Shorter Oxford English Dictionary (6th edition, vol 1).
12 Andrew Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) at [5.4.9].
to these clauses and, in particular, cl 34 as providing a bar to the signatories suing the trustees for damages.
[67]Alison takes no issue with what the trustees are seeking on this point.
[68] Philip submits that, while the usual rules of construction should apply to the clauses, they should be read in the context of the agreement as whole, which was to resolve the testamentary and equitable claims made against the deceased’s estate. He contends that it is putting a strain on the words of the agreement to say that the parties were giving away their rights against the trustees if, for example, the trustees refused to implement the agreement or acted in a way inconsistent with the HOA.
[69] Eleanor submits that cl 35 speaks for itself. As for cl 34, however, she submits that the clause should not be interpreted to prevent a beneficiary from suing for a cause of action that arose after the HOA had been signed. It is noted that the clause specifically refers to claims “which they have made” and the clause then provides that they “will not bring any future claims”. She contends that that is to be interpreted as prohibiting the beneficiaries from bringing any claims which they had made or which they could bring in the future in relation to claims arising from events which had occurred prior to 20 September 2015, against the trustees. Eleanor does not accept that the parties have contracted out of their right to sue trustees for conduct that had not yet occurred. She notes that the trustees were not themselves signatories to the HOA and that it had been anticipated that the settlement date would be 30 March 2016.
[70]Eleanor proposes the following draft order:
Clause 34 does not prevent a beneficiary from bringing a claim against the trustees for conduct which arose after 20 September 2015, but the beneficiaries are barred from bringing any future claims against the trustees for conduct which occurred prior to that date.
[71]Simon and Mark did not make specific submissions on this point.
Analysis
[72] As set out in [25] above, at the time the HOA was entered into, there were a number of claims against the trustees by the various respondents seeking various forms of relief. There were also FPA claims on behalf of the children of the respondents.
[73] Foremost in the minds of the respondents would have been the satisfactory resolution of those claims. The respondents would have known that the trustees would not have agreed to any settlement which left outstanding and unresolved any of the then current proceedings against the estate.
[74] Although Norman’s grandchildren (other than Simon and Mark) were not party to the HOA, it is implicit that the FPA claims that had been lodged against the estate on behalf of Norman’s grandchildren were also being resolved by the HOA.
[75] I am supported in reaching this conclusion by the wording of cl 35 which expressly says: “All proceedings will be discontinued with no issues as to costs”. It is clearly implied that the parties to the HOA were authorised to act on behalf of Norman’s grandchildren who were claiming under the FPA.
[76] I interpret cl 35 as meaning that the parties to the HOA will withdraw all proceedings they have commenced against the estate and will also procure that their children who had commenced FPA proceedings would discontinue those proceedings as well.
[77] Clause 34 cannot be read in isolation to cl 35. Clause 35 clearly clarifies what cl 34 was intended to relate to: the proceedings that were then current.
[78] Clause 34 starts by saying that the parties will abandon claims they have made against the trustees of the estate. At that point, the only claims made against the estate were those alleging that by way of constructive trust, testamentary promise or some relevant statute, the respondents were entitled to various interests in the assets of the estate. There had been no suggestion at this stage that the respondents had any other sort of claim against the trustees.
[79] Given that background, I conclude that the words “and will not bring any future claims against the trustees of the estate” must be interpreted so as to refer to claims of a similar nature as those that were then before the Court and which were to be discontinued.
[80] I have not overlooked the fact that, in the memorandum on behalf of the trustees with respect to the mediation that had been prepared by Mr Brodie on 11 September 2015 and provided to the respondents at the start of the mediation, Mr Brodie had explained that the trustees had indicated that any settlement must recognise that the trustees would:
… pay all estate liabilities including costs of administration and in a way that the trustees and the estate are released from all liability.
[81] The respondents appear to have largely disregarded much of the contents of that memorandum and therefore there is no reason to believe that cl 34 was intended to give effect to that request.
[82] Mr McVeigh QC, on behalf of the trustees, took me through the case law which establishes that beneficiaries may agree to excuse a trustee from the monetary consequences of a breach of duty owed to the beneficiary and that such exoneration does not extinguish what he described as the “irreducible core obligations of the trustee”.13
[83] However, I do not accept that this is what the respondents intended to do in this case. Accordingly, I make the declaration in the terms set out in [69]-[70] above.
[84] The decision I have come to on this point does not, in reality, expose the trustees to any particular liability. The respondents have clearly consented to the actions of the trustees in attempting to implement the HOA and would therefore be unable to sue in respect of those actions. Nothing in cl 34 of the HOA in any way derogates from the indemnity given to the trustees at the time of the appointment. Neither does it affect the form of the indemnities that the trustees are entitled to receive, and which is dealt with later in this decision.
13 See Butler (ed) Equity and Trusts in New Zealand (2nd ed) at 5.4.9.
Halkett water agreement14
[85] The trustees signed a 10-year agreement with the Selwyn District Council (SDC) dating from 2015 to enable them to continue with their county stock water race scheme. Under the HOA, this property is to pass to Alison, whose trust (the Ednorm Trust) is to be the ultimate owner of Halkett. Her son Simon’s company (Hitcham) currently occupies the property. The 10-year agreement carries with it certain liabilities for the trustees, such as the payment of rental.
[86] The trustees seek a direction as to whether it is within their powers or a proper exercise of such powers:
(a)To decline to sign the one-year agreement?
(b)To require Philip to sign the 10-year agreement within five working days of the metering being completed?
(c)If the signed agreement is assigned rather than replaced with a new agreement, to require the trustees of the Ednorm Trust to provide Philip and the estate trustees with an indemnity for any liability they have as a result of entering into the SDC agreement.
[87] The trustees submit that this direction is only needed because, if the agreement is assigned rather than replaced with a new agreement, then it is only fair that they should have an indemnity for any liability they may have as a result of entering into the agreement.
[88]Eleanor submits that it is only fair that the trustees have such an indemnity.
[89] In response, Alison states that the Halkett water agreement cannot be assigned because the SDC will not allow it. The only way it can be transferred is by the present owners relinquishing their rights and the new owner applying. Even then there is no guarantee the new owner will get rights.
14 Schedule to the trustees’ amended application, cl 13.
[90] Alison further submits that the trustees and Philip have received rent from Mark up until 31 March 2016 under the HOA for Halkett valued as an irrigated property. However, the water agreement has still not been signed by Philip and the required meters had not been fitted prior to that date. She submits that the trustees need to require Philip’s signature as part of any “package” with him or take the necessary steps to enable Philip’s signature to be dispensed with, with directed costs consequences.
[91] As to indemnities, Alison submits the only risk is that of losing the water rights altogether because of the delay in metering or Philip not signing the agreement. She says it is difficult to discern what further indemnity the trustees themselves need beyond their usual s 38 indemnity,15 or equitable indemnity, arguing that any further risk is to the Syme/Reed interests and if anyone should be seeking an indemnity for those, it would be herself.
[92] Philip consents to the application for orders confirming that it is within the trustees’ powers to decline to sign a one-year agreement and, if the existing agreement is assigned rather than replaced with a new agreement, for the trustees to require the trustees of the Ednorm Trust to provide Philip and the estate trustees with an indemnity for any liability they have as a result of entering into the SDC agreement (cls 13(a) and (c) of the schedule to the trustees’ amended application), but opposes the order requiring him to sign a 10-year agreement within five working days of the meter being completed (cl 13(b)). He says this is because the Court does not have jurisdiction to empower the trustees to compel him to sign a contract. In addition, he notes there is no signed agreement that whoever uses the water will comply with the water agreement conditions and there is no signed lease.
[93] Philip states that his concern has been to establish the identity of who will be using the water. He submits that, if he signs the agreement, he will be liable for actions taken under it. While he has requested details of which of the Syme/Reeds will be farming Halkett and will therefore be responsible for complying with the terms of the agreement, he has not received a response. He says that once that response is received
15 Trustees Act 1956, s 38.
in writing, with confirmation that they will agree to comply with any terms, conditions or regulations set by the SDC, there should not be any issue with signing the agreement.
[94] In the memorandum of counsel for the trustees dated 18 December 2019, there is reference to the joint memorandum of counsel for the trustees and Alison dated 5 December 2019. This memorandum proposed that, until it was known whether the Council would permit the water agreement to be assigned or not, the issues in cl 13 of the trustees’ amended application relating to the Halkett water agreement could be put aside with leave reserved to the parties to apply to the Court in relation to the provision of an indemnity in the future.
[95] I am prepared to adopt this approach but, for the guidance of the parties, I express the preliminary view that if the agreement can be assigned then it is appropriate for the assignee to provide both Philip and the trustees with an indemnity in relation to any liability they may have incurred as a result of entering into or operating under the SDC agreement. This should be a straightforward and simple task that does not require any reference back to the Court.
Halkett water meter16
[96] A separate, but related issue to the Halkett water agreement is the question of who is liable for the supply and installation of the water metering equipment at Halkett (cl 12 in the schedule to the trustees’ amended application).
[97] The history of this matter is dealt with in the joint affidavit of John Bowden Mackintosh and Matthew Chadlow Hall dated 13 December 2018. The relevant paragraphs read:
[153] Halkett has a County stock water race known as the Paparua Water Scheme administered by the Selwyn District Council (SDC) running through the property. SDC has a Water Management Plan which allows for the allocation of irrigation water and at the time we were appointed, the Water Agreement had expired and was simply running on. As stated in [114] of Alison’s affidavit to support her application for directions, we received a one year agreement for the 2014-2015 year and a further agreement for 10 years commencing 2015.
16 Schedule to the trustees’ amended application, cl 12.
[154] The 10 year agreement has a condition in it that metering was to be installed to measure water use. It has been disputed between Alison, whose trust, the Ednorm Trust is to be the ultimate owner of Halkett, along with her son Simon’s company, Hitcham which occupies the property on the one hand and Philip on the other, as to who is to pay for the metering. We anticipate the cost will be approximately $12,000 plus labour.
[155] To get the work done to ensure compliance with the Water Agreement, we offered to fund the work from estate funds on the basis that once it was concluded by agreement, arbitration or by the Court, the party ultimately responsible would refund the estate. That offer has not been taken up. …
[156] As we stated in [49] income and outgoings for Halkett has for many years been treated as partnership income and outgoings.
[98] As to who is obliged to fund the installation of water meters on Halkett, Philip submits that his understanding is that Simon has fitted a new pump and changed the irrigation scheme. The Council’s changing requirements have arisen since the mediation but, even so, if Alison wishes to seek a refund, then it appears she ought to seek it from Simon who will be receiving the benefit of the improved metering.
[99] In her affidavit of 11 February 2019, Alison’s explanation for the claim for reimbursement in respect of the Halkett water meters is:
[63] The delays in settling the estate were having detrimental impact on the property at Halkett as there was non-compliant irrigation, from both health and safety and environment perspectives. Simon has now installed a replacement metered water pump and made appropriate infrastructure changes, on Halkett, at his own cost, as he could not risk using the old irrigation for another season. The cost of doing so was greater than the cost of the meters proposed by the trustees. I believe that Simon should be compensated for this amount from the estate or partnership.
[100] The HOA required Mark Reed to pay rent for Halkett for the period of occupation (24 May 2012 to 30 September 2015) jointly to the estate and Philip. The rental was to be based on the John Ryan valuation. This valuation valued Halkett on the basis that it was an irrigated property. The trustees and Philip were therefore obliged to provide an irrigated property. The 10-year agreement with the SDC required metering to be installed to measure water use.
[101] As the trustees noted at [49] of the joint affidavit of 13 December 2018, although Halkett is not an asset of the Partnership but was jointly owned by Norman and Philip and therefore is not recorded in the Partnership accounts, it had been farmed
in conjunction with other partnership properties and income from it, and outgoings relating to it, had been treated as Partnership income and expenses.
[102] It is not clear why the trustees offer to get the metering work done to ensure compliance with the water agreement and then have the question of liability determined by the Court was not taken up. There is conflicting evidence as to whether the work has yet been done and beyond the reference to the estimated cost being approximately $12,000 plus labour, it is not clear what the cost of the metering will be. As noted at [99] above, it may be that, as a result of other changes to the irrigation system, Simon has already installed a meter. However, where the land is being leased to Mark as irrigated land, the cost of complying with the agreement reached with the Council for the supply of water falls on the estate and Philip equally and should be treated as a liability of the Partnership in the same way as other outgoings in relation to Halkett were treated.
[103] I therefore direct that, within 15 working days of the issue of this decision, if no adequate meter has yet been installed, Alison, on behalf of the Ednorm Trust on the one hand and Philip and the trustees on behalf of the Partnership on the other hand, are to enter into an agreement to purchase and install metering at Halkett that complies with the obligations under the SDC agreement. If no agreement can be reached on the working specifications to determine that, they (the trustees) are authorised, on behalf of the Partnership, to complete the specification and the work, with payment to be made to them within 10 working days of the presentation by the trustees to the Partnership of the invoice. If suitable metering has, in fact, already been installed, Simon will, within 15 working days of this decision provide Philip and the trustees with the specifications of the meter and the claimed cost. Should there be any dispute by either Simon, Alison, the Ednorm Trust or Philip as to the appropriate specifications or cost, the trustees’ decision shall be final. The trustees, on behalf of the Partnership, shall then reimburse Simon.
Nordean indemnity17
[104] Nordean is owned by Nordean Farm Ltd and was farmed by the Partnership until 6 April 2012. It was then farmed by Alison’s trading entity, the A and I Syme Partnership until August 2016. Since then, it has been farmed by Philip.
[105] Norman was the sole director of Nordean Farm Ltd. On Norman’s death, Nordean Farm Ltd needed a director. The estate owned all of the 100 ‘A’ shares in the company (which had 40 votes each) and 1,900 of the 3,900 ‘B’ shares (which had one vote each). The other 2,000 ‘B’ shares are owned by the Thomas Family Trust. The trustees of the trust are Eleanor, Alison and Philip, as well as a Christchurch solicitor. The beneficiaries are Eleanor, Alison and Philip. It was not appropriate for any of them to be a director in view of their potential conflicts of interest. Given the estate’s controlling shareholding in the company, it was sensible for one of its trustees (specifically Mr Mackintosh) to agree to be a director. The duties of company director are no different to any of the other tasks carried out by the trustees that they were required to undertake in order to ensure the orderly resolution of the estate’s affairs. It is therefore appropriate that these costs be met by the estate.
[106] The trustees seek a direction that, having regard to the trustees’ powers or the proper exercise of such powers, upon resignation of Mr Mackintosh as sole director of Nordean Farm Ltd, they are entitled to require such of the parties as the Court directs to provide him with an indemnity in what is referred to as “the Kelly Deed”.18 They submit that it is a matter of fairness that he should be entitled to require such an indemnity.
[107] Eleanor has no objection to this, while Philip reserves his rights until the final version is provided for his consideration. He asserts, however, that “as a matter of fairness” there does not appear to be a compelling ground for granting what may be a potentially onerous obligation on the respondents, and that the scope of the indemnity is unspecified, and a more specific order should be advanced by the trustees.
17 Schedule to the trustees’ amended application, cl 15B.
18 This is the deed of indemnity prepared by Greg Kelly, a solicitor in Wellington acknowledged as an expert in the field of trust law.
[108] Alison argues that it is not at all clear what the need is for an indemnity from herself over and above the usual trustee indemnities operative at law, given that Nordean appears to have no unpaid income tax, compliance or others risks. She also notes that, under the HOA, she is disposing of her entire interest in Nordean to Philip and questions why she should provide an indemnity to the trustees when her interest is being conveyed directly to Philip and bypassing the estate. It is submitted that if an indemnity is required by the trustees for Nordean, it should come from Philip and be provided to both Alison and Mr Mackintosh who was the trustee who holds the Nordean directorship.
[109] There is no basis for Alison receiving an indemnity from Philip. Unlike Mr Mackintosh who discharged the position of director solely as part of his role as trustee, Alison was never a director of the company. She farmed Nordean for her own benefit between 6 April 2012 and August 2016. In the unlikely event that she did something during that period that created a liability for Nordean Farm Ltd, that should remain her responsibility.
[110] In a memorandum dated 13 December 2019, counsel for Eleanor proposed an order in the following terms:
John Mackintosh will resign as a director of Nordean Farm Limited and receive an indemnity on similar terms as the general estate indemnity from Philip, representing the continuing ownership of Nordean by him and his family.
[111] In submissions dated 13 December 2019, Philip’s counsel, at [34] appears to accept Eleanor’s proposed wording. In the trustees’ submissions of 18 December 2019 at [8], the trustees also appear to accept Eleanor’s wording.
[112] There is no doubt that the only reason Mr Mackintosh took on the role of director of Nordean was to facilitate his duties as trustee. He is therefore entitled to an indemnity. As the wording proposed by Eleanor seems to be accepted, I make a declaration that the question posed in cl 15B of the trustees’ amended application is answered in accordance with Eleanor’s proposed wording.
[113] The trustees also seek a direction as to who to transfer the shares and current account in Nordean to. The HOA provides little assistance in answering this question. It simply says:
That Alison Symes’ interests in Nordean, whether in her own right or as a current beneficiary under the Will and including any current account, will be vested in Philip Thomas on the following conditions:
(a)Philip Thomas receives the Nordean land on 31 March 2016;
(b)Legal title of the land will be provided on a date to be agreed with the Trustee.
[114] There seem to be two options: either the trustees transact a half-interest to Alison leaving her to then on-sell her complete interest at that point to Philip; or they transact the shares and current account direct to Philip leaving Alison to transact her own interest to him as a separate transaction.
[115] Both Eleanor and Alison have filed draft proposals as to how the estate should transact the shares in Nordean. The principal differences between the proposals are:
(a)Eleanor proposes that John Mackintosh, as director of Nordean, shall declare a dividend of $300,000 to utilise available imputation credits;
(b)the payment to the trust in respect of rent is $116,928 instead of
$162,400 with the difference being accounted for by income tax of
$45,472 calculated at 28 per cent.19 Nordean is to then meet its tax obligation of $45,472 in respect of the rental received; and
(c)Eleanor’s proposal provides directions in relation to the variation of Norman’s Will and the manner in which Philip will acquire both Alison’s and Eleanor’s interests in Nordean and the ND Thomas Family Trust.
19 Nordean is an exception to the agreed rate of 33 per cent set out in Item 3 of the schedule to the joint memorandum of counsel dated 17 December 2019.
[116] In their submissions filed on 18 December 2019, the trustees refer to Eleanor’s draft proposal and indicate that while these matters are between the parties, from an estate administration point of view, they agree with the approach.
Analysis
[117] If there are imputation credits to be had, and there is no disadvantage to the estate, there is no reason why Mr Mackintosh should not declare a dividend. The only downside to Nordean is that it incurs a liability to pay withholding tax understood to be at a rate of five per cent (ie $15,000). The company will not have the funds to do that and that is why it is necessary for Philip to provide the funds to the company to pay the tax liability. However, given Philip’s track record of not paying sums directed by Court orders, it is necessary that, prior to Mr Mackintosh declaring a dividend that Philip actually advance to the company sufficient funds to cover the withholding tax liability. If he does not do that, then Mr Mackintosh is under no obligation to declare a dividend.
[118] The deduction of $45,472 from the $162,400 to be by Nordean Farm Ltd to the ND Thomas Family Trust and the consequent reduction in the capital payment from the trust to Alison by the same amount is necessary to ensure that Nordean has funds with which it can pay its taxation liability on the rental received.
[119] The proposals by Eleanor as to how the transactions are to be implemented are sensible and practical. The most efficient way for the trustees to facilitate the implementation of cls 3 and 7 of the HOA would be for them to transfer Alison’s interest in the company shares to her and for her to transfer those and her interest in the current account to Philip.
[120] Accordingly, and subject to the qualification set out in [117] above in relation to the dividend, the questions posed in cls 15, 15A and 15B of the trustees’ amended application, are answered in accordance with draft order 14A attached to the submissions of Eleanor’s counsel dated 13 December 2019.
[121] Finally, with regard to issues relating to Nordean, Alison has raised the attribution of the Nordean transacting costs. She submits that the costs of transacting
to Philip should be paid by Nordean, not the estate. The joint memorandum filed by counsel for the respondents dated 17 December 2019 dealt with transacting costs. Under the heading “Item 20 – Liability for transaction costs”, it said:
The costs of the trustees relating to the transaction costs are to be paid by the purchaser or in relation to Yaldhurst, by Eleanor Marr, in whole and are not to be treated as costs in the administration of the estate.
[122] Consistently with this agreement, I make a declaration that the costs of transacting Nordean are to be paid by Philip.
Apportionment of costs of administration20
[123] Alison is seeking a direction that the trustees should claim reimbursement from the Partnership for costs, expenses and disbursements incurred by them since the beginning of their administration which, she says, were incurred in relation to the Partnership and Partnership disputes with Philip.
[124] The trustees, however, note that, although the question of apportionment of costs was on the list of issues which the parties were asked to address at the mediation, the HOA was silent on the issue. They contend that, if it had been dealt with, they would have kept separate records from that point onwards.
[125] It is submitted for the trustees that there will be a considerable workload for which they should be paid and will almost inevitably lead to a lengthy further dispute between Alison and Philip. The trustees’ stated preference is that those expenses all be treated compendiously as costs in the administration of the estate and not apportioned to individual parties.
[126] Consequently, they seek a declaratory order that the HOA properly construed means that because it is silent on the apportionment of costs, the trustees are to be released from claiming reimbursement of Partnership-related costs or any other costs.
[127] If not, they want to know if it is within their powers, or a proper exercise of such powers to:
20 Schedule to the trustees’ amended application, cl 19.
(a)require a finalised list of those issues where the trustees are to claim reimbursement;
(b)require that the trustees’ decision will be final as to the amount; and
(c)charge for that apportionment.
[128] Philip agrees with the trustees’ submission on this matter, submitting that if the trustees had to apportion expenses between the Partnership and the estate, it would be an enormously costly and time-consuming exercise.
[129] Eleanor notes that there is no requirement under the HOA that the trustees apportion their time as between the Partnership and the estate, and submits that, not only would the cost of undertaking such a task now be out of all proportion to the outcome, it would inevitably be contentious.
[130]She submits the following draft order:
The trustees are released from claiming reimbursement of partnership related costs or any other costs.
[131] Alison submits that costs that are “internal” to the Partnership should be attributable to the Partnership in the first instance, not the estate. She contends that it is not an answer to assert that the HOA was silent on the issue. It is argued that it is presumably a matter of record keeping and if the amounts at issue are significant then it is not sufficient for the trustees to effectively say that it is all just too hard. As the trustees themselves point out, the fact that the Partnership is a separate entity from the estate is a concept which “has often been overlooked by the parties”.
[132] At the hearing, counsel for Alison invited the trustees to indicate whether they would be prepared to provide an estimate as to the likely division of total costs as between the Partnership and estate business respectively. Counsel for the trustees confirmed that they would but indicated that it could only be approximate. The qualification was that, before they understood such an exercise, all parties to the proceeding would need to consent. Such consent has not been forthcoming.
[133] The trustees ask that, if the Court requires the trustees to apportion costs as between the estate and the Partnership, then it records that the trustees are entitled to charge for such work.
Analysis
[134] The HOA did not address the issue of apportionment at all. This was in spite of the fact that apportionment was on the list of issues which the trustees asked the parties to the mediation to address. Not unreasonably, the trustees assumed that because it was not dealt with in the HOA, it was of no moment to the parties and they have not kept separate records. They cannot be criticised for adopting that approach.
[135] The trustees say that producing the information Alison requires will be a considerable workload and when done, will inevitably lead to a further dispute between Alison and Philip. There is force in both propositions. Given that the reason that the trustees did not keep separate records is because they reasonably believed that the parties did not require them to, it is appropriate for them to be able to charge for the work involved in undertaking any reconciliation.
[136] The trustees are only involved in the Partnership in their capacity as trustees in Norman’s estate. To that extent, attending to Partnership matters is just another aspect of their duties as trustees. Under the Partnership agreement, neither partner is entitled to charge the Partnership for dealing with disputes with the other partner. Philip would certainly not be able to charge the Partnership for these sorts of matters. However, this is different to the situation where the trustees have had to undertake legal work solely referable to the Partnership. Examples might be:
(a)negotiating a contract for the Partnership;
(b)dealing with the bank in respect of the Partnership’s overdraft or mortgage liabilities;
(c)preparing and finalising the Partnership’s annual accounts; or
(d)dealing with the IRD re the Partnership’s tax liabilities.
[137] These are activities that the Partnership should appropriately bear the cost of. The fact that there are some sorts of activities that are properly attributable to the Partnership is no doubt why the trustees specifically asked for the issue of apportionment to be addressed in the HOA.
[138] The Court is in no position to make an informed decision as to what proportion of the trustees’ costs are attributable directly to the operation of the Partnership. All that can be said with confidence is that some of the trustees’ costs are so attributable. The Court has no idea whether the quantum of such costs would exceed the expenditure incurred by the trustees in calculating the apportionment.
[139] However, as the exercise will shift the burden of at least some costs from the estate to the Partnership, in the absence of agreement by all the respondents that no apportionment is required, the Court has to order that an apportionment be done. However, the approach to this must be pragmatic and any assessment will have to be broad-brush.
[140] I therefore answer the question posed in cl 19 of the trustees’ amended application with the following declaration:
(a)The trustees are required to apportion their costs as between the estate and the Partnership on the basis that costs involved in disputes with Philip as to matters of the operation of the Partnership or interpretation of the Partnership deed fall on the estate and costs directly related to the operation of the Partnership, such as those mentioned in [136] above, are to fall on the Partnership.
(b)The apportionment exercise is required to be undertaken to the extent possible on a broad-brush basis with the trustees to be mindful of the costs involved in comparison to the sums in issue.
(c)The trustees’ decision as to which category a cost falls in is final.
(d)The trustees are entitled to charge the estate for all work in relation to the apportionment exercise.
Trustees’ indemnity and securities21
[141] The trustees seek directions as to whether it is within their powers or a proper exercise of such powers:
(a)To require the parties, prior to any property being transacted, to grant to the trustees indemnities in the “Kelly Deed” and securities as set out in the subparagraphs below?
(b)To require Philip to provide, as security for the indemnities, a registered first mortgage on the Auckland District Law Society mortgage form 2015/2009 over Mays and a mortgage of the estate’s shares in Nordean Farm Ltd once the constitution has been amended to provide the trustees with the right to wind up the company; or a registered first mortgage over McCauslands (less the Pitts Road Block) in the mortgage form as above?
(c)If, at his request and with the trustees’ approval, Philip opts for the purchase of Mays and the shares in Nordean Farm Ltd, or McCauslands (less the Pitts Road Block) to be a trust, a company or a partnership, to require him to arrange for the trust, company or partnership, together with the trustees, directors, shareholders and partners, to guarantee (in a form approved by the estate’s trustees) his performance under the indemnities; and for those guarantors to provide as security for the indemnities, and their guarantee or guarantees, a registered first mortgage on the Auckland District Law Society mortgage form 2015/2009 over either Mays and a mortgage of the Nordean Farm Ltd shares once the constitution has been amended to provide the trustees with the right to wind up the company; or a registered first mortgage
21 Schedule to the trustees’ amended application, cl 28.
over McCauslands (less the Pitts Road Block) in the mortgage form above?
(d)To require Alison to arrange for the Ednorm Trust to guarantee, in a form approved by the estate trustees, her performance under the indemnity; and for the Ednorm Trust trustees to provide as security for the indemnities and their guarantee, a registered first mortgage on the Auckland District Law Society mortgage form 2015/2009 over Halkett?
(e)To require Eleanor, subject to the sale of Yaldhurst, to provide as security for the indemnity the sum of $2 million?
(f)To require all parties to provide a credit line totalling $1 million to be drawn down by the trustees?
[142] It appears to be accepted by the respondents that, in principle, the trustees are entitled to indemnities to cover their position and exposure to contingent liabilities.
[143] Counsel for the trustees contends that the respondents in these proceedings should provide to the trustees’ indemnities and securities satisfactory to the trustees in the trustees’ absolute discretion. It is submitted that:
(a)A trustee has a right of indemnity against the trust assets for liabilities incurred in performance of the trustee’s duties. The right of indemnity may be expressly provided for in the trust deed or implied at equity. In this case, there is specific provision in the Court order appointing the trustees. There is also a statutory right of indemnity provided in s 38(2) of the Trustee Act 1956.
(b)The right of indemnity against trust assets exists where a trustee has paid trust expenses from his or her personal funds and seeks recoupment of those funds. It also exists where liabilities have been
incurred but have not yet been paid. In that case, the trustee seeks to pay the liabilities out of trust assets.
(c)The trustee’s rights of indemnity take priority over the beneficiaries’ interest in the trust property. However, a trustee can only call on the indemnity if a liability has been properly incurred.
(d)The trustee retains the right of indemnity and his or her equitable lien, even after he or she has resigned as trustee or been replaced.
(e)Protection and enforcement of the trustee’s right of indemnity is by way of an equitable lien over the assets of the trust. This creates a proprietary interest in the trust property in favour of the trustee where the right is one of recoupment. In New Zealand, it appears that it also creates such a proprietary interest in the trust property where the right is one of exoneration.
(f)The equitable lien therefore supports the registration of a caveat and may be enforced just like any other charge over land, that is, by order of sale or court order.
(g)The lien comes into existence when the right of indemnity arises, that is at the time the liability is incurred. It is not always necessary for the amount of the liability to be determined in order for the trustee’s charge or lien to arise.
[144] In short, the trustee’s position is that, in the particular circumstances of this case, it is eminently reasonable that they should be entitled to insist on both indemnities and securities. This is said to be particularly so because of the history of this estate and the disputatious nature of some of the protagonists.
[145] Alison does not dispute the trustees’ right of indemnity but is opposed to them seeking an indemnity which goes beyond the entitlement they already have. She considers the “Kelly Deed” indemnity to be very far reaching, arguing that the security
sought is excessive and that there is no need for their indemnity to be secured over the properties to be transferred, noting they already have a court ordered indemnity. The requirement that all parties provide a credit line totalling $1,000,000 is said not to be necessary in order to meet the trustees’ expense which are covered by the shortfall contributions ordered by the Court of Appeal.
[146] Alison submits that, if the Court does determine that the trustees are entitled to a security, it must:
(a)be calculated on the reasonable probability of there being future demands by the IRD against the trustees for that amount;
(b)attach to the properties in proportion to the share each party is to receive from the estate; and
(c)be based on up to date valuations. In particular, Yaldhurst has previously been valued on its rural use and not on its commercial potential.
[147] Philip accepts that the trustees are entitled to an indemnity and some security but does not accept that the test as to what constitutes reasonable indemnities and security is at the “trustees’ absolute discretion”. If that were so, he submits, the trustees would have absolute carte blanche to retain as much as they wanted, despite the beneficiaries disagreeing with the assessment and the Court taking a contrary view. He submits that to grant the orders as sought by the trustees would amount to an astonishing extension of trustees’ rights and would be contrary to authority, relying on Re Yorke (deceased)22 and Dawson v Sneddon.23
[148] He opposes the trustees’ request for indemnities and securities on a number of grounds, including that they have not provided evidence justifying the level sought, they are already entitled to $624,000 per year until such time as the Court of Appeal orders are varied or discharged.
22 Re Yorke (deceased) [1997] 4 All ER 907 (Ch).
23 Dawson v Sneddon [2019] NZHC 736.
[149] Eleanor accepts that the trustees are entitled to indemnities from all parties but suggests that the major focus should be on the securities and, in particular, the length of time for which the securities are to be held. She has offered to put up security of up to $2,000,000 being held in the trust account of her solicitor, on terms which are agreeable to the trustees and herself but, at this stage, agreement has not been reached. It appears that the issue is one of timing, as having that sum of money tied up is clearly a significant financial imposition on Eleanor and her family, and their farming interests.
[150] Eleanor submits that neither the trustees’ indemnities nor their securities should exceed what is reasonably required, and that the levels required should become clearer once accounts have been finalised and returns filed with the Inland Revenue Department.
[151] Eleanor advised that, in addition to the indemnity and securities, the parties have also agreed to provide a credit line totalling $1,000,000 to be drawn down by the trustees on the terms set out in the draft order below. This credit line is to be provided by the respondents as to $200,000 each. The specific issue of the credit line is discussed at [157] below.
[152]Eleanor proposes the following draft order:
(a)The parties, including Mark and Simon, are, prior to any property being transacted, to grant to the trustees indemnities, but the form of those indemnities and the securities over which they are to be taken, are to be determined by either agreement or the Court.
(b)Philip is to provide as security for the indemnities a registered first mortgage on the Auckland District Law Society mortgage from (2015/2009) over Mays.
(c)Alison is to arrange for the Ednorm Trust to guarantee, in a form approved by the estate trustees, her performance under the indemnity; and for the Ednorm Trust trustees to provide as security for the indemnity and their guarantee, a registered first mortgage on the Auckland District Law Society mortgage from (2015/2009) over Halkett or, alternatively, to provide as security for the indemnity a sum of cash equivalent to Eleanor as set out in (e) herein.
(d)In the event that Alison’s security for the indemnity is insufficient to cover any liability of Mark and Simon, then Mark and Simon are to
provide a security for their indemnity as the trustees require and the Court directs.
(e)Eleanor, subject to the sale of Yaldhurst, is to provide as security for the indemnity, on terms which are agreeable to her, a sum of up to
$2,000,000.
(f)All parties are to provide a credit line totalling $1,000,000 to be drawn down by the trustees, but the trustees cannot draw down on the credit line as and when they determine but firstly, the credit line of the person or entity who has the primary liability shall have their credit line drawn upon in the first instance, and that there shall be appropriate cross indemnities as between the person providing the credit line, should the trustees have to call on a credit line of a person who was not primary liable or the liability which arose, but the trustees must at all times act reasonably in any draw down on the credit line.
[153] In the joint memorandum of counsel for the respondents dated 17 December 2019, the respondents set out a detailed proposal relating to the trustees’ indemnity and securities. That proposal represented considerable progress toward resolution but was not entirely acceptable to the trustees.
Analysis
[154] I will deal with each of the points of contention (excluding the credit line issue) separately in the order that they appear in [12] of the trustees’ memorandum of 18 December 2019:
(a)Firstly, the trustees submitted that the extent of the first mortgage to be given by the third and fourth named respondents (the Reeds) should be defined.
By memorandum dated 20 January 2020, counsel for the Reeds responded to this by referring to the contents of [1](c) and (d) on page 9 of the respondents’ memorandum of 17 December 2019. It was submitted that these clauses defined the extent of the mortgages to be given by Mark and Simon as $500,000 each. In reply to that, the trustees filed a memorandum dated 22 January 2020 noting that, in the memorandum of 17 December 2019, Mark and Simon had both referred to offering a second mortgage whereas the memorandum of
20 January 2020 had referred to “… the extent of the first mortgage to be given by Mark Reed and Simon Reed.”
The trustees said that they would agree to a second mortgage being provided as security for the indemnities of Mark and Simon but with the first mortgages having a priority of $500,000.
To the extent that there is an ambiguity, it can be clarified by amending [1](c) of the joint memorandum of counsel for the respondents dated 17 December 2019 so that it reads:
Mark is to arrange for the entity that receives his share of Cridges to guarantee, in a form approved by the estate trustees, his performance under the indemnity; and for the registered proprietor of his share of Cridges to provide as security for the indemnity and their guarantee. A registered second mortgage on the Auckland District Law Society mortgage form (2015/2009) provided that the first mortgage secures the sum no greater than $500,000.
A similar change in wording can be made to [1](d) relating to the mortgage from Simon.
(b)Secondly, the trustees submitted that Eleanor should provide as security a bank guarantee in favour of the estate for $2 million to be maintained until the securities are discharged. The relevant provision in [1](e) of the respondents’ memorandum said:
[354] Dunningham J granted the injunction sought on a number of conditions which included the obligation on Simon and Mark to pay all outgoings including rates and insurance. The decision was very specific as to whom the rent was due. It stipulated:42
… that such rental is to be paid half to the estate as one-half owner of the property and half to Philip as the other co-owner.
[355] The rent was payable until further order of the Court. The HOA also dealt with who Simon was meant to pay the rent for Cridges to. Clause 20 stated:
39 Mackintosh v Thomas, above n 2, at [19].
40 At [45].
41 At [51].
42 At [60(c)].
Simon Reed pays the half the rent of the John Ryan rent valuation for Cridges to the ND and PD Thomas Partnership for the period of occupation from 24 May 2012 until 30 September 2015.
[356] Simon paid the sum of $94,444.14 into the trust account of Philip’s lawyers, Young Hunter, on account of rent. That figure was inclusive of GST. Young Hunter credited the entire sum to Philip. Simon did not pay any money to the estate.
[357] There is no agreement between the respondents as to whether Philip should be required to account to the trustees for half of the rental, whether it should be debited as a drawing to his current account or whether the trustees are obliged to pursue Simon for payment of a similar sum to them.
[358] There are a range of views among the respondents. Eleanor expressed the view that she thought that the payment was to go to Philip for rent owed to Philip personally, although, in oral argument, her lawyer acknowledged that this is not what was recorded in the HOA. He also indicated Eleanor’s view that how it was recorded was not really going to affect her.
[359] Alison contends that in order to give effect to cl 20 of the HOA, Philip should refund $94,444.14 to the Partnership in cash.
[360] Philip submits that the money paid by Simon into Young Hunter’s trust account was intended by Simon to be for his personal benefit and not that of the Partnership. He gets to that position by noting that, in the case before Dunningham J, it was Simon’s contention that he should be entitled to the half-share in Cridges owned by the estate and therefore should only have to pay half the rent in respect of that part of the land that represented Philip’s share of the Partnership.
[361] Acknowledging that cl 20 of the HOA referred specifically to the rent being payable to the ND and PD Thomas Partnership, in his written submissions of 14 November 2019, Mr Evans, counsel for Philip, submitted:
When the Heads of Agreement refers to payments to the Partnership, it is effectively shorthand for payments to Philip.
[362] As an alternative position, Mr Evans argued that Dunningham J’s judgment required half the rental to be paid to Philip and half to the estate and that “the position as between Simon and the estate is entirely a matter for them, and it does not affect Philip’s entitlement to use the money received as he sees fit”.
[363] In their submissions of 25 November 2019, the trustees submitted that where land is owned by the Partnership, the entity entitled to receive the rent is the Partnership, with all rent payments being recorded in the Partnership accounts. They submitted that the right of the individual partners is limited to receiving their share of Partnership profits and their right to share in the Partnership assets on dissolution.
Analysis
[364] The position argued for on behalf of Philip is untenable on a number of grounds. The obligation on Simon to pay rent for Cridges did not reflect his view of what his obligations were. It was imposed on him by the Court. In directing that he had to pay the full rent, not just half of it, Dunningham J specifically rejected Simon’s claim that he should only have to pay half rent.
[365] The Partnership existed at the time the rental obligations accrued, and the payment was made. The trustees’ submission that when land is owned by a partnership, what the partners are entitled to share in, is the net profit, not a particular income stream, is correct.
[366] Simon could not subvert Dunningham J’s decision by paying only one-half of the rent and not the other half. The HOA came into effect after Dunningham J’s decision. It clearly unequivocally imposes an obligation to pay rent to the ND and PD Thomas Partnership. If the signatories to the HOA intended that the rent was to be paid only to Philip, they would have said so. They said the opposite.
[367] Accordingly, I make a declaration that the $94,444.14 is to be brought into the Partnership accounts as a receipt of rental due to the Partnership and then debited to Philip’s current account with the Partnership in the year payment was received.
“Other beneficial interest”
[368] After listing the various assets of the estate that the respondents wanted to divide up among themselves, cl 6 of the HOA provides:
That any other beneficial interest the Estate has in the ND and PD Thomas Partnership will vest in Philip Thomas.
[369] The respondents cannot agree what this means. Philip claims that it includes the estate’s current account with the Partnership with the consequence that he is not obliged to equalise his current account with that of the estate as part of the process of dissolution of the Partnership.
[370] Alison says that it has nothing to do with the current account; that the HOA specifically provided for the Partnership to continue in existence and that normal principles of partnership accounting and law apply until the Partnership is dissolved.
[371] The trustees do not take a partisan position but emphasised that they have consistently made it clear to the respondents, both before and after the mediation that led to the HOA, that they intended to conduct the affairs of the Partnership in accordance with standard principles of partnership law.43
[372] In the course of oral argument, Mr Weatherly, for Philip, submitted that the wording used by Norman in the statement of claim he filed in the proceedings issued against Philip in relation to his notice of dissolution of partnership was relevant. He referred to [7] of that document where Norman had asserted he was entitled to the “legal beneficial ownership” of a one-half share in all of the jointly owned land and Partnership assets.
[373] Mr Weatherly submitted that the use of these words “sheds a great deal of light” on what the term “beneficial interest” in the HOA was intended to mean. Unfortunately, he did not develop that submission and it is not immediately obvious how a reference to language used by Norman in proceedings issued before his death
43 Sections 42 and 47 of the Partnership Act 1908 set out the process to be followed on dissolution of a partnership. See also Frances v Frances [2018] NZHC 1753 at [28]-[30].
is of any assistance in understanding what the parties to the HOA meant by their use of the term “beneficial interest”.
[374] In his written submissions of 25 November 2019, Philip’s counsel submitted that the purpose of cl 16 of the HOA was to ensure that Partnership assets that were not otherwise disposed of by the HOA such as sundry debts and investments would be transferred to Philip and need not be the subject of any distribution by the estate.
Analysis
[375] While it is permissible, in certain circumstances, to have regard to extrinsic facts when interpreting a document,44 the starting point is the plain and ordinary meaning of the words used. The context of the language being used is also important.
[376] The concept of a beneficial interest is well understood at law. It is often used to describe an interest arising under equity, such as that of a beneficiary under a Will or trust. It is also commonly used to distinguish the interest in question from a legal interest. A legal interest in land will be created by a legal process such as the registration of a transfer or the execution of a deed.
[377] A current account in a partnership is a debt. It records the sum owed by the Partnership to the holder of the current account. It is capable of precise calculation and will often fluctuate according to what capital the partner introduces to, or withdraws from, the partnership.
[378] A debt of this nature is the opposite of a beneficial interest. There is nothing in the HOA or in any admissible intrinsic evidence that would support the submission that the parties to the HOA intended to include the current account in the concept of “other beneficial interest”.
[379] Indeed, if the issue of context is looked at, there is clear evidence that in the surrounding clauses, where the parties wanted to make it clear that a particular
44 See Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5 at [19]; and Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912 per Lord Hoffmann.
arrangement was to include a current account, they expressly referred to the current account.
[380] The clause immediately following the clause in question says, in relation to what interest Philip is to receive in Nordean Farm Ltd and the Thomas Family Trust:
7. That any interest, including any current account, Alison Syme has in Nordean Farm Ltd and the Thomas Family Trust will be vested in Philip Thomas.
[381] A similar form of words was used in cl 3 of the HOA which referred separately to rights as a beneficiary and the contents of a current account. It said:
3.That Alison Syme’s interests in Nordean, whether in her own right or as a current beneficiary under the Will and including any current account, will be vested in Philip Thomas on the following conditions
…
[382] The surrounding wording in the HOA shows that the respondents treated a current account as something different to a beneficial interest and that, when it was intended that a current account vest in a particular party, that was specifically stated.
[383] The factor that militates most strongly against the interpretation being advanced by Philip is the provision in the HOA that the Partnership was to continue in existence until dissolved.
[384] The clear implication of this provision is that, until dissolved, the estate would benefit from the Partnership assets and income which had not been otherwise allocated. Philip has been clear that he expects the estate to meet an equal share of the ongoing liabilities of the Partnership. If the estate is obliged to meet its share of the Partnership liabilities in cash, but Philip can simply have his current account debited and never have to equalise the current account, the whole basis of the HOA would be undermined.
[385] The respondents were aware at the time that they entered into the HOA that the trustees intended to apply orthodox accounting principles to the estate and Partnership. Nothing in the HOA determined what was to happen on dissolution of the Partnership.
[386] At the time of the hearing, the imbalance in the partners’ current accounts was some $2.9 million in favour of the trustees. In their written submissions of 25 November 2019, the trustees said that:
Ordinarily, the trustees would expect to receive the first $2.9 million of the assets available for distribution on dissolution with all remaining assets being distributed equally.
[387] Philip’s accountant, Raelene Rees, at [16] of her affidavit of 12 September 2016 says that historically, the Partnership never required a reconciliation of the current accounts each financial year and implies that none should be required on dissolution.
[388] However, in that affidavit she also acknowledges that she has never seen a copy of the Partnership deed. The Partnership deed specifically requires that the capital of the Partnership is to be contributed in equal shares.
[389] Whatever practice the partners may have followed in preparing the annual accounts cannot dictate what should happen on dissolution. The deed requires capital to be contributed equally. If the current accounts are not equal as at the date of dissolution, whoever has the imbalance in their favour, is entitled to a sum representing that imbalance before the remaining Partnership assets are distributed equally.
[390] Any beneficial interest that the estate might have in the Partnership can only be calculated as at the date of dissolution. Whatever that is, will then form part of the residue to be distributed in accordance with cl 36 of the HOA.
[391] As to when a dissolution should be, the trustees proposed that this should be the major distribution date unless the Court directed otherwise, or all the respondents agreed.
[392] The respondents have not agreed on any alternative date. The major distribution date seems to be the most efficient date for the dissolution.
[393] Therefore, in answer to the questions posed at [77] of the trustees’ submissions of 25 November 2019, I make the following declarations:
(a)The term “other beneficial interest” used in cl 6 of the HOA does not include any current account.
(b)Nothing in the HOA alters the application of normal accounting principles on the dissolution of the Partnership, nor does the HOA alter the Partnership deed’s requirement that there be equal capital contribution.
(c)On dissolution date, if the current account balances have not been equalised, the partner with the greater balance will receive the amount of the imbalance first with the remainder to be divided equally.
(d)The Partnership shall be dissolved on the major distribution date.
(e)The “other beneficial interest” can only be calculated once the Partnership dissolution accounts are settled. Whatever it might consist of will be transacted once the dissolution accounts are agreed to.
Clause 10 – Debts claimed by Philip
[394] By consent, the following declarations can be made in relation to the debts claimed by Philip:
Any reimbursement claimed by Philip, including the following amounts:
(a)irrigation logistics for Cridges – $5,738.50;
(b)EQC Steeles, McCauslands and Cranmore – $1,416.90;
(c)Westpac loan fee – $500;
(d)heat pump McCauslands – $8,500;
(e)carpet – Cridges – $1,039;
(f)clean up trees – Cranmore – $17,968.75.
Total: $36,173.25
are not to be estate liabilities and are to be paid by the Partnership upon the production of satisfactory invoices by Philip.
[395] A further declaration is made, not by consent, to avoid the possibility of a dispute over what is a “satisfactory invoice”:
The trustees’ decision as to what amounts to a satisfactory invoice is final.
Money owed to the estate on account of NT Farming
[396] The respondents resolved a dispute amongst themselves as to what Simon owed the estate in respect of NT Farming Ltd at the sum of $18,000 plus GST. The trustees have proposed slightly different wording with the only significant difference being that it clarifies that any tax liability incurred by the estate as a result of implementing what is proposed by the respondents that will be borne by him.
[397]Accordingly, I make the following declaration:
Simon will pay to the estate on transaction date $18,000 plus GST (if any) in full and final settlement of its claim relating to NT Farming and Simon acknowledges that any tax liability of the estate arising from the settlement will be refunded by him.
Interest on accounts
[398] The HOA specified a default interest rate of six per cent per annum in respect of any late rental payments by Mark and Simon, but otherwise said nothing about what was to happen when other payments mandated by the HOA were not made on time or at all.
[399] The trustees’ position on interest was set out at [96] of their submissions of 25 November 2019 where they said:
The parties are free to agree on the extent (if any) to which interest is to be pursued. In the absence of such agreement, the trustees consider that they are bound to take steps to recover this interest unless otherwise directed by this Court. The trustees seek a declaration whether they are obliged to pursue possible interest claims and on what accounts.
[400] The trustees, in their memorandum of 11 September 2015, have indicated their view that interest at 5.5 per cent was payable on all unpaid accounts including rental. Such a clause did not make its way into the HOA. However, what can be drawn from cl 17 of the HOA is that all the respondents applied their minds to what a default interest rate should be on a late payment of rental (specifically a late payment by Mark or Simon) and that was six per cent per annum. I accept that as the default rate on all late rental payments.
[401] An issue of equity arises as between the respondents as a result of the fact that Eleanor consistently paid all of her rental in full and on time. Philip and Alison did not. Mark and Simon initially did not until ordered by the High Court to do so.
[402] It was not contemplated by the signatories to the HOA that only one of them would pay their rent in full and on time. The only way to do equity by Eleanor is to require the other respondents to pay interest at six per cent on their late rental payments.
[403] Another issue between the respondents is as to what the consequences of the failure by Philip and Alison to pay the shortfall payments ordered by the Court of Appeal should be given that Eleanor made all the payments on time. Eleanor incurred funding costs on the money she borrowed to pay her shortfall contributions. Other than in relation to this matter, the respondents had agreed that the trustees are not obliged to pursue any other recovery of interest. The two unresolved matters are therefore interest on the outstanding Malley & Co invoices for Mr Mackintosh’s fees as trustee (which as at the date of the hearing was some $132,521.91), and whether interest should be paid by Alison and Philip on their late payment of the sums ordered to be paid by the Court of Appeal.
Malley & Co debt
[404] Philip’s position was that a lawyer can only charge interest on his unpaid fees if liability for interest was specified in the lawyer’s client care letter. He also submitted that if a client care letter was signed on behalf of the estate by Mr Mackintosh, he would have had a conflict of interest rendering any such agreement invalid.
[405] Eleanor’s initial position was that a trustee is not entitled to interest on their account for fees relying on Foster v Spencer.45 But in the memorandum of her counsel dated 13 December 2019, she accepted that Malley & Co were entitled to charge interest but, because she had always paid all the sums due from her on time, she submitted that the liability to pay interest should fall on Philip and Alison.
45 Foster v Spencer [1996] 2 All ER 672.
Analysis
[406] During the Court hearing Mr McVeigh, without objection from any of the respondents, produced correspondence from Mr Mackintosh to the original trustees prior to the current trustees accepting appointment. That correspondence included Malley & Co’s standard terms and conditions of engagement. The terms of engagement included an entitlement to charge interest on fees and disbursements at 14 per cent per annum.
[407] The then trustees agreed in 2013 to the terms of engagement. However, Malley & Co’s fees were not promptly paid, and on 12 May 2016 they wrote to the estate’s solicitors indicating that, in accordance with their normal terms and conditions, they would begin, at the end of that month, charging interest at 14 per cent. That letter was emailed to all the respondents’ lawyers by the estate’s solicitors.
[408] Philip’s lawyer challenged Malley & Co’s right to charge interest and was forwarded a copy of the terms and conditions outlining that right. The invoices from Malley & Co after May 2016 showed the amount of fees outstanding and the amount of interest.
[409] I am satisfied that prior to the appointment of Mr Mackintosh as a trustee, the standard terms and conditions of his employer, Malley & Co were provided to the then trustees and accepted by them.
[410] The delays in paying the fees rendered by Malley & Co were egregious and that firm showed considerable restraint in not invoking their entitlement to charge interest until May 2016.
[411] As to the quantum of the interest rate charged, none of the respondents challenged Mr McVeigh’s assertion from the Bar that 14 per cent per annum was within the range commonly charged by solicitors in Christchurch, at that time, on overdue accounts.
[412] Accordingly, I declare that the estate is liable to pay interest on the outstanding Malley & Co accounts at 14 per cent per annum until they are paid.
[413] The next issue is who should bear the cost of that interest. If Alison and Philip had paid the rental on the estate properties that they occupy on time and in full, as Eleanor did, there would have been sufficient funds to allow the estate to pay the Malley & Co accounts as they fell due. It is therefore inequitable to require Eleanor to contribute to the interest cost. I therefore declare that Philip and Alison are to equally contribute to the interest charged, to date, on the Malley & Co accounts.
[414] In respect of any future interest charge on outstanding Malley & Co accounts, Alison and Philip shall equally fund that until such time as they bring their rental payments up to date. If there is any dispute as to the quantum of the interest contribution payments required from Alison and Philip, the decision of the trustees shall be final.
Court of Appeal payments
[415] In a decision dated 19 December 2016, Heath J directed that “Mays” be sold to provide funds to permit the trustees to administer the estate in accordance with the HOA.46
[416] Mays was a property that the HOA had allocated to Philip. He appealed Heath J’s decision on the basis that he had lodged a claim in respect of the estate’s one-half interest in Mays, and that it was necessary for that claim to be adjudicated upon before Mays could be sold.
[417] No doubt appreciating that, in order for Philip’s appeal to the Court of Appeal to be successful, he would have to convince the Court that there was an alternative way of funding the trustees’ ongoing costs other than the sale of Mays, Philip proposed that after the payment of equalising contributions, he, Alison and Eleanor would fund the administration of the estate by quarterly shortfall payments.
[418]The Court of Appeal noted that:47
46 Mackintosh v Thomas [2016] NZHC 3141.
47 Thomas v Mackintosh [2017] NZCA 549 at [57].
… it was only at the 11th hour, and in response to the inquiry to this Court’s minute that the funding proposal based on cl 37 of the Heads of Agreement was volunteered.
[419] Notwithstanding that it was at Philip’s invitation that the Court of Appeal instituted the obligation on Philip, Alison and Eleanor to make quarterly payments of
$52,000 each to the trustees commencing in early 2018, only Eleanor commenced paying promptly. Neither Philip nor Alison made any payments at all in 2018 and it was only in June 2019 when Philip started his payments and not until the end of November 2019, immediately prior to the commencement of this case, when Alison paid the $622,000 by then, outstanding.
[420] In her submissions of 14 November 2019, Alison claimed that she (and Philip) should not have to pay interest on the sums ordered to be paid by the Court of Appeal because their ability to obtain finance from the properties they had allocated to themselves in the HOA was frustrated.
[421] In a proposed draft order attached to her submissions on 13 December 2019, Alison maintained this position but agreed that Eleanor should be paid $30,000 by her and Philip to recompense her for the financing costs she had incurred in borrowing to fund her quarterly shortfall payments.
[422] In the draft order attached to her memorandum of 13 December 2019, Eleanor proposed that Philip and Alison pay interest to the estate on the Court of Appeal payments at five per cent per annum from the date when each Court of Appeal payment was due to the date the payment was made.
[423] Philip’s position was that he should not have to pay interest because he says the trustees had been responsible for, or contributed to, delays in implementing the HOA and finalising the estate.
[424] These allegations are comprehensively rebutted in the affidavit of John Mackintosh dated 25 June 2019. That affidavit details the extensive efforts made by the trustees over an extended period of time to try and facilitate the transaction of titles
to Philip (and Alison) so as to assist their ability to make the Court of Appeal ordered payments.
[425] It is clear that it is not the trustees who were responsible for delays and also that any “delays” however caused, were not the reason for Philip’s failure to pay the shortfall contributions.
[426]The Court of Appeal’s decision of 19 December 2017 required Philip to pay
$98,000 into the trustees’ bank account within 15 days. Alison was also required to pay $173,000 within the same timeframe and Eleanor to pay $293,000. The quarterly payments were to commence on 1 March 2018.48
[427] The decision of Gendall J of 11 June 2018 recorded that, as at 11 June 2018, Eleanor had paid the initial lump sum and the first of the two quarterly payments while Philip and Alison had paid nothing at all.
[428] At [19], Gendall J noted that instead of making any effort to make the Court of Appeal ordered payments, Philip and Alison had instead, applied for what were orders effectively varying the terms of the Court of Appeal judgment.
[429] Gendall J at [37], also expressed the view on the cause of delays in implementing the HOA to that point. He described these as due to “continuing disputes” and “machinations” between the respondents. That observation could equally be applied to such delays as have occurred since that time.
[430] Philip’s attempt to blame the trustees for the consequences of his own actions extends well beyond accusing them of causing avoidable delays. He claimed in his affidavit of 1 March 2019, not to understand why the trustees’ costs were “so great” or “why such a premium has been charged for these straightforward services”.
[431] To describe proceedings which have resulted in 11 separate High Court or Court of Appeal hearings, repeated disregard of Court orders and constant disputes as “straightforward” is a significant misnomer.
48 Thomas v Mackintosh (No 2), above n 6.
[432] In his original application in these proceedings, Philip initially sought an order that the Court review the trustees’ fees “… so that I have comfort about my ongoing liability to pay them.” He also sought an order that the trustees personally pay the costs of bringing this application. While he wisely eventually abandoned these applications, the fact that he made them at all indicates a significant lack of insight into the actual causes of the delay in implementing the HOA, and the enormous extra work for the trustees caused by the failure of the respondents to comply with Court orders, or even to fully undertake the obligations they had agreed to in the HOA.
Analysis
[433] The quarterly shortfall payments carry interest as a result of the application of r 11.2.7 of the High Court Rules 2016 (HCR), and s 63 of the Judicature Act 1908 which deems a Court of Appeal judgment to be a judgment of the High Court under HCR 17.4 (which provides that costs and interests are recoverable in the enforcement of a judgment).
[434] Eleanor did not have available to her a title of an estate property to facilitate her payment of her shortfall contribution. She had to borrow the funds involved. There is no reason why Philip and Alison should not have done that as well. Fairness to Eleanor requires that Philip and Alison pay interest on their unpaid shortfall contributions.
[435] Accordingly, I make the declaration suggested by Eleanor in her submissions of 13 December 2019:
Philip and Alison are to pay interest to the estate on the Court of Appeal payments at the rate of five per cent per annum from the date when each Court of Appeal payment was due to the date payment was made.
[436] In order to avoid any doubt, I make a further declaration that the obligation to pay interest attaches to all shortfall payments not paid on the due date until such time as either the trustees agree, or the Court orders that no further such payments are required. Alison and Philip are required to pay to the estate their outstanding shortfall interest payments within 30 days of the date of this decision.
Contentious submissions
[437] In a minute I issued on 6 December 2019 at the conclusion of this hearing, I gave directions as to the filing of draft orders and memoranda. Some of the respondents went further than directed by that minute.
[438] By memorandum dated 18 December 2019, Alison objected to parts of Philip’s memorandum of 13 December 2019 on the basis that it went further than simply addressing the issue of possible consent orders. However, in case I decided to have some regard to Philip’s submissions, Alison set out her response.
[439] By memorandum of 20 January 2020, counsel for Mark and Simon filed further submissions in response to the submissions of the trustees of 18 December 2019.
[440] By memorandum of 22 January 2020, the trustees objected to those but again, in case I read them, they provided their response.
[441] The trustees are correct that, if parties wish to file further submissions beyond those called for by the Court, the proper course is to apply for leave to do so. However, in this case, because the unauthorised additional submissions have been responded to, no-one has been disadvantaged and I have had regard to them.
Conclusion
[442] I invite the trustees to prepare and file for sealing an order in terms of the declarations set out in this decision.
[443] In case I have omitted to address any issue believing it to have been already settled when that was not the case, and the parties still require a declaration, I reserve leave for any party to apply to the Court, within 14 days of the date of this decision, in respect of such matter.
Costs
[444] My preliminary view is that the trustees’ costs are to be paid by the estate and all other parties’ costs lie where they fall. If any party wishes to apply for an alternative
costs order, they are file and serve such application, of no more than five pages in length, within 14 days of this decision, with all other parties having 14 days to file a response, no greater than five pages in length.
Churchman J
Solicitors:
Meares Williams, Christchurch for Plaintiffs Young Hunter, Christchurch for First Defendant Harmans, Christchurch for Second Defendant
Wynn Williams, Christchurch for Third and Fourth Defendants RMF Silva Ltd, Ashburton for Fifth Defendant
Barristers:
C A McVeigh QC and G M Brodie, Christchurch for Plaintiffs R J B Fowler QC, Wellington for Second Defendant
K W Clay, Christchurch for Fifth Defendant
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