McCabe v McCabe
[2014] NZHC 632
•2 April 2014
IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY
CIV-2012-488-255 [2014] NZHC 632
BETWEEN BRUCE McCABE and IVAN McCABE First Plaintiffs
THISTLE FARMS LIMITED Second Plaintiff
ANDROBERT McCABE First Defendant
IRENE MISIEPO Second Defendant
NEIL McCABE Third Defendant
HEATHER POMFRETT Fourth Defendant
WEBB ROSS JOHNSON TRUSTEES LIMITED
Fifth Defendant
Hearing: 25 February 2014
Counsel: A J Easterbrook for first, second, third and fifth defendants in support
G J Judd QC for plaintiffs to oppose
Judgment: 2 April 2014
JUDGMENT OF ASSOCIATE JUDGE SMITH
This judgment was delivered by me on […………………] 2014 at [………….]am/pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors:
Webb Ross McNab Kilpatrick Limited, Whangarei for first, second, third and fifth defendants
Wells & Co, Auckland for plaintiffs
McCABE& ANOR v McCABE & ORS [2014] NZHC 632 [2 April 2014]
Contents
Introduction ....................................................................................................................................... [1] Background........................................................................................................................................ [3] The McCabe family and the McCabe Family Trust ........................................................................ [3] Thistle Farms Limited – Share transfers ...................................................................................... [11] The Court proceeding ................................................................................................................... [20] The counterclaim .......................................................................................................................... [34] The application ................................................................................................................................ [41] Notice of opposition ......................................................................................................................... [42] The relevant law – Rule 5.58 of the High Court Rules ................................................................. [43] Parties’ submissions – the first counterclaim ................................................................................ [48] Discussion – First Counterclaim .................................................................................................... [60] Parties’ submissions – the second counterclaim ........................................................................... [74] Discussion – Second counterclaim ................................................................................................. [85] Considerations applicable to both first counterclaim and second counterclaim ..................... [102] Conclusions .................................................................................................................................... [106] Costs ............................................................................................................................................... [107] Further steps in the litigation ....................................................................................................... [108]
Introduction
[1] This proceeding was commenced by the first plaintiffs in 2012, acting in their capacity as trustees of a trust known as the B R McCabe Family Trust (the trust). On
11 September 2013, the first, second and third defendants (collectively, the applicants) filed a counterclaim, seeking an order that the first plaintiffs be replaced as trustees of the trust by the Public Trustee, or by some other independent trustee. The applicants also sought an order restraining the first-named plaintiff from exercising his power to appoint and remove trustees of the trust, a declaration that the date of distribution of the trust funds had passed on 22 September 2011 and an order directing that the trust fund be distributed to the beneficiaries of the trust.
[2] The applicants now apply (the application) to have their counterclaim heard
separately from, and before, the plaintiffs’ claims.
Background
The McCabe family and the McCabe Family Trust
[3] The trust was established by deed dated 25 May 1971, entered into between Bernard Robert McCabe (Bernard) as settlor, and Bernard and his wife Nancy McCabe (Nancy) as trustees.
[4] The trust fund was to be held by the trustees until the distribution date, and was then to be divided among each of Bernard and Nancy’s children who was then living. Under cl 1 of the deed, the “date of distribution” was defined as the date of expiration of a period of 21 years from the date of Nancy’s death, although cl 1 of the deed gave the trustees an absolute and uncontrolled discretion to resolve, by written instrument, that the date of distribution could be any earlier date.
[5] At cl 2, the deed conferred on the trustees the right to pay or apply any part of the income or capital of the trust fund for the maintenance, education or advancement, or otherwise howsoever for the benefit, of all or any of various people, including Bernard and Nancy’s children.
[6] Bernard and Nancy had six children. They are the first plaintiffs (Bruce and Ivan), and the first to fourth defendants (Robert, Irene, Neil and Heather). The six children are the beneficiaries of the trust and they are entitled to share equally in the trust fund on the date of distribution.
[7] Bernard died in 2002, and the period of approximately 12 years since his death has seen numerous legal and other disputes among family members. There have been Court proceedings over Nancy’s and the children’s entitlements under Bernard’s estate, proceedings relating to Nancy’s entitlement under the Property (Relationships) Act 1976 and an argument about whether a loan owed by Robert had been forgiven by Bernard.
[8] In 2004, Nancy appointed Irene and Robert as additional trustees of the trust. On 22 January 2004, the trustees signed a document which had the apparent effect of bringing forward the date of distribution to the date of Nancy’s death. There is an unresolved dispute between the first plaintiffs and the applicants as to whether this was a valid resolution.
[9] Nancy died on 22 September 2011. Her death did not bring an end to the disputes. Bruce and Ivan lodged a caveat against the grant of probate of Nancy’s will, and there was an argument about costs when the caveat proceedings were finally resolved.
[10] Under cls 11 and 12 of the trust deed, Bernard held a power of appointing and removing new trustees. On his death, that power devolved to Nancy, and on Nancy’s death, the power devolved to Bernard’s executor. Bernard’s executor was Bruce. Following Nancy’s death, Bruce moved promptly to exercise his power of removing and appointing trustees. He removed Robert and Irene as trustees and appointed himself and Ivan in their places.
Thistle Farms Limited – Share transfers
[11] The trust’s only assets are shares held by it in the second plaintiff, Thistle Farms Limited (Thistle). At the date of Bernard’s death, the trust held 4,400 shares in Thistle. The remaining shares were held by Nancy and Bruce, with 300 shares each.
[12] On or about 20 February 2006, acting then as trustees of the trust, Nancy, Robert and Irene resolved to distribute 600 of the trust’s shares in Thistle to each of Nancy, Robert, Irene and Neil.
[13] Bruce and Ivan contend that these purported share transfers were beyond the powers of the trustees of the trust and were made unlawfully. They allege that the transfers were ineffective, so that the legal entitlement to the transferred shares remains with the trustees for the time being of the trust.
[14] The 600 shares in Thistle, which were purportedly transferred by the trust to Nancy, were on-transferred by Nancy to a trust she had established in April 2005 called the Kauri Farms Trust (Nancy’s trust). The fifth defendant is a trustee of Nancy’s trust, and by her will Nancy appointed Irene, Robert and Neil as additional trustees.
[15] The shares purportedly distributed by the trustees of the trust to Irene were purchased from Irene by the trustees of a trust known as the Gollywog Trust. The trustees of that trust are Irene and the fifth defendant.
[16] A further 600 shares in Thistle were purportedly transferred by the trustees of the trust to Heather, by share transfer form dated 19 January 2011. The transfer to
Heather was preceded by a trust minute purporting to authorise the transfer. However, the resolution was signed only by Nancy, and Bruce and Ivan say that it was ineffective because of the non-participation of Nancy’s co-trustees, Robert and Irene. They say further that the trustees of the trust had no power under the trust deed or otherwise to make the distribution to Heather.
[17] Thistle has also been involved in litigation with a family member. There is a dispute presently pending in the Employment Court, commenced by Robert, which concerns his employment status with Thistle.
[18] The directors of Thistle from February 2004 were Nancy (until her death in
2011), Robert (until 13 December 2012), Irene (until 7 December 2012, with the exception of a period of nine months between January and October of 2011), and (from 13 December 2012) Bruce, Ivan, and Heather.
[19] Thistle is said to have assets of approximately $1.6 million, together with any value there may be in the claims brought by Thistle in this proceeding. I was informed at the hearing that the $1.6 million consists entirely of cash deposits in various bank accounts.
The Court proceeding
[20] The present proceeding was commenced by Bruce and Ivan as the sole plaintiffs in 2012. They sought orders for the return of the total 3,000 shares in Thistle, which were purportedly distributed by the former trustees of the trust to each of Nancy, Robert, Irene, Neil and Heather. Bruce and Ivan also sought repayment of a $12,000 cash distribution, which is said to have been made from the trust to Robert.
[21] Following the commencement of the litigation, senior counsel for the parties conferred, and counsel for the defendants filed a memorandum dated 17 August 2012 noting that there was a substantial measure of agreement between counsel as to the issues, and laying out the steps which would be necessary to resolve them. Counsel for the defendants noted in his memorandum that he and counsel for the plaintiffs were in agreement that a final distribution of the trust was the only rational action,
and that, while commencing the litigation had been justified in order to bring matters to a proper focus, continuation of the litigation was not thought to be necessary. Counsel for the defendants noted:
7.We are agreed that final distribution will require the bringing into account of previous share (and any other form of trust) distributions, and that this may require total or partial unwinding of those distributions.
8.Distribution under the Deed is to be equal. There are no relevant discretions. There is no uncertainty as to how the final distribution is to be calculated.
9.Before final equal distribution can occur, the affairs of the trust and company must be scrutinised to ensure that proper rentals shall have been paid by any beneficiary users of the company’s land; that any sales of company or trust assets shall have been properly accounted for; and that the books of the company and trust are otherwise in order.
[22] The case came before Woodhouse J for a first case management conference on 21 August 2012. The Judge noted that counsel for all defendants other than Heather, who has taken no steps in the litigation, had acknowledged that, as a matter of law, a number of transactions in relation to trust assets were not valid. Woodhouse J went on to make a number of directions by consent, including the following:
(b) By Wednesday, 5 September 2012, the first, second, third and fifth defendants are to provide to the plaintiffs an acknowledgement in writing, from the defendants’ solicitors, to the following effect:
(i) The transfers in 2006 of shares in Thistle Farms Ltd to Nancy McCabe and to the first to fourth defendants were invalid.
(ii) The subsequent transfers of shares in Thistle Farms Ltd by Nancy McCabe to Kauri Farms Trust and by the second defendant to Gollywog Trust were invalid.
(iii) Any payments of purported remuneration to trustees, other than professional trustees, were and are invalid and are to be set aside.
(c) If such acknowledgements are not provided on or before
5 September 2012 the first, second, third and fifth defendants are to file and serve a statement of defence (or statements of defence) and
that is to be done by 5 September 2012.
[23] The defendants did not provide the acknowledgements referred to in the minute of Woodhouse J, and the first plaintiffs applied for judgment. That application did not proceed, apparently because the first plaintiffs then considered that with the purported transfers being ineffective, legal and beneficial ownership remained with the trust. All that was then thought to be necessary was the correction of Thistle’s share register. The only other claim in the proceeding at that point was for recovery of the sum of $12,000 from Robert. Given the size of that claim, the first plaintiffs were then content for it to be left over to be dealt with at trial.
[24] For their part, the defendants apart from Heather say that the acknowledgements referred to in the minute of Woodhouse J were only provided conditionally, in order to achieve a practical resolution of the claims then brought by the first plaintiffs and on the understanding that there would be a prompt distribution of the trust fund. They say that, as no practical resolution of the claims was in fact achieved, the conditions were not met and the acknowledgements are not binding on them.
[25] In November 2012, Robert and Irene agreed to resign as directors of Thistle, and to execute a resolution appointing as directors the persons the first plaintiffs wished to have appointed. The defendant shareholders of Thistle also agreed that they would not thereafter vote their shares in Thistle in any way until authorised to do so by the first plaintiffs or by the Court.
[26] Thistle was joined as second plaintiff in the proceeding on 31 July 2013. In general terms, Thistle claims that the defendants apart from Heather have acted improperly and in breach of obligations owed to Thistle, including by taking money from Thistle and/or using Thistle’s assets for their own private benefit.
[27] In an amended statement of claim, orders were sought for an account and inquiries to be undertaken in relation to the business and affairs of Thistle, the trust, Nancy’s trust, and the Gollywog Trust.
[28] Thistle’s claims were pleaded more precisely in a third amended statement of
claim dated 18 December 2013. That is the plaintiffs’ current pleading.
[29] Four separate causes of action are pleaded by Thistle. In its first cause of action, Thistle alleges that, while a director of Thistle, Robert purchased a piece of land (Kaiikanui Road) from Thistle for $90,000 and sold it back to Thistle a little over two years later for $140,000, making a profit of $50,000. Thistle alleges that Robert wrongly profited from his position as a director of Thistle in this transaction, and that Robert acted in breach of his duty to act in good faith and in the best
interests of Thistle.1
[30] Thistle’s second cause of action is against Robert, Irene and the fifth defendant in their capacities as trustees of Nancy’s trust, and against Robert and Irene as directors of Thistle and as administrators of Nancy’s estate.
[31] This cause of action concerns a second piece of land (Titoki Place), which was purchased in August 2008 by Nancy’s trust. Thistle says that Nancy’s trust borrowed $250,000 from Thistle for the purchase, and two years later in July 2010, Robert and Nancy caused Thistle to purchase Titoki Place from Nancy’s trust for approximately the same amount it had advanced to Nancy’s trust. Thistle says that the Titoki Place property was sold in June 2012 for a net figure of approximately
$228,000 after costs, thereby causing loss to Thistle. Thistle alleges that the defendants to this cause of action acted in breach of s 131(1) of the Companies Act, and also in breach of fiduciary obligations allegedly owed to Thistle. The trustees of Nancy’s trust are said to have been accessories to those breaches.
[32] In its third cause of action, Thistle claims from Robert, Irene, Neil and the fifth defendant monies allegedly owing to Thistle as shown in Thistle’s financial statements. Draft financial statements prepared by PricewaterhouseCoopers are said to show a total of approximately $158,000 owing to Thistle by Nancy’s trust, and a further sum of approximately $108,000 owing to Thistle by Nancy’s estate.
[33] Thistle’s final cause of action is against Robert. Thistle alleges that on
25 September 2008, Robert and his partner bought another of Thistle’s properties for
$180,000 for use as a lifestyle block. Thistle alleges that Robert and his partner have
continued to occupy this property, and that Thistle’s money has been spent on the
1 Companies Act 1993, s 131(1).
property, ostensibly for Thistle’s purposes but actually for Robert’s purposes. The cause of action goes on to provide particulars of various assets said to be owned by Thistle, which Robert has allegedly been treating as his own personal property. Robert is also alleged to have spent thousands of dollars of Thistle’s money on travel to pick up private purchases, and to have spent over $21,000 on containers and associated fit out costs to house those purchases on the lifestyle block. Thistle’s claim alleges that there are a number of fixed assets recorded in Thistle’s books, which are not properly company purchases. The purchase price of these items has been debited to Robert’s current account with Thistle. Thistle claims that Robert owes it not less than $218,000 on this cause of action, primarily for the alleged use by Robert of Thistle funds for Robert’s private purposes.
The counterclaim
[34] In their counterclaim, the applicants say that there exists an extremely hostile relationship between the plaintiffs and the applicants, and that the plaintiffs’ conduct, both historically and in the proceeding, demonstrates the pursuit of a vendetta against the applicants. The counterclaim pleads numerous disputes and differences between the first plaintiffs and the applicants and/or Nancy, including (in addition to the legal disputes referred to earlier) verbal insults and threats, the issue of trespass notices to the first plaintiffs by the applicants and Nancy, allegations of personal abuse of one kind or another, allegations of theft and “enduring ill-feeling and distrust between all of the parties”. The applicants also cite the failure of the first plaintiffs to make any approaches to them to settle the disputes before this proceeding was filed.
[35] By letter dated 11 July 2013, the applicants asked the first plaintiffs to resign as trustees of the trust, and to appoint the Public Trust as sole trustee. They also asked that Bruce relinquish his power of appointment of the trustees. Those requests were rejected by the first plaintiffs.
[36] In those circumstances, the applicants contend that a proper administration of
the trust is impossible, and that the trustees’ continuation in office is untenable.
[37] In support of the cause of action which seeks to have the first plaintiffs removed as trustees of the trust and an independent trustee appointed (the first counterclaim), the applicants refer to alleged “extreme antipathy” between the first plaintiffs and the applicants, and they contend that the first plaintiffs are so out of sympathy with the defendant beneficiaries of the trust that the first plaintiffs’ continuation in office is untenable. They also say that the first plaintiffs have misconducted themselves in the administration of the trust.
[38] Apparently in support of the latter pleading, the applicants say that in all historical disputes, and in this proceeding, the first plaintiffs have sought to benefit themselves at the expense of the defendants or Nancy. They allege that excessive legal fees have been incurred by the first plaintiffs on behalf of the trust in pursuing the defendants for sums which are less than the amounts likely to be recovered in any judgment. They say that the total costs that will be incurred if the first plaintiffs wind up the trust and Thistle’s affairs, and continue the present proceeding, will be out of all proportion to the value of the trust assets including the trust’s potential claims.
[39] The second cause of action on the counterclaim (the second counterclaim) seeks a direction that the trust fund must be distributed. This claim is dependent upon the validity of the resolution dated 22 January 2004, under which the then trustees of the trust resolved that the date of distribution would be the date of Nancy’s death.
[40] In their defence to the second counterclaim, the first plaintiffs first put the applicants to proof of the authenticity of the January 2004 resolution. If authentic, the first plaintiffs say that the resolution was ineffective to establish a new distribution date, as the resolution was not in the form of an “instrument in writing” as required by cl 1 of the Trust Deed. Alternatively, the first plaintiffs say that the resolution was ineffective because the defendants and Nancy did not make the purported appointment of the earlier distribution date for proper purposes, but as part of an alleged unlawful “manipulation of the trust fund”.
The application
[41] The applicants plead the following grounds in support of the application:
(a) The factual and legal issues raised in the counterclaim are separate from the issues raised by the plaintiffs.
(b)The primary relief sought on the counterclaim – the appointment of an independent trustee – would be rendered nugatory if the plaintiffs’ claim were allowed to proceed to trial before the counterclaim was determined.
(c) The applicants are unlikely to be able to afford legal representation to defend a full trial of the plaintiffs’ claims, and are likely to represent themselves. They have shown that they will make reasonable concessions if in receipt of competent independent advice, and there is a good chance that the substantive proceedings will settle if managed by an independent trustee.
(d) Further disputes are likely if an independent trustee is not appointed.
The plaintiffs’ actions in the conduct of the proceeding to date show an intention to bring wider and more substantial claims against the defendants.
(e) Determining the counterclaim first is likely to reduce the necessary Court time if the counterclaim is successful. In addition, it is unlikely to have an effect on the required Court time if it is unsuccessful. If the application is successful, the independent trustee will manage the proceedings free of the influence of bitter historical conflict, and attempt a negotiated settlement. The proceedings will only be pursued if necessary. If the application is unsuccessful, the time required to hear the plaintiffs’ claims and the counterclaim at a trial will be similar, because claim and counterclaim raise different questions of law and fact. The challenge to the first plaintiffs’ position as trustees will be brought whether now or later.
(f) By the time of the trial, it will be too late to avoid the significant risk that unnecessary costs will be incurred by all parties to the proceeding.
Notice of opposition
[42] In opposition to the application, the plaintiffs say:
(a) The first, second and third defendants are seeking by the application to try to avoid the hearing of the claims made against them.
(b) The vendetta allegation is denied.
(c) It is impossible for the counterclaim to be considered in isolation from the plaintiffs’ claims without traversing, in relation to the counterclaim, the same issues which are raised by the claim. Furthermore, if the counterclaim is heard first, it will be necessary to traverse not only the matters in the claim but also the inter-personal relationship issues to which the applicants have referred. Traversing those issues will be a time-consuming process which is completely unnecessary when the real issues are those raised by the plaintiffs in their claim.
(d)Justice would not be promoted by ordering the counterclaim to be heard separately and in advance.
(e) Prima facie, a counterclaim must be tried simultaneously with the statement of claim or immediately afterwards. This is an appropriate case for the Court to adopt that default position because if, as asserted by the plaintiffs, a decision on the plaintiffs’ claims will determine all outstanding matters, the counterclaim will be irrelevant, and it would be an abuse of procedure for the applicants to proceed with it.
The relevant law – Rule 5.58 of the High Court Rules
[43] Rule 5.58 of the High Court Rules provides in relevant part as follows:
5.58 Place of trial of counterclaim
(1) A counterclaim must be tried at the same place as the statement of claim in the original proceeding and either simultaneously or immediately afterwards.
(2) Despite subclause (1), if it appears to the court that a counterclaim and the statement of claim can more fairly or conveniently be tried separately, it may, subject to such conditions as it thinks fit, make an order that the counterclaim be tried at some other place or time.
[44] The applicants also referred to r 10.4, which provides that the Court may order separate trials of causes of action, and may direct the sequence of those separate trials, when justice requires. Rule 10.4 also includes broad provision for the Court to make any supplementary order which may be just in directing separate trials of causes of action.
[45] In Talyancich v Cole, the Court dealt with an application for an order directing that it should hear and determine the plaintiff ’s claim ahead of and at a separate time from the counterclaim. 2 Chambers J noted that the presumption is that the claim and counterclaim are to be tried together. The onus is on the applicant to show that the claim and counterclaim could be tried more fairly or conveniently if tried separately.
[46] The application for separate trials in Talyancich was rejected. Among the factors considered relevant by Chambers J was that there was a substantial overlap between the issues raised respectively in the claim and in the counterclaim. His Honour also considered the question of whether there would be likely savings in trial time, and therefore costs, if claim and counterclaim were tried separately. He also accepted that, in circumstances where discretionary relief had been sought in the claim, it was not appropriate to hear the claim for the discretionary relief without also hearing the matters raised in the counterclaim.
[47] The applicants also referred to Goodship v Minister of Fisheries.3 In this case, the Court held that an order for separate trials would not be made if the matters to be traversed in each trial might substantially overlap, if there were a risk of res judicata or conflicting findings, or if substantially more Court time would be taken by separate trials. Similar questions were considered by the Court in AHM Allison & PA van Dorsten v KPMG Peat Marwick.4
Parties’ submissions – the first counterclaim
[48] The applicants argue that hearing the first counterclaim in advance of the plaintiffs’ claims will result in considerable cost savings. They do acknowledge that, if the counterclaim is successful and an independent trustee is appointed, there will be some extra cost incurred as a result of the independent trustee getting up to speed. However, they say that the independent trustee, free of the influence of family conflict, is more likely to be amenable to settling the proceedings in the most practicable way. Mr Easterbrook submitted that ongoing costs are being incurred in legal fees, and at the end of the day it is likely that the first plaintiffs’ legal fees will be deducted from the trust fund, to the disadvantage of all beneficiaries. Mr Easterbrook noted that the defendants are currently facing the fourth statement of claim in the proceeding, and submitted that it was unlikely to be the last.
[49] Secondly, the applicants submit that the issues on the first counterclaim do not overlap with the issues raised by the plaintiffs. As Mr Easterbrook put it in his written submissions, the statement of claim seeks the return of some shares, and the payment of money to Thistle, for breach of trust and breach of fiduciary duty respectively. The first counterclaim, on the other hand, seeks the removal of the trustees. The applicants say that any overlap is limited to uncontested facts relating to the establishment of the trust and Thistle, and the relationship between those entities and the beneficiaries of the trust. For those reasons, they contend that there is no risk of conflicted findings.
[50] Thirdly, the applicants argue that a decision declining the application would foreclose any meaningful remedy on the first counterclaim, which is in substantial
3 Goodship v Minister of Fisheries [2001] NZAR 274.
4 Allison v KPMG Peat Marwick HC Auckland CP1063/90, 20 May 1992.
part concerned with the manner in which the first plaintiffs (and Thistle under their effective control) have conducted this litigation. As Mr Easterbrook put it in his submissions, the first counterclaim is highly likely to be redundant if no order is made that it is to be heard first.
[51] Fourthly, the applicants say that the first plaintiffs are in a position of conflict, as every dollar claimed by the plaintiffs is a potential profit for them in their capacity as beneficiaries of the trust. Mr Easterbrook referred to Naera v Fenwick in support of the proposition that, where a trustee is conflicted, he or she cannot deal with the trust without the informed consent of all beneficiaries or the Court. 5
[52] Mr Easterbrook submitted that the best use of time and judicial resources would be for the counterclaim decision to be made in advance of the hearing of the plaintiffs’ claims.
[53] For the plaintiffs, Mr Judd QC emphasised that the only causes of action brought by the first plaintiffs as trustees of the trust have been the subject of acknowledgements made by the defendants. He submitted that, while the defendants say the acknowledgements given were conditional only, there is unlikely to be any real issue over the first plaintiffs’ causes of action.
[54] On the question of the ongoing costs of the proceeding, Mr Judd referred to the first plaintiffs’ statement of defence to counterclaim, in which the first plaintiffs plead that if the defendants continue to adopt the untenable position of seeking to benefit from their alleged misappropriations and other unlawful activities, they will further attenuate the costs of the proceeding.
[55] Mr Judd submitted that, for the applicants to have any prospect of succeeding on the first counterclaim, they will need to prove that the claims against them are unjustified. He submitted not only that the first plaintiffs’ claims are justified, but (importantly in the context of this application) that the applicants will need to traverse, on the first counterclaim, exactly the same issues as the first plaintiffs will have to traverse on their two causes of action. The difference will be that, on the
first counterclaim, the onus will be on the applicants to demonstrate that the claims are so lacking in merit as to render them unjustifiable.
[56] Mr Judd acknowledged that it is not for the Court on this application to purport to determine the merits of the counterclaim. What the Court can and should do, however, is determine what is in issue on the claim and the counterclaim. In that regard, Mr Judd advised that no further amendments to the plaintiffs’ pleadings are contemplated, and that the proceeding is now nearly ready to be set down. The remaining issues relate to legal matters (for example, what were the duties of Thistle’s directors in the circumstances pleaded) and quantum issues. Quantum issues are likely to be the subject of orders for inquiries or an account. Discovery has been completed.
[57] In his reply submissions, Mr Easterbrook referred to the Court of Appeal decision in Kain v Hutton in support of the proposition that an extreme antipathy between trustees and beneficiaries can in certain circumstances be grounds for removal of the trustees.6 He submitted that the question of whether success on the counterclaim would reduce overall costs is an issue to be dealt with on the hearing of the counterclaim itself.
[58] On the state of the proceedings generally, Mr Easterbrook advised that the defendants do seek some further discovery from the plaintiffs, and further directions on that point are likely to be required.
[59] Mr Easterbrook advised that, for the purposes of the application the Court may proceed on the basis that what is pleaded in the third amended statement of claim is true. Mr Easterbrook added one proviso – “if we have to argue whether the condition attached to the acknowledgements is of any effect”.
Discussion – First Counterclaim
[60] I am not satisfied that the applicants have shown that the plaintiffs’ claims and the first counterclaim can more fairly or conveniently be tried if the first counterclaim is tried in advance of the plaintiffs’ claims.
[61] First, it is to be remembered that any order for the removal of the first plaintiffs as trustees of the trust, and the appointment of an independent trustee, will only directly affect the conduct of the first two causes of action, which are brought by the first plaintiffs as trustees of the trust. Any such orders would not directly affect the conduct of Thistle’s claims, and it seems unlikely that an independent trustee would be confident enough that the trust held sufficient shares in Thistle to remove its directors (or otherwise influence the conduct of Thistle’s claims), at least before the Court gave judgment on the plaintiffs’ first cause of action.
[62] The first counterclaim clearly puts in issue the first plaintiffs’ behaviour in the conduct of this proceeding.7 However, the reality seems to me to be that the causes of action pursued by the first plaintiffs as trustees appear to have met with little, if any, opposition. The applicants have provided conditional acknowledgements of liability on both of the first plaintiffs’ causes of action and, on the pleadings as they stand, the nature of any defence to those causes of action is not at all clear.
[63] In those circumstances, the first plaintiffs say the Court cannot address the merits of the first counterclaim without at the same time considering the merits of the claims which the first plaintiffs as trustees have brought against the applicants. That submission seems to me to have considerable merit. If and to the extent that the applicants are relying on an argument that the first plaintiffs should be removed as trustees because of the manner in which they have conducted their claims on the first two causes of action, the question of whether the claims in those two causes of action are valid claims must be highly relevant to the application for removal of the first plaintiffs as trustees. On the face of it, then, there would be a clear overlap
between the issues on the first counterclaim and the issues in the plaintiffs’ first two
7 See for example, paragraphs [31], [51], [52], [53], [54], [56], and [58] of the statement of counterclaim.
causes of action. In my view, that is a powerful pointer against making any order for a separate and earlier hearing of the first counterclaim.
[64] Mr Easterbrook endeavoured to meet that obvious difficulty by inviting me, for the purposes of the application, to treat the first plaintiffs’ causes of action as valid. Subject only to the possibility that the applicants might wish to argue that the condition attached to the acknowledgement provided by them to the Court rendered the acknowledgements ineffective, the Court is invited to consider the application on the basis that what the first plaintiffs plead in their first two causes of action is true.
[65] But it seems to me that the applicants cannot have it both ways. Either there are genuine defences to be heard on the first plaintiffs’ two causes of action, or there are no defences and there will be nothing requiring a substantive hearing. In the former case, it seems to me that there must be an overlap of issues, of the kind referred to in [63] above. In the latter case, there would be no further scope for the first plaintiffs to misconduct themselves in the conduct of the claims, as there would be no defended claims to conduct.
[66] I note too that the Court’s decision on whether to remove trustees will be a discretionary one,8 and that Chambers J cautioned in the Talyancich case against the Court dealing with matters of discretionary relief without taking all matters into account, including those raised in a counterclaim.9
[67] On the question of costs savings, the applicants properly acknowledge that there will be some additional costs incurred if an independent trustee is appointed, while the independent trustee gets up to speed. I note too that the proceeding is now relatively well advanced. It was started in 2012, and I was informed by the plaintiffs’ counsel that it is now ready to be set down for trial. Mr Easterbrook did note that there may be some further discovery required, but any remaining
interlocutory steps which may be necessary do not seem to me to be substantial.
8 Kain v Hutton, above n 6, at [268].
9 Talyancizh v Cole, above n 2.
[68] Further, if this application were to be granted and the Court, on hearing the first counterclaim were to appoint a new trustee, it is by no means clear to me that the case would then quickly settle. While any new trustee would presumably look first at the merits of the various claims and might come to the view that the defences to the first plaintiffs’ causes of action do not appear to be strong, the real obstacles to early settlement could easily be associated with the claims made by Thistle. As noted above, it is not clear to me that any new trustee would be in a position to influence the settlement of the claims brought by Thistle, at least before the Court ruled on the extent of the trust’s shareholding in Thistle. I am not persuaded on the evidence before me that a hearing of the first counterclaim in advance of the plaintiffs’ claims would result in any significant costs savings.
[69] The applicants allege that the first plaintiffs are in a position of potential conflict, in that every dollar they may recover in the proceeding will benefit them personally in their capacity as beneficiaries of the trust. They also say that the first plaintiffs’ counterclaim will be rendered largely, if not totally, redundant if an order is not made that the counterclaims are to be tried first.
[70] But in my view, neither of those considerations, even if the points are valid, would be sufficient to tilt the scales in favour of the making of the order which the applicants seek. If the Court is to proceed on the hypothesis that the first plaintiffs’ claims in the proceeding are valid, it would require the Court to conclude that the first plaintiffs are doing no more than properly pursuing the relief they seek in the proceeding.
[71] Furthermore, this is not a case like Naera, which involved decisions by the trustees to enter into certain joint ventures and to develop an area as a geothermal tourism park.10 Here, the first plaintiffs have effectively done no more than seek rulings from the Court on the matters raised in the plaintiffs’ first two causes of action.
[72] It may or may not be the case that the first counterclaim will be rendered largely redundant if it is not directed to be heard before the plaintiffs’ claims. But
10 Naera v Fenwick, above n 5.
given what I see as the strength of the arguments favouring the status quo position that the counterclaim to be heard with or immediately after claim, I am not persuaded that this consideration moves the balance in the applicants’ favour.
[73] In summary, the applicants have failed to discharge their onus of proving that the first counterclaim can more fairly or conveniently be tried separately and before the plaintiffs’ claims. In my view, any consideration by the Court of the exercise of its discretion to remove trustees would be more appropriately considered against the background of all facts, including the plaintiffs’ claims against the defendants. The application is therefore refused insofar as it relates to the first counterclaim.
Parties’ submissions – the second counterclaim
[74] The applicants say that the date of distribution of the trust fund was
22 September 2011, being the date of Nancy’s death. They say that as the trust fund is certain – 4,200 shares in Thistle –it must now be distributed equally amongst the children of Bernard and Nancy.
[75] The applicants submit that, in bringing these proceedings, the first plaintiffs have been acting as though they are entitled to all of the shares. But if the second counterclaim were successful that would not be the case; indeed, the first plaintiffs would be seen to have acted ultra vires in bringing and pursuing their claims in this
proceeding.11
[76] In his submissions, Mr Judd noted that there will be issues of both fact and law arising out of the applicants’ claim that the 22 January 2004 resolution was both authentic and effective to bring forward the date of distribution of the trust fund to the date of Nancy’s death. These will be substantive issues to be dealt with at the hearing of the second counterclaim. In the more limited context of the present application, Mr Judd began by asking rhetorically what the position would be if the
applicants were successful on the second counterclaim, and the Court found that the
11 Mr Easterbrook confirmed at the hearing that if the trustees were now to distribute the trust’s shares in Thistle to the beneficiaries in specie, that would result in the applicants acquiring sufficient shares in Thistle to effectively control the company.
date of distribution of the trust fund was the date of Nancy’s death. What would the rights and obligations of the first plaintiffs as trustees of the trust be in that scenario?
[77] Mr Judd submitted that the scenario would not necessarily result in a distribution of the trust’s Thistle shares to the beneficiaries in specie. He pointed out that the trust deed makes no reference to Thistle at all. Shares in Thistle are not mentioned in the definition of “the trust fund” near the beginning of the trust deed, and the trust deed empowers the trustees to retain as authorised investments in the trust fund any shares in a limited liability company that may for the time being form
part of the trust fund.12 Mr Judd also submitted that the trustees will need money to
defray expenses and, prima facie, would be expected to turn the non-money assets of the trust into money, discharge the trust’s expenses and liabilities, and then distribute the balance.
[78] Mr Judd referred to the decision of Randerson J in Burns v Steel,13 in support of the proposition that the trust beneficiaries in this case have no entitlement to receive a distribution of Thistle shares in specie. Randerson J noted:14
The absence of any absolutely vested right by the plaintiff to receive the shares in specie is an important consideration when considering the scope of the trustees’ duties pending completion of the pre-emption process. In particular, it is relevant to the question whether the trustees are bare trustees. Halsbury’s Laws of England (4th ed) volume 48, has the following definition of a bare trustee at [650]:
Meaning of ‘bare trustee’. A bare trustee is a person who holds property in trust for the absolute benefit and at the absolute disposal of other persons who are of full age and sui juris in respect of it, and who has himself no present beneficial interest in it and no duties to perform in respect of it except to convey or transfer it to persons entitled to hold it, and he is bound to convey or transfer the property accordingly when required to do so.
[79] Mr Judd’s submission was that, to transfer the trust’s shares to the trust beneficiaries, the first plaintiffs would have to go through the pre-emption process set out in Thistle’s constitution (at least in the absence of consent from all
shareholders). The shareholders who would be entitled to rights of pre-emption
12 Clause 1 of the Schedule to the trust deed.
13 Burns v Steel [2006] 1 NZLR 559 (HC).
14 Burns v Steel, above n 13, at [41], citing Halsbury’s Laws of England (4th ed) at [650] and the
Laws of New Zealand (vol 29) at [120].
would be Bruce and the executors of Nancy’s estate. In that circumstance, Mr Judd submitted that the right of the trust beneficiaries to receive Thistle shares in specie is no more than a possibility.
[80] Mr Judd also submitted that the trustees have duties which are active, not merely passive. He noted that in Burns v Steel, Randerson J cited Hotung v Ho, where the Court observed:15
While the shares were held for the beneficiaries absolutely, the trustee still had duties to perform as a registered owner of the shares in order to safeguard the interest of beneficiaries. These included attending the shareholders’ meeting, requesting company meetings, ensuring the proper operation of the company, and receiving and directing payment of dividends of the shares.
[81] In this case, Mr Judd submitted that protecting the shareholders’ interests by causing Thistle to recover moneys owing to it, thereby enhancing its value (and therefore the value of the trust fund) is precisely the sort of thing which trustees in this situation are required to do.
[82] Given the legal position as explained in Burns v Steel and Hotung v Ho, and having particular regard to his submission that the trust beneficiaries have no entitlement to a distribution in specie of Thistle shares, Mr Judd submitted that it could be neither fair nor convenient to have the second counterclaim heard in advance of the plaintiffs’ claims.
[83] In reply, Mr Easterbrook submitted that the issue over the effect of the pre- emptive rights in Thistle’s constitution is an issue for the hearing of the counterclaim itself. He did nevertheless point to cl 3.6 of Thistle’s constitution, noting that the transfer notice required to be given by a shareholder wishing to sell his or her shares is deemed to constitute Thistle’s directors the prospective seller’s agent for the sale of the shares to any member or members of Thistle (or to any other person or persons approved by the directors in their absolute discretion), at the “transfer price”.
[84] Mr Easterbrook submitted that the “transfer price” in this case would arguably have to be zero for transfers to the trust beneficiaries, or alternatively that
15 Burns v Steel, above n 13, at [48]; citing Hotung v Ho [2002] 3 HKLRD (CA) at 1.
there would be no “transfer” at all as beneficial ownership already lay with the trust beneficiaries. In the end, he submitted that the pre-emption issue, if there is one, cannot affect the ultimate outcome: all six children of Bernard and Nancy will receive one-sixth of the trust’s shares in Thistle. On that basis, he submitted that the Court will only need to consider the effect of the pre-emptive rights if the plaintiffs’ position on the pre-emptive rights issues is so strong that the second counterclaim itself is doomed to fail. In Mr Easterbrook’s submission, it is not.
Discussion – Second counterclaim
[85] As with the first counterclaim, it is for the applicants to persuade the Court that the second counterclaim can be more conveniently or fairly heard in advance of the plaintiffs’ claims. For the reasons which follow, I am not satisfied that the applicants have discharged that onus.
[86] It is not for the Court on this application to purport to determine the merits of the second counterclaim. However, that does not preclude the Court from considering the issues which will arise in the plaintiffs’ claims and on the second counterclaim. The issues of fairness and convenience under r 5.58(2) must be addressed having regard to those issues. Nor do I believe that the Court is precluded, on this application, from considering the likely effect on the litigation as a whole of any orders which might be made on the second counterclaim if it is heard first. Rule
5.58(2), is concerned with fairness and convenience in respect of both claim and counterclaim.
[87] Looking at the issues, the principal relief sought on the first plaintiffs’ first cause of action is an order declaring that shares in Thistle owned by the trust were unlawfully transferred by the former trustees to the applicants and to Nancy and Heather. Part of the second counterclaim effectively seeks a direction that a significant number of those very same shares (or, presumably, cash representing their value) should be distributed to the applicants and Heather as beneficiaries under the trust. The relief sought on the competing claims is obviously closely related.
[88] It may be that if the second counterclaim were heard first and the Court made an order to distribute the trust fund, the issues on the first plaintiffs’ first cause of
action would fall away, on the basis that the applicants only received what they would have been entitled to on the final distribution of the trust fund anyway. But it seems to me that there is likely to be little time expended on the plaintiffs’ first cause of action regardless of whether it is heard after a decision is given on the second counterclaim or it is heard with the second counterclaim.
[89] Turning to the plaintiffs’ second cause of action, I note the applicants argue that if they are successful on the second counterclaim, it must follow that the first plaintiffs will be seen to have been no more than bare trustees since the date of Nancy’s death, with no duties to perform in respect of the trust fund except to
convey or transfer it to the beneficiaries under the trust.16 And that they have acted
ultra vires in bringing the present proceeding. In those circumstances, it seems to me entirely appropriate that the second counterclaim should be heard together with, and not in advance of, the first plaintiffs’ second cause of action. On its face, the plaintiffs’ second cause of action appears to show that the trustees did have a duty to perform in respect of the trust fund, namely the ordinary duty of any trustee to get in trust assets.
[90] On the face of it, then, both fairness and convenience suggest that both of the first plaintiffs’ causes of action should be heard together with, and not after, the second counterclaim.
[91] Subject to what I say at [102] to [105] of this decision, the applicants might perhaps have been on stronger ground on the issue of delay. If the Court were to hold that the date of distribution has passed, the applicants (and the other trust beneficiaries) might arguably have an immediate right to distribution, with no reason to delay distribution until Thistle’s claims have been heard. But even if an immediate distribution order were made on an early hearing of the second counterclaim, it is by no means clear to me that the beneficiaries would be likely to receive either shares in Thistle or equivalent cash, before the substantive claims
could be brought on for hearing.
16 Burns v Steel, above n 13 at [41].
[92] There are two reasons for that. First, the plaintiffs’ pleadings are now in final form, and Mr Judd advises that his clients are not contemplating any interlocutory applications. From their perspective, the proceeding is ready to be set down for trial. If any interlocutory applications made by the defendants are disposed of promptly, and the Court fixes a close of pleadings date and gives directions for the earliest available trial, I think there must be quite a good prospect that all of the claims and counterclaims can be heard and determined without too much further delay. At least the applicants have not persuaded me otherwise.
[93] Secondly, I am not persuaded that an early decision on the second counterclaim would be likely to result in any immediate distribution of the trust fund. The major obstacle is that it is by no means clear precisely what a “distribution” of the trust fund would entail.
[94] The relevant pre-emption provisions of the Thistle constitution are as follows:
3.4Subject to the provisions of clause 3.9, no shares shall be sold or transferred by any member or assignee in bankruptcy of a member or by the personal representative of any deceased member unless and until the rights of pre-emption hereinafter conferred shall have been exhausted but every sale or transfer of share shall be subject to the provisions of Clause 3.2 hereof.
3.5Every member or assignee as aforesaid who may desire to sell or transfer any share and every personal representative of a deceased member shall give notice in writing (hereinafter called “the transfer notice”) to the Directors that he desires to make such sale or transfer. The transfer notice may include several shares and shall operate as a separate notice in respect of each. The transfer notice shall not be revocable except with the sanction of the Directors.
3.6The transfer notice shall constitute the Directors the agents of the person giving such notice for the sale of such shares either in one lot or in separate lots to any member or members of the Company or any other person or persons approved by the Directors in their absolute discretion at the transfer price.
3.7If the Directors as such agents shall within twenty-eight days after such price has been agreed upon or determined as aforesaid (as the case may be) find a member or members or other approved person or persons as aforesaid willing to purchase the shares at such price and shall give notice thereof to the member, assignee or personal representative (as the case may be) he shall be bound upon payment of such price (subject to any lien which the Company may have under the Company’s Constitution and to a deduction in respect thereof) to transfer the shares to such purchaser.
[95] In Burns v Steel, the deceased and his three sisters held shares in a company at the date of the deceased’s death.17 In his last will, the deceased appointed the defendants as trustees of his estate, and he left all of his shares in the company to one of the sisters, Ms Burns. The company’s constitution contained rights of pre- emption which applied to the transfer of the shares from the trustees to the plaintiffs. Ms Burns sought a declaration and orders under s 68 of the Trustee Act 1956 to the
effect that the trustees were obliged to comply with her directions as to how and when the pre-emption process was to proceed, and that in the meantime, she had the right to direct the trustees as to how they were to exercise their powers as shareholders.
[96] In his judgment, Randerson J held that Ms Burns’ counsel was right to concede that she did not have an absolutely vested interest in the shares, in the sense of having a right to receive them in specie. The gift of the shares was held to be necessarily subject to the terms of the constitution of the company, and Ms Burns’ right to receive the shares in specie was entirely contingent upon the outcome of the pre-emption process. Ms Burns might or might not have received a transfer of the shares, and if she did receive some shares, she might not have received all of them. That she might receive the shares in specie was held to be “no more than a
possibility”.18 Nor could it be said that the trustees’ duties were confined to
transferring the shares to the plaintiff and guarding the property in the interim. Randerson J observed that the deceased must be taken to have known of the pre- emption provisions of the company’s constitution, and the trustees’ duties were to be defined accordingly.19
[97] In the present case, there does not appear to be any provision in Thistle’s constitution which would permit the simple transfer of shares held by a member as trustee of a trust, to a beneficiary of that trust, without going through the pre-emption process. If that is correct, it seems at least possible that Bruce or the trustees of Nancy’s estate (the other shareholders in Thistle) might seek to purchase some or all
of the shares which were the subject of any sale notice which might be given by the
17 Burns v Steel, above n 13.
18 At [37].
19 At [45].
trustees to Thistle’s directors. In that event, an order for immediate distribution of the trust fund would not see the applicants receiving any shares (or additional shares) in Thistle.
[98] I appreciate that Mr Easterbrook has raised contrary arguments, including an argument that the pre-emption process ought not to apply at all where the transfer is merely a transfer from a trustee to a beneficiary. I also accept that any attempt to reach a conclusion on the construction of Thistle’s constitution would be an exercise beyond the scope of the present application. That said, it seems to me to be fairly clear that Mr Judd’s arguments based on the Thistle constitution and Burns v Steel are, at the very least, arguable, and that any order which might be made on the second counterclaim directing the first plaintiffs to distribute the trust fund would very probably require further argument over how the distribution should be effected, and in particular whether, and if so how, the pre-emption provisions of the constitution were to be applied. There is obvious potential for additional costs and delay.
[99] The alternative is to hear all of the claims and counterclaims together. All remaining assets, and all costs, would then be known, and Thistle and the trust could readily calculate the respective entitlements of all shareholders and trust beneficiaries. As Thistle’s assets consist entirely of cash, there would seem to be no reason for any significant further delay in winding up the trust. In the long run, proceeding in that way seems to me to be likely to be more convenient, and no less fair, than determining the applicants’ claims on the second counterclaim in advance of the plaintiffs’ claims.
[100] If and to the extent that the applicants may have been hoping that an order of the Court directing an immediate distribution of the trust fund would bring about a change in the control of Thistle, and make Thistle’s claims easier to settle, I consider (taking into account the issues over the pre-emption provisions in Thistle’s constitution) it is not certain that this would occur. But even if it were the outcome, it is by no means clear to me that the result would be either fair to the first plaintiffs and Thistle, or convenient in the long run.
[101] If the applicants did manage to secure that sort of tactical benefit from an early hearing of the second counterclaim, the litigation track record of these parties suggests that the first plaintiffs would be most unlikely to take that result lying down. It could hardly be regarded as a “convenient” outcome if Thistle’s claims against the defendants were to be settled in circumstances which only provoked further litigation from the first plaintiffs, whether under the Companies Act 1993 or otherwise. In my view, this is a case which cries out for the earliest resolution of all claims and counterclaims, and that is most likely to be achieved if they are all heard together.
Considerations applicable to both first counterclaim and second counterclaim
[102] Under this heading, I note first that senior counsel for the parties agreed, in August 2012, that a final distribution of the trust estate was “the only rational action”, and that the affairs of the trust and the company would have to be scrutinised “before final equal distribution can occur”. They agreed that the books of the company and the trust would have to be in order before final distribution.
[103] While I do not believe that agreement between counsel can be determinative of the present application, I think it is a proper matter to take into account in determining whether it is fair for the applicants to now change tack and seek to have the trust fund finally distributed in advance of the resolution of the outstanding trust and Thistle claims.
[104] A further matter which I take into account is the long delay between the date of Nancy’s death in September of 2011, and the filing of the applicants’ counterclaim in September 2013. The applicants were clearly in no hurry to have the “early distribution” point resolved.
[105] Finally, I note that, as recently as August 2013, the defendants consented to the joinder of Thistle as a plaintiff. That consent was consistent with the agreed position set out in the August 2012 memorandum of senior counsel for the defendants, and it appears that the only thing that has changed since August 2013 is that Thistle has now set out its claims more precisely. That in itself does not seem to me to be a valid reason for regarding a process which the parties apparently
considered both fair and convenient prior to August 2013, as having become unfair or inconvenient.
Conclusions
[106] For the foregoing reasons, the applicants have failed to persuade me that the proceeding can be more fairly or conveniently tried if the applicants’ counterclaims are heard separately from, and in advance of, the plaintiffs’ claims. The application is accordingly refused.
Costs
[107] The plaintiffs are entitled to costs. If the parties cannot agree, the plaintiffs may file a memorandum seeking costs within 14 days of the date of this judgment. The applicants may file a memorandum in response, within 14 days after service of the plaintiffs’ memorandum.
Further steps in the litigation
[108] I direct that a telephone conference is to be scheduled for the earliest convenient date, so that directions can be given for the future conduct of the proceeding. The parties are to file memoranda three working days in advance of that conference, addressing the issues of further interlocutory applications, a close of pleadings date, the anticipated number of witnesses and likely duration of the trial, and a proposed pre-trial timetable, including proposed directions for the exchange of evidence and preparation of a common bundle of documents for trial.
Associate Judge Smith
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