McCallum v McCallum
[2019] NZHC 1925
•30 July 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-404-000372
[2019] NZHC 1925
UNDER Part 18 of the High Court Rules BETWEEN
WILLIAM FRASER MCCALLUM JNR
Plaintiff
AND
CARRICK ROBERT ZACHARY MCCALLUM AND CALLUM FRASER
MCCALLUM as executors and trustees of the estate of WILLIAM FRASER MCCALLUM SNR
First Defendants
CARRICK ROBERT ZACHARY MCCALLUM AND CALLUM FRASER
MCCALLUM as trustees of the MCCALLUM FAMILY TRUST
Second Defendants
CARRICK ROBERT ZACHARY MCCALLUM
Third DefendantCALLUM FRASER MCCALLUM
Fourth Defendant Continued over page
Hearing: 30 July 2019 Appearances:
A H H Choi for the Plaintiff
K G Davenport QC and A M Cameron for First and Second Defendants/First and Second Applicants
S M Lowery on instructions from C Walsh for Third and Fourth Defendants
A K Finnie as Litigant Guardian for Fiona McCallumJudgment:
30 July 2019
ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL
MCCALLUM v MCCALLUM [2019] NZHC 1925 [30 July 2019]
CIV-2019-404-000937
UNDER Part 19 of the High Court Rules
IN THE MATTER of an application for a Beddoe order
IN THE MATTER of an application by CARRICK ROBERT
ZACHARY MCCALLUM AND CALLUM FRASER MCCALLUM as
trustees of the MCCALLUM FAMILY TRUST
First Applicants
CARRICK ROBERT ZACHARY MCCALLUM AND CALLUM FRASER
MCCALLUM as executors of the estate of WILLIAM FRASER MCCALLUM SNR
Second Applicants
Solicitors:
Kelly Flavell Law, Mellons Bay Asco Legal Ltd, Howick
Davenports Harbour Lawyers, Albany
Introduction
[1] On 4 September 2019, there will be a hearing on two matters. In CIV-2019- 404-372 the plaintiff will apply for a prospective costs order. In CIV-2019-404-937 the first and second defendants will apply for Beddoe directions.1 Ahead of that hearing the plaintiff applies for discovery. He seeks disclosure of six categories of documents:
(a)All invoices for legal fees and disbursement incurred by:
(i)the trustees of the McCallum Family Trust (second defendants and first applicants) (the New Trust) in relation to litigation or the prospect of litigation with William Fraser McCallum Jnr (plaintiff);
(ii)the executors of the estate of William Fraser McCallum Snr (first defendant and second applicants) (Bill snr’s estate) in relation to litigation or the prospect of litigation with William Fraser McCallum Jnr (plaintiff);
(iii)Carrick Robert Zachary McCallum (third defendant) and Callum Fraser McCallum (fourth defendant) in relation to litigation or the prospect of litigation with William Fraser McCallum Jnr (plaintiff) following the death of William Fraser McCallum Snr, and either;
a.incurred in their capacities as trustees of the W F McCallum Trust (old trust); or
b.incurred in their personal capacities but for which they may seek indemnity from the new trust or the father’s estate;
1 Re Beddoe, Downes & Cottam [1893] 1 Ch 547 (CA).
(b)All resolutions, correspondence, minutes of meetings and memoranda of the trustees and executors of the new trust, the father’s estate and the old trust relating to the provision of money to William Fraser McCallum Jnr to pay legal fees since 18 November 2016;
(c)All legal opinions and other written legal advice received by the trustees of the new trust and the old trust, and by the executors of the Bill Snr’s estate in the administration of the trust, relating to the resettlement of the assets of the old trust, and the transfer and sale of assets of the old trust and Bill Snr to the defendants/applicants;
(d)All legal opinions and other written legal advice received by the trustees of the new trust and the old trust, and by the executors of Bill Snr’s estate relating to decisions as to provision/non-provision of funds to William Jnr for his legal fees;
(e)William Fraser McCallum Snr’s prior wills;
(f)Documents identifying the arrangements for Andrew Finnie’s payment of his professional fees in regard to these proceedings in his anticipated role as litigation guardian for Fiona McCallum.
[2] When this matter was first called on 21 June 2019, counsel for the plaintiff orally sought directions for the first and second defendants to disclose records of payments of professional fees to consultants and advisers. I was not willing to deal with the matter on the hoof in a chambers list and directed that the matter be put on a more formal basis. The plaintiff filed an application on 24 June 2019. The scope of documents sought is much wider than at the chambers call.
Background to the case
[3] The case concerns the estate planning by the late William Fraser McCallum Snr (Bill) before his death in January 2017 and steps taken at the end of 2017 by executors of his estate and the trustees of trusts he had established. The plaintiff is his son (William). Bill was married to Heather. They had two children, William and
Fiona. For the last 20 years Fiona has lived in Western Australia. In recent years she suffered a stroke and as a result is incapacitated. Following her stroke, William went to live with her and has stayed in Western Australia ever since. Neither William nor Fiona are married or have partners and neither has children. Bill died in January 2017 and Heather died shortly afterwards. Carrick Robert Zachary McCallum (Robert) is Bill’s brother. Callum Fraser McCallum (Callum) is a nephew of Bill and Robert, that is, he is a cousin of William and Fiona.
[4] Yesterday I appointed Mr Finnie as litigation guardian for Fiona. He appeared this morning out of courtesy. I record that one of the arrangements of his appointment is that he is not to be personally liable for any costs incurred in acting on behalf of Fiona. He also explained the funding arrangements for him to act as litigation guardian. One half of his fees is to be paid from the estate of Fiona’s mother by the executor, the Public Trust. The other half is to be paid by the trustees of the W F McCallum Trust established by Bill in 2016.
[5] In 1986, Bill established the W F McCallum Trust (the Old Trust). The beneficiaries under that trust are Bill’s wife, his children and their spouses, his grandchildren and their spouses, trusts for the benefit of any beneficiary and any charitable trust. Bill was not a beneficiary of the trust. The trust deed provided that he was not to take any benefits under it. Various assets were settled on the trust, including a one-third share in a farm at Clevedon (Lismore) and investment properties in Papakura. Bill was a creditor of the trust for his expenditure on the farm property.
[6] By 2016, Bill was aware that he was terminally ill. He made estate planning arrangements during 2016. He established another family trust, the McCallum Family Trust (the New Trust).
[7] At the beginning of 2016 the trustees of the Old Trust were Bill, William and Robert. In November 2016, Bill as appointor made Callum a trustee of the Old Trust. He also applied to the court for William to be removed as a trustee. William did not oppose that application. Woodhouse J made an order in December 2016 removing
William as a trustee of the Old Trust.2 That left Robert and Callum as the only trustees after Bill died.
[8] Bill established the New Trust in August 2016. The trustees of that trust were Bill, Robert and Callum. Robert and Callum are the current surviving trustees of the New Trust. They are sued in this proceeding as trustees of that trust and for actions they took as trustees of the Old Trust. They are also the executors of Bill’s estate. They are sued for actions they took as executors and for alleged breaches of duty by Bill while he was alive.
[9] The beneficiaries of the New Trust are Bill, Heather – both have now died – William and Fiona, any children of William and Fiona, and any trust held for the benefit of any discretionary beneficiary and any person appointed as a discretionary beneficiary.
[10]The statement of claim alleges that the final beneficiaries of the New Trust are:
(a)any children of William;
(b)any children of Fiona;
(c)any charitable trust;
(d)Bill’s grand-nephews and grand-nieces; and
(e)any trust for the benefit of any final beneficiaries.
The statement of claim pleads that William and Fiona are not final beneficiaries of the New Trust. A point also made for William is that Robert and Callum have a limited interest under the trust because they can enjoy the use of Bill’s boat “The Thistle” and an associated marina berth at Pine Harbour. The deed for the New Trust provides that any discretionary beneficiary who starts legal proceedings against the trustees will be
2 McCallum v McCallum [2016] NZHC 2929.
barred from taking anything under the trust. William’s case is that the New Trust is not in the interests of Fiona and himself.
[11] There were other significant transactions. These started in August 2016. There was a deed of exchange of assets under which Bill and the trustees of the Old Trust exchanged assets. The assets on each side of the transaction were said to be worth $1.7 million. The trust’s one-third share of the farm property was transferred to Bill and in return he paid $500,000 cash and transferred to the trust shares in a family company and a property at Settlement Road, Papakura.
[12] Bill signed a memorandum of wishes to the executors of his estate and to the trustees of the Old Trust. The memorandum states that the overall purpose of the trust was to manage the family’s wealth to ensure that the income and capital from the trust’s rental properties and any other investment assets of the trust were applied to make adequate provision during the lives of himself, Heather and their children. Secondly, he wished “heirloom” family assets to pass down the McCallum family line and he wanted to make certain other specific assets available to beneficiaries. He directed his trustees to have special regard to the needs of his wife and continue to have regard to the reasonable needs of his children. After his death, while Heather was alive, he wanted the trustees to have special regard to her reasonable needs and he asked the trust to meet the costs of healthcare and living accommodation for her. The trustees are also to continue to have regard to the needs of William and Fiona and to ensure they could continue a lifestyle similar to what they were accustomed to. The trustees were to make available both income and capital as necessary to maintain their lifestyles. He gave directions what was to happen to other assets, with different provisions according to whether William and Fiona had children or not. William contests this deed of exchange and a later one because he says that it involved a resettlement which was outside the scope of the resettlement provision in the deed for the Old Trust.
[13] William says that in the months leading up to his death Bill entered into a programme to divest his assets away from William and Fiona in favour of Robert and Callum. That involved settling various assets on the New Trust: the vessel “The Thistle” and shares in various family companies. He also transferred shares in one of
his companies, Excelsior Ltd, to Robert for no consideration. William says that is contrary to what Bill had expressed in his memorandum of wishes. Excelsior Ltd is said to be Bill’s primary source of income on which William and Fiona depended. Shares in another company, Rob McCallum Ltd, were transferred to Robert with the remaining share transferred to Callum. The marina berth at Pine Harbour was transferred to the New Trust.
[14] Bill made a final will in November 2016. He had made an earlier will in August 2016. The earlier will had included William as an executor, but that was changed under the November 2016 will. He gave his personal domestic assets to Heather. He forgave his debt to the New Trust. He gifted the residue of his estate to the trustees of the New Trust. One of Bill’s assets was the debt owed by the Old Trust and that fell into his residuary estate which has accordingly gone to the New Trust. Bill died on 15 January 2017. Probate of his will was granted on 7 February 2017.
[15] Heather died after Bill. Assets of her estate comprise the half-interest in the family home and about $1 million in bank accounts. The Public Trust is the executor of her estate. I have been advised that the Public Trust is continuing a proceeding started by Heather while she was alive against Bill’s estate under pt 8 of the Property (Relationships) Act 1976.
In November 2017, there was a re-settlement under the Old Trust. Assets under the Old Trust were settled on the New Trust. That was undertaken after Bill’s death. Robert and Callum did that in their capacities as trustees of the Old Trust and trustees of the New Trust. William challenges that re-settlement as involving the re-settlement of the Old Trust on the New Trust where the beneficiaries include non-objects of the Old Trust.
The statement of claim
[16]The statement of claim has these causes of action:
(a)William claims against the estate of his father under the Family Protection Act 1955. The proceeding was started on 1 March 2019.
Because it is more than a year after the grant of probate he has also applied for an extension of time to begin the proceeding.
(b)The second cause of action is headed “breach of moral duty by Bill Snr”. It is alleged that Bill owed legal and fiduciary duties to William to recognise William as a member of the family. Bill’s actions in his estate planning in the year before his death are said to be unconscionable and in breach of his fiduciary duties. The defendants allegedly hold assets transferred by Bill before his death under a constructive trust. By this pleading, William is trying to claw back into Bill’s estate assets he parted with in the year before his death. I understand that is with a view to enlarging the estate for the family protection claim. The normal rule is that under the Family Protection Act, the assets over which the Court may make orders are the estate of the deceased as at the date of death, plus any gifts causa mortis.3 That aside, there is no general claw back provision which allows assets transferred before death to be brought back into the estate. (Unlike, say, the voidable transaction provisions of the Insolvency Act 2006,4 the Companies Act 19935, the Property Law Act6 and the Property (Relationships) Act7).
(c)A claim that assets of the old trust were invalidly resettled, including:
(i)transfers under the deed of exchange in August 2016;
(ii)the sale of the one-third interest of the family farm to Callum at an under-value; and
(iii)the resettlement by Robert and Callum in December 2017.
3 Family Protection Act 1955, s 2(5).
4 Insolvency Act 2006, Part 2 subpart 7.
5 Companies Act 1993, ss 292-296.
6 Property Law Act 2007, Part 6 subpart 6.
7 Property (Relationships) Act 1976, ss 44, 44C, 44F.
The relief sought includes declarations as to breach of trust, that the purported resettlement of assets was invalid and that the defendants hold assets on trust for the beneficiaries of the Old Trust. Tracing orders are sought against Callum plus an order that assets of the Old Trust may be followed and traced into the New Trust.
(d)A claim for knowing receipt of trust and estate assets against both Callum and Robert. The transactions include a transfer of a one-third interest in the farm to Callum and Robert’s receipt of shares in Excelsior Ltd.
(e)A claim for breach of fiduciary duty against Callum for breaching his duties as trustee.
(f)A similar claim for breach of fiduciary duty against Robert for breaching his duties as trustee.
(g)Removal of Callum and Robert as trustees and as executors.
(h)Setting aside of Bill’s last will and other transactions because of undue influence.
Other parties
[17] The hearing today has been primarily between William as plaintiff in the 372 proceeding and Robert and Callum, as first and second defendants in that proceeding. Mr Lowery appeared out of courtesy for the third and fourth defendants but did not take an active part in the proceeding. Mr Finnie helpfully appeared to explain the arrangements for him to act as litigation guardian. The Public Trust, as executor of the estate of Heather McCallum, is not formally a party to the proceeding but its counsel filed a memorandum addressing whether funds can be made available to meet the legal expenses of William and Fiona. Heather’s last will left her estate equally to William and Fiona. The Public Trust advised that a property relationship claim has been filed in the Family Court and may be transferred to this Court. I was advised
that, because that estate will incur legal expenses for the property relationship litigation, it has limited funds to make available to William for this litigation.
Beddoe orders
[18] In the 937 proceeding, Robert and Callum have applied under s 66 of the Trustee Act 1955 for directions whether it is reasonable and proper for them to defend the 372 proceeding and whether they are entitled to be reimbursed out of the trust assets for their reasonable legal costs. They have also sought a direction whether as executors of Bill’s estate, they should defend the proceeding seeking their removal as executors and whether they are entitled to be reimbursed out of the estate assets for their costs in doing so. That is a Beddoe application.
[19]In Woodward v Smith, Kós J described a Beddoe application:8
[27] The Beddoe order, part of equitable procedure for 120 years now, involves a separate application by a trustee for pre-emptive directions as to whether to bring or defend proceedings. Full disclosure of the strengths and weaknesses of a case (normally by the mechanism of a fully informed counsel’s opinion provided to the court) is required. The order will normally provide that the trustee may recover costs and expenses incurred in accordance with counsel’s advice or from the trust itself. But it will not usually deal with costs the trustees have already paid to other parties.
In giving that outline he referred to that well-known trusts text, Lewin on Trusts.9
[20] Kós J recognised that trusts litigation is divided into three broad categories and referred to Kekewich J’s categorisation in Re Buckton.10 In Woodward v Smith, Kós J put the categorisation as follows:11
(a)The first category involves proceedings brought by trustees to obtain the Court’s guidance on the construction of the trust deed or some aspect of the trust’s administration. In such cases, the costs of all parties necessarily participating are treated as incurred for the benefit of the estate and ordered to be paid out of the trust fund.
(b)The second category involves a similar application, but by someone other than a trustee (such as a beneficiary). However, it is case which
8 Woodward v Smith [2014] NZHC 407, [2014] 3 NZLR 525 at [27].
9 Mowbray and others Lewin on Trusts (18th ed, Sweet & Maxwell, London, 2008).
10 Re Buckton [1907] 2 Ch 406 (Ch) at 413–417.
11 Woodward v Smith, at [23](a).
would have justified application by a trustee. The same approach is to take the costs in the second category as to the first.
(c)The third category, however, is where a beneficiary is making a “hostile” claim against the trustees, or another beneficiary. The claim may still involve a point of construction, or administration. It will often claim to a beneficial interest or entitlement to a part of the trust fund. In the third category, involving a hostile claim against trustees or another beneficiary, the usual principles as to costs apply. Ordinarily they will follow the event.
[21] In Alsop Wilkinson v Neary, Lightman J gave a slightly different categorisation, but he too recognised a class of hostile cases:12
Trustees may be involved in three kinds of dispute. (1) The first (which I shall call a “trust dispute”) is a dispute as to the trusts on which they hold the subject matter of the settlement. This may be “friendly” litigation involving e.g. the true construction of the trust instrument or some other question arising in the course of the administration of the trust; or “hostile” litigation e.g. a challenge in whole or in part to the validity of the settlement by the settlor on grounds of undue influence or by a trustee in bankruptcy or a defrauded creditor of the settlor, in which case the claim is that trustees hold the trust funds as trustees for the settlor, the trustee in bankruptcy or creditor in place of or in addition to the beneficiaries specified in the settlement. The line between friendly and hostile litigation, which is relevant as to the incidence of costs, it not always easy to draw: see In Re Buckton …(2) The second (which I shall call a “beneficiaries” dispute) is a dispute with one or more of the beneficiaries as to the propriety of any action which the trustees have taken or omitted to take or may or may not take in the future. This may take the form of proceedings by the beneficiary alleging breach of trust by the trustees and seeking a removal of the trustees and/or damages or breach of trust. (3) The third (which I shall call a “third party” dispute) is a dispute with persons, otherwise than in the capacity of beneficiaries, in respect of rights and liabilities e.g. in contract or tort assumed by the trustees as such in the course of administration of the trust.
He went on:
Trustees (express and constructive) are entitled to an indemnity against all costs, expenses and liabilities properly incurred in administering the trust in lien of the trust assets to secure such indemnity. Trustees have a duty to protect and preserve the trust estate for the benefit of the beneficiaries and accordingly to represent the trust in a third party dispute. Accordingly, their right to an indemnity and lien extends in the case of a third party dispute to the costs of proceedings properly brought or defended for the benefit of the trust estate. Views may vary whether proceedings are properly brought or defended, and to avoid the risk of a challenge to their entitlement to the indemnity, (a beneficiary dispute), trustees are well advised to seek court authorisation before they sue or defend. The right to an indemnity and lien will ordinarily extend to the costs of such an application. The form of application is a
12 Alsop Wilkinson v Neary [1996] 1 WLR 1220 (Ch) at 1223-1224.
separate action to which all the beneficiaries are parties (either in person or by a represent defendant). With the benefit of their views the Judge thereupon exercising his discretion determines what course the interests of justice require to be taken in the proceedings … So long as the trustees make full disclosure of the strengths and weaknesses of their case, if the trustees act as authorised by the Court, their entitlement to an indemnity and lien is secure.
A beneficiaries dispute is regarded as ordinary hostile litigation in which costs follow the event and do not come out of the trust estate…
And:13
… In a case where the dispute is between rival claimants to a beneficial interest in the subject matter of the trust, rather the duty of the trustee is to remain neutral and (in the absence of any court directions to the contrary and substantially as happened in Merry’s case…) offer to submit to the court directions leaving it to the rivals to fight their battles. If this stance is adopted, in respect of the costs necessarily and properly incurred e.g. in serving a defence agreeing to submit to the court’s direction and in making discovery, the trustees will be entitled to an indemnity and lien. If the trustees do actively defend the trust and succeed, e.g. in challenging a claim by the settlor to set aside for undue influence, they may be entitled to their costs out of the trust, for they have preserved the interests of the beneficiaries under the trust…But if they fail, then in particular in the case of hostile litigation although in an exceptional case the court may consider that the trustees should have their costs …, ordinarily the trustees will not be entitled to an indemnity, for they have incurred expenditure and liabilities in an unsuccessful effort to prefer one class of beneficiaries e.g. the express beneficiaries specified in the trust instrument, over another e.g. the trustees in bankruptcy or creditors, and so have acted unreasonably and otherwise than for the benefit of the trust estate.
[22] In Fundacion Pinjo v Aguilar Ltd,14 Katz J observed that the various categories of trust litigation have been recognised as discretionary and overlap significantly and that each case will turn on its own facts and is subject to the discretion of the Judge who hears it.
Prospective costs orders
[23] In his application, William seeks an order authorising the trustees of the New Trust to make funds available to him to pay his legal fees and disbursements. That will include any third-party expert costs. The Court has an inherent jurisdiction to make prospective costs orders in trust cases. That jurisdiction is exercised as part of the Court’s equitable jurisdiction to supervise the administration of justice.
13 At 1225.
14 Fundacion Pinjo v Aguilar Ltd [2015] NZHC 1402 at [38]
Prospective costs orders can be two sorts. In one, the beneficiaries seek an order that their own costs be paid out of the trust fund on an indemnity basis. In the other, beneficiaries may seek an order in advance of the substantive hearing that they will not be liable to pay the other party’s costs regardless of the outcome. That is an immunity or “other party” costs order. In this case, William applies for an indemnity order but does not seek immunity from costs.
[24] Prospective costs orders may be made in favour of a plaintiff in categories one and two under the Buckton categorisation.15 The matter is different when it comes to hostile litigation. The approach there is that indemnity costs will be ordered only in exceptional circumstances. In Woodward v Smith, Kós J said:16
As a general rule, it is only where the Judge hearing the application is satisfied that the Judge at trial could properly exercise his or her discretion only by making an order in accordance with the proposed prospective costs orders that the order will be made. It follows that only where there are very special circumstances will a PCO be made in a Buckton category 3 case.
[25] His judgment can also be taken as recognising another potential category for an award of prospective costs. That is not only where the merits are overwhelmingly on the side of the party seeking prospective costs, but also where there has been misconduct by defendants. He said:17
There appear to have been some defaults by the defendants, but not of such an order as to have seriously disadvantaged the plaintiff in the fair conduct of this case. Such misconduct might well justify a court in its equitable jurisdiction taking pre-emptive steps in relation to costs. This is not, for instance, a case like Re X (Trust) in the Royal Court of Jersey, where the defendants had turned off the tap of distributions to the plaintiff beneficiaries. Ostensibly to protect trust assets, but unquestionably also for tactical reasons to discourage continuation of the litigation.
[26] In this case, William relies on both heads of special circumstances. He will argue at the hearing on 4 September that the merits of the case are overwhelmingly in his favour and that the defendants, if they have not turned off the tap, have allowed only a dribble which is not enough to allow him to run the litigation in a viable manner. The evidence shows he has been paid $20,000 to take legal advice. Beyond that, he
15 Woodward v Smith, above n 8, at [28]; and Fundacion Pinjo v Aguilar Ltd, above n 14, at [36].
16 Woodward v Smith at [29]. See also Fundacion Pinjo v Aguilar at [36].
17 Woodward v Smith at [49].
receives a living allowance. That and the payments to Fiona for her living allowance are by no means enough to allow him to run litigation of the sort being run here.
Discovery principles for this case
[27] In normal litigation, a judge will give costs directions at a first case management conference. That does not apply here. The Beddoe application is an originating application under Part 19 of the High Court Rules 2016. The 372 proceeding has been brought under pt 18 of the High Court Rules 2016, but there has not been a case management conference yet. That will not take place until the last quarter of this year, after a decision on the Beddoe application. The trustees have applied for a Beddoe order at the earliest opportunity and are not taking other steps until the outcome of their Beddoe application.
[28] It is not normal practice to make discovery orders on originating applications. Nor is it normal practice to order discovery before a first case management conference. Nevertheless, the Court has accepted that it has a jurisdiction to order discovery in appropriate cases, even when the rules do not allow for it. That has happened in applications for originating applications, applications for summary judgment18 and in liquidation proceedings.19
[29] In Commissioner of Inland Revenue v Elementary Solutions Ltd, Osborne AJ drew principles out of cases that he had considered. He rejected any suggestion that discovery should not be allowed only in exceptional or the rarest of cases. Instead, he said:20
(a)The court has a discretion to order discovery.
(b)The document sought must be capable of supporting the applicant’s case or adversely affecting their opponent’s case.
(c)Any orders for discovery should be subject to the proportionality and practicality requirements identified in r 8.2 of the rules and should accord with the objective of “just, speedy, and inexpensive determination” under r 1.2 of the rules.
18 NZI Bank Ltd v Philpott (1988) 1 PRNZ 560.
19 Nemesis Holdings Ltd v North Harbour Industrial Holdings Ltd (1989) 1 PRNZ 379 (HC); and
Commissioner of Inland Revenue v Elementary Solutions Ltd [2017] NZHC 2411.
20 At [37].
(d)The approach to discovery should be conservative.
(e)Discovery will be appropriate in marginal cases where the party makes out an outline case but the court encounters genuine difficulty in determining, without the documentary evidence which is likely to assist, whether the threshold test is satisfied.
[30] Those guidelines offer helpful guidance for this case. I will consider whether the discovery is required to assist in the Beddoe application and the application for prospective costs orders. As this case progresses there may be further discovery directions. After all, discovery is likely to be ordered at the first case management conference. William may have substantive rights of disclosure independent of any rules of procedural discovery under the principles laid down by the Supreme Court in Erceg v Erceg.21 I also note that William has already received significant disclosure. His narrative affidavit in the 372 proceeding attaches some 300 pages of exhibits.
[31] I emphasise here that proportionality is a relevant consideration. That is important because, as Kós J noted in Woodward v Smith, applications for a Beddoe order in prospective costs applications are not the occasion for a mini-trial of complex issues of fact and law.22
[32] To a certain extent, disclosure by trustees seeking Beddoe directions ought to be self-regulating because the trustees are required to make full and frank disclosure to the Court of all matters, especially any weaknesses in their case. Failure to make full and frank disclosure may lead to their losing the protection of any orders under s
66. In response to that, Mr Choi made the point that there is no assurance that a plaintiff starved of funds may be able to last the distance to see whether the trustees did make full and frank disclosure when they sought Beddoes directions. A point fairly made.
[33] I treat the main litigation as hostile litigation under the Buckton categorisation. Neither side contended otherwise. William has opposed the Beddoe application on the basis that it is hostile litigation. The issues are consistent with this being hostile litigation, given the allegations of breaches of fiduciary duty against Robert and
21 Erceg v Erceg [2017] NZSC 28; [2017] 1 NZLR 320.
22 Woodward v Smith, above n 8, at [20], citing Re Westdock Realisations Ltd [1988] BCLC 354 (Ch) at 362.
Callum personally for their decisions as trustees in divesting the Old Trust of assets which were intended for the benefit of William and Fiona, allowing themselves to become beneficiaries of the New Trust and receiving the benefit of those assets and ensuring that assets passed to Callum’s descendants.
[34] Deciding that the case involves hostile litigation is important for the discovery application. If the case were not hostile litigation, a prospective costs order would be relatively routine, and disclosure of documents would be less important. For hostile litigation findings of fact are more critical. That adds to the claim that there should be discovery. Other relevant considerations are relevance, proportionality and claims of privilege.
The categories of documents sought
[35] The fifth and sixth categories have already been cleared up. As to the fifth, Bill’s earlier wills, the will of August 2016 has already been disclosed. A 2002 will has more recently been disclosed to William. So no orders under that head are required.
[36] As to the sixth category of documents, Mr Finnie has advised the Court of the arrangement for payment of his fees. Given his advice, there is no need to direct disclosure of documents under that head. Only the first four categories require close consideration.
Invoices for legal fees and disbursements
[37] The argument for the relevance of invoices for legal fees and disbursements is that, on the Beddoe application, William may submit to the Court that the costs that the trustees consider they are likely to run up may be disproportionate and it would not be prudent for them as trustees to impose those costs on the trust’s assets at the expense of beneficiaries.
[38] Robert and Callum’s response is that financial statements are made available to the beneficiaries and financial statements will disclose the gross amounts of legal expenditure charged against the trust assets. Apparently, some financial statements
showing legal expenses have already been provided. Statements for earlier years can be made available and accounts for the year ending 31 March 2019 are to be completed shortly and can also be provided.
[39] For the Beddoe application, the trustees have already considered what costs might be charged against the trust if the case goes the full distance. The disclosure of financial statements is all that is required. I see little need to require particular invoices to be disclosed for the Beddoe application. A close analysis of invoices will not be required. All that counts is that William knows the total amount.
[40] Accordingly, I direct that, within two weeks of today, the trustees are to provide William’s lawyers with the gross amounts of legal fees incurred. That may be done informally by letter or by sending copies of the end of year financial statements for the year ending 31 March 2019. If they have not been prepared yet, the figures should be communicated in any event.
Resolutions, correspondence, minutes of meetings, memoranda of the trustees of the New Trust, the Old Trust, the father’s estate relating to the provision of money to William to pay legal fees since 18 November 2018
[41] Obviously, any documents held by the trustees in relation to the payment or non-payment of William’s legal fees are relevant to the application for a prospective costs order. The matter turns more on proportionality and privilege. It is helpful to have regard to the general principles on which trustees may be required to provide trust documents to beneficiaries.23 I was referred to the English Court of Appeal’s decision in Re Londonderry’s Settlement.24 The principles in that decision were generally upheld in Erceg. I refer to the judgment of Salmon LJ:25
It is not unusual for a disappointed beneficiary to persuade herself that she has a real grievance. Whether there is any justification for the present defendant’s view, I do not know and I have no means of knowing. Whether the court, if it knew all the facts known to the trustees would have acted as they did, again I do not know - nor is it material. The settlement gave the absolute discretion to appoint to the trustees and not to the courts. So long as the trustees exercise power with the consent of persons called appointors under the settlement and exercise it bona fide with no improper motive, their exercise of the power
23 Forman v Kingston [2004] 1 NZLR 841 at [99] cited in Erceg at n 54.
24 Re Londonderry’s Settlement [1965] 1 Ch 918 (CA).
25 At 936.
cannot be challenged in the courts - and their reasons for acting as they did are, accordingly, immaterial. This is one of the grounds for the rule that trustees are not obliged to disclose to beneficiaries their reasons for exercising a discretionary power. Another ground for this rule is that it would not be for the good of the beneficiaries as a whole and yet another that it might make the lives of trustees intolerable should such an obligation rest upon them…Nothing would be more likely to embitter family feelings and the relationship between the trustees and members of the family were trustees obliged to state their reasons for the exercise of powers entrusted to them. It might indeed well be difficult to persuade any persons to act as trustees were a duty to disclose their reasons, with all the embarrassment, arguments and quarrels that might ensue, added to their present and not inconsiderable burdens.
The Judge noted the other rule that beneficiaries have a right to see all trust documents and went on:26
It would need the clearest authority to persuade me that whilst trustees are not compelled to disclose the reasons or any information which might affect their reasons so long as nothing is put on paper, yet once the reasons or information are reduced to writing, the writing must be disclosed to beneficiaries. There is no such authority and I would expect to find none, for if it existed it would in my view be entirely contrary to reason and common sense.
Further on he said:27
The position is quite different where the beneficiary seeks disclosure of documents in the air, as in this case, from the position where the beneficiary seeks discovery of documents in an action in which allegations are being made against the bona fides of the trustees. If the documents in question are in the possession or power of the trustees and they are relevant to the issues in the action, they must be disclosed whether or not they are trust documents. In some instances, however, the fact that they are trust documents may nullify the privilege that would otherwise exist, as for example, if the document consisted of counsel’s opinion, taken before the issue of the writ, clearly the beneficiary is entitled to see the opinion taken on behalf of the trust.
[42] The point here is that, while under substantive disclosure principles in Erceg disclosure of trustees’ reasons for decisions may not be required, litigation or procedural discovery may require documents in the possession or control of trustees to be disclosed even if they are not trust documents but are relevant to an issue in the proceeding. All the same, the decision seems to recognise that some respect ought to be given for the confidentiality of trustees’ deliberations and that they should not have to disclose reasons for their decisions. Re Londonderry’s Settlement recognised,
26 At 937.
27 At 938.
however, that that is subject to an exception where it is said that trustees have acted in bad faith. A general allegation of acting in bad faith is not sufficient. There must be something in the circumstances of the case to suggest that there is some proper basis for alleging bad faith.
[43] At this stage of the proceeding, I am not persuaded that it could reasonably be argued on the application for a prospective costs order that the trustees have acted in bad faith. Mr Choi referred to Kós J’s reference in Woodward v Smith to Re X Trusts, decided in the Royal Court of Jersey, where trustees had turned off the tap. Kós J noted in his case that the trustees had not turned off the tap. Here it appears that the trustees have at least maintained a flow of funds to Fiona and William. While the merits of the trustee’s decision may be open to debate, the fact that it is possible to question the decision does not mean that there is an arguable case for them having acted in bad faith. I do not regard any suggestion that there was bad faith as reasonably arguable and I see no basis, therefore, for requiring disclosure of the documents in category 2.
Legal opinions and advice in relation to the administration of the trust
[44] This category goes to legal advice received by trustees of the New Trust and the Old Trust and executors of Bill’s estate in the administration of the trust relating to the resettlement of the Old Trust and the transfers of assets from the Old Trust.
[45] There is one critical document under this head: an opinion that the trustees of the New Trust obtained in November 2017 when they were intending to resettle the assets of the Old Trust on the New Trust. Ordinarily, legal advice that trustees obtain whether to enter into a transaction is regarded as a trust document and should be disclosed under Erceg principles to the beneficiary. The trustees have already disclosed the opinion to the Court in their Beddoe application, but they have redacted an affidavit so as not to disclose the opinion to William. They have made that redaction because they claim litigation privilege under s 56 of the Evidence Act 2006. To claim that privilege they need to show that litigation was reasonably apprehended and that obtaining the advice was for the conduct of the litigation.
[46] I accept that, in November 2017, the trustees could reasonably apprehend litigation. That is because counsel acting for William had written, threatening litigation if they went ahead with the settlement. I do not, however, accept that litigation was the dominant purpose in obtaining the legal advice. A lawyer had been instructed for William and had given notice that the trustees’ actions would be under scrutiny and could be challenged in court. A trustee who then seeks advice as to what they ought to do and whether they could go ahead with a planned course of action is doing so to ensure that they do so in a lawful manner. Litigation is a secondary consideration in those circumstances. Trustees seeking advice to ensure that the course they intend can be lawfully carried out obtain the advice to make sure that they can do so effectively, independently of any litigation. There may well be litigation downstream, but their purpose is to ensure that they have carried out their transactions in a way that is legally sound. Accordingly, the prospect of litigation is, on my assessment, a secondary consideration in much the same way as it was in the litigation privilege case of Guardian Royal Exchange Assurance of NZ Ltd v Stuart.28
[47] I have the advantage over Mr Choi of having looked at that document. I direct that part of the document may be redacted, but the section dealing with the proposed resettlement is relevant to this proceeding and is not subject to litigation privilege. It ought to be disclosed. Requiring disclosure will not impose any hardship on the trustees because they already have it to hand.
Legal opinions and other written legal advice received by the trustees relating to decisions as to provision or non-provision to William for his legal fees
[48] The debate here was whether the documents under this head are advice going to the administration of the trust or to the conduct of the litigation. The litigation privilege normally applies to the preparation of a case before hearing to ensure that parties to litigation can make full and frank disclosure of their circumstances to their lawyers so that their case can be conducted to best advantage. If parties were required to disclose of matters disadvantageous to them under discovery orders, that would inhibit them in the conduct of their case. Justice therefore requires that they be given privilege for that purpose.
28 Guardian Royal Exchange Assurance of NZ Ltd v Stuart [1985] 1 NZLR 596 (CA).
[49] I see the matter differently when it goes to deciding whether William should be funded for his legal fees. That goes more to the administration of the trust. Litigation privilege is outside advice given to trustees, whether they should make funds available to a beneficiary to conduct litigation. No privilege applies. Again, any legal advice the trustees have received is relevant to the prospective costs application. It would give helpful guidance to the Court in deciding the Beddoe application. It is not disproportionate to require any legal advice on that question to be disclosed. There will be an order for disclosure under that head accordingly.
Outcome
[50] I sum up. Under category 1, the trustees are to disclose amounts spent on legal fees but they are not required to disclose individual invoices. I do not require any disclosure under category 2. Under category 3 I require disclosure of the opinion of November 2017 which may be redacted but should disclose the section dealing with resettlement of assets on the New Trust. I require disclosure of legal advice within category 4. I do not require disclosure under category 5 and category 6.
[51]The disclosure I have directed is to be completed by 13 August 2019.
[52] I invite counsel to confer as to costs. If they cannot agree, memoranda may be filed.
[53] I record one other matter. I have not dealt entirely with what documents should be disclosed to the plaintiff for the Beddoe application. The plaintiff has received some redacted documents. This decision is not to be read as upholding all those redactions. I reserve leave to seek directions if the plaintiff wishes to challenge any redactions. I ask counsel to consider whether that issue should be dealt with by the judge who will take the hearing on 4 September or whether it should be dealt with before then. Counsel should contact the Registry if they require directions before the hearing.
Associate Judge R M Bell
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