McNulty v McNulty HC Dunedin CIV 2010-412 000810
[2011] NZHC 1173
•30 September 2011
IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY
CIV 2010-412 000810
IN THE MATTER OF s 68 of the Trustee Act 1956
BETWEEN AMBER LEE MCNULTY First Plaintiff
AND CARL MICHAEL MCNULTY Second Plaintiff
AND BRIAN FRANCIS MCNULTY First Defendant
AND GCA LEGAL TRUSTEE 2008 LIMITED Second Defendant
AND PETER AUSTIN GOWING Third Defendant
Hearing: 10 May 2011
(Heard at Dunedin)
Counsel: D P Robinson and M Dalgleish for Defendants/Applicants
C Luke for Plaintiffs
T J Shiels for McNulty's Investment Ltd and McNulty's TransportLimited (appearing but then excused) Judgment: 30 September 2011
JUDGMENT OF ASSOCIATE JUDGE OSBORNE
as to defendants’ strike out and summary judgment applications
Introduction
[1] In this proceeding, the plaintiffs attack a decision of the trustees of what is their grandfather’s family trust. The decision involved appointing the trust’s major asset to Brian McNulty who was a trustee as well as a beneficiary.
[2] The various defendants have applied for summary judgment against the
plaintiffs or alternatively an order striking out the plaintiffs’ claims.
MCNULTY V MCNULTY HC DUN CIV 2010-412 000810 30 September 2011
The Trust and its history
[3] Frank McNulty settled the McNulty Family Trust (“the Trust”) by deed dated
20 January 1995. The trustees appointed were his solicitor (Evan Moore) and two accountants (Kenneth Fergus and Alexander Laing). Frank McNulty and his wife were appointed advisory trustees. Frank McNulty was given the power of appointment of any new trustee during his lifetime or by Will. He was also given a power to remove trustees for any cause whatsoever and without giving reasons.
[4] The Trust is a discretionary trust.
[5] The beneficiaries included the settlor, settlor’s spouse, settlor’s children and remoter issue of those children, spouses of beneficiaries and any charity nominated by an advisory trustee.
[6] Frank McNulty had two sons, namely Brian and Allan McNulty. The plaintiffs, Carl and Amber McNulty, are Allan’s children (and Frank’s grandchildren).
[7] Clause 4 of the Trust deed makes provision for income and capital payments in the following terms –
INCOME AND CAPITAL PAYMENTS The Trustees may at their discretion until the Vesting Day pay or apply the whole or any part of the capital and/or income for or towards the personal support, maintenance, comfort, education or advancement in life or other benefit of any of the Beneficiaries then living or in existence during the trust period in any manner, at any times, in any proportions and subject to any terms and conditions which the Trustees in their absolute discretion may decide. Any income not paid to or applied for any Beneficiary during, or within six months after, any income year shall be accumulated and added to the trust fund.
[8] Clause 9 makes provision for final distribution in these terms –
FINAL DISTRIBUTION On Vesting Day the trust fund shall be divided equally among the Settlor’s Children then living but if any one or more of them has died before the Vesting Day leaving children or remoter issue then the children or remoter issue shall take per stirpes and, if more than one, as tenants in common in equal shares the share in the trust fund which would otherwise have been distributed to the deceased parent.
[9] The “Vesting Day” referred to in clause 9 is dealt with in clause 2 of the deed
which provides –
TERM OF TRUST The Trust shall continue until the Vesting Day, which means:
(a) the 1st day of December 2074;
(b) any earlier date which the Trustee in their absolute discretion appoints by deed for the whole or any specified part of the trust fund and any date appointed shall be the Vesting Day of the trust fund or the specified part, as the case may be.
[10] The deed expressly deals with conflicts of interest in clause 14 which provides –
14. TRUSTEE’S CONFLICTS OF INTEREST
14.1 The Trustees shall be entitled to act as Trustees and exercise all of
the Trustee’s powers and discretions, even if:
(a) the Trustees are associated in any way with any person, trust or unincorporated body of persons with whom or which the Trustee is dealing;
(b) the interests or duty of the Trustees may conflict with their
duty to the trust fund or any Beneficiary; or
(c) the Trustees are dealing with the trust fund in a personal capacity as well as that of Trustee.
14.2 The Trustees may:
(a) act in any capacity for any company or any company associated with that company in which the trust fund has a
debt or equitable interest; and
(b) retain any remuneration and other payments properly chargeable in respect of so acting.
[11] The deed deals with the scope of the trustees’ discretion in clause 10 which
materially provides –
10. GENERAL POWERS
10.1 To achieve the objects of the trusts in this deed, the Trustee shall
have all rights, powers and privileges of a natural person in the administration, management and investment of the trust fund and, subject to the trusts in this deed, may deal with the trust fund and any appropriated and partitioned part of the trust fund as if the Trustee were beneficially entitled to it.
10.2 Except as otherwise expressly provided in this deed, the Trustees shall have absolute and uncontrolled discretion to exercise the powers and discretions vested in the Trustees but shall always take into consideration the advice of the Advisory Trustee(s).
10.3...
[12] The following changes of trusteeship occurred –
26 January 2004 (by deed). Alexander Laing retires. Frank appoints
Brian and Allan McNulty as (additional) trustees.
4 May 2007. Allan McNulty dies.
5 September 2008 (by deed). Kenneth Fergus and Evan Moore retire. 5 September 2008. Frank McNulty appoints GCA Legal Trustee
2008 Limited (“GCA”) an additional trustee.
[13] It was on the same date as the latter two deeds (5 September 2008) that Brian McNulty and GCA, by Deed, appointed the Trust’s only asset, a Cromwell property (also referred to as the “Inlet property”) to Brian McNulty himself.
[14] The parties differ as to the value of the Cromwell property. Carl McNulty by affidavit has sworn that the Cromwell property is currently worth in the region of
$4,000,000 to $5,000,000. He is not qualified to provide valuation evidence and there is no basis on which the Court can accept his evidence of value. His uncle, Brian McNulty, has produced evidence of the (1 September 2010) valuation used for rating purposes, which indicates a capital value of $1,210,000.
[15] Other matters of background, some accepted but some disputed, appear in the affidavits filed. None of these matters is pleaded. They accordingly may be relevant in the summary judgment application but not in the strike out application.
[16] Carl McNulty states that the intention of the Trust was that Brian’s and Allan’s families would share the benefit of the Cromwell property. That intention does not appear in the Trust document itself. There is no other evidence to indicate that it was an intention of the Trust or indeed of the settlor. For his part, Brian says
that he does not know the origin of the suggestion that there was such an intention of the Trust.
[17] There is a hint whence the concept of “intention” may have come in a letter sent by the plaintiffs’ solicitors to the defendants’ solicitors on 1 September 2009, which refers to the plaintiffs’ having seen a copy of Frank McNulty’s old will. It is there stated –
From viewing Mr McNulty’s will it appears that his intention for the property is that it is to be for the benefit of both Brian and Allan McNulty (and any issue thereof).
The will was not in evidence. The comment in the letter is not admissible evidence in itself. This all serves to underscore why the Court should not place an y reliance on Carl McNulty’s reference to “the intention of the trust”.
[18] Carl and Amber McNulty, as well as being beneficiaries of their grandfather’s family trust, were beneficiaries of their father’s trust (the Allan McNulty Family Trust) and of their father’s estate. Their uncle, Brian McNulty, was an executor of Allan’s estate and a trustee of Allan’s trust. It is his uncontradicted evidence that the estate and trust between them have a 50 per cent interest in McNulty Investment Limited and McNulty’s Transport Limited which in July 2010 had a mid-point value (for the half share) of $1,570,500. Brian McNulty’s deposes that that full value is held for the benefit of Carl and Amber McNulty.
[19] It is Brian McNulty’s further uncontradicted evidence that the Allan McNulty Family Trust also owns a substantial house property (which Amber McNulty lived in for a period).
[20] Carl McNulty has deposed to hostility on the part of Brian McNulty to Carl and Amber. He refers to difficulties over access to the home owned by the Allan McNulty Family Trust. He refers to his uncle as having initially denied taking a gold coin collection (belonging to Allan’s estate) but later admitting he had it. He says that neither Brian McNulty nor any of the other defendants has ever enquired either directly or indirectly as to the welfare, financial situation or other means of Amber and himself. He says that he and his sister do not believe that Brian McNulty has
been able to put aside a conviction that Amber and Carl should not get any benefit from the McNulty family property following Allan’s death. He says that Brian has not been able to put aside Brian’s self-interest so as to be able to credibly and fairly exercise his duty as trustee of the McNulty Family Trust. He refers to his uncle’s actions:
in arranging the resignation of the remaining independent trustees, appointing his solicitors as trustee, and appointing the entire trust property to himself, and refusal to provide any reason for the appointment...
[21] Brian McNulty disputes most of the accusations made against him. He accepts that hostility has occurred but relates that to what he says is an unresolved personal grievance which Carl McNulty brought against McNulty’s Transport Limited after some limited holiday employment. He accepts that he (Brian) has possession of the gold coin collection but adds that Carl and Amber are welcome to it if they wish to have the collection. He says in relation to the home that Amber was permitted to remain in the home after having approached him about living in it but he recalls the neighbours phoning to complain of noisy parties. He says that Carl and Amber have not been communicative as to their needs, with the only occurrence being when Carl was 16 or 17 years old and made a request of Brian as trustee for approximately $600,000 for a business venture. Brian indicates that he well knew the financial circumstances of Carl and Amber through his involvement with their father’s family trust and estate.
[22] Brian McNulty denies that he has not properly discharged his obligations as trustee. He says that he did not arrange the resignation of the independent trustees. He notes that he did not have the power under the trust deed to achieve that. He deposes that his father was still alive at that point and desired to have his affairs administered by the firm of Gallaway Cook Allan following the appointment of his previous solicitor to the bench. He deposes that the appointment of GCA as trustee was initiated by his father. (He might have added that it was his father who also appointed GCA pursuant to his power of appointment of new trustees). Brian McNulty deposes that Evan Moore (one of the retiring trustees) had no ongoing involvement with Frank McNulty’s affairs and desired to resign. He adds that Kenneth Fergus remains a director of McNulty’s Transport Limited. He concludes,
in relation to the giving of reasons for the exercise of a discretion, that the trustees have declined to disclose their reasons (at this juncture) based on advice received.
[23] The ages of Amber and Carl McNulty at the date Carl McNulty swore his affidavit in April 2011 were 22 years and 19 years respectively. In the affidavit sworn on their behalf by Carl McNulty, no reference is made to their personal financial circumstances. No issue has been taken by them with the summary of their trust and estate interests provided by Brian McNulty in his evidence.
[24] The Court has before it in evidence exchanges of correspondence between the plaintiffs’ solicitors (Prudentia Law) and the Trust’s and defendants’ solicitors (Gallaway Cook Allan). The correspondence begins on 24 June 2009 when Prudentia Law requested clarification as to the current situation regarding ownership of the Cromwell property and concludes with letters sent by Gallaway Cook Allan on
16 August 2010 (responding to complaints and allegations made on behalf of Carl and Amber) and on 14 February 2011 (under cover of which the statement of defence was served and in which a narrative summary of the points of defence was set out). For present purposes nothing turns on the contents of the correspondence but I note one point. In a reply sent by Gallaway Cook Allan (signed by Peter Gowing) to Prudentia Law on 9 October 2009 it was said –
Further to a memorandum on the file and the clear recollection of Mr Brian McNulty and myself (Mr Frank McNulty, is as indicated, indisposed) was that the position of all the beneficiaries of the Trust was considered by Mr Frank McNulty, Mr Brian McNulty and the writer as at the 27 May last year and a Deed of Capital Appointment followed that consideration and Mr Allan McNulty’s instruction.
[25] It was common ground between counsel that the concluding reference to “Mr Allan McNulty’s instruction” was clearly an error and should have read “Mr Frank McNulty’s instruction”. The “memorandum on the file” was not produced to the Court in evidence. I therefore do not know whether it supports the history as implied by Mr Gowing or not. Mr Luke for the plaintiffs did not make any submission with regard to the memorandum nor did he (either before or at the hearing) suggest that the memorandum should be produced. It may well be that Mr Gowing’s reference to the memorandum and implied reference to its contents constituted a waiver of
confidentiality or privilege. That however was an evidential matter for the plaintiffs to pursue if they wished.
Striking out a claim – the principles
[26] High Court Rule 15.1 makes provision for orders striking out all or part of a pleading. In this case the defendants/applicants invoke r 15.1(1)(a) (No reasonably arguable cause of action) and r 15.1(1)(d) (Abuse of the process of the court).
[27] I adopt the following as principles applicable to the consideration of this application:
(a) The Court is to assume that the facts pleaded are true (unless they are entirely speculative and without foundation).
(b) The cause of action must be clearly untenable in the sense that the
Court can be certain that it cannot succeed.
(c) The jurisdiction is to be exercised sparingly and only in clear cases.
(d)The jurisdiction is not excluded by the need to decide difficult questions of law, even if requiring extensive argument.
(e) The Court should be slow to rule on novel categories of duty of care at the strike out stage. (See Attorney General v Prince [1998] 1
NZLR 262).
Defendants’ summary judgment application – the principles
[28] The starting point for a defendant’s summary judgment application is r
12.2(2) High Court Rules, which requires that the defendant satisfy the Court that none of the causes of action in the statement of claim can succeed.
[29] I summarise the general principles which I adopt in relation to the application:
(a) The onus is on the defendant seeking summary judgment to show that none of the plaintiff’s causes of action can succeed. The Court must be left without any real doubt or uncertainty on the matter.
(b)The Court will not hesitate to decide questions of law where appropriate.
(c) The Court will not attempt to resolve genuine conflicts of evidence or to assess the credibility of statements and affidavits.
(d)In determining whether there is a genuine and relevant conflict of facts, the Court is entitled to examine and reject spurious defences or plainly contrived factual conflicts. It is not required to accept uncritically every statement put before it, however equivocal, imprecise, inconsistent with undisputed contemporary documents or other statements, or inherently improbable.
(e) In weighing these matters, the Court will take a robust approach and enter judgment even where there may be differences on certain factual matters if the lack of a tenable defence is plain on the material before the Court.
(f)Once the Court is satisfied that there is no defence, the Court retains a discretion to refuse summary judgment but does so in the context of the general purpose of the High Court Rules which provide for the just, speedy and inexpensive determination of proceedings.
The plaintiffs’claims
[30] The plaintiffs’ four causes of action (as further explained in the submission
by Mr Luke) may be summarised as follows –
First cause: Brian McNulty in appointing the entire Trust property to a single beneficiary (himself) acted in a position of conflict (as between
his duty as trustee and his self-interest as beneficiary).
Second cause: GCA in considering whether or not to appoint the entire trust property to a single beneficiary (Brian McNulty) when that beneficiary and his father (Frank McNulty) were in their personal capacities clients of Gallaway Cook Allan (whose partners comprised all the directors of GCA) acted in a position of conflict of interest, the conflict being between the fiduciary duty owed to Brian and Frank McNulty as clients and the duty owed to Amber and Carl McNulty as
beneficiaries of the Trust.
Third cause: the defendants breached duties –
o To make an informed decision as to the appointment;
o To make enquiries into or take account of the plaintiffs’ needs;
o To act impartially.
Fourth cause: breach of the provisions and intent of the trust deed
(requiring equal division of trust property) by appointing the whole of the trust property to Brian McNulty.
The full pleadings – the jurisdiction
The detailed provisions of the statement of claim
[31] Paragraphs 1-8 of the statement of claim set out matters relating to the constitution of the Trust and other matters of background, which I have largely covered. Two paragraphs deal with the second and third defendants as follows:
2. THAT the second defendant, GCA LEGAL TRUSTEE 2008
LIMITED, is a duly incorporated professional trustee company incorporated under the Companies Act 1993 on 31 January 2008
with its registered office at Gallaway Cook Allan, Lawyers, Cnr
High & Princes Streets, Dunedin, New Zealand. At all material times the second defendant was a trustee of the trust.
3. THAT the third defendant, PETER AUSTIN GOWING, is a lawyer and director of the second defendant and resides at 36 Matai Road, Wanaka, 9305, New Zealand. At all material times the third defendant was responsible for directing the second defendant in accordance with the second defendant’s role as trustee of the trust.
[32] The causes of actions are then pleaded as follows: -
FIRST CAUSE OF ACTION: BREACH OF FIDUCIARY DUTY TO NOT ACT IN SITUATION OF CONFLICT OF INTEREST
9. THAT the first defendant, by attempting to carry out the appointment to himself, an exercise of a fiduciary power under the trust deed, acted in conflict between his duty as trustee owed to the plaintiffs and his self interest as beneficiary of the appointment.
WHEREBY THE PLAINTIFFS SEEK ORDERS:
(a) Removing the first and second defendants as trustees;
(b) Rescinding the appointment of the Inlet Property to the first defendant;
(c) Appointing the Inlet Property in equal parts to the first defendant (50%) and the plaintiffs (50%) pursuant to clause 9 of the final distribution provision of the trust;
(d) That the defendants pay the plaintiffs’ costs in bringing this
proceeding on an indemnity or solicitor/client basis; and
(e) Such other orders as the Court deems just.
SECOND CAUSE OF ACTION: BREACH OF FIDUCIARY DUTY TO NOT ACT IN SITUATION OF CONFLICT OF INTEREST
10. THAT the directors of the second defendant and the third defendant are lawyers and partners in the law firm of Gallaway Cook Allan.
11. THAT at the time of the appointment on 5 September 2008 Gallaway Cook Allan acted for the first defendant in his personal capacity and for Mr. Frank Michael McNulty (the settlor and advisory trustee) in his personal capacity. It is likely the law firm also represented one or more of the first defendant’s companies. It has since acted for McNulty Investment Limited and McNulty Transport Limited, two companies in which the first defendant is a 50% shareholder.
12. THAT the second and third defendants owed fiduciary duties to the first defendant and the advisory trustee in conflict with the fiduciary duty they owed to the plaintiffs. By attempting to carry out the appointment the second and third defendants acted in a conflict situation in breach of the duty not to do so.
WHEREBY THE PLAINTIFFS SEEK ORDERS: (a) Removing the second defendant as trustee;
(b) Rescinding the appointment of the Inlet Property to the first defendant;
(c) Appointing the Inlet Property in equal parts to the first defendant (50%) and the plaintiffs (50%) pursuant to clause 9 the final distribution provision of the trust;
(d) That the defendants pay the plaintiffs’ costs in bringing this
proceeding on an indemnity or solicitor/client basis; and
(e) Such other orders as the Court deems just.
THIRD CAUSE OF ACTION: BREACH OF TRUSTEES’ DUTIES
13. THAT the third defendant as principal director responsible for the trust owed the plaintiffs a duty to carry out his role as director of the second defendant as if he were personally appointed trustee.
14. THAT in attempting to carry out the appointment the defendants
breached the following trustees’ duties:
i. To recognise discretion – the second and third defendants failed to make an informed decision on the appointment and only followed the instructions of the first defendant.
ii. To make an informed decision – the defendants failed to make any enquiries of the plaintiffs’ welfare, interests, or financial position or take any of these into account.
iii. To act impartially – the defendants acted in a partial manner with the interests of the first defendant at the forefront and the interests of the plaintiffs receiving little or no consideration.
WHEREBY THE PLAINTIFFS SEEK ORDERS:
(a) Removing the first and second defendants as trustees;
(b) Rescinding the appointment of the Inlet Property to the first defendant;
(c) Appointing the Inlet Property in equal parts to the first defendant (50%) and the plaintiffs (50%) pursuant to clause 9 the final distribution provision of the trust;
(d) That the defendants pay the plaintiffs’ costs in bringing this
proceeding on an indemnity or solicitor/client basis; and
(e) Such other orders as the Court deems just.
FOURTH CAUSE OF ACTION: BREACH OF TRUST DEED
15. THAT the trust deed contains a final distribution provision at clause
9 providing that the first defendant and the plaintiffs (as the children
of Mr. Allan McNulty) should take equal shares of the trust property on vesting day.
16. THAT by appointing the whole of the trust property to the first defendant the defendants in practice and effect declared vesting day and failed to apply the provisions and intent of the trust deed to divide the property equally.
WHEREBY THE PLAINTIFFS SEEK ORDERS:
(a) Removing the first and second defendant as trustees;
(b) Rescinding the appointment of the Inlet Property to the first defendant;
(c) Appointing the Inlet Property in equal parts to the first defendant (50%) and the plaintiffs (50%) pursuant to clause 9 the final distribution provision of the trust;
(d) That the defendants pay the plaintiffs’ costs in bringing this
proceeding on an indemnity or solicitor/client basis; and
(e) Such other orders as the Court deems just.
Defendants’ grounds of application
[33] The defendants’ grounds of application (common to both applications) begin with a general ground relating to the statement of claim and then move to each of the causes of action.
The statement of claim generally
[34] The defendants assert:
(1) The Pleadings purport to be an application to the Court for Review of a Trustee’s action pursuant to section 68 Trustee Act 1956, and seeks an Order under that section.
(2) Section 68 confers jurisdiction to review an “act or omission or decision of a trustee in the exercise of any power conferred by [the Trustee Act 1956]”;
(3) The appointment of land occurred pursuant to a power conferred by the Trust deed, not the Act.
[35] In their notice of opposition the plaintiffs asserted that the Court has jurisdiction to hear the plaintiffs’ claims either under the Trustee Act 1956 or in the Court’s inherent jurisdiction.
[36] It happens that in the heading to the statement of claim the plaintiffs have included reference to the proceeding being –
Under Section 68 of the Trustee Act 1956
[37] Mr Robinson submitted that as the appointment of land occurred pursuant to a power conferred by the Trust deed and not a power given by the Trustee Act, there was accordingly no jurisdiction to entertain the plaintiffs’ claims, s 68 being concerned with powers conferred by the Act.
[38] I am strongly inclined to the view that Mr Robinson was correct in his submission to the extent that s68 does not provide the relevant source of jurisdiction : see Re Havill (decd) [1968] NZLR 217 at 223. But the Court has its inherent jurisdiction to supervise trusts and trustees and to make appropriate orders to protect the interests of beneficiaries of a trust: see Wendt v Orr [2004] WASC 28 at para 30.
[39] Accordingly the defendants’ first ground of application cannot succeed.
First cause of action
[40] The defendants assert in relation to the first cause of action that:
(1) Any conflict of interest (which is denied) cannot found a cause of action;
(2) Clause 14.1 of the Trustee Deed expressly permits a trustee to act when a conflict does or may exist;
(3) The Trust is fully discretionary in nature (refer clause 10.1 and 10.2 of the Trust Deed);
(4) The rule that the trustee must not act in a situation of (potential) conflict of interest does not apply where the trustee has been put in that position by the settler (sic) under whose disposition the trust arose.
[41] Trustees must exercise their powers and discretions properly and conscientiously. A range of duties arises from this principle including the duty upon trustees not to exercise any discretion directly or indirectly for their own benefit unless authorised by the trust instrument or by statute: see Underhill & Hayton, Law Relating to Trusts and Trustees (16th ed) pp 688-689. There have been said to be two rules involved in that duty, namely the self-dealing rule and the fair-dealing rule, which were described by Sir Robert Megarry V.C. in Tito v Waddell (No.2)[1] in this way –
[1] Tito v Waddell (No 2) [1977] 1 Ch 106 at 241.
The self-dealing rule is (to put it very shortly) that if a trustee sells the trust property to himself, the sale is voidable by any beneficiary ex debito justitae, however fair the transaction. The fair-dealing rule is (again putting it very shortly) that if a trustee purchases the beneficial interest of any of his beneficiaries, the transaction is not voidable ex debito justitae, but can be set aside by the beneficiary unless the trustee can show that he has taken no advantage of his position and has made full disclosure to the beneficiary, and that the transaction is fair and honest.
The inapplicability of these rules where the deed expressly permits trustees to benefit themselves is related to the principle that a trustee’s duty is to adhere to the terms of the trust.
[42] When such a duty is expressed more broadly in terms of the duty of trustees not to put themselves in positions where their interest and duty conflict, the duty remains subject to the express provisions of the trust instrument. Mr Luke, in his submissions, referred to the judgment of Lord Herschell[2] in a passage cited in J
[2] Bray v Ford [1896] AC 44 at 51.
Mowbray QC & ors, Lewin on Trusts (18th ed, 2008) at para 20-01 for the statement
of general principle in the chapter dealing with “unauthorised profits and conflicts of interest”, where his Lordship said –
It is an inflexible rule of a Court of Equity that a person in a fiduciary position, such as the respondent’s, is not, unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict. It does not appear to me that this rule is, as has been said, founded upon principles of morality. I regard it rather as based on the consideration that human nature being what it is, there is danger, in such circumstances, of the person holding a fiduciary position being swayed by interest rather than duty, and thus prejudicing those whom he was bound to protect. It has, therefore, been deemed expedient to lay down this positive rule.
(emphasis added)
[43] For more recent recognition of the primacy of the provisions of the trust deed see also Edge v Pensions Ombudsman[3] and Dever v Knobloch[4] per Dobson J at [50].
[3] Edge v Pensions Ombudsman [1999] 4 All ER 546 (CA)
[4] Dever v Knobloch HC Napier CIV-2008-441-537 29 October 2009.
[44] Similarly, this Court in Blair v Vallely & ors[5] accepted the operation of a clause in a trust deed which expressly authorised a trustee to act and to exercise discretionary powers notwithstanding a personal interest in the trust.
[5] Blair v Vallely & ors [2000] WTLR 615, also HC Wanganui CP8/98 23 April 1999.
[45] The rule may be excluded not only by the authorisation of conflict within the trust instrument but also where the trustee is placed in a position of conflict of interest and duty by the settlor - see Sargeant v National Westminster Bank plc[6]. In Dever v Knobloch (above [43]) Dobson J at [47] expressed doubt as to whether in a family trust situation (as against a superannuation trust) acting in conflict would be permissible where someone else (such as the settlor) had put the trustee in that position.
[6] Sargeant v National Westminster Bank plc (1990) 61 P & CR 518 (CA) per Nourse LJ at 523 (Bingham LJ and Sir George Waller at 525 agreeing with the judgment).
[46] In this case, the trust deed expressly dealt with the subject of trustee’s
conflict of interest at cl 14. For convenience, I repeat the provisions of cl 14.1 –
14. TRUSTEE’S CONFLICTS OF INTEREST
14.1 The Trustees shall be entitled to act as Trustees and exercise all of
the Trustee’s powers and discretions, even if:
(a) the Trustees are associated in any way with any person, trust or unincorporated body of persons with whom or which the Trustee is dealing;
(b) the interests or duty of the Trustees may conflict with their duty to the trust fund or any Beneficiary; or
(c) the Trustees are dealing with the trust fund in a personal capacity as well as that of Trustee.
[47] Mr Robinson submitted that the plain meaning of cl 14(a) (applied to this case) was that Brian McNulty was entitled to exercise all his powers and discretions even if his interest as beneficiary conflicted with his duty as trustee.
[48] In Dever v Knobloch (above [43]) the High Court was dealing with a defendant’s summary judgment application brought by trustees in response to a claim by a beneficiary (a son) alleging breach of trustee duties. Mrs Dever was alleged to have engaged in self-dealing by participating both as a trustee and as a beneficiary receiving a substantial distribution. The participation of another trustee, a Mr Billington (who was a husband of a beneficiary), was alleged to be also tainted given his marriage. The parallel between what Mr Dever alleged in his case and what the plaintiffs here allege is reflected in this summary of the case law at [44] of the judgment of Dobson J –
... Mr Dever’s pleading is in broad enough terms to encompass a more general allegation that the decision by the trustees to make the distributions they did was flawed because of the participation by Mrs Dever when she was conflicted by virtue of her interest in the capital apportioned for her benefit, relative to the extent of distributions made to other beneficiaries. If Mr Billington “participated”, then a comparable issue arises in respect of his participation. In the absence of either an express provision in the Trust Deed permitting participation by a trustee who, as a beneficiary, may receive a benefit from a decision by the trustees, or the informed consent of all beneficiaries, then the participation by a trustee who acquires a benefit from such a decision is one in respect of which other beneficiaries may have a tenable basis for challenge. This presumptively arises because of the conflict between the duty to act even-handedly towards all beneficiaries, and the interest in preferring that trustee’s own interests.
[49] Mr Luke, for the plaintiffs, submitted correctly that what cl 14 authorises is a matter of construction. He submitted that while cl 14.1 provides an “entitlement” to act as trustee and to exercise powers and discretions in a specific set of circumstances, it cannot and should not be read as an express authority to either (1) exercise a discretion to appoint trust property to the trustees; or (2) continue to act in a situation of clear, unequivocal, and direct conflict as existed in the present case. He observed that cl 14.1 does not include in the enumerated list the entitlement to act where the trustee is to receive the trust property directly or by appointment. He submitted therefore that Brian McNulty was not entitled to exercise the discretion (as to appointment of capital) in favour of himself to the exclusion of other beneficiaries.
[50] Mr Luke elaborated that the conflict permitted by cl 14.1 was a conflict which arises “indirectly”. He submitted that the clause (and in particular cl 14.1(b)) would apply to protect a trustee when dealing with trust assets alongside or in conjunction with other assets owned personally by the trustee or controlled by him. He submitted that cl 14 should not be read so as to allow other beneficiary’s interests to effectively be cancelled out. He submitted that the clause did not allow the trustees to put their interests before their duty.
[51] He submitted that the operation of cl 14.1 should be seen as involving a question of degree. The Trust did not authorise conflict where there was a total appointment of assets but it did authorise conflict if there was a partial appointment.
[52] In his written submissions, Mr Luke had focussed on four matters of background which should influence the construction of the trust deed –
(a) The original trustees were not also beneficiaries. It was not originally contemplated that the act triggering conflict would be an appointment to a trustee; and
(b) The directness and extent of the conflict; and
(c) The extent to which the action in conflict prejudices other beneficiaries;
(d)The boilerplate nature of the trust clause. The clause is drafted as a general protection rather than a specific empowerment.
[53] I examine these submissions in slightly different order.
[54] Mr Luke did not refer me to any manual of trust precedents (or similar) which would illustrate the boilerplate nature of the clause in question. It may well be that the provisions of cl 14.1 are the standard provisions of a particular firm or of a textbook. In J Kessler QC & K Ayers Drafting Trusts and Will Trusts in New Zealand (2010) the authors at 5.5.2 refer to the mechanism of an express authority to act in conflicts of interest (although the text does not then contain example clauses).
[55] In the New Zealand text K Ayers & P Wyllie Trusts and Relationship Property (2003), the authors include in Appendix 1 (“Specimen Trust Deed and Analytical Commentary”) a sub-clause 14.3 (“Interested Trustee”) which permits a trustee of the trust to act and exercise powers even though certain situations apply, including –
14.3.1 Trustee Interested: that Trustee is at any time associated in any capacity with any person:
(a) to which the Trustees sell or lease property forming part of the Trust Fund;
(b) in which the Trustees hold or intend to purchase shares, securities or other rights for the Trust Fund; or
(c) with which the Trustees deal in their capacities as trustees of the Trust;
14.3.2 ...
14.3.3 Conflict of Interest or Duty: that Trustee’s interests or duties in a matter of conflict with that Trustee’s duty to the Trust Fund and/or to the beneficiaries of the Trust;
14.3.4 Dealings with Trustee in Personal Capacity: that Trustee deals as a trustee of the Trust with himself or herself in a personal capacity (including, without limitation, as a beneficiary of the Trust or of any other trust); or
14.3.5 Power in Trustee’s Favour: the exercise of the Trustee’s powers may be in the Trustee’s own favour (including, without limitation, as a beneficiary of the Trust or of any other trust).
The authors do not provide “analytical commentary” on these provisions but the similarity between specimen clauses 14.3.1, 14.3.3 and 14.3.4 and clause 14.1(a)-(c) of the subject deed is plain to see. Counsel did not refer me to this or other texts containing specimen forms. The 2003 text indicates that at least as at 2003 there were clauses of this nature available in boilerplate fashion. There is no reason to believe that that was not so eight years earlier when Frank McNulty’s solicitor drew up the deed.
[56] The use of a standard provision of itself would not determine whether the clause properly construed was intended to be comprehensive or limited. Mr Luke’s characterisation of the clause as “a general protection rather than a specific empowerment” does not in my judgment assist his cause – if the words “general
protection” were replaced by “general authorisation” that in my judgment would fit more aptly with the actual wording of the clause. The authorisation to act as trustee and to exercise all the trustee’s powers and discretions even if the interests of the trustees may conflict with their duty to the trust fund or to any beneficiary does not have the quality of addressing specific (if by that Mr Luke meant individual) situations. On its face it is a comprehensive authorisation.
[57] The proposition that the appointment which took place prejudiced other beneficiaries (by removing all assets from their trust) misses the point that the clause authorises the trustee to be involved in the exercise of powers and discretions even when his own interest is involved. There is no reference to or suggestion of any sliding scale of potential detriment to a beneficiary or even to the trust fund itself. Mr Robinson characterised Mr Luke’s submission as involving an invitation to find in cl 14 some sort of sliding scale in relation to the extent of conflict. Mr Robinson submitted that that very concept tells against the limiting construction which Mr Luke would place on cl 14. Mr Robinson suggested that the clause should be construed upon the basis that the parties to the deed must have wanted from cl 14 a provision which was workable and certain. I agree. Nothing in cl 14 creates a sliding scale which would render some degree of conflict between duty and interest impermissible (while other conflicts were permissible).
[58] The concept that the construction of cl 14.1 might be affected by the fact that the original trustees were not also beneficiaries sits uncomfortably with the earlier proposition that the trust clause is boiler-plate in nature. If one were to assume that cl 14 is a relatively standard clause used by at least this drafting firm, then having regard to the power of the settlor to remove and appoint trustees, the clause has the appearance of suiting admirably a common family trust situation where there may be at any given time either professional trustees, family trustees or a mixture. Whether or not the subjective concept of the parties to the deed might have been that professional trustees would be covered by cl 14, the clause is entirely apt to deal with trustees from whatever backgrounds. I find no reason to read it down on the grounds that the original trustees were not also beneficiaries.
[59] I am also not assisted by the proposition that there was in this case a “direct” conflict. The conflicts covered by cl 14.1(b) are not identified by reference to “directness” or “indirectness” and there is again no reason to read down the plain meaning of cl 14.1.
Conclusion – first cause of action
[60] The plaintiffs’ allegation in their first cause of action is that Brian McNulty, by being involved in the appointment of the Cromwell property to himself, had acted in a situation where there was a conflict between his duty as trustee and his personal interest as beneficiary. He undoubtedly did. The trust instrument entitled him to exercise all his powers and discretions even if his interests conflicted with his duty to the trust or to any beneficiary. Clause 14.1 operates in this case so as to render the plaintiffs’ first cause of action untenable on the evidence.
[61] In a strike-out context, I also hold that the pleadings disclose no reasonably arguable cause of action. It is permissible in relation to a strike-out application to have reference to the content of the document which is the subject matter of the proceeding, in this case the trust deed dated 20 January 1995. The first cause of action discloses no reasonable cause of action because, while asserting that there has been a breach of duty through acting in a situation of conflict of interest, it does not identify any (let alone any tenable) basis upon which it could be asserted that the trustee was not expressly permitted to act.
Second cause of action
[62] Whereas the first cause of action focussed on Brian McNulty’s conflict, the second focussed on the role of the other trustee, GCA. It is alleged that not only GCA breached a fiduciary duty (by acting in a conflict situation) but that Mr Gowing similarly did so. No relief (other than costs) is sought against Mr Gowing.
[63] It is convenient to examine the claims against GCA and Mr Gowing in that order.
The second cause of action as against GCA
[64] The defendants’ grounds of application in relation to the second cause of
action were that:
(1) Any conflict of interest (which is denied) cannot found a cause of action;
(2) Clause 14.1 of the Trustee Deed expressly permits a trustee to act when a conflict does or may exist;
(3) The Trust is fully discretionary in nature (refer clause 10.1 and 10.2 of the Trust Deed);
(4) The Third Defendant owes no duty to the Plaintiffs;
(5) The rule that the trustee must not act in a situation of (potential) conflict of interest does not apply where the trustee has been put in that position by the settler (sic) under whose disposition the trust arose.
[65] The issues as between the plaintiffs and GCA under the second cause of action were accordingly parallel to those as between the plaintiff and Brian McNulty under the first cause of action. Counsel carried their submissions in relation to the construction of the deed of trust and, in particular, to cl 14 over to this cause of action. My earlier conclusions therefore also apply at this point.
[66] Mr Luke by reference to the pleading in the statement of claim confirmed that the conflict alleged against GCA was that it continued to act once it knew a decision was being considered as to whether or not to appoint the entire trust property to a single beneficiary who was a client of the law firm whose partners were the directors of GCA.
[67] Mr Luke submitted that the trustee company was clearly intended to be the “independent trustee” and its role was therefore to ameliorate the potential for conflict and protect all beneficiaries from prejudice.
[68] Mr Luke submitted that the fact that the partners of Gallaway Cook Allan were at the same time the directors of GCA meant that a reasonable man would think that there was “a real sensible possibility of conflict”. He adopted this test from the
judgment of Thomas J in Jones v AMP Perpetual Trustee Company NZ Ltd,[7] in turn citing Lord Upjohn in Boardman v Phipps.[8]
[7] Jones v AMP Perpetual Trustee Company NZ Ltd [1994] 1 NZLR 690 at 711.
[8] Boardman v Phipps [1967] 2 AC 46 at 124.
[69] Mr Robinson’s oral submissions focussed on the proposition that GCA (and Mr Gowing) had no interest in the trust. He submitted that to be relevant a conflict must lie between the duty of the fiduciary and the interest of the fiduciary. He submitted that GCA owed no fiduciary duty to Brian McNulty and similarly owed no duty to Frank McNulty (or their interests) as clients of Gallaway Cook Allan.
[70] In his written submissions Mr Robinson submitted that the Court should take judicial notice of the fact that it is common for a firm of solicitors to incorporate a company to discharge the role of independent trustees in discretionary trusts when the firm is instructed to establish a trust to be settled by a client. He submitted that it is highly likely that there will be discretionary beneficiaries for whom the solicitor will not act. Absent more, he submitted that there can be no objection to the solicitor or the trustee company having an ongoing role in the affairs of the trust.
[71] In my view, there is room for argument, based on the passage quoted by Mr Luke from Jones v AMP (above [68]) that a reasonable person would think that there was a real sensible possibility of conflict in the position of GCA given its relationship to the firm of Gallaway Cook Allan and that firm’s fiduciary duties to Brian McNulty in particular.
[72] That said, I find that cl 14.1 permitted GCA to exercise its trustee’s powers and discretions even in a conflict situation. GCA’s position was possibly covered by both cl 14.1(a) and 14.1(b) – it is sufficient that it is covered by at least one. It may be that cl 14.1(a) is the more appropriate in relation to professional trustees given that they may often be -
associated in any way with any person... with whom or which the Trustee is dealing.
The sub-clause does not distinguish between direct and indirect association. It deals
with all association. The concept of “association” encompasses an indirect
relationship of the kind GCA might arguably have with Brian McNulty as a client of Gallaway Cook Allan. Alternatively, if GCA is considered to have some form of duty to Brian McNulty as a client of Gallaway Cook Allan (which is what Mr Luke contends) then cl 14.1(b) covers also that construction of the relationship.
Conclusion – second cause of action as against GCA
[73] The plaintiffs’ second cause of action as against GCA is untenable. By reason of the provisions of cl 14.1 GCA was entitled to act as a trustee and to exercise all of the trustee’s powers and discretions notwithstanding that GCA was arguably in a position of conflict of interest by reason of Brian McNulty’s being a client of Gallaway Cook Allan.
Second cause of action – as against Mr Gowing
[74] The second cause of action against both GCA and Mr Gowing is pleaded as a breach of fiduciary duty (by acting in a situation of conflict of interest). Mr Gowing is identified as one of the partners in Gallaway Cook Allan who were all directors of GCA. It is pleaded that at all material times Mr Gowing was responsible for directing the second defendant in accordance with GCA’s role as trustee of the Trust.
[75] In addition to the grounds relating to GCA, the plaintiffs in their application contend that the second cause of action cannot succeed against Mr Gowing as he owed no duty to the plaintiffs.
[76] By reason of my finding in relation to GCA, namely that GCA had not committed a breach of fiduciary duty by acting in an arguably conflicted situation because cl 14.1 permitted such an event, Mr Gowing can be in no different a position. The plaintiffs pleaded that he was the person responsible for directing the professional trustee company. If he thereby personally had an arguable responsibility as a matter of trust law to carry out the terms of the trust, then he equally had the benefit (or burden) of clauses by which the trust deed defined or limited responsibilities.
[77] I would therefore find on this ground alone that the second cause of action as against Mr Gowing is untenable.
[78] The second cause of action was not pleaded as a cause of action in tort. Indeed, no cause of action is pleaded in tort at all.
[79] In their notice of opposition, the plaintiffs said this in relation to the claim against Mr Gowing –
Where a director or employee of a company has taken responsibility to act directly to carry out the obligations of the company to an individual there is a tortious duty to take reasonable care that may be sued upon and where the obligation is fiduciary in nature the duty owed is also fiduciary.
[80] The Court is dealing with a summary judgment application (as well as a strike-out application) in relation to the pleading as it stands. No application was made to amend the second cause of action (framed against GCA as a breach of fiduciary duty claim as it had to be) or to add an additional cause of action in tort. It is not for the Court uninvited to treat the claim as amended. I therefore conclude that the defendants (and in particular, Mr Gowing) are entitled to argue for summary judgment on the basis of the claim as framed – in equity for breach of fiduciary duty. The defendants cannot apply for summary judgment in relation to a cause of action which is unpleaded.
[81] Insofar as Mr Gowing was a director of a trustee of GCA as the trustee company, Mr Robinson relied upon an old line of authority more recently addressed in HR v JAPT,[9] a decision of Mr Justice Lindsay in Chancery Division. Replacement trustees and a (in practical terms representative) beneficiary of a company pension scheme sued the former corporate trustee and two other defendants who had been both directors of the former corporate trustee and senior officers of it.
[9] HR v JAPT [1997] EWHC Chancery 371; [1997] PLR 99.
The Court found the plaintiff’s case as to a direct fiduciary duty to be unarguable. The Court recognised a line of authority commencing with Wilson v Lord Bury[10] and including Bath v Standard Land Co Ltd.[11] See also the summary of the law in Lewin
[10] Wilson v Lord Bury (1880) 5 QBD 518 (CA).
[11] Bath v Standard Land Co Ltd [1911] 1 Ch 618 (CA).
on Trusts (above [42]) at 40.49. The broad principle (as described by Cozens-Hardy
MR in Bath at p 627) is that the directors of a trust company stand in a fiduciary position only to the company itself and not to strangers dealing with the company and not even where the stranger is able to describe himself or herself as a beneficiary of a trust of which the company is trustee. Where the argument is that the directors are responsible simply because they have purported to act as such it is insufficient to classify a case as having such exceptional facts as should lead to an imputation of personal duty. Within the New Zealand jurisdiction, the decision of the Privy
Council in Kuwait Asia Bank EC v National Mutual Life Nominees Ltd[12] again
recognised the principle that a director does not by reason only of his position as director owe any duty to shareholders or to trustees for creditors of a company (per Lord Lowry for the Board at 217). Their Lordships, at 218 – 219, adopted dicta from Wilson v Lord Bury.
[12] Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1991] 1 AC 187.
[82] Mr Luke, for the plaintiffs, did not take issue with these statements of principle. Instead, in his oral submissions, he emphasised (in an implicit submission that this was a case of exceptional facts in which an individual director had assumed a fiduciary duty) the history of Mr Gowing’s involvement before the deed of appointment was executed on 5 September 2008. That date was also the date on which GCA was appointed as trustee. Prior to that date, Mr Gowing’s capacity had been only as a solicitor to Brian McNulty and Frank McNulty. Yet Mr Gowing’s letter of 9 October 2009 refers to the position of all beneficiaries of the trust being considered by Frank McNulty, Brian McNulty and Mr Gowing on 27 May 2008. At that time, before GCA became trustee, Kenneth Fergus and Alexander Laing remained trustees. Mr Luke placed emphasis upon Mr Gowing’s statement, in the letter, that
a Deed of Capital Appointment followed that consideration [on 27 May
2008]...
[83] Mr Luke submitted that if Mr Gowing committed to action with Brian McNulty and only subsequently took on via his trust company the role of carrying out that commitment, Mr Gowing was conflicted as a fiduciary. Mr Luke submitted that it was the “baggage Mr Gowing brought in”, comprising the advisory role and
an assumption of obligation, which should lead to the recognition of a fiduciary duty upon him.
[84] Mr Robinson submitted that the key date is 5 September 2008, being the date of GCA’s appointment as trustee and the date of the Deed of Appointment of the Cromwell property. That must be so. Until GCA was appointed trustee it had no fiduciary duty in relation to this trust. If it (or Mr Gowing as its director) acted in a position of conflict in making the appointment, that must have been on 5 September
2008. Issues raised by the plaintiffs in relation to prior conduct might inform the Court’s assessment in relation to other alleged breaches – such as whether the trustees made an informed decision – but not in relation to the conflict allegations.
[85] Accordingly, even had I not found already that the fiduciary duty claimed against Mr Gowing was untenable by reason of cl 14.1, I would have found it that the matters of history which the plaintiffs seek to raise as against Mr Gowing could not themselves make the second cause of action tenable.
[86] I then turn to consider briefly Mr Luke’s suggestion that the second cause of action as against Mr Gowing might be treated equally as a cause of action in tort (although it is not pleaded in that way). I remind myself that what is pleade d against Mr Gowing is that he was “responsible for directing GCA in accordance with GCA’s role as trustee of the trust”.
[87] In support of the proposition that the plaintiffs had an arguable claim in tort against Mr Gowing Mr Luke again pointed to the history or “the baggage Mr Gowing had brought in”. In particular, there is the role of Mr Gowing from at the latest, 27 May 2008, some three months before he became a trustee.
[88] It will be recalled that the plaintiffs’ pleading as it stands does not contain a cause of action framed in tort. Mr Robinson for his part chose to reply to the submission that Mr Gowing had acted in breach of a tortious duty. By reference to Trevor Ivory Ltd v Anderson[13] Mr Robinson submitted that it is settled law that a director of a trustee company does not owe a tortious duty to the beneficiary of the
[13] Trevor Ivory Ltd v Anderson [1992] 2 NZLR 517
trust. There needs to be an assumption of personal responsibility on the part of the director, but that is not pleaded or in evidence in this case. He submitted that what the Court must look for is conduct whereby a person steps outside the company and undertakes a task. Simply doing the task in the course of the company’s business is insufficient. He submitted that, in relation to a trust, such a stepping outside must be nearly impossible as, when the exercise of a trust discretion or a power is attacked, it is the appointed trustee who had the discretion and powers and not the director. Mr Robinson submitted that in practical terms there is no sense in which such a director can step outside the corporate trustee. He noted that in this case the deeds executed by GCA as trustee have in fact been signed in each case by two directors and not by Mr Gowing alone.
[89] Mr Robinson referred again to HR v JAPT (above [81]). In that case, the Court having determined that the suggestion that the director of the corporate trustee had a direct fiduciary relationship was untenable went on to conclude that similarly the suggestion of a direct tortious duty was on the pleaded facts untenable. What is pleaded in the second cause of action as against Mr Gowing is that at the time of the appointment on 5 September 2008 (and at all material times) he was
responsible for directing GCA in accordance with GCA’s role as the trustee
of the trust.
[90] This is a pleading of activity by Mr Gowing as a director of GCA on business which GCA as a corporate trustee would naturally have its directors and senior management conduct.
[91] Accordingly I am satisfied that if one were to read the second cause of action as amended to a tortious cause of action the plaintiffs could still not succeed upon it and it would as a pleading remain untenable.
Third cause of action
[92] At the heart of the third cause of action is the pleading that the defendants were in breach of duties to recognise discretion, to make informed decisions and to act impartially. Relief is sought against the first and second defendants, namely their
removal as trustees. The other relief is (as in the earlier causes of action) rescission of the appointment of the Cromwell property to Brian McNulty and an order appointing the property equally to the two sides of the family.
[93] In the third cause of action, the plaintiffs also plead that Mr Gowing as “principal director” was responsible for the trust and owed the plaintiffs a duty to carry out his role as director of the second defendant as if he had been personally appointed a trustee. I have already found that allegation to be untenable. That still leaves what I have referred to as the heart of the third cause of action, namely the alleged breach of duties.
[94] In the defendant’s application as it related to the third cause of action the first two grounds related to the pleading in relation to Mr Gowing. The pleading which focussed on the allegation of breach of duty said simply this –
The Trustees are not bound to give reasons for their decisions and the beneficiaries cannot require the provision of reasons for a trustee’s decision. There is no basis therefore for impugning the Trustees’ decision-making process.
[95] The plaintiff’s notice of opposition, relevant to the third cause of action said
this –
Even when a trust instrument permits a discretion, duties remain as to how the trustees may exercise the discretion. The respondents alleged breaches of those duties.
[96] In his submissions, Mr Robinson submitted that the appointment of the Cromwell property to Brian McNulty was a quintessential exercise of the trustee’s discretionary power, which in the present case is unfettered.
[97] Mr Robinson noted with reference to Stuart v Armourguard Security Ltd[14] that there is no obligation upon trustees to meet the requirements of natural justice in the administrative law sense.
[14] Stuart v Armourguard Security Ltd [1996] 1 NZLR 484.
[98] Mr Robinson noted as settled law the proposition that there is no obligation upon a trustee to give reasons and that the beneficiaries have no entitlement to
receive documents evidencing the reasoning of trustees: see Foreman v Kingstone.[15]
[15] Foreman v Kingstone [2004] 1 NZLR 841.
He submitted, with reference to Worn v Buxton[16] that the validity of trustees’ reasons will be reviewed if they choose to state their reasons for the exercise of a discretion but not otherwise. Therefore it was not open to the Court to look at the exercise of the trustee’s discretion for the independent purpose of impugning the exercise of discretion on grounds that enquiries were inadequate, appreciation of facts wrong, or their decision unwise. The examination involves whether discretion was exercised
[16] Worn v Buxton HC Auckland M125-SD01, 17 June 2002 at [31] per Paterson J.
but does not examine how it was exercised. As is made clear by Wong v Burt[17] the
[17] Wong v Burt [2003] 3 NZLR 526 at [18] (appeal allowed but not on this point: Wong v Burt [2005] 1 NZLR 91)
Court is not an appellate body from a trustee’s decision.
[99] Mr Robinson submitted that the absence of evidence tendered by the plaintiffs confirms that the plaintiffs’ allegations (being a reference to the breach allegations in para 14 of the statement of claim (above [32]) are speculative at best, with no factual foundation. Mr Robinson submitted that the three particulars of alleged breach were all matters which by their nature the plaintiffs could not adduce evidence to discharge the onus upon them –
(a) A breach by failing to recognise discretion and to make an informed decision, following only the instructions of Brian McNulty – Mr Robinson submitted that given that reasons have neither been given nor required to be disclosed, the plaintiffs cannot point to any matter to substantiate this allegation.
(b)The failure to make an informed decision through failing to make enquiries of the plaintiffs’ welfare, interests or financial position or to take account of those – Mr Robinson submitted that the same response can be given to this allegation and that, in any event, the evidence discloses that the financial position of the plaintiffs was known.
(c) Breach through acting partially, and giving little or no consideration to
the plaintiffs’ interests – Mr Robinson submitted that given there is no
evidence of the reasoning process and no requirement for it to be given, there is no evidence of partially, which in any event is permissible by reason of cl 14.1 of the deed.
[100] Mr Robinson concluded his written submission by asserting (with implicit reference to Wong v Burt (above [98]) that in the absence of credible allegations of bad faith the third cause of action must fail.
[101] In his oral submissions Mr Robinson added reference to Craddock v Crowhen.[18] In that case, in relation to a group superannuation scheme, Tipping J made overt comments that trustees must act reasonably when exercising their discretions and that it was time for the private law to catch up with public law. Mr Robinson submitted that in this case the plaintiffs could not establish that the decision to appoint the Cromwell property to Brian McNulty was unreasonable. He
[18] Craddock v Crowhen (1995) 1 NZSC 40,331.
noted the provisions of cl 10.2 of the trust deed which provides not merely that the advisory trustee (in this case Frank McNulty) may express his wishes to the trustees but that the trustees –
Shall always take into consideration the advice of the Advisory Trustee(s).
[102] In relation to the onus of proof, Mr Robinson submitted that the Court will presume that trustees have acted in a bona fide manner and that the onus of proving that a trustee has acted in bad faith lies on those impeaching the action of the trustee: see Edmonds v Millett;[19] and Re Brittlebank, Coates v Brittlebank.[20]
[19] Edmonds v Millett (1855) 20 Beav 54.
[20] Re Brittlebank, Coates v Brittlebank (1881) 30 WR 99.
[103] Mr Luke addressed first the burden of proof. He submitted that authorities support a shift of the burden in some cases. In particular, Mr Luke referred to the judgment of Knox J in Hillsdown Holdings plc v Pensions Ombudsman[21], where his Lordship said –
[21] Hillsdown Holdings plc v Pensions Ombudsman [1997] 1 All ER 862 at 895.
I accept that, unless there is an express provision in the relevant trust deed permitting a trustee to act in negotiations with the employer under the scheme notwithstanding that the trustee is a director or employee of the company, the fact that negotiations had been conducted by persons one of
whom had a conflict of duties puts upon those who say the transaction in question should be upheld the onus of proving that it was indeed reasonable and proper. That of course involves an investigation of the facts.
[104] Mr Luke also referred in this context to the passage to which I have already referred from the judgment of the Vice Chancellor in Tito v Waddell (No. 2) at 241 (above [41]) which held, in the case of a trust property sold to the trustee himself, that the complainant is not required to prove anything other than the sale itself.
[105] Mr Luke accepted that it is not for the Court to consider concepts of natural justice nor is it for the Court to exercise an appellate function in relation to the trustees’ decisions.
[106] Mr Luke took issue with Mr Robinson’s reference to “an unfettered discretion” given that the trustees must always meet the responsibilities which the law recognises. Mr Luke submitted that ultimately in this case it will be open to a trial Court to view the decision reached by the trustees to appoint the Cromwell property to Brian McNulty as capricious or irrational. He submitted that as a matter of common sense it is difficult to envisage any form of impartial consideration which could produce the result achieved on 5 September 2008.
[107] Mr Luke accepted that the authorities establish that the trustees have a right to remain silent as to their decision-making processes but he submitted that it is equally the case that where trustees elect to remain silent, the Court may draw an inference as to the process. He submitted that on the information before the Court at present it is more likely than not that a flawed process was involved in this case.
Discussion
Burden of proof – onus of proof
[108] There are cases in which the Courts recognise that trustees will have an onus of proving that a decision or exercise in discretion was reasonable and proper. The passage from the judgment of Knox J in Hillsdown plc v Pensions Ombudsman (above [103]) identifies that such will apply in relation to a self-dealing situation
where the trustee is also a director or employee of the company whose pension scheme is involved –
Unless there is an express provision in the relevant trust deed permitting a trustee to act in negotiations with the employer...
[109] The proviso is of fundamental importance. Where conflict of interest is expressly permitted, the usual onus applies.
[110] The usual position in relation to onus is that reflected in the old authorities referred to by Mr Robinson and summarised by the authors of N Kelly & Ors, Garrow & Kelly Law of Trusts and Trustees (6th ed, 2005) at 19.3.5 in these terms –
The exercise in good faith of a discretion by a trustee is a protection to the trustee whether the result is good or bad. The Court will presume that the trustee has acted bona fide and the onus in proving that the trustee acted in bad faith lies on those impeaching the actions of the trustee.
[111] For a more recent recognition of this onus, see Jones v AMP Perpetual
Trustee Company NZ Ltd (above [68]).
[112] Accordingly, in this case, the plaintiffs have the onus of establishing that the trustees acted in breach of their duty.
Trustees’ freedom not to disclose their reasons
[113] It is a fundamental principle of trust law that trustees have autonomy in the exercise of the discretions under the trust instrument, with the consequence that they are not obliged to disclose to beneficiaries their reasons for exercising their discretionary power: Re London Dairy’s Settlement Peate v Walsh;[22] Forman v Kingstone.[23]
[22] Re London Dairy’s Settlement Peate v Walsh [1964] 3 All ER 855.
[23] Forman v Kingstone [2004] 1 NZLR 841 at [89].
[114] The right of the trustees to decline to disclose their reasons (which the trustees have elected to invoke “at this juncture” - per Brian McNulty) does not prevent Court’s drawing appropriate inferences from any failure of the trustees to
give such explanation when an explanation is called for. This has been recognised
by the English Court of Appeal in Edge v Pensions Ombudsman[24] (above ([43]). Counsel did not refer me to an example of the case in which an “adverse” inference has been drawn but it is at least open to the plaintiffs in this case, on the authority o f Edge v Pensions Ombudsman to suggest that the appropriate time for a consideration of any inference is when all the appropriate background information is before a trial Court.
[24] per Chadwick LJ (for the Court) at 572d.
Unreasonableness or irrationality
[115] In his oral submissions, Mr Luke placed emphasis upon a collective description of the particularised (alleged) breaches of duty by suggesting that ultimately the decision to appoint the entire capital to Brian McNulty could be viewed as capricious or irrational. I find it appropriate to first examine that categorisation and then to return to the particularised duties.
[116] It is at least arguably open to beneficiaries to attack a trustee’s decision upon the basis that it is so irrational that no reasonable trustee could have reached it – this is well demonstrated by the discussion of the subject of “unreasonableness” at 19.7 in Garrow & Kelly Law of Trusts and Trustees (above [110]). As there observed, at
19.7.5, in Gailey v Gordon[25] O’Regan J observed that the role of unreasonableness
[25] Gailey v Gordon [2003] 2 NZLR 192 at 203.
warrants authoritative guidance from the Court of Appeal or Supreme Court. The decision in Gailey v Gordon may indicate (as observed by Dobson J in Dever v Knobloch (above [43]) at [56]) -
...something of a retreat from the preparedness to consider the reasonableness of trustee’s conduct the very debate recognised would indicate that it is not appropriate to dismiss in a summary context beneficiaries’ complaints based on irrationality, provided the allegation of irrationality is at least open on the facts.
In Jones v AMP Perpetual (above [68]) Thomas J at 711 characterised the reasonableness of the conduct of trustees as being a question of fact and degree, with the facts needing to be “closely scrutinised”. Here, although Brian McNulty has given evidence as to a number of matters including his knowledge of some of the
assets or entitlements of the plaintiffs, he has chosen to give no evidence as to his
own circumstances. He clearly would have known his own circumstances but neither he nor Mr Gowing gives evidence that GCA (or Mr Gowing) knew of Brian McNulty’s financial position. In his affidavit filed shortly before the hearing, Mr Gowing stated that Brian McNulty was aware of the extent of the assets in both the Allan McNulty Family Trust and in the estate of Allan McNulty. Mr Gowing does not depose to having been aware of the extent of those assets himself nor does he suggest that GCA (or Mr Gowing himself) had information as to the asset position of Brian McNulty.
[117] Whereas Mr Robinson in his submissions, in response to the allegation that the defendants had failed to make proper enquiries as to the plaintiffs’ position or to take those into account, emphasised that “the financial position was known in any event”, GCA’s knowledge is not asserted in the evidence of Mr Gowing. There is also nothing in the evidence to suggest that GCA was aware of the comparative financial position of Brian McNulty.
[118] It is at least arguable that pursuant to the trustees’ duty of diligence they may need on the particular facts of a given case to make enquiries as to the respective positions of the relevant class of beneficiaries before exercising any discretion as to appointment of capital or income: see Stuart v Armourguard Security Ltd (above [97]) at 506. There may be room to argue that the need for such enquiries is heightened where the trustees have in mind the appointment of the entire capital of the trust to one of their number as a beneficiary when all other beneficiaries (non- trustees) will miss out.
[119] As Mr Robinson emphasised, it was the right of the trustees in this litigation and prior to it to refuse to give their reasons. That privilege does not attach to the non-disclosure of events which occurred in the life of the trust or information which was received by the trustees (other than privileged information). Thus, it will be open to the plaintiffs coming towards a trial to obtain discovery of records of financial information obtained or held by the trustees appropriate interrogatories may be administered, and it will be open to plaintiffs’ counsel at trial to cross-examine as to what information was obtained or held.
[120] It is unlikely to be an adequate answer for the trustees to suggest that Brian McNulty undertook the responsibility for enquiry into the affairs of the other beneficiaries and of himself. In the absence of express powers of delegation the individual trustees must each be involved in the consideration of relevant information. Similarly, the consideration of the decision to appoint capital and the decision itself, at least on the part of GCA, are required to have occurred on GCA’s appointment as a trustee and not before. This follows from the unanimity rule, which is closely related to the non-delegation rule. That relationship is demonstrated
in judgments such as those in Rodney Aero Club Inc v Moore[26] and in Dever v
[26] Rodney Aero Club Inc v Moore [1998] 2 NZLR 192 at 195.
Knobloch (above [43]) at [31]. In the latter case, Dobson J had to consider the role played by one trustee, Mr Billington, who absented himself from the decision- making but after the resolutions were made committed himself to the formal documentation required to carry them into effect. Dobson J at [32] observed in relation to the plaintiff beneficiary –
Mr Dever could complain that there was a form of delegation, and that the decision was not a proper one because he was entitled to have all of the trustees individually consider the proposals, including his position. A decision reached without that quality of deliberation is less than he is entitled to. Conceptually, had Mr Billington participated, he may have questioned the fairness of excluding Mr Dever.
[121] His Honour then observed that in reality there was no suggestion that Mr Billington did not concur with the decision taken. But his Honour came to the tentative view at [34] that –
...formal endorsement of the documents following the decision being made by the other trustees is not sufficient to meet what is a requirement for substantive participation by all trustees in what was a fundamentally important decision to distribute the Trust.
[122] His Honour then concluded at [36] that -
Either way it is characterised, Mr Billington’s “participation”, or “nonparticipation” gives rise to the prospect of a tenable cause of action, and that leads to an assessment on whether it is one to which the trustees have an inarguably complete answer.
[123] The facts of this case are different in that GCA was a party to the deed of appointment on 5 September 2008. However, beyond the Court’s knowing that fact by reason of the record of the deeds, the Court knows nothing of GCA’s “substantive participation”, to adopt the expression of Dobson J in Dever. Although both Brian McNulty (two affidavits) and Mr Gowing (one affidavit) filed evidence they did not depose as to the holding of any meeting or discussion on 5 September 2008, following GCA’s appointment.
[124] In my judgment, the plaintiffs have at least a tenable cause of action relating to non-participation. Again, in a discovery and interrogatory context, there are matters capable of exploration (because they do not relate to the reasons for the decision themselves) such as whether the trustees in fact met or at least had telephone discussion on 5 September 2008.
[125] Apart from the immediate focus of the previous discussion in relation to duties such as unanimity and non-delegation, the exploration of these matters may be relevant to the over-arching “irrationality” argument.
[126] In the way the defendants have chosen to put their case in the context of these summary judgment and strike-out applications there is something of a challenge to this Court. The defendant trustees effectively say that the Court has no right to enquire into the trustees’ reasoning when the trustees choose to provide no reasoning. This was illustrated by Mr Robinson’s recorded response to each of the particularised allegations of breach in para 14.1, 14.2 and 14.3 of the statement of claim (above [32]). In response to such complaints as that the second defendant had failed to make an informed decision and that the defendants had failed to make proper enquiries, Mr Robinson’s response was that –
no reasons had been disclosed, nor are they required to be disclosed. The
Plaintiffs cannot point to any matter to substantiate the allegation.
[127] The circumstances of this case, when the entire capital was appointed to a beneficiary who is also a trustee on the very day the other trustee was appointed must cause the Court at least a concern as to whether the trustees carried out all their duties that day. This may be a case, given the importance of that one day, where the
failure of the trustees to provide reasons is found by the Court to justify an adverse inference of the kind the English Court of Appeal considered might be permissible in Edge v Pensions Ombudsman (above [42]). The examination of what factual inferences are appropriately drawn is one properly made when there is full evidence as to the events.
[128] This is not a case in which it is possible to say that in relation to the third cause of action the plaintiffs have no arguable claim.
[129] Mr Robinson formally conceded at the hearing that given the factual nature of the allegations contained in para 14 of the statement of claim it was not open to the defendants to seek a striking-out of that claim.
Fourth cause of action – alleged breach of the trust deed through an appointment contrary to equal sharing under clause 9 of the deed
[130] Mr Luke did not formally abandon this cause of action at the hearing.
[131] In essence the plaintiffs contend that because the final (default) distribution provision in clause 9 of the deed (above [8]) provided for equal division between Brian and Allan McNulty (or upon their deaths stirpital division), it was a breach of trust for the trustees to appoint the whole of the property to one beneficiary.
[132] The plaintiffs’ proposition ignores the provisions of the deed and the nature of the discretionary trusts created. Without cl 9 ever coming into operation (because the default vesting day (1 December 2074) was not reached) the trustees had by cl 4 the power to apply the whole or any part of the capital and income during the term of the trust.
[133] There is nothing in the terms of cl 4 or the Trust Deed as a whole to support the plaintiffs’ contention that the deed contained an intention of equal sharing. It appears to be an unfortunate aspect of this case that the plaintiffs, as reflected in each of their causes of action, have apparently entertained an expectation that this Court has power to order an equal distribution of the estate. That is not the function of the
Court. The trustees have autonomy in relation to distributions as to “the whole or any part of the capital and/or the income”.
[134] Accordingly, the plaintiffs have no arguable case in relation to the fourth cause of action. Nor is that cause of action tenable when the pleading is read alongside the full provisions of the deed.
Conclusion
[135] The Court cannot enter summary judgment for the defendants where one of the plaintiffs’ causes of action is arguable. Accordingly the application for summary judgment will be dismissed.
[136] That leaves three causes of action as untenable – it is appropriate that they be struck out.
[137] Insofar as the third cause of action names Mr Gowing as third defendant that claim is also untenable and it is appropriate that paragraph 13 of the statement of claim be struck out and that Mr Gowing be dismissed from the proceeding as a defendant.
Orders
[138] I order:
(a) The defendants’ application for summary judgment is dismissed. (b) The first, second and fourth causes of action are struck out.
(c) Paragraph 13 of the statement of claim is struck out and Peter Austin
Gowing is dismissed from the proceeding as a defendant. (d) Costs are reserved.
Next case management conference
[139] I adjourn the proceeding to a case management conference at 3.00 pm on 15
November 2011, by telephone (Associate Judge Osborne). I look to counsel to discuss the requirements of amended pleading before that conference and to file preferably three working days before a memorandum setting out any agreements as to timetable. I also look to counsel to discuss and reach agreement on the costs associated with the applications – in the event no agreement is reached before the telephone conference counsel are to record their suggestion as to timetabling in that regard. The Court, if it is required to make a ruling would expect to deal with the
question of costs on the papers.
Associate Judge Osborne
Solicitors:
Gallaway Cook Allan, PO Box 143, Dunedin 9054 ([email protected]) Prudentia Law, PO Box 340, Shortland Street, Auckland ([email protected]) (Counsel) Clayton Luke, Barrister, PO Box 340-193, Birkenhead, North Shore City ([email protected])
T J Shiels Barrister, PO Box 5029, Moray Place, Dunedin 9058
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