Percy v Percy
[2017] NZHC 1989
•18 August 2017
IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY
CIV-2016-441-50 [2017] NZHC 1989
UNDER Section 51 of the Trustee Act 1956 IN THE MATTER
of claims of breach of trust and fiduciary duty and an application for removal of trustees
BETWEEN
DOUGLAS WILLIAM PERCY Plaintiff
AND
VANCE CHARLES PERCY AND MURRAY DAVID RIDDELL
First defendants
VANCE CHARLES PERCY and
DENISE MARY PERCY Second defendants
Hearing: 26 June 2017 Appearances:
J L Bates for the plaintiff
D J OʼConnor for the first-named first defendant and for the second defendants
No appearance for the second-named first defendant
Judgment:
18 August 2017
JUDGMENT OF ASSOCIATE JUDGE SMITH
PERCY v PERCY [2017] NZHC 1989 [18 August 2017]
CONTENTS
The application .................................................................................................................................. [1] Background........................................................................................................................................ [2] The amended statement of claim ................................................................................................... [10] Statement of defence ....................................................................................................................... [24] Mr Riddell’s position....................................................................................................................... [31] Douglas’ application for appointment of auditors and reviewers ............................................... [33] The notice of opposition filed by Vance and Denise ..................................................................... [37] Evidence ........................................................................................................................................... [38] Issues ................................................................................................................................................ [43]
Issue 1 — does the Court have jurisdiction to appoint auditors and/or reviewers to enquire
into and report on the matters identified in Douglas’ application? ............................................ [45]
Discussion and conclusions.......................................................................................................... [45]
Issue 2 — If the Court has jurisdiction to appoint auditors and reviewers, should any of
the orders sought be made? What should be the scope of any audit and/or review? ............... [65]
Submissions .................................................................................................................................. [65]
Discussion and conclusions.......................................................................................................... [66]
Issue 3 — are Mr Palairet and Mr Fan-Robertson truly independent, and do they have
the necessary skills to conduct any audit and/or review the Court might order? ..................... [89]
Issue 4 — if it is not appropriate to appoint an auditor and/or reviewer under s 83B of
the Act or in the Court’s inherent jurisdiction, should the Court appoint an expert under r 9.36 of the High Court Rules, to enquire into and report on the matters raised in the application?...................................................................................................................................... [90]
Discussion and conclusions.......................................................................................................... [97]
Result .............................................................................................................................................. [103]
The application
[1] This is an interlocutory application by the plaintiff, Douglas Percy (Douglas), for an order appointing auditors and reviewers to a family trust which had been established in 1969 by his father, the late Frank William Percy.
Background
[2] The Trust is known as the Percy Farming Trust (the Trust). The current trustees of the Trust are the above-named first defendants Vance Percy (Vance), who is Douglas’ brother, and Mr Murray Riddell, who is a retired farmer (the trustees).
[3] The Trust owns 50 per cent of the shares in a farming company called the F W Percy Farming Co Ltd (the Company), which was incorporated around the same time as the Trust was settled. The balance of the shares are owned by Vance (30 per cent), Douglas and Vance’s mother Leone Helen Percy (20 per cent), and Vance’s wife, Denise Mary Percy (Denise) (who holds one share).
[4] Until recently Douglas had spent many years working as a safari operator in Kenya. He has recently returned to New Zealand, and according to his first amended statement of claim dated 12 May 2017 he is now unemployed.
[5] Douglas is a discretionary beneficiary of the Trust.
[6] Douglas has become concerned about certain aspects of the manner in which the Trust is being operated. In particular, he is concerned at the very low return received by the Trust from its shareholding in the Company, and the low rate of interest (one per cent per annum) the Trust is getting on a $220,000 loan it has made to the Company. In addition, Douglas is concerned that Vance and Denise, who are the two directors of the Company, have been grazing stock owned by themselves (through a partnership known as the Shiloh Santa Gertrudis Stud — “the Shiloh partnership”) on the Company’s land, without paying market fees for the right to do so. As a result of the latter concern, Douglas amended his original statement of claim to join Vance and Denise as second defendants in the proceeding in their capacities as the partners of the Shiloh partnership, on the basis that they have
knowingly and wrongfully assisted Vance in breaching his duties as a trustee of the
Trust.
[7] At the heart of Douglas’ case is the allegation that Vance has a conflict of interest in being both a trustee of the Trust and a director of, and controlling shareholder in, the Company. He alleges that Vance is in breach of the “self-dealing” rule, binding on all trustees, as he is using Company property (the farm) for the benefit of the Shiloh partnership in which he has an interest.
[8] Douglas also contends that, over the years, distributions made by the trustees of the Trust have favoured Vance’s family over his own family.
[9] Douglas says that his attempts to obtain information about the operations of the Trust were rebuffed over a lengthy period. It is only since this proceeding was filed that Vance and the trustees have provided him with the requested information.
The amended statement of claim
[10] In his amended statement of claim, Douglas says that Vance became a director of the Company in August 1995 and a trustee of the Trust (replacing a retiring trustee) on 23 February 2001. Mr Riddell became a trustee of the Trust on
21 June 2002.
[11] Douglas alleges that from February 2009 he began to raise concerns with the trustees about distributions from the Trust made for the benefit of only Vance’s family. He refers in the Claim to distributions of income made on 30 May 2005, when $3,000 was distributed to Vance and Mr Riddell as trustees, and $24,000 was distributed to Vance’s two children. Douglas’ then-solicitors raised concerns on his behalf about the perceived conflict between Vance’s role as trustee and his personal interests in making distributions from the Trust to members of his own family.
[12] Douglas proposed that Vance resign as trustee, so that any decision making, or lack thereof, would not be biased towards Vance’s own family. He says that he did not receive any satisfactory response to his solicitor’s correspondence.
[13] In August 2015, Douglas’ present solicitors raised concerns with the trustees’ solicitor about their failure to provide information and explanations as to their dealings with trust property. The solicitors also expressed Douglas’ concerns about Vance’s apparent “self-dealing”, in relation to both income distributions and the Shiloh partnership grazing arrangements.
[14] Douglas alleges that he has sought various information from Vance and the trustees, including copies of the following documents: any leases or licences or other agreements the Company has entered into with any persons (including Vance), all Trust documents, all Company financial statements, all completed Trust financial statements, all trustees’ resolutions, and all tax returns of the Trust. Douglas alleges that the trustees failed to respond to his requests for information and explanations as to their dealings with Trust’s assets, despite repeated requests.
[15] Douglas alleges that the information he has now received (either through discovery or informally since the proceeding was commenced) confirms that Vance has set up transactions between the Company and himself (as a partner of the Shiloh partnership), under which the Shiloh Partnership has (since at least 2005) paid an annual “grazing fee” of $1,000 per annum to the Company. Also, since at least 2005, the Shiloh partnership has paid only $2,080 for rent of a homestead on the farm owned by the Company.
[16] Douglas refers to advice received from Vance’s solicitor that there is no delineated grazing area on the farm for the Shiloh partnership. The Shiloh partnership does not hold any formal lease, and no market valuation was obtained before the grazing right was agreed.
[17] Douglas pleads five causes of action. First, breach of trust by the trustees in (i) failing to provide copies of the Trust’s financial statements (notwithstanding Douglas’ repeated requests), (ii) failing to provide information and explanations as to the trustees’ dealings with Trust property, and (iii) failing to act unanimously in dealing with Trust assets (in particular in respect of decision-making about the use of the Company’s land) and in relation to income allocation decisions. He alleges more generally that the trustees have failed to act with reasonable skill and care in
managing the affairs of the Trust, and that Vance has breached his obligations as trustee by profiting personally from the Trust (by entering into the transactions with himself for the use of the Company’s farm and assets, and by failing to act in good faith and in the best interests of the beneficiaries).
[18] A breach of trust is also alleged against Mr Riddell. He is said to have failed to prevent Vance, his co-trustee, from personally dealing with the Company’s assets.
[19] On this first cause of action, Douglas seeks a declaration that the trustees are in breach of their trust, an enquiry into losses sustained by the Trust, and an order that Vance make good any losses suffered by the Trust.
[20] Douglas’ second cause of action alleges breach of fiduciary duty by the trustees. He pleads that Vance owed a duty of single-minded loyalty to the Trust’s beneficiaries, including himself, and that that duty required Vance not to place himself in a position where his duty and his personal interests might conflict. He alleges that Vance entered into transactions for his own benefit, or for the benefit of the Shiloh partnership, in conflict with that fiduciary duty. Douglas seeks a declaration that Vance is in breach of his fiduciary duty, and an enquiry into losses sustained by the Trust, or gains received by Vance, as a result of his alleged breaches of fiduciary duty. He also asks for an order directing Vance to account for the profits, or pay equitable compensation, arising from the alleged breaches of fiduciary duty.
[21] Douglas’ third cause of action also alleges breach of fiduciary duty by Vance. This cause of action is substantially concerned with the income allocations from the Trust which Douglas says have favoured Vance’s family over his own. Douglas alleges that when he complained to Vance about the lack of consideration or benefit he and his family received from the Trust, and the preference given by the trustees to Vance’s own children, Vance told him that he had no intention of ever allocating income to Douglas. Douglas further alleges that the trustees have failed to recognise his interests and/or have unlawfully fettered their discretion to allocate income to him. He says that the trustees have failed to make sufficient enquiries as to his maintenance, educational and/or other advancement needs, and have failed to
exercise their discretion impartially, on an informed basis. In ruling out any income allocations to Douglas, whatever his needs, Vance is said to have acted in bad faith. Douglas also says that the trustees have acted in bad faith in failing to have regard to a Memorandum of Guidance for Trustees of the Trust, prepared by the late Mr Percy on 30 November 2002. On this cause of action, Douglas asks for a declaration that Vance is in breach of fiduciary duty.
[22] Douglas’ fourth cause of action alleges that the trustees have misconducted themselves in the administration of the Trust. He repeats his earlier allegations of breach of trust and breach of fiduciary duties, and alleges that the trustees are “out of sympathy” with him and other beneficiaries. He seeks orders under s 51 of the Trustee Act 1956 (the Act), or in the court’s inherent jurisdiction, removing the trustees and replacing them with an independent professional trustee, to regularise the affairs of the Trust, free of conflicts between duties and personal interests.
[23] Douglas’ fifth cause of action seeks relief against Vance and Denise as partners of the Shiloh partnership. He says that at all material times Vance and Denise knew that Vance owed duties as a trustee of the Trust, including fiduciary duties to the Trust beneficiaries, and they knowingly assisted Vance to enter into the transactions with the Shiloh partnership, in breach of those duties. He alleges Vance and Denise have benefited from the breaches of trust and fiduciary duty, by profiting from their ability to graze stock owned by them on farming land owned 50 per cent by the Trust. Douglas seeks a declaration that Vance and Denise have knowingly assisted Vance to breach his fiduciary duties, an enquiry into profits derived by the Shiloh partnership from grazing stock on the farm, and an order that Vance and Denise pay the Trust equitable compensation, or account for 50 per cent of the profits received by them as a result of grazing their stock on the farm.
Statement of defence
[24] Vance in his capacity as trustee, and Vance and Denise as partners of the Shiloh Partnership, have jointly filed a statement of defence. Generally, they deny any liability.
[25] They admit that Vance is both a trustee of the Trust and in effective control of the Company. Vance owns all of the shares in the company which carry voting rights. However they say that the late Mr Percy wanted the family farm to remain in the family, and for Vance to take over the farm. It was the late Mr Percy who requested and authorised the appointment of Vance as trustee, and it was he who in May 2001 transferred all of the shares in the Company carrying voting rights to Vance. Vance did not place himself in a position of conflict of interest and duty; he
was placed in that position by the late Mr Percy.1
[26] Vance and Denise refer to para 6(m) of the Trust Deed, which states that a trustee may act as director of any company in which the Trust holds any form of investment. They contend that there has been an implied exclusion of the conflict of interest rule in this case, as the late Mr Percy intended to waive the conflict of interest rule for Vance. They also say that the trustees have taken into account the late Mr Percy’s wishes, as expressed in the Memorandum of Guidance.
[27] In respect of the May 2005 distributions from the Trust, they say that on
23 May 2005 the late Mr Percy gifted $3,000 to the trustees of the Trust, and
$12,000 to each of Vance’s two children. These payments were recorded by the late
Mr Percy in a gift statement filed with the Inland Revenue Department.
[28] As for the alleged failure to provide information to Douglas, Vance and Denise say that they tried many times to communicate with Douglas, and to discuss future plans for the farm and the Trust, but Douglas showed a lack of interest and was not prepared to contribute or discuss these matters. They say that the trustees have always been available to discuss matters with beneficiaries, but Douglas never approached them directly.
[29] Vance and Denise refer to a letter from the trustees’ solicitors to Douglas’
solicitors, sent on 17 March 2017, which provided certain details about the operations of the Company and the Shiloh partnership. The details included advice
1 Through the late Mr Percy’s will, by the terms of the Memorandum of Guidance and the Trust Deed, and by a Deed of Advancement dated 26 May 1986, under which the then-trustees of the Trust advanced $66,000 to enable Vance to purchase 1000 of the ordinary B shares then held by the Trust in the Company.
that Vance was managing the farm full-time, receiving an annual salary of $36,000, while Denise was working full-time on the farm for an annual salary of $12,000. The letter referred to advice from the Company’s accountant that a market salary for a farm manager would be at least $70,000.
[30] The 17 March 2017 letter is said to have referred to a schedule of expenses showing a total sum of $178,236.93 spent by the Shiloh partnership for general farm expenses and a further $119,150.17 for vehicles. The letter contended that the schedule showed that the Shiloh partnership has in fact been financially supporting the Company.
Mr Riddell’s position
[31] Counsel for Mr Riddell filed a memorandum dated 23 June 2017, advising that Mr Riddell has agreed terms with Douglas that would see the proceeding being discontinued against Mr Riddell. At the hearing, I was advised that the proposed agreement will see Mr Riddell resign as a trustee. Mr Riddell’s counsel also advised in his memorandum that agreement has been reached in principle with Vance, and that it was anticipated that a discontinuance against Mr Riddell would be filed shortly.
[32] In those circumstances, Mr Riddell elected not to participate in the
26 June 2017 hearing.
Douglas’ application for appointment of auditors and reviewers
[33] In his interlocutory application, Douglas seeks the following orders:
(a) the appointment of John Palairet and Glenn Fan-Robertson, who are professional Trustee and Chartered Accountant respectively (the auditors and reviewers), as independent auditors and reviewers to carry out an investigation and review of the Trust’s assets and their use;
(b)a direction to the auditors and reviewers that the audit is to be more thorough than a simple audit opinion on the state of the financial statements, and that the auditors and reviewers will:
(i)review the Trust to sufficiently enable consideration of whether the trustees have acted with the care, skill and diligence that a prudent person of business would exercise in managing the affairs of others;
(ii)review the Trust to sufficiently enable consideration of whether the trustees are acting in the best interests of the Trust’s beneficiaries;
(iii)identify the nature of transactions with the Shiloh Partnership, including the number and type of stock they have grazed on Company land;
(iv)note the circumstances of dealings with Trust assets which are or may not be orthodox from the perspective of an independent chartered accountant and/or professional trustee;
(v)obtain any professional advice or valuations the auditors and reviewers think fit including:
(a) market valuations of the Trust’s share of property;
(b)assessments of the return on the Trust’s investments (including whether the Company is being run in the best interest of the Company’s shareholders);
(c) whether the grazing fees received from the Shiloh
Partnership are being paid at market rates or not.
(vi)note any omissions or other matters which the auditors and reviewers think fit, and any general observations thereto;
(vii)in the event that the auditors and reviewers consider loss has been occasioned to the Trust by either the trustees’ failure to act with care, skill and diligence or by failing to act in the best interests of the Trust’s beneficiaries, to determine the quantum of such losses;
(viii)on completion of the audit and review, the auditors and reviewers are to supply to the Court and copy to the parties accounts and a report which generally conforms with s 83B of the Act;
(c) a direction that the trustees deliver to Douglas and the auditors the records referred to in s 83B(2) of the Act.
(d)a direction that Vance and Denise deliver to Douglas and the auditors and reviewers the Shiloh Partnership’s financial statements.
(e) an order that the trustees cooperate with the auditors and reviewers and supply them with information they may reasonably require to complete their report, including the financial statements of the Shiloh Partnership.
(f) a direction that the Trust bear the costs of the audit and review pending further order of the Court.
(g)a direction that the auditors, reviewers and Douglas be at liberty to apply to the Court for further directions as to the conduct of the audit and review.
[34] The application is made under s 83B of the Act, and/or under the Court’s inherent supervisory jurisdiction over the affairs of trusts. Reference is also made in the application to r 4.56 of the High Court Rules, which is concerned with joining or removing parties to or from a proceeding.
[35] Section 83B of the Act provides:
83B Audit of other trust estates
(1) Subject to the provisions of any regulations made under this Act, and unless the court otherwise orders, the condition and accounts of any trust estate (being an estate which is not being administered by a trustee corporation) shall, on an application being made and notice thereof being given in the prescribed manner by or on behalf of any trustee or beneficiary in that estate, be investigated and audited by such solicitor or such qualified statutory accountant as may be agreed on … between the applicant beneficiary and the trustees and Public Trust, … or, in default of any such agreement, by a solicitor or a qualified statutory accountant appointed by Public Trust:
provided that—
(a) except with the leave of the court, such an investigation or audit shall not be required within 12 months after any such previous investigation or audit; and
(b) a beneficiary shall not be appointed under this section to make an investigation or audit; and
(c) Public Trust may require the applicant to deposit a sum of money covering the costs of the investigation and audit, as estimated by Public Trust, or to secure the same to Public Trust’s satisfaction before proceeding with the application.
(1A) In subsection (1), qualified statutory accountant has the same meaning as in section 5(1) of the Financial Reporting Act 2013.
(2) The person making the investigation or audit (in this section called the auditor) shall have a right of access to the books, accounts, and vouchers of the trustees, and to any securities and documents of title held by them on account of the estate, and may require from them such information and explanations as may be necessary for the performance of his duties.
(3) Upon the completion of the investigation and audit, the auditor shall forward to the applicant, and to every trustee, and to Public Trust, a copy of the accounts of the estate, together with a report thereon, and a certificate signed by him to the effect that the accounts correctly show the state of the affairs of the estate, and that he has had the securities of the trust fund investments (if any) produced to and verified by him, or (as the case may be) that such accounts are deficient in such respects as may be specified in that certificate.
(4) Every beneficiary shall, subject to the provisions of any regulations made under this section, be entitled at all reasonable times to inspect and take copies of the accounts, report, and certificate, and, at his own expense, to be furnished with copies thereof or extracts there from.
(5) The auditor may be removed by order of the court; and if any auditor is removed, or resigns, or dies, or becomes bankrupt or incapable of acting before the investigation and audit are completed, a new auditor may be appointed in his place in like manner as the original auditor was appointed.
(6) The remuneration of the auditor and the other expenses of the investigation and audit (including Public Trust’s charges) shall be such as may be prescribed by regulations under this section or (in the absence of any such prescription) as may be determined by the court, and shall, unless the court otherwise orders, be borne by the estate; and, in the event of the court so ordering, such expenses shall be borne by the trustees personally or any of them, or by the applicant, or be apportioned between them or any of them, or between them and any of them and the estate, in such proportions as the court thinks just.
(7) If any person having the custody of any books, accounts, vouchers, securities, or documents to which the auditor has a right of access under this section fails or refuses to allow him to have access thereto, or in anywise obstructs the investigation or audit, the auditor may apply to the court, and thereupon the court shall make such order as it thinks just.
(8) Subject to any rules of court, applications under or for the purposes of this section to the court shall be made to a Judge in Chambers.
(9) If any person in any statement of accounts, report, or certificate required for the purposes of this section wilfully makes a statement that is false in any material particular, he or she is liable on conviction to imprisonment for a term not exceeding 2 years or a fine not exceeding $200, or both.
(10) Public Trust shall not be liable for any expenses or costs under this section.
(11) All expenses and costs for which the estate is liable under this section shall be a charge on the assets of the estate, and that charge may be enforced in such manner as the court directs.
(12) The Governor-General may from time to time, by Order in Council, make all such regulations as may in his opinion be necessary or expedient for specifying the procedure and regulating the remuneration, expenses, charges, and other matters in regard to the investigation and audit of trust estates.
(13) All regulations made under this section shall be laid before Parliament within 28 days after the date of the making thereof if Parliament is then in session and, if not, shall be laid before Parliament within 28 days after the date of the commencement of the next ensuing session.
[36] The relevant regulations are the Trust Estates Audit Regulations 1958 (the Regulations). Clause 2 of the Regulations provides:
In connection with the investigation and audit of accounts of trust estates (other than estates administered by any trustee corporation) the following provisions shall apply:
(a) The trustee or beneficiary desiring the investigation and audit to be made shall make application to Public Trust in form 1 of the Schedule hereto:
(b) The applicant may name a solicitor or a member of the [New Zealand Institute of Chartered Accountants] whom he agrees should be appointed to make the investigation and audit, or may authorise Public Trust to select one on the applicant's behalf:
(c) When the selection has been made, either by agreement between the applicant and Public Trust and the trustees of the trust estate, or (if they cannot agree) by Public Trust alone, Public Trust shall in writing in form 2 of the Schedule hereto, appoint the solicitor or the member of the [New Zealand Institute of Chartered Accountants] so selected, and by notice in form 3 in the said Schedule inform the applicant and the trustees of the trust estate thereof:
(d) The remuneration of the auditor and Public Trust, and the other expenses of the investigation and audit, shall be such as are fixed by Public Trust with the concurrence of the trustees of the trust estate or (if they do not concur) by a Judge of the High Court: Provided that the minimum amount of remuneration payable to Public Trust shall be £5 5s:
(e) The forms in the Schedule hereto may be modified as the occasion may require.
The notice of opposition filed by Vance and Denise
[37] Vance and Denise oppose the application. They say:
(a) the Court has no jurisdiction to appoint what is in effect a Court- appointed expert, under s 83B of the Act;
(b)Douglas’ application relies on certain assumptions which must be the subject of evidence and determination by the Court before the opinion of any independent expert would be likely to resolve an important issue;
(c) an expert cannot express an opinion on the ultimate issue that the Judge must decide, nor on a matter within the common knowledge of the Judge;
(d)a Court-appointed expert cannot engage others to provide “any professional advice” or “valuations” as they think fit. An expert opinion based on hearsay is not admissible;
(e) Mr Palairet and Mr Fan-Robertson do not have the necessary specialised knowledge or skill gained from study, training or experience to inquire into and report upon valuations, including a valuation of the Trust’s shares, a valuation of the farm, and an assessment of return on investments;
(f) all relevant documents have now been provided to Douglas;
(g)Douglas’ application to appoint an expert is not a substitute for discovery;
(h)the appointment of an expert will not resolve an important issue in the case, it will merely add to the body of evidence before the Court. There is no reason to incur the expense of appointing an expert. The preferable path is for the Court to require the experts to meet before trial and identify the issues on which they agree or disagree and then have them give evidence in the presence of each other.
Evidence
[38] Douglas and Vance both filed affidavits generally confirming their respective positions as set out under the headings “Background”, “The amended statement of claim”, and “Statement of Defence” earlier in this judgment.
[39] There were two other affidavits. First, Mr Ewan Gardiner, a senior chartered accountant who had completed accounting work for the Company, the Trust and the Shiloh partnership over many years, provided an affidavit for Vance. Mr Gardiner’s
firm had completed all of the financial statements for the Trust and the Company since 1991. Mr Gardiner generally confirmed Vance’s evidence as to the salaries received by Vance and Denise from the Company, and the fact that those salaries have been substantially below market levels.
[40] Mr Gardiner also confirmed that the grazing arrangement between the Company and the Shiloh partnership was in place when the late Mr Frank Percy was alive. In Mr Gardiner’s opinion the Company has not been disadvantaged by the arrangement, when consideration is had to the below market salaries paid to Vance and Denise.
[41] Finally Mr Gardiner said that it was the late Mr Percy’s wish that Vance should retain the farm and run it as long as Vance wanted. The late Mr Percy had taken legal advice on the appointment of Vance as a trustee of the Trust.
[42] The second affidavit was a reply affidavit sworn by Douglas. Douglas referred generally to difficulties in communication between Vance and himself. He denied that his wish was for the farm to be sold, saying that what he has been seeking is that the trustees comply with the Memorandum of Guidance, and that to that end Vance should consider purchasing the Trust’s share of the farm, with a reasonable sum to be made available to Douglas and his sister (a Trust beneficiary who lives in Australia and who has not taken part in the litigation). Douglas attached a copy of a letter from Mr Palairet, apparently addressed to Vance’s solicitors, in which Mr Palairet set out a number of “preliminary comments” on material which had been provided to him with a view to his accepting an appointment as auditor/reviewer if the Court should so order.
Issues
[43] The following issues are to be determined:
(1)does the Court have jurisdiction to appoint auditors and/or reviewers to enquire into and report on the matters identified in Douglas’ application?
(2)if so, should any of the orders sought be made? What should be the scope of any audit and/or review?
(3)are Mr Palairet and Mr Fan-Robertson truly independent, and do they have the necessary skills to conduct any audit and/or review the Court might order?
(4)if it is not appropriate to appoint an auditor and/or reviewer under s 83B of the Act or in the Court’s inherent jurisdiction, should the Court appoint an expert under r 9.36 of the High Court Rules, to enquire into and report on the matters raised in the application?
[44] I deal with each of these issues in turn.
Issue 1 — does the Court have jurisdiction to appoint auditors and/or reviewers
to enquire into and report on the matters identified in Douglas’ application?
Discussion and conclusions
[45] Section 83B(1) of the Act provides for the condition and accounts of any trust estate to be investigated and audited on an application in the prescribed form by a beneficiary or trustee of the trust unless the Court orders otherwise. The prescribed form is set out in the Regulations. Clause 2(a) of the Regulations states “[t]he trustee or beneficiary desiring the investigation and audit to be made shall make application to the Public Trust in form 1 in the Schedule hereto”.
[46] Douglas has not made an application to the Public Trustee in the prescribed form. He has relied on two cases in which an application to the Public Trustee was not required.
[47] The first of these is Stuart v Harding, a case in which the applicant was the former wife of the settlor.2 The applicant believed her former husband had arranged his affairs in order to avoid making payments to her under a relationship property
agreement entered into between them. She sought an order under s 83B of the Act,
2 Stuart v Harding (2002) 16 PRNZ 321 (HC).
requiring an audit of two trusts. As in this case, no preliminary application had been made to the Public Trustee for the appointment of an auditor. The former husband, who was the respondent on the application, submitted that the failure to make a preliminary application to the Public Trustee was fatal to the application. He submitted that in the particular circumstances involving the Public Trustee would have the effect of increasing the costs in a situation where neither the applicant and, more particularly, the trust estate, apparently had any funds available to meet the costs incurred by the Public Trustee or the auditor.
[48] The applicant submitted that the s 83B procedure is subject to the Court’s
discretion, as is evidenced by the opening words of s 83B(1).
[49] Laurenson J noted that the Public Trustee had had no involvement with the two trusts in question. If the Public Trustee became involved there would necessarily be costs incurred by him in researching the position. Now that the matter was before the Court, and taking into account the credentials of the proposed auditor, his Honour could see no benefit in requiring that the Public Trustee become involved. The Judge considered it clear from the succeeding subsections of s 83B that the Court is able to maintain control over the audit and the cost of it, and that it was appropriate for the Court to exercise its jurisdiction to provide an alternative method of appointing the auditor, but in a manner consistent with the intent of
s 83B.3
[50] The second of the cases relied on by Douglas was Vincent v Stewart.4 A brother and sister were the beneficiaries of their father’s trust. Their relationship had broken down, and the sister had brought a number of proceedings against her brother. The brother applied for an order for the distribution of the trust estate, including the sale of an estate property. The sister (Ms Vincent) took the view that the trust property had not been properly managed (the brother was the manager). An order was sought removing Mr Stewart as trustee. She also asked for a full accounting in respect of the financial affairs of the estate. The application for a full
accounting was made under s 83B. In relation to that application Venning J said:
3 At [23].
4 Vincent v Stewart HC Auckland M671-IM02, M1248–SD02 17 April 2003.
[48] … The [Regulations] made under the Act provide for an application to be made to the Public Trustee for an audit. However, in Stuart v Harding (2002) 16 PRNZ 321 the Court was faced with an application similar to the present one. In that case counsel submitted the Court had no jurisdiction to entertain an application under s 83B as the applicant had not made a preliminary application to the Public Trustee for the appointment of an auditor. Laurenson J rejected that submission. His Honour noted that s
83B(1) was expressed to apply “unless the Court otherwise orders”, noted that the following subsections of s 83B provided for control by the Court over the audit process including its cost and concluded the Court could exercise its jurisdiction to provide an alternative method of appointing the auditor in a manner consistent with the intent of s 83B.
[51] A submission that there was no jurisdiction to make an order under s 83B was not pursued by counsel for the brother, and counsel did not suggest that Stuart v Harding was wrongly decided. Venning J accepted that the Court had jurisdiction to appoint an auditor and direct an audit of the trust accounts.
[52] Mr O’Connor submits that provisions substantially similar to s 83B have been in place for more than 100 years, originally in the Public Trust Office Act 1913. He submits that the judge in Stuart v Harding did not cite any legal authority for the proposition that a Court could appoint an auditor in circumstances where no prior application had been made to the Public Trustee. Mr O’Connor relies on the earlier decision of Hemming v Public Trustee, in which Paterson J dealt with an application for removal of an auditor who had been appointed under s 83B by the Public Trustee. In that context his Honour considered the provision in s 83B that the Public Trustee
shall appoint an auditor “unless the Court orders otherwise”.5
[53] Mr Hemming had died in 1988, leaving his widow a life interest in his estate. His children were to take the residue on her death. Three out of the four children and a Mr Germann were the trustees of the estate. The fourth child advised the Public Trustee that she was not satisfied that proper and accurate accounts had been kept. The Public Trustee appointed a Mr Wylie as auditor, to investigate the condition and audit the accounts of the estate. The trustees applied to have Mr Wylie removed as auditor.
[54] Paterson J referred to authorities decided under s 13 of the Public Trustee Act
1906 (UK), which was similar, although not identical, to s 83B. In Re Oddy, the
5 Hemming v Public Trustee (2000) 19 FRNZ 429 (HC) at [18].
Court considered an appeal from the Public Trustee’s directions as to who bore the costs of the audit. Parker J, referring to s 13 of the UK enactment, said:6
Section 13, when carefully examined, appears to be an exceedingly drastic enactment. It enables any trustee or beneficiary to apply for an audit of the whole accounts of a trust at any time whatsoever, subject to the limit that the application cannot be made within one year after there has been a prior audit. There is no limit backwards beyond which the audit is not to be extended, and therefore, in a trust which has lasted thirty or forty years it is open to a cestui que trust to go back to the very beginning, unless of course, the Court otherwise orders — which means that the audit can only be prevented by an application to the Court to stay the exercise of the prima facie right conferred upon the beneficiary. The only penalty for insisting improperly on an investigation of the trust accounts is that to which the applicant is liable under the jurisdiction the Public Trustee has to order the applicants to pay the costs of the audit.
[55] Paterson J noted that s 83B(1) of the Act contemplates the possibility of the provisions of regulations preventing the appointment of an auditor. There were no such regulations which prevented the appointment of Mr Wylie in the case before him, and his Honour went on to say:7
… the Public Trustee had a mandatory obligation under s 83B(1) to appoint an auditor “unless the Court otherwise orders”. This is because the section provides that once an application has been made, “the conditions and accounts of any trust estate … shall, … be investigated and audited” (emphasis added). The use of the mandatory “shall” does not give the Public Trustee a discretion in this matter. Thus, once Mrs Burrows made the application, the Public Trustee had an obligation to appoint an auditor unless the trustees obtained a Court order under s 83B(1) of the Act. They did not do so and the Public Trustee was therefore obliged to make an appointment. The fact that the Public Trustee knew that the other sets of proceedings had been issued was irrelevant.
[56] While Hemming was concerned with the different situation of the removal of an auditor validly appointed by the Public Trustee under s 83B, it appears that both Paterson J (and Parker L J before him in Re Oddy) regarded the wording in s 83B(1) “unless the Court otherwise orders” as at least principally directed to conferring on the Court jurisdiction to prevent the Public Trustee proceeding with an audit which had been the validly requested (rather than conferring on the Court an original statutory jurisdiction, parallel to that of the Public Trustee, to order an investigation
and an audit under the section).
6 Re Oddy [1911] 1 Ch 532 at 537.
7 Hemming v Public Trustee, above n 5, at [18].
[57] For my own part, I would have said that that was indeed the statutory intention of the words “unless the court otherwise orders” in s 83B. The words “unless the court otherwise orders” seem more likely to have been directed to what would otherwise be the mandatory obligation in the section, namely that the condition and accounts of the trust estate be investigated and audited by a solicitor or qualified statutory accountant to be agreed or appointed by the Public Trustee. I think what was intended was a relatively simple process, which in most circumstances would not require court intervention at all — the Public Trustee would facilitate the provision of an audit report to the applying trustee or beneficiary, and any such application which appeared to be unnecessary or vexatious could be met with an application to the Court for an order that the investigation or audit should not proceed.
[58] I note also that the Regulations clearly contemplate that any s 83B
application will be made to the Public Trustee, not to the Court.
[59] I accept that that view of s 83B may be contrary to the view expressed by Laurenson J in Stuart v Harding, which was followed by Venning J in Vincent v Stewart. It may be that the explanation of those cases is that the Court retains an inherent supervisory discretion to make orders for the audit of trust estates, and that it was considered that the pragmatic course was to exercise that jurisdiction once the facts were before the Court, and it was clear that supervisory orders of some sort were appropriate.
[60] I am content to approach the matter on that basis. I conclude that the Court has inherent jurisdiction to consider the application Douglas has made. That jurisdiction is to be exercised consistently with s 83B to provide an alternative method for bringing an application for audit of trust accounts.
[61] Before leaving Issue 1, I refer to the recent report of the Law Commission on its review of the Trustee Act. The Commission said:8
[15.14] Section 83B provides a process by which a beneficiary or trustee can make an application for the accounts of trust property to be investigated and
8 R130
audited by a solicitor or chartered accountant appointed with the agreement of the applicant, the trustees and the Public Trust, or, if there is no agreement, by the Public Trust alone. The provision requires that an application be made to a judge in chambers in addition to requiring the agreement of the Public Trust.
[15.15] It is a long and complex provision. We understand that applications under the section are seldom made, but that beneficiaries and trustees do on occasion apply to the Public Trust to begin this process. In most of these cases, the Public Trust’s involvement in initiating negotiations as to how the audit might be carried out and who will pay for it leads the trustees and beneficiaries to settle the matter among themselves without an application to a judge ever being made or an auditor being appointed. The provision is considered to be a useful tool in encouraging trustees and beneficiaries to work out their disagreements. However, we have heard comment that the provision is overly bureaucratic as it effectively requires the double handling of an application to appoint an auditor because it involves both the Public Trust and the court.
[62] The reform recommended by the Law Commission was:
[15.16] We recommend that the provision is retained, but with a modified process so that the need for an application to a judge in chambers is removed. Instead, we think it would be appropriate and effective for the applicant beneficiaries and trustees to apply to the Public Trust to appoint an auditor with the agreement of the applicant and the trustees, if possible. This is unlikely to alter what actually happens in practice now. The role for the Public Trust is administrative rather than adjudicative and is consistent with its current range of roles.
[63] I note the various references in those passages of the report to the need for application to be made to a judge in chambers (in addition to the Public Trustee). On my reading of the section, application may be made to a judge in chambers on a number of subsidiary matters (eg removal of an auditor, fixing fees), but the substantive application for appointment is required by the section and the Regulations to be made to the Public Trustee. (Subsection 83B(8) simply provides that where an application is made to the court, the application will be heard by a Judge in Chambers. It does not require an application for audit to be made to the
Court).9
9 For completeness, I note that a new Trusts Bill has very recently been introduced in the House (Trusts Bill 2017 (290–1). The Bill proposes alterations to s 83B, clarifying that applications for the investigation of the condition and accounts of trust property are to be made to the Public Trust (Cl. 146). This (much simplified) provision also provides that the Public Trust must not go ahead with the application if a court has ordered that an investigation should not proceed (C1. 146(2)(b).
[64] Nothing in the passages quoted from the Law Commission report affects my view that any original jurisdiction the Court has to entertain applications for orders appointing investigators and/or auditors of a trust estate, is not under s 83B but an inherent jurisdiction. In any event, the result is the same. The Court has jurisdiction to consider Douglas’ application.
Issue 2 — If the Court has jurisdiction to appoint auditors and reviewers, should any of the orders sought be made? What should be the scope of any audit and/or review?
Submissions
[65] Douglas seeks a direction that the audit is to be more thorough than one performed simply to provide an audit opinion on the state of the Trust’s financial statements. Vance and Denise submit that what is asked for in the application is not in fact an audit opinion on the financial statements in accordance with s 83B. Instead it seeks to appoint Mr Palairet and Mr Fan-Robertson as experts to carry out a wide investigation and review which includes providing an opinion on legal issues pleaded by the plaintiff, providing an opinion on the ultimate issues in the pleadings, obtaining professional advice or valuations from other persons as they think fit, noting any omissions or other matters “which they think fit”, and if they consider loss has been occasioned to the Trust as a result of failure to act with care, skill and diligence or failure to act in the best interests of the Trust’s beneficiaries, to determine the quantum of such losses. They submit that s 83B does not allow for an auditor to be appointed to carry out the matters set out in the application.
Discussion and conclusions
[66] Under s 83B(3) the auditor, upon completion of the investigation, is to provide a copy of the accounts of the estate, together with a report thereon, and a certificate to the effect that the accounts correctly show the state of the affairs of the estate and that the auditor has had the securities for the trust fund investments produced to and verified by him or her, or (as the case may be) that the accounts are deficient in the respects specified in the certificate.
[67] Mr Bates relies on the following passage from Vincent v Stewart to support his application for a direction that the audit be more thorough than a simple audit opinion:10
[50] The issue then for the Court is really the extent of the audit.
[51] A trustee is obliged to keep an accurate account of trust property and must always be ready to render accounts. A trustee must also furnish to a beneficiary or to a person authorised by a beneficiary information or the means of obtaining information as to the method in which the trust property [or] the beneficiaries’ share in it has been invested or otherwise dealt with: Re Murphy’s Settlements [1998] 3 All ER 1. In addition a trustee must furnish information to a beneficiary whether the beneficiary has a present interest in the trust property or only a contingent in the remainder: Re Dartnell (1895) 1 Ch 474 and Re Tillott (1892) 1 Ch 86. Peter Vincent’s objection to providing information concerning income prior to the death of his mother cannot be sustained. …
[52] The two principal issues regarding the administration of the C R Vincent Estate are capital and income. The capital transactions are of significance because they provide the corpus of the residuary estate. It is necessary to consider the significant capital transactions to determine how the capital of the estate has been made up. Most of those transactions occurred years ago, as long ago as late 1960’s. A practical approach must be taken. As Ms McCartney submitted, the major capital items are the property at Victoria Avenue, and the shares in Ray Vincent Limited and TEL. Given the passage of time my view is that any audit of capital items ought to be limited to those items and a trace of their proceeds into the corpus of the estate, together with any items of capital expenditure or distribution.
[53] The other issue is income. A practical approach must also be taken in relation to the income. An appropriate starting point to consider the position of income and the general administration of the C R Vincent Estate to determine whether the trustee has been even handed in his treatment of the life tenant and the residuary beneficiaries is the date when the trustees of the Vincent Martelli Trust purchased their interest in the Cedric Vincent Estate from the Official Assignee. … An audit from and including the financial year ending 31 March 1996 will enable consideration of whether the trustee has acted appropriately in balancing the interests of the life tenant and the residuary beneficiaries.
[54] I appoint Mr Shane Hussey of Auckland to carry out an investigation and audit of the condition and accounts including income of the trust estate of Cedric Vincent from and including the financial year ending 31 March
1996 down to the present time. Mr Hussey is also to conduct an audit of capital items and expenditure and distributions of capital back to the
commencement of the trusts created by the will (if that is possible). The
capital items are identified as the shares in TEL and Ray Vincent Limited and the Victoria Avenue property.
10 Vincent v Stewart, above n 4, at [50]–[54] (emphasis added).
[68] Mr Bates relies on this passage, particularly the italicised part in para [53], submitting that the judge in Vincent v Stewart allowed the auditor to consider whether the trustee had acted appropriately in balancing the interests of the life tenant and the residuary beneficiary, notwithstanding that was a legal consideration. He submits that the intent of s 83B is to enable a beneficiary to have the Court investigate the affairs of a particular trust, in the context of particular legal complaints concerning the trustee’s acknowledged legal duties.
[69] In my view this submission fails to take into account the context of the decision in Vincent v Stewart. In that case Mr Peter Vincent was content for there to be an audit of the accounts as to income and expenditure going back to the date of the death of the life tenant in 2001, but not before that time. He also indicated through his counsel that he might not oppose review of certain capital items.
[70] Certainly Venning J took the view that an audit of the trust’s income (including for a period of approximately five years prior to the death of the life tenant) would be an “appropriate starting point” in determining “whether the trustee has been even-handed in his treatment of the life tenant and the residuary beneficiaries”. But the Judge only then appointed Mr Hussey to “carry out an investigation and audit of the condition and accounts including income of the trust estate of Cedric Vincent from and including the financial year ending 31 March 1996 down to the present time”. Mr Hussey was not directed to do anything further than audit the estate accounts for the period stated. The reference to determining whether the trustees had acted even-handedly appears to have been no more than a reference to what might or might not be shown by the audit. The results of the audit would allow the beneficiaries to see the full picture, and allow the applicant and the Court to form their own views on whether the trustees had failed to act even-handedly. I think the passage relied upon by Mr Bates expressed the rationale for the relevant part of the decision allowing the audit, but it did not extend the scope of the audit.
[71] Mr Bates also relies on Stuart v Harding. He submits that the Court in that case granted the application for an audit as it was concerned by the trustee’s involvement in legal entities other than the relevant trust, including a partnership in which the trustee was a partner, and companies in which he was a shareholder and/or
director. The Court was also concerned with the apparent intermingling of the
trustee’s funds with those of the trust. The Judge stated:11
[26] … if a trustee … intermingles his own funds with those of the trust, then it calls for that trustee to be able to explain and demonstrate quite clearly that his management of the trust is beyond reproach. …
[27] … I conclude that the applicant is entitled to be, as her counsel Mr Weatherhead described it, troubled by the affairs of the Trust. Accordingly I further consider this is an appropriate case for the Court to exercise its discretion pursuant to s 83B. I accordingly make the following orders:
(a) That Mr Torrie be appointed as auditor to undertake an audit of the two trusts pursuant to s 83B(1) of the Trustee Act
1956 …
[72] Mr Bates submits that it is clear from the passage quoted that the Court had concerns about the trustee’s conflicts between his duties as trustee, and his own personal interests in light of his dealings as trustee with himself in other capacities. He submits that this is the exact same concern that is evident in the present proceeding.
[73] While it might be said that there are some similarities between the present case and Stuart v Harding, I do not think that case advances the argument that more than a simple audit is justified. In Stuart v Harding Mr Torrie was simply appointed as an auditor under s 83B(1). Nothing was said about the scope of the audit, and he does not appear to have been directed to form a view on the broad questions of whether the trustee’s management of the Trust had or had not been “beyond reproach”, or whether Mr Stuart had or had not discharged the duties to his daughter (which he had undertaken in the relationship property agreement with his former wife).
[74] I accept the submission of Vance and Denise that s 83B does not contemplate an auditor carrying out the broad range of enquiries set out in Douglas’ application. What s 83B envisages is an audit, in the sense of that expression described at para [66] of this judgment (although in the circumstances of a particular case a full audit
might not be required — if, for example, the concerns of the beneficiary or trustee
11 Stuart v Harding, above n 2, at [26]–[27] (emphasis added).
seeking the audit are limited to some parts of the trust estate, or some transactions, only12). Accordingly, I would not be prepared to give a direction to any auditor who may be appointed under s 83B that the audit is to be “more thorough than one performed simply to provide an audit opinion on the state of the financial statements” (as Douglas seeks in his application).
[75] Quite apart from the ambit of s 83B, I would not have been prepared to exercise my jurisdiction to give the auditors/reviewers any of the specific directions proposed by Douglas at para 1(b) (i)–(viii) of the application.
[76] First, this is not a case where information sought by Douglas about the financial affairs of the Trust has not been provided. Although that may have been the case historically, Mr Bates acknowledged at the hearing that there are now no documents which have been sought from the trustees which have not been provided. The one possible area that Mr Bates suggested the auditors/reviewers might look into was stock records, something which would appear to enquire investigation into the affairs of the Company rather than the affairs of the Trust.
[77] Secondly, Mr Bates acknowledges that Douglas could obtain any further information he requires by use of ordinary processes of the Court, such as discovery, interrogatories or (in an appropriate case) an order for inspection of property. And in answer to my question at the hearing as to how some of the proposed enquiries by the auditors/reviewers would differ from the questions the Court will be required to answer at trial, Mr Bates responded that there would be no difference — the present application is simply an efficient way of getting to the same result as an enquiry and/or account of profits which the Court may direct at trial, with the benefit that if the proposed directions are given to the auditors/reviewers now, the parties will avoid the need for split trials.
[78] I do not consider that either the appointment of a solicitor or a qualified statutory accountant under s 83B, or in the exercise of the court’s inherent
supervisory jurisdiction over the conduct of trustees, was intended to serve the
12 See Hemming v Public Trustee, above n 4, at [22], and the limitations on the extent of the audit which Venning J considered appropriate in Vincent v Stewart.
function of assisting a party to obtain evidence (beyond what it would obtain from an audit of the Trust financial statements under s 83B), at an interlocutory stage, for later use by that party at trial. The ordinary processes of the Court are to be used for that purpose, including discovery, interrogatories, inspection and (in an appropriate case) the appointment of an expert to report to the Court under r 9.36.
[79] There are also particular difficulties with each of the proposed further directions to the auditors/reviewers set out at para (b) of the application. I deal with each in turn.
“Review the Trust to sufficiently enable consideration of whether the [trustees] have acted with the care, skill and diligence that a prudent person of business would exercise in managing the affairs of others”
Whether the trustees have acted with the care, skill, and diligence of a prudent business person is a matter for the Court at trial, and each party can call its own evidence directed to that question. Directing an auditor or reviewer to enquire into questions of the kind the Courts commonly deal with and are well equipped to answer is unlikely to be of significant assistance, even if such evidence may now be admissible under s 25(2)(a) of the Evidence Act 2006. Also, I think it probable that if either side did not like the auditors’/reviewers’ opinion on the issue that side would provide its own expert evidence (to which the other side would probably feel compelled to reply). I do not think there would be any significant costs saving of the kind Mr Bates envisages.
“Review the Trust to sufficiently enable consideration of whether the [trustees] are
acting in the best interests of the Trust’s beneficiaries”
[80] Similar comments apply in respect of this proposed direction. Whether the trustees have acted in the best interests of the Trust’s beneficiaries will be an important question for trial, and there appears to be very little dispute about what steps the trustees have taken. The Court will be well equipped to deal with this question.
“Identify the nature of transactions with the [Shiloh Partnership] including the number and type of stock they have grazed on [Company land]”
[81] These issues appear to affect the relationship between the Company and the Shiloh partnership. As such, I doubt that they are appropriate matters for enquiry by a solicitor or qualified statutory accountant appointed to investigate and report on the financial affairs of the Trust under s 83B. Nor would they appear to fall within the Court’s inherent jurisdiction in respect of the supervision of trusts and trustees. This is an issue which can be addressed by Douglas by application for particular discovery and/or by the administration of interrogatories.
“Note the circumstances of dealings with Trust assets which are or may not be orthodox from the perspective of an independent Chartered Accountant and/or professional trustees”
[82] It is not clear how this proposed direction would provide more information than an ordinary audit, where the auditors could be expected to provide qualifications in their certificate in appropriate circumstances (if they considered that the financial statements of the Trust did not show a true and fair view of its position). This proposed direction appears to be unnecessary.
“Obtain any professional advice or valuations the auditors and reviewers thinks fit including:
(a) Market valuations of the Trust’s share of property;
(b) Assessments of the return on the Trust’s investments (including whether the [Company] is being run in the best interest of the Company’s shareholders including the Trust);
(c) Whether the grazing fees received from the [Shiloh Partnership] are being paid at market rates or not.”
[83] I accept Mr O’Connor’s submissions on this point. Directing the auditors/reviewers to obtain valuation or other professional advice would go beyond the scope of an audit of the kind contemplated by s 83B, and might permit the auditors/reviewers to present in their report the expert evidence of others who have not been appointed by the Court. The Court will be well able to assess, on the evidence produced by the parties, whether the Company is being run in the best interests of its shareholders (even if that were an appropriate area of enquiry for auditors/reviewers tasked with investigating the financial state of the Trust).
“Note any omissions or other matters which the auditors and reviewers think fit, and any general observations thereto”
[84] I think this proposed direction is too vague, and would leave the auditors/reviewers unclear on the full extent of their duties. The ordinary purpose of an audit is to investigate whether an entity’s financial statements show a true and fair view of its position. If and to the extent they do not, the auditors could be expected to qualify their certificate accordingly.
“In the event that the auditors and reviewers consider loss has been occasioned to the Trust by either the [trustees’] failure to act with care, skill and diligence or by failing to act in the best interests of the Trust’s beneficiaries, to determine the quantum of such losses”
[85] This is a question for the Court on the enquiry and account of profits claims, and the Court will be well equipped to answer the question when the evidence on those claims is in.
“On completion of the audit and review, the auditors and reviewers are to supply to the Court and copy to the parties accounts and a report which generally conforms with s 83B of the Trustee Act 1956”
[86] This proposed direction is not necessary. It is already adequately covered by s 83B.
Directions sought in paragraphs (c), (d), (e), (f) and (g) in the application
[87] In the view to which I have come, Douglas has not made out his case for the orders sought at paragraphs 1(a) and (b) of his application. It is accordingly unnecessary to consider these proposed directions.
[88] I conclude on Issue (2) that none of the orders sought should be made.
Issue 3 — are Mr Palairet and Mr Fan-Robertson truly independent, and do they have the necessary skills to conduct any audit and/or review the Court might order?
[89] In the view to which I have come on Issues (2) and (4), it is not necessary to consider these issues.
Issue 4 — if it is not appropriate to appoint an auditor and/or reviewer under s 83B of the Act or in the Court’s inherent jurisdiction, should the Court appoint an expert under r 9.36 of the High Court Rules, to enquire into and report on the matters raised in the application?
[90] Douglas did not seek to rely on r 9.36. Nevertheless Mr Bates submits that the Court may at any time, on its own initiative, appoint independent experts on any question of fact or opinion not involving a question of law or of construction.
[91] Mr O’Connor submits that what Douglas is really seeking is the appointment of Messrs Palairet and Fan-Robertson as experts under r 9.36 of the High Court Rules.
[92] Mr O’Connor further submits that the question to be submitted to the Court expert, and the instructions (if any) given to the expert, must be either agreed by the parties or settled by the Court. He submits that the question cannot call for an opinion on the ultimate issue the Judge is to decide, or an opinion on a matter within the common knowledge of the Judge.13
[93] Mr O’Connor submits that Mr Palairet and Mr Fan-Robertson cannot be appointed as experts in any event, because they do not have the necessary specialised knowledge or skill. An expert cannot engage others to provide “any professional advice”, as this would be based on hearsay evidence.
[94] Mr O’Connor further submits that the Trust does not have the money to pay for a Court-appointed expert. Vance and Denise intend to engage expert witnesses to provide evidence directed to the legal issues in this proceeding, and Douglas should do the same.
[95] Mr Bates submits that as chartered accountants both Mr Palairet and Mr Fan- Robertson are well qualified to opine on the level of the return on the Trust’s investments. It is also well within the scope of a chartered accountant’s qualification
to determine the value of the shares.
13 Citing Nev Mellon Electrical Ltd v AAPC NZ Pty Ltd HC Wellington CIV-2005-485-268,
13 December 2005.
[96] On the costs of the proposed audit and review, Mr Bates submits that the Trust’s assertion that it cannot pay for the proposed investigation and audit does not square with the extent of the Trust’s realisable assets. He submits that if the appointment is not made, both Douglas and Vance and Denise will likely engage expert witnesses for the trial. The proposed appointment will avoid duplicating the costs of experts.
Discussion and conclusions
[97] Rule 9.36 of the High Court Rules states:
9.36 Appointment of court expert
(1) In a proceeding that is to be tried by Judge alone and in which a question for an expert witness arises, the court may at any time, on its own initiative or on the application of a party, appoint an independent expert, or, if more than 1 such question arises, 2 or more such experts, to inquire into and report upon any question of fact or opinion not involving questions of law or of construction.
(2) An expert appointed under subclause (1) is referred to in this rule and in rules 9.37 to 9.42 as a court expert.
(3) A court expert in a proceeding must, if possible, be a person agreed upon by the parties and, failing agreement, the court must appoint the court expert from persons named by the parties.
(4) A person appointed as an independent expert in a proceeding under rule 9.44(3) may not be appointed as a court expert unless the parties agree.
(5) In this rule, expert, in relation to a question arising in a proceeding, means a person who has the knowledge or experience of, or in connection with, that question that makes that person’s opinion on it admissible in evidence.
[98] The authors of McGechan on Procedure say that appointment of a Court expert will be appropriate where an important question in the proceeding can be resolved by such a person’s report.14 They refer to Theatrelight Electronic Control &
Audio Systems Ltd v Angliss,15 stating that:16
14 Andrew Beck and others McGechan on Procedure (online looseleaf ed, Thomson Reuters) at
[HR9.36.01].
15 Theatrelight Electronic Control & Audio Systems Ltd v Angliss (1997) 10 PRNZ 422 (HC) at
425.
16 McGechan on Procedure, above n 14, at [HR9.36.01].
… an expert should have specialised knowledge or skill so as to speak with authority on matters of fact or opinion. The expert cannot report on matters of legal questions or construction.
The Court should consider whether such a report is likely to resolve an important question and whether the proposed expert has the requisite knowledge and skill. Where valuation evidence is involved, the opinion given in the report may be based on hearsay.
[99] In Theatrelight Electronic Control & Audio Systems Ltd v Angliss, Paterson J
explained:17
While there may be some cases where the Court will need to consider whether it is appropriate to appoint an expert in view of the ultimate issue rule, this is not one of those cases. It therefore follows that the matters to be considered by a Court in deciding whether or not to make an appointment under [the forerunner of r 9.36] are:
(a) Is a report from an expert likely to resolve an important question in the proceeding? If not, there would appear to be no reason to incur the expense of appointing such an expert; and
(b) Does the expert have the necessary specialised knowledge or skill gained from study, training or experience to inquire and report upon the proposed questions of fact or opinion?
[100] Overall, I consider that there is no basis for the appointment of Mr Palairet and Mr Fan-Robertson as Court experts. First, I do not consider that any expert report they might provide would be likely to resolve an important question in the proceeding, particularly in circumstances where Vance and Denise have said that they intend to appoint their own expert (a course which I think they are entitled to take). It seems likely that the opinions of any Court-appointed expert would not be likely to go unchallenged by one side or the other, and in those circumstances the Court would be left with its familiar task of evaluating and deciding between competing expert opinions. Appointing an expert would not be likely to resolve any important question in the proceeding.
[101] I also accept Mr O’Connor’s submission on the absence of any agreed question to be put to the experts. Appointments of this nature are far more likely to resolve important issues where the parties agree on both the appointee and the
matters the appointee is required to investigate. That is not the position here.
17 Theatrelight Electronic Control & Audio Systems Ltd v Angliss above n 15, at 425–426.
[102] I decline to appoint Mr Palairet and Mr Fan-Robertson as experts under r 9.36.
Result
[103] Douglas’ application for the appointment of Mr Palairet and Mr Fan- Robertson as auditors and reviewers under s 83B of the Act, or in the Court’s inherent jurisdiction, is dismissed.
[104] My decision to decline to exercise my discretion to appoint auditors and/or reviewers for the purposes set out in the notice of application is without prejudice to Douglas’ entitlement to apply to the Public Trustee under s 83B to appoint a solicitor or qualified statutory accountant to carry out the normal audit contemplated by that section, if he wishes to do so.
[105] I decline to appoint an expert under r 9.36 to investigate and report on the questions referred to in the notice of application.
[106] Vance and Denise are entitled to one set of costs on the application, on a 2B
basis, plus disbursements as fixed by the Registrar.
Associate Judge Smith
Solicitors:
Brown & Bates Ltd, Napier for the plaintiff
Lunn & Associates, Napier for the first and second defendants
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