Refrigerant Recovery NZ Ltd v Trust for the Destruction of Synthetic Refrigerants
[2024] NZHC 3933
•19 December 2024
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2023-404-2007
[2024] NZHC 3933
UNDER the Companies Act 1993 and Charitable Trusts Act 1957 BETWEEN
AND
REFRIGERANT RECOVERY NZ LIMITED
First Plaintiff
THE INSTITUTE OF REFRIGERATION, HEATING AND AIR CONDITIONING
ENGINEERS OF NEW ZEALAND INCORPORATED
Second PlaintiffAND
THE TRUST FOR THE DESTRUCTION OF SYNTHETIC REFRIGERANTS
First Defendant
(continued)
Hearing: 4 December 2024 Appearances:
T M Molloy and H C I Wagner-Hiliau for Plaintiffs
A S Butler KC, N L Walker and G D J Lomax-Sawyers for First Defendant
No appearance required for for Second to Seventh Defendants Z R Hamill and R E R Gavey for Attorney-General
Judgment:
19 December 2024
JUDGMENT OF O’GORMAN J
This judgment was delivered by me on 19 December 2024 at 12.30 pm pursuant to r 11.5 of the High Court Rules 2016.
Registrar/Deputy Registrar
…………………………………
REFRIGERANT RECOVERY NZ LIMITED v THE TRUST FOR THE DESTRUCTION OF SYNTHETIC REFRIGERANTS [2024] NZHC 3933 [19 December 2024]
(…continued)
AND CLIFTON JAMES MADGWICK
Second Defendant
LIONEL JAMES ROWE
Third DefendantSAMEER HANDA
Fourth DefendantKENNETH JOHN BOWEN
Fifth DefendantMAX WILLIAM MCDERMID
Sixth DefendantPATRICK DEMPSEY
Seventh Defendant
Overview
[1] This is an application by the first defendant, the Trust for the Destruction of Synthetic Refrigerants (the Trust), seeking a Beddoe order1 authorising its defence of the proceeding at the cost of the Trust on the basis that this is in the Trust’s best interests. The Trust also seeks a Beddoe order confirming that it may meet the reasonable costs of the second to seventh defendants (the ex-directors of the Trust’s trustee company).
[2] The second plaintiff is The Institute of Refrigeration, Heating and Air Conditioning Engineers of New Zealand Incorporated (IRHACE). The first plaintiff is its wholly owned subsidiary company. In 1993 the subsidiary was called Ozone Protection Company Ltd, but it is now called Refrigerant Recovery NZ Ltd (RRNZ).
[3] RRNZ was the corporate trustee from the Trust’s establishment in 1993 through to a restructure that took place during 2021 (the 2021 Restructure). The substantive claim challenges the validity of that 2021 Restructure and the ex-directors of RRNZ are sued for the decisions they made to implement it.
[4]The disputed issues in the Beddoe application are:
(a)Should the application be declined because it was commenced as an interlocutory application rather than as a separate originating application?
(b)Is it in the best interests of the Trust for the defendants to defend the proceeding, taking into account the merits of the claims?
(c)Three causes of action are for breaches of director duties rather than breach of trustee duties. Does this preclude the benefit of a Beddoe order?
1 A procedure named after Re Beddoe [1893] 1 Ch 547 (CA).
(d)The remaining claims are for breaches of duty as trustees. Should this be classified as hostile litigation, and does that preclude the benefit of a Beddoe order?
(e)If a Beddoe order is appropriate, what terms control the reasonableness of the amount?
Factual background
[5] When the Trust was established in 1993, IRHACE as settlor desired to create a Charitable Trust.2 In cl 3 of the 1993 Trust Deed, the charitable object of the Trust was:
. . . to arrange for a fund to cover the costs incurred following analysis, of the collection, storage, and disposing within New Zealand in an environmentally acceptable way, of CFC’s and HCFC’s and mixes containing them which have been used in the refrigeration and airconditioning industries.
[6] Part 2 of the Waste Minimisation Act 2008 provides for government accreditation of product stewardship schemes (PSS) for people and organisations involved in the life of a product to share responsibility for making products reusable and recyclable, and to manage environmental harm from when the product becomes waste.3 Accredited PSS may be either voluntary or regulated. If regulated, typically there is only one accredited provider.
[7] In performance of its charitable objects, from 2010 the Trust operated the only government-accredited, voluntary PSS for refrigerant gases. This involved the collection of synthetic refrigerant gases from various refrigerant industry sectors and the transportation of these gases to Australia for their destruction.
[8] Under the 1993 Trust Deed, IRHACE as settlor had certain ongoing rights, including:
2 The essence of a charitable trust is that it is a trust “for the promotion or advancement of social purposes rather than a trust for individual beneficiaries”: Latimer v Commissioner of Inland Revenue [2004] UKPC 13, [2004] 3 NZLR 157 at [29], quoted in Auimatagi v Mangere Congregational Church of Jesus Trust Board [2023] NZHC 3120, [2023] 3 NZLR 720 at [37].
3 Waste Minimisation Act 2008, s 8.
(a)a provision in the 1993 Trust Deed that the trustee may exercise trustee powers in consultation with the settlor (cl 12);
(b)the ability to control the composition of RRNZ’s board of directors, given that IRHACE was and remain RRNZ’s sole shareholder; and
(c)a broad variation power under cl 14:
14. IT shall be lawful for the Trustee (or where there is more than one Trustee, the Trustees by unanimous resolution) to revoke or vary or add to any of the provisions of this deed so long as such revocation variation or addition is not inconsistent with the exclusively charitable scope and intention of this deed.
[9] In 2019, the government announced significant reforms and began consultation on establishing compulsory regulated PSS for each of six priority products, including synthetic refrigerant gases. As part of that consultation, a working group was established for synthetic refrigerants with broad industry representation — 15 members from 12 organisations, including two representatives from IRHACE (Christine Johnston and Dave Nicholls).
[10] On 20 March 2020, the industry working group issued a report called “Synthetic Refrigerant Stewardship Milestone 4: Report 1” (Milestone 4 Report).
(a)The working group recommended that there should be only one Product Stewardship Organisation (PSO) operating the regulated PSS for synthetic refrigerants in New Zealand.
(b)Given its experience operating the only government-accredited, voluntary PSS, the Trust was considered best-placed to perform that PSO role, subject to ensuring compliance with the government’s requirements.
(c)At [2.4] the working group recommended a governance structure that would have representatives from a range of stakeholders.
(d)In terms of s 14(d) of the Act, a product stewardship scheme must list the classes of person involved in the design, manufacture, sale, use, servicing, collection, recovery, recycling, treatment, and disposal of the product.
(e)As stated at [2.10] of its Milestone 4 Report, the working group listed a wide range of classes of persons regarded as essential for the success of a synthetic refrigerants PSS.
[11] On 29 July 2020, the Associate Minister for the Environment gave notice by gazette declaring that synthetic refrigerants were a “priority product” for which a regulated PSS must be developed. The government issued gazetted guidelines pursuant to s 12(1) of the Waste Management Act 2010. The guidelines included, as to governance, that:
(a)the scheme “will be managed by a legally registered not-for-profit entity”; and
(b)directors or governance boards will:
(i)be “appointed through an open and transparent process”;
(ii)“represent the interests of producers and consumers of the priority product and the wider community as informed by stakeholder advisory groups”; and
(iii)“follow governance best practice guidelines”.
[12] Applications for accreditation were required to “specify how the proposed scheme incorporates or will provide for” those governance matters (among a range of other requirements).
[13] RRNZ (under the management of the ex-directors) identified that the Trust’s existing governance structure was inconsistent with the guidelines. The Trust had a single corporate trustee, the directors of which were appointed at the sole discretion of its shareholder, IRHACE. RRNZ therefore proposed various amendments to the 1993 Trust Deed, to enable the Trust to become the PSO.
[14] RRNZ circulated a draft deed for consultation, including to IRHACE. By this time, IRHACE says that it had become increasingly concerned with the way RRNZ was administering the Trust. IRHACE alleged a lack of transparency, poor performance, and unresolved conflicts of interest for two of RRNZ’s directors. IRHACE regarded the changes as inappropriate.
[15] In a letter dated 3 March 2021, IRHACE advised RRNZ that it objected to the restructure. It instructed RRNZ’s directors instead to focus on the Trust’s existing activities.
[16] On 6 March 2021, the then board of RRNZ met to discuss that letter. The directors resolved to obtain a legal opinion.
[17] Following consideration of that opinion, RRNZ executed a Deed of Removal and Appointment of Trustees and Deed of Variation dated 14 March 2021, which implemented the following actions (the 2021 Restructure):
(a)the board of directors of RRNZ, in their role as the Appointments Committee, appointed Clifton Madgwick, Lionel Rowe and Sameer Handa as new trustees of the Trust (the New Trustees);
(b)the board of directors of RRNZ resolved that RRNZ would retire as the trustee of the Trust; and
(c)the New Trustees, immediately upon their appointment, purported to exercise the variation power in cl 14 of the Trust Deed to adopt the new trust deed (the 2021 Trust Deed).
[18]Among other things, the 2021 Trust Deed:
(a)removed any reference to the settlor being consulted about the exercise of trustee powers (cl 12);
(b)recorded that the trustees should incorporate as a trust board under the Charitable Trusts Act 1957; and
(c)permitted members of the trust board to be paid reasonable and proper remuneration.
[19] Whereas the previous board members of RRNZ administered the Trust without remuneration, the New Trustees’ remuneration included $100,000 per annum paid to the chairperson of the Trust, and $40,000 per annum to the other trustees. In the year to 31 March 2024, the Trust paid $310,000 in trustee fees, and the Trust’s subsidiary Chemical Destruction Services Ltd paid $25,000 in directors’ fees.
Substantive claim
[20] The plaintiffs allege that the 2021 Restructure was invalid. They advance six causes of action against the defendants:
(a)First cause of action against second to seventh defendants (in their position as ex-directors of RRNZ) — the plaintiffs allege that the exercise by the board of RRNZ of the fiduciary power of appointment of New Trustees (as recorded in the 2021 Restructure) was invalid including because it was exercised for an improper purpose, which was to divest the New Trustees of any accountability to the settlor and in circumstances where the New Trustees knew that the 2021 Restructure was being undertaken in breach of trust due to a failure to consult with the settlor as required by cl 12 of the 1993 Trust Deed.
(b)Second cause of action against second, third and fourth defendants (in their position as trustees) — the plaintiffs allege that the exercise by the New Trustees of the variation power in cl 14 of the Trust Deed was
defective including because it was exercised for an improper purpose, which was to divest the New Trustees of any accountability to the settlor; it conferred pecuniary benefits on the defendants in breach of their fiduciary duties; and because the defendants purported to exercise the power in circumstances where the New Trustees knew that the 2021 Restructure was being undertaken in breach of trust due to a failure to consult with the settlor as required by cl 12 of the 1993 Trust Deed.
(c)Third cause of action against second, third and fourth defendants (in their position as trustees) — the plaintiffs allege that cl 12 of the Trust Deed imposed a pre-condition on the trustee with respect to the exercise of any trustee power. The pre-condition being that in order to validly exercise a trust power, the trustee was first required to consult with the settlor. This was particularly so with respect to a purported wholesale variation of the 1993 Trust Deed that removed any future requirement to consult with the settlor. In the present case, the New Trustees were appointed by Deed of Removal, Appointment and Variation dated 14 March 2021 and, contemporaneously with that appointment, purported to implement the 2021 Restructure to the Trust Deed. The New Trustees failed to consult at all with the settlor with respect to the implementation of the 2021 Restructure. They could not rely on any previous consultation (to the extent that occurred) by the former trustee, RRNZ. The 2021 Restructure is therefore invalid.
(d)Fourth cause of action against second, third and fourth defendants (in their position as trustees) — cl 13 of the Trust Deed prohibited the New Trustees from exercising the variation power in cl 14 of the 1993 Trust Deed in a manner that conferred a private pecuniary profit on the trustees. The 2021 Restructure included a new provision in the 2021 Trust Deed that purported to allow the trustees to receive remuneration. The purported exercise of the variation power to implement the 2021 Restructure was therefore a breach of trust/fiduciary duty and was invalid. The New Trustees have received
significant salaries in breach of trust. The plaintiffs seek an order that the 2021 Restructure is invalid for breach of trust.
(e)Fifth cause of action against second to seventh defendants (in their position as ex-directors of RRNZ) — the plaintiffs allege that, as then-directors of RRNZ, the second to seventh defendants each owed statutory duties to the company under the Companies Act 1993. Namely, s 131 (to act in good faith and in RRNZ’s best interests); s 133 (to exercise powers for a proper purpose); and s 134 (to comply with the Act and RRNZ’s constitution). The ex-directors breached those duties by appointing the seventh defendant as director without the requisite consent of the first plaintiff, as well as by implementing the 2021 Restructure. The plaintiffs seek orders setting aside the 9 April 2020 resolution purporting to confirm the seventh defendant as director and setting aside the 12 March 2021 resolution to implement the 2021 Restructure.
(f)Sixth cause of action against second to seventh defendants (in their position as ex-directors of RRNZ) — the first plaintiff alleges that, as then-directors of RRNZ, the second to seventh defendants each owed IRHACE the duty, as RRNZ’s sole shareholder, to ensure it complied with the Companies Act and its constitution. In resolving to implement the 2021 Restructure without IRHACE’s approval, the ex-directors permitted RRNZ to enter a major transaction in breach of s 129 of the Act and cl 3.1 of the constitution. That constituted conduct that was unfairly prejudicial to IRHACE, as shareholder, in terms of ss 174 and 175 of the Act.
Defendants’ position
[21] During July 2024, after this proceeding was commenced, the Trust’s proposed scheme was accredited by the Ministry for the Environment | Manatū Mō Te Taiao. This means that the Trust has been selected as PSO, the sole organisation to organise and implement the forthcoming mandatory PSS for synthetic refrigerants.
[22] The Trust says the claim is based on a misguided belief that IRHACE and RRNZ should control the Trust, whereas a charitable trust can only ever operate to advance its charitable purposes. All six causes of action are pleaded only against the second to seventh defendants, being the ex-directors of RRNZ. None of them have any personal interest in the proceeding — their involvement with the Trust was for charitable purposes rather than self-interest, and no relief is sought against them personally.
[23] The Trust seeks a Beddoe order authorising its defence at the cost of the Trust, on the basis that doing so is in the Trust’s best interests and the claims are weak with little prospect of success. The ex-directors will have limited involvement in the proceeding, with the Trust taking primary responsibility for the defence, but the ex-directors remain necessary parties because they have been named and will be required to give evidence.
Beddoe applications — legal principles
[24] As a general principle, trustees have a duty to protect trust assets for the benefit of the beneficiaries.4 The courts have recognised that this duty extends to the bringing and defending of claims where necessary to fulfil that duty.5 Litigation costs that have been incurred for the benefit of the trust in its defence will generally be paid out of trust funds, but they must be reasonably and properly incurred.6
[25] A Beddoe order allows a court pre-emptively to approve the bringing or defending of such claims at the cost of the trust. The fundamental question is what is in the best interests of the trust.7
[26] In typical non-charitable trust cases, courts usually have regard to whether a trustee’s pursuit or defence of proceedings is self-interested. There is, however, no absolute rule as to when a Beddoe order is warranted, and any application turns on its
4 McCallum v McCallum [2021] NZCA 237, (2021) 32 FRNZ 851 at [28]; Pratley v Courteney [2018] NZCA 436, [2018] NZAR 1787 at [18]; and Nicola Peart Trusts Act 2019 Act and Analysis New Zealand (Thomson Reuters, Wellington, 2024) at [TU26.01] and [TU26.02].
5 McCallum v McCallum, above n 4, at [1].
6 At [28]; and McLaughlin v McLaughlin [2018] NZHC 3198, [2019] NZAR 286 at [18].
7 At [43], endorsing McLaughlin v McLaughlin, above n 6, at [29].
own facts.8 Even in self-interested litigation where a trustee secures a personal benefit from successfully defending allegations of breach of trust, a Beddoe order ought to be granted if it is in the best interests of the trust and the beneficiaries as a whole, having regard to all the circumstances.9
[27] Where a charitable trust is involved, I accept that there tends to be a “public overlay to the interests at stake”10 making it more likely that a Beddoe order is appropriate. As indicated in Wallace v Green,11 the nature of the trust does not change the tests to be applied, but that factual context will make it more likely that the trustees are not acting in self-interest, and it may make it inappropriate for the trust/current trustees to take a neutral role if that will not adequately protect the charitable objects.
[28] One of the relevant considerations for a Beddoe order is the merits of the proceeding, to the extent that can be assessed in the context of an interlocutory application. If the claim against a trust or trustee is weak or vexatious, then this is a powerful reason for granting the Beddoe order.12
Procedure
[29] Under r 19.4(f) of the High Court Rules 2016, a Beddoe application is one of the specified types of the proceedings that may be commenced by originating application under pt 19. Rule 19.4(f) was inserted on 20 May 2021, along with a new r 19.4A which specifies what must accompany such an application, namely a memorandum, an affidavit and an application for directions as to service giving reasons (if applicable) why any particular beneficiary should not be served with the application, and why parts of the evidence should be withheld from any persons served, or why any person should be excluded from any part of the hearing.
8 Re Uncle's Joint Pty Ltd [2014] NSWSC 321, (2014) 12 ASTLR 487 at [26]; and McCallum v McCallum, above n 4, at [45], quoting Spencer v Fielder [2014] EWHC 2768 (Ch), [2015] 1 WLR 2786 at [27].
9 McCallum v McCallum, above n 4, at [43]–[45], quoting McLaughlin v McLaughlin, above n 6, at [29] (footnotes omitted); and Spencer v Fielder, above n 8, at [27].
10 Singh (as trustees of the Sikh Sangat NZ Trust) v Attorney-General [2022] NZHC 666 at [112].
11 Wallace v Green [2022] NZHC 512 at [64]–[65].
12 McCallum v McCallum, above n 4, at [45], citing STG Valmet Trustees Ltd v Brennan (1999) 4 ITELR 337 (CA) at 351; and Re Evans [1986] 1 WLR 101 (CA) at 107.
[30] A memorandum proposing these changes was considered by the Rules Committee in their meeting of 25 November 2019.13 The issue was raised on behalf of the Society of Trust and Estate Practitioners because it had been unclear what type of proceeding was required for Beddoe applications, leading to undue costs being incurred. In New Zealand, it was noted that most Beddoe applications were brought as applications for directions under s 66 of the Trustee Act 1956. As such, the usual procedure had been an application under pt 18 of the High Court Rules14 unless leave was given under r 19.5 to use the originating application procedure. Part 19 was considered better suited for Beddoe applications, given the need for them to be dealt with promptly and simply,15 and the desirability for the applicant to be able to frankly disclose the strengths and weaknesses of the proceeding to the Court which was not something on which the other parties to the contemplated litigation were entitled to be heard. Accordingly, the proposal was to make it clearer that pt 19 was the preferred procedure in those circumstances, and the new r 19.4A was modelled on the Practice Direction 64B in England and Wales. The Committee agreed that it was desirable to clarify that the appropriate means of making a Beddoe application was by originating application under pt 19 of the High Court Rules as opposed to by way of an application for directions under s 66 of the Trustee Act (and thus by way of pt 18).
[31] The omnibus of rule changes that made these Beddoe amendments was the High Court Amendment Rules 2021. The explanatory note states that it was “to clarify and codify the proper manner of bringing a Beddoe application”. In other words (given the background), the intention was to capture the existing approach for best practice in most cases. At no stage did the Rules Committee discuss overriding the Court’s discretion to decide on the appropriate procedure in any given case, including for matters specifically permitted to be commenced under pt 19. As the Court recognised in Wallace v Green, r 19.4(f) is a permissive rule that does not compel use of the originating application procedure for a Beddoe application.16
13 I attended all relevant meetings discussing these changes, as a member of the Rules Committee at the time.
14 High Court Rules 2016, r 18.1(b)(xiii).
15 Courteney v Pratley [2017] NZHC 3285 at [46]–[57]; and Pratley v Courteney [2018] NZCA 436, [2018] NZAR 1787 at [24].
16 Wallace v Green, above n 11, at [45]–[46].
[32] The usual reasons for dealing with a Beddoe application in a separate proceeding do not particularly arise on the facts of this case. The Attorney-General has participated in the hearing of this application, to gives submissions in her capacity representing the beneficial interests of the charity. There are no non-party beneficiaries who needed to be heard on the Beddoe application, nor any beneficiaries who need to be excluded because they are adversaries in the main proceeding. The Trust and other defendants have addressed the merits of the claim and their intended defences openly with the plaintiffs, largely because there is nothing secretly strategic to be assessed — evaluating the merits involves questions of interpretation (questions of law) applied to non-contentious facts about the procedure followed in the planning and implementation of the 2021 Restructure.
[33] I asked counsel for the plaintiffs to identify any aspects in which they had been disadvantaged by the Beddoe application being pursued by an interlocutory application within the substantive proceeding. There is little practical difference because much of the procedure in pt 19 is based on interlocutory applications.17 The plaintiffs do not contend that there are any other people who should be heard on the application, and the plaintiffs have benefited from having a greater opportunity to be heard on the merits of whether the Beddoe order should be granted. The only concern raised was the appropriateness of the trial Judge seeing an independent opinion of Vanessa Bruton KC setting out her views of the prospects of the proceeding and whether bringing or defending it is in the best interests of the Trust (that document was filed because of the requirement in r 19.4A(1)(b)(iii), without any waiver of privilege). That issue can be addressed simply by removing that document from the Court file.
[34] I agree with the Trust’s submissions that any minor departures from r 19.4A are immaterial and these are not grounds for refusing the Beddoe order.18
17 At [19].
18 High Court Rules, r 1.5; and Wallace v Green, above n 11, at [50] and [54]–[59].
Substantive merits
[35] For analysing the merits of the substantive claim, the core complaints feature in many of the causes of action, so I address those under these groupings:
(a)alleged improper purpose of avoiding accountability to the settlor;
(b)failure to consult with the settlor; and
(c)conferral of pecuniary benefits by agreeing to pay office holders.
Improper purpose
[36] The plaintiffs allege that the board of RRNZ acted for an improper purpose under the first cause of action when appointing New Trustees as part of the 2021 Restructure, and in the second cause of action to divest the New Trustees of any accountability to the settlor.
[37] The evidence strongly supports the defendants’ position that the 2021 Restructure, including these changes, was undertaken to ensure that the Trust could meet the government’s stated governance expectations to achieve regulated PSS accreditation and become the PSO, consistent with the Trust’s charitable purposes. These objectives were set out in a discussion paper prepared by legal advisors at the time and circulated as part of the consultation process.
[38] As mentioned above, the government’s expectations were set out in a gazetted notice from the Minister on 29 July 2020, issuing guidelines pursuant to s 12(1) of the Waste Management Act.19
[39] In terms of the plaintiffs’ allegation of removing accountability to IRHACE as settlor, this largely depends on an interpretation of the phrase referring to consultation within cl 12.
19 See [11] above. Relevant guidelines, as to governance, are detailed.
[40] The introductory section (chapeau) of cl 12 of the Trust Deed provided as follows:
THE Trustee shall have and may exercise in consultation with the settlor all powers conferred upon them by law including (without limitation) the following powers authorities and discretions:
a. To invest the Trust Fund and the income from it …
…
[41] The plaintiffs allege that this imposed a condition precedent, that any powers conferred on the Trustee could be exercised only if the settlor had first been consulted. To have that meaning, the word “may” would be mandatory (may only), namely that without such consultation the Trustee may not exercise any of the powers conferred upon them.
[42] In my view, the better interpretation is that the phrase “may exercise in consultation with the settlor” is permissive:
(a)This recognises the difference between the words “shall” and “may”.
(b)The Trustees “shall have … all powers conferred upon them by law including (without limitation) …”. This is deliberately drafted in broad terms, using “shall” as an unconditional modal verb. Having a power inherently implies the ability to exercise such a power.
(c)The phrase “may exercise in consultation with the settlor” is permissive and additional. Using the word “may” is not the sort of language usually adopted to fetter a general power.20
20 Holland (As Trustees of the Tauranga Energy Consumer Trust) v Jonkers [2021] NZHC 3469 at [140].
(d)It permits consultation with the settlor. Without the additional phrase, such consultation may have been criticised, because of it potentially undermining the independence required of a trustee pursuing charitable objects, raising issues of delegation21 and settlor overreach.22
(e)The plaintiffs’ interpretation of requiring prior settlor consultation in every case would be cumbersome and unworkable, for example on trivial administrative or operational decisions. This is even more evident on the plaintiffs’ submissions that any consultation process must give time for IRHACE to consult in turn with its own members (around 800 in number).
(f)The suggestion of accountability to, and control by, the settlor in that way is inconsistent with the Trust’s charitable nature. The interests of those engineer members are not necessarily the same as those benefiting from the trust objects, being a much wider range of participants in the refrigeration and air conditioning industries.23
[43] Accordingly, I accept the Trust has a strong argument that cl 12, on its terms, only permits (rather than requires) consultation with IRHACE and does not confer control.
[44] In exercising the power to appoint new trustees under cl 6 of the Original Trust Deed, the “appointments committee” (being ex-directors of RRNZ) only needed to exercise the power for a proper purpose, honestly and in good faith.24 It does not matter whether the 2021 Restructure is a step the Court itself would have taken if it had stood in their shoes. The Court’s task is instead to determine whether trustees could properly form the view that they did.25
21 At [321].
22 See Chris Duncan and Henry Brandts-Giesen “The potential vulnerability of reserved powers trusts” (2021) 27(3) Trusts & Trustees 194.
23 See [10](c) and [10](d) above.
24 See, for example, Holland (as trustees of the Tauranga Energy Consumer Trust) v Jonkers, above n 20, at [96]; Garrett v Noble (1834) 6 Sim 504, 58 ER 683; and Trusts Act 2019, s 94.
25 Re Honoris Trust [2017] NZHC 2957, [2018] 3 NZLR 160 at [58].
[45] I accept that the defendants have a strong case that the appointment of the New Trustees was simply so that they could give effect to the 2011 Restructure and meet the government’s stated governance expectations to achieve regulated PSS accreditation as a PSO, being a proper purpose consistent with the Trust’s charitable objects.
[46] The removal of cl 12 is in the same category. The permissive entitlement to consult IRHACE could not override the trustee’s obligation to pursue the Trust’s charitable purpose, which I accept is arguably inconsistent with any requirement that the interests of IRHACE should be given priority. To qualify for accreditation as PSO, this relationship needed to change so that the directors or a governance board would represent the interests of producers and consumers of the priority product and the wider community as informed by stakeholder advisory groups.
Failure to consult
[47] Subject to special prescribed requirements, the following principles generally apply for an obligation to consult:26
(a)Consultation includes listening to what others have to say and considering the responses.
(b)The consultative process must be genuine and not a sham.
(c)Sufficient time for consultation must be allowed.
(d)The party obliged to consult must provide enough information to enable the person consulted to be adequately informed, to be able to make intelligent and useful responses.
(e)The party obliged to consult must keep an open mind and be ready to change and even start afresh, although it is entitled to have a work plan already in mind.
26 Wellington International Airport Ltd v Air New Zealand [1993] 1 NZLR 671 (CA) at 675; Waikato Tainui Te Kauhanganui Inc v Hamilton City Council [2010] NZRMA 285 (HC) at [48]–[51].
[48] As set out above, IRHACE was consulted about the changes that were introduced by the 2021 Restructure. It gave its objections to RRNZ in a letter dated 3 March 2021. There is no evidence about the extent to which IRHACE consulted its own 800 members during the process leading up to that letter.
[49] The basis for the three causes of action about failure to consult relates to the appointment of the New Trustees. The plaintiffs say that the New Trustees were the ones who purported to exercise the variation power in cl 14 to adopt the new Trust Deed, and this occurred without them undertaking their own consultation process as required under cl 12. The plaintiffs say a newly appointed trustee cannot rely on a consultation already undertaken by someone else.
[50] In my view, this aspect of the first to third causes of action is unlikely to succeed. As referred to above, cl 12 is permissive, giving the option of consulting with IRHACE.
[51] In any event, IRHACE had been consulted as a matter of fact and I do not consider that any further steps would have been required by the New Trustees to understand the views of IRHACE before making their decisions in accordance with their obligations under the Trust Deed. IRHACE representatives were part of the working group in 2019 that recommended the Trust should seek to become the PSO for the regulated PSS, and those representatives took part in the working group’s subsequent meetings about the restructure. IRHACE’s lawyers gave feedback on the proposed new draft deed and some changes were incorporated as a result before the deed was executed. In those circumstances, I consider there is a strong argument that a court would not find any substantive breach of an obligation to consult the settlor prior to exercising the power to amend the Deed (if such consultation were mandatory). In my view, new trustees take up their role from the date of their appointment but may generally rely on steps already taken to that point by other trustees or the trustees they replace (subject to exceptions, such as knowledge of trustee breaches or omissions that need to be remedied, but that does not apply on the facts).27
27 Thomas Fletcher (ed) Lewin on Trusts (20th ed, Sweet & Maxwell, London, 2020) Vol 1 at [21−122]: “Still less is the new trustee required to hunt for breaches of trust committed by his
Pecuniary benefits
[52] The plaintiffs plead that there was an improper purpose of conferring personal benefits on the New Trustees. That is said to result from the introduction of cl 22, which provides for trustees to “be entitled to reasonable and proper remuneration for their services in office given the nature, frequency and extent of their duties as Trustees of the Trust” as approved by the board annually.
[53]In response, the Trust submits:
(a)Clause 22 is consistent with cl 12(l) of the 1993 Trust Deed, which provided trustees with the power “to employ and pay reasonable and proper remuneration to any person, firm, company or corporation (including any Trustee)”.
(b)Clause 13 of the Original Trust Deed did not prohibit the payment of trustee remuneration, only private pecuniary profit over and above reasonable remuneration.
(c)In addition, the Milestone 4 Report suggested that board members should be remunerated. It is common for trustees of charitable trusts to have some level of remuneration to ensure highly skilled people are appointed as trustees.
[54] I accept on the evidence that the amendments made to provide reasonable remuneration for the work of board members was not intended as something to personally benefit these particular directors. Rather, that change was consistent with government guidelines to attract suitable office holders, who would come and go over time. Those changes were understandably considered important, given the increased responsibilities that would come with an appointment to run a PSO operating a compulsory PSS.
predecessors, as he is entitled to assume that they have behaved properly, though if a possible breach comes to his notice, he should investigate it.”, approved in Jaffer v Jaffer [2024] EWHC 135 (Ch) at [380]–[383].
[55] There is nothing inherently improper about paying reasonable remuneration to a trustee for their work in that role, particularly where they do so without self-interest for charitable purposes. If authorised, reasonable compensation for their time does not amount to an improper private pecuniary profit.28 Accordingly, the defendants have strong arguments there was no improper purpose of conferring personal benefits on the New Trustees.
Companies Act allegations
[56] The fifth cause of action alleges breaches by the ex-directors of their duties to act in RRNZ’s best interests, to comply with the Companies Act and constitution, and to avoid reckless trading (ss 131, 134 and 135).
[57] In a situation of a corporate trustee, viewing the trust obligations as being owed to the shareholder rather than the beneficiaries is misguided. When performing its duties as a trustee, a corporate trustee has no beneficial interest in the trust assets (other than the right to an indemnity)29 and must act for the benefit of the beneficiaries in accordance with the trust’s objects (in this case, charitable).
[58] I accept the defendants have a strong case that the ex-directors did not breach any duty to act in RRNZ’s best interests when it removed that company as trustee, because that ended RRNZ’s duties and potential liability for any breaches of trust, and there is no corporate entitlement to seek to profit/benefit from trust assets by resisting removal.
[59] A similar analysis applies to the sixth cause of action alleging breach of s 129 of the Companies Act requiring special resolutions for major transactions. The property held on trust by the company does not form part of its beneficial assets,30 so ceasing to be a trustee does not trigger any obligation for compliance with the major transaction provisions, nor does it amount to reckless trading (unless this is triggered
28 Chris Kelly and Greg Kelly Garrow and Kelly The Law of Trusts and Trustees (8th ed, LexisNexis, Wellington, 2022) at [20.78] and [20.82].
29 Arnerich v DHC Assets Ltd [2021] NZCA 225, [2021] NZCCLR 25 at [140]; and Peter Watts, Neil Campbell and Christopher Hare Company Law in New Zealand (2nd ed, LexisNexis, Wellington, 2016) at [1.2.5].
30 Levin v Ikiua [2010] 1 NZLR 400 (HC) at [85]–[86].
by losing the right to an indemnity when the company has ongoing liabilities incurred as trustee).
Conclusion on the merits
[60] For the above reasons, I conclude the Trust will likely defend all causes of action successfully, and it is in the best interests of the Trust for the defendants to defend the proceeding, so it should be entitled to use trust funds to pay the legal costs of doing so.
[61]This is consistent with the Attorney-General’s submissions, that:31
On the available evidence, and assessed at a general level (and against the relief sought), the Court may find that this position is reasonably arguable such that there is a realistic prospect of success.
Breaches of director duties
[62] As referred to above, although the fifth and sixth causes of action are framed as claims for breaches of director duties, they are inherently based on the plaintiffs’ challenge of the 2021 Restructure and whether this was a proper step to take for the Trust (as administered by the corporate trustee, then the New Trustees). The actions of the directors were not undertaken for any reasons of personal gain, nor were the actions taken in respect of any assets beneficially owned by the company. I find that there is no aspect of these director duty claims that should be treated differently and carved out of the scope of the Beddoe order.
[63] This is consistent with recognition by courts that a trustee has powers to support persons jointly defending a trust fund and that “this power is not limited to supporting persons who are themselves entitled to an indemnity from the fund”.32 In Lloyds Bank International (Cayman) Limited v Byleven Corporation, the Court granted an indemnity from trust funds for protectors of the trust, because the protectors
31 With reference to the applicable standard in Wallace v Green, above n 11, at [75].
32 Lloyds Bank International (Cayman) Limited v Byleven Corporation SA [1994–95] CILR 520 at 529–530.
would not be able to defend the proceedings themselves, and their participation was necessary to the trustees’ effective defence of the proceedings.33
[64] Indeed, whether in the Beddoe jurisdiction or not, the fundamental question regarding any expenditure of trust money is whether the trustee is acting reasonably on behalf of the trust.34
[65] The involvement of the ex-directors in these proceedings is necessary for the defence of them, because of their knowledge of the 2011 Restructure and participation in it. However, the relief sought pursuant to all of the causes of action is solely against the Trust, to unwind the 2021 Restructure. The dispute centres on questions of interpretation (issues of law) following the receipt of legal advice, rather than questions of misconduct.
[66] The ex-directors’ involvement is not self-interested. They do not stand to benefit one way or the other from the substantive proceeding. It would be inappropriate to expect them actively to defend the proceeding in those circumstances. They are entitled to independent representation because of the pleaded allegations of breach against them in their capacity as directors, but it is appropriate for the main burden of the defence to rest of the Trust, on the understanding that the Trust’s legal counsel will seek to minimise any duplicated legal costs.
[67] Granting the order enabling the Trust to meet the ex-directors’ costs is also consistent with the terms of the Trust (both before and after the 2021 Restructure):
(a)Clause 18 of the Original Trust Deed provided that “the Trustee shall not be liable for (and shall be indemnified out of the Trust Fund for) and loss of or liability which they may incur by reason of the exercise, manner of exercise, or non-exercise of any of the powers, authorities or discretions conferred by them by this deed or by law”.
33 At 529–530.
34 Trusts Act, s 81. See, for example, Butterfield v Public Trust [2017] NZCA 367 at [20]; and Sunde v Sunde [2019] NZCA 552 at [13]–[14].
(b)Clause 45 of the Trust Deed (as amended in 2022) gives each trustee, former trustee, officer of any trustee or former trustee “a full and complete indemnity from the Trust Fund for any liability which that trustee, former trustee or officer may incur in any way arising out of or in connection with that trustee or officer acting or purporting to act as or on behalf of a trustee of the Trust …”.
[68] Failure to provide an indemnity in the present circumstances would not only undermine the above entitlements, but it could also have a chilling effect on the willingness of people to become office holders for trusts with charitable purposes.35
Hostile litigation
[69] It has been said that, where a beneficiary or third party is making a “hostile” claim against a trustee, it would only be in exceptional circumstances that it was appropriate to grant a Beddoe order.36
[70] In McCallum v McCallum, the Court of Appeal considered such categorisation as being of limited use and the expression “hostile” inaccurate. The Court preferred instead to examine the extent to which the trustee had a self-interest in bringing or defending litigation.37
[71] In this case, none of the ex-directors were acting in self-interest. I have determined that the defendants are likely to succeed in defending the claims, because the 2021 Restructure was undertaken for the purpose of ensuring that the Trust could meet the government’s stated governance expectations to achieve regulated PSS accreditation and become the PSO, consistent with the Trust’s charitable purposes. The circumstances are distinguishable from cases involving trustees disregarding their obligations or acting flagrantly.
35 See Re Keeping Kids Company [2021] EWHC (Ch) 387 at [848] and [911]; and Children’s Investment Fund Foundation (UK) v Attorney General [2020] UKSC 33, [2022] AC 155 at [189].
36 See Re Singh [2024] NZHC 2559 at [28].
37 McCallum v McCallum, above n 4, at [42]–[45], applied in Re Singh, above n 36, at [28].
[72] In my view, the categorisation of these claims as “hostile” does not assist the analysis. If such a label could apply, then it does not change my conclusion above, that on the facts of this case the defendants should succeed on both aspects of the Beddoe order.
Terms of order
[73] Before the amended statement of claim was filed, the Trust estimated legal fees for defending the claims as potentially as much as $1,345,000 (before GST), including up to $280,000 for the second to seventh defendants.
[74] The Attorney-General notes that these estimated costs are high. For assistance, I have been referred to authorities that demonstrate a range of measures courts have adopted to limit the expenditure of charitable funds on legal expenses.38 Against this, the Attorney-General acknowledges the Trust is a defendant in this proceeding, such that it is not in direct control of the scope of the litigation and equality of arms considerations are engaged.
[75] As was the approach adopted in Wallace v Green, on the facts of this case I do not consider that any restrictions are appropriate beyond noting that the orders are limited to the extent that such costs and expenses are reasonably incurred.39 This can ultimately be reviewed by the Court if there is a dispute about whether that requirement is satisfied.
(a)As defendants, they are constrained to being responsive more than would be the case for a plaintiff.
(b)The importance of the issues to the status and value of the Trust as PSO justifies senior and experienced counsel.
38 Spencer v Fielder [2015] 1 WLR 2786 at [37]–[38]; STG Valmet Trustees Ltd v Brennan [1999−2000] Gib LR 211; Singh v Singh [2024] NZHC 2736 at [12]; Toailoa v Eliu [2024] NZHC 2030 at [16(b)]; and Mackintosh v Thomas [2019] NZHC 1585 at [33(a)].
39 Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008, r 9.1 sets out the factors to be taken into account.
(c)Higher charge out rates for such skills does not necessarily translate to greater overall expense, because of the efficiency of counsel of that calibre.
(d)Since the estimate was provided, some duplication of costs has been avoided and those efforts will continue. For example, I excused any appearances for the second to seventh defendants at this hearing of the Beddoe application.
(e)The estimate assumed a one-week witness trial, whereas in my view the substantive claims should be able to be determined in a two or three-day hearing based on affidavit evidence and/or agreed facts. Co-operation to reduce costs in this way is more likely to be achieved between experienced counsel.
(f)Approaching the approval of costs on a staged basis, or requiring ongoing monitoring and reporting, would only increase the costs of the proceeding for the defendants.
Result
[76]I make orders:
(a)confirming that the Trust is justified in defending this proceeding brought against the Trust and the ex-directors by RRNZ and IRHACE, and can have recourse on an indemnity basis to the funds of the Trust in order to meet the reasonable costs of the proceeding (including to meet the reasonable costs of the second to seventh defendants, so long as reasonable efforts are made to avoid duplication);
(b)confirming that the Trust can have recourse on an indemnity basis to the funds of the Trust in order to meet the reasonable costs of making this application (including the reasonable costs of the second to seventh defendants);
(c)excusing any non-compliance with r 19.4A of the High Court Rules; and
(d)directing that the following documents that were not included in the hearing bundles be removed from the Court file (to address the plaintiffs’ concern about the trial judge reviewing privileged legal advice on the merits that has not been seen by the plaintiffs):
(i)First Solicitor’s Affidavit of Georgina Daisy Joy Lomax-Sawyers dated 20 March 2024; and
(ii)Second Solicitor’s Affidavit of Georgina Daisy Joy Lomax-Sawyers dated 31 May 2024.
O’Gorman J
Solicitors/Counsel:
Meredith Connell, Auckland Tom Molloy, Auckland
Russell McVeagh, Wellington Andrew Butler KC, Wellington Mallett Partners, Wellington
James Little, Shortland Chambers, Auckland Crown Law Office, Wellington
0
14
1