S and S Ltd v XYZ Ltd

[2016] NZHC 26

THIS JUDGMENT IS SUBJECT TO THE SUPPRESSION/NON- PUBLICATION ORDERS SET OUT IN PARAGRAPH [136(E)]

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2015-404-433 [2016] NZHC 26

BETWEEN

S AND S LIMITED

Plaintiffs

AND

XYZ LIMITED Defendant

Hearing:	6 and 14 May 2015
Appearances:	R J Katz QC for Plaintiffs K Davenport QC for Defendant
Judgment:	29 January 2016

JUDGMENT OF ASSOCIATE JUDGE R M BELL

This judgment was delivered by me on 29 January 2016 at 3:00pm

Pursuant to Rule 11.5 of the High Court Rules

…………………………………………………….

Registrar/Deputy Registrar

Solicitors:

Lowndes Law (M W McCarthy), Auckland, for Plaintiffs
Davenports Harbour Lawyers (T McLeod), North Harbour, Auckland, for Defendant

Counsel:

R J Katz QC, Auckland, for Plaintiffs

Kate Davenport QC, Auckland, for Defendant

S AND S LIMITED v XYZ LIMITED [2016] NZHC 26 [29 January 2016]

Table of Contents

Paragraph

Introduction  [1]

Background  [10] The Intco Trust  [14] The XYZ Family Trust  [22]

Other proceedings  [29] CIV 2013-404-2404  H v S (the 2404 proceeding)  [29] Illegality  [30] Unclean hands  [33] Indemnity  [34] CIV 2014-404-3   XYZ LTD v S  [37]

A trustee’s indemnity and lien  [38]

Officer’s indemnity  [40] The alleged liabilities  [41] Liability to W Trustees Ltd for defective title to assets  [45]

New Zealand taxes  [64] Intco trustees’ liability for income tax  [68] Intco trustees’ liability for gift duty  [79] XYZ Ltd’s liability for tax  [84] Summary on New Zealand taxes  [86]

Country B’s taxes  [88] Mr H’s tax liability  [92] The caveators’ downstream liability  [94] Criminal offending  [96] Offending by Mr H  [98] Offending by Mr S and S Ltd  [107] Consequences of offending  [108] Voidable disposition of assets  [111] Summary on country B’s taxes  [121] What if the caveators do owe taxes to the taxation

authority of country B?  [123]

A constructive trust argument  [132] Issues not addressed  [133] Outcome  [134]

Introduction

[1]      This is a contested application under s 145A of the Land Transfer Act 1952 to sustain two caveats.  Mr S, an Auckland lawyer, and one of his trustee companies, S Ltd, have each lodged a caveat against the title to a property in Auckland owned by XYZ Ltd, the corporate trustee of the XYZ Family Trust.   The family behind the trust are Mr and Mrs H, former clients of Mr S.  They have fallen out with him and litigation has followed.  This is one of the proceedings.  While he acted for the Hs, Mr S assisted in establishing two trusts, the Intco Trust and the XYZ Family Trust. For a period, S Ltd, of which Mr S was a director, was a trustee of the Intco Trust. Mr S was one of the directors of XYZ Ltd for a time.

[2]      Each caveat claims an equitable lien arising from a trustee’s right of recourse to trust assets to discharge liabilities incurred and recoup expenses paid as a trustee. S Ltd also claims a constructive trust in the alternative.   It says that as a former trustee of the Intco Trust it faces potential liabilities: to a later trustee by reason of a defective title to trust assets, to the New Zealand Commissioner of Inland Revenue and to the taxation authority of country B.   The caveats also claim a liability to vendors of shares which became assets of the trust, but in the hearing Mr Katz QC disclaimed any reliance on that alleged head of liability. Even though assets of the Intco Trust have been distributed, S Ltd says that its equitable lien allows it to follow the  distributions  through  to  the  XYZ  Family  Trust  and  the  investment  in  the Auckland property of funds derived from the Intco Trust.

[3]      Mr S was not a trustee himself, but he relies on provisions in the trust deeds giving an indemnity to officers of corporate trustees.  His caveat relies on the same liabilities as the caveat for S Ltd.   As well, he claims for liabilities he may have incurred as a director of XYZ Ltd, in particular an alleged liability to the Commissioner of Inland Revenue.

[4]      XYZ  Ltd  contests  the  liabilities  alleged  by  the  caveators,  denies  that liabilities incurred by trustees of the Intco Trust may be traced through to assets held by XYZ Ltd and says that the liens claimed are not caveatable interests under the Land Transfer Act. The focus of the decision is the alleged liabilities.

[5]      In applications to sustain caveats under s 145A of the Land Transfer Act, the caveator has the onus of showing a reasonably arguable case for the interest claimed. The interest must come within s 137(1) of the Act.  A personal or contractual right is not enough: the caveator must show an entitlement to or beneficial interest in the land in the caveat.   Something more than a potential interest is required.   Caveat applications are summary and therefore not suited for deciding disputed questions of fact.  On the other hand the court is not required to accept uncritically, as raising a dispute of fact which calls for further investigation, every statement in an affidavit however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself it may be.  For a caveat to lapse it must be patently clear that the caveat cannot stand because there was no ground for lodging it at the time it was lodged or because any such ground no longer exists.  The court has a residual discretion not to uphold a caveat but that is exercised cautiously, as when the caveat could serve no useful purpose or alternative safeguards are available.

[6]      To establish a reasonably arguable case there must be evidence tending to prove  the  facts  relied  on.   Assertion,  whether  in  pleadings  or  affidavits,  is  not enough.   The evidence need not be as extensive as that given in a hearing on the substantive merits.  It may be circumstantial.  But if there is no evidence to prove the facts contended for, the caveator will not have made out a reasonably arguable case for those facts.1   As a qualification to the reasonably arguable standard, where there are allegations of fraud or other reprehensible conduct, it is necessary to show a prima facie case.2

Procedural matters

[7]      XYZ Ltd sought an order under r 7.32 of the High Court Rules to refer to affidavits and pleadings in other proceedings: CIV 2013-404-2404 H v S (the 2404

proceeding) and CIV 2014-404-3 XYZ Ltd v S.   There was no objection to my

1      Re Lord Cable [1977] 1 WLR 7 at 19-20, an interim injunction case, applied in Woodroffe v

Coleman (2011) 13 NZCPR 161(HC) at [16], a caveat case.

2      Schmidt v Pepper New Zealand (Custodians) Ltd [2012] NZCA 565 at [15], Trustees Executors Ltd v Steve G Ltd [2013] NZHC 16 at [63]-[66] and Paugra Holdings Ltd v Harvestfield Holdings Ltd [2013] NZHC 1297 at [78] (overturned on appeal, but not on this point - Paugra Holdings Ltd v Harvestfield Holdings Ltd [2014] NZCA 164, (2014) 15 NZCPR 227).

referring to the first proceeding.  It was important to be able to do so.  There is one technical awkwardness.   Rule 7.32 allows the court to use affidavits in another proceeding only if the other proceeding is between the same parties.  There is not a complete match between the parties.  S Ltd is not a party in the 2404 proceeding. The Hs are parties in that proceeding but not in this one.  Happily the absence of opposition overcame that difficulty.  While I did consider the second proceeding, it has limited if any relevance to the issues in this case.

[8]      There  were  complaints  about  late  filing  of  affidavits  and  about  opinion evidence given by experts without complying with r 9.43 and sch 4 of the High Court Rules.  After the first day I directed further materials on questions of New Zealand taxes.   XYZ Ltd used that opportunity to address the shortcoming under r 9.43.  I have considered all the affidavits filed up to the second hearing day.  Some of the delay in filing evidence seemed excusable: an affidavit from a lawyer in country B on country B’s tax law understandably could not be filed on time.   In allowing all the affidavits, I considered that neither side would be unduly prejudiced and that it was important to have regard to all the evidence, whenever it was filed.

[9]      In a decision in the 2404 proceeding Associate Judge Smith made orders against identification of the parties3  . He gave an anonymised judgment. It would undermine his orders if I were to identify the parties.  Accordingly I also give an anonymised judgment and directions against publication of identifying information.

Background

[10]     Mr H is from country B but renounced his citizenship in September 2013.  He has  a background  in  equities  trading.    Mrs  H  is  from  country A.   She has  an accounting background.   They married in 2004 in country A and have one child. They came to New Zealand in December 2006 as skilled migrants and have permanent New Zealand residence.  They had substantial funds derived from trading

in shares in Intco, a utility in country A.   They transferred those funds to a New

3 H v S [2015] NZHC 310 at [145]-[150].

Zealand bank account.   In February 2007 they approached Mr S and became his clients.4

[11]     The parties give differing accounts as to the transactions in country A.  Mr S goes by Mr H’s instructions in 2007, which he says were reaffirmed later.  Mr H told Mr S that in 2002 he borrowed B$1,000,000 from an associate in country B.   He advanced that plus B$250,000 of his own to Ms HK (who later becomes Mrs H – they had not married at that stage) for her to use as his agent.  The purpose was to acquire shares in Intco.  Under country A’s law, holding Intco shares was restricted to its own citizens.  Ms HK incorporated a company in country A under her sole control to buy and hold the shares.  That was said to be no more than a device to conceal the true nature of the transaction which was the purchase of the shares by Mr H without infringing country A’s restrictions on foreign ownership of Intco shares. The shares were  sold  in  2006  and  the  proceeds  (approximately  B$8,000,000)  paid  into  an account in Mrs H’s name, before they were remitted to New Zealand.  On Mr S’s account, the share dealing was illegal under country A’s law.   It also resulted in evasion by Mr H in paying country B’s taxes on the profits.

[12]     The Hs on the other hand say that the transactions were lawful under country A’s law and that Mr H is not liable to pay country B’s taxes on the profits. PCo, a country A company under Ms HK’s control, borrowed B$200,000 in June 2002 and B$1,000,000 in October 2002 from Acorp, a country B company under Mr H’s control. PCo made two purchases of Intco shares:  one tranche of shares in August- September 2002 for A$8,100,000 and another tranche in October 2002 for A$31,000,000.  Precision sold the first tranche of shares to Ms HK in April 2003 for A$8,000,000.  She sold them in October 2006 for A$90,000,000 and repaid the loan to PCo.  As the sale was more than three years after the purchase, it was not subject to country A’s income or capital gains tax.  In July 2005 PCo sold the second tranche of shares to Mrs H’s sister, Ms M, for A$50,000,000.   Ms M sold the shares in August-October 2006 for A$200,000,000.  Country A tax of A$21,000,000 was paid on the proceeds.  Ms M repaid the loan of A$50,000,000 in November 2006.  She

also made two loans to Mrs H: A$63,000,000 repayable in September 2026 and

4      At different times Mr S was associated with various legal practices. He formed the last practice in August 2007. For this case these changes are not relevant.

A$68,000,000 repayable in November 2026.   The loans to Acorp were repaid in

December 2006 with interest. ACorp repaid its loan to Mr H’s associate.

[13]     For this case relevant differences include:

(a)      Whether the purchases of shares were by one transaction, under which Mr  H  (or  his  company)  was  the  principal  and  Ms  HK  (or  her company) was his agent, or more, loans to Ms HK and  purchases by her;

(b)      Whether any shares were sold before 2006;

(c)       Whether the dealing in the Intco shares breached country A’s law

restricting transactions to citizens of country A; and

(d)      Whether Mr H is liable for country B’s taxes on the profits.

In  so  far  as  there  are  factual  differences,  I  cannot  say  that  one  version  is demonstrably wrong.  I assume that after a hearing on the substantive merits, either account could be upheld.

The Intco Trust

[14]     In April 2007 Mr S gave the Hs a written opinion on their position and how they should formalise that position in accordance with New Zealand law.   He considered that a valid and binding oral trust was established in 2002 under which Mr H was the settlor, Mrs H the trustee and both of them and their children (one existing and any future) were beneficiaries.  The opinion does not address any choice of law questions and does not say which laws govern that trust.  If country A’s law applies, it is hard to see how there could be a trust – I understand that like most legal systems not derived from the common law, country A’s law does not recognise trusts. Following Mr S’s advice to document the trust, Mr H instructed Mr S to prepare a trust deed.

[15]     In May 2007 funds held in the New Zealand bank account were transferred to an account with a foreign bank in Auckland, then to a bank in country C.   The amount sent to the account in C was B$8,000,000.

[16]     On 31 October 2007 Mr and Mrs H signed the trust deed prepared by Mr S for the Intco Trust.  Mr H is the settlor, Mrs H the trustee.  Their son and any further children of Mr H are the final beneficiaries. Discretionary beneficiaries are Mr and Mrs H, the final beneficiaries and any grandchildren, and charities. The trust began on 1 July 2002, the date of the first settlement on the trust. The trust fund is defined:

“Trust fund” means two original tranches in the sum of B$1,000,000 and

B$250,000 respectively, settled on the trustee during July 2002 and October

2003 respectively, and for the specific purposes of investing in Intco shares (ownership of which was then prohibited by country A’s authorities) and all property which may in the future be received or acquired by the Trustee from any source whatever for the purposes of the Trust and the money or investments from time to time representing such property and, unless inconsistent with the context, the income from such property.

The trustees’ powers to pay debts and discharge liabilities are within the general management powers in cl 12.1:

To achieve the objects of the Trust, the Trustees shall have in the administration, management and investment of the Trust Fund all the rights, powers and privileges of a natural person and, subject always to the trusts imposed by this deed, may deal with the Trust Fund as if the Trustees were the absolute owners of and entitled to the Trust Fund and accordingly, in addition to any specific powers vested in the Trustees by law, in dealing with the Trust Fund or acting as Trustees of the Trust, the Trustees may do any act or thing…or enter into any obligation whatever…”

Clause 21.2 is the indemnity provision:

Each Trustee or former Trustee or officer of any Trustee or former Trustee shall be entitled to 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, provided such liability is not attributable to that Trustee’s or officer’s own dishonesty, or to the wilful commission or omission by that trustee or officer, of an act known by that Trustee or officer to be a breach of trust.

As to governing law, cl 22.1 says:

Whilst the trust was originally established under the laws of country A, the laws of New Zealand shall govern the effect and construction of this deed and the courts of New Zealand shall have exclusive jurisdiction.5

Other provisions are those typically found in a deed for a discretionary trust.  The trustees have discretionary powers to distribute income and capital.  The settlor may appoint and remove beneficiaries.  Mr and Mrs H jointly may appoint and remove trustees and may transfer the power of appointment and removal.   A trustee may reside overseas.   The trustees are to act unanimously.   A professional trustee may charge for its services. The trustees may vary or revoke the deed.

[17]     On 16 November 2007 Mr and Mrs H appointed S Ltd as a further trustee.

[18]     By a deed dated 26 March 2010 Mrs H and S Ltd retired as trustees and Mr and Mrs H appointed Mrs H’s sister, Ms M (of country A) as sole trustee of the Intco Trust.  Mr S prepared the documents.  The reason was to ensure that the trust had a non-resident trustee for New Zealand income tax purposes.  The deed contains standard indemnities in favour of the retiring and incoming trustees.  Mr S advised the Inland Revenue Department on 30 April 2010 that S Ltd was no longer a trustee of the Intco Trust and that the foreign trust no longer had a resident trustee.

[19]     On 8 December 2010 Ms M resolved to distribute all the income of the Intco Trust to Mrs H.  The purpose of the distribution was to take advantage of Mrs H’s exemption from New Zealand income tax for overseas investment income.   The exemption was about to expire.   The amount of the distribution was B$8,070,000

The trust’s balance sheet for the year ending 31 March 2011 shows that Mrs H

advanced B$7,500,000 back to the trust.

[20]     There was a further change of trustee on 23 February 2011: by deed Mr and Mrs H removed Ms Y and appointed W Trustees Ltd.  That is a registered company in country Q, a tax haven, but operates out of country V.  Its ultimate holding entity is W Offshore Company.  The proposal for W Trustees Ltd to become trustee had been mooted earlier, in 2008-2009.   Mr S provided W Offshore Company with

information as to the Hs and the trust in that earlier period.

5      I note again my reservation whether the trust could have been established under the law of country A.

[21]     According to pleadings in the 2404 proceeding,6  W Trustee Ltd resigned as trustee on 29 October 2014 and was replaced by KLM Ltd, a New Zealand company.

The XYZ Family Trust

[22]     The XYZ Family Trust was established by a deed signed on 9 December

2010.  Mrs H is the settlor.  The trustee is XYZ Ltd, which was incorporated on the same day.  Mrs H is the sole shareholder.  She and Mr S were the initial directors of the company.  The trust deed is in terms similar to the deed for the Intco Trust, but without any exotic elements.  The trust period runs from the date of the deed.  The indemnity provision is in the same terms as that in the deed for the Intco Trust. Mr H was not initially a discretionary beneficiary, but he was added by a deed of the same date.   By deed Mrs H transferred to him the powers to appoint and remove trustees.

[23]     In  February  2011,  August  2011  and  during  2012  at  Mrs  H’s  direction payments totalling B$4,000,000 were made by the Intco Trust from its C account the New Zealand bank account of the XYZ Family Trust.  These payments were treated in the accounts of Intco Trust as drawings against her beneficiary’s account.

[24]     Under an agreement of 9 August 2011, XYZ Ltd bought half the shares in D for $544,000.  D Ltd (later renamed) was a joint venture investment company.  The vendors were the trustees of the T Trust, a family trust of Mr S.  The source of the funds for the share purchase is the payments Mrs H drew from the Intco Trust.  In the 2404 proceeding the Hs say that XYZ Ltd made further payments totalling

$1,041,500 towards the joint venture.

[25]     In September 2011 XYZ Ltd bought the Auckland property and later built the Hs’ family home there.   Again the source of the funds for the joint venture, the purchase and development in Auckland is the funds from the Intco Trust.  XYZ Ltd does not suggest otherwise.

[26]     On 11 December 2012 Mr S resigned as director of XYZ Ltd.

6 Statement of defence of 30 September 2015 at [143].

[27]     On 29 January 2015 the caveators lodged their caveats against the title to the

Auckland property.

[28]     Other lawyers acted for XYZ Ltd on the purchase of the Auckland property, but that aside, there is no evidence that until then the Hs had any other New Zealand lawyer acting for them on transactions involving the trusts.  They had New Zealand accountants to prepare end of year statements and to assist with compliance with New Zealand tax laws.

Other proceedings

CIV 2013-404-2404 H v S (the 2404 proceeding)

[29]     D  Ltd  made  unsuccessful  investments  in  a  number  of  ventures:  an immigration consultancy, a scheme to help migrants remit their pensions to New Zealand, a foreign exchange scheme and a cupcake business.  The Hs say that there was no return for the $1,585,500 XYZ Ltd invested.  In the 2404 proceeding they and XYZ Ltd have sued Mr S and the trustees of the T Trust.  S Ltd is not a party. The causes of action in the statement of claim of 26 June 2015 are for breach of fiduciary duty (three: against Mr S as lawyer, for receiving secret commissions and in respect of a joint venture), breach of a joint venture agreement, knowing receipt, misleading conduct under the Fair Trading Act 1980 and breach of confidence.  As well as denying large parts of the plaintiffs’ case and putting them to proof, the defendants have pleaded affirmative defences and made a counterclaim.   The counterclaim has three causes of action.  It is not necessary to go into the first two causes of action: the first blames the Hs for incompetence and introducing tainted funds; the second alleges that D Ltd failed because the Hs refused to inject further funds in November 2012.  The affirmative defences and the third cause of action in the counterclaim overlap with issues in this case.

Illegality

[30]     For an illegality defence, the defendants say that the funds invested can be traced back to the proceeds of sale of the Intco shares and were obtained illegally in

breach of country A’s law.  The applicable law pleaded is a regulation of country A which was in force until late 2005.  Under the regulation foreigners required a permit to enter into certain transactions for Intco shares.  The pleading does not specify the kind  of  transactions  caught  by  the  regulation.    Transactions  in  breach  of  the regulation were void under legislation of country A. The defendants say that because the purchases and sales of the Intco shares were in breach of the regulation the Hs, the  trustees  of  the  Intco Trust  and  the  trustee  of  the  XYZ  Family Trust  never obtained clear title to the proceeds of sale of the Intco shares.

[31]     As a second ground for illegality, they say that Mr H was answerable to the taxation agency of country B for the profits made on the sale of the shares.  As a country B citizen he is liable for tax on his worldwide income. Provision 21 of statute A (country  B’s  tax  legislation)  makes  tax  evasion  an  offence  and  gives country B’s government a tax lien for the deficiency.   Because Mr H allegedly evaded tax contrary to provision 21, the Intco and XYZ trustees never obtained title to the funds derived from the dealing in the Intco shares.

[32]     The third ground for illegality is based on alleged non-compliance with New Zealand tax laws.   The defence applies only if no oral trust was established in country A in 2002.  In that case the Intco Trust was established only in October 2007. As the settlor and the trustees were New Zealand residents, tax was payable on the worldwide income of the trust.   The Intco trustees made no returns to the Inland Revenue and paid no tax on the trust’s income.  These breaches of the law are also alleged to taint the funds paid to XYZ Ltd so as to disable it from suing.

Unclean hands

[33]     As a further defence, the defendants repeat the above allegations to say that the plaintiffs cannot claim in equity because of unclean hands.

Indemnity

[34]   The third affirmative defence overlaps the third cause of action in the counterclaim.   Mr S relies on the indemnity provisions of the trust deeds of both

trusts to seek declarations that they are entitled to full indemnity, exoneration and recourse to all the assets of the trusts with respect to any liability he may have to the taxation agency of country B, the New Zealand Commissioner of Inland Revenue and to any subsequent trustees of the Intco and XYZ Family Trusts.  Those potential liabilities are the same as those in issue in this case.   Oddly Mr S seeks a similar declaration for S Ltd, but it is not clear how he can do that when that company is not a party.  No order has been made under s 165 of the Companies Act 1993 allowing a derivative proceeding.   The current trustee of the Intco Trust, KLM Ltd, is a counterclaim defendant.

[35]     The plaintiffs applied to strike out the defences of illegality and unclean hands, as set out in the first and second statements of defence.   They argued that ex turpi causa non oritur actio7  did not apply as they did not have to rely on the illegality to sue.  They also argued that the case involved the enforcement of foreign penal and revenue laws.   Associate Judge Smith dismissed the application.8     His

decision illustrates the court’s normal cautious approach in strike out applications.9

The judgment is in substance interlocutory: in refusing to strike out two affirmative defences, it was setting issues for the substantive hearing, but it was not deciding issues finally between the parties.  Accordingly, no issue estoppel arises.10   It was a decision  on  the  pleadings  applying  the  normal  presumption  that  the  defendants would be able to prove what they had pleaded.  In a caveat application pleadings are not enough: evidence is required to prove a caveatable interest.

[36]     When a caveat is maintained, the court typically orders the caveator to take proceedings to have the interest claimed in the caveat upheld.  The 2404 proceeding is  a  suitable  vehicle  for  Mr  S  to  claim  the  interests  in  his  caveat,  but  as  the proceeding is presently constituted S Ltd cannot use it to vindicate its lien.  It is not a

party to the proceeding and Mr S cannot sue derivatively on its behalf.

7      Lord Mansfield stated the principle in Holman v Johnson (1775) 1 Cowp 341, 343: “No court will lend its hand to a man who founds his cause of action upon an immoral or illegal act.”

8      H v S, above n 3.

9      The plaintiffs applied to review his decision, but withdrew the review application.

10     Joseph Lynch Land Co Ltd v Lynch [1995] 1 NZLR 37 (CA) at 43.

CIV 2014-404-3 XYZ Ltd v S

[37]     XYZ Ltd lodged a caveat against properties owned by the T Trust on the alleged ground that funds it had put into D Ltd could be traced to these properties. That was the basis for the knowing receipt cause of action in CIV 2013-404-2404. An interim order has been made that the caveat not lapse.  The proceeding is of no more than background interest for this case.

A trustee’s indemnity and lien

[38]     A trustee’s right of indemnity and lien arose in equity.  The right of indemnity has statutory recognition in s 38(2) of the Trustee Act 1956.  The basic principles are:11

(a)      As against a third party, a trustee is personally liable for debts and liabilities incurred as a trustee;

(b)The trustee has a right of indemnity out of the trust assets for expenses or liabilities incurred by the trustee by recoupment of expenditure and exoneration of liability;

(c)      The right of indemnity is secured by an equitable lien over the trust assets, which arises by operation of law, confers a proprietary interest by way of security in the trust assets and takes priority over the claims of beneficiaries;

(d)The lien extends to all the trust assets, except for those specifically excluded by the trust deed;

(e)      As the lien is equitable, the trustee can enforce it only by judicial sale or appointment of a receiver, not by sale out of court;

11     I have taken these from Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344, (2008) 74 NSWLR 550. Brereton J in turn drew on Trim Perfect Australia Pty Ltd (in liq) v Albrook Constructions Pty Ltd [2006] NSWSC 153. See also Andrew Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) at [16.6].

(f)       The right of indemnity accrues at the time the obligation is incurred;

(g)Upon bankruptcy or liquidation of the trustee, the right of indemnity vests in the Official Assignee or liquidator;

(h)If the trust property is transferred to a new trustee, the lien survives and the new trustee takes subject to the lien of the old trustee – except in the `case of a bona fide purchaser for value;

(i)A trustee is entitled to retain possession of trust property against a beneficiary until its indemnity is exercised.

[39]     These are general principles only, not specific rules.  Their application may turn on the circumstances in which the indemnity is invoked.  It is important to bear in mind that a trustee’s indemnity has different aspects: reimbursement, exoneration, retention and realisation.12   A trustee who incurs a liability may discharge it out of his own pocket and then reimburse himself from the trust fund.  Alternatively, he may discharge the liability by paying directly from the trust fund, so as to exonerate

himself. A trustee may retain the trust fund until he has been indemnified for present liabilities and for contingent or future liabilities.  A trustee may realise trust assets to meet his expenses and liabilities.

Officer’s indemnity

[40]     The general law does not provide for the case of an officer of a corporate trustee.13     It is possible that an officer of a corporate trustee may incur personal liability for a matter in which the company was acting as trustee.  Clause 21.2 of the trust deeds in this case provides that the indemnity applies not only to each trustee and former trustee but also to their officers and that the indemnity is “full and complete”.  An indemnity in favour of an officer which did not include the usual

equitable lien would not be full and complete. Accordingly Mr S as director of S Ltd

12     See Lynton Tucker, Nicholas Le Poidevin and James Brightwell (eds) Lewin on Trusts (19th ed, Sweet & Maxwell, London, 2015) at [21-043].

13     Lewin  on  Trusts  at  [21-041] suggests that  third  persons  with  fiduciary functions, such  as protectors, have an implied right of indemnity. That does not necessarily apply to directors, who may owe fiduciary duties only to their companies, not to trust beneficiaries.

and former director of XYZ Ltd is entitled to an equitable lien to the extent that he has a right of indemnity under cl 21.2.  XYZ Ltd did not submit otherwise.

The alleged liabilities

[41]     Mr S’s and S Ltd’s caveats rely on their having incurred liabilities during the trusteeships.   For the Intco Trust, the relevant period is from 16 November 2007, when S Ltd became a trustee, to 26 March 2010, when it retired.   For the XYZ Family Trust, the period is from 9 December 2010, when XYZ Ltd became the trustee on the trust’s establishment, to 11 December 2012, when Mr S resigned as director.

[42]     XYZ Ltd’s initial response to the alleged liabilities was to say that none of the alleged creditors had made any demands and Mr S had not given any evidence that any trust creditor was looking to him or S Ltd for payment of any debts incurred as trustee.   The caveators’ case is that S Ltd and XYZ Ltd could be liable and Mr S may face accessory or secondary liability of some sort, even if no demands have been made yet.  It is therefore necessary to look at the alleged heads of liability more closely.

[43]     I  consider  mainly  whether  the  corporate  trustees  are  or  were  under  any liability.  If a trustee cannot be liable, Mr S as its director should not be. Accordingly if the trustee is not liable, it is not necessary to consider separately whether Mr S could be liable.  There was no submission that, even if the trustee was not liable, Mr S as its director could be.  I can think of no case where he would be.  Conversely, if the trustee may be liable, I shall assume that Mr S might also face liability without setting out exactly what that would be.   As an example, if one of the corporate trustees were found liable, Mr S might be liable as an accessory or he might face a contribution  claim  or a  claim  for breach  of duty as  director.   Working out  the particular head of liability is unnecessary.

[44]     As between the corporate trustees, I deal for the most part with the position of

S Ltd as trustee of the Intco Trust.  The caveators say that XYZ Ltd has only one

head of distinct liability – for New Zealand taxes.  In all other cases, I assume that if

S Ltd cannot be liable, XYZ Ltd cannot be either.

Liability to W Trustees Ltd for defective title to assets

[45]     The particular liability claimed in the caveat of S Ltd is:

The right of indemnity is further in respect of a liability the caveator incurred to [W Trustees Ltd] in respect of defective title to trust assets which liability the caveator incurred in carrying out the Trust when the caveator was trustee and in an amount to be determined.

[46]      Mr S’s caveat is to similar effect.  In his affidavit, Mr S explains that he and S may owe duties to W Trustees Ltd.  The duties could arise in two ways: because of liabilities to country B’s taxation agency and the New Zealand Commissioner of Inland Revenue and because as trust officer and trustee they received tainted funds. In this part of the judgment I deal only with the tainted funds aspect.  I consider later

whether there are any liabilities to country B or for New Zealand taxes.14   If there is

no tax liability, it will not be necessary to deal with any question of breach of duty to

W Trustees Ltd.

[47]     When a person makes a defective title claim, they are saying that an asset in their apparent ownership or possession really belongs to someone else or is subject to an interest of that other person.  That requires them to show that there is some other person who owns or has an interest in the asset.  In a caveat application that is to an arguable case standard.  A valid claim by a third party results variously in that person obtaining ownership of the asset or recognition and enforcement of their interest or compensatory relief.  The vulnerability to such adverse rulings gives the ground for a defective title claim.  It is not enough to assert baldly that title to an asset is defective without also showing the adverse claim. The inquiry is accordingly into what claims could be made against W Trustees Ltd by third parties that they own or have an interest in assets of the Intco Trust.   Only if such a claim is made out

could the caveators face any liability of the sort they allege.

14     At [87] and [122].

[48]     The caveators’ case is that Mrs H never had clear title to the funds settled on the Intco Trust because they were the proceeds of illegal dealing in Intco shares in country A.  They invoke ex turpi causa non oritur actio.  Because Mrs H did not have title to the funds, she could not pass title to the trustees, including S Ltd.  They in turn could not pass good title to later trustees.  Mr S refers to W Trustees Ltd in particular because the information he gave to W Offshore Company in [20] above, which he intended W Trustees Ltd to act on, may have been incorrect and there may be some claim against him as a result of W Trustees Ltd acting on that information to its detriment.

[49]     The alleged illegality is a matter of country A’s law.  Foreign law is a matter of fact and needs to be proved.  Section 144 of the Evidence Act 2006 sets out how foreign law may be proved:

(1)       A party may offer as evidence of a statute or other written law, proclamation, treaty, or act of State, of a foreign country—

(a)       evidence given by an expert; or

(b)       a  copy of  the  statute  or other  written  law,  proclamation, treaty, or act of State that is certified as a true copy by a person who might reasonably be supposed to have the custody of the statute or other written law, proclamation, treaty, or act of State; or

(c)       any document containing the statute or other written law, proclamation, treaty, or act of State that purports to have been issued by the government or official printer of the country or by authority of the government or administration of the country; or

(d)       any document containing the statute or other written law, proclamation, treaty, or act of State that appears to the Judge to be a reliable source of information.

(2)       In addition, or as an alternative, to the evidence of an expert, a party may offer as evidence of the unwritten or common law of a foreign country, or as evidence of the interpretation of a statute or other written law or a proclamation of a foreign country, a document—

(a)       containing reports of judgments of the courts of the country;

and

(b)       that  appears  to  the  Judge  to  be  a  reliable  source  of information about the law of that country.

(3)       A party may offer as evidence of a statute or other written law of a foreign country, or of the unwritten or common law of a foreign country, any publication—

(a)      that describes or explains the law of that country; and

(b)      that  appears  to  the  Judge  to  be  a  reliable  source  of information about the law of that country.

(4)       A  Judge  is  not  bound  to  accept  or  act  on  a  statement  in  any document as evidence of the law of a foreign country.

(5)       A reference in this section to a statute of a foreign country includes a reference to a regulation, rule, bylaw, or other instrument of subordinate legislation of the country.

(6)       Subpart 1 of Part 2 (which relates to hearsay evidence) does not apply to evidence offered under this section.

[50]     There is no evidence by the caveators as to the relevant law in country A. The references to the regulation and the legislation in the statements of defence and counterclaim in the 2404 proceeding are pleadings, not evidence.   The caveators have had plenty of time to obtain evidence as to country A’s law: they first put it in issue in their statement of defence and counterclaim of 9 October 2013 in the 2404 proceeding.15    As  something  of  a  let-off  for  the  caveators,  Mr  and  Mrs  H acknowledge that in country A there were restrictions on foreigners owning Intco shares, but at the same time they maintain that they structured their transactions so as to comply with the law.16   On that slender basis, it is arguable for the caveators that it was illegal under country A’s law for Mr H or any corporation under his control to own Intco shares.  Under the caveators’ version of events, Mrs H or her corporation in country A arguably held the shares as agent for Mr H with the result that they

infringed the restrictions under the laws of country A.

[51]     There is also no evidence as to the effects of the alleged breach of the law.  In case it is thought that I have been too strict in not having regard to the pleading in the 2404 proceeding, I do not regard the plea that under country A’s legislation a transaction in breach of the law is void as offering any useful guidance.17  It is

necessary to avoid a trap: just because a word in the A language has been translated

15     Statement of defence and counterclaim of 9 October 2013 at [104] and [139.14].

16     Their joint affidavit of 24 October 2013 at [3], Mr H’s affidavit of 12 December 2013 at [11] and

Mrs H’s affidavit of 12 December 2013 at [5], all in the 2404 proceeding.

17     Statement of defence of 30 September 2015 at [139.5].

into English as “void” does not mean that the consequences in country A’s law are the same as for a transaction that is void under New Zealand law.  For all I know any of the following could apply under the A legislation:

(a)       the courts may refuse to have anything to do with the transaction; (b) the transaction may be unenforceable;

(c)       the parties to the transaction are to be put back in the position they were in at the outset;

(d)an owner may be able to enforce his rights to property against third parties, even though he acquired the asset illegally;

(e)      some doctrine akin to “possession vaut titre” may apply; or

(f)      the repeal of the regulation validated the transactions.

[52]     Instead, in the absence of evidence of the foreign law a New Zealand court applies its general law.18   That is not a universal rule.  In Damberg v Damberg, after reviewing  comprehensively  cases  and  learned  commentators  on  the  question, Heydon JA said:19

To state exhaustively when a court will not assume that the unproved provisions of foreign law are identical with those of the lex fori would be a difficult task.

In this case while the Hs’ acknowledgements allow inferences to be drawn as to regulatory controls on dealing in Intco shares, it is not possible to work out how country A’s law treats the illegality.  In those circumstances it is acceptable for the court to apply its own general law as the law with which it is familiar.  The court is not applying local regulatory laws: it is irrelevant that dealing in Intco shares was not

controlled in New Zealand.  It does not matter that the local law is in statute rather

18     Mount Cook (Northland) Ltd v Swedish Motors Ltd [1986] 1 NZLR 720 (HC) at 726-7.

19     Damberg v Damberg [2001] NSWCA 87, (2001) 52 NSWLR 492 at [162].

than common  law.   The circumstances  here are not  within  any of the cases  in

Damberg v Damberg where courts did not apply local law.

[53]     The applicable local law is the Illegal Contracts Act 1970.   Here I diverge from the arguments in the strike out application in the 2404 proceeding which relied on the common law doctrine ex turpi causa non oritur actio.  While that doctrine may have a place in other parts of the law, it does not apply to illegal contracts and their effects.20    The Act provides for illegal contracts and their effects.  Subject to certain immaterial savings, those rules  displaced the former common law rules, including ex turpi causa non oritur actio.

[54]     Sections 3 and 5 of the Illegal Contracts Act say:

3         Illegal contract defined

Subject to section 5, for the purposes of this Act the term illegal contract means any contract governed by New Zealand law that is illegal at law or in equity, whether the illegality arises from the creation or performance of the contract; and includes a contract which contains an illegal provision, whether that provision is severable or not.

5         Breach of enactment

A contract lawfully entered into shall not become illegal or unenforceable by any party by reason of the fact that its performance is in breach of any enactment, unless the enactment expressly so provides or its object clearly so requires.

[55]     Because there is  no  evidence of the particular  provisions  of country A’s regulation, there is an obvious difficulty in applying them.   But as it seems that ownership of Intco shares by foreigners was prohibited, it is arguable that a contract for a foreigner to acquire shares is illegal.  On the other hand, because the apparent purpose of the enactment was to restrict ownership of Intco shares to country A’s citizens, a contract under which a foreigner sells his shares to a country A citizen cannot arguably infringe.  The caveators have not shown an arguable case that any sales of the shares were illegal contracts.  Moreover, if I have been too strict in not

having regard to the pleadings in the 2404 proceeding, the expiry in late 2005 of the

20     Illegal Contracts Act, s 10 and see Leason v Attorney-General [2013] NZCA 509, [2014] 2

NZLR 224 at [105].

regulation controlling ownership of Intco shares means that any sale of the shares in

2006 could not have breached the decree.21

[56]      In case I am wrong on that, I go on to the effects of the sales being found to be illegal contracts.   The Illegal Contracts Act altered the law on the passing of property under illegal contracts.   Lord Browne-Wilkinson’s summary in Tinsley v Milligan matches the position in New Zealand before the act:22

Neither at law nor in equity will the court enforce an illegal contract which has been partially, but not fully performed.  However, it does not follow that all acts done under a partially performed contract are of no effect.   In particular it is now clearly established that at law (as opposed to in equity), property in goods or land can pass under, or pursuant to, such a contract.  If so,  the  rights  of  the  owner  of  the  legal  title  thereby  acquired  will  be enforced, provided that the claimant can establish such title without pleading or leading evidence of the illegality.  It is said that the property lies where it falls, even though legal title to the property was acquired as a result of the property passing under the illegal contract itself.

[57]     On the other hand, under the act the starting position is that property does not pass under an illegal contract.  Section 6(1) says:

Notwithstanding any rule of law or equity to the contrary, but subject to the provisions of this Act and of any other enactment, every illegal contract shall be of no effect and no person shall become entitled to any property under a disposition made by or pursuant to any such contract:

provided that nothing in this section shall invalidate—

(a) any disposition of property by a party to an illegal contract for valuable consideration; or

(b) any disposition of property made by or through a person who became entitled to the property under a disposition to which paragraph (a) applies—

if the person to whom the disposition was made was not a party to the illegal contract and had not at the time of the disposition notice that the property was the subject of, or the whole or part of the consideration for, an illegal contract and otherwise acts in good faith.

[58]     If the sales were illegal, under s 6(1) the purchasers did not take title to the shares sold to them.  On the other hand, under the proviso ownership would pass to

21     Statement of defence and counterclaim of 30 September 2015, paragraph [139.1].

22     Tinsley v Milligan [1994] 1 AC 340 (HL) at 369. See also Bowmakers Ltd v Barnet Instruments

Ltd [1945] KB 65 (CA) and Singh v Ali [1960] AC 167 (PC).

any sub-purchasers, unless they had notice of the illegality or otherwise did not act in good faith.  The possibility that sub-purchasers would not satisfy the conditions for taking title is too remote to require consideration.  Purchasers of shares in publicly- listed corporations almost never know any title defects of their sellers.  They can be put to one side.  The possibility that purchasers might make claims because they did not obtain title to their shares might support the caveators’ claims.  That possibility also seems slim, given that their purchasers would have the benefit of the proviso and would not need to claim against them and the Hs certainly have no interest in recovering the shares from the purchasers.  Without a claim by a third party to their shares the purchasers would not have claims for defective title.

[59]     Section 7 is relevant as showing the court’s power to give discretionary relief,

including to vest property the subject of the contract:

Notwithstanding the provisions of section 6, but subject to the express provisions of any other enactment, the court may in the course of any proceedings, or on application made for the purpose, grant to—

(a) any party to an illegal contract; or

(b) any party to a contract who is disqualified from enforcing it by reason of the commission of an illegal act in the course of its performance; or

(c) any person claiming through or under any such party—

such relief by way of restitution, compensation, variation of the contract, validation of the contract in whole or part or for any particular purpose, or otherwise howsoever as the court in its discretion thinks just.

(2) An application under subsection (1) may be made by—

(a) any  person  to  whom  the  court  may  grant  relief  pursuant  to subsection (1); or

(b) any other person where it is material for that person to know whether relief will be granted under that subsection.

(3) In considering whether to grant relief under subsection (1), and the nature and extent of any relief to be granted, the court shall have regard to—

(a) the conduct of the parties; and

(b) in  the  case  of  a  breach  of  an  enactment,  the  object  of  the enactment and the gravity of the penalty expressly provided for any breach thereof; and

(c) such other matters as it thinks proper;

but shall not grant relief if it considers that to do so would not be in the public interest.

(4) The court may make an order under subsection (1) notwithstanding that the person granted relief entered into the contract or committed an unlawful act or unlawfully omitted to do an act with knowledge of the facts or law giving rise to the illegality, but the court shall take such knowledge into account in exercising its discretion under that subsection.

(5) The court may by any order made under subsection (1) vest any property that was the subject of, or the whole or part of the consideration for, an illegal contract in any party to the proceedings or may direct any such party to transfer or assign any such property to any other party to the proceedings.

(6) Any order made under subsection (1), or any provision of any such order, may be made upon and subject to such terms and conditions as the court thinks fit.

(7) Subject to the express provisions of any other enactment, no court shall, in respect of any illegal contract, grant relief to any person otherwise than in accordance with the provisions of this Act.

[60]     This section supplants the common law on restitutionary relief in respect of illegal contracts.23  Any claim by the purchasers to be paid back the purchase price of the shares or for compensation would be brought under the section.  For that, their target would be the Hs as the vendors of the shares, not W Trustees Ltd.  In a caveat decision it is not appropriate to evaluate the substantive merits of a possible application for relief under s 7, but one matter is clear.  The claim would be statute- barred under s 4(1)(d) of the Limitation Act 1950: more than six years have passed since the sales.24   Under s 55 of the Limitation Act 2010, foreign limitation laws are matters of substantive law, not procedural law of the forum.   I have applied New Zealand law in the absence of evidence of country A’s limitation rules.

[61]     The only way that the caveators could target W Trustees Ltd (or the current trustee) would be to assert a proprietary claim by contending that under s 6 of the Illegal Contracts Act they retained title to the funds they paid to Mrs H and to trace

and  follow  those  funds  through  to  the  current  trustee.    That  would  also  be  an

23     For the common law, see Charles Mitchell, Paul Mitchell and Stephen Watterson (eds) Goff & Jones: The Law of Unjust Enrichment (8th ed, Sweet & Maxwell, London, 2011) at ch 25 and

35.

24     The Limitation Act 1950 has been repealed by the Limitation Act 2010, s 57, but there is a saving under s 59 for acts and omissions before 1 January 2011.

application under s 7.   It would seek directions for the transfer or assignment of property under s 7(5).  A claim outside the section is not available.  This is another case where Parliament has enacted wide discretionary relief to replace particular rules.25   Any such claim would still seek recovery of a sum of money by virtue of an enactment so as to be statute-barred under s 4(1)(d) of the Limitation Act 1950.

[62]     In addition to s 7 now setting the restitutionary relief available for illegal contracts, it can also be noted that relief would not be available at common law anyway.  The common law will treat the property as having passed.  Illegality is in general a defence to a claim for unjust enrichment26 and there is nothing to show that there would be any departure from that approach in this case.

[63]     This consideration of the alleged illegality said to put W Trustees Ltd at risk of a defective title has shown that there was no breach of the law in obtaining the alleged tainted funds.  The caveators have not shown an arguable case that the sales proceeds were obtained under illegal contracts.   Even if the sales were illegal, the caveators have not shown how anyone could now mount a viable challenge to the Intco trustees’ ownership of the trust assets including any traced proceeds of sales of Intco shares.  The purchasers of the shares could not claim – they are now out of time.  The caveators have not identified anyone else who might claim and I cannot think of any.   Because W Trustees Ltd could not face an arguable defective title claim  on  account  of  tainted  funds,  the  caveators  do  not  have  any  exposure  to W Trustees Ltd on that account.  The unreality of any such claim is also shown by these factors:

(a)       the sales were completed at least nine years ago;

(b)there is no evidence of anyone notifying the Hs or the Intco trustees of any claim to the share sales proceeds;

25     For a comparable case, see s 9 of the Contractual Remedies Act 1979, which replaced the rules for quantum meruit claims following cancellation for breach of contract – Brown & Doherty Ltd v Whangarei County Council [1990] 2 NZLR 63 (HC).

26     Goff & Jones: The Law of Unjust Enrichment, above n 23, at [35-09].

(c)      on the Hs’ account, Ms M was one of the purchasers of the shares – as a later trustee of Intco Trust she must have known of the trustees’ ownership of the proceeds of sale but she has not given notice of any intention to claim against those proceeds; and

(d)any  purchaser  from  country  A  is  likely  to  face  real  practical difficulties in bringing a claim.

In summary the caveators do not have an arguable case under this head of their caveats.

New Zealand taxes

[64]     The particular liability claimed in the caveat of S Ltd is:

The right of indemnity is in respect of a liability that the caveator incurred to the  New  Zealand  Inland  Revenue  Department  in  an  amount  to  be determined, which liability the caveator incurred in carrying out the Trust when the caveator was trustee.

There is a similar claim in Mr S’s caveat, except that his also applies to his directorship of XYZ Ltd.

[65]     After they came to New Zealand the Hs took professional advice on their New Zealand tax position, including from Mr S.  Their tax planning was based on the notion that the Intco Trust had first been established in country A in 2002.  The caveators accept that if that is the case, they do not face any liability for New Zealand income tax.   Their liability arises if the trust was not established until October 2007.  They say that would be the case, if the Hs’ version of events in [12] above is accepted.  A further reason is that as country A apparently did not have a law of trusts, it makes good sense to consider the tax position of the trust on the basis that it was established in New Zealand.

[66]     The Income Tax Act 2007 applies.   It came into force on 1 April 2008. Besides, for this case there are no material differences between it and the Income Tax Act 2004.  Many of the provisions of the tax legislation I shall refer to are hedged

with provisos and qualifications that are not relevant for this case.  I will not set them out or refer to them.

[67]     As migrants to New Zealand, Mr and Mrs H were transitional residents under s HR 8 of the Act.   As they remained resident in New Zealand, their investment income sourced from outside New Zealand was exempt from New Zealand income tax until the end of the 48th month after they came to New Zealand – 31 December

2010.  The exemption provision is s HR 8(1).  Relevantly the effect of s HR 8(1)(d), which applies to certain trust rules, is that distributions of exempt income from foreign-sourced amounts to beneficiaries are not taxable in the hands of transitional residents.  The imminent expiry of the exemption is why the Intco Trust made the distribution in [19] above before the end of 2010.  Once the four years were up, the Hs became taxable on all their income both New Zealand and worldwide.  Their tax accountant says that they have made returns and met their New Zealand tax obligations ever since.

Intco trustees’ liability for income tax

[68]      The income tax position of the Intco Trust is different.  There are two aspects of potential tax liability for S Ltd: for trust income and for taxable distributions to beneficiaries.  Subpart HC of the Act deals with the taxation of trusts.  Trustees must satisfy the income tax liability for their trusts as if they were beneficially entitled to

the trust income.27   Beneficiary income is income derived by a trustee to the extent

to which it vests absolutely in interest in a beneficiary in the relevant trust year.28   To the extent that it is not beneficiary income, an amount of income derived by a trustee is trustee income.29    Under s HC 26 there is an exemption for foreign-sourced trust income derived by a New Zealand resident trustee:30

Exempt income

(1)       A  foreign-sourced  amount  that  a  New  Zealand  resident  trustee derives in an income year is exempt income under section CW 54 (Foreign- sourced amounts derived by trustees) if—

27     Section HC 24(1).

28     Section HC 6.

29     Section HC 7.

30     The exemption is also flagged in s CW 54.

(a) no settlor of the trust is at any time in the income year a New

Zealand resident who is not a transitional resident; and

(b) the trust is not—

(i) a superannuation fund; or

(ii) a testamentary trust or an inter vivos trust of which a settlor died resident in New Zealand (whether or not they died in the income year).

When subsection (3) applies

(2)       Subsection  (3)  applies  for  an  income  year  to  a  resident  foreign trustee of a foreign trust to which sections 22(2)(fb) and (m), and 59B of the Tax Administration Act 1994 applies.

When knowledge offence committed

(3)       Subsection (1) does not apply if the trustee—

(a) is not a qualifying resident foreign trustee for the income year;

and

(b)  is  convicted  of  an  offence  under  section  143A  of  the  Tax

Administration Act 1994; and

(c)  has  committed  the  offence  in  connection  with  information relating to the income year.

Exception

(4) Subsection (3) does not apply to an offence under section 143A(1)(b) of that Act if the information is supplied to the Commissioner after the conviction is entered.

[69]     “Foreign-sourced amount” is defined in s YA1 to mean an amount of income

that is treated as having a source in New Zealand under ss YD 4 and YZ 1.

[70]     Under s HC 27(2) there is an extended definition of “settlor”.  It means more

than the person named in the trust instrument as the settlor:

Meaning of settlor

(2) A settlor of a trust is a person who, at any time,—

(a) transfers value—

(i) to the trust; or

(ii) for the benefit of the trust; or

(iii) on terms of the trust:

(b) provides financial assistance to the trust or for the benefit of the trust with an obligation to pay on demand, and the right to demand is not exercised or is deferred:

(c) is treated as a settlor under section HC 28.

[71]     Mrs H was clearly a settlor; Mr H may have been as well.   It was not suggested that anyone else could be a settlor.   During the relevant period of trusteeship, both were transitional residents in New Zealand, so as to satisfy s HC 26 (1)(a). Any income of the Intco Trust came from the funds held in the account in C – the funds had been moved there before the trust deed of October 2007 and before S Ltd became a trustee.   The account in C was not a New Zealand source, but a

Indian exchange control legislation required the will trustees to remit funds to India.

67     Re Reid (1970) 17 DLR (3d) 199 (BCCA).

68     Above, n 1.

Indian estate duty was payable but the assets in India were not enough to meet that liability.    The  will  trustees  wished  to  remit  the  funds  to  India  to  meet  their obligations under Indian law.  They and the Indian company under their control were vulnerable to  enforcement  proceedings  being taken  against  them  in  India.   The beneficiaries argued that the case involved the direct or indirect enforcement of the

revenue or penal laws of a foreign state.  Rejecting that, Slade J said:69

It is one thing for the court to intervene by requiring trustees to comply with foreign fiscal legislation: it is quite another thing for it to decline to prevent trustees  of a  foreign  trust from complying with  fiscal legislation  of  the country of the proper law, which under foreign law they are entitled and indeed obliged to obey.

And on the exchange control legislation:70

The beneficiaries, however, must in my judgment be regarded by the English court as having succeeded to their interests under this trust at least subject to the rights, even if not the obligations, of the will trustees, in administering the trust, to comply with the exchange control legislation of the country of the proper law of the trust.  There is clear authority that the court will refuse to enforce a contract if its performance would be illegal under exchange control legislation enacted by the country of the proper law of the contract…Similar principles must in my judgment apply where beneficiaries under a will invite the English court to order trustees to act in violation of exchange control legislation enacted by the proper law of the trust.  This is not to say that the English court will intervene for the purpose of positively enforcing such legislation; it will, in my judgment, simply regard any equitable rights possessed by the beneficiaries to have their pecuniary interests protected by the English court as taking second place to the rights of the trustees to comply with such legislation if they think fit.

[127]   Carey Group plc v AIB Group (UK) plc did not involve a trustee discharging a foreign tax liability but dealt with a challenge to an assignment of a lending facility agreement on the basis that it would amount to an unlawful exercise in England of sovereign power by a foreign government agency under the public law of a foreign

state.71  A Northern Ireland bank was a subsidiary of an Irish bank. An agency of the

Irish government established to stabilise and rebuild the Irish economy proposed to acquire from the subsidiary bank the rights under the lending facility.  The customer

objected.    One  of  its  grounds  was  that  the  court  should  not  allow  the  Irish

69     At 23.

70     At 24. The estate duty aspect was dealt with similarly at 25-26

71     Carey Group plc v AIB Group (UK) plc [2011] EWHC 567 (Ch), [2012] Ch 304.

government agency to enforce the provisions of its empowering Irish legislation in

England.  Briggs J rejected that. The caveators rely on this dictum:72

In my judgment a person resident or carrying on business in this jurisdiction is at liberty to comply voluntarily with a request or demand of a foreign government agency, based upon foreign public law, without fear of restraint by the English courts, provided only that he thereby commits no wrong actionable under English law.  Thus for example, a person with tax liabilities in the USA may, although resident in England, perfectly properly pay his US tax, and the Inland Revenue Service of the USA may perfectly properly demand payment of that tax.   The only effect of the non-enforcement principle is that (in the absence of any relevant treaty or convention) the IRS will not be able to bring English proceedings to enforce payment.

[128]   The caveators distinguished Damberg v Damberg.  A father claimed from his children funds he had advanced to them: he claimed a resulting trust.  The children resisted on the ground that he had made the advances so as to avoid incurring German capital gains tax.  The New South Wales Court of Appeal held that foreign fiscal law could not be used to defeat the resulting trust: it would involve the indirect enforcement of German tax laws.  The caveators say that this case does not involve any such indirect  enforcement  of country B’s  tax  laws.   In  their submission, a liability to pay taxes to country B’s taxation authority gave them a right of indemnity from assets of the Intco Trust.  That is recognition but not enforcement of foreign revenue laws and is not objectionable.

[129]   These cases do not help the caveators.  There are two relevant aspects: they are under no practical compulsion to pay country B’s taxes and they are no longer a trustee or an officer of a trustee.   In Re Reid and Re Lord Cable, the trustees’ compliance did not involve the enforcement of foreign revenue or penal laws in the country of the forum, but there was an element of compulsion – in both cases the trustees faced the real likelihood of enforcement in the other country.  In Re Cable the Indian company was vulnerable to enforcement by the Indian authorities.  It was understandable that the courts would allow the trustees recourse to trust assets to indemnify themselves.  A trustee who has been forced under a foreign law to pay a foreign tax incurred during the trusteeship may arguably claim that it has incurred that as an expense for the purpose of the indemnity under s 38(2) of the Trustee Act.

In Carey Group plc v AIB Group (UK) plc on the other hand, not a trustee case

72 At [62].

involving a claim to indemnity, the question of compliance with the foreign law was purely voluntary, although no doubt dictated by a desire to work in with the requirements of the holding company.73

[130]   In this case there is no element of compulsion.  As a New Zealand-resident corporate trustee, S Ltd will not face any enforcement action by country B’s taxation authority in New Zealand.  Mr S’s evidence does not suggest how he could face any enforcement proceedings.  Compliance with country B’s tax law will be voluntary. That would not change if Mr S were to enter country B: he could not claim compulsion by willingly exposing himself to the risk of enforcement.

[131]   There may of course be good reasons for trustees to arrange to pay foreign taxes from trust funds.  It may be in the beneficiaries’ interests.  I am not required in this decision to set the boundaries on trustees’ payments of foreign taxes.  Voluntary payment of foreign taxes may be a proper exercise of powers by trustees, but they do not involve enforceable liabilities and therefore do not raise questions of indemnity. Voluntary payments from the trust fund are within the powers of current trustees, not former trustees.  As the latter are no longer in office, they can no longer manage the trust assets.  The caveators had the opportunity while S Ltd was trustee to raise the question of paying any of country B’s taxes from the trust fund.  As the trustees are required to act unanimously, Mrs H would have had to agree.  It is obvious from this case that she would not have.  Now that it is no longer trustee, S Ltd has no power to manage the trust funds.   Accordingly it is now too late for the caveators to raise payments of country B’s taxes as a ground for indemnity.

A constructive trust argument

[132]   As part of their submissions as to recognition, but not enforcement, of foreign revenue  and  penal  laws,  the  caveators  referred  to  Nanus  Asia  Company  Inc  v Standard Chartered Bank.74    Corporate customers sued a Hong Kong bank for the funds in their accounts.   The man behind the companies had taken part in highly

profitable, but illegal, insider trading in the United States and had moved the funds

73     It had bound itself contractually, but was not subject to the Irish statute.

74      Nanus Asia Company Inc v Standard Chartered Bank [1988] HKC 377, [1990] HKLR 396.

to the Hong Kong bank.  The United States Securities and Exchange Commission took enforcement proceedings in the District Court of the United States, obtained worldwide restraining orders and notified the bank’s New York branch.  The Hong Kong High Court declined to enforce the orders of the United States District Court as that would amount to enforcement in Hong Kong of foreign penal laws.  It found for the bank on another defence, which was independent of the orders obtained by the SEC. Applying banking law and rules of equity the court found that the bank had requisite knowledge of the interests of third parties in the funds – the defrauded investors.   That knowledge placed the bank  under an equitable duty not to act adversely to the interests of the third parties (beneficiaries under constructive trusts) by giving knowing assistance to the bank’s customers and the man behind it.  The case illustrates that rights that do not rely on the enforcement of foreign revenue or penal laws will be enforced.  That proposition does not assist the caveators to get round the difficulty that they do not have a second string to draw on, even if they were under any liability for country B’s taxes.

Issues not addressed

[133]   The position reached now is that the caveators have not made out an arguable case that they are under any of the liabilities they have claimed in their caveats.  That is enough to dispose of the case: the caveats must lapse.  The parties’ submissions covered other matters.  I do not need to decide them.  In case this matter goes further, I note them:

(a)      XYZ Ltd said that even if there were liabilities to the caveators, an equitable lien did not arise.   It submitted that a former trustee can have an equitable lien only where the existing trust assets are insufficient to meet the liability, there is no existing trustee who is willing and able to meet the claim, the former trustee incurred the liability during its trusteeship and there is a real as opposed to a fanciful likelihood that a claim by a third party against the former trustee will be successful.

(b)XYZ Ltd cited older authorities for the proposition that a right of indemnity could not arise until liability had accrued.75   The caveators countered with more recent authorities where rights of indemnity were recognised for contingent and future liabilities.76    In these cases trustees’ rights of retention were in issue.

(c)      The  caveators’  claim  to  trace  liabilities  in  respect  of  the  Intco trusteeship through to assets held by XYZ Ltd is novel.   Their arguments cited authorities showing that a former trustee’s right of indemnity may survive a change of trusteeship.77    They did not however deal with following trust assets distributed to beneficiaries. There is a view that a trustee’s lien is discharged on a distribution of assets to a beneficiary, but it is not clear whether that applies to a lien of a former trustee.78    There is an added wrinkle in this case in that Mr S took an active part in arranging the distribution to Mrs H.

(d)XYZ Ltd contested whether there was a caveatable interest under s 137 of the Land Transfer Act.   It invited me to reconsider or to distinguish  Official  Assignee  v  Menzies.79    Australian  authorities accept that a trustee’s equitable lien is a proprietary interest,80  but Lewin on the other hand says that there is no such interest in the case of a trustee’s right of exoneration.81

Outcome

[134]   If I were to uphold the caveats, I would set conditions requiring the caveators to pursue substantive proceedings to uphold the interests they claim.  In the case of

75     Hughes-Hallet v Indian Mammoth Goldmines Co [1882] 22 Ch D 561 at 564; Re Perkins [1898]

2 Ch 182 at 189; and McIntosh v Dalwood (No 3) (1930) 30 SR (NSW) 332 at 335.

76     Re Pauling’s Settlement Trusts (No 2) [1963] 1 All ER 857 (Ch); X v A [2000] 1 All ER 490; McKnight v Ice Skating Queensland (Inc) [2007] QSC 273; Southern Wine Corporation Pty Ltd v Frankland River Olive Co Ltd [2005] WASCA 236; Re Capricorn Trust [2008] SC Bda (Civ)

38; and Re the Bermuda Longtail Trust [2014] SC (Bda) (Civ) 79.

77     The discussion in Lemery Holdings, above n 11, is valuable.

78     Lewin on Trusts, above n 12, at [26-041].

79     Official Assignee v Menzies HC Auckland CIV-2010-404-5457, 14 February 2011.

80     Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 367; Commissioner of Stamp

Duties for New South Wales v Buckle (1998) 192 CLR 226 at 245.

81     Lewin on Trusts, above n 12, at [21-043(2)], [22-039] and [22-041].

Mr S, that would require him to continue the indemnity cause of action in the 2404 proceeding.  S Ltd would need to start a fresh proceeding.

[135]   I have provided time before the caveats lapse to give the caveators time to consider whether to appeal.  If they do appeal and seek an interim extension of the caveats, they will need to apply for relief under r 12(3) of the Court of Appeal (Civil) Rules 2005.

[136]   I make these orders:

(a)       As from 19 February 2016 the caveats will lapse;

(b)The caveators are to pay XYZ Ltd the costs of this proceeding.  If the parties cannot agree costs, memoranda may be filed;

(c)      Publication  of  this  anonymised  version  of  the  judgment  is  not restricted,  but  distribution  and  publication  of any non-anonymised version of the judgment are prohibited without leave of a judge;

(d)      The court file may not be searched without leave of a judge;

(e)      Publication of the names of the parties to this proceeding and of any information which may tend to identify them is prohibited, including information identifying Mr and Mrs H, Intco, the Hs’ trusts and the trustees of those trusts;  and

(f)       Leave is reserved to apply for variations of orders (c) to (e).

………………………………….

Associate Judge R M Bell