Spencer v Spencer HC Wellington CIV-2001-485-000857
[2011] NZHC 2114
•19 October 2011
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IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2001-485-000857
BETWEEN BARRY ROBERT GIUSEPPE SPENCER Plaintiff
ANDBARRY ROBERT SPENCER First Defendant
ANDDAVID JAMES UNDERWOOD PHILIP JOSEPH VAVASOUR BARRY ROBERT SPENCER Second Defendants
ANDSPENCER GROUP LIMITED Third Defendant
Hearing: 6 & 7, 12 & 13 April, 20 May 2011
Counsel: J C Corry for Plaintiff
Defendants in person
Judgment: 19 October 2011
RESERVED JUDGMENT OF HON JUSTICE FRENCH
as to Liability
SPENCER V SPENCER HC WN CIV-2001-485-000857 19 October 2011
Index
Introduction ................................................................................................................[1] Factual background ....................................................................................................[4] What is the standing of the former Mrs Spencer in these proceedings? ..................[34] Was Mrs Spencer’s caveat responsible for the failure of the trust? .........................[41] Does clause 7 of the order afford the defendants a complete defence? ...................[44] Was Spencer Group Limited indebted to the № 2 Trust?.........................................[49] Fees charged by Spencer Group Limited
What were the fees charged?........................................................................[85]
Was it a breach of the trust deed to charge the fees and for the trust to pay them? ..........................................................................................................[101]
Were the fees excessive? ............................................................................. [113] Barry Spencer’s drawings from the trust ...............................................................[126] Was there net income available to be paid to Robert? ...........................................[137] Payment of fees to Spencer Group .............................................................[151]
Rent not charged to Spencer Group ...........................................................[155] Charging depreciation to income ...............................................................[163] Life insurance premiums ............................................................................[171] Charging of interest on the Spencer Group debt........................................[174]
Are the trustees personally liable? .........................................................................[182] Summary of key findings ................................................................................... [200](i) Remedy and further directions ...............................................................................[201]
Introduction
[1] The plaintiff, Robert Spencer,1 is a beneficiary of the Spencer Family № 2
Trust. Under the terms of the trust, he was entitled to be paid $200 per week out of net income. He is also a beneficiary as to capital.
[2] Robert says that in breach of trust, the trustees failed to make the $200 payments and wrongfully diverted trust funds to the benefit of one of the trustees, his father, Barry Spencer. Robert seeks restoration of lost trust assets and compensation.
[3] The trustees strongly deny the claims.
Factual background
[4] Robert Spencer is the son of Barry and Alida Spencer. There are two other
children of the marriage Alida Junior and James, both also beneficiaries of the № 2
Trust.
[5] Barry is a real estate agent and property developer. In 1980 he established a trust known as the Spencer Family Trust. For convenience, I shall call this trust the
№ 1 Trust.
[6] In 1992 Barry and Alida Spencer separated. Relationship property proceedings were issued in the Family Court. They were subsequently settled by way of a consent order dated 19 July 1995 under s 182 Family Proceedings Act
1980.
[7] The scheme of the consent order was that certain specified assets were to remain in the № 1 Trust for the benefit of Mrs Spencer and the children of the marriage, while the “balance of the assets and any liabilities of the Spencer Family
trust” were to be settled on a new trust, the № 2 Trust, for the benefit of Barry and
the children.2
[8] Under the order, the trustees of the new № 2 Trust were to be appointed by Barry and counsel for the children, with the terms of the trust deed to be “in like terms (with necessary modifications)” to those of the № 1 Trust.
[9] The order went on to say at clause 6:
The Trustees of the № 2 Trust shall resolve to apply the net income of such
Trust firstly:
(a) In payment of the sum of $200.00 per week for the maintenance and support of [Robert], a child of the marriage. (b)
In payment of school fees of Alida Antonia Laura Spencer, a child of the marriage.
(c)
In providing, according to the discretion and duty of the Trustees, for the general welfare, education and advancement in life of the 3 children of the marriage.
[10]
At
the time of the Court order, the defendants Mr Underwood
and
Mr Vavasour were trustees of the № 1 Trust.
[11] After the Court order, they resigned and were appointed trustees of the new
№ 2 Trust.
[12] Mr Underwood is an accountant, and his firm was responsible for preparing the accounts of both trusts while he was a trustee. Mr Vavasour is a property developer. Both are close friends of Barry. There was a third trustee of the new № 2
Trust, a solicitor, Mr Brandon. He however resigned in 1996 and was later replaced by Barry himself. There is some uncertainty as to exactly when Barry first became a trustee. He first appears as a trustee in the accounts for the year ending 31 March
1999. In evidence, however, he said that it was November 1996.3 As he was entitled
to do, Barry also elected to become a beneficiary of the № 2 Trust.4
2 The former Mrs Spencer now goes under the name of Mrs Miculetich. For convenience, I refer to her throughout this judgment as Mrs Spencer or the former Mrs Spencer. I refer to both Mr Robert Spencer and Mr Barry Spencer by their first names.
3 Affidavit of Barry Robert Spencer, 27 April 2007, paragraph 31.
4 Clause 5.2 of the Court order provided that Barry Spencer may at his discretion be a beneficiary.
[13] According to the № 2 Trust‟s first set of annual accounts, capital of $227,851 was transferred to it from the № 1 Trust. This appears to have consisted of the
following:
Buildings (141-147 Thorndon Quay) $874,000 Office furniture and equipment $53,500 Total $927,500 less mortgage to NZI
$900,000
balance building/office equity $27,500 add Spencer Group debt
$184,512
add motor car $12,000 add cash $3,839 Total trust equity $227,851
[14] The property at Thorndon Quay was a commercial property held on a ground lease from the Wellington City Council. It was the № 2 Trust‟s key income earning asset.5
[15] Its other main asset, according to the opening accounts, was the Spencer
Group debt. Spencer Group Limited was a company incorporated in 1990. From
1995 onwards, Barry was a director, along with Mr Underwood. Spencer Group occupied space in the Thorndon Quay building. It employed Mr Spencer as its manager and at least for some period of time paid him a salary of $15,000 per annum.
[16] During the trust‟s first accounting period, rent of $11,250 payable to the trust by Spencer Group was added to its debt of $184,512, which had been transferred from the № 1 Trust. That made the total amount shown as owing by Spencer Group
$195,762.
[17] There is a dispute in the evidence as to whether this amount of $195,762 was or was not an enforceable debt.
[18] After the № 2 Trust was established, eight fortnightly sums of $400 were paid from the trust‟s bank account to Robert. The payments abruptly stopped in December 1995. When Robert‟s mother and her solicitors sought an explanation, Mr Underwood replied (in a letter dated 20 December 1995):
… the trustees do not have the resources to commence making payments and that position will continue until Thorndon Quay has been relet and the income flow is sufficient to generate a surplus.
[19] Robert‟s mother continued to press for payment in 1996. She also requested a copy of the trust deed, and information detailing how the money of the trust was being spent. Mr Underwood refused the request, relying on a clause in the trust deed that beneficiaries did not have any rights to obtain information relating to the trust. He also advised Robert‟s mother that the trust was still in financial difficulties.
[20] There matters appear to have rested until Mrs Spencer‟s solicitors wrote to the trustees in February 1998, again asking for information. When no reply was received, proceedings were issued in Robert‟s name against the trustees, seeking an audit of the trust and also seeking an order if required varying the trust deed so as to render it compliant with the Family Court order.
[21] The proceedings were served on Messrs Underwood, Vavasour and Spencer on 22 May 1998.
[22] In July 1998, the trustees‟ solicitors provided Mrs Spencer‟s solicitors with a copy of the trust deed. It then became apparent that in breach of the Family Court order, the trust deed was not “in like terms” as the original № 1 Trust deed.
[23] Subsequently, a consent order was made on July 2001 rectifying the trust deed.
[24] Two of the most important changes effected by rectification were the deletion of the clause denying beneficiaries access to information and the inclusion of a more restrictive clause regarding payments to trustees.
[25] Since then, Spencer Group has been struck off the register.6 As for the trust, although it made a profit on the sale of the Thorndon Quay property in October
2000, it is insolvent. Its only assets are said to be tax losses.
[26] The trust‟s accounts for the years 1996 to 2004 show a combined loss of
$214,771.
[27] When Mrs Spencer and her advisers finally obtained copies of the accounts, they had a number of concerns, which led to the issuing of the present proceedings.
[28] The statement of claim alleges there was net income from which Robert could have been paid, that Barry made a significant number of drawings from the trust for his own personal benefit, and that property belonging to the trust has been dissipated, mainly as a result of Spencer Group charging the trust fees that were both prohibited by the trust deed and excessive.
[29] Eight causes of action are pleaded. Several of them overlap. [30] The claims are as follows:
(i)As against Barry in his personal capacity and the trustees, order sought for restoration of improper charges levied against the children‟s current accounts.
(ii)As against the trustees, breach of trust in failing to administer the Spencer Group debt. Inquiry sought as to the amount of income which the trust ought to have received.
(iii)As against the trustees, breach of trust in paying excessive management fees to Spencer Group. An order for restoration
of $211,074 is sought.
6 The company was struck off on 16 June 2004 .
(iv)As against the trustees, breach of duty to administer trust competently and prudently. An inquiry is sought into losses sustained.
(v)As against the trustees, depriving Robert of the benefit of the trust. Compensation sought in the sum of $60,000 for arrears of income together with interest.
(vi)As against Barry in his personal capacity, an inquiry into what sum Barry should pay the trust for compensation for the use of trust funds borrowed without any payment of interest.
(vii)As against Barry in his personal capacity, an inquiry into the direct and indirect benefits arising out of his drawings from the trust, the trust‟s payment of excessive fees to Spencer Group and the failure to charge any interest on the Spencer Group debt.
(viii)As against Spencer Group, an order requiring it to account for the fees and interest on the debt it owed the trust.
[31] For their part, the defendants deny any wrongdoing. They contend they have complied with the trust deed and in any event are protected from personal liability under an exemption clause. They further contend that if anyone is to blame for the trust failing, it is Mrs Spencer herself.
[32] The specific issues requiring determination are as follows:
What is the status of the former Mrs Spencer in these proceedings? Was Mrs Spencer‟s caveat responsible for the collapse of the trust?
Do clauses 7 and 8 of the Court order provide the defendants with a complete defence?
Was Spencer Group indebted to the trust?
Was charging of management and other project fees a breach of the trust deed and were the fees excessive?
Should Mr Spencer have paid interest on drawings he took from the trust, and should he be required to account for drawings charged to the
children?
Was there net income available to be paid to Robert?
Are the trustees exempted from personal liability?
[33] I turn now to consider each of these issues.
Discussion
What is the standing of the former Mrs Spencer in these proceedings?
[34] The plaintiff Robert Spencer is 35 years of age. He is mentally disabled.
[35] Barry contends these proceedings should be struck out because his former wife obtained a guardianship order in relation to Robert without consulting him, and by giving false evidence that he (Barry) took no interest in Robert.
[36] I have no way of determining whether this allegation is true or not.
[37] However, as grounds for striking out the present proceedings, the argument is misconceived. Mrs Spencer‟s right to instruct solicitors to issue these proceedings on behalf of Robert is derived not from the guardianship order, but rather an order appointing her Robert‟s personal property manager.
[38] There is no challenge to the validity of that order.
[39] The defendants also alleged that the former Mrs Spencer was only bringing these proceedings out of spite and as part of a long-standing vendetta.
[40] It was clear there is a great deal of hostility between the former Mrs Spencer and Barry. I also accept, as claimed by the defendants, that Mrs Spencer was not a particularly reliable witness. But nor for that matter was Barry himself. Further, the issues on which Mrs Spencer was unreliable were not germane to my determination. Suffice it to say, for reasons that will became apparent, I consider there are a number of disquieting features about the operation of the № 2 Trust which, viewed objectively, would amply justify the issuing of proceedings.
Was Mrs Spencer’s caveat responsible for the failure of the trust?
[41] On 27 February 1998 Mrs Spencer, acting as Robert‟s agent, caused a caveat to be lodged against the Thorndon Quay property. In evidence, she said she did this because of the trustees‟ failure to continue the payments to Robert. The caveat was removed when the property was sold in October 2000.
[42] The defendants allege that had it not been for the caveat, the trust would have been able to make a profit and so have been in a position to make distributions to Robert and other beneficiaries. They contend the caveat prevented refinancing and redevelopment which would have made all the difference.
[43] However, the evidence established that proposed redevelopment plans were not very far advanced at all and that no approach was ever made to Mrs Spencer to ask her to remove the caveat so that these could proceed.7 The defendants say no approach was ever made because they believed it would be pointless. That may well be, but it is not a basis for blaming the caveat for the financial collapse of the trust. When Mrs Spencer was formally asked to remove the caveat so as to enable the sale
to go ahead in 2000, she complied.
Do clauses 7 and 8 of the Family Court order afford the defendants a complete defence?
[44] Clauses 7 and 8 of the Family Court order stated:
7 A letter was sent in November 1998 by Mr Vavasour, asking Mrs Spencer to remove the caveat in exchange for his agreeing to speak to the other trustees about assisting with the children‟s dental treatment (plaintiff ‟s bundle of documents, page 183).
7.This order is subject to and conditional upon the NZI Life agreeing to accept a principal reduction of $150,000.00, to reduce interest to a sum not exceeding 11% p.a. and suspending payment of premiums on collateral life policies for a period of not less than 3 years.
8. The Trustees of the № 2 Trust only may waive this condition.
[45] It is common ground that only one of the three conditions specified in cl 7 was ever satisfied. Accordingly, the defendants argue that the Court order, and hence the obligation to pay Robert, never came into force.
[46] In my view, this argument is entirely without merit.
[47] The trustees accepted the trust property from the № 1 Trust and assumed control over it. They did so in their capacity as trustees of the № 2 Trust which had been created pursuant to the Court order. Over the ensuing years, they dealt with that property as if they were unconditionally entitled to do so, including selling it. They also consented to a High Court judgment rectifying the trust deed in order to comply with the Family Court order. At no stage until now did they ever suggest that the reason they were not paying any money to Robert was because the order had
not become unconditional.8
[48] By their conduct, the trustees clearly waived the conditions. Alternatively, if waiver is not applicable because the trustees were previously unaware of the existence of cl 7 then in the circumstances they are clearly estopped from claiming the order never became unconditional.
Was Spencer Group Limited indebted to the № 2 Trust?
[49] The opening accounts of the № 2 Trust show the current assets as including a
debt owing by Spencer Group to the trust in the sum of $195,762.
[50] Unfortunately, there is no documentation in existence – or at least none that was produced – showing how that debt was created.
8 In closing submissions Barry Spencer contended that the trustees had “attempted to operate as if the Court order was in force”. However, the evidence established that none of the trustees were aware of the existence of clause 7.
[51] As I have already mentioned, the notes to the opening accounts show total capital transferred from the № 1 Trust as being $227,851. The equity in the Thorndon Quay property accounts for only $27,500 of that $227,851. There was also a car valued at $12,000 and cash of $3,839. By a process of elimination, that means the amount of the Spencer Group debt that was transferred from the № 1 Trust must have been $184,512. According to Mr Underwood, that figure increased by
$11,250 during the course of the № 2 Trust‟ first financial year on account of rent
owed by Spencer Group. That brought the total amount owing by Spencer Group to
$195,762 ($184,512 plus $11,250).
[52] The № 2 Trust never charged Spencer Group with interest on the debt. Nor were any steps taken to recover it. The trustees in fact progressively reduced the debt by writing it off against management fees which Spencer Group charged the trust, fees which the plaintiff says should never have been charged in the first place and which were excessive.
[53] At the hearing, the trustees‟ justification for taking no action in respect of the
debt owing by Spencer Group varied.
[54] Mr Vavasour said it benefited the trust not to call it up because the trustees knew Spencer Group could not pay it.9
[55] In an affidavit sworn in 2007, Barry said the reason it was not enforced was because it would be unfair. He deposed that the $184,512 was “debt that I took on board from the marriage” and that for “accountability [sic] purposes this matrimonial debt was included as a debit against the № 2 Trust”. His affidavit goes on to say that it would be unfair for Spencer Group to be required to pay the № 2 Trust interest on
a debt in which it had no interest or derived any benefit.10
[56] Subsequently, in oral evidence, Barry claimed the debt was a fictitious debt
and the product of “creative accounting”, designed to conceal the fact the trust was
9 Notes of evidence, page 266, line33.
10 Affidavit of Barry Spencer at paragraphs 131-133. It is assumed the word „not‟ in paragraph
133 (“… it would be unfair if SGL should not be required to pay the No. 2 Trust interest…”)
was typed in error.
insolvent from its creditors. He described the accounts as having been massaged in order to make it appear the trust was solvent. He claimed further that rather than being an asset of the trust, it was actually a liability. When it was put to him that it was a deception to treat a liability as an asset, he said it was a “survival tactic”.11
[57] When asked how, if it was a fictitious debt, it could have been used as a contra for the management fees, Barry said that question would have to be put to Mr Underwood.
[58] When it came to Mr Underwood‟s turn to give evidence, he stated that
Barry‟s evidence betrayed a lack of understanding of accounting.
[59] Mr Underwood testified that in the absence of any documentation showing how Spencer Group came to owe the money, “the only logical and possible” explanation was that the current account debts for the beneficiaries in the № 1 Trust must have been transferred to the № 2 Trust, and that Spencer Group must have assumed or taken on the liabilities of the beneficiaries. It would, he said, have looked a lot better for the accounts to show the money as owing by a company than by individual family members, the former Mrs Spencer being the one with the greatest debit.
[60] Unlike Mr Spencer, Mr Underwood said it was a real debt. There was, however, no point in charging interest to family members.
[61] Although Mr Underwood claimed it was a real debt, at the same time he also accepted the debits were likely to have been debts which the beneficiaries knew nothing about and which it was never intended to enforce. This was because Mr Underwood adopted an accounting practice of „parking‟ distributions to beneficiaries by showing them as debits in their respective current accounts with a view to later writing them off “when the time was right”.
[62] The propriety of this accounting practice was questioned by an accountant called on behalf of Robert. The accountant, Mr Berry, drew a distinction between
distributions to beneficiaries and genuine advances or loans. In his opinion, it was improper to record distributions as debts owing by beneficiaries in the balance sheet. Only advances or loans to the beneficiaries should be treated in that way.
[63] That the Spencer Group debt represented the beneficiaries‟ current accounts from the № 1 Trust was an explanation Mr Underwood had previously given Mrs Spencer‟s lawyers in a letter dated 22 September 2000. In the letter, he claims to have researched the file and sighted a journal entry.
[64] However, all the key records were withheld from Mrs Spencer and are now said to be lost.
[65] The lost records include the records of the № 1 Trust for the year ended March 1995. Those records are of critical importance in this case because they would show what the assets of the № 1 Trust were immediately prior to the court order of July 1995. Without those records, there is no way of knowing for certain that all the assets that should have been transferred from the № 1 Trust did in fact end up in the № 2 Trust. The records would also shed light on the Spencer Group debt and the validity of Mr Underwood‟s claims about the debt being the beneficiaries‟ current accounts from the № 1 Trust.
[66] Mr Underwood‟s assertion that the beneficiaries‟ accounts were “the only logical and possible” explanation for the Spencer Group debt was based on the accounts of the № 1 Trust for the previous year (ie the year ended March 1994). These show beneficiary current accounts totalling $207,463. There is no record of what happened to the current accounts, and they do not show up as an asset in the №
2 Trust. Therefore, Mr Underwood says that must be what the Spencer Group debt represents.
[67] However, the amount of $207,463 does not correspond with the amount of the Spencer Group debt of $184,512, and the reason for their apparent disappearance is just as likely, if not more likely, to be that they were written off12 as opposed to being assumed for some unexplained reason by Spencer Group.
[68] Further, there are other assets shown in the № 1 Trust‟s 1994 accounts which likewise never turned up in the № 2 Trust, namely Oriental Bay Development and a debt owing to the № 1 Trust by A Fagan (a relative of Barry) in the sum of $258,994. The № 1 Trust sold units 8 and 9 of Oriental Bay in November 1994 and according to a settlement statement the net proceeds of $582,119.07 were paid from the solicitors handling the sale (Brandons) to Mr Underwood‟s firm. There are no records as to where that money went. The plaintiff suspects some may have been advanced to Spencer Group. Alternatively, the plaintiff suggests that Spencer Group may have assumed the Fagan liability after A Fagan had repaid some of the debt to Spencer Group.
[69] In closing submissions, under the heading “Brandon & Fagan Sums”, Barry states there was a balance remaining in the accountants‟ trust account after the № 2
Trust was established, but that payments were made from it on an as required basis whenever there was a shortfall in the cashflow. He further states that these funds helped keep the № 2 Trust afloat. The submission is not, however, supported by the trust‟s cash book, nor is there any record of these balance funds in the № 2 Trust‟s accounts, which there should have been if they were not the Spencer Group debt.
[70] For his part, Mr Underwood says the Fagan $258,994 was wrongly shown in the № 1 Trust accounts as a credit – it should have been a trust liability – and that the Oriental Bay monies were all applied to paying off debt, presumably before the № 2
Trust was established. That, he argues, is the reason why there is no mention of those funds in the № 2 Trust accounts, and why they cannot provide an explanation for the Spencer Group debt.
[71] In April 2002, an accounting firm which had taken over the administration of the № 1 Trust wrote to Mr Underwood asking him to provide them with any records he was still holding so that they could complete financial statements for the years ended 31 March 1995 onwards.
[72] Mr Underwood replied, refusing to hand over the records on two grounds. First, because he was being sued in this proceeding. Secondly, because he had not
been paid for substantial work which he said he had undertaken to bring the records and accounts up to date.
[73] I pause here to interpolate that in my view neither of those two grounds justified Mr Underwood in refusing to disclose the documents or at least allow them to be inspected.
[74] The new accountants wrote a second time in April 2002, asking Mr Underwood to reconsider. They specifically pointed out that the information being sought included information relating to the position of the № 1 Trust immediately prior to the date of the Court order.
[75] Mr Underwood never responded to that letter.
[76] In cross-examination, he acknowledged that at the time of this correspondence in April 2002 he still had the relevant documents in his possession. That was a month after the defendants had made discovery in this proceeding, the verified list of documents being sworn in March 2002. These crucial records were not discovered. They should have been.
[77] It was not until this year that the plaintiff‟s representatives were informed for the first time that the financial records relating to the 1995 year for the № 1 Trust had been lost.
[78] They are not the only missing records. Mr Spencer admitted to having “thrown out” a whole pile of diaries “a year or two ago” regarding trust affairs which would have contained relevant data.
[79] Mr Underwood, who is now retired, blamed the unavailability of the financial documents on Mrs Spencer‟s delay and her failing to honour an undertaking to meet unpaid accounting fees. He submitted it meant Robert was unable to prove his case.
[80] It was however unclear exactly what accounting fees if any were owing. Mrs Spencer denied giving any such undertaking. Mr Underwood did not produce
any invoices, and none of the financial records for either trust have any reference to a liability for accounting fees.
[81] In any event, in my view, the primary responsibility for the records rests fairly and squarely with Mr Underwood and his former firm. As the custodian of trust records which he knew were central to a current proceeding in the High Court, he had a duty to take care of them.
[82] That, combined with the defendants‟ failure to discover the records at a time when by Mr Underwood‟s own admission they were still in his possession, together with the conflicting explanations given by the defendants has led me to draw an adverse inference that the documents would not support the defendants.
[83] The situation is obviously highly unsatisfactory. However, the accounts of the № 2 Trust record the existence of a debt which the trustees by their actions treated as valid and enforceable. In the absence of any documentary evidence supporting the defendants‟ claims, I accept Mr Corry‟s submission that the only appropriate finding is that the debt was owed by Spencer Group.
[84] I also accept Mr Corry‟s submission that the trustees breached their duty to the beneficiaries in failing to take any steps to recover this debt or charge payment of any interest on it.
Fees charged by Spencer Group Limited:
a) What were the fees charged?
b) Was charging the fees a breach of the trust deed?
c) Were the fees excessive?
What were the fees charged?
[85] The trustees say they engaged Spencer Group to manage the Thorndon Quay property on the basis of an agreement that Spencer Group would charge a management fee of 7.5 per cent on both rent and outgoings (except mortgage payments).
[86] Like the trustees‟ evidence about the Spencer Group debt, the evidence as to exactly when this fee agreement was reached was highly unsatisfactory.
[87] The trustees rely on a letter dated 24 April 1995.13 The letter, written on Spencer Group letterhead, is addressed to the trustees of the Spencer Family Trust. It was signed by Barry on behalf of Spencer Group, and marked „approved‟ on 26
April by Mr Underwood and Mr Vavasour. The letter states:
RE: Management Fees/Office Rental – Spencer Family Trust
A brief note to confirm in writing the details of our agreement regarding fees for managing the affairs of the Spencer Family Trust and the Rental of office space for Spencer Group Limited.
Spencer Group Ltd will be paid 7.5% of all receipts and disbursements made on behalf of The Spencer Family Trust as from the time of Barry and Alida‟s seperation [sic], 28/9/92.
Office space occupied by Spencer Group Ltd, Top floor 141 Thorndon Quay, will be offset against the management fee.
The office rental has been agreed at $100 per week or $5,200 p.a. applicable from the same date.
[88] The first point to be noted about this letter is that it purports to record an agreement between Spencer Group and the then trustees of the № 1 Trust, not the №
2 Trust. As at 24 April 1995, the № 2 Trust had not yet come into being. There is no written record of the trustees of the № 2 Trust ever resolving to adopt the agreement.
[89] The second point is that the letter was written only a few months before the Family Court order. Its existence was never disclosed to Mrs Spencer‟s lawyers, who must have been in the throes of negotiating the terms of the consent order. Yet the backdating of the fees to 1992 meant that by the time of the consent order there was a potential liability of approximately $100,000 – a liability, moreover, which if it existed should have been shown in the opening accounts of the № 2 Trust, which it was not. The № 2 Trust, it will be recalled, was to take on the liabilities of the № 1
Trust under the consent order.
[90] It is difficult to avoid the conclusion that the letter was a pre-emptive strike designed to advantage Barry at his wife‟s expense and secure some form of leverage over the yet to be formed № 2 Trust, something to be produced if and when required. Mr Underwood and Mr Vavasour accepted that in their capacity as trustees of the №
1 Trust, they did not seek any external advice about the reasonableness of the agreement. Further, when asked why the date of the separation had been selected, Mr Vavasour‟s only explanation was that it was for want of any other better date, an answer which was plainly not credible.
[91] As I have said, there is no documentary evidence of the № 2 trustees ever adopting this agreement. On the contrary, the minutes of the № 2 Trust‟s inaugural meeting on 28 July 1995 state under the heading of „Management‟:
Mr B R Spencer has offered to manage the trust‟s investments without fee.
The trustees resolved to accept that offer on a trial basis, to be reviewed at 31
March 1996.
[92] There is no written record of any such review ever having taken place. In evidence, Barry claimed that when he made the offer, he did so in the belief the profitability of the Thorndon Quay building could be turned around in a relatively short time. However, he said, it soon became apparent that he had been overly optimistic. There were so many problems with tenants and the building that managing it was more or less a full-time job. Accordingly, he went to the trustees and informed them how much time he was having to spend managing the property. It was, he says, agreed to bring the review date forward and Spencer Group “began
charging management fees from August 1995 at the previously agreed rate.”14
[93] In so far as this suggests the review took place in August 1995, it would mean it must have became apparent to Mr Spencer within less than a month that his hopes had been overly optimistic.
[94] The first invoice was not however issued until August 1997. It was for $5000 including GST and was expressed to be part-payment of fees owed. There were then no more invoices until four were issued in May 1999, which was after the first
proceedings were issued and a time when Barry was proposing to sell the Thorndon Quay property. The four invoices purport to relate to the years 1995 to 1999. Further invoices followed, the last being November 2000.
[95] In explanation for the delay between 1995 and 1999, Barry said he did not want to invoice the trust until its financial position improved. When it was pointed out to him in cross-examination that the trust‟s position was worse in May 1999, he then claimed the invoices were issued for “tax reasons”.
[96] Mr Vavasour testified that the issuing of the series of invoices in May 1999 was the result of an agreement between the three trustees and that it had “a relevance to the way the trust was being operated”.15
[97] The total fees invoiced by Spencer Group amount to $256,152, GST exclusive. Of that sum, $167,752 comprises the management fees charged on the 7.5 per cent basis, while the remaining $88,400 comprises fixed fees charged for various specified projects. There is an element of double-charging, because a significant proportion of the specific activities concern leasing and management of outgoings which were part of the percentage management fee charge.
[98] The $167,752 management fees represented 21.65 per cent of the trust‟s total
income.
[99] The trust paid the bulk of Spencer Group‟s fees by writing them off against the debt Spencer Group owed the trust. The total written off was $195,762. In addition, the trustees made cash payments to Spencer Group totalling $53,784. According to Mr Spencer, that left at least $157,290 still owing by the trust, which he said included the pre-1995 fees for which no invoices have ever been issued.16
[100] Mr Corry submits that none of these payments, charges or write-offs should have been allowed by the trustees, principally on the ground that Spencer Group as the vehicle of Barry was not only expressly prohibited by the trust deed from being
paid, but on principle that as a trustee he must not obtain any benefits for himself
15 Notes of evidence, page 259, line 22.
16 Affidavit of Barry Spencer, paragraph 94 and notes of evidence page 149, line 7.
from the trust. As regards Mr Underwood and Mr Vavasour, the submission is that they knew he was a trustee and they ought to have known he was not entitled to make any charges against the trust.
Was it a breach of the trust deed to charge the fees and for the trust to pay them?
[101] The general principle is that, subject to any express provisions in the trust deed, a trustee must act gratuitously.17
[102] Clause 11.03 of the unrectified trust deed stated that no trustee shall be disqualified by his office as such from contracting with the trustees or required to account to the trustees arising from the contract.
[103] However, the rectified trust deed is different. It provides in cl 5(m):
5THE trustee shall have and may exercise either alone or together with any other person or persons the following powers authorities and discretions namely:
…
(m) TO employ and pay any person, firm, company or corporation (including any trustee other than the Settlor) to do any act of whatever nature relating to the trusts hereof including the receipt and payment of money without being liable for loss incurred thereby AND IT IS DECLARED that any trustee for the time being hereof being a solicitor or accountant or other person engaged in any profession or business and any firm of which any such person may be a partner shall be entitled to charge and be paid all proper professional and other charges for any business or act done whether by such person or such firm in connection with the Trust Fund or income thereof including acts which a trustee could have done personally BUT IT IS EXPRESSLY DECLARED that neither the Settlor nor the Settlor‟s personal representatives shall be entitled to charge or be paid for any act service or business performed by the Settlor as such trustee or to apply to the Court for commission under the provisions of Section 72 of the Trustee Act 1956 (or any statutory modification or re-enactment thereof) or to receive or be paid any commission or share of commission granted by the Court upon the application of any other trustee hereof or in any other manner to receive or be paid any benefit whatsoever for any act service or business performed as a trustee hereof;
17 Peach v Jagger (1910) 30 NZLR 423.
[104] Legally, rectification is retrospective, so that it is this latter clause which must apply.
[105] Barry was the settlor of the № 2 Trust and, according to his own evidence, by the time the first invoice was issued in August 1997 he was also a trustee.
[106] The trustees however say they did not employ Barry, but rather Spencer Group, and that Barry issued the invoices as the manager of Spencer Group not as a settlor nor as a trustee. The work he performed was not work performed by him as a trustee. The defendants say further that someone had to do the work and it made sense for Barry to do it, given his expertise, his in-depth knowledge of the building and the fact he had a vested interest in achieving success.
[107] I do not accept those arguments.
[108] The clear thrust of cl 5(m) is that the settlor is in a special category and that while other trustees may charge for work undertaken for the benefit of the trust, the settlor, even if he or she is also a trustee, may not do so. I also accept Mr Corry‟s submission that for consistency, and in order to make sense of the clause, the words “as such trustee” mean “while a trustee”.
[109] It also cannot be right that the intent and purpose of this clause could be defeated by the simple expedient of using a limited liability company in circumstances where for all intents and purposes the company in question is the alter ego of the settlor.
[110] While Barry sought at times to deny this, I am satisfied on the evidence he and Spencer Group were (in substance, if not in form) one and the same. The original purpose in creating the company was to provide a legal entity available for Barry in the event of his bankruptcy and once the immediate threat of bankruptcy had dissipated, the company remained as a vehicle for his personal benefit. He was a director and at all material times a shareholder. Company records show a single joint shareholding, Mr Spencer, Mr Vavasour and Mr Underwood jointly holding 100 shares. There was no suggestion that Messrs Vavasour and Underwood, or indeed
anyone else for that matter other than Barry, was intended to receive any benefit. Barry had complete autonomy in the running of the company. He was not accountable to anyone else. Significantly, the trustee minutes quoted above record that it was Mr B R Spencer who made the offer to manage. In several instances, invoices issued in the name of the company speak of “my fee”.
[111] In those circumstances, I have come to a clear view that for the purposes of cl 5(m) the word “settlor” should be given a wide interpretation so as to include any legal entity controlled and beneficially owned by the settlor.
[112] It follows that Barry acted in breach of trust by charging the trust, and that it was a breach of trust for the trustees to pay or contra the fees.
Were the fees excessive?
[113] I am also satisfied that even if Barry was entitled to charge fees, the management fees charged were excessive.
[114] At the hearing, the plaintiff called expert evidence from an experienced valuer and property manager, Mr O‟Sullivan.
[115] Mr O‟Sullivan testified that a reasonable management fee for the years
1995-2001 for a building in Thorndon Quay, Wellington, would usually be assessed on a fixed fee basis. Such a fee would take into account negotiating with lessees for rent reviews, leasing with real estate agents for new tenants, ensuring all maintenance was completed in a good and tradesmen-like manner and the payment of all outgoings. Every three months a brief report would be supplied to the owners.
[116] In Mr O‟Sullivan‟s opinion, based on the rental details of the Thorndon Quay property for the relevant years and his recall of the building, a fair management fee would have been a fixed fee in the sum of $8500 per annum with an annual CPI adjustment.
[117] The defendants sought to discredit Mr O‟Sullivan on the grounds of his lack
of familiarity with the Thorndon Quay building. However, that overlooks the key
point of his evidence which was not disputed, namely that since the late 1980s it has been virtually unheard of for a property manager to charge percentage fees on a commercial building in Wellington. Indeed, Mr O‟Sullivan said he did not know of any property manager that charged a percentage fee on a commercial building. Neither could the defendants name any, even although two of them are property developers.
[118] It was put to Mr O‟Sullivan that his estimate did not take account of the complexities of managing the Thorndon Quay building, including its tenant mix, its poor state of repair, its limited car parking space, the difficulties of attracting reliable tenants, its high turnover of tenants and the number of vacancies.
[119] That the building was extraordinarily difficult and complex to manage was a central plank of the defendants‟ case. However, the claim sits uneasily with the fact that the building was completely refurbished at a cost of $1m in the late 1980s and with two management reports written by Barry. Barry only produced the two reports. One of those reports was written in 1996, the other in 1999. In the 1996 report, Barry said the future outlook was very positive. In the 1999 report he said all was not well, but according to Mr O‟Sullivan the problems identified in the 1999 report did not indicate anything unusual or justify claims of special complexity.
[120] My sense of the evidence, viewed in its entirety, was that the problems were over-stated. However, on the assumption that comments about the building being complex were fully justified, Mr O‟Sullivan accepted that a premium of another
$3000 or $4000 over and above his figure of $8500 could be warranted.
[121] It follows that at best for the defendants, the very most that could reasonably have been charged is approximately $12,000 a year.
[122] In coming to this conclusion, I have not overlooked the evidence of the defendants that in 1999 they sought the views of a Mr Hastings about the reasonableness of the fees. Mr Hastings provided a letter, dated 6 December 1999, which states:
I have given thought to the Management Fee I would require in respect of the above property.
Bearing in mind the multiplicity of Tenants, I would expect to secure a fee of at lease [sic] 7.5% and possibly more, in order to have me accept such a Management Project.
[123] Mr Hastings was not however called to give evidence. The letter does not say what his instructions were or what his 7.5 per cent relates to. Further, it transpires that although Mr Hastings was familiar with the building, he is a real estate agent and does not manage properties.
[124] In all those circumstances, I prefer the evidence of Mr O‟Sullivan and do not attach weight to Mr Hasting‟s letter other than the fact it shows the trustees did seek some advice in 1999.
[125] Having regard to all of the above, my conclusion is that the management fees were excessive and that it was a breach of trust to charge any fee in the first place.
Barry Spencer’s drawings from the trust
[126] From the outset (ie even before he became a trustee) Barry was put in charge of the trust‟s cash book and had sole signing rights on the chequebook. According to his evidence, that meant quite long periods would go by where the trustees did not know what payments might have been made out of the cash book. Unless something was required, there would be no consultation about monies going in and out of the trust.18 However, Mr Underwood and Mr Vavasour were at pains to emphasise that although there were relatively few formal meetings of trustees as such, Barry kept them well informed and they approved of these payments.
[127] Also from its inception, the trust paid out a monthly sum of $1000 expressed to be for „CJ Oakley rent‟19 and charged to Barry as a beneficiary in the accounts. The payment was paid out of available cash in the bank account and was made on a
regular basis until November 1999.20
18 Notes of evidence, page 146, line 16.
19 C J Oakley is Barry‟s second wife.
20 The payment was charged to Barry‟s current account and not charged against the income of the
trust.
[128] In addition to this payment, Barry took drawings from the trust for other personal living expenses including even golf club subscriptions. All this was done with the consent of Mr Underwood and Mr Vavasour.
[129] In the final accounts of the trust, Barry was shown as owing the trust
$19,323, most of which was written off in the final year as a distribution.
[130] Barry also took drawings from the trust to take the children out for meals and buy them birthday and Christmas presents. Somewhat surprisingly, these were charged to the children‟s current accounts and shown as debts owing by the children to the trust. They too were later written off as distributions.
[131] Mr Corry argues that Barry should be required to restore the drawings charged to the children, and also to pay interest on all the money he borrowed, both that charged to his own account and to the children‟s account.
[132] For his part, Barry says he does not see anything wrong with charging many of his personal expenses to the trust:21
137.At paragraph 11 of Mr Corry‟s memorandum, he records that the trustees charged many of my personal expenses to the Trust. I do not see what is wrong with this. The № 2 Trust contained more or less everything that I took from the relationship property. Of course I should have also benefited from the Trust. My expenditure was very modest.
138.I am quite sure that Alida charged expenses against her Trust. I do not criticise her for doing so. That is because I accept and acknowledge that the № 1 Trust effectively owned the property that she received through the division of our matrimonial property.
[133] Mr Underwood accepts that there were drawings by Barry for his own personal benefit. However, Mr Underwood submitted it was fanciful to call them substantial or to require interest to be charged when for most of the time they were
“more than covered by interest free loans” from Barry‟s second wife, Mrs Oakley.
21 Affidavit of Barry Spencer.
[134] Likewise, Mr Underwood said he had had no concerns about Barry taking drawings – for example to pay golf club subscriptions – when Mrs Oakley was paying money into the trust.
[135] Barry‟s drawings were not, however, always covered by loans to the trust by
Mrs Oakley. He should have paid interest.
[136] I also accept Mr Corry‟s submission that to allow those drawings, while at the same time representing to Robert‟s mother that there was no money to pay Robert, was not the action of responsible trustees.
Was there net income available to be paid to Robert?
[137] The Court order provided that:
6.The trustees of the № 2 Trust shall resolve to apply the net income of such Trust firstly:
(a) In payment of the sum of $200.00 per week for the maintenance and support of [Robert]
[138] In breach of the Court order, the trustees did not ever pass a formal resolution as such, but in my view nothing turns on that.
[139] Under the Court order, there was no discretion about the $200 payments to Robert. He had an entitlement as of right to the money, subject only to the proviso that there was sufficient net income.
[140] In evidence, both Mr Vavasour and Mr Underwood confirmed their
knowledge and understanding of Robert‟s entitlement.
[141] It was common ground that the term “net income” meant income after expenses. However, what is very much in dispute was whether there was sufficient net income available to pay Robert.
[142] The trust received rental income of $974,681 during the five years and 72 days it operated commercial leasing at Thorndon Quay (28 July 1995 to 6 October
2000).
[143] However, apart from a profit in 1996 and 2001, it made losses in each year of its operation as follows:
1996 $263
1997 -$13,479
1998 -$37,872
1999 -$129,526
2000 -$50,308
2001 $24,822
2002 -$2,603
2003 -$6,068
2004 $0
Total Loss $214,771
[144] The trustees rely on these accounts to show that there was no income available to pay Robert. According to Barry, the servicing of debt and insecure tenancies were the most significant factors in the Thorndon Quay property not returning a profit.22
[145] However, Mr Berry, the accountant called on behalf of Robert, questioned the accuracy of the accounts. He testified that there was income that had been omitted, namely rent not charged to Spencer Group, and interest on the Spencer Group debt. He also questioned a number of items in the accounts that had been in his view wrongly charged against income, namely depreciation, the payment of the management fees and the inclusion of payments of insurance premiums as an interest expense.
[146] After adjusting the figures in the financial statements on account of these various matters, Mr Berry concluded there would have been sufficient to pay Robert
22 Affidavit of Barry Spencer, paragraph 110.
$10,400, every year except in the year 2000 when there would have been accumulated income from the previous years from which to make the payments.
[147] He also concluded that the trust would have had the cash funds to make the payments to Robert, either by charging Spencer Group interest on its debt or obtaining repayment of the principal.
[148] The defendants challenged Mr Berry‟s evidence on the grounds of lack of independence. He is now the accountant for the № 1 Trust. They also argued that what was at issue was accounting practice on which opinions could legitimately differ without it amounting to a breach of trust.
[149] Through counsel‟s oversight, Mr Berry had not read the Code of Conduct for Expert Witnesses prior to giving his evidence. However, he retrospectively confirmed on oath that he had complied with all of its requirements. The fact he is the accountant for the № 1 Trust, and so has dealings with Mrs Spencer, is a matter to be taken into account. However, he did not at any time give me the impression he was advocating for Mrs Spencer. I was impressed with Mr Berry as a witness and found his evidence helpful.
[150] I have carefully considered each of the matters raised by Mr Berry, and have reached the following findings.
Payment of fees to Spencer Group
[151] For the reasons already discussed, I consider that none of Spencer Group‟s
fees should have been charged against income.
[152] That said, I accept someone would have had to do the work and accordingly, in calculating what compensation is properly payable to Robert, it would be reasonable to take that into account.
[153] In my view, having regard to the evidence of Mr O‟Sullivan and making a realistic allowance for claims of special complexities, I consider that a reasonable management fee would have been in the vicinity of $10,000 per annum. That would
make the total management fees no more than $54,000, as compared with the fee charged by Spencer Group on a percentage basis of $167,752 excluding GST.
[154] Mr O‟Sullivan‟s evidence was limited to the management fees, and accordingly I make no findings as to the reasonableness or otherwise of the project fees.
Rent not charged to Spencer Group
[155] Spencer Group occupied a part of the Thorndon Quay building, as indeed at one point did Mr Vavasour.
[156] No rent was however paid.
[157] Barry claims rental of $100 per week was agreed, but that payments were offset against management fees owed. However, the accounts do not show that.
[158] Mr Underwood‟s evidence on this issue was vague. He stated at [42] of his brief of evidence:
Rent: There is confusion about any rental charge to Spencer Group Limited for being able to operate from the № 2 trust property. It was a sensible arrangement as it meant Mr Spencer was on the premises and was able to deal with tenants, inquiries, agents and problems. It also looked better for anyone looking at the rental income if considering a purchase. If a real tenant had wanted the space, the company would have moved out immediately. The matter is dealt with fully in Mr Spencer‟s evidence.
[159] He did not provide any details of the “sensible arrangement”.
[160] Mr Underwood did, however, later in his evidence appear to accept there should be an adjustment to take account of rental.
[161] There is some uncertainty in the evidence as to the extent of the adjustment. Barry says the agreed rental was $100 per week, relying on the April 1995 letter, but in a letter to the trust dated 11 June 1999 he had recorded an allowance of $200 per week for office space for Spencer Group. According to his affidavit sworn in 2007, the figure in the letter was “an error”. In cross-examination it emerged that it was no
error, but a deliberate mis-statement so as to try and make the building look more attractive to prospective buyers. While none of this reflects well on Barry, I am prepared to accept that the agreed rental was $100 per week.
[162] At $100 per week, that means income for the trust of approximately $21,600 has been omitted up to the date Barry vacated the property in October 1999.23
Charging depreciation to income
[163] The trust‟s financial statements show depreciation as a cash expense.
[164] In evidence, Mr Berry contended this should not have been done. He stated that while it was legal at the relevant time to claim depreciation for tax purposes on a building, it was not appropriate to take it into account when assessing net income for the purposes of making distributions to beneficiaries. Mr Berry‟s approach was submitted to be supported by authorities drawing a distinction between the
administration of a trust and accounts prepared for tax purposes.24
[165] This was disputed by Mr Underwood. He relied on two clauses in the trust deed.
[166] The first was cl 5(j) which empowers the trustees to make final and binding determinations on what expenses ought to be paid out of capital and income respectively. However, in my view it would be wrong to extend this power to depreciation, which is not an expense but a tax allowance.
[167] The second clause Mr Underwood relied upon does however make an express reference to depreciation. Clause 5(e) states:
TO postpone the sale of any property whatsoever (whether a trustee investment or not) for so long as the trustee thinks fit without being liable for any loss thereby resulting to the Trust Fund or income thereof AND IT IS DECLARED that subject to writing off any usual depreciation against income the whole of the net income received by the trustee shall be deemed
23 Mr Berry‟s figure was $26,600, but this does not appear to take into account the fact that
Spencer Group vacated in October 1999.
24 Garrow and Kelly Law of Trusts and Trustees [22.1.5].
to be income and on the sale or falling in of any property no part of the proceeds of such sale or falling in shall be applied as past income;
[168] Mr Corry submitted that what was contemplated by this clause was the setting aside of a reserve for depreciation out of income as sanctioned by s 15(2) of the Trustee Act. That was not what happened here. All the trustees did in this case was to claim a tax deduction.
[169] Unfortunately, Mr Berry was not made aware of the existence of cl 5(e), and
I therefore do not have the benefit of his expert opinion.
[170] On its face, the clause does authorise the trustees to write off usual depreciation against income, and in the absence of evidence to the contrary, I consider that usual depreciation is capable of meaning the depreciation rate set by the Inland Revenue Department. I am not satisfied I should depart from that interpretation, and accordingly find that the trustees were entitled to deduct depreciation from income.
Life insurance premiums
[171] The mortgage on the Thorndon Quay property was secured by collateral life insurance policies on the Spencer children.
[172] The premiums on these policies were included as an interest expense during the 1996 to 2001 years. The amount involved was in total $60,745.
[173] I accept the evidence of Mr Berry that to charge these against income was wrong. The premiums were not an expense, but payments helping to create an asset. To be consistent, however, the adjustment also needs to take account of the fact that when the policies were cashed in, the proceeds ($74,437) were treated as a recovery of income, whereas it was in fact a capital recovery.
Charging of interest on the Spencer Group debt
[174] Spencer Group never paid interest on the debt it owed the trust.
[175] The interest which the trust was paying to NZI on its mortgage ranged from
7.5 per cent for a brief period in 1998 to 12 per cent for the period March 1995 to October 1988. The average rate was in excess of 10 per cent, and accordingly Mr Berry suggests it would be equitable for Spencer Group in turn to have paid interest to the trust at the rate of interest at 10 per cent for the period from 19 July
1995 onwards. That would have generated income for the trust of $170,284.
[176] Alternatively, Mr Berry says the trustees could have called up the debt and used the money to reduce the NZI mortgage, with considerable saving of interest.
[177] All that of course pre-supposes Spencer Group was in a position to repay the debt or pay interest, which the defendants say it was not.
[178] The only evidence that would suggest some funds were available is Spencer Group‟s cash book. It shows that by 8 August 1995, $180,000 had been paid out through the bank account to commercial call or term deposit, and $100,000 paid back, a net outflow to commercial call or term deposit of $80,000. Those funds remained available, albeit on a reducing basis, for several months. There was also evidence that between October 1995 and February 1996, withdrawals were made from the commercial call account totalling $57,500.
[179] Mr Corry relies on this to support an argument that at least $80,000 was available to answer the debt if payment had been sought in August 1995.
[180] The defendants‟ response is that such an argument is untenable in the absence of any evidence as to the other demands on that money.
[181] It is correct that there was no evidence as to the other demands on that money. But, in my view, the defendant‟s response fails to address the more fundamental point that it was incumbent on the trustees to at least make some attempt to recover the debt or seek interest. They did not even initiate inquiries. I am satisfied from the evidence that they had no intention of ever requiring repayment and that at least $80,000 was available to answer the debt if payment had been sought in August 1995.
Are the trustees personally liable?
[182] For the reasons articulated above, I am satisfied that the trustees acted in breach of trust in the following respects:
Failing to make payments to Robert when there was net income available.
In the case of Barry Spencer, charging fees to the trust through the mechanism of a company for his own personal benefit.
Paying fees to Spencer Group.
Writing off the Spencer Group debt against the fees charged by Spencer
Group.
Failing to take steps to recover the debt owed by Spencer Group. Failing to charge interest on the debt.
Failing to charge interest on advances made to Barry. Failing to recover rent from Spencer Group.Charging the children‟s current accounts with advances made to Barry.
[183] The trustees submitted that even if they were found to be in breach of trust they were not personally liable, because of a trustee exemption clause in the trust deed.
[184] The statement of defence does not plead the exemption clause, despite an Associate Judge giving the trustees an opportunity to file an amended pleading raising the issue.
[185] However, any deficiencies in the statement of defence have not prejudiced the plaintiff. The trustees‟ reliance on the clause at the hearing did not come as a surprise.
[186] In those circumstances, my view is that the trustees who were not legally represented should be permitted to raise this defence and have it considered.
[187] The clause in question reads:25
11. NO trustee acting or purporting to act in the execution of the trusts of these presents shall be liable for any loss not attributable to his or her own dishonesty or to the wilful commission or omission by him or her of an act known to be a breach of trust and in particular no trustee shall be bound to take or be liable for failure to take any proceedings against a co-trustee for any breach or alleged breach of trust committed by such co-trustee.
[188] Clause 11 is a standard exclusion clause commonly found in trust deeds. The scope of such clauses has been the subject of some controversy, particularly in England.26
[189] As a first instance Judge in New Zealand, I consider the following principles apply:
(i) Limitation or exclusion clauses such as cl 11 are valid.
(ii)There is, however, an irreducible core of obligations owed by a trustee to a beneficiary which is fundamental to the concept of a trust and which cannot be excluded, namely the duty of the trustee to perform the trust honestly and in good faith for the
benefit of the beneficiaries.27
25 The same clause was in both the rectified and unrectified deeds.
26 See the discussion A S Butler & D J Flynn “What is the Least That We Can Expect of a Trustee?
Exclusion of Trustee Duties and Exemption of Trustee Liability” [2010] New Zealand Law Review 459 and the differing opinions in Spread Trustee Company Ltd v Hutcheson & Ors [2011] UKPC 13.
27 Armitage v Nurse [1998] Ch 241 (CA).
(iii)It is the trustees who bear the onus of establishing that they are protected by cl 11.28
(iv)The exemption clause is to be construed narrowly against the trustees.29
(v)Acting dishonestly means simply not acting as an honest person would in the circumstances.30
(vi) The standard is an objective one.31
(vii)A trustee may still be held to have acted dishonestly even although the trustee does not stand to gain personally from the impugned actions.32
[190] The general tone of the trustees‟ evidence in this case was very much one of righteous self-indignation. They expressed a strong sense of outrage at being sued. It was clear they regarded the former Mrs Spencer as not only vindictive but also ungrateful for all the support they claim to have given her and the family in the past during difficult times. They consider they have done absolutely nothing wrong and have worked very hard in the interests of the beneficiaries.
[191] The indignation appeared deeply felt.
[192] In trying to reconcile the trustees‟ injured air with the unacceptable way they administered this trust, I was driven to the conclusion that they may well have believed what they were doing was morally justifiable. There was, as Mr Corry put it, something of a mind-set. They all, for example, seemed strongly imbued with the idea that the relationship property settlement was unfair to Barry, and that Mrs Spencer was unreasonable. They were also strongly imbued with the idea that
payments need not be made to Robert because he was well provided for by the № 1
28 Wong v Burt [2005] 1 NZLR 91.
29 Walker v Stones [2000] 4 All ER 412.
30 Royal Brunei Airlines v Tan [1995] 3 All ER 97.
31 Wong v Burt, above n 28.
32 Armitage v Nurse above n 27.
Trust. I gained the clear impression that this was a key reason for not making the payments, despite the trustees knowing such a consideration was irrelevant under the terms of the Court order.33 I also gained a clear impression that all three men essentially regarded the № 2 Trust as Barry‟s property, for all intents and purposes to do with as he saw fit, even although they knew he was only one of the beneficiaries and that Robert had priority. Hence, for example, the failure to obtain rent from Spencer Group, the failure to make any meaningful enquiries as to whether any management fee was properly payable, their conduct in allowing Barry to be the sole
signatory of the trust‟s bank account before he was a trustee, and their conduct in purporting to appoint Barry‟s second wife and other relatives as additional discretionary beneficiaries in September 1996, despite this being contrary to the Court order. Significantly, Barry‟s explanation for this latter action was that he “understood that second trust was there for my benefit and the first trust was there
for Alida‟s benefit.”34
[193] As I say, I accept it is possible that all three men may well have felt that what they were doing was morally justifiable. However, as the Court of Appeal has made clear, a person can act dishonestly for the purposes of the exemption clause even although he or she genuinely believes their actions are morally justified.35
[194] In my view, the three trustees simply did not act as an honest person would in the circumstances.
[195] I also see no basis for distinguishing between the three.
[196] While Barry was the decision-maker and obtained a personal benefit, the other two trustees actively acquiesced in what happened. It was they who put him in control of the trust. Further, according to their own evidence, Barry kept them well informed and they approved what he did. I have carefully considered whether there was an argument for exonerating Mr Vavasour on the grounds of his reliance on
Mr Underwood‟s accounting expertise. However, acting on incorrect advice cannot
33 Notes of evidence, page 239, line 10 and 265, line 5.
34 Notes of evidence, page 160, line 5.
35 Wong v Burt, above n 28.
in itself provide trustees with a shield,36 and in any event the breaches went beyond technical accounting matters. The obligations breached were fundamental. As a property developer himself, Mr Vavasour must have known for example that it was unheard of for a percentage fee to be charged on commercial buildings. He knew that Mrs Spencer was being told there was no money to pay Robert, while at the same time Barry was taking drawings and without paying interest. Mr Vavasour knew no attempt was being made to recover the debt from Spencer Group, or charge interest on that debt, or seek payment of rent. He may not have appreciated the irregularity of showing distributions to the children as debits in their accounts (for
example, the four payments to Robert),37 but he must have known that money
advanced to Barry for Barry‟s own purposes should not be debited to the children.
[197] The fact of the matter is that both Mr Underwood and Mr Vavasour allowed their friendship with Barry to over-ride their legal obligations to the Spencer children, and in particular Robert. They operated the trust as if it were for the sole benefit of Barry, although they knew it was not. The fact they genuinely believed Barry deserved it and that Robert‟s needs were being adequately met from other sources is irrelevant.
[198] For completeness, I should also record that I have considered the implications of the fact the trust deed was initially defective and what role that may have played in the trustees‟ actions. There is no evidence to suggest that any of the defendant trustees were responsible for drafting the defective deed or were aware of its deficiencies prior to May 1998. In those circumstances, it would obviously be unfair to make them personally liable for breaches that occurred as a result of those deficiencies. However, once the first set of proceedings was served on them in May
1998 they were clearly put on notice as to the exact terms of the Family Court order and the deed under which they were supposed to be operating. Thereafter, they cannot be heard to say they did not know and understand the terms of the order and
their obligations.
36 Wong v Burt, above n 28..
37 The four payments to Robert made in 1995 and Alida‟s school fees were treated in the accounts
as advances to the children and then later written off.
[199] My conclusion is therefore that the exclusion clause does not afford the trustees a defence.
[200] Nor, in my view, is this a case in which the trustees can claim the protection of s 73 of the Trustee Act. Section 73 gives the High Court a discretion to relieve trustees from personal liability if the Court is satisfied that although acting in breach of trust, the trustees nevertheless acted reasonably and honestly and ought fairly to be excused. In this case, the evidence satisfies me that none of the trustees acted reasonably or honestly.
Summary of key findings
(i)Mrs Spencer had the lawful authority to instruct solicitors to issue these proceedings.
(ii) The caveat lodged against the Thorndon Quay property by
Mrs Spencer did not cause the trust to fail.
(iii)Clause 7 of the Family Court order does not afford the defendants a defence.
(iv) Spencer Group was indebted to the № 2 Trust in the sum of
$195,762.
(v)It was a breach of trust for the trustees not to seek interest on the payment of that debt or take steps to recover it.
(vi)It was a breach of the trust for Barry, through the vehicle of his company, to charge the trust fees.
(vii)The management fees charged by Spencer Group were excessive. A reasonable management fee would have been
$54,000.
(viii)It was a breach of trust for the trustees to approve the fees, pay and contra them against the debt owing by Spencer Group.
(ix) It was a breach of trust for Barry not to pay interest on his advances.
(x) It was a breach of trust for advances made to Barry to be
charged against the children‟s accounts.
(xi) It was a breach of trust not to obtain rent from Spencer Group. (xii) The trustees are not exempted from personal liability by clause
11.
(xiii) In calculating whether net income would have been available to make the weekly payments to Robert, adjustments should be made to take account of the following:
a. Rent of $100 per week that should have been obtained from Spencer Group.
b. Reduction of management fees from $167,752 to
$54,000 ($10,000 pa) excluding GST.
c. Interest on the Spencer Group debt at a rate of 10 per cent.
d.Life insurance premiums not included as an interest expense.
(xiv) Had payment of the Spencer Group debt been sought in
August 1995, there would have been $80,000 to pay it.
Remedy
[201] As so often happens, the focus of the hearing was on liability rather than remedy.
[202] My findings on liability will require recalculation of the losses and the appropriate relief. There is the further complication that Spencer Group has been struck off the register, presumably rendering any judgment against it futile. Another factor which in my view needs to be taken into account is that the trust never paid interest to Mrs Oakley (Barry‟s second wife) on the advances she made to the trust.
[203] I therefore seek further submissions from the parties, limited solely to the issue of remedy. I stress this is not an opportunity to re-argue the findings made in this judgment.
[204] Mr Corry is to file and serve his submissions within ten working days. Barry, Mr Vavasour and Mr Underwood are to file and serve their respective submissions within ten working days after receiving Mr Corry‟s submissions. Mr Corry will then have five working days in which to file any response.
[205] I will then convene a conference call, at a date and time to be advised.
Solicitors:
J C Corry, Wellington
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