Vella and MCI Trustees 2013 Ltd
[2016] NZHC 1130
•27 May 2016
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV 2015-485-300 [2016] NZHC 1130
UNDER the Trustee Act 1956 IN THE MATTER OF
an application by the Trustees of the
BA Vella Trust for directions pursuant to section 66 of the Trustee Act 1956
BETWEEN
CHRISTOPHER MARIANO VELLA AND MCI TRUSTEES 2013 LIMITED AS TRUSTEES OF THE BA VELLA TRUST
Plaintiffs
Hearing: 25 May 2016 Counsel:
J A Herd and J L Mills for Plaintiffs
Judgment:
27 May 2016
JUDGMENT OF BROWN J
Introduction
[1] The plaintiffs, who are the trustees of the BA Vella Trust, seek directions under s 66 of the Trustee Act 1956 with reference to the extent of their obligation to recover interest in respect of a debt owed by another trust.
[2] On 5 May 2015 directions were made by Kόs J for the service of the proceeding on each current and potential beneficiary of the BA Vella Trust. It appears that the plaintiffs’ solicitors encountered considerable difficulties in serving all beneficiaries with the proceeding and the process took a substantial amount of time. However the affidavits of D M Consedine of 22 September 2015, M A Paewai dated 11 March 2016 and D M Consedine dated 8 April 2016 confirm that eventually
all beneficiaries were served with the proceeding.
C M VELLA AND MCI TRUSTEES 2013 LTD [2016] NZHC 1130 [27 May 2016]
[3] None of the beneficiaries served have taken any step in the proceeding. Consequently the application proceeds by way of formal proof under r 15.9 of the High Court Rules.
Background
The BA Vella Trust
[4] The circumstances giving rise to the application involve three generations of the Vella family. Joseph and Mary Vella had seven children, one of whom, Christopher, is a plaintiff in this proceeding.
[5] Another son, Bernard, passed away on 6 June 1989. Clause 3 of his will established the BA Vella Trust in the following terms:
I direct my trustees to stand possessed of the residue of my Estate and the investments for the time being representing the same upon trust:
(a) To pay or apply the net annual income arising there from in or towards the maintenance, education or advancement or otherwise howsoever for the benefit of my parents and the children of my brothers and sister or any one or more of them exclusively whether of full age or not so long as either of my said parents shall be living in the absolute discretion of my trustees with power for such purpose to pay such income or any part thereof to the guardian or parent of any such child or children without being bound to see to the application thereof.
(b) After the death of the survivor of my parents to hold both capital and income for such of the children of my brothers and sister as shall be living at my death or be born within ten (10) years of the date of my death and attain the age of twenty-five (25) years and if more than one as tenants in common in equal shares.
[6] In 1994 the trustees of the BA Vella Trust advanced $65,000 to Joseph and Mary Vella for the purpose of providing another son, Joseph, with the funds to put a house on a farm property owned by his parents. A memorandum of mortgage dated
26 October 1994 executed by Joseph and Mary Vella as mortgagor and Joseph Vella as covenantor provided for the principal sum to be repaid on 1 August 1998. Interest was to be payable by monthly instalments of $406.25 (reflecting an ordinary rate of interest of 7.5 per cent per annum). A penalty interest rate of 11.5 per cent was to apply in respect of any unpaid instalments of interest.
[7] One repayment of $5,832 was made on a date which is unknown but understood to have been early in the term of the loan.
[8] Joseph Vella passed away in 1995 and Mary Vella passed away in March 2013. Christopher Vella was appointed an executor and trustee in relation to both of their estates (“the J&M Estates”). The outstanding amount of the loan in the sum of $59,168 became a debt of the J&M Estates. That sum was paid by the solicitors for the J&M Estates to the solicitors for the BA Vella Trust in September 2014 pending the resolution of the question whether the BA Vella Trust should seek a repayment of the mortgage and interest on that sum.
[9] There are 15 beneficiaries of the BA Vella Trust, being the children of Christopher, Joseph, Maryanne and Nicholas. Eleven of the beneficiaries are currently 25 and over and therefore current beneficiaries. The remaining four are potential beneficiaries, their eligibility being subject to their reaching the age of 25. There are no further potential beneficiaries under the Trust as 10 years has passed since Bernard Vella passed away.
The interest issue
[10] The interest in relation to the $59,168.00 that remained outstanding on the loan until September 2014 is an asset of the BA Vella Trust and accordingly the trustees are obliged to consider recovery of those funds. The issue which gives rise to the present proceeding concerns the question of interest. It was explained in the plaintiffs’ submissions in this way:
20.If interest was pursued strictly in accordance with the terms of the memorandum of mortgage, the sum would total $126,198.00. This sum sees 7.5 per cent per annum charged to 1 August 1998 to amount to $22,212.31, and 11.5 per cent per annum charged from
2 August 1998 to 2 September 2014 to amount to $103,986.00.
21.The plaintiffs are concerned that pursuing the full amount owing would be inequitable and unduly burdensome to the J&M Estates, given that no interest has been pursued to date and no discussions regarding the matter can be recalled.
22.Concurrently, however, the loan was not paid back for a considerable period of time. If no interest is pursued, then this would reduce the Trust’s assets substantially.
23.The plaintiffs believe that a balance must be struck between preserving family relationships by acting equitably toward the J&M Estates, and protecting the interests of the beneficiaries of the Trust.
[11] In those circumstances the plaintiffs gave consideration to proposals aimed at striking an appropriate balance between the interests of the J&M Estates and the BA Vella Trust.
Proposals to deal with interest and responses from beneficiaries
[12] The initial proposal involved requiring repayment of the outstanding balance but seeking to recover a significantly reduced amount of interest. Counsel explained that the proposal reflected the absolute discretion that the trustees had regarding the Trust assets during the lifetimes of the primary beneficiaries, Joseph and Mary Vella. It was considered that that discretion could justify a waiver of interest for a portion of the mortgage term and also avoided the higher penalty rate of 11.5 per cent per annum.
[13] The proposal was outlined in a letter sent to each of the beneficiaries dated
11 September 2014 as follows:
7.The Trustees propose to seek repayment of the entire outstanding balance of $59,168 from the estate of Mary and Joseph Vella, together with interest at 7.5% from 1 August 1993 to 1 August 1998 (being the period over which it was anticipated interest would be paid), and from 31 March 2013 to 2 September 2014, the date the principal sum has been paid in full. This would involve accepting the funds held by Morrison Kent in full and final settlement of the principal sum, and seeking payment of the additional interest payment from the K&M (sic) Estates.
8.On a strict analysis, the J&M Estates are likely to be liable for 2/3 of the outstanding balance with the remaining 1/3 due from Joe, with the same proportions applicable to the interest payable on the sum borrowed.
9.Reaching an agreement with the executors of the J&M Estates in relation to repayment of the loan will settle Joseph’s obligations to the BA Vella Trust and it will be up to the trustees of the J&M Estates and Joseph to determine whether the payment in full from the estates should be reflected in Joe’s share.
10.In terms of the interest payable, interest might legitimately be sought from the date the loan was taken out, and at a potentially higher rate of 11.5% from August 1998 (the original due date). However,
because the parties have not enforced that interest requirement to date, the Trustees consider that it would strike a fair and appropriate balance to limit the interest sought to 7.5% per annum. As interest was to accrue at 7.5% per annum from 1 August 1993, under the strict terms of the agreement, the trust would ordinarily be entitled to recover approximately $93,639.44 in interest as of 1 September 2014 when payment of the principal was received.
11. Given there was no demand for repayments during that entire period the trustees take the view it would be unreasonable and unduly burdensome to demand retrospective interest of such a large sum. They do however acknowledge the need to ensure there is a balance between the interests of the beneficiaries of the BA Vella Estate and the J&M Estates. They consider it is appropriate some interest be sought and accordingly propose to seek interest for the period over which the mortgage was intended to be repaid and from
1 March 2013, being the month following the death of
Mrs Mary Vella, the remaining primary beneficiary under Clause 3(a) of the BA Vella Trust, to the date payment in full is made. The interest on $59,168 from 1 August 1993 to
1 August 1998 amounts to $22,212.32. The interest payable from
1 March 2013 to 2 September 2014 is $6,698.94.
12.The proposal does mean the trustees may recover less for the beneficiaries than they might otherwise be strictly entitled to recover under the terms of the mortgage. The Estate currently holds
$549,168. Recovery of the interest as proposed at paragraphs 7 and
11 above as proposed by the trustees should increase those funds to more than $570,000.00.
13.As the proposal means the trust will recover an amount that may be less than the beneficiaries might be strictly entitled to, the Trustees intend to seek the approval of the High Court under s 66 of the Trustee Act 1956. The Court will want to know if any of the beneficiaries have a view on the proposal and accordingly the Trustees have instructed us to write to you to seek your views as a beneficiary under the estate of Mr Vella.
14.If all beneficiaries agree, the Court will be advised accordingly. If however any of the beneficiaries oppose the proposal, there will be an ability for you to formally oppose the proposal, and any beneficiaries opposing the proposal will have an opportunity to be heard by the Court.
[14] Responses were received from all the then current and potential beneficiaries. Although none of the beneficiaries opposed the proposal, eight beneficiaries indicated a preference not to seek any interest at all and one beneficiary preferred that no funds be sought at all.
[15] The trustees then wrote to all the current and potential beneficiaries again to give those beneficiaries, who had not expressed a view on the suggestion that the
Trust ought not to seek any interest, an opportunity to provide their views. A letter dated 27 November 2014 to the beneficiaries stated:
3.The proposal that no interest at all be sought has not previously been put to all the beneficiaries. The trustees would like to know your view on the proposal to seek no interest at all (as opposed to the reduced interest to be sought in the previous proposal). The trustees would particularly like to hear the views of the beneficiaries who indicated support for the previous proposal or who did not express an opinion either way, but if you have previously indicated you are in favour of seeking no interest, confirmation of this position would be appreciated. You may wish to seek some advice on this alternative proposal.
4.The trustees would be willing to put this proposal, seeking no interest, to the court instead of the proposal which has already been circulated if all beneficiaries favour the alternative set out above. If there is no unanimous support, then the trustees propose to put forward both the original proposal and the alternative (i.e. that no interest be sought), and seek the Court’s guidance as to the appropriate approach in the current circumstances.
[16] Responses to that letter were received from nine beneficiaries. The plaintiffs’ submission stated that it could be assumed that the remaining six beneficiaries did not respond because they felt that they had already provided their opinions on the matter. On that assumption the views of the beneficiaries were summarised in this
way:
In favour of the Proposal to seek a lesser amount of interest In favour of the Proposal to seek no interest
Current beneficiaries
3
8
Potential beneficiaries
1
3
On that basis approximately 27 per cent of the beneficiaries preferred the initial proposal.
[17] However I raised with counsel the position concerning the views expressed by the four beneficiaries who are the children of Joseph Vella, in particular the issue whether their views should be taken into account given that the proposal to seek no interest was potentially to the financial advantage of Mr Joseph Vella. I understood counsel to accept that those four beneficiaries could be viewed as having a particular
interest on account of the potential liability of their father. One of the four had supported there being no recovery of interest and the other three had favoured no recovery of the funds owed.
[18] If the responses were analysed without taking into account the views of those four beneficiaries, then the percentage in favour of the proposal to seek reduced interest increased to approximately 36 percent.
[19] In light of the responses from the beneficiaries the plaintiffs decided to put before the Court two alternative proposals to deal with the issue of interest:
(a) The first proposal would recover a portion of the interest due under the loan. The plaintiffs would apply the lower interest rate of 7.5 per cent annum from 1 August 1993 to 1 August 1998 (the period during which the loan was intended to be paid) and then from 1 March 2013 to 2 September 2014 (from the month following the death of Mrs Vella, the last remaining primary beneficiary under clause 3(a) of the Will, to the date that the loan was paid in full to the trust account of Morrison Kent). This proposal would seek the recovery of the principal sum of $59,168.00 together with interest of $28,911.26 from the J&M Estates.
(b)The second proposal would seek repayment of the outstanding balance of the loan ($59,168.00) but not seek any interest from the J&M Estates.
[20] Counsel advised that the plaintiffs believe that both proposals strike a fair balance between the interests of the J&M Estates and the BA Vella Trust.
Section 66 considerations
[21] Section 66(1) of the Trustee Act 1956 provides:
66 Right of trustee to apply to court for directions
(1) Any trustee may apply to the court for directions concerning any property subject to a trust, or respecting the management or administration of any such property, or respecting the exercise of any power of discretion vested in the trustee.
[22] Lexis Nexis Law of Trusts states:1
A trustee who is in genuine doubt about the propriety of any contemplated course of action in the exercise of his or her fiduciary duties and discretions is always entitled to seek proper professional advice and, if so advised, to protect his or her position by seeking the guidance of the Court.
[23] In New Zealand Māori Counsel v Foulkes Kόs J analysed the purpose of s 66 and suggested a four part formulation which can be summarised as follows:2
(a) Section 66 may be used to resolve any live question of interpretation of the Trust Deed, as well as any uncertainty as to the exercise of a power. Section 66 is a robust, parallel source of jurisdiction to resolve any substantial question of law concerning the meaning or administration of the trust.
(b) The existence of a dispute is not fatal to the exercise of the jurisdiction. Indeed the existence of a dispute, or at least a doubt, is essential.
(c) The more profound the dispute, the more care must be taken that those with a legitimate interest in the outcome are represented, in particular, beneficiaries.
(d) The relief sought must not involve resolution of any disputed issues of facts.
Discussion
[24] Counsel submits, and I accept, that the present application concerns a genuine doubt on behalf of the trustees concerning the administration of the Trust and that the Court therefore has jurisdiction under s 66 to give directions in relation to the matter.
[25] Indeed, given the context of a family of significant numbers spanning three generations, I consider that the trustees were prudent to make the present application.
It is evident that they have taken great care to ensure that the views of all
1 Law of Trusts (online looseleaf ed, Lexis Nexis), at [4.28.2].
2 New Zealand Māori Counsel v Foulkes [2014] NZHC 1777 at [44]–[50].
beneficiaries have been sought and provided to the Court. The opportunity has also been afforded to the beneficiaries to participate in the proceeding.
[26] Counsel for the plaintiffs was unable to locate any authorities directly concerning the discretionary recovery of interest on loans that are trust assets. Consequently recourse was had to wider trust law considerations.
[27] While recognising that the beneficiaries’ financial interests will be considered paramount, counsel submitted that in certain circumstances broader considerations may be pertinent.3 Attention was drawn to the observations of Megarry V–C in
Cowan v Scargill:4
Third, by way of caveat I should say that I am not asserting that the benefit of the beneficiaries which a trustee must make his paramount concern inevitably and solely means their financial benefit, even if the only object of the trust is to provide financial benefits … The beneficiaries might well consider that it was far better to receive less than to receive more money from what they consider to be evil and tainted sources. ‘Benefit’ is a word with a very wide meaning, and there are circumstances in which arrangements which work to the financial disadvantage of a beneficiary may yet be for his benefit …
[28] The trustees submit, and I agree, that the recovery of the debt in the present case is analogous to investment decisions of trustees in that both considerations relate to the discretion of trustees to make financial decisions regarding trust assets for the benefit of the beneficiaries. While there is a heavy burden on the plaintiffs, I consider that that burden has been discharged, particularly where the beneficiaries, by consenting to the lesser recovery of interest or indeed the non-recovery of interest, can reasonably be taken to have indicated that their best interests encompass considerations that extend beyond strict financial gain. The trustees submit, and I accept, that the beneficiaries’ interests include consideration of the family-oriented nature of the trust, the preservation of family relationships and the fair enforcement
of debts.
3 Andrew Butler Equity in Trusts in New Zealand (2nd ed Thomson Reuters, Wellington, 2009) at
[5.3.1(4)].
4 Cowan v Scargill [1984] 2 All ER 750 (Ch) at 761.
[29] Counsel also referred by way of analogy to the jurisdiction of the Court under s 64A of the Act to authorise variations of trust. In particular she drew attention to the following feature of s 64A:
… the Court shall not approve an arrangement on behalf of any person if the arrangement is to his detriment; and in determining whether any such arrangement is to the detriment of any person the Court may have regard to all benefits which may accrue to him directly or indirectly in consequence of the arrangement, including the welfare and honour of the family to which he belongs …
(emphasis added)
Attention was drawn to the judgments in Re Greenwood5 and Atkinson v
Registrar-General of Land (No 2).6
[30] I am satisfied that in the administration of the BA Vella Trust the plaintiffs are not required to pursue the full amount of interest otherwise owing to the Trust by the J&M Estates.
[31] I am also satisfied that, having regard to the familial nature of the trust and the fact that none of the beneficiaries oppose the proposal, it is an appropriate exercise of the trustees’ discretion to adopt and pursue the first of the interest-recovery proposals presented to the Court. I consider that that proposal strikes a fair balance between preserving family relationships, by acting equitably toward the J&M Estates, and protecting the interests of the beneficiaries of the BA Vella Trust.
[32] I consider that the second proposal tilts the balance more in favour of the J&E Estates and would be a less appropriate course, as reflected in the difference of views among the beneficiaries.
Orders
[33] Pursuant to s 66(1) the following orders are made:
5 Re Greenwood [1988] 1 NZLR 197 (HC) at 211-212.
6 Atkinson v Registrar-General of Land (No 2) (2004) 5 NZCPR 149 (HC) at [9].
(a) a declaration that the terms of the BA Vella Trust do not require the trustees to pursue the full amount of interest otherwise owing to the BA Vella Trust (and its beneficiaries by the J&M Estates);
(b)a direction that the plaintiffs should adopt their first identified proposal to recover from the J&M estates the principal sum of
$59,168.00 together with interest of $28,911.26, being interest at the lower rate of 7.5 per cent per annum from 1 August 1993 to
1 August 1998 and from 1 March 2013 to 2 September 2014;
(c) an order that the costs of this application are to be met by the
BA Vella Trust;
(d) leave is reserved to apply to vary or supplement the direction given.
Brown J
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