A PRACTICAL LOOK AT TRUSTEE RETIREMENT AND APPOINTMENT WITH THE ASSISTANCE OF THE COURT

Transcription

1 A PRACTICAL LOOK AT TRUSTEE RETIREMENT AND APPOINTMENT WITH THE ASSISTANCE OF THE COURT 1

2 CCH Trusts and Estates Conference 2016 A PRACTICAL LOOK AT TRUSTEE RETIREMENT AND APPOINTMENT WITH THE ASSISTANCE OF THE COURT Vicki Ammundsen Vicki Ammundsen Trust Law Auckland The appointment and removal of trustees is most commonly dealt with in accordance with the terms of the trust instrument or, where that does not assist the Trustee Act However, in some circumstances the assistance of the Court will be required. This paper discusses the appointment and removal of trustees where the assistance of the Court is required either pursuant to legislated powers or the inherent jurisdiction of the High Court. Matters such as vesting orders and costs that flow from appointments where the Court s assistance is required are also canvassed. The legislative frame-work It is common for modern deeds of trust to provide for the appointment and removal of trustees. However, where the deed of trust does not make provision for appointment or removal, or where the provision in the deed cannot be used, it is necessary to consider what other options are available. Both the Administration Act 1969 and the Trustee Act 1956 provide for the appointment and removal of trustees with the assistance of the Court. Trustees of Friendly Societies can be removed in accordance with s 28(3) Friendly Societies Act See Pritchard v Evans. 1 Administration Act, s 21 If the Court s assistance is required regarding the appointment or removal of the trustee of a testamentary trust, the correct means as to the retirement or appointment of a trustee will depend in part on how far advanced the administration of the will is. The question is whether the trustees (executors) are still holding the trust property as administrators of the estate, or as trustees? In the former instance the application for retirement / appointment is made under s 21 of the Administration Act and otherwise under the Trustee Act. 1 [2014] NZHC

3 Section 21 of the Administration Act provides: 21 Discharge or removal of administrator (1) Where an administrator is absent from New Zealand for 12 months without leaving a lawful attorney, or desires to be discharged from the office of administrator, or becomes incapable of acting as administrator or unfit to so act, or where it becomes expedient to discharge or remove an administrator, the court may discharge or remove that administrator, and may if it thinks fit appoint any person to be administrator in his or her place, on such terms and conditions in all respects as the court thinks fit. (2) The administrator so removed or discharged shall, from the date of that order, cease to be liable for acts and things done after that date. (3) Upon any administrator being discharged or removed as aforesaid (whether or not any other administrator is appointed) all the estate and rights of the previous administrator or administrators which were vested in him or her or them as such shall become and be vested in the continuing administrator or administrators (including any administrator appointed under subsection (1)) who shall have the same powers, authorities, discretions, and duties, and may in all respects act, as if he or she or they had been originally appointed as the administrator or administrators. (4) This section shall, with all necessary modifications, extend to the case where an administrator dies, and the powers and authorities hereby conferred may be exercised and shall take effect accordingly. (5) Nothing in this section shall restrict section 8. 2 Whether the executor s functions have been completed, so that the assets that comprise the residual will trust have been ascertained, depends upon the course of administration. To address this, the law has evolved the concept of assent as the means by which an administrator might indicate that the administrator does not require particular property of the deceased for the purposes of administration and that it may pass to the beneficiary. Cartwright J provides a useful statement of the position in Re Eagle (deceased) 3 : Although it is common for one person to discharge both functions, nonetheless the roles of executor and trustee are quite distinct The executor s duties include proving the will, burying the deceased, getting in the assets and paying the debts, funeral and testamentary expenses and death duties The residue is then transferred to the beneficiaries or the executor assents to the vesting of that property in him or herself as trustee. At that point there is a transition to the office of trustee, who holds the property upon any specific trusts in the will If there are none, then the estate is held on trust for the beneficiaries according to their rights and interests under the will until a specified event occurs. However, as formal assent marking the transition of duties from executor to trustee is not commonly given by executors, assent, if required to be determined, is generally determined on a case by case basis and requires consideration of the acts of the executor. 2 Grant of special administration when administrator is out of New Zealand. 3 HC Auckland M721/97 & M 1171/97, 21 November 1997 at 5 6 3

4 CCH Trusts and Estates Conference 2016 If the residue after the claims against the estate for debts, legacies, testamentary and administration expenses have been ascertained then assent can be inferred. Where assent has not occurred, an application for the removal (and appointment) is made under s 21 of the Administration Act. When assent has occurred any application for the appointment and retirement of trustees should be made in accordance with the Trustee Act Practically little turns on which Act an application is made under as the respective provisions are in almost identical form. Expedience is the test the Court must apply in each case. Expedience is a lower threshold than necessity and imports considerations of suitability, practicality and efficiency. Misconduct, breach of trust, dishonesty, or unfitness is not required to be established. Other relevant guiding principles that are evident provide that: the starting point is the Court s duty to see estates properly administered and trusts properly executed the settlor or will maker s wishes the welfare of the beneficiaries, which is the litmus test. Matters that the Court turns its mind to include: whether the executor must be removed to ensure that the estate is properly administered this includes paying all of the estates debts before making any distributions to beneficiaries if this is required by the deceased s will the executor must have an independent and impartial mind decision making should not be clouded by emotional or personal financial considerations. See Beazley v Tauriki 4 where the Court replaced administrators who had not been appointed in accordance with the order of priority set out in the High Court rules at (3). Also see Littleton v Kelly 5 where the Court determined that an application to remove a trustee of a will estate pursuant to s 51 of the Trustee Act would be more appropriately made under s 21 of the Administration Act. Although the differentiation between executorship and trusteeship can be largely academic, the distinction can be important in determining how an executor or trustee can be removed. This was considered in Harsant v Menzies 6 where the Court noted as follows: [51] As I have said, the present application was brought under s 21 of the Administration Act 1969 which permits the Court: (a) to discharge or remove an administrator when it is expedient to do so; and (b) to appoint any person to be administrator in his place, on such terms and conditions in all respects as it thinks fit. 4 [2015] NZHC [2016] NZHC [2012] NZHC

5 [52] Mr Malcolm (Sam) Harsant submitted, however, that the executors are no longer holding the Cooks Beach property as administrators of Frederick s estate, but rather as trustees. I agree. The position is as stated by Cartwright J in Re Eagle (deceased). Although a determination either way is not fatal, it is necessary to form a view so that the correct application can be made. That said, as noted in Harsant v Menzies: But whether or not the application is made under s 21 of the Administration Act or under s 51 of the Trustee Act 1956 does not, in my view, matter. Section 51 permits the Court to replace trustees and for all present intents and purposes is materially identical to s 21. Trustee Act, s 51 Section 51 of the Trustee Act confers power on the Court to remove a trustee if the Court is appointing a new trustee. Section 51 cannot be used only to remove a trustee: Thurston v Thurston. 7 Section 51 providing: 51 Power of Court to appoint new trustees (1) The Court may, whenever it is expedient to appoint a new trustee or new trustees, and it is found inexpedient, difficult, or impracticable so to do without the assistance of the Court, make an order appointing a new trustee or new trustees, either in substitution for or in addition to any existing trustee or trustees, or although there is no existing trustee. (2) In particular and without prejudice to the generality of the foregoing provision, the Court may make an order appointing a new trustee in substitution for a trustee who (a) Has been held by the Court to have misconducted himself in the administration of the trust; or (b) Is convicted of a crime involving dishonesty as defined by section 2 of the Crimes Act 1961; or (c) Is a mentally disordered person within the meaning of the Mental Health (Compulsory Assessment and Treatment) Act 1992, or whose estate or any part thereof is subject to a property order made under the Protection of Personal and Property Rights Act 1988; or (d) Is a bankrupt; or (e) Is a corporation which has ceased to carry on business, or is in liquidation, or has been dissolved. 7 [2013] NZHC

6 CCH Trusts and Estates Conference 2016 (3) An order under this section, and any consequential vesting order or conveyance, shall not operate further or otherwise as a discharge to any former or continuing trustee than an appointment of new trustees under any power for that purpose contained in any instrument would have operated. (4) Nothing in this section shall give power to appoint an executor or administrator. (5) Every trustee appointed by the Court shall, as well before as after the trust property becomes by law, or by assurance, or otherwise, vested in him, have the same powers, authorities, and discretions, and may in all respects act as if he had been originally appointed a trustee by the instrument, if any, creating the trust. It is not a pre-requisite to seeking that court s assistance pursuant to s 51 that the trustee or trustees have misconducted themselves. Guidance on when it is it is expedient that a new trustee is appointed by the Court or inexpedient, difficult, or impracticable to appoint a new trustee without the assistance of the Court in the context of a licenced securities trustee, is provided in Perpetual Trust Limited v Lombard Finance & Investments Limited 8 where the trustee s licence to act as a corporate trustee was due to expire. Further it was inexpedient, difficult and impracticable to appoint a new trustee without the assistance of the Courts because the investors had to agree to the appointment of a new trustee by way of an extraordinary resolution and there were geographically diverse groups of investors ranging from 230 to 13,000. As the investors had lost significant sums of money there were concerns that the investors might boycott or stymy the process. Although it might appear that the assistance of the Court was sought to avoid the investors input, an amicus was appointed to represent the investors interests. The amicus noted at [23]: under the trust deeds Perpetual is entitled to retire by giving notice. The investors resolution is about the replacement trustee, not Perpetual s retirement. The only link is that the retirement is subject to the investors approval of the replacement trustee. Through declining to approve the new trustee, investors could delay Perpetual s retirement. The consequence of dispensing with investor meetings is, therefore, not that investors are denied an opportunity to approve Perpetual s retirement. Rather that they will not have a say on whether [the new trustee] is the appropriate replacement trustee. The Court considered whether there might be any prejudice to investors, creditors or others if Perpetual is permitted to resign and satisfied itself that this had been adequately addressed. While the grounds set out in s 51 include misconduct, a trustee does not need to have committed a breach of trust in order to be removed. As was stated in Attorney-General v Ngati Karewa and Ngati Tahinga Trust: 9 [66] As our Court of Appeal pointed out in Hunter v Hunter (1938) NZLR 520, 529, the primary question is not whether the impugned trustees have committed 8 [2013] NZHC HC Auckland M2073/99 and CP 242/00, 5 November

7 breaches of trust. The jurisdiction to remove trustees is merely ancillary to the principal duty of the Court to see that the trusts are properly executed: Letterstedt v Broers (1884) 9 App Cas 371 (PC). While the specific grounds enumerated in s 51(2)(a)-(e) plainly form a basis upon which the Court may exercise its discretion, the section makes it clear that those particular grounds are without prejudice to the generality of the Court s discretion under subs (1). When the Court is exercising its power to appoint new trustees, matters to take into consideration include the settlor s intentions, neutrality between beneficiaries and promotion of the purposes of the trust. 10 The Court will not make an order removing a trustee lightly, and that Courts are reluctant to remove trustees if other avenues can be found to remedy the perceived risk. See Powell v Powell 11 [2014] NZHC 2096 Trustee Act, s 46 A trustee cannot be compelled to remain a trustee. Where a trustee wishes to retire, but cannot do so without assistance, s 46 of the Trustee Act can assist. 46 Discharge of trustee with assistance of court or Registrar (1) Where any trustee is desirous of being discharged from his trust he shall be entitled to retire therefrom on passing his accounts before the Registrar, and giving notice of his retirement to his co-trustees (if any), and to such other person (if any) as is empowered to appoint new trustees. (2) If such co-trustees, or such other person as aforesaid empowered to appoint new trustees, or any of them, refuse or neglect to appoint a new trustee or to consent to such appointment in place of the trustee so retiring, or if the retiring trustee is the sole trustee having power to appoint a new trustee, but the exercise of that power is impracticable or difficult without the assistance of the court, it shall be lawful for the retiring trustee to apply to the court for the appointment of a new trustee in his place. (3) The court may, upon any such application, make an order appointing some proper person as trustee in place of the trustee so desirous of being discharged from his trust, and direct any accounts and inquiries to be made, and make an order discharging the trustee from the trust and from all liability in respect thereof, and may make such order as to costs or otherwise as it thinks fit, and may exercise any of the powers contained in Part 5; and the person who upon the making of the order becomes trustee shall have the same rights and powers as he would have had if appointed by judgment in an action duly instituted. (4) If the court, on an application under subsection (2) by a trustee other than a supervisor, appoints Public Trust as the replacement trustee, Public Trust must accept the appointment. (5) In subsection (4), supervisor means a person appointed as a supervisor within the meaning of section 6(1) of the Financial Markets Conduct Act Mendelssohn v Centrepoint Community Growth Trust [1999] 2 NZLR [2014] NZHC 476 upheld on appeal by the Court of Appeal. See Powell v Powell [2015] NZCA 133 7

8 CCH Trusts and Estates Conference 2016 While most cases involving the removal of trustees are actions against trustees, in some instances cases for removal are brought by trustees who wish to relieved of their obligations. This was the case in SWL Trustee Company Limited v Marshall & Anor 12. In this case SWL Trustee Company Limited (SWL) acted together with two other trustees as trustees of a family trust. SWL was unable to get instructions from its co-trustees and gave the notice required by the deed of trust. However, SWL s co-trustees would not respond. Legal title to the trust properties could not conveyed from SWL to a replacement trustee and the continuing trustees. As a new trustee was not being appointed s 51 was not the appropriate course of action. Instead an application needed to be made for removal under s 46 of the Trustee Act as well as an application for a vesting order transferring the property to the continuing trustees. Costs were also awarded to SWL. Inherent jurisdiction Where no suitable statutory provision applies, the Court can have recourse to its inherent jurisdiction to remove a trustee (or make other related orders) where this is necessary for the welfare and benefit of the beneficiaries and the trust property. The Court s inherent supervisory function is derived from the Court s equitable powers to supervise trusts for the benefit of the beneficiaries. See Miller v Cameron 13 where Dixon J explains the jurisdiction as follows: The jurisdiction to remove a trustee is exercised with a view to the interests of the beneficiaries, to the security of the trust property and to an efficient and satisfactory execution of the trust and a faithful and sound exercise of the powers conferred upon the trustee. In deciding to remove a trustee the court forms a judgment based upon considerations, possibly large in number and varied in character, which combine to show that the welfare of the beneficiaries is opposed to his continued occupation of the office. Such a judgment must be largely discretionary. A trustee is not to be removed unless circumstances exist which afford ground upon which the jurisdiction may be exercised. But in a case where enough appears to authorise the court to act, the delicate question of whether it should act and proceed to remove the trustee is one upon which the decision of a primary judge is entitled to especial weight. The leading cases regarding the nature of the jurisdiction and as to the circumstances in which the Court has ordered the removal of a trustee in the exercise of that jurisdiction are Letterstedt v Broers 14, Miller v Cameron 15 and Hunter v Hunter. 16 The following passage from Letterstedt v Broers (pp ) provides some useful guidance on the application of the Court s inherent jurisdiction: ] NZHC (1936) 54 CLR (1884) 9 App Cas 371 (PC) 15 (1936) 54 CLR 572 (HCA) 16 [1938] NZLR 520 (CA) 8

9 But in cases of positive misconduct, Courts of Equity have no difficulty in interposing to remove trustees who have abused their trust; it is not indeed every mistake or neglect of duty, or inaccuracy of conduct of trustees, which will induce Courts of Equity to adopt such a course. But the acts or omissions must be such as to endanger the trust property or to shew a want of honesty, or a want of proper capacity to execute the duties, or a want of reasonable fidelity. It seems to their Lordships that the jurisdiction which a Court of Equity has no difficulty in exercising under the circumstances indicated by Story is merely ancillary to its principal duty, to see that the trusts are properly executed. This duty is constantly being performed by the substitution of new trustees in the place of original trustees for a variety of reasons in non-contentious cases. And therefore, though it should appear that the charges of misconduct were either not made out, or were greatly exaggerated, so that the trustee was justified in resisting them, and the Court might consider that in awarding costs, yet if satisfied that the continuance of the trustee would prevent the trusts being properly executed, the trustee might be removed. It must always be borne in mind that trustees exist for the benefit of those to whom the creator of the trust has given the trust estate. The Court of Appeal referred to these passages in its decision in Kain v Hutton 17 confirming that the inherent jurisdiction is derived from the Court s general supervisory powers in equity relating to the supervision of trusts for the welfare of beneficiaries. The Court s principal duty is to see that trusts are properly executed and it is from this that the power to remove trustees flows. Where the court acts in accordance with its inherent jurisdiction a trustee can be removed and not necessarily replaced. See for example In the Matter of the Borrich Family Trust. 18 The Court has a discretion whether to exercise its inherent jurisdiction. See Wallace v Naknok 19 where the Court declined to do so. In that case Mr Wallace sought the removal of Ms Naknok as his co-trustee following the end of their relationship. Although Mr Wallace was the sole beneficiary of the trust, the Court found that as Mr Wallace had chosen to form a trust, the law of trusts applied with respect to the legal relationships that arose as a result of the trust. While the Court must have regard to the welfare of the beneficiaries, this does not mean that the Court must accede to the wishes of a beneficiary as to who the trustees should be. Trustee Deadlock Where trustees are deadlocked, whether because of a relationship breakdown or some other tension, trusts cannot function. In Little v Little 20 Mrs Little applied for Mr Little to be removed as a trustee following their relationship break down on grounds that included his failure to account for trust funds and that he had acted unilaterally, contrary to the terms of the deed of trust. The Court was satisfied that Mr Little has no grasp of the duties owed by a trustee and that he cannot be relied upon to fulfil his obligations as 17 CA23/01, 25 July [2014] NZHC [2012] NZHC [2014] NZHC 780 9

10 CCH Trusts and Estates Conference 2016 such. In particular, Mr Little has failed to separate his duties as a trustee from the pursuit of his personal interests. Mr Little s unilateral actions were in breach of Trust. Mrs Little was not found blameless, although her failures as a trustee were significantly less than those the Court attributed to Mr Little. While Mr Little was the worst behaving trustee, the Court was not satisfied that Mrs Little would act even-handed between all beneficiaries of the trust. Even though the application to remove Mrs Little was made during the hearing and without notice, the application was granted. Accordingly, both Littles were removed and a trustee company appointed. In this regard it is noted that even if Mrs Little were not removed, as the deed did not permit a single natural person trustee an additional trustee would have been required. The case highlights the need to consider the terms of the trust deed before seeking the assistance of the Court. It should not be presumed that where a trust was deadlocked the Court would remove all trustees. While this may be the case where the trustees are spouses it should not be presumed that the same approach would apply to other relationships. See Powell v Powell. 21 Incapacity When a trustee can no longer act as a trustee due to the effects of dementia, the appropriate course of action is the removal of the trustee and, if necessary, the appointment of a replacement trustee. Such applications can often be made by way of originating application under Part 19 of the High Court Rules. However, it is important that there are no competing positions or interests. In the case of Neverman v Hudson 22 the Court raised the question as to whether (given that all of the discretionary beneficiaries had consented to the application) the consent of any issue of any final beneficiary should also be required. In this regard the Court decided that the consent of that class of beneficiary was not required. Addressing issues of competence in a measured fashion might also ensure that trustees do not require urgent court assistance so that the trustees can deal with trust property. See for example Wethey v Wethey 23 where the property needed to be dealt with urgently so that the trustees could meet the costs of a beneficiary s care. Also see Andrew v Andrews. 24 The absentee trustee A trustee who will not acquit the trustee s responsibilities can be removed. See Wright v Wright 25 where the plaintiff trustees could not continue to administer the trust as one trustee would not attend trustee meetings to discuss trust business, but also refused to sign a Deed of Retirement. On application to the Court the trustee was removed and a new 21 n [2015] NZHC [2015] NZHC [2015] NZHC [2016] NZHC

11 trustee appointed pursuant to s 51 of the Trustee Act. The Court was satisfied that the defendant has not been discharging her duties as trustee and is willing to resign but has not done so. Appointors When the assistance of the Court is required for the removal and appointment of trustees, it may also be necessary to seek the Court s assistance regarding who should hold powers of appointment moving forward. In Tarasiewicz v Titford 26 concerns were raised that if the appointor s powers were not removed, the effect of the Court s intervention could be rendered nugatory. Although questions were raised regarding the validity of the powers of appointment, the Court did not find it necessary to determine the validity of these but ordered the removal of the powers and the Court gave the power of appointment and removal to the trustee. These orders were made in accordance with the Court s inherent supervisory jurisdiction to ensure that the terms of a trust are properly carried out. Protectors While protectors are not a common feature of New Zealand trusts, they are not entirely unheard of. Where protectors have powers of appointment and removal, questions can be raised as to how the exercise of these powers are governed. Kea Trust Company Limited v Pugachev 27, while turning on its own facts, provides some useful guidance as to the role of protector and the extent of fiduciary obligations a protector can owe. The case also highlights that the Court can be looked upon to supervise the exercise of powers and appointment and removal of trustees by protectors. Also see Re Bird Charitable Trust. 28 Incomplete retirement In some instances a trustee may have purported to retire, but the retirement has not been effective. Such situations can later require the assistance of the court to confirm the status of the trustee s appointment. See Visini v Cadman 29 where a trustee (Mr Wood) resigned but failed to do so effectively as the resignation document did not meet the formalities required by the requriements of the (then) Property Law Act Resignation was required to be by deed in accordence with s 45 of the Trustee Act as the trust instrument did not provided for retirement. Subsequent proceedings arose and it became necessary to establish the validity of Mr Wood s retirement. The retirement was found to be invalid and, accordingly, Mr Wood had remained a trustee. 26 [2013] NZHC [2015] NZHC [2008] JLR 1 (Deputy Bailiff Birt and Jurats Bullen and Liddiard) at paras [2012] NZCA

12 CCH Trusts and Estates Conference 2016 Vesting Orders It is important to appreciate that when a new trustee is appointed (or removed) with the assistance of the Court that it may also be necessary for vesting orders to be made transferring any trust property to the new trustee. Where a trustee retires but has not or will not complete the requisite formalities, a vesting order can be required even if there is no dispute regarding the retirement. See Re Kleiman 30 where one of three trustees renounced his trusteeship and signed a declaration requesting his removal as a trustee of the Trust but refused to co-operate with the transfer of trust property to the remaining trustees. In an affidavit filed in support of the application the remaining trustees confirmed that the retiring trustee had made it clear on numerous occasions that he did not wish to have anything further to do with the Trust, and would not sign any further documents. An order was made under s 52 of the Trustee Act 1956, vesting the Trust s real property in the remaining trustees. Vesting orders can also be required where a trustee has been removed under an enduring power of attorney. While LINZ will register a transfer authority signed by an attorney under an enduring power of attorney where the attorney is acting for the donor in his or her personal capacity, LINZ will not register a transfer authority where the attorney would be acting for an incapacitated done in his or her trustee capacity. This will be the case even when the donor holds the property personally in part and as to a trustee in part: Fynn & Ors v Fynn. 31 Costs The cost of seeking the Court s assistance with the appointment and removal of trustees is an important consideration. In contentious matters it can be expected that costs will follow the event. However, in non-contentious matters the costs may be met from the trust fund. See for example Lipscombe v Lipscombe 32 where the costs of removal were met from the trust fund after orders were successfully obtained to vest the trust property in two of the trustees, the third having been removed (pursuant to a power of appointment) following his being certified as mentally incapable due to dementia for the purposes of the Protection of Personal and Property Rights Act Where the application for removal of trustees is indisputably in the best interests of the trust and there are grounds otherwise for very considerable concern that the welfare of all the beneficiaries is at risk costs may be awarded on an indemnity basis. See for example the costs decision in Harsant v Menzies. 33 Where a vesting order is required following the removal of a trustee it might be presumed that the general rule applies and costs will follow the event. However, this will not always be the case. Even if a vesting order is required, if the trustee has good reason to question the removal or accepts it and retires but will not sign a transfer authority (authority and 30 [2015] NZHC [2014] NZHC [2014] NZHC [2014] NZHC

13 instruction form (A & I)) in respect of any real property owned care is required before seeking a costs order. See Broderick v Broderick 34 where the Court found that the trustee who was removed in contentious circumstances (a relationship break up) was entitled to refuse to sign an A & I until a suitable indemnity was provided. 34 [2015] NZHC