It is well recognised that arrangements surrounding family trusts are often informal. However, while this is understandable, and explainable, the consequences of this informality can be uncertainty and, at worst, understandings of some parties that are light years from what might have been intended.
Regardless of the relationship between the parties, and indeed often because of the relationship between the parties, the need to record what is intended when monies flow between related parties, or related trusts, cannot be overstated.
The reasons for this are clearly demonstrated in the decision in Hansard v Hansard. This case intially involved an unsuccessful summary judgment application for the recovery of an alleged debt between related trusts of over $1.2m. The circumstances were simple. Money was advanced and liability for debts assumed. However, there was no loan documentation and no demands were made until the the borrowers’ marriage broke down. The lending party, the settlors of which are the parents and the parents-in-law, made no efforts to call up the loan or formalise repayment arrangements before the marriage broke down.
In finding there could be a case to answer, and that the matter cannot be resolved by a summary judgment application, the High Court considered that the failure to call up the loan sooner or for repayment arrangements to be documented could mean that the “lending” trust was estopped from calling up the loan for the future. This does not mean that this will be the case. However, as there simply wasn’t enough evidence that the advance was a loan, rather than a gift, the matter survived to spend another day in court. When subsequently heard the High Court found that the full sum sought was owing (see Trustees until Divorce us do Part). This was not the final word on the subject though. It is important before considering the next instalment to consider the facts.
The failure of marriages, and the rallying of troops is understandable, and lamentably common place. What is harder to understand is the way in which substantial sums are advanced, and accepted, with apparently no clear documented and agreed consensus as to the basis of the transfer. The existence of some trustee resolutions could have made the difference here.
Regular review by the trustees of the advancing trust, and some recorded dialogue could also have put the entire matter, and the question of whether the advance was a loan or a gift, to bed.
Trustees, take note.
In the meantime, let us return to the third instalment of Hansard v Hansard, where the decision was appealed, with some success to the Court of Appeal.
In this court the debt owing was broken down into 2 parts. Part of the debt related to the aquisition of assets, and this debt was up-held by the Court of Appeal. However, the status of the balance of the debt was less clear cut. While the Court of Appeal was satsified as to how the debt arise in the context of the re-structure, what was unclear was whether Sharon (Mrs Hansard Junior) understood that the value of assets transferrred from a related company was significantly less than the debt assumed to the trustees of the parents’ trust. While only a general level of knowldge was required with respect to a straight-forward debt (even if it is not adequately documented), more is required when the debt does not represent adequate consideration or equivalence in value.
While the Court of Appeal was satisfied that financial accounts might be approved subsequently, such approval would not necessarily ratify actions taken without the unanimous approval of the trustees because “… in order to ratify a transaction, the person ratifying must know the essential detail of the act or decision in question. It is not sfficient to show that he or she was aware of a change in the trust’s financial position, even if that change carries iwth it necessary implications that some sort of transaction must have occured. For a trustee to ratify a decision, it must be shown that there was more than a passive acquiescence to a decision made by another trustee. The ratifying act must show that the trustee considered the exercise of his or her power as a trustee and consented to the action taken.”
To paraphrase – even if the trustee says “sure fine”, if the trustee has not in fact turned his or her mind to the sureness and fineness, then it is not sure and it is not fine.
Where the difficulty lay for the trustees in trying to show that is was all sure and fine, was that even the trustees on the Hansard Seniors’ team wasn’t all that sure himself about the nature of the transaction or who bought what from whom. The words devil and detail are writ big right now.
The Court of Appeal decision in Hansard is a worthwhile read to get your head around ratification and some of the boundaries to this particular stamp that may contain less rubber than is often appreciated.
- Hansard v Hansard  NZHC 1159
- Hansard v Hansard  NZHC 1692
- Hansard v Hansard  NZCA 433