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Relationship Property, Trustee Resolutions, Trustees, Trusts

Trustees until divorce do us part

I’ve taken some liberties with the heading, the couple in question may not yet be divorced.  They are separated.  In a sequel to a previous blog regarding litigation to determine whether a $1.22 m loan was in fact a gift the High Court has determined that the sum in question was in fact a loan.

Background

The background facts can be summarised as follows (some liberties have been taken in the interests of concision):

  • Mr and Mrs Hansard (junior) are the shareholders of a printing business, once valuable, now not
  • Mr and Mrs Hansard (senior) were the settlors of two trusts – one of which made advances to the printing business – the other provided a family home for Mr and Mrs Hansard (junior) and their children.  I will refer to these trusts as the senior trusts
  • Mr and Mrs Hansard (junior) were the trustees of the junior trust, a trust they settled
  • Mr and Mrs Hansard (senior) were trustees of the senior trusts
  • there were no independent trustees
  • a restructuring was carried out whereby the junior trust came to own the family home and the printing business’ assets and as a consequence of the restructure, a debt of over $1.22m was owed to one of the senior trusts
  • the junior trust derived significant income from the business assets
  • record keeping by all trusts was poor (see para 45 of the judgment where Ellis J notes that “… both the trustees of the [junior] trust were as lax about recording its decisions as they and the trustees of [one of the senior trusts] were about formally documenting significant transactions.”
  • when Mr and Mrs Hansard (junior) separated the relevant senior trust called up the loan

Arguments raised

Mrs Hansard (junior) put forward three arguments as to why the loan should not be called up:

  • lack of unanimity
  • breach of fiduciary duty by Mr Hansard (junior)
  • estoppel

All arguments were initially unsuccessful.

Although the court was satisfied that there were no formal trust resolutions or minutes, it was found that the decisions made, if not initially unanimous were ultimately ratified by Mrs Hansard (junior) when, at the very latest, she signed the financial statements each year.  The fact that the trust income supported the family was also a factor taken to evidence that she knew what was going on.

The breach of fiduciary duty claims were quickly put to bed due to a lack of appreciation of the different capacities in which the different parties acted.  However, it is also postulated that in the event any duty was found to have been breached, Mrs Hansard (junior) may have been just as guilty for the same breaches due to her lack of engagement as a trustee.

The estoppel argument was given short shrift due to Mrs Hansard (junior’s) inability to point to any detrimental reliance.  Expectation that the loans would be gifted in due couse, or would ultimately form part of her husband’s “inheritance” were not sufficient to satisfy the evidential requirements.

Court of Appeal

However, the matter did not stop there.

When the matter came before th Court of Appeal, the debt owing was broken down into 2 parts by the court for consideration. 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 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.”

Accordingly the Court of Appeal did not uphold the High Court judgment on the balance of the debt and it is now open to the trustees of the Senior Trust to revisit the claim in estoppel.

Estoppel argument

Which the trustees did.

The four elements a party must establish to rely upon a claim in estoppel are neatly smmarised in Wilson Parking New Zealand Ltd v Fanshawe 136 Ltd, as:

(a) The party against whom the estoppel is alleged has acted in a clear and unequivocal manner that has caused the claimant to have a certain belief or expectation.

(b) The claimant has reasonably relied upon that belief or expectation.

(c) The claimant has suffered detriment by relying on the belief or expectation.

(d) It would be unconscionable for the party against whom the estoppel is alleged to depart from the belief or expectation.

An important consideration raised by the Court of Appeal when it considered the estoppel argument is that it is not enough that financial accounts have been signed, the person relying on this, must have know that this was the case.  However, this by itself is not determinative.  While the Court of Appeal was satisfied of a general awareness on the part of the lender trustees ,that was insufficient to found an estoppel.  However, more significant was the findings regarding the accounts prepared by external accountants.  In this regard the court paid attention to the processes adopted and in doing so satisfied itself that in her capacity as a trustee of the junior trust and as a director of the printing company, Mrs Hansard (junior) must be imputed with the knowledge of her duly authorised agent (the accountant) acting within the scope of his authority.  Thus the first element of estoppel was satisfied.  As were the remaining three.

Accordingly, the trustees of the junior trust were liable for the full amount of the debt.

Score a point for how a trust can be used to protect advances from relationship fall out.  That said it is difficult not to have some sympathy for the position Mrs Hansard (junior) finds herself in.

The Lesson

The decisions make dispirited reading.  The ease at which trusts are settled and the refusal of parties to these complex relationships to properly understand or appreciate their obligations and expectations, let alone who owns what is disappointing.   $1.22m odd is not a small amount of money, and yet none of the parties felt the need to properly record the terms on which the sum was advanced.  Perhaps Mrs Hansard (junior) is justifiably disappointed and was lulled by the lack of overt documentation and discussion into believing that all the debts were in fact gifts.  Perhaps if the Hansards (senior)  hadn’t fallen out over fees with the lawyers first acting on the structure, matters might have been better settled and recorded.  Trustees elsewhere might be wise to take note and look to their own closets.  Transferring wealth between generations through trusts is alarmingly simple, and often desirable.  And its all fun and games until somebody loses an eye.  Trustees – the take home message – document document document and make jolly sure all efforts are made to ensure that there is evidence all partie know and understand what they signed.  Sometimes it is worth an hour with an advisor not just so that you all actually know what you are doing (in case you don’t actually want to) but also so that when there is trouble you have something to turn to to show that all trustees were properly informed.

Also see Helen Edwards, Ratification of Trustees’ Actions [2014] NZLJ 377

References:

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Discussion

One thought on “Trustees until divorce do us part

  1. NIce article Vicki. So many people I believe are given the “keys” to setting up a Trust through accounting practices that are really only about trying to mitigate tax returns and protect assets from creditors in the event of business collapse. The reality of Trust is so much more complex and the obligations to maintaining them are reflected in my own recent experiences – similar to the Hansards – but fortunately a lot less money involved. Thanks.

    Posted by Brett Killip | August 20, 2013, 9:21 am

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