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Beneficiary rights, Deed of Trust, insolvency, Removal of trustees, Settlors, Trustees

Providing trust assets does not ensure later control

It may seem somewhat trite law that once a trust is settled, the settor loses the right, by virtue of having made that settlement, to control the trustees.  To put this another way, just because you are the source of the trust’s assets, you cannot determine how these assets are utilised.  This fundamental proposition of trust law was recently confirmed in Tarasiewicz v Titford.

In that case the trustee sought and obtained an order for sale of trust property, a vesting order as the trust property in question was not registered to the trustees and an order removing the power of appointment and removal of trustees from the trust’s settlor so that the sale could not be obstructed through the exercise of these powers.

The facts of Tarasiewicz v Titford are not entirely straight-forward due to the settlor’s prolonged incarceration in prison and the settlor’s estranged wife’s bankruptcy.  However, looking beyond these, and accepting that there may have been a diminution in the value of the trust’s assets once Mr Titford was not available to work the land, the case is a good example of the propositions stated above.  The case also demonstrates the value of the powers available to the court under the Trustee Act when a trust is deadlocked due to the personalities and circumstances.

The facts can be summarised as follows:

  • Mr Titford, arranged for the Mengha Trust to be created in Launceston, Tasmania in 1999 (nothing turns on this in the decision and the court was satisfied that New Zealand was the correct jurisdiction to determine the matter
  • the person named in the Deed of trust as “the Principal” had the power to appoint and remove trustees, and to appoint additional beneficiaries. Mr Titford claims that he is the current Principal.
  •  Mengha Trustees Limited (Mengha Trustees), is the current trustee. Ms Tarasiewicz, is the director and shareholder of Mengha Trustees
  • The Mengha Trust’s principal includes a substantial property in Awanui property
  • The Trustee of the Mengha Trust has entered into an agreement (conditional on a court order giving the trustee the power to complete the sale) to sell the Awanui property as the trustee is not able to manage the property without Mr Titford’s assistance and there are debts that need to be met
  • The trustee also seeks an order under s 52 of the Trustee Act 1956 vesting the titles to the Awanui property in Mengha Trustees; ad an order removing Mr Titford as Principal under the trust deed

Mr Titford opposed all three applications contending that the property should be improved and developed.

Absent any contrary intention in the deed of trust, s 64 of the Trustee Act 1956 permits the Court to make an order empowering a trustee to enter into a transaction regardless of whether or not the trust deed already provides the trustee with that power.

Where there is a contrary intention the Court to make an order provided all persons who may be interested in the proposed transaction are parties to the application, or where they are represented or consent to the order sought. Accordingly the Court may  make an order notwithstanding the absence of consent by an interested party so long as that party is either present or legally represented at the hearing.

To utilise s 64 the Court must also be satisfied that it will be “inexpedient or difficult or impracticable” for the trustee to effect the transaction without the assistance of the Court.  To date the courts have interpreted s 64 liberally in New Zealand and have approved a wide variety of transactions inclluding the sale of land owned by trustees: Public Trustee v Attorney-General, Re Powell.

The Court was satisfed that there were no provisions in the deed of trust preventing the sale of trust property. Although counsel questioned whether the clause empowering sale, which read “The trustees shall have power to make or vary or sell any investment and to engage in any transaction or dealing on behalf of the trust fund …” means that the trustees can realise an investment but not sell land would be to interpret the clause far too narrowly.

In determining that it was expedient in the management or administration of the Mengha Trust for the Awanui property to be sold the Court found that:

  • the history of the trust must be taken into consideration
  • after the Mengha Trust acquired the Awanui property in 2002, Mr Titford assumed responsibility for farming that property for the next eight years. He and his family lived on the property during that period. Mr Titford’s role as farm manager ceased after he was arrested in November 2010 on several serious charges. At that point Mr Titford became subject to bail conditions requiring him to live away from Northland. As a consequence, Mengha Trustees had no option but to arrange for a succession of managers to farm the Awanui property
  • Mr Titford’s subsequent conviction means that he will not be able to farm the property in the forseeable future
  • The Awanui property also currently faces a number of pressing issues. The most immediate of these is a bank demand relating in large part to substantial rates arrears
  • capital expenditure is necessary to comply with obligations under the Resource Management Act 1991
  • other capital expenditure is required
  • the only way to obtain further bank support would be for the trustee’s director to provide a personal guarantee.  The director is not a beneficiary of the trust and does not wish to provide the guarantee
  • there is on-going conflict between the trustee company and Mr Titford

Mr Titford’s position was that the trust could not have acquired the Awanui property but for money advanced to the Mengha Trust by him and his labour.   Mr Titford “says that the proposed sale is at a “fire sale” price, and that it will result in the trust losing the ability to recoup its losses by developing and improving the property in the future.” para [47]

In response the Court noted that:

“[51] There is no way, in my view, to avoid the need for significant capital to be invested in the Awanui property regardless of the nature of the farming operation that is to be carried on in the future. Whilst conversion from dairying to beef production may resolve some of the outstanding issues, it would also inevitably require a considerable capital outlay to effect. The trust cannot meet this from cashflow, and it will not be able to obtain a further loan without the support of a personal guarantee. It is highly unlikely, in my view, that any person who might be an acceptable guarantor to the mortgagee would be willing to assume personal liability for the trust’s liabilities in that way. I also regard the proposal to subdivide the Kaikohe property as being fanciful given Ms Tarasiewicz’s evidence that she is presently “trespassed” from that property, and has no current knowledge of what is occurring on it.

[52] The only realistic way in which the present problems can be resolved is through the sale of the Awanui property in order to repay outstanding debt. It follows that I am satisfied that it is expedient in the management and administration of the Mengha Trust for the Awanui property to be sold.”

Considering whether it was “inexpedient, difficult or impracticable” for the Awanui property to be sold without the assistance of a Court the Court accepted that in the absence of the Court making suitable sale and vesting orders and removing any power of appointment and removal Mr Titford has then Mr Titford could endeavour to thwart the proposed sale.

While it was not clear that Mr Titford was validly appointed as Principal, the original Principal being his wife who was automatically removed in accordance with the terms of the deed of trust on her bankruptcy. At that time Mr Titford and his wife signed a resolution purporting to appoint Mr Titford as Principal to replace his wife. It is not clear that this is valid.  However, Mr Titford relies on this.

The Court did not find it necessary to determine the validity of Mr Titford’s appointment but ordered his removal as Principal in accordance with the Court’s inherent supervisory jurisdiction to ensure that the terms of a trust are properly carried out.  Also see Clifton v Clifton, Davidson v Israel, Mudgway v Slack,Morris v Sumpter.

It is noted that 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 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.”

In making the orders sought the Court gave the power of appointment and removal to the trustee.  However, following the sale and repayment of debts the trustee could not make any other trust distributions without the court’s consent.

A useful decision on dealing with personalities but also a salutory lesson to settlors about the possibility of a loss of future control.

References:

  • Tarasiewicz v Titford [2013] NZHC 3466
  • Public Trustee v Attorney-General HC Wellington CP 66/00, 4 July 2000.
  • Re Powell (2000) NZFLR 269
  • Clifton v Clifton HC Auckland CIV-2004-404-4185, 5 November 2004
  • Davidson v Israel [2012] NZHC 631
  • Mudgway v Slack HC Auckland CIV-2010-404-2058, 26 July 2010
  • Morris v Sumpter HC Auckland CIV-2004-404-3060 6 April 2005
  • Miller v Cameron (1936) 54 CLR 572

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