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Cases, Removal of trustees, Trustee Resolutions, Trusts

Power of attorney does not negate terms of trust deed

Powers of attorney and deeds of delegation can be useful, especially where a trustee may be absent from New Zealand for periods of time.  However, the extent to which trustees can rely on decisions made where one trustee has acted in a personal capacity and under a power of attorney require consideration.

Consider the facts in Kite v Hodge:

The assets of two trusts (the Kite Family Trust and the David Hodge Trust) are sold to new trusts and a capital distribution of each of the vendor trusts’ equity is made from each trust to Graeme Hodge.

The trustees of each of the vendor trusts are Graeme Hodge, David Hodge (absent from New Zealand.  Graeme has David’s power of attorney pursuant to a Power of Attorney and Deed of Delegation) and  Maureen De La Rue.  The trustees were able to undertake the transactions without David Hodge’s direct involvement as Graeme Hodge signed all documents and resolutions under David’s power of attorney.

Graeme Hodge and David Hodge are both beneficiaries of both trusts. Maureen De La Rue is not.

The deed of the David Hodge Trust includes a clause that provides that:

“7.3 If any TRUSTEE is a DISCRETIONARY BENEFICIARY that TRUSTEE must not join with the other TRUSTEES in the exercise in favour of that TRUSTEE of any discretion, and the remaining TRUSTEES shall have the sole right of exercising any such discretion which, for the purposes of clause 7.1 shall be deemed unanimous.”

In accordance with the terms of the deed of trust Graeme Hodge was prohibited from joining with the trustees to make a decision in his favour, which the capital distribution clearly was.   Graeme Hodge’s argument that he had not participated in the decision was clearly negated by a trustee resolution signed by him and as David Hodge’s attorney.

Accordingly, the Court made a declaration that Graeme Hodge acted in breach of the terms of the deed of trust of the David Hodge Trust by joining with Maureen De La Rue in the decision to make a capital distribution in his favour.

The deed of the Kite Family Trust as on different terms to that of the Kite Family Trust (rookie error to presume the terms of any trusts are the same).  There was no provision equivalent to clause 7.3 of the David Hodge Trust.  However, there was a different self-benefit provision in clauses 7.1 and 7.2 of the Kite Family Trust, these clauses providing that:

“7.1 Subject to compliance with the requirements of clause 8.3, and with the exception of the circumstances stated in clause 7.2, all discretions given to the TRUSTEES by this deed shall be properly exercisable by a majority of the TRUSTEES provided that every TRUSTEE has first been given the opportunity of giving his opinion or voting on the question at issue.

7.2 In the event of any decision being required to be made by the TRUSTEES while their numbers include any person who is a DISCRETIONARY BENEFICIARY, or related to a DISCRETIONARY BENEFICIARY, the decision in the event of disagreement between the TRUSTEES shall be made by the majority vote of the other TRUSTEES (or TRUSTEE) who are not beneficiaries or so related. If no resolution on the question at issue can be made in that manner it shall be the subject of an application by the TRUSTEES to the Court under section 64 of the Trustee Act 1956.”

The effect of these clauses is to permit majority decision making so long as all of the trustees have first been given the opportunity to give an opinion or vote on the matter.

Graeme Hodge’s position here was that he had David’s power of attorney and so the trustees were not required to give David the opportunity to give an opinion or vote on the matter.

It is important to appreciate at this point that no argument was made that Graeme Hodge breached his trustee obligations by using David Hodge’s power of attorney to make a capital distribution to himself.

However, the use of the power of attorney does go to the heart of the claims against Graeme Hodge and Maureen De La Rue, regarding the capital distribution to Graeme Hodge from the Kite Family Trust.  In this regard the Land J states at [37] that (my emphasis):

“[37] I have no doubt that Graeme could have signed the resolution as David’s attorney if David had agreed to the capital distribution. However, I do not consider the fact that Graeme held the power of attorney negated or affected the requirement under clause 7.1 that all trustees should have the opportunity to vote on or express their views in relation to decisions to be made by the trustees. Clause 7.1 is an extremely important provision. It ensures that the trustees do not exercise their powers and discretions under the trust deed without first ensuring that all trustees have an opportunity to vote or express their view. That type of safeguard was particularly important in respect of decisions that affected the trust’s assets. Graeme accepted in evidence that he was in regular contact with David when David was living in Ireland. It would therefore have been a simple matter for Graeme to have raised the issue of the proposed capital distributions with David so that David could provide his input into that issue. In failing to do so Graeme breached the requirements imposed by clause 7.1.

[38] I acknowledge that it is possible that the ultimate outcome may have been the same even if David had disagreed with the proposal so that he and Graeme were required to step aside and leave the decision to Ms De La Rue. In that event, however, Ms De La Rue would have been required to make her decision knowing that David disagreed with the proposal. She would also have known why David disagreed with it. It is therefore by no means certain that her decision would have been the same if David had been given an opportunity to express his view about the capital distribution.”

As a result both Graeme and Maureen De La Rue were held to have breached the requirements imposed by clause 7.1 when they signed the resolution approving the capital distribution to Graeme.  A declaration was made that both acted in breach of trust by failing to provide David Hodge with an opportunity to vote on or provide his opinion in relation to the proposed capital distribution to Graeme Hodge.

The use of powers of attorney is not uncommon.  However, too little thought is often given to the validity of actions carried out under a power of attorney or how the powers are exercised.

The facts of this case may prove a timely lesson.

References:

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