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Powers of attorney, trust, Trustee liability, Trustees, Trusts

Powers of attorney can bite

The facts of FAI Money Limited v Crawley, which traverses, amongst other things, whether a trustee can be liable for a debt incurred under a power of attorney, are set out in the High Court decision discussed in 1 of 2 Trustees Personally Liable.

By way of brief recap:

Edward Johnston’s brother Richard Johnston who is an accountant, and his father-in-law Gavin Crawley (in their capacity as trustees) guaranteed a loan made to Edward Johnston, then a West Auckland lawyer, since bankrupted.

In due course there was a default.  The trusts for which the trustees acted were of no value.

Accordingly FAI elected to pursue the trustees personally for their own distinct breaches of their undertakings.  This was because under the loan agreement and the guarantees, FAI could pursue the trustees personally if deprived of recourse to the trusts’ assets because the trustees have acted without capacity, power or authority, or dishonestly, or negligently, or in breach of trust.

The High Court found that Richard Johnston was personally liable but that Mr Crawley was not because there was no evidence that he had any knowledge of events, Edward Johnston having signed all the relevant documents under Mr Crawley’s power of attorney and deed of delegation.

Unfortunately for Mr Crawley, the Court of Appeal did not take such a kindly view noting instead at [31] and [32] that:

“[31] … We are satisfied Mr Crawley had no appreciation of his responsibilities as a trustee of the Trusts and took no steps to fulfil his responsibilities in that respect. He was obliged to familiarise himself with the affairs of the Trusts, to take care of their assets, and to act in the best interests of the beneficiaries. Specifically in relation to the matters at issue, he was obliged to ensure he was kept informed about the intention to borrow money from FAI, to satisfy himself this was in the best interests of the beneficiaries, and to verify the accuracy of the details in the statement of position before executing or authorising the execution of the loan documents containing the warranty relied upon by FAI. As with Richard Johnston, he did none of those things and we are satisfied he was negligent in those respects. The protection expressed in s 31(3) of the Trustee Act is not available since it applies only in suits brought by a beneficiary.
[32] As the Judge noted, unlawful behaviour between donor and donee will not prevent the creation of an obligation between donor and a third party dealing with the agent in good faith: National Australia Finance Ltd v Fahey.  It follows that the terms of the loan agreement and the guarantees bind Mr Crawley despite the power of attorney being exercised outside its terms.”

The end result that Mr Johnston and Mr Crawley were joint and severally liable for the loss attributed to FAI Money.  The result may seem harsh, given that neither were beneficiaries of the trust.  However, it serves to highlight the risky business that can be the lot of the trustee.

References:

FAI Money v Crawley [2016] NZCA 219

 

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