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General

Foreign trust: Beneficiaries in charge

It is generally accepted that while beneficiaries are the recipients of trust assets at the trustees’ discretion, beneficiaries have relatively little in the way of enforceable rights. Beneficiaries can request trust information and can ask, but not compel, the trustees to distribute trust assets to them. It is not always appreciated that beneficiaries’ access to the courts of New Zealand is a benefit of trusts with a New Zealand connection.

This is the same irrespective of whether a trust is a New Zealand-resident trust or a foreign trust with New Zealand resident trustees. While of late New Zealand has been the subject of negative press in the context of foreign trusts, with suggestions that New Zealand is tantamount to a tax haven for such trusts, the decision of Low Hock Peng v Rothschild Trust (Schweiz) AG [2017] NZHC 25 usefully demonstrates that the inherent jurisdiction of the High Court of New Zealand extends to administering trusts for the benefit of beneficiaries.

The facts of the case are briefly as follows:

  • A complex international structure was created which included a number of New Zealand foreign trusts
  • The trusts, through a number of holding companies and structures, own valuable assets in several countries
  • Assets with an attributed value of US$265 million are located int he United States
  • The US Government has filed complaints alleging that the US assets are the proceeds of money laundering activities and initiated forfeiture proceedings
  • The existing trustees are reluctant to defend action due to the nature of the claim, fearing that appearing before the US court would open themselves to liability for money laundering
  • The beneficiaries are unable to make an appearance to oppose forfeiture due to lack of standing in the US
  • The beneficiaries therefore brought an action before the New Zealand High Court seeking to remove the existing trustees and replace them with trustees willing to defend the forfeiture proceedings

In an oral decision released on 20 January 2017, Toogood J canvassed the issues, including the application of s 51(1) of the Trustee Act 1956, before making the orders sought removing the defendants as trustees and appointing new trustees in their place. Toogood J noted that there are other trusts within the structure in other jurisdictions, including the Cayman Islands, where courts have also made similar orders substituting trustees.

In coming to its decision the Court made it clear that its role was not to determine the merits of the underlying issues (including the concerns of the defendants, other than that they were genuinely held fears) but whether, in accordance with s 51(1) of the Trustee Act 1956 it was expedient for the court to assist in the removal and replacement of the existing trustees, and also that it was inexpedient to do so without the assistance of the Court.  In this regard the court found that it was expedient for the court to assist in the appointment and removal of trustees. See the following discussion (at paras [38] to [43]) regarding the interpretation of expedient in this context:

“[38] Looking at the first limb of s 51(1), relevant factors for consideration by the Court in exercising its discretion that it is expedient to replace trustees are the welfare of the beneficiaries and the security of trust property and satisfactory execution of the trusts. I accept Mr Ingram’s submission that expediency is a lower threshold than necessity and imports considerations of suitability, practicality and efficiency. I also accept that misconduct, breach of trust, dishonesty or unfitness is not required to be established.

[39] As to the second limb of s 51(1), whether it is inexpedient, difficult or impracticable to make an order substituting trustees without the assistance of the Court is dependent upon the particular facts and circumstances of the particular case…. I am satisfied, however, that in this case it is neither necessary nor appropriate for the Court to question the trustees’ decisions in that regard. Given the absence of any assurances from the US Government that the current trustees would not be implicated in allegations of improper dealings by directing a defence of the forfeiture proceedings, I am satisfied that the trustees’ views are genuinely held.

[40] … this case is not about the merits of the allegations made by the US Government in the California proceedings …

[41] It is sufficient that I am satisfied that assets located in the United States, valued in excess of US $250,000,000, are likely to be forfeited to the US Government … unless parties properly authorised to do so, who have a sufficient interest in the assets, take the procedural steps available to them at law to oppose the making of the orders.

[42] It follows that I am satisfied that the replacement of the current trustees with trustees who are willing to ensure that proper legal steps are taken in the California proceedings is not only expedient but necessary to safeguard the trust assets in the meantime; to protect the interests of the beneficiaries and to ensure that the trusts are properly implemented so far as the law permits.

[43] Moreover, I am also satisfied that, given the attitude of the current trustees, there is no expedient or practicable way in which the proposed new trustees could be appointed without the assistance of the Court. The grounds under s 51(1) of the Act, therefore, are made out.”

The decision in Low Hock Peng highlights the fact that while, in the wake of the Panama Papers publicity, many people have the view that foreign trusts are settled in New Zealand largely on account of tax or secrecy considerations, the importance of developed and principles-based trust jurisprudence in New Zealand is fundamental to the attractiveness of the country as a home for foreign trusts.

References:

  • Low Hock Peng v Rothschild Trust (Schweiz) AG [2017] NZHC 25

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