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Beneficiaries, Beneficiary income, Beneficiary rights, breach of trust, Right to trust information, Trustee Act, Trustee liability, Trustees

The blessing of the court

Being a trustee is hard, and at times quite possibly boring (to paraphrase from the movie An Education: Emma Thompson and Carey Mulligan).  And worse, if you get it wrong the beneficiaries can sue you, no matter how hard a trustee might try to get it right.

Fortunately, help is at hand in the form of the Trustee Act 1956, which provides at s 66 for trustees to seek directions from the court. However, how much help and how much risk must a trustee continue to assume?  Is it possible, when hard decisions need to be made, to get the “blessing” of the court so that the trustee is absolved from all liability?  This was the question posed in Re PV Trust Services Limited.

Background

The Honoris Trust was settled by deed dated 5 February 2010 by Alsira who was resident in Argentina (notwithstanding that the trust’s assets were owned by Alsira and Dulce).  The trustee at the time the directions application was made was PV Trust Services Limited (the trustee). Alsira and her daughter Dulce were the named beneficiaries as to 50% each. The trustee has wide discretionary powers to appoint and remove beneficiaries and to appoint and distribute trust income and capital.

At the end of the trust period (80 years from the date of settlement) the trustee is to hold un-appointed trust capital in shares as appointed by the trustee before the end of the trust period.  An un-appointed part of the trust fund is then held for the “final repository.

The trust deed did not identify any default beneficiary or final repository.

Two letters of wishes were prepared by Alsira before her death.  The letters were in part a clear statement of wishes (provision of US$2,000 for life for a long-standing family employee (MM)) and in part pro forma (for example provision was made for Dulce’s children although she was 60 and had no children).

Alsira died in 2014 and left her entire estate to Dulce.  No provision was made for her other two children who were excluded in accordance with Argentine law).  Soon after Dulce began to prepare a list of final beneficiaries.  This was not finalisesd and Dulce died unexpectedly in 2015.

The problem

The trustee wishes to act in accordance with Alsira’s second letter of wishes.  However, after doing so it will be left with some US$11 million until the trust period expires (or an earlier date is nominated); in the absence of final beneficiaries, this will then revert to Alsira’s estate on resulting trust.

The proposal

The trustee wishes to ensure that the payments to MM proposed by Alsira’s in a letter of wishes are made, together with payments to charities and for the balance to be paid in accordance with Dulce’s will (as a result of the resulting trustee referred to above)

The trustee is of the view that it has all the necessary powers to administer and distribute the trust estate as proposed. However, it considers the proposed distributions would be particularly momentous given they result in the distribution of the entire trust estate. Accordingly, the trustee applies to the Court for directions that it is “proper and lawful” for it to administer and distribute the trust estate as proposed.

The blessing

Section 66 of the Trustee Act 1956, which gives trustees a broad right to apply to the High Court for directions:

66  Right of trustee to apply to court for directions

(1)Any trustee may apply to the court for directions concerning any property subject to a trust, or respecting the management or administration of any such property, or respecting the exercise of any power of discretion vested in the trustee.

(2)Every such application shall be served upon, and the hearing may be attended by, all persons interested in the application or such of them as the court thinks expedient.

Relevantly, where a trustee acts under the directions of the court, the trustee is deemed to have discharged the trustee’s duties in relation to the subject matter of the directions (see the Trustee Act 1956).  A direction “blessing” the trustee’s actions protects the trustee from later claims by beneficiaries.

What then is the extent of the application of s 66?  This is where the decision gets interesting.  Fitzgerald J embarks on a considered and useful examination of the scope of s 66 when a trustee has made a decision, but want the blessing of the court.  Interestingly, the requirements are similar to that of a Beddoe order, which makes sense given that the result of either is that the trustee can proceed with confidence and can look to the trust fund for expenses to be met.  And can sleep at night…

Of relevance is whether the trustee in seeking the blessing of the court is deferring to the court’s judgment.   In this regard see [41] to :

[41] Mr Molloy notes that, in a well-known but unnamed and unreported case [that was heard in chambers], Robert Walker J (as he then was) set out four categories of cases in which the Chancery Division of the English High Court will give directions to trustees. Mr Molloy says the orders sought by PVTS are covered by the “second category”, where a trustee has formed its own view of the appropriate course of action (i.e. there is no “genuine doubt” in the trustee’s mind as to what should occur), but it nevertheless seeks the court’s blessing given the course of action is momentous.

[42] Robert Walker J’s statement of these four categories was repeated by Hart J in Public Trustee v Cooper, where one of the issues considered was whether the Privy Council’s decision in Marley meant that the act of a trustee seeking directions necessarily involved the trustee surrendering his or her discretion.  Hart J referenced Robert Walker J’s (chambers) judgment and set out the following extract from it:

At the risk of covering a lot of familiar ground and stating the obvious, it seems to me that, when the court has to adjudicate on a course of action proposed or actually taken by trustees, there are at least four distinct situations (and there are no doubt numerous variations of those as well).

(1) The first category is where the issue is whether some proposed action is within the trustees’ powers. That is ultimately a question of construction of the trust instrument or a statute or both. The practice of the Chancery Division is that a question of that sort must be decided in open court and only after hearing argument from both sides. It is not always easy to distinguish that situation from the second situation that I am coming to …

(2) The second category is where the issue is whether the proposed course of action is a proper exercise of the trustees’ powers where there is no real doubt as to the nature of the trustees’ powers and the trustees have decided how they want to exercise them but, because the decision is particularly momentous, the trustees wish to obtain the blessing of the court for the action on which they have resolved and which is within their powers. Obvious examples of that, which are very familiar in the Chancery Division, are a decision by trustees to sell a family estate or to sell a controlling holding in a family company. In such circumstances there is no doubt at all as to the extent of the trustees’ powers nor is there any doubt as to what the trustees want to do but they think it prudent, and the court will give them their costs of doing so, to obtain the court’s blessing on a momentous decision. In a case like that, there is no question of surrender of discretion and indeed it is most unlikely that the court will be persuaded in the absence of special circumstances to accept the surrender of discretion on a question of that sort, where the trustees are prima facie in a much better position than the court to know what is in the best interests of the beneficiaries.

(3) The third category is that of surrender of discretion properly so called. There the court will only accept a surrender of discretion for a good reason, the most obvious good reasons being either that the trustees are deadlocked (but honestly deadlocked, so that the question cannot be resolved by removing one trustee rather than another) or because the trustees are disabled as a result of a conflict of interest. Cases within categories (2) and (3) are similar in that they are both domestic proceedings traditionally heard in Chambers in which adversarial argument is not essential though it sometimes occurs. It may be that ultimately all will agree on some particular course of action or, at any rate, will not violently oppose some particular course of action. The difference between category (2) and category (3) is simply as to whether the court is (under category(2)) approving the exercise of discretion by trustees or (under category(3)) exercising its own discretion.

(4) The fourth category is where trustees have actually taken action, and that action is attacked as being either outside their powers or an improper exercise of their powers. Cases of that sort are hostile litigation to be heard and decided in open court. [Emphasis added]

As noted at [44] and [45] Fitzgerald J was of the view that (at least in England) trustees do not need to be in genuine doubt before approaching the court for directions.  Although the decisions referred to had not been expressly adopted in New Zealand .. ultimately, it was unnecessary for the Court to expressly consider or adopt the categories in that case, given the key issue was “whether the Trustees’ application for directions involved a surrender of their discretion to the Court”.

Then as noted at [54]: … Fitzgerald J is of the view that “the jurisdiction conferred by  s 66 can extend to the category-two type directions described by Robert Walker J and Hart J in Public Trustee v Cooper.  Moreover, having given specific consideration to New Zealand’s unique trusts landscape [as noted by the Court of Appeal in Vervoort v Forrest] …  so long as appropriate procedural safeguards are put in place to minimise potential prejudice to beneficiaries, such a jurisdiction could indeed be useful in the New Zealand context.”

Given the potential for beneficiaries to be disadvantaged, the proper approach for a “blessing” order is that the court should consider (see Public Trustee v Cooper):

(a) First, has the trustee in fact formed the opinion which the court is asked to bless?
(b) Second, is the opinion formed one at which a reasonable body of trustees, properly instructed as to the proper meaning of any relevant provisions of the trust deed, could properly have arrived?
(c) Third, is the opinion vitiated by any conflict of interest under which any of the trustees might have been labouring?

It is important to note that prior to his retirement, Fogerty J managed the case in hand by way of an active and inquisitorial role to ensure that the court was fully informed, which is the appropriate course of action for a category 2 approach.

The court found that it was proper and lawful for the trustee to administer the trust and make the distributions it wished to make.

The decision is important not for what the trustee wished to do, which was essentially a private decision, but rather for the process of the decision, how the court was informed, and why the court could give its blessing.

Being a trustee is hard.  But doing it the hard way (Jack Reacher reference) can be doing it the right way.

References:

  • Re PV Trust Services Limited [2017] 2957
  • Trustee Act 1956, s 66
  • Public Trustee v Cooper [2001] WTLR 901 (Ch)
  • Vervoort v Forrest [2016] NZCA 375, [2016] 3 NZLR 807 at [63]
  • Lee Child: The Hard Way (2006)

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