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alter ego trust, appointment and removal of trustees, Appointor; power of appointment, Arbitration, Beneficiaries, breach of trust, Capacity, Deed of Trust, Discharge, Memoranda of Wishes, Removal of trustees, Settlors, Sham trust, supervision of trustees powers of the court, trust, Trustee Act, Trustee retirement, Trustees, Trusts, Variation, Vesting order

Buyer’s remorse

Trusts can seem like a great idea.  And then one day a settlor can be confronted with the reality of the loss of control and cast around for someone to blame.  In addressing the realities of trust ownership, the exercise of powers of removal and appointment can offer a solution to issues with the dynamics between trustees, or trustees who are no longer in favour with the settlor against the backdrop of changing family circumstances.

Where there are family rifts, the exercise of such powers can be inflammatory. Triezenberg v Mason provides a useful consideration of  the validity of a purported removal of trustees  and a judicial assessment of whether trustees should be removed in the context of family disharmony.

Desire to be discharged for the purposes of s 43 of the Trustee Act

One of the matters before the court was whether the trustees entry into a settlement agreement was an expression of a desire to be discharged from the role of trustee for the purposes of s43 of the Trustee Act.  In this regard while it is noted that s 43 does not specify that an expression to retire must be deed (see [93]) the court noted at [91] that “removal of or resignation by a trustee is a significant step or decision in the context of any trust’s administration … any expressed “desire” to be removed for the purposes of s 43 ought to be clear and unambiguous.”  at [92] it is noted that s 45 of the Trustee Act further reinforces the clarity expected when  a trustee wishes to be discharged “requiring a trustee to declare so by way of deed. Further, eve n if the trustees makes such a declaration by way of deed, the trustee is not deemed to have retired from the trust unless the co-trustees and any person with the power of appointment consent to the trustee’s discharge.”

A desire to be discharged cannot be evinced from pleadings and various prayers for relief that might follow [98].

Removal of trustees

Whether there was  a power to remove the trustees was considered separately by reference to the terms of the deeds of each of the two trusts.

In respect of the No 1 Trust Triezenberg v Mason usefully considers the position where the power of removal of trustees is jointly held in circumstances where one of the appointors has lost mental capacity (and a property manager has been appointed).  The view of the court is that in the case of a joint power where one party is not capable of exercising the power the power is held jointly with the competent settlor and the “continuing or surviving trustees” pursuant to s 43.

The terms of the deed of the No 2 Trust were far more detailed that for the No 1 Trust and provided that powers of appointment and removal could be exercised by an attorney under an enduring power of attorney.  The court was of the view that the power vested in the attorney until the revocation of her appointment.

Editor’s note.  This should be considered in light of the decisions of Nation J in Godfrey v McCormick and Marshall Family Trust.

Following that revocation the court’s view was that on a correct interpretation of the trust deed the incapacitated settlor’s power of attorney was vested in the trustees.  Accordingly, the removal exercised by the other settlor was invalid.

Removal or replacements of the current trustees

Having established that the trustees had not been validly removed the next question for the court was whether any or all of the current trustees should be removed or replaced.  The relevant principles set out at [115] and [116] usefully summarise the legal position.

[115] Removal and substitution of trustees pursuant to s 51 of the Trustee Act and the Court’s inherent jurisdiction was comprehensively summarised by Winkelmann J in Green v Green:

[598] The Court has jurisdiction under s 51 of the Trustee Act 1956 to appoint and substitute trustees, which includes the power to remove by substitution. Section 51 relevantly provides:

51 Power of court to appoint new trustees

(1) The court may, whenever it is expedient to appoint a new trustee or new trustees, and it is found inexpedient, difficult, or impracticable so to do without the assistance of the court, make an order appointing a new trustee or new trustees, either in substitution for or in addition to any existing trustee or trustees, or although there is no existing trustee.

(2) In particular and without prejudice to the generality of the foregoing provision, the court may make an order appointing a new trustee in substitution for a trustee who—

(a) has been held by the court to have misconducted himself in the administration of the trust;

[599] There is the suggestion in some texts that the jurisdiction is not available where there is a dispute as to facts or where the trustee is willing and able to continue. However there is nothing in the statutory language to suggest such a limitation. The notion that this jurisdiction is so limited may originate from early cases in which the concern was with the proper form of pleading. Those concerns obviously no longer apply here.

[600] In any case, the Court also has an inherent jurisdiction to remove trustees as part of its general jurisdiction to supervise the administration of trusts.

[601] When exercising its jurisdiction to remove trustees the Court is guided by the welfare of the beneficiaries. As the Privy Council stated in Letterstedt v Broers:

In exercising so delicate a jurisdiction as that of removing trustees, their Lordships do not venture to lay down any general rule beyond the very broad principle above enunciated, that their main guide must be the welfare of the beneficiaries. Probably it is not possible to lay down any more definite rule in a matter so essentially dependent on details often of great nicety. But they proceed to look carefully into the circumstances of the case.

[602] As well as the welfare of the beneficiaries, the security of trust property and the satisfactory execution of the trusts are recognised as guiding principles in the exercise of the Court’s jurisdiction. Dixon J stated in Miller v Cameron:

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 trusts 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 authorize the Court to act, the delicate question 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.

[603] As the Court of Appeal recognised in Medlessohn & Schmid v Centrepoint Community Growth Trust the settlor’s intentions, neutrality between beneficiaries and promotion of the purposes of the trust are also relevant circumstances.

[604] In considering whether a trustee should be removed it is not necessary to establish that there has been a breach of trust, but equally establishing a breach of trust will not necessarily be sufficient to justify the removal of a trustee. Inconsequential mistakes should not be allowed undermine a settlor’s intention. Nor will a trustee be removed simply because of a position of conflict between duty and interest. Whether or not a position of conflict will justify removal depends on the nature of the conflict and the other circumstances of the case.

[605] As to incompatibility between trustees and beneficiaries the Court of Appeal in Kain v Hutton said:

…mere incompatibility between trustees and beneficiaries is not enough … Any incompatibility must be at such a level that the proper administration of the trust is seriously adversely affected and it has become difficult for a trustee to act in the interests of the beneficiary…

[606] What is apparent therefore, is that each or any of the existence of conflicts of interest, misconduct on the part of the trustee, incompatibility or hostility between trustees and beneficiaries can be reasons for removing a trustee, but whether removal is appropriate in a particular case will depend on whether any of those factors are present to a sufficient extent to undermine the satisfactory execution of the trust for the welfare of the beneficiaries.

[116] Trustees are not to be lightly removed. The courts are generally reluctant to remove trustees if other avenues can be found to remedy a perceived risk. Further, incompatibility between trustees and beneficiaries is not enough to justify removal. Any incompatibility must be at such a level that the proper administration of the trust is seriously adversely affected and it has become difficult for a trustee to act in the interests of the beneficiaries.

Factors to consider

In Triezenberg v Mason Fitzgerald J acknowledged that trustees are not to be removed lightly, but that although the administrative matters were tolerably settled, the court did need to exercise its supervisory jurisdiction for reasons including:

  • the current stewardship was only achieved due to the spectre of proceedings and it “should not be necessary for trustees to have legal advisers constantly “sitting on their shoulder” to regularise matters
  • there was no prospect of the trustees working together given the findings of the court regarding removal and the trust assets are being significantly eroded to the ultimate detriment of the beneficiaries
  • further issues that required the trustees to act cohesively are anticipated

Forming the view that the best option was to remove the settlor as a trustee reasons given to explain this included:

  • the view of the court that the settlor “does not believe in the concept of the two trusts” and his view is essentially that the trust assets belong to him and his wife and his candid concession that he is unhappy with his co-trustees because they will not let him do whatever he wants with the trust assets [125] [Editor’s note: it is suggested that this is a reality that will confront many settlors as trusts “come of age”]
  • a person who “does not accept or believe in the very convent of the trust of which they are a trustee is the antithesis f who ought to be a trustee.”[126]
  • trustees must be flexible [127]
  • hostility between trustees and inability to consider some beneficiaries [129] and [130]
  • consideration was given to removing the other trustees but this step was not taken because:

“[133] First, for the reasons set out in the following section of this judgment, there is in my view no principled basis upon which to remove Ms Triezenberg and Mr Dodd as trustees. The removal of trustees should be for sound and principled reasons, not simply as a matter of convenience or to ease the anxiety of a particular party.

[134] Second, even if Ms Triezenberg and Mr Dodd were removed and a professional trustee appointed in their place, I do not consider this would solve or remove the issues which have presented in the trusts to date. As noted above, Mr Mason does not accept the very nature of the two trusts, which will not be resolved by the introduction of yet another “stranger” into the Mason family affairs. Further, I have no doubt Mr Mason will soon fall out with any independent trustee appointed who does not fully agree with or adopt his proposed course of action. The history of these proceedings and the broader family dispute demonstrates a lengthy and unfortunate list of those Mr Mason has fallen out when they did not agree with him …”

Consideration was also given to removing all the trustees and appointing a trustee corporation who had consented to such appointment.  This step was not taken because as set out at [137]:

“While I was initially attracted to such an outcome, on reflection, I have reached the conclusion that it is not necessary or appropriate. The primary reason is that as explained below, I have concluded there is no principled basis upon which to remove the plaintiffs as trustees. Further, in the absence of a principled reason to remove and replace trustees, injecting a new trustee into the trusts will cause the trusts to incur further unnecessary costs as the new trustee “comes up to speed” with the history and present status of the trusts.”

Of note was Fitzgerald J’s view that the trustees had originally been “handpicked by [the settlors, one of whom] is now unable to speak fro herself, to be the trustees of the two trust for the next phase of the [settlors’] lives.”

Further as noted at [140] the trustees have worked conscientiously carry out their role as trustees.  It would have been easy for the to “throw in the towel” but they persevered in extremely difficult circumstances.  Reference was also made at [150] to Fitzgerald J’s view that notwithstanding strained family relationships, the court was satisfied that the beneficiaries would be dealt with in a “fair and impartial manner.”

The decision reflects a pragmatic consideration of the facts presented and highlights the need to measure expedience against principles.[157]

Arbitration

The decision also includes a helpful assessment at [74] to [84] of a dispute resolution clause in the Trust Deed and the court’s reasoning for why this clause, which provides for disputes to be referred to an independent person does not amount to an agreement to submit to arbitration.

References:

  • Triezenberg v Mason [2019] NZHC 14
  • Trustee Act 1956, s 43, 45
  • Marshall Family Trust [2017] NZHC 472
  • Godfrey v McCormick [2017] NZHC 420
  • Green v Green [2015] NZHC 1218 at [598]-[606]
  • Peng v Rothschild Trust (Schweiz) AG [2017] NZHC 25

 

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