Subjectively

In a majority decision (Winkelmann CJ dissenting) the Supreme Court has dismissed the appeal in Legler v Formannoij.

For the background to this matter see The proper corporate trustee.

The key issue for decision is set out at as follows at [5] the Supreme Court decision:

“It is also common ground that whether Marina’s purpose in appointing KT Ltd as trustee was improper is judged subjectively (that is, according to her intent) at the date of the exercise of the power.8 This means that at trial Li, Laila and Ken had to prove that the appointment of KT Ltd, at the time the appointment was made, was for the purpose of benefiting Marina at their expense. If that has not been proved then the
appeal fails, whether or not, and in what circumstances, an intention of benefiting herself at the expense of Ricco’s children would have been an improper purpose.“

The majority of the Supreme Court determined the case on the facts, that is, at the time the corporate trustee was appointed, Maria Formannoij (Marina) did not have the intention of benefiting herself at the expense of her late husband’s children).

The decision turns on the particular facts and the terms of the Kaahu Trust.

Given that a corporate trustee can be used in circumstances where powers can be exercised by such a company’s sole director as a director, that would not be permissible by the director as a beneficiary; the Chief Justice’s views set out at [185] to [195] warrant careful consideration.

[185] First, cl 18.1, a provision of general application, precludes a trustee/beneficiary exercising a power or discretion in favour of themselves. For a trustee/beneficiary to appoint a company they entirely control to the position of sole trustee is to exercise a power in favour of themselves. They thereby gain control of the corpus of the trust, control of all decision-making and thereby the ability (unconstrained by the views of another trustee) to distribute the assets to themselves at will. The respondents say that cl 18.1 is permissive only, in the sense that the clause does not preclude a trustee exercising a power or discretion in their own favour. That is a hard argument to maintain. I repeat the terms of cl 18.1 in full:

Any power or discretion vested in the Trustees may be exercised in favour of a Trustee who is also a Beneficiary by the other Trustee or Trustees.

It is a necessary implication of cl 18.1 that a trustee who is also a beneficiary may not exercise a power or discretion as trustee in their own favour. As cl 18.1 makes clear, decisions benefiting a trustee who is also a beneficiary can only be made by the other trustee or trustees. It is also worthwhile contrasting this clause with the provision in the Horowai Family Trust deed which deals with the same subject matter and which could properly be categorised as permissive. The clause in that deed provides:

Any power or discretion vested in the Trustees may be exercised in favour of or for the benefit of a Beneficiary who is also a Trustee.

[186] My second reason for rejecting an interpretation which treats such an appointment as authorised relates more directly to the provisions dealing with the appointment of trustees. It is significant that the Trust Deed does not expressly authorise such an appointment, contrary to what the High Court held. The best that the respondents can point to in this regard is cl 27.2(c), which contemplates that a beneficiary might have an interest in a corporate trustee as a shareholder, director or otherwise, and that the corporate trustee may exercise a power or discretion to benefit that beneficiary. But that does not authorise a corporation exclusively controlled by a beneficiary to act as sole trustee.

[187] On the other side of the interpretive ledger, the intention to prevent a trustee/beneficiary from gaining and using control of the trust to prefer themselves is apparent from several other provisions within the Trust Deed. It is apparent from the requirement of unanimity in trustee decision-making in cl 8.3, from the prohibition on a trustee/beneficiary exercising a power in favour of themselves in cl 18.1, and from much of the text of cl 26.1. As noted, cl 26.1 (which is one of only two clauses from which there may be no derogation should the trust be varied) achieves two things: it prevents a trustee who finds themselves as the sole remaining trustee from dealing with the trust assets, allowing them only to act to appoint an additional trustee (para (a)); and it requires there to be at least one trustee who is not a beneficiary nor in a specified category of relationship with a beneficiary or other trustee (para (b)).
Read as a whole, these provisions are clearly intended to ensure that independent judgement (in the sense of judgement which is not tainted by self-dealing or self-interest) is brought to bear when a discretion or power is exercised to deal with trust assets.

[188] The respondents point out that sole corporate trustees are excluded from cl 26.1, and thus from the restrictions on the identity of trustees in cl 26.1(b). However, it is apparent from the way cl 26.1(b) is drafted that it is directed to trustees who are natural persons. To state the obvious, a corporate trustee could never be in one of the prohibited categories of relationship (spouse, parent, child or sexual) with
a beneficiary or other trustee. The fact that such restrictions are expressed, by virtue of the chapeau, to apply “[u]nless a corporate body is the sole Trustee” is therefore of no moment. It does not suggest that the intention to ensure independence in trustee decision-making is negated when the trustee is a body corporate. Rather, the proviso related to a sole corporate trustee should be read as applying to
cl 26.1(a) — reconciling it with cl 27.1 so that a corporate body is able to act as sole trustee.

[189] Thirdly, logic compels such an interpretation. There is no logic in providing for independence, but allowing that requirement to be bypassed by the appointment of a company owned and controlled by a beneficiary as sole trustee. In particular, it is illogical to construe cls 26.1 and 27 as permitting a beneficiary-controlled body corporate to be sole trustee — why would the settlors intend to preclude individual trustees from appointment, or from acting in certain circumstances, but allow companies controlled by those same individuals to be appointed and to so act?

[190] The respondents respond that cl 26.1 is not concerned with securing independence but rather with maintaining separation between the beneficiaries and the trust fund, so as to ensure the trust is immune from “trust busting” attacks. In this regard they call in aid the authority of the decision of the High Court of Australia in Montevento Holdings Pty Ltd v Scaffidi. In that case the trust deed provided that, if the individual with the power to appoint and remove trustees was also a beneficiary, they were not eligible to be a trustee.

[191] The High Court of Australia approved the finding of Buss JA, who had been in the minority in the Court of Appeal, that there was no implicit or actual prohibition upon a corporation, even if controlled by a beneficiary, being a trustee in these circumstances. In reaching that conclusion Buss JA had rejected an argument that, if an individual appointor/beneficiary was precluded from appointing themselves as
trustee, they must also be precluded from appointing as trustee a company they controlled. The Judge, it seems, rejected the notion that the clause in question had anything to do with securing independence or “even-handedness” in decision-making. Rather, he held, it was designed to avoid the risk, arising under
particular legislation, that if a natural person who was a beneficiary under a discretionary trust was also the trustee, and the appointor of trustees, they would be held to hold a general power of appointment in respect of the assets and therefore be liable for death duties. In reaching that view, the Judge referred to revenue legislation relevant to the trust when it was established, and contemporary legal writing from that time that elucidated what drafters of trust deeds were attempting to achieve.

[192] Montevento, then, turns upon the particular legal context and upon the particular provisions in that trust deed. As outlined above, there are clear indications n the Kaahu Trust deed that there was a desire to achieve independence in decision-making.

[193] Finally, I address the significance to this analysis of cl 2.2 — the clause which provides that, unless expressly provided for, powers in the Trust Deed are not limited by the interpretation of any other clause, and that interpretation should favour the broadening of powers. Such a clause does not of course remove the requirement to construe each clause within the overall context of the deed — to find otherwise would
be to set up, through interpretation, conflict between the clauses. In this case, cl 2.2 cannot override the difficulty for the course of action settled upon by Marina that cl 18.1 creates — it is to be remembered that the effect of that clause is that a trustee/beneficiary may not exercise a power or discretion in their own favour. Nor can cl 2.2 compel an interpretation of a power or discretion that undermines the clear
intent and purpose of other provisions — in this case the clear intent that there be independence brought to bear in trustee decision-making.

[194] To conclude on this point, Marina’s appointment of a company owned and controlled by her as the sole trustee was precluded by the terms of the Trust Deed. This conclusion flows from the following:
(a) cl 18.1 precluded Marina, as a trustee/beneficiary, from appointing a company she controlled as sole trustee because to do so was to exercise that power in her own favour; and (b) construed together, the provisions of the Trust Deed are to be interpreted as requiring that there be independence (in the sense of independence from the interests of an individual beneficiary) brought to bear in trustee decision-making and so as precluding the appointment by a trustee/beneficiary of a company they control as sole trustee in order to subvert this requirement.

The purpose of the power

[195] However, the appellants did not argue or plead that the appointment was outside the scope of the power. Rather they accept that the appointment was not expressly prohibited by, and was technically consistent with, the Trust Deed, instead arguing that it was not an exercise of the power for a proper purpose.

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For more information see CCH Trust Series 2025 – Practical Insights from Supreme Court Decisions.

References

• Grand View Private Trust Company Limited v Wong UKPC [2022] 47
• Grand View Private Trust Company Ltd v Wong Civil Appeal No 5A of 2019
• Pitt v Holt [2013] 2 AC 108
• Re Manisty’s Settlement [1974] Ch 17
• Vacher v Paul [1915] 1 A..C. 372, 379
• Arnold v Britton and Wood v Capita Insurance Services Ltd [2017] UKSC 24
• Legler v Formannoij [2022] NZCA 607
• Legler v Formannoij [2024] NZSC 173