What about the directors?

Refrigerant Recovery NZ Limited v the Trust for the Destruction of Synthetic Refrigerants relates to a Beddoe order application. The substantive claim challenges the validity of a trust restructure and decisions made by the former trustee’s directors to implement the restructure.

The restructure was brought about to address reforms to the product stewardship schemes (one of which related to refrigerant gases).

By way of background as set out at [25] to [27]:

[25] A Beddoe order allows a court pre-emptively to approve the bringing or defending of such claims at the cost of the trust. The fundamental question is what is in the best interests of the trust.

[26] In typical non-charitable trust cases, courts usually have regard to whether a trustee’s pursuit or defence of proceedings is self-interested. There is, however, no absolute rule as to when a Beddoe order is warranted, and any application turns on its own facts. Even in self-interested litigation where a trustee secures a personal benefit from successfully defending allegations of breach of trust, a Beddoe order ought to be granted if it is in the best interests of the trust and the beneficiaries as a whole, having regard to all the circumstances.

[27] Where a charitable trust is involved, I accept that there tends to be a “public overlay to the interests at stake ”making it more likely that a Beddoe order is appropriate. As indicated in Wallace v Green,
the nature of the trust does not change the tests to be applied, but that factual context will make it more likely that the trustees are not acting in self-interest, and it may make it inappropriate for the trust/current trustees to take a neutral role if that will not adequately protect the charitable objects.

With respect to procedure, the analysis set out at [29] to [34] is helpful:

[29] Under r 19.4(f) of the High Court Rules 2016, a Beddoe application is one of the specified types of the proceedings that may be commenced by originating application under pt 19. Rule 19.4(f) was inserted on 20 May 2021, along with a new r 19.4A which specifies what must accompany such an application, namely a memorandum, an affidavit and an application for directions as to service giving reasons (if applicable) why any particular beneficiary should not be served with the application, and why parts of the evidence should be withheld from any persons served, or why any person should be excluded from any part of the hearing.

[30] A memorandum proposing these changes was considered by the Rules Committee in their meeting of 25 November 2019. The issue was raised on behalf of the Society of Trust and Estate Practitioners because it had been unclear what type of proceeding was required for Beddoe applications, leading to undue costs being incurred. In New Zealand, it was noted that most Beddoe applications were brought as applications for directions under s 66 of the Trustee Act 1956. As such, the usual procedure had been an application under pt 18 of the High Court Rules unless leave was given under r 19.5 to use the originating application procedure. Part 19 was considered better suited for Beddoe applications, given the need for them to be dealt with promptly and simply, and the desirability for the applicant to be able to frankly disclose the strengths and weaknesses of the proceeding to the Court which was not something on which the other parties to the contemplated litigation were entitled to be heard. Accordingly, the proposal was to make it clearer that pt 19 was the preferred procedure in those circumstances, and the new r 19.4A was modelled on the Practice Direction 64B in England and Wales. The Committee agreed that it was desirable to clarify that the appropriate means of making a Beddoe application was by originating application under pt 19 of the High Court Rules as opposed to by way of an application for directions under s 66 of the Trustee Act (and thus by way of pt 18).

[31] The omnibus of rule changes that made these Beddoe amendments was the High Court Amendment Rules 2021. The explanatory note states that it was “to clarify and codify the proper manner of bringing a Beddoe application”. In other words (given the background), the intention was to capture the existing approach for best practice in most cases. At no stage did the Rules Committee discuss overriding the
Court’s discretion to decide on the appropriate procedure in any given case, including for matters specifically permitted to be commenced under pt 19. As the Court recognised in Wallace v Green, r 19.4(f) is a permissive rule that does not compel use of the originating application procedure for a Beddoe application.

[32] The usual reasons for dealing with a Beddoe application in a separate proceeding do not particularly arise on the facts of this case. The Attorney-General has participated in the hearing of this application, to gives submissions in her capacity representing the beneficial interests of the charity. There are no non-party beneficiaries who needed to be heard on the Beddoe application, nor any beneficiaries who need to be excluded because they are adversaries in the main proceeding. The Trust and other defendants have addressed the merits of the claim and their intended defences openly with the plaintiffs, largely because there is nothing secretly strategic to be assessed — evaluating the merits involves questions of interpretation (questions of law) applied to non-contentious facts about the procedure followed in the planning and implementation of the 2021 Restructure.

[33] I asked counsel for the plaintiffs to identify any aspects in which they had been disadvantaged by the Beddoe application being pursued by an interlocutory application within the substantive proceeding. There is little practical difference because much of the procedure in pt 19 is based on interlocutory applications. The plaintiffs do not contend that there are any other people who should be heard on the application, and the plaintiffs have benefited from having a greater opportunity to be heard on the merits of whether the Beddoe order should be granted. The only concern raised was the appropriateness of the trial Judge seeing an independent opinion of Vanessa Bruton KC setting out her views of the prospects of the proceeding
and whether bringing or defending it is in the best interests of the Trust (that document was filed because of the requirement in r 19.4A(1)(b)(iii), without any waiver of privilege). That issue can be addressed simply by removing that document from the Court file.

[34] I agree with the Trust’s submissions that any minor departures from r 19.4A are immaterial and these are not grounds for refusing the Beddoe order.

In analysing the substantive claim the key issues identified were:

(a) alleged improper purpose of avoiding accountability to the settlor;
(b) failure to consult with the settlor; and
(c) conferral of pecuniary benefits by agreeing to pay office holders.

The merits of each issue were considered by O’Gorman J in some detail. Although not definitive, the view reached was that there were strong defenses to the courses of action.

Of particular interest is the position regarding the former directors. As set out at [56] to [59]:

[56] The fifth cause of action alleges breaches by the ex-directors of their duties to act in RRNZ’s best interests, to comply with the Companies Act and constitution, and to avoid reckless trading (ss 131, 134 and 135).

[57] In a situation of a corporate trustee, viewing the trust obligations as being owed to the shareholder rather than the beneficiaries is misguided. When performing its duties as a trustee, a corporate trustee has no beneficial interest in the trust assets (other than the right to an indemnity) and must act for the benefit of the beneficiaries in accordance with the trust’s objects (in this case, charitable).

[58] I accept the defendants have a strong case that the ex-directors did not breach any duty to act in RRNZ’s best interests when it removed that company as trustee, because that ended RRNZ’s duties and potential liability for any breaches of trust, and there is no corporate entitlement to seek to profit/benefit from trust assets by resisting removal.

[59] A similar analysis applies to the sixth cause of action alleging breach of s 129 of the Companies Act requiring special resolutions for major transactions. The property held on trust by the company does not form part of its beneficial assets, so ceasing to be a trustee does not trigger any obligation for compliance with the major transaction provisions, nor does it amount to reckless trading (unless this is triggered by losing the right to an indemnity when the company has ongoing liabilities incurred as trustee).

The end result was that, notwithstanding the estimated costs of $1,345,000 + GST (including $280,000 on account of the former directors), the Beddoe order was granted. The decision in Refrigerant Recovery NZ Limited v the Trust for the Destruction of Synthetic Refrigerants warrants careful consideration in the context of corporate trustees whether appointed as trustees of a charitable trust or otherwise.

References:

• Refrigerant Recovery NZ Limited v the Trust for the Destruction of Synthetic Refrigerants [2024] NZHC 3933
• Re Beddoe [1893] 1 Ch 547 (CA)
• McLaughlin v McLaughlin [2018] NZHC 3198
• Re Uncle’s Joint Pty Ltd [2014] NSWSC 321
• McCallum v McCallum [2021] NZCA 237