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Rea and Sargison v Russell: trustee liability in the context of voidable transactions

The High Court decsion in Rea and Sargison v Russell considers an application under s 294 of the Companies Act 1993 to have payments between a company and a trust set aside on the basis of being void pursuant to s 292 (payments made during the specified period that result in a greater payment than on the subsequent liquidation).

The case is interesting in that it highlights the difficulties that can arise when some legislation is applied to trusts, where the drafters of the same have perhaps not fully considered how best to deal with a situation where a trustee is the legal owner but not the beneficial owner of funds that may need to be returned.

In this case the High Court found that payments by the company were found to be in restoration of property unlawfully misappropriated from the trust, rather than payments by a debtor to a creditor. Accordingly, they were not payments for the purposes of s 292, and as such the liquidators were not entitled to an order setting them aside. Although the decision was overturned on appeal (see below) the reasoning remains interesting as it highlights the precise nature of the matters taken into account in the context of voidable transactions.

See for example para [66] – [67] where AJ Bell notes:

“[66] If there had been a relevant creditor-debtor relationship so as to bring s 292 into play, Mr Russell would be in some difficulty. The liquidators intend to enforce any liability for voidable transactions against him personally. As a trustee he has no doubt accounted for the money received from the company. If found liable and ordered to pay under s 295, he may have an indemnity which would entitle him to an equitable lien and the right to be recouped out of trust assets for payment of a judgment debt, but that may be little comfort when the trust is insolvent. Section 296 has not been drawn with trustees such as Mr Russell in mind.

[67] There is a possible way around the difficulty. The voidable transactions provisions of the Companies Act are directed at those who benefit as creditors. Although Mr Russell was in law the recipient of the company‘s payments, as trustee he had no beneficial interest in the money received. His position is comparable to that of an agent who receives funds and passes them on to his principal. Restitution law may not regard an agent who accounts to his principal as the beneficiary of a payment. In principle there seems to be no reason why a similar approach should not be taken in the case of a voidable transaction. A way to address this is to mould any orders so that they are directed at the beneficiaries of any voidable payments rather than the trustee. One such way is to make it a condition of any order for payment under section 295(a) that Mr Russell is not to be personally liable but that the order is to be satisfied only out of the assets of the trust, giving the liquidators a right to be subrogated and to claim against trust assets. On any such subrogation claim the receiver would have to be heard. If I had found that the payments were voidable transactions and had got to the stage of making orders under section 295, I would have considered attaching such a condition.”

The case is also useful for the assistance provided in determining how to establish in what circumstances actions will and will not be attributed to a trustee.  Fundamental to the case was the acceptance that Mr Russell had no knowledge of transactions between the trust and the company in question.  However, if Mr Russell delegated the management of the trust to his co-trustee Mr Kirk, Mr Russell is bound by the actions of Mr Kirk. It is an established principle of trust law that a trusteeship is personal and only the trustee can exercise the powers, authorities and discretions conferred under a trust. The trustee must exercise his powers in good faith, must not fetter the trustee’s discretion. Further as trustees must act unanimously (unless the trust deed or legislation provides otherwise), it is not generally possible for there to be more than one prevailing decision on respect of any action. The question of whether trustees can know different things is also not entirely clear. See for example the Court of Appeal decision in Regal Castings where one trustee’s knowledge is attributed to another.

Although trustees cannot delegate their powers, in certain circumstances a trustee can appoint an agent.

Helpfully, trust law, distinguishes between the appointment of an agent and that of a delegate. At general law the personal nature of the trustee-beneficiary relationship dictates that although trustees can appoint an agent to carry out or implement decisions made by the trustees, the trustee cannot delegate the exercise of the trustee’s decision making process.

At para 40 AJ Bell notes that “athough it does not mark the distinction between delegation and agency quite so clearly, the following dictum of Paterson J in the Court of Appeal‘s decision in Niak v Macdonald [2001] 3 NZLR 334 (CA) at [16] provides some assistance:

It is an established rule of trust law that a trustee must not delegate his or her duties or powers, not even to co-trustees. Delegation is, however, allowed where such delegation is specifically permitted by the trust instrument, or practically unavoidable and is usual in the ordinary course of business and the particular agent is employed in the ordinary scope of his or her business…A trustee has a duty to act personally and this duty requires trustees to be unanimous in any decision they take. …”

In that case one trustee had borrowed trust funds to buy a yacht. At first instance it was held that the other trustees had effectively given that trustee general authority to transact trust business (in accordance with s 29 of the Trustee Act 1956). However, the Court of Appeal overturned this decision on appeal finding that a general, non-specific delegation cannot be valid.

In the case at hand the trust deed provided amongst other things that the trustees had the power at clause 4.2.3 “to delegate any of their management and administration Powers or duties to any Person. …”.

That said, importantly such a power is specific and does not extend to the power to delegate trustee powers generally. In Rea and Sargison v Russell the High Court found that although the word “delegate” was used in clause 4.2.3 it really only allows for an agent to be engaged to carry out functions that are management and administration and does not extend to functions that go beyond management and administration i.e. decisions of strategy and policy and disposition.

AJ Bell noted that the distinction between the powers of an agent of a trustee and those of a trustee can be seen in Lord Millett‘s example of a solicitor for a family trust in Dubai Aluminium Co Ltd v Salaam [2003] 2 AC (HL) at para 133, 134. In that case the courts distinguished between the acts of a solicitor when acting as solicitor to the trustees and acts done by him as an express trustee. It is part of a solicitor’s business to advise whether trust money may lawfully be invested in an overseas hedge fund or used to pay a discretionary beneficiary’s school fees. However, it is not part of his business to make the decision whether to do so or not as this is the duty of a trustee.

As noted at para 45 in Rea and Sargisen v Russell “a decision to place funds with a finance company is an investment decision. A trustee may decide on a given investment strategy and then leave an agent to make investments following that strategy. Decisions as to investment strategy are non-delegable functions of a trustee. Decisions made in the course of carrying out an investment strategy are managerial and may be delegated under clause 4.2.3 of the trust deed.”

When one trustee made the decision to place trust funds without reference to the other trustee, that trustee was not acting under any delegated power. Accordingly, the investment decisions could not be attributed to Mr Russell.

In response to this the liquidators argued that Mr Russell was at fault for having not better monitored the trust fund. In this regard the court noted at para 47 that:

“It is important to mark the distinction between the scope of powers conferred and potential liability for breach of duties. If a trustee purports to give an agent powers or authority which the trustee cannot confer, the trustee may face liability to beneficiaries for losses arising from the actions of the agent… If the trustee has validly appointed an agent but did not take proper care in the choice of agent or did not take due care in supervising the agent, the trustee potentially faces liability to beneficiaries for losses. Mr Russell might owe a duty of care to the beneficiaries to ensure that trust assets are not dissipated by trust agents, but that is a different question from the scope of authority given to Mr Kirk and the extent to which Mr Kirk‘s conduct can be attributed to Mr Russell.”

This decision was overturned on appeal.  The Court of Appeal finding that payments to the trust by the company were voidable in terms of s 292. 

The High Court finding that the payments were in partial satisfaction of the trust’s proprietary claim, was not upheld as the payments went into an overdraft account and could not be traced.  

 

The result was that Mr Russell, although no longer a trustee, is liable to pay $928,937.79 to the liquidators as he was the trustee at the relevent time.  Alternate orders could have been made, for example an order requiring the beneficiaries of the voidable payments to satisfy the voidable payments from the trust’s assets.  However, the court was satisfied that that was no appropriate in this case and that it had insufficient information regarding the trust to contemplate orders other than those against Mr Russell.

References:

 

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