Trusts – removing Trustees – some recent cases
Applications to remove Trustees used to be rare. Most Trustees who weren’t wanted, preferred to resign. But in recent times there has been a marked increase in the number of cases where the Trustees have preferred to stand and fight. How have they fared?
First the law. Section 51(1) of the Trustee Act provides that the Court can appoint new Trustees whenever it is found “inexpedient, difficult, or impractical so to do without the assistance of the Court …” Section 51(2) adds less common grounds for removal: “misconduct”; a conviction of a crime of dishonesty; bankruptcy; and mental disorder. Although the section refers only to the “appointment” of new Trustees and not to the “removal” of existing ones, the Courts have interpreted the section to authorise both appointment and removal.
The Courts also have an inherent jurisdiction to remove Trustees and they have used this jurisdiction more frequently in recent years.
As a matter of principle the Courts are generally “reluctant to remove Trustees if other avenues can be found to remedy the perceived risk”. So said Paterson J in Clifton v Clifton, Ak CIV-2004-404-4185, 5.11.04.
Applications to remove Trustees arise in a wide variety of situations and I will illustrate some of them. A surprising number have involved solicitors who have been forcibly removed from their Trusteeships.
Scenario One involves Trustees/Appointors who are too partisan. In Clifton Paterson J took the powers of appointment from a Mr Clifton who was using them to remove a solicitor Trustee and replace him with an Auckland barrister to whom he owed $40,000 for unsuccessfully defending him on drug charges. The new Trustees intended to borrow $40,000 from the Trust to pay the fees and an additional sum for purposes that were thought inappropriate.
Justice Keane did something similar last year in Oxley v Lookout Holdings Ltd, Ak CIV 2007-404-4828, 24.4.08 when he prevented an appointor from exercising his powers without first obtaining the leave of the Court – on the basis that it was “strongly arguable that he was a party to a breach of trust.”
In the English case of E v E (1990) 2 FLR 233 – a case under the UK equivalent of s 182 of the Family Proceedings Act – a Protector was removed because of his active hostility to one of the beneficiaries – his estranged daughter-in-law. Section 182 may therefore provide an additional jurisdiction to remove a Trustee.
Scenario Two involves Trustees who have a conflict of interest. An example is Farnsworth Ak M1767/97, 12.1.99 where Potter J removed a solicitor Trustee. He had acted for the deceased who had told him that it was his “responsibility to see [that his widow would be] protected from claims from his children”. In pursuing this instruction it was held that he was not “able to stand back from the situation and objectively and even-handedly assess it, in the interests of all beneficiaries and potential claimants”.
Scenario Three involves a situation where a Trustee is seriously “out of sympathy with the beneficiaries”. This occurred in Kain v Hutton, Christchurch M198/00, 3.12.04 where it was held that one of the Trustees was so out of sympathy with a group of the beneficiaries as to make “his continuation in office untenable”.
I have been involved in cases where beneficiaries have contrived to create a state of affairs of this nature. Courts need to be alert to distinguish between cases of genuine conflict and contrived conflict.
The last scenario to which I will refer involves relationship property disputes where a spouse/partner is typically a Trustee or who has valuable powers of appointment. In my experience it is quite common in relationship property litigation to include such claims. They are typically used as a make-weight in the hope that they will intimidate an opponent into settling. They have succeeded where the Trustees have been incompetent and ignorant of their duties but seldom otherwise.
For example in Osborne v Wilson & Anor (2005) the High Court removed all three Trustees. They were a husband, his estranged wife, and a solicitor. The wife refused to allow Trust funds to be used to prepare accounts for the Trust. She had caveated a property owned by the husband and he “in retaliation ... ‘froze’ the Trust’s bank account”. The solicitor Trustee sided with the husband and wrote partisan correspondence on his behalf. It was a case that typifies the outstanding ignorance of so many people have who have had their houses settled on Trusts and who have no understanding of the legal consequences.
Should a spouse be removed because he/she has the “effective control” of a Trust? In accordance with the Supreme Court’s decision in Kain v Hutton [2008] 3 NZLR 589 such Trusts are to be regarded as legitimate. This may make it harder to remove a Trustee since the Supreme Court’s judgment appears to expressly contemplate that he or she can act in a partisan way.