The Ruinous Risks of Trusteeship

This week’s article is about five trustees who face financial ruin.  Their Trust was to acquire some land near Turangi and develop it in a joint venture with a Company.

Three of the trustees - a teacher, a prison officer and a policeman - signed some papers that committed their Trust to obligations that now exceed $4.5m. 

This is how they came to sign the papers.  

The first trustee  went to an office in Turangi where a lot of people were present.  A solicitor “gave us a brief explanation about the fact that documents needed to be signed …  There were a lot of documents.  Papers were being initialled by a lot of people and they were being pushed along as fast as possible.”

He hadn’t seen the documents before and wasn’t advised to get independent legal advice.  He was horrified when he discovered what he’d signed. 

The second trustee had no commercial or business experience and gave a similar explanation.  He said he had no knowledge that the documents might expose him to personal liability.

The third trustee had no independent legal advice.  He didn’t understand that the documents exposed him to personal liability.  He assumed that if the other two trustees signed them, the documents “must be alright”.

They have each been found liable to pay more than $4.5m to a finance Company: Dorchester Finance Ltd v Ngahuia Ltd & Others, CIV-2009-404-2529, 8.2.10, Doogue AJ.

In the meantime, interest is accruing on the debt at more than $2,500 per day. 

What of the two Trustees who didn’t sign the documents? 

This is the most alarming part of the story. 

The Trust allows decisions to be made by a majority.  Doogue AJ has held that this may mean that they, too, are personally liable to pay $4.5m if the other trustees have “validly, collectively bound [the Trust] to the contract.”  In that event the trustees “do not escape liability on the ground that they did not sign the contracts.”

“If a majority makes a decision, it must be the case that the minority are bound by it in all respects.  Otherwise, … those dealing with the Trust could be confronted with the situation where some of the owners of the Trust property would agree to executing securities affecting their properties … but the minority could defeat the contractual objectives of the parties by declining to co-operate.”

“but once a Trust has validly contracted, then unlimited personal liability attaches to the trustees.”

The minority trustees “do not escape liability on the ground that they did not sign the contracts”. 

For the moment, the two trustees have avoided judgment being entered against them on a summary judgment application because they may be able to establish a defence under a section of the Maori land legislation which says that a trustee who “dissents in writing from the majority decision” may not be liable:  s 227(6) of the Te Ture Whenua Maori Act 1993.

You will ask, “Why didn’t they instruct a lawyer to advise them about the contracts?”  Their answer is that their joint-venture partner told them “it would be cheaper” if they used the same law firm that was acting for the joint venturer – which is what they did.

What lessons can be learned from this tragedy?

1.      No one should be a trustee of a Trust that permits majority voting except in the case of a Trust to which s.227(6) of the Te Ture Whenua Maori Act applies.  Not only are dissenting Trustees bound by a decision which they refused to support, but they’re personally liable to pay for all the adverse consequences that flow from it.

2.      Trustees who do not understand the possible consequences of a contract that they wish to sign should take expert advice on all the liabilities to which they may be exposed.

3.      Using the services of another party’s lawyer because “it will be cheaper to do so” may produce the most expensive advice that it’s possible to obtain.

4.      No trustee should sign contractual documents in the belief that it’s safe to do so because other trustees have signed them first.

5.      Anyone who wants to be a trustee, where the trusteeship is likely to carry material risks of personal liability, should try to do so via the use of a corporate trustee.  This is not guaranteed to immunise a director from liability since directors can be attacked by “dog leg” claims.  This is a strategy that has been used overseas in which a beneficiary sues the corporate trustee which in turn sues its directors, but I am not aware of the strategy having been used in New Zealand.