Reviewing the actions of trustees
Reviewing acts and decisions of trustees
R32 The new Trusts Act should include a review provision to replace section 68 of the Trustee Act 1956 with the following features:
(1) The court should be able to review the act, omission or decision (including a proposed act, omission or decision) of a trustee on the grounds that the act, omission or decision was not reasonably open to the trustee in the circumstances.
(2) The procedure for review should be a two stage process:
(a) an applicant for review should be required to put forward evidence that raises a genuine and substantial dispute as to whether the act, omission or decision in question was reasonably open to the trustee in the circumstances (first stage); and
(b) if the court is satisfied that the applicant has established a genuine and substantial dispute, the court must allow the trustee the opportunity to appear before the court and put forward evidence establishing that the act, omission or decision was reasonably open to the trustee in the circumstances (second stage).
(3) Where the court finds, on a balance of probabilities, that the trustee’s act, omission or decision was not reasonably open to the trustee in the circumstances, the court may set aside the act or decision, restrain the trustee from acting or deciding the case, or in the case of an omission direct the trustee to act.
(4) The court must not make any order under the provision that affects:
(a) a distribution of the trust property that has been made not in breach of trust and before the trustee had notice of the application; or
(b) any right or title acquired by a person in good faith and for value.
(5) A trustee’s act, omission or decision under a power either in the new Act or the terms of the trust would be subject to review under the new provision.
(6) An application for review may only be made by:
(a) a beneficiary; or
(b) any personal representative of a beneficiary who lacks capacity (such as a parent or guardian of a minor beneficiary, or a property manager or holder of an enduring power of attorney for an incapacitated beneficiary).
Current law and issues
11.3Section 68 permits a beneficiary aggrieved by an act, omission or decision of a trustee to apply to the High Court to review that act, omission or decision. A beneficiary may also apply if he or she has reasonable grounds to anticipate that he or she will be aggrieved by an act, omission or decision of a trustee. The court may require the trustee to appear before it and substantiate the trustee’s decision. The court may make any orders as are necessary in the circumstances, except that the court may not disturb any distribution of trust property that has been made without a breach of trust before the trustee was aware of the application to the court. The court also may not affect any right acquired by any person in good faith and for value.
11.4 Jurisdiction under section 68 can only be invoked by a person who is beneficially interested in the trust property. In addition, it is limited to acts, omissions or decisions of a trustee in the exercise of a power conferred by the Act. Trustees’ powers conferred by trust deed or by another statute fall beyond the jurisdiction of section 68, as do powers conferred by court order.
11.5One significant issue is whether section 68 gives the court a greater ability to interfere with a trustee’s decision than does the court’s inherent jurisdiction to supervise the exercise of discretionary powers by trustees. Section 68 is silent on this issue and does not prescribe the circumstances in which the court may interfere with a trustee’s decision or action. This may give the court a wide power to interpose its guiding, or restraining, hand on the exercise by trustees of their powers and discretions. This was the approach taken by the court in the early case of Rossiter v Wrigley. Here the Court seemed to consider that the standard for review was whether the trustees acted reasonably or not in the steps that they took. More recently, in obiter comments in Jaspers v Greenwood, Kós J construed the provision more narrowly. He said:
Section 68 does not confer upon the High Court the role of general court of appeal from trustees' decisions. The relevant beneficiary grievance must involve the exercise (or intended exercise) of a trustee power in a manner that is ultra vires, vitiable on the basis of relevance of considerations or bad faith, or unreasonable in a Wednesbury sense. In other words, the ordinary means of review of the exercise of a statutory power.
11.6 In Wendt v Orr the Supreme Court of Western Australia, when considering the Western Australian equivalent of section 68, was not prepared to limit itself in that way. It considered that while the established grounds for intervention would allow the court to intervene, there may be other grounds as well.
11.7 Another significant issue with the current section is whether the ordinary incidence of the onus lying on the applicant for review is altered in section 68. In Rossiter v Wrigley the Court required the applicant to do no more than satisfy the standing requirement before requiring the trustee to show that he had not breached a duty or standard. More recently in Jaspers v Greenwood, the Court disagreed with this approach, finding that the onus was on the applicant. In Queensland, where there have been a number of cases under a similarly worded provision, the courts have considered that the onus is on the applicant beneficiary to show that the trustee has breached the appropriate standard of conduct required of trustees before they require a trustee to appear to defend his or her actions.
When should the court interfere with a trustee’s decision or action?Top
11.8A new provision should specify the standard against which the court will review trustees’ decisions. If the new provision is silent there will be continued uncertainty about the standard expected of trustees when exercising their powers.
11.9Some submitters argued that review by the courts under the provision should be limited to the grounds already developed by the court under its supervisory equitable jurisdiction because this reflects the court’s role as a corrector of fundamentally flawed decisions and not a de facto trustee. There was little support from submitters for the court being invited simply to consider whether trustees have acted unreasonably. The New Zealand Law Society, for example, considered the word “unreasonably” to be imprecise and that various forms of noncompliance by a trustee could fall within the meaning of “unreasonable”. It can also give the impression that the merits of a trustee’s decision can be examined for reasonableness. The New Zealand Law Society considered that the term “irrational” (in the sense that no reasonable trustee could make the decision) was more precise and should be used instead.
11.10 In the Preferred Approach Paper we proposed making the standard one of whether the action or decision of the trustee “was one that was not reasonably open to the trustee in the circumstances”. This formulation was intended to capture existing grounds of review as developed by the High Court under its supervisory jurisdiction, including the ground of “irrationality” in the sense of being a decision that no reasonable trustee could have made. Although the majority of submissions raised no concerns over the “not reasonably open” formulation, a few submitters thought it was too broad and there was a risk that it would be applied by the courts as a test of whether the trustee had acted reasonably. Conversely a few submitters also questioned whether that test captured all the current grounds for intervention, including unlawfulness, developed by the courts.
11.11We have not considered it necessary to modify the wording to expressly include a reference to whether the act or decision was “unlawful”. We consider that this is not necessary and that an unlawful decision (because it is unlawful) would not be a decision that is reasonably open to the trustee. The test of “not reasonably open” we have recommended is one of whether or not the trustee’s action or decision was one of a range of options that was properly open to the trustee in the circumstances. It is our intention to capture, with this formulation, the established grounds for intervention developed by the court under its supervisory equitable jurisdiction, while also leaving open the possibility that the courts may need to further develop those grounds in the future.
11.12It is important that the test in the statute broadly aligns with the approach taken under the court’s inherent jurisdiction to supervise trustees and review their actions. As has been noted in many cases and commentaries, the settlor has given the trustees, and not the courts, discretion to take action and make decisions in respect of the trust. The role of the court under the proposed review provision should continue to be a supervisory one, ensuring that actions and decisions entrusted to trustees are properly exercised by them. The court should not be invited to review the merits of the trustee’s decision or impose its own view as to what was reasonable in the circumstances.
What should an applicant be required to prove?Top
11.13We consider that the usual standard, which requires an applicant to show on the balance of probabilities that a trustee has acted improperly in the exercise of his or her powers sets too high a threshold for a beneficiary to overcome given the information asymmetry between trustees and beneficiaries. A trustee is not required to give reasons for the exercise of his or her discretions or decisions, and will not be required to do so under the changes we are recommending elsewhere in this Report. Without knowing the trustee’s reasons, it will be difficult for a beneficiary to challenge the exercise of a trustee’s powers as improper.
11.14We consider that this rather defeats the purpose of a review provision, which is to provide a mechanism to allow beneficiaries to hold trustees to account. This concern was shared by a number of submitters. However, many submitters were also concerned that the bar not be set too low either. All submitters considered that there should be some obligation on an applicant to raise at least a tenable issue. Most also expressed concern that trustees should not end up having to respond to frivolous time and resource wasting nuisance claims by beneficiaries who merely disliked his or her decision or have a general sense of grievance.
11.15In response, and to balance the interests of trustees and beneficiaries, we recommend a two stage process under which the applicant is first required to put some evidence before the court that raises a genuine and substantial dispute as to whether the trustees have acted properly in the exercise of their powers (first stage). Only then, if the court is satisfied that the applicant has raised a genuine and substantial dispute, should the trustee be required to appear before the court and put forward evidence that their action or decision was a proper one in the circumstances (second stage). By the term substantial we mean that the matter genuinely in dispute is not trivial. It should be a matter of genuine dispute that is of some importance for the trust’s beneficiaries.
Actions and decisions under trust deeds should be within scopeTop
11.16 We recommend that the review provision should apply to a trustee’s actions and decisions whether they are made under a power in the new Act or the trust deed. This has the advantage of introducing a consistent standard across all actions. It also addresses current uncertainty over whether review is available where the same powers are contained in both the statute and the trust deed. Most submitters were in favour of this approach and argued that it is something of an anomaly to allow the court to review trustees when they exercise some powers but not when they exercise powers set out in the trust deed. It is also confusing and leads to inconsistencies in the law.
Who should have standing to apply for a review?Top
11.17At present the court has jurisdiction to review a decision of a trustee under section 68 only where an applicant has a beneficial interest in the trust property. The specific wording in the section is “any person who is beneficially interested in any trust property”. Some commentators and judges have suggested that it is arguable that discretionary beneficiaries cannot apply under the section, while others have considered that it is likely that a person with contingent or vested interests, whether indefeasible or subject to divestment, would be considered “beneficially interested”.
11.18We consider that the same definition of beneficiary contained in draft clause 1 and discussed in chapter 4 should apply here. This includes a discretionary beneficiary; and may include a settlor or trustee where they may receive a benefit under the trust.
11.19Many submitters, including the New Zealand Law Society, argued that the new provision should not distinguish between beneficiaries of a trust and the objects of a power of appointment, and that both should be entitled to make an application. However, some submitters, responding to the Preferred Approach Paper, were concerned that our definition of beneficiary was too broad and that it could allow trustees to be held to account by institutions or members of a class whose chances of receiving property in reality are remote. These submitters suggested that potential applicants should be limited to those beneficiaries who have or may have, sometime in the future, real prospects of receiving trust property.
11.20While we acknowledge these concerns, we believe the risk is more theoretical than real. Although any beneficiary, no matter what their prospects of benefiting may be, would be free to bring an application for review, we consider the requirement that the applicant adduce evidence raising a genuine and substantial dispute is sufficient to address concerns over spurious nuisance claims. Our view is that the evidential threshold included as the first stage of the procedure for review will ensure that any applicant must have a genuine issue with the trustee’s conduct before the court will properly consider an application.
11.21In the Preferred Approach Paper we proposed that the guardians of minor beneficiaries and representatives of incapacitated beneficiaries should have standing to apply under the new provision. This proposal raised no concern among submitters and we recommend the inclusion of these potential applicants. The Preferred Approach Paper also included a proposal that settlors should also be able to apply under the new provision. This proposal did however raise concern among a few submitters. Having reconsidered that issue, we have decided not to recommend the inclusion of settlors who do not already fall within our definition of beneficiary. We consider that to give settlors review rights would be a significant change to the law in New Zealand and would alter the existing relationship between settlors and trustees.
11.22The review provision we have recommended is not intended to remove the courts’ inherent supervisory jurisdiction in respect of trusts. We consider that the courts’ supervisory jurisdiction should remain. It would therefore be possible for a beneficiary to apply to the court under the inherent jurisdiction or the new provision. The preservation of the courts’ supervisory jurisdiction would enable New Zealand to benefit from decisions in other common law countries where actions of trustees are reviewed.