Contents

Chapter 8
Appointment and removal of trustees

Discharge and replacement of a trustee

RECOMMENDATION

R20 Mandatory and discretionary grounds for removal
​The new Trusts Act should:
(1) Require the removal of certain trustees by imposing an obligation on persons with the power to appoint and remove trustees under R21(1) to remove a trustee when the following mandatory grounds are met:
(a) the trustee is incapacitated; and  
(b) the trustee is subject to either an enduring power of attorney in relation to property or a property order, or has a trustee corporation appointed to act as a manager under the Protection of Personal and Property Rights Act 1988; and  
(c) the trustee’s powers have not been delegated by a delegation authorised by statute or by the terms of the trust.
(2) Empower (but not require) persons with the power to appoint and remove trustees under R21(1) to remove a trustee and appoint a replacement, if it is desirable for the proper functioning of the trust, when one or more of the following discretionary grounds are met:
(a) the trustee refuses or fails to act as a trustee;  
(b) the trustee, being a corporate trustee, enters into receivership or liquidation, ceases to carry out business, is dissolved, enters into a compromise with creditors or voluntary administration under Parts 14 or 15A of the Companies Act 1993, or does not satisfy the solvency test in section 4 of that Act;  
(c) the trustee is no longer considered suitable to continue to hold office as a trustee because of circumstance or conduct, for instance, this may be the case when:
(i) the whereabouts of the trustee is unknown and the trustee cannot be contacted;  
(ii) the trustee is not capable of fulfilling the role because of sickness or injury;  
(iii) the trustee is adjudged bankrupt;  
(iv) the trustee is convicted of a dishonesty offence;  
(v) the trustee becomes precluded from serving as a director under the Companies Act 1993 because of a breach of that Act or the Securities Act 1978, or is the subject of a current banning order under the Financial Markets Conduct legislation;  
(vi) the court finds the trustee has committed serious misconduct in the administration of the trust; or  
(vii) the trustee, being a lawyer, chartered accountant or financial adviser, is found to have seriously breached the applicable ethical standards of that profession, resulting in the trustee being struck off, losing a license or being disqualified.
(3) Retain the court’s general discretion to remove trustees if expedient, including the discretion to remove a trustee without appointing a replacement in accordance with R25.
(4) Provide that nothing in (1) or (2) is to be read as limiting the grounds on which a person nominated under the terms of the trust with a power to remove and appoint trustees is entitled to exercise that power.

R21 Who may remove a trustee and appoint a replacement
The new Trusts Act should provide that:
(1) In absence of any contrary intention in the terms of the trust, the following persons have the power to remove and appoint trustees by deed when the grounds in R20 are met:
(a) the person nominated under the terms of the trust with a power to remove and appoint trustees; or  
(b) if there is no person in (a) or if that person is unavailable or unwilling to make a decision, the remaining trustees; or  
(c) if there is no person in (a) or (b) or if that person is unavailable or unwilling to make a decision, whichever of these representatives of the trustee being removed is relevant:
(i) a property manager appointed over the trustee under the Protection of Personal and Property Rights Act 1988;
(ii) the holder of an enduring power of attorney over property of an incapacitated trustee; or
(iii) the liquidator of a corporate trustee that enters into liquidation.
(2) Where a representative of the trustee listed in (1)(c) acts to remove and replace, the following process applies:
(a) the representative should provide notification of the intended discharge of the trustee and of the person selected as replacement, and a statement of the trust accounts to all competent adult beneficiaries, or where it is unreasonable or impractical to do so, to a reasonably representative sample of beneficiaries;
(b) the beneficiaries should be given 20 working days from the date that notification is received to object to the intended replacement trustee or to anything in the statement of trust accounts;  
(c) at the end of the notice period, if no one has objected the representative should apply to the Public Trust to confirm the discharge and replacement of the trustee;  
(d) the Public Trust, if it is satisfied that due notice and information was given to the beneficiaries and that no objections have been made, may confirm the discharge and replacement of the trustee by deed;  
(e) if a beneficiary objects, an application will need to be made to the court for the trustee to be removed and replaced;  
(f) if the Public Trust:
(i) is not satisfied regarding the notice and information given to the beneficiaries; or  
(ii) has concerns because of issues raised by the beneficiaries, disagreement between the parties, or any other reason,
it may decline to confirm the discharge and replacement of the trustee. An application will need to be made to court for the discharge and replacement of the trustee and the court will be able to make any other necessary directions about the management of the trust.

R22 Appointment of replacement when trustee dies while in office
(1) The new Trusts Act should provide that, in absence of any contrary intention in the terms of the trust:
(a) if a trustee dies while in office and it is necessary, either because the trustee was a sole trustee or because the terms of the trust require it, or desirable for the trustee to be replaced, the replacement may be appointed by deed by:
(i) the person nominated under the terms of the trust with a power to remove and appoint trustees; or  
(ii) if there is no person in (i) or if that person is unavailable or unwilling to make a decision, the remaining trustees; or  
(iii) if there is no person in (i) or (ii) or if that person is unavailable or unwilling to make a decision, the executor or administrator of the trustee; and
(b) if the deed of replacement is to be made by the executor or administrator, the process of notification of beneficiaries and confirmation by the Public Trust in R21(2) should apply.

R23 Retirement and replacement of trustee
The new Trusts Act should provide that, in absence of any contrary intention in the terms of the trust:
(a) if a trustee wishes to retire, the trustee may be discharged by deed by:
(i) the person nominated under the terms of the trust with a power to remove and appoint trustees; or  
(ii) if there is no person in (i) or if that person is unavailable or unwilling to make a decision, the remaining trustees; or  
(iii) if there is no person in (i) or (ii) or if that person is unavailable or unwilling to make a decision, the retiring trustee and a replacement trustee, selected by the retiring trustee, together; and
(b) if (a)(iii) applies, which will be the case if the retiring trustee is a sole trustee or if the persons in (a)(i) and (ii) are unavailable or unwilling, the process of notification of beneficiaries and confirmation by the Public Trust in R21(2) applies (with necessary amendments).

Current law

8.12Currently, the Trustee Act sets out aspects of the law regarding the discharge and replacement of a trustee in sections 51 and 43. Section 51 of the Trustee Act provides a list of specific circumstances in which the court may replace an existing trustee, including committing misconduct, being convicted of a crime, being mentally disordered, being bankrupt, and being a corporation in liquidation. Section 43 states that the person nominated in the trust deed as appointer of trustees, the surviving or continuing trustees, or the personal representative of the last surviving or continuing trustee, may appoint a replacement trustee in limited circumstances (in addition to any power contained in the trust deed). These circumstances include where the trustee has died, is out of the country for more than 12 months, desires to be discharged, refuses to act, is unfit or incapable of acting or is a corporation in liquidation.

8.13The court has the jurisdiction to remove trustees and appoint new trustees. This is a general discretion to be exercised when the removal of an existing trustee and appointment of a new trustee is expedient, for instance when there is a conflict of interest or an irreconcilable disagreement between the trustee and the beneficiaries.223
8.14 There are a number of issues with the way that sections 51 and 43 operate. These sections are neither aligned nor clearly differentiated, which causes confusion and a lack of clarity about the circumstances in which a trustee may be removed without recourse to the court. Some of the court’s specific powers of removal, for example the power to remove a bankrupt trustee, have been held to come within the broad power under section 43 to remove a trustee who is “unfit to act”.224 There is some case law on the meaning of the terms “unfit to act” and “incapable of acting”. However, there remains ambiguity and these terms may not provide sufficient guidance to persons wishing to exercise a power under section 43.225

8.15The law on the retirement of a trustee is unclear and does not operate as an effective statutory default. In addition to a trustee being able to retire if discharged under sections 43 and 51, a trustee may retire by deed with the consent of co-trustees or those with the power to appoint trustees under section 45. Also, in a seldom-used and unclear process under section 46, a trustee may retire by “passing his accounts before the Registrar” of the High Court where there are no co-trustees or they do not consent, and, if no one is able or willing to appoint new trustees, the retiring trustee may apply to the court for the appointment of a new trustee. However, there are situations that fall outside all of these sections, where there is no effective mechanism for a trustee to retire without recourse to the court, for instance where there is a sole trustee and no one with the power to remove and appoint trustees.

R20: Mandatory and discretionary grounds for removal of a trusteeTop

8.16We consider that it is useful for legislation to address the removal of a trustee in a more comprehensive, coherent way. We propose replacing the vague and problematic terms “unfit” and “incapable” under section 43 with a list of circumstances that meet the broad criteria to guide the exercise of discretion.226 The statutory grounds for removal would not be able to be overridden, but the trust deed would be able to include further grounds or detail to guide the exercise of discretion. We do not intend that the court’s inherent jurisdiction to remove and replace trustees would be altered by the provision.

8.17We propose that persons with the power to remove and replace trustees should have an obligation to remove a trustee who loses capacity to deal fully with property because of a personal property order or the appointment of a property manager. This would not apply where a delegation is in place for temporary incapacity. However, once the delegation expires and if the incapacity continues, the trustee should be removed. The legislation would also provide a list of grounds for removal on a discretionary basis under an updated and modernised form of section 43. Factors relating to the trustee’s capacity, like bankruptcy, liquidation, and receivership, should be included among these grounds, as well as other factors that call into question the trustee’s suitability.

8.18We have considered the option of mandatory removal when the grounds are made out but consider that this is not appropriate because it would impose additional duties on the person with the power to remove and replace trustees. Also, there may be situations where one of the grounds is made out but it is not in the interests of the trust for the trustee to be removed.

8.19Submitters have generally approved of this approach and have provided specific suggestions to refine the wording of the proposed provision. As a result, we have adjusted the structure of the proposal to make the circumstances that require mandatory removal clearer. We have also made sure the provision aligns with other aspects of our recommendations, such as delegation of trustee powers and the minimum number of trustees.

8.20Several submitters suggested that the threshold for considering that a trustee should be removed on the basis of one of the discretionary factors (“desirable for the proper functioning of the trust”)227 was too easily satisfied and that a more objective, higher standard, such as “necessary”, would be better. They were concerned that a trustee could be too readily removed when any of the list of circumstances was present, although not necessarily serious or instrumental to the trustee’s capacity to carry out the role. We consider that “desirable” is the more appropriate standard as it gives those with the power to appoint and remove trustees’ discretion to consider whether removal of a trustee is the best course of action in the circumstances. We have made changes to address submitters’ concerns that trustees should not be removed for minor breaches of trust or professional ethical standards. More serious misconduct is now required.

8.21We have not followed the Inland Revenue’s related suggestion that creditors should be given standing to apply to the court for the removal of a trustee.

R21: Who may remove a trustee and appoint a replacementTop

8.22Under the existing law, the continuing trustees or someone with the power to appoint or remove trustees under the trust deed, are able to remove a trustee where necessary in most cases.228 However, issues may arise where there is no such person, or where that person is unavailable, for instance, if there is a sole trustee or a corporate trustee enters into liquidation.

8.23Our intention with the recommendation is to continue to empower persons who have the power to remove and appoint trustees to do so when the grounds for removal are met, so that application to court can be avoided in most cases. We have expanded the categories of representatives who may remove and appoint a trustee to include a liquidator of a corporate trustee, and the holder of an enduring power of attorney or property manager under the Protection of Personal and Property Rights Act. We have included a process to provide validation and confirmation when trustees are being removed by a representative, to prevent this power being misused.

8.24We are aware that there are some concerns with the proposal to give the power to holders of an enduring power of attorney and property managers. The Ministry of Social Development was not in favour because it considers the role of the property manager or attorney is to look after the incapacitated person’s personal affairs. The property manager or attorney owes specific duties to persons unable to manage their own property. The Ministry does not consider it appropriate to extend the role by imposing duties in respect of a trust.

8.25In our view, the practical advantages of this option outweigh the concern. We consider that a representative of a trustee who loses capacity would be in a good position to remove and replace the trustee because the representative is already familiar with the trustee’s affairs. The power to remove the trustee is consistent with the existing role. The power to appoint new trustees is an extension of the role, but is consistent with the current approach of allowing the personal representative of a deceased trustee to appoint a replacement. Given that these issues only arise if there is a sole trustee in office and no one with the power to appoint and remove trustees, the personal representative of the trustee is likely to have some level of involvement, and may be the only person aware of the situation and competent to act. If the property manager fails to remove the trustee, it will put the incapacitated trustee at risk of liability, something from which a property manager is required to protect the trustee. We recognise that it is not ideal for the personal representative to fill this role but that there is no one else who is in a position to effect the change of trustee so that in these relatively rare cases a court proceeding can be avoided.

8.26 The recommendation includes supervision by the Public Trust when there is a sole trustee and no one with the power to appoint and remove trustees. If the Public Trust is not satisfied that the beneficiaries were notified of the discharge and replacement of the trustee and given a statement of the trust accounts, or if the beneficiaries object to the proposed appointment or anything in the statement of accounts, the personal representative will need to apply to the court to approve the appointment and provide direction on the administration of the trust. The statement of trust accounts is intended, in line with the duty to keep proper accounts, to be a statement that adequately identifies the assets, liabilities, income and expenses of the trust. This is a change from the proposal in the Preferred Approach Paper, which would have required the Public Trust to certify that the accounts were in order.229 Following feedback from the Public Trust and others, we now realise that this would have placed a potentially onerous obligation on the Public Trust to check over the trust accounts. We do not think this is necessary so long as a statement of the trust accounts is brought to the attention of the beneficiaries who are being notified of the replacement of the trustee so that the beneficiaries are given the opportunity to raise any concerns.

8.27It should be emphasised that if for any reason the process in this recommendation or the recommendations in R22 or R23 cannot occur, or those involved do not want to proceed with this process, an application can be made to the court for the discharge and replacement of the trustee. Further, it should be noted that the provisions recommended in this chapter are default provisions, and would not apply if an alternative process were set out in the terms of a trust. For instance, the Auckland Energy Trust deed contains rules governing the appointment, retirement and proceedings of trustees. These would continue to apply under the new Act.

R22: Appointment of a replacement when trustee dies while in officeTop

8.28Section 43 of the Trustee Act mingles death with other reasons for discharging a trustee, meaning that it is less than straightforward to work out the procedure that applies in that situation. Our proposals in the Preferred Approach Paper did not directly address what happens when a trustee dies.230

8.29We now consider that clarity is improved by separating out the case of a trustee that dies while in office. The recommended process echoes that in R21 but applies to an executor or administrator of the trustee who has died rather than a personal representative. It may not always be necessary or desirable for a deceased trustee to be replaced. This provision will only be needed when the deceased trustee was the only trustee of the trust, the terms of the trust require that the trustee is replaced, or those with the power to appoint a new trustee consider that it is desirable to do so.

R23: Retirement and replacement of a trusteeTop

8.30 Many modern trust deeds do not rely on the Trustee Act provisions for the retirement of a trustee; instead they include a process for retirement and replacement of trustees.

8.31The current law means that a court application is necessary where the retiring trustee is a sole trustee and the trust deed does not grant anyone the power to remove and appoint trustees. This causes unnecessary expense and takes up the court’s time for an essentially administrative matter.

8.32A trustee could currently be discharged without consent by applying to the Registrar of the High Court, even when this is not in the best interests of the trust. However, there may be valid reasons for those with a power to appoint and remove trustees not to discharge a trustee who wishes to retire, for instance, when a trustee seeks to retire because the trust has been poorly managed and the trustee wishes to avoid potential liability. However, there is no reasonableness requirement for withholding consent, which may pose an obstacle to efficient removal and replacement.

8.33In the Preferred Approach Paper, we proposed a simpler process for retirement that aligned more closely with general provisions for removal by including “wishes to be discharged from office” in the list of possible grounds for removal.231 When a trustee retired, the co-trustees, or those with a power to appoint, would make sure that the trust was in order before carefully selecting a new appointment. We considered the option of allowing a trustee to retire unilaterally because this would remove the need for a complex and expensive court process. However, while this would continue to be possible if authorised by the trust deed, we did not think the statutory default should allow this. The recommendation, involving certification by the Public Trust, is designed to allow removal without court supervision unless there is disagreement.

8.34As a result of submitter feedback, our recommendation is now to have provisions addressing retirement of a trustee that are separate from the grounds and process for removal of a trustee. We have tried to clearly distinguish retirement and removal so that they are recognised as different concepts.

8.35We have also modified the proposal by allowing a trustee who wishes to retire but who any co-trustees and the person with the power to appoint and remove trustees under the deed refuse to discharge, to use the process of notifying beneficiaries and seeking confirmation from the Public Trust. This resulted from submitter concern that it would be too difficult for a trustee to retire.

8.36 Notifying beneficiaries of the intended appointment and enabling beneficiaries to challenge a proposed new appointment would provide a safeguard to ensure that contentious cases receive court supervision.

223Re Roberts (1983) 70 FLR 158, 20 NTR 13 (SC); Mendelssohn v Centrepoint Community Growth Trust [1999] 2 NZLR 88 (CA); Kain v Hutton CA23/01, 25 July 2002.
224Andrew S Butler “Trustees and Beneficiaries” in Andrew S Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) 105 at 114, citing Re Wheeler and De Rochow [1896] 1 Ch 315 and In re Hopkins (1881) 19 Ch D 61 (Ch).
225For a discussion of the case law, refer to the Fourth Issues Paper, above n 213, at [4.14]–[4.15].
226The power of removal would apply to established situations that currently fall under the headings “unfit” (such as dishonesty offence convictions and misconduct in trust administration), and “incapable” (trustees not capable of fulfilling their duties, for instance, because of sickness or injury).
227See Preferred Approach Paper, above n 213, at P23(2).
228Trustee Act 1956, s 43.
229Preferred Approach Paper, above n 213, at P23.
230At [6.31]−[6.39].
231At [6.45].