In Legler v Formannoij  NZCA 607, the children of a deceased father challenge their stepmother’s decision to appoint a corporate trustee, exclude the children and the family trust as beneficiaries of the Trust and distribute the trust fund to their stepmother, the sole director of the corporate trustee. We examine this decision, and the subsequent decision of the Privy Council in Wong Wen-Young & Olrs v Grant View Private Trust Company Ltd  UKPC 47 in further detail below.
Ricco Legler (Ricco) inherited significant wealth on the death of his father, a successful European businessman. With this wealth, Ricco settled two trusts:
- The Horowai Trust – The final beneficiaries of the Horowai Trust were Ricco and his children. The discretionary beneficiaries were the final beneficiaries, Ricco’s second wife Maria Formannoij (Maria) and any trust that benefits a beneficiary who is also a beneficiary of the Horowai Trust.
- The Kaahu Trust – The final beneficiaries of the Kaahu Trust were Ricco and Maria. The discretionary beneficiaries were the final beneficiaries, any issue of the final beneficiaries (including Ricco’s children) and any trust that benefits a beneficiary who is also a beneficiary of the Kaahu Trust (which included the Horowai Trust).
Following the death of Ricco in 2017 and the resignation of BOI Taxation Trustee Co No 2 Limited, Maria was the sole trustee of the Kaahu Trust.
The Trust Deed contained provisions to ensure that sole trustees, while acting personally, could not benefit themselves. However, clause 27.2 (c) of the Trust Deed exempted a corporate trustee from these rules. This clause provided that a company may act as trustee and exercise all powers, even if a beneficiary has an interest in that trustee company, whether as a director, officer, shareholder or otherwise.
Maria obtained legal advice to this effect and Kaahu Trustee Limited (KTL) was then incorporated with Maria as the sole director and Maria and a professional adviser as shareholders. On the day of KTL’s incorporation, KTL was appointed as the trustee of the Kaahu Trust and Maria resigned.
A few months after KTL’s appointment, KTL excluded the Horowai Trust and Ricco’s children as beneficiaries of the Kaahu Trust. KTL then distributed the trust fund to Maria and appointed Maria as the sole beneficiary on the vesting day of the Kaahu Trust.
In the case, Ricco’s children sought the appointment of an independent trustee in place of KTL. The children argued that Maria appointed KTL so that she may benefit herself and that Maria had therefore breached the trustee duty to exercise powers for a proper purpose.
The Court held that for Maria’s actions to amount to a fraud on power, Ricco’s children needed to prove that Maria had an improper, collateral intention that offended the objects of the Kaahu Trust. As the trust deed expressly permitted a self-dealing corporate trustee, the Court held that it was a “logical fallacy” to argue that strict compliance with the terms of the trust deed can amount to a fraud on power, without further evidence of an improper intention. The Court dismissed the appeal and held that there was no evidence that Maria was motivated by an improper purpose.
The Court accordingly declined to order that an independent trustee be appointed to the Kaahu Trust.
Dissent by Cull J
Cull J disagreed with the majority decision. Her rationale was as follows:
- The appointment of KTL was not compliant with the terms of the Kaahu Trust and the intention evidenced in the Trust Deed. This is because the Trust Deed defined a corporate body as a “properly appointed corporate body”. According to Cull J, this language distinguished between a corporate trustee like the Public Trust or Perpetual Guardian and one like KTL. Cull J stated that this interpretation would be consistent with the other provisions of the Trust Deed that constrain a trustee’s ability to self-benefit and require an independent trustee to be unrelated to a beneficiary.
- The solicitor who drafted the Trust Deed told Maria that he had concerns about a corporate trustee controlled by Maria and advised that the control of a corporate trustee must be given to someone other than Maria, and the control should be independent. The solicitor also informed Maria’s lawyers that it was the settlor’s intention for there to be an independent trustee at all times.
- Maria was motivated by an improper purpose in the appointment of KLT as sole trustee to gain control of the trust for her benefit exclusively. Cull J stated that Maria’s failure to appoint another independent trustee after BOI Limited retired demonstrated her improper motivation.
- The decision to remove the beneficiaries from the Kaahu Trust cannot be evaluated separately from Maria’s exercise of her power of appointment. Cull J held that the removal of Ricco’s children as beneficiaries should be taken into account in determining Maria’s subjective motivation at the time she exercised the power of appointment.
Cull J accordingly held that Maria’s appointment of KTL was not in the best interests of all of the beneficiaries of the Trust and was accordingly improper.
Wong Wen-Young & Olrs v Grand View Private Trust Company Ltd
The Privy Council’s decision in Wong Wen-Young & Olrs v Grant View Private Trust Company Ltd  UKPC 47 was released one day after the Legler decision.
This case was factually comparable to Legler and concerned the trusts set up by two brothers, Wang Yung-Ching and Wang Yung-Tsai (Wang Brothers). The Wang Brothers had established two trusts:
- The Global Resource Trust (GRT) – This trust was established for the benefit of the children and successive generations of the Wang Brothers.
- The Wang Family Trust (WFT) – A non-charitable purpose trust that did not benefit the family members of the Wang Brothers.
In this case, the trustees of GRT excluded all family members as beneficiaries and appointed the trustee of WFT as the sole beneficiary of GRT. The trustees of GRT then transferred the trust fund to WFT, out of reach of the family members of the Wang Brothers. In exercising these powers, the trustees of GRT relied on the wording of the trust deed which permitted the appointment or removal of any persons as beneficiaries of GRT.
The case was brought by one Wang Brother’s son and grandchild.
The Privy Council held that the purpose of GRT was to benefit the family. Accordingly, that the trustees of GRT exercised their powers for an improper purpose by transferring the assets from GRT to WFT and depriving the family from any benefit.
The Wang case is interesting in light of the Legler decision, as the GRT trustees were similarly empowered by the Trust Deed to exercise their powers.
To date, the Privy Council decision has not been applied in the New Zealand Courts. The decision made by the Privy Council will be considered persuasive precedent in the New Zealand Courts. It will therefore be interesting to see how the New Zealand Court deals with questions regarding whether a trustee has acted with proper purpose, when a trustee is complying with the terms of a trust
Cases concerning whether a trustee has exercised their powers for a proper purpose are heavily fact dependent and turn on the facts of the case. It is important to obtain legal advice when considering whether to appoint and remove trustees or beneficiaries, as these matters require careful consideration of the terms of the trust and the settlor’s intention.
If you have any questions about this article please get in touch with our Private Wealth Team or your usual contact at Hesketh Henry.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.