Kain v Hutton

Supreme Court Resolves Trust Feud

Kain v Hutton et al [2008] NZSC 61

Some family feuds are of mythical proportion. The Montegu and Capulets, and the Hatfields and McCoys, come to mind. In the New Zealand setting the feud between the Kains and the Coupers is a close rival. In August 2008 the Supreme Court decided the latest and supposedly last round in this feud, dealing with two issues which arose from transactions undertaken in July 1999 by the Mangaheia Trust. The first of those was an appointment to Mrs A E Couper of shares in Ponui Station Limited. The second was a resettlement of shares in Mangaheia Station Limited on a new Mangaheia Trust.

The background to the feud lies in the thwarted expectations of the Kain family that they would enjoy the lion’s share of the Mangaheia Trust fund. That trust had been settled by Mr W A X Couper at a time when he was unmarried. His nieces and nephews were beneficiaries and expectations grew. He subsequently married Mrs A E Couper who already had four daughters, but there were no children by her marriage to Mr Couper. As time went by he felt he had to provide better for Mrs Couper and her children.

Mr Couper’s sister, Mrs J R Kain, had a number of children (the nieces and nephews referred to above) who became protagonists in the litigation when their expectations under the Mangaheia Trust as to both income and capital were undermined. As to income the trust permitted Mrs Couper to participate but not her children. She could participate alongside the children and grandchildren of Mrs Kain. If no allocation of income took place, then the Kain children were entitled to a default income.

Capital could go as above on the distribution date if expressly allocated by the trustees, but if that did not occur, it had to go to the children of Mrs Kain with a gift over to grandchildren. The children of Mrs Couper did not participate in capital at all. It was clear that the Kain lineage could expect the lion’s share of income and capital, subject only to the possibility that Mrs Couper might personally benefit as a discretionary object along the way.

The Supreme Court noted a number of additional matters which bore upon its decision in the case. Firstly, the trustees were entitled to accelerate the distribution date for all or part of the fund. Secondly, they had an express power to maintain and advance objects of the trust, incorporating section 41 of the Trustee Act 1956, slightly amended. Thirdly, it was accepted that Mrs Couper was a discretionary object as to income and capital but had no vested or contingent interest. Fourthly, it was acknowledged that her daughters and other relatives were not objects of the trust powers in the old Mangaheia Trust.

The two transactions that were the subject of dispute before the Supreme Court occurred in the following way. First, in relation to shares in Ponui Station Limited, the trustees of the Mangaheia Trust who included Mrs Kain’s son-in-law, Mrs Couper and an accountant, accelerated the date of distribution for the shares and distributed them to Mrs Couper outright. On the same day Mrs Couper settled the shares on a new trust, the Annette Couper Ponui Trust. The beneficiaries of that trust were Mrs Couper, her children and grandchildren, siblings, parents, spouses of beneficiaries, etc. Wide discretions were granted as to the application of the trust fund and the ability to appoint and remove beneficiaries was vested in Mrs Couper.

The result was that the Kain family expectations insofar as they related to the Ponui Station Limited shares were devastated. The wife of Mr Couper, by now amicably separated from him, were seen to have thwarted the original limits on her participation in the Mangaheia Trust. Her daughters and broader lineage were brought in as beneficiaries when they had previously been excluded.

From the Kain children’s point of view, as if that was not bad enough, the second element of the case involved a resettlement of the balance of the assets of the Mangaheia Trust on a new trust which again thwarted their interests. Mr Couper and the old Mangaheia trustees established a new trust essentially for Mrs Couper and Mrs Kain’s grandchildren. By deed poll the trustees recited a decision to resettle shares in Mangaheia Station Limited on that new trust. The effect of that would have been to allow Mrs Couper’s children to benefit and also to narrow the class of Kain beneficiaries to grandchildren.

The issues taken before the Supreme Court were limited by the Court’s leave. In relation to the Ponui shares it was alleged that a fraud had been committed on the power of appointment, influenced by Mr Couper. Though ostensibly proper, the power had been exercised, it was alleged, to confer a benefit on non-objects, namely Mrs Couper’s daughters.

In relation to the Mangaheia Station shares, the deed poll was treated as purportedly advancing capital in terms of section 41 of the Trustee Act as incorporated in the trust deed. This required the recipient to have a vested or contingent interest of which it was alleged there was none, and it also required the written consent from the Kain children which had not been obtained.

The Supreme Court dealt with the argument in relation to the Ponui Station Limited shares by examining first the difference between an excessive execution of a power of appointment as opposed to a fraud on the power. The significance of the two is that the former is inoperative only to the extent of the excess while a fraud on the power annihilates the exercise completely.

The Court’s discussion made it clear that a fraud on a power is a variant or subset of the excessive execution of a power of appointment in that it is a device to effect the purpose of benefiting a non-object of the trust. Although in that sense it might be considered a subterfuge, the concept of a fraud on a power does not involve dishonesty. It is merely that the power is exercised for a purpose or an intention beyond the scope of the deed. The same might be said of an excessive execution of the power but the difference lies in the actuating purpose for which the appointment is effected.

The onus of proving a fraud on a power rests on the person who seeks to upset the relevant appointment. The Court said that person had to establish that the real purpose of the appointer is to benefit himself or a non-object, rather than an object of the trust. In approaching that the Court would ask whether the appointer would ever have exercised the power without the benefit arising to himself or the non-object.

The Court’s observations on the extent of inquiry are instructive. The inquiry must be more than superficial and it must recognise that an object may benefit indirectly through a relative participating in the trust. In other words, non-objects could participate as long as that was genuinely on the basis that their inclusion was of benefit to the object. The actuating purpose of the appointer had also to be determined against contemporary practices. This took account of duty and taxation issues and it was relevant that the inclusion of other family members in the later settlement avoided duty costs by skipping the need for settlements between generations. Such practical outcomes were only to be expected and did not suggest any ulterior motive.

In conclusion the Supreme Court found that the appellants had failed to show that the appointment to Mrs Couper was not for her benefit but for the benefit of her daughters. She certainly wanted and expected that her daughters would eventually benefit but that was not enough for a fraud on the power to be established. The inclusion of wider classes of beneficiaries was expected – they might need Mrs Couper’s help – or other contingencies could arise such as her death. There was considerable benefit to Mrs Couper investing the Ponui shares in a new trust of the type she chose. Discrimination between classes of beneficiaries was expressly contemplated in the old Mangaheia Trust. Nothing had been done which was not contemplated and provided for.

On this point the decision of the Supreme Court can be compared with that of the Court of Appeal in Wong v Burt [2004] NZCA 174. In that case a fraud on a power of appointment was found to have occurred when funds were distributed to facilitate an advance to a new trust intended to benefit non-objects of the original trust. The intended beneficiaries were the grandchildren of the appointor but their mother, who might have benefited under both trusts, had died in the meantime. In other words there was no continuity of object between old and new trust, such as existed in relation to the Ponui shares in Kain.

In relation to the Mangaheia Station shares, the resettlement on a new Mangaheia Trust was not upheld by the Supreme Court. In coming to that conclusion it examined two issues, namely the difference between default and discretionary beneficiaries and the difference between a power of appointment as opposed to a power of advancement.

The first of these comparisons was relevant because it affected the status of the Kain children and whether it could be said that they had an interest either vested or contingent in the Mangaheia Trust fund. The High Court had concluded that a default beneficiary was no better off than a discretionary beneficiary and held a mere expectancy. Both the Court of Appeal and Supreme Court held differently, that a default beneficiary had a vested or contingent interest liable to be defeated by the exercise of a power of appointment. That was important because having that interest, the Kain children must have consented to the exercise by the Mangaheia trustees of the power to advance an interest in the trust and they had not done so. By contrast Mrs Couper was a discretionary beneficiary with a mere expectancy. The power of advancement had nothing on which to “bite” because of that.

Secondly the Court considered the difference between a power of appointment and that of advancement. This became relevant because the Court of Appeal had said that if the Mangaheia resettlement failed as a section 41 advance into trust, it could still be upheld as an appointment under clause 4 of the old Mangaheia Trust deed. The Court held that although there were common threads between the two, they are different concepts. It is a reminder that the power to appoint is a power to select a beneficiary from amongst a class. It goes to whether, to what extent and when that person will receive any part of the fund. It permits an object to be preferred over others so that some may miss out.

By comparison a power of advancement is an ancillary power only, which allows the date of enjoyment of rights already conferred under the trust deed to be brought forward. It does not alter or determine who benefits except that it may “head off” a possible failure to vest. The issue in relation to advancement is not whether someone benefits at all, but whether they do so earlier or in a different manner than might otherwise apply.

The conclusion the Court reached in relation to the Mangaheia Station shares was that the trustees of the old Mangaheia Trust had deliberately purported to effect an advance and the Court should not entertain an argument that the alternative route of appointment under clause 4 of the deed was available, and should be chosen by the Court of the advance was ineffective. The Court referred to Pilkington but in a context which reminds that this case dealt with resettlement as a means of effecting advancement to a beneficiary already enjoying an absolute or contingent interest in the trust fund. The fact that the trustees had chosen a different route in relation to the Ponui Station shares showed that they understood the distinction between the routes available to them and counted against the Court now relying on clause 4 if the advance was ineffective.

In this case there was no vested or contingent interest to advance because of Mrs Couper’s status and the Kain children had to consent to the advance because of the terms of the deed which imported section 41 of the Trustee Act 1956. On both scores the advance failed.

The result was that the Ponui Station shares stayed where they had been sent – in the Couper Ponui Trust. However, the Mangaheia Station shares reverted to the old Mangaheia Trust.

The Supreme Court has, in this judgment, gone back to basic principles to state:

(a) The nature of a fraud on a power of appointment and the inquiry that must be made to determine actuating purpose against real time considerations;

(b) The distinction between the vested and contingent (though defeasible) interests of a default beneficiary as opposed to a discretionary beneficiary;

(c) The difference between a power of appointment and a power of advancement, the former being a power which determines who may benefit under an instrument while the latter simply accelerates the right to receive a vested or contingent interest; and

(d) The limits on the extent to which a Court of equity will exercise a power which is available but which has not been exercised by the relevant trustees

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E.  geoff.clews@taxcounsel.co.nz