Removing Trustees under the Trusts Act 2019
The Trusts Act 2019 (Act) came into force on 1 January 2021 and will apply to most existing and new trusts and signifies the first significant legislative change to trust law in New Zealand in over 60 years. The new Act is designed to make trust law more accessible by clarifying and simplifying core trust principles and essential obligations for trustees.
The Law Commission in its Review of the Law of Trusts (Report 130, August 2013) noted that there were issues with the current law in the area of the appointment and removal of trustees, including grounds for removal, “due to a lack of clarity in the existing statutory provisions or processes, or an outdated approach that no longer meets the needs of contemporary trust practice”. The Commission made recommendations to modernise the statutory provisions in these areas of trust administration, and to provide guiding principles and mechanisms for appointment and removal of trustees that were more robust.
As part of that overall goal, the Act has clarified a number of the statutory rules around the appointment and removal of trustees, which topic is the subject of this article.
Overview of removal mechanisms under the Act
In summary, a person nominated under the trust instrument as having the power to remove trustees has the power to remove a trustee in writing, but that power must be exercised honestly and for a proper purpose. A person with the power to remove trustees may still apply to the court for directions on the exercise of a power of removal.
The Act differentiates between powers of removal exercised under the Act and powers of removal exercised under the terms of a Trust. Section 103(1) states that the person or people who are named in the terms of the trust as having power to remove may do so either under the trust terms or under s 104 or s 105.
If a person with a power to remove a trustee decides to remove a trustee under the Act’s provisions, that person must give written notice of that decision. The notice takes effect 20 working days after the trustee receives notice, unless the trustee served with the notice applies to the High Court for an order preventing removal, in which case the notice takes effect only if and when ordered by the Court. Previously a trustee concerned at his or her removal would make an application for directions from the Court as to whether it was appropriate to resist removal.
Under the Act’s removal provisions, if a trustee applies to prevent his or her removal, that trustee must produce evidence that raises a genuine dispute as to whether the removal decision was reasonably open to the person in the circumstances. If the Court is satisfied that the trustee has established a genuine dispute, the onus then moves to the person who made the removal decision to establish that it was reasonably open in the circumstances.
The High Court may make an order preventing the removal of the trustee only if the Court is satisfied that none of the grounds for removal are made out. Grounds for removal are specified in the Act, but also include grounds recognised at common law and in equity.
Grounds for removal of a trustee can include:
loss of the capacity to perform the functions of a trustee;
removal of a trustee is desirable for the proper execution of the trust and one of the following grounds are also met:
the trustee repeatedly refuses or fails to act as trustee;
the trustee becomes an undischarged bankrupt;
the trustee is a corporate trustee that is subject to an insolvency event; or
the trustee is no longer suitable to hold office as trustee because of the trustee’s conduct or circumstances
Examples of conduct or circumstances that may make a trustee no longer suitable to hold office as trustee include being convicted of a dishonesty offence, where the trustee cannot be contacted, or where the trustee is prohibited from being a director or manager of a company or incorporated body.
Under the Act, the Court can also make an order removing a trustee whenever it is necessary or desirable to remove a trustee and it is difficult or impractical to do so without the assistance of the Court. This could occur, for example, where the person with the power to appoint or remove trustees is the trustee who is sought to be removed.
The wording “necessary or desirable” is a slight change from the word “expedient” under the previous Trustee Act 1956, which imported considerations of suitability, practicality, and efficiency. Under the prior Act and at common law and equity, misconduct, breach of trust, dishonesty or unfitness were not necessarily required to be established, and whether it was inexpedient, difficult, or impractical to remove a trustee without the assistance of the court depended on the facts and circumstances of the case. It is likely that similar considerations will apply under the new Act.
The primary considerations for the High Court in any removal decision are its duty to see trusts properly administered and executed, and the best interests of the beneficiaries of the trust.
Section 94 of the Act applies whether or not the removal power is exercised under the terms of the trust or under the Act and provides that a person with the power to remove or to appoint trustees must exercise any power of removal or appointment honestly and in good faith and for a proper purpose.
Coextensive Inherent Jurisdiction
The removal mechanisms in the Act are not the only source of the High Court’s power to remove and appoint trustees as the Court retains its inherent jurisdiction to review the exercise of the power of removal, as well as the power itself to remove trustees. The inherent jurisdiction is derived from the Court’s general supervisory powers in equity relating to the supervision of trusts for the welfare of beneficiaries.
Review of the exercise of a power of removal
The exercise of a power of removal or appointment of a trustee would usually be regarded as the exercise of a fiduciary power because the subject matter of the power is the office of the trustee, which lies at the core of the trust and carries fundamental and onerous obligations to act in the best interests of the beneficiaries as a whole. However, as Heath J has noted in one of the Pugachev judgments, “the debate about whether, in any given case, a protector exercises a fiduciary or personal power may be arid because of the need, in either event, for the power to be exercised for proper purposes. The doctrine of fraud on a power is equally applicable to both types of power.”
When considering whether the power of removal was exercised properly, prior High Court decisions have applied a test similar to that under applied in judicial review. So it has been held that the removal of a trustee required an exercise of judgment, and the trustee’s decision will be set aside only where the trustee has acted in bad faith or for an improper motive, made an error in law, failed to consider relevant considerations, considered irrelevant considerations, or reached a perverse or capricious decision.
Grounds for Court to remove a trustee
When exercising its jurisdiction to remove trustees the Court is guided by the welfare of the beneficiaries, the security of trust property, and the promotion of the purposes of the trust.
In New Zealand, the Court of Appeal has approved the following summary of the circumstances in which a court will exercise its power to remove trustees:
“… in cases of positive misconduct, Courts of Equity have no difficulty in interposing to remove trustees who have abused their trust; it is not indeed every mistake or neglect of duty, or inaccuracy of conduct of trustees, which will induce Courts of Equity to adopt such a course. But the acts or omissions must be such as to endanger the trust property or to show a want of honesty, or a want of proper capacity to execute the duties, or a want of reasonable fidelity.
Some examples of circumstances where a court has considered it appropriate to remove trustees include:
where trustees had failed to administer the estate and to keep proper accounts and give full information to beneficiaries when required;
where the trustee had “no understanding whatever” of the role of a trustee or of the duties of a trustee towards the trust beneficiaries;
where there is a lack of confidence and trust existing between trustees such that it prejudices the efficient and effective ongoing administration, management or winding up of trust; or
where there had been a complete breakdown in the structure and organisation of a charitable trust, and the problems were intractable.
Breach of trust by a trustee and conflict between trustees are also relevant matters. The primary concern is the welfare of the beneficiaries and protection of the trust estate. In assessing any case, a trustee’s failures will generally be viewed cumulatively, based on the operation of the trust as a whole, even if separate matters taken individually may be of insufficient consequence, but when taken together may more than warrant that trustee’s removal.
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