Retiring trustees forced to seek court order due to appointor incapacity

This alert discusses the legal position where a holder of the power to appoint and remove trustees under a trust deed (Appointor) has lost capacity, in light of the recent High Court decision in Aksinya Enterprises Limited v Levin and Madsen-Ries [2024] NZHC 2048 (Aksinya).

The Trusts Act 2019 (Trusts Act) now provides relatively comprehensively for the appointment, removal and retirement of trustees, including by setting out who holds the powers in certain situations. These provisions reduce the need for specific provisions in the trust deed and recourse to the Court. In general, the Trusts Act provisions rely on the Appointor, in the first instance, and introduce default provisions where there is no Appointor, or the Appointor is unable or unwilling to act.

Under the Trusts Act, the Appointor:

• has the power to discharge a retiring trustee who expresses in writing a wish to retire from their trustee duties (section 101(a) of the Trusts Act). It follows that the notice in writing should be delivered to the Appointor (or, failing that, the relevant person specified in section 101); and

• either may appoint a replacement trustee by section 113(2) of the Trusts Act, or must do so, if the retiring trustee is the sole trustee or the trust terms require it (section 113(1) of the Trusts Act) e.g. where the retirement would reduce the number of trustees below the minimum number required by the trust terms.

In Aksinya's case, the combination of facts meant that the provisions of the Trusts Act could not be applied to resolve a situation where the two trustees of a trust wished to retire and be discharged from their duties.

One of the joint Appointors had lost capacity

As is common in New Zealand trust deeds, the settlors of the trust in Aksinya's case were the joint Appointors during their joint lifetimes. However, one of the joint Appointors had lost capacity. In the Triezenberg case,¹ the Court of Appeal held that, where one of two joint Appointors had lost capacity but was still living, the other joint Appointor could not exercise the power unilaterally i.e. the joint Appointors were unable to act.

In Aksinya's case, the High Court accepted that the joint power of appointment could not be exercised by, and the present trustees could not give notice of their wish to retire to, the Appointors, because one of the Appointors lacked capacity.

There were no remaining trustees, no one willing to be appointed as replacement trustee and no one who could discharge the retiring trustees

Section 92(2)(ii) of the Trusts Act provides that if the Appointor is unable or unwilling to act, the power to appoint a replacement trustee defaults to the 'remaining trustees'. In Aksinya's case, there were no remaining trustees.

By section 92(2)(iii) of the Trusts Act the power of appointment then defaults to the retiring trustees. However, there were no persons, including Public Trust, willing to be appointed as replacement trustees. This is not entirely surprising as the trust property comprised of a residential property with the usual property outgoings but few liquid assets to pay expenses and, therefore, paying professional trustee fees was challenging.

In the absence of a replacement trustee, there was no one eligible to discharge the trustees from their duties under section 101(a) of the Trusts Act.

Recourse to the High Court was necessary

Accordingly, the present trustees sought and were granted orders from the High Court:

• removing them as trustees under section 112 of the Trusts Act. The Court accepted that it was impractical to effect the retirement without the Court's intervention; and
• appointing Public Trust as the replacement trustee of last resort. Under section 114(4) of the Trusts Act, if the Court appoints Public Trust, it must accept the appointment. The Court noted that section 114 of the Trusts Act is available where it is at least difficult or impracticable but, in this instance, also likely impossible, to appoint a new trustee without the Court's assistance.

Recourse to the High Court to enable the present trustees to retire (and be discharged) may have been avoided, if the issue of Appointor incapacity had been dealt with in the trust deed or otherwise. However, given the illiquid nature of the trust property, a court order would still have been necessary to compel Public Trust to act as trustee.

Joint powers of appointment are relatively common in New Zealand trusts. Advisers should discuss the possibility of incapacity with Appointors and address how it should be managed.

Where a trust holds illiquid assets, such as a family home or holiday home, advisers should also discuss how the trust will meet its expenses, including any necessary professional trustee fees.

1. Mason v Triezenberg and Dodd [2022] NZCA 138.

This alert is written by Suzanne Smith TEP, Associate, Dentons New Zealand Private Wealth team.

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