Contents

Chapter 6
Appointment and removal of trustees

Exercise of power to appoint trustees

Proposal
P26 New legislation should:
(1) impose a duty of good faith and honesty on those exercising a power to remove and appoint trustees, whether the power is exercised under statute or under the trust deed. This will apply to the decision to remove a trustee, and the selection of a replacement or the decision not to replace the trustee, as the case may be;
(2) provide that the court may remove and replace someone with the power to appoint trustees under the trust deed if that person breached the duty of good faith, or if that person has been removed in their capacity as a trustee, or if otherwise expedient; and
(3) provide that a person with the power to appoint trustees would be entitled to apply to the court for directions in the exercise of that power, for example if there was a perceived conflict of interest.
Please give us your views on this proposal.

Current law

6.61The court has held that a person with the power to appoint trustees is subject to fiduciary duties,172  and on this basis has ordered their removal and replacement. Whether the duties will be imposed depends on the terms of the trust deed. There is no statutory provision clarifying when these duties will be imposed, and those exercising the power may not be aware of the case law. It has been argued that persons with the power to appoint and remove trustees are subject to a case law duty of good faith; however this has not been settled by the courts.173

Issues

6.62The power to appoint and remove trustees is of increasing importance. Sometimes this power is retained by the settlor to keep a final level of control over the trust.

6.63There are questions regarding the appropriate bounds of this role, in particular, whether those exercising a power to appoint trustees (either under the trust deed or legislation) should be subject to any of the core fiduciary duties; and whether the court should be able to remove and appoint someone with the power to remove and appoint trustees under the trust deed.

6.64Problems have arisen in relationship property claims where both parties to the relationship are trustees of a family trust, but only one party has the power to remove and appoint trustees under the trust deed.174  The party with the power of appointment and removal is able to remove the other party as a trustee and acquire the full management of the trust. This would be an example of the wrongful exercise of the power, but it is unclear how much the courts are able to intervene, as duties on the person with the power of appointment and removal will depend on the wording of the trust deed.

6.65There is also a lack of clarity as to whether persons exercising a statutory power to remove and appoint trustees are subject to any fiduciary duties. This is relevant to questions of liability. It is not clear for example whether a personal representative of a deceased trustee will be liable for appointing an unsuitable replacement.

Options for reform

6.66The options considered were:

(a)imposing a specific set of duties, such as the duty of impartiality between the beneficiaries, a duty to adhere to the terms of the trust, and a duty not to profit from the office;
(b)imposing a general duty of good faith; or
(c)leaving any duties to be imposed to the trust deed.

Discussion

6.67Submitters supported clarifying in legislation that the court has a supervisory jurisdiction over those with the power to appoint and remove trustees. They expressed support for enabling the court to remove and replace an appointer. Taylor Grant Tesiram suggested that the power to appoint and remove trustees should be removed automatically from a trustee who holds that power if the trustee is removed by the court on grounds of misconduct.

6.68We consider that the best option would be to impose a general duty of good faith on those exercising the power to remove and appoint trustees, whether under statute or under the trust deed. We favour this option because it is flexible enough to address the broad range of circumstances that may arise, and does not impose onerous duties on personal representatives exercising the power of appointment and removal.

6.69This approach is based on the principle that persons with a role of authority and power within a trust structure should be subject to duties to the trust. If there are no duties imposed on the person with the power to appoint and remove a trustee and the court has no power to remove such a person, then there is no check on the exercise of this power. This could lead to abuses of power or improper administration of the trust.175

6.70We considered whether further specific duties should be imposed. In our view this is not necessary. The power to appoint and remove trustees depends on the exercise of discretion. If the discretion is exercised in good faith, there is no need for a higher standard. This approach does not preclude further duties being imposed through the trust deed.

172Carmine v Ritchie [2012] NZHC 1514 at [66]; David Hayton, Paul Mathews and Charles Mitchell (eds) Underhill and Hayton: Law Relating to Trusts and Trustees (17th ed, LexisNexis Butterworths, Bath, 2006) at [73.11].
173Andrew S Butler “Trustees and Beneficiaries” in Butler (ed) Equity and Trusts, above n 170, at 112−113.
174These issues were the background to the case of Kilkelly v Arthur Watson Savage Legal HC Invercargill CIV-2006-425-148, 23 July 2007.
175See for example Re The CP Clifton Children's Trust HC Auckland CIV-2004-404-4185, 5 November 2004, in which the general power to alter the trust deed was used to address these issues.