Contents

Chapter 6
Appointment and removal of trustees

Removal of a trustee

Proposal
P23
(1) New legislation should impose a duty on persons with the power to appoint and remove trustees to remove a trustee when the trustee is incapacitated and becomes subject to either an enduring power of attorney in relation to property or a property order, or has a trustee corporation appointed to act as a manager under the Protection of Personal and Property Rights Act 1988.
(2) New legislation should provide that the court, or those with the power to appoint and remove trustees may, if it is desirable for the proper functioning of the trust, remove a trustee and appoint a replacement in the following circumstances:
(a)the trustee refuses to act, fails to act, or wishes to be discharged from office;
(b)the trustee, being a corporate trustee, enters into receivership, enters into liquidation, ceases to carry out business, is dissolved, enters into a compromise with creditors under Part 14 of the Companies Act 1993, enters into voluntary administration under Part 15A of that Act, or does not satisfy the solvency test as defined in section 4 of the Companies Act;
(c)the trustee is no longer suitable to continue to hold office as a trustee because of circumstance or conduct, including but not limited to when the following occurs:
(i) the whereabouts of the trustee becomes unknown and the trustee cannot be contacted;
(ii) the trustee is not capable of fulfilling his or her duties by reason of sickness or injury;
(iii) the trustee is adjudged bankrupt;
(iv) the trustee is convicted of a dishonesty offence;
(v) the trustee becomes precluded from serving as a director under the Companies Act 1993 because of a breach of that Act or the Securities Act 1978;
(vi) the trustee is held by the court to have misconducted himself or herself in the administration of the trust; or
(vii) the trustee, being a lawyer, accountant or financial adviser, is found to have materially breached the applicable ethical standards of that profession.
(3) New legislation should retain the court’s general discretion to remove trustees if expedient, in order to capture circumstances which may not be foreseen and may not be included in the grounds for removal above.
Please give us your views on this proposal.

Current law

6.24Section 51 of the Trustee Act provides a list of specific circumstances in which the court may replace an existing trustee. The circumstances are where the trustee:

(a)has been held by the court to have misconducted himself in the administration of the trust; or
(b)is convicted, whether summarily or on indictment, of a crime involving dishonesty as defined by section 2 of the Crimes Act 1961; or
(c)is a mentally disordered person within the meaning of the Mental Health (Compulsory Assessment and Treatment) Act 1992, or whose estate or any part thereof is subject to a property order made under the Protection of Personal and Property Rights Act 1988; or
(d)is a bankrupt; or
(e)is a corporation which has ceased to carry on business, or is in liquidation, or has been dissolved.

6.25Section 43 states that the person nominated by the trust deed for the purpose of appointing new trustees, or the surviving or continuing trustees, or the personal representative of the last surviving or continuing trustee, may appoint a replacement trustee in limited circumstances (in addition to their powers contained in the trust deed). The circumstances are if the trustee being replaced:

(a)is dead; or
(b)remains out of New Zealand for the space of 12 months during which no delegation of any trusts, powers, or discretions vested in him as such trustee remains in operation under section 31; or
(c)desires to be discharged from all or any of the trusts or powers reposed in or conferred on him; or
(d)refuses to act therein; or
(e)is unfit to act therein; or
(f)is incapable of so acting; or
(g)being a corporation, has ceased to carry on business, is in liquidation, or is dissolved… .
6.26There is some case law on the meaning of the terms “unfit to act” and “incapable of acting”. However, there remains ambiguity and these terms may not provide sufficient guidance to persons wishing to exercise a power under section 43.168
6.27The court has the jurisdiction to remove trustees and appoint new trustees. This is a general discretion to be exercised when the removal of an existing trustee and appointment of a new trustee is expedient (that is, desirable to ensure the proper working of the trust). This covers situations such as a conflict of interest or an irreconcilable disagreement between the trustee and the beneficiaries or any other situation where a new trustee is necessary for the proper functioning of the trust.169

Issues

6.28There are a number of issues with the way that sections 51 and 43 operate. These sections are neither aligned nor clearly differentiated, which causes confusion and a lack of clarity about the circumstances in which a trustee may be removed without recourse to the court. Some of the court’s specific powers of removal, for example the power to remove a bankrupted trustee, have been held to come within the broad power under section 43 to remove a trustee who is “unfit to act.”170

6.29The overarching questions are which circumstances warrant the removal of a trustee and whether there should be mandatory or default provisions included in the statute.

Options for reform

6.30The options considered were:

(a)including a mandatory list of grounds for removal in a new Act;
(b)including a discretionary list of grounds for removal in a new Act;
(c)not including statutory provisions on removal. The inherent court discretion to remove trustees when expedient would remain, and other removal powers could be contained in the trust deed; and
(d)a combination of the above options.

Discussion

6.31Submitters expressed widespread support for:

6.32Most submitters considered that there was merit in trusts legislation specifying categories of persons who may be removed from office. However, the ADLS considered that the grounds for removal should be able to be overridden by the trust deed. Most also considered that the categories of prohibited trustees should be strictly limited. There was concern that if the list was too broad, then continuing trustees or those with the power of appointment could use the threat of removal to coerce a dissenting trustee into agreeing with a course of action they oppose. Submitters all agreed that the court should retain the discretion to remove and replace trustees in other circumstances where necessary or desirable to ensure the proper administration of the trust, such as when a trustee is not properly carrying out his or her functions.

6.33We favour an approach that includes elements of the different options presented above. We propose that persons with the power to remove and replace trustees should have a duty to remove a trustee who loses capacity to deal fully with property because of a personal property order or the appointment of a property manager. The legislation would also provide a list of grounds for removal on a discretionary basis under an updated and modernised form of section 43, which should be redrafted to provide clearer guidance. Bankruptcy, liquidation, and receivership should be included among these grounds, as well as other factors that call into question the trustee’s suitability.

6.34We have considered the option of mandatory removal when the grounds are made out. We consider this is not appropriate for two reasons. First, this would impose additional duties on the person with the power to remove and replace trustees. Second, there may be situations where one of the grounds is made out but it is not in the interests of the trust for the trustee to be removed because of the particular circumstance of the trust. For instance, this may be appropriate where a trustee is incapacitated due to sickness, but is likely to recover shortly or where the trustee for property not requiring active management is bankrupted, but no suitable replacement is willing to take over the trusteeship.

6.35We have also discounted the option of leaving removal provisions to the trust deed. Not all trust deeds grant someone the power of appointing and removing trustees, yet there are some circumstances where a trustee should be removed without requiring an application to the court. Section 43 is useful, as it avoids court processes and assists in the efficient removal and replacement of trustees. Most trust deeds currently in effect would have been drafted on the assumption that an express power to remove a trustee in certain circumstances exists under the legislation. Reverting to an approach which requires greater specificity in the trust deed would therefore cause complications for these trusts, while having different rules for trusts established at different dates would not simplify the legislation as we aim to do.

6.36The list proposed retains a broad power of removal when a trustee is no longer suitable to hold office, but differs from the status quo by removing the vague and problematic terms “unfit” and “incapable”. Legislation would provide a list of circumstances that meet the broad criteria, to guide the exercise of discretion.171  In formulating this approach, we have attempted to provide robust guidance that is flexible enough to apply in unforeseen situations.

6.37The expanded grounds would allow for removal of a corporate trustee that is facing financial difficulties. As with the other discretionary grounds, the trustee should be removed only if this is desirable for the proper functioning of the trust. The statutory grounds for removal would not be able to be overridden, but the trust deed will be able to include further grounds or greater detail to guide the exercise of discretion.

6.38The court would retain its inherent power to remove trustees when expedient. This would be available where there is an irreconcilable breakdown between trustees, or where there is a conflict of interest or the trustees are out of sympathy with the beneficiaries, or some other situation which undermines the effective operation of the trust and requires the court to intervene.

6.39The discretionary list would apply to removal by a person with the statutory power to do so, or removal by the court, for example on the application of a beneficiary. This would achieve greater alignment between sections 43 and 51. The list would provide clarity on when a trustee can be removed, but would not need to be completely comprehensive, as other matters could be specified in the trust deed or used by the court.

168For a discussion of the case law, refer to the Fourth Issues Paper, above n 164, at [4.14]–[4.15].
169Re Roberts (1983) 70 FLR 158; Mendelssohn v Centrepoint Community Growth Trust [1999] 2 NZLR 88 (CA); Kain v Hutton CA23/01, 25 July 2002.
170Andrew S Butler “Trustees and Beneficiaries” in Andrew S Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) 105 at 114 [Equity and Trusts], citing Re Wheeler and De Rochow [1896] 1 Ch 315 and In re Hopkins (1881) 19 Ch D 61 (Ch).
171The power of removal would apply to established situations that currently fall under the headings “unfit” (such as dishonesty offence convictions and misconduct in trust administration), and “incapable” (trustees not capable of fulfilling their duties, for instance, because of sickness or injury).