Contents

Chapter 6
Appointment and removal of trustees

Who may be appointed as a trustee?

Proposal
P22
(1)New legislation should restrict appointment based on capacity to be a trustee. The following categories of persons will be precluded from appointment as a trustee:
(a)a person under 18 years of age;
(b)an undischarged bankrupt;
(c)a person who is subject to a property order made under section 31 of the Protection of Personal and Property Rights Act 1988 or a person for whom a trustee corporation is acting as manager under section 32 or 33 of that Act; and
(d)a corporation which is in receivership or in liquidation; and
(2) provide that any natural person or body corporate may be a trustee unless one of the grounds above applies.
Please give us your views on this proposal.

Current law

6.15Under case law, any person with legal capacity to hold property may be appointed as a trustee. This includes the settlor, and any of the beneficiaries. The only restriction is that there will not be a valid trust if the sole trustee is also the sole beneficiary, because legal and beneficial ownership will exist in the same person.166

Issues

6.16The issue is whether there should be any restrictions on who may be a trustee, and if so, the content of these restrictions. The Fourth Issues Paper invited comments as to whether there should be restrictions on appointment as a trustee for reasons such as bankruptcy or conviction of a criminal offence. It also asked whether the list of precluded appointments should mirror the grounds for removal.

Options for reform

6.17In developing options, we drew a distinction between restrictions based on capacity and restrictions based on suitability. Some persons have limited capacity to deal with property or enter into contracts, for example persons under the age of 18 years, undischarged bankrupts (who because of this status cannot hold property), companies which are in liquidation, and persons subject to a property order under the Protection of Personal and Property Rights Act 1988 (PPPRA). Irrespective of their suitability for office, such persons are not able to function effectively as trustees because of their limited capacity to deal with property. In contrast, other factors, such as a history of dishonesty offences, do not affect a person’s capacity to deal with property, but may raise doubts about the person’s suitability.

6.18The options considered are:

(a)restricting the appointment of trustees based on capacity;
(b)restricting the appointment of trustees based on capacity and suitability; and
(c)not restricting the appointment of trustees at all.

Discussion

6.19Most submitters considered that there was merit in trusts legislation specifying categories of persons who could not be appointed as trustees, and that the grounds for removal from office and disqualification from appointment should reflect one another more closely. Most also considered that the categories of prohibited trustees should be strictly limited. There was general support for:

6.20Our preferred approach is to impose restrictions based on capacity, but not based on suitability. Persons who lack full capacity should not be able to be appointed as trustee. Any purported appointment should be invalid. P22 should be read together with P23, which addresses grounds for removal of a trustee. Some submitters favoured a fuller list that also precluded appointments based on suitability. Some proposed a list similar to that contained in the Companies Act 1993 in relation to directors’ qualifications. We have considered the argument that the office of a trustee requires the utmost good faith, good judgement, and honesty, and that this justifies restrictions to prevent persons who demonstratively lack these characteristics from being appointed. Arguments for exclusion on suitability grounds are stronger in the abstract than in application. It is difficult to draw principled grounds for excluding someone from acting as a trustee on the basis of past behaviour. For example, a category such as “dishonesty offences” includes even relatively minor instances of theft, which a settlor may not consider to be sufficiently serious to cast doubt on the responsibility of the proposed trustee and his or her ability to manage property. The inclusion of persons who are “mentally disordered” under the Mental Health (Compulsory Assessment and Treatment) Act 1992 might extend to persons who are entirely capable of managing trust property, depending on the nature of mental disorder.167  A mandatory prohibition would also preclude such people from acting as trustees of trusts which they themselves settle for the benefit of their families.

6.21While some trusts are commercial arrangements with a public element, many are strictly private. It is difficult to justify restrictions around suitability also because there may be valid reasons for a settlor choosing to appoint a trustee with a criminal record or previous involvement in failed companies. There is an element of subjectivity in judgements about suitability. We consider that these are best left to the settlor rather than imposed through legislation.

6.22We consider that settlor autonomy is an important principle, but it does not extend to restrictions based on a lack of legal capacity. Precluding persons who do not have full capacity is a corollary of the nature of the office of a trustee and should not be viewed as a fetter on the settlor’s discretion.

6.23Corporate trustees raise their own issues. The preferred approach is to prevent a company from being appointed as a trustee if it is in liquidation or receivership. Further restrictions have been considered, including if the company is under statutory management or has entered into a compromise with creditors or does not satisfy the solvency test. There is a risk that these companies will be unable to meet financial liabilities to beneficiaries if loss is caused to the trust, and may be unable to meet liabilities to creditors of the trust. They may also be used as a means to avoid the responsibilities of trusteeship, or to avoid responsibilities to creditors. Some of these issues are addressed in more detail in chapter 8. We also propose, below, an expanded set of grounds for the removal of corporate trustees.

166Re Heberley [1971] NZLR 325 (CA) at 333 and 346; Re Cook, Beck v Grant [1948] 1 All ER 231 (Ch) at 232.
167The inclusion of this category in the Eden Park Trusts Amendment Bill 2009 was subject to a report by the Attorney General under s 7 of the Bill of Rights Act 1990 which held that this constituted unjustifiable discrimination on the basis of disability and was not sufficiently linked to capacity to be a trustee.