7.3Section 50(1) of the Trustee Act provides that a corporation may be appointed as a custodian trustee in any case where a corporation could be appointed as a trustee. A specific power in the trust deed is not necessary.
7.4The custodian trustee will not be liable for the default of the managing trustees or for acting on their instructions. The custodian trustee can apply to the court for directions if they consider that the instructions of the managing trustee are in breach of trust. The extent to which a custodian trustee will be liable for facilitating a breach of trust by the managing trustees is unclear.
7.5The current provision does not expressly enable a custodian trustee to be appointed over part of the trust property, although this could be provided for in the trust deed. It is also arguably within the scope of section 50. It is unclear how commonly this occurs in practice.
7.6Section 50(4) provides for the remuneration of custodian trustees, but does not address reimbursement of expenses. Arguably this comes within the provisions, enabling trustees to be reimbursed.
7.7There are differences between the provisions under the Trustee Act and Te Ture Whenua Māori Act 1993 (TTWMA). Section 50 of the Trustee Act does not seem to allow for the appointment of more than one person. It also does not allow for the appointment of a natural person. Conversely, section 225 of TTWMA provides that any individual or body corporate may be appointed. Submitters have advised that custodian trustees are frequently used in Māori land trusts, and commonly the Māori Trustee is appointed as custodian trustee together with another trustee.
7.8The issue is whether the provisions on custodian trusteeship can be improved in order to achieve greater clarity while retaining a convenient and flexible mechanism for separating the legal ownership and management of trust property. This section considers whether it is necessary for legislation to specify duties that apply to custodian trustees, and the circumstances in which a custodian trustee should be liable to a beneficiary. It also considers whether the detail of the statutory defaults can be improved.
7.9We have considered reform options in relation to the duties of custodian trustees. Some of these options could be combined. The question of liability is closely connected to the question of duties, as custodian trustees should be liable for any failure to comply with their duties.
7.11There is a possibility that imposing some of these duties may change the nature of the role. For example, if custodian trustees had a duty to act consistently with the trust deed then they would be required to second guess or supervise the substantive decisions of the managing trustees, rather than merely giving effect to these decisions. Clarifying the duties of custodian trustees invites questions as to how the role should properly be construed. There are also questions of whether or not the duties in the statute should be mandatory.
7.12We also considered some minor issues relating to the statutory defaults for custodian trustees. We looked at whether or not the default position should be:
7.13All submitters on this issue considered custodian trustees a useful mechanism that should be retained. Taylor Grant Tesiram submitted that the roles, duties, and liabilities of custodian trustees need to be clarified. Some submitters, including the Auckland District Law Society, considered that the mechanism is underused and that better statutory defaults could assist.
7.14Our preferred approach is to spell out the role of custodian trusteeship in new legislation. This includes clarifying that custodian trusteeship is essentially an administrative role, and imposing duties and grounds for liability.
7.15We do not propose to change the nature of the custodian trustee’s role. The duties and liabilities to be included in new legislation are intended to be consistent with the current conception of the role. Many of the trustees’ duties in chapter 3 for ordinary trustees will be inapplicable to the custodian role.
7.16The most difficult issue is how to address a possible situation in which the custodian trustee receives unlawful instructions from the managing trustees.
7.17The role of the custodian trustee is to act on the instructions of the managing trustee. It is not to check whether these instructions are valid. An injured beneficiary can recover from the managing trustee directly. We consider that the custodian trustee should only be liable in the following circumstances:
7.18These situations would arise only where the custodian trustee acted without the authority of the managing trustees. New legislation should provide that the custodian trustee is liable for failing to execute the instructions of the managing trustees and acting without the authority of the managing trustees. These should be mandatory provisions for which liability cannot be excluded. The legislation should also provide that the custodian trustee has the duty to act on the instructions of the managing trustee and has all the administrative powers of a trustee, although is not able to exercise discretion.
7.19We propose to provide explicitly that the custodian trustee is entitled to indemnity from the trust fund, as this is necessary in order for custodian trustees to efficiently deal with property, and to provide clarity.
7.20The legislation should also provide that a custodian trustee may be appointed over part of the trust property as this may be useful in some situations. This would clarify the current law and is consistent with the purpose of custodian trusteeship.
7.21We propose that multiple custodian trustees and natural persons as custodian trustees should be allowed, bringing trusts legislation into line with TTWMA. This could be useful in some circumstances, such as appointing a professional adviser as a custodian trustee. We recognise that there are some significant arguments against this approach. Part of the rationale of custodian trusteeship is to allow the assets to be held by an entity that will provide consistency through time in a way that a natural person could not. Traditionally the custodian trustee was a public trustee company that provided greater certainty that the legal personality behind the trust would not be subject to change. It could be argued that appointing natural persons or multiple persons as custodian trustees is inconsistent with this rationale, and could unhelpfully blur the distinction between custodian trusteeship, managing trusteeship, advisory trusteeship and ordinary trusteeship. It could also be argued that if the settlor wanted to allow natural persons to be custodian trustees or to allow joint custodian trusteeship this could be provided for in the trust deed, and so does not need to be included as a statutory default. Notwithstanding these arguments, in our view, if custodian trusteeship is to be enabled as a statutory default then it is desirable to allow greater flexibility so that it can be used effectively. We are not aware of any problems arising from allowing natural persons or multiple custodian trustees in Māori land trusts. The greater flexibility in the statutory defaults in this context appears to have contributed to a wider realisation of the possible administrative benefits. We consider that this should be available to other trusts as well.