CHAMBERS v THE NEW ZEALAND GUARDIAN TRUST COMPANY LIMITED [2023] NZHC 3826

CHAMBERS v THE NEW ZEALAND GUARDIAN TRUST COMPANY LIMITED [2023] NZHC 3826 [20December 2023]IN THE HIGH COURT OF NEW ZEALANDNELSON REGISTRYI TE KŌTI MATUA O AOTEAROAWHAKATŪ ROHECIV-2021-442-036[2023] NZHC 3826UNDER the equitable jurisdiction, Law Reform(Testamentary Promises) Act 1949 andFamily Protection Act 1955IN THE MATTER of the estate of DENIS EDWINCHAMBERS Deceased formerly ofRichmond, NelsonBETWEEN CINDY MARY CHAMBERSPlaintiffAND THE NEW ZEALAND GUARDIANTRUST COMPANY LIMITEDDefendantLYNETTE ANN CHAMBERSInterested PartyHearing: On the PapersCounsel: J C Ironside and S W Sansom for PlaintiffA R Gilchrist for DefendantG Pearson for Interested PartyJudgment: 20 December 2023JUDGMENT (NO 2) OF McQUEEN J[1] By judgment dated 7 August 2023, I upheld the claim made by the plaintiff(Cindy) under the Law Reform (Testamentary Promises) Act 1949 (the TPA) and, inthe alternative, her claim based on a common intention constructive trust.1 I wassatisfied she is entitled to the shares held by her father (Denis) in each of Chambersand Jackett Ltd (CJL) and Chambers and Jackett Equipment Ltd (CJEL) (or1 Chambers v The New Zealand Guardian Trust Company Ltd [2023] NZHC 2084.collectively, the companies), subject to a requirement to provide an income to theinterested party (Lynette) during her lifetime, by reference to a 10 per cent share of theannual net profits earned by CJL.2 I outlined some possible approaches about how thatrelief should best be implemented.3 In the event that counsel were unable to agreebetween themselves as to how to give effect to my decision on liability, I soughtsubmissions from counsel.4 Counsel have since filed submissions.Cindy's position[2] Counsel for Cindy, Mr Ironside, submits that Cindy is prepared to meet anobligation to pay Lynette a set amount each year for the rest of Lynette's life, fromdividends generated from her shareholding, or otherwise from her current account ifthe dividend payments are insufficient to meet this obligation. Cindy proposes that theannual payment should be set at $45,000, this being the halfway position between the$40,000 and $50,000 indicated by Denis.[3] Alongside his submissions, Mr Ironside has filed a memorandum written bythe companies' accountant, Mr Gilbert Robertson, which states:In looking at providing a structure for making a payment to Lynette, I haveconsidered the profitability of both companies due to the nature of theintercompany transactions and the effect this connectivity can have on theprofitability of the main trading company, Chambers and Jackett Limited.Normally when looking at the distribution from a company, I consider anamount of profit is required to be retained to ensure the company has sufficientequity for such transactions as asset purchases and loan repayments. Theretained earnings I would recommend could range from 30-50% of profitsdepending on the requirements of the company.However, based on the discussions held with Denis prior to his death, andlimited by not having a more detailed discussion with Denis prior to hispassing, I have made my calculations based on 100% of profits being paid outof the group, with the view of providing Lynette a gross income of $40,000 to$50,000 as per Denis' wishes.I note the net dividend payments (after deduction of company tax of 28% plus[dividend withholding tax] of 5%) that would be received from a gross incomeof $40,000 to $50,000 are $26,800 and $33,500 respectively. The mid-pointbeing $45,000 gross amounts to $30,150 net.2 Above n 1, at [115] and [150].3 At [153]–[157].4 At [159].To assist, I have prepared a table outlining the profits of the group for the lastthree years (based on the annual financial statements to March 2021 and 2022,and the draft financial statements to March 2023) and what a 10% dividendfrom the company might look like.Given Cindy is to receive Denis' shares increasing her shareholding in thecompanies to 50%, I have considered what I believe is a simple and reasonableway to move forward although subject to my comments below aboutaffordability in non-profit years. I suggest Lynette is paid out from Cindy'sshare of dividends from the company, as a Capital Compensation payment forthe shares in the group.Where Lynette receives the payment based (approximately) on a net dividendamount as a Capital Compensation payment, this payment would come toLynette without the need to include it in her personal tax return. Cindy willhave accounted for the tax when the dividend she receives is included in her(or her trust's) tax return.However, I do raise a concern around the affordability of this arrangementshould the company have non profitable years and is having cash flowdifficulties. I do not believe it would have been Denis's intention to place thecompanies, nor Cindy, in a position where they would struggle to meet thepayments.Therefore, a suggested prudent way forward is for Cindy to provide Lynettewith a payment equal to 10% of any profit's [sic], net of tax, each year in linewith the second option of J McQueen [sic].[4] Thus, Mr Robertson envisaged that, had Denis lived, in implementing Denis'intention to provide annual payments to Lynette, a discussion would have occurredconfirming the annual payment would be subject to tax as income for Lynette.Mr Robertson would also have advised that the companies retain a certain level ofprofits for future investment or contingencies.[5] However, rather than calculating an annual payment based on a percentage ofprofits, to give certainty to Lynette and to be consistent with Denis' intention, Cindycommits to:pay Lynette $30,150 per annum from the total dividends that she receiveseach year from the company (for her 50% shareholding), or otherwise fromher current account if there is any shortfall from dividend distributions for her50% shareholding.Cindy can facilitate this payment from the company directly to Lynette'snominated account by way of an irrevocable Dividend Distribution Agreementof Shareholders which would be subject to company solvency rules (theDistribution Agreement) whereby the company pays Lynette the regularannual compensatory payment which is to be deducted from Cindy's annualdividend distributions or otherwise from her current account with the C&Jcompanies.Further, Cindy is prepared to facilitate a personal property security over hershares in favour of Lynette to secure these payments.[6] Cindy proposes that the distribution agreement would include the usualprovisions including (but not limited to):(a) the annual payment is subject to the directors confirming the companiessatisfy the solvency test;(b) in the event of Cindy's death, a lump sum payment to be made byCindy's estate and/or the companies to Lynette for an amountcalculated as a capitalisation of her lifetime entitlement based on anactuary valuation;(c) in the event of Lynette's death, the distribution agreement (and annualpayments) to terminate;(d) in the event Cindy wishes to sell her shares, a lump sum payment to bemade by Cindy and/or the companies to Lynette for an amountcalculated as a capitalisation of her lifetime entitlement based on anactuary valuation; and(e) the shareholders and directors of the companies to consent toregistration of a personal property security over Cindy's shares infavour of Lynette to secure the annual payments.[7] Cindy also commits to making testamentary provisions consistent with herobligations pursuant to a distribution agreement.The Guardian Trust's position[8] Counsel for the defendant (Guardian Trust), Mr Gilchrist, says that theGuardian Trust has no issue with continuing to hold some of the shares in thecompanies and managing the income distribution to Lynette, particularly given that itwill remain involved in the administration of Denis' estate due to the administrationof the life interest in Denis and Lynette's home. However, the Guardian Trust sees theissue of relief as primarily being between Cindy and Lynette.Lynette's position[9] Counsel for Lynette, Mr Pearson, submits that:(a) the quantum of any payment cannot fairly be determined on the basisof actual profits or dividends resulting from the trading of thecompanies given that in a family business, both are entirely dependenton the management of the companies, and it is common and legitimateto reduce profits to nil in a closely held company by paying shareholdersalaries determined after the end of the year;(b) the obligation to make yearly payments to Lynette must be a personalobligation of Cindy, as otherwise there is no security assuring recoursefor default in payments;(c) the payments, if they are periodic income payments, will be taxablewhen Lynette receives them, and it is not open to Cindy to say she willpay tax on Lynette's income; and(d) whatever Cindy receives in enforcement of the testamentary promisemust be reasonable having regard to all the circumstances and need notbe arrived at "by a meticulous monetary calculation".5[10] When assessing the reasonableness of relief under s 3(1) of the TPA,Mr Pearson highlights the effect of my judgment on the total share of assetsrespectively received by Cindy and Lynette from Denis' estate, as well as reiteratingsubmissions he made in relation to the substantive matter as to the value of servicesprovided by Cindy, as compared to the value of the shares in the companies. He5 Law Reform (Testamentary Promises) Act 1949, s 3(3)(b); Gartery v Smith [1951] NZLR 105(CA) at 119; and Re Welch [1990] 3 NZLR 1 (PC).submits that what Lynette is entitled to receive from Denis' estate is not related to herfinancial position, but only concerns what is reasonable under the testamentarypromise, and that there needs to be considerable adjustment to create a reasonableoutcome.[11] Mr Pearson then says:25. It seems unrealistic for Ms Cindy Chambers to make periodicpayments that can offset the excess over the value of the services, lessthe provision made for her inter vivos and in the Will.26. The starting point can be made more realistic by an order for thetransfer of the CJL shares with a value of $2,031,000 is ordered onterms that the residual interest in the Cushendall Rise property valuedat $1,000,000 is transferred to the widow Ms Lynette Chambersinstead of going to Ms Cindy Chambers as provided in the Will.[12] Mr Pearson prefers a solution where Cindy receives the shares in thecompanies, makes periodic income payments to Lynette, but also gives up the lifeinterest in the Cushendall Rise property. He explains the adjustment as follows:(a) the value of the shares received by Cindy as a result of the substantivejudgment is $2,031,000;(b) the total value of the services provided by Cindy on her own evidencewas $474,657.43;(c) the excess of share value over services is therefore $1,556,342.57;(d) Cindy has already been provided with $1,253,875 (through Denisgifting Cindy shares in the companies during his lifetime valued at$252,875, and the residual interest in the Cushendall Rise propertygiven to Cindy in Denis' will valued at $1,000,000); and(e) thus an adjustment of $2,810,217.57 is required in order for there to bea reasonable outcome.[13] Mr Pearson submits that having found that there is an enforceable testamentarypromise, it is not open to the Court to mandate a different outcome, as equity (in theform of a constructive trust), cannot overrule statute.6Submissions in reply for Cindy[14] In submissions in reply, Mr Ironside submits that Mr Pearson has not engagedwith the direction to make submissions about how the relief ordered should best beimplemented. He says that the submissions on behalf of Lynette engage in a selectivesummary of the evidence and case law, and seek to resurrect the unpleaded relieforiginally sought by Lynette.7[15] Mr Ironside also provided a further letter from Mr Robertson, as well as a draft'Declaration of Acknowledgement of Liability'. Mr Ironside says in response toMr Pearson's submissions:[Mr Robertson] makes the valid point that a practical and tax efficient outcomepursuant to what is essentially a family arrangement is a reasonableexpectation. The [amount of any periodic payment] is a matter for the Courtto determine, but the plaintiff contends that a gross sum of $45,000 is withinthe paraments of the Court's fundings as to the annual payment to be made toMrs Chambers, and is just and reasonable based on the evidence. Thisproduces a net annual capital compensation payment of $30,150 to MrsChambers. A figure of $50,000 gross would result in a net annual capitalcompensation payment of $33,500 to Mrs Chambers.[16] Mr Robertson's position is that taxation is a relevant consideration. He saysthat if Lynette was to retain a shareholding or a life interest in a shareholding, then anyincome derived from that shareholding would be subject to tax, with dividendsreceived net of tax. He says that Denis's intention was for Lynette to receive a grossincome of $40,000 to $50,000 per year and that he would not have expected Cindy tocarry the burden of the relevant tax payment on that sum. He explains that hissuggestion of the capital nature of the transaction was to remove the need for bothparties to account for the transaction in their personal tax returns, as that is prudentaccounting practice. Mr Robertson says that if the payments were taxable in the handsof Lynette and deductible for Cindy, the net result would be the same as above, but he6 Fortex Group Ltd (in rec & liq) v Macintosh [1998] 3 NZLR 171 (CA) at 175.7 Above n 1, at [38].does not see how such payments could be classified as income to Lynette anddeductible to Cindy where Lynette is not providing any services to the company. Heagrees that to remove the risk associated with the management of the companies andother influences on profitability, it makes sense for Cindy to take personalresponsibility for the proposed payments and to provide security.[17] The terms of the draft Declaration of Acknowledgement of Liability are asfollows:1 Declaration of acknowledgement of liabilityOn transfer to Cindy of the shares in Chambers & Jackett Limited andChambers & Jackett Equipment Limited (the companies) owned byDenis Edwin Chambers at the date of his death (the transferredshares), Cindy acknowledges and obligation to pay to Lynette acapital sum of $30,150 per annum (the annual principal payment)for the remainder of Lynette's life in accordance with the finaljudgment of the High Court in proceeding CIV 2021-442-036.2 Terms of payment and security2.1 Cindy agrees to pay the annual principal payment on the first day ofJuly of each year commencing on 1 July 2024 until the date ofLynette's death.2.2 In the event that Cindy fails to make payment of an annual principalpayment, interest shall accrue at the prescribed rate pursuant to theInterest on Money Claims Act 2016.2.3 In the event of Cindy's death, a lump sum capital payment to be madeby Cindy's estate to Lynette for an amount calculated as acapitalisation of Lynette's lifetime entitlement pursuant to this Deedfrom the date of Cindy's death based on an actuary valuation from aregistered actuary appointed by Cindy's executor and Lynette, andfailing agreement an actuary appointed by the President of the NewZealand Law Society.2.4 In the event of Lynette's death, the annual principal payments toterminate and an adjustment payment made to Lynette's estate for anyunpaid portion of the year up until the date of Lynette's death forwhich the annual principal payment applies.2.5 Cindy will obtain the consent of the directors and shareholders of thecompanies to registration of a personal property security over thetransferred shares in favour of Lynette to secure the annual principalpayments, and such security shall be registered within 14 says of thetransfer of the shares to Cindy pursuant to the final judgment referredto at clause 1.2.6 In the event that Cindy wishes to sell any of the transferred shares, alump sum payment shall be made by Cindy to Lynette for an amountcalculated as a capitalisation of Lynette's lifetime entitlementpursuant to this Deed (calculated from the date of sale of the shares)based on an actuary valuation from a registered actuary appointed byCindy and Lynette, and failing agreement an actuary appointed by thePresident of the New Zealand Law Society.2.7 This deed binds Cindy's executors and administrators.[18] Mr Pearson also filed a further memorandum dated 18 October 2023 in whichhe clarified that Lynette's position is that any payments should commence from thedate of Denis' death, rather than from 1 July 2024.Discussion[19] It is unfortunate that Cindy and Lynette, through their counsel, were unable toagree on the implementation of the relief ordered as this would have provided the bestopportunity for a detailed arrangement to be put in place to the advantage of bothparties.[20] Mr Pearson's submissions on relief primarily focused on adjustments heconsiders necessary following the conclusion in my judgment that all of Denis' sharesin the companies should be vested in Cindy. Mr Pearson wants to revisit thereasonableness of that decision as a reward for the testamentary promise I found wasmade by Denis. He seeks instead an arrangement whereby Cindy gives up her residualinterest in the Cushendall Rise property. It seems to me that this position is moreappropriately advanced on an appeal of my judgment, rather than in submissions thatwere sought by the Court in relation to implementation of that decision through relief.For this reason, I found Mr Pearson's submissions of limited assistance in the taskpresently before me.[21] Mr Pearson did, however, express the clear view that the only order that wouldbe of value to Lynette would be one that imposed a personal obligation on Cindy tomake annual payments to Lynette. Cindy is willing to agree to this. Such a personalobligation on Cindy provides certainty to both parties and avoids the risks relating tomanagement of the companies and other influences on profit. I agree that it is anappropriate requirement.[22] As to the sum to be payable, Cindy considers a gross payment of $45,000 eachyear for the duration of Lynette's life is just and reasonable, although sheacknowledges that the sum is a matter for the Court to determine. As Lynette's overallview is that Cindy's interest in Denis' estate should be reduced, it is difficult to assesswhat sum she might think appropriate. Mr Pearson says that a gross payment of$50,000 yearly over Lynette's life plus giving up the residual interest in theCushendall Rise property is still too little for Lynette to receive. He identified a furtherconcern that the value of the payments may be eroded through inflation.[23] I consider that the appropriate sum for Lynette to receive is a gross payment of$45,000. Both parties have identified concerns that affect the amount, and I amsatisfied that settling on this mid-range figure takes those concerns into account. I amreassured by the calculations provided by Mr Robertson in relation to company profitsthat show that the calculations for the years 2021, 2022 and 2023, based on a 10 percent shareholding (or 20 per cent of Cindy's 50 per cent shareholding) would havebeen $25,473, $38,970 and (provisionally) $17,271 respectively. The average of thesesums is $27,238 (net of tax) or $40,653 (gross of tax) which is not far from the gross$45,000 payment proposed in its net of tax form of an annual payment of $30,150.[24] In the absence of information offering an alternative to Mr Robertson'sproposal that the payments to Lynette be capital compensation payments, I intend toproceed on this basis with the effect that Cindy's obligation will be to pay Lynette thenet of tax sum of $30,150 per year.[25] I also consider that the draft Declaration of Acknowledgement of Liabilityentered into as a deed provided with the reply submissions filed on Cindy's behalfprovides a helpful and concrete way forward. It provides for Cindy's personalobligation to pay Lynette on a yearly basis and deals with security and what shouldhappen on the death of either Cindy or Lynette in a manner that respects Denis'intention and Cindy's obligation. In the absence of other submissions proposing aviable alternative, I have decided to adopt this approach.[26] The final question is to consider the date at which these arrangements are tocommence. Cindy's draft Declaration of Acknowledgement of Liability contemplatesthat the first payment be made to Lynette on 1 July 2024 whereas Mr Pearson says thatpayments should start from the date of Denis' death. No information is available to meabout what has happened to the earnings of the companies since Denis' death (althoughit appears from Mr Robertson's calculations mentioned above is that earnings havebeen identified).[27] The premise of my substantive judgment is that Cindy was entitled to Denis'shares in the companies from his death, but these proceedings have necessarily takentime. The important point to my mind is that Lynette should not receive both a 10 percent share of the annual net profits earned by CJL and a payment from Cindy, and onthe other hand, if Cindy receives those profits, she should make a payment to Lynette.Given the other orders I am making in this judgment, it may be that counsel will beable to resolve this issue. I will reserve leave to the parties to revert to the Court shouldthat not be the case.[28] Accordingly, I make the following orders as to relief:(a) the plaintiff, Cindy Mary Chambers, shall execute a Declaration ofAcknowledgement of Liability in the form attached to her replysubmissions within 14 days of this order;(b) the interested party, Lynette Ann Chambers, is to transfer all shares inChambers & Jackett Limited and Chambers and Jackett EquipmentLimited that were owned by Denis Edwin Chambers at the date of hisdeath to the plaintiff, Cindy Mary Chambers, on execution of theDeclaration of Acknowledgement of Liability referred to in (a) above;(c) leave is reserved for the parties to seek further orders of the Court ifrequired in relation to a 10 per cent share in the annual net profits ofCJL over the period between the death of Denis Chambers and 30 June2024.Costs[29] Costs are yet to be determined. If the parties cannot agree on costs, I direct thatcounsel file memoranda of no more than five pages in length together with a schedule,within ten working days. Any brief reply submissions may be filed within a furtherfive working days. I will then determine costs on the papers.McQueen JSolicitors:Richmond Law, Nelson for PlaintiffPerpetual Guardian, Wellington for Defendant