FRIENDS OF THE AUCKLAND ART GALLERY ACQUISITIONS TRUST v FRIENDS OF THE AUCKLAND ART GALLERY INCORPORATED & ORS [2018] NZHC 1768

FRIENDS OF THE AUCKLAND ART GALLERY ACQUISITIONS TRUST v FRIENDS OF THEAUCKLAND ART GALLERY INCORPORATED & ORS [2018] NZHC 1768 [17 July 2018]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2017-404-1784[2018] NZHC 1768UNDER Section 64 of the Trustee Act 1956 and Part18 of the High Court RulesIN THE MATTER of an application to vary the Plaintiff's TrustDeedBETWEEN FRIENDS OF THE AUCKLAND ARTGALLERY ACQUISITIONS TRUSTPlaintiffAND FRIENDS OF THE AUCKLAND ARTGALLERY INCORPORATED, REGIONALFACILITIES AUCKLAND and THEAUCKLAND ART GALLERYFOUNDATIONDefendantsHearing: 29 June 2018Appearances: N Penman-Chambers and RW Belcher for PlaintiffDJ Perkins and J Herring for Attorney-GeneralJudgment: 17 July 2018JUDGMENT OF TOOGOOD JThis judgment was delivered by me on 17 July 2018 at 3.30 pmPursuant to Rule 11.5 High Court RulesRegistrar/Deputy RegistrarIntroduction[1] The trustees of the Friends of the Auckland Art Gallery Acquisitions Trust (theAcquisitions Trust or the Trust) seek an order to vary the Acquisitions Trust deed (theDeed) in accordance with which the Trust was settled. If granted, the variation soughtwould permit the trustees to:(a) use the capital of the Trust to purchase an artwork or artworks for theAuckland Art Gallery; and(b) gift any remaining capital to the Auckland Art Gallery Foundation (theFoundation).Exercising such new powers would render the Acquisitions Trust impotent.[2] This judgment addresses the Court's jurisdiction to vary the Deed in suchcircumstances, and whether it is an appropriate case for the Court to exercise itsdiscretion under s 64 of the Trustee Act 1956 to make the changes sought. Becausethe ultimate objective is to wind up the Acquisitions Trust, the primary question iswhether the Court should decline the application and require the trustees to prepare ascheme under Part 3 of the Charitable Trusts Act 1957 (the CTA) to dispose of theTrust's property for another charitable purpose.Background circumstances[3] In 1954, the Friends of the Auckland Art Gallery (Incorporated) (the Friends)was formed as an incorporated society.1 Historically, the Friends have raised fundsfor the Auckland Art Gallery (the Gallery) and run various events supporting theGallery.[4] On 20 December 1983, the Auckland Gallery Associates Acquisitions Trustwas settled and was registered as a charitable entity in 2008. In 2009, it changed itsname to the "Friends of the Auckland Art Gallery Acquisitions Trust". In 2017, thetrustees incorporated as a Board under Part 2 of the CTA. The Acquisitions Trust's1 The entity was originally called Auckland Gallery Associates (Incorporated).beneficiary is the Auckland City Council (the Council), Regional Facilities AucklandLimited being the Council entity which operates the Gallery.[5] The purpose of the Acquisitions Trust is to provide "in perpetuity" funds forthe purchase of artwork for Auckland Council, to be displayed at the Auckland ArtGallery, and to increase the appreciation of visual arts in the local community, bycollecting donations and accumulating funds on behalf of the Friends. The trusteesmay apply the Acquisitions Trust's income towards its purposes, but may apply itscapital only in limited circumstances.[6] On 21 February 2005, the Auckland Art Gallery Foundation (the Foundation)was settled as a duly incorporated charitable trust. The Foundation's beneficiaries arethe general public and the Gallery and it has similar purposes to those of theAcquisitions Trust.[7] In recent years, the Friends' membership has been dwindling and for all intentsand purposes the Friends has wound down. Whereas the Friends now hasapproximately 500 members only, the Foundation's membership exceeds 6,700. In2015, the Gallery proposed to create and operate a new membership programme,replacing that run by the Friends. The Gallery and Friends entered into aMemorandum of Understanding (MOU) to record how the Gallery membershipprogramme would be structured, and how it would encompass the existing Friendsprogramme.[8] On 5 November 2015, the Friends held a special general meeting. The Friendsresolved to accept the MOU, put the Friends into liquidation and appoint a liquidatoron a future date. The new membership programme has been running since this timeand has been a great success.[9] On 13 February 2018, at the annual general meeting of the Friends and afterconsultation between the trustees, the Friends, and the Gallery, consensus was reachedthat it would be most prudent for the Acquisitions Trust's capital to be applied topurchase art work for the Gallery, and to wind up the Acquisitions Trust.Proposed variation to the Deed[10] It is against that background that the current application is brought.[11] As the Friends and the Acquisitions Trust have a symbiotic relationship, theTrust's continued operation depends on the Friends' continued existence. This isbecause:(a) the Acquisitions Trust's income is expended at the direction of theFriends;(b) the Friends can direct who is to choose artwork in place of the Gallerydirector;(c) the Friends may, following a resolution passed at a general meeting,request a change to the purposes for which the Acquisition's Trust'sincome may be applied, provided such purpose is conducive to thebenefit of the Gallery; and(d) the Friends appoints the Acquisitions Trust's trustees.[12] Furthermore, as it is intended that the Friends will no longer operate, therehave been no recent donations to the Acquisitions Trust. The only present andanticipated income is from returns from its current investments. The net resources ofthe trust at 31 March 2017 totalled $515,126. There has been little movement sincethen and the income derived from the Trust's investments is insufficient to achieve itspurposes effectively, the acquisitions account being in deficit at the 2017 balance date.The proposal[13] There is currently no power in the Deed for the trustees to expend the Trust'scapital2, wind up the Acquisitions Trust, or vary the Deed to provide the trustees withthe above powers. It is proposed that this Court should exercise its supervisory powerto vary the Deed by inserting two clauses that would allow the trustees to expend the2 Except in limited circumstances: Deed at cl 7.Acquisitions Trust's capital on art work for the Gallery, and gift any remaining capitalto the Foundation.[14] The wording of the proposed clauses is as follows:7A. The Trustees may use the capital of the Trust Fund or any part of it forthe purchase of an art work or art works for the Auckland Art Gallery, abusiness unit of Regional Facilities Auckland. Such art work or art works tobe selected in accordance with clause 5 of the Trust Deed, all artworks to bepurchased solely by the Acquisitions Trust and to be recorded as gifted by theFriends of the Auckland Art Gallery.7B. Following the purchase of artworks pursuant to clause 7A, anyremaining assets of the Trust Fund that Trustees consider to be too small forthe purchase of an artwork may be gifted to the Auckland Art GalleryFoundation (a registered charitable trust: incorporation number 1610446; aregistered charitable entity: incorporation number CC26873) ("Foundation")to be held on the trusts set out in the trust deed of the Foundation.[15] The proposed clauses have been approved by the Friends and the changes alsohave the support of the Gallery and the Foundation.Relevant law[16] Although the Court has jurisdiction to vary a charitable trust, the general ruleis that such a trust cannot be terminated.3 There are, however, three exceptions to therule:4(a) Where the trust is set up in such a way that the property is applied forcharitable purposes for a limited duration and the trustees are givenexpress powers to terminate.(b) Where a charity that has the power to expend both income and capitalno longer has funds.(c) Where the objects of the charity are dependent on the existence of aparticular institution or premises.3 National Anti-Vivisection Society v Inland Revenue Commissioners [1948] AC 31 (HL).4 William Henderson, Jonathan Fowles and Julian Smith Tudor on Charities (10th ed, ThomsonReuters, London, 2015) at [21-024]-[21-025].[17] Furthermore, a trust may come to an end if the trust deed allows the trustees towind up the trust without outside intervention; if the trust is a society incorporated asa board;5 or if the society and trustees were incorporated on just and equitablegrounds.6Section 64(1) of the Trustee Act 1956[18] In this proceeding, the trustees rely on s 64(1) of the Trustee Act 1956. Thesection provides:64 Power of Court to authorise dealings with trust property andvariations of trust(1) Subject to any contrary intention expressed in the instrument (if any)creating the trust, where in the opinion of the Court any sale, lease,mortgage, surrender, release, or other disposition, or any purchase,investment, acquisition, retention, expenditure, or other transaction isexpedient in the management or administration of any property vestedin a trustee, or would be in the best interests of the persons beneficiallyinterested under the trust, but it is inexpedient or difficult orimpracticable to effect the same without the assistance of the Court,or the same cannot be effected by reason of the absence of any powerfor that purpose vested in the trustee by the trust instrument (if any)or by law, the Court may by order confer upon the trustee, eithergenerally or in any particular instance, the necessary power for thepurpose, on such terms, and subject to such provisions and conditions(if any) as the Court may think fit, and may direct in what manner anymoney authorised to be expended, and the costs of any transaction,are to be paid or borne, and as to the incidence thereof between capitaland income:Provided that, notwithstanding anything to the contrary in theinstrument (if any) creating the trust, the Court, in proceedings inwhich all trustees and persons who are or may be interested are partiesor are represented or consent to the order, may make such an orderand may give such directions as it thinks fit to the trustee in respect ofthe exercise of any power conferred by the order.[19] The objective of s 64 is to ensure trust property can be managedadvantageously in the interests of the beneficiaries and to authorise specific dealingswith property which the Court might have felt itself unable to sanction in the exerciseof the Court's inherent jurisdiction.7 The section permits the Court to authorise certaintransactions involving trust property. It confers on the Court a "supervisory function,5 Charitable Trusts Act 1957, s 24.6 Charitable Trusts Act 1957, s 25.7 Re Gray (deceased) [1956] NZLR 764 (SC) at 768.whereby it can enlarge inadequate powers of administration and management".8 Inthe past, the Court has interpreted the section liberally, and used it to make ordersapproving a wide variety of transactions.9[20] In the present case, the proviso to s 64(1) may operate to permit the Court tovary the trust in a manner which is arguably contrary to the perpetual nature of thetrust. The Friends (by the resolution of a majority of its members voting in the matter),the sole beneficiary and the trustees are all either parties to the proceeding orrepresented by counsel.[21] Counsel for the Acquisitions Trust also rely on s 64A of the Trustee Act 1956as a foundation for the order sought. The Court's power under s 64A is limited,however, to approving variations "on behalf of those who are legally incapable ofgiving their consent". Here, the sole beneficiary of the Acquisitions Trust (AucklandCouncil) is ascertainable, has capacity and is capable of consenting to a variation inthe trustees' powers of administration and management. I find that s 64A does notapply.SubmissionsAttorney-General's report and submissions[22] The duty of ensuring the due administration of charities and the proper use offunds devoted to charitable purposes rests with the Crown in its parens patriae (parentof the country) role.10 As the senior Law Officer, the Attorney-General exercises thatresponsibility in this proceeding in the public interest. Through delegated authority toa Deputy Solicitor-General, the Attorney-General has filed a report addressing theissues that arise; Crown Counsel presented submissions in support of the report'sconclusions. As may have been expected, the report and counsel's submissions areobjective, principled and balanced. I have found them helpful.8 Re Lyall (deceased) [1977] 1 NZLR 713 (SC) at 716.9 Baker v Waimakuku Whanau Trust Board Inc [2013] NZHC 2530 at [90].10 G E Del Pont Law of Charity (2nd ed, LexisNexis Butterworths, Australia, 2017) at [14.24] citingConstruction Industry Training Board v Attorney-General [1973] 1 Ch 173 at 183; and Wallis vSolicitor-General for New Zealand [1903] AC 173 at 181-2.[23] Mr Perkins, on behalf of the Attorney-General, does not press an argument thatthere is no jurisdictional bar to the trustees making an application under s 64(1) of theTrustee Act, subject to confirmation that this application has been brought on behalfof all trustees. I am satisfied that that is the case. Mr Perkins submits, however, thatalthough the present application does not by its terms seek to terminate theAcquisitions Trust, it would be unrealistic to ignore the stated intention that it formspart of a larger project, the culmination of which is the Trust's liquidation.[24] The Acquisitions Trust capital was "dedicated in perpetuity" and Mr Perkinssubmits that the proposed clauses are contrary to the intention of the original settlor.He submits that this Court should not use its powers under s 64 of the Trustees Act toapprove a variation designed to facilitate the termination of a charitable trust that wasintended to be perpetual in circumstances that do not come within one of therecognised exceptions to the general rule that a charitable trust cannot be terminated.[25] Counsel argues that, in these circumstances, the more appropriate andpreferable option would be for the trustees to prepare a scheme under Part 3 of theCTA for disposal of the trust capital for other charitable purposes.11 Reliance on thestatutory powers found in ss 32 and 33 of the CTA is recommended by the Attorney-General, but the trustees have elected not to resort to them. The procedure under Part3 of the CTA, informed by the cy-près doctrine, is designed to keep the purposes of acharitable trust alive in circumstances where either the administration of the trust couldnot be facilitated other than by amendment to the subject trust deed, or the originalpurpose of the trust has become frustrated.[26] Mr Perkins argues that it is significant that the Part 3 procedure requires:(a) submission of the proposed scheme to the Attorney-General, who thenmay exercise certain statutory powers in relation to the proposal;1211 See Charitable Trusts Act 1957, ss 32  37.12 Section 35.(b) notification to the public by Gazette notice and advertisement in a localnewspaper;13 and(c) the opportunity for objections to be heard by the Court.14[27] Mr Perkins notes the Baptist Union case15 as authority for the proposition that,in the case of a charitable trust, it is preferable to proceed by way of an applicationunder Part 3 of the CTA rather than under s 64(1) of the Trustee Act. That is becauseof the greater degree of transparency in the Part 3 procedure than in the presentproceeding, which he contends is important in the present case because the amendmentto the Deed is not supported unanimously by the membership of the Friends.16[28] Mr Perkins accepts nevertheless that, if the Deed is varied as sought, thetrustees of the Acquisitions Trust will not be compelled to expend the capital in sucha way that the Trust would become defunct and that there would still be scope for ascheme under Part 3 of the CTA. He submits correctly, however, that that is not theircurrent intention.Acquisitions Trust[29] Ms Penman-Chambers, for the plaintiff, argues that the Court's view in BaptistUnion was not followed in Greenwood v Greenwood,17 a decision later cited withapproval by the Court of Appeal in Pryor v Bully.18 She submits that a Part 3 schememay be avoided where all interested parties are in agreement and says that all partiesto this proceeding have come to the view that the proposed way forward is in the bestinterests of the Gallery.[30] Ms Penman-Chambers contends that, while principled, the Attorney-General'srecommended approach is not a pragmatic response to the current situation. Shesubmits that approaching the matter under s 64 of the Trustees Act is preferable as the13 Section 36.14 Section 37.15 Baptist Union of New Zealand v Attorney-General [1973] NZLR 42.16 I note, however, that only a small minority of the total membership  two per cent  voted againstthe relevant motions.17 Greenwood v Greenwood HC Christchurch A. No. 48/85 23 July 1987.18 Pryor v Bully [2013] NZCA 559.charitable purpose which the Acquisitions Trust serves will be better served byallowing the role of the Friends to be subsumed within the Foundation, which sharesa common purpose with the Acquisitions Trust and the Friends.[31] Ms Penman-Chambers argues that interested members of the Friends or thegeneral public will have an opportunity to oppose the liquidation of the AcquisitionsTrust, if that step is taken, as any liquidation application following the procedure underthe Companies Act 1993 would be publicly advertised.19DiscussionDoes the Court have jurisdiction to grant the application?[32] Mr Perkins suggested that there is conflicting authority about whether s 64(1)may be used to approve textual variations to a deed. He notes that the jurisdiction isconfined to authorising any "sale, lease, mortgage, surrender, release, or otherdisposition, or any purchase, investment, acquisition, retention, expenditure, or othertransaction" and that it is arguable that amending the terms of the Deed is not an actcontemplated by the section. Mr Perkins referred to Re Lyell (deceased)20 in which,counsel submitted, Beattie J held that the Court did not have jurisdiction to maketextual variations to a deed, relying upon what the Judge described as "strongauthority" of the England and Wales Court of Appeal in Re Downshire Settled Estate.21In Lyell, the Judge referred to what he described as a "practical suggestion" of counselfor certain beneficiaries of a will trust that would amount to varying the beneficialinterests provided by the Trust. In support of his view that the Court could not adoptthe suggested approach, Beattie J noted that s 64 had been stripped of the specificpower that counsel wished the Court to exercise in favour of specific powers beingprovided by s 64A to deal with such matters.2219 See Charitable Trusts Act 1957, Part 2 and the discussion at [40] below.20 Re Lyell (Deceased) [1977] 1 NZLR 713 (SC) at 716.21 Re Downshire Settled Estate [1953] Ch 218; [1953] 1 All ER 103.22 I have held at [20] that s 64A of the Trustee Act is not available in this case.[33] As noted above,23 however, Beattie J observed that:24 pursuant to s 64 the court has a supervisory function whereby it can enlargeon inadequate powers of administration and management.[34] I respectfully agree. It seems to me that that is what the trustees have askedthe Court to do here. The Court can exercise that function and achieve the desiredobjective by making the textual variations to the Trust without varying any beneficialinterests. As Mr Perkins properly acknowledged, this Court has previously madetextual variations to trust deeds under s 64.25[35] The test for the exercise of the Court's powers under s 64(1) is expediency.Given the state of the Trust's finances; the successful establishment of an alternativevehicle for the provision of support to the Art Gallery formerly provided by the Trust;the transfer of membership support from the Friends to the Foundation; and, mostsignificantly, the decision to wind up the Friends, the proposal meets the test ofexpediency, for the Trust as a whole, in the management or administration of trustproperty.[36] Giving s 64(1) of the Trustee Act a purposive interpretation, I conclude that thejurisdiction of the Court to confer upon the trustees the necessary powers to achievethe purposes for which this application is brought may be exercised by approving thevariation of the trust deed as sought.Should the Court exercise its discretion to grant the application?[37] The remaining question is whether the Court should exercise its discretion infavour of the trustees being empowered to take a step or steps which will not inthemselves result in the termination of the Trust, but which are intended to facilitatethat end.[38] I do not regard the settlor's intention to create a perpetual trust as creating anyobstacle to the trustees' intention to facilitate the winding-up of the Trust. The proviso23 At [18].24 Re Lyell (Deceased) [1977] 1 NZLR 713 (SC) at 716.25 Re Philips New Zealand Limited [1997] 1 NZLR 93 (HC); Re Bruce McLaren Trust HC AucklandM663-IM02, 18 June 2002.to s 64(1) expressly provides the means to circumvent the barrier. I agree withMr Perkins that, in determining whether the Court approve the trustees' proposals, itwould be unrealistic for the Court to ignore the ultimate objective, which is toterminate a charitable trust. In this proceeding, however, the Court is neither invitednor empowered to sanction that outcome. It has been asked only to vary the powersof the trustees and not to alter the interests of the beneficiaries.[39] The purpose of the Acquisitions Trust is the provision of funds to acquire artworks of any and every description for presentation to the Auckland City Council fordisplay in the Auckland Art Gallery, and to increase the appreciation of the visual artsamongst the citizens of Auckland. It is clear that there is a widely held view amongthose responsible for the administration of the Auckland Art Gallery and, particularly,among those who have devoted their time and resources to supporting the Gallery andenhancing its collection through the Friends, that the Acquisitions Trust is no longerable to serve its intended purpose and that there is a better arrangement for achievingthe common objectives.[40] The Auckland Art Gallery is a civic, regional and national taonga and I am notpersuaded that it would be a proper exercise of the Court's discretion to decline, onwhat are essentially technical grounds, to exercise the jurisdiction available to theCourt to facilitate the achievement of the objectives of those in whose name thisproceeding is brought. It is firmly established by the evidence that much thought anddiscussion has preceded the making of the application. If the application is granted,the trustees will have the power to divest the Trust of its resources in accordance withthe wishes of an overwhelming majority of its stakeholders and for a purposeconsistent with the Trust's purposes.[41] It is open to the trustees to ensure that the powers vested in them by thevariations will be exercised in such a manner as to ensure that the Trust has sufficientresources to promote a scheme under Part 3 of the CTA, or to otherwise liquidate theBoard under the appropriate provisions of Part 2 of the Act, as and when the trusteesconsider such a course to be appropriate. A voluntary liquidation under Part 2 wouldbe conducted in accordance with the liquidation procedures under Parts 16 and 17 ofthe Companies Act 1993, modified as may be necessary, including adherence to thepublic notice requirements. As mentioned, the Part 3 procedure similarly requirespublic notification. Both forms of liquidation will require the ultimate sanction of theCourt, but that is a matter for the future. For the present, I have no doubt that the Courtshould approve what is sought in this proceeding, notwithstanding the valued adviceof the Attorney-General not to do so.Order[42] Accordingly, I order that new clauses 7A and 7B be added to the trust deed ofthe Friends of the Auckland Art Gallery Acquisitions Trust as follows:7A. The Trustees may use the capital of the Trust Fund or any partof it for the purchase of an art work or art works for the Auckland ArtGallery, a business unit of Regional Facilities Auckland. Such art workor art works to be selected in accordance with clause 5 of the TrustDeed, all artworks to be purchased solely by the Acquisitions Trust andto be recorded as gifted by the Friends of the Auckland Art Gallery.7B. Following the purchase of artworks pursuant to clause 7A, anyremaining assets of the Trust Fund that Trustees consider to be too smallfor the purchase of an artwork may be gifted to the Auckland ArtGallery Foundation (a registered charitable trust: incorporationnumber 1610446; a registered charitable entity: incorporationnumber CC26873) ("Foundation") to be held on the trusts set out in thetrust deed of the Foundation.[43] I am grateful to counsel for their assistance..................................................Toogood J