CHARITABLE TRUST APPLICATION, BARTELS [2017] NZHC 104

CHARITABLE TRUST APPLICATION, BARTELS [2017] NZHC 104 [8 February 2017]IN THE HIGH COURT OF NEW ZEALANDHAMILTON REGISTRYCIV-2016-419-341[2017] NZHC 104UNDER the Charitable Trusts Act 1957 and theTrustee Act 1956IN THE MATTER of a Charitable Trust created by a Deed,the Hamilton Residential TrustBETWEEN KEVIN WILLIAM BARTELS,BERNADETTE DOUBE, RUSSELLLESLIE DRAKE, NEVILLE HABLOUSAND NEVILLE PUCKEY AS THETRUSTEES OF THE HAMILTONRESIDENTIAL TRUST, OF HAMILTONApplicantsHearing: 8 February 2017Appearances: K F Shaw for the ApplicantsJudgment: 8 February 2017ORAL JUDGMENT OF MUIR JCounsel/Solicitors:K F Shaw, Harknes Henry, HamiltonS J Rawcliffe, Harkness Henry, HamiltonIntroduction[1] The applicants, who are Trustees of the Hamilton Residential Trust (HRT) apply for orders:(a) Under s 32 of the Charitable Trusts Act 1957 varying the Trust Deed of HRT;(b) Under s 33 of the Charitable Trusts Act 1957 for orders extending their powers in order to make the Deed more flexible for the future; and(c) An order pursuant to s 64 of the Trustee Act 1956 retrospectively validating certain actions of the HRT.[2] In accordance with previous orders of this Court the application was advertised in the Gazette and in the Waikato Times. No party opposes the applications.[3] In addition the application invited a report from the Attorney-General. This has been provided. That report, pursuant to ss 35 and 56 of the Act concludes that the Attorney-General is satisfied that the proposed variations under ss 32 and 33 of the Act are appropriate.The facts[4] HRT was established on 22 May 1991. It is incorporated under the Charitable Trusts Act 1957. It was established to provide residential support services and accommodation for persons with intellectual disabilities in the Waikato Region.[5] Although starting from small beginnings it now provides residential accommodation services to approximately 45-50 residents and staff.[6] Between its incorporation and 2000, HRT acquired a number of properties and interests in properties for the purposes of furthering those charitable objectives. These included:(a) a leasehold interest in 10 Palmerston Street, Hamilton;(b) a property at 90 Lake Road, Hamilton;(c) a leasehold interest in 78 Palmerston Street, Hamilton; and(d) a property at 13 Angelsea Street, Hamilton.[7] Significant difficulties arose in managing this property portfolio. These included both the time and cost of dealing with property maintenance issues and exposure and risks to the property market. As a result the Trustees decided to sell its properties in Lake Road and Anglesea Street to the Housing Corporation and entered into leases with the Corporation in respect of the same properties. That left HRT with significant cash funds. Those cash surpluses in turn created difficulties for HRT in terms of its applications for funding from the Ministry of Health and obtaining further charitable grants. In essence it was hoist by the petard of its own balance sheet.[8] The Trustees took professional advice on their options. They were advised tosplit HRT's property ownership and investment functions away from its day to dayoperations as a service provider of residential services and accommodation. As a result, they formed a new trust, the HRT Property Holdings Trust (HRPHT).[9] Crucially, before HRPHT was incorporated the Trustees of HRT received professional advice from both their accountants, Staples Rodway, and their then solicitors, McBreans, to the effect that the HRT Trust deed allowed them to make capital distributions to another trust with charitable purposes similar to those of HRT.[10] In doing so the Trust's then advisers relied primarily on clause 4.2(1) of the Trust Deed in terms:The Trustees intention is that the Trustees have and may have in their discretion the fullest possible powers in relation to the Trust Fund and the persons who are or may be interested in it and that they may do everything they think desirable to notwithstanding it is something which they would not normally have power to do in the absence of an expressed power or an Order of the Court.[11] HRPHT was formed on 31 October 2006 and on 9 November 2006 it was incorporated under the Charitable Trusts Act. Thereafter the Trustees of HRT proceeded to make various capital distributions to HRPHT in accordance with the advice they had received. In particular:(a) on 1 July 2007 they transferred the property at 10 Palmerston Street Hamilton and various cash reserves to HRPHT;(b) on 14 November 2007 they transferred the leasehold interest in 78 Palmerston Street Hamilton to HRPHT; and(c) on 25 March 2010 they transferred $200,000 to HRPHT.[12] There have, in the intervening period, also been instances of support of HRT by HRPHT. In particular on 28 January 2011 the Trustees of the Property Trust resolved to make a grant to HRT of $200,000.[13] By 2014 the Trustees of HRT had engaged new solicitors. They sought advice from them about further distributions to HRPHT. The new solicitors advised that, in their opinion, there was significant uncertainty about the power of HRT to make capital contributions to HRPHT under the Trust Deed. In their view, although cl 4.2(1) of the Trust Deed was widely expressed it did not give the Trustees the power to do something not included in HRT's "purposes". They said that supportinganother trust was arguably not one of HRT's purposes in that it was not an expresspurpose of HRT. Furthermore they pointed out that the Trust Deed did not specifically include any general power to distribute Trust capital and indeed cl 2.4contains specific restrictions on the use of HRT's capital.[14] These concerns appear to me to have been properly raised and I accept that there is uncertainty as to the ability of the HRT Trustees to make capital distributions to any other charitable trust.The s 32 application[15] The existing provisions of cl 2.3 of the Trust Deed provide:2.3 ObjectsThe Trustees shall hold the Trust Fund in perpetuity for the following charitable purposes (in each case within New Zealand) upon the following trusts:(1) To provide a range of quality residential support services for persons resident within the Waikato Provincial area who have an intellectual handicap and to promote and maintain the personal and cultural identity of those persons and to assist them to achieve optimum physical psychosocial and spiritual well-being. The Trust is to provide residential accommodation for those persons and to assist them to gain skills in independent living, self-management, inter- personal relationships, conflict resolution and problem solving.(2) To pay out of the income of the Trust Fund and if necessary out of the capital of the Trust Fund all expenses and other charges involved in the administration of the Trust Fund including the reasonable administration expenses of the Trust Board and reimbursement to the Trustees of any disbursements and out of pocket expenses incurred by them while acting to further business of the Trust.(3) The Trustees may accumulate all or any of the income from the Trust Fund in any accounting period for a period not exceeding 80 years from the date of this Deed. This accumulated income will be added to the capital of the Trust Fund and is to be held on the same trusts. This power is in addition to any other power the Trustees may have to accumulate income.(4) The Trustees may carry forward unexpended income in any year to a future year or years. This power is in addition to any other power or discretion the Trustees may have to carry forward income or to establish reserves.[16] The application proposes amending cl 2.3 to include a new clause 2.3(1A) in the following terms:(1A) To make donations or distributions, from the income of the Trust Fund or from the capital of the Trust Fund to other organisations in New Zealand which are exclusively charitable and which have purposes similar to those of the Trust, including HRT Property Holdings Trust (a trust created by a deed dated 31 October 2006 and incorporated as a charitable trust board under the Charitable Trusts Act 1957).[17] Section 32 of the Charitable Trusts Act 1957 provides:32 Property may be disposed of for other charitable purposes(1) Subject to the provisions of subsection (3) of this section, in any case where any property or income is given or held upon trust, or is to be applied, for any charitable purpose, and it is impossible orimpracticable or inexpedient to carry out that purpose, or the amount available is inadequate to carry out that purpose, or that purpose has been effected already, or that purpose is illegal or useless or uncertain, then (whether or not there is any general charitable intention) the property and income or any part or residue thereof or the proceeds of sale thereof shall be disposed of for some other charitable purpose, or a combination of such purposes, in the manner and subject to the provisions hereafter contained in this Part of this Act.(2) Subject to the provisions of subsection (3) of this section, in any case where any property or income is given or held upon trust, or is to be applied, for any charitable purpose, and the property or the income which has accrued or will accrue is more than is necessary for the purpose, then (whether or not there is any general charitable intention) any excess property or income or proceeds of sale may be disposed of for some other charitable purpose, or a combination of such purposes, in the manner and subject to the provisions hereafter contained in this Part of this Act.(3) This section shall not operate to cause any property or income to be disposed of as provided in subsection (1) or subsection (2) of this section—(a) If in accordance with any rule of law the intended gift thereof would otherwise lapse or fail and the property or income would not be applicable for any other charitable purpose:(b) In so far as the property or income can be disposed of under Part 4 of this Act.(4) Subject as aforesaid, this section shall extend to cases where the charitable purpose affecting any property or income is defined by a scheme approved by the Court under this Part of this Act or otherwise, or approved by the Attorney-General under Part 4 of this Act, and in any such case the original purpose or purposes may be restored, with or without modifications.(5) The provisions of this section shall apply with respect to trusts created, and to schemes approved, before or after the commencement of this Act.[18] In Re Tennant Hammond J summarised the principles governing an application for a variation under s 32 as follows:1(a) The application must come within the statutory jurisdiction (which includes a necessity for the purposes to have been charitable at the date of settlement);1 Re Tennant [1996] 2 NZLR 633 (HC) at 636.(b) The substituted arrangements must be charitable as that term is understood in law;(c) In deciding whether to approve the substituted arrangements, the new scheme should accord as closely as reasonably possible in the changed circumstances to the terms of the original trust;(d) The Court will dispose of the property in such a way as will best serve the interests of those intended to be beneficiaries and the public.[19] In Re McElroy Trust the Court of Appeal commented on the meaning of"inexpediency" in the following terms:2The general connotation of the word "inexpedient" in its present context is of the original charitable purpose or purposes having become unsuitable, inadvisable or inapt. Parliament's wish to expand the concepts of impossibility and impracticability should not be inhibited by too narrow aninterpretation of the word "inexpedient". Clearly Parliament wished to givethe Courts power to approve a scheme of variation in circumstances beyond those where the original purpose could no longer be carried out. The concept of inexpediency introduced a value judgment rather than simply an assessment of feasibility. It may remain possible and practicable to carry out the original purpose but it may have become inexpedient to do so. If that is so, a scheme of variation may be approved so long as it keeps as close as reasonably possible in the new circumstances to the original intention of whoever established the trust: see Re Twigger [1989] 3 NZLR 329 and the various cases there surveyed, and in particular the influential decision of Tompkins J in Re Whatman (SC Wellington, 16 July 1965). It may be worth repeating here that the question is not whether the scheme carries out the purposes of the trust better. Rather it is whether it is now inexpedient to carry them out.[20] I accept the applicant's submission that inexpediency can capture practicalconsiderations in the administration of a trust. In Re Tuhoe Charitable Trust the High Court allowed the amalgamation of three trusts agreeing that the duplication of administration and compliance costs, as well as the inability to rely on investment strategies, to pool resources and to make joint distribution decisions made it inexpedient for the three charities to continue separately. 3[21] Another example of the exercise of the Court's jurisdiction is the Merton Trust decision.4 In that case the High Court accepted it was no longer expedient for the trust concerned to own a very expensive cello, the purpose of which had been to2 Re McElroy Trust [2003] 2 NZLR 289 (CA) at 293-294.3 Re Tuhoe Charitable Trust Board [2012] NZHC 19524 Merton Trust HC Auckland CIV-2006-404-3327, 6 September 2006.loan out to third parties, because the ongoing costs of doing so had become too great. The Court accordingly gave approval for the sale of the cello.[22] Once a Court is satisfied that it has become inexpedient or impracticable to carry out the purposes of a trust, it is not free to vary those purposes as it thinks fit. Instead, it must endeavour to vary the trust in terms that accord as closely as is reasonably possible in the changed circumstances to the terms of the original trust deed.[23] The Trustees rely on the inexpediency ground in s 32. They say that it would be inexpedient if the trustees did not have the power to make donations or distributions from the income of the Trust Fund or the capital of the Trust Fund to other charities having similar purposes because:(a) in the environment in which it operates it is inexpedient for HRT to hold significant cash assets and reserves given its reliance on charitable grants and Ministry contracts in its service functions;(b) it is inexpedient for HRT to hold significant cash assets and reserves given that those assets are placed at risk by its service operations; and(c) it is inexpedient that the Trustees should continue in a state of uncertainty as to their powers to make distributions in circumstances where they have over the last 10 years received conflicting legal advice as to their entitlement to do so.[24] HRT further says that absent the orders sought its sources of government and charitable funding may be imperiled and this would inevitably force it back into the property ownership structure which it had formerly rejected on account of the excessive administrative requirements associated with it.[25] In essence it says that the retention of property curtails its ability to operate effectively as a service provider and likewise exposes those assets to risk.[26] I accept that these are valid concerns. I accept also that it is inexpedient that trustees of a charitable organisation should be required to continue in an environment of uncertainty as to their legal rights and obligations such as has been created by the competing advice they have received.[27] I am also satisfied that the proposed variation accords with the original intentions of the Trust. HRT continues to provide residential support services. The intention is that it should be assisted in those objectives by the proposed distributions. The Attorney-General concurs in that objective.[28] I accordingly accept the Trust's submission that a variation to the Trust Deed so as to include the proposed cl (1A) in cl 2.3 of the Trust Deed is appropriate.The s 33 application[29] The Trustees propose, pursuant to s 33 of the Charitable Trusts Act that the Trust Deed be amended to include a new cl 9 as follows:9. Subject to the provisions of this clause, the Trust Board may resolve to amend any provisions of this Deed. Any resolution to effect an alteration or addition must be passed by a unanimous resolution of the Trustees at a meeting of the Board where not less than 21 cleardays' prior written notice of intention to move the amendment isgiven to all the Trustees.No amendment may be made to the Trust Deed in any respect which would have the effect of causing the Trust to cease to be a charitable trust or to amend the Objects, or to amend clauses relating to restrictions on:(1) Providing a personal benefit to a trustee;(2) Providing a private pecuniary profit to any individual; or(3) Distributions made upon winding up.[30] It does so in an endeavour, it says, it make HRT's Trust Deed more flexible inthe future and in order to prevent the need for further applications to the Court.[31] Section 33 of the Charitable Trusts Act provides:33 Extension of powers or alteration of mode of administration of trust –In any case where it is made to appear that any property or income is given or held upon trust, or is to be applied, for any charitable purpose, and the administration of the property or income or the carrying out of the trust could be facilitated by extending or varying the powers of the trustees or by prescribing or varying the mode of administering the trust, the powers of the trustees may be extended or varied, and the mode of administering the trust may be prescribed or varied, in the manner and subject to the provisions hereafter contained in this Part of this Act:Provided that nothing in this section shall restrict the powers that are or may be conferred on the Court or the trustees by or under the Trustee Act 1956 or any other Act or by law.[32] As Paterson J noted in Re Melanesian Mission Trust Board,5 the threshold for orders under s 33 is that:It is necessary for this Court to be satisfied that the administration of the property or the carrying out of the Trust "could be facilitated" by thevariation sought. The ordinary dictionary meaning of "facilitate" is "made easier, promoted, or helped forward".The threshold test is not therefore high.[33] In respect of the proposed variation the report of the Attorney-General provides:78. Proposed clause 9 would permit changes to the HRT trust deed by unanimous resolution. It would not permit any changes to the charitable purposes, or to clauses relating to (i) restrictions on providing a person benefit to a trustee, (ii) providing a private pecuniary profit to any individual, or (iii) distributions made upon winding up. I note that upon winding up, clause 8 provides for the funds to be distributed to organisations which have charitable objects of a similar nature to the objects contained in the trust deed. In myview the "objects contained in the trust deed" would encompass theobjects if they are varied in accordance with the current scheme (not only the original objects).79. The provision is limited to the "administration" of the trust asrequired by s 33, and not the underlying charitable purposes. Counsel for the applicants has explained the purpose of the proposed clause is to make the HRT deed more flexible and prevent the need for further Court applications. I am satisfied that the administration of the trust could be facilitated by the inclusion of clause 9, which will reduce the work and cost required to make variations to the trust deed.5 Re Melanesian Mission Trust Board (1998) 1 NZTR ¶8-003 (HC) at 205.80. Clause 9 makes no substantial difference to either the purpose of the trust, or the demands of the trust fund, and it includes important safeguards against inappropriate amendments. The provision ensures that the objects of the trust are not affected by any variations, and there is an appropriate procedural safeguard to ensure that all trustees are both informed of and agree to any amendments. A similar provision was approved by the High Court in Re Brooks.[34] I agree with the Attorney-General that cl 9 makes no significant difference to the purpose of the Trust and includes important mechanisms for its protection. I note also the approval of a similar provision in the decision of Re Brooks.6[35] I am satisfied therefore that it is appropriate to amend the Trust Deed of HRT by the inclusion of the new cl 9 as proposed.Application under s 64 of the Trustee Act[36] The Trustees seek retrospective authorisation of the various distributions made by HRT by HRPHT under s 64(1) of the Trustee Act 1956. That section provides:64 Power of Court to authorise dealings with trust property and variations 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 is expedient in the management or administration of any propertyvested in a trustee, or would be in the best interests of the persons beneficially interested under the trust, but it is inexpedient or difficult or impracticable to effect the same without the assistance of the Court, or the same cannot be effected by reason of the absence of any power for that purpose vested in the trustee by the trustinstrument (if any) or by law, the Court may by order confer upon the trustee, either generally or in any particular instance, the necessary power for the purpose, on such terms, and subject to such provisions and conditions (if any) as the Court may think fit, and may direct in what manner any money authorised to be expended, and the costs of any transaction, are to be paid or borne, and as to the incidence thereof between capital and income:Provided that, notwithstanding anything to the contrary in theinstrument (if any) creating the trust, the Court, in proceedings in which all trustees and persons who are or may be interested are6 Re Brooks [2015] NZHC 950. See also Re Neill Barr Farm Forestry Foundation [2014] NZHC 2324; and Royston Hospital Trust Board v Attorney-General [2015] NZHC 1753.parties or are represented or consent to the order, may make such an order and may give such directions as it thinks fit to the trustee in respect of the exercise of any power conferred by the order.[37] I am not satisfied that s 64(1) responds to the circumstances of this case. Ms Shaw relies on the Court of Appeal decision in Pryor v Bulley in which it was held that the Court had power retrospectively to authorise the acquisition of shares acquired in breach of trust under that section.7 However, that decision turns onreference in the section to the word "retention". The relevant shares were, at thetime of the application, "retained" by the applicant. Authorisation of retention had the practical effect of retrospectively authorising acquisition.[38] The present circumstances are, however, different. What is sought to be retrospectively authorised are various dispositions which have occurred between 2005 and 2010. I do not see s 64(1) as applicable in those circumstances.[39] It may be that an application under s 73 of the Trustee Act could be entertained. That section provides the Court with power to relieve Trustees from personal liability. Although not wishing to bind any Court which might ultimately be required to consider the issue, it does seem to me on the affidavit evidence filed that the prior transfers and dispositions made by HRT to HRPHT were made in good faith and reliance on legal advice, that they were in the interests of the beneficiaries and that they were intended to preserve the trust property for the future benefit of disabled people. A similar conclusion is referenced in the Attorney-General's report.Such may well be relevant considerations in terms of any future application under s 73. Relevant also must be the fact that the Court having made the orders that it has today all such transfers would now be lawful.Costs[40] I make orders:(a) That HRT pay the Attorney-General the sum of $750 in relation to provision of his report.77 Pryor v Bulley [2013] NZCA 559 [2015] NZAR 518.(b) That the reasonable costs of the Trustees arising out of the current application and orders be met from the funds of HRT.__________________________Muir J