New Zealand Law Society - Proprietary rights and settlor intentions

Proprietary rights and settlor intentions

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The rule in Saunders v Vautier (1841) 41 ER 482, which has long been a part of New Zealand’s common law, provides that an adult beneficiary who is sui juris and who has an absolute, vested and indefeasible interest in the capital and income of property, or an aliquot share of capital and income as the case may be, may at any time require the immediate transfer of the property to him and consequently terminate the trust.

The rule recognises the proprietary rights of beneficiaries to overbear and defeat the intention of the testator or settlor who wishes to hold property under the continuing powers and limitations of a trust.

Where all beneficiaries jointly wish to terminate the trust, no prejudice to a beneficiary, or a class of beneficiaries, will arise. That is not so where some beneficiaries seek distribution of their aliquot share of trust property against the wishes of fellow beneficiaries.

This matter was considered recently in the High Court decision of Gough v Strahl [2013] NZHC 3184. In that case, Justice Mackenzie had to consider whether either of the two established limitations to a Saunders distribution would apply to frustrate the distribution of shares in a private company to a vested beneficiary.

The first limitation prevents the division of real property. The principle behind this limitation is clear: a share of real estate “never fetches quite its proper proportion of the proceeds of sale of the entire estate”.1

The second limitation, and without doubt the more unsettled of the two, relates to what the cases have called “special circumstances”, “prejudice” or “grounds to the contrary”. United Kingdom, Australian and New Zealand Courts have not seen it appropriate to define what constitutes “special circumstances”.

Justice Clausen in Re Sandeman’s Will Trusts2 said that “the Court has I think been rather careful never to define in precise terms exactly what would be good ground to the contrary”.

Speaking broadly, special circumstances will negate a Saunders distribution where it would be prejudicial to beneficiaries who wish the property to remain undistributed on trust.

Of particular importance to Justice Mackenzie’s decision in Gough v Strahl was the New South Wales Supreme Court decision of Re Henley3 in which Justice Slattery provides a helpful comparison of United Kingdom and United States approaches to the distribution of trust property.

The US approach

The United States Supreme Court addresses a distribution of this nature as a policy decision. US Courts are under a duty to uphold the directions of the settlor; any distribution going against the settlor’s directions will only be made if it does not contradict public policy. The question to be determined is “how far should a settlor be permitted to control not only the disposition but the enjoyment of property?”

The US appears less willing than the Commonwealth to recognise the proprietary rights that a beneficiary has in absolutely vested trust property. It would typically seem absurd that a person with an indefeasible interest in property could not control it himself/herself. However, where the interest arises through a trust, US Courts are under a prima facie duty to deny that indefeasible interest in favour of upholding the settlor’s intentions (unless public policy justifies otherwise).

There is a concern that US courts are, to some extent, authorising the settlor to control property that he/she has gifted into a trust; a principle that clearly contradicts the position in New Zealand that a settlor’s proprietary interests are foregone upon settling property on trust.

The Commonwealth approach

Unlike in the US, the default position in the UK and Australia, where the requirements of a Saunders distribution are satisfied, is that distribution will be ordered; the onus being on those who oppose distribution to establish that a limitation applies.

The distribution of cash or shares in public companies is unlikely to give rise to one of the limitations as the division of such assets is simple and does not create special circumstances. The leading Commonwealth authorities4 have interestingly all involved the distribution of shares in private companies, with “special circumstances” being alleged because distribution (and the division of share ownership which naturally follows) affected share value and company control.

This was also the case in Gough v Strahl, where Justice Mackenzie held it was not right for the court to deprive the beneficiary of a distribution so as to hold her under the trust for a cause which she did not espouse.

In each of these cases the claims were rejected and distribution was ordered on the Saunders principle with the overarching focus in each case being on the proprietary rights of vested beneficiaries.

Justice Slattery in Re Henley clarified the policy behind the Saunders rule in Australia as being that any restriction on the enjoyment by a beneficiary of a vested interest in property is inconsistent with the nature of that interest and must be disregarded. The policy is clearly based in the property rights of the beneficiary, far removed from the US “settlor’s directions” approach.

Gaining support from Gough v Strahl, New Zealand courts should not overlook the simple fact (when considering what has become an overcomplicated area of trust law) that the settlor forgoes his/her right to control property upon settling it on trust. The proprietary interests of a beneficiary, whether contingent or vested, should always be the paramount consideration in the context of a call for distribution of trust property.

As was simplified by Justice Turner in the NZ Court of Appeal5: “ … a donee is saying, ‘Property has been given to me and is mine, and I am going to do what I choose with it, no matter what the donor may have wished,’ and, whatever may be thought about his ingratitude, the Courts are compelled to hold that he is within his legal rights”.

Harry Shaw is a solicitor with Wynn Williams where he works in the litigation and dispute resolution team and with the employment team.

  1. In re Horsnaill (1909) 1 Ch 631; In Re Marshall (1914) 1 Ch 192 at 199
  2. Re Sandeman’s Will Trusts; Sanderson v Hayne [1937] 1 All ER
  3. Re Henley [2013] NSWSC 975
  4. In Re Sandeman’s Will Trusts, Sanderson v Hayne [1937] 1 All ER; Re Weiner; Wyner v Braithwaite [1956] 1 WLR 579; [1956] 2 All ER 482; Re Henley [2013] NSWSC 975
  5. Re Lushington (deceased) [1964] NZLR 161
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