In Guest v Guest [2019] NZCA 64, the Court of Appeal held that the trustees of a family trust, including a trust company, were liable for costs after they did not step aside in favour of an independent trustee. The Court of Appeal also held the director of the trust company was personally liable for costs.

Background

Martin Guest ran a farming partnership with his brother. The farming partnership informally leased land from family trusts, including the Martin and Anne Guest Family Trust. The trustees were Mr Guest, his wife, Anne Guest, and the accountant for the farming partnership, Ms Warner.

After Martin Guest died in August 2012, Mrs Guest’s involvement in the farming partnership increased and she raised queries regarding the accounting for the partnership. Mrs Guest’s brother, Mr Livingstone, assisted her in making enquiries about the accounting.

The issues in relation to the partnership’s accounting led to a dispute between Mrs Guest and Ms Warner. Mrs Guest, in her capacity as trustee of the Trust and executor of Mr Guest’s estate, purported to remove Ms Warner as trustee and replace her with Guest Trustee Ltd (GTL) by way of deed. Mr Livingstone was the sole director and shareholder of GTL.

Ms Warner did not accept that she had been legitimately removed as trustee and refused to facilitate the transfer of trust assets. Mrs Guest brought proceedings to confirm Ms Warner had been legitimately removed as a trustee of the Trust.

Mrs Guest died before the matter had been heard and the executors of her estate continued the proceeding on her behalf. The executors were her daughters, Joanne and Melissa. In their capacity as executors, together with GTL as the trustee of the Trust, they appointed Joanne as trustee of the Trust. They later appointed M Guest Investment Trust Ltd (MGITL) as an additional trustee.

The plaintiffs in the proceeding were Joanne, GTL and Melissa, who sought an order confirming that Joanne, GTL and MGITL were the only trustees of the Trust. Alternatively, they sought an order removing Ms Warner as trustee of the Trust and appointing Joanne, GTL and MGITL in her place.

Ms Warner defended the proceeding on the basis she had not been properly removed as trustee. By way of counterclaim, Ms Warner sought orders removing all trustees, including herself, and appointing an independent trustee and Mrs Guest’s son, Phillip, as trustees.

Mrs Guest’s other son, Aaron, filed a statement of defence similar to Ms Warner’s. He alleged improper purpose in the exercise of trustee powers. Essentially, his case was that Mrs Guest exercised her powers as trustee to defeat his own interests and advance hers. He made similar allegations against his sisters and Mr Livingstone. Aaron sought the appointment of the same trustees sought by Ms Warner, as well as Ms Warner’s reinstatement as trustee if necessary.

High Court decision

In Guest v Warner [2018] NZHC 666, the High Court held that it was desirable to appoint an independent trustee in place of the current trustees.

Jagose J found that the plaintiffs’ actions displayed an inability to take a neutral position. The animosity the trustees had towards the farming partnership was a “clear disincentive to … efficiently executing the trusts, and faithfully and soundly exercising their trustee powers”. The trustees were also focused on selling trust assets, which was at odds with the trust’s purpose to support a working farm. Accordingly, Jagose J made orders appointing an independent trustee.

The High Court’s “preliminary view” regarding costs was that each party should bear their own costs. Part of Jagose J’s reasoning for this was that no party could “claim truly to be the successful party in the proceeding”. Jagose J also considered that the costs should not be borne by the Trust and that the costs incurred by the family members were “further investments made in those beneficiaries’ personal interests”. Jagose J also held that Ms Warner being liable for her own costs recognised the principle in Carmine v Ritchie [2012] NZHC 2279 that where a trustee unsuccessfully defends an action for removal without the court’s sanction, they will be personally exposed to costs, even if acting on counsel’s opinion and in good faith.

In the costs decision, Guest v Warner [2018] NZHC 1150, Jagose J noted that after reviewing the memoranda regarding costs, he was reinforced in his preliminary view that costs should lie where they fall, for the reasons set out in the substantive judgment.

Court of Appeal decision

Aaron appealed the decision regarding costs, seeking costs jointly and severally from Joanne, Melissa and GTL. He also sought costs from Mr Livingstone, who was not a party to the proceeding, but was the director of GTL.

The Court of Appeal overturned the High Court’s order that each party should bear their own costs. The Court of Appeal pointed to the principle that “costs are normally awarded to the party who has the success” in the proceeding. The Court of Appeal disagreed with Jagose J’s conclusion that no one in the proceeding could claim to be truly successful.

In the Court of Appeal’s view, Aaron was the successful party. Aaron sought the appointment of his brother Phillip and an independent trustee and the reinstatement of Ms Warner as trustees. Accordingly, Aaron had to satisfy the court that the trustees of the Trust should not remain as trustees. Jagose J made significant findings about their lack of fitness to be trustees and replaced them with an independent trustee. On this basis, Aaron was entitled to costs and the Court of Appeal ordered that Joanne, Melissa, GTL and Mr Livingstone were jointly and severally liable to meet his costs of $104,367.

Mr Livingstone was not a party to the proceeding. The Court of Appeal noted that it is settled law that an award of costs may be made against a non-party. Key factors for the court to consider are the level of involvement of the non-party in the litigation and what the non-party stands to gain from the litigation. The Court of Appeal rejected the argument that Mr Livingstone was merely a loyal brother assisting Mrs Guest and held that there was “no doubt that Mr Livingstone has been heavily involved”. He was a significant creditor of the Trust, having personally advanced at least $260,000.

Furthermore, Mr Livingstone acted as a trustee through GTL. The court described the company as “a corporate shell with no assets or income” that existed solely to be a trustee of the trust. Mr Livingstone accepted that he formed the company solely to protect himself from personal liability.

Ultimately, the court held that the fact Mr Livingstone acted through a corporate entity “should not in all these circumstances insulate him from a costs liability he would bear if a trustee in his own name”. On that basis, the court considered it appropriate to hold him personally liable for costs.

Conclusion

The Court of Appeal held the High Court was incorrect to depart from the fundamental rule that costs follow the event. The Court of Appeal determined that Aaron was the successful party in the proceeding and awarded costs to him.

Guest v Guest serves as a reminder to trustees that where an application is made to replace them with an independent trustee, not stepping aside may lead to liability for costs. Trustees must recognise when they should agree to be replaced, such as where they lack independence.

The decision also demonstrates that directors of trust companies involved in proceedings should be wary about costs if they have had significant personal involvement in the matter, even if they are not personally a party to proceedings. The ability to use a company as protection from personal liability may be limited in this context.

Sally Morris sally.morris@morrislegal.co.nz is a partner and Freya McKechnie freya.mckechnie@morrislegal.co.nz a solicitor at Auckland trust, estate and relationship property specialists Morris Legal.