Trusts Act 2019 and Not-for-Profits

Updated statute applying to Trusts

The Trusts Act 2019 was enacted in July 2019, and it came into force on 30 January 2021. The delay gave many trusts time to amend the documents that control how they operate and to alter their procedures. However, many trusts will still be caught by surprise by this updated statute.

This article is particularly focussed on the implications of the Trusts Act 2019 for not-for-profit charitable trusts (with some implications for incorporated societies).

General delegation under the Trusts Act 2019

The Trusts Act 2019 permits limited delegation by trustees by the appointment of agents (especially sections 67 and 70) and by the appointment of an attorney if a trustee is out of New Zealand, and these provisions extend to charitable trusts (section 70(2)(a)). The following points should be noted:

Appointments under section 70(1) must be by a formal power of attorney.
Section 67 does not justify a broad delegation of duties and powers — it is more directed towards the delegation of administrative matters (section 70(2)).
Apart from occasions where a trustee cannot act because of some practical inability to do so, the delegated power does not extend to making what might be described as policy decisions — the power of the delegate or agent under section 67 is expressed in terms of administration, and section 67(2) contains some explicit restrictions. Adopting the language of modern leadership theory, trustees cannot delegate the power of governance (the making of policy), but may delegate some management powers (the execution of policy through administration).
Full delegation is permitted under section 70 only when either the trust property or a trustee is out of New Zealand or where a trustee is temporarily unable to act.
If trustees are considering appointing others to exercise or perform specific powers or functions specific legal advice should be obtained.

Delegation from necessity

Under trustee law there has long been a rule relating to delegation justified by “necessity,” but the applicability of this rule is very limited and relates to some matters of administration where a trustee cannot possibly act himself or herself. Although still recognised, this general rule has largely been superseded by express statutory provisions (allowing delegation under section 70(2) when necessary because of a trustee’s absence from New Zealand, temporary inability to be contacted, temporary physical incapability, or temporary lack of capacity to perform the functions of a trustee), but the Trusts Act 2019 does not otherwise address the issue of “necessity.”

“Rule of thumb” guideline to delegation by trustees

It may not always be easy to identify the difference between the duties of trustees in relation to “governance” (which cannot be delegated) and the duties of trustees in relation to “management” (which can be delegated). However, if there is a doubt, it is preferable to err on the side of caution and for the responsibility to be exercised by the trustees and not by any delegate unless competent legal advice has been obtained.

Control and investment of trust funds

Trustees can invest only as authorised by the document establishing the trust, by statute, or by the High Court. Most trust deeds or declarations of trust establishing a trust contain specified investment powers, in addition to the powers conferred by statute (the statutory power is to invest in any real or personal property – sections 58 – 79, Trusts Act 2019).

The fundamental obligations of trustees as to the investment and control of trust funds are to:

Comply with the terms of the trust instrument (section 24, Trusts Act 2019, noting that, historically, the powers of investment have tended to be interpreted in a restrictive way by the courts: Re Maryon-Wilsons Estate [1912] 1 Ch 55 (CA),
Invest having regard to a wide range of factors specified in section 59. Trusts Act 2019, which includes considering issues such as the objectives or permitted purpose of the trust, the desirability of diversifying investments, the need to maintain the real value of investments, the risks of losses and the potential for gain, the length of the investment and the term of the trust, the marketability of the investment, and the effects of inflation, and
Seek to diversify their investments, have an investment strategy, and periodically and regularly review the trust’s investments (noting sections 128-129, Trusts Act 2019).

While the provisions just reviewed are not directly applicable to societies, the executive of a society would do well to bear in mind the obligations imposed on trustees, as the control and investment of a society’s funds are normally in the hands of its executive, and a society’s rules should provide for the control and investment of the society’s funds. The Charitable Trusts Act 1957 has no statutory requirement comparable to sections 128-129, Trusts Act (of course, a well-drawn set of society rules, whether or not incorporated and whether registered under the Incorporated Societies Act or the Charitable Trusts Act, will or should set out the necessary powers).

Section 21(2) of the Charitable Trusts Act clarifies the position on the disposal of property of a society or trust registered under that Act, by providing that “Any money or other property received in consequence of any … sale or exchange shall be held upon the same trusts as affected the property so dealt with, and any such money may be invested in accordance with the Trusts Act 2019.”

Borrowing by societies

The power of a society’s executive to borrow is usually limited, and most commonly requires the authority of a general meeting of members. Under the proposed new Incorporated Societies Act “A society has “full capacity to carry on or undertake any activity, do any act, or enter into any transaction,” unless the society’s constitution contains a provision that restricts the capacity of the society to borrow. For charitable trusts. the Charitable Trusts Act 1957 is silent on this issue, but there is Court authority (Forsythe v Wellington Central Mission (1904) 24 NZLR 780) which indicates that if an entity has power to own and dispose of real property that is sufficient to imply that it has power to mortgage that property. A well-drawn society constitution will include a carefully drafted power to borrow, whether the entity is registered under the Incorporated Societies Act or the Charitable Trusts Act.

Where there is power to borrow the courts will restrict the exercise of the power to what is expressly stated (as in Union Bank of Australia (Ltd) v The South Canterbury Building and Investment Society (Ltd) (1894) 13 NZLR 489 (CA) where a company’s directors had exceeded their power to borrow, but the shareholders were deemed to have ratified their actions by adopting, over a long period of years, balance sheets showing the debt). Whether an incorporated society or charitable trust has inherent power to grant a security holder power of attorney (something common in security documents) has never, to this author’s knowledge, been tested. An unincorporated society will usually find it difficult to borrow (unless a member is prepared to offer some appropriate security).

Neither the Incorporated Societies Act (existing or as currently proposed) nor the Charitable Trusts Act provides for debentures as does the Companies Act 1993. Some societies issue what are loosely called “debentures” to members to raise money, but these cannot be registered and the lenders have no security. Such borrowing must still comply with the relevant statutory and constitutional requirements, and these should be examined in each case before any such borrowing is undertaken.

Borrowing by charitable trusts

Before the enactment of the Trusts Act 2019, the power of trustees to borrow was extremely limited, but section 56 of the 2019 Act now provides that:

A trustee has the following general powers:

(a) all the powers necessary to manage the trust property including, in relation to the trust property, all the powers of an absolute owner of the property:

(b) all the powers necessary to carry out the trust, including powers incidental to those in paragraph (a).

Because the particular circumstances of any proposed borrowing need careful examination having regard to the provisions of the trust instrument, where charitable trustees wish to borrow, legal advice specific to the borrowing should be sought by both the borrower and the lender (noting that the trust instrument may legitimately prohibit borrowing – see Caldwell v Fleming [1927] NZLR 145 and In re Clark, Horwell v Dent [1961] NZLR 635).

Ownership and leasing of real property

As a corporate body, and subject to its constitution, an entity incorporated under either the current or proposed Incorporated Societies Act or the Charitable Trusts Act 1957 has the capacity, in its own name, to own or lease property (however a trust instrument may, legitimately, prohibit the sale of property, see Caldwell v Fleming [1927] NZLR 145 and In re Clark, Horwell v Dent [1961] NZLR 635, and therefore, possibly, the purchase or leasing of property). The practicalities, advantages, and disadvantages of property ownership or leasing are a subject in themselves, and are not usually legal issues. An entity contemplating owning or leasing a property should seek specific expert advice on the issues relevant to it and the property concerned. Those issues may include:

Suitability factors such as location, zoning provisions, parking, neighbours, and room for expansion,
What licences or registration may be required from the local territorial authority for a place of assembly, for trading activities, or for the sale of liquor,
Financial considerations such as the capital cost of acquisition and/or fit-out, and the ongoing costs of rates, rent, insurance, maintenance, and upgrading,
Whether any specific procedures must be followed under the entity’s constitution, for instance, as to borrowing, and
Arranging adequate, comprehensive insurance cover, possibly including replacement cover and full public liability cover to cover potential liability against civil claims and under legislation such as the Occupiers’ Liability Act 1962 and Health and Safety at Work Act 2015.

The Charitable Trusts Act 1957 includes, in section 21(1), certain specific powers in respect of property:

Without restricting the powers that are or may be conferred on any Board by or under the Trusts Act 2019 or this Act or any other Act or otherwise howsoever, it is hereby declared that any Board may,— …

(b) Notwithstanding any trusts that may affect its property, sell or exchange any part of its property for any purpose upon such terms as it deems expedient:

Provided that no property subject to any trust shall be sold or exchanged in exercise of the power conferred by this paragraph without the consent of the Court in any case where it is of the essence of the trust that the particular property should be used for the purpose of the trust:

(c) Subject to the rules or other documents providing for the constitution of the Board, purchase any property, whether situated in New Zealand or elsewhere, and apply any money for the time being held by the Board for or towards any such purpose; and any property so purchased shall be held upon the same trusts as affected the money applied in payment for the property.

Control and investment of trust funds

Trustees can invest only as authorised by the trust instrument, statute, or the High Court, and, in addition to the investment power to invest in any real or personal property under section 58, Trusts Act 2019, there are usually investment powers set out in the trust instrument. The fundamental obligations of trustees as to the investment and control of trust funds are to:

Comply with the terms of the trust instrument (see section 24, Trusts Act 2019), noting that, historically, the powers of investment have tended to be interpreted in a restrictive way by the courts (see Re Maryon-Wilsons Estate [1912] 1 Ch 55 (CA)), and
Invest having regard to a wide range of factors specified section 59, Trusts Act 2019, which includes considering issues such as the objectives of the trust or the permitted purpose of the trust, the desirability of diversifying investments, the need to maintain the real value of investments, the risks of losses and the potential to gain, the length of the investment and the term of the trust, the marketability of the investment, and the effects of inflation.
Trustees should have an investment strategy, seek to diversify their investments, and periodically and regularly review the trust’s investments (noting sections 128-129, Trusts Act 2019, and Nestle v National Westminster Bank PLC [1994] 1 All ER 118 (CA)).

While the provisions in the Trusts Act 2019 are not directly applicable to societies, the committee of a society would do well to bear in mind the obligations imposed on trustees. The control and investment of a society’s funds are normally vested in its executive, and, under the proposed new Incorporated Societies Act, a society’s rules will be required to provide for the control and investment of the society’s funds, but the Charitable Trusts Act 1957 has no comparable statutory requirement. A well-drawn set of society rules, whether or not incorporated and registered under the Incorporated Societies Act or the Charitable Trusts Act, will set out the necessary powers.

Section 21(2) of the Charitable Trusts Act clarifies the position on the disposal of property by a charity by providing that “Any money or other property received in consequence of any … sale or exchange shall be held upon the same trusts as affected the property so dealt with, and any such money may be invested in accordance with the Trusts Act 2019.”

Borrowing

The power of a society’s executive to borrow is usually limited, and most commonly requires the authority of a general meeting of members. Under the proposed Incorporated Societies Act a society will have full capacity to carry on or undertake any activity, do any act, or enter into any transaction, unless the society’s constitution contains a provision that restricts the capacity of the society to borrow. For charitable trusts the Charitable Trusts Act 1957 is silent on this issue, but there is authority which indicates that if an entity has power to own and dispose of real property that is sufficient to imply that it has power to mortgage that property (see Forsythe v Wellington Central Mission (1904) 24 NZLR 780). A well-drawn constitution will include a carefully drafted power to borrow, whether the entity is registered under the Incorporated Societies Act or the Charitable Trusts Act. Where there is power to borrow the courts will restrict the exercise of the power to what is expressly stated (Union Bank of Australia (Ltd) v The South Canterbury Building and Investment Society (Ltd) (1894) 13 NZLR 489 (CA), a case where the directors exceeded their power to borrow, but the shareholders were deemed to have ratified their actions by adopting, over a long period of years, balance sheets showing the debt). However, whether an incorporated society or charitable trust has inherent power to grant a security holder power of attorney (something common in security documents) has never, to this author’s knowledge, been tested. As already pointed out above, an unincorporated society will usually find it difficult to borrow.

Neither the Incorporated Societies Act nor the Charitable Trusts Act provides for debentures as does the Companies Act 1993. Some societies issue what are loosely called “debentures” to members to raise money (as in Goodson v Hawera Lawn Tennis and Croquet Club Inc [1931] NZLR 1096), but these cannot be registered and the lenders have no security. Such borrowing must still comply with the relevant statutory and constitutional requirements, and these should be examined in each case before any such borrowing is undertaken.

Before the enactment of the Trusts Act 2019, the power of trustees to borrow was extremely limited, but s 56 of the 2019 Act now provides that:

A trustee has the following general powers:

(a) all the powers necessary to manage the trust property including, in relation to the trust property, all the powers of an absolute owner of the property:

(b) all the powers necessary to carry out the trust, including powers incidental to those in paragraph (a).

Ownership and leasing of real property

As a corporate body, and subject to its constitution, an entity incorporated under either the existing or proposed Incorporated Societies Act or the Charitable Trusts Act 1957 has the capacity, in its own name, to own or lease property (but noting that the trust instrument may legitimately prohibit borrowing – see Caldwell v Fleming [1927] NZLR 145 (FC) and In re Clark, Horwell v Dent [1961] NZLR 635). The practicalities, advantages, and disadvantages of property ownership or leasing are subjects in themselves, and cannot be adequately covered in this article. An entity contemplating owning or leasing a property should seek specific expert advice on the issues relevant to it and the property concerned. Those issues may include:

Suitability factors such as location, zoning, parking, neighbours, and room for expansion,
What licences or registration may be required from the local territorial authority for a place of assembly, for trading activities, or for the sale of liquor,
Financial considerations such as the capital cost of acquisition and fit-out, and the ongoing costs of rates, rent, insurance, maintenance, and upgrading,
Whether any specific procedures must be followed under the entity’s constitution, for instance, as to borrowing, and
Arranging adequate, comprehensive insurance cover, possibly including replacement cover and full public liability cover to cover potential liability against civil claims and under legislation such as the Occupiers’ Liability Act 1962 and Health and Safety at Work Act 2015.

The Charitable Trusts Act 1957 includes, in section 21(1), certain specific powers in respect of property:

(b) Notwithstanding any trusts that may affect its property, sell or exchange any part of its property for any purpose upon such terms as it deems expedient:

Changing trustees

Just as no-one can be compelled to accept appointment as a trustee, so no one can be compelled to remain in office. However, a trustee retiring knowing that after retirement any co-trustee or new trustee will commit a breach of trust and that the retirement would enable this breach to occur (see Head v Gould [1898] 2 Ch 250) may be personally liable for any losses to the trust. In addition, and something all too commonly overlooked by retiring trustees, a retiring trustee cannot simply abandon the responsibilities of trusteeship, but has obligations to ensure the valid appointment of any required replacement trustee. Further, no power of removal or appointment should be exercised for any improper purpose, and certainly not to facilitate any breach of trust.

There are different possible mechanisms for the change of trustees of a charitable trust, and the following points should be noted

Sometimes the person who established the trust (the “settlor”) will reserve the power to remove trustees and appoint replacement of new trustees.
Trust instruments commonly empower remaining trustees to fill vacancies caused by resignation, disqualification, and death, and sometimes authorise the removal of trustees by a majority vote of the trustees.
Often a trust instrument will provide that, if a trustee’s position changes (for instance, if the trustee ceases to be a member of a specific church, or is no longer resident in an area, or becomes bankrupt), the trustee automatically ceases to be a trustee or can be removed, usually by the remaining trustees.
The holders of a particular office, such as the mayor of a local authority or a specific office-holder in a named organisation, may be given the power to appoint a trustee, often to “represent” (be morally accountable to) the interests of a locality or class of people.
An organisation, such as a professional body, an interest group, or a local authority may also have the power to appoint trustees.
Some trusts provide for trustees to be elected (a common feature of trusts holding Māori property on behalf of Māori families and other groupings). In such cases the courts will require elections to be elected in strict accordance with the provisions of the trust instrument (as illustrated by the decision in Solomon-Rehe v Hokotehi Moriori Trust [2015] NZHC 46).
There are also statutory powers of appointment under section 43, Trusts Act 2019, for instance, vested in the surviving trustees or the personal representatives of the last surviving trustee. Such statutory powers may be exercised to replace a trustee who dies, remains out of New Zealand for the space of 12 months while there is no valid delegation under section 31 of the Act, wants to be discharged from the trust, refuses to act or is unfit to act, is incapable of acting, or which, being a corporation, has ceased to carry on business, is in liquidation or is dissolved.
The High Court has both inherent (discussed at length and applied in Ngati Kuri Trust Board v Neho, High Court Auckland, CIV-2003-485-2776, 6 October 2006, at paras [194]–[208]), and statutory powers of removal and appointment (see section 21 Trusts Act 2019, and Kain v Hutton [2008] NZSC 61), for instance, where trustees misconduct themselves, are convicted of crimes, become incapable of acting, reach an impasse, become bankrupt, or (in the case of companies) cease to carry on business or are liquidated. Removal of trustees by the High Court can extend to banning a former trustee from being re-appointed (see Ngati Kuri Trust Board v Neho, High Court, Auckland CIV-2003-485-2776, 6 October 2006, paras [200]–[208]).

Every new appointment, retirement and removal of a trustee should be properly and formally recorded either in accordance with procedures specified in the trust instrument and in terms of ss 92(1), 92(1) and 101 of the Trusts Act 2019 this must be done “in writing,” a requirement all too commonly neglected. The effect of the equivalent provision in the previous statute was clarified in a number of High Court decisions which still appear to be applicable:

The powers of appointment of trustees in trust deeds take precedence over statutory powers of appointment, and the statute does not limit the scope of the power within a deed,
Powers of appointment of trustees in trust deeds must be construed (interpreted or applied) strictly within the terms in the deed,
Any power to remove trustees in trust deeds or other instruments is also strictly construed (interpreted or applied) and only arises if the prerequisites to the exercise of that power have arisen, but
Where the trust deed is silent, ss 92(1), 92(1) and 101 of the Trusts Act 2019 will apply, and the change should be recorded by a formal document (in the writer’s opinion, the written documents needs to be signed by the appropriate people and all the signatures should, preferably, be formally witnessed by an independent person, to reduce the possibilities of future disputes arising), and
Changes in the officers of a charitable entity (not just trustees of a trust, but also executive members of a society), whether as the result of an officer ceasing to hold office or the appointment of a new officer, or both must be notified to the Charities Board if the charitable entity is registered with the Board (section 40(1)(c), Charities Act 2005).

Trustee remuneration

Under section 37, Trusts Act 2019 “A trustee must not take any reward for acting as a trustee, but this does not affect the right of a trustee to be reimbursed for the trustee’s legitimate expenses and disbursements in acting as a trustee (see section 81(2)).” Previously, trustees could charge for their efforts if expressly authorised by the trust instrument, and this was usual for professional trustees (see Ellison v Airey (1748) 1 Ves Sen 111 (CA); and Stevens v Dalrymple [1928] NZLR 93).

Trustees are also prohibited from profiting or gaining any advantage by reason of their position as trustees, and no trustee should deal with trust property to his or her own personal advantage or benefit unless expressly authorised by the trust instrument. Accordingly a trustee cannot in a personal capacity purchase property from or sell property to the trust or undertake any similar transaction (although the High Court might approve such a transaction under sections 125 and 130, Trusts Act 2019).

Powers

The executive of a charitable society may exercise such powers as are conferred by the rules of the society and in accordance with any limitations written into the rules. The trustees constituted by a trust instrument have powers conferred by that instrument and must act in accordance with its terms. In addition, where constituted by a trust instrument:

- Subject to any restrictions in the trust instrument, charitable trustees have the powers conferred on them by the Trusts Act 2019 and the Charitable Trusts Act 1957 (if a society, previously under the Incorporated Societies Act 1908), and
- Unless the trust instrument provides to the contrary, charitable trustees may act by a majority and the majority’s decision will bind the minority, according to Re Whiteley [1910] 1 Ch 600 which has, apparently, never been considered in New Zealand. If it is intended that charitable trustees make majority decisions it would be good drafting practice to provide for this explicitly in the trust instrument, rather than rely on Whiteley). However, non-charitable trustees must act unanimously unless the trust instrument provides otherwise.

Additional powers of distribution under the Charitable Trusts Act 1957

Under section 21(1)(a) of the Charitable Trusts Act 1957, “Without restricting the powers that are or may be conferred on any Board by or under the Trusts Act 2019 or this Act or any other Act or otherwise howsoever, it is hereby declared that any Board may … Notwithstanding any trusts that may affect its property, with the consent of the Court, dedicate all or any part of its property for any public purpose …” The reference to “public purpose” in this section is curious because it does not refer to a “charitable public purpose.” However, the charitable nature of any such purpose must be implied, and it is most unlikely that the Court would consent to dedication of a charitable entity’s property to other than a public charitable purpose.

Special trust advisors

In addition to the ordinary trustees, known under section 49, Trusts Act 2019, known as the “responsible trustees”, “special trust advisers” (commonly known as “advisory trustees”) may be appointed under the trust instrument, pursuant to sections 74-75, by the responsible trustees, or by the High Court under section 74(2). The position of a special trust adviser is, briefly, as follows:

The responsible trustees may consult the special trust adviser but are not obliged to do so,
The special trust adviser is entitled to advise the responsible trustees,
If the responsible trustees act on the advice of a special trust adviser the responsible trustees are not normally liable as a result of anything done or omitted by following the advice,
The responsible trustees are not obliged to follow the advice of a special trust adviser, and if such advice is given the responsible trustees may seek directions from the High Court, and
Where special trust advisers are not unanimous in giving advice the responsible trustees may also apply to the High Court.

The concurrence or otherwise of a special trust adviser is immaterial to third parties dealing with the responsible trustees (section 71(2).

Trustee remuneration

Under s 37, Trusts Act 2019 “A trustee must not take any reward for acting as a trustee, but this does not affect the right of a trustee to be reimbursed for the trustee’s legitimate expenses and disbursements in acting as a trustee (see section 81(2)).” Previously, trustees could charge for their efforts if expressly authorised by the trust instrument, and this was usual for professional trustees.

Powers

Subject to any restrictions in the trust instrument, charitable trustees have the powers conferred on them by the Trusts Act 2019 and the Charitable Trusts Act 1957 (if a society, previously under the Incorporated Societies Act 1908), and
Unless the trust instrument provides to the contrary, charitable trustees may act by a majority and the majority’s decision will bind the minority (according to Re Whiteley [1910] 1 Ch 600, apparently never considered in New Zealand, but if it is intended that charitable trustees make majority decisions it would be good drafting practice to provide for this explicitly in the trust instrument, rather than rely on Whiteley), while other, non-charitable trustees must act unanimously unless the trust instrument otherwise provides.

Remedies for breach of trust

Charitable trusts are subject to some degree of supervision on inquiry by the Attorney-General or by Charities Services, and if incorporated the Registrar may dissolve the charity under section 26, Charitable Trusts Act 1957, if he or she is satisfied that it is no longer in operation or should not have been registered.

The Charities Board has power to intervene in the event of “serious wrongdoing” (defined in section 4 of the Charities Act 2005 as “(a) an unlawful or a corrupt use of the funds or resources of the entity; or (b) an act, omission, or course of conduct that constitutes a serious risk to the public interest in the orderly and appropriate conduct of the affairs of the entity; or (c) an act, omission, or course of conduct that constitutes an offence; or (d) an act, omission, or course of conduct by a person that is oppressive, improperly discriminatory, or grossly negligent, or that constitutes gross mismanagement”). The “warning notice” procedure under sections 54 and 55 may not suffice to effect change within a charity, and removal of the charity from the Register may sometimes be warranted, but if such a course is followed because of the actions of a few it will often be unfair to a charitable entity, others who work in it, or those who support it. It is, perhaps, regrettable that the Board is not statutorily empowered to seek other remedies for breach of trust such as those that may be taken by individuals involved in a charity or by the Attorney-General.

The High Court has power to remove a trustee under section 112 of the Trusts Act 2019, and in the exercise of its inherent discretion and where clear misconduct is proved the Court will remove the trustee (Hunter v Hunter [1938] NZLR 520 (CA), but is reluctant to exercise any ongoing supervisory role (Mendelssohn v Centrepoint Community Growth Trust [1999] 2 NZLR 88 (CA)). The High Court also has power to liquidate an incorporated charity under section 25, Charitable Trusts Act 1957, if it is satisfied that it is “just and equitable” to do so. Apart from this power being available where a charity is insolvent, the power appears to be available where there is a dispute about the administration of the trust (Misa v Congregational Christian Church of Samoa (Wainuiomata) Trust Board [1984] 2 NZLR 461 (CA)).

The terms of charitable trusts are normally (but not always) wide, and a trustee commits a breach of trust when a trustee does anything not permitted by the trust instrument, fails to do something directed by the trust instrument, or acquiesces in a breach of trust by a co-trustee. The trustees of an incorporated charitable board and the executive of a charitable society may be held personally liable if they cause or permit the entity they govern to apply charitable funds in unauthorised ways, thereby knowingly assisting a breach of trust (see Royal Brunei Airlines v Tan [1995] 3 All ER 97 (PC), and Fletcher v Eden Refuge Trust [2012] NZCA 124). Trustees are personally, strictly liable to make good to the trust losses arising from:

Any trust money being used for their own purposes not in accordance with the trust,
The destruction of trust property,
Improperly alienating trust property, and
Negligently allowing others to misappropriate trust property.

The Courts tend to respond leniently where trustees have acted honestly but mistakenly, but are severe with trustees who wilfully, corruptly, or negligently misapply trust funds or fail to exercise proper diligence in their duties. Although not a decision involving a charity, Re Mulligan (Deceased) [1998] 1 NZLR 481 illustrated well-known principles that must also apply to charitable trustees, and the Court held that trustees have a duty “to act with due diligence and prudence in the discharge of their duties,” each trustee bears independent responsibility for the losses, it being “elementary that a duty of diligence rests on each trustee,” and trustees have a “duty of impartiality,” it being “elementary that a trustee must act with strict impartiality and endeavour to maintain a balance” between the interests of different beneficiaries or, “Put another way, a trustee must be even-handed as between income and capital beneficiaries.” Generally, the remedy for a breach of trust will be to make good the loss suffered to the trust, but this will not be ordered as a “punishment” for a negligent trustee.

To enforce the objects of a charitable trust s 60(1) of the Charitable Trusts Act 1957 authorises an application to the High Court for an order (and the Court has a wide discretion to make such order as it thinks fit):

(a) Requiring the trustees to carry out the trusts on which the property or income or money is held, and to comply with the provisions of the scheme (if any):

(b) Requiring any trustee to meet his liability for any breach of trust affecting the property or income or money as the Court may direct:

(c) Excluding any purpose from the purposes for which the property or income or money may be used, applied, or disposed of:

(d) Giving directions in respect of the administration of the trust; or in respect of any examination or inquiry under section 58 of this Act; or of any question to be answered or assistance to be given by any person in connection with any such examination or inquiry:

(e) Directing that on and after the date of the order, or on and after any subsequent date specified in the order, the property or income or money subject to the trust shall not be used or applied or disposed of otherwise than in accordance with a scheme which, after the date of the order, is approved by the Court under Part 3 or Part 4 of this Act or otherwise, or by the Attorney-General under Part 4 of this Act.

Copies of any such application have to be served on the charitable trustees (including any incorporated society) and on the Attorney-General, and the Court may hear others in support of or in opposition to the application.

Additional powers of distribution under the Charitable Trusts Act 1957

Under s 21(1) of the Charitable Trusts Act 1957:

(a) Notwithstanding any trusts that may affect its property, with the consent of the Court, dedicate all or any part of its property for any public purpose …

The reference to “public purpose” in section 21(1)(a) is curious because it does not refer to a “charitable public purpose.” However, the charitable nature of any such purpose must be implied, and it is most unlikely that the Court would consent to dedication of a charitable entity’s property to other than a charitable public purpose.

For specific advice about any of those issues, please contact Mark at mark@nfplaw.co.nz.

This is one of a series of articles on societies and charitable trusts by Mark von Dadelszen, a lawyer and author of Members’ Meetings, 3^nd Edition, 2012, and Law of Societies, 3^nd Edition, 2013 (both texts being in the course of editing for 4^th editions to be published after the new Incorporated Societies Act is enacted).

Trusts Act 2019 and Not-for-Profits

Articles

Contact Mark