As family trusts have grown in popularity over recent years, increasing numbers of people have been asked by friends and family members to take on trustee roles. The offer is often seen as something of a compliment; a sign of respect for the skills and wisdom of the trustee. However, potential trustees can easily overlook the risks involved with accepting such an offer.
The trustee’s role has significant responsibilities and with those responsibilities comes the risk of personal liability if those responsibilities are not met. Two recent cases illustrate the risks involved and are a salutary reminder for all existing trustees of the personal risks they face.
Selkirk v McIntyre
This case involved a family trust engaged in property development. The trust was set up by Mr McIntyre and the two trustees of the trust were Mr McIntyre and his solicitor, Mr Selkirk. After the trust was established it purchased some land, subdivided it and then sold the sections. The trust incurred GST liabilities as a result of these activities but failed to file its GST returns. Although Mr McIntyre assured his co-trustee Mr Selkirk that the accountants had all the necessary paperwork under control, it turned out that Mr McIntyre did not arrange for the accountants to file the required tax returns.
In 2004 Mr Selkirk received a letter from the IRD seeking payment of outstanding taxes of approximately $30,000. Mr Selkirk urged Mr McIntyre to arrange payment of the outstanding tax and file the required returns as soon as possible.
Mr McIntyre made some attempts to pay the outstanding tax (at a rate of $200 per week) and filed some of the outstanding returns. However, those arrangements were eventually cancelled and in late 2005 the IRD contacted Mr Selkirk again to advise that the outstanding tax now amounted to approximately $93,000 (including penalties). This pattern continued for another couple of years: the IRD contacted Mr Selkirk and he would chase Mr McIntyre who would then ignore the issue and fail to pay any of the outstanding taxes.
By early 2011 the tax arrears (including penalties) had escalated to $520,000 and the IRD took legal action against Mr Selkirk, on the basis that he was a trustee of the trust, seeking payment of the entire outstanding amount. Mr Selkirk negotiated with the IRD and paid $200,000, from his own pocket, to settle the claim.
Mr Selkirk then took legal action against Mr McIntyre (who, by this time, had moved to Australia) seeking an order that Mr McIntyre should have been liable for the full $200,000. Mr Selkirk argued that Mr McIntyre was solely responsible for the failure to pay the tax due and that he should therefore pay $200,000 to Mr Selkirk to compensate him for the payment he made on the trust’s behalf. Mr Selkirk claimed that he was only an independent trustee and that Mr McIntyre was responsible for managing the trust and ensuring that it paid its tax.
The Court did not accept Mr Selkirk’s argument. It held that both trustees were personally liable for ensuring that the tax was paid. The fact that Mr Selkirk was an “independent trustee” was irrelevant. When he accepted appointment as a trustee, he accepted joint and equal responsibility with Mr McIntyre for operation of the trust and payment of its debts. Because both trustees were jointly liable, Mr McIntyre was only liable for half of the tax Mr Selkirk has paid.
In summary, Mr Selkirk accepted an appointment as trustee and ended up paying $200,000 from his personal funds to the IRD. Although he was able to claim a contribution of $100,000 from his co-trustee, he still faced the challenge of seeking payment of that amount from a former client who had moved to Australia.
This case is a reminder of the real risks of personal liability that trustees face and the fact that all trustees need to be actively involved with the management of their trust to ensure that its liabilities are met.
The following case also illustrates the risks of personal liability of trustees, this time arising from a failure to understand the scope of a trust’s purposes.
Church Property Trustees v Attorney General and the Great Christchurch Buildings Trust
This high profile case involved a dispute over the application of insurance proceeds received by the Anglican Church for earthquake damage to the Christchurch Cathedral. Following the Christchurch earthquakes, the Church Property Trustees (the relevant part of the Anglican Church) received nearly $39 million as an insurance payout for the damaged Cathedral. The trustees proposed to use approximately $4.5 million to construct a temporary cathedral (often referred to as the “cardboard Cathedral”) at a different location while plans for the original Cathedral site were finalised.
Following legal action by the Great Christchurch Buildings Trust challenging the Church’s plans for the Cathedral, the Church Property Trustees (“Trustees”) applied to the High Court for confirmation that they were entitled to spend some of the insurance money they had received under the Church’s insurance policy to build a temporary cathedral on another site.
The Trustees argued that their purpose was to support the church community using the Cathedral and that its purposes were therefore wider than simply maintaining the physical building on the original Cathedral site. The Court disagreed. It focused on the founding documents for the Trust (which was a separate entity within the Church) and decided that the purpose of the Trust was limited to constructing and maintaining a cathedral on the Cathedral Square site. Use of Trust assets for any other purpose (including the construction of a temporary cathedral on another site) would be outside the Trust’s purposes and therefore a breach of trust.
This decision had significant implications for the Trustees. By the time these issues were considered by the Court, the Trustees had already entered contracts to begin work on the temporary cathedral and had incurred significant liabilities under those contracts. As those contracts were outside the scope of the Trust’s purposes, the Trust’s assets (specifically, its insurance payout of $39 million) could not be used to meet those liabilities. That left the Trustees with a personal liability for those contractual liabilities as they had signed the relevant contracts.
Facing significant personal liabilities, the Trustees asked the Court to confirm that they could be excused from personal liability. However, the Court refused to make a decision on that point as it considered that further evidence and argument would be required. This issue will be decided in a future Court hearing but in the meantime the Trustees are left with potentially significant personal liabilities.
This case highlights two fundamental and interrelated aspects of trusteeship. The principles apply to the trustees of all trusts, not just the trustees of high profile charities. Firstly, trustees need to have a detailed understanding of the scope of their powers under the trust documents creating their trust. Those documents will set the boundaries for what they can and cannot do. Trustees must stay strictly within those boundaries when acting on the Trust’s behalf. Secondly, trustees will be personally liable if they act outside those boundaries. Although courts have discretion to relieve trustees from personal liability for acting beyond their powers, it can be difficult to obtain that relief.
Is it worth it?
Mr Selkirk and the Church Property Trustees may have accepted their appointments as trustees for different reasons but none of them received any personal financial benefit from the assets they were entrusted to manage. Despite that “independence” all of these trustees ended up with personal liabilities as a result of their trusteeship. The Church Property Trustees may be able to avoid that liability but they will have to succeed in lengthy and expensive Court proceedings before that can happen.
If you are asked to accept appointment as a trustee, consider the role carefully. Are the benefits from contributing as a trustee worth the risk of personal liability you will incur? If you decide that the risks are worth taking, manage those risks by ensuring that the trust is well managed, pays its liabilities when due and that you and the other trustees keep strictly within the limits of your powers under the trust deed.
Published: 02 July 2013