In a recent LawNews article, Anthony Grant states it is a fundamental rule of trusts that “judges do not exercise jurisdiction to initiate the distribution of trust assets. They can approve or reject a trustee’s decision about a distribution of assets, but they will not initiate a decision themselves.”

It is a well-established judicial policy that decisions affecting trust assets are best made by the person entrusted to make them. This is reflected in the courts’ reluctance to interfere with trustee decision-making unless it can be shown the trustees have manifestly failed to take into consideration some relevant matter or have allowed some irrelevant matter to taint their deliberations or where a decision is actuated by an improper purpose (traditionally called a “fraud on a power”).

However, it is incorrect to say, as a matter of law, that the court’s jurisdiction is limited to approving or rejecting proposals initiated by the trustees.

As long ago as 1805, no less a figure than Lord Eldon LC held in Morice v Bishop of Durham (1805) 10 Ves 522 that “the execution of a trust shall be under the control of the court, [so] that the court itself can execute the trust”.

This principle, long dormant in New Zealand, was recently enlivened by the decision of Hinton J in Ryan v Lobb [2023] NZHC 689. That decision forms part of a long-running and ongoing dispute following the separation and ultimate divorce of Lobb and Ryan.

Ryan v Lobb: the facts

Stuart James Lobb and Verena Colleen Ryan married in 2000. They purchased a property in Remuera in their own names in 2003. In 2005, they established a reasonably conventional trust known as the Lothbury Trust and caused the Remuera property to be transferred to it. They were two of the trustees, alongside a professional independent trustee.

The deed constituting the trust was somewhat unusual in that it contained a clause directing what was to occur in the event of the couple separating. That clause provided:

If the Settlors separate (or their marriage is legally dissolved), either Settlor may give the Trustees written notice requiring them to resettle (on new trusts acceptable to the Settlor who has given notice) such part of the Trust assets as the trustees consider fair and equitable having regard to the respective contributions of the Settlors (whether by gifting, inheritance or otherwise) to the total assets of the Trust.

Eventually, unhappy differences arose, and the parties separated in 2016. In 2017, Ryan (having by then reverted to her maiden name) gave notice to the trustees under the mandatory resettlement clause. The trust rapidly became dysfunctional. In 2019, Ryan filed proceedings seeking a declaration as to the proper construction of the mandatory resettlement clause.

Trusts, trust powers and mere powers

It is necessary to divert to a brief discussion of trusts, trust powers and mere powers.

Strictly speaking, a trust arises where one person (the trustee) holds property for one or more beneficiaries. In that case, the trustee has no discretion as to which beneficiary receives what part of the trust property.

The paradigm example is the trusts created by a simple will: the trustee of a deceased estate typically has no power to decide what a legatee or residuary beneficiary should receive. Trusts such as the trust in this case (sometimes called “settlements” to distinguish them from trusts in the narrow sense described above) are more complicated. The trustees are given a wide range of administrative and dispositive powers. The distinguishing feature of these powers is that the trustee (better described as the donee of the power) has a discretion about whether to exercise the power at all and a discretion as to how the power should be exercised.

Such powers were traditionally classified as “mere powers” or “mere fiduciary powers”. “Mere powers” can be distinguished from “trust powers” in that trustees have no discretion whether to execute a trust power. When the appointed time arrives, the trustees must exercise the power; their only discretion goes to the mode and manner of the exercise.

Settlements with a mixture of trusts and discretionary powers of appointment are typically referred to in New Zealand as “discretionary trusts”, although strictly speaking that term more properly refers to trust powers in the sense just described, where there is no discretion as to whether to exercise the power but only to decide who should get what proportion of the subject property: see the discussion of Lord Walker in Schmidt v Rosewood Trust Ltd [2003] UKPC 26 at [35]-[42].

Moving towards non-interventionism

Before a series of reforms in the 19th century, culminating in the Judicature Acts, an aggrieved beneficiary who wished to enforce his or her rights under a trust had to obtain a “general administration order” as a precondition of obtaining relief. The effect of a general administration order was draconian:

The court would order that the trust was to be specifically performed under its supervision, that nothing was to be done without its imprimatur, that account should be taken to see what the trust assets were, and the court would give directions as to how the trust would be carried out. (McLean v Burns Philp Trustee Co Pty Ltd (1985) 2 NSWLR, 623 at 633)

Even by the 19th century, the general administration procedure, famously satirised in Bleak House in the form of Jarndyce v Jarndyce, was reviled as burdensome, slow and, most of all, costly. Procedural and other reforms enabled aggrieved beneficiaries to seek more targeted forms of relief without first needing to obtain a general administration order.

General administration orders have, to a large degree, become virtually obsolete. Indeed, they appear to be almost unheard of in New Zealand. Freed of the constraints of the administration procedure, the courts adopted a steadily more laissez faire attitude towards trust administration, prioritising settlor and trustee autonomy over the rights of beneficiaries.

Nevertheless, the remedy of general administration has never been abolished and the court retains the power to revert to more direct intervention if circumstances require it. Thus, in England and Wales at least, it is conventional to conclude prayers for relief in trust disputes, with a prayer for “further or general administration if and insofar as is necessary”.

Judicial administration is not merely a historical curiosity: it goes to the heart of the court’s jurisdiction over trusts. It probably does not go too far to say that all, or nearly all, of the orders the court can make in respect of trusts are specific manifestations of the jurisdiction the court possessed (and theoretically still possesses) under a general administration order.

Old wine and new bottles

Before Ryan’s claim could be heard, there was a further development: the independent trustee applied to be removed because of the dysfunction. Edwards J removed all the trustees and appointed a receiver to manage the trust’s assets pending determination of the substantive dispute (Lockhart Trustee Services No 56 Ltd v Ryan [2020] NZHC 1823).

Unusually, the court did not appoint a replacement trustee, largely because nobody was prepared to take it on. While removing trustees without appointing replacement trustees is unusual, there is no question that the court has jurisdiction to make such an order in its inherent jurisdiction: see the discussion in Lewin on Trusts (20th ed) at 14-074.

Thus, by the time Ryan’s case came on for hearing, there were no trustees in office who could decide on her claim to have a proportion of the trust’s assets resettled on the trustees of her new trust. Instead, Ryan argued that the court, in effect, should step into the shoes of the trustees and direct a resettlement of half the trust’s assets. She also sought orders that, following the resettlement, the original trust be amended so she was removed as a beneficiary and ceased to hold any powers conferred on her by the trust deed.

Hinton J accepted the submission that the mandatory resettlement clause conferred on the trustees was a trust power. Accordingly, once the conditions triggering the power had been satisfied, the trustees had no discretion not to exercise it. Their only discretion was how the power ought to be exercised, considering the facts.

As there were no trustees in office, the next question was whether the court could step into the shoes of the trustees and exercise – or, perhaps more properly, execute – the resettlement trust power.

Hinton J referred to the summary of principle in Lewin on Trusts (20th ed, at 33-034-035) and stated at [108]-[109]: While I accept that the Court intervening directly in executing the trust power is an unusual step, this is one of those cases where it is required. The cost and delays to the parties has (sic) been vast. There are no trustees currently in office to execute the power. Any trustee would have to be independent and there is no realistic prospect of any suitable trustees accepting office. Without the Court’s assistance, there is no end in sight to the litigation affecting the parties.

For the above reasons, I am satisfied it is within the Court’s power to step in and implement a resettlement under cl 2.5 (3) and that it is clearly appropriate to do so. Lewin states the law as follows at 33-034: A trust power of appointment partakes of the nature of a trust and accordingly the court protects a beneficiary from the failure of the donee of such a power as it would from the failure of a trustee. If the trustees have such a power committed to them and they either die in the testator’s lifetime, or decline the office, or disagree among themselves as to the mode of execution, or do not declare themselves before their death, or simply fail to appoint, or if, from the circumstances, the exercise of the power by the persons entrusted with it becomes impossible, the court will substitute itself in the place of trustees and will exercise the power by the most reasonable rule. If necessary the court will exercise the power retrospectively. It is no objection to the jurisdiction that it will be difficult for the court to execute the power: the court will take up the trust, whatever difficulties or impracticabilities may stand in the way, for the rule is that, if the trust can by any possibility be executed by the court, the non-execution by the trustee shall not prejudice the beneficiary.

The distinction between trusts, trust powers and mere powers was discussed by Lord Eldon in Brown v Higgs (1803) 8 Ves Jun 561. In that case, Lord Eldon held:

But there are not only a mere trust and a mere power but there is also known to the court a power which the party to whom it is given is intrusted and required to execute and with regard to that species of power, the court considers it as partaking of so much of the nature and qualities of a trust, that if the person who has that duty imposed on him does not discharge it, the court will to a certain extent discharge the duty in his room and place.

In McPhail v Doulton [1971] AC 424, Lord Wilberforce adverted to the court’s jurisdiction to execute a trust of its own volition. Referring to the late 19th and 20th century preference for nonintervention, he opined:

But I do not think that this change of attitude, or practice, affects the principle that a discretionary trust can in a suitable case, be executed according to its merits and otherwise than by equal division. I prefer not to suppose that the great masters of equity, if faced with the modern trust for employees, would have failed to adapt their creation to its practical and commercial character. Lord Eldon himself, in Morice v Bishop of Durham, laid down clearly enough that a trust fails if the object is insufficiently described or if it cannot be carried out, but these principles may be fully applied to trust powers without requiring a complete ascertainment of all possible objects. His earlier judgment in the leading and much litigated case of Brown v Higgs shows that he was far from fastening any rigid test of validity of trust powers. After stating the distinction, which has ever since been followed, between powers, which the court will not require the donee to execute, and powers in the nature of a trust, or trust powers he says of the latter that if the trustee does not discharge it, the court will, to a certain extent, discharge the duty in his room and place.

He later went on to say:

But in the case of a trust power, if the trustees do not exercise it, the court will: I respectfully adopt as to this the statement of Lord Upjohn’s opinion (p 525). I would venture to amplify this by saying that the court, if called upon to execute the trust power, will do so in the manner best calculated to give effect to the settlor’s or testator’s wishes. It may do so by appointing new trustees, or by authorising or directing representative persons of the classes of beneficiaries to prepare a scheme of distribution or, even, should the proper basis for the distribution appear by itself directing the trustees so to distribute. The books give many instances where this has been done, and I see no reason in principle why they should not do so in the modern field of discretionary trusts …

Although the authorities discussed by Lord Wilberforce were concerned with trust powers rather than mere powers, English courts have been willing to extend the application of the principle.

Mettoy Pension Trustee Ltd v Evans [1990] 1 WLR 1587 concerned an application by the trustee of a pension scheme established for the employees of a toy manufacturer and its subsidiaries.

The company and its related entities went into receivership and eventually liquidation. There was a surplus in the pension fund and the trustee applied for directions. The trustee had a discretionary mere power of appointment (as opposed to a trust power in the strict sense).

Under the relevant legislation, the appointment of an insolvency practitioner had the effect of disempowering the trustee. The question was who, if anyone, could exercise the power, given the appointment of receivers and liquidators. Referring to Lord Wilberforce’s discussion quoted above, the court held:

In the latter part he was indicating how the court might give effect to a discretionary trust when called on to execute it. It seems to me however that the methods he indicated could be equally appropriate in a case where the court was called on to intervene in the exercise of a discretion in category 2 [ie, a fiduciary mere power rather than a trust power as such]

A recent example of the court executing a trust power in the place of recalcitrant trustees is AB v CD [2019] EWHC 2323 and 2324.

In that case, the claimant was a trustee of two trusts known as the Will Trust and the Grandchildren Trust. The first, second and third defendants were co-trustees of the two trusts and the fourth to ninth defendants were the grandchildren beneficiaries of each trust. The trustees had been unable to reach a decision on how to divide the trusts’ assets, largely it seems because the first defendant trustee wanted to punish the eighth and ninth defendant beneficiaries for their treatment of his mother during her lifetime.

During the proceedings, “a large measure of agreement” emerged that the six grandchildren should be treated equally but differences remained as to how to achieve that equal treatment in practical terms. The Master issued a draft judgment directing the trustees to reconsider matters with a view to implementing the distribution agreed in principle but cautioned that if the trustees could not agree, the court would step in and make the necessary decisions in their stead. Still the trustees could not agree and eventually the court rendered a second judgment ordering a distribution in the manner deemed appropriate by the Master.

Result

In the final result, Hinton J vested certain jewellery and similar items in Lobb and Ryan and held that one half of the trust’s assets should be resettled on the trustees of Ryan’s new trust.

The facts of Ryan v Lobb are unusual, and it should be assumed that the court will continue to be reluctant to exercise trustee powers in the place of trustees. However, it demonstrates that in appropriate circumstances, the court will take a robust approach and will step into the shoes of the trustees and execute a trust power and perhaps even a mere power if the justice of the case requires it. ■

Luke Dixon is a senior associate at Patterson Hopkins ■