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Should Directors of Corporate Trustees owe Direct Fiduciary Duties to Trust Beneficiaries?


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Should Directors of Corporate Trustees owe Direct Fiduciary Duties to Trust Beneficiaries?

Faculty of Law

Victoria University of Wellington 2021



I Introduction ... 4

II What is the problem? ... 6

A Overview ... 6

B Defining a corporate trustee ... 6

C Orthodox position ... 7

D “A commercial monstrosity”... 9

E Conclusion ... 10

III Trusts and fiduciaries ... 11

A Overview ... 11

B The nature of trusts in New Zealand ... 11

C Powers, rights, and obligations of trustees ... 13

D Who and what is a fiduciary? ... 14

1 Who is a fiduciary? ... 14

2 What is a fiduciary? ... 15

3 What remedies follow a breach of duty by fiduciaries ... 17

E Conclusion ... 20

IV Companies ... 21

A Overview ... 21

B What is a company and why did it come about? ... 21

C Directors’ powers and duties ... 24

1 Section 131: Good faith and best interests ... 25

2 Section 133: Proper purpose ... 27

3 Section 135: Reckless trading ... 28

4 Section 136: Reasonable grounds for incurring obligations ... 28

5 Section 137: Duty of care ... 29

D The corporate veil ... 29

E Conclusion ... 33

V Justifying reform ... 34


A Overview ... 34

B Why the law must change ... 34

1 Permitting insolvent trustees ... 34

2 Ignoring reality ... 35

3 Lack of enforceability ... 37

C Objections to change ... 39

1 Piercing the corporate veil ... 39

2 Creating more problems ... 41

3 Negates the use of corporate trustees ... 42

D Conclusion ... 44

VI New Zealand Reform ... 45

A Overview ... 45

B Legislative reform ... 45

C Common law and equity ... 47

1 New Zealand cases ... 47

2 United Kingdom cases ... 50

D Conclusion ... 52

VII Conclusion ... 53

VIII Bibliography ... 55

IX Word count... 60


I Introduction

A decade long reform process was concluded at the beginning of 2021 when the new Trusts Act was implemented.1 Whilst addressing many of today’s most pressing issues regarding the application of trust law in New Zealand, some notable issues were left unresolved.2 One of these issues is the focus of this paper: should the law impose a direct fiduciary relationship between the directors of a corporate trustee and trust beneficiaries?

It was initially thought by the Law Commission that the answer should be yes:3

… legislation should require that directors (or equivalent) of a corporate acting as a trustee have the same obligations to the beneficiaries of the trust as they would have had if they and not the company had been the trustees.

However, upon receiving strong opposition to their proposal, the Law Commission sought to postpone the matter to a later review.4 While it is unclear when such a review might occur, this paper seeks to further build on the work done by the Law Commission. It ultimately finds that the suggested provision should be included in legislation to maintain consistency with trust and fiduciary jurisprudence and to ensure the protection of trust beneficiaries.

Chapter II provides an overview of the problem at hand. It defines a corporate trustee and demonstrates the orthodox position of the law to elucidate the challenge being faced by trust beneficiaries. At the heart of this is the clash between the corporate veil and trust and fiduciary jurisprudence due to the creation of “limited liability trusteeship”.

Chapter III and IV provide an explanation on the key legal concepts engaged in answering the question of this paper. Chapter III looks at trusts and fiduciaries and explains how trustees are the archetypal fiduciary. Chapter IV goes through the historical roots of the company and how the corporate veil plays a critical role in ensuring the company remains

1 Trusts Act 2019; and see Bell Gully “The Big Picture: New Rules for Trusts” (December 2020)


2 See Law Commission Review of the Law of Trusts: A Trusts Act for New Zealand (NZLC, R130, 2013) at [1.12]–[1.18]: where the Law Commission mentions that two other areas of law have been omitted in this review: the review on charitable and purpose trusts and the review on corporate trustees.

3 Law Commission Law of Trusts: Preferred Approach Paper (NZLC IP31, 2012) at [P36]; This was also suggested in 2002 by the Law Commission Some Problems in the Law of Trusts (NZLC R79, 2002) at [29].

4 Law Commission, above n 2, at [16.6]–[16.10].


relevant today. It also goes through the importance of company directors and their respective powers and duties.

Chapter V and VI address matters of reform. Chapter V justifies the need for reform in New Zealand based on the discrepancies found in practise between trustees who are companies and trustees who are natural persons. It contends that the opposing arguments are not enough to justify the law preferring corporate veil principles over that of trust and fiduciary law. Chapter VI agrees with the Law Commission on the preferred approach to legislative reform. It then points to existing avenues which may be open to the courts in finding that the director of a corporate trustee can owe fiduciary duties directly to trust beneficiaries.


II What is the problem?

A Overview

Whilst corporate trustees are nothing new, their increasing prevalence raises concerns that they may be used as a means to avoid liability.5 The Law Commission’s suggestion of finding a direct fiduciary relationship between the director and beneficiary conflicts with those who view the sanctity of the corporate veil as immutable. This section seeks to demonstrate the clash between the corporate veil and trust and fiduciary jurisprudence. It also reveals the problems with leaving the law as it stands.

B Defining a corporate trustee

The task of appropriately defining a corporate trustee is not without its challenges.6 In response to the Law Commission’s 2002 report, only two submitters supported the term being defined in legislation.7 Nonetheless, to clarify the scope of this paper, the term corporate trustee will be used to refer to those companies, with little to no assets, incorporated to act as trustees of a trust. This was the approach taken by Heath J in Levin v Ikiua,8 and affirmed by the Court of Appeal.9 Expressly excluded are unit trusts, superannuation and investment trusts,10 and business trusts.11

5 See Law Commission Law of Trusts: Preferred Approach Paper, above n 3, at [8.86]; and David Goddard QC “NZLC 79 – 'Some Problems in the Law of Trusts' – Implementation” (Draft Memorandum prepared for Ministry of Justice, 6 May 2007) at 2.

6 Law Commission Court jurisdiction, trading trusts and other issues: review of the law of trusts - fifth issues paper (NZLC IP28, 2011) at [6.8], [8.32].

7 Law Commission Law of Trusts: Preferred Approach Paper, above n 3, at [8.10].

8 Levin v Ikiua [2010] 1 NZLR 400 (HC) at [97].

9 Levin v Ikiua [2010] NZCA 509.

10 Law Commission, above n 6, at [6.6].

11 See at [6.10]: “Trading trusts also need to be distinguished from “business trusts”… where the trust holds the shares in a company which owns the business assets.”


C Orthodox position

The corporate veil is central to the separate legal personality of companies and is inviolable barring certain exceptional circumstances. This can be traced back to the seminal case of Salomon v A Salomon & Co Ltd (Salomon).12 The case involved a leather and boot manufacturing business which was sold by Aron Salomon to the company A Salomon &

Co Ltd. The company had seven shareholders, including Mr Salomon (who held almost 100% of the shares). The six other shareholders were nominees and holding the shares on Mr Solomon’s behalf. Upon the sale of the business by Mr Salomon to his company, part of the payment was left owing to him by the company and recorded by way of debenture.

This debenture conferred preference for the debenture holder, before unsecured creditors, in the case of insolvency. When the business became insolvent the residual assets were enough to pay the debenture holder, who was a third party by then, but not the unsecured creditors. Unsecured debts were £7,000. The liquidator sued Mr Salomon on the ground that the company was merely his nominee and agent, and that he was liable to indemnify it for its unsecured debts. The House of Lords disagreed with the liquidator and held that a properly registered company is a legal person wholly separate from its directors and shareholders. This was the advent of the corporate veil which remains today.

In New Zealand, the Privy Council applied Salomon to the facts of Lee v Lee's Air Farming Ltd where a farm pilot formed a company to run his business.13 Lee owned all but one of the company’s shares, was sole employee, and its governing director. When he was killed at work in an airplane accident, the question was whether Lee’s widow was entitled to compensation from the compulsory Workers’ Compensation Insurance taken out by the company. The Privy Council followed Salomon in finding that Lee could be a company employee notwithstanding the fact he was a director. This became the general position of New Zealand law,14 and is entrenched in the Companies Act 1993.15

When one considers the position of a corporate trustee it would appear at first instance that the directors cannot be held liable to trust beneficiaries for a breach of trust. The trustee is the company, and it is the company – separate from its shareholders and directors – which owes duties to the beneficiaries. Thus, in the context of a breach of trust, the only recourse

12 Salomon v A Salomon & Co Ltd [1897] AC 22 (HL).

13 Lee v Lee's Air Farming Ltd [1961] NZLR 325 (PC).

14 Jonathan Barrett and Ronán Feehily Understanding Company Law (4th ed, LexisNexis, Wellington, 2019) at 15.

15 Companies Act 1993, s 15.


a beneficiary has is against the company as trustee. This is largely worthless where the company has little to no assets of its own. It should be noted that the directors of the company trustee still owe duties to the company itself, under the Companies Act. It is said that these can be used to cover the sharp practise of directors.16 However, these can only be enforced by the company (or a liquidator) and not by trust beneficiaries.

The majority in Bath v Standard Land Company Limited (Bath) appear to confirm the orthodox position which prohibits a direct imposition of fiduciary duties on directors of corporate trustees.17 Bath concerned a situation where directors of a corporate trustee had provided their various professional expertise to the trust and were seeking compensation.

The Court held that the directors stood in a fiduciary position to the company, but not to trust beneficiaries, and so a reasonable profit for the directors in their professional capacity might be allowed. Andrew Butler appears to agree with the case and comments that Bath finally settled the general rule that directors of corporate trustees are not liable to beneficiaries for the actions of the corporate trustee.18

The finding of direct liability between the directors of corporate trustees and trust beneficiaries typically requires some form of piercing or lifting the corporate veil. In the United Kingdom Supreme Court decision of Prest v Petrodel Resources Ltd (Prest), Lord Sumption said that the “corporate veil may be pierced only to prevent the abuse of corporate legal personality.”19 He then concludes in the following paragraph that where a person deliberately frustrates or evades the enforcement of existing legal duties or liabilities by interposing a company under his control, then the court may pierce the corporate veil for the sole purpose of depriving the company or its controller of the advantage that they would otherwise have obtained by the company's separate legal personality.20

It is unclear what factual matrix would justify the piercing of the corporate veil to find that directors of a corporate trustee owe direct fiduciary duties to trust beneficiaries. Read together, Bath and Prest do not appear to permit the finding of a direct fiduciary duty.

Directors owe a fiduciary duty to the company alone and it is the company, as a separate legal entity, which owes the fiduciary duty to trust beneficiaries. Prest does not appear to

16 Law Commission, above n 6, at [6.23].

17 Bath v Standard Land Company Limited [1911] 1 Ch 618 (CA).

18 Andrew Butler and Tim Clarke Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, 2009) at 421.

19 Prest v Petrodel Resources Ltd and others [2013] UKSC 34 at [34], [2013] 2 FLR 732 at 751.

20 Prest, above n 19, at 751.


capture a corporate trustee as a “deliberate frustration or evasion of the enforcement of existing legal duties”. Therefore, it would seem that piercing or lifting of the corporate veil to find directors liable to trust beneficiaries is unlikely.

D “A commercial monstrosity”

The problem with the orthodox position is that it produces a number of inconsistencies between the law of fiduciaries as applied to natural persons and to corporate trustees. It is often recognised that the board of directors are the corporate trustee’s “legal face”,21 yet it is striking that the law does not recognise the practicalities of such an arrangement.22 It leaves open the possibility for the corporate form to be used as a means to avoid liability to beneficiaries.23 This makes little sense when the directors of the company are, for all intents and purposes, the trustees.24

Professor Harold Ford once wrote that the “fruit of this union of the law of trusts and the law of limited liability companies is a commercial monstrosity”.25 He was talking particularly about how the fusion of the two could produce adverse results for creditors, and could detrimentally affect the corporate form. Nonetheless, these comments remain equally as appropriate when applied to trust beneficiaries. Fundamental to this position was the challenge with reconciling the two areas of law. Heath J in Levin v Ikiua identified the situation as being counter-intuitive:26

…trust law has developed on an underlying expectation that a settler would want a responsible trustee to be appointed, to protect the interests of the beneficiaries. A solvent trustee can be sued if he or she were to commit a breach of trust. However, a trading trust is premised on the opposite assumption: namely it is preferable to trade through a corporate trustee with limited liability and no assets other than the right of indemnity.

The intertwining of company law in the law of trusts has produced this situation where beneficiaries could be left with a trustee who is merely a shell. The directors of the trustee,

21 Hawke's Bay Trustee Co Ltd v Judd [2016] NZCA 397 at [8].

22 Law Commission Law of Trusts: Preferred Approach Paper, above n 3, at [8.84].

23 At [8.86].

24 At [8.84].

25 Harold Ford “Trading Trusts and Creditors’ Rights” 13 Melb UL Rev 1 at 1.

26 Levin v Ikiua, above n 8, at [115].


the “legal face”, are protected from the beneficiaries by means of the corporate veil. Where trust law has ensured direct liability of trustees to beneficiaries to ensure the trust assets are administered appropriately, company law severs the chain of responsibility making it harder for beneficiaries to claim for a breach of fiduciary duty.27

E Conclusion

The use of corporate trustees has become increasingly encouraged as a means to effect a form of “limited liability trusteeship”.28 The approach raises concerns that impecunious corporate trustees may be incorporated to avoid liability. This would potentially leave trust beneficiaries with a shell company as their only recourse. The Law Commission’s suggested provision for the Trusts Act created a direct fiduciary relationship between the director and beneficiary and was intended to go some way to resolving the issue posed by this relatively new phenomenon. It sought to bring the reality of the situation in line with the development of trust jurisprudence and remind directors of corporate trustees that, as the “legal face” of the company, they could not misuse the corporate veil to avoid responsibility to trust beneficiaries.

27 Law Commission Law of Trusts: Preferred Approach Paper, above n 3, at [8.74].

28 See Lilly Falcon “Corporate vs Individual Trustees in NZ” (21 December 2020) LegalVision

<www.legalvision.co.nz>; Toni Eisenhut and Kurt Fechner “Corporate Trustee vs Individual Trustee – What is the difference?” (19 July 2020) ABA Legal Group <www.abalegalgroup.com.au>; and Hana Lee and Hunter Watkin “The basics of appointing a corporate trustee” (22 March 2021) Forty Four Degrees

<www.fortyfourdegrees.com.au>; but see Richard Ashby “I’m A Trustee – What’s My Exposure?” Gillian Sheppard <www.gilliansheppard.co.nz>.


III Trusts and fiduciaries

A Overview

This section seeks to elucidate the idea of the trustee as archetypal fiduciary. First, the nature of the trust will be explored, including its historical origins, to help explain how it exists today. Second, the powers, rights and obligations of trustees are considered in light of the nature of trusts. Thirdly, the big questions are asked: who is a fiduciary, what is a fiduciary, and what are the implications of breaching duties as a fiduciary?

B The nature of trusts in New Zealand

It has been said that no definition of a trust can be given which is beyond contention.29 Trusts have developed organically to meet the needs of its time.30 It is difficult to come to an all-encompassing definition given that such a statement could only be made by examining judicial utterances spanning hundreds of years.31 It is made more difficult by the fact that the way the institution of the trust has been described is dependent on the trend of thought at the relevant time.32 Nonetheless, Simon Gardner provides a useful starting point:33

A trust is a situation in which property vested in someone (a trustee) who is under legally recognised obligations, at least some of which are of a proprietary kind, to handle it in a certain way, and to the exclusion of any personal interest. These obligations may arise either by conscious creation by the previous owner of the property (the settlor), or because some other legally significant circumstances are present.

A typical express trust is an invention of equity.34 It involves three groups of people: a settlor, trustees, and beneficiaries. It is settled by a settlor, an owner of property. The settlor

29 Simon Gardner An Introduction to The Law of Trusts (3rd edition, Oxford University Press, New York, 2011) at 2.

30 Ian Rowe and Simon Weil Working with Trusts (online ed, Westlaw) at [1.1].

31 Gardner, above n 29, at 1.

32 At 1.

33 At 2.

34 Jeremy Johnson and James Anson-Holland Law of Trusts (NZ) Trusts and Asset Planning: An Introduction (online ed) at [1.3].


entrusts that property to another who is known as a trustee. The trustee undertakes to care for that property in the best interests of those with beneficial ownership in the property (the beneficiaries).

The historical roots of trusts are believed to have originated from feudal times, coming to the fore at the time of the Christian Crusades in the eleventh to thirteenth centuries.35 As property owners went into battle, they wanted custodians to care for their property, in the best interests of their family, whilst they were away. The trust enabled owners to empower trustees to administer trust property, acting in their family’s best interests, whilst being able to reclaim the property on their return.

Today the law of trusts still espouses the same basic principles. In New Zealand, a person (the settlor) generally creates an express trust by clearly and with reasonable certainty:36

(1) indicating an intention to create a trust; and

(2) identifying the beneficiaries (or classes of beneficiaries); and (3) identifying the trust property.

This is often done by the execution of a deed which also names the settlor, trustees and beneficiaries and directs how the trust is to be administered.37 After creating the trust, the settlor drops out of the picture and has no rights in respect of the trust unless they also happen to be a beneficiary or trustee of the trust, or have expressly reserved some power within the trust deed.38 At this point, it should be noted that, unlike a company, a trust is not its own legal entity.39 The trustee holds trust property in their own name whilst knowing that such property is kept independent from their own (it remains property held on trust).40

35 Johnson and Anson-Holland, above n 34, at [1.3].

36 Trusts Act 2019, s 15.

37 Greg Kelly and Chris Kelly Garrow and Kelly’s Law of Trusts and Trustees (7th edition, LexisNexis, Wellington, 2013) at [2.5].

38 Richard Wilson Halsbury’s Laws of England Meaning of 'trust' and 'power' (online ed) at 1.

39 “The Family Trust” (17 March 2020) <www.lawsociety.org.nz>.

40 Geoffrey Fuller The Laws of New Zealand Nature of Trusts and of the Trust Relationship (online ed) at [1].


C Powers, rights, and obligations of trustees

A trust produces corresponding powers, rights and obligations between trustees and beneficiaries. Trustees have a general power to administer trust property as if they were the absolute owner of the property.41 This is a substantial responsibility which could incur significant liabilities and costs. The trustee is properly entitled to be indemnified by trust assets for any expenses reasonably incurred in preserving trust property.42 However, this leads to the foreseeable situation of beneficiaries who disagree with trustee decisions. This was the case from the earliest of days.43 At the trust’s advent, the common law was unable to address the concerns arising from this unusual arrangement because it was too rigid.

Thus, trusts became a child of equity, with equity enforcing certain duties on trustees to carry out their obligations to the settlor and to the beneficiaries.44

Today, the Trusts Act 2019 prescribes mandatory and default duties. Mandatory duties cannot be altered,45 whereas default duties which can be removed by the trust instrument.46 These duties can be enforced by trust beneficiaries. Many of these duties already exist at common law but have been stipulated in the new Act in order to provide a reference point for increased accessibility.47 The following table identifies the mandatory duties and the more notable default duties:

Mandatory Duties Default Duties48 (a) know the terms of trust a general duty of care (b) act in accordance with terms of trust invest prudently

(c) act honestly and in good faith not exercise power for one’s own benefit (d) act for the benefit of beneficiaries avoid conflicts of interests

(e) exercise powers for proper purpose remain impartial

(f) not to profit

(g) to act unanimously

41 Trusts Act 2019, s 56.

42 Trusts Act 2019, s 81.

43 Johnson and Anson-Holland, above n 34, at [1.3].

44 At [1.3].

45 Trusts Act 2019, s 23–27.

46 Trusts Act 2019, s 29–38.

47 Trusts Act 2019; see Law Commission, above n 2, at [3.7].

48 Key examples shown. For complete list of default duties see Trusts Act 2019, s 29–38.


Some of the mentioned duties are fiduciary in nature. The Trusts Act 2019 recognises the fiduciary relationship between trustee and beneficiaries in s 13. Section 13 states that an express trust must have the characteristics of a fiduciary relationship in which a trustee holds or deals with trust property for the benefit of the beneficiaries.49 The concept of a fiduciary is another matter which “defies definition”.50

D Who and what is a fiduciary?

Arriving at an all-encompassing definition of “who, and what, is a fiduciary” is rather challenging. There is a missing consensus of a basic principle.51 There are also troubles plaguing such attempts to define it. Too narrow a definition provides better guidance, but omits guidance for those who are fiduciaries but are not caught in the definition. Broad over-arching principles tend to capture all who are considered fiduciaries, and also those who ought not to be held as such.52 Lord Briggs said that they also have “such a high level of generality that [they] provide little useful guidance in the factually complicated world of real people, real events and real transactions.”53 This part will follow the approach taken by Sarah Worthington in her paper “Four Questions on Fiduciary Law” in first asking who is a fiduciary, what is a fiduciary, and what are the implications for said fiduciary?54

1 Who is a fiduciary?

Coming to an understanding of what a fiduciary is will assist in discovering who might be a fiduciary. Equally, identifying who might be a fiduciary can assist in coming to an understanding of what is a fiduciary. Yet, taking the second approach is made more difficult by the fact that the category of “fiduciary” has grown beyond its traditional roots to wider spheres.55 Historically, the type of relationship involved was used to identify a fiduciary.56

49 Trusts Act 2019.

50 Breen v Williams (1996) 186 CLR 71 (HCA) at 106.

51 Lord Briggs of Westbourne, Justice of The Supreme Court of the United Kingdom “Equity in Business”

(The Denning Society Annual Lecture, Lincoln’s Inn, London, 8 November 2018) at [3].

52 Sarah Worthington “Four Questions on Fiduciaries” (2016) 2 CJCCL 723 at 727.

53 Lord Briggs of Westbourne, above n 51, at [3].

54 Worthington, above n 52.

55 Butler and Clarke, above n 18, at 475.

56 A status based approach. See Rob Batty “Examining the Incidence of Fiduciary Duties in Employment”

(2012) 18 Canta LR 187 at 188.


These were relationships of trust where there was an expectation that the fiduciary would act in the interests of beneficiaries, because they exerted some measure of control which might put beneficiaries at a disadvantage.57 Common examples include company directors, trustees, and agents.58 Today, the concept has broadened to include commercial intermediaries like joint ventures and financial advisors.59 As a result, it is no longer workable to apply a solely status-based approach in asking who is a fiduciary.60 Thankfully, trustees (as the archetypal fiduciary) and directors are governed by the full expectation of fiduciaries, so a comprehensive discussion on who might be a fiduciary can be set aside for now. Nonetheless, a discussion on what is a fiduciary is still required.

2 What is a fiduciary?

Worthington suggests, that fiduciaries are those subject to the no-conflict/non-compete rule.61 They are expected to put their principal’s interests ahead of their own.62 Lord Millett provides a starting point in assessing what is a fiduciary with his statement that:63

The distinguishing obligation of a fiduciary is the obligation of loyalty … This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict. (Emphasis added)

Note that Lord Millet points to the duty of loyalty being the distinguishing one, not a fiduciary’s only obligation. Furthermore, a fiduciary is not obliged to act positively to produce some advantageous end.64 A fiduciary is instead bound by a proscriptive duty to adhere to rules relating to improper profits from the misuse of position, and the avoidance of conflicts of interests and duties.65 This too appears to be in line with Paul Finn’s thinking.66

57 Butler and Clarke, above n 18, at 473.

58 Worthington, above n 52, at 735.

59 At 736.

60 Rowe and Weil, above n 30, ch 1.3.02; Butler and Clarke, above n 18, at [17.2.2].

61 Worthington, above n 52, at 737.

62 At 734.

63 Bristol and West Building Society v Mothew [1997] 2 WLR 436 (Ch) at 449.

64 P & V Industries Pty Ltd v Porto [2006] VSC 131 at [23]; and Pilmer v Duke Group Ltd (in liq) [2001]

HCA 31 at [74].

65 Worthington, above n 52, at 740.

66 See Paul Finn “The Fiduciary Principle” in Worthington, above n 52, at 739.


Moving to another aspect, Paul Finn makes an important observation regarding those who are fiduciaries. He draws a distinction between breaches of fiduciary and non-fiduciary duties:67

if no issue of disloyalty is involved, [pure negligence of a lawyer, an agent’s excess of authority, a partner’s breach of the partnership contract or a trustee’s improvident investment] will be actionable through those primary bodies of law which constitute or govern the ordinary incidents of the relationship in question – negligence, breach of contract or breach of trust.

The key to this observation is that fiduciaries are inevitably subject to a number of different duties. Yet, not all of these are fiduciary ones.68 The result is that when asking “what is a fiduciary duty?”, there are two possible answers:69

(a) the narrow, proscriptive, no-conflict/non-compete rule; and

(b) the wider approach which includes all the obligations a fiduciary might be subject to including:

(i) to comply with the terms of engagement;

(ii) in an appropriate manner; and

(iii) to do so loyally (the fiduciary proscription).

(Emphasis added)

Paul Finn points out this distinction because, historically the distinction had been ignored.

Fiduciaries who breached any duty would have been implicated as having broken fiduciary duties, even when that was not the case.70 To illustrate, take the example of the negligent lawyer given by Finn. A lawyer who acts on behalf of a client in pure negligence breaches the non-fiduciary duty of care he owes to that client. That breach ought to be addressed by the usual mechanism of the law of torts because it is not an issue which raises a question of conflict or competition – even though a lawyer is held to be a fiduciary at law. Yet, because the courts would historically identify a relationship as fiduciary first, subsequent

67 Finn, above n 66 in Worthington, above n 52, at 739.

68 Worthington, above n 52, at 744.

69 At 740.

70 At 743.


discourse would loosely apply fiduciary terminology to standards of good faith, disclosure standards, limits on the proper exercise of discretionary powers, and even fiduciary care.71 Another aggravating factor which has led to the misconception that all breaches by a fiduciary are breaches of fiduciary duty is that damages were historically discussed through the language of “account”.72 The approach was that a “fiduciary” described a relationship, which embraced all the relationship duties, and account provided a vehicle for the remedy.73 This is problematic because “account” tells one very little about the remedy relevant to the breach. Does it refer to standard common law remedies for breaches of duties which were not fiduciary in nature? Or does it refer to equitable remedies like disgorgement?

The inevitable problem with using the word “account”, suggesting a breach of fiduciary duties, is that the negligent lawyer might now be held to a greater standard than a non- fiduciary person. There would become a distinction between a fiduciary negligence, and a

“standard” negligence, even though the same offence was committed. If the imposition of a higher standard for the fiduciary is applicable, it must be on principled grounds – something more substantial than just being by virtue of holding a fiduciary position. Sarah Worthington suggests that a breach of a non-fiduciary duty by a person in a fiduciary position should be treated the same way as if it had been breached by a non-fiduciary.74

3 What remedies follow a breach of duty by fiduciaries

There is ongoing academic debate about what remedies are appropriate for a breach of fiduciary duties, and non-fiduciary duties, when committed by a fiduciary.75 Without going into undue complexities, the aim is to help the reader to gain an appreciation of the consequences for both breaches, when committed by a fiduciary.

Beginning with a breach of fiduciary duties, these can generally arise in two forms. A breach of fiduciary duty is a breach of the no-conflict/non-compete principle, which can be referred to as disloyal profiteering. The first class of disloyal profiteering is when the

71 Robert Austin “Moulding the content of Fiduciary Duties” in A Oakley Trends in Contemporary Trust Law (Oxford University Press, New York, 1996) at 156.

72 Worthington, above n 52, at 743.

73 At 744.

74 At 744.

75 At 745.


fiduciary deals disloyally with the assets themselves.76 They can do this by either taking the assets without authority or engineering a transaction where they are on both sides of the deal.77 In these circumstances the remedy of disgorgement, which is proprietary, is universally accepted to exist. Disgorgement is “where a person is forced to give back any profit he has made or money he has received either illegally or unethically at the expense of another.”78 The nature of it being proprietary is significant. It means that if the trustee simply takes the asset from a trust fund, the asset will continue to be held on the original trust, and its traceable proceeds will be held on constructive trust.79

The second class of disloyal profiteering is when the fiduciary competes with the principal for an advantage which, if the fiduciary had acted loyally, might have been acquired for the principal.80 Examples include pursuing competing business opportunities, or taking a bribe or secret commission from the counterparty to a deal being done on behalf of the principal.81 It is here where the question arises of whether disgorgement is a personal or proprietary remedy. If it is a proprietary remedy, then the proceeds can be traced into the hands of third parties who are not bona fide purchasers for value (without notice of the principal’s interests).82

There are two possible policy aims for disgorgement in such a situation. The first is to disgorge disloyal gains because the fiduciary must not have them. In this case, there is no necessary reason the principal must have them. The aim is to be proscriptive and prophylactic in nature.83 The second is to disgorge disloyal gains because the principal must have the asset in question. The first can be achieved by a personal remedy of disgorgement whereas the second requires a proprietary remedy of disgorgement. The type of disgorgement applied will depend on the obligation owed by the fiduciary and whether it is seen as necessary to the underlying relationship that the proprietary form of “over- protection” is warranted.84 Worthington states:85

76 Worthington, above n 52, at 745.

77 At 745.

78 “Glossary: disgorgement” Thomson Reuters Practical Law <www.uk.practicallaw.thomsonreuters.com>.

79 Worthington, above n 52, at 746.

80 At 746.

81 At 746.

82 At 748.

83 Butler and Clarke, above n 18, at 478.

84 Worthington, above n 52, at 752.

85 At 753.


This choice about where the benefits should lie is difficult because it is not a matter of doctrine; it is exclusively a matter of policy: what is the obligation in issue and what is its purpose? The appropriate remedy follows ineluctably from that.

Moving now to a breach of non-fiduciary duties by a fiduciary, countless claimants have tried to hold the fiduciary to “account”. The end is to claim harsher remedies for what is an ordinary breach of a non-fiduciary duty. Accepting the position that there is no reason to hold fiduciaries to a higher standard than anyone else in the case of a breach of a non- fiduciary duty, the same measure for damages should apply.

In assessing the remedy, the United Kingdom Supreme Court in AIB Group (UK) v Mark Redler & Co Solicitors (Redler) emphasised the need to begin with understanding the obligation required, which had been breached, and all its detailed requirements. 86 Only after doing so can discussion on the appropriate remedy begin.

Applying the approach in Redler to a fact scenario assists in illustrating that there should be no real difference between a claim in equity and a claim for damage at common law.87

$1 million is taken from a trust fund by a trustee to use in a non-traceable way. This should have been invested in certain shares, and would now only be worth $500,000. What was the obligation of the trustee, and what would be the corresponding damages? The trustee was obligated to act in a certain way, which they did not do. Was this obligation to preserve trust assets, or was it to manage the trust assets? Preserving the trust assets focuses on how the $1 million should never have been misappropriated and punishes the trustee by a remedy which would seek $1 million from him. This is the case the claimant is likely to make.

On the other hand, managing trust assets focuses on how the $1 million should have been invested properly and would seek to restore the fund to a state as if the management had properly been carried out. Damages would remain at $500,000, the same as at common law. This example alone illustrates the critical nature of establishing what exactly is the obligation breached which the court seeks to address. It also demonstrates that there should be no real differences between a claim in equity and a claim for damages at common law, when due consideration has been given to the obligation breached. Ultimately, the same breach should produce the same compensation.

86 AIB Group (UK) v Mark Redler & Co Solicitors [2014] UKSC 58 [Redler].

87 Example based off Worthington, above n 52, at 762.


E Conclusion

Trusts are a creature of equity, taken on because the common law was too rigid to engage with it. Trusts involve a settlor who vests property in a trustee so that the trustee might selflessly deal with the property to the benefit of trust beneficiaries. Trustees are given full power to deal with the property as if it were their own. They are therefore subject to corresponding obligations, which they are accountable to trust beneficiaries for. Trustees are the archetypal fiduciary from which fiduciary jurisprudence developed.88 Such duties were developed to balance the fact that trustees were given the power to affect the legal and practical interests of the beneficiaries, who are vulnerable to a misapplication of that power.89 Today, through the application of strict remedies,90 the law continues to proscribe trustees ensuring that they act in good faith for the beneficiary’s best interests.91

88 Charles Rickett The Laws of New Zealand Relationships Recognised as Fiduciary (online ed) at [104].

89 Rowe and Weil, above n 30, at [1.3.02].

90 Charles Rickett “Understanding Remedies for Breach of Trust” (2008) 11 Otago LR 603 at 612.

91 Rowe and Weil, above n 30, at [1.3.02]; and Butler and Clarke, above n 18, at [17.2.2].


IV Companies

A Overview

This section provides a discussion on the key features of a company. Whilst too extensive to cover comprehensively, the aim is to provide an overview of company law and the importance of the corporate veil. It begins with the historical origins of corporations in order to understand the roots and reasons for separate corporate identity. Then a brief overview is given as to how a company operates in New Zealand today. That includes the role of directors and their related duties. Finally, the corporate veil is explained in more detail to reveal its primacy and the situations which may justify its dismissal.

B What is a company and why did it come about?

The corporate form is so ubiquitous that lay people put little thought into its significance.92 Most people are unaware that a great number of their daily interactions involve contact with a company. However, it was not always the case that companies were so prolific.

Before going into the history, it is important to understand the defining features of a modern company. Armour, Hansmann, and Kraakman provide a summary on the five basic legal characteristics of a business: legal personality, limited liability, transferable shares, delegated management under a board structure, and investor ownership.93 They claim that these characteristics are found in almost every large-scale business found in market economies, and that small firms also replicate this with slight deviations to fit their needs.94 A core tenet of company law is that the company has the benefit of its own legal personality, bringing with it limited liability.95 The company is a separate person from the persons setting it up, which means that the shareholders’ personal estates cannot be attacked if the company becomes insolvent.96 This is also known as the corporate veil

92 At the time of writing, there were 692,000 registered companies on the register. See New Zealand Companies Office (25 September 2021) <www.companiesoffice.govt.nz>.

93 John Armour, Henry Hansmann and Reinier Kraakman “The Essential Elements of Corporate Law: What is Corporate Law?” (Discussion Paper, Harvard Law School, 2009) at 2.

94 At 2.

95 Barrett and Feehily, above n 14, at 3.

96 Rodney Craig Morison's Company Law (New Zealand) Directors’ Powers and Duties (online ed) at [2.4].


which separates shareholders from the company’s creditors.97 Take note of this concept as, later on, this paper will include consideration on the corporate veil and whether that ought to prevent a direct fiduciary relationship between the director of a corporate trustee and trust beneficiaries.

Separate legal personality and limited liability have not always been features of companies.

Back in the 16th century, most United Kingdom companies were created for mercantilist corporations – acting as a body of individuals with the common purpose of uniting their capital for profit.98 In the 17th century, the London Stock Market was formed,99 and two milestones were achieved: the raising of capital from investors, and a permanent and perpetual joint stock.100 By the start of the 18th century, company and capital market developments had led to the selling of government debt.101 Yet companies still did not have limited liability.

In the 18th century, the unincorporated company became more common in cases where the business enterprise had large capital requirements.102 These had some elements of separation between ownership and control by means of trust deed.103 However, these deeds were ignored by the common law with all shareholders being treated as partners in legal proceedings.104 This posed a problem to rich investors who did not want to risk all of their personal wealth through risky enterprises.105

It was in the 19th century that the modern company came to be. After a few legislative predecessors,106 the United Kingdom passed the Companies Act 1862. Every business could now become incorporated through a simple registration process.107 These changes were instigated by the political need for large capital investment in infrastructure projects,

97 Barrett and Feehily, above n 14, at 15.

98 John Turner “The development of English company law before 1900” in Harwell Wells (ed) Research Handbook on the History of Corporate and Company Law (Edward Elgar Publishing, Cheltenham, 2018) at 123.

99 At 126. London Stock Market dates back to the 1690s.

100 At 125. Capital raising occurred to fund the East India Company’s voyage to the Indies.

101 At 125. Three large companies (The Bank of England, South Sea Company, and East India Company) held 39 percent of the United Kingdom’s government debt.

102 At 128.

103 At 128.

104 At 129.

105 Barrett and Feehily, above n 14, at 3.

106 Including the Joint Stock Companies Act of 1844 (UK).

107 Turner, above n 98, at 135.


which could only be met by the aggregation of investor funds.108 Additionally, the increasing wealth of the middle classes required more outlets for investment and pushed the need for limited liability.109

In New Zealand, the Companies Act 1993 governs how companies are set-up and run. New Zealand is a relatively small country and its business context is different from the more complex economies of the countries from which it has adopted legislation.110 Notably, New Zealand’s business environment includes a small stock exchange, a lack of professional directors, few large companies, and an overwhelming number of small and medium-sized enterprises (SMEs). Whilst New Zealand has previously tried to keep its companies legislation in line with the global community, our unique business environment is making it increasingly difficult to do so. Especially because SMEs, companies with fewer than 20 employees, make up 97% of businesses in New Zealand.111

Turning to the Companies Act 1993, to be incorporated a company must have:112 (i) a name, a registered office, and an address for service in New Zealand (one

address can be used for both functions); and

(ii) at least one share, one shareholder, and one director (a minimum of one director must reside in New Zealand).

The process of incorporation is designed to be quick and straightforward. It can be completed online.113

More generally, the Companies Act provides for only one type of company: a company with shares that has either limited or unlimited liability for its members.114 The existence of these companies continues indefinitely, despite the death of any shareholder.115 Limited companies provide the effect that the shareholders of the company are only liable for debts

108 Turner, above n 98, at 138.

109 At 138.

110 Barrett and Feehily, above n 14, at 5.

111 Ministry of Business, Innovation and Employment “Small business” (28 September 2020)


112 Companies Act 1993, ss 10, 186, and 192.

113 See Companies Office <www.business.govt.nz/companies>.

114 Craig, above n 96, at [1.3].

115 At [2.4].


of the company up to the amount committed upfront to share capital.116 Their personal assets are generally considered to be distinct from the company. The long title of the Act also reaffirms the value of the company as, “a means of achieving economic and social benefits through the aggregation of capital for productive purposes, the spreading of economic risk, and the taking of business risks.”117

The Act partially codifies the general duties of directors and their powers,118 but does not remove those duties which still exist at common law.119 It also clearly recognises the concept of the “one-person” company.120 A disclosure-based approach is taken to conflicts of interest, as opposed to prohibiting or restricting transactions where a conflict exists.121 The Act also provides for a variety of remedies to enforce obligations owed by the directors and the company, including the concept of derivative actions.122

C Directors’ powers and duties

The board of directors is the company’s “legal face”,123 responsible to shareholders for the management of its business and affairs.124 The common law on companies has, to a large extent, developed from trust law and has brought with it notions of fiduciary and non- fiduciary duties.125 However, some of these have been amended in substance by the Companies Act.126 This section will briefly outline the key powers and duties of directors under New Zealand law.

Part 8 of the Act contains the finer details of directors’ powers and duties.127 It gives the definition of a director and the meaning of “the board”.128 Section 128 states that “the board

116 Note that earlier Acts and certain equivalent legislation overseas can provide for multiple types of companies. See Craig, above n 96, at [3.1].

117 Companies Act 1993, Title.

118 Companies Act 1993, pt 8.

119 Craig, above n 96, at [1.3].

120 At [2.2].

121 See Companies Act 1993, ss 139–149.

122 See Companies Act 1993, pt 9.

123 Hawke's Bay Trustee Co Ltd v Judd, above n 21, at [8].

124 Tom Pasley Morison's Company Law (New Zealand) Directors’ Powers and Duties (online ed) at [24.1].

125 Barrett and Feehily, above n 14, at 198.

126 At 182.

127 Companies Act 1993.

128 See Companies Act 1993, ss 126, 127.


of a company has all the powers necessary for managing, and for directing and supervising the management of, the business and affairs of the company”, subject to any changes made in the company’s constitution.129 Counter-balancing these broad discretionary powers, are the duties which directors owe. These are vast and will not be covered extensively here.

For the purposes of this paper, the following will provide an outline of the key duties of company directors.

Sections 131 to 149 of the Companies Act represent the duties of a fiduciary nature which accompany the office of director.130 A director is regarded as a fiduciary and has fiduciary obligations imposed on them,131 namely, “a director must not put his or her personal interests ahead of those of the company.”132 Directors must also act in good faith in the interests of the company, exercise powers for a proper purpose, exercise reasonable care and skill in the performance of their duties, and avoid unnecessary conflict of interests between their own interests and those of the company.133

Director's duties have traditionally been held as being owed to the company itself. Under the Companies Act, it is unclear whether this remains the general rule. Some duties explicitly mention that they are owed to the company and not to shareholders.134 Some duties provide that they are owed directly to shareholders.135 The remaining duties are not owed expressly to any person.136 The better position appears to be that the traditional starting point remains and that the duties are generally owed to the company.137

1 Section 131: Good faith and best interests

The duty to act in good faith and best interests is a core duty of directors. It has great parallels with a trustee’s duty to put the interests of the principal ahead of their own. For directors, the company is owed this duty.138 This section has been referred to as requiring

129 Companies Act 1993.

130 Pasley, above n 124, at [24.1].

131 Rickett, above n 88, at [105].

132 Morgenstern v Jeffreys [2014] NZCA 449 at [55].

133 Pasley, above n 124, at [24.1]; and see Companies Act 1993, ss 131, 133, 137, 139–149.

134 Companies Act 1993, ss 131, 133, 135, 136, 137, 145.

135 Companies Act 1993, ss 90, 140, 148.

136 Pasley, above n 124, at [24.7].

137 At [24.7].

138 Companies Act 1993, s 131.


the directors to ensure there is some “corporate benefit”.139 The classic situation in which a director breaches s 131 occurs where the director puts his or her own interests, the interests of a third party, or the interests of another company in the group ahead of the company’s interests.140

Examples of a s 131 breach include:

(a) Wagner v Gill:141 Mr Gill was CEO and director of a company that had a sponsorship contract with Netball NZ. The contract gave Netball NZ the right to terminate if Mr Gill resigned as CEO. When the company encountered financial difficulties, Mr Gill resigned as CEO and procured Netball NZ to terminate the contract with the company and enter into a new sponsorship contract with another company he controlled. Mr Gill’s steps to engineer the transfer of the contract were for his own personal benefit, and in breach of his duty to the company under s 131.142

(b) Lakeside Ventures 2010 Ltd (in liq) v Levin:143 Mr Burrows was the sole director of a trustee company that made a profit for which it was immediately liable for income tax. The director caused the trustee company to distribute all of the profit to himself as the beneficiary of the trust, leaving the company with no money to meet its tax liability. Mr Burrows then delayed filing the company’s tax return, exposing it to penalties and interest. The Court found that Mr Burrows was in breach of s 131.144 Section 131 can also be breached by directors’ failure to consider the interests of creditors and other stakeholders.145 Whilst the traditional approach holds that director’s duties are only owed to the company, where a company is nearing insolvency or insolvent, the interests of creditors must be considered.146 This was the case in Debut Homes Limited (in liq) v Cooper (Debut Homes). Debut Homes also brought to light the fact that s 131

139 Westpac Banking Corp v Bell Group Ltd (in liq) (No 3) [2012] WASCA 157 at [2069] per Drummond AJA and at [2781] per Carr AJA.

140 Pasley, above n 124, at [24.9].

141 Wagner v Gill [2013] NZHC 1304 at [133]; and see Wagner v Gill [2014] NZCA 336 where the Court upheld the decision on appeal without substantive discussion of this point.

142 Example from Pasley, above n 124, at [24.10].

143 Lakeside Ventures 2010 Ltd (in liq) v Levin [2014] NZHC 1048 at [42].

144 Example from Pasley, above n 124, at [24.10].

145 At [24.13].

146 See Debut Homes Limited (in liq) v Cooper [2020] NZSC 100 at [183]–[188].


breaches of this kind are also likely to result in a breach of s 135, reckless trading, for a lack of consideration of the creditors’ interests.

Additionally, s 138A of the Companies Act makes it a criminal offence for a serious breach of s 131:147

A director commits an offence if the director exercises powers or performs duties as a director of the company—

(a) in bad faith towards the company and believing that the conduct is not in the best interests of the company; and

(b) knowing that the conduct will cause serious loss to the company.

The consequence of such an offence is imprisonment for a term not exceeding 5 years or to a fine not exceeding $200,000.148

2 Section 133: Proper purpose

Section 133 of the Companies Act simply states, “a director must exercise a power for a proper purpose.” Case law suggests that the courts will apply the following test in such a consideration:149

(a) identify the power being exercised;

(b) identify the proper purpose for which that power was delegated to the directors;

(c) identify the substantial purpose for which the power was in fact exercised; and (d) decide whether that purpose was proper.

The proper purpose rule is aimed at prohibiting a director’s abuse of power by acting for an improper reason, even if the act itself is within the scope of his or her powers.150 Note that in New Zealand, few cases engage s 133 of the Companies Act without reference to another breach of duty.151 More commonly, the Courts consider the issue of whether a

147 Companies Act 1993, s 138A(1).

148 Companies Act 1993, s 373(4)(aaa).

149 Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 (PC) at 835.

150 Pasley, above n 124, at [24.14].

151 At [24.15A].


director has breached s 131, and then rely on the same reasoning to rule that the director has breached s 133 as well.152

3 Section 135: Reckless trading

This section states that the director of a company must not agree, cause, or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors. The law in this area focuses on a “substantial risk”

of “serious loss”. According to the Court of Appeal in Yan v Mainzeal Property and Construction Ltd (in liq) (Mainzeal), it applies an objective test to the director’s circumstances and focuses on what the directors knew or ought to have known at the relevant time.153 This provision is similar to the old s 320 of the Companies Act 1955 which only applied to insolvent companies. The 1993 Act has no such qualifications and can theoretically apply at any point.154 However, in practice, it is likely to only apply in near insolvent or insolvent cases.

4 Section 136: Reasonable grounds for incurring obligations

This provision prohibits the director of a company from agreeing to the company taking on an obligation unless they believe at that time, on reasonable grounds, that the company will be able to perform the obligation when it is required to do so. The Supreme Court in Debut Homes held that this duty applies, not only to contractual and specific obligations, but also to obligations in the broader sense.155 Like the reckless trading provision, this section is most likely to be engaged in situations where the company is in financial difficulties.

Section 136 applies a subjective element, relating to the belief of the director, and an objective element concerning the grounds on which the belief is based.156 An example occurs in Mainzeal,157 where the Court of Appeal held that it will clearly not be reasonable for directors to trade on, and incur obligations, especially those that run long into the future,

152 At [24.15A].

153 Yan v Mainzeal Property and Construction Limited (in liq) [2021] NZCA 99 at [441].

154 Companies Act 1993.

155 Debut HomesLimited (in liq) v Cooper, above n 146, at [91].

156 Pasley, above n 124, at [24.18].

157 Yan v Mainzeal Property and Construction Limited (in liq), above n 153, at [462]–[464].


knowing that the company is vulnerable to failure, and that if it stops trading there will be a serious deficiency to some creditors.158

5 Section 137: Duty of care

Section 137 requires a director to exercise the care, diligence, and skill of a reasonable director in the same circumstances, taking into account, but without limitation:159

(a) the nature of the company; and (b) the nature of the decision; and

(c) the position of the director and the nature of the responsibilities undertaken by him or her.

The traditional position at common law held directors liable to the extent they breached the duty when compared to directors of the same degree of knowledge and experience.160 The statutory provision employs a higher standard, that of the “reasonable director in the circumstances”.161

D The corporate veil

The effect of the corporate veil is that companies can act as legal persons distinct from their owners and managers.162 John Turner states that:163

[C]ompanies can now enter contracts more efficiently; sue and be sued in the name of the firm’s designated officers; own real estate and assets; and pledge real estate and assets to creditors.

158 Pasley, above n 124, at [24.18].

159 Companies Act 1993.

160 See Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1990] 3 NZLR 513, [1990] 3 WLR 297 (PC).

161 Companies Act 1993, s 137.

162 Turner, above n 98, at 121.

163 At 121.


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