Articles: January - June 2011

March 2011 - Trustees' Duties
March 2011 - 90 Day Trial Period for New Employees
February 2011 - Setting your Company up to prosper

March 2011 - Trustees' Duties

By Bruce Logan

The standards that trustees must observe in the administration and management of a trust arise from the duties that the law imposes on trustees. Much of the law has been created by the Courts over many centuries and some is contained in the Trustee Act 1956 ("the Act").

Trustees of a trust generally possess wide discretionary powers and authority. That authority carries with it corresponding responsibility. Trustees owe their duties to the trust beneficiaries and in certain situations can be held accountable for their actions or failures to act.

The following summarises some of the duties imposed on trustees and provides an introduction as to their practical significance to trustees. While the summary is not exhaustive it may be useful for individuals considering taking up appointment as an independent trustee or becoming a trustee of their own trust.

The following list includes several of the most important duties expressed in general terms:

  1. the duty of efficient management;
  2. the duty to keep and render full and proper accounts to the beneficiaries;
  3. the duty to act personally; and
  4. the duty of loyalty.

Duty of Efficient Management

Trustees must take responsibility to ensure that the trust fund is managed in an efficient and economic manner. This duty can be summarised as follows:

  1. a trustee has a duty to get to know thoroughly the terms of the trust and to obey those terms;
  2. an incoming trustee must enquire into the propriety of the acts of an outgoing trustee;
  3. once appointed, the trustee should "take title" to the trust assets — if title is registered in the names of the trustees, then on the appointment of a new trustee all trustees have the duty to make sure that they hold title to the trust assets as joint tenants;
  4. trustees also have a duty to make sure that the title documents for the trust assets and the trust assets themselves are protected against improper use; and
  5. the most important duty is the general duty to take all those precautions which an ordinary prudent business person would take in managing similar affairs of his or her own.

Duty to Keep and Render Accounts

Trustees have the duty to keep and render to the beneficiaries a proper record of their administration of the trust assets. In relation to this:

  1. the trustees must keep proper accounting records and prepare financial statements relating to appropriate accounting periods;
  2. the trustees' general duties include the duty to provide other information to beneficiaries - beneficiaries are entitled to inspect "trust documents" unless there is good reason why they should not.

The duty to keep and render accounts is a duty imposed directly on trustees, but trustees do not have to prepare the accounts themselves. Unless trustees have appropriate skills or the trust affairs are very simple, the trustees should use qualified accountants to:

  1. keep accounting records; and
  2. prepare periodic financial statements and tax and associated returns;

for the trust. However, it is for the expert to advise and the trustees to decide. Trustees cannot delegate the exercise of their discretions, even to experts, unless they are specifically authorised to do so by the trust deed or by law.

Duty to Act Personally

A trustee has the duty to act personally in managing trust affairs. A trustee cannot delegate his or her powers and discretions.

While the non-delegation rule is the fundamental part of the duty to act personally, trustees must remain conscious that they:

  1. do not let others dictate how discretions should be exercised, although trustees are entitled to seek professional advice or to refer to relevant documentation such as the settlor's "memorandum of wishes";
  2. exercise their powers in a timely fashion and with reference to relevant facts and circumstances;
  3. act unanimously (unless the trust deed allows majority rule); and
  4. together are responsible for the trustees' decisions and actions — there is no room for a passive trustee.

There is a small number of exceptions to the general rule that trustees cannot delegate their powers:

  1. the trust deed may authorise delegation (it should also set out the scope of the delegation);
  2. under section 29(2)of the Act, any person may be appointed to act as the trustees' agent in the exercise of the trustees' discretions, trusts and powers relating to any property outside New Zealand; and
  3. under section 31 of the Act, trustees can delegate their trusts, powers and discretions to another where the trustee is incapacitated or absent from New Zealand.

Modern trust deeds normally contain general or specific powers to appoint agents. Typically however agents are only appointed to carry out a decision taken personally by the trustees. In appointing agents, there is a duty to make sure that the proper person is appointed and that that person is properly supervised.

It is important to remember that trustees, as the owners of the trust assets and persons responsible for their management, will be personally liable for any liabilities incurred in the performance of the trust. If a trust earns income, income tax will be payable on that income, and it is the trustees who will be personally liable to the IRD to pay that income tax.

Duty of Loyalty

The trustees must observe the terms of the trust and manage the trust assets in the beneficiaries' best interests. The main aspects of this duty can be stated as follows:

  1. trustees should act exclusively in the best interests of all the beneficiaries of the trust present and future;
  2. trustees should act impartially as between beneficiaries and in practical terms gain an understanding of the beneficiaries' circumstances;
  3. trustees must not profit from their position as trustee unless:
    1. this is expressly authorised by the trust deed;
    2. all of the beneficiaries consent; or
    3. court approval is obtained;
    although a trustee may receive benefits from the trust as a beneficiary of the trust, if that trustee is also a beneficiary;
  4. trustees should not purchase trust assets or sell their own assets to the trust unless the above exceptions apply (of course settlors generally sell property to the trusts they have established); and
  5. trustees have a general duty to avoid putting themselves in a position of conflict between:
    1. their duties to the trust and its beneficiaries and their personal interests; or
    2. their duties to the trust and its beneficiaries and their duties to others.

Prudential Investment

Under section 13A of the Act trustees may "invest any trust funds, whether at the time in a state of investment or not, in any property".

The Act contains the "prudent person" test to determine whether any particular investment by trustees may be a breach of duty. This test is applied to the trustees' methods used in the investment process rather than the absolute performance of the trust investments.

Failure to maintain the real value of the trust is not necessarily a breach of trust. Events such as the share market crash of 1987 and the World financial crisis of 2007-2010 resulted in losses even for the most prudent investors. A loss in these circumstances is not necessarily a breach of trust as long as the trustees have acted prudently in carrying out their duties.

Pointers as to whether trustees have invested prudently include whether they have an investment plan and have diversified their investments appropriately.

In certain circumstances, the settlors' intention behind creating a trust may simply be to preserve a particular asset for future generations. If this is so, thought should be given to specifying this intention in the trust instrument and abrogating the prudential investment requirements in the Act (by expressing a "contrary intention" in the trust instrument). Otherwise, the trustees' prudential investment obligations may dictate that the asset concerned be sold to maximise both capital growth and income production from the trust assets, an action which may be totally undesirable to the settlors in terms of their original intention.

Conclusion

To summarise, trustees must efficiently manage the affairs of the trust and always act in the best interests of the beneficiaries. Good record keeping will assist the trustees in fulfilling their duties.

Logan Gold Walsh Lawyers Limited supports its client trustees in the administration of their trusts and assists them to fulfil their trustee duties. The lawyers at Logan Gold Walsh are very experienced in trust law and administration and will provide timely and quality advice to trustees.

March 2011 - 90 Day Trial Period for New Employees

by Tim Grooby
Staff Solicitor

There has been a lot of debate in recent times about the legislation that enables an employer to include a 90 trial period in an employment agreement.

The current legislation gives the employer the right to include a 90 day trial period in an employment agreement in which, during that trial period, the employer may dismiss the employee and the employee will be barred from bringing a personal grievance for unjustified dismissal. At the moment the 90 day trial period can only be used by employers who employ fewer than 20 employees. On 1 April 2011 this law will be extended to apply to all employers regardless of the size of their business.

The case of Smith v Stokes Valley Pharmacy (2009) Limited has recently addressed the interpretation and application of the legislation relating to the 90 day trial period.

Ms Smith was employed as a retail pharmacy assistant at a pharmacy for two and half years. Ms Smith was told by her employer in August 2009 that the business was being sold. Ms Smith was interviewed by the new business owners and was told she had “got the job”.  On 29 September 2009 Ms Smith was given a draft employment agreement which contained a 90 day trial provision.  The new business owners took over the business on 1 October 2009. Ms Smith was told to come to work as she usually would on that day. On 2 October Ms Smith met with her new employers and expressed concern about the 90 day trial provision, they said she should not worry too much about it. Ms Smith signed the employment agreement that day.

Ms Smith was then dismissed during the trial period. Ms Smith raised a personal grievance for unjustified dismissal.

The legislation was given a strict interpretation due to the fact it takes away the employee’s right to justice. It was held that Ms Smith could bring a personal grievance because certain actions by her new employers meant the legislation did not apply.

As Ms Smith commenced work for her new employers on 1 October 2009  but didn’t sign the employment agreement until 2 October 2009, it was held she had been previously employed by her employer. The employment agreement including the trial provision must be signed before the employee commences employment for their new employer and the employee must not have been employed previously by the employer. If the employee works for the employer prior to signing the employment agreement they will be regarded as being previously employed by that employer and the legislation will not apply.

If you are looking to purchase a business, you need to be aware that where employees transfer to the new business owner and continue to work while new employment agreements are negotiated, you will not be able to include a trial provision. If you wish to include a trial provision the transferring employee must sign their employment agreement before the business purchase settles and you, as the new business owner, take control of the business.

The legislation provides that the employer can terminate the employee’s employment by giving the employee notice of the termination. Where an employment agreement contains a notice period on termination, the employer must adhere to that notice period when they terminate an employee’s employment agreement in accordance with a 90 day termination clause. When Ms Smith’s employer terminated her employment they offered her two weeks pay in lieu of notice. Ms Smith’s employment agreement provided for four weeks notice on termination. The employer was held not to have terminated Ms Smith’s employment on notice due to the fact they did not adhere to the contractual notice period so they could not rely on the 90 day trial period legislation barring Ms Smith from bringing a personal grievance for unjustified dismissal.

The Smith decision clears up a lot of the questions relating to the application and interpretation of the 90 day trial period legislation. If you would like to discuss any matter regarding employment law please contact Tim at tim@lgwlawyers.co.nz at Logan Gold Walsh Lawyers Limited.

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February 2011 - Setting your Company up to prosper

By Julie Olds, Associate, Logan Gold Walsh

There are a few types of entity that a business owner can operate to run a business in New Zealand. In this article I will only focus on the company,and in particular, the foundation documents. A company is a separate legal entity but generally has the rights and obligations of a natural person.

A company is controlled by the directors and the shareholders. The shareholders hold shares in the company and usually provide the initial funds for start up. The power of decision making is shared by the shareholders and directors – depending on the nature of the decision to be made. A major decision of the company must be approved by the shareholders.

The Companies Act 1993 ("the Act") places a number of obligations on company directors, including a duty to act in good faith. Most companies in New Zealand are closely held companies – meaning there are usually only a couple of directors and they are the shareholders as well.

When a company is formed you have the option of adding a Constitution to the documents on the Companies Office website. A Constitution is a set of rules which governs the company. There is no requirement to have a Constitution but if you do not have one the rules contained in the Act apply. It is often better to have a tailored document to provide the rules appropriate for your company.

A Shareholder Agreement is a contract between the shareholders of the company. It sets out how the company is structured and managed, and is quite useful for those businesses where the shareholders are also employees.

Both a Company Constitution and a Shareholders' Agreement can cover pre-emptive rights. These oblige sellers of shares to offer their shares to existing shareholders first, prior to selling on to a third party.

Other important matters that can be covered in a Shareholders Agreement include:

  • A method to value shares
  • A Dividend policy (how the dividend will be set and how often it is to be paid)
  • A Dispute resolution process
  • The percentage of shareholder votes required to approve transactions

An advantage to a Shareholders Agreement is that it remains confidential to the parties to it whereas a Constitution is a public document and held online with the Companies Office. It would be usual for a Shareholder's Agreement to contain a provision that its terms prevail if there is also a Constitution for the company.

It is much easier to deal with issues between shareholders if there is a process set out in a foundation document. We often see problems when a party goes to exit the business if these matters have not been addressed at the outset. We recommend that when you form a company either one or both of these documents are discussed and tabled along with the first set of company resolutions. Please contact me or one of the team at Logan Gold Walsh Lawyers Limited if you think your business would work better with a set of ground rules.

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