Supreme Court Cooper v Pinney – Clayton distinguished – Mr Pinney’s trust powers not property for purposes of PRA
The Supreme Court’s decision in Cooper v Pinney[1] (Pinney) is an important clarification of the application of the principles established by Clayton v Clayton [Vaughan Road Property Trust][2] (Clayton) that a bundle of rights and powers held by an individual under a discretionary family trust can be so extensive as to amount to “property” under the Property (Relationships) Act 1976 (PRA), and the effect of the Trusts Act 2019 (2019 Act) on trust powers and rights.
The judgment is a compelling and well-reasoned analysis of the principles in Clayton and the importance of fiduciary obligations as constraints on trust powers. The Court’s careful analysis leads to the clear conclusion that the trust deed in Pinney and the trust deed in Clayton “are not alike” and that Mr Pinney’s bundle of trust powers do not amount to property for the purposes of the PRA[3]. The emphasis on the requirement of unanimous decisions by a minimum of two trustees, the fiduciary nature of trust powers and judicial oversight provides valuable guidance for both trust and relationship property practitioners.
This analysis will begin by showing how the definitions of “property” and “owner” under the PRA have been expanded to encompass rights and powers under a trust deed. It will then provide an overview of the Clayton decision, followed by a summary of the Supreme Court’s decision in Pinney. Finally, the analysis will conclude with a discussion on the application of the mandatory and default duties in the Trusts Act 2019.
Relevant PRA definitions
The starting point is the definition of “property” and “owner” in section 2 of the PRA. The definition of “property” includes “any other right or interest”, and the definition of “owner” includes “the person who, …is the beneficial owner of the property under any enactment or rule of common law or equity”, together these definitions tie into the meaning of “relationship property” at section 8(1) PRA.
That a discretionary beneficiary does not have a beneficial interest in the income or capital of a discretionary trust is well supported by a long-standing line of authorities.[4] The principle applied in the PRA context provides that discretionary beneficiaries do not have a beneficial interest amounting to property under the PRA, even where there is evidence of a long-standing intention by the trustees to exercise their discretion to favour a particular beneficiary.[5]
However, case law has broadened the definitions of property and ownership to apply to trust rights and powers through application of the purpose and principles of the PRA, it’s statutory context and the social context in which legislation such as the PRA is interpreted. This “substance-over-form” approach was endorsed by the Supreme Court in Pinney.[6]
Clayton and the Vaughan Road Property Trust (Clayton Deed)
The Supreme Court agreed with the Court of Appeal[7] that a general power of appointment was tantamount to ownership[8]. Defining a general power of appointment as “a power to appoint property to anyone including themselves without considering the interests of anyone else”[9].
Clayton considered whether the bundle of rights comprised of powers and entitlements vested in Mr Clayton by the Clayton Deed gave him effective control, to such an extent that the bundle of rights was appropriately classified as property under the PRA. Such an analysis must also consider restrictions on the exercise of powers, including how the rights of remaining beneficiaries can exert practical limitations on the exercise of trust powers.[10]
The relevant provisions of the Clayton Deed meant that Mr Clayton could:[11]
- apply all of the capital and income of the trust to himself as a discretionary beneficiary;
- bring forward the vesting day and appoint all trust capital to himself as a discretionary beneficiary; and
- resettle the trust capital on another trust of which he was a beneficiary.
The Supreme Court in Pinney clarified its findings in Clayton as:
… not whether powers or rights conferred by a trust deed actually amount to a general power of appointment. That status does not necessarily define those powers constituting donee property. Nor is that status definitive as to whether a power is property for the purposes of the RPA: in Clayton this Court did not find the trust deed actually created a general power of appointment, but rather recognised something analogous to one (which the Court said was property for the purposes of the PRA).[12]
Central to this finding was the “suite of provisions”[13] modifying or removing fiduciary duties. The Supreme Court found that there was no effective constraint on Mr Clayton’s exercise of powers in favour of himself.[14]
Pinney and the MRW Pinney Family Trust (Pinney Deed)
In Pinney the Supreme Court was asked to apply the principle in Clayton that a bundle of trust rights and powers such as those vested in Mr Clayton and unrestrained by fiduciary obligations, are together so extensive as to amount, in effect, to a general power of appointment, and therefore fall within the definition of property for the purposes of the PRA.[15]
Although the Supreme Court states that a finding that goes as far as saying that trust powers actually amount to a general power of appointment is not determinative of those powers being property for the purposes of the PRA. It also goes on to say:
But a finding that one is dealing with powers amounting in effect to a general power of appointment may offer a short-cut: it tends to be conclusive as to effective ownership by the donee, and an inference can then be drawn that the power concerned is property for PRA purposes.[16][emphasis added]
Dealing with the law applying before the 2019 Act, the Supreme Court found that judicial oversight of trusts is a constraint that can be inconsistent with a finding that trust powers amount to effective ownership by the donee. Noting that the more intrusive the scope for judicial oversight, the less likely that power is the property of the donee.[17]
Contrasting the terms of the Clayton Deed with those of the Pinney Deed, the Supreme Court found there were several significant differences that were sufficiently material to distinguish the Pinney Deed from the Clayton Deed. That the power to appoint and remove trustees does not allow Mr Pinney to take sole control of the trust was found to be sufficient on its own to distinguish the Pinney Deed from the Clayton Deed. The Supreme Court went on to state that even if unilateral control were possible, the powers to dispose of trust assets in Pinney were still constrained by fiduciary obligations.[18]
The Supreme Court framed its analysis under the following headings:[19]
- The deeds distinguished: The main similarity between the Clayton and Pinney deeds are the almost identically framed broad discretionary powers to distribute income and capital to discretionary beneficiaries. But noting four significant differences:
- Appointment and removal of trustees: Both deeds confer a power to appoint and remove trustees, including to self appoint. However, the power contained in the Pinney Deed is subject to the requirement for a minimum of two trustees. By contrast, the power contained in the Clayton Deed allows Mr Clayton to appoint himself sole trustee.[20]
- Unanimity: The Pinney Deed requirement for all trustee decisions to be unanimous, combined with the minimum of two trustees, meant that every decision “must be the product of a meeting of the minds of more than one trustee”. Whereas the Clayton Deed allowed a sole trustee to act freely, only requiring unanimity where there is more than one trustee appointed.[21]
- Exclusion of fiduciary constraints: Both deeds have general clauses purporting to allow trustees to make decisions in their “absolute and uncontrolled discretion”. The Pinney Deed went no further. However, the Clayton Deed went on to expressly exclude obligations, such as the core obligation of a trustee to consider the interests of the beneficiaries.[22]
- Removal of beneficiaries: The Clayton Deed allowed Mr Clayton to remove all discretionary beneficiaries leaving himself the sole discretionary beneficiary, and to appoint all of the trust assets to himself before the vesting day, leaving nothing for the final beneficiaries. There are no equivalent powers in the Pinney Deed.[23]
- The trustee appointment power remains fiduciary and constrained: Counsel for Ms Cooper argued that Mr Pinney could appoint himself and another trustee who would act on his direction, or a corporate trustee controlled by Mr Pinney, to then appoint all the trust assets to Mr Pinney.
The Supreme Court did not accept that argument. Finding that exercise of the power of appointment with the intention of taking sole control of the trust would be a breach of the proper purpose rule and inconsistent with the fiduciary nature of the power of appointment and removal of trustees.[24] By finding that the power as expressed in the Pinney Deed is fiduciary in nature, it follows that it must be exercised in good faith and in the interests of the beneficiaries, and not for any improper purpose.[25]
The Supreme Court felt that was sufficient to dispose of the case, but for completeness, went on to address the powers to dispose of trust capital and income.
- The remaining trustee powers likewise are fiduciary and constrained: Counsel for Ms Cooper also relied on provisions of the Pinney Deed allowing Mr Pinney to direct that the trustees appoint all trust assets to himself as a discretionary beneficiary to the exclusion of all others.[26]
In considering the argument for completeness, the Supreme Court noted the substantive difficulty with that argument is that the trust ownership arrangement is still subject to an “irreducible core” of duties owed by a trustee which are a fundamental trust concept: the duty to perform the trust honestly and in good faith for the benefit of the beneficiaries.[27]
- Mr Pinney’s powers are not his property for PRA purposes: The Supreme Court said it best, and I for one cannot do better. So here it is in the words of Winkelmann CJ and Kόs J:[28]
[125] It will be clear by now that we consider the combination of powers reserved to Mr Pinney under the MRWT deed to be significantly different to those powers reserved to Mr Clayton in Clayton v Clayton. A power analogous to a general power of appointment is not created. Rather, the core power in cl 15 to appoint and remove trustees remains limited by the proper purpose rule and bound by the fiduciary obligations that it be exercised in good faith and in the interests of the beneficiaries. So too are the dispositive powers in cls 4, 6 and 7 – powers which are moreover constrained by the two-trustee requirement and the requirement of unanimity. The general discretion provision in cl 13 does not alter this analysis, and nor does the limited variation power in cl 12. The distinctions between the VRPT deed in Clayton and the MRWT deed are therefore sufficiently material to warrant different classification in terms of the PRA definition of “property”. The two cases are not alike.
[126] It follows that we do not consider Mr Pinney enjoys a personal property right in respect of the bundle of powers vested in him by the MRWT deed.
Application of the Trusts Act 2019
Although the 2019 Act came into force on 30 January 2021 and applies to all express trusts whether created before or after commencement, it was accepted that the 2019 Act did not directly apply to Pinney. Because Pinney was commenced prior to the 2019 Act coming into force the proceedings were governed by the 1956 Act, due to the effect of sch 1 cl 8 of the 2019 Act and s 18 of the Interpretation Act 1999.
Despite this the Supreme Court highlights the intention of the 2019 Act to “restate and reform” the law of trusts in New Zealand by “setting out the core principles of the law relating to express trusts”[29]. Further emphasising that the mandatory duties – to know, and to act in accordance with, the terms of the trust; to act honestly and in good faith; to act for the benefit of the beneficiaries; and to exercise powers for a proper purpose – were “intended to restate and summarise the current legal position”[30].
The fiduciary obligations imposed on trustees and implied in all trust deeds by the mandatory and default duties contained in the 2019 Act, are likely to have a significant effect on the status of a bundle of trust rights and powers for the purposes of the definition of property under the PRA.
It seems that trusts will continue to provide some limited protection for beneficiaries in PRA proceedings, at least where the fiduciary obligations in the mandatory duties are combined with relevant default duties and a requirement for two-trustee unanimous decision making.
Will we ever see the like of Clayton again? One certainly hopes not.
[1] Cooper v Pinney [2024] NZSC 181
[2] Clayton v Clayton [Vaughan Road Property Trust] [2016] NZSC 29, [2016] 1 NZLR 551.
[3] Cooper vi Pinney, above n 1 at [125]-[126].
[4] Cooper v Pinney, above n 1 at [90], citing Gartside v Inland Revenue Commissioners [1968] AC 553 (HL) at 607 per Lord Reid, Lord Morris of Broth-y-Gest and Lord Guest and 617-618 per Lord Hodson and Lord Wilberforce concurring.
[5] Cooper v Pinney, above n 1 at [91].
[6] Cooper v Pinney, above n 1, at [34]-[36].
[7] Clayton v Clayton [2015] NZCA 30 at [99] and [111].
[8] Clayton v Clayton, above n 2 at [60]-[61].
[9] Cooper v Pinney, above n 1 at [38].
[10] Clayton v Clayton, above n 2 at [50]; Cooper v Pinney, above n 1 at [40].
[11] Clayton v Clayton, above n 2 at [52]-[55]; Cooper v Pinney, above n 1 at [41].
[12] Cooper v Pinney, above n 1 at [93].
[13] Cooper v Pinney, above n 1 at [42].
[14] Clayton v Clayton, above n 2 at [67]; Cooper v Cooper, above n 1 at [42].
[15] Cooper v Pinney, above n 1 at [1] and [92].
[16] Cooper v Pinney, above n 1 at [94]; See Australian Securities and Investments Commission v Carey (No 6) [2006] FCA 814, (2006) 153 FCR 509 at [19].
[17] Cooper v Pinney, above n 1 at [98].
[18] At [100].
[19] At [101]-[102].
[20] At [102(a)].
[21] At [102(b)].
[22] At [102(c)].
[23] At [102(d)].
[24] At [104]-
[25] At [115].
[26] At [116].
[27] At [116]-[118].
[28] At [125]-[126].
[29] Cooper v Pinney, above n 1 at [67]; Trusts Act 2019, s 3(a). Among other maters: see paras (b)-(d).
[30] Cooper v Pinney, above n 1 at [67]; Trusts Act 2019, ss 23, 24, 25, 26 and 27; and Law Commission Te Aka Matua o te Ture Review of the Law of Trusts: A Trusts Act for New Zealand (NZLC R130, 2013) at 107.
