Rise of the discretionary beneficiary?

In our previous alert on the incoming Trusts Act 2019, we explained how the new Act would provide clarity on the rights of discretionary beneficiaries.

The High Court has now provided further clarity on beneficiaries’ rights in New Zealand by confirming the ability of a non-shareholder beneficiary to take action, on behalf of the relevant company, against a director for breach of fiduciary obligations owed as director.

The ownership structure is a common one

As is common in New Zealand, the shares of the company in question were 100% owned by a trust. Trusts (and their beneficiaries) are not registered on the Companies Office, rather the names of the trustees are registered as shareholders. In this case, the trustee was also a director of the company – also a common scenario.

Non-shareholder was able to bring a ‘double derivative’ claim

Due to the impugned director having an effective ‘veto’ on decisions by the Company, the Company itself was practically unable to authorise any action being taken against that director.

Furthermore, as the impugned director was also a trustee of the trust (and was named as the holder of the trust’s shares), the trust could not bring a simple derivative action against the director under s165 of the Companies Act. That section enables shareholders to apply to the court to bring proceedings in the name of the company where the company itself fails to do so.

So the discretionary beneficiary asked the court to allow it to bring a ‘double derivative’ claim – i.e. to allow the beneficiary to exercise the right of the trustee as shareholder to exercise the right of the Company to sue the director.

The Court allowed the discretionary beneficiary to bring the claim.

Notwithstanding that the beneficiary was not recorded as a shareholder, the Court said that beneficiaries should not be at a disadvantage to a registered shareholder “when wrongdoers in control of the company and the trust assets breach their fiduciary duties”.

It is important to consider all interested parties

When establishing corporate structures, we recommend seeking advice on the proposed structure – and if you were attempting to limit the rights of non-shareholding beneficiaries, think again.

If you have any questions contact one of our experts.

Co-authored by Rodney Craig (Partner, Corporate) and Jack McCaw (Senior Solicitor, Property)

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