While it can be useful to have to ensure that there is someone who can make decisions for you and sign documents when you are not able to, it is important to review your powers of attorney from time to time and make sure that your attorney will act appropriately.  It is also important to appreciate that under a standard “power of attorney and deed of delegation” your attorney can also exercise your trustee powers while you are temporarily physically incapacitated or absent from New Zealand.

The recent case of ‘The facts of FAI Money Limited v Crawley’ highlight the risks inherent in granting a power of attorney.

In this case Edward Johnston’s brother, Richard Johnston who is an accountant, and his father-in-law Gavin Crawley (in their capacity as trustees) guaranteed a loan made to Edward Johnston, then a West Auckland lawyer, since bankrupted.

In due course there was a default.  The trusts for which the trustees acted were of no value.

Accordingly, FAI elected to pursue the trustees personally for their own distinct breaches of their undertakings.  This was because under the loan agreement and the guarantees, FAI could pursue the trustees personally if deprived of recourse to the trusts’ assets because the trustees have acted without capacity, power or authority, or dishonestly, or negligently, or in breach of trust.

The High Court found that Richard Johnston was personally liable but that Mr Crawley was not because there was no evidence that he had any knowledge of events, Edward Johnston having signed all the  relevant documents under Mr Crawley’s power of attorney and deed of delegation.

Unfortunately for Mr Crawley, the Court of Appeal did not take such a kindly view noting instead at [31] and [32] that:

“[31] … We are satisfied Mr Crawley had no appreciation of his responsibilities as a trustee of the Trusts and took no steps to fulfil his responsibilities in that respect. He was obliged to     familiarise himself with the affairs of the Trusts, to take care of their assets, and to act in the best interests of the beneficiaries. Specifically, in relation to the matters at issue, he was obliged to ensure he was kept informed about the intention to borrow money from FAI, to satisfy himself this was in the best interests of the beneficiaries, and to verify the accuracy of the details in the statement of position before executing or authorising the execution of the loan documents containing the warranty relied upon by FAI. As with Richard Johnston, he did none of those things and we are satisfied he was negligent in those respects. The protection expressed in s 31(3) of the Trustee Act is not available since it applies only in suits brought by a beneficiary.

[32] As the Judge noted, unlawful behaviour between donor and donee will not prevent the creation of an obligation      between donor and a third party dealing with the agent in good faith: National Australia Finance Ltd v Fahey.  It follows that the terms of the loan agreement and the guarantees bind Mr Crawley despite the power of attorney being exercised outside its terms.”

The end result that Mr Johnston and Mr Crawley were joint and    severally liable for the loss attributed to FAI Money.  The result may seem harsh, given that neither were beneficiaries of the trust.  However, it serves to highlight the risks associated with being a trustee, and with giving powers of attorney.

“Panama Papers” and the Government Inquiry into Foreign Trust  Disclosure Rules -  does this affect my trust?

Simply, put, probably not.  The event referred to know as the Panama Papers related to a substantial information leak, following which   allegations arose about New Zealand’s weak approach to due diligence. This prompted the Government Inquiry into Foreign Trust  Disclosure Rules (the Report), which  was released on 27 June 2016. The report investigated whether it was correct that New Zealand foreign trusts are being used extensively by wealthy individuals in structures that facilitate:

  • Tax evasion
  • Aggressive tax planning
  • Money laundering and the hiding of assets.

The Report concluded that stronger disclosure was required for foreign trusts and that:

  • Banning foreign trusts or removing the current tax exemption is not necessary or justified;
  • Theoretically, the existing tax disclosure and exchange of information arrangements should be sufficient, but current law and enforcement practices means the risk of detection is low;
  • There has been no direct evidence (the Panama Papers were not released publicly) that illicit funds have been hidden in New Zealand foreign trusts, however it is considered reasonable to conclude that there are cases where this has occurred;
  • Foreign trusts, like domestic trusts, are a legitimate vehicle to manage family wealth. Allowing foreign trusts to be established here is in line with our policy of maintaining an open economy that welcomes foreign investment.

Key recommendations from the Report centred around the need to develop a more vigorous disclosure regime for foreign trusts and included:

  • Requiring information on foreign trusts to be maintained in a  register
  • Requiring disclosure of information to Inland Revenue of personal information of the settlors, protectors, non-resident trustees, any other person that has effective control of the trust, beneficiaries of fixed trusts (including underlying beneficiaries) and enough details of the class of beneficiaries of discretionary trusts to enable identity to be established at the time of a distribution
  • Requiring the trust deed to be filed at registration
  • Requiring an annual return, amounts of distributions paid with names, foreign address, tax number and residence of recipient beneficiaries
  • Requiring revision of the Anti-Money Laundering legislation to require verification of the underlying source of funds or wealth settled on a foreign trust
  • Requiring revision of the legislation around reporting of suspicious financial transactions that do not go via a New Zealand bank.

The Government has substantially agreed to implement the recommendations and advised that a tax bill will be introduced in August 2016, to effect the majority of the recommendations.