Charitable Trustees Profiting at the Expense of Charities

Reports of Court cases often provide useful, quick lessons on basic principles of society and charity law.  That is the case of the recent High Court decision in Prasad v Parai [2012] NZHC 2858.  The decision establishes no new important principles, but it illustrates a number of implications for charitable trustees where they act unlawfully.

Mr Prasad was a trustee and the general manager of a charitable trust.  He appealed a District Court decision that he should account to the trustees of the trust for profit of approximately $47,000 Mr Prasad had made on the sale of a property that Mr Prasad purchased, using trust funds of $43,000 to pay the deposit.

Charitable trustees will not be permitted to profit personally at the expense of a charity

The Prasad judgment contains a number of statements which have wider application than just to the facts of that case:

“[23] I acknowledge that the letter of authority (backdated to 1 October 2008) could amount to the Trust ratifying the purchase of the property by giving a belated authority for its purchase but by then, the Trust could not purchase it because it had been on-sold.  I cannot see how the Trust could ever properly ratify Mr Prasad’s use of the funds to purchase a property when it did not know all the details of the purchase, including the fact the property was not available for it to own, that it had already been on-sold by Mr Prasad for a profit that he kept for himself.  Nor can I see how a charitable trust could ever properly authorise conduct that amounted to a trustee obtaining a personal benefit from the use of trust funds.  A charitable trust must act in accordance with its powers under the trust deed and these must be consistent with its charitable purposes.  Assisting a trustee to make a personal profit can never be consistent with its charitable purposes.

“[25] The evidence … is that Mr Prasad purchased a $430,000 property in his own name using the Trust’s funds as a deposit in circumstances where the Trust had not authorised this and he then on-sold the property in circumstances where the on-sale paid for the balance of his liability for the purchase.  This all occurred before the Trust knew anything about the use of its funds.  As Mr Prasad was a trustee at the time, this amounts to a breach of trust.  Mr Prasad must account to the Trust for any profit he received from his breach of trust: see Boardman v Phipps [1967] 2 AC 46 (HL).  The Judge was right to find Mr Prasad liable in this way and to order him to disgorge the profit that he had made.”

The judgment continued (at [26]) by noting that “Mr Prasad argued he should be permitted to enjoy at least some of the profit from the on-sale of the property, as it was his skill that contributed to the gain: see discussion in Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433 on the topic of when an errant fiduciary will be permitted to enjoy some of the gain that he or she has made from a breach of fiduciary obligation. However, in Chirnside the majority of the Supreme Court at [134] distinguished between trustees who necessarily have accepted the obligations of trusteeship and others who by operation of law have fiduciary obligations imposed upon them.  Persons in the first category were less likely to be able to retain any gains as a result of a breach of trust.”  Having regard to that decision, the High Court Judge concluded “… that when a trustee of a charitable trust board acts dishonestly and obtains a personal benefit in breach of trust, it would be contrary to public policy to allow the trustee to retain any of the unlawful gains.  A charitable trust has no beneficiaries to, in effect, police the conduct of the trustees. Thus, it is important that, in those circumstances, trustees have no incentive to act dishonestly in breach of trust for personal gain.  For this reason, I consider that Mr Prasad cannot be permitted any allowance for his efforts in achieving the gains that flowed from the on-sale of the property.”

Who generally polices the conduct of charitable trustees?

While the Prasad judgment noted that “A charitable trust has no beneficiaries to, in effect, police the conduct of the trustees,” those concerned about potential misconduct by charitable trustees can seek assistance:

  • First, as in the Prasad case, other trustees may seek Court assistance.
  • Second, under section 50, Charities Act 2005 a complaint to the Charities Commission may result in some “policing” of charitable trustees’ actions, but one can only speculate on whether that may have been cheaper, faster, and as effective as Court proceedings.
  • Third, while the beneficiaries of a charitable entity need not be individual people, where some people can identify themselves as beneficiaries they may be able to take any steps to secure their benefits if s. 60, Charitable Trusts Act 1957 applies (see Re Belling (deceased); London Borough of Enfield v Public Trustee [1967] Ch 425; [1967] 1 All ER 105; and Hauxwell v Barton-on-Humber UDC [1974] Ch 432).  Where an individual commences proceedings under s. 60 of the Act, the court is likely to join the Attorney-General into the proceedings (see Kaikoura County Council v Boyd [1949] NZLR 233 (CA); and Morgan v Wellington City Corporation [1975] 1 NZLR 416 at 418 (CA)).  An example of a case where income and capital beneficiaries were held entitled to sue with respect to alleged wrongs done in respect of a trust is Manukau City Council v Trustees of the Auckland Energy Consumer Trust (High Court, Auckland CP 210-SW99, 21 May 1999, Morris J).
  • Fourth, the Attorney-General has historically represented the Crown and the public interest in charity proceedings through the Crown Law Office, and enforcement action is usually taken by the Attorney-General in that supervisory capacity as guardian of charitable trusts.  As noted in a Privy Council decision, Wallis v Solicitor-General (1902-1903) NZPCC 23 (PC), “It is the province of the Crown as parens patriae to enforce the execution of charitable trusts and it has always been recognized as the duty of the Law Officers of the Crown to intervene for the purpose of protecting charities and affording advice and assistance to the Court in the administration of charitable trusts.”

Historical note

The Privy Council decision in Wallis trenchantly criticised the Solicitor-General’s conduct of the case and the New Zealand Court of Appeal judgment.  An unprecedented (and perhaps somewhat infamous) sitting of the Court of Appeal was later held to protest the criticism, see NZPCC Appendix at 730.

This is one of a series of articles on societies and charitable trusts (originally published in the NZ Lawyer magazine) by Mark von Dadelszen, a Hastings lawyer and author of Law of Societies, 3rd Edition, 2013. If any reader has examples of issues that have arisen or questions about societies or charitable trusts that might be a suitable subject for one of these articles please contact Mark at mark.vondadelszen@bvond.co.nz.