A recent preliminary determination of the High Court of New Zealand, Whimp v Dugdale [2026] NZHC 1630, details a situation where a court may imply obligations on trustees to achieve the terms of a settlement agreement.
Background
Forex Technical Analyst Systems Limited (“Forex”) built a house for the Eternal Trust (the “Trust”) on a Mangawhai property owned by the Trust. Mr and Ms Dugdale were trustees of the Trust and Mr Dugdale was also the sole director and shareholder of Forex. Mr Dugdale placed Forex into liquidation.
The liquidator alleged that the Trust received the benefit of the construction work at a substantially undervalued price and was involved in conduct that prejudiced Forex’s creditors. The liquidator commenced proceedings against the trustees, including the professional independent trustee, a lawyer (“Mr Walters”).
Because the Mangawhai property was the Trust’s most valuable asset, the liquidators obtained an interim injunction preventing the trustees from selling the property or reducing the equity in it. The purpose was to preserve an asset pool against which any future judgment could be enforced.
Mr Walters later proposed a settlement to the trustees and liquidator, under which he would not actively defend the proceedings and would abide the Court’s decision, in exchange for his liability being limited to Trust assets rather than being enforceable against him personally.
Although formally signed by all parties in January 2023, the Court found the parties were already contractually bound by 14 December 2022, when the plaintiffs signed and returned the agreement and all key terms had been agreed.
Refinancing of the Trust Property
Despite the injunction order:
● On 22 December 2022, the Trust refinanced the property.
● Approximately $970,000 was borrowed.
● Existing lending was repaid, and surplus funds were distributed to pay debts and make funds available to Mr and Ms Dugdale.
● The refinancing reduced Trust equity by approximately $103,080.00.
Mr Walters acted as solicitor on the refinancing transaction.
The liquidators learned of the refinancing in March 2023 and, on 13 April 2023, brought proceedings to cancel the settlement agreement.
Could the Settlement Agreement Be Cancelled?
The Court was asked whether the liquidators were entitled to cancel the settlement agreement on the basis that the property had been refinanced and the Trust’s equity in the property had been reduced.
The Court’s Decision on the Settlement Agreement
The Court held that the parties had all agreed material terms of the settlement agreement by December 2022. Therefore, the settlement agreement was already binding when the refinancing of the property occurred.
The injunction expressly prohibited transactions that reduced the equity available in the Trust property, and the refinancing had that effect.
Generally, the courts are reluctant to imply terms into a carefully drafted agreement. But in this case, the Judge concluded that an implied term existed requiring Mr Walters not to participate in dealings inconsistent with preservation of the trust assets.
The Court’s reasoning included the following factors:
● All parties knew preservation of the property was critical.
● The injunction existed for the above purpose.
● The settlement agreement was negotiated against the background of the court order to preserve the property.
● The settlement only made sense if the property remained preserved; and
● The trustee’s role as an independent professional trustee.
Implications for Trustees and Settlement Agreements
The decision suggests that where a trustee obtains the benefit of a settlement arrangement on the basis that they are acting as an independent professional trustee, the Court may be willing to imply obligations necessary to give effect to the purpose of that arrangement, even if those obligations are not expressly recorded.
Trustees cannot assume their liability will remain limited, and rights of indemnity will always protect them. The decision shows that a trustee who has a right of indemnity, may lose the protections if their conduct becomes inconsistent with the rationale for granting them in the first place.
What is the key takeaway for trustees?
Trustees should consider not only the express wording of agreements and court orders but also their underlying purpose. Courts may imply obligations where those obligations are necessary to give effect to the parties’ intention.
Can trustees be personally liable?
As a general rule, trustees are personally liable for liabilities incurred as trustees, although they often have rights of indemnity from trust assets. This case demonstrates that contractual limitations on liability and indemnity protections may not be available to trustees in every circumstance.
What lessons can trustees learn from this case?
● Professional trustees are held to a high standard
The Court considered Mr Walters’ status as an experienced solicitor and professional trustee when assessing
the parties’ expectations and determining what obligations should be implied.
● Trustees must take particular care where trust assets are subject to court-imposed restrictions
Where trust assets are subject to:
– a freezing order;
– an injunction;
– a caveat;
– a preservation order; or
– ongoing litigation,
Trustees should exercise particular caution before approving transactions that may affect those assets.
● Trustees should consider the purpose of agreements
When making decisions, trustees should consider not only the wording of an agreement but also its underlying purpose. An important question is whether the proposed action could undermine the objective the agreement was intended to achieve.
Concluding remarks
This decision illustrates the circumstances in which a court may be prepared to imply obligations into a settlement arrangement involving trustees.
Trust administration can involve complex legal, practical and governance considerations. If you are a trustee, beneficiary, or settlor, and would like guidance on all Trust related matters, Sarah Churstain and Elizabeth Hughes at Ford Sumner Lawyers would be happy to assist.
Please get in touch with us to discuss your circumstances and obtain advice tailored to your situation.
——————————————————
Disclaimer
The information on this web page provides you with general information that is true and accurate to the best of Ford Sumner’s knowledge.
Ford Sumner may change, delete, add to, or otherwise amend the information contained on this webpage without notice.
Information on this webpage is not business, tax, or legal advice. You should take specific, professional advice before taking any action based on this information.
While Ford Sumner has taken all reasonable care in placing the correct information on this webpage, it cannot be liable for any inaccuracy, error, omission, or any other kind of inadequacy, deficiency, or flaw in, or in relation to the information contained on this webpage.
Ford Sumner fully excludes any and all liability of any kind to any person or entity that chooses to rely upon the information.
