Sunday, July 19, 2020

Pirani v. Pirani

In a family trust, the trustees may be given the discretion to determine if and when to make payments to beneficiaries. The trustees may be given the power to decide to distribute the trust assets to any one or more of the beneficiaries, to the exclusion of others. Often the discretion is set out in very broad terms, such as “absolute and unfettered discretion.” In most cases, when trustees are given such powers, courts will not interfere with their decisions. However, the powers of trustees are not unlimited. They have a duty of loyalty to the beneficiaries, and in some cases the court may interfere with the trustees’ decisions if not made in good faith or in a conflict of interest. This is illustrated by the recent decision of the Supreme Court of British Columbia in Pirani v. Pirani, 2020 BCSC 974.

During the reign of Ida Amin, four brothers immigrated to Canada. There names were Mohammed Aly Pirani, Madatali Pirani, Pyarali Pirani and Haider Pirani. Only Haider Pirani is still alive. The Pirani brothers established a successful business through family owned companies owning and operating hotels in Canada and in the United States. The two main companies were Pirani Enterprises and Piramco Investments Ltd. In 1993, they arranged an estate freeze of their companies. An estate freeze involves exchanging shares that increase in value with the company for other shares that have a fixed value. New shares are then issued for a nominal amount of money. These new shares are initially worth only the nominal value, but if the company grows, the new shares will become worth more. Often the new shares are either distributed to other family members or held in a family trust, often for the next generations. This is what the four Pirani brothers did.

Each brother had a holding company that held the new growth shares in two family companies. The shares in each holding company were held in four separate family trusts, one set up for the children and grandchildren of each brother.

One of the trusts was created by Mohammed Aly Pirani. In the decision, this trust is referred to as the “MAP Trust.” Mr. Mohammed Pirani was one of the initial trustees of this trust, together with his wife, and his brother Haider Pirani. After Mohammed Pirani’s death, his nephew Mustaq Pirani became a trustee. Mohammed Pirani’s wife also died, but no other trustee was appointed. This trust held shares in a holding company 438702 B.C. Ltd. (“702”) The beneficiaries of the trust were his children Mehboob Pirani (referred to in the decision as Meb), Fareed Pirani, and Arshad Pirani, as well as his grandchildren, Meb’s son Imran Pirani, and Fareed’s daughters Sheliza Pirani and Zaida Pirani. You may notice that the trustees are not beneficiaries.

One of the other trusts is referred to as the Madatali Trust which held shares in another holding company, 438703 (“703”). The trustees were initially Madatali Pirani, Haider Pirani and Meb Pirani. When Madatali died, no new trustee was appointed. The beneficiaries of this trust were Madatali Pirani’s three children, Mustaq Pirani, Bashir Pirani and Najma. You will notice again that the trustees are not beneficiaries. You may also notice that Meb Pirani is a beneficiary of MAP Trust, and a trustee of the Madatali Trust, while Mustaq Pirani is a trustee of the MAP Trust and a beneficiary of the Madatali Trust.

Although the terms of the trusts provided for a termination after 80 years, in each case the trust deed allowed the trustees to terminate the trusts earlier if they considered it advisable to preserve the capital of the trusts because of taxation. Under the Income Tax Act, Canada, the trusts would be subject to a deemed disposition of the trusts assets 21 years after the trust was settled, which would have resulted in significant taxes on the shares of the holding companies. But if the trusts were rolled out of the trusts to the beneficiaries before the 21st anniversary, the tax would be avoided (or really deferred until the beneficiaries sold the shares or died.

The trustees of each of each of the four trusts, including the MAP Trust and the Madatali Trust decided to wind-up the trusts by distributing the shares before the 21st anniversary. 

In winding-up the MAP Trust, the trustees, Haider and Mustaq as the trustees decided to give Meb voting control over the holding company 702, and 45% of the equity, while giving Fareed and Arshad 20% of the equity each, and Meb’s son, Imran, 15% of the equity. There was a twist in the plan. The trustees decided to do another estate freeze, essentially freezing the value of the shares distributed to the beneficiaries, and creating new growth shares, all of which were distributed to Meb.  The effect was that Meb would have voting control over 702 and all of the future growth in value. Before implementing the plan, the trustees removed Fareed and Arshad as directors of 702. Directors’ resolutions would be required to create new shares and implement the estate freeze.

The trustees of the other trusts followed a similar plan in respect of the shares of the holding companies held in each trust. In the case of the Madatali Trust, the trustees gave Mustaq the voting control and growth shares. In each case, growth shares were given to those beneficiaries most active in the businesses.

To implement an estate freeze it is necessary to value the company shares. The value of the new freeze shares issued in exchange for the old growth shares needs to be determined.  An appraisal firm, Duff & Phelps were hired to appraise the shares. However, the valuation was based on the values of various real estate holdings owned by Pirani Enterprises and Piramco Investments Ltd. These valuations of real estate were not based on professional appraisals, but were estimates made by Mustaq Pirani, which Madam Justice Sharma found were unreliable, and likely too low. The effect of a low valuation would be to undervalue the freeze shares, with the effect that the new growth shares would be worth more than a nominal value at the time of the freeze.

Fareed Pirani, Arshad Pirani, Sheliza Pirani and Zaida Pirani, all beneficiaries of the MAP Trust sued Haider Pirani, Mustaq Pirani, who were the trustees, Meb Pirani and Imran Pirani, who were beneficiaries, and the holding company 702. They alleged the following:

a)    The MAP Trustees committed breach of trust and breach of fiduciary duty, and breached the applicable standard of care. The breaches arose from the MAP Trustees’ acting with mala fides, for an improper purpose while in a conflict of interest.
b)    The Defendants are liable for conspiracy, knowing assistance and knowing receipt.
c)     The MAP Trustees colluded with Meb to deliberately injure the plaintiffs. They acted in concert to deprive the plaintiffs of their entitlement to a share of the Family Business in a manner that was deliberate, high-handed and self-interested causing the plaintiffs to suffer loss and damage.
d)    702 and Meb are liable for oppression and breach of fiduciary duty because of their removal of Fareed and Arshad as directors and the creation of the class D shares.

I am going to focus on the allegations that the MAP Trustees committed breaches of their fiduciary duties, or in other words, their duties of loyalty to the beneficiaries, and that Meb knowingly assisted in the breach of fiduciary duties. 

The defendants denied the allegations. The claims were advanced by beneficiaries of the MAP Trust, and the defendants focused their defence on the terms of the trust, which as noted gave the trustees the discretion to wind-up the trust, and gave them a broad discretion on how to distribute the shares. The trustees of the MAP Trust, Haider and Mustaq were not beneficiaries of that trust, and they argued that they had no conflict of interest.

However, Madam Justice Sharma took a broader approach, and considered the overlapping roles of the trustees and directors of the holding companies. The trustees of the four trusts addressed the winding-up of the trusts before the 21- year deemed disposition in concert. They went further than distributing the shares by implementing new estate-freezes and determined the direction of the family business, without properly considering the interests of the other beneficiaries.

She wrote at paragraphs 281, 284 and 285:
[281]     It is important to analyze their conduct in context. It is materially significant that despite the existence of separate trusts and Numbered Companies, the Defendants created and implemented a plan that dealt with four trusts together. They chose to act collectively to address the 21 Year Rule.
[282]     The trustees decided to implement an estate freeze for the purpose of differentiating the type of shares they wanted to bestow amongst the beneficiaries of each trust. Although I make no finding on this, the quality and independence of a valuation of trust assets may have carried less significance if the trustees knew they would be equally dividing all trust assets. However, that was not the case. I add that Meb and Mustaq acknowledged that obtaining a fair and independent valuation of trust assets was vital to the process of winding up the trusts.
[283]     By no later than May 2013, the trustees of each trust had decided what percentage of the frozen value would be distributed to which beneficiaries. They had also decided upon whom they would confer the control and all future growth of each of the Numbered Companies: for 702 that person was Meb, and for 703 that person was Mustaq.
[284]     In my view, one cannot separate out the Defendants’ decision (as directors in the Family Business) to restructure the Numbered Companies, from their distribution decisions as trustees, which conferred all future growth in each company to only specific pre-determined beneficiaries.
[285]     To the extent the Defendants assert their decisions as trustees was somehow isolated from their decisions about the corporate reorganization, I do not find the evidence supports that conclusion. Specifically, Meb’s insistence that he had “no involvement” in the MAP Trustees’ decision to allocate to him all the future growth in 702 rings hollow on the facts of this case. The Defendants collectively made decisions about the running and future operations of the Family Business.
The Court found that the trustees placed themselves in a conflict of interest and breached their duties of loyalty to the beneficiaries, by failing to act in good faith. They did not consult with other beneficiaries, despite advice from one of their trust lawyers to do so. As set out in the reasons for judgment:

[194]     The Defendants received advice about options to address the 21 Year Rule, but also how to go about choosing one of the options. They were strongly advised to inform and seek the view of all adult beneficiaries before decisions were finalized. Why? Because legally their duty as trustees required them to approach the complex task of winding up of the trust and make decisions only in the best interests of all beneficiaries. I note they were also advised to do this to maintain family harmony (see above, para. 180), but this does not detract from the legal foundation for this advice.
[195]     Given the overlapping roles within the Family Business and family trusts, they needed to do something to address the existing conflicts. They were obliged to ensure their judgment was not swayed by self interest, or indeed anything not consistent with the best interests of all beneficiaries. They did not follow any of the advice they received from Mr. Fish at the outset. It is difficult to conclude how they discharged their fiduciary obligations without following that sound legal advice.
Madam Justice Sharma was critical of the manner in which the shares were valued for the purpose of the new estate freezes. She wrote:

[295]     Thus, Meb and Mustaq had a personal financial interest that favoured an underestimation of trust assets. That conflict was not imposed upon them. Instead, it was created by the Defendants’ joint decision to confer on Meb and Mustaq all future growth in their family’s Numbered Company. The vehicle of that distribution was the distribution of trust funds, but the decision to give themselves all future growth was made at the beginning of the process. Indeed, the decision not to equally share future growth amongst all the beneficiaries was why they had to create new classes of shares in the Numbered Companies before the distribution of trust funds.
[296]     The plaintiffs adduced evidence that seriously questioned the accuracy of Mustaq’s estimates. That evidence strongly suggests that for the SeaTac Property and the properties in North Vancouver, the value he gave to Duff & Phelps was grossly low. The Defendants failed to counter that evidence.
[297]     More troubling, on that very, issue both Meb and Mustaq mislead the Court (see above, paras. 77-88). I conclude, from that lack of evidence and that testimony, that it is more probable than not that both Meb and Mustaq believed the figures supplied by Mustaq were inaccurately low. Given their roles as directors they knew the impact of the corporate restructure. Therefore, they understood how an undervaluation would benefit them as compared to beneficiaries who were to receive only a portion of the trusts’ frozen value. They did nothing about that. That conduct is dishonest, not in good faith and a blatant breach of their fiduciary duties.
She concluded with respect to the breach of fiduciary duties at paragraph 346:
a)    I am satisfied that the plaintiffs established Haider and Mustaq were in a prima facie conflict as the MAP Trustees because of their overlapping roles. They failed to persuade me that they conducted themselves in good faith and with honesty in the face of that conflict. I conclude that Mustaq’s duty of loyalty was impaired by his self-interest. I conclude Haider and Mustaq breached their fiduciary duties to the plaintiffs. 
b)    I am persuaded that the evidence establish that Meb knowingly assisted Mustaq and Haider in their breach of their fiduciary duties. I also conclude his conduct was not in good faith because he was guided by his self-interest.
c)     With regard to the process of winding up of the family trusts and the steps taken to restructure the Numbered Companies, the Defendants acted collectively. I conclude they all were in a prima facie conflict from the outset of the process. Mustaq and Meb failed to persuade me that in light of that, they adhered to their duty of loyalty to all beneficiaries. I conclude their actions and decisions were influenced by their self-interest and their conduct was not in good faith throughout that process.  
She ordered that Meb and Mustaq give up what they gained by breaching their duties, by order the disgorgement of some of the shares that they received, as well as disgorgement of some of the shares Imran received from his father.

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