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Cases, Illusory trust, Relationship Property, s. 182, Settlor; settlors, Settlors, sham, Sham trust, trust, Trusts

The Supreme Court Writes Back

The long-awaited decision (issued in fact as two separate decisions) in Clayton v Clayton were released today (23 March 2016).

The first decision relates to the Vaughan Road Property Trust (VRPT) and the second to the Claymark Trust.

Background

Mr and Mrs Clayton commenced a de facto relationship in 1986 and married in 1989. They separated in 2006 after 17 years of marriage, and their marriage was dissolved in 2009. They have two daughters. Shortly before their marriage, the parties signed a contracting out agreement. Under that agreement, Mrs Clayton was to receive a maximum of $10,000 for each year of marriage up to a maximum of $30,000.

At the time the parties met, Mr Clayton owned a  timber supply business and a block of land. The parties built a family home on that land during the relationship. The business owned two other blocks of land in Vaughan Road. By the time they separated, Mr Clayton had built up a significant sawmilling and timber processing business (the Claymark business).

The VRPT owned the land and buildings in Vaughan Road from which the Claymark business was operated while the Claymark Trust owned some adjoining land.

VRPT

The VRPT was settled on 14 June 1999 ( thirteen years after the relationship between the Claytons commenced). Mr Clayton is the settlor and sole Trustee of the VRPT. The discretionary beneficiaries include Mr Clayton, Mrs Clayton, and their two daughters. The daughters are the final beneficiaries.

Mrs Clayton has argued that the VRPT is a sham or, alternatively, that it is an illusory trust. The claim of sham has failed at all levels, but both the Family Court and High Court found that the VRPT was an illusory trust, albeit for differing reasons. The Court of Appeal overturned the finding that the VRPT was an illusory trust, but held that the power of appointment held by Mr Clayton held under the VRPT deed was relationship property, and that the value of that relationship property was equivalent to the net value of the assets of the VRPT.

The VRPT deed provides that Mr Clayton is settlor, sole Trustee, Discretionary Beneficiary and has powers to add and remove beneficiaries; but he is free from the normal obligations imposed on fiduciaries in family trust deeds.

Mr Clayton, in his personal capacity and as Trustee of the VRPT, challenged the Court of Appeal’s decision that his power of appointment in respect of the VRPT deed amounted to relationship property.

The Supreme Court disagreed. Significantly, Mr Clayton as trustee and a discretionary beneficiary could pay all of the Trust capital to himself.  This coupled with his ability to bring forward the vesting date, or to resettle in his own favour, resulted in a finding that notwithstanding the fact that the Court of Appeal was incorrect when it found that Mr Clayton could remove the final beneficiaries (he could not) his powers were rights or interests and therefore property for the purposes of the Property Relationships Act 1976.

Taking a substance over form approach to “the problem” (see [75]) and reflecting the need for “worldly realism” ([79]), the Supreme Court was satisfied that Mr Clayton’s powers collectively in respect of the VRPT (rather than only his power to appoint and remove beneficiaries) were properly classified as “rights” that give Mr Clayton an “interest” in the VRPT and its assets. The powers are thus property and as the VRPT powers were “acquired” by Mr Clayton after his relationship with Mrs Clayton began, the powers collectively are relationship property.

As to the position of the Discretionary or Final Beneficiaries, the Supreme Court noted at [93] that:

“… the breadth of the powers given to the Trustee under the deed, the lack of constraint on the exercise of those powers …  and the fact that, as Discretionary Beneficiaries, their interest is only the right to be considered, and as Final Beneficiaries their position is contingent on the trust capital not being distributed before the Vesting Day.”

As to the value of the power, the Supreme Court reasoned as follows:

[104] As Mr Clayton can appoint the assets of the VRPT to himself at any time, we see no reason to differentiate the value of the power to do this from the value of the assets to which the power relates. Indeed, some cases relating to general powers of appointment say that the power gives the donee of the power an interest tantamount to ownership of the assets to which the power relates.Treating the VRPT powers as having a value equal to that of the assets to which they apply can be seen as consistent with that approach to general powers of appointment.

[105] As counsel for Mrs Clayton argued, if Mr Clayton’s powers and entitlements under the VRPT deed were for sale, it is hard to see why Mr Clayton would not attribute to them precisely the same value as he would attribute to the net assets over which those powers give him virtually absolute control.

[106] This outcome is also consistent with the approach taken in Kennon v Spry, Charman v CharmanWhaley v Whaley and Kan Lai Kwan v Poon Lok To Otto.

[107] We conclude that the value of the VRPT powers is equal to the value of the net assets of the VRPT.”

Illusory Trust

The position of the Supreme Court regarding whether or not the VRPT was illusory is less clear-cut.  The essence of the Supreme Court’s view can be summarised, without deciding the point, that:

  • We do not see any value in using the “illusory” label: if there is no valid trust, that is all that needs to be said.
  • a finding that a trust deed is not a sham does not seem to us to preclude a finding that the attempt to create a trust failed and that no valid trust has come into existence [123]
  • defects  where say “the breadth of those powers can be said to bring into question whether the irreducible core of Trustee obligations referred to in Armitage v Nurse apply” do not deny the possibility that a valid trust may come into existence at some time in the future, for example, [if the trustee] was to be replaced by a new Trustee who did not have the range of powers such as those reserved to Mr Clayton.  See [124]
  • the facts of Clayton are very unusual and the “issue is unlikely to arise in the future”.

As to whether there is a distinction between a sham trust and an illusory trust, the final words are that the Supreme Court finds the term illusory unhelpful “a sham is a pretence: the terms of the document do not represent what the party or parties really intended. A finding of sham in this case would involve the Court assessing the subjective intention of Mr Clayton and concluding that the VRPT deed did not conform with his real intention.”

Irrespective of the terminology, a trust can be intended, but if the terms upon which the trust is executed, and to which the parties  agree are so inadequate that “despite their subjective intention to create a trust, they failed in their attempt to do so.”

The Claymark Trust

The decision with regard to the Claymark Trust relates to whether the Court of Appeal was wrong to find that this Trust was not a “nuptial settlement.”

The terms of the Claymark Trust can be summarised as follows:

  • the Claymark Trust was settled by Mr Clayton on 10 May 1994 during the parties’ marriage
  • the trust is a discretionary trust with beneficiaries that include Mr and Mrs Clayton and any children of Mr Clayton
  • the original trustees were Mr Clayton, Kim Thompson (an accountant) and Richard Pryce (a solicitor)
  • Mr Clayton had the power to appoint and remove trustees
  • the current trustees of the Trust are Messrs Clayton and Cheshire
  • Mrs Clayton’s evidence was that she was responsible for keeping the ledger book for this trust and communicating with third parties on behalf of the Trust until 2003
  • the primary purpose of this trust was to keep “assets out of the circle of bank guarantees”
  • there were no minutes or resolutions

The question for the Supreme Court was whether an order should have been made in regard to this trust under s 182 of the Family Proceedings Act 1980. Section 182 deals with nuptial settlements and allows orders varying the settlement to be made either for the benefit of the children or of the parties to the marriage. In exercising this discretion, a court may take into account the circumstances of the parties and any change in those circumstances since the date of the settlement, as well as other matters the court considers relevant. Also at issue was whether an order should have been made under s 44C of the Property (Relationships) Act 1976 (PRA).

The Family Court held that the Trust was not a nuptial settlement and therefore that no order under s 182 should be made. This was because the Trust was created for business purposes and Mrs Clayton had no expectation of acquiring an interest in business assets. The Family Court also refused to make an order under s 44C of the PRA. The decision of the Family Court on these issues was upheld by the High Court and the Court of Appeal.

The Supreme Court unanimously allowed the appeal relating to s 182 (with Elias CJ concurring for separate reasons with the reasons delivered by Glazebrook J for herself and for Young, Arnold and O’Regan JJ). The Supreme Court held that the courts below had not correctly applied s 182.

A two stage approach should be taken to s 182 claims.

The first stage is to determine whether a settlement is a nuptial settlement. In this regard a generous approach should be taken. To be a nuptial settlement, the arrangement must be one that makes some form of continuing provision for either or both of the parties to the marriage in their capacities as spouses. There must be a connection or proximity between the settlement and the marriage.

In deciding this the nature of the assets is not determinative.  What it requires is a clear connection between the marriage and the settlement of the Trust.  A nuptial settlement can be made for business reasons and contain business assets.

As noted at [34]:

” Where there is a family trust (whether discretionary or otherwise) set up during the currency of a marriage with either or both parties to the marriage as beneficiaries, there will almost inevitably be that connection. As Lord Penzance said in Worsley v Worsley:

“The Court would have a great difficulty in saying that any deed which is a settlement of property, made after marriage, and on the parties to the marriage, is not a post-nuptial settlement.”

Note that an exception may be where the trust is set up by a third-party and there are substantial other beneficiaries apart from the parties to the marriage and their children.  See In the Marriage of Knight.

The second step is to decide whether and, if so, how to exercise the discretion. It is not enough that there is a nuptial settlement.

Nuptial settlements are premised on the continuation of the marriage or civil union. The purpose of s 182 is to empower the courts to review a settlement to remedy the consequences of the failure of the premise on which the settlement was made. Each case will require individual consideration.

In Clayton there was a clear difference between the benefits Mrs Clayton would have received from the trust had the marriage continued and her current position after the dissolution of the marriage. This provides a clear basis for exercising the discretion under s 182.

Importantly, the trust was settled during the marriage to benefit the Clayton family unit. All of its assets were acquired during the marriage. Had the matter not been settled, the Supreme Court would have made an order to split the Trust equally into two separate trusts.

See: Lawyers see landmark in $28m trust battle

Also see Law News 22 July 2016 “Clayton, the Supreme court, and the rule of law’

 

References:

  • Decisions of interest for the decisions and the media releases
  • Clayton v Clayton [2016] NZSC 29
  • Clayton v Clayton [2016] NZSC 30
  • Tasarruf Mevduati Sigorta Fonu v Merrill Lynch Bank & Trust Co (Cayman) Ltd [2011] UKPC 17, [2012] 1 WLR 1721
  • Kennon v Spry [2008] HCA 56, (2008) 238 CLR 366
  • Kan Lai Kwan v Poon Lok To Otto (2014) 17 HKCFAR 414 (CFA)
  • Charman v Charman [2005] EWCA Civ 1606, [2006] 1 WLR 1053
  • Charman v Charman (No 4) [2007] EWCA Civ 503, [2007] 1 FLR 1246
  • Whaley v Whaley [2011] EWCA Civ 617, [2012] 1 FKR 735
  • Worsley v Worsley (1869) 1 LR P & M 648 at 651
  • In the Marriage of Knight (1987) 90 FLR 313 at 316

 

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