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Sham trust

Trust validity

In 2017 MezhProm Bank v Pugachev (see The Curious Story of the Angora Cat) heralded the possibility of a whole new sham genre of true effects as the new trust illusion.

Fast forward to 2019, and where has this taken us?  Perhaps surprisingly, not very far at all.

MezhProm Bank v Pugachev was soon followed by the Cook Islands decision of Webb v Webb, which related to a relationship property claim in the context of a crumbling empire and competing tax debts.  Mrs Webb was unsuccessful in the High Court of the Cook Islands, but found a more sympathetic ear on appeal.   The facts are, as set out in judgement, complex and this blog only considers the trust validity.  If the destructibility of foreign tax debts is of interest, the judgment will provide pleasant reading.  Of relevance for this recitation is a challenge to the validity of two trusts, one settled soon after Mr and Mrs Webb married, and the other soon after their separation.

Trust validity  

The key issue was whether, on an objective analysis of the powers reserved to the settlor, Mr Webb, in the relevant trust deeds, the settlor had evinced an intention to irrevocably relinquish a beneficial interest.

Reference was made to the decisions in MezhProm Bank v Pugachev and Clayton v Clayton.    However, as noted at [56]:

[56] Although cases such as Pugachev and Clayton illustrate the principle, we do not think it profitable to embark on a detailed comparison between this trust deed and the trust deeds in those cases. The ultimate question is whether the powers reserved to this respondent-settlor were inconsistent with an intention to irrevocably relinquish a beneficial interest. This requires careful interpretation of the particular deed in question. The matter is best tested by asking what would have occurred if the respondent had attempted to recover the property which he ostensibly settled on the trust. If a critical step in such an attempt would have required the assent of a truly independent person, or would have been subject to an enforceable fiduciary duty on his part, it could not be said that the purported settlement on the trust was ineffective. Conversely if, on an objective view of the deed, the respondent had retained for himself the uncontrolled power to recover the property it could not be said that he had divested himself of his beneficial ownership of the property. The latter situation might usefully be described as “objective nullity” to distinguish it from “sham”. A sham turns on the subjective intent of the parties involved. But in the end what matters is whether there is no valid trust, by whatever route that conclusion might be reached.

After an analysis of the control aspects of each trust the court formed the view that the deed for each trust failed “to record an effective alienation of the beneficial interest in the assets in question.” The powers retained by the settlor  meant in the eyes of the court  “that at any time he could have recovered, and still could recover, the property which he had purported to settle on the trusts. The trusts are therefore invalid.”

The main points canvassed in finding that the deeds were ineffective are set out at [57] to [64] of the decision.  While each case will fall to be determined on its own facts, the indicia of control and the weight given to control that is not absolute, but nevertheless persuasive, requires consideration.

[57] For the Arorangi Trust deed we find cl 14.1(c) to be a useful starting point. It permits the Trustee (the respondent from the outset) to act as such, and to exercise his powers and discretions notwithstanding that in any matter his interests or duty might conflict with his duty to the Trust Fund or any Beneficiary.
[58] Mr McAnally submitted that in context, cl 14.1(c) should be confined to individual transactions of a commercial nature. We do not think that the plain words of the provision can be read down in that fashion. We are reinforced in that view by two considerations. One is cl 3.2(a) which provides that in cases of doubt the interpretation of the deed is to favour the broadening of the powers, and the restricting of the liabilities, of the Trustee. The other is that the reference to “discretions” as well as “powers” readily extends to discretions affecting distributions to beneficiaries as distinct from mere commercial transactions entered into on behalf of the trust as a whole. For all practical purposes the provision is a denial of the fiduciary duties which would otherwise apply where the Trustee wishes to exercise his powers and discretions in his own favour.[31]
[59] The second preliminary matter is that as the sole Trustee, the respondent could have immediately appointed himself as Consultant under cl 5.1 (as he in fact did). Mr McAnally submitted that he could not have validly done so in that it would be a nonsense to appoint himself in order to give advice to himself. However the giving of advice is by no means the only function of the Consultant. The Consultant was also given various powers with respect to investments (cl 4.1), removal and replacement of trustees (cl 6.2), consent to acceleration of final vesting (cl 9.1) and consent to variation of the trust deed (cl 18.1). Nor was there anything to stop the respondent from giving the advice function purpose by appointing himself Consultant and then appointing an additional Trustee (as he in fact did) or replacing himself as Trustee.
[60] That is the background against which we turn to some of the self-benefit avenues which would have been open to the respondent had he been so minded.
[61] The first is that in his capacity as the sole Trustee the respondent could have made a distribution of capital and/or income to himself under cl 1.1 of the General Terms and Conditions in the Schedule.[32] The breach of fiduciary duty which that would otherwise entail is negated by cl 14.1(d).
[62] The second is that in his capacity as the sole Trustee the respondent could have either resettled the trust under cl 12, or varied its terms under cl 18 (the latter with his consent as Consultant), in such a manner as to permit the vesting of all trust property upon himself alone.
[63] The third is that as the appointer identified in cl 10.1, the respondent could have nominated himself as the sole nominated beneficiary in substitution for the existing nominated beneficiaries. Mr McAnally submitted that he could not have done so given that to vest property in a trustee who is also the sole beneficiary collapses the trust. But that is the point of the inquiry. If the respondent had retained to himself the power to restore the property to himself the result would be that he had not effectively alienated the beneficial interest in the first place.
[64] The final point is that even if he had resigned as Trustee, the respondent would have retained a high level of control in his capacity as Consultant. Some of the powers of the Consultant have already been mentioned. In addition the Consultant retained the important power to remove and replace Trustees (cl 6.2). The power conferred by cl 6.2 was to be exercised by the Consultant “at his absolute discretion and without giving reasons therefore”. It was clearly non-fiduciary[33] and in practice represented an important means by which the respondent could have disposed of uncooperative trustees. It is unnecessary for us to assess the significance of that power if it had stood alone. It is one of those powers which might be regarded as an important component of a bundle of rights and powers as matrimonial property. But for present purposes it suffices to say that it adds to the picture of a settlor who has never intended to alienate his beneficial interest for the purpose of the law of trusts.

That said, it is important to reflect on how trust is defined in the Trusts Act 2019 (see ss 12 to 15) , and that no aspect of the definition specifically considers control or alienation of beneficial interest.

For more information on sham trusts see Trust Series 2019 – Sham Trusts, Resulting Trusts and Other Trusts that fail 


  • Webb v Webb (Cook Islands) [2017] CKCA 4
  • MezhProm Bank v Pugachev [2017] EWHC 2426 Ch
  • Clayton v Clayton [2016] NZSC 29



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