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Appointor; power of appointment, Illusory trust, protector, Relationship Property, Settlors, Sham trust, Taxation, trust, Trustee liability, Trustees, Trusts

Invalidity upheld

Webb v Webb relates to whether a tax debt owed by the former husband in New Zealand is enforceable in the Cook Islands, and what that means in the context of the division of matrimonial property in the Cook Islands; the validity of two trusts settled on somewhat unusual terms; and valuation considerations when a “financially dominant spouse fails to disclose relevant documents and information.”

See Trust Validity for the background to this case.

During the marriage Mr Webb settled the Arorangi Trust.  Mr Webb nominated himself as trustee.   The beneficiaries of the Arorangi Trust were Mr Webb and his son Sebastian (who was born from a previous marriage).  The Arorangi Trust owned property interests in the Cook Islands.  Separately Mr Webb was embroiled in a dispute with Inland Revenue in New Zealand that resulted in a tax debt in excess of $26 million. 

Following the end of Mr Webb’s marriage to Mrs Webb, Mr Webb began a new relationship and the Webb Family Trust was settled by Leslie Ellison.  No reasons were established as to why Mr Ellison settled the Webb Family Trust.  Assets of the Arorangi Trust were transferred to the Webb Family Trust for nominal value.  The Webb Family Trust was not a beneficiary of the Arorangi Trust.

The matter was heard pursuant to the (New Zealand) Matrimonial Property Act 1976, which still has application in the Cook Islands (but not the subsequent amendments that led to Property (Relationships) Act 1976).

The Court of Appeal held that Mr Webb’s tax debt should not be taken into consideration for the purposes of the division of relationship property as it was not enforceable in the Cook Islands and that the Arorangi Trust and the Webb Family Trust (the Trusts) were invalid because the deeds for each of the Trusts failed to record an effective alienation of the beneficial interest in the assets of the Trusts.

With respect to the terms of the Arorangi Trust the Privy Council noted as follows:

” 80. I must now consider the deeds in issue in this appeal and for this purpose I can focus on the Arorangi Trust. The terms of this deed are concise and clear and have a number of aspects which merit emphasis at the outset. First, Mr Webb is appointed as sole trustee (the Trustee) and the trust is established for just two beneficiaries, Mr Webb and his son Sebastian (clause 2).

81. Secondly, the deed provides for the appointment by the Trustee of a consultant (the Consultant) whose role is to assist the Trustee in the administration and management of the Trust and to advise the Trustee on all matters relating to the Trust’s investments (clause 5); who is empowered, at his absolute discretion and without giving reasons, to remove the Trustee and appoint a replacement (clause 6.2); who may request with any nominated beneficiary the early vesting of the property of the Trust (clause 9.1); and who is empowered to consent to a variation by the Trustee of the trust deed (clause 18.1). Mr Webb could and did appoint himself as Consultant at the outset and so reserved to himself all of these powers.

82. Thirdly, the Trustee, Mr Webb, is permitted to act as trustee and to exercise all the powers and discretions conferred upon him by the deed notwithstanding that his interests may conflict with his duties to the funds of the Trust or any beneficiary (clause 14.1(c)).

83. With these points in mind it is convenient to consider next various ways in which it is said that Mr Webb can exercise these powers to secure the benefit of the trust property to himself. The first and most important is through the exercise of the power conferred by clause 10. This reserves to Mr Webb as settlor the power to nominate himself as sole beneficiary in place of the existing beneficiaries and in that way to become settlor, Trustee, Consultant and sole beneficiary. It is important to note that Mr Webb enjoys this power as settlor and not as Trustee and that, as settlor, he is not subject to any fiduciary duty, irrespective of the operation of clause 14.1(c).

84. Another is conferred by clause 1.1 of the General Terms and Conditions. This, so it is said, confers on Mr Webb, as sole Trustee and in his uncontrolled discretion, the power to pay and apply the whole of the capital and income of the Trust for his personal use and advancement as a beneficiary and to the exclusion of any other beneficiary. Further, he is not obliged to preserve the assets or the income generating capacity of the Trust. The Court of Appeal considered that any breach of duty the exercise of this power would otherwise entail is negated by clause 14.1(c). I do not agree. Clause 14.1(c) confers on Mr Webb an entitlement to act notwithstanding that his duty as Trustee may conflict with his duty to the trust fund or to any beneficiary. However, he remains a fiduciary and must exercise the powers conferred on him in a manner which is consistent with his fiduciary duties. Clause 14.1(c) does not exonerate him from all possible breaches of trust.

85. The third is for Mr Webb to exercise the powers conferred on him as Trustee by clause 12.1 to resettle the assets of the Trust upon the trustees of any trust anywhere provided that other trust includes among its beneficiaries one of the beneficiaries of the Trust (of which Mr Webb is one); and, by clause 18.1, with the prior written consent of the Consultant (again, Mr Webb), to vary the terms of the Trust deed; in either case in such a way as to ensure that all of the assets of the trust vest in him. However, clause 14.1(c) would not exonerate Mr Webb from a breach of trust in this context any more than it would in respect of the exercise of the power conferred by clause 1.1 of the General Terms and Conditions.”

With respect to the Webb Family Trust, which was settled by Mr Ellison (presumably as a nominee) the Privy Council noted at 88 that “… Mr Ellison purported to settle in trust only NZ$ 10 and it was plainly intended by Mr Webb that this would operate as a vehicle into which he could at a later stage transfer matrimonial property…”

At 87, the Privy Council distinguised between a sham and the failure to make effective dispositions of property as follows:

“87. There is, however, no inconsistency between the finding by Potter J, upheld by the Court of Appeal, that the trusts are not shams and a conclusion that Mr Webb’s attempts to create the trusts have failed or are defeasible. Acceptance that Mr Webb intended to create trusts does not in any way preclude a finding that he reserved such broad powers to himself as settlor and beneficiary that he failed to make an effective disposition of the relevant property. Moreover, and as I have explained, the powers of clause 10 are conferred on Mr Webb as settlor, not in his capacity as Trustee or Consultant. These powers were therefore amply sufficient for Mr Webb to arrange matters in such a way that he alone would hold the trust property on trust for himself and no-one else, with the consequence that the legal and beneficial interest in all of that property would vest in him.”

The conclusion of the Privy Council is recorded at [89] as follows:

“… I will therefore confine myself to the substantive question whether Mr Webb’s powers under each of the trust deeds were such that, in equity and in all of the circumstances of this case, he can be regarded as having had rights in the trust assets which were indistinguishable from ownership. In my view he plainly can. Mr Webb had the power at any time to secure the benefit of all of the trust property to himself and to do so regardless of the interests of the other beneficiaries. In my opinion, for the reasons set out at para 87 above, the Court of Appeal was plainly entitled to find as it did that the trust deeds failed to record an effective alienation by Mr Webb of any of the trust property. The bundle of rights which he retained is indistinguishable from ownership.”

The essential finding is that the disposition of property was ineffective due to the terms of the trusts onto which property was purportedly settled. The language used at times conflates trust terms in respect of the initial trust settlement and consequences of further settlements onto the same terms.

The message in the decision is clear in that where trust terms are such that the irreducible core of obligations required to establish a trust cannot be identified with any certainty; a finding that there has been no alienation of property, whatever the form of that finding, can be expected.

Tax debt

The majority of the Privy Council held that the tax debt should not be taken into account in determining the value of the Webbs’ matrimonial property on the basis that the debt is unenforceable in the Cook Islands.

Nominee settlor

The role of a nominee settlors was also briefly considered as Mr Webb had arranged for his tax advisor, to settle one of the trusts with the sum of $10. However, the view of the Privy Council set out at [88] was that it “made no material difference” as “it was plainly intended by Mr Webb that [the trust] would operate as a vehicle into which he could…transfer matrimonial property… it is a reasonable inference that [the nominee settlor’s] activities… in connection with his trust were carried out by him under the direction and control of Mr Webb and his nominee.”

References:

  • Webb v Webb [2020] UKPC 22

Discussion

2 thoughts on “Invalidity upheld

  1. Can’t the NZ IRD use the convention on mutual administrative assistance in tax matters to get the tax debt collected in the Cook Islands?

    Posted by David Hillary | August 10, 2020, 6:17 pm

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