Sham Trust Assignment

Description

Assignment

Sham Trust Assignment

Opinion Assignment 01

Equity
I have been asked to draft an opinion based on the supplied facts. This will
advise HB Construction’s (HBC) creditors, Jeremy and Wilma as to the
likelihood of the HB Developments Trust (HBDT) being declared either a
sham, alter ego or illusory trust. This will cover a number of legal issues and
414140_1



depend on how they apply to the specific facts. Initially this opinion will
discuss whether HBDT was validly constituted at the outset. Then we will
attempt to follow a timeline of key issues which will encompass asking the
following questions:
 Has Hank got complete control of HBDT?
 Does Lily not keeping proper records point to a sham trust?
 Are Lily and the trustees liable for breach of trust?
 Is the mistaken belief by creditors evidence that the transfer to the
HBDT should be set aside?
 Is the property of HBDT available to go in the relationship property
pool and therefore divisible?
 Can the Official Assignee set aside HBDT assets?
I conclude by advising that it is about 50% likely that the Court will declare
HBDT a sham and it is unlikely to declare HBDT either an alter ego or illusory
trust. Declaring HBDT a sham will result in “trust busting” where the property
of HBDT is divisible to both the creditors and Wilma.
Was the HBDT validly constituted?
Lord Diplock set-out the elements in a sham transaction as being:1
acts done or documents executed by the parties to the ‘sham’ which are intended by
them to give to third parties or to the court the appearance of creating between the
parties legal rights and obligations different from the actual rights and obligations (if
any) which the parties intend to create…for acts or documents to be a sham, with
whatever legal consequences follow from this, all the parties thereto must have a
common intention that the acts or documents are not to create the legal rights and
obligations which they give the appearance of creating. No unexpressed intentions of
a ‘shammer’ affect the rights of a party whom he deceived



The above test was held to apply to ascertaining of whether a trust was a
sham.2
As this English case occurred post Official Assignee v Wilson3
it is only
persuasive in New Zealand. In this case a trust was placed over the home by a
married couple. When they later borrowed money from the bank on the
1 Snook v London and West Riding Investment Ltd (1967) 2 QB 786.
2 Midland Bank Plc v Wyatt (1995) 1 FLR 696.
3 Official Assignee v Wilson (2008) 3 NZLR 45.
Jayne Sankey-O’Dwyer 1111626
security of the house they neglected to disclose that the trust existed until the
bank commenced recovery proceedings.
O’Regan and Robertson JJ held in Wilson4
that for a sham trust to exist the
settlor and trustee(s) must have a common intention to not create a trust from
the outset. You cannot look at later conduct.5

An arrangement is a sham when it is designed to conceal the true nature of
what is going on.6
The transaction acts as a cloak or façade for the true legal
arrangement between the parties.7
When both the settlor and trustee have a
common (subjective) intention to mislead, the trust will be declared void ab
initio. The lack of intention gives grounds to void the trust.8
The case of
Hotchin discussed this intention finding that “it’s inevitable that the parties’
subjective intentions must be considered”. Therefore evidence of a subjective
sham is required. In this case, there was a common intention between the
trustees and settlor. Therefore, it is likely that the HBDT was validly
constituted. A common intention by all parties of creating a sham would be
necessary for a sham trust to have been created.
The decision from Official Assignee v Wilson9
posited a serious issue where
many commentators have said we will be unable to prove sham trusts in New
Zealand due to this requirement.
In June 2009 David Hayton J, from the Australian jurisdiction, was present at
the Transcontinental Trusts Conference, where he was critical of New
Zealand’s approach to sham alter-ego trusts, saying that the Court of Appeal
4 Official Assignee v Wilson.
5 At 23.
6 Official Assignee v Wilson, at 26; Paintin and Nottingham Ltd v Miller Gale and Winter
[1971] NZLR 164 (CA) at 168; and Bateman Television Ltd v Coleridge Finance Co Ltd
[1969] NZLR 794 (CA) at 813.
7 Paintin and Nottingham Ltd v Miller Gale and Winter, at 168
8 Nicola Peart “Trust Busing Looking through Trustd’ (paper presented to the New Zealand
Law Society Truss Conference, June 2007) 174.
9 Official Assignee v Wilson, above n 3.
3
414140_1
decision in Official Assignee v Wilson was incorrect. He suggested we should
look at the objective effect of the parties’ conduct, rather than the “secret,
dishonest intentions that were never revealed”.
Therefore, it is likely that if we do follow Hayton J we can show that the
conduct of the settlor and trustees has changed and that now we are looking at
a sham trust.
Has Hank got complete control of HBDT?
In Hotchin, a New Zealand case, a trust was void for lack of intention to create
a valid trust. It was alleged that the KA4 trust was “…set up to conceal Mr
Hotchin’s continued enjoyment of all the normal incidents of ownership in
respect of the trust property. He maintained “full and effective control over the
assets.”10 It was found that the trust was the alter ego of Mr Hotchin as the trust
lent Mr Hotchin money without requiring repayment and the trust transactions
were done according to their benefit to Hotchin. This meant that the property of
the KA4 trust was actually the property of Hotchin personally and held on
resulting trust where it was accessible to creditors.
Persuasive English case law utilised a new approach to family trust law. As this
was decided the year prior to Wilson it now persuasive authority only. In this
case, Mr Charman was the settlor, who reserved to himself the power to
appoint and remove trustees. He included the clause in the trust to say that
assets were to be transferred to him without question, and that he alone should
receive all income. The Court decided against Mr Charman and dismissed his
appeal saying he exerted so much control as to make all the assets in the trust
his property.11
Supporting this is persuasive Australian case law from two tandem cases where
the full Court of the Family Court of Australia looked at the issue of control.
Again the husband in each case was in control of the assets of the trust to such
10 Financial Markets Authority v Hotchin [2012] NZCA 155 at [52].
11 Charman v Charman [2007] EWCA Civ 503, [2007] 1 FLR 1246.
Jayne Sankey-O’Dwyer 1111626
an extent that the trust property was the husbands own.12 This meant that the
trust was duty bound to give the property to him under the terms of the trust.
Further supporting this, the Federal Court of Australia held that the trustee of a
discretionary trust controlled the trust to the extent that he was the alter ego of
a beneficiary.13 Applying this, Hank used the assets and property of HBDT like
it was his own. Hank also demonstrated complete control by having what he
wanted to happen within HBDT occur.
Therefore, it is likely that utilizing the power principle Hank has retained
complete control. This means that using this approach HBDT is not deemed to
be a trust, as Hank is not acting in the best interests of all the beneficiaries.
This also leaves the trustees vulnerable to a legal action by the other
beneficiaries (the two children) as the trustees are not performing as trustees
should.

Does Lily not keeping proper records point to a sham trust?
Evidence of poor administration of the trust is insufficient, of itself, to establish
a sham. This may be evidence of a breach of trust, but the fact that the trustees
have acted poorly in managing the trust does not establish an intention that the
trust operate as a sham14
.
Applying this, as solicitor to the HBDT Lily failed to keep proper records of
the HBDT matters as required. However, it is likely that Lily and the other
trustees not keeping proper records concerning HBDT does not point to a sham
trust when considered in isolation.
12 In the Marriage of Ashton (1986) 11 Fain LR 457 (FamCA); In the Marriage of Goodwin
(1990) 14 Fain LR 801 (FamCA).
13 Australian Securities and Investments Commission v Carey (no 6) Australian Securities and
Investments Commission v Carey (No 6) [2006] FCA 814, (2006) 153 FCR 509.
14 Official Assignee v Wilson (2008) 3 NZLR 45 at 92
5
414140_1
Are Lily and the trustees liable for breach of trust?
It is an established principle of trust law that “the existence of a coherent
system of administration is the only way of ensuring that trustees fulfil their
duties under the law and avoid liability for breaches of trust.”15
Applying this, the trustees failed to do their duties by not keeping and
maintaining proper records. Therefore, it is likely that Lily and the trustees are
liable for breach of trust of HBDT. It should be noted that only the
beneficiaries of HBDT, being the two children, can enforce the trust and bring
legal action against Lily and the trustees.
Is the mistaken belief by creditors evidence that the transfer to the trust
should be set aside?
Where a debtor acts in bad faith and with the intent to hinder, delay or defeat
the legitimate interests of a creditor by divesting themselves of an asset that a
creditor could rely on being available to satisfy their debt in the case of default,
the court will set that transfer aside if intent is proven.16
If the circumstances are such that the insolvent must have known that his
creditors would not be paid, or must have known that he was exposing them to
a significant risk they would not be paid, the Court will set aside the gift or
transfer; Regal (Hastings)17
.
Applying this, Hank’s creditors continued to supply his company with supplies
on the mistaken belief that Hank still personally owned the trust assets. It could
be argued that Hank knew on the transfer of the property to the trust that his
creditors would probably not be paid. Therefore, it is likely that Hank
continuing to lead creditors in the mistaken belief that he still personally owned
trust assets was evidence that the transfer to the trust should be set aside by the
Court. It should be noted that if Hank did this expressly through an untrue
statement in an advertisement or registered prospectus where subscribers were
15 “Administration of Trusts” (1999) New Zealand Law Society Trusts Conference at p 165.
16 Property Law Act 2007, s 345.
17 Regal Castings Ltd v Lightbody [2008] NZSC 87, [2009] 2 NZLR 433.
Jayne Sankey-O’Dwyer 1111626
sought, this could leave him open to both civil and criminal liability under the
Securities Act.18

Is the property of HBDT available to go in the relationship property pool and
therefore divisable?
‘The question of whether a property interest arises when a family trust is
effectively under the control of one of the parties is moot. Such control may
arise for instance where a party has power of appointment in the sense of
making distributions or in the sense of appointing trustees (etc).’19
Section 25 of the Property (Relationships) Act 1976 says “… the court may:20
(a)make any order it considers just—
(i)determining the respective shares of each spouse or partner in the relationship
property or any part of that property; or
(ii)dividing the relationship property or any part of that property between the spouses
or partners
Due to a clause Mr Clayton had put in the trust which said in his personal
capacity Mr Clayton had the power to add and remove beneficiaries. The Court
found such a power was actually tantamount to property ownership within the
bundle of rights theory.21 Supporting this is the Court of Appeal referring to a
bundle or package of rights associated with trusts.22

Further supporting this is the finding where the High Court of Australia treated
the trust property as a property interest and brought the trust property into the
pool for division.23
18 Civil liability is under ss 55A to 57, while criminal liability is under ss58 — 60 The
Securities Act 1978.
19 Classification of Relationship Property at 7.320.
20 Property (Relationships) Act 1976, s 25.
21 Clayton v Clayton [2015] NZCA 30.
22 Walker v Walker [2007] 2 NZLR 261.
23 Kennon v Spry (2008) 238 CLR 366.
7
414140_1
Applying this, Hank had unlimited access to the trust property, with such a
power being actually tantamount to property ownership within the bundle of
rights theory.
Therefore, it is likely that the property of HBDT will be available to go in the
relationship property pool.
If Hank is declared bankrupt, can the Official Assignee set aside HBDT
assets?
Property of the insolvent vests upon bankruptcy in the Official Assignee. This
includes all trust property the bankrupt has a beneficial interest in upon
insolvency.24 A gift by a bankrupt to another person may be cancelled on the
Assignee’s initiative if the bankrupt made the gift within 2 years
immediately before adjudication.
25
Applying this, Hank set up the HBDT when his company experienced financial
trouble and is one of the beneficiaries. Although it is not expressly stated, as
the creditors continued to supply HBC it can be inferred that HBC would not
pass a solvency test, if not already in liquidation, and that the events of
property transfer took place within the past 2 years. Therefore, it is likely that
Hank is bankrupt and the Official Assignee holds all Hanks beneficial interest
of HBDT and that the assets will be added to the unsecured creditor pool.
Conclusion
The “busting” of the HBDT is one possibility. Here ownership of the trust
assets would no longer reside with the trustees. Section 44 of the Property
Relationships Act 1976 dictates that the property held in trust would be
relationship property and available for division.26 It is possible that prior to the
division of property between the spouses the creditor debts would be taken
from the available pool. After that the remainder would be divided equally
between the spouses. Although the recognition of trust property as being
24 The Insolvency Act 2006, s101.
25 Section 204.
26 Property (Relationships) Act 1976, s 44.
Jayne Sankey-O’Dwyer 1111626
relationship property has resulted from recent high profile decisions, this
approach is not guaranteed.
For the above result a sham trust would have to be declared. For a trust to be a
sham it must be correct to say the settlor and trustees did not intend the trust to
take effect according to the terms of the trust, coupled with an intention to
deceive other people. Alternatively, if Hank is bankrupt, the Official Assignee
could take control of the HBDT property which Hank has a beneficial interest
in and make it available for unsecured creditors.
It is unlikely that the Court would declare HBDT an alter ego. This is because
the application of the concept has fallen out of favour with local Courts over
recent times. Here the trust is said to be the alter ego of a person, usually the
settlor.
It is unlikely that the Court would declare the HBDT illusory. This is what the
lower Court did in Clayton27 and the Court of Appeal in this case disregarded
such a notion.
Therefore it is about 50% likely that the Court will declare HBDT a sham and
it is unlikely to declare HBDT either an alter ego or illusory trust. Declaring
HBDT a sham will result in “trust busting” where the property of HBDT is
divisible to the creditors and Wilma.
27 Clayton v Clayton [2015] NZCA 30.
9
414140_1
Bibliography
A. Cases
1. New Zealand
Bateman Television Ltd v Coleridge Finance Co Ltd [1969] NZLR 794 (CA).
Clayton v Clayton [2015] NZCA 30.
Financial Markets Authority v Hotchin [2012] NZCA 155.
Regal Castings Ltd v Lightbody [2008] NZSC 87, [2009] 2 NZLR 433.
Official Assignee v Wilson (2008) 3 NZLR 45.
Paintin and Nottingham Ltd v Miller Gale and Winter [1971] NZLR 164 (CA).
Walker v Walker [2007] 2 NZLR 261.
2. England and Wales
Charman v Charman [2007] EWCA Civ 503, [2007] 1 FLR 1246.
Midland Bank Plc v Wyatt (1995) 1 FLR 696.
Snook v London and West Riding Investment Ltd (1967) 2 QB 786.
3. Australia
Australian Securities and Investments Commission v Carey (No 6) [2006] FCA
814, (2006) 153 FCR 509.
In the Marriage of Ashton (1986) 11 Fain LR 457 (FamCA).
In the Marriage of Goodwin (1990) 14 Fain LR 801 (FamCA).
Kennon v Spry (2008) 238 CLR 366.
B. Legislation
Insolvency Act 2006.
Property Law Act 2007.
Property (Relationships) Act 1976.
C. Books and Chapters in Books
Lexis Nexis New Zealand “Administration of Trusts” (1999) New Zealand
Lexis Nexis New Zealand Classification of Relationship Property Law Society.
Withers “When is a trust not a sham?” nd Withers LLP.
Jayne Sankey-O’Dwyer 1111626
D. Journal Articles
Tappenden, S. (2009). The family trust in New Zealand and the claims of
‘Unwelcome Beneficiaries’. Journal of Politics and Law, 2(4), 17-25.
E. Conference Papers
Peart, N “Trust Busing Looking through Trustd’ (paper presented to the New
Zealand Law Society Truss Conference, June 2007) 174.

Reviews

There are no reviews yet.

Only logged in customers who have purchased this product may leave a review.