Invalidity of trusts - Don't let a faulty trust ruin your legacy. Get legal expertise you can trust!

Invalidity of Trusts

In summary invalidity of the trust can result from:

•        The trust not complying with the three certainties required for there to be a valid trust, see [4.6.1];

•        There being no intention to create a trust including conduct in the administration of the trust, showing that there was no intention to create a trust;

•        The trust being a “sham”. If the scheme of a trust, including the deed, is intended to be a mere facade, behind which other activities might be carried on, the words of the deed will be disregarded, and it is referred to as a “sham” trust. This matter is dealt with in detail in Sham Trusts.

 What is frequently overlooked is that in cases where the trustees genuinely obtain and then retain control over the trust assets and exercise their discretion to do what is best for the beneficiaries, the trust cannot be declared a sham.

It is accordingly important that the powers reserved to settlors, appointors or protectors are not such as would result in a Court concluding that any of the above problem situations has come about. It is for those reasons important that no provision in the trust deed (including protector provisions) negates the absolute discretion of the trustees or obliges them to take any form of action, save to consider the exercise of the power and a request from a person who is within the ambit of the power.1

4.6.1 The three certainties

Provided a sole trustee does not hold property on trust for himself or herself as the sole beneficiary, a trust will be valid if it meets three certainties. These were set out by Lord Langdale in the leading case of Knight v Knight:2 

(a)    The words used must be couched that, taken as a whole, they may be deemed to be imperative. In other words there must be language or conduct which shows a clear intention to create a trust;

(b)    The subject matter of the trust must be certain. In other words it must be clear what property is to be held subject to the trust;

(c)    The persons or objects intended to be benefited must also be certain. A discretion given to a trustee to select objects will be valid if the objects from which the trustee must choose are clearly designated.

4.6.2 Certainty of intention — the settlor’s intention to create a trust

Those seeking to establish the legality of the express trust must show that the alleged settlor had the intention required to constitute a trust. As Gummow J stated in Herdegen v Federal Commissioner of Taxation:3

... if there is the necessary certainty in identity of trustee, subject matter and beneficiary, then in any given case it will be necessary for those propounding the express trust to establish on the part of the alleged settlor the presence of the necessary intention to constitute a trust. The relevant principles are explained by Herring CJ in Re Armstrong (dec’d) [1960]VR 202 at 205–206 and by Megarry V-C in Re Snowden [1979] Ch 528  at 536 E–H. In the present proceedings, the alleged settlors are also the alleged trustees. In divining intention from the language they employed, the Court may look to the nature of the transaction and the circumstances in order to infer intention: Trident General Insurance Co Ltd v McNeice Bros Pty Ltd (1988) 80 ALR 574; 62 ALJR 508 at 514 per Mason CJ and Wilson J.

 For the creation of a trust, the intention to do so must exist at the time of its creation. If, when considering all the circumstances the Court is of the opinion that the settlor did not mean to create a trust, the Court will not impute a trust. Furthermore, when property is put in the name of a trust, there is always a question (however obvious the answer may generally appear to be) as to whether this was done with the necessary intention to subject the property to the terms of the trust.

Even where a trust deed has been prepared, if the parties to the deed (the settlor and the trustee(s)) had no intention of creating a trust, there will be no trust, regardless of the form of words used. In such cases, no question of a “sham trust” arises. As the Court of Appeal held in Clayton v Clayton:4

... If evidence establishes that, notwithstanding the existence of a document described as a deed of trust, the parties to the deed (the settlor and the trustee(s)) had no intention of creating a trust, there will be no trust.5 In this event any property the subject of the “trust” will be regarded as still belonging to the “settlor”. Where legal title to the property has been transferred to a purported trustee who is not the settlor, the trustee holds the property on resulting trust for the settlor, in whom the beneficial interest remains.6 The property will be available to third party claimants against the settlor.

 Conversely, as the Supreme Court held in Clayton v Clayton [Vaughan Road Property Trust]7 “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”.

The test of whether a trust has been created was stated by Megarry V-C in Tito v Waddell (No 2)8 as being “whether in the circumstances of the case, and on the true construction of what was said and written, a sufficient intention to create a true trust has been manifested”.

In Belton v Commissioner of Inland Revenue9 Hutchison ACJ held the intention need not be couched in any formal language; it may even be inferred from conduct taken into account along with such words as there may be.10 He held that “in case of doubt, the contemporaneous and subsequent acts of the settlor may be looked at”.

An oral trust can be created if the settlor has the necessary intention to constitute himself, herself or itself a trustee in favour of the trustees in relation to definite property.11 In the case of land, the declaration of trust must be in writing, but it is sufficient if the writing comes into existence before any action is brought.12

It is clear from the House of Lords decision in Twinsectra Ltd v Yardley13 that when considering whether a settlor intended to create a trust, his or her subjective intention is irrelevant. The issue in that case was whether, when transferring money to a solicitor’s client account to be dealt with in a certain manner, the transferor Twinsectra had created a trust. This raised the question of whether Twinsectra, acting through its “moving spirit” Mr Ackerman, intended to create a trust. The House of Lords held that Mr Ackerman’s subjective intention was irrelevant. His intention had to be ascertained from the document. Thus Lord Hoffman said:14

As for Mr. Ackerman’s understanding of the matter, that seems to me irrelevant. Whether a trust was created and what were its terms must depend upon the construction of the undertaking. Clauses 1 and 2 cannot be ignored just because Mr. Ackerman was not particularly interested in them.

As Lord Millett observed:15

A settlor must, of course, possess the necessary intention to create a trust, but his subjective intentions are irrelevant. If he enters into arrangements which have the effect of creating a trust, it is not necessary that he should appreciate that they do so; it is sufficient that he intends to enter into them.

Where a person’s intention in creating a trust is to benefit only him or herself, equity will not recognise that as a sufficient intent to give rise to a trust. A trustee advising that he or she must “seek my client’s instructions”, or always seeking the advice of the “client” before making decisions concerning the trust assets, could provide sufficient evidence for a Court to hold there was no trust because the settlor did not intend the trustees to assume the rights of the owners of the property, with an equitable obligation to deal with the property for the benefit of the beneficiaries.

In Commissioner of Stamp Duties (Queensland) v Jolliffe16 the High Court was concerned with the effect of a man having paid a substantial sum into a savings account in the name of his wife, with his own name added as trustee. Knox CJ and Gavan Duffy J upheld the trial Judge’s finding that:17

it was not the real intention of the respondent to make a gift to his wife, but that the money was placed in the account for the sole purpose of procuring interest which the respondent believed would not be procurable... if the money were placed in his own name.

Their Honours added; there was “an insuperable obstacle” in the way of the appellant, who was seeking to show a trust. They said:

We know of no authority, and none was cited, which would justify us in deciding that by using any form of words a trust can be created contrary to the real intention of the person alleged to have created it. In our opinion the law is accurately stated in Lewin on Trusts, 11th ed, at p 85: ‘It is obviously essential to the creation of a trust, that there should be the intention of creating a trust, and therefore if upon a consideration of all the circumstances the Court is of opinion that the settlor did not mean to create a trust, the Court will not impute a trust where none in fact was contemplated.’

If the certainty of intention to create a trust is not present, the Court may find, depending on the circumstances in which the purported trust was established, that instead of a trust a valid outright gift has been made, or that the gift is imperfect and the property remains with the original owner.17a

4.6.3 Certainty of objects

In relation to the certainty of objects, Lord Evershed MR in Re Endacott18 stated:

No principle perhaps has greater sanction of authority behind it than the general proposition that a trust by English law, not being a charitable trust, in order to be effective, must have ascertained or ascertainable beneficiaries.

Accordingly, for a non-charitable trust to be valid, it must be possible to say with certainty that any given person is or is not a member of the class of beneficiaries: McPhail v Doulton.19 In the case of discretionary trusts the rules which determine whether the trust will fail for uncertainty regarding beneficiaries has changed over the years, and will undoubtedly change in the future.

Lord Wilberforce in McPhail v Doulton20 established that a discretionary trust could fail:

… where the meaning of the words used is clear but the definition of beneficiaries is so hopelessly wide as not to form ‘anything like a class’ so that the trust is administratively unworkable or in Lord Eldon LC’s words one that cannot be executed (Morice v Bishop of Durham). I hesitate to give examples for they may prejudice future cases, but perhaps ‘all the residents of Greater London’ will serve. I do not think that a discretionary trust for ‘relatives’ even of a living person falls within this category.21

Not only must the class of beneficiaries be certain, but some person must become absolutely entitled to the trust property on or before the expiry of the perpetuity period. A trust “for the longest period allowed by law, that is to say, until the period of 21 years from the death of the last survivor of all persons living at my death” failed, despite meeting the perpetuity rules, because it was not possible for the trustees to find out when the last person living at the settlor’s death eventually died: Re Moore.22

Trustees must ensure the definition of beneficiaries is not vague or unworkable.

The consequence of there being no certainty of objects was that the trust failed by reason of uncertainty, and the trust funds reverted to the settlor:23

[130] As a consequence, the applicants do not have the responsibility or possess the power as trustees to retain and manage the trust funds which, in the absence of the existence a valid and effective trust, reverts to the estate of Rex White, to which Mrs White is entitled as the sole beneficiary of his estate. …
[132] The result of the Court’s finding is that the applicants do not have any power or authority to use or apply the funds that they held as trustees of the RWFT for any purpose other than repaying and transferring the funds through the executor of the Rex White estate and thereby on to Mrs White. The applicants are not authorised or empowered to use or apply any of the funds for or towards the payment of costs, expenses or legal fees without prior approval of the Court. 

In offshore financial centres (tax havens) it has been common to establish “blind trusts” with the Red Cross or another charity named as the sole beneficiary, but with the power to add the “real beneficiaries” later as additional beneficiaries.

If the trust deed provides that the charity can only take in default of appointment of other beneficiaries at the end of the trust period, then there are in the interim no beneficiaries interested in the trust property, and nobody in whose favour the trust can be enforced. The trust is therefore unenforceable and void. Assuming that the trust was valid, the failure of the trustee in the exercise of their discretion to give any consideration to the charity as a beneficiary could result in liability for breach of trust.

For there to be accountability the beneficiaries should be told they are beneficiaries, as otherwise there is no one who knows of their right to enforce the trust.24

If it is not possible to ascertain the object of the trust, although the other certainties are satisfied, a court will find that the trustees hold the property on a resulting trust for the settlor or the testator’s estate.24a

4.6.4 Certainty of property

As to certainty of property Gummow J in Herdegen v Federal Commissioner of Taxation stated:25

… there must be certainty also as to the property bound by the trust (Federal Commissioner of Taxation v Clarke (1927) 40 CLR 246 at 283–285, Scott on Trusts, 4th ed, 1987, paras 76, 77).

If the only amount settled on the trust is the customary $10.00 that must be paid by the Settlors into the trust bank account (if any). Alternatively it can be paid by the paying part of the invoice for the establishment of the trust. It is important that how it has been paid is documented.

However obvious it may appear, there must be an intention on the part of the creators of the trust to subject the property to the terms of the trust before the property will be owned by the trust. In Joyce v Ashfield Municipal Council,26 Walsh JA stated:27

I think it appears that the Court found itself in the position that the evidence placed before it concerning the transactions which took place and concerning the intention or the purposes of those who took part in them (that is, the appellants and the persons who were stated to be donors and lenders of money which was used in the transactions) did not satisfy it that the lands were held upon the trusts declared by the trust deed.

An illustration of this principle is provided by the law governing assignments by debtors of their property to “trustees” for the benefit of their creditors. Such an assignment may or may not amount to a trust recognised by equity: It should always be asked whether it was intended by the debtor that the creditors should be actual beneficiaries and that the trusts should not be revocable by him or whether the arrangement was made merely for the debtor’s personal convenience and benefit — a mandate to the named trustee as agent of the debtor principal which was revocable by the debtor. The distinction was expressed by Turner V-C, in Smith v Hurst:28

Cases appear to me to result in this, that in cases of deeds vesting property in trustees upon trust for the benefit of particular persons, the deed cannot be revoked, altered or modified by the party who has created the trust (that is, in the absence of an express power of revocation); but that in the cases of deeds purporting to be executed for the benefit of creditors, the question whether the trusts can be revoked, altered or modified depends upon the circumstances of each particular case. It is difficult, at first sight, to see the distinction between the two classes of cases; for in each of the classes a trust is purported to be created, and the property is vested in the trustee; but I think the distinction lies in this: in cases of trust for the benefit of particular persons, the party creating the trust can have no other object than to benefit the person whose favour the trust is created, and the trust being well created the property in equity belongs to the cestui que trust as much as it would belong to them at law if the legal interest had been transferred to them; but in cases of deeds purporting to be executed for the benefit of creditors, and to which no creditor is a party, the motive of the party executing the deed may have been either to benefit his creditors or to promote his own convenience; and the Court there has to examine the circumstances for the purpose of ascertaining what was the true purpose of the deed....

Even though a person, by the use of clear, express language purports to make him or herself or another the trustee of property for a third person, evidence that the settlor’s actual intention was to retain complete control and a complete power of disposition over the whole of the property in question will prevent any trust arising. If a settlor intends to retain complete control and complete power of disposition over the trust property, there is no trust.

In JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev29 Mr Sergei Pugachev was formerly an oligarch and the owner of the largest private bank in Russia. He purported to settle over 95 million USD worth of assets on five New Zealand foreign discretionary trusts between 2011 and 2013. Each had a newly formed New Zealand company as the sole trustee, and each had Mr Pugachev as one of the discretionary beneficiaries, and the First Protector. The powers which Mr Pugachev had as the First Protector included the power to appoint beneficiaries, the right to request information from the trustee, the power to “remove any existing Trustee with or without cause”; the power to appoint an additional Trustee or additional Trustees; the Protector was “irrevocably appointed as a retiring trustee’s agent to vest the trust fund in the continuing or new trustees”; and “the Protector’s consent is required before the trustee may exercise many of the powers normally vested in a trustee such as the distribution of income or capital and investment. Other steps which require the Protector’s consent are the exclusion of a discretionary beneficiary and variation of the deed”. In the case of the London Residence Trust, the First Protector also had the power “direct the sale of the residential property, subject to various provisions”.30

Auckland solicitor William Patterson was one of the two initial directors of the New Zealand trustee companies, and he and his wife Robyn Hopkins were the initial shareholders of those companies.

In 2015, the original trustees of the trusts were removed and replaced with newly incorporated trustee companies “more closely controlled by Mr Pugachev”. One of the factors of considerable importance in Birss J’s judgment was his conclusion that:

456. Mr Pugachev’s intention in setting up all five trusts was to retain control of the assets but use them as a pretence to mislead third parties by hiding his control. No other natural person involved in setting up the trusts (neither Mr Liechti, Ms Dozortseva, Ms Hopkins nor Mr Patterson) had an intention independent of Mr Pugachev’s...

The claimants, the relevant Russian state authority and the bank (now in liquidation), obtained a judgment in Russia against Mr Pugachev for misappropriating some £1bn of bank funds. The claim formed part of the claimants’ attempts to enforce that judgment in England.

Birss J referred to the New Zealand decision of Heath J in Kea Trust Co Ltd v Pugachev31 that “the removal of the original trustees by the Protector(s) and appointment of the new trustees was valid” and that “[h]e decided it did not matter whether or not the Protector was labelled a fiduciary because even if he was not, the exercise of the powers was still subject to the court’s supervisory jurisdiction and could be impugned if the exercise was for an improper purpose” and “[t]hen at [53] the judge concludes that on the evidence before him, which he notes was uncontested, there is no reason to suggest that the Protector’s power to remove the original trustees was exercised improperly”.32

Birss J distinguished Heath J’s decision on the following basis:

263. For my purposes the judge’s decision at paragraph [51] is more significant than the conclusion at [53]. The latter is a finding on the facts based on different evidence than is before me. However at [51] Heath J finds that the Protector’s powers, such as the power to remove a trustee, are to be exercised “in the best interests of the beneficiaries”, by which he means all the Discretionary Beneficiaries, in other words the members of the Pugachev family. The claimants case before me is that there is no such fetter on the Protector’s powers.

Birss J held that the First Protector’s powers were purely personal powers:

267. However I cannot construe the powers conferred on the Protector in these deeds in the same way as Heath J. In my judgment the true construction of these trust deeds is that the powers conferred on Mr Pugachev as First Protector are conferred to be exercised freely for his own benefit. Or put another way, considered objectively, the powers are personal powers conferred to give the Protector the ability to act in his own best interests. They are not constrained by a consideration of the interests of the Discretionary Beneficiaries as a class.

The fundamental reason that the judge reached that conclusion “is having regard to the extensive nature of the Protector’s powers combined with the fact that the First Protector is the settlor of all the trust assets and is also one of the named Discretionary Beneficiaries”. Another significant reason was:

275. I believe the provisions about the Protector being Under a Disability defined as to include a disability by operation of law support the same conclusion. The arrangements have been set up so that if the Protector is subject to a court order requiring him to do something he does not want to do, he ceases to be the Protector and his son Victor stands in his place. If required to act against his will Mr Pugachev can truly say to the court that he has none of the Protector’s powers. If the Protector’s powers under the deed were limited to acting only in the best interests of the Discretionary Beneficiaries as a class, rather than in his own selfish interests, then I doubt this provision would be necessary. What it does is allows Mr Pugachev’s effective complete control of the trusts to cease to exist the moment he is compelled to do something he does not want to do, like hand over the assets to a creditor. It is an attempt to make the trust judgment proof and should not be accepted.

This led the Judge to conclude that:

244.... this is where the combination of the Protector’s status as Discretionary Beneficiary with wide veto powers together with the Protector’s power to replace trustees becomes significant. The Protector’s power of removal can be exercised on the Protector’s own initiative. If it is a purely personal power then the Protector can lawfully remove a trustee who does not act in accordance with the Protector’s wishes. A trustee who refused to distribute trust assets to the Protector could be removed and replaced by one who will. …

245.... if the Protector’s powers in these deeds are non-fiduciary then that person is not simply a watchdog. If the powers are purely personal to Mr Pugachev then these deeds allow him to retain complete control over the assets he settled into the trusts. In substance these trusts would then be nothing more than bare trusts in which the property is held by the trustees on trust for the Protector alone.

278. I conclude therefore that on their own terms these trusts do not divest Mr Pugachev of the beneficial ownership he had of the assets transferred into them. In substance the deeds allow Mr Pugachev to retain his beneficial ownership of the assets.

Other significant matters which led Birss J to that conclusion were:

298. The conclusions about Mr Pugachev’s intentions will be drawn after considering all the other topics but at this stage I can say this. The evidence shows that Mr Pugachev has two important characteristics. He is not a person who would lightly relinquish control of anything and he is a person quite willing to lie and put forward false statements deliberately if it would suit his purpose. The circumstances as a whole and Mr Pugachev’s character support a credible inference that one of Mr Pugachev’s purposes in transferring the property into these trusts was what is euphemistically called “asset protection”, in other words to hide them from possible claims, facilitate a plausible denial of ownership, while retaining control in fact.

338. There is plenty of evidence that Mr Patterson regarded Mr Pugachev as “the client” and “the principal”, which he clearly was. It supports the point that Mr Pugachev was the settlor for all the assets but it does not show the deeds were a sham. However there is also evidence of Mr Patterson using the term “UBO”. The term is used by Mr Patterson in an exchange of emails on 6th September 2013 with Mr Liechti. UBO stands for ultimate beneficial owner. Of course the idea that Mr Pugachev is the “UBO” of the assets is the claimants’ case in a nutshell and is flatly contrary to Mr Patterson’s position that as a Discretionary Beneficiary Mr Pugachev has no proprietary interest in the trust assets (c.f. paragraph 2.4 of his witness statement quoted above).

408. Overall however while the operation of the trusts is consistent with their being genuine discretionary trusts for the class of Discretionary Beneficiaries as a whole, it does not allow one to distinguish between that and Mr Pugachev retaining beneficial control of the underlying assets.

409. There is evidence which shows instances in which each of Mr Pugachev himself, Mr Patterson and Mr Liechti have used language in a way which describes Mr Pugachev as the real owner of the assets. That is a different point from the operation of the trusts.

 The Cook Islands Court of Appeal in Webb v Webb33 the respondent settled the Arorangi Trust one week after his marriage to the appellant. The trust subsequently acquired land in Rarotonga and other assets in the Cook Islands. The beneficiaries of the trust were at the time of the hearing the respondent and his son from a prior marriage. The parties separated in 2016. The appellant and their daughter stayed on in the Rarotonga property. The respondent then arranged for the settlement of a new family trust, the Webb Family Trust. The respondent arranged for the Arorangi Trust to resettle some of its assets on the new trust. New Zealand’s Matrimonial Property Act 1976, as originally enacted, is incorporated into Cook Islands law by the Matrimonial Property Act 1991–92. Most subsequent amendments to the New Zealand Matrimonial Property Act 1976 have not been adopted in the Cook Islands. The Court of Appeal held:

[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”....

[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]... 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.

[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)....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. 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.... 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 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.

[65] We are satisfied that the two deeds of trust fail to record an effective alienation of the beneficial interest in the assets in question. The powers retained by the respondent meant 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.

[67] Given our conclusion that the trusts were invalid, the property which appeared to be that of the trusts was in fact the property of the respondent. It is not contended that in those circumstances it would be anything other than matrimonial property. Nor is there any dispute over the appellant’s right to half the value of that property under ss 8 to 15 of the Matrimonial Property Act..

An appeal against that decision to the Privy Council (the Cook Islands final appellate Court) has been filed.

The decision in Equiticorp Industries Group Ltd (In Statutory Management) v The Crown (No 47)34 shows that, even if there is no finding of a sham, the consequences may still be disastrous if the Court finds that the trust is a nominee for the settlor or another, and as a result there is non-compliance with a statutory provision. In summary Smellie J held that:

a nominee can be said to be a person/company/body which (directly or indirectly, generally or specifically, and perhaps irrespective of ultimate enforceability) holds any property on behalf of another or exercises some power at the direction of another. At the core of the concept is the question of control. Who calls the shots?

In Equiticorp Industries Group Ltd (In Statutory Management) v The Crown (No 47)35 the Crown wished to dispose of its substantial shareholding in New Zealand Steel Ltd (“NZS”) and entered into agreements to sell its shares to Equiticorp Holdings Ltd (“EHL”) for EHL shares and $327m. Smellie J stated:

The Ararimu Trust

As mentioned above, the full text of the trust is to be found at p 92 of vol II. The plaintiffs point to the following in support of their claim that the trust holds its shares as nominee for EHL:

 1.     Messrs Darvell and Hawkins created the ownership structure of the group (including the trust). This is established by a letter from Darvell to Hawkins dated 12 February 1988.

 2.     Mr Darvell was the settlor of the trust.

 3.     Messrs Darvell and Hawkins were trustees of the trust.

 4.     EHL had a considerable degree of control over the exercise of the trustees’ powers:

•        The power of appointment and removal of trustees was vested by the deed in EHL (cl 7).

•        EHL’s written consent was required for the appointment or removal of any beneficiaries (cl 5).

•        EHL could terminate the trust (cl 3).

•        EHL’s consent was required to vary the terms of the deed (cl 8.16).

•        Assets could only be distributed to beneficiaries with the sanction of EHL (cl 6).

 5.     EHL was obliged to pay all stamp duty, brokerage, charges and expenses incurred by the trustees (cl 8.8).

It can be seen therefore that the trust deed’s provisions set out expressly the extent of direct control EHL had over the trustees and the trust. Most powers could only be exercised at the direction of, or with the consent of, EHL. The existence of such a degree of control establishes, in my judgment, that the Ararimu Trust held its shares in Setar 72 as EHL’s nominee.

As a consequence, Smellie J held as a result of the Ararimu Trust being a nominee, that AI4 was a subsidiary of EHL, and that the contract transferring the NZS/EHL parcel from the Crown to AI4 in return for the $327,224,013 in the assigned deposits was contrary to s 40 of the Companies Act 1955 and void.

If the settlor exerts all of the power, in reality the trustee is the nominee of the settlor. Moreover, the conduct of the trustees may show that the trustees are merely acting as agents or nominees of the settlor.

Under s 67(1)(c) of the Trusts Act 2019, after that Act comes into force on 30 January 2021 a trustee will only be able to:

(c)    appoint an eligible person to hold or deal with all or part of the trust property as nominee or custodian and vest all or part of the trust property in that person.

As detailed in [4.2] as a result of s 5 and Schedule 2 of the Trusts Act 2019 the application of s 67(1)(c) may be completely excluded but may not be modified, despite any contrary intention in the terms of the trust, if it is proposed that another party should hold or deal with trust property as a nominee or custodian.

Under s 67(4) of the Trusts Act 2019:

(4) For the purposes of subsection (1)(c), eligible person means—

(a)    a person who carries on a business that consists of or includes acting as a nominee or custodian; or

(b)    a body corporate that is controlled by the trustee; or

(c)    an incorporated law firm.

As a result of s 5 and Schedule 2 of the Trusts Act 2019 this section of the Trusts Act 2019 cannot be modified or excluded by an express provision in the trust deed.

Official Trustee in Bankruptcy v Baker36 in which the Court concluded that B “was in reality asserting ownership [of the art collection], as he had always intended, and the companies, of which he was the directing mind, accepted the collection from him necessarily upon the same basis.” This case involved an application by the trustee in bankruptcy for a declaration that a collection of contemporary art works said to be worth over $3 million, and that certain moneys representing art works, were the property of the bankrupt, B. In the late 1970s, B started collecting art works. B claimed that in 1977, he set up a trust, called the Modern Art Trust, to which the collection belonged beneficially from 1977 until late 1983 and that the trustee was a company, JABI, which B controlled.

However, no trust deed in respect of the Modern Art Trust could be produced, nor were any trust records. While some records of transaction were put in the name of the Modern Art Trust, generally receipts for works purchased were issued in B’s name. Most of the works were purchased with funds which came from tax evasion moneys paid to B personally. The receipt of the tax sums involved was to attempt to camouflage the diversion of cheques to the bank accounts of the various companies he controlled. Funds were freely transferred between the companies.

Although on bankruptcy B arranged for a new trustee to take over the art collection, it was always his intention to maintain effective control of the collection and the various companies.

The trial Judge, Drummond J,37 concluded that the Modern Art Trust never existed. The Federal Court of Appeal upheld these findings. This finding meant that the subsequent purported transfer of the art collection by the Modern Art Trust to another trust, and its subsequent transfer to other trusts were ineffective. The Federal Court of Appeal finding that the Modern Art Trust was never constituted meant that the works of art belonged to B. JABI had no title to transfer, whether as trustee of a trust existing in name only, or otherwise. Each of the transfers through companies, in as far as they related to works in the original collection were ineffective. This series of transactions, which depended on a fictitious trust, clouded every other dealing with the collection. The Court also held that the settlors of other trusts, who merely gave effect to B’s instructions, acted as his agents in establishing those trusts. The settlor, B, retained complete control and complete power of disposition over the whole collection. Drummond J held that the true intention was that B would himself retain full beneficial ownership, and the transfers of the collection from company to company controlled by him were shams.

Commissioner of Stamp Duties (Qld) v Jolliffe38 in which money was placed by a man in the account of his wife “for the sole purpose of procuring interest which the respondent believed would not be procurable... if the money were placed in his own name”.

In the Marriage of Cowling39 where “neither the husband nor his son Rex intended that the latter have any beneficial interest in any of the series of properties transferred to or acquired in the name of the latter”.

In the Marriage of Ashton40 where “the assets of the trust fund have been dealt with and treated, for practical purposes, as if they were the husband’s absolute property. Although he is not a named beneficiary he has been in receipt of income from the trust, the husband was in full control of the assets of the trust, and the evidence made it clear that he was applying them and income from them as he wished and for his own benefit”.

Sonenco (No 77) Pty Ltd v Silvia41 where “this bankrupt is in effective control of the trust and that the purported transfer of the property to the wife was dressed up to appear as a matrimonial agreement in favour of the trust to deprive his creditors of a valuable asset”.

Uncertainty of subject matter means that the trust does not exist and either the property will remain with the alleged settlor (or his or her estate) or, if there was a gift to an intended trustee, the intended trustee will be the absolute owner of the property.42

1      See Re Manisty’s Settlement [1973] 2 All ER 1203.

2      Knight v Knight (1840) 3 Beav 148; 49 ER 58 (Ch).

3      Herdegen v Federal Commissioner of Taxation (1988) 84 ALR 271.

4      Clayton v Clayton [2015] NZCA 30; [2015] 3 NZLR 293; [2015] NZFLR 233 at [63].

5      David Fox “Private Express Trusts” in John McGhee (ed) Snell’s Equity (33rd ed, Sweet & Maxwell, London, 2014) 645 at [22-070]; Tucker, above n 61, at [4-27]; and Geraint Thomas and Alastair Hudson The Law of Trusts (2nd ed, Oxford University Press, Oxford, 2010) at [2.47].

6      G Thomas and A Hudson The Law of Trusts (2nd ed, Oxford University Press, Oxford, 2010) at [2.47].

7      Clayton v Clayton [Vaughan Road Property Trust] [2016] NZSC 29; [2016] 1 NZLR 551; [2016] NZFLR 230; BC201660399 at [123].

8      Tito v Waddell (No 2) [1977] Ch 106  at 111.

9      Belton v Commissioner of Inland Revenue [1959] NZLR 1372 at 1374.

10   Quoting from Garrow and Henderson’s Law of Trusts and Trustees, (2nd ed, Butterworths, Wellington, 1972) at 13.

11   Herdegen v Federal Commissioner of Taxation (1988) 84 ALR 271; Hunter v Moss [1994] 3 All ER 215 (CA); Winterton Constructions Pty Ltd v Hambros Australia Ltd (1991) 101 ALR 363; Belton v Commissioner of Inland Revenue [1959] NZLR 1372 at 1374 per Hutchison ACJ.

12   Mountain v Styak [1922] NZLR 131.

13   Twinsectra Ltd v Yardley [2002] UKHL 12; [2002] 2 AC 164 ; [2002] 2 All ER 377.

14   Twinsectra Ltd v Yardley [2002] UKHL 12;  [2002] 2 AC 164 ; [2002] 2 All ER 377 at 382.

15   Twinsectra Ltd v Yardley [2002] UKHL 12;  [2002] 2 AC 164 ; [2002] 2 All ER 377 at 396.

16   Commissioner of Stamp Duties (Queensland) v Jolliffe (1920) 28 CLR 178. This decision was applied by the Federal Court of Appeal in Baker v Official Trustee in Bankruptcy (Full Court, Federal Court of Australia, 3 August 1995, unreported)) per Burchett, Ryan and Carr JJ.

17   Commissioner of Stamp Duties (Queensland) v Jolliffe (1920) 28 CLR 178, 181.

17a Andrew S Butler “Basic Concepts” in Andrew S Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) 21 at 70 [Equity and Trusts] citing K Gray “Equitable property” [1994] CLP 157 at 163.

18   Re Endacott [1959] 3 All ER 562; [1960] Ch 232 .

19   McPhail v Doulton [1971] AC 424 ; [1970] 2 All ER 228 was a three to two decision in the House of Lords, with the result being an equitable one on the facts.

20   McPhail v Doulton [1971] AC 424 , [1970] 2 All ER 228, 247.

21   McPhail v Doulton was followed in R v District Auditor No 3 Audit District of West Yorkshire Metropolitan County Council (The Times, 25 July 1985, Lloyd LJ and Taylor J) where a discretionary trust for “any or all or some of the inhabitants [of West Yorkshire]” was declared void on this ground, and in Herdegen v Federal Commissioner of Taxation (1988) 84 ALR 271.

22   Re Moore [1901] 1 Ch 936 .

23   Davis v White [2016] NZHC 1626, [2016] NZAR 985; BC201661637.

24   Examples of how the Courts approach this problem include Chaine-Nickson v Bank of Ireland [1976] IR 393  and Spellson v George (1987) 11 NSWLR 300.

24a Andrew S Butler “Basic Concepts” in Andrew S Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) 21 at 23 [Equity and Trusts] citing K Gray “Equitable property” [1994] CLP 157 at 84.

25   Herdegen v Federal Commissioner of Taxation (1988) 84 ALR 271 at [19].

26   Joyce v Ashfield Municipal Council (1967) 14 LGRA 133, 144, Holmes JA concurring.

27   As was shown by the later decisions Joyce v Ashfield Municipal Council (No 3) (1970) 20 LGRA 173 and Ashfield Municipal Council v Joyce [1978] AC 122 .

28   Smith v Hurst (1852) 10 Hare 30, 47; 68 ER 826, 833.

29   JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2017] EWHC 2426 (Ch), Birss J.

30   JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2017] EWHC 2426 (Ch), Birss J, at [116] and [117]

31   Kea Trust Co Ltd v Pugachev [2015] NZHC 2412; BC201563237.

32   JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2017] EWHC 2426 (Ch), Birss J at [253] and [262] respectively.

33   Webb v Webb [2017] CKCA 4; CA 7.2017 (24 November 2017), Cook Islands Court of Appeal reported at <http://www.paclii.org/ck/cases/CKCA/2017/4.html >.

34   Equiticorp Industries Group Ltd (In Statutory Management) v The Crown (No 47) [1998] 2 NZLR 481. This case took 198 days holding time.

35   Equiticorp Industries Group Ltd (In Statutory Management) v The Crown (No 47) [1998] 2 NZLR 481, 533.

36   Official Trustee in Bankruptcy v Baker (Full Court, Federal Court of Australia, 5 August 1994, unreported) per Drummond J.

37   Official Trustee in Bankruptcy v Baker (Full Court, Federal Court of Australia, 5 August 1994, unreported) per Drummond J.

38   Commissioner of Stamp Duties (Qld) v Jolliffe (1920) 28 CLR 178, 181.

39   In the Marriage of Cowling (Appeal No 105 of 1989, File No S2903 of 1977).

40   In the Marriage of Ashton (1986) 11 Fam LR 457.4.

41   Sonenco (No 77) Pty Ltd v Silvia (1989) 24 FCR 105; (1989) 89 ALR 437.

42   Andrew S Butler “Basic Concepts” in Andrew S Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) 21 at 23 [Equity and Trusts] citing K Gray “Equitable property” [1994] CLP 157 at 80.