"When can Judges re-write Trusts? The Supreme Court wants to consider s 182 of the FPA"

The Supreme Court has agreed to hear two appeals in Ward v Ward [2009] NZFLR 655. One is narrow and the other is broad.

In the narrow appeal the Court will consider whether the existence of a matrimonial property agreement between the parties prevented the Court from invoking s 182. This is a technical matter which involves the interpretation of s 182(6).

The broad appeal involves the big question of the role that s 182 should have in modifying pre-nuptial and post-nuptial settlements. This decision is likely to affect many of the Trusts that have been created in New Zealand.

Section 182 has been on the Statute books for more than 140 years and until a few months ago it had never been considered by the Court of Appeal – let alone the Privy Council or the Supreme Court. Now, within the space of a few months the Court of Appeal will have looked at s 182 twice (in X v X and Ward v Ward) and the Supreme Court once.

The attention is well deserved since section 182 is the most potent potential destructor of Trusts in the armoury of the law.

When Courts are given the power to make “such orders … as they think fit” with reference to Trust assets – and indeed Trusts themselves - it is highly desirable that the Supreme Court and the Court of Appeal should give some considered guidance to the Family Court on the purpose of the section and the ambit of the orders that should be made under it.

The facts
Mr and Mrs Ward were married for 12 years. During the course of the marriage, the farm on which they lived was sold to a Trust of which they and a family friend were Trustees. By the time of the trial, the debt due back to each party from the Trust was $189,000. This was virtually all the relationship property that Mrs Ward would receive unless the Trust was altered.

The Trust was in a state of paralysis - which was not surprising since two of the three Trustees were a husband and wife who were at war with each other.

Nearly all of the cases in which s 182 has been successfully invoked have involved an absence of an adequate amount of relationship property and this was one of those cases.

The claim for modification was especially compelling since Mr and Mrs Ward had signed a “Memorandum of Intention” in which they had instructed the Trustees to treat their own interests as “paramount and of the first priority”. Following the collapse of the marriage the Trustees ignored this request and allowed Mr Ward to live rent free in the house, leaving Mrs Ward with no benefit of any sort from the Trust.

Comments
I have two comments on the forthcoming appeal.

The first is this. When Parliament enacted the changes that became the PRA in 2002, it refused to give the Courts powers to take assets out of Trusts for the benefit of a spouse. A study of the Parliamentary materials shows that a compelling case can be made to establish that none of the politicians in 2001 was even aware of s 182.
The process of reform that led to the PRA changes in 2002 was tortuous. Few pieces of legislation in recent years have been subject to such scrutiny and debate. If only eight years ago Parliament, after much deliberation, refused to allow “Trust busting” powers to be enacted – of the type that s 182 expressly permits - the Courts should surely respect that resolve in the way that Robertson J did in X v X (CA). In giving judgment for the Court of Appeal for himself, O’Reagan J and Ellen France J, he said that:

“When the PRA was substantially amended in 2001, Parliament declined to grant any general judicial power to go behind Trust structures as part of relationship property division. Section 182 of the FPA must be interpreted and applied with that in mind.”

By contrast Glazebrook J, in Ward v Ward, (CA), while acknowledging that Parliament had refused to give the Courts “a wide discretion to order a distribution of capital from a Trust” went on to say that “s 182 … remains on the statute books despite there now being a comprehensive relationship property regime” and that “there remains a place for the orders that the Court can make under s 182 of the FPA.”

It is an extraordinary situation. Parliament refused in 2001 to give powers to modify Trusts – in apparent ignorance of the fact that such powers had been on the Statute books for well over a century! (The ignorance is explained by the fact that only a handful of cases on s 182 had ever gone to Court; the cases that had been decided were either unreported or were reported in specialist reports; and they were virtually unknown to all but a few practitioners.)

Should the Courts give precedence to a section that was obscured from the politicians or should they give precedence to the careful decision of Parliament in 2001 that such powers ought not to be available to the Courts? Many would say that the recent decision of Parliament should generally prevail.

My second comment relates to the Supreme Court’s recent decision in Kain v Hutton, in which it was said that Mrs Couper’s “ability to appoint and remove Trustees and discretionary beneficiaries” of the Ponui Trust gave her “complete ongoing control of the Trust”. They said it put her “in effective control” of the [shareholding in a farm that was owned by the Trust] “with the ability to take the benefit herself”. This aspect of the Supreme Court’s decision in Kain v Hutton has been the subject of some criticism and debate because it uses terminology which is more commonly associated with sham Trusts to describe a genuine Trust. If the Supreme Court considers the criticism to be misplaced, the Ward appeal may give the Court the opportunity to clarify any misunderstandings that it considers have been created by that decision.

This, and the clarification of the boundaries of s 182 are two of the most important subjects in the laws concerning New Zealand Trusts today.

Copyright Anthony Grant 2006