"Trusts - The High Court says it can "Ignore a debtor's Trust"

This week’s article concerns a Trust that Associate Judge Hole said he would “ignore”. He did not say it was a sham or an alter ego Trust. In the context of a creditor – debtor dispute he said the Trust should simply be “ignored”. The case was Matarangi Beach Estates Ltd v Dawson & Dawson [2008] NZHC 1445, 15 September 2008.

The Defendants, a husband and wife, had paid deposits on two beach sections but they defaulted on paying the rest of the purchase price. When they were sued for specific performance they said (a) they could not realise the equity from the house in which they lived as it was owned by a Trust and (b) no orders for specific performance should be made against them as, without access to the equity in their home, it would be impossible for them to comply with such an order. (There is authority to justify this proposition.)

The Court proceedings were filed in March 2008. At that time Mr and Mrs Dawson were recorded on the Title of their house as its owners. The purchase price had been paid from the proceeds of sale of their previous house which had been owned by the Trust. Four months later they arranged for a corporate Trustee to own the property. The Judge said that the “appropriate way of looking at the Defendants’ financial situation is to … ignore the fact the home is settled in a Trust. This is a device which has been used for the benefit of the Defendants.”

The judgment gives little detail about the corporate Trustee but my inquiries show that:

• Mr and Mrs Dawson were its two shareholders and directors.
  
  
• The Trust Deed had conflicting provisions for the powers to appoint new Trustees. One of its provisions gave Mr Dawson the sole power to appoint new Trustees.

The Bank statements for the Trust showed that the Trust’s Bank account was used by the Dawsons as a conduit for many of their living expenses. When Mr and Mrs Dawson saw the measure of their vulnerability it appears that they tried to distance themselves from their home by creating the Corporate Trustee.

They said that this was done on the advice of their solicitor who thought that the ownership of the property by a Corporate Trustee would reveal the existence of a Trust with greater clarity.

Was Hole AJ right to say that could simply “ignore the fact that the home was settled in a Trust”?
The judgment did not refer to any of the terms of the Trust. Nor did it record the powers that the Defendants had to control it.

I suspect that underlying the decision was a belief that debtors should not pretend that they have disowned property when they have covertly retained powers to control its destiny.

In the context of relationship property, the Court of Appeal has said that where a person has powers of control over a Trust each power is to be treated as an item of property that should be valued by reference to the assets it controls.

The Matarangi case can be seen as an extension of this principle into the area of debtor – creditor relationships. If a debtor can control the destiny of a Trust asset, the Court may decide to “ignore” the existence of the “Trust” and treat its assets as his or her own.

This is not erudite jurisprudence and it may not be much of a precedent. But in its naked scepticism that the manipulation of ownership via “Trusts” that are little more than devices to deceive creditors, the decision may strike a chord with other Judges who think the same way and who may find safer platforms on which to rest such decisions.

Should such “Trusts” be treated as shams? In OA v Wilson [2008] 3 NZLR 45 the Court of Appeal gave a very narrow interpretation to the concept of a sham Trust. One of the world’s leading academic experts on Trust law – Justice David Hayton – has recently criticised the decision in OA v Wilson and his comments will be the subject of a further article.

Interestingly, his criticism of the Court of Appeal’s decision in OA v Wilson combines with other international criticism of some of our Trust rulings. I refer to Donovan Waters QC’s criticisms of the High Court’s decision in Harrison v Harrison (18.9.08) and a polite put-down by the authors of the current edition of Lewin on Trusts of the Court of Appeal’s decision in Wong v Burt. This, too, will be the subject of a future article.

Copyright Anthony Grant 2006