Trusts – the Supreme Court – and questionable jurisprudence
In Official Assignee v Wilson (2008) the Court of Appeal said that the existence of “effective control” by a person of a Trust would “help establish a Trust as a sham”.
This was not new law. It had been well established in several jurisdictions. However, in Kain v Hutton the Supreme Court implied the opposite. It suggested that a Trust over which a person had “effective control” was not a sign of probable illegitimacy but of legitimacy.
The Supreme Court’s attitude to “effective control” has now been confirmed in a decision of the High Court. In Official Assignee v Sanctuary Propvest Ltd (11 June 2009) Justice Asher has said that:
“It is implicit in the [Supreme Court’s Judgment] that it is permissible for a person who has the powers of appointment of Trustees and discretionary beneficiaries to exercise control of the Trust.”
New Zealand is now diverging quite markedly from the rest of the Common Law world on this aspect of the law of Trusts.
What are the consequences of this?
First, the international perception of our legal system may suffer. The international perception that our courts can be relied upon to give orthodox rulings on Trust law - and other laws - is important for the business that the perception creates. If the perception is lost, there will be a lesser level of confidence in our legal system.
Second, the Court's ruling will almost certainly encourage people to establish Trusts over which they have “effective control”. Debtors – both actual and potential – will be encouraged to do this to shield their assets from their creditors. Smart debtors will probably do this by arranging for powers of appointment to be vested in friendly third parties. This will obviously be an unwelcome development.
Many New Zealand lawyers will not be aware of the extraordinary criticism that the authors of Meagher Heydon & Leeming’s Equity – Doctrines and Remedies 4th ed (2002) made of our Court of Appeal a few years ago, before the abolition of the right of appeal to the Privy Council. Amongst other criticisms they said the Court of Appeal’s decision in Aquaculture Corp v NZ Green Mussel was “astonishing”. The high point of their criticism was this: “More alarmingly, the New Zealand decision proceeds in an apparent total ignorance of the existence in equity of a jurisdiction to award compensation, a state of affairs which throws into doubt the claim of its decisions in this area to serious consideration.”
The people who wrote that were lawyers of eminent distinction. One of them became a Judge of the New South Wales Court of Appeal (Mr Meagher). Another is presently a Judge of the High Court of Australia (Mr Haydon). The same criticism was made in a previous edition of the work of which one of the authors was Mr Gummow – he is also now a Judge of the High Court of Australia. In fairness to the members of the Supreme Court who were party to the Kain v Hutton decision it must be said that none of them was a party to the Aquaculture decision that was criticised so fiercely.
The point of importance is not what was said in the Aquaculture case but the fact that if decisions are criticised by eminent legal writers, it reflects poorly on our legal system as a whole.
The Aquaculture decision shows that judgments which straddle the boundaries of orthodoxy risk international censure. The problems that arise from the Kain v Hutton judgment are particularly evident from Justice Asher’s decision. The facts of OA v Sanctuary Propvest Ltd reeked of fraud and duplicity. Asher J would have disavowed his judicial oath if he had not held that the so-called “Trust” under consideration was almost certainly a sham. But to get there he had to criticise the “Trust” in terms which showed that in substance its architect had “effective control” over it and treated it as his own property, as he had presumably always intended to. In this way Justice Asher said, for example, that the Trustee “was the puppet” of the appointer – which is another way of describing the concept of “effective control”.
The fact remains that the concept of “effective control” has far more in common with the notion of personal property than with the notion of property that is held on Trust for the benefit of beneficiaries. The Court of Appeal was right about this. So long as the Kain v Hutton dictum survives, it is likely that our law will be criticised, circumscribed and circumvented by Judges who will not tolerate the abuses which it appears to allow.