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University of Otago Law Theses and Dissertations |
Last Updated: 11 April 2024
A question of trust
Challenging the validity of settlor-controlled trusts
Sam Becroft
A dissertation submitted in partial fulfilment of the degree of Bachelor of Laws (Honours) at the University of Otago – Te Whare Wānanga o Otāgo.
October 2018
Acknowledgements
To Nicola Peart, for her support, guidance and encouragement, not only in supervising this dissertation, but throughout my five years at university.
To my friends, Mitch and Owen, for their insightful comments and reassurance.
To India, for her enduring patience, love and support.
To my parents, Andrew and Philippa, for everything.
Table of Contents
“Put not your trust in money, but put your money in trust.”
Oliver Wendell Holmes Sr, The Autocrat of the Breakfast-Table (1858).
Introduction
The trust is an institution of tremendous elasticity.1 Within a default framework of fiduciary duties and powers, the trust may be tailored to suit the needs of its maker. The primary advantage of the private trust is asset protection: property held on discretionary trust is not available to a settlor’s creditors or spouse. The price of asset protection is a loss of ownership. In modern times, settlors are increasingly seeking the asset protection advantages of the trust structure but without relinquishing meaningful control of the trust property. This is achieved in two ways: by granting trustees wide discretions, and by reserving significant powers of control. The aim of this dissertation is to place a definitive limit on the ability of settlors to manipulate the trust structure.
Chapter I outlines the problem with settlor control from a policy perspective. It also contains a discussion of existing external legislation regulating the use of trusts. Finally, it sets out the background to the three cases that form the crux of this dissertation: Clayton v Clayton,2 a decision of the New Zealand Supreme Court; JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev,3 a decision of the English High Court; and Webb v Webb,4 a decision of the Cook Islands Court of Appeal. All three cases concern trusts settled in New Zealand.
Chapter II examines the theoretical and philosophical underpinnings of the trust structure. In doing so, it attempts to redefine the “irreducible core” of the trust. It is argued that this core has two elements. First, the trustee must be subject to an obligation to hold the property for the benefit of another. Second, that this obligation is enforceable by the beneficiaries.
The focus of Chapter III is the ability of a trustee to benefit. The situations in which a trust will lack the core obligation are identified. As part of this analysis, the duties that apply to trustee decision-making are examined. The argument advanced in this chapter is that an obligation to act in good faith does not preclude a trustee from self-benefiting, and accordingly does not give rise to a valid trust.
Chapter IV examines the effect of powers commonly reserved by settlors. Reserving significant powers of control gives rise to two issues. First, there is risk that the powers erode the obligation of the trustees to hold the property for the benefit of another. Second, the powers may together give the settlor the ability to vest the entirety of the trust property in themselves.
In Chapter V, the framework developed in Chapters II to IV is applied to the three ‘problem cases’: Clayton, Pugachev and Webb.
1 FW Maitland “Lecture III: Uses and Trusts” in Equity – A Course of Lectures (2 ed, Cambridge University Press, Cambridge, 1936) 23 at 23.
2 Clayton v Clayton [2016] NZSC 29, [2016] 1 NZLR 551.
3 JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2017] EWHC 2426 (Ch).
4 Webb v Webb [2017] CKCA 4.
Chapter I: The problem
A The birth of the modern discretionary trust
The trust has long been a device of avoidance. The English ‘use’ – the ancestor to the trust – was developed for this very purpose.5 Property was held by a trusted friend or relative “to the use” of their wives or dependants.6 In particular, it enabled landowners to leave property via will and avoid the capricious incidences of the feudal system.7 By 1500, the majority of land in England was held in use.8 As Maitland observed, “The whole nation seems to enter into one large conspiracy to evade its own laws”.9
As the trust developed as an anti-creditor device, the Chancery refused to countenance attempts to make a beneficiary’s interest inalienable. In Brandon v Robinson, Lord Eldon held that a beneficiary’s interest in the trust property was available to his creditors.10 To permit otherwise was to contradict the essential nature of property: if property could be owned by the beneficiary, it could be alienated by his creditors.11 Lawyers realised that if property could not be doctored so as to put it beyond the reach of the beneficiary’s creditors, matters had to be arranged so that what the beneficiary had was not property at all.12
It was this development that gave birth to the modern discretionary trust. Beneficiaries of a discretionary trust have no interest in the trust property. Rather, they receive distributions of income and capital at the trustees’ discretion. But until that occurs, beneficiaries have no more than a mere hope or expectation of receiving trust property.13
B Discretionary trusts in New Zealand
The discretionary trust is the preferred vehicle for managing family wealth. Most trusts in New Zealand are discretionary in nature.14 The settlor will usually be a trustee, often along with their spouse and an independent trustee. The discretionary beneficiaries of the trust normally include
5 A K R Kiralfy Potter’s Historical Introduction to English Law (4th ed, Sweet & Maxwell, London, 1958) at 606-607.
6 Remus Valsan “Rights against rights and real obligations” in Lionel Smith (ed) The Worlds of the Trust (Cambridge University Press, Cambridge, 2013) 481 at 482. See also Law Commission Review of Trust Law in New Zealand (NZLC IP19, 2010) at [2.4]-[2.10].
7 JH Baker An Introduction to English Legal History (4th ed, Oxford University Press, New York, 2007) at 247- 258.
8 At 251.
9 FW Maitland “Outlines of English Legal History, 560-1600” in The Collected Papers of Frederick William Maitland, Volume II (Cambridge University Press, Cambridge, 1911) 417 at 492.
10 Brandon v Robinson [1811] EngR 640; (1811) 18 Ves 429, 34 ER 379.
11 Stuart Anderson “Trusts and Trustees” in William Cornish and others The Oxford History of the Laws of England Volume XII: 1820-1914 Private Law (Oxford University Press, New York, 2010) 232 at 246-247.
12 At 250.
13 Gartside v Inland Revenue Commission [1967] UKHL 6; [1968] AC 553 (HL) at 606; Commissioner of Stamp Duties (Queensland) v Livingston [1965] AC 694 (PC) at 713; Hunt v Muollo [2003] NZCA 66; [2003] 2 NZLR 322 (CA) at [11].
14 Don Breaden (ed) Law of Trusts (online looseleaf ed, LexisNexis) at [2.11].
the settlor, their spouse and children.15 The trust property almost always includes the family home.
The discretionary trust is commonly used to put property beyond the reach of creditors. Upon adjudication, all property belonging to the bankrupt vests in the Official Assignee.16 This includes a vested beneficial interest under a trust.17 But because a discretionary beneficiary has no more than a mere hope of receiving a distribution, the trust property does not vest in the Official Assignee.18 Accordingly, the trust property is not available to a beneficiary’s creditors.19
Property is also held on discretionary trust to avoid the application of the Property (Relationships) Act 1976 (“PRA”). Under s 11, there is a presumption that relationship property will be divided equally between spouses or partners when the relationship ends.20 But to qualify as “relationship property”, property must be beneficially owned by a party to the relationship.21 Because a discretionary beneficiary has no interest in the trust property, the property held on trust is not relationship property.22 In this respect, the discretionary trust can be used to thwart the equal sharing regime.23
C The problem of settlor control
Settlors are invariably reluctant to cede control of their property. They may be somewhat distrustful of their trustees or wish to ensure that the trust is managed in accordance with their expectations.24 Settlors will often retain significant powers of control. These include the power to appoint and remove trustees and beneficiaries, the power to veto trustee decisions and the power to revoke the trust.25 Alternatively, the settlor may simply make themselves a trustee. In this situation, the settlor has the power to distribute property to the beneficiaries, of which they themselves are typically one.
15 Jessica Palmer “What to do about trusts?” in Jessica Palmer and others (eds) Law and Policy in Modern Family Finance: Property Division in the 21st Century (Intersentia, Cambridge, 2017) 177 at 179.
16 Insolvency Act 2006, s 101.
17 West v Martin [2000] NZCA 177; [2001] NZAR 49 (CA) at [23]; West v Official Assignee [2007] NZCA 523 at [17]- [19].
18 Erceg v Erceg [2015] NZHC 594, [2015] NZAR 1239 at [22]. This was seemingly accepted on appeal: Erceg
v Erceg [2016] NZCA 7; [2016] 2 NZLR 622 at [17]; Erceg v Erceg [2017] NZSC 28, [2017] 1 NZLR 320 at
[20].
19 It should also be noted that property held by the bankrupt on trust for another does not vest in the Assignee: Insolvency Act 2006, s 104.
20 Property (Relationships) Act 1976, s 11.
21 “Owner” is defined in s 2 as the “beneficial owner of the property”. The requirement that one partner ‘own’ the property is express or implicit in ss 8-16: RL Fisher (ed) Fisher on Matrimonial and Relationship Property (online looseleaf ed, LexisNexis) at [4.46].
22 Nation v Nation [2004] NZCA 288; [2005] 3 NZLR 46 (CA) at [74]- [76].
23 Palmer, above n 15, at 179.
24 Patrick O’Hagan “The Reluctant Settlor – Property, Powers and Pretences” (2011) 17 Trusts & Trustees 905 at 905.
25 Palmer, above n 15, at 179-180.
Trust law is facilitative.26 It can be used to protect assets, establish business ventures and avoid taxes.27 Given the trust is a fundamentally facilitative device, it has long been accepted that settlors can settle trusts on terms that achieve their aims.28 This, after all, is how the trust became a vehicle of wealth management. But modern trust drafting practices are stretching the trust concept to its limit. As Waters ponders, “Can you really alienate your title on trust, or declare yourself a trustee of identified assets but retain all the control you had while absolute owner?”29
The fundamental concern with trusts of this nature is that they enable the settlor to both ‘have their cake and eat it too’.30 The settlor retains the benefits of ownership while also enjoying the asset protection advantages of the trust structure. If the settlor can achieve these advantages without sacrificing the benefits of ownership, the trust becomes devoid of conceptual justification.31 It allows settlors to achieve the very thing Lord Eldon refused to countenance in Brandon v Robinson: the controlling beneficiary owns the property, but that property cannot be alienated.
The extent of control retained by settlors in some modern discretionary trusts is such that it calls into question the very existence of a trust. Trusts of this nature are not to be confused with shams. A trust is a sham where the deed is a pretence and no trust was ever intended.32 Three recent cases illustrate the conceptual challenges these “massively discretionary trusts” pose.33
D The problem cases
Mark and Melanie Clayton married in 1989. At the time, Mr Clayton owned a small timber processing business and three properties worth about $500,000. When the Claytons separated in 2006, Mr Clayton had amassed assets worth an estimated $28,831,000.34 These assets related
26 See Simon Gardner An Introduction to the Law of Trusts (Oxford University Press, New York, 2011) at 30-32. 27 JE Penner “An Untheory of the Law of Trusts, or Some Notes Towards Understanding the Structure of Trusts Law Doctrine” (2010) 63 CLP 653 at 665.
28 Anderson, above n 11, at 246.
29 Donovan Waters “Trusts: Settlor Reserved Powers” (2006) 25 Estates, Trusts & Pensions Journal 234 at 239. 30 Mark Bennett “Competing views on illusory trusts: The Clayton v Clayton litigation in its wider context” (2017) 11 J Eq 48 at 57, 78; Christopher McKenzie “Having and Eating the Cake: a Global Survey of Settlor Reserved Power Trusts: Part 1” (2007) 5 Private Client Business 336.
31 James P Webb “An ever-reducing core? Challenging the legal validity of offshore trusts” (2015) 21 Trusts & Trustees 476 at 477.
32 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2 NZLR 289 at [33]. See also Clayton v Clayton (SC), above n 2, at [110]-[117].
33 Lionel Smith “Massively Discretionary Trusts” (2017) 70 CLP 17.
34 This was the estimate at the time of the Family Court hearing: MAC v MAC Rotorua FAM-2007-063-652, 2 December 2011 at [4]. See also Clayton v Clayton (SC), above n 2, at [16].
to Mr Clayton’s business, the Claymark Group, and were mostly held in a complex network of discretionary trusts and companies. Central to this structure was the Vaughan Road Property Trust (“VRPT”), which held the land from which the Claymark business operated. Mrs Clayton argued that the VRPT was a sham or otherwise invalid.
Mr Clayton was the settlor, sole trustee and a discretionary beneficiary of the VRPT. The final beneficiaries were his children.35 As trustee, Mr Clayton had the unfettered discretion to distribute income and capital.36 This included the express ability to exercise this power for his own benefit.37 He could also bring the vesting date forward.38 The deed excluded any obligation to consider the interests of the beneficiaries or act impartially, and enabled Mr Clayton to act contrary to their interests.39 In his capacity as “Principal Family Member”, Mr Clayton had the power to appoint and remove any of the discretionary (but not final) beneficiaries.40
The Family Court held that the VRPT was not a sham, but was illusory.41 The High Court agreed, albeit for different reasons. Rodney Hansen J held that Mr Clayton had the unfettered ability to appoint income and capital to himself: “The reality is, however, that if he chooses to, Mr Clayton is able to deal with trust property just as he would if the trust had never been created.”42 The Court of Appeal rejected the notion of an illusory trust: the trust was either valid or a sham.43 Instead, it held that Mr Clayton’s power to add and remove beneficiaries was a general power of appointment and thus “property” within s 2 of the PRA.44
The Supreme Court decision
Leave was granted by the Supreme Court.45 The Claytons settled after oral argument, but the Court decided to issue judgment to address the important legal issues the case raised.46 The Supreme Court disagreed with the Court of Appeal that Mr Clayton’s power to add and remove discretionary beneficiaries was a general power of appointment. While Mr Clayton could remove discretionary beneficiaries, he could not remove final beneficiaries.47 The Court instead held that Mr Clayton’s powers in combination amounted to a general power of appointment. He could appoint all the trust assets to himself, or anyone else by first adding them as a discretionary beneficiary.48 The Court accordingly held that the VRPT powers were
35 Vaughan Road Property Trust Deed, cl 2.1.
36 Vaughan Road Property Trust Deed, cl 4 and 6.
37 Vaughan Road Property Trust Deed, cl 14. 38 Vaughan Road Property Trust Deed, cl 2.1. 39 Vaughan Road Property Trust Deed, cl 11. 40 Vaughan Road Property Trust Deed, cl 7. 41 MAC v MAC, above n 34, at [85].
42 Clayton v Clayton [2013] NZHC 301, [2013] 3 NZLR 236 at [90].
43 Clayton v Clayton [2015] NZCA 30, [2015] 3 NZLR 293 at [84]- [85].
44 At [108]-[111].
45 Clayton v Clayton [2015] NZSC 84.
46 Clayton v Clayton (SC), above n 2, at [3].
47 At [46].
48 At [62].
“rights” that gave him an “interest” in the trust property.49 Those powers were acquired during the course of the marriage and were therefore relationship property.50
That meant it was unnecessary for the Court to decide whether the VRPT was a valid trust. Nevertheless, the Court made a number of observations in respect of the illusory trust issue. The Court disagreed with the Court of Appeal that the absence of a sham necessarily precluded a finding that the attempt to create a trust failed and no valid trust came into existence.51 The Court recognised that because Mr Clayton had reserved such extensive powers, he arguably did not dispose of the trust property in favour of another. Equally, the breadth of those powers brought into question whether he was subject to the “irreducible core” of trustee obligations.52
However, this did not deny the possibility that a valid trust would emerge if Mr Clayton was replaced by an independent trustee.53 Second, although the trust was effectively defeasible in the sense Mr Clayton could bring the trust to an end at any time, there was no reason why it should not be regarded as a trust until this occurred. The Court relied on the decision in TMSF v Merrill Lynch.54 While the Privy Council held that the settlor’s power to revoke the trust was tantamount to ownership, at no point did it suggest that the trust was invalid before that power was exercised.55 The Supreme Court recognised the issue was one of “some complexity”. Given the Claytons had settled, the unusual terms of the deed and the fact the Court did not have a unanimous opinion, it declined to express a view as to the validity of the VRPT.56
Sergei Pugachev is a Russian oligarch who was once worth USD 15 billion.57 He founded the Mezhprom Bank, which became one of the largest private banks in Russia. He was also a Russian Senator and a close associate of President Vladimir Putin. However, Mezhprom failed during the 2008 global financial crisis and was liquidated with a shortfall of USD 2.2 billion.58 Mr Pugachev’s position with the ruling elite deteriorated, and he fled to London in 2011 when a criminal investigation was launched into the Bank’s collapse. The Bank and its liquidator obtained judgment against Mr Pugachev for approximately USD 1 billion. They challenged the
49 At [80].
50 Section 8(1)(e) of the Property (Relationships) Act 1976 states that relationship property includes “all property acquired by either spouse or partner after their marriage, civil union, or de facto relationship began”. Paragraph
(e) of the definition of “property” in s 2 states that property includes “any other right or interest.”
51 At [123]. The Court also refrained from using the term ‘illusory’: “For our part we do not see any value in using the ‘illusory’ label: if there is no valid trust, that is all that needs to be said.”
52 At [124].
53 At [124].
54 Tasarruf Mevduati Sigorta Fonu v Merrill Lynch Bank & Trust Co (Cayman) Ltd [2011] UKPC 17 [TMSF].
55 Clayton v Clayton (SC), above n 2, at [125] citing TMSF, above n 54, at [59].
56 At [127].
57 Pugachev, above n 3, at [3] and [7].
58 At [9] and [35].
validity of five New Zealand trusts settled between 2011 and 2013. These trusts held property in London, St Barths, Switzerland, Boston and Russia worth more than USD 95 million.59
The terms of the five trusts were the same in all material respects.60 Mr Pugachev was the settlor61 and a discretionary beneficiary.62 The residual beneficiaries were Mr Pugachev’s estranged partner and children.63 Unlike Mr Clayton, Mr Pugachev was not a trustee. But as trust ‘Protector’, Mr Pugachev had the power to remove trustees “with or without cause” and appoint new trustees.64 Further, the Protector’s consent was required before the trustees could distribute income and capital, remove a discretionary beneficiary, or bring forward the vesting date.65
Birss J held that the five trusts were invalid as they did not divest Mr Pugachev of beneficial ownership of the trust assets.66 The decision hinged on Birss J’s conclusion that Mr Pugachev’s powers as Protector were purely personal and could be exercised in his own best interest. 67 That such extensive powers had been conferred upon a beneficiary militated against any suggestion that the powers were fiduciary in nature.68 The ability of the Protector to remove trustees “with or without cause” also suggested the power could be exercised without limitation.69 As a result, Mr Pugachev could remove a trustee who refused to act in accordance with his wishes and replace them with one who would.70 He could leverage this power into complete control of the trust property.
Paul and Rosemary Webb were married on 2 December 2005. A week later, Mr Webb settled the Arorangi Trust. The trust held land and other assets in the Cook Islands. Mr Webb was initially the settlor, sole trustee and one of two discretionary beneficiaries, the other being his son from a previous marriage. Mr Webb could replace the list of beneficiaries at any time.71As trustee, he had the uncontrolled discretion to appoint income to any of the beneficiaries for their “personal use, support, benefit, maintenance, education or advancement in life”.72 The
59 At [32] and [204].
60 At [28] and [141]-[142].
61 Some of the assets of the trust were transferred into the trusts by Victor Pugachev, Sergei’s son: at [74]. However, there was no evidence to show how Victor came by any of these assets. Birss J found that Sergei was the beneficial owner of the assets settled on trust and that Victor was acting entirely on his instruction: at [204]- [211]. Sergei can therefore be regarded as the settlor.
62 London Residence Trust Deed, cl 1.1(c)(i).
63 London Residence Trust Deed, cl 5.5. 64 London Residence Trust Deed, cl 4.5. 65 London Residence Trust Deed, cl 6.3. 66 At [278].
67 At [267].
68 At [268].
69 At [272].
70 At [244].
71 Arorangi Trust Deed, cl 10.1.
72 Schedule to Arorangi Trust Deed, cl 1.1.
trust deed permitted him to benefit from the trust and to act notwithstanding a conflict of interest.73
The deed also provided for the trustee to appoint a “Consultant” to “assist in the administration and management of the trust”.74 In addition, the Consultant had the absolute discretion to replace the trustee.75 In 2006, Mr Webb appointed his business partner, Mr Andrew Tauber, to the positions of Consultant and trustee. Mr Tauber and his children were also added as discretionary beneficiaries. In 2014, Mr Tauber retired as trustee and Consultant and he and his children were removed as beneficiaries. The Webbs separated in April 2016. Shortly thereafter, Mr Webb began a relationship with Ms Brenda Dixon and settled the Webb Family Trust. Mr Webb and Ms Dixon were the trustees. Assets of the Arorangi Trust were resettled on the Webb Family Trust. The other terms were essentially the same as the Arorangi Trust.76 During this period, Mr Webb appointed himself as Consultant to the Arorangi Trust. He also appointed an additional trustee.77
Mrs Webb contended that both trusts were invalid, and that the trust assets were matrimonial property under Cook Islands law. The Court of Appeal referred to both Clayton and Pugachev, and held that the ultimate question was whether the powers reserved by the settlor were inconsistent with an intention to irrevocably relinquish a beneficial interest in the trust property. If Mr Webb could recover the trust property without requiring the assent of a truly independent person, or without breaching an enforceable fiduciary duty, the trust was invalid.78 In his capacity as sole trustee, Mr Webb could appoint the entirety of the trust property to himself.79 He could also remove his son as a discretionary beneficiary, effectively collapsing the trust.80 Accordingly, the trusts were invalid.81
E Traditional challenges to the validity of express trusts
Prior to Clayton, creditors could only claim against a discretionary trust in limited circumstances. Under ss 344–350 of the Property Law Act 2007, a disposition of property intended to defeat creditors may be set aside. “Disposition” includes both the creation of a trust, as well as a transfer to a trustee.82 The test of intention is whether the person disposing of property knew or must have known that they were exposing creditors to a significantly
73 Arorangi Trust Deed, cl 14.1.
74 Arorangi Trust Deed, cl 5.1.
75 Arorangi Trust Deed, cl 6.2.
76 Webb v Webb, above n 4, at [52].
77 At [59]. Presumably, the newly appointed trustee was also Ms Dixon.
78 At [56]. See also at [53].
79 At [61].
80 At [63].
81 At [65].
82 Property Law Act 2007, s 345(2)(a)–(b).
enhanced risk of not recovering the amounts owing to them.83 If property is gifted to a trust within five years of the donor being adjudged bankrupt, it may also be recoverable by the Official Assignee under the Insolvency Act.84
The ability of spouses to challenge the validity of a trust was similarly circumscribed. Under s 44 of the PRA, a disposition of property may be set aside if it was intended to defeat a claim under the Act and has that effect.85 “Disposition” includes settlement on trust or a transfer to a trustee.86 The test for intention is the same as under the Property Law Act: knowledge that the disposition is likely to defeat a claim under the Act.87 Section 44C applies where one spouse has disposed of relationship property to a trust with the effect of defeating the claim or rights of the other spouse, and s 44 does not apply. In such a case, the court has a discretion to award compensation, property or income from the trust to the other spouse. However, the court has no power to award capital from the trust.88
If the other spouse has no other assets, and the trust has no income, s 44C is of little assistance.89 If the parties were married or in a civil union, the disadvantaged partner could pursue a claim under s 182 of the Family Proceedings Act 1980.90 This allows the court to vary a “nuptial settlement” – a disposition that makes continuing provision for one or both parties in their capacity as spouses91 – for the benefit of one or both partners. A trust will almost inevitably be a “nuptial settlement” where it is settled during the currency of the relationship and either or both parties are beneficiaries.92 If there is no nuptial settlement, or the parties were in a de facto
83 Property Law Act 2007, s 345(1); Regal Castings Ltd v Lightbody [2008] NZSC 87, [2009] 2 NZLR 433 at [54]
and [167].
84 A gift made by the bankrupt within two years of adjudication may be cancelled by the Assignee: s 204. A gift made within two to five years of adjudication may be cancelled by the Assignee if the bankrupt was unable to pay their debts at the time: s 205. A “gift” includes transfer of property or an assignment of an interest to a trust: Official Assignee v MWA Consultants Ltd [2017] NZHC 2801 at [35]. However, the position may be complicated where property is transferred in exchange for a debt, and that debt is then forgiven. Under s 207(1), “on the cancellation of an irregular transaction under which property of the bankrupt, or an interest in property of the bankrupt, is transferred”, the court may make an order for the retransfer of the property to the Assignee. But the forgiveness of a debt – which is the ‘gift’ – does not involve a transfer of property. Accordingly, there is no foundation for the Court to make an order under s 207: see Official Assignee v Mayers [2012] NZHC 34.
85 The requirement that the disposition must also have the effect of defeating a claim is implicit in Gray v Gray
[2013] NZHC 2890; SMW v MC [2013] NZHC 396, [2014] NZFLR 71 at [73]- [76]; Horsfall v Potter [2017]
NZSC 196[2017] NZSC 196; , [2018] 1 NZLR 638 at [99].
86 The term “disposition” is broadly construed to include all forms of alienation, whether for value or not: Re Polkinghorne Trust [1988] NZHC 1525; (1988) 4 NZFLR 756 (HC); Clayton v Clayton (CA), above n 43, at [133]; Nicola Peart (ed) Brookers Family Law: Family Property (online looseleaf ed, Thomson Reuters) at [PR44.02(1)]. The disposition must be of the beneficial interest in the property: see Horsfall v Potter, above n 85.
87 Ryan v Unkovich [2009] NZHC 2627; [2010] 1 NZLR 434 (HC) at [33]; Potter v Horsfall [2016] NZCA 514, [2016] NZFLR 974
at [41].
88 Peart, above n 86, at [PR44C.05(2)].
89 See Law Commission Review of the Law of Trusts: A Trusts Act for New Zealand (NZLC R130, 2013) at [19.7]- [19.15].
90 Peart, above n 86, at [PR44C.05(2)].
91 Ward v Ward [2009] NZCA 139, [2009] 3 NZLR 336 at [27]; Clayton v Clayton [2016] NZSC 30, [2016] 1
NZLR 590 at [34] [Claymark Trust].
92 Clayton v Clayton [Claymark Trust], above n 91, at [34].
relationship, there may be scope for a constructive trust claim if the disadvantaged party has made a contribution to property held on trust.93
F Avenues of attack
First, there is the ‘property as powers’ approach. This was the approach of the Supreme Court in Clayton. Although the Supreme Court stressed the PRA context, the reasoning parallels that in TMSF where the Privy Council held more generally that powers may be treated as property even in the absence of a legislative provision to that effect.94 This suggests the Court’s reasoning could have more general application.95 The Court, however, declined to clarify the position if Mr Clayton’s powers had been less extensive: the question is simply whether the powers give the settlor “such a degree of control over the assets that it is appropriate to classify those powers” as property.96
The second approach is to challenge the validity of the trust. The trust is invalid ab initio and the property is held on resulting trust for the settlor. This was the approach in Pugachev and Webb. As was the case in Clayton, courts are usually freed from the obligation to engage with the validity issue by external legislation regulating the use of trusts.97 Although in Pugachev, Birss J indicated that he would have set aside the five trusts under the Insolvency Act on the basis they were settled to defeat Mr Pugachev’s creditors.98 Yet he elected to resolve the case on the basis the trusts were invalid.
It is suggested that declaring the trust invalid is preferable to the ‘powers as property’ approach. If the powers themselves are treated as property, they must be valued. This is particularly problematic in the context of the PRA. In Clayton, both the Supreme Court and Court of Appeal held that the value of the VRPT powers was equal to the value of the trust assets.99 However, this risks converting separate property into relationship property.100 All the Supreme Court said was that if the underlying assets were separate property, s 13 of the PRA – which allows the court to distribute property unequally if equal sharing would be “repugnant to justice” – could
93 See, for example: Murrell v Hamilton [2014] NZCA 377; Vervoort v Forrest [2016] NZCA 375, [2016] 3 NZLR 807; Hawke’s Bay Trustee Company Ltd v Judd [2016] NZCA 397.
94 Jonathan Orpin-Dowell and Nicola Peart “Vulnerability of Trusts” (paper presented to New Zealand Law Society Trusts Conference – Trusts on Trial, June 2017) 183 at 199.
95 For example, under s 101(1)(b) of the Insolvency Act, “the powers the bankrupt could have exercised in, over, or in respect of any property . . . for the bankrupt’s own benefit vest in the Assignee.” This is express statutory recognition that powers may in some cases be regarded as property: see Orpin-Dowell and Peart, above n 94, at 202.
96 Clayton v Clayton (SC), above n 2, at [50].
97 Bennett, above n 30, at 78.
98 The equivalent provision is s 423 of the Insolvency Act 1986 (UK). See Pugachev, above n 3, at [443]-[448].
99 Clayton v Clayton (CA), above n 43, at [113]; Clayton v Clayton (SC), above n 3, at [104].
100 Jessica Palmer and Nicola Peart “Clayton v Clayton: a step too far?” (2015) 8 NZFLJ 114 at 117.
be invoked.101 Aside from the notoriously high threshold, s 13 is an awkward fit in this situation, as it deals with division rather than the classification of property.102
Rather, it is more conceptually coherent to simply declare the trust invalid and deal with each item of property separately.
101 Clayton v Clayton (SC), above n 2, at [89].
102 Orpin-Dowell and Peart, above n 94, at 188.
Chapter II: The “irreducible core” reincarnated
The aim of this chapter is succinctly described by Parkinson:103
Because trusts arise in so many different contexts, and the necessary features of the trust vary accordingly, it is a futile exercise to try to find a definition of the trust which is both comprehensive ... and also accurate. However, there is great value, and much practical significance, in trying to define the irreducible core of the trust concept, without which a court is entitled to say that no trust exists ...
Crucial to the definition of the common law trust is the notion of an “irreducible core”. Without a core, the trust ceases to be a coherent concept and instead represents a ‘mere amalgam of historically and often pragmatically adopted ideas’.104 But identifying the core features of a valid trust is far from straightforward. Parkinson has noted that “there can be no area of law in which there is more confusion about basic definitions than the law of trusts”.105 Definitional discourse has been dominated by two paradigms: the proprietary theory and the obligational theory.106
A The proprietary theory
First, the trust can be conceived of as a mechanism of property.107 According to this view, the trust is a structured transfer of property from the settlor to the beneficiaries.108 Fundamental to this transfer is the separation of legal and equitable estate.109 The trustee holds the legal estate, and the beneficiary a corresponding equitable estate.110 The trustee, as the legal owner, has the power to deal with the property; the beneficiary, as the equitable owner, has the right to benefit.111
The beneficiary’s interest is derivative of the trustee’s interest: if the trustee has no power to give effect to the trust structure, the beneficiary has no right to benefit.112 The trustee, having taken legal title to the trust property, is subject to an obligation to employ those powers to give
103 Patrick Parkinson “Reconceptualising the Express Trust” (2002) 61 CLJ 657 at 682.
104 Webb, above n 31, at 478.
105 Parkinson, above n 103, at 657.
106 Jessica Palmer “Theories of the Trust and What They Might Mean for Beneficiary Rights to Information” [2010] NZ L Rev 541 at 542-543.
107 Palmer, above n 106, at 543.
108 James Penner “Exemptions” in Peter Birks and Arianna Pretto (eds) Breach of Trust (Hart Publishing, Portland, 2002) 241 at 261.
109 Parkinson, above n 103, at 658-659; Penner, above n 108, at 252; Jessica Palmer and Charles Rickett “The revolution and legacy of the discretionary trust” (2017) 11 J Eq 157 at 159.
110 Parkinson, above n 103, at 658.
111 James Penner “The (True) Nature of a Beneficiary's Equitable Proprietary Interest under a Trust” (2014) 27 CJLJ 473 at 477.
112 Paul Matthews “From Obligation to Property, and Back Again? The Future of the Non-Charitable Purpose Trust” in David Hayton (ed) Extending the Boundaries of Trusts and Similar Ring-Fenced Funds (Kluwer Law International, London, 2002) 203 at 206.
effect to the dispositional structure.113 This obligation ‘runs’ with the property, binding successors in legal title.114 It therefore matters not who the trustee is, only that there is a person able to give effect to the trust structure.115
B The obligational or multi-patrimonial view
Secondly, the trust can be understood as a species of obligation.116 The trust is a negotiated relationship or deal between settlor and trustee. A duty of confidence is imposed upon the trustee to deal with specified property for the benefit of the beneficiaries.117 It is because this obligation relates to the benefit of ascertained property that it gives rise to a trust.118 The beneficiaries have a commensurate right to enforce the trustee’s obligations and to hold them to account. This is at the core of the “obligational” trust.119
The trust property belongs to the trustee. The trust is a special patrimony to which particular rights and duties attach. The property within this does not form part of the trustee’s general patrimony, and so is not available to satisfy the claims of their creditors or spouse.120 It is for this reason that the obligational trust is sometimes referred to as a “multi-patrimonial” trust.121 There is no requirement that the equitable estate rest with the beneficiaries. Rather, the substance of the trust is determined by the extent of a trustee’s obligations in respect of particular property.122
C The competing theories in practice
It is trite that a trust will not fail for want of a trustee.123 Where a trustee disclaims their appointment, the trust property revests in the settlor, who holds the property subject to the original trust.124 Any individual trustee may retire from office, and the Court itself will execute the trust if necessary.125 Penner and Palmer both argue that this suggests a trust is created
113 Penner, above n 108, at 262.
114 At 263.
115 At 261.
116 Parkinson, above n 103, at 659.
117 David Hayton “The Irreducible Core Content of Trusteeship” in A.J Oakley (ed) Trends in Contemporary Trust Law (Clarendon Press, Oxford, 1996) 47 at 47; Peter Jaffey "Explaining the Trust" (2015) 131 LQR 377 at 378; Penner, above n 108, at 254.
118 Lionel Smith “Trust and Patrimony” (2008) 38 Rev Gen Droit 379 at 388.
119 Hayton, above n 117, at 47; Parkinson, above n 103, at 663.
120 Penner, above n 108, at 254.
121 Penner, above n 108, at 254; Webb, above n 31, at 478. See also Smith, above n 118, generally.
122 Penner, above n 108, at 253-254
123 Re Lawton, Gartside v Attorney-General [1936] 3 All ER 378 (Ch) at 380; In re List v Prime [1948] NZGazLawRp 115; [1949] NZLR 78
(SC) at 81; Donoghue v Farmer [1998] 1 NZLR 116 (HC) at 120.
124 Mallot v Wilson [1903] UKLawRpCh 102; [1903] 2 Ch 494 (Ch) at 503. See also David Hayton (ed) Underhill & Hayton: Law Relating to Trusts and Trustees (19th ed, LexisNexis, London, 2016) at [8.9].
125 Penner, above n 108, at 261.
through a transfer of property to one party to be used for the benefit of another.126 The existence of the trust does not depend on any form of agreement between the settlor and prospective trustee.127
A trust will, however, fail for want of a trustee where the identity of that person is essential to the trust.128 Smith argues that this “is one of many proofs” of the underlying obligational character of the express trust.129 Where the trustee is no more than a representative of an office, it matters not which individual is subject to the trust obligation. The classic example is where the settlor wishes to appoint a solicitor or accountant. Appointment of another trustee simply reflects the court’s inherent desire to give effect to the settlor’s intention. But if the identity of the individual is essential to that intention, and they refuse or are otherwise unwilling to act, the trust must fail. A transfer of property alone cannot create a trust. The trust will only be valid if the individual accepts the trust obligation.
The proprietary theory is unable to explain the relaxation of the requirement of certainty of objects.130 The classic test required the beneficiaries of the trust to be ascertainable, such that they could be drawn up as a complete list.131 In McPhail v Doulton, the trust provided that the trustees “shall apply the income of the fund ... at their absolute discretion to or for the benefit of the officers and employees, ex-officers or ex-employees of the company, or to any relatives or dependants ... as they think fit”.132 Clearly, the trust did not satisfy the traditional test. Nevertheless, the House of Lords held that a trust is valid if it can be said with certainty that any given individual is or is not a member of the class.133
So long as some beneficiaries are clearly identifiable, there is someone able to enforce the trust to ensure the trustee is not able to treat the property as their own.134 This logic appears to underlie the decision in McPhail. But it does not seem possible to treat an unascertainable class as genuine beneficial co-owners in equity.135 The definition of ‘relative’ – “descendants from a common ancestor” – ultimately settled on by the Court of Appeal136 would include a vast number of people distantly related to employees or former employees.137 While theoretically plausible, it is practically fanciful to think that such a class could ever form an exhaustive list.
126 Penner, above n 108, at 261; Palmer, above n 106, at 545.
127 Penner, above n 108, at 262.
128 Re Lysaght [1966] Ch 191 (Ch) at 207.
129 Smith, above n 118, at 388, n 16.
130 Penner, above n 108, at 256
131 IRC v Broadway Cottages [1955] Ch 20 (CA).
132 McPhail v Doulton [1970] UKHL 1; [1971] AC 424 (HL).
133 At 437, 446-447 and 456.
134 Penner, above n 108, at 256.
135 At 256.
136 In re Baden's Deed Trusts (No 2) [1973] Ch 9 (CA) at 28.
137 Parkinson, above n 103, at 660.
For an equitable property right to exist, the identification of the collective owners cannot be “up in the air”.138 McPhail therefore lends support to the obligational view of trusts: the beneficiary is not an equitable owner, yet they can compel the trustee to properly administer the trust.139
Whether the trust is conceived of as proprietary or obligational, the trustee must be subject to enforceable obligations.140 It goes without saying that an obligational trust must contain obligations. On a proprietary view, enforceable obligations are necessary to ensure the trustee gives effect to the dispositional structure. They flow from the fact the trustee holds the property for the benefit of another.
Both Palmer and Penner concede that duties which impose a particular standard of care upon a trustee can only be explained by an obligational model.141 The primary example is the duty of prudent investment, which requires a trustee to exercise the care, diligence and skill of a prudent person of business.142 Such a duty does not follow from the fact that property is held for the benefit of another. But while this concession is accurate, the duty of prudent investment does not form part of the “irreducible core” of the trust. A purely custodial trust exists even in the absence of such a duty.
Palmer argues that the obligational model does not readily provide a justification for the content of trustees’ obligations; it tells us nothing more than the fact trustees are subject to obligations.143 Under the obligational approach, the property belongs to the trustee subject to special obligations that attach to the property. The existence of these obligations means that the trust property does not form part of the trustee’s general patrimony. If the property were held exclusively for the trustee’s own benefit, it would form part of this general patrimony. The fundamental obligation must therefore be an obligation to hold the property for the benefit of someone else. Other duties flow from this central obligation.
The rule in Saunders v Vautier144 is often cited in support of the proprietary theory. It allows beneficiaries who are of full age and sound mind, and are absolutely entitled to the trust property, to bring the trust to an end. The rule can only be justified on the basis that the trust
138 Penner, above n 108, at 256.
139 Antony Duckworth “Trust Law in the New Millennium, Part III: Fundamentals” (2001) 7 Trusts & Trustees 9 at 13.
140 Parkinson, above n 103, at 679.
141 Palmer, above n 106, at 551; Penner, above n 108, at 250.
142 Trustee Act 1956, s 13B.
143 Palmer, above n 106, at 552.
144 Saunders v Vautier [1841] EngR 629; (1841) 4 Beav 115, 49 ER 282 (Rolls Court).
property ultimately belongs to the beneficiaries.145 The principle has been applied to discretionary trusts by treating the identified discretionary objects as one person owning the entire fund.146 The proprietary basis of the rule was therefore capable of being maintained, at least where there is a defined list of discretionary beneficiaries.147
However, the rule in Saunders v Vautier, and the proprietary basis of the express trust, has been significantly eroded by the decision in McPhail v Doulton. There is no possibility of an unascertainable class of beneficiaries invoking the rule. The presence of a power to add and remove beneficiaries further complicates application of the rule. It is difficult to say the beneficiaries are ‘absolutely entitled’ to the trust property if beneficiaries may be added and removed. At least in Australia, the rule has been recast in obligational terms. In Miskelly v Arnheim, the New South Wales Supreme Court identified a second basis for the rule: that it may be exercised by those entitled to demand due administration of the trust.148
The most significant development in support of the obligational theory is the notion of the irreducible core of trusteeship.149 The concept is the work of Professor Hayton, who argued that a trustee’s duty of good faith forms the “irreducible core” of the trust.150 This defines the trust by reference to the obligations owed by the trustee to the beneficiary, which is the essence of the obligational theory. The “irreducible core” was swiftly endorsed by Millett LJ in Armitage v Nurse:151
There is an irreducible core of obligations owed by the trustees to the beneficiaries and enforceable by them which is fundamental to the concept of a trust. If the beneficiaries have no rights enforceable against the trustees there are no trusts... The duty of the trustees to perform the trusts honestly and in good faith for the benefit of the beneficiaries is the minimum necessary to give substance to the trusts, but in my opinion it is sufficient.
Millett LJ’s reference to ‘the substance of the trust’ is somewhat cryptic.152 In Clayton, the Court of Appeal took it to mean that all that is necessary for a valid trust, in addition to the
145 Penner, above n 108, at 255
146 See Re Smith, Public Trustee v Aspinall [1928] Ch 915 (Ch).
147 Palmer and Rickett, above n 109, at 163.
148 Miskelly v Arnheim [2008] NSWSC 1075 at [32] citing CPT Custodian Pty Ltd v Commissioner of State Revenue [2005] HCA 53; (2005) 224 CLR 98 at [48]- [49] and Sir Moses Montefiore Jewish Home v Howell & Co (No 7) Pty Ltd [1984] 2 NSWLR 406 (SC) at 410-411. See also Palmer and Rickett, above n 109, at 163-164.
149 Palmer, above n 106, at 551.
150 Hayton, above n 117, at 47 and 62.
151 Armitage v Nurse [1998] Ch 241 (CA) at 253.
152 David Fox “Non-Excludable Trustee Duties” (2010) 17 Trusts & Trustees 17 at 19.
three certainties laid down in Knight v Knight,153 is a duty to act honestly and in good faith.154 But as Fox and Barkley have argued, this is to misread Millett LJ’s dictum.155 The principal duty of the trustee is to perform the trust honestly and in good faith for the benefit of the beneficiaries.156 Implicit in this is an obligation for the trustee to act in the best interests of the beneficiaries. A requirement of honesty dictates how this obligation must be discharged, but honesty itself is not the fundamental trust obligation.157
Together, the three certainties and a duty of honesty and good faith constitute “an exceedingly loose legal category”.158 There is nothing “peculiarly fiduciary” about a duty to act in good faith.159 As Clayton illustrates, increasingly brazen drafting practices mean that duties of honesty and good faith have little bite in isolation. If the trust deed expressly permits the trustee to exercise their discretion in their own favour, any obligation to act in the best interests of the beneficiaries is effectively undermined without eroding any duty of honesty or good faith.
Millett LJ’s analysis is founded upon a standard of liability rather than a core duty that gives the trust substance.160 An obligatory requirement of honesty and good faith is necessary to give efficacy to the core fiduciary obligation. If a trustee may be excused from liability for a dishonest breach, a duty to act in the best interests of the beneficiaries has little substance. A dishonest trustee could simply misappropriate trust property with no fear of personal liability. This concern appears to underlie Millett LJ’s analysis. In short, duties of honesty and good faith are necessary to enforce the trust obligation, but those duties by themselves are not the content of the trust.161
E Redefining the “irreducible core”
It is clear that the trust has both a proprietary and obligational dimension.162 A stoic adherence to a single theory would therefore be unhelpful.163 Nevertheless, the orthodox proprietary model has been severely shaken. First, it is now possible to have a valid trust without being able to locate an equitable estate in the trust property.164 McPhail v Doulton illustrates as much.
153 Knight v Knight [1840] EngR 862; (1840) 3 Beav 148, 49 ER 58 (Ch). The three certainties are certainty of intention, certainty of subject matter and certainty of objects.
154 Clayton v Clayton (CA), above n 43, at [52]-[54].
155 Fox, above n 152, at 19; Tobias Barkley "Clayton v Clayton: The Court of Appeal on the concepts of property and trusts” [2015] NZLJ 164 at 165.
156 Alexander Trukhtanov “The Irreducible Core of Trust Obligations” (2007) 123 LQR 342 at 345.
157 Barkley, above n 155, at 165
158 At 164.
159 Matthew Conaglen Fiduciary Loyalty: Protecting the Due Performance of Non-Fiduciary Duties (Hart, Portland, 2010) at 40-44.
160 Webb, above n 31, at 479.
161 Tobias Barkley “The content of the trust: what must a trustee be obliged to do with the property?” (2013) 19 Trusts & Trustees 452 at 462.
162 Jaffey, above n 117, at 399.
163 Webb, above n 31, at 478.
164 Parkinson, above n 103, at 679.
Second, settled aspects of trust law previously considered firm ground for proprietary theorists are being explained in obligational terms. To the extent that the orthodox proprietary theory requires identifiable legal and equitable estates, it no longer provides a realistic definition of the modern trust.
As the proprietary theory weakens, the proprietary and obligational models of the trust begin to converge. Palmer defends the proprietary theory: “A trust is fundamentally proprietary. The trustee owns property but not absolutely – the property must be held to benefit another.”165 The account given by Palmer is very much a weakened view of the orthodox proprietary theory. In particular, the proprietary trust does not “require all beneficiaries to own the property beneficially, but merely that the trust property be applied to another”.166 In other words, the trust property need not be owned by the beneficiaries, so long as it is not owned by the trustee. This bears little difference to the obligational definition proffered by Parkinson: “it is, then, the essence of the trust that property is held for the benefit of others”.167
The irreducible core of the trust lies at this point of convergence: an obligation to hold property for the benefit of another. The property need not be beneficially owned by the beneficiaries; the essential requirement is that it is not beneficially owned by the trustee. Further, this obligation must be enforceable by the beneficiaries, the only incentivised enforcers.168 The trustee must be sufficiently accountable “so that his status as the non-beneficial owner of the assets vested in him is practically real”.169 If the beneficiaries have no rights enforceable against the trustees, there is no trust. An obligation that cannot be enforced is no obligation at all.
F Conclusion
The common law trust is an enormously flexible institution. It does, however, have a certain logic to it. Trusts have features that are definitionally present, in the sense that if those features are absent, the structure is not a trust.170 On the foregoing analysis, the irreducible core has two elements. First, the trust must impose an obligation on a trustee to hold the trust property for the benefit of the beneficiaries. Second, that obligation must be enforceable by the beneficiaries.
165 Palmer, above n 106, at 552.
166 At 553.
167 Parkinson, above n 103, at 680.
168 MW Lau The Economic Structure of Trusts (Oxford University Press, New York, 2011) at 10.
169 Fox, above n 152, at 24.
170 Smith, above n 33, at 52.
Chapter III: The basis for invalidity
Part A: An obligation to hold the property for the benefit of another
If a particular trust does not include both elements of the irreducible core, the settlement is invalid, and the trust property is held on resulting trust for the settlor.171 The first is the obligation to apply the property for the benefit of the beneficiaries. It is axiomatic, therefore, that the trustee cannot benefit from the trust to an unlimited extent. As Smith says, “If the trustee could appoint property to himself, or make himself the beneficiary, we would probably no longer be dealing with a trust”.172
A The ability of a trustee to benefit
The general rule is that a fiduciary is not allowed to place themselves in a position where their interest and duty to the beneficiaries may conflict.173 Closely related is the rule that a trustee must not profit from their position: both reflect a trustee’s fundamental duty of loyalty.174 Problems arise when the trustee is also a beneficiary, which is frequently the case.175 In this situation, the conflict rule will generally be excluded expressly or by implication.176 In both Clayton and Webb, the trust deed expressly authorised ‘trustee-objects’ to exercise their powers for their own benefit. But even in the absence of such a clause, where the settlor includes a trustee within the class of beneficiaries, the implication is that the settlor intended the trustee to be able to exercise their powers for their own benefit.177 Accordingly, the rule does not apply.178
Barkley distinguishes ‘limited benefit powers’ from ‘unlimited benefit powers’. A limited benefit power permits the trustee to benefit from its exercise, but the nature of the power is
171 Geraint Thomas “Shams, Revocable Trusts and Retention of Control” in David Hayton (ed) The International Trust (3rd ed, Jordans, Bristol, 2011) 597 at 609-610.
172 Lionel Smith “Mistaking the Trust” (2011) 40 HKLJ 747 at 791.
173 Bray v Ford [1895] UKLawRpAC 54; [1896] AC 44 (HL) at 51.
174 Fenwick v Naera [2015] NZSC 68, [2016] 1 NZLR 354 at [71]; Lynton Tucker, Nicholas Le Poidevin and James Brightwell (eds) Lewin on Trusts (19th ed, Sweet & Maxwell, London, 2015) at [20-033].
175 Hayton, above n 124, at [14.1]; Tucker, Le Poidevin and Brightwell, above n 174, at [20-166]. There is no rule preventing a trustee from being a beneficiary: John McGhee (ed) Snell's Equity (33rd ed, Sweet & Maxwell, London, 2015) at [11-001], n 2.
176 Thomas argues that the broader no conflict rule has no application to dispositive powers. Powers of appointment may only be exercised in favour of identified objects. This is so irrespective of whether the power is fiduciary or personal. If the donee is not an object, and exercises the power in their favour, that is a fraud on the power. If the donee is included as an object, the intention of the settlor would seem to exclude the rule. In both cases, the rule has no application: see Geraint Thomas Thomas on Powers (2nd ed, Oxford University Press, Oxford, 2012) at [12.11].
177 Tucker, Le Poidevin and Brightwell, above n 174, at [20-181]; Thomas, above n 176, at [12.11] and [12.19]; Dever v Knobloch HC Napier CIV-2008-441-537, 29 October 2009 at [47]. Exclusion must be attributable to the settlor’s intention and terms of the trust. An express clause permitting trustee’s to exercise their powers for their own benefit will apply to any subsequent trustee. But the no conflict rule will not be implicitly excluded where a beneficiary is later appointed as a trustee: see Tucker, Le Poidevin and Brightwell, above n 174, at [20-178].
178 Sargeant v National Westminster Bank (1990) 68 P & CR 518 (CA) at 523; Thomas, above n 176, at [12.19].
such that the trustee cannot completely exclude the interests of the other beneficiaries. This could be because the nature of the power does not extend to the whole of the trust, or there is an objectively determinable limit on the ability of the trustee to benefit.179
B Limited benefit powers
Such a power was in issue in Edge v Pensions Ombudsman.180 The Industrial Training Boards Pension Funds were administered for the benefit of current employees and retired pensioners. The scheme was funded by contributions from employers and current employees. The trustees comprised of nine employers, nine employees and two pensioners. The trustees had the power to vary the scheme rules. This included the ability to reduce employer or employee contributions, and to augment pensioner and employee benefits. The scheme clearly contemplated that these powers could be exercised for the trustees’ benefit, as any change would result in a benefit to at least some of the trustees.181 Accordingly, a decision to reduce both employer and employee contributions and increase current employee benefits could not be challenged on the basis it conferred a benefit on some of the trustees.182 However, the ability of the trustees to benefit was limited. They were authorised to benefit their own class, but they could not prefer themselves over other members of that class.183
Another example is where a trustee is able to exercise a power of investment for their own benefit.184 A trustee who is a life tenant will benefit from an investment strategy that prioritises yield over long-term capital growth.185 But while the trustee benefits, they do so to only a limited extent. Their ability to benefit extends only to the income generated by the trust. The beneficiaries remain entitled to the investment no matter how the power is exercised. Limited benefit powers are compatible with the trust concept, as they do not undermine the core obligation of the trustee. To the extent the power is unable to be exercised for the benefit of the trustee, the trustee is obliged to use the property for the benefit of someone else.186 A trustee does not lose fiduciary status because he or she has “an express right to partial enjoyment of the trust property” as a beneficiary.187
179 Barkley, above n 161, at 453.
180 Edge v Pensions Ombudsman [1998] Ch 512 (Ch); Edge v Pensions Ombudsman [2000] Ch 602 (CA).
181 Edge v Pensions Ombudsman (Ch), above n 180, at 539-540.
182 Edge v Pensions Ombudsman (Ch), above n 180, at 540-541; Edge v Pensions Ombudsman (CA), above n 180, at 622.
183 Barkley, above n 161, at 456.
184 This is the example given by Tucker, Le Poidevin and Brightwell, above n 174, at [20-167].
185 This was essentially the situation in Re Mulligan (Deceased) [1998] 1 NZLR 481 (HC), although the power could not be exercised solely for the trustee’s benefit. Preferring the life interests of the life tenant, who was also a trustee, was therefore a breach of trust.
186 Barkley, above n 161, at 453.
187 PD Finn Fiduciary Obligations (Law Book Company, Sydney, 1977) at 98.
C Unlimited benefit powers
The problem is more acute with respect to dispositive powers.188 The paradigm case is where the trustee is also a discretionary beneficiary, and has the absolute discretion to appoint income and capital. On the face of it, there is nothing in a clause of this nature precluding the trustee from exercising the discretion for their own benefit and to the complete exclusion of the other beneficiaries. Faced with such a power, a court has three options.189 First, the power might be interpreted in light of its purpose to exclude the trustee as a valid object. Because a trust was intended, the trustee, as a fiduciary, cannot distribute to themselves. The second possibility is to recognise that the settlor has left the trustee-object completely free to use the property for his or her own benefit. This being so, there is no trust. Third, the power might be restricted in some way by requiring the trustee to consider the interests of the other beneficiaries. The arrangement is treated as a trust, but there are no concrete restrictions on the ability of the trustee to benefit.190
If there is a provision in the trust deed expressly allowing the trustee to exercise the power in their own favour, the first option is unavailable. A court must take the second or third option. Historically, courts displayed a preference for the second option: where the trustee was an object of a dispositive discretion, the power was not fiduciary and there was no trust. In Re Penrose, Luxmoore J stated that a power of appointment can only be fiduciary if the donee is not an object.191 And in Re Wills’ Trust Deeds, Buckley J held that if the donee is an object and could appoint the whole of the trust property to himself, the power could not be regarded as fiduciary.192
In recent times, there have been indications that courts may opt for the third possibility.193 In Re Beatty, the testatrix bequeathed her chattels and a legacy of £1.5m to her trustees to “allocate, divide or make over ... to or among such person or persons as they think fit”.194 The power was an unlimited benefit power in the nature of a general power of appointment: the trustees were expressly permitted to exercise the power “notwithstanding that they may have a direct personal interest in the mode of its exercise”. Yet Hoffmann J stated that the powers were fiduciary, as they had to be exercised honestly and for the purpose for which they were created.195 This observation was strictly obiter, and Hoffmann J’s reasoning was not fully developed. Nevertheless, Re Beatty has subsequently been taken as authority for the
188 Tucker, Le Poidevin and Brightwell, above n 174, at [20-168].
189 Barkley, above n 161, at 453-454.
190 At 454.
191 Re Penrose, Penrose v Penrose [1933] Ch 793 (Ch) at 805-806.
192 Re Wills’ Trust Deeds [1964] Ch 219 (Ch) at 228.
193 See also Mettoy Pension Trustees Ltd v Evans [1990] 1 WLR 1587 (Ch).
194 Re Beatty [1990] 1 WLR 1503 (Ch).
195 At 1506.
proposition that a trustee can be an object of an unlimited benefit power without the power ceasing to be fiduciary.196
The approach to unlimited benefit powers in New Zealand
The approach of New Zealand courts to unlimited benefit powers has been somewhat erratic. In Blair v Vallely, Wild J opted for the third possibility. Although the deed permitted a trustee to exercise a dispositive discretion for his or her own benefit, the trustee was still subject to an obligation to act reasonably.197 Similarly, in McNulty v McNulty, the trustees appointed the entirety of the trust property to a trustee who was also a beneficiary. Associate Judge Osborne struck out a claim based on a breach of the conflict rule, as the deed permitted the trustees to exercise their powers even though their interests may conflict with their duties as trustees.198 He refused, however, to strike out a claim that the trustees breached their duties “to recognise discretion, to make informed decisions and to act impartially”.199 Again, the implication is that an unlimited benefit power may still be subject to fiduciary obligations.
B v X concerned a dispute over child support.200 Shortly after the father, B, became obliged to pay child support, he settled his business shares and house on trust. The discretionary beneficiaries were B, his children and any spouse. B was the sole trustee, and as “Appointer” held an unfettered power of appointment of income and capital. Fogarty J rejected the mother’s contention that the trust was a sham.201 However, he concluded that the deed did not create a trust. A trustee has control of assets not for their benefit, but for the benefit of others.202 The trust did not impair B’s ability to use the assets for his own benefit.203
Fogarty J’s decision on this point was strictly obiter,204 and the issue was not addressed by the Court of Appeal.205 Palmer has criticised the decision.206 She argues that B’s ability to deal with the property was still fettered in a way that it would not have been had there been no trust. B was still subject to obligations to perform the trust “for a proper purpose and not capriciously or wantonly; and actively to consider the beneficiaries and whether any power should be
196 For example, Thomas, above n 176, at [12.16] states that it is clear from Re Beatty that, provided the intention of the donor is made plain, a power may be fiduciary despite being exercisable by the donee in favour of themselves.
197 Blair v Vallely [2000] WTLR 615 at 639. Whether a trustee is in fact subject to a duty to act reasonably is controversial. See below at 24.
198 McNulty v McNulty (2011) 3 NZTR 21-025 (HC) at [60]-[61].
199 At [92] and [108]-[129]
200 B v X [2011] NZHC 2117; [2011] 2 NZLR 405 (HC).
201 At [85].
202 At [88].
203 At [83] and [96].
204 The primary dispute concerned B’s liability for child support. The sham claim was a cross-appeal by the mother that ultimately fell away: see at [78].
205 EJV v AJCB [2013] NZCA 100, [2013] NZFLR 325.
206 Jessica Palmer “Controlling the Trust” [2011] OtaLawRw 3; (2011) 12 Otago LR 473. See also Nicola Peart, Mark Henaghan and Greg Kelly “Trusts and Relationship Property in New Zealand” (2011) 17 Trusts & Trustees 866 at 880.
exercised in their favour”.207 Further, Fogarty J stated that the deed was a “formal expression of a general power of appointment.”208 However, B could only appoint to a limited class of objects.209
D Do the obligations that attach to dispositive discretions constrain trustees?
The issue can be distilled as follows: are the duties of a trustee that apply to an exercise of a dispositive discretion sufficient to create a valid trust? These include the duties alluded to by Palmer: to actively consider exercising the discretion, to make a genuine decision, to not act capriciously, to act for a proper purpose and to take into account relevant considerations.210 These duties are broadly part of a trustee’s overarching duty of good faith.
Assessing compliance with many of these duties requires evaluation of the trustee’s subjective thought process.211 This makes it difficult to determine whether the trustee actively considered exercising the discretion in favour of the other beneficiaries. A similar problem exists in respect of whether the trustee gave the matter real and genuine consideration. This includes an obligation to exercise the power personally, and not at the prompting or direction of others.212 But again, this does not restrict the trustee’s freedom. Putting the difficulties in assessing compliance aside, a trustee could still appoint the entirety of the trust property to themselves while honestly considering the exercise of their discretion.
It is difficult to see how appointment to the trustee could constitute an improper purpose. Where the power is a dispositive power, the purpose will be to benefit one or more of the specified beneficiaries.213 Appointing the trust property to one discretionary beneficiary who happens to be the trustee falls within this scope. While the trustee cannot directly appoint the property to non-objects, this does not truly fetter their ownership. The trustee could appoint trust property indirectly to a non-object without committing a fraud on the power. This is because “an object may very well be benefited when a relative of the object receives a benefit”.214 While this is limited to an ability to indirectly make appointments to relatives of the trustee, in practice, it is highly unlikely the trustee would wish to appoint property to a stranger. If the trustee also holds a power to add beneficiaries, the restriction falls away completely.
A trustee acts capriciously if they act for reasons irrational, perverse or irrelevant to any sensible expectation of the settlor.215 For example, if they made a distribution to a beneficiary
207 Palmer, above n 206, at 483 and 492
208 B v X, above n 200, at [96].
209 Palmer, above n 206, at 484.
210 See also Thomas, above n 176, at [10.01]-[10.04].
211 Barkley, above n 161, at 459.
212 Tucker, Le Poidevin and Brightwell, above n 174, at [29-165].
213 Andrew Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) at 165-
166. See also Kain v Hutton [2008] NZSC 61, [2008] 3 NZLR 589 at [47].
214 Kain v Hutton, above n 213, at [20]-[23].
215 In re Manisty’s Settlement [1974] Ch 17 at 28.
based on their height, complexion or borough of residence.216 Settlor intention is the litmus test. Accordingly, it is difficult to see how the settlor appointing the entirety of the trust property to themselves could be considered capricious. In exceptional circumstances, such as where a beneficiary is sick or in obvious need of support, it may be capricious for the settlor to disregard their claim. Where the settlor is a trustee, their actions must be tested against their expectations as settlor as ascertained from the trust deed. While it will be tempting for a court to intervene, it is at least questionable whether a finding of capriciousness is justified in this situation given the settlor granted themselves the power to benefit one beneficiary to the complete exclusion of the others. In any case, until such circumstances arise, the duty does not constrain the ability of a settlor-trustee to self-appoint.
That leaves the requirement to “take into account all relevant considerations and refrain from taking into account any irrelevant consideration”.217 The duty has a greater objective component, as the court determines the matters that should have been considered.218 However, just how those considerations should be weighed is left to the trustee’s subjective assessment. The decision will only be set aside if the trustee would or might have reached a different decision had the correct considerations been taken into account.219 Where the trustee exercises the power in their own favour, this conclusion seems unlikely. It is not sufficient that the court would have decided differently.220 Even if the decision is set aside, the trustee has the discretion to make the same decision in the future.221
The fundamental problem with these duties is that they are subjective and disconnected from the actual outcome.222 As a result, they do not place any objective limit on the trustee’s ability to self-benefit. The exception to this would be if the courts recognised a duty to act reasonably.223 Such a duty would enable the court to examine the substantive decision made by the trustee.224 There are a number of recent dicta to the effect that, when exercising a discretion, a trustee ought to act reasonably.225 However, the position in New Zealand appears to be that it is no more than another expression for the requirement to act in good faith and in
216 At 28.
217 Masters v Stewart [2014] NZHC 2419, [2018] NZAR 233 at [33]- [38]; Clement v Lucas [2017] NZHC 3278 at [68]- [75]; Re Hastings-Bass, Hastings v Inland Revenue [1975] Ch 25 (CA) at 40-41. See also Pitt v Holt [2013] UKSC 26, [2013] 2 AC 108.
218 Barkley, above n 161, at 454, n 7.
219 Pitt v Holt, above n 217, at [91]-[92]; Abacus Trust Co (Isle of Man) v Barr [2003] Ch 409 (Ch) at [21].
220 Pitt v Holt, above n 217, at [73].
221 Clement v Lucas, above n 217, at [107]. But see Masters v Stewart, above n 217. The trustees made a distribution to “equalise” the position of the beneficiaries but failed to consider the contributions made by one beneficiary to the trust property. The decision was not set aside. Rather the trustees were directed to reconsider their decision. In reality, the trustees were not free to make the same decision again.
222 Barkley, above n 161, at 454.
223 Barkley, above n 161, at 454, n 9.
224 See Butler, above n 213, at 181. This essentially imports the administrative law concept of ‘unreasonableness’. 225 Scott v National Trust [1998] EWHC 318; [1998] 2 All ER 705 (CA) at 718; Edge v Pensions Ombudsman (Ch), above n 180, at 534; Craddock v Crowhen HC Christchurch M425/92, 10 February 1995; Blair v Vallely, above n 197, at 639; Wrightson Ltd v Fletcher Challenge Nominees Ltd HC Auckland CP129/96, 21 August 1998 at 43.
a manner that is not capricious.226 There is no independent ground of review on the basis the decision was so unreasonable that no reasonable trustee could have made it.227
E The duty to act unanimously
The trustee must be able to unilaterally appoint the entirety of the trust property to themselves. Where there is more than one trustee, trustees are required to act unanimously unless the deed provides otherwise.228 To bind the trust, the decision must be made by all the trustees.229 Even if the trust deed provides that a decision may be made by a majority, the ability of any trustee to benefit is limited by the need for the assent of another.230 The only exceptions would be if the trust deed provided that one trustee was to abide by the decisions of the other,231 or that one trustee was to have a casting vote.232 In both cases, that trustee would be able to make decisions unilaterally.233
A jointly held power of appointment does not amount to an unlimited benefit power, as it may only be exercised with the consent of another person.234 To the extent that a co-trustee does not sanction the trustee-beneficiary to benefit, they are obliged to hold the property for the benefit of another. A husband and wife may both be trustees and discretionary beneficiaries.235 While they could agree to appoint the property to themselves, neither is free to benefit independently of the other. The use of corporate trustees also poses some difficulty. Where the trustee company is controlled by the settlor – for example, as the majority shareholder – they have the ability to appoint directors and thus act unanimously.236 If there is no majority shareholder, as was the case in Harrison v Harrison, the person behind the trustee company can no longer act unanimously and does not hold an unlimited benefit power.237
226 Little v Howick Trustee DL Ltd [2018] NZHC 1884 at [48]- [53]; Masters v Stewart, above n 217, at [28]-[32];
Gailey v Gordon [2003] 2 NZLR 192 (HC) at [88]-[90].
227 New Zealand Maori Council v Foulkes [2014] NZHC 1777, [2015] NZAR 1441 at [89]. See also Jonathan Orpin “Reviewing 'Unreasonable' Discretionary Decisions Made by Trustees” (2015) 21 NZBLQ 131.
228 Halsbury’s Laws of England (5th ed, 2013, online ed) vol 98 Trusts and Powers at [393]; Niak v McDonald
[2001] NZCA 123; [2001] 3 NZLR 334 (CA) at [16]. See also Hayton, above n 124, at [52.1].
229 John Brown (ed) New Zealand Trusts and Asset Planning Guide (online looseleaf, CCH New Zealand) at [140- 260].
230 Re Butlin’s Settlement Trusts [1976] Ch 251 (Ch). See also Hayton, above n 124, at [52.4].
231 This was the situation in Re Arnott [1899] 1 IR 201. The example is discussed more fully in Hayton, above n 124, at [52.3].
232 Hayton, above n 124, at [52.3], n 2.
233 The settlor could also take an irrevocable power of attorney from the co-trustee to do all things necessary in respect of the trust, as was the case in Vervoort v Forrest, above n 93, at [35].
234 In re Churston Settled Estates [1954] Ch 334 (Ch) at 444; In re Earl of Coventry’s Indentures; Smith v Earl of Coventry [1974] Ch 77 (Ch) at 91.
235 See Harrison v Harrison (2008) 27 FRNZ 202 (HC).
236 The general position is that company directors, who make decisions in respect of the trust, may be appointed by appointed by ordinary resolution: Companies Act 1993, s 153. This requires the appointment to be approved by a simple majority (more than half) of shareholders: Linda Howes and others Company Law (online looseleaf ed, Thomson Reuters) at [CA105.01]. The position may be different where there is a constitution or shareholders’ agreement that provides for a different method of appointment.
237 Harrison v Harrison, above n 235. The trust in question was jointly settled by a husband and wife, who were both included in the class of discretionary beneficiaries. The sole trustee was a company controlled by the settlors
The settlor-beneficiary will often appoint themselves a trustee alongside a relative or professional trustee. However, it is not uncommon for that co-trustee to abdicate responsibility or abide by the wishes of the settlor. This creates two possibilities. First, the appointment of the co-trustee might be a sham.238 This would leave the settlor as the sole trustee and holder of an unlimited benefit power. Second, if the co-trustee simply follows the wishes of the settlor, they would be in breach of their duty to act personally. Self-appointment by the settlor could be challenged by the beneficiaries.
F Conclusion
Where there is only one trustee, duties of honest decision-making do not place any practical restriction on the ability of a trustee to exercise a dispositive discretion in their favour. Compliance can only be tested by assessing the trustee’s state of mind at the time the power is exercised. This task is further complicated by the fact trustees are not generally required to provide reasons for their decisions.239 Even if the duties are complied with, it is still possible for a trustee to appoint the entirety of the trust property to themselves. Barkley illustrates the problem:240
For example, it would mean an owner of property, who was at some risk of future bankruptcy, could subject him or herself to a duty to honestly consider using the property to benefit his or her children. Then if bankruptcy did occur he or she could claim to hold the property upon trust and thus prevent it passing to the assignee in bankruptcy, but if bankruptcy did not occur then he or she could honestly decide it fulfilled the purpose of the power to use the property for her or his own benefit.
Where a trustee has the power to unilaterally appoint the entirety of the trust property to themselves, there is no substantive obligation imposed on the trustee to hold the property for the benefit of another, and thus no trust. The irreducible core of a trust is not simply an obligation “to perform the trusts honestly and in good faith”.241 That is a secondary obligation that gives this primary obligation substance. But when the terms of the trust ostensibly permit the trustee to benefit to an unlimited extent, the primary obligation no longer exists. Concluding otherwise elevates these secondary obligations of honest decision-making to a trust.242
as its directors and major shareholders. The structure of the trustee company was such that distributions could only be made with the consent of both the husband and wife.
238 Smith, above n 33, at 45-46; Vervoort v Forrest, above n 93, at [36]. The Court of Appeal in Vervoort v Forrest
rejected this suggestion, as there was no indication of “a deliberate pretence being created or developing.”
239 In re Londonderry’s Settlement [1965] Ch 918 (CA) at 928 and 933 per Harman LJ and 936–937 per Salmon LJ; Foreman v Kingstone [2004] 1 NZLR 841 (HC) at [99]. Although note that the failure to give reasons may lead to the court drawing adverse inferences against the trustees: Scott v National Trust, above n 225, at 719; Maciejewski v Telstra Super Pty Ltd (1998) 44 NSWLR 601 (SC) at 604; Taylor v Midland Bank Trust Co Ltd [2002] WTLR 95 (CA) at 116.
240 Barkley, above n 161, at 468.
241 Armitage v Nurse, above n 151, at 253.
242 Barkley, above n 161, at 454.
Part B: Accountability to the beneficiaries
The second aspect of the irreducible core is that the obligation to hold property for the benefit of another must be enforceable by the beneficiaries. A complete lack of accountability will generally require extreme provisions excluding liability for a breach of trust, that prohibit the beneficiaries from enforcing the trust or confer an unchallengeable dispositive power upon the trustee.243 Such provisions nullify the obligation of a trustee to hold property for the benefit of another. They could simply appropriate the trust property leaving the beneficiaries without recourse. As Hayton has said, a clause completely exonerating a trustee from liability results in a bare trust for the settlor.244 Accordingly, liability cannot be excluded for dishonesty if a trustee is to be truly accountable.245
A settlor cannot oust the jurisdiction of the court to supervise and enforce the trust.246 A trustee who could not be compelled to deliver up the trust property would in substance be the beneficial owner.247 If only the settlor can sue for breach, or the beneficiaries can sue only with the settlor’s consent, the trust property would be held for the benefit of the settlor.248 Other duties can also be explained in terms of the requirement that the trustee must be accountable to the beneficiaries. Oft-cited examples include keeping the trust property separate, the requirement to keep trust accounts, informing beneficiaries of their status and providing them with information about the trust.249 Each of these additional obligations ensures the trustee’s accountability. The latter duties are particularly important. If beneficiaries are unaware of their status and the basic workings of the trust, they cannot hold the trustees to account.250
The paradigm case of a lack of accountability is AQ Revocable Trusts, a decision of the Supreme Court of Bermuda.251 The settlor was initially the sole trustee. He could revoke or amend the trust and retained the power to add and remove beneficiaries. As trustee, he had the discretion to appoint income and capital to himself during his lifetime. Significantly, the settlor could also approve the “complete release of the Trustee (including the Donor) of any liability or responsibility of the Trustee to any person” in respect of any trust transaction. Ground CJ
243 Bennett, above n 30, at 61.
244 Hayton, above n 117, at 56. Although in contrast to the approach taken in this dissertation, Hayton’s view is that a lack of accountability is the sole basis for a finding of invalidity.
245 See Spread Trustee Company Ltd v Hutcheson [2011] UKPC 13 at [54]- [55].
246 Rhodes v Muswell Hill Land Company [1861] EngR 211; (1861) 29 Beav 560, 54 ER 745; Permanent Trustee Co v Dougall [1931] NSWStRp 51; (1934) 34 SR (NSW) 83 at 86–87; Adams v Adams (1882) 1 Ch 369 (Ch) at 373, 377; AN v Barclays Private Bank & Trust (Cayman) Ltd [2007] WTLR 565 at 597.
247 Fox, above n 152, at 23.
248 David Hayton “Anglo-Trust, Euro-Trusts and Caribbo-Trusts: Whither Trusts” in David Hayton (ed) Modern International Developments in Trust Law (Kluwer Law International, London, 1999) 1 at 5. A more contestable issue is whether a settlor is free to stipulate that all disputes must be referred to arbitration. The orthodox view is that he may not. But if the deed specifies an alternative dispute resolution mechanism that is truly independent, there is no reason in principle why this should not be permissible: see Fox, above n 152, at 24-25.
249 Bennett, above n 30, at 62.
250 Hayton, above n 117, at 49. See also Erceg v Erceg (SC), above n 18, at [60].
251 BQ v DQ; Re the AQ Revocable Trusts [2010] SC (Bda) 40 Civ.
held that the “concatenation of rights and powers in the Settlor ... rendered this trust illusory during his lifetime”.252 He observed that the “cumulative effect of the trust documents means that the Settlor as Trustee could not effectively be called to account during his lifetime”.253
It is relatively uncontroversial that a complete lack of trustee accountability will render the settlement invalid.254 The dual requirements of an obligation to hold property for the benefit of another and trustee accountability are closely related. Where there is a complete lack of accountability, the trustee will in substance hold an unlimited benefit power. That being so, there is no obligation to hold the property for the benefit of another. However, the reverse is not always true. A trustee may in theory be accountable to the beneficiaries – for example, the power must be exercised in good faith – despite holding what is in substance an unlimited benefit power.
252 At [29].
253 At [30].
254 Bennett, above n 30, at 61-63.
Chapter IV: Settlor-reserved powers
In Chapter III, it was argued that a trust is invalid if the trustee has the ability to appoint the entirety of the trust property to themselves. Where the settlor is the sole trustee, a discretionary beneficiary and can exercise a power of appointment in his own favour, the trust is invalid. But the settlor is often not the sole trustee. Instead, they may reserve powers, or grant powers to a “protector” – a person other than the trustee who is granted powers to influence trustee decisions and the administration of the trust.255 Waters observed in 2006 that it was not uncommon for offshore settlors to create the position of protector and then appoint themselves to the position.256 The phenomenon has since migrated onshore. Although not the formal settlor, Mr Pugachev was the “Protector”. Mr Webb occupied a similar office as the “Consultant”. Settlor-reserved powers and powers conferred on an office held by the settlor are two sides of the same coin.257
The issue posed by settlor-reserved powers is two-fold. First, there is risk that the powers erode the obligation of the trustees to hold the property for the benefit of another. Second, the powers may together give the settlor the ability to vest the entirety of the trust property in themselves. Whether the settlor can legitimately do so depends principally on whether the power is personal, fiduciary or somewhere in between.258 Even in relation to the same trust, some of the settlor’s powers may be fiduciary while others may be personal.259 The nature of these powers depends principally on the intention of the settlor, as derived from the construction of the trust deed.260
This chapter examines the effect of four commonly reserved powers on the core obligation of the trustees to hold the trust property for the benefit of another. These are the power to withhold consent and direct the trustees, the power to appoint and remove trustees, the power to add and remove beneficiaries, and the power to revoke the trust.
255 Donovan Waters “The Protector: New Wine in Old Bottles?” in in A.J Oakley (ed) Trends in Contemporary Trust Law (Clarendon Press, Oxford, 1996) 63 at 63; Anthony Duckworth “Protectors—Fish or Fowl? Part 1” (1996) 3 Private Client Business 169 at 169. The term protector is not a term of art: Rawson Trust Co Ltd v Perlman [1990] 1 Butterworths OCM 31 at 50.
256 Waters, above n 29, at 263.
257 Waters, above n 29, at 264. The settlor may choose to establish an office if he envisages the powers being exercised by others after his own death or incapacity.
258 See Matthew Conaglen and Elizabeth Weaver “Protectors as fiduciaries: theory and practice” (2012) 17 Trusts & Trustees 17 at 20-21.
259 Re Bird Charitable Trust and Bird Purpose Trust [2008] JLR 1 at 82.
260 Thomas, above n 176, at [1.69]; Conaglen Weaver, above n 258, at 35; Manukau City Council v Lawson [2001] 1 NZLR 599 (HC) at [13].
A Powers to withhold consent and direct the trustees
It is commonplace for settlors to make the exercise of a power of appointment subject to their written consent.261 This, in effect, gives the settlor a power of veto over trustee decisions.262 Waters takes issue with such a power, as it directly interferes with the relationship between trustee and beneficiary.263 The settlor controls the relationship.264 But even if a power of veto could be exercised for the benefit of the donee, it does not undermine the obligation of the trustee to hold the property for the benefit of another. It is a power of veto, not a power to direct. At most, the donee could force a deadlock, which may result in the final beneficiaries receiving the trust property.265
Powers to direct are “trouble”.266 They are often accompanied by clauses excluding the liability of trustees for acting on such directions.267 If the settlor can issue binding directions to the trustees in respect of dispositions, and the settlor is an object, they hold an unlimited benefit power. They can force the distribution of the entirety of the trust property to themselves. Settlor control usurps trustee discretion.268 As Waters observes:269
At the forefront of the drafter’s mind must be the remembrance that the trustee cannot be reduced to one who responds to orders. As has many times been said, whatever power is reserved to the settlor the trustee must have duties and powers of its own, and make its own decisions in the exercise of trustee discretions.
There is no obligation imposed on the trustee to hold the property for the benefit of another as the obligation is subject to the whim of the settlor. Nor can the beneficiaries hold the trustee to account and require performance of the trust: in effect, there is no trustee.270 In other words,
261 O’Hagan, above n 24, at 910; Conaglen and Weaver, above n 258, at 33. Such a power was included in the trust deeds in Pugachev, above n 3; Rawson v Perlman, above n 255; Re Z Trust [1997] CILR 248; and, Re Papadimitriou [2004] WTLR 1141 57.
262 Blenkinsop v Herbert [2017] WASCA 87, (2017) 51 WAR 264 at [122]; Pugachev, above n 3, at [188] and
[236].
263 Waters, above n 29, at 257-258.
264 At 266.
265 Grahame Young “Trust protectors – an Australian perspective” (2016) 22 Trusts & Trustees 455 at 455, 460.
266 Waters, above n 29, at 258.
267 See, for example, Citibank NA v MBIA Assurance SA [2007] EWCA Civ 11 and Re Z Trust, above n 261. At least in the context of complex commercial transactions, the English Court of Appeal in Citibank appeared to suggest that such a power may exist in a valid trust. See Trukhtanov, above n 156.
268 Bennett, above n 30, at 63-65.
269 Waters, above n 29, at 255.
270 Trukhtanov above n 156, at 343 and 344.
the core features of a valid trust are lacking. The settlor has done no more than transfer the property to a nominee. No trust exists other than a resulting trust for the settlor.271
B The power to appoint and remove trustees
The power to appoint and remove trustees is generally considered to be fiduciary irrespective of the capacity in which it is held.272 The subject matter of the power is the office of the trustee, which lies at the core of the trust and carries with it onerous obligations to act in the best interests of the beneficiaries.273 Accordingly, the power must be exercised in good faith and for the benefit of the beneficiaries as a whole.274 Absent exceptional circumstances, an appointor may not appoint themselves.275 The justification for this prohibition is even stronger where the appointor is an object of a dispositive power held by the trustees and wishes to make themselves the sole trustee. By similar logic, a settlor who was already a trustee could not use the power to remove their co-trustees. Any exercise of the power which leaves a settlor- beneficiary as the sole trustee cannot possibly be in the best interests of the beneficiaries.
But while the power to appoint and remove trustees is generally fiduciary, that position may be modified by the settlor.276 The nature of the power will depend on the construction of the particular trust deed. But it is suggested that it would take more than simply vesting the power in a beneficiary for a court to conclude that such a power is personal.277 The trust deed would need to expressly permit the power to be exercised in favour of the appointor. In Clayton, Mr Clayton as Principal Family Member held the power to appoint and remove trustees “from time to time”. However, cl 17.5 provided that:
Power of appointment unrestricted: The holder of any power of appointment of Trustees may, subject to any contrary intention expressed in the deed (if any) transferring the power to that person, exercise that power in favour of himself or herself.
The only possible conclusion is that such a power was intended to be personal. If the power is personal, there is seemingly nothing to stop the settlor from appointing themselves as the sole trustee. If the settlor is also an object and the conflict rule is excluded, the settlor, once appointed, could in theory appoint the entirety of the trust property to themselves.
271 Waters, above n 29, at 246; Brown, above n 229, at [141-850]. Brown describes this situation as a ‘bare trust’. In either case, the settlor is the beneficial owner of the trust property.
272 Carmine v Ritchie [2012] NZHC 1514 at [66]; McGhee, above n 175, at [27-011]; In Re Skeat's Settlement
[1889] UKLawRpCh 150; [1889] 42 Ch D 522.
273 Hayton, above n 124, at [70.20] and [71.11]; New Zealand Māori Council v Foulkes [2015] NZCA 552, [2016]
2 NZLR 337 at [22]-[24].
274 Carmine v Ritchie, above n 272, at [67]-[70].
275 In Re Skeats’ Settlement, above n 272, at 526; Montefiore v Guedalla (No 3) [1903] UKLawRpCh 139; [1903] 2 Ch 723 (Ch) at 725.
276 Re Z Trust, above n 261, at 285.
277 This was the conclusion of the Manx Court in Re Papadimitriou, above n 261. Also, in Carmine v Ritchie, above n 272, where the power to add and remove trustees was held to be inherently fiduciary, the power was vested in a beneficiary in her capacity as “Principal Family Member”.
C The power to add and remove beneficiaries
The power to add and remove beneficiaries gives rise to two issues. First, a settlor who is also a trustee could conceivably add themselves as a beneficiary and exercise a power of appointment in their favour. Second, a settlor could remove the other beneficiaries leaving themselves as the sole beneficiary. If the settlor is also the sole trustee, the trust would collapse and the trust property would vest in the settlor.278
It has been argued elsewhere that the power, like the power to appoint and remove trustees, is inherently fiduciary.279 The basis of this argument is that the power goes to the core of the trust. If the settlor is free to remove beneficiaries and thus dictate who is entitled to the trust property, he has arguably not alienated his beneficial ownership.280 Similarly, a settlor could also remove beneficiaries who sought information about the trust or wished to challenge a decision of the trustees. This undermines the right of the beneficiaries to hold the trustees accountable.281 It is said that if there is no fetter on this power to add and remove beneficiaries, there is no trust.282
The power to add and remove trustees is inherently fiduciary because the subject matter of that power is a fiduciary office.283 The same is not true of the power to add and remove beneficiaries. As Dobson J observed in McLaren v McLaren:284
Because of the critical importance of the identity of trustees, powers to remove or add them are distinguishable from powers to alter the class of beneficiaries. The former power naturally reflects a shared interest by all beneficiaries, whereas the latter is inevitably discriminatory between beneficiaries.
The power cannot be inherently fiduciary because it is inherently discriminatory. Adding a beneficiary will rarely be in the best interests of the existing beneficiaries. While the existing discretionary beneficiaries still retain a hope of receiving a distribution, the likelihood of them doing so is reduced. If the power had to be exercised in the best interests of the beneficiaries, it is difficult to see how it could be exercised at all.285 At most, the power could be subject to an obligation to consider the impact of the addition on the existing beneficiaries.286 But that
278Re Heberley (Deceased) [1971] NZLR 325 (CA) at 333 and 346; Clayton v Clayton (CA), above n 43, at [47]. 279 Josie Beverwijk “Power, To a Point: Is the Power to Add and Remove Discretionary Beneficiaries of a Trust Fiduciary?” (LLB (Hons) Dissertation, University of Otago, 2015); Jessica Palmer and Nicola Peart “Double Trouble – the power to add and remove beneficiaries and the power to appoint and remove trustees” (paper presented to New Zealand Law Society Trusts Conference, June 2015) 33.
280 Beverwijk, above n 279, at 27-29.
281 At 28.
282 Palmer and Peart, above n 279, at 39-40.
283 See above at 31.
284 McLaren v McLaren [2017] NZHC 161 at [46].
285 Tucker, Le Poidevin and Brightwell, above n 174, at [30-058]; Am Mei Kam v HSBC International Trustee Ltd
286 Palmer and Peart, above n 279, at 40.
does not stop the donee nevertheless resolving to add a new beneficiary. Powers of removal are even more fraught: exclusion invariably defeats the interest of the removed beneficiary.
The ability of the settlor to control the class of beneficiaries does not, of itself, undermine the trust. The trustees are still subject to an obligation to hold the property for the benefit of the current beneficiaries. It enables the settlor to create and delete relationships between trustee and beneficiary, but they cannot interfere with the trustees’ decisions.287 The possibility that a settlor-trustee may remove a beneficiary to avoid being held to account is more problematic. But even if the power is not fiduciary, it may only be exercised for a purpose justified by the instrument creating the power. This is the doctrine of fraud on a power.288 Associate Judge Osborne in Penson v Forbes doubted that the doctrine applied to powers of exclusion, as there is no restriction on who can be removed.289 This is correct where the actuating purpose is to extinguish a beneficiary’s entitlement. After all, this is the purpose of the power. The purpose is not to allow the settlor to avoid being held to account. Removing a beneficiary for this reason would be improper.
Despite not being generally fiduciary, the power will be of this nature where it is held as a trustee. General principles apply and the trustee will be unable to use their fiduciary power of selection to add themselves to the class of objects.290 In Clayton, the Court of Appeal held that a power to appoint and remove beneficiaries that is held by a person in a capacity other than as trustee could be exercised free of fiduciary obligations.291 The Supreme Court noted the argument advanced by Palmer and Peart to the effect that the power to add and remove beneficiaries is inherently fiduciary, but did not express a concluded view.292 The view of the Court of Appeal is shared by Conaglen and Weaver, as well as the authors of Lewin on Trusts.293 They suggest that where an unqualified power to add and remove beneficiaries is reserved to the settlor by the settlor, it will usually be personal in nature. More recently, Dobson J in McLaren noted that the power will generally be personal where it is held by the settlor, although the position may differ where it is held by another beneficiary.294
It is suggested that where the settlor reserves an unqualified power to add and remove all beneficiaries to themselves in a capacity other than as trustee, the power will be personal. The settlor could add themselves as a beneficiary. If the settlor is also the sole trustee and the conflict rule is excluded, they will be able to appoint the entirety of the trust property to themselves. Similarly, there is nothing to prevent the settlor from removing the other
287 Waters, above n 29, at 257.
288 Vatcher v Paull [1915] AC 372 (PC) at 378.
289 Penson v Forbes [2014] NZHC 2160 at [58].
290 Thomas, above n 176, at [12.21]; In Re Skeats’ Settlement, above n 272, at 526; Breakspear v Ackland [2008] EWHC 220, [2009] Ch 32 at [114].
291 Clayton v Clayton (CA), above n 43, at [108].
292 Clayton v Clayton (SC), above n 2, at [64], citing Palmer and Peart, above n 279.
293 Conaglen and Weaver, above n 258, at 35; Tucker, Le Poidevin and Brightwell, above n 174, at [30-010].
294 McLaren v McLaren, above n 284, at [38] and [50]-[63].
beneficiaries. If there is more than one trustee, there will still be a valid trust, although the settlor will be the beneficial owner of the trust property. If the settlor is also the sole trustee, the trust will collapse and the trust property will vest in the settlor.
D The power to revoke the trust
It is now generally accepted that a settlor may reserve the power to revoke the trust.295 But the position is not altogether settled.296 Some authorities suggest that a declaration of trust must be irrevocable.297 Indeed, the Court of Appeal in Webb said that the settlor must evince “an intention to irrevocably relinquish a beneficial interest” in the trust property.298
Permitting the settlor to reserve a power of revocation can be justified in principle. A power to revoke is a power to terminate; it does not come between trustee and beneficiary during the currency of the trust.299 Unlike a power to issue binding instructions, it does not interfere with the obligations of the trustee and corresponding rights of the beneficiaries. The trustees are still subject to an obligation to hold the trust property for the benefit of the beneficiaries unless and until the power of revocation is exercised. Similarly, that obligation is enforceable by the beneficiaries notwithstanding the power of revocation. Accordingly, there is a valid trust, albeit a revocable one.300
Reserving a power of revocation may nevertheless be ill-advised for a settlor looking to protect their assets from their creditors or spouse. Recall that in TMSF, the Privy Council held that a power of revocation was tantamount to ownership and could be treated as property.301 In Clayton, the Supreme Court endorsed TMSF and the proposition that a general power of appointment may be treated as property for some purposes.302 It would therefore seem likely that a power of revocation would be considered “property” for the purposes of the PRA and Insolvency Act.303
295 Beecher v Major (1865) 2 Dr & Sm 431, 62 ER 484; Thompson v Browne [1835] EngR 906; (1835) 3 My & K 32, 40 ER 13;
Young v Sealy [1949] Ch 278 (Ch) at 284; T Choithram International SA v Pagarani [2000] UKPC 46; [2001] 1 WLR 1 (PC) at 11. This is so irrespective of whether the settlor transfers property to a trustee or declares himself a trustee of property he already owns: Thomas, above n 171, at 604.
296 The position is also not helped by the fact that some of the early decisions are poorly reasoned. In Thompson v Browne, above n 295, at 36, it was merely said that if a power of revocation made a trust invalid, “a great number of transactions of which the validity has never been doubted would be liable to be impeached”. See also Bennett, above n 30, at 63-64.
297 Grant v Grant [1865] EngR 662; (1865) 34 Beav 623, 55 ER 776 at 625; Re Cozens, Green v Brisley [1913] UKLawRpCh 67; [1913] 2 Ch 478 (Ch) at
486.
298 Webb v Webb, above n 4, at [53] and [56].
299 Waters, above n 29, at 257.
300 Thomas, above n 176, at [15.01].
301TMSF v Merrill Lynch, above n 54, at [59].
302 Clayton v Clayton (SC), above n 2, at [69].
303 See Orpin-Dowell and Peart, above n 94, at 200-202.
E Conclusion
Reserved powers give rise to two issues. First, there is risk that the powers erode the obligation of the trustees to hold the property for the benefit of another. It is suggested that where a settlor is able to issue binding directions to the trustees, there is no valid trust. The trustees are controlled by the settlor, who is not subject to any fiduciary obligation. The ability of the beneficiaries to hold the trustees to account is therefore illusory.304
Second, the powers may together give the settlor the ability to vest the entirety of the trust property in themselves. However, the trustees are still subject to an obligation to hold the property for the benefit of another until that power is exercised. Thus, a power of revocation does not threaten the validity of the trust, although that power may be treated as property. An analogy may be drawn with the power to remove all other beneficiaries and collapse the trust. Until such time as the beneficiaries are removed, the trustees are still subject to an obligation to hold the property for the benefit of another. The trust is valid, but defeasible. Like the power to revoke the trust, it is suggested that this power should be considered ‘property’ for the purposes of the PRA and Insolvency Act.
The settlor could also engineer a situation in which they are the sole trustee and can appoint the entirety of the trust property to themselves. When this happens, the settlor holds an unlimited benefit power and there is no trust. But what is the status of the trust until this occurs? Before the settlor assumes the role of sole trustee, the trustees are subject to an obligation to hold the property for the benefit of another and the trust is valid. Again, it is suggested that the trust is valid, but defeasible, and the settlor’s powers should be treated as property.
304 Trukhtanov, above n 156, at 344.
Chapter V: The problem cases revisited
A Clayton v Clayton
Mr Clayton was the sole trustee, a discretionary beneficiary and could exercise his power of appointment in favour of himself. While he was still in theory subject to an obligation to act in good faith, he could at any time have appointed the entirety of the trust property to himself. As a trustee, he was not subject to an obligation to hold the property for a benefit of another. This being so, the trust was invalid.
The Supreme Court declined to take this step and declare the VRPT invalid. Two reasons gave the Court pause. The first – that a valid trust would come into existence if Mr Clayton was replaced by an independent trustee – is unpersuasive. It is trite that a ‘one man trust’ with a sole trustee and beneficiary is invalid.305 A valid trust would come into existence if the trustee in that situation was replaced, but that does not mean that the trust is valid until this occurs. The same analysis should have been applied in respect of the VRPT. The scenario contemplated by the Court – Mr Clayton replacing himself as a trustee – was also entirely unrealistic. The whole purpose of the VRPT was to protect his assets while at the same time giving himself unilateral control of the property. The trust was not valid and was unlikely to become so in the future.
The second was the decision of TMSF v Merrill Lynch. In TMSF, the Privy Council held that the settlor’s power to revoke the trust was tantamount to ownership. However, the Court noted that there was nothing in the Privy Council judgment to indicate that the trust was invalid before the power was exercised. Accordingly, the Court suggested that the VRPT could be regarded as valid until such time as Mr Clayton exercised his powers to bring the trust to an end. However, there is a significant difference between the two cases. While the settlor in TMSF could revoke the trust, that did not affect the obligation of the trustees to hold the property for the benefit of another. Hence, a trust existed despite the power of revocation. But Mr Clayton, as trustee, was free to appoint the entirety of the trust property to himself. Accordingly, a valid trust never arose. The ability of Mr Clayton to do so “is an anathema to a trust”.306
B JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev
Unlike Mr Clayton, Mr Pugachev was not a trustee and did not have the power to appoint property. Nevertheless, Birss J held that Mr Pugachev could leverage his power to appoint and remove trustees into complete control of the trust property. He concluded that the power to remove trustees “with or without cause” was personal and could be exercised for Mr Pugachev’s benefit. As a result, Mr Pugachev could remove a trustee who refused to act in
305 See above at 32, n 278.
306 Palmer, above n 15, at 188.
accordance with his wishes and replace them with one who would. But even if the power to remove trustees was personal, this puts the cart before the horse.307 The newly appointed trustees are still fiduciaries, as Birss J acknowledged.308 If the trustees merely acted as agents for Mr Pugachev, they would have been in breach of their duty to act personally and make genuine decisions.
Secondly, it is debatable whether the power to remove trustees was in fact personal. Recall that the power is generally considered to be fiduciary irrespective of the capacity in which it is held.309 In 2015, Mr Pugachev replaced the original trustees, which were companies controlled by the solicitor who drafted the deeds, with companies controlled by his associates. The original trustees sought directions to determine whether they were validly removed.310 The application was heard by Heath J.311 He correctly noted that a protector’s powers may be personal or fiduciary depending on the context.312 He then stated that the debate as to whether the power to remove trustees is personal or fiduciary may be “arid” because of the need for both iterations of the power to be exercised for a proper purpose.313 Heath J concluded that the Protector’s powers in this case were to be exercised “in the best interests of the beneficiaries.”314 That is the definition of a fiduciary power.
Birss J did not agree with Heath J’s interpretation. That such extensive powers had been conferred upon the settlor, who was also a discretionary beneficiary, suggested that they could be exercised for his own benefit.315 As Birss J recognised, it was not altogether clear on the evidence before Heath J that Mr Pugachev was the settlor. But even so, the suggestion that extensive reserved powers are always personal where the settlor is also a discretionary beneficiary cannot be reconciled with existing authority.316 Birss J fastened on to the fact that trustees could be removed “without cause” to support his conclusion that the powers were personal. In Davidson v Seelig, Henderson J noted that the powers of the protectors to veto trustee decisions and to remove trustees “with or without cause” were fiduciary and had to be exercised in the best interests of the beneficiaries.317 Birss J distinguished Davidson on the basis the protectors were neither the settlor nor the beneficiaries.318
The power to remove trustees “with or without cause” is contained in a separate subclause to the power to appoint trustees. It could be argued that “with or without cause” simply clarifies
307 James Brightwell and Luke Richardson “Mezhprom v Pugachev: bold new approach or illusory development?” (2018) 24 Trusts & Trustees 398 at 401.
308 Pugachev, above n 3, at [220] and [273].
309 See above at 31.
310 The application was made under s 66 of the Trustee Act 1956.
311 Kea Trust Co Ltd v Pugachev [2015] NZHC 2412.
312 At [47].
313 At [48].
314 At [51].
315 Pugachev, above n 3, at [268].
316 Brightwell and Richardson, above n 307, at 402.
317 Davidson v Seelig [2016] EWHC 549 (Ch).
318 Pugachev, above n 3, at [272].
that the power is not limited to circumstances that would justify the court removing a trustee. But even if the power to remove trustees could be exercised for Mr Pugachev’s benefit, that does not necessarily mean he had the same freedom in appointing a new trustee. In New Zealand Maori Council v Foulkes, trustees could be removed “at any time and from time to time”, which meant that trustees could be removed without cause.319 However, the power to appoint new trustees was still fiduciary.320 Determining whether a power is fiduciary or personal is a matter of construction. When doing so, it is suggested that courts should give due weight to the fact that a power is ordinarily considered to be fiduciary in nature. Where a provision is expressed in neutral terms, this ordinary meaning should be preferred. Advisors who draft instruments proceed on this basis.
Other than the fact Mr Pugachev was the settlor and a discretionary beneficiary, there was little else to warrant departure from the ordinary position. With respect, Birss J’s conclusion was very much based ‘on the vibe of the thing’: that it was clearly a trust controlled by Mr Pugachev to help him avoid his creditors. Birss J was perhaps on firmer ground with his observations in respect of the disability provisions. Clause 4.2 of the trust deed provides that a person ceases to be the Protector if they are “Under a Disability”, which means “any event or happening which renders the person temporarily or permanently incapable of exercising free will”. If Mr Pugachev had been subject to a court order requiring him to use his powers in a particular way, he would be unable to do so. If the powers had to be exercised in the best interests of the beneficiaries, Birss J doubted whether such a provision would be necessary.321 This suggests that some of the Protector’s powers may have been intended to be personal, but it does not follow that all were personal.322
C Webb v Webb
When the Webbs separated in 2016, Mr Webb was the sole trustee. He had the “uncontrolled discretion” to appoint income and capital to the beneficiaries. He could exercise this power in his own favour and appoint the entirety of the trust property to himself. He could also have resettled the trust at any time in a manner that vested the entirety of the property in himself alone. The trusts were therefore invalid, at least at the time that the Webbs separated.
But at other points during the term of the trusts, the offices of trustee and Consultant were occupied by different people. When Mr Tauber held office as a co-trustee, Mr Webb’s ability to appoint property to himself was fettered to the extent that he required his co-trustee’s consent. The same is true when Mr Webb appointed an additional trustee in 2016. Admittedly,
319 New Zealand Maori Council v Foulkes [2014] NZHC 747 at [14].
320 At [85].
321 Pugachev, above n 3, at [275].
322 See above at 29, n 259.
Mr Tauber and Ms Dixon, who was presumably the other co-trustee, were far from independent. Mr Tauber was Mr Webb’s longstanding business partner, while he was in a relationship with Ms Dixon. This probably explains the Court’s reference to requiring the assent of “a truly independent” person. But irrespective of their independence, the trustees were still subject to a duty to act personally. Had they simply followed Mr Webb’s orders, they would have been in breach of duty. Alternatively, if they were never intended to be more than paper trustees, their appointment would have been a sham. But on the face of it, such an arrangement is still a valid trust. Additionally, when Mr Tauber served as the Consultant, he had the absolute discretion to remove Mr Webb as trustee.323 If this power had ever been exercised, Mr Webb would have been unable to appoint the trust property to himself.
The problem is that a trust may vacillate from valid to invalid depending on the identity of the trustee. As Smith argues, this supports the view that the trust is fundamentally obligational in that the identity of the trustee matters.324 But this creates several problems. The settlor must also have an intention to create a trust.325 One could argue that by removing themselves as the sole trustee, the settlor at that point evinces an intention to create a valid trust.326 The settlor would then be imposing an obligation on the new trustee to hold the property for the benefit of another. But removal cannot be rationalised in this manner when the settlor ceases to be the sole trustee by reason of a court order or death.327 At no point does the settlor have the intention to create a valid trust.
The inverse occurs where the settlor is not initially the sole trustee, but later ascends to that position. At the outset, the settlor has the requisite intention to create a valid trust. But at the point they become the sole trustee, the trust collapses in the same way it would if the sole trustee were the sole beneficiary. The issue is whether a valid trust can once again emerge if another trustee is appointed. In principle, if the trustee does so voluntarily and thus evinces the necessary intention, there is no reason why a valid trust should not re-emerge. There is no difference in substance between appointing a new trustee and settling a new trust on the same terms. But again, there are practical issues. Say that the original deed specifies a period of 80 years.328 Does this run from the day the deed was executed, or does it reset every time a new trust arises? One could perhaps say that the vesting date specified in the deed applies absolutely.
323 Although not essential to the result, the Court of Appeal stated that the power of the Consultant to replace trustees “at his absolute discretion and without giving reasons therefore” was “clearly non fiduciary.” It cited Pugachev in support of this proposition. Again, it is least arguable that despite the broad scope of the power, it was still fiduciary in nature. A power to remove trustees without reasons is not necessarily non-fiduciary: see Winwood v Winwood [2015] NZHC 946 at [2]; Cadman v Visini (2011) 3 NZTR 21-011 (HC) at [22].
324 See above at 14.
325 Knight v Knight, above n 153.
326 Grahame Young “Sham and illusory trusts–lessons from Clayton v Clayton” (2018) 24 Trusts & Trustees 194 at 200.
327 At 200.
328 This is the maximum period allowed under the Perpetuities Act 1964, s 6.
The concepts of an ‘emerging trust’ and ‘emerging invalidity’329 are at first glance problematic. Although a trust may be initially invalid, this does not discount the possibility of a valid trust coming into existence in the future. But until this occurs, there is no trust. In contrast, a trust that is initially valid will collapse if the settlor subsequently becomes the sole trustee and can appoint the trust property to themselves. The powers of the settlor to bring about this situation may be treated as property, but the trust is valid until these powers are exercised.330
The Court of Appeal noted that other “self-benefit avenues” available to Mr Webb included the ability to “have nominated himself as the sole nominated beneficiary in substitution for the existing nominated beneficiaries”. A power to change the list of beneficiaries – the power held by Mr Webb – is tantamount to a power to both add and remove beneficiaries.331
The power was reserved to Mr Webb personally. On the basis of the discussion in Chapter IV, this power is personal in nature and could be exercised for Mr Webb’s own benefit. The Court was therefore correct to conclude that Mr Webb could have removed his son as a beneficiary and collapsed the trust. However, this alone does not mean that the trust is invalid. Rather, it is suggested this power should have been treated as property for the purposes of the Matrimonial Property Act 1976.332
This line of analysis is more attractive than the conclusion that Mr Webb could appoint the entirety of the trust property to himself as trustee. The reason is that in treating the power as property, it does not matter whether the settlor is the sole trustee. If the settlor can remove the other beneficiaries, they can become the sole beneficiary and thus the absolute beneficial owner of the trust property. Even if the trust does not collapse because there are multiple trustees, the trust assets can still be treated as property owned by the settlor for insolvency or relationship property purposes.333
The Arorangi Trust deed also included a clause stating that beneficiaries have no “right or entitlement to call for accounts ... or to obtain any information of any nature from the Trustee”. It was argued that this clause also rendered the trust invalid. In light of its earlier conclusion, it
329 Young, above n 326, at 200.
330 See above at 35.
331 Kearns v Hill (1990) 21 NSWLR 107 (NSWCA) at 110.
332 The Matrimonial Property Act 1991–1992 (Cook Islands) incorporates the Matrimonial Property Act 1976 (NZ) into Cook Islands law “as if that Act was enacted by the Parliament of the Cook Islands”: Matrimonial Property Act 1991–1992, s 3. This Act has a similarly broad definition of ‘property’ to the PRA and Insolvency Act. The Court of Appeal accepted that the same result would be reached by treating the powers as property: at [55]. This suggests powers fall within the statutory definition of property.
333 See above at 3.
was unnecessary for the Court to express a view on the matter. Nevertheless, the Court observed “that while the provision for absolute non-disclosure to beneficiaries may well have been ineffective, it would not have invalidated the trusts as a whole”.334
An absolute prohibition on disclosure prevents beneficiaries from holding the trustees to account. Such clauses are therefore repugnant to the trust concept.335 But rather than declare the trust invalid, courts have generally held that blanket prohibitions on access to information are void.336 This approach makes sense in terms of protecting the interests of the beneficiaries and the proper administration of trusts. But as Birss J noted in Pugachev, why should a court assist a settlor in avoiding their creditors by modifying the deed so that it constitutes a valid trust?337 A deed containing such a clause does not create a valid trust. Why this should be salvaged rather than struck down is not altogether clear. Just because a clause is easily severable does not mean that it should be severed. The court is preferring the subjective intention of the settlor to create a trust to their objective intention evinced in the trust deed.
334 Webb v Webb, above n 3, at [66].
335 Hayton, above n 117, at 54.
336 Jones v Shipping Federation of British Columbia (1963) 37 DLR (2d) 273 (BCSC) at 274-275; Re an Application for Information about a Trust [2013] SC (Bda) 16 Civ at [17]-[27]. The Supreme Court made a comment to similar effect in Erceg v Erceg (SC), above n 18, at [88], where it said a settlor’s desire for confidentiality will not ordinarily warrant a complete refusal to disclose. See also Donovan Waters Waters’ Law of Trusts in Canada (3rd ed, Thomson Carswell, Toronto, 2005) at 1077; Gavin Lightman “The Trustees’ Duty to Provide Information to Beneficiaries” (2004) Private Client Business 23 at 29.
337 Pugachev, above n 3, at [187].
Conclusion
A settlor cannot have their cake and eat it too. If the settlor can achieve the asset protection advantages of the trust structure without sacrificing the benefits of ownership, the trust is devoid of conceptual justification. The aim of this dissertation has been to place a definitive limit on the ability of settlors to manipulate the trust structure.
The irreducible core of the trust has two elements. First, the trust must impose an obligation on a trustee to hold the trust property for the benefit of another. Second, that obligation must be enforceable by the beneficiaries. If the trustee can appoint the entirety of the trust property to themselves, there is no trust. Similarly, if the beneficiaries cannot enforce the obligation, the trustee is free to use the property for their own benefit. The trustee is not accountable and the trust is invalid.
Settlor-reserved powers threaten the existence of the core obligation of the trustee to hold the property for the benefit of another. If the settlor can give the trustees binding directions, there is no trust. Powers to remove beneficiaries and to revoke the trust may give the settlor the ability to vest the entirety of the trust property in themselves. However, the trustees are still subject to an obligation to hold the property for the benefit of another unless and until the power is exercised. The trust is valid, but defeasible. In this situation, it is suggested that the ‘powers as property’ approach relied upon in Clayton should be applied, and the power should be treated as property for insolvency and relationship property purposes.
In Clayton, Mr Clayton, as trustee, could appoint the entirety of the trust property to himself. Accordingly, he was not subject to an obligation to hold the property for the benefit of another and the trust was invalid. Birss J in Pugachev perhaps went a step too far in concluding that the trusts were invalid. While Mr Pugachev could appoint and remove trustees “without cause”, the trustees, once appointed, were still subject to a fiduciary obligation to act in the best interests of the beneficiaries. Finally, in Webb, Mr Webb, as trustee, could appoint the entirety of the trust property to himself. The Court of Appeal was therefore correct to conclude that the trust was invalid. But given Mr Webb was not always the sole trustee, it is suggested that the Court’s alternative line of analysis – that Mr Webb could remove the other beneficiary and collapse the trust – provides a stronger justification for the decision.
Moving forward, it is hoped that courts will declare trusts of this ilk invalid, and in doing so, force settlors to choose between having their cake, and eating it.
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Spread Trustee Company Ltd v Hutcheson [2011] UKPC 13 (Guernsey).
T Choithram International SA v Pagarani [2000] UKPC 46; [2001] 1 WLR 1 (PC) (British Virgin Islands).
Tasarruf Mevduati Sigorta Fonu v Merrill Lynch Bank & Trust Co (Cayman) Ltd [2011] UKPC 17 (Cayman Islands).
Vatcher v Paull [1915] AC 372 (PC) (Jersey). Webb v Webb [2017] CKCA 4 (Cook Islands). C Books and chapters in books
Stuart Anderson “Trusts and Trustees” in William Cornish and others The Oxford History of the Laws of England Volume XII: 1820-1914 Private Law (Oxford University Press, New York, 2010) 232.
JH Baker An Introduction to English Legal History (4th ed, Oxford University Press, New York, 2007).
Don Breaden (ed) Law of Trusts (online looseleaf ed, LexisNexis).
John Brown (ed) New Zealand Trusts and Asset Planning Guide (online looseleaf, CCH New Zealand).
Andrew Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009).
Matthew Conaglen Fiduciary Loyalty: Protecting the Due Performance of Non-Fiduciary Duties (Hart, Portland, 2010).
PD Finn Fiduciary Obligations (Law Book Company, Sydney, 1977).
RL Fisher (ed) Fisher on Matrimonial and Relationship Property (online looseleaf ed, LexisNexis).
Simon Gardner An Introduction to the Law of Trusts (Oxford University Press, New York, 2011).
Halsbury’s Laws of England (5th ed, 2013, online ed) vol 98 Trusts and Powers.
David Hayton “The Irreducible Core Content of Trusteeship” in A.J Oakley (ed) Trends in Contemporary Trust Law (Clarendon Press, Oxford, 1996) 47.
David Hayton “Anglo-Trust, Euro-Trusts and Caribbo-Trusts: Whither Trusts” in David Hayton (ed) Modern International Developments in Trust Law (Kluwer Law International, London, 1999) 1.
David Hayton (ed) Underhill & Hayton: Law Relating to Trusts and Trustees (19th ed, LexisNexis, London, 2016).
Linda Howes and others Company Law (online looseleaf ed, Thomson Reuters).
AKR Kiralfy Potter’s Historical Introduction to English Law (4th ed, Sweet & Maxwell, London, 1958).
MW Lau The Economic Structure of Trusts (Oxford University Press, New York, 2011).
FW Maitland “Lecture III: Uses and Trusts” in Equity – A Course of Lectures (2 ed, Cambridge University Press, Cambridge, 1936) 23.
FW Maitland “Outlines of English Legal History, 560-1600” in The Collected Papers of Frederick William Maitland, Volume II (Cambridge University Press, Cambridge, 1911) 417.
Paul Matthews “From Obligation to Property, and Back Again? The Future of the Non- Charitable Purpose Trust” in David Hayton (ed) Extending the Boundaries of Trusts and Similar Ring-Fenced Funds (Kluwer Law International, London, 2002) 203.
John McGhee (ed) Snell's Equity (33rd ed, Sweet & Maxwell, London, 2015).
Jessica Palmer “What to do about trusts?” in Jessica Palmer and others (eds) Law and Policy in Modern Family Finance: Property Division in the 21st Century (Intersentia, Cambridge, 2017) 177.
James Penner “Exemptions” in Peter Birks and Arianna Pretto (eds) Breach of Trust (Hart Publishing, Portland, 2002) 241.
Geraint Thomas “Shams, Revocable Trusts and Retention of Control” in David Hayton (ed)
The International Trust (3rd ed, Jordans, Bristol, 2011) 597.
Geraint Thomas Thomas on Powers (2nd ed, Oxford University Press, Oxford, 2012).
Lynton Tucker, Nicholas Le Poidevin and James Brightwell (eds) Lewin on Trusts (19th ed, Sweet & Maxwell, London, 2015).
Remus Valsan “Rights against rights and real obligations” in Lionel Smith (ed) The Worlds of the Trust (Cambridge University Press, Cambridge, 2013) 481.
Donovan Waters “The Protector: New Wine in Old Bottles?” in in A.J Oakley (ed) Trends in Contemporary Trust Law (Clarendon Press, Oxford, 1996) 63.
Donovan Waters Waters’ Law of Trusts in Canada (3rd ed, Thomson Carswell, Toronto, 2005).
D Journal articles
Tobias Barkley “The content of the trust: what must a trustee be obliged to do with the property?” (2013) 19 Trusts & Trustees 452.
Tobias Barkley "Clayton v Clayton: The Court of Appeal on the concepts of property and trusts” [2015] NZLJ 164.
Mark Bennett “Competing views on illusory trusts: The Clayton v Clayton litigation in its wider context” (2017) 11 J Eq 48.
James Brightwell and Luke Richardson “Mezhprom v Pugachev: bold new approach or illusory development?” (2018) 24 Trusts & Trustees 398.
Matthew Conaglen and Elizabeth Weaver “Protectors as fiduciaries: theory and practice” (2012) 17 Trusts & Trustees 17
Anthony Duckworth “Protectors—Fish or Fowl? Part 1” (1996) 3 Private Client Business 169.
Antony Duckworth “Trust Law in the New Millennium, Part III: Fundamentals” (2001) 7 Trusts & Trustees 9.
David Fox “Non-Excludable Trustee Duties” (2010) 17 Trusts & Trustees 17. Peter Jaffey "Explaining the Trust" (2015) 131 LQR 377.
Gavin Lightman “The Trustees’ Duty to Provide Information to Beneficiaries” (2004) Private Client Business 23.
Christopher McKenzie “Having and Eating the Cake: a Global Survey of Settlor Reserved Power Trusts: Part 1” (2007) 5 Private Client Business 336.
Patrick O’Hagan “The Reluctant Settlor – Property, Powers and Pretences” (2011) 17 Trusts & Trustees 905.
Jonathan Orpin “Reviewing 'Unreasonable' Discretionary Decisions Made by Trustees” (2015) 21 NZBLQ 131.
Jessica Palmer “Theories of the Trust and What They Might Mean for Beneficiary Rights to Information” [2010] NZ L Rev 541 at 542-543.
Jessica Palmer “Controlling the Trust” [2011] OtaLawRw 3; (2011) 12 Otago LR 473.
Jessica Palmer and Nicola Peart “Clayton v Clayton: a step too far?” (2015) 8 NZFLJ 114.
Jessica Palmer and Charles Rickett “The revolution and legacy of the discretionary trust” (2017) 11 J Eq 157.
Patrick Parkinson “Reconceptualising the Express Trust” (2002) 61 CLJ 657.
Nicola Peart, Mark Henaghan and Greg Kelly “Trusts and Relationship Property in New Zealand” (2011) 17 Trusts & Trustees 866.
James Penner “An Untheory of the Law of Trusts, or Some Notes Towards Understanding the Structure of Trusts Law Doctrine” (2010) 63 CLP 653.
James Penner “The (True) Nature of a Beneficiary's Equitable Proprietary Interest under a Trust” (2014) 27 CJLJ 473.
Lionel Smith “Trust and Patrimony” (2008) 38 Rev Gen Droit 379. Lionel Smith “Mistaking the Trust” (2011) 40 HKLJ 747.
Lionel Smith “Massively Discretionary Trusts” (2017) 70 CLP 17.
Alexander Trukhtanov “The Irreducible Core of Trust Obligations” (2007) 123 LQR 342.
James P Webb “An ever-reducing core? Challenging the legal validity of offshore trusts” (2015) 21 Trusts & Trustees 476.
Grahame Young “Trust protectors – an Australian perspective” (2016) 22 Trusts & Trustees 455.
Grahame Young “Sham and illusory trusts–lessons from Clayton v Clayton” (2018) 24 Trusts & Trustees 194.
E Other reports and papers
Josie Beverwijk “Power, To a Point: Is the Power to Add and Remove Discretionary Beneficiaries of a Trust Fiduciary?” (LLB (Hons) Dissertation, University of Otago, 2015).
Law Commission Review of Trust Law in New Zealand (NZLC IP19, 2010).
Law Commission Review of the Law of Trusts: A Trusts Act for New Zealand (NZLC R130, 2013).
Jonathan Orpin-Dowell and Nicola Peart “Vulnerability of Trusts” (paper presented to New Zealand Law Society Trusts Conference – Trusts on Trial, June 2017) 183.
Jessica Palmer and Nicola Peart “Double Trouble – the power to add and remove beneficiaries and the power to appoint and remove trustees” (paper presented to New Zealand Law Society Trusts Conference, June 2015) 33.
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