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Invalid Trusts and Other Issues in Matrimonial Proceedings

1. Introduction

Webb v. Webb,[1] a recent decision of the Privy Council involves a dispute between spouses about the matrimonial property available for distribution after their relationship ended by separation. It might seem that therefore it would not be of much interest to the trusts and estates bar. However, the case raised a number of issues that do make it of interest, in particular the validity of certain trusts.

Mr. Webb and his business associate, Andrew Tauber operated a group of companies called the Honk Group and an associated trust, the Honk Land Trust (“HLT”).

Mr. and Mrs. Webb were married in New Zealand in 2005. They were New Zealand citizens and lived there. Their daughter, Bethany, was born in 2006. Mr. Webb also had a son, Sebastian, from a previous marriage. Mr. and Mrs. Webb enjoyed a high standard of living. Shortly after the marriage, Mr. Webb established a family trust, the Arorangi Trust (“AT”) to acquire land and other assets in the Cook Islands. Mr. Webb was the settlor and he appointed himself and Sebastian as beneficiaries. In 2006 the AT acquired a leasehold interest in Arorangi, known as the Arorangi Property. Later in 2006 the AT acquired an interest in an adjacent property and since then it acquired further property in the Cook Islands, including an interest in a property known as the Terepai Arihii Property (“TAP”).

In 2011 the New Zealand Inland Revenue Department (“IRD”) began to investigate Mr. Webb’s business affairs. It focused principally on payments he made to the Honk Group over many years. The IRD made default assessments against Mr. Webb. As of September 2017 the tax, penalties and interest owing amounted to more than NZ$26 million. There was a suggestion that Mr. Webb might be placed in receivership or bankruptcy in New Zealand in order to enforce the debt.

In 2013 Mr. and Mrs. Webb moved to the Cook Islands, where they lived in the Arorangi Property. One of the AT properties was then sold and the proceeds were paid to the HLT.

The Webbs separated in April 2016. Mrs. Webb continued to live in the Arorangi Property with Bethany. Mr. Webb returned to New Zealand with Sebastian and entered into a new relationship with Brenda Dixon. He arranged for the establishment of a new trust, the Webb Family Trust (“WFT”). A Mr. Leslie Ellison was the nominal settlor (or “economic settlor”). He constituted the trust with the amount of NZ$10. Mr. Webb and Ms. Dixon were the trustees. Mr. Webb, Sebastian, and Bethany were the beneficiaries. Mr. Webb also arranged for the AT to transfer some of its assets to the WFT for nominal consideration.

2. Judgment of Potter J. in the Cook Islands Supreme Court

In May 2016 Mrs. Webb began proceedings in the Cook Islands Supreme Court under the Matrimonial Property Act 1976 of New Zealand (the “1976 Act”) for orders concerning the division of the parties’ matrimonial property. That Act was adopted in the Cook Islands by the Matrimonial Property Act 1991-92. Subsequent amendments to the New Zealand Act, which was renamed, did not apply to the Cook Islands.

Potter J. heard the case. Mrs. Webb argued that the AT and the WFT were invalid, because, among other deficiencies: (1) they lacked the “irreducible core of obligations” necessary for a trust to exist;[2] (2) they were shams; (3) the settlors did not intend to relinquish control of the beneficial interest in the trust property; and (4) the WFT was invalid for uncertainty of objects. She also argued that the property available for division  under the 1976 Act included the leasehold interest in the Arorangi Property, the interest in the TAP, moneys held in bank accounts in the name of the AT, and shares in companies called Solar 3000 Ltd., Fleet Lease Ltd., and Kuru Investments Ltd. Mr. Webb opposed most of Mrs. Webb’s arguments. He took the position that if the properties mentioned by Mrs. Webb were matrimonial property in his hands, he was entitled to deduct his debt to the IRD and that would exhaust any property available for division.

Potter J. found Mrs. Webb to be an honest witness, whereas Mr. Webb’s evidence was vague, evasive, sometimes contradictory, and generally unreliable. However, she denied Mrs. Webb’s claim. She held the trusts to be valid. She also found that there was a real likelihood that Mr. Webb would have to pay his debt to the IRD. Thus it was a personal debt that had to be brought into account.

3. Judgment of the Cook Islands Court of Appeal

Mrs. Webb appealed to the Cook Islands Court of Appeal in 2017. The Court of Appeal allowed the appeal. It held that the debt to the IRD should not be brought into account, since it was unlikely to be enforceable in the Cook Islands. Further, it held that the AT and the WFT were invalid because the trust deeds failed to record an effective alienation of the beneficial interest in the assets. However, the court held that the trusts were not shams.

In determining the value of the matrimonial assets, the court rejected Mr. Webb’s argument that he owed a debt of NZ$ 3.3 million to the HLT, since it was not a genuine debt but the product of an ineffective tax avoidance scheme. It also accepted Mrs. Webb’s estimate of the value of the Solar 3000 Ltd. shares. The estimate was admittedly speculative, but Mr. Webb brought that on himself by making inadequate disclosure. However, the court held that Mrs. Webb failed to establish that any matrimonial property was used to acquire the interest in Kuru Investments Ltd.

Meanwhile Mrs. Webb had indicated that if the Arorangi Property was allocated to her, she would forgo any claim against the other matrimonial assets. The Court of Appeal determined that the value of the Arorangi Property was less than half of the total matrimonial assets and so it directed that the interest in that property should be vested in her.

4. Judgment of the Privy Council

Mr. Webb appealed with leave to the Privy Council. The board rendered judgment on 3 August 2020. Lord Kitchin, with whom Lord Carnwath, Lady Black, and Lord Briggs agreed, delivered the Board’s judgment. Lord Wilson delivered a dissenting judgment.

4.1 Lord Kitchin’s Judgment

Lord Kitchin concluded that there were three sets of issues to be decided: (1) the issues concerning Mr. Webb’s liability to the IRD; (2) the issues concerning the validity of the trusts; and (3) the issues concerning the valuation of the matrimonial assets.

4.1.1 First Set of Issues: Mr. Webb’s Tax Liability

Under the first set of issues the court had to take into account the provisions of the 1976 Act and in particular its provisions regarding the deductibility of debts. Section 20(5) provided that, from the value of the matrimonial property owned by a spouse, the following should be deducted: (a) any secured or unsecured debts (other than personal debts or debts secured wholly on separate property) owed by as spouse; and (b) the unsecured personal debts owed by a spouse to the extent they exceed the value of any separate property of that spouse. Mr. Webb argued that his liability to the IRD was an unsecure personal debt within the meaning of s. 20(5)(b) and so it had be deducted.

The court found that Mr. Webb’s liability to the IRD was indeed a debt, but it should not be deducted, because of the “foreign tax principle”, that is, the long-standing common law principle that (aside from tax treaties) courts will not collect taxes of a foreign state for the benefit of that state. The principle applies to both direct and indirect enforcement. Lord Kitchin was convinced that if the IRD or a receiver or trustee in bankruptcy were to enforce the debt, this would amount to indirect enforcement.[3] He further stated that within the scheme of the 1976 Act, it was clear that for an unsecured debt to be a personal debt it would have to be enforceable or likely to be paid, for allowing an unenforceable debt to be deducted from a spouse’s matrimonial property would result in manifest injustice, especially in this case, since it would mean that there would be nothing left to share with Mrs. Webb.[4] Mr. Webb argued that a New Zealand tax debt would be enforceable in the Cook Islands because of the longstanding relationship between the two countries. However, Lord Kitchin rejected that argument on the ground that, although, the Cook Islands were formerly part of New Zealand, they became a self-governing nation in 1964, with its own Parliament, government and court system. Although Potter J thought that there was a real likelihood that Mr. Webb would pay the IRD debt, she gave no reasons for that opinion and the Court of Appeal seems not to have shared it. Neither did Lord Kitchin, considering Mr. Webb’s strong challenge to the default assessments.[5]

4.1.2 Second Set of Issues: Validity of the Trusts

In determining whether the trusts were valid, Lord Kitchin reviewed that principle that a completely general power of appointment, which, depending upon the context, allows the holder to appoint the subject matter of the property to himself, may be tantamount to ownership. For this purpose, he referred to Tasarruf Mevduati Sigorta Fonu v. Merrill Lunch Bank and Trust Co. (Cayman) Ltd.,[6] which the Supreme Court of New Zealand applied in Clayton v. Clayton.[7] He used the provisions of the AT to consider this issue and noted the following:[8] (1) Mr. Webb was the sole trustee and the trust was established for only two beneficiaries, himself and his son. (2) Mr. Webb could and did appoint himself as consultant and thus had power to remove the trustee and replace him; he could request an early vesting of the property; and he could consent to a variation of the trust. (3) Mr. Webb could exercise all the powers and discretions conferred on him as trustee notwithstanding any conflict of interest.

This meant that Mr. Webb could: (1) Nominate himself as sole beneficiary and thereby become settlor, trustee, consultant, and sole beneficiary.[9] And as settlor he was not subject to any fiduciary duty. (2) He could also apply the whole of the income and capital to himself as a beneficiary. Nonetheless, he remained a fiduciary as trustee and, although he could exercise his powers despite any conflict of interest, that did not allow him to breach the trust. (3) Under the terms of the trust he could resettle the assets on trustees of any trust so long as that trust included among its beneficiaries one of the beneficiaries of the AT and, of course, Mr. Webb was such a beneficiary. (4) He could also vary the terms of the trust.[10]

Although Potter J. held that the trusts were not shams, that did not mean that the trusts could not be held void for other reasons.[11] With respect to the WFT, Mr. Webb offered no explanation why Mr. Ellison settled it, so a reasonable inference was that he acted under the direction and control of Mr. Webb as his agent.[12]

Lord Kitchin agreed with the Court of Appeal’s analysis that one could analyse the powers reserved to Mr. Webb in one of two ways: (1) The powers are so extensive that he cannot be regarded as ever having disposed of any of the property that was purportedly settled in the trusts. (2) The powers are so extensive that in equity Mr. Webb can be regarded as having rights that were tantamount to ownership. Lord Kitchin focused on the second of these approaches and concluded that the rights Mr. Webb had in the assets were indistinguishable from ownership.

This meant that it was unnecessary to consider whether the trust deeds were void because the beneficiaries were not entitled to require the trustees to account or whether the WFT was void for uncertainty of objects.[13] Lord Kitchin did consider the question whether the trusts were shams, but he held that Potter J. was entitled to find that they were not shams because Mr. Webb did not set up the trusts as a pretence.[14]

Lord Kitchin dismissed Mrs. Webb’s argument that the AT was void under the common law rule against perpetuities, since this trust could continue for only a maximum period of 21 years. However, he held that the WFT was void under the rule, since it could last for 60 years.[15]

4.1.3 Third Set of Issues: Value of Specific Assets

It was undisputed that the Solar 3000 Ltd. shares were matrimonial property. Mrs. Webb had only limited evidence of their value because of Mr. Webb’s failure to make disclosure. This meant that the value proposed by Mrs. Webb was speculative. However, Lord Kitchin held that the court could draw adverse inferences in the circumstances and that it could do so especially in claims for ancillary relief in matrimonial proceedings. Such proceedings have distinctive features, which include a public interest in ensuring the proper maintenance of the plaintiff spouse. Consequently, the proceedings have an inquisitorial element. Moreover, the claimant spouse is dependent upon proper disclosure by the other spouse. While this does not grant the court licence to engage in pure speculation, the court could draw on its experience in dealing with such cases and take notice of inherent probabilities in determining what the defendant spouse is likely concealing.[16] Lord Kitchin agreed with the Court of Appeal that the shares in Kuru Investments Ltd. were not purchased with money taken from matrimonial property. Thus, they did not form part of the matrimonial property.[17]

Mrs. Webb had indicated that if she were allocated the Arorangi Property, she would forgo any claims against other assets held by Mr. Webb and so the Court of Appeal did allocate that property to her. Thus, it was not necessary to ascertain precise values for all the assets.[18]

4.2 Lord Wilson’s Dissenting Reasons

Lord Wilson agreed with everything discussed under the Second and Third Sets of Issues in the Board’s judgment, but disagreed with the Board in its treatment of the First Set of Issues, namely in regard to Mr. Webb’s debt to the IRD. Thus, he would have allowed Mr. Webb’s appeal. In his view, the Board was too bold in concluding that New Zealand would not be able to enforce the IRD debt in the Cook Islands. Lord Wilson regarded the debt as being enforceable on a practical level, either directly, or in Mr. Webb’s potential bankruptcy.

5. Conclusion

There is often a desire on the part of settlors to control the affairs of inter vivos trusts as much as possible. This may for legitimate or flagitious reasons. Regardless, this case makes clear that the drafter can only go so far in giving effect to a settlor’s wishes. This is true of trusts generally, but, for policy reasons, particularly so in the matrimonial context.

[1]    2020 UKPC 22 (Cook Islands), released 3 August 2020.

[2]    The quoted term was coined by Millett L.J. in Armitage v. Nurse, [1998] Ch. 241 at 253-54.

[3]    Para. 39

[4]    Para. 41.

[5]    Para. 59

[6]    [2011] UKPC 17, [2012] 1 W.L.R. 1721. I have written about this previously. See “Abatement and General Powers of Appointment”, http://welpartners.com/blog/2016/09/abatement-and-general-powers-of-appointment/.

[7]    [2016] NZSC 29, [2016] N.Z.L.R. 551.

[8]    Webb, paras. 81-82.

[9]    Lord Kitchin did not raise the point directly (although he did so indirectly in para. 89), but this surely means that there is then not trust. If one and the same person is trustee and sole beneficiary, there cannot be a trust, because that one person holds the complete title. The title is not ( and cannot be) bifurcated into a legal and an equitable title.

[10]   Paras. 83-85.

[11]   Para. 87.

[12]   Para. 88.

[13]   Para. 90.

[14]   Para. 91.

[15]   Paras. 95-98.

[16]   Paras. 104-05.

[17]   Para. 107.

[18]   Para. 108.

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