Chapter 3
The new Trusts Act

The new Trusts Act and the validity of trusts

The provisions

3.23Our recommendation is that the new Trusts Act should contain a provision that sets out the characteristics of an express trust,111 as well as providing that all express trusts must recognise mandatory duties owed by the trustees. We have provided indicative drafts of these provisions.112 We have also recommended that there be a provision confirming courts will be able to declare a trust as not having satisfied the characteristics of an express trust. We also provide that nothing in the new statute will preclude the invalidity of an express trust on other grounds.We have suggested the following drafting for that provision:
6 No express trust except under section 5
(1) A trust, if it is to be an express trust, must be created in accordance with section 5.
(2) Nothing in subsection (1) precludes the invalidity of an express trust on any other ground recognised at law.
3.24However, in a separate recommendation, the effect of excluding a mandatory duty in a trust within the definition of the Act will be that the exclusion is negated, rather than there being no express trust as such.113 We have made this recommendation to avoid courts having to find, in the face of a clear intention for a trust, that there is not an express trust for the purpose of the Act.

Issues arising out of the interrelationship of these provisionsTop

3.25A number of issues follow from these recommendations. First, the degree to which the ability to declare something is not an express trust will interface with current case law relating to “sham” trusts or “illusory” trusts, or to the inherent jurisdiction of the court simply not to recognise the existence of a valid trust. Second, there is a question as to what the effects of a declaration that a particular arrangement is not an express trust will be. Third, there is the issue as to what effect our recommendation that terms of trust cannot exclude the mandatory duties will have on trust deeds that purport to exclude those mandatory duties.

Relationship of the new Act to “sham” or “illusory” doctrines or “no trust” finding

3.26 It is not possible to say that the law relating to sham trusts or illusory trusts is a particularly settled part of New Zealand or overseas jurisprudence.114 The phrase “illusory trust” has only been part of the New Zealand discourse since Clayton v Clayton in February 2013, which at the time of writing this Report is subject to appeal.115 Some might argue that while parties and courts have resorted to the language of sham or illusion, the proper approach ought to have always been the consideration of whether there had in fact been a proper trust in the first place. The use of “sham” or “illusory” trust might represent something less than the application of a new doctrine, but rather explain why the courts might have found that a trust existed or did not exist.116

3.27Nothing in our recommendations is intended to stand in the way of such a process. It is part of the role of courts to determine whether there is a valid trust and what the effect of that valid trust ultimately is. The effect of a determination under our proposed statute that there is no express trust will essentially be to remove the purported trust from the operation of the new Trusts Act. The courts would still have the ability to determine that there was some other kind of trust or that a trust-like relationship was established. Generally, we think such a determination would be unlikely. The failure to satisfy the essential characteristics of a trust and the three certainties of intention, property and objects in the statute would also fail to satisfy what most would consider to be the requirements for establishing a trust. However, legal developments in particular areas may lead to the variation of some of those elements in particular circumstances, and we think it is important to leave open the opportunity for such developments.

Express trusts that exclude mandatory duties

3.28The more difficult question, however, is what the effect will be of requiring courts to read into deficient trust documents the mandatory obligations that we have specified. The case of Clayton v Clayton presents an example. That case concerned a series of trusts, the validity of which were challenged in relationship property proceedings. Rodney Hansen J found that in relation to one of the trusts in dispute, the way in which the trustee who was also the settlor and a beneficiary might exercise discretion without reference to the interest of the beneficiaries was so inconsistent with the normal obligations of a trustee that a trust had not been established. This was despite the intention to create a trust.117

3.29Disputes like Clayton will unquestionably remain an important pressure point in the law of trusts in New Zealand. Although we make no judgement about the particular facts of Clayton itself, the question arises from the result or the reasoning by which the result was reached, as to how this particular kind of dispute might be reasoned under the new Trusts Act. The approach under our recommended statute would be to first start with the provision that confirms the courts’ ability to declare that a purported trust not to be an express trust within the meaning of the new Act. Under our new statute, once those core characteristics have been satisfied, the question then becomes one of whether the terms of the trust have purported to exclude one of the mandatory duties that is otherwise provided for in the Trusts Act. If it has purported to exclude such a duty then the provision that we have recommended would have the effect of rendering that exclusion void and would essentially read those duties into the trust deed. It is possible that what might have otherwise been held to be a sham or illusory trust for having purported to have excluded a key mandatory duty will be saved in essence by the voiding of the otherwise offensive clause.

3.30However, that would not be a necessary result of our new Trusts Act. We would expect a court faced with such a contention to look at whether the existence of such an exclusion in the terms of the trust went directly to the intention of the parties to create a trust in the first place. In many cases the express exclusion of the mandatory duties will indeed indicate lack of intention to create a trust, and hence there will not be a trust. We have taken the view in this Report that it should not be a necessary consequence of the exclusion of one of the core mandatory duties that there was in fact no intention to create a trust. There may well remain cases where it can be appropriately held that there was an overriding intention to create a trust relationship despite poor wording or misapprehension as to what must be contained in a valid express trust deed. Such a determination would necessarily be particularly fact specific, as indeed it is under the current law.

111See R1.
112See cls 9 and 10 of Appendix A.
113See R2.
114See the discussion in Thomas Gibbons “Alter Ego trusts” [2007] NZLJ 316; Jessica Palmer “Dealing with the Emerging Popularity of Sham Trusts” [2007] NZ L Rev 81; Jessica Palmer [2008] NZLJ 319 discussing the decision of Official Assignee v Wilson [2007] NZCA 122, [2008] 3 NZLR 45; Ross Holmes “All a Sham” [1999] NZLJ 262; Matthew Colaglen “Sham Trusts” (2008) 67 Cambridge L Rev 176.
115Clayton v Clayton [2013] NZHC 301.
116Clayton v Clayton, above n 115. This case was in the context of considering whether the transfer of what would otherwise have been matrimonial property to a husband’s companies was a facade or a sham. See the observations of Lord Sumption in Prest v Petrodel Ltd [2013] UKSC 34 at [28]:
The difficulty is to identify what is a relevant wrongdoing. References to a “facade” or “sham” beg too many questions to provide a satisfactory answer. It seems to me that two distinct principles lie behind these protean terms, and that much confusion has been caused by failing to distinguish between them. They can conveniently be called the concealment principle and the evasion principle. The concealment principle is legally banal and does not involve piercing the corporate veil at all. It is that the interposition of a company or perhaps several companies so as to conceal the identity of the real actors will not deter the courts from identifying them, assuming that their identity is legally relevant. In these cases the court is not disregarding the “facade”, but only looking behind it to discover the facts which the corporate structure is concealing. The evasion principle is different. It is that the court may disregard the corporate veil if there is a legal right against the person in control of it which exists independently of the company’s involvement, and a company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement. Many cases will fall into both categories, but in some circumstances the difference between them may be critical.
117Clayton v Clayton, above n 115, at [90].