In a recent high profile relationship property case, Clayton v Clayton
 NZCA 30, the Court of Appeal held that a power of the trust’s
settlor to appoint and remove trust beneficiaries was “relationship property”
for the purposes of the Property (Relationships) Act 1976 (the
Act). The value of the power was deemed to be the same as the
value of the trust assets – in effect “busting” the trust.
The decision may yet be appealed to the Supreme Court. However, pending the
outcome of any appeal, the decision has potentially significant implications for
many other trusts in New Zealand which may have similar features to those in the
case. The decision represents another means by which parties to a relationship
split may pursue assets held in a trust. The decision will also be of interest
to creditors looking to pursue the assets in a trust under which a debtor has an
Context – “trust busting” in the Courts
The Clayton case is another in a long line of cases where attempts
to “bust” a trust were made. “Trust busting” is a colloquial term given to the
practice of looking through ownership of assets in a trust and attributing
ownership of those assets to a person other than the trustee, more often than
not the settlor of the trust. The effect of “busting” a trust is usually to
treat the trust assets as belonging to the trust settlor, thereby rendering the
assets available to a claimant such as a spouse (in the context of a
relationship property dispute) or a creditor (in a bankruptcy context).
In the relationship property context, courts have generally relied on the
broad powers afforded under the Act to set aside or alter dispositions of
property to a trust. Section 44 provides a court a power to set aside a
disposition of assets where the disposition was intended to defeat the rights of
the other party to sharing of relationship property, while section 44C permits a
court to make orders with respect to relationship property disposed of to a
trust where the disposition has the effect of defeating the other party’s
rights. Similar powers exist under section 182 of the Family Proceedings Act
1980, which permits a court to vary the terms of a pre or post-nuptial
However, allegations of trusts being “shams” or “alter ego trusts” have also
been made before New Zealand courts by parties seeking access to assets
otherwise out of their reach. The concept of a “sham” at law is a
well-established one and in the trust context it operates where a settlor and a
trustee did not intend that the trust would take effect according to its terms
and there was an intention to deceive others. The effect of a successful
challenge is that the trust is regarded as never having existed, with the result
that the assets are available to a claimant.
The concept of a trust being merely the “alter ego” of a person (again
usually the trust’s settlor) has previously been recognised in New Zealand
courts, with the consequence that the trust assets are then available for equal
sharing under the Act. The concept has fallen out of favour with New Zealand
courts in recent years and it is now unlikely to be applied.
Attacks have also been made on trusts on the basis of the so-called “bundle
of rights” doctrine. This treats the rights of one spouse under a trust (for
example, their rights as trustee, protector and/or beneficiary and, importantly
in the current context, powers of appointment held as settlor or “principal
family member” or otherwise) as a “bundle of rights” which are themselves
capable of being treated as relationship property for the purposes of the Act.
It is not clear that this has ever been a separate cause of action in its own
right. However, there are features of the decision in Clayton which
suggest that this decision is the latest manifestation of the doctrine.
The argument that a trust is “illusory” is less common in New Zealand. It was
a feature of the lower court decisions in the Clayton case and its
overlap with the concept of sham was commented on by the Court of Appeal in its
Background to the Clayton case
To turn, then, to the facts of the case at hand. Mr and Mrs Clayton separated
in 2006 after 17 years of marriage. Mr Clayton was a successful businessman
involved in the sawmilling and timber processing industry. His interests in the
business assets were held through several trust and company structures.
One of those trusts was known as the Vaughan Road Property Trust. It was
settled during the marriage of the Claytons. Mr Clayton was the settlor and
the trustee of the trust, while he, together with his wife and their two
children, were “Discretionary Beneficiaries”. The children were also the “Final
Beneficiaries” of the trust. Mr Clayton was nominated in the trust deed as
the “Principal Family Member” and in that capacity held a power to remove any
person as a Discretionary Beneficiary as well as to appoint any person to become
a Discretionary Beneficiary. He also held the power to remove and appoint
trustees of the trust. The trust deed gave wide powers to the trustees and
permitted the trustees to act despite the possibility of a conflict between the
trustee’s interests and those of a trust beneficiary.
After their separation, Mrs Clayton argued that the trust assets were
relationship property subject to the equal sharing principle in the Act. The
dispute was first heard in the Family Court. It held that the trust was
“illusory” on the grounds that the wide powers granted to the trustees by the
trust deed negated the ability of trust beneficiaries to ever call the trustees
to account, and that the manner in which the trust was administered indicated
that it was simply a “convenient structure” for commercial purposes and carried
few of the “hallmarks of a trust”. It therefore regarded the property in the
trust as relationship property and available for sharing in accordance with the
The High Court agreed that the trust was illusory but on a different basis
from the Family Court. It did not accept that the terms of the trust eroded the
trustee’s core obligations owed to the beneficiaries. It instead concluded that
Mr Clayton retained control over the trust assets to such a degree that he
was able to deal with trust property as if the trust had never been created, and
that as a consequence the trust could be regarded as “illusory”. The High Court
was influenced by the fact that there was no clause in the trust deed preventing
self-dealing, thereby effectively conferring on him an unfettered discretion, as
the sole trustee, to distribute trust property to himself (as a beneficiary).
This contrasted with another high profile case in which the validity of a trust
was challenged on similar grounds, Financial Markets Authority v
Hotchin, where such aprovision was included in the trust deed.
Court of Appeal decision in Clayton
The Court of Appeal confirmed the requirements for the existence of a sham
trust and held that the trust in this case was not a sham. It found that Mr
Clayton genuinely intended to create the trust for legitimate business purposes.
It also rejected the High Court’s conclusion that the trust could be disregarded
on the basis that it was “illusory”. Importantly, the Court of Appeal held that
there was no separate concept of an “illusory” trust, but that the concept was
the same as a sham.
However, the Court of Appeal was of the view that Mr Clayton’s power to
appoint and remove beneficiaries amounted to “relationship property” for the
purposes of the Act. The Act contains an extended definition of “property” for
this purpose, which includes “any other right or interest”. The Court based its
decision not on the more ambiguous “bundle of rights” doctrine, but on a 2011
decision of the Privy Council, Tasarruf Mevduati Sigorta Fonu v Merrill
Lynch Bank and Trust Co (Cayman) Limited. That case was a decision on
appeal from the courts of the Cayman Islands, and as such is not binding on New
Zealand courts. However, it is persuasive authority.
In the TMSF case the Privy Council held that a power of revocation
given to the settlor of a trust was “property” for the purposes of applicable
bankruptcy laws (with the practical effect that the assets of the trust were
available to the bankrupt settlor’s creditors). Traditionally, a mere power,
such as a power of appointment in a trust deed, has not been regarded as
property in itself. However, the Privy Council was of the view that the
distinction between a power and property has not been preserved in all contexts
and for all purposes. It noted that for many purposes the law regards the holder
of the power as being the effective owner of the property subject to the power.
The Court of Appeal applied the reasoning of the Privy Council in this regard
with the result that the power was a property right in Mr Clayton’s hands.
Importantly, the Court of Appeal noted that Mr Clayton held the power in his
capacity as nominated “Principal Family Member”, and not as trustee. Trustees
owe fiduciary duties to beneficiaries and cannot act in an unrestrained manner.
Although Mr Clayton was a trustee, the power was given to him in his separate
capacity as “Principal Family Member”. As such, his ability to exercise the
power was not fettered by any fiduciary duties such as those that would
constrain the exercise of a power by trustees. Mr Clayton would have been
entitled, by virtue of the power, to remove all beneficiaries other than
himself, and then (in exercise of his separate wide power of distribution of
trust assets held as the sole trustee) to distribute all the trust assets to
The Court of Appeal was of the opinion that the value of the power was equal
to the value of the trust assets themselves. The effect of this decision was
that the power, with value equal to the trust assets, was treated as
relationship property and was available for equal sharing under the Act.
The Court of Appeal’s decision in Clayton is a welcome clarification
of the scope of the “sham” doctrine in the trusts context. Pending any different
outcome should the case be appealed to the Supreme Court, the Court of Appeal’s
confirmation that there is no separate cause of action of “illusory” trust is
If the case is appealed to the Supreme Court, the views of that court (our
highest) on certain issues would be welcome. The Court of Appeal placed
considerable reliance on the Privy Council decision in TMSF.
TMSF itself had judicial precedent, and similar reasoning has been
applied recently in another English case, JSC Mezhdunarodniy Promyshlenniy
Bank & Another v Sergei Viktorovich Pugachev. However, Mr Clayton’s
power was not the same as that in TMSF. The power in that case was a
power to revoke a trust. Upon revocation of a trust, trust assets either revert
to the trust settlor or are to the order of the settlor by the trustee. Here,
the power was only to alter the class of discretionary beneficiaries (not, it
should be noted, the “Final Beneficiaries” of the trust). The Court of Appeal
was of the view that there was no practical distinction between the powers in
those cases. Further argument and judicial reasoning on this point would be
The extent to which the reasoning in the case may be applied to similar fact
situations may become apparent over time. The Clayton case had somewhat
unusual facts. Mr Clayton held the power solely, and was also the sole trustee
of the trust. Whether the reasoning of the Court of Appeal could apply where the
power is held jointly (for instance by a settlor and a third party such as a
solicitor), or by one person where that person habitually acts on instructions
from the settlor, is uncertain.
The potential application of the reasoning in a bankruptcy context is also
unclear. The finding of the Court of Appeal was that the power itself was
relationship property, having a value equal to the value of the trust assets.
Whether this would give a creditor in a bankruptcy sufficient grounds to claim
against the trust assets remains uncertain.
These questions may yet be determined in future cases.
If you would like to discuss the potential relevance of the Clayton
case to your personal and family affairs please contact the authors or your
usual Bell Gully adviser.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.