Extra Trusts Case Summaries:

The house transaction was completed and the property

Objects of the Trust:

registered in the name of the trustees, mortgage guaranteed

In Re Denley's Trust Deed, Holman v Martyn and Co

by Reynolds personally, mortgage payments by Reynolds

[1969] 1 Ch 373:

and Ms Clyma.

"The said land shall be maintained and used as and for the On Feb 1998 Mr Reynolds entered into a contract on behalf purpose of a recreation or sports ground primarily for the

of the trust to purchase another property in Queenstown.

benefit of the employees of the company and secondarily

The trust was never administered well and there was

for the benefit of such other person or persons (if any) as

intermingling between the affairs of the trust and Mr

the trustees may allow to use the same..."

Reynolds.

Mr Mills has argued that the trust is either a trust for the benefit of individuals, in which he argues that they are an

Sham. A sham exists where there is an intention to conceal

unascertainable class, and therefore the trust is void for

the true nature of a transaction: Snook v London and West

uncertainty, or that it is a purpose trust, that is a trust for

Riding Investments Ltd. A trust will be held to be a sham

providing recreation, which he submits is void on the

where there is an intention to have an express trust in

beneficiary principle.

appearance only. A sham requires an intention to mislead.

The trust deed expressly states that employees of the

Equity looks to intent rather than form. The absence of an

company shall be entitled to the use and enjoyment of the

intention to create a genuine trust prevents the trust from

land.

being valid, because one of the essential ingredients for its

According to Leahy v AG, 'a gift can be made to persons,

creation is missing. The trust is void for the lack of

but it cannot be made to a purpose or an ojbect: so also a

intention to create a trust.

trust may be created for persons as a cestuis que trust but not for a purpose or object unless the purpose or object be The OA submitted that, in order to find the trust a sham, it charitable.'

was not necessary to prove a common intention between

His Honour eventually concluded that the individuals for

both the settlor and the trustees. Mr Guest argued that there

whose benefit the trust was designed were capable of

was no need to establish an actual intention to create a sham

ascertainment at any given time and that the trust was not

on part of the trustees, but that it was sufficient if the

void for uncertainty of objects.

trustees demonstrated a lack of care and concern in following along with Mr Reynolds wishes. He relied on

Challenging the Validity of Trusts:

Midland Bank v Wyatt, for the contention that, where a

Official Assignee v Wilson and Clyma [2008] 3 NZLR 45

trustee goes along with a settlor neither knowing, nor

(CA):

caring, what he or she is signing, this constitutes sufficient

This appeal involves the law relating to shams and alter ego intention to create a sham. The factual situation in Wyatt is principles including whether they constitute a separate

markedly different to the present. Mr Wilson was a

action or are only an evidentiary matter with regard to a

professional trustee who knew what he was signing.

sham. Mr G M Reynolds was a property developer, adjudicated

In Snook, Diplock LJ held that all parties to the transaction

bankrupt in the 1990s. By March 1996 he had been

must share a common intention before a sham finding could

discharged, and he entered into an agreement to purchase a be made. The OA sought to distinguish Snook because it house.

involved a bilateral transaction (hire purchase agreement),

He settled the G M Reynolds Family Trust in May 1996

whereas in the context of trust, transactions are unilateral. A

with the first respondents as trustees, and the beneficiaries settlor can unilaterally create a trust, and a trust is complete, were Mr Reynolds' children and grandchildren.

without any element of acceptance by the trustee. Mr Guest

thus argues that only the settlor's intention was significant. But there is no 'sham trust' to be created - there is no trust to be a sham. Matthew Conlagen argues that Ms Palmer In Re the Esteem Settlement (overseas), the court found that mistakenly categorises all trusts as unilateral transactions, a settlor transfers assets to a trustee to hold on trust, and the distinguishing them from consensual contractual settlement will be a sham only if both the settlor and the

agreements.

trustee have a common intention. This was based on four

An important prior question is whether common intention

main reasons:

must be ascertained objectively, or subjectively.

1. 2.

Previous authority suggests a common intention is required

Not all trust transactions have the same form. Some are

It would be absurd if in circumstances where a

unilateral because the settlor and the trustee are not separate

trustee has acted as a perfect trustee applying

persons, and there is therefore no possibility of mutuality of

assets in good faith that the secret, unexpressed

any mental state, which precludes a common intention. But

intention of the settlor that a trust be a sham could other trusts are, practically speaking, bilateral involving the cause the trust to be held to be invalid.

3. actual intention and consciousness of both the settlor and

Gifts should not be invalidated soley on the basis the trustee(s). of intention

4. Trusts are not necessarily unilateral transactions.

The principle that an arguable allegation of a sham trust

The court found that the trust deed in this case was legitimates examination of subjective intention, and not not unilateral as it contained terms for the benefit simply the objective intention as evinced by the "trust" of the trustee such as renumeration.

documentation, is consistent with the proposition that courts will not wantonly interfere in ostensibly valid

It is trite law that in order for a valid trust to be created

commercial transactions. In the context of trusts, where a

three certainties must be satisfied, certainty of intention,

transaction objectively appears to be a trust, it will be held

certainty of subject matter, and certainty of object: Knight v out to be a trust, even if it is unclear whether the settlor Knight.

actually intended there to be a trust (Paul v Constance).

A court cannot hold that a trust exists unless it is satisfied that there was the intention to create such a trust. Equity

The OA argued that, even if it could not be established that

will look to the substance not simply the form of any

Mr Reynolds intended the trust operate as a sham from its

purported trust.

inception, he had developed such an intention by the time the Qtown property was acquired.

The creation of a trust is rightly described as a unilateral

The judge undertook an assessment of whether individual

transaction. If, objectively assessed, a settlor intends to

transactions were shams, rather than assessing the overall

create a trust, and the other certainties and requirements of picture. constitution are present then the intentions of the trustee will be irrelevant.

As an alternative, the OA argued that the trust was an alter

A trust does not normally fail for lack of a trustee.

ego of Mr Reynolds. Two HC cases have affirmed the

This feature of valid trust formation is the basis of Jessica

existence of the alter ego trust concept in NZ - Prime v

Palmer's argument. The trustee's intention is irrelevant to

Hardie, and Glass v Hughey. A number of cases in the

the creation of a valid trust, and likewise it is irrelevant to

context of de facto or marital relationships have relied on

the creation of the appearance of a trust. If no mutuality of the alter ego concept. intention is required to create a valid trust, it is conceptually There are some cases/legal writings that suggest that an incoherent to require mutuality to create a sham trust.

alter ego trust occurs where a person is held to have control

over an express trust to such an extent that the trustees are Official Assignee v Sanctuary Propvest 11/6/09 Asher J, HC considered to be "mere puppets" of the defendant. To find Auckland CIV-2009-404-852: that the trust structure is a facade.

Establishment of whether the caveat should be sustained or fall. Need to establish an arguable case that they have an

The relationship between shams and alter ego trusts is not interest in the land. clear. In Australia it has developed as a separate cause of

Mr Armitage bankrupt three times.

action to a sham. An alter ego occurs where the "controller" Mr Robinson argues that Sanctuary Propvest is a sham and is deemed to have effective control over the trust and/or

alter ego for Mr Armitage, and that it is appropriate to

trust property. Unlike a sham, the alter ego is intended to be pierce the corporate veil. He relies on Official Assignee v a genuine trust. There is no requirement of intention to

15 Insoll Avenue Ltd, where the corporate veil was lifted

deceive. Need to view the Australian cases with some

when it was established that the company did not have

caution. Actual control alone does not provide justification persons as directors who knew or had consented to be for looking through/invalidating a trust.

directors. He also argues that Sanctuary Trust is a sham and that there was a common intention, ascertained objectively,

To establish a sham, the intention to mislead must be shown to conceal the true nature of the transaction. to have existed from the inception of the trust. We are satisfied that Chisholm J's treatment of the alter ego trust

Mr Dunn was shareholder, director and trustee. He is a

argument was correct. Alter ego trusts are not an

truck driver and met Mr Armitage at the bowling club.

independent cause of action, nor are they the same as

The effect of his statement was that he was asked to

shams. In the trust context, alter ego arguments are

become involved in the trust and the company by Mr

confined to evidence to help establish a sham.

Armitage. His role was to be that of a "letterhead" while Mr Armitage would run the company. Mr Dunn's evidence

Where breaches of trust can be established, that does not

indicates that Mr Armitage was the person who set up the

necessarily suggest that the trust has been a sham from its

company and the trust. He said that he was told that if he

inception.

helped Mr Armitage in this way he would get a good credit

It is not necessarily the case that the transfer was not in the rating and that it would enable him to obtain a house or best interests of the beneficiaries. There is no direct

something of his own.

evidence that Mr Reynolds intended that the G M Reynolds Family Trust be operated as a sham. There was an absence Mr Armitage would come around with papers for him to of resolutions or minutes, no annual accounts, intermingling sign, which he would sign. of financial arrangements between the trustees and Mr

I consider that the following factors indicate a lack of

Reynolds, and no record of decisions or other

intention on the part of Mr Armitage, Mr Crump and Mr

documentation relating to the use of trust property.

Dunn to set up a genuine trust/company structure:

Evidence of poor administration of the trust is insufficient,

1. The circumstances of the creation of the trust and

of itself, to establish a sham. This may be evidence of a

the purchase of the property arguably at the

breach of trust, but the fact that the trustees have acted

direction of Mr Armitage, at a time when he was

poorly in managing a trust does not establish an intention

prohibited by the provisions of the Insolvency Act

that the trust is a sham.

1967 from owning property.

2. Mr Dunn's lack of business knowledge and

We are not persuaded that there is a basis from which the

knowledge of the specific property purchase, his

Court could declare that the trust is a sham.

apparent lack of knowledge of Mr Crump, and his entire lack of substantive involvement in any of

3.

the property issues. He was the puppet of Mr

Here, I have already found that it is seriously arguable that

Armitage.

this company was set up to enable the bankrupt, Mr

The signing of blank cheques by Mr Dunn, and the Armitage, to disguise what was in effect, acquisition of possible forging of his signatures, suggested by Mr property by him. Dunn.

4. I am also satisfied that if a company is created as a sham or

Mr Armitage's control of the actions and the affairs facade so that a person can perpetrate a fraud or carry out of the company.

an unlawful activity, the Court may look behind the

In essence Mr Dunn's whole involvement appears to have

company structure.

been a facade to hide Mr Armitage's control. It was never

An institutional constructive trust is one which arises by the

intended that Mr Dunn would function as a trustee or

principles of equity and whose existence the Court simply

director, and he did not in any substantive way do so. He

recognises in a declaratory way. A remedial constructive

did what he was told by Mr Armitage.

trust is one which is imposed by the Court as a remedy in circumstances where before the order of the court, no trust

It must be recognised that in New Zealand, company and

of any kind existed.

trust structures are not lightly put to one side. The parties are free to choose whatever lawful arrangements suit their A constructive trust arises therefore by operation of law in purposes, providing they are not shams.

circumstances where it would be unconscionable for the

While it is easy to assert that a structure is a sham, to give holder of property to assert a beneficial interest in that any such allegation teeth it is necessary to find a principled property. The constructive trust is a flexible remedy. legal basis for putting the structure to one side and putting something else in its place.

Before a trust is to be regarded as a sham, it must be shown that it is intended by the parties to have an effect different

In essence the corporate veil should only be lifted if in the from its objectively determined legal effect. The fact that particular context and circumstances its presence would

there is factual control by someone other than the trustee

create a substantial injustice. If they are genuinely and

does not mean the trust is a sham.

honestly used they should not be set aside. The special

Factual control has no effect on legal ownership.

circumstances of this case enable the Court to pierce the corporate veil.

In this case, unlike Mr Reynolds, Mr Armitage was a

The court can treat the acts of the company as those of the discretionary beneficiary of the trust. The Official Assignee shareholder if:

has a reasonable argument that he is in the position of Mr

The company is merely an agent of the shareholder.

Armitage, and that the position is that of beneficial owner

The corporate entity is a sham or facade intended to conceal of the property. There is no difficulty in a constructive trust the shareholder's involvement.

being imposed.

The corporate entity is being used to perpetrate a fraud. Challenging Dispositions to Trusts: It would be artificial to regard Sanctuary Propvest as the

Regal Castings v Lightbody [2009] 2 NZLR 433 (SC):

agent of Mr Armitage. I am satisfied that the company

Mr Lightbody made himself personally liable for the debts

structure has been set up as a facade, lacking in reality a

of Capro Three Ltd to its major supplier, Regal Castings

structure involving shareholders and directors, but rather

Ltd. Without telling Regal, some three years later Mr and

involving control by a single person in order to avoid or

Mrs Lightbody transferred their house, which was their

disguise legal duties or obligation on that person. This was only substantial asset, to a family trust. Over the next four the sort of sham that was put to one side in Jones v Lipman. years, Mr and Mrs Lightbody forgave the debt. Capro went

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