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High Court of New Zealand Decisions |
IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
CIV.2002-404-1791
BETWEEN ISOLARE INVESTMENTS LIMITED
Plaint iff
AND DENIS JOHN FETHERSTON AND
ANNA MARIA BERNARDINA
FETHERSTON
Defendants
Hearing:
16 August 2006
Counsel: P J P Grace and N W Woods for plaintiff/respondent in opposition
P K McGrath for defendants/applicants
in support
Judgment: 15 September 2006 at 3:00pm
RESERVED JUDGMENT OF WILLIAMS J
This judgment was delivered by
Hon. Justice Williams
on
15 September 2006 at 3:00pm
pursuant to R 540(4) of the High
Court Rules
...................................
Registrar/Deputy Registrar
Date: ...........................
A. The application by the defendants/applicants for discharge
of charging
orders 6439273.1 and 6589916.1 (CT 921/272) is dismissed.
B. The plaintiff/respondent is entitled to costs
as per para [65] of this
judgment.
____________________________________________________________________
ISOLARE V FETHERSTON
HC AK CIV.2002-404-1791 15 September 2006
Introduction and Issues
[1] On 17 October 2002, an order was made in favour of the
plaintiff, Isolare
Invest ments Limited, against the defendants, Mr and Mrs Fetherston, for costs and
disbursements totalling $4160
resulting from Isolare's successful application to set
aside a statutory demand they issued against it. The order was not sealed
until
2 December 2002. A charging order was obtained by Isolare on 23 May 2005 in
relat ion to that judgment charging the property
at 26 Marama Street, Milford, North
Shore (CT NA921/272) of which Mr and Mrs Fetherston are registered proprietors.
The charging
order was registered against the title under No 6439273.1 on 30 May
2005.
[2] Following the substantive hearing in this claim,
Courtney J delivered a
reserved judgment on 28 April 2005 finding Mr and Mrs Fetherston liable to Isolare
for $335,000 plus interest
and for a $30,000 advance made in August 2005, again
plus interest. Isolare was also awarded costs.
[3] When quantified, that
judgment including interest and costs totalled
$402,064.52. $100,000 of that was for costs, a sum increased by the Judge as a
result
of Mr and Mrs Fetherston's conduct. Inclusive of additional interest, the
judgment totalled $787,064.52 and a charging order was
obtained by Isolare on
23 September 2005 for that amount. That was registered under No.6589916.1
against the title to 26 Marama
Street on 29 September 2005.
[4] The judgments and subsequent charging orders were obtained by Isolare
against Mr and Mrs Fetherston
in their personal capacities.
[5] On 15 March 2006 Mr and Mrs Fetherston applied under R 570 as persons
prejudicially affected
for orders discharging the charging orders on the basis that
they are the registered proprietors of 26 Marama Street as trustees
of the Denis and
Ans Fetherston Family Trust and not in their personal capacities and accordingly the
charging orders have been wrongly
registered against the title.
[6] The application was opposed by Isolare on a number of grounds including
that the Fetherston
Family Trust was settled in breach of the Property Law Act 1952,
s 60 as being settled with an intention to defraud Isolare and Mr
and Mrs
Fetherston's other creditors or, alternatively, that the Trust is a sham or the alter ego
of the applicants.
[7] This
judgment deals with Mr and Mrs Fetherston's R 570 application
Interest charged
[8] It was common ground that a charging order charges
the beneficial, but not
the bare legal interest, of the registered proprietors of land. In Motor Vehicle
Dealers Institute
Inc v UDC Finance (1991) Limited [1994] 1 NZLR 659, 663 the
Court of Appeal said:
The bare legal estate of a trustee has never been able to be made subject to a
charging
order. As was said by Williams J in Re Beattie (1887) NZLR 5 SC
342 at pp 342-343:
The object and effect of a charging order absolute is to charge
property
to which a defendant is beneficially entitled, and not to
charge property belonging to some one else, and in which
the
defendant has a bare legal interest.
As was held in that case, and in Re Mutual Benefit and Investment
Society,
ex parte Baynes (1887) NZLR 5 SC 293, a charging order over land is
subject to all prior equities. Those cases have been applied and the principle
reaffir med in Messent v New Zealand Farmers' Co-operative Association of
Canterbury Ltd [1925] NZLR 564; Nicol v Raven [1925] NZLR 155; Firth
Concrete Industries Ltd v Duncan [1973] 1 NZLR 188, Brdjanovich v Ellis
Hardie Syminton Ltd [1974] 2 NZLR 542 and Property Restoration Ltd v
Farquhar [1991] 3 NZLR 498. A bare trustee has no equity in the property
of which he is a trustee, and so has no interest which can be charged.
Burden
of proof
[9] For Isolare, its leading counsel, Mr Grace submitted the onus of showing they
had no beneficial interest in 26
Marama Street lay on Mr and Mrs Fetherston.
Though direct authority was elusive, he relied on the Court of Appeal's observation
in
Motor Vehicle Dealers Institute (at 665) that an applicant under r 570 does not
need to demonstrate prejudice and the observations
of Master Gambrill in
Litho Plate Services Ltd v Aigner (HC AK CP2218/88 23 February 1990 at p8-9) to
the effect that where a charging
order has been properly made it is the chargee's
obligat ion to show why it should be removed.
[10] In response, Mr McGrath,
counsel for Mr and Mrs Fetherston, submitted that,
if it were necessary to demonstrate prejudice it could be shown in this case as
the
trustees were unable to deal with the property, their first mortgagee was threatening
sale and a refinancing proposal was unable
to proceed whilst the charging orders
remained registered against the title.
[11] The correct view is that the onus of proof
under R 570 is on the applicant for
relief. The judgments obtained by Isolare against Mr and Mrs Fetherston were
properly obtained.
Judgment creditors are entitled to issue charging orders without
leave after judgment has been sealed (R 568). They are
entitled to register a
charging order against any interest held by their judgment debtor in land. That is to
give them security for
payment of their judgment (R 574) even though, of course,
charging orders are not, of themselves, execution of the judgment on which
they are
founded since they require further action such as writs of sale or the other execution
processes for which the High Court
Rules provide to ensure payment of the
judgment.
[12] Whilst Isolare's charging orders could not, of course, have been registered
against the title to 26 Marama Street had it not been for the coincidence that Mr and
Mrs Fetherston incurred personal liability
to Isolare under the judgments and are also
the trustees of the family trust, having created that coincidence, it is for them to
show
they have no beneficial interest in 26 Marama Street in order to be successful in their
applicat ion for discharge of Isolare's
charging orders.
Trust deed
[13] The Fetherston Family Trust was constituted by deed dated 17 December
2002 under which they,
as settlors, created the trust and appointed themselves and
The Independent Trustee Co Limited as trustees.
[14] Their solicitor
in relation to the constitution of the trust was Mr Langdon who
is also the sole director and shareholder of The Independent Trustee
Co Limited.
[15] Mr Langdon said he was initially consulted by Mr Fetherston in relation to
the constitution of the trust on
23 October 2002. Mr Fetherston was considering
setting up a trust to protect the family assets as the result of him marketing software
and wishing to do so in as financially advantageous fashion as possible.
[16] Mr Langdon said that the form of the Fetherston
Family Trust was similar to
that which he commonly uses including his own family trust this standard form
being amended following
the abolition of death duties in 1991 to give trustees
greater control of the assets than was the position beforehand.
[17] In
fact, according to Mr Fetherston's most recent affidavit, he and his wife
considered setting up a trust in 1996 when preparing wills
but did nothing about it at
the time.
[18] The Fetherston Family Trust gives Mr and Mrs Fetherston power of
appoint ment, sets
the date of distribution as 80 years from execution subject to the
trustees' power to abbreviate that term, names them as "Primary
Beneficiaries" and
their two children as "Secondary Beneficiaries" and makes all beneficiaries
"Discretionary Beneficiaries". Clause
3.1 provides:
The first responsibility of the Trustees shall be to consider on a regular basis
the circumstances of each of the Primary Beneficiaries while they are
respectively living and to pay or apply so much of the income or of the
capital of the Trust Fund as the Trustees shall
think fit to or for the
ma intenance and benefit of them or any of them including the provision of
sufficient funds
(but without limiting the generality of the foregoing
provisions) to provide such financial assistance as may be necessary
for the
purposes of purchasing or refurnishing a home or homes, purchasing a new
car or cars, meeting the expenses
of holiday tours whether in New Zealand
or abroad, or other purposes of a capital nature such power to be exercised
by the Trustees in a liberal way (but having regard to any other sources of
income or capital known by the Trustees to be
available to them) to enable
them both to maintain a reasonable standard of living throughout their lives
having regard
to the standard of living to which each had been accustomed
so that the comfort and welfare of each of the Primary Beneficiaries
is the
primary consideration of the Trustees.
[19] Clause 3.2 provides similarly for the interests of the "Secondary
Beneficiaries" as the trustees "next responsibility".
[20] Clause 3.4 gives the trustees power to acquire additional assets,
and repay
debts including mortgages.
[21] Clause 3.6 gives the trustees additional powers including vesting the whole or
any
part of the trust fund on any of the Discretionary Beneficiaries (cl 3.6.1) or
resettling the same or making advances for education,
advancement or the like on
any beneficiary (cl 3.6.2).
[22] Under cl 3.7 the trustees are required to transfer the trust fund
at the date of
distribut ion to the Fetherston children or the settlors' grandchildren or, if there are no
such beneficiaries, to
pay it respectively to Mr and Mrs Fetherston's siblings or
children.
[23] The deed contains wide powers of investment for the
retention of assets
including, in cl 7.1.2:
... that it is the Settlors' intention that the trustees shall retain as assets
of the
Trust Fund the property situated at 22 View Road, Campbells Bay, North
Shor e City, Auckland together with
the shares in Automated Maintenance
Holdings Limited and not dispose of the same unless the Trustees consider
that
disposal is in the best interests of the beneficiaries of the Trust Fund.
Facts
[24] Mr and Mrs Fetherston are involved in
the business of licensing software
used in health and safety risk management developed by Mr Fetherston, the
intellectual property
of which was until recently owned by Automated Maintenance
Holdings Limited with the operating company for the business being Risk
Management Services Limited.
[25] Isolare's claim against Mr and Mrs Fetherston was commenced as a summary
judgment application
filed on 31 July 2002 based on their guarantee of a loan from
Isolare to Risk Management Services of $355,792 on 17 May 2001.
[26]
Mr and Mrs Fetherston's response was to issue a statutory demand against
Isolare for $463,000 "in respect of an agreement to
place those funds at the disposal"
of Mr and Mrs Fetherston.
[27] Isolare applied on 22 August 2002 to set aside the statutory
demand. An
order to that effect was granted by consent on 17 October 2002 and Master Lang (as
he then was) made the order for costs
on which the earlier charging order is founded
because he took the view that the statutory demand was an "improper use of the ...
procedure to apply some form of leverage or pressure" on Isolare. Six days after
Master Lang's judgment, Mr Fetherston, as noted,
consulted Mr Langdon concerning
settlement of the family trust with the deed itself being signed about two months
later.
[28]
On 3 April 2003 Mr and Mrs Fetherston sold the 50 and 45 shares they
respectively held in Automated Maintenance Holdings Limited to the trust for
$13,157.90 and $11,842.10, the trustees giving
acknowledgements of debt in reply.
[29] On the same day they contracted with the trustees to sell their then home at
22 View
Road, Campbells Bay, North Shore to the trustees for $915,000 the whole
of which (bar $1) was left owing under a further acknowledgement
of debt. The
purchase price was supported by a valuation of 22 View Road dated 5 November
2002 for $900,000.
[30] A month later,
namely on 8 May 2003, Mr and Mrs Fetherston "and/or
no minee" contracted to buy 26 Marama Street for $1.16m payable by way of a
deposit
of $100,000 on 14 May 2003 and the balance when the contract became
uncondit io nal. Possession was to be given on 31 October 2003
or earlier by mutual
agreement. Mr Fetherston said the contract became unconditional on 9 June 2003
but settlement was delayed until
3 March 2004 because the vendor was unable to
obtain a certificate of compliance. He said the Fetherston Family Trust paid the
$100,000
deposit from its own funds raised by the sale of shares and obtained
bridging finance of $1.07m but repaid what was its then indebtedness
to the bridging
financier of $949,763.04 on settlement on 3 March 2004 when the advance was
replaced by a loan from the ASB Bank
of $900,000.
[31] Following Isolare challenging whether the Fetherston Family Trust in fact
paid the deposit from its own resources,
Mr Fetherston filed a further affidavit in
which he said that Automated Maintenance Holdings Limited issued 14,625 shares
to Red
Fox Investments Limited on 16 May 2003 for $150,000 following his
agreement to arrange that the Fetherston Family Trust's shareholding
in the company
would be diluted to enable the transaction to occur. On 6 October 2003 the
Fetherston Family Trust sold 23,888
shares in Automated Maintenance Holdings
Limited to Killer Ants of Sydney Limited for $250,000 with the trust loaning that
sum to
Automated Maintenance Holdings Limited. Then, on 9 February 2004 the
Fetherston Family Trust sold 10291 shares in Automated Maintenance
Holdings
Limited to Zambezi Investments Limited for $100,000.
[32] In the meantime, two other matters had occurred.
[33]
The first was that The Independent Trustee Co Limited resigned as trustee of
the Fetherston Family Trust on 22 August 2003. Mr Langdon
said his company's
resignat ion did not occur as the result of any concern that the trust was being
inappropriately operated.
[34]
The second was that on 20 November 2003 Mr and Mrs Fetherston
contracted to sell 22 View Road for $1.35m payable by way of a deposit
of $100,000
and with settlement on 16 January 2004. The net proceeds of $130200.59 were paid
into the Family Trust account that day.
[35] In parallel, these proceedings progressed through various interlocutory and
case management conferences including the
making of two "unless" orders against
Mr and Mrs Fetherston - leading up to the trial between 11-19 April 2005, the
judgment delivered
on 28 April 2005, the charging order for the statutory demand
costs being registered a month later and the second charging order
registered on
23 September 2005. (Mr Fetherston said the applicants have now given instructions
to their solicitor to seek leave
to appeal out of time against Courtney J's judgment,
their impecuniosity having precluded that step before now, but no such application
has as yet been filed and accordingly nothing hangs on that matter as far as the
present application is concerned).
[36] Around
that relatively spare chronology, a lot of evidence was adduced
designed to show or rebut the possibility that Mr and Mrs Fetherston
have a
beneficial interest in 26 Marama Street or it was purchased in breach of the Property
Law Act 1952, s 60 or the trust was
a sham or the applicants' alter ego, and
accordingly the charging orders should remain registered against the title.
[37] It
is unnecessary for the purposes of this judgment to analyse that evidence in
detail, particularly because Mr Grace accepted the Court could reach
no definite
conclusio n on a serious issue of that nature without a hearing, hence Isolare's
emphasis on the onus of proof.
[38]
Isolare's director, Mr Gallagher who Mr and Mrs Fetherston unsuccessfully
sought to join as third party and then counterclaim
defendant on 8 February and 21
April 2005 respectively, the latter after their case at the substantive hearing had
closed said
that, after partial discovery, he remained of the view that the Fetherston
Family Trust "is a front for the defendants' personal
finances and transactions and
was intended to defeat the plaintiff of the fruits of its judgment". He put in evidence
numerous bank
statements and other documents in the trust's name dealing with day
to day transactions including purchases for liquor, pharmacy
requirements, petrol,
pet shops, hardware and supermarket bills. He drew attention to a number of
instances of what he regarded
as unexplained deposits and withdrawals, particularly
by Mr and Mrs Fetherston, and several payments by the trust for rent for Mr
and Mrs
Fetherston's son.
[39] He drew attention to what, on their face, could appear to be deficiencies in
accordance with proper
accounting and trustee requirements in the way in which
various transactions have been handled in the Fetherston Family Trust books.
He
made similar observations concerning the way in which the sales of the shares in
Automated Maintenance Holdings Limited were said
to have been transacted.
[40] Specifically in relation to 26 Marama Street, he noted the contract for the
property's purchase
was not executed by The Independent Trustee Co Limited,
although it remained a trustee for some three months after the contract was
signed.
And he especially relied on the fact that Mr and Mrs Fetherston apparently occupy
the property "in perpetuity" under a
tenancy agreement dated 23 February 2004 with
the tenancy being subject to the terms of the Fetherston Family Trust and the rental
box being simply marked "refer trust deed".
[41] Unsurprisingly, Mr Fetherston firmly denied any impropriety or any
implicat
ion that he and his wife had any beneficial interest in 26 Marama Street. He
said the trustees' discretion has "never been exercised
in our favour" as regards
22 Marama Street, all accounting has been properly done, the omission to have The
Independent Trustee Co
Limited execute the 26 Marama Street contract was a
solicitor's oversight and the business offices of Automated Maintenance Holdings
Limited were successively at 22 View Road and then at 26 Marama Street with the
properties being regularly used for the company's
purposes. That, he said, explains
the trust meeting payments for liquor, food, petrol and the like. Even the pet shop
payment was
for "bloodworm for the company office fish tank". The rental
payments arose because the couple's son has been an
employee of Automated
Maintenance Holdings Limited for a decade. The tenancy agreement was a standard
document and was entered into
by the trust pursuant to express trust deed powers in
that regard.
Submissions
[42] Though acknowledging some infelicities
in the documentary trail,
Mr McGrath nonetheless submitted that Mr and Mrs Fetherston had demonstrated
the charging orders were wrongly
registered against the title to 26 Marama Street.
[43] In relation to the ground of opposition raised under the Property Law
Act
1952, s 60, Mr McGrath pointed to the high standard of proof lying on Isolare as
described in Elders Pastoral Holdings Limited
v Grey (HC Ak CP2-SD99 17
December 1991, Fisher J [13] p5-6) where the following appears:
Under s 60 an intent to defraud
creditors includes an intent to defraud any
one or more of the disponor's creditors. The plaintiff must prove that the
disponor had an actual intent to defraud creditors ... The allegation that a
party has disposed of property with intent to defraud creditors is a serious
one and the evidence advanced
in support of that proposition must be
assessed with commensurate caution. This is another way of acknowledging
the rather difficult formula often said to apply in these cases that, while the
standard of proof is the balance of probabilities,
that must nevertheless be
approached with appropriate regard to the gravity of the allegation and
ther efore the
higher degree of satisfaction demanded of the tribunal of fact
befor e accepting that the allegation has been made out.
[44] Naturally enough, Mr McGrath emphasised that when the Fetherston Family
Trust was settled, the only Isolare judgment outstanding
against Mr and Mrs
Fetherston was the small one of $4160 and that, at that stage, neither Mr and Mrs
Fetherston nor the Fetherston
Family Trust owned 26 Marama Street. Two-and-a-
half years passed, he emphasised, before Isolare successfully obtained the
substant
ive judgment underpinning the second charging order. By that stage, the
Fetherston Family Trust contract to buy 26 Marama Street
was nearly two years old
and the trust had owned the property for nearly a year. All of that indicated strongly,
he suggested, both
that the s 60 and other arguments were misconceived and the
charging orders could not stand, the property being owned by the Fetherston
Family
Trust.
[45] Mr McGrath submitted Mr Fetherston's reasons for settling the trust were
unexceptionable having regard to
their embarking on a new business at the time free
of former constraints. While creditor protection was a reason for constituting
the
trust, it was not linked to the Isolare claim. Similarly, it could not be said that the
constitution of the Fetherston Family
Trust was a "sham" since Isolare could not
demonstrate a common intention on the part of the settlors of the trust deed that the
deed created legal rights and obligations different from those actually obtaining
(Snook v London & West Riding Investments Ltd
[1967] 1 All ER 518, 528 per
Diplock LJ). The Fetherston Family Trust deed did not, he submitted, do other than
correctly create and record legal rights
and obligations.
[46] Mr Grace submitted Mr and Mrs Fetherston's interest in 26 Marama Street as
settlors, trustees and Primary
Beneficiaries of the trust was significantly greater than
a bare legal interest. He relied on Ayers & Wyllie Trusts and Relationship
Property
para 6.1.2 p 21 where the authors, in discussing conventional family trusts, make the
observat ion that following settlement
"unless the settlor is a beneficiary of the trust,
the settlor has no interest in the trust property". Mr and Mrs Fetherston were,
he
pointed out, both settlors and Primary Beneficiaries. Mr Grace also relied on the
fo llo wing passage (para 6.1.3 p 23) that:
Wher e full beneficial ownership of the trust fund is vested in a beneficiary
and that beneficiary is of full legal
age and capacity, that beneficiary is
entitled to call on the trustee of the trust to transfer the trust property to the
beneficiary, and the trust will come to an end, notwithstanding any contrary
intention in the trust document.
but since
that passage does no more than restate the well-known Rule in Saunders v
Vautier [1841] EngR 629; (1841) 4 Beav 115; 41 ER 482, it scarcely helps Isolare. Beyond noting that
the couple's son has been an employee of Automated Maintenance Holdings Limited
for
over a decade and must accordingly be of full age, the evidence says nothing
about the age of the couple's children nor whether they
have grandchildren and
accordingly is silent as to whether all beneficiaries of the Fetherston Family Trust
are capable of combining
to bring the trust to an end.
[47] Mr Grace especially relied on what he submitted were the terms of the trust
deed. They were
generous to Mr and Mrs Fetherston. He submitted they had more
than a hope or expectation that the trustees' discretion their own
discretion - would
be exercised in their favour. The terms of the deed effectively rendered that exercise
of discretion highly likely
and not dependent on any contingency. However, the
authority on which he relied Johns v Johns [2004] 3 NZLR 202, 211-2 [31]-[33]
contains the following passage:
[31] few citations are necessary to support the view that a so-called
discretionary interest in trust property does not constitute a legal or
equitable interest in that
property and thus does not qualify under s
21(2) [of the Limitation Act 1950] which must be regarded as
referring to interests of that kind. In Hunt v Muollo [2003] 2 NZLR
322 at p 325 this Court described the position of discretionary
beneficiaries in the following way at para [11]:
it is generally regarded as settled law that a discretionary
beneficiary's interest in
a normal discretionary trust is no
mor e than a mere expectancy. It is simply an expectation or
hope (in Latin a specs) that the trustee's discretion may be
exercised in the beneficiary's
favour: see Dal Pont and
Chalmers, Equity and Trusts in Australia and New Zealand
(2nd ed, 2000) at p 505. The position, as stated, is supported
by high authority: see Gartside v Inland
Revenue
Commissioners [1968] AC 533 at p 607 per Lord Reid and at
p 615 per Lord Wilberforce. An ordinary discretionary
beneficiary has no interest, legal or equitable, in the assets of
the trust: see Queensland Trustees Ltd
v Commissioner of
Stamp Duties [1952] HCA 52; (1952) 88 CLR 54 at pp 62-65, Commissioner
of Stamp Duties (Queensland) v Livingston [1964] UKPC 2; [1965] AC 694
(PC) and Pearson v Inland Revenue Commissioners [1981]
AC 753 at p 775 per Viscount Dilhorne and at p 786 per
Lord Keith of Kinkel. It is only on the making of a
distribution to the discretionary beneficiary that the
beneficiary obtains any interest in property,
and then only to
the extent of the distribution.
[32] In Armitage v Nurse [1998] Ch 241, which was
cited in the present
case, but not in Hunt v Muollo, Millet LJ (with Hirst and Hutchison
LJJ concurring)
said at p 260 that the interest of a discretionary
beneficiary, such as that now under consideration, did not qualify
in
ter ms of the United Kingdom exact equivalent to the proviso to
s 21(2). This was because the discretionary
beneficiary was merely
the object of a discretionary power or trust which might never be
exercised in
her favour. A little earlier His Lordship had said that
the beneficiary in question had only the right to require the
trustees
to consider from time to time whether to make payment to her, or
accumulate, as was the alternative
in that case.
[33] We respectfully agree that a right of that kind cannot properly be
regarded as an "interest"
in the trust property, whether present or
future, for the purposes of the proviso to s 21(2). We are unable to
accept Mr Carter's submissions to the contrary. They cannot be
reconciled with the authorities mentioned,
or indeed with
conventional concepts of what amounts to an interest in trust
property. That interest
must be either legal or equitable. It cannot
extend to the so-called interest of a discretionary beneficiary which
is neither legal nor equitable.
[48] Mr Grace submitted that the evidence demonstrates that the Fetherston
Family
Trust is merely a front for Mr and Mrs Fetherston's personal dealings and no
more than their alter ego. Accordingly they should not
be able to benefit from the
trust being merely discretionary when their interests are effectively identical. He
supported that submission
with reference to the numerous apparently domestic or
personal payments by the trust and challenged whether the trust in fact paid
the
deposit of $100,000 for 26 Marama Street.
[49] Mr Grace especially relied on Courtney J's credibility findings against
Mr
and Mrs Fetherston, her subsequent increase in scale costs to $100,000 as a result
of their actions, what he submitted were their
attempts to delay and avoid the
substant ive hearing and Mrs Fetherston's failure in her application to set aside a
bankruptcy notice
served on her following delivery of the substantive judgment.
Discussion
[50] Traditionally, as the citation from Johns (including
Hunt) shows, an interest
in possible distributions of trust property as a Discretionary Beneficiary does not
constitute a legal or
equitable interest in that property. Apart from the citation from
Johns earlier set out, it is instructive to note the following
conclusions in
Hardingham & Baxt, Discretionary Trusts (2nd ed) (1984) para [605] p 126:
The following suggestions will be
made concerning the interests of objects
in the distributable fund:
(1) that objects of a discretionary trust
each have a right, in the nature of
an equitable chose in action, to call upon the trustees to deal with the
distributable fund in a manner appropriate to the due administration
of the trust;
(2) that
it may be said that, because the objects of a discretionary trust
have individual rights to ensure that the distributable
fund is dealt
with appropriately, each has an interest, in a popular and loose
sense, in the totality
of the assets making up the distributable fund;
(3) that no object has an equitable interest, in the strict sense, in the
distributable
fund as a whole or in any fraction of it; as far as any
application of the fund in his favour is concerned the object
has a
mer e expectancy; and
(4) that the chose in action belonging to each object is "property" in the
strict sense; that neither the loosely-termed "interest" of each object
in the assets constituting
the trust fund nor the expectancy of
personal benefit which each object has is "property" in the accepted
sense.
(See also para [606] p 129).
[51] As mentioned, Mr Langdon said that his, and other practitioners,
commo nplace
form of discretionary family trusts now gives trustees very much
greater control over trust assets than hitherto. At least as far
as the Fetherston
Family Trust is concerned, the form of the deed may well be seen as raising the
expectations of Discretionary Beneficiaries,
particularly when there is identity
between the Primary Beneficiaries and the trustees. Whether, following detailed
scrutiny of such
changes, the traditional view of beneficiaries' lack of interest in
discretionary trust assets will survive remains to be seen. It
was not in issue in Johns
or Hunt.
[52] There can be no doubt the terms of the Fetherston Family Trust empower,
indeed require,
Mr and Mrs Fetherston as trustees to regard their personal interests as
pre-eminent over those of their children and expand what
would traditionally be
regarded as trustees' powers in the giving of support for their favourable treatment,
should they decide to
exercise their discretion and make a distribution.
[53] The evidence is such as to give some weight, as Mr Gallagher argues,
that the
trust is no more than a convenient interposition of a legal entity designed to shield
Mr and Mrs Fetherston from personal
liability for their debts, and enjoy what would
otherwise in all probability be their personal assets. Not only are the tenancy
arrangements significant in that regard, the granting by the trustees of benefits so
obviously favourable to themselves as beneficiaries
would normally run counter to
trustees' obligations.
[54] An inference is also clearly available from the timing of the constitution
of
the trust by comparison with Mr and Mrs Fetherston's failure only a few days
beforehand, effectively to halt Isolare's litigation
against them and avoid liability for
costs. That is particularly the case when Mr Fetherston makes it clear that,
personally,
he and his wife had difficulty financing the litigation.
[55] On the other hand, while the evidence currently includes the
documents
pursuant to which Mr and Mrs Fetherston transferred 22 View Road to the trust, it
does not disclose the details of their
acquisition of that property. All the Court has is
the inference available from the transfer dated 3 April 2003 by contrast with
the
commencement of this proceeding some nine months previously and what had
happened in the interim including the costs order and
the sale of 22 View Road and
the purchase of 26 Marama Street just a month later.
[56] Standing back and looking at the matter
overall, the transactions leading up to
the settlement of the Fetherston Family Trust and its acquisition first of 22 View
Road and
then of 26 Marama Street could, on one view of the matter, be normal
transactions for a family trust set up and operated to maximise
the financial
advantages arising out of the use of the trust's assets by the settlors and their family.
However, equally, in this
case, the litigation could imply that the Fetherston Family
Trust was settled as and when it was and has been managed as it has
in a way
designed to shield Mr and Mrs Fetherston from their possible liability, later proved,
in a substantial sum to Isolare.
[57] For present purposes, however, there is no basis to depart from established
law notwithstanding that the terms of the Fetherston Family Trust appear to give
Mr and
Mrs Fetherston as trustees discretions and powers more favourable to
themselves than might traditionally have been thought appropriate.
[58] The first conclusion must accordingly be therefore that, in accordance with
the authorities earlier cited, no case has
been made out from which it is possible to
conclude that, in addition to Mr and Mrs Fetherston being the registered proprietors
of
26 Marama Street as trustees of the Fetherston Family Trust, they also have a
personal and beneficial interest in that property.
They are no more than
Discretionary Beneficiaries, even though they are Primary Beneficiaries, of the trust
and the law
is clear that, currently at least, such beneficiaries have no beneficial or
equitable interest in the trust property.
[59] That
does not, however, lead to the conclusion that Mr and Mrs Fetherston
have demonstrated that it is inarguable that the Fetherston
Family Trust is a "sham",
their alter ego, or was set up to defeat Isolare's potential, later actual, status as their
creditor and
thus in breach of the Property Law Act 1952, s 60.
[60] In those latter respects, this Court adopts the recent decision on "sham"
and
alter ego trusts in Official Assignee v Wilson [2006] 2 NZLR 841, 852, 854 at [52]-
[58]:
Sham trusts
[52] The plaintiff's primary allegation is that the trust is a sham in the
conventional sense described in Snook v London & West Riding
Investments Ltd [1967] 1 All ER 518. In that decision Diplock LJ
stated at p 528 that a "sham":
... means acts done or documents
executed by the parties to
the `sham' which are intended by them to give to third
parties
or to the court the appearance of creating between the
parties legal rights and obligations different from
the actual
legal rights and obligations (if any) which the parties intend
to create. One
thing I think, however, is clear in legal
principle, morality and the authorities (see Yorkshire
Railway
Wagon Co v Maclure [(1882) 21 Ch D 309];
Stoneleigh Finance Ltd v Phillips [[1965] 1 All ER 513],
that for acts or documents to be a `sham',
with whatever
legal consequences follow from this, all the parties thereto
must have a common intention
that the acts or documents
are not to create the legal rights and obligations which they
give the appearance
of creating.
That test has been adopted in New Zealand (Bateman Television Ltd
v Coleridge Finance & Company Ltd
[1969] NZLR 794 (CA) at p
821, Paintin and Nottingham Ltd v Miller Gale and Winter [1971]
NZLR 164 (CA) at p 168, p 175 and p 181, Re Securitibank Ltd (No
2) [1978] 2 NZLR 136 (CA) at pp 155-156; and Marac Finance Ltd
v Virtue [1981] 1 NZLR 586 (CA) at p 593.
[53] ... It is not disputed that a sham can either exist from the outset or
emerge over time if the parties
depart from their initial agreement
and yet have allowed its shadow to mask their new arrangement
(Marac Finance v
Virtue at p 588). ...
[54] Because there is no direct evidence of a sham the Court must
carefully examine and analyse the
evidence, particularly the
documentary evidence, to see whether that inference should be
drawn. It is, of course, a
serious allegation that those involved with
the trust intended to mislead others, and I adopt the observation of
Lee
J, in Fraunschiel v Federal Commissioner of Taxation [1989] FCA 236; (1989)
20 ATR 955 at p 980, that clear evidence is required. On the other
hand, it is not necessary for the plaintiff to prove a breach of trust,
or
fraud or dishonesty in a criminal sense.
Alter ego trusts
[55] Mr Guest noted an emerging line of authority indicating
that the
Courts are prepared to treat trusts as the alter ego of some external
controller where the trustees are considered
to be mere puppets of
that person. He drew attention to two decisions of this Court (Prime
v Hardie [2003] NZFLR 481 and Glass v Hughey [20034] NZFLR
865)
...
[57] In Marriage of Gould (1993) 17 Fam LR 156, one of the Australian
Family Court decisions cited by Mr Guest, Fogarty J concluded that
the distinction between a
trust that is a sham and a trust that is the
alter ego or puppet of the settlor is important. He said at p 167:
On the other hand, the description of an entity as the `alter
ego' or `puppet' of a person really denotes something
differ ent. Correctly described, it is not an assertion that it is
a `counterfeit, a façade or a false
front'. Rather, it describes
an actual situation although as a matter of law or practicality
the actions
of the other entity may be capable of and may in
fact be controlled by the party in question. For example, a
party may establish a trust over which he or she exercises
control. That trust may in
turn own or control money. It
ma y be correct to describe that trust as the alter ego or even
perhaps the puppet of that party, but it would not be correct
to describe its existence or its
ownership or control of
property as a sham. Transactions entered into by it under
which
it deals with its property by, for example, a transfer of
property to a third party would not be a sham transaction.
It
is likely to be a genuine transaction although the evidence
ma y demonstrate that
the transaction was carried out `by
direction of or in the interest of' the party.
Put another
way, the fact that a trust is the alter ego or puppet of the
settlor does not of itself make the trust a sham because,
among other
things, the requisite common intention for a sham will not
necessarily be present.
[58] The underlying common intention requirement for a sham has been
consistently adopted by the Court of Appeal
and is clearly binding
on this Court. If alter ego trusts were to be automatically recognised
as shams
that underlying requirement would be negated. The result
would be that a halfway house between a conventional sham
trust
and a valid trust would be created. In Re Securitibank Ltd (No 2) at
p 168, Richardson J seems
to have rejected the possibility that there
is any halfway house. I accept that view. It seems to me that to
adopt a halfway house would be to effectively rewrite the traditional
understanding of a sham.
[61] As
Mr Grace realistically acknowledged, since examination of all the factors
leading to the settlement of the Fetherston Family Trust
on 17 December 2002 and
its running since have not been able to be examined and cross-examined upon, it is
not open to the Court
to reach any final conclusion as to whether the trust is a sham
within the meaning of those authorities or whether the manner of
its operation since
its settlement could have amounted to a sham. However, in light of the factors
discussed earlier the conclusion
must be that Mr and Mrs Fetherston have been
unable to dispel, to the required standard, the possibility that their Family Trust
was
set up in order to proof them against possible personal liability to Isolare and other
creditors and that the trust deed accordingly
creates rights and obligations which do
not accurately reflect the impetus for, and reality of, the transactions involved in the
constitution of the trust and its management.
[62] Further, the terms of the trust deed and what is already before the Court
as to
its operation, including whether a number of its transactions have occurred or at least
been properly documented, or that the
trustees' discretion has been properly
exercised gives rise to a real possibility that, either in its settlement or in its
operation, it has merely been the alter ego of both Mr
and Mrs Fetherston. They
have failed to discharge the onus on them of showing that the Fetherston Family
Trust and their operation
of it means it is not merely a "puppet" for their personal
business and, in particular, set up to try to isolate them from Isolare's
judgments
against them and protect their assets from execution.
[63] In those circumstances, it is not possible to hold that
Mr and Mrs Fetherston
have discharged the burden on them that, in due course, they may not be held to have
settled the Fetherston
Family Trust and operated it up to and since its acquisition of
26 Marama Street in a manner that might infringe the Property Law
Act 1952, s 60,
and thus be set aside. They have also failed to show the trust is not a "sham" or not
their alter ego in the way
discussed in the authorities which could, in due course,
again lead to the trust being set aside.
Result
[64] The defendants/applicants'
case therefore fails and is dismissed.
[65] The plaintiff/respondent is entitled to the costs of the applications.
The
Court's inclination is that the appropriate scale is Band 2B but if the parties are
unable to agree or if counsel cannot
agree on quantum, memoranda (maximum five
pages) may be filed, with that from the plaintiff/respondent within 21 days of the
date
of delivery of this judgment and that from the defendants/applicants within
28 days and with the parties certifying in their memoranda,
if considered appropriate,
that the Court may determine all the matters on costs without further hearing.
......................................
WILLIAMS J
Solicitors:
Rice Craig (N W Woods) P O Box 72-440 Papakura, Auckland, for Isolare Investments Limited
Legal
Vision, P O Box 47-587 Ponsonby, Auckland, for Mr and Mrs Fetherston
Copy for:
Philip J P Grace, P O Box 1144 Pukekohe
Patrick K
McGrath, P O Box 4385 Auckland
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