Harrison v Harrison HC Auckland CIV 2008-404-001270 [2008] NZHC 2580 (18 September 2008)

Last Updated: 19 February 2015

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

_{CIV 2008-404-001270}

BETWEEN CHRISTINE ANN HARRISON Appellant

AND PAUL ANTHONY HARRISON Respondent

Hearing: 7 August 2008

Counsel: R C Knight for Appellant

D K Wilson for Respondent

Judgment: 18 September 2008

_{JUDGMENT OF FOGARTY J}

Introduction

[1] Mrs Harrison appeals against a decision of the Family Court, Judge L De Jong, of 14 April refusing to provide for an interim distribution of

$500,000 pursuant to s 25(3) of the Property (Relationships) Act 1976. Mr Knight, her counsel, argues that the Court erred in holding that it lacked jurisdiction to make an interim order in all the circumstances of the case. Further, that the Court erred in finding that compensation for the purposes of s44(C) was not specific property for the purposes of an application under s 25(3) of that Act. He relies on facts not before

_{Judge De Jong.}

HARRISON V HARRISON HC AK CIV 2008-404-001270 18 September 2008

The assets and how they are held

[2] The assets, which accumulated in the course of the marriage, are the family home and a half share in a profitable business. The family home was bought in 1990 before the births of the couple’s two children. After the birth of the second child the husband began working for Hawkins Watts Limited (HWL). He soon entered into an agreement with Mr Hawkins to acquire a 50% shareholding in HWL over three years.

[3] On 10 November 1999 the husband and wife entered into a deed which has the title “Deed of Settlement Creating Discretionary Trust”. The husband and wife are described as the settlor and the trustee is a company Cappa Harrison Trust Company Limited (CHTC).

[4] The husband and wife sold the family home to CHTC, and the husband sold his shares in HWL to CHTC. CHTC purchased these assets by acknowledging a debt to the husband and wife of $272,000 for the house and to the husband of

$329,993 for the shares. That is a total liability of CHTC of $601,993. The existence of these debts was not drawn to Judge L De Jong’s attention.

Application for interim distribution

[5] Mr Knight has signalled to the Court that his client’s wish to seek an interim distribution is for the practical purpose of enabling her to obtain some funds to continue to retain her expert accountant and ongoing legal services in order to address what is at the heart of the current dispute between the parties. This is a substantial difference of opinion between experts as to the value of the 50% shareholding in HWL. To that end, Mr Knight seeks orders vesting both debts of CHTC in the couple jointly, then ordering the purchase of the wife’s half share for the sum of $300,996.50.

[6] Mr Wilson, for the respondent, began his submissions essentially protesting the case being brought by the appellant on a quite different footing than that argued before the Family Court. Further, he queried the notion that the two debts owed by

the family trust to the parties could be property in respect of which an interim order could be made. In this regard he argued that the trustee CHTC is not a party to the Family Court proceeding. He disputed that the parties have ever agreed to treat the assets of the trust as relationship property. He submitted that the correct position is that it is for the purpose of negotiations that the shares would be treated as relationship property and valued accordingly.

[7] Mr Wilson does not contest the fact that the accounts of the trust disclose these two debts owed by CHTC to the husband and wife. He argued, however, they are:

... in effect notional amounts of money due by the trust back to the parties. The two debts do not exist as a specific amount of money which could be immediately be made available to the plaintiff. The appellant does not cite any authority for the Court to order that the trustee, who is in essence a third party, must find the cash and pay it to one of the parties.

[8] He went on to point out that the only source of funds to realise on these debts would be loans either on the family home or on the shares.

[9] Mr Wilson also argued that seeking an order as to specific debts is in contradiction to the approach which the appellant wishes to take being that the trust ownership of these assets is to be overlooked. He submitted that if the plaintiff is taking that approach it would not be possible to say that the shares in the home ought to be treated as relationship property and in addition that there were two debts owed by the trust to the husband and wife. He pointed out:

At this stage, a Court has not ruled that the house and shares are relationship property.

[10] He submitted that the Court should only exercise its jurisdiction on an interim basis when the Court is satisfied there is a fair and practical method of doing justice between the parties on an interim basis.

[11] He ended submissions by making this point:

While technically there may be specific assets in the form of two debts, it is well established that under the Relationship Property Act the Court cannot direct third parties to do any act or alter their position (subject to certain

limitations). Given the approach the appellant was seeking now to take, the family trust is a third party. With respect, it is not within the Court’s powers to direct the family trust on the present application to make a cash payment in satisfaction of the debts.

[12] Mr Knight advised that his client’s preference is to negotiate a settlement in this case after achieving an acceptable valuation of the shares. It is unlikely that she will want to pursue the litigation by challenging the trust.

[13] I expressed some concern as to whether or not taking advantage of these debts as a basis for an interim distribution might prevent the wife from subsequently contending that the deed was ineffectual inasmuch as it is intended to establish a trust. Mr Knight apprehended that there was no legal basis upon which he could challenge the existence of a trust given that the arrangements were not a sham, citing Genc v Genc HC Auckland CIV 2005-404-006279 20 March 2006..

The relationship between the two debts and the ‘trust’

[14] The deed was not a sham. There is no doubt that the husband and wife intended to create a trust when entering into the deed of settlement, and to provide it with assets when they jointly sold their family home and the husband sold his shares to the trustee. However, it does not follow the Court will recognise a trust relationship.

[15] In the absence of fraud, and with limited public policy exceptions going to the subject matter of contracts, such as illegality, the common law always respects private ordering of arrangements, be they by way of contract or deed. As Richardson J wrote in Mills v Dowdall [1983] NZLR 154 at 159-160:

... The only exceptions to the principle that the legal consequences of a transaction turn on the terms of the legal arrangements actually entered into and carried out are: (i) where the essential genuineness of the transaction is challenged and sham is established; and (ii) where there is a statutory provision, such as s 99 of the Income Tax Act 1976, mandating a broader or different approach which applies in the circumstances of the particular case. A document may be brushed aside if and to the extent that it is a sham in two situations: (a) where the document does not reflect the true agreement between the parties in which case the cloak is removed and recognition given to their common intentions (as happened in Marac Finance Ltd v Virtue); and (b) where the document was bona fide in inception but the

parties have departed from their initial agreement while leaving the original documentation to stand unaltered.

The reason why the Courts have adopted the approach I have been discussing is obvious enough. Commercial men are entitled to order their affairs to achieve the legal and lawful results which they intend. If they deliberately enter into a genuine transaction intended to operate according to its tenor, those intentions should be recognised. It is what they choose to do that counts and their rights and obligations should be determined on that basis except where the legislation has itself directed otherwise.

[16] In Mills v Dowdall the husband’s father had transferred 350 shares in a family company to the husband for an express consideration of $2 a share and on the same day executed a deed of forgiveness of the whole debt. The husband’s mother had transferred a house property to the husband for express consideration of $47,500, the whole of which was secured by first mortgage back and a debt forgiveness program commenced. The Commissioner of Inland Revenue considered the consideration for the shares and the house was inadequate. The issue before the Court was whether these two items were excluded from matrimonial property by s

10(1) of the Matrimonial Property Act 1976 as having been acquired by the husband:

... by gift from a third person.

[17] Plainly, on the facts there was an argument that the shares were and house was being gifted to the husband by his parents. However, the Court of Appeal affirmed Ongley J’s respect for the instruments executed by the parents and their son. The Court of Appeal approached the issue of gift or not by applying the common law to the instruments that were executed, see Cooke J 156, Richardson J

158 (expressly), Bisson 162, and 164 (albeit less clearly expressed).

[18] However, this judgment of the Court of Appeal cannot be read as rejecting a substance over form approach when applying the law of equity. While a concept of

‘equity’ was referred to in Mills v Dowdall, the issue was always the legal effect of the instruments of conveyance, acknowledgment of debt, and forgiveness of debt. There was no question of there being any rights to relief in equity – or any equitable estate.

[19] Equity always prefers substance to form.

Courts of Equity make a distinction in all cases between that which is matter of substance and that which is matter of form; and if it find that by insisting on the form, the substance will be defeated, it holds it to be inequitable to allow a person to insist on such form, and thereby defeat the substance.

_{(Parkin v Thorold (1852) 16 Beav 59 at 66 per Romilly MR – cited in}

Snell’s Equity 31^st Ed (2005) Thomson Sweet & Maxell at 106, 5-24)

This principle is sometimes restated as the maxim:

Equity looks to intent not form. (Snell’s Equity 31^st Ed para 5-24)

[20] However, it does not follow that equity will always respect an intent to create a trust. It is sometimes thought by advisers, often not legally qualified, that the creation of a trust is an exercise of private ordering in the complete control of the parties. It is not. Every trust is actually a relationship. A trust is not an entity.

The general feature of a trust is that a person in whom property is vested (called “the trustee”) is compelled in equity to hold the property for the benefit of another person (called “beneficiary”) or for some other legally enforceable purposes other than his own. (Snell’s Equity 31^st Ed para 19-01)

Note the phrase “compelled in equity”. Trust is a word used to sum a relationship where equity will compel a person holding the legal interest in a property to use it for the benefit of someone else.

[21] The Courts applying the law of equity have ultimate control in the recognition of all trust obligations and in their performance. Equity will only recognise fiduciary obligations where there is a substantial divergence between rights over assets of the persons holding the legal title and different persons who equity recognises have rights over those assets, against the interests of the holders of legal title. There is a very old principle of equity that where the equitable and legal estates in fact unite in the same person the separate estates of legal and equitable are not recognised.

... I have no difficulty in saying, that the common sense stripped of all technical and artificial reasons is, that the equitable estate is a mere creature of this Court, and subsists in idea only as to any legal consequences, that might result from the possession of it, but totally distinct from the legal estate. This Court has determined, that such equitable estates are to be held perfectly distinct and separate from the legal estate.

Brydges v Brydges (1796) 3 Ves 120, 126 Arden MR

In Philips v Brydges (ante, 126,) I stated as a universal proposition, that wherever the legal and equitable estates uniting in the same person are co-extensive and commensurate, the latter is absorbed in the former.

Selby v Alston (1797) 3 Ves 338, 340-41 Arden MR

See also Halsbury’s Laws of England 4^th Ed 2007 Reissue Trusts, para 609.

[22] There is no doubt that the terms of the deed appear on their face to separate the legal title from the beneficial interests. But that may not be the substantial effect of the arrangement. As a matter of substance the only significant change which appears to be effected by the deed in this case is that the husband’s shares in HWL, which he originally held personally, have fallen into the joint control of himself and his wife. The husband and wife are otherwise in the same position as they were before entering into the deed, inasmuch as they have postponed to the future whether or not the house or the shares or any other assets will pass to the benefit of their children or any other persons. This outcome follows from powers reserved in the deed, which I now note.

[23] The deed provides that the trustees stand possessed of the trust fund and retain a complete and uncontrolled discretionary power over capital and income and as to how the capital and income is to be applied to such of the beneficiaries and if more than one in such shares as the trustees in their sole and uncontrolled discretion shall think proper.

[24] By the deed, “beneficiary” and “beneficiaries” mean and include any of the husband, the husband and the wife, their children and remoter issue of the children and any husband or wife or widower of the children, and any person, groups of persons or body incorporated or unincorporated who the trustees shall before the date of distribution by deed appoint as a beneficiary and any charitable, educational or religious organisations which the trustees may think fit.

[25] However, the husband and wife control the trustees. There is an all encompassing power of appointment and removal of trustees, reserved to the husband and wife jointly and after their death to their executors and administrators.

These powers do not prevent the husband and wife appointing themselves as trustees. The power of appointment entitles the husband and wife to effectively change the shareholding of any corporate trustee at any time, and that is expressed to be an irrevocable power of attorney. This deed contemplates that CHTC is a party to the deed although it has not executed the deed copied on the file. In any event, I understood from the bar that CHTC is a company under the complete control of the husband and wife, as one would expect from reading the encompassing power of appointment and removal of trustees.

[26] In short, the husband and wife have the ability at any time, without the need to give any reason to the other contingent beneficiaries, to vest the entire assets of the ‘trust’ to themselves. It appears that the intention of the husband and wife when entering into the deed was to retain complete control over the use and enjoyment of all the assets transferred to the trustee, until at some later date when they might decide to transfer some or all of the assets to other persons. Given the ability and the apparent intention, there is a serious argument, which the parties may yet engage in, that, upon a substantive analysis, for the time being the legal and equitable estates unite in the husband and wife.

[27] However, in any event, the common law recognises the sale of the family home and the shares in HWL to CHTC. There is no doubt that that company is the legal owner of those assets. Equally, there is no doubt that that company is indebted to the husband and wife jointly for $272,000 and to the husband for $329,9993.

[28] In situations where an entity such as CHTC holds the assets but later a trust is not recognised by the Court, the entity can be treated by the Court as merely an instrument of the true owners, sometimes described as a puppet or alter ego, see Genc v Genc at [69] citing the Australian decision: The Marriage of V R & N Gould [1993] FamCA 126; (1993) 17 Fam LR 156, and [70], citing Prime v Hardie [2003] NZFLR 481 and Glass v Hughey [2003] NZFLR 865.

[29] For the purpose of these proceedings, seeking an interim distribution, I can proceed on two alternatives in the final resolution of this dispute:

1. The trust will be recognised in equity, with the consequence that the family home and the shares are not relationship property, but the debts back are; or

2. The trust will not be recognised in equity. The private ordering still continues to take effect at common law. The parties are still free to reorder their assets by agreement, subject only to the application of the Property (Relationships) Act, should either party or both parties successfully invoke its application, whereupon the home and the shares will be recognised as relationship property. As part of the freedom to reorder their affairs, the husband and wife may decide to exercise the powers they have reserved to unwind the “trust”.

Either way, in the absence of an order to the contrary under the Property (Relationships) Act, the debts owed by CHTC to the husband and wife remain to be taken into account.

Power to direct interim distribution

[30] To enable interim distribution, Mr Knight relies on s 25(3) of the Act. Section 25 provides:

25 When Court may make orders

(1) On an application under section 23, the Court may— (a) make any order it considers just—

(i) determining the respective shares of each spouse or partner in the relationship property or any part of that property; or

(ii) dividing the relationship property or any part of that property between the spouses or partners:

(b) make any other order that it is empowered to make by any provision of this Act.

(2) The Court may not make an order under subsection (1) unless it is satisfied,—

(a) in the case of a marriage or civil union,—

(i) that the husband and wife or civil union partners are living apart (whether or not they have continued to live in the same residence) or are separated; or

(ii) that the marriage or civil union has been dissolved; or

(b) in the case of a de facto relationship, that the de facto partners no longer have a de facto relationship with each other; or

(c) that 1 spouse or partner is endangering the relationship property or seriously diminishing its value, by gross mismanagement or by wilful or reckless dissipation of property or earnings; or

(d) that either spouse or partner is an undischarged bankrupt.

(3) Regardless of subsection (2), the Court may at any time make any order or declaration relating to the status, ownership, vesting, or possession of any specific property as it considers just.

(4) To avoid any doubt, but without limiting subsection (3), if proceedings under this Act are pending, the Court, if it considers it appropriate in the circumstances, may make an interim order under that subsection for the sale of any relationship property, and may give any directions it thinks fit with respect to the proceeds.

(5) This section is subject to the other provisions of this Act.

(6) In proceedings commenced after the death of 1 of the spouses or partners, this section is modified by section 91.

(Emphasis added)

[31] Property is defined in the Act in s 2:

property includes— (a) real property:

(b) personal property:

(c) any estate or interest in any real property or personal property: (d) any debt or any thing in action:

(e) any other right or interest

[32] There is no reason to think that specific property as used in s 25(3) is confined to categories (a) and (b). There was no significant argument by Mr Wilson against the proposition that these two debts are both relationship property and specific property.

[33] Mr Knight argued that s 25, and if necessary s 33(1) or s 33(3)(i) could be used to require Mr Harrison to pay half of the sum of those debts. He argued that it would be just for the Court to vest both debts, by way of a sale by Mrs Harrison of her relationship property interest in those debts to Mr Harrison for half the face value of those debts. This would result in a debt by Mr Harrison to Mrs Harrison of

$300,996.50.

[34] He argued that subs (3) should be read liberally as was intended by

Parliament, which intention is reflected in subs (4).

[35] Such a use of s 25 imposes on the parties both the sale of specific property and the consideration.

[36] Mr Knight also relies on s 33(1) which provides:

33 Ancillary powers of Court

(1) The Court may make all such other orders and give such directions as may be necessary or expedient to give effect, or better effect, to any order made under any of the provisions of sections 25 to 32 of this Act.

Further, he relies on s 33(3)(i) which provides:

(3) In particular, but without limiting the generality of subsections (1) and

(2), the Court may make any 1 or more of the following orders:

...

(i) an order for the payment of a sum of money by 1 spouse or partner to the other:

[37] Mr Wilson argued that s 33 was more directed to giving effect to ss 25(1) and

(2). But s 33(1) does not qualify the reference to s 25.

[38] I am satisfied that all of the provisions set out so far should be read liberally in the context of this case. Such liberal reading will give effect to the purposes of the Act, particularly in passages emphasised in bold in ss 1M and 1N. The immediate problem is one of economic disparity in the dispute resolution process:

1M Purpose of this Act

The purpose of this Act is—

(a) to reform the law relating to the property of married couples and civil union couples, and of couples who live together in a de facto relationship:

(b) to recognise the equal contribution of husband and wife to the marriage partnership, of civil union partners to the civil union, and of de facto partners to the de facto relationship partnership:

(c) to provide for a just division of the relationship property between the spouses or partners when their relationship ends by separation or death, and in certain other circumstances, while taking account of the interests of any children of the marriage or children of the civil union or children of the de facto relationship.

(Emphasis added)

1N Principles

The following principles are to guide the achievement of the purpose of this

Act:

(a) the principle that men and women have equal status, and their equality should be maintained and enhanced:

(b) the principle that all forms of contribution to the marriage partnership, civil union, or the de facto relationship partnership, are treated as equal:

(c) the principle that a just division of relationship property has regard to the economic advantages or disadvantages to the spouses or partners arising from their marriage or de facto relationship or from the ending of their marriage, civil union or de facto relationship:

(d) the principle that questions arising under this Act about relationship property should be resolved as inexpensively, simply, and speedily as is consistent with justice.

(Emphasis added)

[39] I conclude that there is specific power to use s 25(3) in the manner contended for by Mr Knight. This is not to find an error in this respect by Judge L De Jong, because his attention was not drawn to the existence of these two debts.

Exercise of discretion as to interim distribution

[40] Mr Wilson’s principal argument was that the Court should exercise its discretion against making these orders using ss 25 and 33. He pointed out that the

proceedings in the Family Court had been initiated by his client, who was looking ultimately for a fair settlement with his wife. Mrs Harrison is living in the family home and is receiving from Mr Harrison monthly payments enabling her to keep the household going and so to look after the two children of the marriage. The husband has offered mediation and offered to pay the cost of that mediation.

[41] Mr Knight says the offer of mediation is not practicable at the present time because the parties’ experts are too far apart on the value of the half share in the business of HWL. At this stage it is not clear why the experts are so far apart. It looks to be at least partly because Mrs Harrison’s expert does not have as much information about the company as Mr Harrison’s expert. Suffice to say the experts are so far apart that it must be either that they are looking at two different sets of facts and/or applying a different criteria. There is no doubting their respective expertise.

[42] Counsel also agreed that in the long run Mr Harrison has to either raise a capital sum to settle with Mrs Harrison or provide for some continuing co-ownership of the commercial company. Either way that will involve, inevitably, co-operation from Mr Harrison’s business partner, and that partner’s family entities which co-own the commercial asset.

[43] I can understand readily that whichever form the ultimate settlement takes there are difficult commercial issues to be resolved, like either by raising debt or by introducing effectively another owner into the shareholding of the commercial business.

[44] Making an order now for the provision of $300,996.50 will tend to bring those difficulties to a head.

[45] On the other hand, this dispute has been running now for over a year and I am sure that the two businessmen concerned must have been giving some thought as to how ultimately Mr Harrison is going to resolve his relationship property issues with Mrs Harrison.

[46] Mrs Harrison, in the meantime, has had to borrow money to fund the cost of legal counsel and accounting expertise. Plainly, given the division between the experts, these costs are going to continue.

[47] The commercial enterprise is profitable, and so quite valuable, into the millions of dollars. Mrs Harrison stands to be significantly disadvantaged if she is not able to continue to afford to retain her professional advice.

[48] In the end I am persuaded that the discretion in ss 25 and 33 should be exercised in her favour, that to do so will advance the purposes of the Act, and will likely lead to an earlier and more just resolution of this dispute, in the interests of the husband and wife, and their children. I have reached the firm view that Mrs Harrison needs the funds to continue to retain accounting and legal advice. In combination s 25(3) coupled with the power to make directions contained in s 33(1) and developed in subs (3), particularly (i), warrant this Court taking advantage of the fact that there are two undisputed liabilities which are relationship property, and to provide for their disposal so as to generate cash for Mrs Harrison.

Orders

[49] Accordingly, this Court makes the following declarations and orders:

1. The appeal is allowed.

2. It is declared that the two debts of CHTC totalling $601,9993 are relationship property.

3. Those debts are held jointly by the husband and wife in equal shares.

4. By interim order the husband shall purchase the wife’s half share for the sum of $300,996.50.

5. That sum is due and payable eight weeks from the date of delivery of this judgment, with leave to apply for an extension of time.

6. That in any final distribution ordered by this Court this sum shall be taken into account as an interim distribution of the ultimate division of the relationship property between the husband and the wife.

7. Leave is generally reserved to seek further directions.

8. Costs are reserved. Leave is reserved to the appellant to seek costs in respect of this appeal.

Solicitors:

Peter E Newfield, Auckland (Counsel acting: R C Knight) for Appellant

D K Wilson, Auckland, for Respondent