Clayton v Clayton: Trust busting

The Court of Appeal's recent decision in Clayton v Clayton1 has been described as redrawing the landscape on trusts and divorce.2 In this article I discuss the more controversial aspect of the judgment - the Court's finding that the settlor's power of appointment is relationship property.

Although the context of the decision is a relationship property dispute, the Court's reasoning could be applied in other contexts, such as bankruptcy.

Background

Mr and Mrs Clayton separated in 2006 after 17 years of marriage. The proceedings concerned the division of relationship property under the Property (Relationships) Act 1976.

Mr Clayton is a sawmilling magnate. He established a timber milling business and inherited an existing business established by his father.

The case concerned various trusts settled during the parties' marriage. If the trusts' property is added to the parties' relationship property pool, Mrs Clayton said it would swell from $850,000.00 to approximately $29,681,000.00.3

The trust which is the focus of this article is the Vaughan Road Property Trust ("VRPT"). It was settled in 1999 by way of a declaration of trust by Mr Clayton. He is the settlor, trustee and a discretionary beneficiary, along with Mrs Clayton and the parties' children. The children were also the default final beneficiaries.

For the purposes of this article I note that the provisions of the VRPT trust deed provided:

that the trustees were permitted to apply the VRPT's income and capital before vesting day; that notwithstanding their duty to act impartially towards the beneficiaries, the trustees' discretion when exercising their powers was unfettered, and they need not consider the interests of all the beneficiaries; that the trustees were permitted to self-deal notwithstanding a conflict of interest; that with the consent of Mr Clayton, the trustees were able to vary, revoke and enlarge the provisions of the trust deed; and that Mr Clayton, as the "Principle Family Member", was empowered to appoint and remove discretionary beneficiaries, and trustees. These last powers are what the Court of Appeal decision turned on.

The lower courts

A focus in the lower courts with respect to the VRPT was whether it was an illusory trust. While the concept of a sham is well established, the argument of an illusory trust in New Zealand is relatively novel. Prior to Clayton v Clayton, it had never been accepted by the courts.

In the Family Court it was held that the provisions of...