Re Reynolds - Official Assignee V Wilson And Another [2007] NZCA 122

Facts and Decision

Mr Reynolds (the "Settlor") was the settlor of the GM

Reynolds Family Trust (the "Trust") under which he

appointed Messrs Wilson and Harvey as trustees (the

"Trustees"). A property was acquired (the "First

Property"), the title to which was registered in the name of

the Trustees and subject to a mortgage guaranteed by the Settlor

personally. The Trustees subsequently sold the First Property to

the Settlor. The Settlor then entered into a contract on behalf of

the Trust to acquire a further property (the "Second

Property"), which required substantial further borrowing. The

Settlor offered the First Property for sale, but the sale did not

occur until after the acquisition of the Second Property and after

the Settlor (having defaulted on the mortgage) had been declared

bankrupt. The proceeds of the sale of the First Property were

applied towards reducing the loans outstanding against the Second

Property. The Trust was never administered well and there was

intermingling and confusion between the affairs of the Trust and of

the Settlor.

The Official Assignee in bankruptcy of the Settlor (standing in

the shoes of the Settlor) claimed against the Trustees, as legal

owners of the Second Property, that the property should vest for

the benefit of the Settlor's creditors in bankruptcy. The claim

was based on the grounds that the Trust was a sham, or

alternatively, an "alter ego" of the Settlor. The High

Court of New Zealand dismissed the claim and the Official Assignee

appealed to the Court of Appeal of New Zealand (the "Court of

Appeal").

The Court of Appeal considered two principal arguments as to the

invalidity of the Trust. First, that the Trust was a sham and,

secondly, that the Trust was the "alter ego" of the

Settlor. In upholding the Trust and unanimously dismissing the

appeal, the Court of Appeal considered that the requirement for

common intention was of central significance in assessing whether

the trust was a sham. Further, the Court of Appeal concluded that

alter ego trusts are not an independent cause of action. In the

trust context, alter ego arguments are confined to helping

establish a sham, or may give rise to a breach of trust.

The main points arising from the Court of Appeal's judgment

are summarised below.

Sham Trusts

A sham trust exists where there is an intention to conceal the

true nature of a transaction under the guise of a trust. In order

for a valid trust to be created the three certainties must be

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