TRUSTS

Trusts — Powers reserved to settlor and alienation of beneficial interest — Nominee settlor — Irreducible core — Sham trust — Matrimonial property claim by former wife against former husband and trusts husband had established — Whether husband as settlor, trustee and beneficiary had reserved such broad powers to himself that he failed to make an effective disposition of the relevant property — Whether the husband’s retained bundle of rights in the trust assets were indistinguishable from ownership — Income tax —Whether appellant’s tax debt in New Zealand was enforceable in the Cook Islands.

Webb v Webb [2020] UKPC 22, (2020) 5 NZTR 30-011 (3 August 2020), Privy Council

Why is the case important?

Where a trust creator retains the ability to restore the trust assets to him/herself, not being subject to any meaningful fiduciary duty, those assets may be regarded as assets of the trust creator, especially in matrimonial or creditor claims. Some jurisdictions may permit a settlor to retain certain powers under their statutes and the trust remain valid. Outside that jurisdiction, a trust with extensive settlor-retained powers is vulnerable to successful attack.

Case background

• Mr & Mrs Webb were New Zealanders who married in New Zealand in December 2005. Three days later, Mr Webb formed the discretionary Arorangi Trust, ultimately for the benefit of himself and his family. Three months later, the Arorangi Trust acquired a leasehold interest in the Arorangi Property, Rarotonga, Cook Islands. It also acquired interests in other Cook Island properties. In 2013, Mr and Mrs Webb and young daughter moved from New Zealand to the Cook Islands and lived in the Arorangi Property.

• Back in 2011, the New Zealand Inland Revenue had investigated Mr Webb for the 2001-2009 tax years and in 2016 obtained a court judgment against him. As at September 2017 tax shortfall, penalties and interest totalled NZD26 million.

• In April 2016 Mr & Mrs Webb separated. Mrs Webb and daughter lived in the Arorangi Property, while Mr Webb and a son returned to New Zealand where Mr Webb began a new relationship. Mr Webb, using a nominal settlor, established the Webb Family trust for himself and his children and arranged for the transfer (for nominal consideration) of some of the Arorangi Trust assets to the Webb Family Trust.

• In May 2016 Mrs Webb brought matrimonial property proceedings in the Cook Islands under the Matrimonial Property Act 1991-92 (Cook Islands) – under the Act property acquired by a married couple during marriage is to be shared equally. The Arorangi Trust did not qualify under the Cook Islands International Trusts Act 1984 regime.

The terms of the two trusts

The terms of the two trusts were very similar and the Courts accepted that it was intended to establish the trusts and they were not shams. In regard to the Arorangi Trust, Mr Webb was settlor, sole trustee and a beneficiary. As trustee Mr Webb appointed himself Consultant. As Consultant, Mr Webb could appoint and remove trustees. As trustee, Mr Webb could exercise all the powers and discretions, notwithstanding that his interests may conflict with his duties to the funds of the Trust or any beneficiary and as sole trustee, Mr Webb could pay or apply all Trust income and capital to himself as beneficiary. The Privy Council considered that in this situation, Mr Webb still remained a fiduciary and must exercise his powers consistent with his duties.

However, the all-important clause for the Privy Council was clause 10 which provided that, as settlor Mr Webb could nominate himself as sole beneficiary in place of the existing beneficiaries so as to become settlor, trustee, Consultant and sole beneficiary. At this point the trust would cease to exist because the legal and beneficial interests combine. Importantly, Mr Webb held this power as settlor, not as trustee and therefore not subject to any fiduciary duty.

The issue

The issue for the Privy Council was whether Mr Webb had evinced an intention irrevocably to relinquish his beneficial interest in the trust property?

“The two deeds of trust fail to record an effective alienation of the beneficial interest in the assets in question. The powers retained by (Mr Webb) meant that at any time he could have recovered...the property he purported to settle on the trusts” [65].

Conclusion

The Cook Islands Court of Appeal and the Privy Council both found that the powers held by Mr Webb could be analysed in two different ways:

Either:

(i) whether the powers were so extensive that Mr Webb never disposed of any property purportedly settled on or acquired by the trusts (the trusts also lacked the irreducible core of obligations owed by trustees to beneficiaries and enforceable by them which is fundamental to the concept of a trust), [89],

Or

(ii) whether the powers reserved to Mr Webb were so extensive that in equity he could be regarded as having had rights which were tantamount to ownership, (following TMSF and Clayton v Clayton ). The Privy Council found “The bundle of rights which he retained is indistinguishable from ownership”, [89].

Mr Webb could do this with the powers he held as Trustee and Consultant (but would have been subject to fiduciary duties) OR as settlor, not subject to any fiduciary duties.

The Privy Council considered that Mr Webb’s New Zealand tax debt was unenforceable in the Cook Islands and so he was unable to offset this against his former wife’s successful matrimonial property claim. His appeal was dismissed.

What about jurisdictions where statute permits a settlor to hold reserved powers?

There are jurisdictions where statute permits a settlor to hold extensive reserved powers and this does not invalidate the trust or affect fiduciary duties that the holder of such powers may otherwise be under, for example, The Trusts (Guernsey) Law, 2007, s 15.

For this writer, such settlor-retained powers would probably only present an issue where a trust established in a favourable jurisdiction moved to a different jurisdiction that was not as favourable, or the trust was engaged in litigation over assets held in a less favourable jurisdiction, for example JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2017] EWHC 2426 (Ch).

Webb v Webb has been followed in the Cayman Islands Grand Court (Financial Services Division) in Gayhart & Buchanan v Schank (FSD No. 206 of 2018 (IKJ) AND FSD No. 53 of 2019, Hon. Justice Kawaley, 14 August 2020). The case concerned the enforcement of a domesticated foreign judgment debt and assets held by or under the control of Mr Schank. These were subject to a freezing order and default judgments, which were enforceable in the Cayman Islands. The trust assets of Mr Schank’s revocable Florida trust included shares in a company in the Cayman Islands, frozen by the freezing order. Mr Schank had then attempted to resettle title of those assets, as an irrevocable Cook Islands Trust.

The issue was whether the rights attached to the shares were capable of being assigned or delegated to the judgment debtor’s [Mr Schank’s] receivers. Referring to TMSF and to Webb v Webb at [87] the Cayman Islands Grand Court at [30] held that with the extensive powers Mr Schank held in his Florida trust;

“the finding that assets purportedly held by a trust belong to the settlor for judgment enforcement purposes does not require a finding that the trust is a sham and wholly ineffective”.

Based on Webb v Webb the rights attached to the shares could be assigned or delegated to the receivers, it was not necessary to find the trust to be a sham. Mr Schank, seeking to hide from his creditors could not do as he liked with his trust and its’ assets.

1Tasarruf Mevduati Sigorta Fonu v Merrill Lynch Bank and Trust Co (Cayman) Ltd [2011] UKPC 17 (PC) (TMSF); Clayton v Clayton [VRPT] [2016] NZSC 29, (2016) 4 NZTR ¶26-002 (SC).

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