A recent Decision of the New South Wales Court of Appeal in Lewis v Condon  NSWCA 204 (4 July 2013), provides a salient reminder of some basic principles and the great strength of Trusts for asset protection purposes.
In Lewis v Condon, the Court had to decide whether the creation of a Trust in 2001, by way of property settled in a Trust, in order to deceive a former husband and to evade tax, was a sham. The Court of Appeal held that the improper purpose for the creation of the Trust was not sufficient for the Trust to be a sham – the Court holding that creation of the Discretionary Trust was consistent with an improper purpose. The Court also held that subsequent conduct, inconsistent with the Trust, amounted to a breach of trust, not an “emerging sham”.
The Court also considered:
- Powers, duties, rights and liabilities of Trustees, including the power of variation linked to the purported exercise of the power of appointment.
- The standing of a beneficiary to bring proceedings;
- The effect of bankruptcy on property, its effect on Trust property, and its effect on the power of appointment.
- In 2001, Colleen caused Appinville, a company controlled by her accountant, to acquire title to land at Kenthurst (“Property”), as Trustee of the Kenthurst Investment Trust, a Discretionary Trust in favour of herself, her daughters, Louise and Melissa, and her grandchildren, and of which Colleen was the Appointor. The primary Judge found that her purpose was to deceive her former husband, the Family Court, and to avoid tax.
- In 2005, Colleen disclaimed any interest in the Trust, and purported to amend the Trust so that Louise was the Appointor; On the same day, Louise purported to remove Appinville and appoint Colleen as Trustee. In 2006, proceedings between Colleen, her former husband, and Louise, were settled, and a Declaration was made that Colleen would hold the Property as Trustee of a Discretionary Trust, and an Order was made that it be transferred to her within 30 days. The Property was transferred to her some 3 years later in 2009, whereupon Colleen borrowed money on the security of a mortgage over it. Although Louise subsequently purported to appoint another company, Robana, as Trustee, the Property was not transferred to Robana because Colleen was made bankrupt in 2012. Her Trustee in Bankruptcy lodged a caveat and applied to have the Property transferred to him. In separate proceedings between the Trustee in Bankruptcy and Robana, a Declaration was made that the Trustee in Bankruptcy was entitled to be noted on the register in respect to the Property as the registered proprietor in lieu of Colleen.
- Louise commenced proceedings against Colleen’s Trustee in Bankruptcy, joining Robana, seeking Orders that the Property was held on the terms of the Kenthurst Investment Trust and that it be transferred to Robana. The Trustee in Bankruptcy said that the Kenthurst Investment Trust was a sham, that the Property had been Colleen’s beneficially, and that the Declaration in 2012 gave rise to a Res Judicata.
- The primary Judge found that the Trust was not a sham, that the Declaration in 2012 did not rise to a Res Judicata, but dismissed the proceedings for want of standing. He also held that Robana had not been validly appointed as Trustee because Colleen continued to be the Appointor (the purported amendment in 2005 being invalid), and favoured the view that there was no Trustee.
- Louise sought leave to appeal. On the strength of the primary Judge’s findings, Colleen purported to appoint Truthful Endeavor as Trustee, and Louise filed a motion seeking a joinder of Truthful Endeavour and the transfer of the Property to it. Colleen’s Trustee in Bankruptcy filed a Notice of Contention and a separate application for leave to appeal from the findings of sham and Res Judicata, in respect of which he had failed.
The Court of Appeal held
A sham transaction is one which takes a legally effective form but is intended by the parties to bear a different character [58–61] Eq. WS Corp Pty Ltd v Glengallan Pty Ltd  HCA 55, applied. WT Ramsay v Inland Revenue Commissioners  UK HL 1; Scott v Commissioner of Taxation (Cth)No. 2 (1966) 40 AL JR 265 followed.
A finding of a sham is to be made cautiously. It is a strong finding, which cannot be made if another inference is at least equally open [62–63]. Sharrment Pty Ltd v Official Trustee in Bankruptcy  FCA 179 followed.
A transaction will not be a sham merely because it is entered into with an improper motive [68–70]. In the matter of Idylic Solutions Pty Ltd; Australian Securities & Investments Commission v Hobbs  NSWSC 1276, followed.
The Trust was not a sham. In order for there to be a sham, it was necessary that there be an intention that the Discretionary Trust created not bear its apparent legal consequence. That was not the case here. While there was an improper purpose, this was entirely consistent with the creation of a genuine Discretionary Trust. It was unsafe to rely on evidence years later that Colleen acted in breach of trust as evidence of a shamming intent in 2001 [73–77].
There was no “emerging sham”, where a valid Discretionary Trust became a sham because a Trustee and some beneficiaries chose to disregard it [80–82].
The Sequestration Order did not destroy the Trust of which Colleen was Trustee, nor, if Colleen was still the Appointor did that power vest in her Trustee in Bankruptcy [91–95] Ex-Parte Gilchrist; Re Armstrong  LR 17 QBD 521; Fonu v Merrill Lynch Bank and Trust Company (Cayman) Ltd  UK PC 17, followed. Re Burton; Wily v Burton  FCA 1146, approved.
Louise had the standing to bring the proceedings, irrespective of whether the Trustee was Colleen or Robana [106-112], Alexander v Perpetual Trustees WA Ltd  HCA 7, applied; Re Lewis Contini Foundation Trust  NSW SC 881, followed.
The Court held, refusing leave to the Trustee in Bankruptcy, to appeal.
- The Trustee of a Discretionary Trust holds the Trust assets for all the potential beneficiaries jointly; No one potential beneficiary can claim to have a right of entitlement to the Trust assets. This was one of the reasons why Colleen’s Trustee in Bankruptcy failed to claim the property for her creditors. The fact that Colleen was Appointor and, subsequently also Trustee as well as a potential beneficiary of the Trust, did not give her, individually, any right or entitlement to the property which was held by the Trust.
- The purpose for which a Trust was created will generally affect its legal effectiveness. Colleen did not wish to purchase a property in her own name, as this would have been against her interests in the Family Court proceedings with her former husband. She also wished to avoid land tax. This did not affect the Trust’s validity.
- To establish that a document or transaction is a sham, and not what it purports to be, requires very strong and cogent evidence. Evidence of the subjective intention of the parties at the time the transaction was entered into is paramount. Evidence of subsequent conduct will be of much less weight.
- The fact that a Trustee fails to comply with their duties and treats Trust assets as their own shall not be sufficient to alter the Trust or bring it to an end. Rather, such conduct may give the potential beneficiaries grounds for recourse against the Trustee for breach of duty.
All of the above points reinforce how strong the Trust is as a vehicle, particularly from an asset protection perspective.
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