Official Assignee v Wilson

Summary of the case

This was a case related to a property developer. He was a discharged bankrupt. He formed a trust and purchased assets for the trust. The creditors could not take away his assets.

Facts

This case was about Mr Reynolds, a property developer who was a discharged bankrupt. He was in a de facto relationship with Ms Clyma. In 1996, he set up a discretionary trust, GM Reynolds Family Trust and purchased house in Invercargill with the beneficiaries including his children and grandchildren. The trustees of his trust include Ms Harvey (Ms Clyma’s mother) and Mr Wilson (Mr Reynolds’ solicitor). His family lived in that house and Ms Clyma paid for the outgoings of the house, including the mortgage. In 1997, the house in Invercargill was sold to Mr Reynolds at the same price as when it was originally purchased. One year after that, Mr Reynolds purchased a property in Queenstown on behalf of the trust. The trust borrowed more funds than needed to purchase the house and the rest of the fund were obtained by refinance the mortgage over the Invercargill property. In 2000, they sold their Invercargill house at a loss of $85000. In 2001, Mr Reynolds was adjudicated bankrupt again and he owed $500,000 to his creditors.

Issues

The Official Assignee investigated Mr Reynolds’s property, especially his Queenstown property to compensate for his creditors. They claimed that the trust was sham and it was only an alter ego of himself, thus that property was actually his property, not the trust

Courts decision

The court looked at some definition of trust, sham trust, emerging sham and alter ego trust and applied those to the facts of the case.

The Official Assignee argued the intention behind forming a trust when the Invercargill property sold to Mr Reynolds at the purchase price within a year of its purchase. They claimed that it showed that Mr Reynolds still had control over the property and the trustees were not acting in the best interests of the beneficiaries of the trust. However, the court agreed with the trustees about the sale that they were not willing to bear the risk of raising funds to make necessary renovations to the property.
Then, the Official Assignee contended that the trust borrowed more money than needed to purchase the Queenstown property and the extra money was used to repay Mr Reynolds’ personal debts. Thus, the trustees worked for the interest of Mr Reynolds showing evidence of a sham trust. However, the trustees argued that they needed to include both properties in Queenstown and Invercargill to obtain a better loan rate, as at the time of purchase, the trust’s assets also valued at $5000. The court still found that this evidence was not sufficient to establish a sham trust.
The official assignee also argued that Ms Clyma used the trust property to raise money for her personal use showing a breach of sham in the trust. However, the court again refused as the respondent showed there was no evidence that this was done with the knowledge of Mr Reynolds and this along was not sufficient to establish a sham trust.
The Official Assignee also noted that the trust had a poor management and operated as a sham. The trust lacked of documents and all information was sent to Mr Reynolds before sending to the trustees and lack of engagement by the trustees. However, the court ruled that poor management might be a breach of trust, but it does not create a sham trust.
Overall, there was not enough evidence to claim that G M Reynolds Family Trust was a sham trust.

The court went further and looked at other issued in this case. They found that the purpose of the trust was to provide Mr Reynolds’ children’s future education and support. It is also likely that he is conscious that the trust could protect his assets against the creditors. However, this would not mean that the trust was a sham as Megarry J said in Miles v Bull [1969] 1 QB 258 at 264: [123]

“A transaction is no sham merely because it is carried out with a particular purpose or object. If what is done is genuinely done, it does not remain undone merely because there was an ulterior purpose in doing it.”