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Clayton v Clayton 

The concept of illusionary trust was mentioned in Clayton v Clayton it was appealed after family court decision. This case was about the respondent Mrs Clayton and the appellant Mr Clayton and other trustees from six different trusts. They got married in 1989, after having two children together the marriage was dissolved in 2009. Mr Clayton had a timber business and many assets under either his name or the business.

Pre-nuptial agreement

Before their marriage, they entered into the pre-nuptial agreement in 1989, which provided that all assets were to be Mr Clayton’s separate property. However, in case of separation, Mrs Clayton was to receive $30,000 after a specified period. However, this pre-nuptial agreement was set aside as the court found that it would cause serious injustice for Mrs Clayton after 20 years of marriage and raising two kids.

During and after the marriage, Mr Clayton had set up some trusts to protect his assets. Because assets were put in trusts, Mr Clayton did not have to split those properties after the marriage was dissolved. However, the court found that some of the trusts were illusory as Mr Clayton’s main intention was to protect assets from Mrs Clayton in case of a separation.

The Vaughan Trust

This trust was settled by Mr Clayton in 1999. He was the sole trustee and held the power to appoint and remove trustees and beneficiaries. The discretionary trustees were Mr and Mrs Clayton, while the final beneficiaries were their children. The purpose of the trust was to separate the land and buildings from the operating assets of the business.

The court determined that this was an illusionary trust, not a sham trust. Judge Munro said these two concepts of illusory and sham are very different and the distinction is very important. For the trust to be a “sham”, trusts are intended to give third parties or the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. Thus, a trust will be a sham where there is an intention to have an expressed trust in appearance only. In this case, Vaughan Trust was not a sham trust because it was clear that Mr Clayton intended to create a trust for legitimate business purposes. However, it could be an illusionary trust. An illusory trust is a trust where the settlor retains all the power for himself. Thus, in this case, Mr Clayton retained all the power to control the trust and he did not intend to give or part with control over the property sufficient to constitute a trust[2]. Thus, the court ruled that Vaughan trust was illusory.

Stacey Clayton Education Trust (SCET) and Anna Clayton Education Trust (ACET)

These trusts were set up in 2004 with trustees Mr Clayton and Mr Cheshire. The discretionary beneficiaries were his two children, and Mr Clayton himself and his relative. Mrs Clayton was a conspicuous omission. The Judge found out that although the trust was set up for Stacey and Anna, they were neither a final beneficiary and there was nothing to indicate that they had any greater entitlement than any of the other discretionary beneficiaries. The trust may be set up for different purposes and one intention for these trusts was to defeat Mrs Clayton’s interests by excluding her from the list of discretionary beneficiaries.

Denarau Resort Trust

This trust was established in 2007 to hold an investment in two apartments in the Denarau Resort in Fiji. The property was acquired after their separation so it would be his separate property. However, the marriage was not dissolved until 2009 and Mr Clayton purchased the resort by the advance from the Vaughan Trust and bank loan. This disposition had the effect of defeating Mrs Clayton’s interest as she had no beneficial interest in the Trust.

Sophia No 7 Trust

The trust was set up in 2008 to hold a property with the sole trustee Deborah Vaughan, Mr Clayton’s sister. The beneficiaries were Deborah Vaughan, her children and any relative of hers, which included Mr Clayton. However, Mr Clayton paid the deposit for the property by advance from the Vaughan Trust. Thus, the purchase of the property by a trust ostensibly set up to benefit his sister and her family. It clearly appears to have the purpose of putting property beyond the reach of Mrs Clayton.

Chelmsford Trust

The Chelmsford Trust was established in 2009 with Mr. Clayton as a sole beneficiary of the trust and had the power to appoint or remove trustees. The property was purchased by his own contribution, a bank loan and an advance from Vaughan Trust. Thus, the effect was to disenfranchise Mrs Clayton from any entitlement to those funds.

Lighter Quay 5B trust

This trust was set up in 2009 by Mr Cheshire and the trustee is NZ Trustee Services Limited. Neither Mr nor Mrs Clayton were beneficiaries. The trust was financed by an advance from Vaughan Trust and a bank loan. The court found out that it was clear that Mr Cheshire held the property for Mr Clayton. Thus, the advance from the Vaughan Trust defeated Mrs Clayton’s interest in those funds.

FMA vs Hotchin [2012] was mentioned in this case many of the provision in trust deed in Vaughan Trust were identical to Hotchin. However, the trust deed in Hotchin contained a prohibition on self-dealing. Where, Mr. Hotchin could not use control as a trustee to distribute trust property to himself. The provision of self-dealing was regarded as important clause in determining the trust was not illusory in Hotchin

Mrs. Clayton demanded share in assets but statutory laws did not provide enough compensation. She argued all trusts were sham and illusionary, it was held nothing fraudulent so no sham, but it was also held it was illusionary.

Mrs. Clayton was given half share in the Vaughan Trust and two educations trusts. In relation to all other trusts the High Court referred the case back to the Family Court to establish valuations of properties and the source of funding so that informed Mrs Clayton interest can be calculated.

Writer believes Clayton v Clayton had similar facts of Official Assignee v Wilson[5] mainly on the note of settlors control but Clayton v Clayton decision was affected by the nature of claim (relationship property dispute). In the absence of strong statutory provision in New Zealand statue that may allow New Zealand courts to look through the trust in the event of relationship property disputes. These sorts of disparity in court’s decision leads to the confusion in defining sham trust.