Rosebud Corporate Case
Rosebud Corporate Trustee Limited v Bublitz  shows how sham trust are being operated in New Zealand, where bankrupt person was operating property development business in Auckland.
Discussion on Rosebud Corporate Trustee Limited v Bublitz
Mr Nielsen was a property developer, who was declared bankrupt in 2009 involving judgement of more than $13 million and was restricted to conduct any further business in New Zealand. Mr Nielsen had two trusted advisors, Mr Whitney (his solicitor and a partner in Ross and Whitney law firm) and Mr Foster (a chartered accountant). Mr Nielsen was believed to give instruction for Mr Whitney and Mr Foster to incorporate a company called Rosebud Corporate Trustee Limited (Rosebud ltd). Mr Whitney’s law firm held all the shares in Rosebud ltd via a company named as Ross & Whitney Trustee Limited, and the directors of Rosebud ltd were law firm partners.
In December 2009, Rosebud ltd settle the Rosebud Trust with the discretionary beneficiaries were either charities or any person or persons appointed by Ross & Whitney Trustee Limited. In separate deed, Mr and Mrs Nielsen were appointed as discretionary beneficiaries of the trust.
Then, Mr Nielsen again entered a business venture with Mr Cook, Mr Chevin and Mr Bublitz in 2010. Although he was bankrupt, he still convinced his business partners that he was allowed to carry on business in New Zealand. In 2012, the business fell and the Rosebud trust sued for monies owed to them under the buy-out agreement.
The question about whether Rosebud ltd has the right to sue on the buyout agreement was raised leading to the court to look more into Rosebud ltd. The defendant claimed that Rosebud Trust was a sham trust set up by Mr Nielsen in order to enable him to carry on business.
In order to prove a valid trust, “three certainties must be satisfied – first, certainty of intention, secondly, certainty of subject matter, and thirdly, certainty of object. The absence of any of these certainties results in a failure to create an express trust”
Court went on and explained the definition of a sham trust
“A trust will be a sham where the intention was to create the appearance of a legitimate trust, but there was no intention to effect the rights and obligations of the relevant parties in the way that a valid trust would. A Sham will exist where there is an intention to conceal the true nature of a transaction, and a trust will be held to be a sham where there is an intention to have an express trust in appearance only. There is then an intention to mislead and the trust is void for lack of intention to create the trust. The settlor has to intend, at the inception of the trust, to give third parties, or the court the appearance of creating rights and obligations different from the legal rights and obligations actually intended”
Thus, if a trust is not a valid trust, it will be void.
Then, the judge applied those principles to the case. Rosebud ltd was incorporated in December 2009 and two days later, Rosebud Trust was settled and Rosebud ltd was both the settlor and trustee of the trust. Rosebud ltd retained all the power to remove any person or class of person from the class of discretionary beneficiaries, to consent to a resettlement of the trust fund, and to appoint and remove the trustee. It had an absolute discretion in the exercise of its powers and it could give consent on such terms and conditions as it saw fit.
One of the trustee, Mr Whitney accepted that a trust was set up as a tool for Mr Nielsen to continue his business ventures . Moreover, Mr and Mrs Nielsen were appointed as discretionary beneficiaries in a separate deed. In the trust, although the trustee was Rosebud ltd, Mr Nielsen still had full control and made all decisions in the trust. In 2010, Mr Whitney was replaced as directors of Rosebud ltd by Mr Foster at Mr Nielsen’s request. And again in 2012, Mrs Nielsen was appointed as director under the influence of Mr Nielsen showing that Mr Nielsen had full control in the trust.
The court also found that the trust had poor management system in place. All the financial statements were poorly made and inaccurate. They did not show the true position of the trust and the company. Mr and Mrs Nielsen also used the trust‘s bank account and assets for their personal benefit.
Therefore, the court ruled that this trust was sham from inception and all the transactions were voided.