Facts
The case concerned a trust established in August 2001, the Kenthurst Investments Trust, to serve as the vehicle for the purchase of a piece of real estate (“the property”) (at [7]). The purpose behind using the trust for the purchase was that, at the time, a Ms Colleen Lewis was involved in complex proceedings in the Family Court against her former husband, and wanted to “keep it away” from her own name until such time as the court proceedings were finalised, then she would transfer the property into her own name (at [13]). Accordingly, the loans made to purchase the property were guaranteed by Colleen, and all other expenses were met by her (at [15]). For all intents and purposes, Colleen provided all funds in relation to the property.
The trust was a discretionary trust: the trustee was Appinville Pty Ltd, and the beneficiaries were Colleen, her daughters and grandchildren. The trustee had absolute discretion in distribution amongst the beneficiaries, but Colleen was the appointer (she had the power to replace the trustee at will) (at [7]-[8]).
Over the following years, there were various changes made to the trust. The first came about through two deeds entered into in August and November 2005, the effect of which was to:
- Replace Colleen as appointer with her daughter Louise;
- Remove Colleen as a beneficiary of the trust; and,
- Remove Appinville as trustee, with Colleen taking its place as trustee (at [18]-[19], [21]).
The second was in late 2006 at the resolution of the aforementioned court proceedings, which, by this time, had been transferred to the Supreme Court of NSW (at [25]-[26]). A settlement was reached, and consent orders made, the terms of which were to appoint Colleen as the trustee of the Kenthurst Investment Trust (at [26]). This was apparently in ignorance of the 2005 deeds.
Despite the 2005 deeds and the 2006 settlement, Appinville remained the registered proprietor of the property until December 2009, when Colleen transferred the property into her name (at [29]).
Between late 2009 and early 2010, Colleen entered into a series of loans secured by the property, one of which incorrectly stated that she was entering the loan pursuant to the 2006 consent orders, while another made no mention of her holding the property as trustee (at [32]-[36]). One of these loans was a mortgage to ANZ (at [36]).
In June 2011, the third change to the trust was made in which Louise purported to remove Colleen as trustee and appointed Robana Pty Ltd in her place (at [37]).
Colleen later defaulted on the ANZ loan, and was declared bankrupt in May 2012. Mr Condon was appointed her trustee in bankruptcy (at [39]).
Mr Condon asserted that the Kenthurst Investments Trust was a sham, i.e. it was entered into with the object of concealing the fact that the property was actually owned by Colleen, and therefore it should be made available to Colleen's creditors (at [46]).
Mr Condon asserted that the Kenthurst Investments Trust was a sham, i.e. it was entered into with the object of concealing the fact that the property was actually owned by Colleen, and therefore it should be made available to Colleen's creditors (at [46]).
The Decision
Leeming JA (with whom McColl JA and Sackville AJA agreed) held that the trust was was not a sham on the basis that, while the trust was clearly established with the intention of keeping assets out of Colleen's name, it was not established with the intention that it should not have its apparent effect nor any legal consequence (at [55]-[57], [59]). This definition of a sham trust was provided by the High Court of Australia in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; (2004) 218 CLR 471 at [46]. His Honour (at [60]) also cited Lord Wilburforce in WT Ramsay v Inland Revenue Commissioners [1982] AC 300 at 323 that, “to say that a document or transaction is a 'sham' means that while professing to be one thing, it is in fact something different”. The key for any court, therefore, is to look beyond the “primary material”, in the words of Matthew Conaglen in 'Sham Trusts' (2008) 67 CLJ 176 at 206 (cited by Leeming JA at [61]), to all the other “material factors” that demonstrate a quite different intention of the parties to the trust. His Honour held that this required that the legal meaning of a document is not to be demonstrated by objective factors, as is usually the case, but by the subjective intentions of the parties (at [63]). This implies that there is an intent to deceive at work, and therefore “there is a "strong and natural presumption against holding a provision or a document a sham": National Westminster Bank plc v Jones [2001] 1 BCLC 98 at [59] (Neuberger J).” Leeming JA further went onto cite Robertson and O'Regan JJ of the New Zealand Court of Appeal in Official Assignee v Wilson [2007] NZCA 122; [2008] 3 NZLR 45 at [52] that, "A court will only look behind a transaction's ostensible validity if there is a good reason to do so, and 'good reason' is a high threshold, since a premium is placed on commercial certainty", and Lockhart J in Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449 at 461 that what is required is "a strong finding, and one which cannot be made if another inference is at least equally open" (at [64]).
Leeming JA (with whom McColl JA and Sackville AJA agreed) held that the trust was was not a sham on the basis that, while the trust was clearly established with the intention of keeping assets out of Colleen's name, it was not established with the intention that it should not have its apparent effect nor any legal consequence (at [55]-[57], [59]). This definition of a sham trust was provided by the High Court of Australia in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; (2004) 218 CLR 471 at [46]. His Honour (at [60]) also cited Lord Wilburforce in WT Ramsay v Inland Revenue Commissioners [1982] AC 300 at 323 that, “to say that a document or transaction is a 'sham' means that while professing to be one thing, it is in fact something different”. The key for any court, therefore, is to look beyond the “primary material”, in the words of Matthew Conaglen in 'Sham Trusts' (2008) 67 CLJ 176 at 206 (cited by Leeming JA at [61]), to all the other “material factors” that demonstrate a quite different intention of the parties to the trust. His Honour held that this required that the legal meaning of a document is not to be demonstrated by objective factors, as is usually the case, but by the subjective intentions of the parties (at [63]). This implies that there is an intent to deceive at work, and therefore “there is a "strong and natural presumption against holding a provision or a document a sham": National Westminster Bank plc v Jones [2001] 1 BCLC 98 at [59] (Neuberger J).” Leeming JA further went onto cite Robertson and O'Regan JJ of the New Zealand Court of Appeal in Official Assignee v Wilson [2007] NZCA 122; [2008] 3 NZLR 45 at [52] that, "A court will only look behind a transaction's ostensible validity if there is a good reason to do so, and 'good reason' is a high threshold, since a premium is placed on commercial certainty", and Lockhart J in Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449 at 461 that what is required is "a strong finding, and one which cannot be made if another inference is at least equally open" (at [64]).
His Honour also noted that it is not necessary the whole of the transaction be a sham, merely part of it may be, i.e. “There may be a validly created trust, but a later settlement of property upon the terms of that trust may nonetheless be a sham: Official Assignee v Wilson [2007] NZCA
122; [2008] 3 NZLR 45 at [57]” (at [66]).
122; [2008] 3 NZLR 45 at [57]” (at [66]).
Essential to Leeming JA's judgement is the distinction he makes between sham trusts and trusts entered into for an improper purpose (at [65], [69]). The latter concerns, for example, transfers of property that activate s 37A Conveyancing Act 1919 (NSW) or s 121 Bankruptcy Act 1966 (Cth). These transactions, designed for the purposes of defrauding creditors or with the main purpose of defeating or delaying creditors, are voidable rather than void and thus are legally effective unless and until a court orders otherwise. This also means that transactions entered into with an ulterior purpose are not open to the label of sham: “[i]f what is done is genuinely done, it does not remain undone merely because there was an ulterior purpose in doing it”: Miles v Bull [1969] 1 QB 258 at 264 (at [69]).
His Honour outlined the above by way of example, “The proposition that not every transaction entered into for a legally improper motive is a sham must also be correct in principle. There is a clear distinction between a settlement of property in favour of (say) a spouse intended to operate in its terms, but made with the intent of defrauding creditors, and a sham declaration of trust in favour of a spouse never intended to give rise to the ordinary incidents of a trust. Both are entered into for an improper purpose, but the legal meaning of the former accords with the language of the declaration (although it is apt to be set aside pursuant to statute), while the legal meaning of the latter is that there is no trust at all. The limited notion of what constitutes a sham does not swallow up the large class of other transactions entered into for a purpose regarded as improper by the law. In short, every case of shamming intent involves a finding of intentional deception as to the effect of a document, but not every case of improper purpose is a sham.” (at [70]-[71]).
Therefore there was no reason in principle why, “an intention genuinely held and documented to create a trust, but on quite different terms from that documented” could not create a valid trust (at [67]). This served as essential to the resolution of the case in favour of the appellant, as the question was then framed as to whether, “Appinville held that property on a bare or resulting trust for Colleen, or a discretionary trust in accordance with the Deed” (at [67]). The answer to that question rested in the intention of Colleen at the establishment of the trust.
On the evidence, Leeming JA found that as at August 2001 Colleen simply wished to establish a trust so that, for the purposes of the court proceedings, she did not have legal title to the property (at [72]). But the Kenthurst Investment Trust operated according to its terms: if the court proceedings were finalised when Colleen originally hoped, then she could have requested that Appinville convey the property to her. If Appinville refused to do so, she could have exercised her power of appointment to remove Appinville and appoint a trustee that would (at [75]-[76]). This intention could not be rebutted by evidence of subsequent events. Indeed evidence of later events in 2005 and 2006 were wholly consistent with this conclusion, as those actions involved Colleen acting in accordance with the terms of the trust.
The final important point his Honour addressed in reference to sham trusts is whether there could be an “emerging sham”: that Colleen's treatment of the property in 2009 and 2010 in terms of borrowing funds against it was inconsistent with renunciation as a beneficiary in 2005 (at [81]). Leeming JA dismissed the concept on the basis that, “A trust once validly constituted does not change in nature because the trustee and some of the beneficiaries subsequently chooses no longer to abide by the obligations of the trust relationship. Such conduct may amount to a breach of trust, and may lead to the removal of the trustee, but does not destroy the proprietary and personal rights and obligations which came into existence when the trust was created.”
I note there were further questions concerning whether or not Louise had standing arising on the facts as to who was the trustee as a result of the failure by Colleen to have the property conveyed to her until 2009, and the subsequent change of trustee to Robana in 2011. Leeming JA ultimately held that Louise had standing on the basis that, where a trustee is unwilling or unable to take steps to get in trust property, a beneficiary may do so, so long as the trustee is joined to the action (at [109]-[114]).
The Court therefore allowed the appeal, and ordered that the property was part of the Kenthurst Investment Trust (at [118]).
Analysis and Conclusions
As a result of this case, the following propositions may be advanced as to sham trusts. The first is that what is relevant is the intention at the time of the settlement of property, not how it is dealt with later. Therefore, as noted above, “a later settlement of property upon the terms of the trust may be a sham”.
Secondly, a sham must have no legal consequence or not its apparent legal consequence. This means, with regard to transactions entered into to defeat creditors, for example, that a transaction which is legally effective as to its terms cannot be a sham. This is why provisions such as s 37A Conveyancing Act 1919 (NSW) and s 121 Bankruptcy Act 1966 (Cth) exist: to render transactions voidable that would otherwise have the effect of taking property legally out of the reach of creditors. Despite not explicitly stating this, it may be the natural corollary of his Honour's reasons that sham trusts are void ab initio, from the outset, as a result of the arrangement not having its apparent nor any legal consequence.
Thirdly, evidence of later actions in reference to the trust property can only be helpful by way of inference of the original intention at settlement; it cannot on its own establish that a trust is a sham because of the conduct that evidence shows.
Finally, and relatedly with the third proposition, there can be no concept of an emerging sham. If trust property is dealt with subsequently in such a way that is contrary to the terms of the trust, then it is a breach of trust, and actionable in the same way such breaches would ordinarily be. However, there is one question raised by this rejection of an emerging sham. If the beneficiaries and the trustee are breaching the trust, then who is going to enforce the breach? Sham trusts often arise between family members and/or close associates. If the trust is breached after settlement, and they are all in on it, then who is going to do something about it? Does this mean that because of the rejection of an emerging sham in this case that there is now a way around the finding of a sham trust, something which itself is already quite difficult to show? These questions remain unanswered by the decision.
