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Has the bundle of rights been reborn? Clayton v Clayton

22 July 2015 - By Anthony Grant

In Clayton v Clayton [2015] NZCA 30 the Court of Appeal has held that Mr Clayton's right to appoint and remove beneficiaries is to be categorised as "property" for the purposes of the Property (Relationships) Act 1976 (PRA) and that the power has converted half a particular trust's assets into relationship property which are to be given to his wife.

The decision is remarkable for the unsatisfactory consequences of this process of reasoning. For example:

  • Half the assets of the trust were declared to be relationship property to which the wife is entitled while the other half of the trust assets are not relationship property but remain trust property.
  • The Clayton children – who were beneficiaries of the trust – have no enforceable rights against the half interest in the trust's assets that have been given to their mother.
  • The fact that half the trust assets were given to Mrs Clayton as relationship property "does not invalidate the Trust or mean that Mr Clayton as Trustee, does not hold the property of the Trust for the beneficiaries. The Trust remains in existence and is enforceable by the other beneficiaries." [114] In other words, Mrs Clayton gets 50% of the trust assets as relationship property but none of the remaining 50% is declared to be Mr Clayton's relationship property. It is the property of a trust against which he and his children have enforceable rights.
  • The Court's reasoning appears to enable a spouse in the position of Mrs Clayton to take half of all trust wealth that derives from inheritances and gifts that her husband has received and which were settled on a trust of which he has the sole power to appoint and remove beneficiaries.
  • The reasoning appears to allow a spouse to take half the wealth that had been settled on a trust by the other spouse's father, grandfather and other relatives, if the other spouse has an exclusive power to appoint and remove beneficiaries.
  • The decision appears to allow Mrs Clayton's creditors to take half the assets of the trust but it is not clear whether Mr Clayton's creditors can take any of the assets of the trust.
  • It is not clear what other powers in a trust will constitute relationship property.

How could this be?

The answer lies in section 2 of the PRA. This is a short section which defines the concept of "property". In four subsections numbered (a) – (d) it is said that "real property", "personal property", "any estate or interest in any real or personal property" and "any debt or other thing in action" are "property" for the purposes of the PRA.

To finish off the section, it is recorded in (e) that "any other right or interest" constitutes "property".

People who have read the debates in Parliament that preceded the PRA amendments will know it was never contemplated that Parliament would implant a Trojan horse into the PRA that would enable a power to appoint and remove beneficiaries – and perhaps other powers – to be declared to be "relationship property". The only powers that Parliament was willing to give the Courts in respect of relationship property that ended up in trusts were the limited powers in s 44C.

When I spoke on the Clayton case at a conference recently, one of the MPs who had drafted the section told me with a mixture of anger and incredulity that it was never contemplated that the Courts could reach such an unintended outcome.

He said that five people had drafted s 2 and that the words "any other right or interest" were intended to qualify the four items of property that preceded them. If the Court of Appeal had used the ejusdem generis principle of interpretation to the concepts of "real property", "personal property" and "any debt or other thing in action" they would not have been able to construe a power to appoint and remove beneficiaries as "property", let alone "relationship property".

The Court of Appeal went down this path in an attempt to find a jurisprudential justification for stopping Mr Clayton from being able to appropriate all of the trust assets for himself.

The trust appears to have been created at a time when Mr Clayton had doubts about his marriage and he gave himself very wide powers to do what he wanted. He could appoint and remove trustees and beneficiaries. He could distribute the trust's income and capital to himself and could "deal with the Trust fund as if he was the absolute owner of it and beneficially entitled to it."

Viewed objectively it was akin to a revocable trust.

The case upon which the Court of Appeal relied in interpreting the power to appoint and remove beneficiaries as "property" involved a revocable trust (TMSF v Merrill Lynch [2011] UKPC 17) where the Privy Council held that the assets of a revocable trust could be treated as the property of Mr Demirel – the person who had the power to revoke the trust.

Having relied on the TMSF case as justification for treating the assets of Mr Clayton's trust as his "property" the Court of Appeal has implicitly given creditors wide rights to take assets from many New Zealand trusts.

In my next article I will refer to another way by which the Court of Appeal might have defeated Mr Clayton's expectations but without involving the many problems that have been created by the reasoning upon which the Court of Appeal relied.

Anthony Grant is an Auckland barrister who specialises in commercial law. He has a particular interest in the law of trusts. He also acts as counsel in relationship property disputes. See www.anthonygrant.com.

This article was also published in LawTalk 866, 5 June 2015, page 32.

Last updated on the 23rd July 2015