Clayton v Clayton

[2013] NZHC 309

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IN THE HIGH COURT OF NEW ZEALAND ROTORUA REGISTRY

CIV-2011-463-000808 [2013] NZHC 309

BETWEEN  MARK ARNOLD CLAYTON First Appellant

ANDMCGLOSKEY NOMINEES LIMITED Second Appellant

ANDCHELMSFORD HOLDINGS LIMITED Third Appellant

ANDDEBORAH JOAN VAUGHAN Fourth Appellant

ANDNEW ZEALAND TRUSTEE SERVICES LIMITED

Fifth Appellant

ANDMARK ARNOLD CLAYTON Sixth Appellant

ANDBRYAN WILLIAM CHESHIRE AND MARK ARNOLD CLAYTON

Seventh Appellant

ANDMELANIE ANN CLAYTON Respondent

Hearing:         13-15 August 2012

Counsel:         R Harley for First Appellant

CR Carruthers QC for Second to Seventh Appellants
JH Hunter and J Hosking for Respondent

Judgment:      22 February 2013

MARK ARNOLD CLAYTON V MELANIE ANN CLAYTON HC ROT CIV-2011-463-000808 [22 February

2013]

JUDGMENT OF RODNEY HANSEN J

This judgment was delivered by me on 22 February 2013 at 4.30 p.m., pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date: ………………………….

Solicitors:          Quigg Partners, P O Box 3035, Wellington 6140 for Appellants

(Email:  [email protected]

Phillips Hosking, P O Box 227, Rotorua for Respondent

(Email:  [email protected] )

Copies to:           RP Harley, P O Box 5241, Wellington 6145 for First Appellant

(Email:  [email protected] )
CR Carruthers QC, P O Box 305, Wellington 6145 for Second – Seventh Appellants
(Email:  [email protected] )

JH Hunter, 152 Anzac Avenue, Auckland 1010 (Email:  [email protected] )

TABLE OF CONTENTS

Introduction  [1] Factual background  [3] Pre-nuptial agreement  [6] Valuation of former matrimonial home  [15] Relationship property under sections 9A(1) and (2)  [23]

Valuation issues  [45] EBITDA  [49] Multiple  [55]

Appeal by trustees  [65]

Vaughan Road Property Trust  [68]

Discussion  [78]

Remaining trusts – setting aside dispositions  [92]

Stacey Clayton Education Trust (SCET)  [93]

and Anna Clayton Education Trust (ACET)

Denarau Resort Trust  [103] Sophia No 7 Trust  [111] Chelmford Trust  [118] Lighter Quay 5B Trust  [125]

Cross-appeal  [129] Section 182 claim  [137] Section 44C  [144]

Summary  [150]

Result  [152]

Introduction

[1]      The first appellant (Mr Clayton) is the former husband of the respondent (Mrs  Clayton).     The  remaining  appellants  hold  property  in  trust  in  which Mrs Clayton claims an interest under the Property (Relationships) Act 1976 (the Act).  The appellants appeal against aspects of the decision of Judge Munro in the Family Court at Rotorua.  She was asked to determine a range of issues arising under the Act.  For her part, Mrs Clayton cross-appeals against Judge Munro’s refusal to make an award in relation to one of the trusts.

[2]      In summary, the issues requiring determination are whether the Judge erred in:

(a)       Setting aside a pre-nuptial agreement made by the parties. (b) Fixing the value of the matrimonial home.

(c)       Finding that Mrs Clayton is entitled to share equally in the increase in

value of Mr Clayton’s business assets.

(d)      Fixing the value of Mr Clayton’s business interests.

(e)       Finding that Mrs Clayton is entitled to share equally in the net assets of trusts to which property had been transferred.

(f)       Refusing to make an award in relation to one of the trusts known as the Claymark Trust.

Factual background

[3]      Mr and Mrs Clayton began a de facto relationship in 1986 and married in

1989.  They have two children, Stacey, born in 1990 and Anna, born in 1994.  They

separated in December 2006 after a marriage which, to use the words of Judge Munro, was punctuated by a number of brief separations.   The marriage was dissolved in 2009.

[4]      The parties met when Mrs Clayton worked in the office of a joinery business built  up  by  Mr  Clayton’s  father.    Mr  Clayton  had  earlier  established  his  own business, Rotorua Timber Supplies and, in 1984, incorporated Claymark Industries Limited, adopting the name under which he would develop a major sawmilling business.  He purchased a sawmill business at Katikati in 1991 and, about the same time, purchased his father’s joinery business. The businesses were owned and run by a number of companies, the shares in which were either owned by Mr Clayton personally or through Clayton Holdings Limited, of which he was the sole shareholder.

[5]      During the marriage a number of trusts were established.  Some were set up for business purposes - to facilitate a restructuring of business assets and, on the advice of a tax expert, to reduce income tax liability.  Others followed advice to address the risk to the business that would be posed by a marriage breakdown. Further  trusts  were  established  after  separation  to  hold  assets  acquired  by  Mr Clayton.

Pre-nuptial agreement

[6]      Mr and Mrs Clayton entered into the pre-nuptial agreement some six weeks before they married in November 1989. The agreement relevantly provided:

Whereas Mark and Melanie intend to marry in the near future and whereas they wish to settle matters between them that relate to the property owned by Melanie and Mark and that may become owned by either or both of them during the course of their marriage, now therefore this deed witnesses as follows:

1.This  is  an  agreement  in  contemplation  of  marriage  pursuant  to section 21 of the Matrimonial Property Act 1976.   In respect of matrimonial  property,  all  property  that  would  be  matrimonial property pursuant to the Matrimonial Property Act 1976 but for this agreement and is in full and final settlement of all claims pursuant to that Act for (sic) at common law or at equity or whosoever.

2.	Mark and Melanie shall own as their separate property notwithstanding the marriage the property that they now own and the proceeds and profits from that property and in particular Mark shall have as his separate property:
(a)      His home at Banksia Place, Rotorua;
(b)      His motor vehicles;
(c)      All shares that he may have in private and public companies;
(d)      All his businesses and business assets.
The home at Banksia Place shall remain as his separate property notwithstanding that it shall be used as the matrimonial home and any care [sic] that he may own shall remain his separate property, notwithstanding that it may be used as the family car, and family chattels that he may own shall remain his separate property, notwithstanding that they are used as family chattels by Mark and Melanie.
3.	The proceeds of any sale of Mark’s property that is separate property shall continue to be separate property and any item purchased with those sale proceeds shall likewise be separate property, notwithstanding its character or nature, or that it otherwise be matrimonial  property  pursuant  to  the  Matrimonial  Property  Act 1976.
4.	...
5.	If the marriage between Mark and Melanie shall end in dissolution, then Melanie shall be paid the following monies by Mark and no other, for the monies are in full and final settlement of any claim by her for this settlement in terms of paragraph 1 of this agreement.
1.        If the separation upon which the dissolution is founded shall occur in the first year of their marriage, he shall pay the sum of $10,000.
2.        If the separation upon which the dissolution is founded shall occur in the second year of their marriage, he shall pay the sum of $20,000.
3.        If the separation upon which the dissolution is founded shall occur in the third or any subsequent year, he shall pay the sum of $30,000.
[7]	Clau	se 4 is omitted as it relates to property bought by the parties together.

There is no property in that category.

[8]      Mrs Clayton sought to have the agreement set aside on three grounds:

(a)       Lack of compliance with the necessary formalities by Mr Clayton; (b)           Uncertainty of subject matter; and

(c)       Giving effect to the agreement would cause serious injustice in terms of s 21J of the Act.

[9]      Judge Munro described Mr Clayton’s position as somewhat ambiguous.  On the one hand, he opposed the application to set aside the agreement and had paid the

$30,000 payable under subparagraph 3 of cl 5.  However, he conceded in evidence that the agreement was unfair and proposed the equal division of the former matrimonial home, family chattels, his ASB Bank account, his current account in Clayton Holdings Limited and advances to one of his companies and three trusts.

[10]   Judge  Munro,  describing  Mr  Clayton’s  position  as  “puzzling  and contradictory”, found that the agreement should be set aside.  She said:

[35]      ... The only conclusion I can draw is that Mr Clayton seeks to have a variation of the s 21 agreement enforced by the Court after removing from the compass of the agreement items which he considers should be treated as relationship property.  I have not been provided with any authority for this approach and neither am I aware of any.  I can find no justification for adopting Mr Clayton’s approach.  In my view, the agreement must either be upheld in its entirety, varied by consent, or set aside.  In this case, there is an acknowledgement by Mr Clayton that the agreement has become unfair.  He does not seek to uphold it in its entirety. There is no consent to vary it on his terms.  It must therefore be set aside.  I do not consider it necessary to make findings regarding the grounds put forward by Mrs Clayton.  Accordingly, the agreement dated 23 November 1989 is set aside upon the grounds as set out in s 21J(4) and particularly on the basis that both parties agree that to give full effect to the agreement would be unfair.

[11]    Mrs Harley submitted that the Judge erred in finding that Mr Clayton had proposed that the former matrimonial home be classified as relationship property and divided equally.  She said he had consistently maintained that the agreement stood and had paid the $30,000 due under it at Mrs Clayton’s request.  She did not accept that Mr Clayton conceded the agreement to be unfair and pointed to evidence that Mrs Clayton acknowledged that, in some respects at least, the agreement was fair.

[12]     The parties’ view on whether the agreement was unfair or had become unfair is not a relevant consideration, although the question of whether, objectively, the agreement  was  or  had  become  unfair  is  one  of  the  factors  to  be  considered. Section 21J of the Act relevantly provides:

21J     Court may set agreement aside if would cause serious injustice

(1)       Even though an agreement satisfies the requirements of section 21F, the Court may set the agreement aside if, having regard to all the circumstances,  it  is  satisfied  that  giving  effect  to  the  agreement would cause serious injustice.

...

(4)       In  deciding,  under  this  section,  whether  giving  effect  to  an agreement made under section 21 or section 21A or section 21B would cause serious injustice, the Court must have regard to—

(a)      the provisions of the agreement:

(b)      the length of time since the agreement was made:

(c)       whether the agreement was unfair or unreasonable in the light of all the circumstances at the time it was made:

(d)       whether the agreement has become unfair or unreasonable in the light of any changes in circumstances since it was made (whether or not those changes were foreseen by the parties):

(e)       the fact that the parties wished to achieve certainty as to the status, ownership, and division of property by entering into the agreement:

(f)       any other matters that the Court considers relevant.

[13]     In my view, it cannot be seriously contended that the Judge was not entitled to find that to give effect to the agreement would cause serious injustice.  If the agreement were allowed to stand, the consequence would be that, after twenty years of marriage, to which Mrs Clayton made a full contribution and bore and raised two children, she would be entitled to no more than $30,000.  She would have no claim to the matrimonial home or family chattels or to other non-business assets in Mr Clayton’s name which, in opening, his counsel had conceded had a value in excess of $3m.  In the circumstances, Mr Clayton was being no more than realistic when he said in evidence that for Mrs Clayton to receive only what she was entitled to under the agreement, is “not right and it’s unfair”.

[14]    It is arguable that the agreement was not unfair or unreasonable in the circumstances pertaining at the time it was made but, having regard to the time that has elapsed since and the substantial assets which have been accumulated, it has undoubtedly become unfair or unreasonable.  The Judge was clearly right to set it aside.

Valuation of former matrimonial home

[15]     The property at Banksia Place was transferred to Mrs Clayton in March 2010, pursuant to a consent order which disposed of her claim for interim spousal maintenance. The transfer was made without prejudice to issues arising in relation to the pre-nuptial agreement but on the basis that, irrespective of how the Court determined substantive issues, Mrs Clayton would be entitled to retain the property as her separate property.

[16]     The Judge found that in the course of the proceedings, the registered value of the property had increased from $850,000 to $950,000.  Mrs Clayton sought to have the value fixed at $850,000 to take account of significant works she had undertaken, particularly the sealing of the driveway.   She contended that the increase in value was largely due to her post-separation input.  Judge Munro found:

[137]    ... There is no evidence before me as to the extent to which the increase was due to the post-separation improvements, and how much was due to market forces.  Neither is there any clear breakdown as to the extent to which Mrs Clayton’s expenditure has been by way of ongoing maintenance, and how much has been by way of improvements.  I do accept, however, that Mrs Clayton has spent a significant sum post-separation on improvements to the property, and therefore adopt a valuation of $850,000.

[17]     Mrs Harley said that it was not open to the Judge to adopt the lower valuation in the circumstances.  She said s 2G of the Act, which governs the date at which the value of property is to be determined, cannot be used to adjust for post-separation contributions by one party.   She submitted that any adjustment should have been made pursuant to s 18B of the Act.

[18]     Section 2G provides:

2G      Date at which value of property to be determined

(1)       For the purposes of this Act, the value of any property to which an application under this Act relates is to be determined as at the date of the hearing of that application by the Court of first instance.

(2)       However, the Court of first instance or, on an appeal the High Court, Court of Appeal, or Supreme Court may, in its discretion, decide that the value of the property is to be determined as at another date.

(3)      This section is subject to Part 6.

[19]     Section 18B provides:

18B     Compensation for contributions made after separation

(1)       In this section, relevant period, in relation to a marriage, civil union, or de facto relationship, means the period after the marriage, civil union, or de facto relationship has ended (other than by the death of 1 of the spouses or partners) but before the date of the hearing of an application under this Act by the Court of first instance.

(2)       If, during the relevant period, a spouse or partner (party A) has done anything that would have been a contribution to the marriage,   civil   union,   or   de   facto  relationship  if   the marriage, civil union, or de facto relationship had not ended, the Court, if it considers it just, may for the purposes of compensating party A—

(a)       order the other spouse or partner (party B) to pay party A a sum of money:

(b)      order party B to transfer to party A any property, whether the property is relationship property or separate property.

(3)       In  proceedings  commenced  after  the  death  of  1  of  the spouses or partners, this section is modified by section 86.

[20]     While the discretion to decide the date of valuation of property in s 2G is a wide one, it was recognised in Fowler v Wills1  and confirmed in Walker v Walker2 that adjustments for losses and benefits since separation are generally better dealt with under ss 18B and 18C of the Act.  Recently the Supreme Court in Burgess v Beaven3 said that with the enactment of ss 18B and 18C there is less need to depart

from the default position of a hearing date value under s 2G.

1      Fowler v Wills [2004] NZFLR 252 (CA).

2      Walker v Walker [2007] NZCA 30, [2007] 2 NZLR 261 at [43]–[44].

3      Burgess v Beaven [2012] NZSC 71, [2013] 1 NZLR 129 at [25].

[21]     That is certainly the case here where the remedy of a change to the date of valuation is not effective to do justice to the parties.  There is no evidence of the cost or valuation of Mrs Clayton’s post-separation contributions.  Effectively, the credit given to her by the change of valuation date was arbitrary and unsupported by the evidence.   There is also some question as to the correct valuation in any event. Mrs Clayton’s evidence was that the valuation at the date of hearing was $925,000, not $950,000.  It may also be relevant to consider evidence adduced for the purpose of the appeal of the recent sale of the property for $735,000.

[22]     The Judge’s decision on this aspect of the case clearly needs to be revisited but there is insufficient information to enable a final determination to be made on appeal.  I will remit the case to the Family Court for this aspect to be reheard.

Relationship property under sections 9A(1) and (2)

[23]     Mr Clayton challenges Judge Munro’s finding that pursuant to ss 9A(1) and (2) of the Act, Mrs Clayton is entitled to a half interest in the increase in value of Mr Clayton’s separate property, including his interest in companies in the Claymark group.  It is not disputed that, pursuant to s 8(1)(a) and (b), the matrimonial home and family chattels are relationship property.   It is also accepted that when the relationship began Mr Clayton had separate property comprising shares in Claymark Industries Limited (which changed its name to Claymark Rentals Limited in 1996) and which owned two parcels of land at Vaughan Road, Rotorua and the land at Banksia Place on which the family home was later built.  The Judge said it was accepted by the parties that this property had a value of $500,000.

[24]     Mrs Clayton claimed that all property acquired by Mr Clayton after their de facto relationship began was relationship property pursuant to s 8(1)(e) which provides that relationship property includes:

(e)       subject to sections 9(2) to (6), 9A, and 10, all property acquired by either spouse or partner after their marriage, civil union, or de facto relationship began.

[25]     The Judge found,  however, that property acquired since  the marriage by Mr Clayton was separate property pursuant to s 9(2) and (3) of the Act (to which s 8(1)(e) is subject) which provide:

9        Separate property defined

(2)       Subject to sections 8(1)(ee), 9A(3), and 10, all property acquired out of separate property, and the proceeds of any disposition of separate property, are separate property.

(3)       Subject to section 9A, any increase in the value of separate property, and any income or gains derived from separate property, are separate property.

Judge Munro found that property acquired by Mr Clayton could be traced both to the proceeds of disposition of his separate property and to the income or gains derived from separate property.

[26]     The Judge then went  on  to  consider whether,  as  submitted on behalf  of Mrs Clayton, s 9A applied to convert into relationship property any increase in the value of or income or gains derived from separate property.  Section 9A relevantly provides:

9A      When separate property becomes relationship property

(1)       If any increase in the value of separate property, or any income or gains derived from separate property, were attributable (wholly or in part) to the application of relationship property, then the increase in value or (as the case requires) the income or gains are relationship property.

(2)       If any increase in the value of separate property, or any income or gains derived from separate property, were attributable (wholly or in part,  and  whether  directly  or  indirectly)  to  actions  of  the  other spouse or partner, then—

(a)       the increase in value or (as the case requires) the income or gains are relationship property; but

(b)       the  share  of  each  spouse  or  partner  in  that  relationship property is to be determined in accordance with the contribution  of each  spouse  or  partner to  the  increase  in value or (as the case requires) the income or gains.

[27]     Judge Munro found that both subsections 9A(1) and 9A(2) apply.   As to s 9A(1), she referred to evidence of Mr Clayton routinely putting part of his salary

and other business income back into the business.  She said there was evidence of “general ongoing application” in this regard and also a specific injection of salary into the business in 2002, 2003 and 2004 in order to capitalise companies.   The Judge referred to a passage in Mr Clayton’s evidence when he was asked about putting  “quite  a  bit”  of  his  income  over  the  years  back  into  the  business, Mr Clayton’s answer was, “Um, just about all of it”.

[28]     The Judge also referred to transactions which occurred in the context of the restructuring carried out for the purpose of reducing tax liability.  Over a three-year period Mr Clayton purchased shares in Claymark Leasing Limited for a total of $5m using salary payments made to him by Clayton Holdings Limited.  He then sold the shares to Claytons Holdings Limited, increasing his current account in Claytons Holdings Limited to $5.3m.  The current account, together with a $1.5m dividend payment was converted to shares.  The result was that Mr Clayton owned $7m worth of shares in Claymark Holdings Limited, of which $5,850,000 worth were acquired with relationship property.

[29]     The Family Court was told that following an Inland Revenue investigation, the steps taken to restructure were unwound.  The Judge did not find it necessary to consider the effect of the reversal.  She said:

[56]      ... The evidence is  clear  that  the  money paid into Mr Clayton’s personal account from Clayton Holdings Ltd was salary.   That salary was applied to his business.  The salary and dividends were not available for family purposes. The purpose of injecting those funds back into the business was to reduce tax liability.  Additionally, Mr Clayton received a significant restraint of trade payment.  This falls within the definition of relationship property, and was paid back into the business.   It was not available to the family.

She concluded:

[57]      I am satisfied that the grounds as set out in s 9A(1) are met, both through the specific application of relationship property in terms of salary and dividends during 2002, 2003 and 2004, and the general application of relationship property by Mr Clayton using his salary and other drawings from the business largely to put back into the business in order to grow it, and that has continued throughout the marriage.

[30]     As to the application of s 9A(2), the Judge found that in the early years of the marriage, Mrs Clayton made a significant contribution to the business by doing office work, although not on a fulltime basis.  She described Mrs Clayton as at her husband’s beck and call and working as and when required.  The Judge found that Mrs  Clayton  was  not  properly  remunerated  for  what  she  did.    She  said  that Mrs Clayton  had  contributed  not  just  by  working  in  the  business,  but  also  by foregoing a proper income for that work.

[31]    In addition, the Judge said Mrs Clayton had undertaken the major part of childcare during the marriage.  She had taken care of the home and supported her husband by entertaining business associates and accompanying him on business trips.  The Judge found that Mrs Clayton had also provided support for her husband by foregoing a higher standard of living, including delaying the completion of the family home for several years, in order to support the business.

[32]     Judge Munro concluded:

[64]      In this case it is not possible to distinguish between the various items of property owned by Mr Clayton and identify whether Mrs Clayton’s contributions under s 9A(2) have indirectly led to an increase in value of a particular item of separate property.  Because of the interconnectedness of all of the entities associated with Mr Clayton and the way in which these have evolved from his initial business of Rotorua Sawmills Ltd, the only way in which the contributions can be assessed, particularly taking into account the principles and purposes of ss 1M and 1N of the Act, is to conclude that Mrs Clayton’s contributions under s 9A(2) give her an entitlement to an increase in the value of all of Mr Clayton’s separate property.

...

[66]      Given that both ss 9A(1) and 9A(2) apply in this case, and in light of the principles of the Act under s 1N, I find that the increase in value of Mr Clayton’s  separate  property  over  and  above  $500,000  is  relationship property to be shared equally.

[33]     The criticisms levelled at the Judge’s findings are:

(a)       The  evidence  did  not  support  the  findings  of  contributions  of relationship property.

(b)      The evidence did not support the Judge’s findings of contributions

made by Mrs Clayton.

(c)       The Judge was wrong to value property owned by Mr Clayton when the relationship began at $500,000.

[34]     There was ample evidence to support the Judge’s finding that Mr Clayton had, directly and indirectly, diverted income into the business.  He accepted that his income had been restricted as a consequence of capital investment and debt servicing requirements and, in the passage of his evidence quoted by the Judge,4  had put income back into the business.

[35]     It  is  also  clear  that,  as  found  by the  Judge,  as  part  of  the  restructuring undertaken for tax purposes and “matrimonial asset protection”, salary and dividends were credited to Mr Clayton and led to his acquiring shares in Claymark Holdings Limited with a value of $7m.  The challenge on appeal is to the Judge’s view that the unwinding of the scheme as a tax avoidance arrangement made no difference.

[36]     The way in which evidence on this issue was introduced was unsatisfactory. In the course of the Family Court hearing, a large volume of documents (several boxes) was “found” by Mr Clayton and a brief of evidence addressed to the issue tendered by Mr Bryan Cheshire, a retired chartered accountant and a director of Clayton Holdings Limited.5    His evidence was to the effect that the steps taken in response to the tax audit practically negated the transactions which culminated in Mr Clayton acquiring the shares.

[37]     Rebuttal evidence was given by Mr Casey Plunket, a specialist tax lawyer. He explained the legal effect of steps taken by the Commissioner of Inland Revenue to void a tax avoidance arrangement.   He concluded that the Commissioner’s assessment had no effect on the salary paid to Mr Clayton and the amounts he paid to acquire shares in Claymark Leasing/Finance Limited.  He said the reassessments did

not have the effect of voiding Claymark Leasing’s rights to assets it had acquired or

4      At [27] above.

5      Mr Cheshire was Mr Clayton’s close advisor for many years. Among other things, he was

responsible for the administration of all trusts established by Mr Clayton.

the amount for which shares in Claymark Leasing was sold by Mr Clayton.  He said there was no reason to adjust this amount for commercial or taxation purposes.

[38]     Mr Plunket was called to give evidence.  He confirmed his affidavit.  He was not cross-examined.

[39]     I am fully satisfied that the Judge was right to find that the requirements of s 9A(1) were met by the application of relationship property routinely in the course of the marriage and specifically for the purpose of the restructuring exercise over the period 2002 – 2004.

[40]     In relation to the Judge’s findings under s 9A(2), Mrs Harley submitted that the evidence of Mrs Clayton’s contributions did not support the Judge’s findings. However, she gave me no reason to doubt that the Judge’s factual findings of the contributions made by Mrs Clayton had a solid evidential foundation.

[41]     In her reply submissions, Mrs Harley was critical of the Judge adopting

$500,000 as the value of property acquired by Mr Clayton before the relationship began.   Yet, as Ms Hunter explained, this actually represented a concession on Mrs Clayton’s part.  She referred to a judgment delivered by Judge Adams on 2 July

2008, in which complaints about disclosure by Mr Clayton were ventilated.  Judge Adams made a series of orders requiring disclosure and discovery by Mr Clayton, including the following:

The respondent shall identify precisely what assets he owned at the commencement of the de facto relationship and to prove how and to what extent they can be traced into existing assets.  To the extent that he does not do so, assets will be deemed to have not been acquired out of separate property, i.e. out of pre-relationship property (leaving to one side issues concerning the agreement).

[42]     Ms Hunter said the effect of the judgment was to deprive Mrs Clayton of the ability to prove the increase in the value of separate property.   On that basis, she conceded that the value of Mr Clayton’s separate property when the relationship began was $500,000.  The Judge explicitly proceeded on the basis that this was an agreed  position.    There  was  nothing  said  in  argument  to  suggest  that  she  had

misunderstood the position or indeed to indicate that the figure was not a reasonable approximation of the value of the assets.

[43]     To the extent that the increase in value of and income or gains derived from separate property were attributable, even in part, to the application of relationship property, those increases, income and gains are relationship property and prima facie should be shared equally.6     Greater difficulty arises in the application of s 9A(2) which is concerned with contributions to the increase in value of or income or gains derived from separate property.  In Rose v Rose the Court said that in undertaking

this exercise, arithmetical exactitude cannot be achieved and, in the end, the evaluation of relative contributions is likely to be a matter of general impression.7

[44]     There was no criticism of the Judge’s finding that, as both ss 9A(1) and 9A(2) apply  and  having  regard  to  the  principles  in  s  1N,  the  increase  in  value  of Mr Clayton’s separate property should be shared equally.

Valuation issues

[45]     The fourth and fifth grounds of appeal were directed to elements of valuation evidence accepted by the Judge for the purpose of valuing the property pool.  These comprised  companies  in  the  Claymark  Group  and  property  owned  by  trusts. Property assets were valued on the basis of recent registered valuations.  The fair market value of shares in the Claymark Group was based on a capitalisation of earnings.  That required ascertaining future maintainable earnings and applying a multiple to achieve an enterprise value from which debt is deducted. The differences between the valuations arose primarily from differences in the future maintainable earnings and multiples adopted.

[46]     The valuer called by  Mrs  Clayton,  Mr  Brendan  Lyne,  used  a  figure  for earnings before interest, tax, depreciation and amortisation (EBITDA) of $7m and a multiple of 6.25.   Mr Clayton called two valuers, Mr James Dent and Mr John

Hagen.   Mr Dent and Mr Hagen respectively adopted EBITDAs of $6.75m and

6      Rose v Rose [2009] NZSC 46, [2009] 3 NZLR 1.

7 At [46].

$5.54m and multiples of 5.2 and 4.75.  These led to radically different valuations. On  Mr Hagen’s  approach,  Claymark  New  Zealand  has  a  negative  value  after deduction of debt.

[47]     Mr Lyne valued the property pool at $28,831,000, of which he attributed

$17,569,000 to Claymark New Zealand and $695,000 to the value of the United States operation.  Mr Dent valued the property pool at $11.5m excluding, however, the two education trusts, although he said that, in the case of a distressed sale, realisable value could be much less.  On Mr Hagen’s approach, after deduction of debt of $31m, Clayton Holdings Limited has a negative value.

[48]     Judge Munro adopted Mr Dent’s EBITDA of $6.75m and the multiple of 6.25 advocated by Mr Lyne.  Subject to modifying the EBITDA to $6.75m and to other adjustments which are not relevant for present purposes, she accepted the evidence of Mr Lyne as to the value of the Claymark Group.  Mr Clayton says that the Judge erred in her findings on both elements.

EBITDA

[49]     Mrs Harley submitted that the Judge erred in adopting Mr Dent’s estimate of future maintainable earnings because it included the value of Claymark’s US business.  She said that would be wrong because the US business is not represented by a property interest against which Mrs Clayton could claim, and the Judge had accepted that.

[50]     Claymark exports a large volume of logs to the US.   I understand the US market accounts for half of Claymark’s international business.  Sales are funnelled through  Claymark  International  Limited  to  a  partnership  in  the  US  in  which Claymark has a 50 per cent interest, beneficially owned by Claymark US Limited, a New Zealand company.

[51]     A trust, the Claymark International Trust (CIT), was formed in 2003–2004 to protect the New Zealand business from liability arising in the USA.  CIT owns 99.99 per cent of the shares in Claymark International Limited (with Mr Clayton owning

the remainder) and 100 per cent of the shares in Claymark US Limited.  The trustee of CIT is Clayton International Trustee Limited.  Mr Clayton owns 100 per cent of its shares.  The final beneficiaries are his children and other family members.  He is one  of  the  discretionary  beneficiaries  and  has  the  power  to  appoint  or  remove trustees.  Mrs Clayton is not a beneficiary of the trust.

[52]     While recognising that the trust was established for the primary purpose of protecting the Claymark business from liability in the US, Judge Munro reached what she described as “the irresistible conclusion” that by specifically excluding Mrs Clayton as a beneficiary, there was an intention to defeat any interest she might otherwise have in the assets of the trust.  However, she went on to say that CIT owns no assets.  It merely acts as a conduit for funds from the US to be channelled to New Zealand entities. Accordingly, the Judge found there is no property that could be the subject of a claim by Mrs Clayton.

[53]    This conclusion founded Mrs Harley’s contention that the Judge erred in adopting the EBITDA of $6.75m because it resulted in a value being put on the US business interests.

[54]     That submission is not supported by Mr Dent’s evidence.  In his evidence-in- chief he put EBITDA in the range $6.5m to $7m.   He settled on the mean in the course of the hearing.  But Mr Dent’s calculations did not attribute a value to the US business.  He said there is minimal net value in the assets.  The US business appears to have played no part in Mr Dent’s estimates of EBITDA.

Multiple

[55]     Mrs Harley submitted that Judge Munro erred  in adopting a multiple of

6.25 per cent.  She said the evidence of Mr Lyne, on which the Judge relied, did not correctly factor in a control premium.

[56]     A control premium recognises the additional value that may accompany a controlling interest in a company.  It is commonly applied when, as in this case, the valuer is relying on listed data relating to minority interests.

[57]     Mr Hagen did not think a control premium should have been applied because he saw no ability for a purchaser of Claymark to increase cash flows.  Mr Dent accepted that a control premium could be applied but questioned the way in which Mr Lyne had taken it into account.  Mrs Harley relied on his evidence in submitting that Mr Lyne erred in his calculation of the multiple.

[58]     Mr Lyne supported a multiple of 6.25 by comparing it with the multiple of Tenon Limited (Tenon) which is a listed New Zealand company, manufacturing and distributing a range of timber products in New Zealand and North America.   He referred to multiples based on historic and prospective earnings for Tenon of 7.0 and

7.4 respectively.  He went on to say in his evidence in chief:

To arrive at a multiple for Claymark I assume say a control premium for Tenon  of  25%  and  a  marketing  discount  of  20%,  would  result  in  a comparable multiple of 7.0 (i.e. 7.0 x (1+25%) x (1-20%) = 7.0 which is higher than my mid-point multiple of 6.25.

[59]     Mrs Harley submitted that Mr Lyne’s calculation of the multiple was in error because he applied the control premium to the EBITDA multiple which is used to value the enterprise as a whole whereas, as Mr Dent explained in evidence, the control premium is applied to the equity of the business, i.e. the enterprise value less debt.  He said the premium should have been much lower than 25 per cent when applied to an EBITDA multiple.  On the basis of this evidence, Mrs Harley presented what she said was a “correct calculation” of the premium which led to a corrected multiple of 5.31 per cent.

[60]     I am by no means persuaded that Mr Lyne’s evidence was in error on this issue.  He did not apply the control premium of 25 per cent to his preferred multiple. He used it, and the marketing discount which effectively cancelled it out, in fixing a comparable multiple for Tenon.  He was asked in cross-examination how the control premium affected his choice of multiple.  After being quizzed about the quantum of the premium, and rejecting a suggestion that 25 per cent was at the “high end”, he was asked:

Q.       Well, let’s just take the controlled premium out all together for the moment.  Do you agree that you get a multiple of 5.6 without that controlled premium being taken into account?

To which he replied:

A.        Yes, mathematically you would, yeah.

[61]     The questioner (Mr Carruthers QC) then went on to another topic.  Mr Lyne was not asked to explain how omission of the control premium reduced the multiple from 6.25 to 5.6.  The evidence of Mr Dent on the issue was never put to him.  What is clear, however, is that for the purpose of the Claymark multiple, the premium was much less than 25 per cent (11 per cent actually), indicating that Mr Lyne was alive to the need to apply a reduced premium for the purpose of valuing the equity of the business.

[62]     All three experts had said in evidence that in the end, the choice of a multiple is a matter of judgment and not a strictly arithmetical process. As Mr Dent said:

At the end of the day, you have to reach a view as to whether you know, the overall  valuation,  irrespective  of  the  component  parts  that  you  use  to calculate that valuation, whether the overall number is plausible and that’s got to be the ultimate influence on you know your view.

[63]     Judge Munro gave careful consideration to the multiple which she identified as the major cause of the radically disparate valuations of the three experts.  She referred to the comparisons made with other companies, including Tenon, and went on to say:

[129]   In addition to comparing with other companies, and in particular Tenon, Mr Lyne has taken account of negotiations which were undertaken in late 2010 between Claymark and Carter Holt Harvey for the purchase of their Profiles business.   Although the evidence was that this proposed acquisition did not proceed, the figure was arrived at utilising a multiple of

6.84.

[130]    Mr Dent was less specific as to the basis of his choice of multiple. He took into account statistics from Biz Stats, which are very much smaller companies, and also his experience and knowledge from his involvement with primary industries, although was not specific as to the companies.  He accepted Tenon as being the closest comparable opinion.

[131]    The major difference between the multiple adopted by Mr Lyne and Mr Dent, however, relates to the inclusion of a control premium.  Mr Lyne has adopted a control premium of 25 percent and a marketability discount of

20  percent.    Mr  Dent  has  also  included  a  marketability  discount  of  20 percent.  If Mr Lyne’s choice of multiple did not include a control premium, the multiple would be 5.6, as opposed to Mr Dent’s multiple of 5.2.

Control premium

[132]    My  Lyne’s  opinion  is  that  it  is  appropriate  to  include  a  control premium where 100 percent of the shares in the company are for sale.  It was Mr Hagen’s evidence that it is appropriate to include a control premium where the owner can influence cashflows.  There is no evidence to support the proposition that this is not such a business.  Indeed, it has been argued for Mr Clayton that the success of the business is largely due to his personal efforts, the relationships he has built up and the markets that he has developed.   I accept that in this case it is appropriate to include a control premium, together with a marketability discount.

[64]    It is clear that the Judge fully appreciated the arguments for and against including a control premium.  Her decision to prefer the evidence of Mr Lyne is clearly and persuasively articulated.  There is nothing to indicate error in the way the control premium was factored into the multiple advocated by Mr Lyne which was well within the available range and supported by, amongst other things, the Tenon multiple and the multiple adopted for the purpose of the Carter Holt Harvey negotiations referred to by the Judge.

Appeal by trustees

[65]     The first to seventh appellants are trustees of seven trusts which were the subject of the following orders in the Family Court:8

(h)       The assets of the Vaughan Road Property Trust vest in Mr Clayton personally, and as such, Mrs Clayton is entitled to be compensated for one half of their net value as at 31 March 2011.

(i)       Mrs Clayton is entitled to share equally in the net equity in the assets of all other Trusts as at 1 March 2011.

[66]     Mr Clayton, as trustee of the Vaughan Road Property Trust, says that Judge Munro erred in holding that the Vaughan Road Property Trust was “illusory” and the property of the Trust, for the purpose of the proceeding, is property in the hands of Mr Clayton personally.

[67]     The remaining appellants, trustees of the six other trusts, say that the Judge erred in finding that dispositions to those trusts were made with intent to defeat

Mrs Clayton’s interests pursuant to s 44 of the Act.

8      At [139](h) and (i).

Vaughan Road Property Trust

[68]     The Vaughan Road Property Trust was settled by Mr Clayton on 14 June

1999.  He is the sole trustee.  The discretionary beneficiaries include Mr and Mrs

Clayton. Their children are the final beneficiaries.

[69]     The Trust was set up for the purpose of separating the land and buildings from the operating assets of the Claymark group.  The business had encountered financial difficulties during the 1990’s.  The decision was made to transfer the real estate which would be leased back to the operating companies.  The rental income would  support  borrowings  from  the  Bank  of  New  Zealand  (BNZ)  which  were secured over the land.   The Trust acted as banker to the Claymark companies, borrowing from the BNZ and making advances to companies in the group.

[70]     In the Family Court it was submitted for Mrs Clayton that the Trust is a sham by virtue of Mr Clayton’s powers as trustee, including the power to appoint and remove trustees and beneficiaries.   This was said to amount to a bundle of rights which could be classified as property in the hands of Mr Clayton.   The Judge observed, however, that the bundle of rights doctrine had “received some critical attention in recent times and been dealt something of a blow in ... Financial Markets

Authority v Hotchin”,9  with Winkelmann J holding that the power of appointment

does not amount to property because, once exercised, the power transfers to the new trustee to exercise at his or her discretion.

[71]     Judge Munro said there were, however, two aspects to the trust deed which called into question the existence of a trust.  The first relates to the requirement that trustees  are  accountable  to  the  beneficiaries.     She  quoted  in  support  of  this proposition the following passage from Armitage v Nurse:10

... there is an irreducible core of obligations owed by the trustees to the beneficiaries and enforceable by them which is fundamental to the concept of a trust.  If the beneficiaries have no rights enforceable against the trustees there are no trusts.

9      Financial Markets Authority v Hotchin HC Auckland CIV-2010-404-8082, 6 May 2011, Winkelmann J.

10     Armitage v Nurse [1998] Ch 241 (CA); [1997] 2 All ER 705 at 713 per Millett LJ.

[72]     Judge Munro found that two provisions of the trust deed negated the ability of beneficiaries to call the trustee to account.  They were cl 11 and cl 19.1(c) which, respectively, provide:

11        Tr ust ees’  di scr et i on  unfett ered

11.1      For the avoidance of doubt and notwithstanding anything in this deed or any rule of law which imposes upon a trustee the duty to act impartially towards beneficiaries, the trustees shall have unfettered discretion as to the exercise of the powers and discretions conferred upon them by this deed even though:

(a)      The interests of all beneficiaries are not considered by the trustees;

(b)       The exercise would or might be contrary to the interests of any present or future beneficiaries;

(c)       The exercise results at any time or whether before or on the vesting day in the whole or at any part of the capital or income of the trust being distributed to any one beneficiary or to any two or more beneficiaries in equal or unequal proportions in either case to the exclusion of the other beneficiaries.

19        Tr ust ees’  confl i ct  of  int er est

19.1     Negation of conflict.  A trustee may act as such and exercise all of

that trustee’s powers and discretions notwithstanding that:

(a)       That trustee is associated as a director or otherwise in a private capacity or as trustee of any other trust with any company or other person to which the trustees sell or lease any property forming part of the trust fund or in which the trustees hold or propose to acquire shares, securities or other rights as part of the trust fund or with which the trustees otherwise deal as trustees of the trust; or

(b)       That trustee may be a trustee of any other trust to or from which the trustees propose to sell or purchase shares, securities or other rights or property or with which the trustees otherwise deal as trustees of the trust; or

(c)       The interests or duty of that trust in any particular matter may conflict with the duty of that trustee to the trust fund or any beneficiary; or

(d)       Such trustee with personally purchasing or taking on lease any property forming part of the trust fund or personally selling any property to become part of the trust fund or is otherwise dealing with the trust fund in a personal capacity as well as that of a trustee.

[73]     The Judge said:

[78]      The  provisions  of  Clause  11  taken  in  conjunction  with  Clause

19(1)(c) negate the ability under this deed for the beneficiaries to call the trustee  to  account  in  the  exercise  of  his  discretion.    The  beneficiaries therefore have no rights under this deed enforceable against the trustee.

[74]     The second matter referred to by the Judge arising from the trust deed is what she described as “a power of revocation” contained in cl 23 which relevantly provides:

23       Amendment of trust deed

23.1The trustees may, with the prior written consent of the principal family member while the principal family member is living at any time or times during the trust period and without infringing the rules against perpetuities, vary, revoke or enlarge all or any of the provisions  of  this  deed  concerning  the  management  or administration of this trust.

[75]     The Judge, noting that the principal family member is Mark Clayton, said the power to revoke the Trust lies entirely with him.  She referred to TMSF v Merrill Lynch Bank and Trust Company (Cayman) Limited11 in which the Privy Council considered the nature of a settlor’s unfettered power to revoke a trust.  She quoted the  following  passage  which  summarised  part  of  the  appellant’s  argument  on appeal:12

A settlor of a trust who has an unfettered power of revocation is entitled to call for the trust assets to be paid over to him at any time for any reason or for no reason.  Such a right is, for most practical purposes, tantamount to ownership.    The English authorities, going back to Sugden, have acknowledged that there may be very little difference between the power to appoint a trust property and ownership of the property itself.  The powers of revocation are not fiduciary powers and are assignable and/or delegable and there is no rule that the person holding the power cannot be ordered to exercise it.

[76]     The  Judge  distinguished  the  power  to  revoke  a  trust  from  the  power  to appoint and remove trustees.  It is, she said, a dispositive power which can be exercised selfishly without regard to the interest of others.  She went on to refer in

general terms to other aspects of the trust deed and the manner in which the Trust

11     TMSF v Merrill Lynch Bank and Trust Company (Cayman) Limited [2011] UKPC 17.

12 At [28].

had been administered which “also indicate that this Trust is a convenient structure for commercial purposes, but carries few of the hallmarks of a trust”.13

[77]     The Judge referred to evidence that, although sole trustee, Mr Clayton did not in fact make decisions regarding the administration of the Trust.  She said those are made  by  two  of  his  advisors,  Mr  Cheshire  and  a  Mr  Waldron,  on  a  purely commercial basis.  Mr Cheshire said they made decisions and simply placed the necessary  documentation  in  front  of  Mr  Clayton  to  sign.    Judge  Munro  said Mr Clayton professed to have very little knowledge of what was contained in any of the documents.  Noting his role as settlor, sole trustee, principal family member and discretionary beneficiary and to his having the power to revoke the trust and to

appoint and remove trustees and beneficiaries, she concluded:14

I find that Mr Clayton has total control over this trust without the need to account to the beneficiaries and to the extent that he may revoke the trust in his favour at any time.  For these reasons I find that the basic elements of a trust are not met and that the property of the Vaughan Road Property Trust, for the purposes of these proceedings, is property in the hands of Mr Clayton personally.  The Trust is illusory.  It follows that any debts owing to the Vaughan Road Property Trust are debts owing to Mr Clayton.  Any current account that the Vaughan Road Property Trust has with any other entity is effectively a current account owned by Mr Clayton.

Discussion

[78]     Judge Munro found the Trust to be illusory.  She did not find it to be a sham, as she had been invited to do.  In argument there was a tendency to use the terms interchangeably.  But the two concepts are quite different and the distinction is important.  As Diplock LJ said in his classic definition of a sham in Snook v London and West Riding Investments Limited15 at 802:

... it means acts done or documents executed by the parties to the “sham” which are intended by them to give to third parties or to 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.

A trust will be a sham where there is an intention to have an expressed trust in

13 At [83].

14     M A C v M A C FC Rotorua FAM-2007-063-000652, 2 December 2011 at [85]

15     Snook v London and West Riding Investments Limited [1967] 2 QB 786 at 802.

appearance only.16  As was said in A v A and St George Trustees Limited & ors:17

The court must find that the settlor and the [trustee(s)] had the intention that the true position should be otherwise than as is set out in the trust deed which they both executed.

[79]     There is nothing to suggest that the Vaughan Road Property Trust is a sham. It is clear that Mr Clayton intended to create a trust and intended to do so for legitimate business purposes.  The issue, as the Judge correctly identified, is whether the trust is illusory.  That, to adopt the words of Winkelmann J in FMA v Hotchin,18 requires a consideration of whether in light of the provisions of the trust deed, Mr Clayton retains such control that the proper construction is that he did not intend

to give or part with control over the property sufficient to constitute a trust.

[80]     In holding the Trust to be illusory, the Judge found that cls 11 and 19.1(c) of the trust deed19 negated the ability of the beneficiaries to call the trustee to account. She impliedly accepted that those provisions eliminated what Millet LJ described in Armitage v Nurse as the “irreducible core of obligations” owed by trustees to beneficiaries.20   The Judge’s finding needs to be tested against what Millet LJ went

on to say were the core obligations.  He said:21

The duty of the trustees to perform the trusts honestly and in good faith for the benefit of the beneficiaries is the minimum necessary to give substance to the trusts, but in my opinion it is sufficient.

[81]     In my view, the provisions of the Trust relied on by the Judge do not erode those core obligations.  Clause 11 allows the trustee to act without considering the interests of all beneficiaries; contrary to the interests of any present or future beneficiaries; and whether the decision results in capital or income being distributed unequally between beneficiaries.  This does not, so it seems to me, excuse the trustee from acting honestly and in good faith.  It merely relieves him from the obligation to

act impartially towards beneficiaries.

16     Official Assignee v Wilson [2007] NZCA 122, [2008] 3 NZLR 45 (CA) at [26].

17     A v A and St George Trustees Limited & ors [2007] EWHC 99 (Fam) at [37].

18     FMA v Hotchin [2012] NZHC 323 at [30].

19 Quoted at [76] above.

20 See [75] above.

21     Armitage v Nurse [1998] Ch 241 (CA); [1997] 2 All ER 705 at 713.

[82]   Clause 19 is to broadly similar effect.   It allows the trustee to act notwithstanding his having an interest that might otherwise disqualify him.  It does not relieve him of the duty to perform the trusts honestly and in good faith.

[83]     The second matter which the Judge found to militate against the creation of a trust is the power of revocation in cl 23.22   In reaching this view, Judge Munro relied on the passage quoted in TMSF v Merrill Lynch.23   However, the power of revocation in this case is markedly different from the power at issue in that case which was in the following terms:

This Trust may be revoked, amended, varied or altered in any manner whatsoever from time to time and at any time by the Settlor by deed and delivered to the Trustees provided always that no such revocation, amendment, variation or alteration shall take effect until actual receipt of such instrument by the Trustees or with the written consent of the Trustees thereto if such revocation, amendment, variation or alteration would increase or extend the obligations, liabilities or responsibilities of the Trustees.

[84]     As the Privy Council found, the power of revocation in this clause conferred on the trustee rights tantamount to ownership and cannot be regarded in any sense as a fiduciary power.24     The power in the present case is much more limited.   It is directed only to the provisions of the trust deed which concern the management or administration of the trust.  It does not confer on the trustee any power to deal with trust property as he pleases.

[85]     However, there are other provisions of the trust deed, not referred to by Judge Munro, which, in my view lead irresistibly to the conclusion that Mr Clayton indeed retained powers tantamount to ownership of trust property.

[86]     As  earlier  mentioned,  Mr  Clayton,  as  principal  family  member,  is  a discretionary beneficiary and has the power to appoint and remove trustees.25    He became the sole trustee.  The trustees have full discretionary power to pay income and capital to beneficiaries.  Clause 4.1 relevantly provides:

4         INCOME DISTRIBUTION

22 Quoted at [77] above.

23     TMSF v Merrill Lynch, above n 11, at [78] above.

24     At [59] and [62].

25     Trust Deed cl 17.1.

4.1Distribution: The Trustees may, after payment of all expenses and other charges to be met from income, and after making or retaining out of, or charging against, the income of the Trust Fund any payments, reserves or other provisions for any of the purposes of the Trust:

(a)       pay or apply all or any part of the income of the Trust Fund to or for such one or more of the Discretionary Beneficiaries who are then living or in existence;

...

Clause 6 provides:

6        DISTRIBUTION OF CAPITAL BEFORE THE VESTING DAY

6.1      The Trustees may at any time:

(a)       pay or apply all or any part of the capital of the Trust Fund to or for such one or more of the Discretionary Beneficiaries who are then living or in existence;

(b)       appropriate all or any part of the capital of the Trust Fund for such one or more of the Discretionary Beneficiaries who are then living or in existence contingently upon the reaching of a specified age or the happening of a specified event.

[87]     Clause 12 of the trust deed confers on the trustees the powers of an owner, providing as follows:

12       POWERS AND DISCRETIONS OF TRUSTEES

12.1Powers: To achieve the objects of the Trust, the Trustees shall have in the administration, management and investment of the Trust Fund all the rights, powers and privileges of a natural person and, subject always to the trusts imposed by this deed, may deal with the Trust Fund as if the Trustees were the absolute owners of and beneficially entitled  to  the  Trust  Fund  and,  accordingly,  in  addition  to  any specific powers vested in the Trustees by law, in dealing with the Trust Fund or acting as Trustees of the Trust, the Trustees may do any act or thing or procure the doing of any act or thing or enter into any obligation whatever, including, without limitation, exercising unrestricted powers to borrow and raise money, and to give mortgages, other securities, guarantees and indemnities.

12.2Discretions: Except at otherwise expressly provided by this deed, the Trustees may exercise all the powers and discretions vested in the Trustees by this deed in the absolute and uncontrolled discretion of the Trustees at such time or times, upon such terms and conditions and in such manner as the Trustees may decide.

12.3Appropriate  funds:  The  powers  and  discretions  vested  in  the Trustees by law or by this deed may be exercised by the Trustees both in respect of the Trust Fund and, in respect of any property held by the Trustees but appropriated, credited on account or otherwise held for any Beneficiary, contingently or otherwise.

12.4Investment discretion: In exercising their powers of investment the Trustees  may  acquire  any  property,  or  retain  or  deal  with  any property which from time to time comprises the whole or part of the Trust Fund notwithstanding that any act or omission by the Trustees in the exercise of those powers and discretions would be, or could be, contrary to the principles governing the investment of trust funds set out in the Trustee Act 1956.  This clause expresses a “contrary intention” for the purposes of section 13D of that Act.

12.5Unanimous approval: Where there is more than one Trustee in office, except as provided in this deed, all powers and discretions of the Trustees shall be exercised with the unanimous approval of the Trustees.

[88]     Finally, and in my view, critically, cl 14 provides as follows:

14       TRUSTEE/BENEFICIARY

14.1Self benefit: A Trustee who is also a Beneficiary may exercise any power or discretion vested in the Trustees in his, her or its favour.

[89]     Many of the provisions of the trust are identical to or not materially different from those in Hotchin where Mr Hotchin, though neither a trustee or beneficiary, had the power to appoint himself sole trustee and a beneficiary.  As in the case of the Vaughan Road Property Trust, the deeds conferred unfettered discretion upon the trustees  to  distribute  the  property  without  considering  the  interests  of  any

beneficiary, including future beneficiaries.26    However, the trust deeds in Hotchin

contained a prohibition on self-dealing.  Whereas cl 14.1 of the deed in this case expressly permits a trustee who is also a beneficiary to exercise any power or discretion in his or her own favour, Mr Hotchin could not use control as a trustee to distribute trust property to himself.  The provision on self-dealing was critical to Winkelmann J’s conclusion that a claim that the trusts were illusory had no prospect of success.

[90]     In  contrast,  the  provisions  of  the  Vaughan  Road  Property  Trust  give

Mr Clayton unfettered power to distribute the income and the capital of the trust to

26     Hotchin, above n 18, at [40].

himself  if  he  wishes  and  to  bring  the  trust  to  an  end  at  any  time  he  pleases. Mr Clayton effectively retained all the powers of ownership.  What he has in fact done  is  neither  here  nor  there,  although  it  appears  that,  through  his  delegates, Mr Clayton exercises, in a practical sense, the powers of ownership.  It is what he has the legal power to do that is important and that is basically to do whatever he wants with trust property.  Within a largely conventional framework the trust deed provides an appearance of separation.  The reality is, however, that if he chooses to, Mr Clayton is able to deal with trust property just as he would if the trust had never been created.

[91]     I  am  led  inexorably  to  the  conclusion  that,  as  Judge  Munro  found,  the

Vaughan Road Property Trust is illusory.

Remaining trusts – setting aside dispositions

[92]     In 2003, Mr Clayton obtained an opinion from Vivienne Ullrich QC27  as to the risks to Mr Clayton of a marital separation, including a consideration of the efficacy of the pre-nuptial agreement.  There was concern that a separation may present  a  significant  risk  to  Mr  Clayton’s  business  interests.    The  advice  of Ms Ullrich was not disclosed but, as the Judge put it, “it is of note” that Mrs Clayton was not a beneficiary of three trusts set up in 2004.  No explanation for her exclusion was put forward in evidence.

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

[93]     These are two of the three trusts set up in 2004.   They were settled by Mr Grant Dunn, solicitor.  The trustees of both are Mr Clayton and Mr Cheshire.  Mr Clayton has the power to appoint new trustees.  The discretionary beneficiaries are (of SCET) Stacey Clayton and (of ACET) Anna Clayton.   Other discretionary beneficiaries  of  both  trusts  are  Mr Clayton  himself,  any  nominated  business associate, employee or consultant of any business connected with him, any child,

grandchild or great grandchild of Stacey or Anna respectively, any relative of Mark

27     Now Judge Ullrich, a Judge of the Family Court.

Clayton and companies, trusts and charitable organisations.   Mrs Clayton is a conspicuous omission.

[94]     Judge Munro noted also that, while the trusts were ostensibly set up for the benefit of Stacey and Anna, neither is a final beneficiary and there is nothing to indicate that they have any greater entitlement than any of the other discretionary beneficiaries.  Clause 4 of each trust deed provides as follows:

4        Capital

4.1At any time before the date of distribution the trustees may pay the whole or any part of the capital of the trust fund to any one or more of the discretionary beneficiaries.

4.2At any time before the date of distribution, Mark Arnold Clayton may at any time require that the trust fund be resettled into another or two or more trusts identical to this trust.

4.3      If the trustees are considering paying capital under Clause

4.1   to   a   discretionary  beneficiary   who   is   entitled   or potentially entitled to a benefit on the date of distribution under Clause 4.4, then as a condition of the payment under Clause 4.1, the trustees can adjust the settlement or potential settlement under Clause 4.4 of the discretionary beneficiary and/or any other person entitled or potentially entitled under this clause, in such manner as the trustees consider appropriate.

4.4Subject to any adjustment in terms of Clause 4.3 on the date of distribution, the trustees shall distribute the trust fund to those of the discretionary beneficiaries who are living at the date of distribution and if more than one in equal shares.

4.5If no person takes a vested interest in the trust fund on the distribution date under the provisions of Clause 4.4, the trustees must distribute the trust fund or balance remaining to any one or more of the discretionary beneficiaries who are living at the date of distribution and in such shares as the trustees in their absolute discretion determine.

[95]     Each trust owns a section in Collingwood Drive, Brunswick Park, Rotorua and a half share in land at 33 View Road, Rotorua on which one of the Claymark sawmills operates.   The two sections were acquired in 2005.   The deposits were funded by part of the proceeds of sale of a holiday property at Lake Rotoiti which had been bought for $410,000 in 2003 and held in the name of Rotoiti Resorts Limited.  It was sold for approximately $600,000 in 2005.

[96]     The Carter Holt sawmill business at View and McCloskey Roads in Rotorua was acquired by Rotorua Sawmill Limited in 2004.   The land on which the sawmill was sited was acquired by SCET for $450,000 and ACET for a little over $300,000. It appears that the cost of purchase was funded by borrowings.

[97]     As at 31 March 2006, the trusts each owed $370,000 to Mr Clayton and other entities with the major creditor being the Vaughan Road Property Trust which had advanced a little over $300,000 to both trusts.  Judge Munro said it was clear that these advances are assets in the hands of Mr Clayton, given that he was and remains a 100  per  cent  shareholder of  each  of the  creditor companies.    She  noted that Mr Clayton had also gifted $20,000 to each trust.

[98]     The Judge concluded:

[92]      Section 44 involves the phrase “intent to defeat the claim”.   The High Court in Ryan v Unkovich [2010] 1 NZLR 434 has accepted that the test in s 44 is analogous to that in s 60 Property Law Act. However, it appears from the authorities that a disposition to a trust for commercial purpose, in the knowledge that the interests of the spouse would be defeated, may not of itself meet the test in s 44 of “intent to defeat the claim”. In these trusts, as will be the case in many trusts, the purpose of setting up the trusts may well have been several. However, the irresistible conclusion that must be reached in relation to these trusts is that an intention to defeat Mrs Clayton’s interests was uppermost in Mr Clayton’s mind, given that she was specifically excluded from the wide-ranging list of discretionary beneficiaries. The gift of $20,000, together with the interest free advances by Mr Clayton and his companies are dispositions of property. I find that s 44 applies in respect of these two trusts, in that there have been dispositions of property with the intent to defeat Mrs Clayton’s interest.

[93]      Mrs Clayton is entitled to a half share in the current equity of the properties owned by these Trusts.

[99]     Mr Carruthers took issue with the Judge’s finding that Mrs Clayton is not a beneficiary of the Trusts.  He pointed out that the discretionary beneficiaries include “any relative of Mark Clayton”.  He referred to Black’s Law Dictionary28 which defines “relative” as:

A person connected with another by blood or affinity ...

And, to the definition of “relative by affinity”, as:

28     Bryan Garner Black’s Law Dictionary (9th ed, Thompson Reuters, Minnesota, 2009).

A person who is related solely as the result of a marriage and not by blood or adoption; ...

It follows, Mr Carruthers submitted, that Mrs Clayton was a relative of Mr Clayton at the material time.

[100]   I am unable to accept that submission.   In my opinion, unless the context clearly requires otherwise, the term “relative” cannot be construed as covering singular relationships such as those of spouse and child.   If there had been an intention to benefit Mrs Clayton, she would have been identified by name or as Mr Clayton’s spouse, as she was in the Vaughan Road Property Trust for example.

[101]   Of greater substance is the further submission that, contrary to the Judge’s finding, there was in fact no disposition.  Mr Carruthers submitted that the finding that  Mr Clayton  made  a  gift  of  $20,000  to  each Trust  is  not  supported  by the evidence.  However, it appears that the proceeds of sale of the  Rotoiti property were used to fund the deposits.  There is nothing to indicate any obligation to repay those amounts.  The balance of the cost of acquiring the land appears to have been met by way of advances from the Vaughan Road Property Trust or bank borrowing.

[102]  In my view, the Judge’s finding that the land was acquired by the two “educational” trusts and dispositions made for that purpose were with the intention of defeating Mrs Clayton’s claim is fully justified. The omission of Mrs Clayton as a beneficiary during the subsistence of the marriage admits of no other rational explanation.  It is relevant too that the land on which the sawmill stands which was acquired (it appears) for a total of $750,000, was valued in the accounts of each trust as at 31 March 2011 at $1.28m.  I was told the land was transferred at book value at the vendor’s request.  I infer that significant unrealised profits arose on the transfer of the land to the trust.

Denarau Resort Trust

[103]   The Denarau Resort Trust was established in 2007 for the purpose of holding an investment in two apartments in the Denarau Resort in Fiji.  Mr Clayton agreed to

purchase the apartments “off the plans” in 2006 before the parties separated.  By the

time the purchase was completed, they were apart.

[104]   According to Mr Geisber, a chartered accountant who is the Chairman of the

Board of Directors of the Claymark Group, the total cost of the apartments was

$706,563 and the accounts show advances to the Trust of $583,887 by the Colonial Bank, Fiji and, by the Vaughan Road Property Trust, of $277,499, leaving negative equity of $154,823.

[105]   The judgment confirms29 that the purchase was funded in part by a loan from a Fiji bank and in part by what is described as “an advance from a former property trust”.30    Mr Clayton’s evidence was that the balance of the deposit came from the proceeds of sale of the Lake Rotoiti property.  He said the balance of the purchase price came from the bank loan.

[106]   Against this background, the Judge concluded as follows:

[99]      Property acquired after separation is prima facie separate property so that any interest that Mr Clayton has in the Denarau Resort Trust would be his separate property.  However, s 44 includes any disposition of property during the marriage.  Whilst the parties separated at the end of 2006, the marriage was not dissolved until 2009.  Mr Clayton disposed of property to the Denarau Resort Trust by way of payment of a deposit and by way of the advance from the Vaughan Road Property Trust.  This disposition has had the effect of defeating Mrs Clayton’s interest, again, given that she has no beneficial interest in the Trust. Accordingly, Mrs Clayton is entitled to a half share in the equity in these apartments.

[107]   Mr  Carruthers  again  submitted  that,  as  Mrs  Clayton  was  a  relative  of

Mr Clayton, she was a discretionary beneficiary until the marriage was dissolved on

20 March 2009.  For the reasons already discussed, I reject that submission.

[108]  It is then submitted that, in any event, the two payments identified by the Family Court could not constitute dispositions for the purpose of s 44.  For this purpose, Mr Carruthers argued that the property disposed of had to be relationship property.  That is incorrect.  Section 44(1) refers to a “disposition of property”.  Such

property may be relationship property but it does not have to be.   It can be any

29 At [97].

30     This appears to have been a typographical error. “Former” should read “Vaughan Road”.

property as the definition of “property” in s 2 of the Act makes clear.31   That said, a disposition of separate property or property vested in a trust is unlikely to be made in order to defeat a claim except as part of a transaction which has that outcome.  The difficulty I have is in establishing just what the outcome was in the case of the Denarau Trust.

[109]   I find it impossible on the basis of the Judge’s decision, the submissions of counsel and the evidence to which I have referred, to obtain a clear picture of how the purchase was funded.  No accounts for the Trust were produced.  As far as I am aware, there is no evidence of the amount of the deposit paid from the proceeds of sale of the Rotoiti  property (or what  those  proceeds  amounted  to  and  how the balance of them was disposed of).  Furthermore, on the information available, the borrowings of the Trust exceed the value of assets. The order made by the Judge that Mrs Clayton share equally in the net assets of the Trust may not be an effective remedy.  The better course may have been to order under s 44(2)(b) that the Trust pay to Mrs Clayton one half of the amount contributed to the purchase from the proceeds of sale of the Rotoiti property.

[110]   I am left in doubt whether there are grounds for an order under s 44 and, if there are, that the order made is the right remedy.  In the circumstances, I propose to allow the appeal against this aspect of the judgment and to refer the issue back to the Family Court for further evidence to be adduced and the question of remedy reconsidered.

Sophia No 7 Trust

[111]  The Sophia No 7 Trust was established on 2 September 2008 to hold the property at 7 Sophia Street, Rotorua.  The settlor was Mr Perry, a solicitor.  The sole

31     See also Nicola Peart (ed) Brookers Family Law – Family Property (online looseleaf ed, Brookers) at PR44.02 where Professor Peart says:

In contrast to s 44C the disposition need not be of relationship property. The view expressed in JG v JBG FC North Shore FAM-2007-044-591, 13 July 2010 at [63] that s 44 would apply only if the applicant had an entitlement in the asset transferred at the time of the transfer is not correct. It is only at the time when the disposition is challenged, at the end of the relationship, that the classification of the asset becomes relevant.

trustee is Deborah Vaughan, Mr Clayton’s sister.   The beneficiaries are Deborah

Vaughan, her children and any relative of hers, which includes Mr Clayton.

[112]   Mr Clayton was the successful bidder at an auction of 7 Sophia Street.  He signed the sale and purchase agreement and paid the deposit.  A deed of nomination was then executed contemporaneously with the signing of the Sophia No 7 trust deed nominating the trustee to purchase the property.

[113]   Ms Vaughan said she did not recall signing any documents in relation to the Trust, although she conceded that she may have.  She became aware that she was a trustee only when she received the rates demand for the property.  She regards her brother as the owner of the property.  She knows nothing about the way in which the property was purchased and has made no decisions in relation to the property or the Trust.  Mr Clayton was unable to explain why the Trust was set up for the benefit of his sister and her children.

[114]   The Judge found the purchase price of the property was $277,000.  She noted Mr Clayton’s evidence that $140,000 of the purchase price was advanced from the Vaughan Road Property Trust.  On the basis that the deed of nomination amounts to a  disposition  in  terms  of  Re  Polkinghorne  Trust32   she  held  that  the  deed  of nomination was a clear attempt to defeat Mrs Clayton’s interest in the funds used to purchase the property.  She concluded that Mrs Clayton is entitled to a one half share in the equity in the property.

[115]   Some of the documents to which I was referred shed a little more light on the way in which the purchase of the property was funded.  According to the schedule prepared by Mr Geisber, the property was bought for $320,000 and funded as to

$142,615 by an advance from the Vaughan Road Property Trust with Mr Clayton personally advancing $137,000.  The equity in the Trust is accordingly $40,385.  The advance by the Vaughan Road Properties Trust is confirmed by enquiries made by a chartered accountant, Bruce Warden, who said that $140,000 with the reference “BNZ Term Loan” was deposited into the Vaughan Road Properties Trust on 2

September 2008 and transferred out on the same day.  The payment was debited to

32     Re Polkinghorne Trust (1988) 3 FRNZ 636.

the Denarau Trust but Mr Warden says that appears to be a mistake as the payment was made on the day on which the purchase of the Sophia Street property settled.

[116]   Mr Carruthers submitted that the Family Court erred in finding that the deed of nomination was an attempt to defeat Mrs Clayton’s interest in the funds used to purchase the property.  However, in the absence of an explanation by Mr Clayton, the purchase of the property by a trust ostensibly set up to benefit his sister and her family but in reality having no connection with them, clearly appears to have had the purpose of putting property beyond the reach of Mrs Clayton.

[117]   I see no reason to disturb the Judge’s finding in that regard though, once again, I have reservations about the remedy she adopted.  I consider that further enquiry is required to establish the purchase price and the way in which it was funded before determining the value of property which was disposed of and in which Mrs Clayton may be entitled to claim an interest.  I propose to remit this aspect of the case back to the Family Court for reconsideration.

Chelmsford Trust

[118]  The Chelmsford Trust was established on 2 June 2009.   The trustee is Chelmsford Holdings Limited.  Mr Clayton is the sole beneficiary of the trust and has the power to appoint or remove trustees.  The trust purchased properties at Oasis Place and Gwendoline Street, Rotorua in 2009.   The trustee purchased the Oasis Place property pursuant to a deed of nomination which included the following provision:

COVENANTS:

1        DECLARATION OF TRUST

1.1Trustee holds property.  The Trustee declares that it will hold the Trust Property in trust for the Beneficiary.

1.2Trustee will transfer property.  At the request and cost of the Beneficiary, the Trustee will transfer the Trust Property, or the benefit of the Trust Property, to the Beneficiary as and when the Beneficiary requires.

1.3      Trustee  will  deal  with property at  request  of  beneficiary.

Until the Trust Property is transferred to the Beneficiary the

Trustee will deal with the Trust Property as the Beneficiary requires.

[119]   The Oasis Place property is adjacent to the sawmill operation in Rotorua.  It was a strategic acquisition for business purposes.  The Gwendoline Street property is adjacent to the home of Mr Clayton’s mother.  Mr Clayton told the Court that he thought it would be beneficial to acquire the property so that his mother would be able to control who lived next door.

[120] The Oasis Place property was purchased for a little over $1m and the Gwendoline Street property for about $400,000.  (These figures are taken from the accounts of the Trust as at 31 March 2011.) The Judge found that the purchases were funded by a contribution of $40,000 by Mr Clayton, an advance of $370,000 from the Vaughan Road Property Trust and a loan from the BNZ of $1,106,000.  This exceeds  the  cost  of  the  properties  by  some  $100,000  and  may  not  be  entirely accurate.

[121]   The Judge concluded:

[111]    ... The effect of the purchase of these two properties through the trust again has been to place funds held by Mr Clayton and in the Vaughan Road Property Trust beyond the reach of Mrs Clayton.  The reality of this trust is that Mr Clayton has settled the trust with advances by himself and the Vaughan Road Property Trust, to the trustee to hold for Mr Clayton at his behest.   The effect has been to disenfranchise Mrs Clayton from any entitlement to those funds.   I find that Mr Clayton was well aware of this effect.  I find that s 44 applies.  Mrs Clayton is entitled to a one half share in the equity of both properties held by this Trust.

[122]   For Mr Clayton, it is said that the Judge has not identified any relationship property having been disposed of to fund the acquisition of the Chelmsford Trust properties.  It has not therefore been shown that there was a disposition for the purpose of defeating a claim by Mrs Clayton.  As I have already said, a disposition for the purpose of s 44 may be of any property.  The key issue is not the status of the property but  whether  the disposition  was  made  in  order to  defeat  the  claim  of Mrs Clayton.

[123]   The most reliable guide to the purpose of a course of action is its likely or achieved outcome.  The Judge found the effect of the transaction was to deny Mrs Clayton a claim to the funds disposed of: as the Judge said, “to disenfranchise” her. However, it is by no means clear that this was the likely or intended consequence. There is nothing to show where the $40,000 came from and that Mrs Clayton would have  any  right  to  a  claim.   At  the  time  Mr  Clayton  would  not  have  regarded Mrs Clayton  as  having  rights  to  claim  against  the  assets  of  the Vaughan  Road Property Trust.

[124]   On the present state of the evidence, I do not believe an order under s 44 is justified.  If it is, I doubt that the order made is an effective remedy.  If it is not, the application of s 44C will need to be considered.  Further evidence may be filed as required by the findings I have made and for the issues to be reconsidered.

Lighter Quay 5B Trust

[125]   This Trust was established on 1 September 2009.  Mr Cheshire is the settlor and New Zealand Trustee Services Limited is the trustee.  Mr Cheshire holds the power of appointment and is one of the discretionary beneficiaries, together with any trust of which he is a discretionary beneficiary and any charitable organisation. Neither Mr or Mrs Clayton are beneficiaries.

[126]  The Trust was formed to hold an apartment in Auckland, financed by an advance of $100,000 from the Vaughan Road Property Trust and a loan from the BNZ of $1,090,000.  The apartment was sold before the hearing and the proceeds of sale held pending orders in the Family Court.

[127]   Judge  Munro  said  it  is  clear  that  Mr  Cheshire  held  the  property  for Mr Clayton. That finding is not in dispute. The Judge concluded that s 44 applies by virtue  of  the  advance  from  the  Vaughan  Road  Property  Trust  which  defeated Mrs Clayton’s interest in those funds.  She held that Mrs Clayton is entitled to one half of the net sale proceeds.

[128]   As with the Chelmsford Trust, I have doubts whether a finding of intent to defeat under s 44 is available or that the order made is effective if it is.  Again, I consider  the  best  course  is  for  the  Family  Court  to  reconsider  the  issue  after receiving any further evidence necessitated by the finding in this judgment.

Cross-appeal

[129]  Mrs Clayton cross-appeals against the Judge’s refusal to make awards in relation to the Trust known as the Claymark Trust either pursuant to s 44C of the Act or s 182 of the Family Proceedings Act 1980.

[130]   The Claymark Trust was settled by Mr Clayton on 10 May 1994.  The first trustees were Mr Clayton, an accountant and a solicitor.  Mr and Mrs Clayton are discretionary beneficiaries and their two daughters are the final beneficiaries.

[131]   The Trust was established to acquire two properties in Katikati adjoining the sawmill there.  It also owns shares in Kaimai Development Limited which has an avocado orchid on the adjacent land.

[132]   Mr Clayton made three gifts of $27,000 to this Trust between 1995 and 1998. He has also made advances to the Trust.   As at 31 March 2010, he was owed

$60,365.

[133]   The Judge found that the Trust had operated as a bona fide business trust. She accepted evidence that it was set up for business purposes which included establishing a buffer between the mill and neighbouring properties to reduce difficulties obtaining resource consents.

[134]   The Judge was asked to find that the establishment of the Trust was a nuptial settlement in terms of s 182 of the Family Proceedings Act 1980.  It was argued that Mrs Clayton would have had an expectation of benefitting under the Trust had the marriage not been dissolved.

[135]   Judge Munro rejected the claim.  She said the Trust was not set up to provide for Mr and Mrs Clayton in the future; indeed, at the time it was established the parties  were  well  aware  there  was  a  pre-nuptial  agreement  in  place  which specifically excluded Mrs Clayton from sharing in any of Mr Clayton’s business interests.   The Judge found she could not, therefore, have had a reasonable expectation of a share in the property purchased by the Claymark Trust.  She found that Mrs Clayton’s claim in relation to the Claymark Trust is limited to a share in any debt owed by the Claymark Trust to Mr Clayton or to any entities which comprise property in the hands of Mr Clayton.

[136]   For Mrs Clayton, Ms Hunter challenges the Judge’s reasoning in relation to the claim under s 182 of the Family Proceedings Act and advances, in the alternative, a claim for compensation under s 44C of the Act which the Judge did not address.

Section 182 claim

[137]   Section 182 of the Family Proceedings Act 1980 relevantly provides:

182      Court may make orders as to settled property, etc

(1)       On, or within a reasonable time after, the making of an order under Part 4 of this Act or a final decree under Part 2 or Part 4 of the Matrimonial Proceedings Act 1963, a Family Court may] inquire into the existence of any agreement between the parties to the marriage or civil union for the payment of maintenance or relating to the property of the parties or either of them, or any ante-nuptial or post-nuptial settlement made on the parties, and may make such orders with reference to the application of the whole or any part of any property settled or the variation of the terms of any such agreement or settlement, either for the benefit of the children of the marriage or civil union or of the parties to the marriage or civil union or either of them, as the Court thinks fit.

...

(3)       In the exercise of its discretion under this section, the Court may take into account the circumstances of the parties and any change in those circumstances since the date of the agreement or settlement and any other matters which the Court considers relevant.

...

[138]   The scope and purpose of s 182 was discussed in Ward v Ward.33   In tracing the legislative history of the section34 the Court noted that ante and post-nuptial settlements envisaged and were premised on the continuance of the marriage.  If that premise ceased to apply, a fundamental change in circumstances came about which it

was recognised could give rise to an injustice.  Section 182 sought to remedy such injustice by giving the Court the power to review the settlement on dissolution of the marriage. The Court went on to say:35

... As already mentioned, a nuptial settlement, whether it be ante or post- nuptial, is premised on the continuation of the marriage.  When the Court is addressing an application under s 182, it must assess whether an order is necessary and, if so, in what terms, to reflect the fact that this fundamental premise no longer applies.   The expectations of the parties when the settlement was made may often have been defeated, at least in part, by the dissolution of their marriage.  One of the purposes of s 182 is to prevent one party from benefitting unfairly from the settlement at the expense of the other in the changed circumstances.  In that situation the order should be directed at eliminating the unfair benefit.   In Chrystall, Judge Inglis, who had considerable expertise in this field, placed substantial emphasis on the role of reasonable expectations in the s 182 assessment.

[139]   The judgment offered guidance on the approach to be taken under s 182 in the following passage:36

[25]     Based on the foregoing discussion we consider the proper way to address whether an order should be made under s 182, is to identify all relevant expectations which the parties, and in particular the applicant party, had of the settlement at the time it was made.  Those expectations should then be compared with the expectations which the parties, and in particular the applicant party, have of the settlement in the changed circumstances brought about by the dissolution.  The court’s task is to assess how best in the changed circumstances the reasonable expectations the applicant had of the settlement should now be fulfilled.  If the dissolution has not affected the implementation of the applicant’s previous expectations, there will be no call for an order.

[26]     Section 182(3) makes this point by directing the court’s attention to the circumstances of the parties.  By its reference to change of circumstances the subsection envisages that the parties’ circumstances, both as regards the settlement, and generally, are to be compared with their circumstances at the date of the settlement.  The court is also empowered by subs (3) to take into account any other matters it considers relevant. Among those matters it may, as here, be significant who established the settlement trust and, subject to subs (6), the source and character of the assets which have been vested in the

33     Ward v Ward [2009] NZSC 125, [2010] 2 NZLR 31.

34     At [14]–[17].

35 At [20].

36     At [25]–[27]

trust.  Obviously the terms of the settlement will be relevant, as will how the trustees are exercising, or are likely to exercise, their powers in the changed circumstances.  Also relevant, of course, are the interests of any children or other beneficiaries involved.  It is neither necessary nor desirable to attempt any comprehensive list of relevant circumstances because each case will require individual consideration.  No formulaic or presumptive approach should be taken.

[27]      It  can  therefore  be  seen  that  s  182  applies  if  the  applicant’s expectations of the ante or post-nuptial settlement have been wholly or partially defeated by the dissolution of the marriage.  The relief to which the applicant  is  entitled  in  those  circumstances  is  an  order  in  terms  of  the section, in whatever form is best suited to the circumstances, restoring those defeated expectations.  The parties should be restored to an appropriate way to the position they were in, as regards the settlement, immediately after it was made, not immediately before it was made.

[140]   Ms Hunter said that in deciding that s 182 did not apply, the Judge focused too heavily on the business operation of the Trust.  She said the purpose of the Trust from “an operational point of view” became a dominant consideration when the key consideration was the duty of the Trust to meet the expectations of the settlement and beneficiaries.  She said the purpose of the Trust itself is to be distinguished from the purpose of its acquisitions.  Ms Hunter submitted that, in any event, the Judge’s finding that the purpose of the Trust was to create a buffer was not strictly correct as that land was not purchased until 2000.   She acknowledged that the fact that the Trust was primarily established for business purposes should not affect the exercise of the s 182 jurisdiction although it may affect quantum.   If the Judge’s approach were correct, she said, it would mean that only settlements of domestic assets would qualify for consideration under s 182.

[141]   Ms  Hunter  was  also  concerned  that  the  Judge  appeared  to  have  been influenced  by  Mrs  Clayton’s  lack  of  knowledge  of  the  Trust.    She  said  that introduced a subjective element whereas the test is an objective one, directed to the expectation of the beneficiaries.

[142]  It is clear from the discussion in Ward, however, that all aspects of the expectations of the parties at the time of settlement must be considered.  They will not be confined to expectations which may be gleaned from the terms of the settlement itself. All relevant circumstances, including the knowledge and intentions of the parties, should be considered.

[143]   Having regard to such circumstances, I see no reason to differ from the Judge’s assessment of the expectations of the parties at the time the Trust was set up. It was undoubtedly formed for business purposes, the primary objective at the time, as Mr Cheshire put it, being to keep “assets out of the circle of bank guarantees”.  It achieved the secondary purpose of providing a buffer zone for resource consent purposes.  It had all the hallmarks of a conventional family trust.  There is nothing to indicate that it was perceived as a means by which Mrs Clayton would acquire an interest or expectation in business assets.  On the contrary, as the Judge pointed out, the ante-nuptial agreement, entered into a relatively short time before, excluded her from any claim to business assets.  There is no basis for a finding that the dissolution of the marriage affected Mrs Clayton’s expectations when the Trust was formed.

Section 44C

[144]   The Judge did not directly consider a claim based on s 44C of the Act which, by subsection (1), applies if the Court is satisfied:

(a)       that, since the marriage began, either or both spouses have disposed of relationship property to a trust; and

(b)the disposition has the effect of defeating the claim or rights of one of the spouses; and

(c)       the disposition is not one to which s 44 applies.

[145]   In Nation v Nation37 the Court of Appeal summarised the requirements for a successful claim under s 44C38. The disposition must be:

(a)       to a trust;

(b)      of relationship property;

(c)       made since the relationship began;

37     Nation v Nation [2005] 3 NZLR 46 (CA).

38 At [144].

(d)      made by either or both of the partners; (e)       one to which s 44 does not apply; and

(f)       one that has the effect of defeating the claim or rights of one of the partners.

[146]   The gifts totalling $81,000 and the loans of $60,365 were dispositions to a trust made by Mr Clayton since the relationship began.  The transfer of funds is a disposition even if it is made by way of an interest-free loan – Nation v Nation; Rabson v Gallagher.39    They could have had the effect of defeating Mrs Clayton’s claim or rights in the sense discussed in those cases.

[147]   Ms Hunter submitted that in terms of the Rabson v Gallagher paradigm, the Judge ought to have taken into account the ability of the Trust to utilise the gifts and advances to expand its asset base and to fund the activities of entities such as Kaimai Development.

[148]   In response, Mr Carruthers pointed to the Judge’s finding that:

[70]      ...  There  is  no  evidence  of  relationship  property  having  been disposed of to this Trust.  In terms of s 44, whilst there has been a disposition of $81,000 by Mr Clayton to this Trust by way of gifting, I do not find that there was any intention to defeat Mrs Clayton’s interest.   She is a discretionary beneficiary.

Mr Carruthers also pointed out that there is no power in s 44C to compensate out of the capital of a trust40  and argued that, in any event, the Court ought to exercise its discretion against making an order having regard to the factors in s 44C(4).

[149]   Section  44C  can  be  invoked  only  if  there  has  been  a  disposition  of relationship  property.     Judge  Munro’s  finding  that  there  is  no  evidence  of

relationship property having been disposed of is fatal to the claim under s 44C.

39     Rabson v Gallagher [2011] NZCA 459, [2011] NZFLR 1040 at [58].

40     See also Ward v Ward, above n 33, at [18].

Summary

[150]   I have upheld the Judge’s decision to set aside the prenuptial agreement; her conclusion that Mrs Clayton is entitled to a half share of the increase in value of Mr Clayton’s business assets and the basis on which she determined that business assets should be valued; and her findings in relation to the Vaughan Road Property Trust and the two educational trusts.

[151]   I have allowed the appeal as it concerns the valuation of the matrimonial home.  In relation to the other trusts, I have concluded that, for various reasons, the orders made should not stand and the question of whether orders should be made under s 44 of the Act reconsidered by the Family Court.  At the same time it will be necessary, if Mrs Clayton pursues them, for the Family Court to consider alternative claims brought in relation to the trusts which were not considered, having regard to the findings made by the Judge under s 44 of the Act.   Ms Hunter invited me to consider those alternative claims, relying on submissions made in the Family Court but clearly that is not an available course.

[152]   The cross-appeal in relation to the Claymark Trust fails.

Result

[153]   The appeal succeeds in part.  The cross-appeal is dismissed.  The matter is remitted to the Family Court for further consideration to be given to the issues identified in relation to the valuation of the matrimonial home and the orders sought in relation to the Denarau Resort Trust, Sophia No 7 Trust, Chelmsford Trust and Lighter Quay 5B Trust.

[154]   I reserve leave to the parties to apply for further directions on any matters arising out of this judgment.

[155] Costs are reserved.   If the parties are unable to agree, I will consider memoranda.