Official Assignee v Wilson HC Dunedin CIV 2004-425-74

[2006] NZHC 389

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IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY

CIV 2004 425 74

BETWEEN  THE OFFICIAL ASSIGNEE Plaintiff

ANDA M WILSON & ANOR First Defendant

ANDS J CLYMA Second Defendant

Hearing:         21, 22, 23, 24 and 25 November 2005

Appearances: JCD Guest and J Comber for Plaintiff

A J Forbes QC for Defendants

Judgment:      12 April 2006

JUDGMENT OF CHISHOLM J

INDEX

Introduction  Paragraph [1] Background  Paragraph [3]

Pleadings  Paragraph [19]

Plaintiff’s Case  Paragraph [22]

Case Against First Defendants  Paragraph [23] Attitude Towards The Counterclaim  Paragraph [29] The Evidence  Paragraph [32]

First And Second Defendants’ Cases  Paragraph [37]

First Defendants’ Defence to Plaintiff’s Claim  Paragraph [38] Second Defendant’s Counterclaim Against The Plaintiff        Paragraph [42] The Evidence  Paragraph [46]

THE OFFICIAL ASSIGNEE V A M WILSON & ANOR AND ANOR HC DUN CIV 2004 425 74  12 April

2006

The Law Relating to Sham Trusts  Paragraph [51]

Sham Trusts  Paragraph [52] Alter Ego Trusts  Paragraph [55]

DiscussionParagraph [60] People Surrounding The Trust  Paragraph [61] Formation of Trust  Paragraph [65] Purchase Of Invercargill Property By The Trust  Paragraph [69] Sale Of Invercargill Property To Mr Reynolds  Paragraph [72] Refinancing In July 1997  Paragraph [83] Purchase Of Queenstown Property  Paragraph [84] Alterations to Queenstown Property  Paragraph [95] Applications For Finance Through Pyco Brokers  Paragraph [99] Other Matters  Paragraph [103] Conclusion  Paragraph [106] Counterclaim  Paragraph [107]

Outcome  Paragraph [110]

Introduction

[1]      Gary Reynolds was adjudicated bankrupt on 14 July 2001 and discharged three  years  later.    Prior  to  his  adjudication  Mr  Reynolds  had  settled  the  G  M Reynolds Family Trust of which the first defendants are the trustees.  It is alleged by the Official Assignee that the trust is a sham and he seeks a declaration (and related orders) that the first defendants hold the Queenstown property owned by the trust for the plaintiff instead of the beneficiaries named in the trust.

[2]      The second defendant, Susan Clyma, is the de facto wife of Mr Reynolds. She is owed money by the trust and was joined as a party because her interests could be affected if the trust is declared to be a sham.  Her counterclaim for various orders will, however, only require detailed consideration if the plaintiff succeeds against the first defendants.

Background

[3]      For  many  years  Mr  Reynolds  and  Ms  Clyma  have  been  in  a  de  facto relationship.   They have three children aged 23, 17 and 14.   Mr Reynolds is an entrepreneur.  He was originally adjudicated bankrupt on 23 March 1992 but after his discharge three years later he resumed his entrepreneurial activities.   Although Mr  Reynolds,  or  companies  controlled  by him,  seem  to  have  been  involved  in numerous properties between his first and second bankruptcies, this proceeding focuses on two properties, one in Invercargill and one in Queenstown.

[4]      On 31 March 1996 Mr Reynolds signed an unconditional agreement for the purchase of a residential property at 210 Mary Street, Invercargill, (the Invercargill property) for $64,000.  He signed the contract as agent in anticipation of a trust being formed and completing the purchase.  A deposit of $6,400 was paid by Mr Reynolds. In terms of  the  agreement  settlement  was  to  be  effected  on  17  May 1996.    A valuation was obtained.

[5]      G M Reynolds Family Trust (the trust) was created by deed dated 8 May

1996.  Mr Reynolds was the settlor.   The trustees are Judith Harvey, Ms Clyma’s mother, and Alexander Wilson, who had been Mr Reynolds’ solicitor for many years.    Discretionary  beneficiaries  as  to  both  income  and  capital  are  the  three children, any other children of Mr Reynolds born after the date of the deed, and his grandchildren.

[6]      The purchase of the Invercargill property was settled on 21 May 1996 and the transfer to the trustees was registered on 28 May.   A first mortgage advance of

$49,500 personally guaranteed by Mr Reynolds  was  provided  by the  Southland Building  Society (SBS)  and  a  company controlled  by Mr  Reynolds  provided  a further  $9,000  towards  the  purchase.    The  family  lived  in  the  home  and  the outgoings,  including  mortgage  instalments,  were  met  by  Mr  Reynolds  and  Ms Clyma.

[7]      It is asserted by the defendants that late in 1996 the trustees orally agreed to sell the Invercargill property to Mr Reynolds because the trustees were not prepared

to carry out renovations to the property that Mr Reynolds and Ms Clyma wished to have completed.  There was no written agreement.  The defendants’ explanation is challenged by the plaintiff.   In any event, a building consent for alterations to the property was issued on 18 November 1996 and a valuation indicates that the alterations were 85% complete when the house was inspected by a valuer on 24

March 1997.

[8]      On 4 April 1997 the Invercargill property was transferred by the trustees to Mr Reynolds for $64,000, the same price that the trustees had paid for it.   The transfer  was  registered  on  24  April  1997.    The  Bank  of  New  Zealand  (BNZ) provided a term loan of $100,000 secured by a first mortgage over the property which was personally guaranteed by Mr Reynolds.  The SBS mortgage was repaid and it appears that approximately $50,000 went towards the alterations.   The defendants maintain that the balance payable to the trust by Mr Reynolds was set off against the amount originally advanced by Mr Reynolds and his company when the property was first purchased.  That is disputed by the plaintiff.

[9]      In July 1997 further banking accommodation was provided to Mr Reynolds by BNZ.  The documentary record indicates that in addition to the original term loan there was further accommodation of several hundred thousand dollars.   The total package was secured over the Invercargill property and other properties controlled by Mr Reynolds.

[10]     For some time Mr Reynolds and Ms Clyma had been interested in moving to Queenstown.  On 25 February 1998 Mr Reynolds entered into a contract on behalf of the trust for the purchase of a property at 475 Frankton Road, Queenstown (the Queenstown property), for $215,000.   A deposit of $21,000 was paid by Mr Reynolds.   The agreement provided for settlement to be deferred until 31 March

1999 on the basis that in the meantime the purchaser would be entitled to rent the property.

[11]     Mr Reynolds, Ms Clyma and their family took possession of the Queenstown property on 21 March 1998 and became responsible for the rental and maintenance

of that property.  After the family moved to Queenstown the Invercargill property was placed on the market but proved difficult to sell.  Ultimately it was rented out.

[12]     Settlement of the Queenstown purchase was effected on 31 March 1999, a valuation having been obtained shortly before.  On settlement the trustees borrowed additional funds so that the BNZ mortgage over the Invercargill property could be refinanced.   This funding came from SBS by way of a first mortgage advance of

$244,500, Speirs Group Limited by way of a second mortgage advance of $50,000, and by way of an unsecured advance of $75,000 from a company controlled by Ms Clyma.  Apart from the security over the Queenstown property both mortgages were collaterally secured over the Invercargill property and personally guaranteed by Mr Reynolds.  Mr Reynolds’ indebtedness to BNZ was reduced by $150,000 and that bank’s mortgage over the Invercargill property was released.

[13]     Following settlement of the Queenstown purchase the trustees agreed to a proposal  by  Mr  Reynolds  and  Ms  Clyma  for  the  renovation  of  the  property. Pursuant to that arrangement Ms Clyma funded the renovations by way of an interest free loan to the trustees.  Between 13 November 2000 and 15 December 2004 Ms Clyma made advances totalling $231,031.18.

[14]     The Invercargill property was sold for $138,000 in October 2000.   By that time there had been numerous defaults under the SBS and Speirs mortgages and Mr Reynolds was obviously in a very precarious financial situation.   When the Invercargill property was sold the balance owing under the Speirs mortgage was repaid and the amount owing under the SBS mortgage was reduced.

[15]     As already mentioned, Mr Reynolds was adjudicated bankrupt for the second time on 14 June 2001.   Initial investigations by the Official Assignee indicated that there was little in the way of assets and an indebtedness of more than $500,000. IRD  was  the  major  creditor.    Once  the  Official  Assignee  established  that  Mr Reynolds had settled a trust which was the owner of an apparently valuable Queenstown property in which Mr Reynolds and his family were residing, there was a closer examination of the trust and its possible relationship to the bankruptcy.

[16]     The Official Assignee exercised his powers under s68 of the Insolvency Act

1967 to summons Mr Reynolds and the two trustees (the first defendants) for examination under oath.  Those examinations were conducted in Invercargill on 11

December 2003 and the transcripts are included in the bundle of documents.  With the benefit of those examinations the Official Assignee formed the view that the trust was a sham and that rather than holding the Queenstown property for the stated beneficiaries the trustees in fact held the property for Mr Reynolds (the Official Assignee).

[17]     A refinancing through SBS in January 2004 reduced the trust’s indebtedness to Ms Clyma from $306,031 (the advance of $75,000 plus the advance of $231,031 for improvements) to $259,551.  As a result of this refinancing the SBS mortgage was increased to $152,234.

[18]     In  February  2004  the  plaintiff  lodged  a  caveat  against  the  Queenstown property and issued this proceeding.   Subsequently the trustees executed a second mortgage in favour of Ms Clyma which has remained unregistered.  A valuation of the Queenstown property dated 26 May 2005 arrived at a current market value of

$680,000 which indicated an equity of approximately $270,000 after allowing for the balance owing at that time under the SBS mortgage and Ms Clyma’s unsecured advances.

Pleadings

[19]     In his statement of claim the plaintiff alleges:

“4.       At all times from 8 May 1996, the Defendants have held assets purportedly on terms of the Deed of Trust but in reality on trust or as agent or nominee for the said GARY MARTIN REYNOLDS, and the Plaintiff says that the appearance of a trust is a sham.  The Plaintiff relies on the following particulars:

(a)       The Deed of Trust was executed for the purposes of completing a transaction purchasing land at 210 Mary Street, Invercargill which the said GARY MARTIN REYNOLDS had entered into in his own capacity;

(b)       The  Trust  could  not  complete  the  purchase  of  the  land  at  210  Mary  Street, Invercargill without the  provision of  assistance from  the  said  GARY  MARTIN REYNOLDS, the Trustees having no assets or income on account of the Trust at the time of the settlement of the purchase;

(c)        The Defendants freely allowed the said GARY MARTIN REYNOLDS from time to time to  place funds into  the  hands of  the  Trustees and  to  direct the payment therefrom of personal expenditure unrelated to the powers purposes provided for by the Deed of Trust;

(d)       It was never intended from its inception that the Trust would operate in any [way] other than an informal fashion, and in particular that there would be no accounts kept nor records of decisions of the Trustees, nor that the beneficiaries would benefit from the Trust to the exclusion of the said GARY MARTIN REYNOLDS;

(e)        The said GARY MARTIN REYNOLDS has derived significant benefits from the

Trust, namely:

•    The provision to him and his partner of a home at no cost other than the outgoings;

•    The  avoidance  or  [sic]  creditors  and  the  effects  and  implications  of bankruptcy;

•    Providing an apparent legal entity to act as an alter ego for the said GARY MARTIN REYNOLDS.

(f)        The Defendants understood that they would act on instructions from the said GARY MARTIN REYNOLDS and did so from time to time.

5.         If the Trust was not a sham from the time of its creation (which is denied) then it became a sham after its creation. The Plaintiff relies on the following particulars:-

(a)       At the end of the first year of operation of the Trust, the Trustees did not prepare any accounts, and have not prepared any accounts at any time;

(b)       No records were made or kept of resolutions of trustees, meetings of trustees, and the relationship between the said GARY MARTIN REYNOLDS and the Trust was never formalised or recorded;

(c)       The  transactions  between  the  purported  trust  and  the  said  GARY  MARTIN REYNOLDS became sufficiently complex and numerous that it was impossible for the Defendants to know at any point in time what the financial position was between the Trust and the said GARY MARTIN REYNOLDS;

(d)       On  the  instruction  of  the  said  GARY  MARTIN  REYNOLDS,  the  Defendants transferred to him by Transfer dated 4 April 1997 the property at 210 Mary Street, Invercargill in order to satisfy his needs;

(e)      In  transferring  the  property  at  210  Mary  Street,  Invercargill  referred  to  in paragraph 4(d) above to the said GARY MARTIN REYNOLDS, the Defendants did

not obtain a valuation, did not take into account improvements that had been effected, and did not require the nett value so transferred to be paid or secured.”

It is pleaded that the first defendants hold the assets of the purported trust for Mr Reynolds and that such assets vest in the Official Assignee by virtue of s42 of the Insolvency Act.

[20]     In  their  statement  of  defence  the  first  and  second  defendants  deny  the allegations contained in paragraphs 4 and 5 of the statement of claim and assert that the trust was properly and genuinely constituted, that it remained so at all times, and that it has been genuinely administered at all times.  The first defendants admit that they are indebted to the second defendant in the sum of $259,551.

[21]     In the event that it is held that the trust is a sham (which is denied) the second defendant counterclaims against the plaintiff that by virtue of the Property (Relationships) Act 1976 she and the plaintiff have equal interests in the Queenstown property.   Alternative counterclaims are advanced by the second defendant on the basis of a constructive trust and mistake.

Plaintiff’s Case

[22]     It is convenient to divide this summary of the plaintiff’s case into three components: his case against the first defendants;   his attitude towards the second defendant’s counterclaim;  and the evidence.

Case Against First Defendants

[23]     The  Official  Assignee  alleges  that  either  the  trust  was  a  sham  from  its inception or it subsequently became a sham when the settlor and trustees “walked away” from the obligations and arrangements contained in the trust deed.  It is also contended that Mr Reynolds as settlor exercised effective or practical control of the trust and was thereby the alter ego of the trust.

[24]     On the plaintiff’s analysis the affairs of the trust were a “shambles” from the outset and the property transactions need to be assessed against that background. The relatively complex financial arrangements surrounding the trust meant that proper accounting and documentation were essential, but they were absent.   Moreover, numerous failings on the part of the trustees support the inference that rather than being driven by the terms of the trust deed, the trustees were in fact acting for, or under the control of,  Mr Reynolds.

[25]   The plaintiff claims that the Invercargill property would not have been transferred to Mr Reynolds if he had not raised the alterations issue;  by transferring the property to Mr Reynolds the trustees were no longer providing a home for the beneficiaries;  following the transfer the trust became “slightly insolvent in balance sheet terms”;  and by that time the improvements to the property had been largely completed.   He disputes that there was any prior agreement and alleges that the trustees effectively acted on Mr Reynolds’ instructions.

[26]     Mr   Guest   submitted   that   the   Queenstown   transaction   is   even   more extraordinary.  In particular the trust borrowed far more than it needed to purchase the property thereby enabling Mr Reynolds to reduce his indebtedness to the BNZ by

$150,000 in return for which he only took on a contingent liability as guarantor of the trust’s borrowings.  He also claimed that this transaction exposed the trust and the beneficiaries to the risk of losing their home if the borrowings could not be serviced and that this problem was compounded by the cost of altering the property. Again he emphasised the absence of any formal arrangements or control by the trustees.

[27]      Significant failings by the trustees in the management and administration of the trust were listed by Mr Guest:   absence of resolutions or minutes; no annual accounts;     intermingling  of  financial  arrangements  between  the  trustees,  Mr Reynolds, Ms Clyma and other entities associated with her;  use of only one ledger in Mr Reynolds’ name by the solicitors acting on the acquisition of the first property; inaccurate accounting statements by the solicitors;  failure to notice or correct such errors;  no record of decision or other documentation relating to the use of the trust

properties by the children’s parents.   According to  Mr  Guest  these  deficiencies support the inference that “no-one cared”.

[28]     It was also submitted that actions or inactions of the first defendants gave rise to  an  advantage  to  Mr  Reynolds  and  disadvantages  to  the  beneficiaries  which supports the inference that the settlor controlled the affairs of the trust as though they were his own and that parties had acted as if they were not bound by the trust deed. Examples of these actions or inactions were provided:  the Invercargill property was transferred to Mr Reynolds at his request;   when the Queenstown property was acquired  a  far  larger  amount  was  raised  than  was  necessary  to  complete  the purchase;   the trustees incurred a very substantial debt as a result of the second defendant’s  expenditure  on  the  Queenstown  property;      absence   of   care  in determining the trustees’ liability at any particular time;   and approaches by Ms Clyma to a mortgage broker about raising money on the security of the Queenstown property for purposes unrelated to the trust.

Attitude Towards The Counterclaim

[29]     The plaintiff accepts that by virtue of either the Property (Relationships) Act or a constructive trust the second defendant is entitled to a half share of the equity in the Queenstown property.   However, his position is that the equity should be calculated without any reference to the sums alleged to be owing by the trustees to Ms Clyma.

[30]     Because the counterclaim was raised so late (after an initial fixture had been allocated) the plaintiff has been unable to fully explore the source of the advances made by Ms Clyma.  Mr Guest suggested that the debt owed by the trustees to Ms Clyma and her shares in the companies involved in the advances to the trustees are probably relationship property which would have to be taken into account when determining the entitlement of Ms Clyma and Mr Reynolds (Official Assignee) to relationship property.

[31]     Under those circumstances Mr Guest suggested that the counterclaim could either be adjourned for further consideration or transferred to the Family Court.  But

he acknowledged that those alternatives were not particularly attractive to parties wanting to bring the litigation to an end.   Thus he proposed a practical solution, namely, that provided the $75,000 debt was ignored the plaintiff would go no further than seeking relief against the equity in the Queenstown property.  As far as I can gather it is also acknowledged by the plaintiff that some allowance would have to be made for the advances made by Ms Clyma after Mr Reynolds was adjudicated bankrupt.

The Evidence

[32]     It is only intended to provide an extremely brief outline of the evidence at this stage.  Where necessary specific reference will be made to the evidence in the discussion section of this judgment.

[33]  Understandably  the  plaintiff  relies  heavily  on  contemporaneous documentation.  Mr Guest suggested that this is a case where actions speak louder than words, especially taking into account that the defendant’s case is heavily coloured by ex post facto reconstruction of events.   On Mr Guest’s analysis Mr Reynolds did not wish to see the wealth that has been created in the trust go to his creditors, he and Ms Clyma wished to protect their home, Mrs Harvey wanted to support her daughter and Mr Reynolds, and Mr Wilson wanted to protect his clients as well as his professional reputation.

[34]     Mr Reynolds was subpoenaed by the plaintiff.  He was questioned about the setting up of the trust, the purchase of the Invercargill property and the transfer of that property to him.   His explanation during the Official Assignee’s examination that the Invercargill property was transferred to him because he needed to satisfy BNZ was also explored.   Mr Reynolds was also asked about the acquisition and financing of the Queenstown property, problems in servicing the SBS and Speirs mortgages,  the  circumstances  surrounding  the  alterations  to  the  Queenstown property, and various other matters.

[35]     A brief of evidence by Joanne Coates, a former deputy Official Assignee who was present when Mr Reynolds and the trustees were examined on 11 December

2003, was admitted by consent.  Clark Taylor, the Invercargill area manager of BNZ, produced BNZ records.  And Stephen Anderson, a senior commercial manager with SBS, produced SBS records.

[36]     William Patterson, a barrister and solicitor with acknowledged expertise in the areas of wills, trusts, estate planning and taxation, provided expert evidence.  He examined the trust deed and commented on whether the trustees had acted in a way that was consistent with the trust deed and the interests of the beneficiaries when compared with the usual practice of solicitors within New Zealand.  Various issues was identified by Mr Patterson.  These will be considered in the discussion section of this judgment.

First And Second Defendants’ Cases

[37]     Again it is convenient to consider these cases under subheadings similar to those used for the plaintiff’s case.

First Defendants’ Defence To Plaintiff’s Claim

[38]     Mr Forbes QC claimed that most of the evidence relied on by the plaintiff amounted to criticisms of the way in which the trust was administered, allegations that its administration was not in accordance with prudent or standard practice, or allegations that there had been breaches of trust.  He submitted that this evidence fell well short of establishing that the trust is a sham, which is a quite different and much more serious allegation.

[39]     The first defendants deny that Mr Reynolds benefited from the trust to the exclusion of the beneficiaries.  To the contrary, they allege that Mr Reynolds and Ms Clyma, particularly Ms Clyma, conferred substantial benefits on the trust.   At the very least they have paid an appropriate occupation cost and at the end of the day the trust  acquired  a  reasonably  substantial  asset  with  an  equity  of  approximately

$270,000.  This was achieved by 100% borrowing from commercial financiers and

Ms Clyma.

[40]     Rather than acting under the direction, or as alter ego, of Mr Reynolds, the trustees had made their own decisions on all relevant matters.   Their refusal to borrow further funds to enable the Invercargill property to be renovated illustrated that point.   There is no evidence that the trust has lost a dollar as a result of the financing   arrangements.      Under   those   circumstances   all   the   allegations   of imprudence or deficiencies in the administration of the trust are academic.

[41]     Mr Forbes submitted that  the  plaintiff’s  case  defies  common  sense.    He reasoned that Mr Wilson would not have advised Mr Reynolds to establish a family trust for the purpose of providing security for his children and protection against creditors only to put those very goals at risk by participating in a false front and an intention to deceive whereby the trust assets were always going to be held for Mr Reynolds.   He also suggested that Mr Wilson’s unblemished professional and personal reputation counted against the scenario advanced by the plaintiff.

Second Defendant’s Counterclaim Against The Plaintiff

[42]     Ms Clyma maintains that the payments she made to the trust were intended by her, and acknowledged by the trustees, to be loans.  Her position is that it defies belief and commonsense that she would have contemplated that Mr Reynolds’ estate in bankruptcy or his creditors would benefit from these loans, especially taking into account that with the exception of a payment of $860 on 13 November 2000 relating to the preparation of plans, all the payments for improvements to the Queenstown property were made after Mr Reynolds had been adjudicated bankrupt.  Ms Clyma’s position is that her loans to the trustees should be repaid or accounted for before the equity is divided.

[43]     Mr Forbes argued that under s42(1) of the Insolvency Act all the property of a bankrupt is vested upon adjudication, subject to all equities validly created before adjudication.   This means that the Official Assignee must take the Queenstown property subject to, first, a loan of $28,520 from Ms Clyma (the balance now owing of the $75,000 advanced for the purchase of the property) and, second, the loans of

$231,031 from Ms Clyma for renovations to the property.  Mr Forbes reasoned that

the Official Assignee cannot expect to take the benefit without also accepting the burden.

[44]    Alternatively, if the loans are to be treated as relationship property, the circumstances of this case are so unusual that in terms of s13 of the Property (Relationships) Act it would be repugnant to justice for there to be equal sharing. This   reflects   the   mutual   intention   of   the   parties,   unconscionability,   unjust enrichment, and a mistaken belief, all of which would arise from the holding that the trust was a sham.  It would also reflect that as between Ms Clyma and Mr Reynolds her contributions have been nearly 100% and she has also been the principal source of funding for the outgoings.

[45]     Mr Forbes also maintained that application of equitable principles, including those relating to constructive trusts, would produce the same result.

The Evidence

[46]     As with the plaintiff’s evidence, this is only intended to be a brief outline. Four witnesses were called by the defendants:  Mr Wilson, Mrs Harvey, Ms Clyma and Mr Affleck.

[47]     Alexander Wilson has practised as a solicitor for 26 years and has acted for Mr Reynolds for approximately 20 years.  He said that he would never be involved in a transaction which was designed to mislead or which did not truly have the legal effect which it gave the appearance of creating.   His evidence covered numerous topics:    advice in relation to the creation of the trust;  purchase of the Invercargill property;  its sale to Mr Reynolds;  its refinancing;  its ultimate sale by Mr Reynolds; purchase  of  Frankton  Road;     financing  arrangements  on  the  purchase;     and alterations to that property.  While he acknowledged shortcomings in the records he rejected allegations that the trust was intended to operate in an informal fashion or that it was the alter ego of Mr Reynolds.  He maintained that decisions relating to the trust had been taken solely by Mrs Harvey and himself.

[48]     Judith  Harvey  gave  evidence  about  her  understanding  of  the  underlying reasons for setting up the family trust;   the relationship between herself and Mr

Wilson in their capacity as trustees;  the purchase of the Invercargill property;   its sale to Mr Reynolds;   the purchase of the Queenstown property;   refinancing that property;  and alterations to it.  Resolutions relating to Ms Clyma’s debt and other aspects of her role as a trustee were also traversed.

[49]     Ms Clyma gave evidence about her businesses;  the advance of $75,000 for the purchase of the Frankton Road property;   and the advances for the alterations. She stated that she would never have contemplated making these advances if she thought  there  was  any  risk  that  they  would  pass  to  Mr  Reynolds’  estate  in bankruptcy.   Details of outgoings met by Mr Reynolds and herself were also provided.  And her role in applications by Pyco Brokers for further finance in 2004 was discussed.

[50]     Dean Affleck, who provides accounting and taxation services to Ms Clyma and her company, Queenstown Consultants Limited, gave evidence about payments relating to the alterations to the Frankton Road property.   He also gave evidence about the company’s turnover and Ms Clyma’s drawings.

The Law Relating To Sham Trusts

[51]     Two matters require consideration.   First, what is meant by the sham trust concept.  Second, whether the concept of alter ego trusts is relevant in this case.

Sham Trusts

[52]     The  plaintiff’s  primary  allegation  is  that  the  trust  is  a  sham  in  the conventional sense described by in Snook v London & West Riding Investments Limited [1967] 1 All ER 518. In that decision Diplock LJ stated at 528 that a “sham”:

“… 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.  One thing I think, however, is clear in legal principle, morality and the authorities (see Yorkshire Railway Wagon Co. v. Maclure (1882), 21 Ch.D.

309;  Stoneleigh Finance, Ltd. v. Phillips [1965] 1 All E.R. 513), that for acts or documents to be a “sham”, with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.”

That test has been adopted in New Zealand: Bateman Television Limited & Anor v Coleridge Finance Company Limited [1969] NZLR 794 (CA) at 821, Paintin and Nottingham Limited v Miller Gale and Winter [1971] NZLR 164 (CA) at 168, 175 and 181, Re Securitibank Limited (No.2) [1978] 2 NZLR 136 (CA) at 155-6 and Marac Finance Limited v Virtue [1981] 1 NZLR 586 (CA) at 593.

[53]     In the present context one of the crucial issues is whether the plaintiff can establish the requisite common intention to mislead by saying or doing one thing and intending another.  It is not disputed that a sham can either exist from the outset or emerge over time if the parties depart from their initial agreement and yet have allowed its shadow to mask their new arrangement:  Marac Finance v Virtue at 588. Both possibilities are alleged in this case.  Either way the result will be the same if a sham is established – the Court will set aside the trust and give effect to the true agreement.

[54]     Because  there  is  no  direct  evidence of  a  sham  the  Court  must  carefully examine and analyse the evidence, particularly the documentary evidence, to see whether that inference should be drawn.   It is, of course, a serious allegation that those involved with the trust intended to mislead others and I adopt the observation of Lee J in Re Erich Fraunschiel,  James Theodore Brasington and Ian David Mcnee v The Commissioner of Taxation (1989) 20 ATR 955 at 980 that clear evidence is required. On the other hand, it is not necessary for the plaintiff to prove a breach of trust, or fraud or dishonesty in a criminal sense.

Alter EgoTrusts

[55]     Mr Guest noted an emerging line of authority indicating that the Courts are prepared to treat trusts as the alter ego of some external controller where the trustees are considered to be mere puppets of that person.  He drew attention to two decisions of this Court - Prime v Hardie [2003] NZFLR 481 and Glass v Hughey [2003] NZFLR 865 – and numerous decisions of the Australian Family Court in which the

Courts disregarded trusts on the basis that they were effectively the alter ego of the settlor.  All of those decisions are within a family law context.

[56]     As  I  understand  it,  Mr  Guest  raised  the  alter  ego  issue  to  support  the inference that the trust was a sham in the conventional sense.  In other words, it was one of the factors to be taken into account when determining whether the trust was a sham.   This seems to be the basis on which the alter ego allegation is pleaded in clause 4(e) of the statement of claim.  I have no difficulty with that proposition.  But there also seemed to be another reason:   that the alter ego concept could save the plaintiff’s claim if his claim based on a sham in the conventional sense failed.  I now consider that possibility.

[57]     In Marriage of Gould (1993) 17 Fam LR 156, one of the Australian Family Court decisions cited by Mr Guest, Fogarty J concluded that the distinction between a trust that is a sham, and a trust that is the alter ego or puppet of the settlor, is important. He said at 167:

“On the other hand, the description of an entity as the “alter ego” or “puppet” of a person really denotes something different.   Correctly described, it is not an assertion that it is a “counterfeit, a façade or a false front”.  Rather, it describes an actual situation although as a matter of law or practicality the actions of the other entity may be capable of and may in fact be controlled by the party in question.  For example, a party may establish a trust over which he or she exercises control. That trust may in turn own or control property. It may be correct to describe that trust as the alter ego or even perhaps the puppet of that party, but it would not be correct to describe its existence or its ownership or control of property as a sham.  Transactions entered into by it under which it deals with its property by, for example, a transfer of property to a third party would not be a sham transaction.  It is likely to be a genuine transaction although the evidence may demonstrate that the transaction was carried out “by direction of or in the interest of” the party.”

Put another way, the fact that a trust is the alter ego or puppet of the settlor does not of itself make the trust a sham because, amongst other things, the requisite common intention for a sham will not necessarily be present.

[58]     The  underlying  common  intention  requirement  for  a  sham  has  been consistently adopted by the Court of Appeal and is clearly binding on this Court.  If alter ego trusts were to be automatically recognised as shams that underlying requirement would be negated.  The result would be that a half way house between a conventional sham trust and a valid trust would be created.   In Re Securitibank Limited (No.2) at 168 Richardson J seems to have rejected the possibility that there is

any half way house.   I accept that view.   It seems to me that to adopt a half way house would be to effectively re-write the traditional understanding of a sham.

[59]     This conclusion means that while a finding that the trust in this case was Mr Reynolds’ alter ego would be very relevant to whether a sham had been proved, it could  not  save  the  plaintiff’s  case  if he failed  to prove  the  necessary common intention.   To the extent that this conclusion may appear to be inconsistent with Prime v Hardie and Glass v Hughey, I make the following observations.   Both of those cases involved family property claims based on a constructive trust.  In Prime v  Hardie  the  proposition  that  the  trust  was  a  sham  had  not  been  pleaded  and Salmon J expressly upheld the objection of counsel for the plaintiff to that matter being raised.  And in Glass v Hughey the alter ego aspect represented an alternative route to the result that Priestley J had already reached with the result that his remarks are probably obiter.  In neither case was the difference between a sham and an alter ego situation explained in the judgment.

Discussion

[60]     I will begin by making some observations about the people surrounding the trust.  Then I will discuss the formation of the trust.  Following that I will examine the transactions on a chronological basis.  The final step will be to consider matters not taken into account up to that time, following which a conclusion will be reached.

The People Surrounding The Trust

[61]     I begin with Mr Reynolds.  Although it was not particularly satisfactory from the plaintiff’s point of view that Mr Reynolds had to be subpoenaed by the plaintiff, the onus is on the plaintiff and the first and second defendants were entitled to make their own decisions about the evidence that they wished to present to the Court.  On the other hand, I agree with Mr Guest that it was relatively easy for Mr Reynolds to agree with the propositions put by Mr Forbes under cross-examination but that he found   it   much   more   difficult   to   reconcile   some   of   his   evidence   with contemporaneous  documentation  and  some  of  the  explanations  he  had  provided

during  the  Official  Assignee’s  examination.    All  in  all,  the  safest  course  is  to approach Mr Reynolds’ evidence with a great deal of caution and to carefully test it against any relevant contemporaneous documentation.

[62]     Turning to Mr Wilson, I agree with Mr Guest that he is an important witness from the point of view of both the plaintiff and defendants.   Clearly he took the leading  trustee  role.     Like  Mr  Reynolds  he  encountered  some  difficulty  in reconciling some of his answers during the Official Assignee’s examination with evidence that he gave to this Court.  I note, however, that Mr Guest accepted during closing that the plaintiff is not suggesting that Mr Wilson is dishonest;   rather its stance is that “he was slack”.  Mr Guest was critical of “advocacy pressure” that had been put on the Court by virtue of Mr Wilson’s standing and reputation.  I do not see the matter in quite the same way.  In my view the Court is entitled to take Mr Wilson’s standing and reputation into account when assessing his reliability, and I do so.   On the other hand, the numerous deficiencies and inaccuracies in his firm’s documentation need to be balanced against his standing and reputation.   I can say that in general terms Mr Wilson impressed as a reliable witness and as far as I could see  his  evidence  was  in  the  main  consistent  with  the  available  documentary evidence.

[63]     Mrs Harvey.  Mr Guest suggested that her evidence could not be given any weight to the extent that it went beyond what she said in her examination by the Official Assignee.  He suggests that she has simply been briefed by others, that there is no probative value in what she says, that she relied heavily on Mr Wilson and that she did not exercise independent judgment.  He suggested that she was nothing more than a trustee in name.  Although I accept that the Court must be particularly careful about her evidence to the extent that it goes beyond her evidence before the Official Assignee, it is also necessary for the Court to be realistic.  Obviously she had a much better opportunity to consider the matter and refer to documents prior to the hearing in this Court than she had before the Official Assignee’s examination.  Under those circumstances it is not surprising that she was able to be more specific in this Court. Moreover, she appeared to me to be an honest witness who was doing her best to recollect events from many years back.   It is obvious that she was guided by Mr

Wilson on many matters.  I do not see anything wrong with that.  It does not suggest to me that she was a trustee in name only.

[64]     Finally, Ms Clyma.  I have considerable reservations about her evidence.  In particular, I think she was evasive about source of the funds in companies controlled by her.  I will return to that topic.

Formation Of Trust

[65]     I accept that Mr Wilson’s advice to Mr Reynolds to form a family trust was prompted by the risky entrepreneurial activities in which Mr Reynolds was involved and the fact that he had previously been bankrupt.  I also accept that Mr Reynolds’ underlying intention in settling the trust was to provide for his children’s future education  and  general  support.    Finally,  I  am  satisfied  that  Mrs  Harvey  was consulted before the trust was established.   It is not disputed that the trust was validly created by the deed dated 8 May 1996.

[66]     Several issues concerning the trust deed were raised by Mr Patterson.   He noted that whereas the preamble to the trust deed indicates an intention to make provision for the welfare of Mr Reynolds’ family, neither Mr Reynolds nor Ms Clyma are discretionary beneficiaries.   He also thought it quite unusual that Mr Reynolds and Ms Clyma were not discretionary beneficiaries because his understanding was that the purpose of the trust was to hold the family home and subsequently a second family home was acquired.  Mr Patterson also considered that the  trust  deed  did  not  give  the  trustees  power  to  enter  into  the  occupation arrangement with Mr Reynolds and Ms Clyma.   In his experience the invariable practice is to include the parents in a family trust situation as discretionary beneficiaries so as to enable the trust to own the family home without such problems arising.

[67]     In response to the suggestion that Mr Reynolds and Ms Clyma should have been beneficiaries, Mr Wilson said that at the time the formation of the trust was discussed they both had considerable assets, were involved in risky entrepreneurial property  investments,  and  Mr  Reynolds  had  a  previous  track  record  of  being

bankrupt and having problems in arranging insurance policies.  The objective was to protect the children rather than the parents and that is why the parents were excluded as beneficiaries.

[68]     While there might be some technical deficiencies in the trust deed, I do not interpret them as indicating that from the beginning Mr Reynolds or the trustees had in mind that they would not abide by the terms of the trust deed.  It seems to me that any deficiencies were nothing more than drafting lapses.  I am satisfied that when the trust was created there was a genuine intention by the settlor and the trustees to abide by its terms.  The evidence (including evidence of later events) has not established that when the trust was created the intention was that the trust would operate in an entirely informal fashion, without records, on the basis that the beneficiaries would not be the true beneficiaries  of  the trust.    But  the possibility remains  that  this situation might have developed at a later stage.

Purchase Of Invercargill Property By The Trust

[69]     Mr  Reynolds  said  that  he  entered  into  the  purchase  agreement  dated  31

March  1996  as  agent  because  the  trust  was  going  to  complete  the  purchase. Although it is not to the credit of anyone that resolutions by the trust to complete the purchase and enter into the financing arrangements are absent, it is beyond doubt that the purchase was in fact completed by the trust with the property being registered in the names of the trustees.   It is also beyond doubt that a mortgage advance of

$49,500 was provided to the trustees by the SBS.

[70]   Obviously Mr Reynolds was influential in the decision to purchase the Invercargill property.   In all the circumstances that is hardly surprising.   The trust had no money and was obviously dependent on Mr Reynolds to provide any cash contribution and to guarantee any borrowings.   That is not an unusual situation. Equally, however, I am satisfied that the trustees independently accepted that the purchase, including an informal agreement whereby Mr Reynolds and Ms Clyma would meet all the outgoings, was in the interests of the trust and that the trust should complete the purchase.  I also note that a valuation had been obtained.  All in

all, I am satisfied that the purchase of the Invercargill property by the trust was an entirely genuine and effective transaction.

[71]     Before leaving this purchase it is appropriate to make brief reference to the funding provided by Mr Reynolds because this is relevant to an issue arising from the later sale of the property to Mr Reynolds.  According to the statements included

in the documentary record Mr Reynolds supplied:

The deposit	$ 6,400
Further advance (through Reyrich Properties)	$ 9,000
$15,400

Given that the trust had no funds it can be inferred that Mr Reynolds also paid

$894.61 to complete the purchase and meet Macalister’s costs, including their costs on the trust deed.    This produces a total of $16,294.61.    An unsigned acknowledgment of debt shows a figure $16,348.24 but Mr Wilson was not able to explain that precise figure.  However, for present purposes the important point is that upon completion of the purchase the trustees owed Mr Reynolds at least $16,294.61.

Sale Of Invercargill Property To Mr Reynolds

[72]     The documents before the Court confirm that the purchase by Mr Reynolds was settled on 4 April 1997, that the transfer to him from the trustees was registered on 24 April 1997, and that on that date the mortgage to SBS was discharged and a new mortgage in favour of BNZ registered.   Unfortunately the documentation concerning the earlier phases of the transaction is decidedly inferior.   Indeed, it is virtually non existent.  Added to that there are inconsistencies between the evidence given by Mr Reynolds and Mr Wilson in this Court and their answers during the Official Assignee’s examination.

[73]     In this Court Mr Reynolds and Mr Wilson said that the Invercargill property was transferred to Mr Reynolds because the trustees were not prepared to borrow more money to enable renovations to be carried out to the property.  According to Mr  Wilson  the  trustees  and  Mr  Reynolds  reached  an  oral  agreement  around

November 1996 that the property would be sold to Mr Reynolds for the same price that the trustees had paid.  Mr Wilson explained that in reaching that decision the trustees relied on the valuation that had been obtained a few months earlier plus Mr Wilson’s assessment that the Invercargill property market was weak (which proved to be accurate).

[74]     When he was examined on oath by the Official Assignee Mr Reynolds was questioned about the circumstances behind the transfer of the property from the trustees to himself.  He did not mention that the trustees had declined to undertake the improvements that he and Ms Clyma wished to have completed.   Rather, his explanation was:

“The reason it was transferred to me is I needed to get an advance against it to satisfy the BNZ and they wanted it tied up in the bank we took it out of the Trust, lent me the house to come out of the thing and then to get it to the security. Which they done.”

Mr Reynolds explains the discrepancy between that answer and his evidence in this Court on the basis that at the time of his examination he had not had an opportunity to examine the documentation before his evidence was taken and that he was confused and agitated.

[75]     There is a similar discrepancy between Mr Wilson’s explanation during his examination and his evidence in this Court.  At the examination he said:

“He [Mr Reynolds] mortgaged it to the BNZ.  You can see that on the title.  As part of his business dealings he was putting it in as collateral security for his business dealings and the trust was being asked to guarantee those business dealings and we wouldn’t as trustees, so therefore the trust then sold the property back to  Gary Reynolds.   Then Gary himself mortgaged that property …”.

Again there is no reference to Mr Reynolds and Ms Clyma wishing to upgrade the property and the trustees declining their request.   Mr Wilson claims that when he was examined by the Official Assignee he confused the purchase in April 1997 with refinancing in July 1997.   He said that the examination took place without any advance notice of the questions that he would be asked and that he had not refreshed his memory by referring to his files.   Mr Wilson also commented that the events under consideration had taken place seven years earlier.

[76]     For whatever reason Mr Reynolds and Mr Wilson seem to have taken the Official Assignee’s examination much too lightly and I accept that this impacted on the accuracy of their answers at that time.  Mr Wilson acknowledged that there had been a discussion with Mr Reynolds during the taking of the evidence but did not recall specifically what had been said.   I think the similarity of their answers is probably attributable to the discussion.  Having read the transcript of Mr Reynolds’ examination I do not have much difficulty in accepting that he was all over the place. Either he was deliberately trying to mislead or he was genuinely confused.  Given that he seems to have gone to the examination without attempting to brief himself, I am inclined to accept that he was genuinely confused.  It is also reasonably apparent from the content of Mr Wilson’s answer during the examination that he genuinely confused the purchase transaction with the refinancing that occurred a few months later.  As will be seen in a moment, the Invercargill property was not provided as collateral security for Mr Reynolds’ wider business dealings until July 1997.

[77]     When Mr Reynolds purchased the Invercargill property in April 1997 BNZ provided a housing term loan totalling $100,000.  This can be verified by reference to a letter from BNZ dated 4 April 1997.   It can also be verified from the documentation that the BNZ term loan was used to repay $49,590 to SBS so that its mortgage could be released.   The evidence indicates that the balance of the BNZ term loan was applied towards the improvements to the property.   Whether Mr Reynolds had paid for some of the improvements in the meantime and was reimbursed from the term loan, I do not know.  But it is not a matter of moment.  I am satisfied that the Invercargill property was not used as collateral security for Mr Reynolds’ wider business dealings in April 1997.

[78]     It is apparent that the trust did not receive any payment when the sale was settled.  As Mr Patterson noted, there seems to be a balance of $14,410 owing to the trustees.  That figure is arrived at in this way:

Purchase price	$64,000
Less payment to SBS	$49,590
Balance owing	$14,410

Mr  Wilson’s  explanation  was  that  this  amount  was  actually set  off  against  the

$16,294.61 owing by the trustees to Mr Reynolds.   While the absence of any documentation recording this set off is once again thoroughly unsatisfactory, I accept that this is a plausible explanation.  Thus, contrary to Mr Patterson’s belief, the end result would have been that in fact the trust owed Mr Reynolds around $2,000.  It follows that the issue raised by Mr Patterson loses its significance.   It would have been different if the end result had been that Mr Reynolds owed the trust $14,410.

[79]     The crucial issue is whether I should accept Mr Wilson’s evidence that there was an oral agreement in approximately November 1996 for the sale to Mr Reynolds and that this arose because  the  trustees  were  not  prepared  to  enter  into  further borrowings for the  renovations.   Although she did not comment on the precise timing, Mrs Harvey’s evidence generally confirms Mr Wilson’s account.  She said that Mr Wilson had spoken to her about the proposed alterations and had indicated that he did not consider the trustees should become involved in borrowing any further funds.  She said that she accepted his advice and agreed with him that the best course would be to sell the property, especially in view of the fact that Mr Reynolds and Ms Clyma had in mind to move to Queenstown at some future time. However,  when  Mr  Reynolds  and  Ms  Clyma  persisted  with  the  idea  of  the alterations the trustees decided to sell the property to Mr Reynolds (I do not think any significance can be read into the fact that the sale was to Mr Reynolds alone).

[80]     Several factors prompt me to accept Mr Wilson’s evidence.   First, he has satisfactorily  explained  the   discrepancy  between   his   answer   at   the   Official Assignee’s examination and his evidence in this Court.  Second, I generally regard him as a reliable witness.   Third, his account is supported by Mrs Harvey who I consider to be a reliable witness.   Fourth, the scenario that there was an oral agreement in approximately November 1996 ties in with the issue of a building consent for the alterations and the fact that they were 85% complete by 24 March

1997.  Finally, although I place lesser weight on this, Mr Reynolds has confirmed that there was an earlier agreement.

[81]     To the extent that there was no written agreement or even a note about the oral agreement reached in or about November 1996, the situation is again thoroughly

unsatisfactory and unorthodox.   It was also unorthodox for the alterations to have been largely completed before the sale was settled.   But I do not think that these matters can alter the fact, first, that there was a genuine reason for the sale from the trustees to Mr Reynolds, and second, that the sale transaction itself was completely genuine.

[82]     Clearly the trustees displayed strong independence when they declined to go along with the request to undertake the alterations.   There is not the slightest foundation  for  concluding  that  the  trustees  were  acting  as  the  puppets  of  Mr Reynolds and Ms Clyma in relation to the sale transaction.  Quite the opposite.  It might also be added that once the trustees made their decision not to authorise the alterations,  a  sale  of  the  property  was  on  the  cards.    Probably  the  sale  to  Mr Reynolds, which did not involve the payment of agent’s commission, was more advantageous to the trust than a sale to an outsider.  Either way the sale, including the price, was within the discretion of the trustees.

Refinancing In July 1997

[83]     Although the trustees were not involved in this refinancing it is necessary to touch on this topic because it provides a context for the refinancing that occurred when the purchase of the Queenstown property was settled.  BNZ records indicate that by July 1997 Mr Reynolds was involved in several property transactions and that he was seeking further banking accommodation of several hundred thousand dollars in addition to the housing term loan of $100,000 that had been uplifted in April 1997.  Further accommodation was approved.  The bank required security over the Invercargill property as well as other properties.

Purchase Of Queenstown Property

[84]     Mr Reynolds signed the unconditional contract dated 25 February 1998 on behalf of the G M Reynolds Family Trust.  While I accept that Mr Wilson and Mrs Harvey discussed the purchase and were aware of what was happening, they were obviously dependent on Mr Reynolds to provide funds for the deposit.  This was not a new situation.  The trust was still in a situation where it did not have any funds.  As it turned out there were difficulties with the deposit and it was only paid by Mr

Reynolds after the vendors had given notice of their intention to cancel if the deposit was not paid by a specified date.  Even then it had been necessary for Mr Wilson to personally provide a temporary advance which was later repaid.

[85]     As mentioned earlier, the agreement provided for settlement approximately

12 months later on 31 March 1999 and for the purchaser to rent the property in the meantime.    An  informal oral  agreement  between  the  trustees  and  Mr  Reynolds permitted Mr Reynolds and his family to occupy the property on the basis that they were responsible for the rental.   History repeated itself.   There were no formal resolutions by the trustees or any written agreements.  By the time settlement date arrived the accumulated rental amounted to about $9,000.  As far as I can gather the vendors  allowed  rental  to  accumulate  on  the  basis  that  it  would  be  paid  on settlement.   In contractual terms the rent was the responsibility of the trustees but they were entitled to reimbursement from Mr Reynolds and Ms Clyma.

[86]     Like the other transactions the purchase and financing of the Queenstown property is very poorly documented.   There are no trustees’ resolutions and it emerged as the evidence evolved that some of the statements were inaccurate.

[87]     It is obvious, particularly from Mr Wilson’s evidence, that the trustees were heavily reliant on Mr Reynolds and Ms Clyma to organise the finance necessary to complete the purchase and that the situation was complicated by last minute hitches. Mr Wilson’s original understanding was that in addition to the deposit Mr Reynolds would provide another $10,000 or $15,000 and that the balance would be borrowed by the trust.  However, as Mr Wilson wryly observed:

“… the nature of a property entrepreneur is that often you don’t know until the eleventh hour how things will work out.  You don’t have clear instructions until the last minute where and how the money will come into a transaction and  it  changes as  they  make money and withdraw money out of a proposal.”

At the eleventh hour Mr Reynolds wanted his deposit back and arranged for the

Speirs group to provide an advance on second mortgage.

[88]     In the end the trustees borrowed much more than was strictly necessary to settle the Queenstown purchase ($203,000 being the purchase price of $215,000 plus

$9,000 for rent, less the deposit of $21,000).  This additional borrowing enabled Mr Reynolds’ indebtedness to BNZ to be reduced by $150,000 and the BNZ mortgage over  the  Invercargill  property  released.    As  already  mentioned,  SBS  provided

$244,500 (first mortgage) and Speirs Group $50,000 (second mortgage).   Those advances were secured over both the Queenstown and Invercargill properties.   Ms Clyma’s company, Game Station Limited, provided a further $75,000 by way of unsecured loan.

[89]     Under  cross-examination  Mr  Wilson  accepted  that  it  would  have  been possible for the purchase to have been completed on the basis that the trustees simply borrowed the amount necessary to complete the purchase.  Not surprisingly he was pressed about why this had not happened.  His explanation seems to be that at the time he was putting the proposal together there was no suggestion that Game Station Limited would be providing $75,000 and that he was using the equity in the Invercargill property as leverage to achieve a favourable financial package from SBS.  This explanation is consistent with the SBS loan application form in which there is no reference to funding from the Game Station.   Nevertheless Mr Wilson acknowledged that even at the last moment it would have been possible to confine the borrowing to the amount necessary to settle the Queenstown purchase.

[90]     To the extent that Mr Reynolds’ indebtedness to BNZ was being reduced by

$150,000 and the trustees were picking up primary responsibility for the borrowings from SBS, the funding package was obviously advantageous to Mr Reynolds and disadvantageous to the trustees.  There were also other disadvantages for the trust.  It was reliant upon Mr Reynolds and Ms Clyma to service the borrowings which were at least $150,000 higher than they would have been if borrowings had been confined to those necessary to complete the purchase.  Moreover, it seems that the trustees did not have any direct recourse to Mr Reynolds.  His guarantee was in favour of SBS and Speirs, not the trustees.

[91]     That overall analysis was not seriously disputed by Mr Wilson.  But he said that he proceeded on the basis that because the Invercargill property was on the market the trustees’ exposure was likely to be for a relatively short period and that once the Invercargill property sold the secured indebtedness could be substantially

reduced.  Mr Wilson also indicated that given the property market at the time he was confident that the value of the Queenstown property had increased by $300,000, if not more, since the contract had been signed and that if the worst came to the worst it could be sold by the trustees without difficulty.

[92]     I have no doubt that when it came to structuring the financial package for the purchase Mr Reynolds exerted enormous influence.  To a large extent the trustees were dependent on him and to the  extent that they had  a choice between only borrowing sufficient to complete the purchase and the package that was entered into, I have no doubt that their choice was heavily influenced by Mr Reynolds.  As Mr Wilson acknowledged under cross-examination, he was acting for both the trust and Mr Reynolds.  By the same token, I do not think that it would be accurate or fair to describe Mr Wilson as Mr Reynolds’ puppet.   I accept that Mr Wilson was independently addressing and making decisions on the issues as they evolved and that he sincerely believed that the package provided by SBS was in the best interests of the trust, albeit that there were also significant benefits for Mr Reynolds.

[93]     The  additional  borrowing  could  have  ended  in  disaster  for  the  trustees. Indeed, the documentation concerning defaults in relation to the SBS and Speirs mortgages reveals how close it came to a mortgagee’s sale.  Fortunately the sale of the Invercargill property, albeit at a relatively low price compared with the valuation, saved the day.  What could have been a disaster turned out to be advantageous for the trust.  Having started with no equity the trust owned a property with an equity in the region of $270,000 as at May 2005.  It can be safely assumed that that equity will be much higher today.

[94]     When the transaction is viewed as a whole it is difficult to see how it could amount to a sham.  It is true that the decisions of the trustees were heavily influenced by Mr Reynolds.  But where is the common intention that the acts or documents are not to create the legal rights and obligations which they gave the appearance of creating?  As far as I can see everything was exactly as it appeared to be on the face of the documentation.  There was no false front.  It might have been unwise for the trustees  to  have  run  the  risk  of  undertaking  extra  borrowing  that  benefited  Mr

Reynolds and if things had turned out differently they might have been facing a breach of trust allegation.  But that does not mean that the transaction was a sham.

Alterations To Queenstown Property

[95]     After Mr Reynolds and Ms Clyma shifted into the Queenstown property they decided that they would like to carry out alterations and renovations which would be funded by Ms Clyma.   Both Mr Wilson and Mrs Harvey gave evidence that the matter was discussed and that the trustees agreed to the proposal.  Mr Wilson signed an application for a building consent dated 23 December 1999.

[96]     Unlike the earlier transactions there are some trustees’ resolutions relating to the  additions  and  alterations  to  the  Queenstown  property,  although  with  the exception of the first resolution all the resolutions were passed after the Official Assignee had flagged that he was going to challenge the trust.  The first resolution dated 30 May 2003 approves the alterations and records that the trustees agree to enter into an unsecured loan with Queenstown Consultants and Ms Clyma.   A resolution dated 19 April 2004 acknowledges payment of $205,972.35 on account of improvements.  Finally, a resolution dated 2 December 2004 confirms an advance of

$205,972.35 and the earlier advance of $75,000 which is described as drawings from Game Station Limited.   This resolution also records that the debt to Susan Clyma had been reduced by a loan from SBS of $45,480.15 and that the trustees agreed to enter into a second mortgage in favour of Ms Clyma.

[97]     Although the pleadings put the second defendant to proof about the advances to the trustees, it does not seem to have been seriously disputed that the expenditure claimed by Ms Clyma was actually incurred.   A supplementary bundle of receipts and invoices relating to the work is before the Court.   I accept that the trust is indebted to Ms Clyma in the sum of $259,551 and that these were genuine advances to the trust.

[98]     One issue that obviously interested the Official Assignee was the source of the funds provided by Ms Clyma through her companies and whether, amongst other things,  they  could  be  traced  back  to  Mr  Reynolds.    There  were  unexplained

anomalies which Ms Clyma was either unable or disinclined to explain.   My impression is that it was the latter.  However, for the purposes of this judgment I do not find it necessary to explore that aspect any further.

Applications For Finance Through Pyco Brokers

[99]     In July 2004 Pyco Brokers, who are mortgage brokers, made application to SBS on behalf of Ms Clyma for a further loan of $50,000 for her own business purposes.   The loan was to be secured over the Queenstown property.   It did not proceed.     And  in  November  2004  Mr  Reynolds  and  Ms  Clyma  had  further discussions with the brokers about financing the purchase of another home in Queenstown.  It seems that the underlying intention was that the trustees would have been asked to sell the Queenstown property if the purchase proceeded.   It did not proceed.

[100]   The plaintiff alleges that this is another instance of Mr Reynolds and Ms Clyma treating the Queenstown property as though it was their own and without regard for the terms of the trust.   Ms Clyma’s explanation is that she made the approach in July 2004 on the basis that the amount owing by the trust to her would be used as security, not the trust property.  This explanation is incompatible with the Pyco Brokers form and the finance offered by SBS.  I do not accept her evidence. On the other hand, I accept Mr Wilson’s evidence that he was unaware until recently that there had been a loan application or an approach to SBS in July 2004 and that the trustees would never have approved the Queenstown property being used as security for a non beneficiary’s business purposes.

[101]   Mr Wilson agreed that there had been some discussion about the possibility of the Queenstown property being sold and another property being purchased by the trust.  He was unaware that there had been any loan application or approach to SBS for finance.  He said that the trustees would probably have been willing to look at the purchase  of  another  property  for  the  family  on  the  basis  that  the  Queenstown property was sold provided they were satisfied with the new property, including its investment potential.  Again I accept his evidence.

[102]   Having accepted Mr Wilson’s evidence, the plaintiff’s allegation loses its sting.  Whatever Ms Clyma’s attitude might have been, it did not taint the trustees. Nothing involving the Queenstown property could have taken place without their concurrence.   I accept that they would have considered the interests of the beneficiaries before taking any such decisions.

Other Matters

[103]   First, the trustees were rightly criticised by Mr Patterson for the very few formal resolutions that had been kept.  I agree that the recordkeeping was very poor and that this was not a prudent way to conduct a family trust, particularly in view of the nature of the transactions entered into by the trust.  Mr Patterson also criticised the  trust  for  allowing  the  financial  affairs  of  the  trust  to  be  intermingled  with financial affairs unrelated to the trust.  Given the explanations that I heard from Mr Wilson, which were not available to Mr Patterson, I think that it is probably an over simplification.  I note that a complaint to the District Law Society was dismissed.  I also keep in mind the observation of North P in Bateman Television Limited & Anor v Coleridge Finance Company Limited  at 805 that carelessness in the preparation of agreements does not constitute evidence that they were not  genuine documents. Thus I do not accept that those matters are capable of altering the outcome.

[104]   Second,  while  the  absence  of  annual  accounts  was  also  noted  by  Mr Patterson, he acknowledged that this is not unusual where the trust does not earn income.  As far as I can see, the trust did not earn income during the period under consideration.   Consequently I do not regard the absence of annual accounts as a matter of significance.

[105]  Third, given explanations advanced in evidence by or on behalf of the defendants, Mr Guest submitted that the Court should take into account evidence that the defendants have chosen not to call.   He suggested that evidence from Ms Boyington, a former legal executive at Macalisters, and someone from BNZ, SBS and Pyco Brokers might have been expected.   Mr Guest also suggested that plans and estimates that the trustees are alleged to have approved for the Queenstown renovations might have been produced.   However, as I have earlier observed, the

onus is on the plaintiff to prove a sham and it is for the defence to decide the evidence that it wishes to adduce.  I cannot see anything sufficiently sinister in the absence of evidence from the quarters mentioned by Mr Guest to draw any adverse inferences.

Conclusion

[106]   The evidence falls short of establishing a common intention by Mr Reynolds and the trustees that the acts and documents in which they were involved were not to create the legal rights and obligations which they gave the appearance of creating. Despite the regrettable lack of documentation my examination of each transaction has not revealed a façade or false front.   On each occasion there was a genuine transaction, the substance of which was exactly as it purported to be.  While at times the trustees were obviously heavily influenced by Mr Reynolds, they were not his puppets or alter ego, and in any event that factor alone could not have saved the plaintiff’s case because there was no sham in the conventional sense.

Counterclaim

[107]   Given the conclusion that I have reached it is unnecessary to discuss the counterclaim in any detail.  However, I will summarise the conclusions that I would have reached if a sham had been established.

[108]   I  would  not  have  adopted  Mr  Guest’s  submission  that  the  counterclaim should be adjourned or referred to the Family Court.  There is sufficient information for the matter to be determined and I would not have regarded the counterclaim as an application under the Property (Relationships) Act in respect of which the Family Court had primary jurisdiction under s22 of that Act.

[109]   Applying equitable principles in relation to constructive trusts I would have concluded  that  Ms  Clyma  was  entitled  to  a  half  share  in  the  equity  of  the Queenstown property after allowing for the balance owing under the SBS mortgage and the unsecured advances by Ms Clyma totalling $259,551.  In my view it would be unconscionable to ignore the contributions made by Ms Clyma which she would

have obviously not made if she had realised that they would go to Mr Reynolds’

creditors.

Outcome

[110]   The plaintiff’s claim fails and the defendants are entitled to judgment.  The caveat lodged by the Official Assignee is to be withdrawn.  My initial impression is that the defendants are entitled to costs on the 2B scale.   However, if agreement cannot be reached about costs, counsel should submit memoranda so that any issues can be resolved.

Solicitors:         Downie Stewart, Dunedin

Cousins & Associates, Christchurch (Counsel: A J Forbes QC)