All News
May 27 2016

I've got the power - Powers as Property - Clayton v Clayton

May 27 2016
All News

I've got the power - Powers as Property - Clayton v Clayton

Written by: Henry Holmes

When spouses or partners separate, it is usually relatively straight forward to establish what personal property (e.g. the house, the cars, the boat, etc.) they own. Only property owned by either spouse personally can be classified under the relevant legislation as property to be shared or property to be kept separate.

Matters are complicated significantly where most of the parties’ ‘property’ is held on trust. In that case, the parties do not own the property in their personal capacity. Rather, the property is owned by the trustees of the trust, who distribute, apply and manage the property for the benefit of the beneficiaries (a class often including the parties).
In March last, year the Court of Appeal decided a case called Clayton v Clayton. This case involved a 17 year marriage and approximately $28 million worth of assets held on Trust. One of the trust deeds gave Mr Clayton several powers in respect of the trust and a therefore a significant amount of control.  Importantly, he was the only trustee and had the unfettered power to add and remove beneficiaries (according to the Court of Appeal and Supreme Court).
One of the many interesting aspects of the Court of Appeal’s decision was its finding that Mr Clayton’s powers under the trust deed were “property” for the purposes of the Property (Relationships) Act 1976 (“the Act”), the legislation governing the division of matrimonial property on separation.

Clayton was appealed to the Supreme Court. Although the parties settled out of Court before the decision was released, the Supreme Court nevertheless released its judgement given the public importance of the issues.
One of the many issues on appeal was whether the Court of Appeal was correct to decide that Mr Clayton’s powers over a trust could be ‘property’ as defined by the Act.

To understand the Supreme Court’s decision, it is necessary to briefly describe the decision of the Court of Appeal.

The Court of Appeal

The Court of Appeal held that, as a general principle,  in certain circumstances, powers may amount in substance to property. This is because the exercise of those powers could result in the property vesting solely in the ownership of the person who holds the power.

Mr Clayton’s power was to add and remove beneficiaries in his capacity as ‘principal family member’, and his discretion was not restricted by a duty to act in the best interests of the other beneficiaries (ordinarily such powers are subject to such obligations).  Given that he was the only trustee, the Court found that he could essentially wind up the trust by devolving the property to himself as both sole trustee and beneficiary. In law, if you hold both interests exclusively, you simply own the property outright and no trust can be said to exist.

The Supreme Court

The Supreme Court reached the same conclusion, but by reference to different powers.

The Supreme Court noted that Mr Clayton could not remove the final beneficiaries (the beneficiaries in whom the assets rest upon the trust being wound up), although he could remove them from the class of discretionary beneficiaries who can be given distributions at the trustees discretion from time to time. As a result, the Court of Appeal had made an error in its interpretation of the trust deed.
The Court then focussed on different powers, but not before suggesting that their decision was limited to finding that the powers were only property for the purposes of the Act. The Court stated that the guiding principles of the Act allowed it to interpret what was property in a broader sense than it might otherwise.

The Court then looked to the other powers in the trust deed and concluded that a collection of seven powers that Mr Clayton held amounted to a ‘General Power of Appointment’ (similar to the power contained in the Privy Council case relied on). That power could therefore be said to amount to property, relying on the decision of the Privy Council. 

Final comments

Mr Clayton’s powers over his trust were unusual. Usually, trust deeds require an independent trustee. Had this been the case with the trust in question, it would have been much harder for both appellate courts to reach the conclusions they did.

Nevertheless, the Court’s decision is significant. It at least offers another means by which the previously untouchable subject matter of a trust may be made available to a disenfranchised former spouse.

As a final point, it is not necessarily certain that the Supreme Court’s decision can, as it suggests, be limited to cases under the Act. This case may offer hope to creditors, who, like former spouses, have often been frustrated by the presence of a trust.

If you would like advice with respect to a trust you have or would like to set up a trust please contact our Family Team.