New Zealand: Clayton v Clayton: nipping the Illusory Trust in the bud


The Court of Appeal's recent decision in Clayton v Clayton1 as been described as redrawing the landscape on trusts and divorce.2 The decision has already generated discussion within the legal community because the Court decided that a settlor's power of appointment could be relationship property. The Court went on to determine that the value of the appointment was the net value of the trust's assets.

The decision is also important because it is the first New Zealand case where the concept of an "illusory trust", as distinct from a "sham trust", has been considered. It is this aspect of the decision which I intend to discuss in this article.3


Mr and Mrs Clayton separated in 2006 after 17 years of marriage. The proceedings concerned the division of relationship property under the Property (Relationships) Act 1976. The case concerned various trusts settled during the parties' marriage. Three of the trusts gave rise to nine questions in the Court of Appeal but only one trust is relevant to the issue I wish to discuss.

The Vaughan Road Property Trust ("VRPT") was settled in 1999 by way of a declaration of trust by Mr Clayton as trustee. He is the settlor and sole trustee. The discretionary beneficiaries include Mr Clayton as the principal family member, Mrs Clayton as his wife, and the children are the final beneficiaries.

The VRPT was described as operating as a banker. It has largely borrowed from BNZ to advance loans to other entities.

I intend to set out the provision of the trust deed only as they relate to the reasoning of the courts.

The Family Court decision

In the Family Court Judge Munro held that the VRPT did not meet the basic elements of a trust and was therefore illusory.4 The effect of this finding was that the VRPT's property was owned both legally and equitably by Mr Clayton, and was therefore relationship property.

In particular, Judge Munro was concerned with three issues. Firstly, he reasoned that the provision conferring the trustee unfettered discretion, read with a provision allowing the trustee's interests to conflict with his duties to the VRPT trust fund "negated the beneficiaries' ability to call the trustee to account in the exercise of his discretion"5. It was therefore held that the beneficiaries had no rights under the deed enforceable against the trustee.

Secondly, the Judge Munro held that, unlike an administrative power to appoint and remove trustees, the power of revocation in the trust deed was a dispositive power which could be exercised selfishly without regard to the interest of others.

Finally, the Judge Munro held that the VRPT deed and the manner in which it had been administered indicated that it is a convenient structure for commercial purposes, carrying few hallmarks of a trust.6

The High Court decision7

For reasons that differed from those given in the Family Court, the High Court held that the VRPT was not a sham, but it was illusory.

The High Court Judge, Rodney Hansen J, rejected the argument that the VRPT trust was a sham on the finding that it was clear that Mr Clayton intended to create a trust and intended to do so for legitimate business purposes.

The Judge did not agree with the Family Court's reasons for finding that the VRPT was illusory. In particular, the Judge did not accept that the provisions granting unfettered trustee discretion and allowing conflicts of interest eroded the trustee's core obligations.

The decision relied on Millet LJ's well cited discussion in Armitage v Nurse on the "irreducible core" of a trustee's duty:8

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

Unless a trustee is accountable to the beneficiaries for these core obligations, then no trust exists.

Notwithstanding his disagreement with the reasoning of the Family Court, the Judge concluded that certain provisions in the VRPT trust deed "led irresistibly to the conclusion that Mr Clayton indeed retained powers tantamount to ownership of trust property".9

The Judge was particularly influenced by the High Court decision of Winkelmann J in Financial Markets Authority v Hotchin10.

In Hotchin the Financial Markets Authority ("FMA") was seeking certain orders in respect of property held in two trusts associated with Mr Hotchin. In both the two trusts under consideration, Mr Hotchin was settlor and he held the power to appoint and remove beneficiaries and trustees. He could therefore appoint himself sole trustee and a discretionary beneficiary, and because the deeds conferred unfettered discretion upon the trustees to distribute the property without considering the interests of any beneficiary, including future beneficiaries, the FMA argued that Mr Hotchin "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".11

However, Winkelmann J found that the existence of a clause that prohibited self-benefit defeated such an argument. Mr Hotchin could not use control as a trustee to distribute trust property to himself, nor could (Winkelmann J found) the trust deed be amended to remove the self-dealing prohibition.

In contrast, the VRPT trust deed expressly permits a trustee who is a beneficiary to exercise any power or discretion in his or her own favour. Accordingly, the Judge distinguished Hotchin and held that:12

..the provisions of the [VRPT] give Mr Clayton unfettered power to distribute the income and the capital of the trust to himself if he wishes and to bring the trust to an end at any times 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...

Court of Appeal decision

The Court of Appeal held that the lower Courts had erred in finding that the trust was illusory. The concept of an illusory trust was unambiguously rejected.

Relying on authority and commentary from other jurisdictions, the Court held that the distinction between a sham and illusory trust could not be supported.13 The question in both cases is, notwithstanding the existence of a trust deed, did the settlor genuinely intend to create a valid, enforceable trust?

The Court pointed out that, in order to find that no sham trust exists, a court is required to examine all the relevant evidence and conclude that the settlor intended to create valid trust. In such circumstances it is not appropriate for a trust to be invalidated simply because the trustee has wide power of control over trust property.

The Court found that an illusory trust was inconsistent with the fact that the terms of the VRPT did not erode Mr Clayton's core obligations as trustee to act honesty and in good faith:14

The powers of Mr Clayton as trustee under the [trust] to deal with the trust property for his own benefit and without regard to the interests of the other beneficiaries did not mean that he owed no obligations at all to those beneficiaries or that they had no rights enforceable against him as trustee.

The Court was also concerned to recognise rights of beneficiaries in this context. It noted that where the conditions have been met to establish a trust (and there is no sham) uptake of control by someone other than an authorised person ought not to extinguish the rights of beneficiaries under a trust.15 In such cases beneficiaries have remedies available which they may choose to pursue.

The Court concluded that in the absence of a finding of a sham or the existence of a statutory power to set aside a trust (as in the case of a tax avoidance arrangement), the courts have no power to set aside an otherwise valid trust.


In our view the Court of Appeal's decision regarding illusory trusts is to be commended.

The issue of whether the illusory trust has utility as an equitable concept goes well beyond trusts concerned with relationship property issues. It is not uncommon for trusts to contain a clause which allows a settlor beneficiary to exercise powers in his or her favour. If the High Court decision had been upheld, such trusts may have required provisions preventing "self-benefit" in order to avoid the risk of a court concluding that they were illusory.

Prior to the Hotchin and the High Court decision, many considered it settled law that a settlor was accorded a large degree of freedom provided the irreducible core of a trust is present. The powers afforded to Mr Clayton do not dissipate his core obligations to the VRPT's beneficiaries.

The powers held were fiduciary powers, and consequently had to be exercised honestly, in good faith, and in the best interests of the beneficiaries as a whole. The trustee would be subject to acting for proper purposes and not committing a fraud on any power.

There may be injustices within the relationship property context which require remedying through reform to the Property (Relationship) Act 1976. That is a matter for Parliament.

The Court of Appeal's decision is to be commended for correcting the development of an "off-shoot" in trust law, which could have undermined established trust law principles, and resulted in uncertainty for settlors and beneficiaries beyond the relationship property context.


1Clayton v Clayton [2015] NZCA 30 (the "Court of Appeal decision").
2Hamish Fletcher Rotorua sawmill magnate's $28 million divorce wrangle: Ruling 'redraws the landscape' (The NZ Herald website, 6 March 2015).
3I intend to discuss the more controversial aspect of the judgment, relating to a settlor's power of appointment, in a separate article.
4The Court of Appeal decision at [26], citing MAC v MAC FC Rotorua FAM-2007-063-652, 2 December 2011 (the "Family Court judgment") at [72].
5The Court of Appeal decision at [26(a)].
6The Court of Appeal decision at [26(c)].
7Clayton v Clayton [2013] NZHC 301, [2013] 3 NZLR 235 (the "High Court decision").
8Armitage v Nurse [1998] Ch 241 (CA).
9The Court of Appeal decision at [31] and the High Court decision at [85]-[88].
10[2012] NZHC 323.
11Ibid at [30].
12The Court of Appeal decision at [31] and the High Court decision at [90]
13The Court of Appeal decision at [77] - [79].
14The Court of Appeal decision at [53].
15The Court of Appeal decision at [81].

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Wynn Williams Lawyers
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Wynn Williams Lawyers
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions