TL4

Cooking up a storm: The Privy Council’s decision in Webb v Webb

Date: 09/11/2020 Type: Articles Topic: HNW Divorce | Finances | Private Client | Trusts | Author: Gemma Willingham, Luke Richardson and Gareth Roberts, Baker & McKenzie LLP

Executive summary

This follows our previous piece, Divorced from reality: Pugachev, Webb, and illusory trusts in divorce proceedings, which was published in the August 2020 edition.

On 3 August 2020 the Privy Council handed down its eagerly awaited Webb v Webb ([2020] UKPC 22) judgment in the appeal from the Cook Islands. Its judgment grapples with several important issues, with perhaps the most eye-catching aspect from a trusts law perspective being the Board’s analysis of the validity (or rather invalidity) of two trusts.

In their judgement, the Privy Council effectively followed the line of reasoning set out in JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2017] and held that the rights that the settlor had retained in the trust assets were so extensive as to be indistinguishable from ownership. As such, these assets were not treated as falling outside his estate and therefore remained available to be divided as part of the settlor’s matrimonial property. This judgement will encourage applicant spouses attacking trusts in financial remedy proceedings, as they will no longer need to demonstrate that a trust is a sham or void if they can instead show that the settlor retained so much power within the trust as to effectively remain the owner of the trust assets. Planning lawyers should also heed this judgment as a warning when they are establishing trusts, and stress upon their clients the real dangers of settlors retaining too much power within trusts.

Background facts

Mr and Mrs Webb married in 2005 in New Zealand. Shortly afterwards, Mr Webb established a family trust (the “Arorangi Trust”) in the Cook Islands, appointing himself as the trustee and nominating himself and his son as beneficiaries.

As trustee, Mr Webb acquired various property investments in the Cook Islands for the Arorangi Trust, including a leasehold interest in land referred to as the ‘Arorangi Property’. Mr and Mrs Webb subsequently moved to the Cook Islands and lived in the Arorangi Property. They separated in April 2016, with Mrs Webb and their daughter continuing to live in the Arorangi Property.

A month after their separation, Mr Webb’s business partner settled a new trust (the “Webb Family Trust”) with nominal consideration, but the courts inferred that Mr Webb was the economic settlor. Mr Webb and his new romantic partner were appointed as trustees, and Mr Webb and his children were the named beneficiaries. In his capacity as trustee, Mr Webb arranged for the Arorangi Trust to transfer some assets to the Webb Family Trust for nominal consideration.

Mr Webb retained an extraordinary level of control over both the Arorangi Trust and the Webb Family Trust (together, the “Trusts”) through his roles as economic settlor, trustee and discretionary beneficiary. Collectively, these roles gave him many powers, including:

  1. as trustee, to:
    1. appoint himself as consultant, which he did, meaning that he (as consultant) had the power to remove and replace himself as the trustee and to request an early vesting of the trust property;
    2. apply the whole of the capital and income to himself as beneficiary;
    3. resettle the assets to a trustee of any other trust, provided that other trust included amongst its beneficiaries one of the beneficiaries of the trust (which of course included Mr Webb); and
    4. vary the trust’s terms (subject to seeking his own consent, in his capacity as the consultant); and
  2. as settlor, to nominate himself as sole beneficiary in place of the existing beneficiaries. As this power was enjoyed by Mr Webb in his capacity as settlor (rather than trustee), it was not subject to any fiduciary duty.

Mrs Webb issued proceedings in the High Court of the Cook Islands, arguing that the assets of both Trusts were matrimonial property and therefore subject to division between the parties. She argued that the Trusts were invalid for several reasons, including because: (a) the settlor did not intend to relinquish control of his beneficial interest in the trust property; and (b) the Trusts were shams.

Decisions of the Cook Islands courts

The Cook Islands High Court rejected this claim and held that the Trusts were valid. This judgment was promptly overturned by the Cook Islands Court of Appeal, which held that the Trusts were invalid because the trust deeds failed to record an effective alienation of the beneficial interest in the assets. It held, however, that the Trusts were not shams.

The Privy Council appeal

Mr Webb appealed the Court of Appeal’s judgment to the Privy Council. He argued, amongst other things, that the Trusts were not invalid and that the trust assets did not constitute matrimonial property. He did not challenge the proposition that there can be no valid trust if, on a proper interpretation of the trust deed, the settlor retains beneficial ownership of the property purportedly settled on trust. Rather, he argued that the Court of Appeal erred in finding that he had retained beneficial control of the Trusts’ assets, which he said resulted from a misinterpretation of the deeds.

Lord Kitchin (with whom the other members of the Board all agreed on this point), held that the court could analyse Mr Webb’s powers in two ways: (1) whether the powers were so extensive that he had never disposed of the property purportedly settled on the Trusts; or (2) whether his powers under the trust deeds were such that, in equity and in all of the circumstances of the case, he could be regarded as having rights in the trust assets that were indistinguishable from ownership.

Given the extraordinary breadth of the powers reserved to Mr Webb, Lord Kitchin found that his rights in the trust assets were indistinguishable from ownership. He noted that Mr Webb had the power at any time to secure the benefit of all of the trust property to himself and to do so regardless of the interests of the other beneficiaries. The Trusts were therefore invalid, and Mr Webb’s appeal was dismissed. The assets of the Trust were therefore available to be treated as matrimonial property and to be used for division purposes.

As the Board found invalidity on this basis, there was no need for them consider in detail whether the Trusts were also “shams”. The Board nonetheless confirmed that the lower courts had been entitled to find that the Trusts were not shams, on the basis that the first instance judge had not considered Mr Webb to have set up the Trusts as a pretence. Lord Kitchin confirmed that there is no inconsistency between a finding that a trust is not a sham and a conclusion that a settlor’s attempt to create a trust had failed or was defeasible.

Considerations

For applicant spouses, the Board’s judgment will be welcome news. It confirms that an additional legal avenue exists for them to challenge trusts established by defendant spouses, thereby allowing them access to the trust assets. Depending on the specific terms of the trusts in question, this may be an easier argument for applicant spouses to make than demonstrating that a trust is a “sham”, which is notoriously difficult (and expensive) to establish.

However, the facts of this case were particularly stark and most settlors will not retain as much control over trust assets as Mr Webb did. It remains to be seen how the courts will deal with cases with less extreme retention of control. Nonetheless, this case serves as a reminder to those seeking to divorce-proof their assets to limit the extent of any settlor reserved powers in order to reduce the risk of a court later determining that those powers are “indistinguishable from ownership” of the trust property or so extensive that the trust property has never been properly disposed of. In this regard, any powers to revoke the trust or general powers of appointment are particularly risky and should be carefully considered before being incorporated

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