The implications of the Clayton case a year on - has it really exposed trusts in relationship property situations?
Just over a year ago the Supreme Court released two decisions that challenged the way trust property is regarded in relationship property disputes.
Although both disputes were settled before the Supreme Court hearings, the court held that the issues in each case were so important that it decided to deliver decisions in any event.
Both disputes involved the Clayton family. One of the decisions concerned the Vaughan Road Property Trust (VRPT), the other decision concerned the Claymark Trust.
Many legal commentators and academics said the Supreme Court's decisions were ground-breaking and that they exposed many trusts to relationship property claims.
But a year on, has the legal landscape for trusts and relationship property really changed? We take a look at the latest case law and see how the courts are interpreting the Clayton decisions in relationship property proceedings.
Mr and Mrs Clayton were married for 17 years and had two daughters. When they separated, Mrs Clayton made claims against two trusts, the VRPT and Claymark Trust, which had both been settled by Mr Clayton during their relationship. Mr Clayton was the sole settlor, sole trustee and principal family member of the VRPT. He was also the settlor and one of two trustees of the Claymark Trust.
The Supreme Court decisions made several key points. The area which gained the most media coverage, however, related to the finding that in the Property (Relationships) Act 1976 a combination of powers held by an individual according to a trust deed can be classified as ‘property’.
The combination of powers the Clayton decision was referring to are powers such as those held as a settlor, trustee, appointer and/or beneficiary of a trust. If these are defined as ‘property’ in the Act, they can be classified as either relationship or separate property and then divided between parties on their separation.
In Mr Clayton's case, according to the legislation, the combination of powers he held were deemed to be relationship property as they were acquired during the relationship. As well, the extent of the 'powers' Mr Clayton held in the VRPT deed were so unrestrained that the value of those powers as 'property' was held to be equal to the entire value of the trust property. The result in the Clayton cases was that Mrs Clayton would have been entitled to half the value of the combined net position of both trusts - essentially half of $28 million.
The Supreme Court also noted the courts "should adopt a wide application of the principles, and a broad interpretation of the Act, in order to achieve a just outcome" between the parties. Trust lawyers feared this phrase would be used to circumvent traditional trust rules to achieve a "just outcome" between parties in a relationship property dispute. Recent attempts to argue the "just outcome" principle have, however, been met with little success.
Developments since March 2016
While it’s still early days, the impact of the Clayton decisions so far has been relatively minor considering the initial hype. The decisions coming out of the High Court and Court of Appeal appear to be interpreting Clayton much more conservatively than commentators and academics first anticipated. Some of the key decisions made by the courts since Clayton are summarised below.
Da Silva v Da Silva
This High Court decision assessed both Clayton decisions. This case involved a trust that was set up by a mother for the benefit of her daughter and grandchildren, during the daughter's marriage. The trustees were the daughter and two trustee companies. The daughter and her husband separated after more than 25 years of marriage; the husband sought orders against the trust, citing Clayton and he argued that his wife's interest in the trust was relationship property.
The High Court found that the interest was not relationship property as there were two other trustees and they all owed fiduciary duties to the beneficiaries. As such, the powers held by the wife were not sufficient to meet the ‘property’ test under the Act. The claim failed.
Buxtone v Buxton
Once again the High Court engaged in a detailed analysis of the relevant trust deed to determine whether or not powers given to a spouse under the trust deed were relationship property. The court found that the powers were not having regard to the differences between the trust deed in question and the trust deed in a Clayton. Crucially, Mrs B could not appoint trust property to herself (as Mr Clayton could) because there was a clause in the deed preventing a trustee from exercising powers for their own benefit. Again, the claim based on Clayton failed.
Roberts v Henderson
In this case an applicant wife claimed that separate property (a debt owed to her husband by a family trust) had become relationship property. She relied on Clayton, arguing that the court “should adopt a wide application of the principles, and a broad interpretation of the Act, in order to achieve a just outcome”. Her application failed in the Family Court and her appeal was dismissed by the High Court. The decision shows that arguments based solely on general fairness or the desire for a 'just outcome' relaying on Clayton are likely to fail.
What happens next?
The Law Commission is currently reviewing the Property (Relationships) Act with its report due in late 2018. One of the key areas to be reviewed concerns property held in a trust.
Any changes to the legislation could be years away so in the meantime Clayton sets the precedent.
While it's still too early to determine with any certainty how the Clayton decisions will impact relationship property outcomes in the future, if the decisions over the past year are any indication of what is to come, Clayton's bark was worse than its bite. However, there is no doubt this area of law remains a movable feast.
If you are concerned about the risk to your trust if you separate from your spouse, please contact a member of our relationship property team.