Trusts are often used to obfuscate ownership of property making recovery more difficult for creditors and trustees in bankruptcy.

At what point will the Courts consider a trust to be “sham” put in place by the debtor in order to disguise true ownership?

This question was earlier this month considered by the NSW Court of Appeal in Condon vLewis.

The facts of this case, like the law, were fairly extraordinary.

The facts

In 2001 the debtor purchased a property.

Rather than placing the property in her name, she instructed her accountant to set up a company to act as trustee. 

She told her accountant:

I'm in a complicated Court case. I've found a property which I want to buy, but I want to keep it away from my own name in the short term because of the Court case. I want to put it in a trust. I will be a beneficiary. The case might be over by Christmas, so it will be a short term thing, and then the property will be transferred back into my name. I will be accountable for all expenses”

Her accountant gave the following evidence about the establishment of the trust:

I regarded the Kenthurst Investments Trust as a device to help Colleen Rayhill. I wanted to assist her for a period of a few months to give the appearance to anyone opposed to her in the litigation she had mentioned to me, that the property at Kenthurst was held in a trust and was not an asset to which she was beneficially entitled."

The evidence about the status of the trust over the 2001 to 2006 period is difficult to reconcile.

For instance in August 2005, the debtor purported to disclaim any interest in the trust as beneficiary.

The accountant though gave evidence that he was subsequently instructed by the debtor to retire the company as trustee and transfer the property to her, since the debtor wished to avoid land tax by showing that the property was her principal place of residence.

In September 2006, the debtor settled her family court proceedings against her former husband.  As part of the settlement, consent orders were made for the property to be transferred into her name, but held subject to the discretionary trust.

Some 3 years later in December 2009 and pursuant to those orders, the property was transferred into the debtor’s name.

In May 2012, the debtor was made bankrupt (unpaid legal bills caught up with her).  Mr Condon was appointed her trustee.

The debtor’s sister (and beneficiary under the discretionary trust) commenced proceedings against Mr Condon, seeking a declaration that the property does not form part of the debtor’s estate.

Mr Condon countered by maintaining that the trust was a sham and ought not be recognised.

The Law

There is a distinct doctrine of law that deals with “sham” transactions.

An essential element is that there be an intention that the true transaction is different from that which would ordinarily be attributed to the transaction on the face of the documents.

The Courts though are reluctant to find that a transaction was a sham.  This is because to do so involves looking behind the transaction documents and second guessing what the parties truly intended.  This is a difficult exercise which detracts from commercial certainty.

In Condon vLewis, despite the accountant’s evidence, the Court was not prepared to find that the trust was a sham.

The Court considered that just because a trust had an improper purpose (in this case, to put the property beyond the reach of creditors eg her husband and the ATO) it does not follow that the trust was a sham.  Rather the debtor and her accountant all behaved as if a trust had been created and the Court was not prepared to void the trust merely because of its improper purpose.