The recent Cook Islands case of Webb v Webb, decided in the context of a division of matrimonial assets upon divorce, afforded the Board of Privy Council an opportunity to consider issues regarding:
- the enforceability of a debt to the New Zealand Inland Revenue Department (the IRD), and the extent to which enforceability should be taken into account when considering the matrimonial assets;
- the validity of two trusts and/or whether assets held by the trusts could be considered to be matrimonial property; and
- what, if any inferences, could be drawn about the value of an asset where the owner of the asset had failed to provide full disclosure.
The tax debt
The parties had lived in New Zealand, but moved to the Cook Islands in 2013. Upon separation in 2016, Mr Webb (H) returned to New Zealand with his son from a previous relationship, but Mrs Webb (W) and the parties' daughter remained in the Cook Islands. Most of the relevant assets were situated there.
An investigation into H's tax dealings had commenced in 2011, and by 2018, there was a judgment debt against him in favour of the IRD with a sum owing of approximately NZ$ 26M.
S.20(5) of the Matrimonial Property Act 1976 of New Zealand (applicable in the Cook Islands by virtue of the Matrimonial Property Act 1991-92), provides that, if a debtor spouse is unable to meet his or her personal debts from their separate (non-matrimonial) property, a creditor can look to the matrimonial property of the debtor for satisfaction, and so the value of that debt must be deducted from the value of any matrimonial property in the debtor's hands.
H's position was that, in the event that the disputed property was indeed matrimonial, the value of such property would be wholly extinguished by his personal debts, including his debt to the IRD.
The Privy Council, however, (with Lord Wilson dissenting) considered that, in order to be caught by s.20(5), the debt had to be enforceable against the matrimonial assets. Lord Kitchin, with whom the majority agreed, took the view that the debt was not enforceable against the matrimonial property owned by the husband because that property was situated in the Cook Islands where the debt was unenforceable.
In coming to this conclusion, the Board applied the foreign tax principle, namely that the courts will not collect taxes of a foreign state for the benefit of the sovereign of that foreign state. This principle applies both to direct and indirect enforcement. Given that the Cook Islands were now a distinct sovereign state, the New Zealand IRD would not be able to enforce the judgment debt against H’s assets in the Cook Islands. In the circumstances, the debt would not be taken into account for the purposes of dividing the matrimonial assets.
Although Lord Kitchin's position, that it would make no sense to allow a debtor spouse to deduct from the matrimonial property unsecured personal debts which were both unenforceable and unlikely to be met, has practical appeal, Lord Wilson's dissenting speech is a powerful one. He considered that the purpose of the1976 Act was to set firm and certain rules for the division of matrimonial property, irrespective of the outcome that may produce. He noted that H is a New Zealand national, who lived in New Zealand. Even if the judgment in favour of the IRD could not be enforced against assets held in the Cook Islands, it could still be enforced against H in New Zealand, where the IRD had issued proceedings for the appointment of a receiver. He noted that, on the majority's construction of s.20(5), the court would, in each case have to determine whether the debt is enforceable against specified assets.
Validity of the trusts
Turning then to the question of validity. H had set up two trusts (the Arorangi Trust and the Webb Family Trust) in relation to which H and his two children were the discretionary beneficiaries.
A key issue for consideration was the validity of the Arorangi and Webb trusts, as it was common ground that they stood or fell together, for the purposes of a matrimonial award. W attacked the trusts on four grounds:
- That they lacked the "irreducible core of obligations" owed by trustees to the beneficiaries, the enforceability of which is fundamental to the concept of a trust
- That the settlor never intended to relinquish control over the beneficial interest in the assets the subject of the trusts
- That the trusts were shams
- That the Webb Family Trust was invalid for uncertainty of objects.
W's claims were initially dismissed by Potter J and the Court of Appeal considered whether (in relation to W's second point), H had "..evinced an intention irrevocably to relinquish his beneficial interest in the trust property.." and found that he did not have that intention. The trusts were therefore invalid.
On appeal to the Privy Council, H maintained that the court had applied an "unduly literal interpretation" of the trust deeds rather than a "purposive and contextual approach". He argued he, as trustee as well as beneficiary, had fiduciary obligations to act in good faith, observe the terms of the trust and to act in the best interests of the beneficiaries.
The Privy Council considered TMSF v Merrill Lynch Bank, which was applied in the later New Zealand case of Clayton v Clayton, as well as the specific terms of the challenged trust deeds. It was held that there was no inconsistency with the finding by Potter J and the Court of Appeal that the trusts were not shams and that H's attempts to create the trusts had failed, having reserved such broad powers to himself (as Settlor and beneficiary) that there was no effective disposition of the property. Lord Kitchin held that Court of Appeal was entitled to find that .." the trust deeds failed to record an effective alienation by Mr Webb of any of the trust property. The bundle of rights which he retained is indistinguishable from ownership". In effect H had failed to part with the beneficial interest in the trusts and no valid trust had been created. The case therefore represents a reiteration of the position regarding the validity of a trust but appear to goes further than the previous TMSF case where the settlor was held to have powers tantamount to ownership and those powers were delegated instead to a receiver.
The Board did not need to consider the question of invalidity based on uncertainty of objects or that the trust was ineffective as the beneficiaries were not entitled to require the trustees to account for the trust management. On the allegations of sham, Potter J was entitled to make no finding as to whether the trusts were set up as a pretence and the Court of Appeal did not need to interfere with this. Sham and a failure to part with a beneficial interest in trust property are separate and not interchangeable concepts.
Inferences
The third issue related to the approach to be taken to the assessment and valuation of matrimonial property where a financially dominant spouse fails to disclose relevant documents and information.
The value of H's shares in a company, Solar 3000 Ltd, were in dispute. At the hearing, W had very limited information, but asserted that the value of H's shares was NZ$ 3,3M. H they were closer to NZ$ 30,500. However, he had produced no disclosure and very little information relating to value. The Court of Appeal acknowledged that W's assessment was speculative and that it had inadequate evidence to support a conventional valuation. It did what it described as the best it could on the sparse material available and adopted a value of NZ$ 2m.
The Privy Council left the assessment by the Court of Appeal undisturbed. Although it is not permissible for a court to convert open-ended speculation by one party into findings of fact against the other, the Board drew on the decision of the UK Supreme Court in Prest v Petrodel Resources Ltd, that judges in matrimonial finance cases are entitled to draw on their experience and to take notice of the inherent probabilities in deciding what an uncommunicative husband is likely to be concealing. H had brought this upon himself.