Clayton v Clayton – Supreme Court Decision

Article Published : 26.04.2016
The Supreme Court’s recent decision gives clear guidance as to the two stage test to be applied.

This article follows on from our commentary concerning the decision by the Court of Appeal in Clayton v Clayton [2015] NZCA 30. 

Notwithstanding that Mr and Mrs Clayton reached an agreement after the oral hearing of the appeal in the Supreme Court, the parties accepted that, as the appeal had been fully canvassed and the issues are of wider public interest, it was appropriate for a judgment to be issued.

On 23 March 2016 the Supreme Court therefore released its judgment.  This appeal, and its decision, relates to the Claymark Trust (“the Trust”) which was settled on 10 May 1994.

The issues at appeal

The substantive issue in this appeal pertained to whether or not an order should have been made in respect of the Trust pursuant to Section 182 of the Family Proceedings Act 1980 (“section 182”). 

Section 182 deals with a nuptial settlement and, in certain circumstances, allows orders to be made varying the settlement either for the benefit of the children or the parties to the marriage.  In exercising this discretion, the Court may take into account the circumstances of the parties and any changes in those circumstances since the date of the settlement, as well as any other matters the Court considers relevant. 

Also at issue in this appeal was whether or not an order should have been made pursuant to section 44C of the Property (Relationships) Act 1976.  Where a party has transferred relationship property to a trust, which defeats the other party’s claim to that property, under section 44C the court can order compensation in a number of ways (including the payment of the Trust’s income – but not capital - to the party whose claim would otherwise be defeated).  

Decisions by the Lower Courts

The Family Court

Mrs Clayton argued in the Family Court that the Trust was a nuptial settlement in terms of section 182 on the basis it was set up during the marriage and she would have had an expectation of benefit under the Trust had the marriage not been dissolved.

This submission was rejected for the following reasons:  first, the Trust was set up for business purposes, not to provide for Mr and Mrs Clayton in the future.  The second was that at the time the Trust was set up and throughout the marriage both Mr and Mrs Clayton were aware of a pre-nuptial agreement specifically excluding Mrs Clayton from claiming a share in Mr Clayton’s business interests.  This meant, the Family Court found, that she could not have had a reasonable expectation of a share in the property acquired by the Claymark Trust.

The Family Court also refused to make an order under section 44C of the Property (Relationships) Act.  

The High Court

The High Court saw no reason to depart from the Family Court’s assessment of the expectations of the parties at the time the Trust was set up.  The High Court found the Trust was undoubtedly formed for business purposes primarily to “keep assets out of the circle of bank guarantees”; there was nothing to suggest it was perceived as a means by which Mrs Clayton would acquire an interest or expectation in business assets.  The pre-nuptial agreement entered into a relatively short time before the marriage excluded Mrs Clayton from any claims to business assets.  As such, there was no basis of finding that the dissolution of the marriage affected Mrs Clayton’s expectations when the Trust was formed.

The Court of Appeal

In the Court of Appeal the decisions reached in the Court’s below were upheld.  The Court outlined the following reasons for that decision:

(a) the focus under section 182 is on the expectations of the parties, especially the applicant, at the time of the settlement of the property to the trust; these expectations are to be ascertained from the relevant evidence;

(b) the Trust was established for business purposes and not as a means by which Mrs Clayton would acquire an interest or expectation in business assets;

(c) that the dissolution of the marriage did not affect Mrs Clayton’s expectations;

(d) there was no good basis to depart from the findings reached in the Courts below.

The Supreme Court

The Supreme Court carefully considered section 182 and, in doing so, applied the “two-stage test” as follows:

First, it must be determined whether the settlement is a nuptial settlement: the Supreme Court held that a generous approach should be taken to this question.  To be a nuptial settlement, the arrangement must be one that makes some form of continuing provision for either or both of the parties to the marriage in their capacities as spouses.  This means that there must be a connection between the settlement and the marriage.

The Supreme Court found that the Claymark Trust was a conventional discretionary family trust.  There was a clear connection between the marriage and the settlement of the Trust:

it was settled during the marriage and just after the birth of the couple’s second child;

Mr Clayton is a beneficiary of the Trust and the other primary beneficiaries are identified by their relationship to him (including marital);

Mrs Clayton as his wife, now former wife, was a beneficiary of the Trust;  those in Mr Clayton’s immediate family unit were clearly intended to be the core beneficiaries;

Mrs Clayton benefited from the Trust during the marriage through the use of a vehicle owned by the Trust.

The Supreme Court did not accept the submission that the Trust was not a nuptial settlement because it was set up for business reasons.  The Court found that the separation of property from the risk associated with business assets must have the purpose of protecting assets for the family. 

For all these reasons, the Court held the Trust was a nuptial settlement.  The nature of the assets was found not to be determinative.  A nuptial settlement can be made for business reasons and contain business assets. 

 The second stage of the test is to determine whether and, if so, how, to exercise the discretion.

In deciding whether or not to exercise the discretion in accordance with the terms of section 182 the Court must take into account all the relevant circumstances in the particular case.  Nuptial settlements are based on the continuation of the marriage.  The purpose of section 182 is to empower the Court to review a settlement and to remedy the consequences of the failure of the presumption on which the settlement was made (i.e. that the marriage would continue).

The test is not to assess the parties’ expectations at the time the trust was established (as the lower courts focused on); rather it is to compare what benefits Mrs Clayton could have expected to receive from the Trust had the marriage continued, against what she could expect to receive now that the marriage had ended and been dissolved. 

The Supreme Court did note that subjective expectations are difficult to assess in the context of a discretionary trust as there is no guarantee of benefit to any of the beneficiaries.  Instead, the Court must consider the settlement from the perspective of the whole family unit, in other words, the benefit Mrs Clayton could have received, as a member of the family unit, had the marriage continued.

In the Clayton case:

  • whilst Mrs Clayton remained a discretionary beneficiary of the Trust as a former wife of Mr Clayton, it seemed unlikely that in the future she would enjoy distributions as a discretionary beneficiary; 
  • although the Trust still supplied her with a vehicle, she was being charged for its use (which evidenced her changed status);
  • she was no longer part of the Clayton family unit and therefore did not enjoy the general benefits to the family and business that the Trust provided.

Even if Mrs Clayton was unlikely to receive distributions from the Trust (other than the vehicle in the near future) that was not held to be determinative.  As a member of the family unit Mrs Clayton would have continued to enjoy the benefits of the Trust conferred on the family.  This would include the availability of the assets of the Trust if needed for family purposes; however, this changed for Mrs Clayton with the end of the marriage.

It was, therefore, found there was a clear difference between the benefit Mrs Clayton could have derived from the Trust, had the marriage continued, compared to her current situation where the marriage is dissolved.  

As such, there was a clear basis for exercising the discretion under section 182.

Had the Claytons not settled the matter between themselves, the Court would have exercised its discretion and made an order to split the Trust equally into two separate Trusts.

Other matters

Given the decision concerning section 182 it was then not necessary for the Court to deal with section 44C of the Property (Relationships) Act.

In a separate but related decision the Supreme Court upheld the findings of the lower Courts which found that in respect of another trust, the “Vaughan Road Property Trust”, the powers that Mr Clayton held under the Trust Deed amounted to property.  The general power of appointment conferred on Mr Clayton meant that he was not constrained by any fiduciary duty when exercising the Trust’s powers in his own favour to the detriment of the other discretionary beneficiaries.  Therefore the Trust was relationship property with the value equivalent to the net assets of the Trust.

Because the Claytons reached a (confidential) settlement, the decisions of the Supreme Court have no impact on the Claytons.

Summary

In summary, in any application under section 182 relating to a settlement (usually a Trust in today’s society) the first task is to decide whether the settlement is a nuptial settlement.  In light of the Clayton decision, a generous approach should be taken to that question.  There must ultimately be a connection between the settlement and the marriage.  The nature of the assets is not, it has been held, determinative on whether the settlement is nuptial or not.  A nuptial settlement can be made for business reasons and contain business assets.

There is no pre-requisite to exercise a discretion under section 182.  The discretion should be exercised in accordance with the terms of section 182 and in light of its purpose taking into account all relevant considerations.  The purpose of section 182 is to empower the Courts to review a settlement to remedy the consequences of the failure of the basis on which the settlement was made.

Commentary

The Supreme Court’s recent decision gives clear guidance as to the two stage test to be applied.  It could be said that the approach applied was a relatively liberal one; in circumstances where significant assets are tied up in a Trust, it may be that, in light of this recent decision, there is a more transparent path to deal with trust assets following marital breakdown, providing the two-stage test under section 182 is satisfied. 

In the majority of cases where there is a settlement during the marriage it will almost always be considered to be a nuptial settlement; the question then arises whether stage two of the test, being the section 182 discretion, should be exercised.  All relevant circumstances must be taken into account in considering the exercise of the section 182 discretion and it must be exercised in light of the purpose of that section. Each case will, ultimately, require individual and careful consideration based on its facts.  

Article by Sarah White

Sarah joined Malley & Co as a Lawyer in September and joined the partnership in November 2018. Sarah is a family law specialist. Her practice at Malley & Co is principally in the area of relationship property, where she represents clients from a variety of backgrounds.

  • 03 363 6365
  • City