Tougher sham trust test ahead

By Deborah Hill Cone

Friday 11th October 2002

A warning today for trustees in some international cases the courts are trying to peek behind the corporate veil and that could put "off-the-shelf" trust arrangements at risk.

Hong Kong-based trust specialist James Wadham will give a hard-hitting presentation to a trust conference in Auckland next week voicing concerns that some New Zealand trust set-ups may become vulnerable as a result of new law.

"There has been a tendency among New Zealand professionals to believe they are immune from what is going on in the rest of the world," Mr Wadham said.

He said international courts, whose rulings were persuasive to New Zealand judges, were increasingly looking to the substance of an arrangement and not the pure formality.

"They have been going back to the basics of the arrangement and ignoring sophisticated variations that stretch the principles," Mr Wadham said.

That means where a businessperson structures a trust but retains control of the assets, the courts are attempting to find out how that really works, not just how it looks on the surface.

The definition of what constitutes a "sham" has tightened.

"Seventy per cent of trusts set up in the 1990s would fail. The reason for that was that trusts were wholesaled as products," Mr Wadham said.

The overall trend in the trust field with litigation was to target arrangements set up 10-20 years ago.

"With the growth in the moneyed classes in the boom of the 1990s, more and more people were pushed into [trusts]. What was starting to be done then was already wrong and since then it has got a lot worse," he said.

Mr Wadham, who has been a director of international banks and trustee companies for over 20 years, lectures on trusts and has advised two offshore financial centres on their legislation and negotiations with the OECD.

The Misplaced Trust conference which he will address on Friday is organised by local firm Anchor Trustees and includes a moot court before Justice Paul Heath.

Other speakers include controversial tax commentator Tony Molloy QC, former Russell McVeagh litigation partner Robert Fardell QC, accountant and director Tony Frankham and insolvency specialist Jeff Meltzer.

Mr Wadham backs Anchor Trustees' position that trustees ought to retain their independence, and that providing legal advice, auditing or funds management presents a conflict of interest.

Anchor Trustees managing director Mike Reynolds said his firm, which was set up in 1996, offered a different service to other trustees because it was totally independent. "We saw there was a niche in New Zealand for an actual trustee ... lawyers and accountants have historically not charged for being trustees."

Other trustees, such as Perpetual Trust, Guardian Trust and Tower Trust, also offer other services.

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