re: FAMILY COURT OF AUSTRALIA decision in Keach & Keach and Ors [2011] FamCA 192 (9 March 2011)

Justice Strickland has excluded from the divisible pool of assets the matrimonial home which was owned by a discretionary family trust established and controlled by the father of a 42 year old man in a contest with his 33 year old wife. The wife alleged the trust was a ‘piece of machinery’ designed to keep the property ‘from the reach of the Family Court’ and the fact that her husband’s siblings were secondary beneficiaries of the trust was ‘camouflage’. In his evidence, the husband’s father admitted that one of his motivating factors in establishing the trust was to keep the property within those trusts as far away from the Family Court as possible. The trust purchased a residential property near the husband’s place of work for $920,000. It was rented out by the trust for nearly 4 years before the husband and wife took up residence there, at a lower rent, and carried out renovations. The husband conducted himself as though he was the owner of their home and the wife harboured that view.

Section 106B(1) of the Family Law Act 1975 provides that:

In proceedings under this Act, the court may set aside or restrain the making of an instrument or disposition by or on behalf of, or by direction or in the interest of, a party, which is made or proposed to be made to defeat an existing or anticipated order in those proceedings or which, irrespective of intention, is likely to defeat any such order.

Strickland J’s judgment peruses various judicial descriptions of a sham, most notably that:

“all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating” Snook v London and West Riding Investments Ltd [1967] All ER 518 Diplock LJ at 528

Strickland J noted that there is some uncertainty about whether a sham required, as an element, the deliberate deception of third parties, such as fraud. His analysis continued on the basis that the particular sham alleged was not as pejorative as fraud, “but still apt to deny the critical step in the appellant’s case”. The test for the Court being to compare the evidence of intention in the document against evidence of real intention. For this, Strickland cited Justice Kirby in Raftland Pty Ltd as Trustee of the Raftland Trust v Commissioner of Taxation [2008] HCA 21; (2008) 246 ALR 406

“The key to a finding of sham is the demonstration, by evidence or available inference, of a disparity between the transaction evidenced in the documentation (and related conduct of the parties) and the reality disclosed elsewhere in the evidence.”

and

“Neither the complexity nor the artificiality of a transaction, nor any circularity evident in it, nor the apparent lack of commercial or economic sense will of themselves, alone or in combination, necessarily warrant a conclusion that a transaction constitutes a sham.”

Strickland J observed that:

“Except in the case of shams, and companies that are mere puppets of a party to the marriage, the Family Court must take the property of a party to the marriage as it finds it. The Family Court cannot ignore the interests of third parties in the property, nor the existence of conditions or covenants that limit the rights of the party who owns it.”

If a requirement for a sham was to find a ‘common intention’ of the parties to the transaction to mislead others, such an finding would be practically ruled out in the typical situation of a family trust because the essential parties are a settlor (often accountant, or a solicitor as in the present case) and the trustee. Strickland J reviewed authorities finding it was possible for a unilateral sham to emerge over time by the transaction masking a departure from the original intent and without involving any party to the marriage. He also noted the narrow operation of the doctrine in New Zealand where the NZ Court of Appeal in Official Assignee in Bankruptcy in the Property of Reynolds v Wilson and Harvey and Anor[2008] NZCA 122 gave safe harbour from sham for any trust valid at its inception, except, possibly, only in relation to a portion of property subsequently transferred into the trust.

From this Strickland J deduced that regardless of the husband’s conduct, for there to be a sham, there must be ‘evidence of an intention on the part of the husband’s father’ to confuse the legal terms of the trust with the ‘actual entitlements of the husband’. Essentially, Strickland found that the wife did not have enough evidence to establish an intention on the part of the husband’s father that would amount to a sham.

This case highlights the enduring strength of family trusts in estate planning to achieve asset protection for a client’s bloodline. The message for family lawyers is that to set aside a properly established and administered family trust, which is not legally controlled by a party to the dispute, requires evidence close to fraud. Just how close, Strickland J did not say.

845 words
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