Not all allegations of fraud stick

Not all allegations of fraud stick
Tuesday February 21, 2012

It’s good to have greater clarification from the Court of Appeal about the circumstances in which a disposition to a trust can be seen as an attempt to defraud creditors. Dispositions to a trust can be challenged by a creditor or a spouse in circumstances where relationship property needs to be resolved. In Taylor & Others v Official Assignee [2011] NZCA 630 (9 December 20110) Mrs Taylor appealed to the Court of Appeal against the finding that five dispositions made by her in relation to her family trust were fraudulent under section 60 of the Property Law Act as dispositions made with intent to defraud creditors. The Court of Appeal confirmed earlier case law that the crucial question in all cases is one of intent such that any “circumstances of secrecy” should be examined. The Court then went on to examine the precise circumstances surrounding the establishment of the trust and each particular transaction in question. It found that none of the dispositions on appeal were caught by the Property Law Act. The reasons for this included the finding that the trust had been set up legitimately on the advice of Mr and Mrs Taylor’s lawyer, and some years before the dispositions in question; the subsequent gifting was initiated by the same lawyers; the gifting regime was open and transparent with the IRD; and Mrs Taylor’s debt levels with the IRD at the time of the relevant gifting were not of concern. In conclusion, the Court could not find an intention to defraud. The Court found that the lower Court had erred by looking at what Mrs Taylor ultimately did (i.e. placed assets outside of the pool available to creditors) and reasoned that she must always have intended to so act rather than properly assessing the circumstances of each transaction. Effect does not equate to intention. The effect of this decision on the trust in question was substantial. By it, the Trust was not obliged to pay the Official Assignee anything – previously, it was required to pay $227,000, plus interest. The decision shows that when dispositions are challenged, the circumstances of each disposition must be analysed to see whether it was a disposition implemented with intent to defraud creditors, or whether it was implemented for perfectly understandable and legitimate reasons. Only dispositions falling into the earlier category will be set aside.