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Is My Business Safe from Relationship Property Claims? 

by Mark Sandelin

Published: December, 2017

Submission: December, 2017


The adage, “Uncertainty is bad for business”, reflects a well-established economic theory in common use at a time of complex global events. It applies equally to the uncertainty caused by relationship breakdown and its disruptive impact on a business-owning spouse or partner (spouse) and their customers.

It is important to understand that business assets can be exposed to crippling family law property claims even when held in trust. However you can do something about it.

In this article we discuss recent case law which re-defines the gold standard for business owners seeking to minimise the risk of a successful claim. In summary, business owners should ensure that their trusts are carefully designed, rigorously administered and complemented by a fair and effective ‘contracting out’ agreement.

If in doubt, or you are uncertain, contact us for peace of mind.

Business assets can be exposed to family law claims

The Property (Relationships) Act 1976 (the PRA) provides that when spouses separate after a relationship of three or more years ‘relationship property’, such as the family home and property acquired during the relationship, is equally divided between the spouses with limited exceptions. ‘Separate property’, such as property owned prior to the relationship, gifts and inheritances, is not shared but may be the subject of compensatory awards.

Even when held in trust

Where business assets are held in trusts (a popular arrangement in New Zealand for income distribution and increased protection from creditor claims) those assets will be neither relationship property nor separate property in the first instance. So they may be immune from applications under the PRA. However, an increasing number of applicants are challenging trusts successfully.

For example, the parties in Clayton v Clayton (2016) (Clayton) separated after a 20 year relationship, having met when the wife worked in the office of a joinery business established by the husband’s father. The husband went on to acquire his father’s business and merge it with his own, building a large and successful saw milling enterprise with the support of his wife. The businesses were all held in trust.

When their relationship broke down, Mrs Clayton sought to overcome the limitations of the PRA and bring business assets held by the Vaughan Road Property Trust (the VRPT) and the Claymark Trust into the pool of property available for division. The court delivered judgment after a settlement was reached.

The wife would have been successful in respect of the Claymark Trust because the trust had the characteristics of a ‘nuptial settlement’. The trust made continuing provision for both parties in their capacities as spouses and there was a connection or proximity between the settlement and the marriage. These features (which should be red-flags for business owners) were key factors in the Court’s decision to split the Claymark Trust into two separate trusts of equal value, one for each party, under section 182 of the Family Proceedings Act 1980.

The wife would have been successful in respect of the VRPT for different reasons. The trust deed empowered Mr Clayton, as trustee and discretionary beneficiary, to exercise uninhibited control over the VRPT assets. He was able to appoint and remove discretionary beneficiaries, bring forward the vesting day, appoint all trust capital to himself and to exercise those discretions without considering the interests of all of the beneficiaries, notwithstanding certain conflicts of interest. The Court held that such extreme powers were ‘property’ of equal value to the trust assets themselves. As it was relationship property it would have been divided equally.

Trusts are under fire across jurisdictions

The Clayton reasoning expresses an emerging view of courts that those who seek to enjoy the protection of trusts are required to submit to fiduciary constraints. This means less control over trust assets. Only weeks ago Clayton was cited by a UK court which showed no mercy to a Russian oligarch seeking to use New Zealand trusts to protect $95 million from claims made by the Russian State and a collapsed Russian bank (Mezhdunarodniy Promyshlenniy Bank v Pugachev). The international business community is on notice.

How to increase certainty

Our firm has a strong and experienced relationship property practice. We welcome the opportunity to advise you and your business partners about relationship property claims and trusts which effectively balance the competing objectives of protection and control over trust assets.
Interestingly, Mr Clayton may have reduced his heartache if a pre-marriage agreement by which the parties contracted out of the relationship property regime had been upheld. We recommend minimising the risk of a successful relationship property claim by carefully reviewing your trust structures and complimenting your trusts with a comprehensive, balanced and effective contracting out agreement that is updated during the relationship.

In a fast changing world, greater certainty is a competitive advantage.

Additional author

Sarah Moore, Senior Solicitor

Sarah has extensive experience advising clients on a wide range of family law matters. Her expertise includes managing multi-million dollar tax-complicated property and trust disputes in New Zealand and Australia.






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