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[2020] UKPC 22
Privy Council Appeal No 0013 of 2019
JUDGMENT
Webb (Appellant) v Webb (Respondent) (Cook Islands)
From the Court of Appeal of the Cook Islands |
before
Lord Wilson Lord Carnwath Lady Black Lord Briggs Lord Kitchin
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JUDGMENT GIVEN ON |
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3 August 2020 |
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Heard on 20 and 21 January 2020 |
Appellant |
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Respondent |
Sean Owen McAnally |
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Isaac Hikaka |
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Tim Mullins |
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Benjamin Marshall |
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Laura Clews |
(Instructed by Keegan Alexander Barristers & Solicitors) |
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(Instructed by Little & Matysik PC) |
LORD KITCHIN: (with whom Lord Carnwath, Lady Black and Lord Briggs agree)
Introduction
1. This is an appeal in a dispute between spouses about the matrimonial property available for division between them after their relationship has come to an end. It raises many issues concerning the relevance of a tax debt incurred by the husband in New Zealand and whether it is enforceable in the Cook Islands, the validity of two trusts established by the husband and which hold assets said by the wife to be matrimonial property, and the approach to be taken to the assessment and valuation of matrimonial property where a financially dominant spouse fails to disclose relevant documents and information.
4. Shortly after Mr and Mrs Webb were married, Mr Webb established a family trust, the Arorangi Trust, for the purpose of acquiring land in the Arorangi area of Rarotonga in the Cook Islands and other assets in that jurisdiction. As settlor, he appointed himself as trustee and nominated himself and Sebastian as beneficiaries. In February 2006, the Arorangi Trust acquired a leasehold interest in a property in Arorangi known as the Arorangi Property. Later that year the Arorangi Trust acquired an interest in an adjacent property and Mr Tauber was appointed as another trustee and his children were added as beneficiaries. Yet further property has since been acquired by the Arorangi Trust, including an interest in a property known as the Terepai Arihii Property.
5. In August 2013 Mr and Mrs Webb and Bethany moved from New Zealand to the Cook Islands, where they lived in the Arorangi Property. By this time the relationship between Mr Webb and Mr Tauber had soured. In 2014 Mr Tauber retired from his position as trustee of the Arorangi Trust and his children were removed as beneficiaries. One of the Arorangi Trust properties (though not the Arorangi Property or the interest in the Terepai Arihii Property) was sold and the proceeds were paid to the Honk Land Trust.
8. In May 2016 Mrs Webb issued these proceedings in the High Court of the Cook Islands for matrimonial property orders pursuant to sections 23 and 25 of the Matrimonial Property Act 1976 of New Zealand as that Act applies in the Cook Islands by virtue of the Matrimonial Property Act 1991-92. I will refer to the Act as incorporated into Cook Islands law as the 1976 Act. Various amendments have since been made to the New Zealand Act, which is now called the Property (Relationships) Act 1976 (NZ) but these have not been adopted in the Cook Islands. I will refer to the New Zealand Act as the 1976 Act (NZ).
The decisions of the courts below
11. Mr Webb took issue with most of Mrs Webb’s case. He argued, among other things, that the Arorangi Property, the interest in the Terepai Arihii Property and various other assets were all the property of the Arorangi Trust, and that the shares in Solar 3000 Ltd, Fleet Lease Ltd, and Kuru Investments Ltd were all held by the Webb Family Trust and, in the case of the shares in Kuru Investments Ltd, were acquired after the parties’ separation. He also argued that if any of this property was matrimonial property in his hands then the value of such property available for division would necessarily be reduced, indeed wholly extinguished, by his unsecured personal debts including his debt to the IRD. This last contention was vigorously opposed by Mrs Webb on the basis that Mr Webb’s debt to the IRD was not one that could be enforced in the Cook Islands and so did not constitute a debt owed by Mr Webb within the meaning of the 1976 Act. For that reason, she submitted, the debt to the IRD should not be brought into account.
14. An appeal by Mrs Webb to the Court of Appeal came on for hearing before Fisher, White and Grice JJA in November 2017. In a judgment of the court, given on 24 November 2017, the appeal was allowed. The court held that Mr Webb’s tax debt to the IRD should not be brought into account because it was unlikely to be enforceable in the Cook Islands. On the second critical issue, namely the validity of the Arorangi Trust and the Webb Family Trust, the court held that these were invalid because the trust deeds failed to record an effective alienation of the beneficial interest in the assets in question.
This appeal
19. More particularly, Mr Webb argues that his liability to the IRD is an unsecured personal debt within the meaning of section 20(5)(b) of the 1976 Act and so it must be deducted from the value of any matrimonial property in his hands. He says that it is a personal debt, irrespective of whether or not it is enforceable by the IRD in the Cook Islands, which he submits it is.
22. Mrs Webb invites the Board generally to uphold the decision of the Court of Appeal. She contends that the Court of Appeal was right to find that Mr Webb’s debt to the IRD was unenforceable in the Cook Islands and it should not be brought into account.
Part I
The 1976 Act
26. The purpose of the 1976 Act is, among other things, to recognise the equal contribution of the spouses to the marriage partnership and to provide for the just division of matrimonial property between the spouses when the marriage ends. The Act therefore provides that, subject to certain exceptions, each spouse is entitled to an equal share in the wealth created during the course of the marriage partnership. It is, I think, essentially for these reasons that the 1976 Act and the 1976 Act (NZ) have been described as social legislation (see, for example, Clayton v Clayton [Vaughan Road Property Trust] [2016] NZSC 29; [2016] 1 NZLR 551, para 38; Fisher on Matrimonial Property, 2nd ed (1984), para 15.6).
“(5) The value of the matrimonial property that may be divided between husband and wife pursuant to this Act shall be ascertained by deducting from the value of the matrimonial property owned by each spouse:
(a) Any secured or unsecured debts (other than personal debts or debts secured wholly on separate property) owed by that spouse; and
(b) The unsecured personal debts owed by that spouse to the extent that they exceed the value of any separate property of that spouse.
(6) Where any secured or unsecured personal debt of one spouse is paid or satisfied (whether voluntarily or pursuant to legal process) out of the matrimonial property, the Court may order that -
(a) The share of the other spouse in the matrimonial property be increased proportionately:
(b) Assets forming part of that spouse’s separate property be deemed matrimonial property for the purposes of any division of matrimonial property under this Act:
(c) That spouse pay to the other spouse a sum of money by way of compensation.
(7) For the purposes of this section, ‘personal debt’ means a debt incurred by the husband or the wife, other than a debt incurred -
(a) By the husband and his wife jointly; or
(b) In the course of a common enterprise carried on by the husband and the wife, whether or not together with any other person; or
(c) For the purpose of improving the matrimonial home or acquiring or improving or repairing family chattels; or
(d) For the benefit of both the husband and the wife or of any child of the marriage in the course of managing the affairs of the household or bringing up any child of the marriage.”
31. Mr Webb’s liability to the IRD is undoubtedly a debt incurred by him. What is more, it is a judgment debt. On 26 November 2018 his defence to a claim by the IRD in the Auckland District Court was struck out and judgment was entered against him. Mr Webb says and I accept, the debt does not fall within any of the exceptions in section 20(7). It necessarily follows, he continues, that it is a personal debt for the purposes of this section. Mrs Webb responds, and the Court of Appeal agreed, that the matter is not so straightforward and depends upon whether the debt is enforceable in the Cook Islands. This gives rise to the foreign tax issue to which I now turn.
The foreign tax issue
32. It is a long-standing principle of the common law that the courts will not collect taxes of a foreign state for the benefit of the sovereign of that foreign state. The history of the principle, which I will call the foreign tax principle, as did the Court of Appeal, was explored by the House of Lords in Government of India v Taylor [1955] AC 491. As Viscount Simonds observed at p 504, it was already well established when Lord Mansfield CJ repeated the formula: “for no country ever takes notice of the revenue laws of another” in a series of cases in the 18th century: Planché v Fletcher (1779) 1 Doug 251, 253; Holman v Johnson (1775) 1 Cowp 341, 343; and Lever v Fletcher (1780) unreported. A persuasive explanation for the principle, provided by Lord Keith of Avonholm in Government of India at p 511, is that the enforcement of a claim for taxes is an extension of the sovereign power which imposed the taxes, and that an assertion of sovereign authority by one state within the territory of another, as distinct from a patrimonial claim by a foreign sovereign, is (treaty or convention apart) contrary to all concepts of independent sovereignties.
“… it appears to me that the United States Government are seeking the aid of these courts. They come as claimants in these interpleader proceedings. By so doing they are seeking the aid of our courts to collect tax. It is not a direct enforcement (as it would be by action for tax in a court of law), but it is certainly indirect enforcement by seizure of goods. It comes within the prohibition of our law whereby we do not enforce directly or indirectly the revenue law of another country. If the position were reversed, I do not think that the United States courts would enforce our revenue laws. For no country enforces the revenue laws of another.”
37. In Damberg v Damberg [2001] NSWCA 87; (2001) 52 NSWLR 492, a decision of the Court of Appeal of New South Wales, an issue arose as to whether the proceeds of the sale of two properties located in Germany and placed by a father in the name of his two children were held on their own account or on resulting trust for him. The father, contending for a resulting trust, maintained that he intended to retain the beneficial interest in the properties and his purpose in transferring them was to avoid German capital gains tax on their sale. The children argued that it was their right to prevent the resulting trusts from being recognised by reason of the father’s non-compliance with German law, or that relief should only be granted to the father on terms that he pay the tax, interest and penalties due to the German government. They also contended that, in the circumstances I have described, the foreign tax principle did not apply. Heydon JA, with whom Spigelman CJ and Sheller JA agreed, rejected the submission that the foreign tax principle did not apply. As he explained at paras 166-169, it was enough that execution of German revenue law was indirectly involved. Given that no condition amounting to the indirect enforcement of German tax law could be imposed, the question which remained for decision was whether the resulting trusts should be recognised unconditionally or not at all. Heydon JA addressed this issue at paras 171-176. He held that the husband was entitled to relief, assuming his conduct had been contrary to German law and notwithstanding an inability to impose terms overcoming the wrongdoing.
39. There can in my view be no doubt that the foreign tax principle, if applicable, would preclude any attempt by the IRD, a receiver or a trustee in bankruptcy (called the Official Assignee in New Zealand) to enforce the judgment debt against Mr Webb’s assets in the Cook Islands. An attempt by a receiver or the Official Assignee to enforce the debt against those assets would in those circumstances amount to indirect enforcement, just as it did in Peter Buchanan. This provides the foundation for Mrs Webb’s argument for, as the Court of Appeal explained, if an unsecured creditor would not be able to execute a judgment against the assets in question there would no longer be any rationale for allowing the debtor spouse to set off that debt against those assets. However, Mr Webb advances two main arguments to the contrary. The first, which I have foreshadowed, turns on the proper interpretation of the expression “personal debt” in section 20(5) of the 1976 Act. The second is founded upon the historical relationship between New Zealand and the Cook Islands, in the light of which, so the argument goes, it may be assumed that the courts in the Cook Islands will enforce a debt to the IRD. I will deal with them in turn. I will then address the suggestion that Mr Webb is engaging with the IRD, that the IRD has taken steps to appoint a receiver over his assets and that the IRD could apply for a bankruptcy order against him.
Personal debt?
40. Mr Webb contends that the expression “personal debt” is defined by section 20(7) of the 1976 Act for the purposes of the section as a whole. He says, correctly, that his liability to the IRD is a debt incurred by him, indeed it is now a judgment debt; further, it does not fall within any of the exceptions in section 20(7). It necessarily follows, he continues, that it is a personal debt for the purposes of the section. Turning to section 20(5), he argues that, in ascertaining the value of the matrimonial property available for division, any unsecured personal debts of a spouse must be deducted from the value of the matrimonial property held by that debtor spouse to the extent that they exceed the value of any of his or her separate property. Importantly, he continues, section 20(5) does not limit the unsecured personal debts that are to be deducted to those enforceable against particular assets. It follows that there is no room for the foreign tax principle. Put another way, it does not matter whether the debt to the IRD is enforceable in the Cook Islands, it is enforceable against him. It is then a matter for the creditor, here the IRD, to explore all enforcement options available to it without a court in matrimonial property proceedings, to which it is not a party, addressing its enforcement rights.
41. Attractively though this argument is presented, I do not accept it. It is not necessary for the purposes of this appeal to explore the precise meaning of all of the terms used in section 20 but only the word “debts” and the expression “personal debts”. As we have seen, the general scheme underpinning section 20(5) and (7) is that spouses should share the burden of the unsecured debts they have incurred in the context of their relationship, but not the burden of unsecured personal debts unless they exceed the value of that debtor spouse’s separate property. To the extent that the unsecured personal debts of either spouse do exceed the value of that debtor spouse’s separate property then the spouses must share that burden too, subject to an order of the court under section 20(6). In my opinion it is plainly inherent in this scheme that for any unsecured debt to be a personal debt for the purposes of section 20 it must be enforceable or likely to be paid. It would make no sense to allow a debtor spouse to deduct from the value of any matrimonial property unsecured personal debts which are both unenforceable and unlikely to be met. Indeed, the manifest injustice which would flow from such an interpretation can readily be appreciated from the circumstances of this case, as the Court of Appeal explained. If Mr Webb were permitted to deduct the judgment debt from the value of the matrimonial assets he holds in the Cook Islands there would be nothing left to share with Mrs Webb. But if the IRD cannot enforce its judgment against those assets, Mr Webb can keep them all for himself. That cannot have been the intention behind section 20(5). In my view the expression “personal debts” does not extend to those debts which are both unenforceable and unlikely to be paid and I believe the Court of Appeal was entirely correct in saying, at para 34:
“The sole reason for allowing a personal debt to impact on the matrimonial property division under section 20(5)(b) is to protect a debtor spouse’s unsecured creditors. But if, for whatever reason, an unsecured creditor would not be able to execute a judgment against the assets in question there would no longer be any rationale for allowing the debtor spouse to set off that debt against his or her matrimonial property assets.”
“… in the present context it seems probable that a debt is intended to qualify if a spouse has an existing legal liability to pay either immediately or at some time in the future a sum of money either certain or capable of estimation which liability is likely to be satisfied by the debtor-spouse or is actionable with a real prospect of recovery on the part of the creditor.” [Footnotes omitted]
The relationship between New Zealand and the Cook Islands
49. Mr Webb contends that if enforceability in the Cook Islands is a relevant consideration, as I would hold it is, there can be no doubt that, in light of the longstanding relationship between the Cook Islands and New Zealand, claims for taxes made in New Zealand are enforceable in the Cook Islands and so there is no room for the foreign tax principle. Mr Webb points to various aspects of that history, the most material of which for present purposes are these. By Order in Council made under section 1(1) of the Colonial Boundaries Act 1895 (UK), the boundaries of New Zealand were extended to include the Cook Islands as from 11 June 1901. In 1907 New Zealand became a dominion within the British Empire and in 1947 it adopted the Statute of Westminster of 1931. From that time until 1965 the New Zealand Parliament legislated for the Cook Islands; the Governor General, acting by and with the advice and consent of the Executive Council, exercised executive authority over the Cook Islands; and there lay an avenue of appeal to the Supreme Court of New Zealand from final judgments of the High Court of the Cook Islands in the exercise of its criminal and civil jurisdictions.
50. It may be the case that, as Mr Webb asserts, the relationship between the Cook Islands and New Zealand as it existed until 1965 was such as to exclude any justification for the application of the foreign tax principle. However, on 4 August 1965 the Cook Islands Constitution Act 1964 (NZ) came into force and from that time the Cook Islands became self-governing and the Constitution of the Cook Islands, set out in the Schedule to the 1964 Act, became the constitution and supreme law of the Cook Islands. The Constitution made provision for, among other things, the appointment of a High Commissioner of the Cook Islands; the appointment of a Cabinet of Ministers presided over by a Premier and with control of the executive government of the Cook Islands; the establishment of an Executive Council of the Cook Islands consisting of the High Commissioner and the members of the Cabinet; the appointment of a Legislative Assembly of the Cook Islands with the power to make laws for the peace, order and good government of the Cook Islands and, subject to certain conditions, to amend the Constitution; a restriction on the power of the Parliament of New Zealand to legislate for the Cook Islands; and the establishment of a High Court with a right of appeal, subject to conditions, to the Supreme Court of New Zealand.
51. The Constitution of the Cook Islands has been amended from time to time. The position of High Commissioner has now been replaced by that of the Queen’s Representative, that is to say the representative of Her Majesty the Queen in the Cook Islands; the Legislative Assembly has been replaced by a sovereign Parliament for the Cook Islands and the Premier with a Prime Minister; and there has been established a Court of Appeal of the Cook Islands as a superior court of record and with a right of appeal to Her Majesty the Queen in Council with the leave of the Court of Appeal or, if such leave is refused, with the leave of Her Majesty in Council.
52. The Joint Centenary Declaration of the Principles of the Relationship between the Cook Islands and New Zealand, signed by the Prime Minster of each country on behalf of their respective governments on 11 June 2001, affords a helpful insight into the status and nature of the relationship at that time. It recorded that all issues affecting the two countries should be resolved on a cooperative and consultative basis; that Cook Islanders did and would retain New Zealand citizenship; that Her Majesty the Queen as Head of State of the Cook Islands was advised exclusively by Her Cook Islands Ministers in matters relating to the Cook Islands; that in all matters affecting the Realm of New Zealand, of which the Cook Islands and New Zealand were part, there would be close consultation between the signatories; that in the conduct of its foreign affairs, the Cook Islands was interacting with the international community as a sovereign and independent state; and that any action undertaken by New Zealand in respect of its constitutional responsibilities for the foreign affairs of the Cook Islands was undertaken with the authority and at the request of the Cook Islands.
53. Mr Webb recognises the developing nature of the relationship between the Cook Islands and New Zealand and the evolution of the Cook Islands into a sovereign state but contends that this relationship is still so close that any rules or principles affecting the enforceability of debts, such as the foreign tax principle, do not apply. As Mr Webb accepts, the Cook Islands have no reciprocal enforcement of judgments regime but there is in place between the Cook Islands and New Zealand a system whereby memorials can be filed and judgments enforced and it is upon this that he focuses next.
54. Section 173(1) of the Cook Islands Act 1915 provides that any person in whose favour any judgment whereby any sum of money is made payable has been obtained in the High Court of New Zealand or in a District Court in New Zealand in civil proceedings may cause a memorial to be filed in any office of the High Court of the Cook Islands. Section 173(4) provides that every memorial so filed shall thenceforth be a record of such judgment, and that execution may issue with the leave of the High Court, and subject to such terms and conditions as the High Court may think fit to impose. Mr Webb relies heavily on this mechanism and contends that the only inquiry contemplated by section 173(4) relates to the terms and conditions to be imposed before leave is given to execute. He continues that the court’s discretion, except perhaps in a residual sense, does not extend to whether or not the judgment can be executed at all.
55. The Court of Appeal was not persuaded by these submissions, in my opinion rightly so. The Cook Islands are now a distinct sovereign state. They have their own parliament and they have their own government. They make their own laws and they control their own constitution. In these circumstances and on the materials before us, I think that the better view is that the general common law principle that the courts of one country will not enforce the penal and revenue laws of another country is one that now applies to the Cook Islands. Furthermore, as Lord Keith explained in Government of India, the rationale underpinning this principle is that enforcement of a revenue law amounts to an extension of the sovereign power which imposed the taxes, and that an assertion of sovereign authority by one state within the territory of another is contrary to the concept of independent sovereignties. In my opinion this rationale is entirely apposite in the present context and that enforcement, absent a treaty, would run counter to the concept of the Cook Islands as a separate sovereign state. The Court of Appeal observed that enforceability might be tested in proceedings between the Commissioner and Mr Webb on a future occasion, perhaps with the assistance of the Solicitor General of the Cook Islands, and if that were to occur it was possible that a fresh approach to the foreign tax principle might be taken. However, the assessment of rights under the 1976 Act should be based upon the most likely outcome. That, as it seems to me, was a perfectly proper approach and in my view, in agreement with the Court of Appeal and for the reasons I have given, the most likely outcome is that Mr Webb’s New Zealand tax debt is not enforceable in the Cook Islands.
56. In this connection it is relevant to note a number of other matters. In 2009 New Zealand and the Cook Islands entered into two agreements: the first provided for the exchange of information with respect to taxes, and the second concerned the allocation of taxing rights with respect to certain income of individuals and established a mutual agreement procedure in respect of transfer pricing adjustments (both are scheduled to the Double Tax Agreements (Cook Islands) Order 2010/148). By contrast, the Parliament of New Zealand has enacted the Trans-Tasman Proceedings Act 2010 which minimises impediments to the enforcement of certain Australian judgments and regulatory sanctions in New Zealand. It expressly provides, in section 68, that no New Zealand court may refuse to enforce an Australian judgment on the ground that Australian tax is payable under it. The difference between the broad scope of the Trans-Tasman Proceedings Act and the limited scope of the agreements the subject of the Double Tax Agreements (Cook Islands) Order is striking and entirely consistent with the continued application of the foreign tax principle in the Cook Islands.
57. Moreover, I do not accept that the power conferred on the High Court under section 173 of the Cook Islands Act 1915 is as limited as Mr Webb contends. I can see no justification for interpreting it in such a restrictive way. In my view it is clearly of sufficient scope to permit a court of the Cook Islands to refuse to enforce a revenue law, just as it would permit such a court to refuse to enforce a penal law.
Will Mr Webb co-operate with the IRD?
62. Fourthly, it is important to keep in mind that the particular issue with which we are concerned is not whether Mr Webb may pay some of his debt to the IRD using his property in New Zealand but whether he will use for this purpose the matrimonial property in his name in the Cook Islands. In that connection it is striking that he has never pledged that property to the IRD. Further, in response to a question from the Board at the oral hearing, his counsel made clear that he reserved the right to adopt a different position in the context of enforcement proceedings from that which he has adopted in these proceedings. In other words, Mr Webb was reserving the right to argue in enforcement proceedings that the debt to the IRD was not enforceable against the Cook Islands property, and that he might do so.
Receiver and bankruptcy
65. The Board has been given no details of any steps a receiver has taken or could take to gather in Mr Webb’s assets, let alone assets that require enforcement steps in the Cook Islands. Nor has the Board been given any details of how the New Zealand Official Assignee could take control of Mr Webb’s assets, whether in the Cook Islands or elsewhere were there to be bankruptcy proceedings. Indeed, there appears to be some doubt as to whether the New Zealand Official Assignee would be recognised in the Cook Islands at all, for the Board was informed that there is no personal bankruptcy in the Cook Islands and the position of Official Assignee does not exist in that jurisdiction. Moreover and in any event, the foreign tax principle applies to the direct and indirect enforcement of the revenue laws of another state, as I have explained above. In this connection counsel were unable to point to any case since 1965 in which the IRD has, directly or indirectly, sought to enforce a tax judgment against property in the Cook Islands.
66. There was also some discussion before the Board about section 655(1) of the Cook Islands Act 1915 which states that: “Bankruptcy in New Zealand shall have the same effect in respect to property situated in the Cook Islands as if that property was situated in New Zealand.” However, for my part and for the reasons given in the immediately preceding paragraph and the further reasons which follow, I feel unable to attach any significant weight to this provision in the context of these proceedings. First, it was not drawn to the attention of Potter J or the Court of Appeal and it formed no part of Mr Webb’s written case on appeal to Her Majesty in Council. Secondly, there appeared at the hearing to be some doubt as to whether it is in force in the Cook Islands. Thirdly, counsel were unable to assist the Board as to how it would be given effect in the Cook Islands after their emergence as a sovereign and independent state. Fourthly, it may be subject to the foreign tax principle. Finally and importantly, counsel for Mr Webb made clear that Mr Webb relied on it only as “part of the context”, and he accepted that no bankruptcy proceedings were presently on foot. In the end, I understood Mr Webb’s position to be that he did not rely on what the IRD was doing in New Zealand in respect of the debt and the Board should place no weight upon it. As for the context, I have addressed this at paras 49 to 57 above and I am not persuaded that section 655 adds materially to it.
67. In respectful agreement with the Court of Appeal, I would therefore hold that the New Zealand tax debt should not be taken into account in determining the value of the Cook Islands matrimonial property available for division. On the materials before the Board, the stronger argument is that the debt is unenforceable in the Cook Islands.
Part II
Validity of the Arorangi and Webb Family Trusts
68. It was common ground before the Court of Appeal that the Arorangi Trust and the Webb Family Trust stood or fell together. Generally speaking, that remains the position on this further appeal. Most of the arguments arising on this further appeal can therefore be considered in relation to the Arorangi Trust alone. The material clauses of the deed establishing this trust are set out in the appendix to this judgment.
69. Mrs Webb mounted four attacks on the trusts at trial. She contended first, that they lacked what Millett LJ described in Armitage v Nurse [1998] Ch 241, 253G-254A as the irreducible core of obligations owed by trustees to the beneficiaries and enforceable by them which is fundamental to the concept of a trust; secondly, that the settlors never intended to relinquish control over the beneficial interest in the assets the subject of the trusts; thirdly, that the trusts were shams; and fourthly, that the Webb Family Trust was invalid for uncertainty of objects.
“If a critical step in such an attempt would have required the assent of a truly independent person, or would have been subject to an enforceable fiduciary duty on his part, it could not be said that the purported settlement on the trust was ineffective. Conversely if, on an objective view of the deed, [Mr Webb] had retained for himself the uncontrolled power to recover the property it could not be said that he had divested himself of his beneficial ownership of the property. The latter situation might usefully be described as ‘objective nullity’ to distinguish it from ‘sham’. A sham turns on the subjective intent of the parties involved.”
“the two deeds of trust fail to record an effective alienation of the beneficial interest in the assets in question. The powers retained by [Mr Webb] meant that at any time he could have recovered, and still could recover, the property which he had purported to settle on the trusts. The trusts are therefore invalid.”
77. It has long been recognised that a completely general power of appointment, such that the holder of the power can appoint the subject matter of the power to himself, may be tantamount to ownership. As Lord Collins of Mapesbury explained in giving the opinion of the Judicial Committee of the Privy Council in Tasarruf Mevduati Sigorta Fonu v Merrill Lynch Bank and Trust Co (Cayman) Ltd [2011] UKPC 17; [2012] 1 WLR 1721 (“TMSF”):
“41. ... even apart from express legislative intervention general powers have been regarded as giving rise to property rights. In Clarkson v Clarkson [1994] BCC 921 (a decision on the definition of property in the Insolvency Act 1986, section 283(4)) Hoffmann LJ referred to In re Mathieson and said, obiter, at p 931:
‘I think that even at the time this was quite a remarkable decision. Lord St Leonards [ie Sugden] in his book on Powers, 8th ed (1861) said: “To take a distinction between a general power and a limitation in fee is to grasp at a shadow while the substance escapes”.’
42. So also in In re Triffitt’s Settlement [1958] Ch 852, 861, Upjohn J said that ‘where there is a completely general power in its widest sense, that is tantamount to ownership’. That was in the context of the question, discussed below, whether a power could be delegated.
43. As Thomas, Powers (1998) puts it (at para 1-08), the fundamental distinction between the concepts of power and property has not been preserved in all contexts and for all purposes. A donee of a truly general power can appoint the subject matter of the power to himself. He therefore has an ‘absolute disposing power’ over the property, citing Sugden, Powers, 8th ed (1861), p 394. Consequently, for many purposes, the law regards the donee as the effective owner of that property.”
78. TMSF concerned two trusts established by a Mr Demirel in the Cayman Islands. Mr Demirel, his wife and children were discretionary beneficiaries and Mr Demirel, as settlor, had a power of revocation. TMSF, effectively a judgment creditor, sought the appointment of receivers by way of equitable execution with a view to reaching the power of revocation and thereby reaching the funds in the trusts. The issue was whether the power of revocation was a property right that Mr Demirel could be required to delegate to the receivers. The Board concluded that the power of revocation was such that in equity Mr Demirel had rights tantamount to ownership. The power could not be regarded as a fiduciary power and the only discretion Mr Demirel had was whether to exercise it in his own favour. He could and should be required to assign his rights to the receivers. In the circumstances it was unnecessary to decide the further question, canvassed in argument, whether the court had jurisdiction to order Mr Demirel to revoke the trusts, with the result that he would have substantial assets of which the receivers could take possession.
Other grounds of invalidity
91. I would, however, say a word about the allegation that the trusts were shams. Potter J in the High Court was not persuaded that they were. It is common ground that she directed herself correctly by reference to the decision of the Supreme Court of New Zealand in Ben Nevis Forestry Ventures Ltd v Comr of Inland Revenue [2008] NZSC 115; [2009] 2 NZLR 289. In the context of this case she was required to consider whether Mr Webb did not at any time have any intention of respecting the formalities of the trust deeds, and whether he intended instead to give a false impression to third parties and, at the end of the day, the court of his rights and obligations. As I have noted above, Potter J found that Mr Webb operated the Arorangi Trust in a cavalier fashion. She also found Ms Dixon was naïve about her duties as one of the trustees of the Webb Family Trust. But she was not prepared to find that Mr Webb set up the Arorangi Trust or the Webb Family Trust as a pretence, that is to say a screen which would conceal his personal use of the trust assets; nor was she prepared to find that, in the case of the Webb Family Trust, Ms Dixon or Mr Ellison had any such intention. These were findings of fact which I believe the judge was entitled to make. The Court of Appeal did not think it right to interfere with them and it cannot be criticised for taking that course.
Section 44
Perpetuity
95. Mrs Webb sought and has been granted permission to raise before the Board an argument that the Arorangi Trust and the Webb Family Trust are void because they breach the rule against perpetuities. In the Cook Islands the common law rule against perpetuities applies. The rule is straightforward. All future equitable interests must vest within the perpetuity period. The perpetuity period at common law is a life or any number of lives in being at the date of creation of the trust, plus 21 years, plus any actual periods of gestation. The rule is applied at the date of creation of the trust.
Part III
The value of the Solar 3000 Ltd shares
99. This is another important issue. As the Court of Appeal recorded, it was not disputed that Mr Webb owned shares in Solar 3000 Ltd, a Cook Islands company, and that those shares were matrimonial property. Mrs Webb contended they were worth approximately NZ$ 3.3m. Mr Webb countered that they had a value of only NZ$ 30,544.
102. Mr Webb now contends before the Board that just as Mrs Webb’s figure of NZ$ 3.3m as the value of his shareholding was speculative, so too was the figure of NZ$ 2m arrived at by the Court of Appeal. That, he says, was not permissible. Any process of assessment had to be logical and the outcome based on proven facts. But, he continues, the Court of Appeal undertook no analysis of the facts and ignored evidence inconsistent with its conclusion. He points, in particular, to the lack of any evidence that the capital investment sought in the Investor Update was ever realised; to the description of prospective business units in a number of other countries but which never came to fruition; to the lack of any relevant correlation between the value of a shareholding in a subsidiary and the share capital of its parent; and to the description of the anticipated profit from the group business in the Cook Islands as being only around NZ$ 6m over a 20 year period. For her part, Mrs Webb argues that the figure arrived at by the Court of Appeal is too low and it had no justification for departing far, if at all, from the figure of NZ$ 3.3m.
103. I would accept that it is not permissible for a court to convert open-ended speculation by one party into findings of fact against the other; there must be a reasonable basis for some hypothesis in the evidence or the inherent probabilities before a court can draw useful inferences from a party’s failure to rebut it. In Prest v Petrodel Resources Ltd [2013] UKSC 34; [2013] 2 AC 415, para 44, Lord Sumption adopted with only minor modification this statement of Lord Lowry in R v Inland Revenue Comrs, Ex p T C Coombs & Co [1991] 2 AC 283, 300:
“In our legal system generally, the silence of one party in face of the other party’s evidence may convert that evidence into proof in relation to matters which are, or are likely to be, within the knowledge of the silent party and about which that party could be expected to give evidence. Thus, depending on the circumstances, a prima facie case may become a strong or even an overwhelming case. But, if the silent party’s failure to give evidence (or to give the necessary evidence) can be credibly explained, even if not entirely justified, the effect of his silence in favour of the other party may be either reduced or nullified.”
106. That is what the Court of Appeal proceeded to do. It founded its analysis on an important piece of evidence to which Mrs Webb had access: the last page of the final investor statement bearing Mr Webb’s signature. It may be the case that all of the investment sought was not forthcoming. I recognise too that the pages of the draft plan describe business activities in countries other than the Cook Islands and that it is possible that these never came to fruition. I am also conscious of what might be described as the relatively modest scale of the business in the Cook Islands described in the pages of the draft. However, Mr Webb did not disclose the information or documents that would allow the court to look into these matters fully or to quantify their impact. The court therefore had to make a broad estimate of the deduction they called for. It no doubt drew upon its experience and the inherent probabilities in so doing. I therefore feel unable to accept the criticisms made by Mr Webb of its approach. It did the best it could in all the circumstances and it arrived at a realistic figure. If Mr Webb thinks it was unduly generous to Mrs Webb, he has only himself to blame. Nor can I accept the criticisms advanced by Mrs Webb. A deduction of some kind had to be made and I think the result reached by the Court of Appeal was certainly not unduly generous to Mr Webb.
The shares in Kuru Investments Ltd
Implementation of the division
Conclusion
APPENDIX
The material provisions of the Arorangi Trust Deed
Deed made the 9th day of December 2005
I, PAUL WEBB (“the Settlor”)
HEREBY SETTLE IN TRUST the sum of ten dollars ($10.00) and such further moneys and/or property (if any) as I may subsequently settle upon this Trust,
AND as the Settlor I APPOINT to act as the Trustee of this Trust, PAUL WEBB (“the Trustee”) upon the terms of trust herein recorded, namely:
…
2. The Trust is established for the benefit of the following person or persons as Beneficiaries subject to the removal or subsequent replacement of such Beneficiaries in accordance with the provisions of this deed:
PAUL WEBB
SEBASTIAN PAUL WEBB
…
3.2 Interpretation: In this deed:
(a) the interpretation of this deed in cases of doubt is to favour the broadening of the powers and the restricting of the liabilities of the Trustee;
…
5. APPOINTMENT OF CONSULTANT TO TRUSTEE
5.1 To assist the Trustee in the administration and management of the Trust, the Trustee may appoint by letter of appointment a Consultant (“the Consultant”) who shall signify his acceptance of the appointment by signing at the foot of the said letter.
The Consultant (if any) shall be empowered to advise the Trustee upon all matters affecting the conduct of the Trust’s investments, and upon such further matters as may be elsewhere specified in this deed provided that any such advice shall not be binding on the Trustee.
6. RETIREMENT AND REMOVAL OF TRUSTEES
6.1 In the event that the Trustee shall withdraw from service as Trustee, or shall die, or for any reason shall become incapacitated to so serve, then but not otherwise, the person to be appointed to replace the then Trustee of the Trust shall be determined as the Trustee alone may direct, save and except that in the event of the Trustee’s death or mental incapacity without having made a prior determination of a replacement trustee, but not otherwise, the direction for reappointment of a trustee to the Trust shall be referred to me as Settlor.
6.2 Notwithstanding the provisions of subclause 6.1 of this deed, the Consultant (if any) shall have power during the Trust Period at his absolute discretion and without giving reasons therefore by notice in writing given to the Trustee to remove the Trustee and to appoint one or more other persons or companies (wherever resident) to be the replacement trustee or trustees.
…
9. TRUST PERIOD
9.1 The Trust is to continue for a maximum period of 21 years (the Trust Period), and shall be determined and the Trust Fund and all property of the Trust distributed to the nominated beneficiary or beneficiaries not later than upon the expiry of the Trust Period, or in the alternative shall be determined and distributed to the nominated Beneficiary or Beneficiaries at such earlier time as shall be specified upon the request to so determine and distribute made by both the Consultant (if any) and by the nominated Beneficiary or Beneficiaries.
10. NOMINATION AND REMOVAL OF BENEFICIARIES
10.1 The Beneficiaries named in clause 2 of this deed and any subsequent Beneficiaries shall remain as the Beneficiaries until replaced by any Beneficiary nomination lodged by me with the Trustee. Any such Beneficiary nomination which is legally valid shall, immediately upon being lodged with the Trustee, replace the current Beneficiaries.
…
12. RESETTLEMENT OF TRUST FUND
12.1 The Trustees may at any time resettle by deed all or any part of the Trust Fund upon the trustees of any trust (whether in the Cook Islands or elsewhere) which includes for the time being among its beneficiaries (contingent or otherwise) any one or more of the Beneficiaries then living or in existence.
…
14. TRUSTEE’S CONFLICT OF INTEREST
14.1 Negation of Conflict
THE Trustee shall be entitled to act as such and to exercise all of the Trustee’s powers and discretions notwithstanding that:
…
(c) the interests or duty of the Trustee in any particular matter may conflict with his duty to the Trust Fund or any Beneficiary;
…
18. TRUST DEED MAY BE VARIED
18.1 The Trustee may at any time or times during the Trust Period, with the prior written consent of the Consultant, and without infringing the rule against perpetuities, by deed vary all or any of the provisions of this deed provided that no variation will adversely affect the benefits which have vested in Beneficiaries shall be made.
19. NON DISCLOSURE
19.1 For the avoidance of doubt, it is hereby declared that no Beneficiary hereunder nor any third party shall have any claim, right or entitlement to call for accounts (whether audited or otherwise) from the Trustee in relation to the Trust Fund and the income thereof, or to obtain any information of any nature from the Trustee in relation to the Trust Fund and the income thereof or in relation to the trusts and powers hereof.
Schedule
…
The following General Terms and Conditions of the Trust shall apply to and govern the conduct of the Trust provided that in the event of any contradiction, or conflict, or other difficulty in interpretation, the provisions of clauses 1 to 20 inclusive of this deed shall take precedence and apply to the exclusion of any provision contained in the Schedule, or implied or imposed by law, to the extent that the law shall permit me as Settlor and/or the Trustee to contract out of any such implication or imposition.
The General Terms and Conditions under which the Trust is to be conducted are as follows:
1. APPLICATION OF TRUST CAPITAL/INCOME
1.1 Until the date for distribution provided in this deed to pay apply or appropriate the whole or any portion of the capital or income of the Trust as the Trustee shall in its uncontrolled discretion think fit in discharge of such debts and obligations of the Trust fund or of the Trustee as may exist from time to time and for or towards the personal use support benefit maintenance education or advancement in life of such of the beneficiaries as may from time to time be living and of any one or more to the exclusion of the other or others as the Trustee in his sole uncontrolled discretion shall think proper without the Trustee being obliged to preserve the income generating potential of the Trust assets, nor to preserve the capital of the Trust.
…
[Signed by Paul Webb as Settlor]
[Signed by Paul Webb as Trustee]
LORD WILSON: (dissenting)
112. The evidence referable to the tax debt is as follows:
(a) The husband did not file tax returns in New Zealand for the eight years from 2001 to 2008 inclusive.
(b) He resided in New Zealand throughout that period and, at any rate latterly, in a property in Remuera, Auckland.
(c) He married the wife in 2005.
(d) Thereafter they enjoyed what the trial judge found to be a high standard of living.
(e) In 2011 the Commissioner began to investigate the husband’s tax affairs.
(f) In 2012 he was convicted of aiding and abetting the wife to obstruct the Commissioner’s lawful search of the home in Remuera by hiding two hard drives.
(g) In about 2012 the Commissioner issued substantial default assessments against him, inclusive of interest and penalties.
(h) In particular she contended that he had falsely represented that income earned by him during those eight years had been loans or owed to trusts rather than to himself.
(i) In 2013 the Commissioner obtained a freezing order which enabled her to enter a caveat against dealings in the title to the home in Remuera.
(j) In 2016, shortly after his separation from the wife, the husband, by counsel, challenged the assessments before the Taxation Review Authority. But Judge Sinclair dismissed the challenge and confirmed the assessments.
(k) The husband sought judicial review of Judge Sinclair’s determination but presumably the application failed.
(l) At the hearings in 2017 before Potter J (“the trial judge”) and the Court of Appeal the debt, inclusive of interest and penalties, was taken to be about NZ$24m.
(m) In 2017 the Commissioner sought judgment against the husband in the Auckland District Court. She included a claim for unpaid tax referable to five further years, from 2010 to 2014, so the total claim rose to about NZ$26m.
(n) Following a hearing in that court in 2018, which the husband attended in person, Judge Cunningham struck out his defence and entered judgment for the Commissioner in the sum claimed.
(o) In his judgment Judge Cunningham noted that the Commissioner was proposing to take bankruptcy proceedings against the husband.
(p) At the hearing before the Board in January 2020 Mr McAnally on behalf of the husband stated on instructions that the Commissioner had issued proceedings in the High Court of New Zealand for the appointment of receivers of his client’s property situated both in New Zealand and in the Cook Islands.
115. It is important to understand the reasoning of the Court of Appeal in concluding that the tax debt was not deductible. It is incomplete to describe it as having been that the debt was unlikely to be enforceable in the Cook Islands. Its reasoning was more focused: it was that the debt was not enforceable against the matrimonial property owned by the husband because the property was situated in the Cook Islands where the debt was unenforceable. In para 34 of its judgment the Court of Appeal reasoned as follows:
“The sole reason for allowing a personal debt to impact on the matrimonial property division under section 20(5)(b) is to protect a debtor spouse’s unsecured creditors. But if, for whatever reason, an unsecured creditor would not be able to execute a judgment against the assets in question there would no longer be any rationale for allowing the debtor spouse to set off that debt against his or her matrimonial property assets.”
117. But a rule is not firm unless it is taken to mean what it says.
120. The Court of Appeal’s construction also has, I respectfully suggest, the curious and inconvenient consequence of requiring a court, confronted with a claim to deduct a debt under section 20(5)(b), to determine, without assistance from the creditor, whether the debt is enforceable against specified assets. The present case offers a perfect example. Into the determination of a modest dispute about the division of matrimonial property under the Act the Court of Appeal insinuated a massive issue, on which there is no authority and which has substantially generated the appeal to the Board: whether a debt, now a judgment debt, owed by the husband to the Commissioner is enforceable in the Cook Islands. The issue falls to be determined in the light of the unique relationship, past and present, between New Zealand and the Cook Islands; and without a contribution from the Commissioner, who would surely have been able to assist the court, and now the Board, in relation to it with greater authority than either of the spouses.
121. The Board concludes, in my view boldly, that the Commissioner would be unable to enforce in the Cook Islands the judgment which she had obtained in New Zealand, whether directly or by seeking a replicate judgment there with a view to its enforcement. But, even if so, section 655(1) of the Cook Islands Act 1915 in New Zealand, not brought to the attention of the Court of Appeal, provides:
“Bankruptcy in New Zealand shall have the same effect in respect to property situated in the Cook Islands as if that property was situated in New Zealand.”
Parliament in New Zealand has repealed many sections of the 1915 Act but not section 655. In para 66 of its Advice the Board seems to suggest that the Cook Islands might now decline to afford to a New Zealand bankruptcy order the effect for which the law of New Zealand continues to provide. But there is no material to support that surprising suggestion. Indeed in my view it would be equally fanciful to consider that, if otherwise obliged to recognise the right of the Official Assignee in New Zealand to assert title to the debtor’s property in the Cook Islands, the court there could decline to recognise it by reference to the identity of the Commissioner as the petitioning creditor behind the bankruptcy.
122. Had I regarded it as necessary to ask whether the husband’s tax debt is enforceable against his matrimonial property in the Cook Islands, my answer would have been that it is enforceable, at any rate indirectly through bankruptcy even if not directly.
“To qualify under section 20(5) a proposed deduction must constitute a ‘debt’ … it seems probable that a debt is intended to qualify if a spouse has an existing legal liability to pay … a sum of money either certain or capable of estimation which liability is likely to be satisfied by the debtor-spouse or is actionable with a real prospect of recovery on the part of the creditor.”
Note that nowhere in his book did Mr Fisher distinguish between the meaning of the word “debts” in subsection (5)(a) and in subsection (5)(b); nor did he cite any authority which supports the Court of Appeal’s construction of the word when found in subsection (5)(b).
(a) the husband is a citizen of New Zealand;
(b) from 2005 he resided with the wife in the home in Remuera until they moved to the Cook Islands in 2013;
(c) in 2016, after he left the Cook Islands, he resumed residence in the home in Remuera;
(d) he still resides there;
(e) in the absence of evidence it is reasonable to assume that he is again generating income in New Zealand;
(f) he regarded it as in his interest to challenge the Commissioner’s assessments to the fullest possible extent; and
(g) the Commissioner has taken active, and no doubt expensive, steps to secure and enforce the liability, first by obtaining a freezing order, then by obtaining a judgment against the husband and now by applying for the appointment of receivers of his property.