A Critical Analysis of Sham Trusts

AuthorDavid Mallon
© 2017 David Mallon and Dublin University Law Society
This article will examine the application of the sham doctrine to trusts
and analyse whether the courts have taken a consistent approach when
considering the powers settlors retain in particular situations. It will
examine proposed arguments against the sham doctrine’s application to
the law of trusts. Continuing on from this analysis, this article will
provide a commentary on whether the courts have clearly and cogently
set out parameters and guidelines for settlors and trustees as to what
actions and levels of control will lead to defining a certain arrangement
as a sham trust. Finally, in order to appropriately determine the question
of how the courts deal with settlors who retain a certain level of control
over a trust, it is argued that the real matter that needs examination is
the existence of a common intention.
If a settlor enjoys all the benefits of a trust during his lifetime while
breaching basic trust principles, the court will abrogate the arrangement
as if it never existed. The sham trust in these situations will fail for want
of due execution. As demonstrating the existence of a sham trust is
increasingly difficult, in many jurisdictions a creditor could also allege
that the settlor was trying to protect their assets in conflict with the rules
of insolvency which act as an additional safeguard to protect against
mischievous settlers.
A trustee should also be particularly concerned with the financial
repercussions arising from a determination that the trust in question is a
sham. He may be able to retain fees and expenses properly paid to it from
the trust fund prior to the finding of sham, but there is the possibility
that fees paid might be subject to a tracing claim brought by the settlor’s
creditors for example. There is an argument to be made, however, that
there should be no question of fees should a sham trust be proven
because the fiduciary role of the trustee to the beneficiaries was non-
existent as the trustee elected to accommodate a false scheme by acting
merely as the bare trustee or nominee of the settlor.
I. What is a sham?
2017] Sham Trusts
Something may be labelled a sham when arrangements or documents
exist which have been falsely created to ‘prevent a court from getting at
the real truth of the matter’.
The classic definition is that stated by
Diplock LJ in Snook v London and West Riding Investments Ltd:
…it means acts done or documents executed by the parties to the
‘sham’ which are intended by them to give to third parties or to the
court the appearance of creating between the parties legal rights
and obligations different from the actual legal rights and
obligations (if any) which the parties intend to create.
The Snook definition has been accorded ‘canonical’ status
and is applied
to shams regardless of the particular area of law involved. Shams in
general have quite a wide ambit in their application. They will occur in a
situation that has been orchestrated ‘while professing to be one thing, it
is in fact something different.’
There are many situations in which the
doctrine will apply, as was noted by Munby J in A v A and St George
Trustees Ltd.
II. Sham trusts
The sham doctrine’s application has not been the subject of much
academic discussion.
However, such case law as there is has recognised
and supported the notion that the application of the sham doctrine is
appropriate when considering the validity of trusts,
although some
judicial comments have highlighted the difficulty in distinguishing
whether the doctrine is appropriate when analysing certain facts. As it is
a well-accepted convention that the sham doctrine applies to gifts, many
of which are settled by way of trust, it is only logical that the doctrine
applies to trusts. The alternative would be a situation whereby the use of
trusts as opposed to gifts would be open to abuse.
Official Assignee in Bankruptcy v Wilson [2008] NZCA 122.
[1967] 2 QB 786, 802.
A v A [2007] EWHC 99 (Fam) [32].
WT Ramsay Ltd. v Inland Revenue Commissioners [1981] 2 WLR 449 [323].
A (n 3) [54].
Geraint Thomas and Alastair Hudson, The Law on Trusts (OUP 2004) 29-30; David Hayton
(eds) Underhill and Haytons’s Law Relating to Trusts and Trustees (17th edn, London 2007)
Midland Bank Plc v Wyatt [1995] 1 FLR 696 (Ch); A v A [2007] EWHC 99 (Fam).

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