A Critical Analysis of Sham Trusts

• Author: David Mallon
• Pages: 162-183

© 2017 David Mallon and Dublin University Law Society

A CRITICAL ANALYSIS OF SHAM TRUSTS

DAVID MALLON*

Introduction

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

163

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’.

1

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.

2

The Snook definition has been accorded ‘canonical’ status

3

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.’

4

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.

5

II. Sham trusts

The sham doctrine’s application has not been the subject of much

academic discussion.

6

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,

7

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.

1

Official Assignee in Bankruptcy v Wilson [2008] NZCA 122.

2

[1967] 2 QB 786, 802.

3

A v A [2007] EWHC 99 (Fam) [32].

4

WT Ramsay Ltd. v Inland Revenue Commissioners [1981] 2 WLR 449 [323].

5

A (n 3) [54].

6

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)

78-82.

7

Midland Bank Plc v Wyatt [1995] 1 FLR 696 (Ch); A v A [2007] EWHC 99 (Fam).