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Lecture 10 Invalidating Factors & Rule against Perpetuities

A trust which meets the requirements of validity may be invalidated if some vitiating factor
is engaged. In such circumstances, the trust may be void or voidable.
Voidable in instances under statute or the general law where a person has
standing to set aside a trust that would otherwise be valid.
Void where a trust automatically fails.
Equitable Doctrines Impacting on Volition
Express trusts are created by an act of actual intention; but if the act is not entirely
voluntary, then there are well-established doctrines which may justify the setting aside of
the trust.
Mistake
The Court may set aside a voluntary disposition entered into by mistake, Pitt v Holt (2013):
Pitts husband suffered serious brain damage in an accident, so she was appointed
his receiver under the Mental Health Act 1983 (UK) and was paid the damages. She
and settled the moneys on a discretionary trust which could have been established
without inheritance tax liability if it had complied with the requirements of s 89 of
the Inheritance Tax Act 1984 (UK), but those requirements were not complied with,
so large inheritance tax liabilities arose on the husbands death.
It was held that the equitable jurisdiction to set aside a voluntary disposition on the
ground of mistake was exercisable whenever there was a causative mistake which
was so grave that it would be unconscionable to refuse relief; that the test would
normally be satisfied only when there was a mistake either as to the legal character
or nature of the transaction, or as to some matter of fact or law which was basic to
the transaction; that a causative mistake differed from inadvertence, misprediction
or mere ignorance, but forgetfulness, inadvertence or ignorance, although not as
such a mistake, could lead to a false belief or assumption which the law would
recognise as a mistake. Pitts claim failed.

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The test from Pitt v Holt (2013) is:


1. That there was a mistake,
2. It was a relevant type of mistake
3. It was sufficiently serious to satisfy the Ogilvie v Littleboy test.

Duress or Undue Influence


If the settlor created the trust but his volition was affected by duress or undue influence
then the trust is voidable at the suit of the settlor.
Other equitable doctrines may also apply, particularly where trusts are created for
consideration (unconscionable dealing). Issues as to capacity (testamentary or otherwise)
must also be considered.

Statutory Rights to Set Aside Trusts


A number of statutory regimes allow individuals with appropriate standing to set aside a
trust in whole or in part.
Insolvency Law
In the insolvency context, a liquidator or trustee in bankruptcy may be able to challenge the
validity of a trust in the interest of unsecured creditors.
In cases of personal insolvency, a trustee in bankruptcy may avoid a
trust on three grounds:
1. Bankruptcy Act 1966 (Cth) s 120 undervalued transactions
occurring within 5 years of the date of the bankruptcy.
2. Bankruptcy Act 1966 (Cth) s 121 if the main purpose of the
trust is to defeat creditors.
3. Bankruptcy Act 1966 (Cth) s 122 if the disposition constitutes a
preference to a creditor within the statutory timeframe.
In cases of corporate insolvency, the operative provision is the Corporations Act 2001 (Cth)
s 588FE. A liquidator may seek to avoid a trust if it constitutes an insolvent transaction
which is also an unfair preference within the meaning of ss 588FA and 588FC, or an
insolvent transaction which is also an uncommercial transaction within the meaning of ss
588FB and 588FC.

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The court has a broad discretion in terms of orders it can make in response to such an
application. Such actions must be commenced within three years of the relation-back day or
12 months of a liquidator being appointed.
Fortress Credit Corporation (Australia) v Fletcher (2015):
The High Court held that a court can make an order extending time under s 88F(3)(b)
without identifying the particular transaction or transactions to which it would apply.
That construction is consistent with the evident purpose of s 88F(3)(b), to allow the
court to mitigate the strictness of the time limits imposed by s 588FF(3)(a) in an
appropriate case. The reenactment of s 588FF(3), which took place after the holding
in BP Australia v Brown that a court could make an order granting an extension of
time in general terms, may be taken to support that construction.
By s 228 of the Property Law Act 1974 (Qld), there is also a longstanding jurisdiction to set
aside dispositions entered into with the intention of defrauding creditors.
Many high-wealth individuals have often sought to use trusts to minimise the risks
associated with relationship breakdown. Under the Family Law Act 1975 (Cth) s 79, the
courts have a broad discretion to make orders in respect of the property of a marriage as
the court considers just and equitable Stanford v Stanford (2012):
The wife suffered a stroke, moved into full time residential care, and later diagnosed
with dementia. The husband provided for her care and set aside money in a bank
account to meet the costs of her medical needs or requirements. He continued to
live in the matrimonial home. The wife (by one of her daughters) applied for orders
altering interests in the marital property between the wife and her husband. A
magistrate ordered that the husband pay his wife $612,931, which represented the
amount assessed as her contribution to the matrimonial assets.
The Court held that there was no basis to conclude that it would have been just and
equitable to make a property settlement order had the wife been alive. She had not
expressed a wish to divide the property, and her needs were being met by a
maintenance order. The bare fact of physical separation, when involuntary, does not
without more show that it is just and equitable to make a property settlement order.

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Under the Family Law Act 1975 (Cth) s 106B, the court may set aside any instrument or
disposition intended to defeat the making of orders under the regime: Kennon v Spry (2008)
The case involved a family trust set up by the father, Spry, in 1981 and amended
several times up to 1998. The beneficiaries of the trust included the children and
their spouses. Spry and the children argued that s 106B was not applicable in respect
of either the 1998 Instrument or the 18 January 2002 Dispositions as the divorce was
a supervening event which defeated any anticipated orders.
It was held that, because the 1998 Instrument effectively disposed of Mrs Spry's
equitable right to be considered in the application of the Trust fund, and having
regard to the trial judge's conclusions about the purpose of the instrument, the
order setting it aside was an appropriate exercise of the Court's power under s 106B.
Under the Succession Act 1981 (Qld) s 41, an eligible applicant (e.g. spouse, child or
dependant) may apply for further provision out of the estate of the deceased. This permits
the court to read and construe a will contrary to the deceaseds intentions to make further
provision. In doing so, the court may set aside the trust in whole or in part.

Illegality and Public Policy


If the objects of a trust are illegal, the trust may be held to be void: Nelson v Nelson (1995):
McHugh J: The imposition of the civil sanction must further the purpose of the statute
and must not impose a further sanction for the unlawful conduct if Parliament has
indicated that the sanctions imposed by the statute are sufficient to deal with conduct
that breaches or evades the operation of the statute and its policies. In most cases, the
statute will provide some guidance, express or inferred, as to the policy of the legislature
in respect of a transaction that contravenes the statute or its purpose. It is this policy that
must guide the courts in determining, consistent with their duty not to condone or
encourage breaches of the statute, what the consequences of the illegality will be. Thus,
the statute may disclose an intention, explicitly or implicitly, that a transaction contrary to
its terms or its policy should be unenforceable. On the other hand, the statute may
inferentially disclose an intention that the only sanctions for breach of the statute or its
policy are to be those specifically provided for in the legislation.

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A trust may be challenged if it is a sham: Raftland v Federal Commission of Taxation (2008):


A company, Raftland, sought to minimise its tax by channelling profits through an entity with
substantial accumulated tax losses. An unrelated loss bearing unit trust was acquired
through a firm of accountants. The loss bearing trust was designated as the tertiary
beneficiary of a discretionary trust.
Raftland was the trustee of that trust. Ostensibly, the tertiary beneficiary was entitled to
receive distributions from the discretionary trust. Group profits for the 1995 tax year were
distributed to Raftland. In turn, it passed resolutions to distribute its entire income to the
loss bearing trust in two transactions, but the second was never paid.
There was an apparent discrepancy between the entitlements appearing on the face of the
documents and the way in which the funds were applied. The court found that this
discrepancy gave rise to a question whether the documents were to be taken at face value
or as not fully disclosing the legal rights and entitlements for which they provide on their
face. On that basis, the court acknowledged that the term sham may be employed here.

Trusts may be declared void on other policy grounds, such as restrains on alientation of
property or trusts for immoral purposes.
Rules against Perpetual Dispositions
A significant policy ground is that of perpetual dispositions.
There are three distinct rules:
1. Against perpetual trusts (intended to last indefinitely)
2. Against perpetual accumulations of trust income
3. Against remoteness of vesting
The first rule is a rule against indestructible trusts. A trust cannot seek to prevent
beneficiaries from eventually using and exhausting the capital of the trust.
The second rule involves circumstances where there is a power or direction to accumulate
income, but the rule provides that the accumulation must not extend beyond the perpetuity
period: Property Law Act 1974 (Qld) s 222.
The third rule is the modern rule against perpetuities or remoteness of vesting.

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The Rule against Remoteness of Vesting


By definition, the rule only applies to non-vested interests. It regulates the maximum
permissible time between creation of the interest and when it ultimately vests. At common
law, several steps are required to determine whether a disposition offends the rule.
1. The rule actually applies it must be a non-vested interest (such as contingent
remainders or executory interests), as well as determinable interests and powers in
ss 219 and 208 of the Property Law Act 1974 (Qld).
2. Time when the interest is created the date from which the perpetuity period runs.
For a testamentary disposition, it is the date of the testators death, per s 206A of
the Property Law Act 1974 (Qld).
For an inter vivos disposition, the interest is created when it is intended to come into
effect: ss 45, 47 of the Property Law Act 1974 (Qld).
3. Who are the lives-in-being? the length of the perpetuity period is determined by
the lives-in-being, who are:
a. Natural persons alive when the interest was created
b. Expressly or impliedly referenced in the disposition
c. If referenced as members of class, members of a closed, ascertainable class
In determining the measuring lives and whether a named class is capable of
increase, there are statutory presumptions which overcome ridiculous
hypotheses about fertile octogenarians and precocious toddlers, per s 212 of
the Property Law Act 1974 (Qld). Under the general law, the measuring lives will
also include a child en ventre sa mre, per Thellusson v Woodford (1799):
It is true that for some purposes as at the common law, to take by descent and
to take by remainder a child, who is in ventre sa mere when the estate designed
for him would devolve upon him if he were born, becomes entitled to it after he
is born and may then enter upon it and divest it from the first taker. But his title
to enter upon the estate after his birth is not a consequence of his supposed
existence during the time he was in ventre sa mere, but because by his taking by
descent, the law, at the instant of his birth, invests him, though a posthumous
child, with the character of heir, and consequently with all the rights of heirship;
and because, when he claims by way of remainder, it is expressly provided that
the remainder shall vest in him upon his birth.

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4. The perpetuity period it runs from the date the interest is created until 21 years
after the death of the last-surviving life-in-being, per Air Jamaica v Charlton (1999):
Lord Millett: Its effect is that no interest is valid unless it must vest, if it vest at
all, within a period of a life in being at the date of the gift plus 21 years. The rule
is applied remorselessly. A gift is defeated if by any possibility, however remote,
it may vest outside the perpetuity period. It is not saved by the fact that, in the
event, it vests inside the period.

5. Apply the rule is it theoretically possible for one or more of the non-vested
interests to vest, if at all, outside the perpetuity period as defined. If yes, the
disposition is void for perpetuity.
The inflexible operation of the rule against remoteness of vesting prompted a number of
statutory reforms, including:
a) The wait and see rule under s 210 of the Property Law Act 1974 (Qld). The
disposition will not be declared void unless and until it becomes clear that the
relevant interests will vest, if at all, outside the perpetuity period.
b) The number of lives-in-being may be increased under s 210(5) of the Property Law
Act 1974 (Qld), which may be compared with the class-closing rules of construction
in Andrews v Partington (1791).
c) The age-contingency reduction rule under s 213(1)-(2) allows that, if there is an agecontingency in the disposition which will cause the gift to fail, then one may reduce
the age contingency to the minimum extent necessary (but no lower than 18 years)
to preven the gift from failing.
d) The severance rule under s 213(3). If the disposition would fail because some
members of the class will fail to qualify for their interest within the perpetuity
period, then the non-qualifying class members may be excluded and the disposition
valid with respect to those who did qualify.
e) A perpetuity period in the disposition itself for 80 years can be defined per s 209
to avoid the difficulties above.

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