14 Dec 2020

The curious case of Webb v Webb

If you want to have your cake and eat it, take a slice or two, not the whole cake.

There has been lot of noise generated by the Supreme Court decision in Webb v Webb* regarding the settlor reserved powers aspect of the case, little of which is worth the airtime. Many practitioners have been warning for years about taking liberties with reserved powers and the danger of stretching the concept too far. Like an elastic band, stretch it far enough, and it will snap.

In this case, reserving a personal (as opposed to fiduciary) power for Mr Webb to declare at any time that he was the only beneficiary of the Trust, made it an easy decision that he had failed to make an effective disposition of property, as the rights he enjoyed in respect of the trust assets, were indistinguishable from personal ownership. Had he not had this power, then it would have been interesting, based on the extensive other powers he had reserved, to see whether he had created a valid trust or not.

Prudent practitioners have always had reservations about taking things to extremes, whether it be about trying to oust the responsibilities for which a professional trustee is paid (as in Zhang v DBS – can you really have a trustee with no obligation whatsoever for oversight?), or about creating trusts with so many reserved powers that you scratch your head and wonder whether it is a trust, or any form of disposition, at all. It is good to see the courts across the world putting the brakes on. If you want to have your cake and eat it, take a slice or two, not the whole cake.

The more interesting aspect of the case was the tax point, which was considered in the context of whether a New Zealand tax debt should be taken into account in determining the value of matrimonial property situated in the Cook Islands. The debt was found to be unenforceable in the Cook Islands.

The conclusion (by 2-1 Lord Wilson dissenting) confirmed that you cannot enforce one country’s tax judgment abroad. This is an entirely conventional principle but interesting in this case because of the legislative and constitutional relationship between the Cook Islands and New Zealand, more particularly section 655 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”.

Mr Webb had been declared bankrupt with the main judgment debtor being the Commissioner of the Inland Revenue. It is highly arguable that the Commissioner should have been in the same position as any other judgement debtor in bankruptcy looking to enforce their rights under section 655.

* Webb v Webb (Cook Islands) 2020 UKPC 22