IN TRUSTS WE TRUST

by LUCINDE RHOODE (Website)

Creditors as parties to litigation often find themselves in a predicament where the individual they have a claim against has assets of insignificant value, but being a trustee of a discretionary trust owning substantial assets.

Creditors are left with little else to do but to ask a court to “go behind the trust” to try and find assets against which it can execute a judgment.

Allegations of a trust being a debtor’s “alter ego” or “a sham” often find their way into pleadings and are often used interchangeably.

Our courts have to date mostly shied away from declaring assets registered in a trust to be regarded as assets falling within the personal estate of one of such trust’s trustees, in the hope of being able to execute a judgment against the assets of such trust, and the recent judgment of VAN ZYL AND ANOTHER NNO v KAYE NO AND OTHERS 2014 (4) SA 452 (WCC) has made it even more difficult to do so.

In the VAN ZYL matter Binns-Ward J had to determine whether two immovable properties, one registered in the name of a trust and the other in the name of a company, must be treated as assets in the insolvent estate of one Mr Kaye.

The trust in question was a family trust of which Kaye, his wife and an attorney were the trustees. The property owned by the trust was used by Kaye and his family as their family home. The beneficiaries of the trust were Kaye, his wife and their descendants.  It appeared from the facts before court that financial transactions might have been recorded in the books of various entities over which Kaye exercised control in a manner that did not represent a correct representation of the flow of funds.

The court clarified the difference between finding that a trust is a sham and going behind a trust.  To hold that a trust is a sham, in other words non-existent, will be a finding of fact inter alia on the basis that the requirements for the establishment of a trust were not met, in which event the “trustees” of the trust acted as agents of Kaye when acquiring the property.

The court found that even a delinquent discharge by trustees of their responsibilities, resulting in only one trustee exercising unfettered de facto control over the trust assets or the maladministration of an asset of the trust is not enough to justify a finding that a trust is a sham, that the trust does not exist or that an asset no longer vests in the trust.  All that it does is call into question the fitness of the trustees to hold office.

Going behind the trust form, on the other hand, entails accepting that the trust exists, but disregarding for given purposes the ordinary consequences of its existence. This might entail, the court found, holding the trustees personally liable for an obligation ostensibly undertaken in their capacity as trustees, or holding the trust bound to transactions seemingly undertaken by the trustees acting outside the limits of their authority or legal capacity or in cases where the trustees treat the property of the trust as if it were their personal property and use the trust essentially as their alter ego.  As this is an equitable remedy, it is a remedy that will generally be given when the trust form is used in a dishonest or unconscionable manner to evade a liability or avoid an obligation and not in a situation where a creditor seeks relief against a debtor who is a trustee of a trust.

The court pronounced that there is nothing untoward in trusts being established for the purposes of holding family homes separately or even for a trustee personally paying the mortgage bond and maintenance expenses in respect of such property.

The court went on to find that even if it were to be accepted that Kaye administered the trust without proper regard to his fiduciary duties and in a sense treated it as his “alter ego“, that does not, in itself, make the trust a sham, nor does it vest ownership of the trust’s assets in the trustees of his insolvent estate.

So what does this all mean?  It appears that this judgment is a further nail in the coffin for creditors trying to recover debs from debtors who as part of their estate planning registered all “their” assets in trusts.

As this avenue has now become more difficult to explore parties to transactions will have to be more astute to ensure they have sufficient security in place in respect of debts due to them, in the form of suretyships or security bonds.

Lucinde Rhoode – Director-Dispute Resolution – Cliffe Dekker Hofmeyr Inc – Cape Town

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.