Under attack

Sunday, 01 April 2012
South African trust law is moving ahead rapidly. The author reports on the groundbraking case of FNB v Britz and others.

Although South African courts have already allowed a creditor to attack a trust, a recent case has become the first time the concept of ‘piercing the veil’ in relation to a trust was accepted. Lawyers will no doubt read about First National Bank (FNB)v Britz and Others (54742/09) [2011] ZAGPPHC 119 with great interest, poised for many more such attacks that will surely come along now.

In FNB v Britz and Others, a creditor was attempting to attach assets that the debtors said belonged to two trusts and not to them. The applicant had issued summons against Mr and Mrs Britz. The summons was for claims due in respect of sureties signed by Mr and Mrs Britz. The applicant attorneys issued a warrant of execution against Mr and Mrs Britz for service at their residence. However, the applicants received a nulla bona return of service from the Sheriff of the High Court, as he stated he had failed to find sufficient disposable property to satisfy the warrant of execution. The Sheriff attached an affidavit disposed to by Mr and Mrs Britz in which they stated that during 2002 to 2004, they had donated all their movable property to the A trust and did not own any attachable assets.

The applicant’s attorneys were able to ascertain that the B trust was the sole beneficiary of the A trust. In addition, the B trust was the owner of the residence where Mr and Mrs Britz resided. Mr and Mrs Britz were the only trustees as well as the income and capital beneficiaries along with their children of the B trust. In terms of the trust deed of the B trust, the trustees were empowered in their full discretion ‘to allow any of the trust beneficiaries to reside in any immovable property which is an asset of the trust, or lease such property…’

The applicant claimed that Mr and Mrs Britz were effectively in full control of the trust and assets of the trust. They also claimed that it was probable that no formal meetings of the trustees of the trust had ever been held. The applicant maintained that the trusts were merely vehicles used by Mr and Mrs Britz to protect themselves against creditors. The applicant also claimed that the trusts were the ‘alter egos’ of Mr and Mrs Britz, and were not treated as separate entities.

The defendants claimed they had sold their movable assets to the A trust at a market value. The sale price was on loan account and every year these had been reduced by the allowable annual donations exempt amount for the period. They also claimed that they rented their residence as a fully furnished property from the B trust and were covering the bond payments out of rent which was market related.

Badenhorst v Badenhorst

The Court referred to the case of Badenhorst v Badenhorst, which created a precedent where assets could be included in the husband’s estate, for purposes of redistribution in terms of the Divorce Act, if he had de facto control of the trust.

On the issue of Mr and Mrs Britz residing at the property, which belonged to the B trust, and supposedly leasing it, the Court said: ‘They claim that they have leased the property from the B trust. They have, however, failed to produce any lease agreement or to show its existence or furnish the relevant details of such lease agreement or to justify their tenancy on the property of the trust…’

When trustees treat a trust as their “alter egos”, the veil will be pierced

Failure by Mr and Mrs Britz to provide proof there was a lease agreement between said trust and them or to furnish explanatory details of the alleged lease or to produce the lease leads to several inevitable conclusions. The first deduction is that there is no such lease agreement between the B trust and Mr and Mrs Britz, and that they use the property ostensibly owned by the trust as their own personal property. Mr and Mrs Britz do not, therefore, regard the immovable property as the separate property of the trust.

The Court also looked at the fact no balance sheets had been attached to the papers to show the income that the A trust derived from Mr and Mrs Britz using the trust’s movable assets, or to show the income the B trust derived from Mr and Mrs Britz staying on its property. That also persuaded the Court to find that Mr and Mrs Britz did not distinguish between their personal assets and the trust assets.

Piercing the veil

The issue of ‘piercing the veil’ came up, and the Court referred to Ebrahim and Another v Airports Cold Storage (Pty) Ltd (485/2007) [2008] ZASCA 113. This case included a discussion about what happens with a company where the court treats company shareholders as if they had been acting in partnership, with the consequences that they are held to be the owners of the property or are liable for its debts and other liabilities. That Court said timing depends on the facts, and the key issue was that the corporate structure had to be a mere facade concealing the true facts, particularly where a controlling shareholder did not treat the company as a separate entity but instead as their ‘alter ego’.

It was held that this principle can apply to a trust, meaning when the trustees of a trust do not treat it as a separate entity but as their ‘alter egos’, the veil will also be pierced. The conclusion there was no evidence that the B trust paid the bond, or that it received any rental payment from its tenants. It also seemed like the tenants assumed the trust’s obligation to pay the bond, with it being unclear whether the payments were recorded as loans or donations. The Court repeated that no detail was furnished in respect of any lease agreement or the financial statements of the B trust.

The Court felt that there was, in effect, no actual rental paid by Mr and Mrs Britz to the trust so they were not tenants on the property. The financial statements of the trust would not have revealed any rental paid. Furthermore there was no proof that the B trust operated a banking account into which any rental could be paid. As for the A trust and the movable assets, the Court felt the trust did not take physical delivery of the movable assets in as much as the movable assets remained in the physical possession and control of Mr and Mrs Britz. So there was no serious intention to transfer ownership of the movable assets to the trust. Mr and Mrs Britz had therefore not relinquished control of the assets. This was backed up by the supposed agreement transferring ownership of assets, which did not contain any specific terms for repayment of the loan and which was so short of detail that it was hard to accept its veracity.

In summing up, the Court used the Badenhorst case to declare that the trust assets had to be seen as part of the personal assets of the founder, and it was satisfied that the applicant had discharged its onus. Therefore the Court found that all the movable property and immovable property were declared to be owned by Mr and Mrs Britz, and that these assets were executable by the applicant to satisfy the judgment it obtained against Mr and Mrs Britz.

Author block
Right
Harry Joffe

Harry Joffe TEP is Head of Legal Services at Discovery Life, Johannesburg.

Topic
Trusts
Section
STEP Journal
Country
South Africa

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