By Clement Marumoagae
In P A F v S C F, the parties were married to each other out of community of property subject to the accrual system. The husband instituted divorce proceedings against the wife. Before the commencement of the divorce trial, the husband created a trust under the laws of Britain. The parties’ minor daughter was the sole beneficiary and the husband’s brother was the sole trustee of the trust. The parties were the residual trustees of this trust. The day the trust was established, the husband made an irrevocable and unconditional donation of the sum of 115 000 Pounds to the trust. The husband also transferred a sum of 125 000 Pounds into the bank account of his father, which he claimed to be the repayment of a loan his father advanced to him approximately 25 years ago. The High Court held that these transactions were made with the fraudulent intention of depriving the wife of her rightful accrual claim. It ordered that the value of the two transactions to be deemed to be part of the husband’s assets for the purposes of calculating the accrual.
Unhappy with this order, the husband appealed to the full-bench, where he applied to lead further evidence regarding the legal opinion he sought from a Senior Counsel regarding the lawfulness of establishing a trust and making a donation to it. He argued that he established the trust based on that opinion, which was to the effect that the establishment of the trust and the donation made to it was not unlawful and that the reasons for the husband creating the trust were legitimate. The full-bench dismissed the appeal. The husband appealed further to the SCA and insisted on leading further evidence. The SCA was of the view that there was no merit in the application to lead further evidence since the evidence sought to be led would not be practically conclusive and final in its effect on the issue of the lawfulness of the donation. The SCA found the evidence sought to be led to be incontrovertible in nature and required oral evidence to be adduced, which the court found could not be done on appeal.
The main issue that the SCA had to determine was whether the high court correctly made an order that the amount donated to the trust should be part of the applicant’s estate for the purposes of the accrual calculation. The husband had already conceded that the donation to his father was unlawful. In determining this matter, the SCA restated trite matrimonial principles as follows:
- Section 3 of the Matrimonial Property Act provides that at the dissolution of a marriage subject to the accrual system, the spouse whose estate shows no accrual or a smaller accrual than the estate of the other spouse, he or she acquires a claim against the other spouse for an amount equal to half of the difference between the accrual of the respective estates of the spouses;
- Where trust property is involved, the default position is that such property does not form part of the personal estate of the trustee, except in so far as the trustee as the trust beneficiary is entitled to the trust property;
- The court has discretion to pierce the trust veil where it finds that the trust is simulated or a sham. The trust veil can also be pierced where there has been abuse of the trust form;
- If it is found that the trust is a sham, the result is that no effect will be given to the transaction and the founder will remain the owner of the trust assets and neither the trustee(s) nor the beneficiaries will acquire any rights with regard to these assets.
- Piercing the trust veneer implicitly recognises the validity of a trust in the legal sense, but finds that there may be a justification to disregard the ordinary consequences of its existence for a particular purpose.
The SCA found that the wife in her amended pleadings accepted the formalities in respect of the trust. The husband argued that in light of the wife’s admission of the formalities of the trust, the High Court was precluded from determining that the donation was made for the sole purpose of reducing the wife’s accrual claim. The SCA rejected this argument and held that the wife in her pleadings, made it clear that she wanted the high court to pierce the trust veil and order that the donation to the trust be considered for the purposes of determining the accrual. The SCA held that where there is an allegation that one of the spouses had sought to transfer his assets to a trust with a view to reduce the value of his estate and the accrual liability, a court is not precluded to enquire into that issue. Further that, as was held in RR v DP and Others 2014 (6) SA 243 (ECP), the power to pierce the trust veil is derived from the common law and not from any general discretion a court may have. The court is empowered to conduct an in-depth examination of the facts to determine whether the trust form had been abused. The court held further that were such abuse is established, the court has the power to look behind the trust and order that the value of assets unlawfully placed in the trust be considered in the accrual calculation. The court emphasised that this power is not exercised based on the Matrimonial Property Act or Divorce Act but the common law. The SCA held further that in pursued of financial equality during divorce, the spouses cannot be allowed to reduce the true value of their accrual by transferring assets to a trust. Most importantly, the SCA held that where the trust form is abused to prejudice an aggrieved spouse’s accrual claim, a court should exercise its wider power in terms of the common law to prevent such prejudice. The SCA confirmed that trust assets may be used to calculate the accrual of a trustee or founder spouse’s estate if the trust form had been abused to the prejudice of the other spouse’s accrual claim. The SCA further confirmed the following principles outlined in Badenhorst v Badenhorst 2006 (2) SA 255:
- To succeed in a claim that trust assets should be included in the estate of one of the parties to a marriage there needs to be evidence that such party controlled the trust and but for the trust would have acquired and owned the assets in his own name;
- While the control of the trust is in the hands of the trustees, often founders of family trusts appoint close associates to do their dibbing in these trusts, thereby assuming real control of these trusts;
- To determine whether a party has such control, it is necessary to have regard to the terms of the trust deed and consider the evidence of how the affairs of the trust were conducted during the marriage.
However, the SCA was of the view that the control test established in Badenhorst did not find application in this case, because the trust was established on the eve of divorce and the brother did not appear to be doing the bidding for the husband. Notwithstanding this test not being applicable, the SCA was of the view that it was entitled to determine the matter based on the allegation that the trust was abused to prejudice the wife’s accrual claim. It emphasised that the absence of control did not necessarily exclude the possibility of trust form abuse, which the court is bound to examine. The SCA held that where abuse is established, it was entitled to pierce the trust veil despite the absence of control. After assessing the timing of the creation of the trust, the establishment of the trust in Britain, the husband’s failure to consult the wife about the creation of the trust, and the fact that there was no immediate need to provide maintenance for the minor child, the SCA agreed with the high court that the husband’s trust was a sham and refused his special leave to appeal.
It cannot be denied that the establishment of sham trusts is one of the ways in which spouses can place assets that increase their estates from the reach of their other spouses thereby prejudicing such other spouses’ patrimonial claims on the dissolution of marriages. With this decision, the SCA has sent a clear message to those who wish to financially prejudice their spouses on divorce that courts will carefully and thoroughly examine the nature and character of their trusts to establish true purpose. Further that, if found to have been created to financially prejudice their spouses, courts will order that the value of such assets be considered when the patrimonial assets are determined. If you are divorcing and you wish to be assisted by legal practitioners who pay attention to details, feel free to contact us.
