It’s an all-too-common scenario. When you try to recover your money from a debtor, you find that all his/her assets (including the luxury home, holiday house and ocean-going yacht) are held by a family or business trust.
Creditors: Follow the Assets
- Prevention being as always better than cure, investigate your debtor’s financial position before granting credit, and take suretyships and other security from the trust and any other related entities that actually hold any of your debtor’s assets.
- Look for loan accounts and unlawful dispositions. Where assets have been transferred into a trust (or to any other third party), the transfers may be impeachable in terms of our insolvency laws. Where the asset transfers were lawful, the trust may well still owe your debtor money for their value, whether or not appropriate loan accounts are actually shown in the trust’s financial records. Such monies may then be recovered as assets in your debtor’s estate.
- Attack the trust directly. A recent High Court judgment discusses two ways of achieving this. Read on below.
The Insolvent and the Properties
The trustees of an insolvent estate asked the High Court to declare that two properties, one held by a family trust and one by a company, be treated as assets in the insolvent estate.
The Court refused the application on the facts, but its analysis of the applicable law provides practical advice both to creditors (on how to attack a trust) and to the trust’s trustees (on how to protect it).
One must, held the Court, distinguish between two different lines of attack –
- Firstly you can try to establish that a trust is a sham. A trust will be a sham if factually “the requirements for the establishment of a trust were not met, or ….. the appearance of having met them was in reality a dissimulation”. If it is a sham, the trust does not exist; or
- If the trust isn’t a sham, it exists. But you can still ask a court to “go behind the trust form” or to “pierce its veneer”. If you succeed, the court will disregard “the ordinary consequences of [the trust’s] existence” and can for example declare trust assets to be assets in the trustee’s personal estate. “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”, most likely to present, said the Court, where “trustees treat the property of the trust as if it were their personal property and use the trust essentially as their alter ego – an all too frequent phenomenon in certain family and business trusts in which the trustees are both the effective controllers as well as the beneficiaries.”
Trustees: Defending your Trust
Trusts can legitimately be used both as estate planning tools and to protect assets from the risks of business failure, but only if they are structured and administered correctly.
So take advice upfront on how to structure the trust and its founding deed, what trustees to appoint and how to appoint them, and how to manage its affairs. Avoid any suspicion that the trust is a sham or that it is being used dishonestly or as an alter ego for the trustees. In particular distinguish clearly between control of the trust’s assets and “use and enjoyment” of them.