Abuse of the trust form (Chapter 7, 7.

6, page 168-192 of your Textbook)

❖ Please note that these is additional notes to what is stipulated in your textbook.
❖ The case law mentioned below is in your textbook with a short discussion.
❖ Also please remember to have a look at the prescribed journal articles as
already stipulated in your PowerPoint slides for Study Unit 7.
Articles

1. MJ K v II K (360/2021) [2022] ZASCA 116 (28 July 2022)

2. Trust assets and accrual claims in divorce proceedings: The Supreme Court of
Appeal muddies the waters by misconstruing its own precedent – MJK v IIK
2023 2 SA 158 (SCA) – by Bradley Smith

3. The Butcher Shop and Grill CC v The Trustees for the time being of the Bymyam
Trust (0382022) [2023] ZASCA 57 (21 April 2023)

4. Bradley S - The “leading case” that continues to confound: Badenhorst v

Badenhorst 2006 2 SA 255 (SCA) and the need, in response to Justice Binns-
Ward, for a nuanced approach to piercing the veneer of abused trusts at divorce
(part 1) TSAR 2024.1 [ISSN 0257 – 7747]

5. Bradley S - SALJ Part 4 2023_PAF v SCF (SCA) Prescient precedent: PAF v SCF
(SCA) and a new paradigm for testing whether a trust has been abused to
manipulate a spouse’s accrual (or redistribution) liability at divorce

6. Trust Assets And The Dissolution Of A Marriage: A Practical Look At Invalid

Trusts, Sham Trusts, And Piercing The Veneers Of Trusts / Going Behind The
Trust Form By Iain Matthys Shipley

7. The proper administration of trusts by Howard Sher

8. The Abuse of the Trust (or: “Going Behind the Trust Form”) The South African
Experience with Some Comparative Perspectives By Marius J. de Waal,
Stellenbosch
 1. What constitutes abuse?

In South Africa, the abuse of a trust form can take various forms, including (but not
limited to):

1. Misappropriation of Trust Property: This occurs when a trustee uses or takes

trust property for their personal gain, without the consent of the beneficiaries.
2. Self-dealing: This refers to a situation where a trustee enters into transactions
with the trust, where they have a personal interest in the transaction, without
disclosing such interest to the other trustees and beneficiaries.
3. Breach of Fiduciary Duty: Trustees are fiduciaries, meaning they have a legal
duty to act in the best interests of the trust and the beneficiaries. Any action
that is not in the best interests of the trust or the beneficiaries can constitute a
breach of fiduciary duty.
4. Mismanagement of Trust Property: Trustees have a responsibility to manage
the trust property diligently and in a manner that maximizes returns for the
beneficiaries. Failure to do so can constitute mismanagement of trust property.
5. Failure to Distribute Trust Property: Trustees have a duty to distribute trust
property to the beneficiaries in accordance with the terms of the trust deed.
Failure to do so can constitute a breach of their duties.
6. Conflict of Interest: Trustees must avoid any situation where their personal
interests conflict with their duties as trustees. Failure to do so can constitute a
breach of their fiduciary duties.

In South Africa, the Master of the High Court has jurisdiction over trust matters and
can investigate any alleged abuse of trust. The beneficiaries of the trust can also
approach the court to seek redress if they believe that the trustees have abused their
powers.

Please see:

• Nieuwoudt v Vrystaat Mielies (Edms) Bpk

• Land and Agricultural Bank of South Africa v Parker
• Badenhorst v Badenhorst
 2. Piercing the trust veneer (or going behind the trust form)

In South Africa, a trust is a legal entity that is created to hold assets for the benefit of
its beneficiaries. Trusts are often used to protect assets, manage wealth, and provide
for family members or other designated beneficiaries. However, in some cases, there
may be a need to pierce the trust veneer, which means to go behind the trust form
and treat the trust as if it does not exist.

There are several reasons why someone might want to pierce the trust veneer in
South Africa. One common reason is to avoid fraudulent or illegal activities that may
be concealed by the trust. For example, if someone is using a trust to hide assets or
avoid paying taxes, a court may allow the trust to be pierced in order to uncover the
truth.

Another reason to pierce the trust veneer is to hold the trustees accountable for their
actions. Trustees have a fiduciary duty to act in the best interests of the trust and its
beneficiaries. If a trustee breaches this duty or engages in misconduct, a court may
allow the trust to be pierced in order to hold the trustee accountable.

To pierce the trust veneer in South Africa, a party must generally show that there is a
compelling reason to do so. This may involve presenting evidence of fraud,
misconduct, or other illegal activities. If the court agrees that there is a compelling
reason to pierce the trust veneer, it may order the trust to be treated as if it does not
exist and its assets to be distributed accordingly.

In conclusion, piercing the trust veneer in South Africa is a legal process that allows
courts to go behind the trust form and treat the trust as if it does not exist. This may
be necessary in cases where there is evidence of fraud, misconduct, or other illegal
activities, or where trustees have breached their fiduciary duty.

Please see:

• Land and Agricultural Bank of South Africa v Parker

• Cape Pacific Ltd v Lubner Controlling Investments (Pty) Ltd
• WT v KT
• REM v VM
 • Van Zyl v Kaye (Also discussed in study unit 2)

2.2 What are the specific remedies that a court can craft when it
pierces a trust’s veneer?

The following possibilities have emerged from case law: (this is not an exhaustive list
because our courts follow a flexible approach)

1. imposing personal liability on a trustee for an obligation that he or she

ostensibly incurred on a trust’s behalf;
2. ordering that a trust is bound to a transaction concluded by a trustee who acted
beyond his or her capacity or authority in terms of the trust instrument; and
3. ordering that trust property must be used to satisfy a trustee’s personal liability.

2.3 Piercing the trust veneer with regard to contracts concluded by

trustees

As mentioned before, in South Africa, a trust is a legal entity that is created to manage
assets for the benefit of one or more beneficiaries. Trustees are appointed to manage
the trust and its assets, and to ensure that the trust's objectives are achieved in
accordance with its trust deed. When trustees enter into contracts on behalf of the
trust, they do so in their capacity as agents of the trust, and not in their personal
capacity.

If a trustee enters into a contract on behalf of the trust, the trust is bound by that
contract. However, there are circumstances under which the trust's liability under the
contract can be limited or excluded. For example, if the trustee exceeded their
authority in entering into the contract, the trust may not be bound by the contract.
Similarly, if the trustee failed to disclose material information about the trust to the
other party to the contract, the other party may be able to claim that the contract is
void or voidable.

In South Africa, there are a number of legal principles that govern the relationship
between trustees and the trust, and between trustees and third parties. These
principles are set out in the common law and in statutory provisions such as the Trust
Property Control Act. They are designed to ensure that trustees act in the best
interests of the trust and its beneficiaries, and that they are held accountable for their
actions.

If there is a dispute over a contract entered into by a trustee on behalf of a trust, it is

important to seek legal advice as soon as possible. An experienced attorney can review
the relevant documentation and advise on the best course of action. In some cases,
it may be necessary to take legal action to protect the interests of the trust and its
beneficiaries.

Please see:

• Land and Agricultural Bank of South Africa v Parker

• Van der Merwe v Hydraberg Hydraulics CC; Van der Merwe v Bosman

2.4 Piercing the trust veneer upon insolvency in South Africa

In South African law, a trust is a legal relationship created by a person (the founder)
who places assets under the control of another person (the trustee) for the benefit of
one or more beneficiaries. The assets placed in the trust are considered separate from
the founder's personal assets and are managed by the trustee in accordance with the
terms of the trust deed.

However, when the founder of a trust becomes insolvent (i.e., unable to pay their
debts), questions may arise as to whether the assets held in the trust can be used to
pay off the founder's debts. In such cases, the court may "pierce the trust veil" and
allow the assets of the trust to be used to settle the founder's debts.

The principle of piercing the trust veil is based on the concept that the trust is not a
separate legal entity and that the founder continues to exercise control over the trust
assets, despite the appointment of a trustee. Therefore, if the founder becomes
insolvent, the court may look beyond the legal structure of the trust and consider the
substance of the relationship between the founder, trustee, and beneficiaries.
The court may consider several factors when deciding whether to pierce the trust veil,
including:

1. Whether the trust was created to avoid creditors

2. Whether the founder continued to exercise control over the trust assets
3. Whether the trust assets were used to pay the founder's personal expenses
4. Whether the trustee acted independently and in the best interests of the
beneficiaries
5. Whether the beneficiaries received any benefit from the trust.

If the court finds that the trust was used to shield assets from creditors or that the
founder continued to control the trust assets, the court may allow the assets to be
used to pay off the founder's debts. However, if the trust was established for a
legitimate purpose and the trustee acted independently and in the best interests of
the beneficiaries, the court may not pierce the trust veil.

In summary, while a trust provides a degree of protection for assets held within it,
this protection is not absolute. If the founder becomes insolvent, the court may pierce
the trust veil and allow the assets to be used to pay off the founder's debts, depending
on the circumstances of the case.

Please see:

• Nedbank Ltd v Thorpe

• First Rand Limited trading inter alia as First National Bank v Britz
• Van Zyl v Kaye

2.5 Piercing the trust veneer upon divorce

In South Africa, trusts are commonly used as a means of asset protection, estate
planning, and tax minimization. However, in the context of a divorce, a trust can
complicate matters, as one spouse may try to use the trust as a way of hiding or
sheltering assets from the other spouse.

When it comes to divorce proceedings in South Africa, the courts have the power to
look beyond the trust and pierce its veneer to determine whether assets held in the
trust should be considered part of the matrimonial estate and subject to division
between the parties.

The court will consider several factors when determining whether to pierce the trust
veneer, including:

1. The purpose of the trust: If the trust was created primarily for asset protection
or tax minimization purposes, this may be viewed as an attempt to hide assets
from the other spouse.
2. Control over the trust: If one spouse has significant control over the trust, such
as being a trustee or a beneficiary, this may indicate that the trust was used as
a means of hiding assets.
3. The timing of the trust: If the trust was created shortly before or during the
marriage, this may be viewed as an attempt to protect assets from the other
spouse in anticipation of a divorce.
4. The nature of the assets in the trust: If the assets in the trust are directly linked
to the matrimonial property, such as the family home, this may indicate that
the trust was used as a means of hiding assets from the other spouse.

If the court finds that the trust was used as a means of hiding assets or sheltering
assets from the other spouse, it may order that the assets held in the trust be included
in the matrimonial estate and divided between the parties.

It is important to note that each case is unique, and the court will consider all relevant
factors before making a decision.

2.5.1 Piercing the trust veneer upon divorce: Marriages out of community
of property and the redistribution of assets

In South Africa, when a married couple divorces, the assets acquired during the
marriage are usually divided equally between them, unless there is a valid agreement
to the contrary. However, if the couple was married out of community of property, the
situation can be more complicated.
When a couple marries out of community of property, each spouse retains separate
control over their assets and liabilities during the marriage. This means that they do
not have joint ownership of any assets or liabilities that they acquire during the
marriage. However, there are instances where one spouse may have contributed to
the growth of the other spouse's assets, or where one spouse may have sacrificed
their own career or financial growth for the benefit of the other spouse. In these cases,
the courts may be asked to pierce the trust veneer and redistribute assets in a divorce
settlement.

Piercing the trust veneer refers to the process of looking beyond the legal ownership
of assets and taking into account the underlying economic reality of a marriage. The
courts will consider factors such as the length of the marriage, the contributions of
each spouse to the marriage, the financial needs of each spouse, and any other
relevant factors in determining whether to redistribute assets.

In some cases, the courts may find that one spouse's assets were built up through the
contributions of the other spouse, and may order a redistribution of assets in the
divorce settlement. For example, if one spouse put their career on hold to support the
other spouse's business, and the business was successful as a result, the court may
find that the non-owning spouse is entitled to a share of the business assets.

However, the courts will only pierce the trust veneer in exceptional circumstances.
The general rule is that each spouse retains the assets that they acquired during the
marriage, and that these assets are not subject to redistribution upon divorce. It is
therefore important for couples who are married out of community of property to
consider entering into a valid antenuptial contract that clearly sets out their respective
rights and obligations in relation to assets acquired during the marriage.

Please see:

• Badenhorst v Badenhorst (good discussion in the testbook, page 150 in the

textbook)
• Jordaan v Jordaan
2.5.2 Piercing the trust veneer upon divorce: Marriages out of community
of property subject to the accrual system

In South Africa, marriages can be classified into two categories: marriages in

community of property and marriages out of community of property. For marriages
out of community of property, couples have the option to include an accrual system
in their antenuptial contract.

The accrual system is a set of rules that determine how assets and liabilities are divided
upon divorce. It is designed to ensure that each spouse is entitled to a fair share of
the joint estate, which is the net value of the assets acquired by the spouses during
the marriage.

When a couple divorces, the joint estate is divided into two separate estates – one for
each spouse. The spouse with the smaller estate is entitled to receive a share of the
difference between the two estates, which is called the accrual.

It is important to note that the accrual system only applies to assets and liabilities that
were acquired during the marriage. Any assets or liabilities that were acquired before
the marriage or that were inherited or gifted to one spouse during the marriage are
excluded from the joint estate.

When it comes to piercing the trust veneer upon divorce, the accrual system is
designed to ensure that both spouses are entitled to a fair share of the assets and
liabilities acquired during the marriage, regardless of how those assets are held. This
means that if one spouse has placed assets in a trust or other legal entity to try to
shield them from the other spouse in the event of a divorce, those assets may still be
subject to division under the accrual system.

However, it is important to note that the courts will consider all relevant factors when
determining a fair division of assets and liabilities upon divorce, including the nature
and extent of the assets and liabilities, the financial needs and resources of each
spouse, and any contributions made by each spouse to the joint estate.

Overall, the accrual system is a fair and equitable way to divide assets and liabilities
upon divorce in marriages out of community of property. While it may not completely
prevent one spouse from hiding assets in a trust or other legal entity, it does provide
a mechanism for ensuring that both spouses receive a fair share of the assets acquired
during the marriage.

Please see:

• REM v VM
• MM v JM
• RP v DP

2.5.3 Piercing the trust veneer upon divorce: Marriages in of community of

property

Marriages in community of property mean that both partners' assets and liabilities are
merged into one estate. This type of marriage contract can have significant
consequences in the event of a divorce, as it can make it difficult to untangle and
divide assets fairly between the spouses.

When a marriage in community of property ends in divorce, the court must first
determine the net value of the joint estate. This is done by subtracting the total
liabilities from the total assets. The court will then divide the net value of the joint
estate equally between the two spouses, unless there are compelling reasons to do
otherwise.

However, there are situations where one spouse may attempt to hide assets or
otherwise manipulate the division of property to their advantage. This is where the
trust veneer may come into play. A trust is a legal entity that can own assets and
liabilities separate from its trustees and beneficiaries. Some individuals may set up
trusts as a way to protect their assets from potential creditors or legal claims, or to
pass wealth on to their heirs in a tax-efficient manner.

In the context of a divorce, a spouse may attempt to transfer assets into a trust to
shield them from being included in the joint estate. However, South African courts
have recognized that a trust is not an impenetrable shield, and that assets held in
trust may still be considered part of the joint estate if they were transferred for the
purpose of defrauding the other spouse.

To pierce the trust veneer, the court will look at factors such as the timing and purpose
of the transfer, as well as the degree of control the spouse has over the trust and its
assets. If the court finds that the transfer was made with the intention of defeating
the other spouse's claim to the asset, it may order that the asset be included in the
joint estate and divided accordingly.

In summary, while a trust can be a useful tool for protecting assets in certain
situations, it is not a foolproof way to shield assets from a divorce settlement. South
African courts have the power to pierce the trust veneer and ensure that both spouses
receive a fair and equitable share of the joint estate.

Please see:

• WT v KT

3. The legal standing to apply for the piercing of a trust’s veneer

In South Africa, the legal standing to apply for the piercing of a trust's veneer depends
on the specific circumstances and the parties involved. Generally, any person who has
a sufficient interest in the trust or its assets may apply to the court for the trust's
veneer to be pierced.

Examples of parties who may have sufficient interest in the trust include beneficiaries
of the trust, creditors of the trust or its beneficiaries, and any person who may have
a legal claim against the trust or its trustees.

The court will consider various factors when deciding whether to pierce the trust's
veneer, including the nature and purpose of the trust, the conduct of the trustees,
and the interests of third parties who may be affected by the trust.

It is important to note that piercing the trust's veneer is an exceptional remedy, and
the court will only do so in exceptional circumstances where it is necessary to prevent
abuse or injustice. Therefore, the applicant must provide strong evidence to support
their case for piercing the trust's veneer.
Please see:

• WT v KT
• REM v VM

- End -

Compiled by Ms C Lanser

Please note:

This is only additional notes to assist you when looking at this specific topic in your textbook.

Please feel free to contact your lecturer if something is still unclear.