Can you access trust assets to settle a trustee’s debt owed to you?
October 9th, 2020 05:54
A recent webinar hosted with Business Report dealt with the importance of proper administration of a trust to prevent a trust from being labelled someone’s ‘alter ego’ (an extension of oneself), whereby the trust form is disregarded when is comes to claiming money from a person, resulting in the inclusion of the trust’s assets in calculating a claim typically against a trustee. This is a common strategy in divorce cases. The question however arises - can you ever recover a loan made to a trustee from a trust instead? The answer is you can, but only in certain circumstances, and only by choosing the right line of attack.
In the Osborne v Cockin case of 2018 it was demonstrated that it is not that easy for a person, who made a loan to a trustee, to attack the trust to recover the loan when the debtor’s estate is sequestrated. After Mr Cockin committed suicide his estate was sequestrated by his creditors who claimed he was involved in a ponzi scheme, with a hopelessly insolvent estate. At the time of his death he was a trustee of a trust which held the family’s wealth, including farms. Mr Osborne, who Mr Cockin owed R 11m (or 1 501 cattle), decided to pursue the trust to recover his loan to Mr Cockin. Mr Osborne made a mistake by bringing an application for the provisional sequestration of the Cockin Trust. Osborne argued that the Cockin Trust was no more than the alter ego of Mr Cockin for the following reasons:
· he simply moved funds from one trust to the other, and that as a result of the deception Mr Osborne suffered R 11m loss;
· he did not intend to hold the assets for the beneficiaries; and
· the Cockin Trust must have formed part of Mr Cockin’s unlawful scheme.
Mr Osborne alleged that the trust was Mr Cockin’s alter ego - in other words, a sham or simulation in which the insolvent had conducted the trust’s financial affairs “as if it was his own money”. The evidence before the Court simply did not support this allegation. Mr Osborne’s legal team also incorrectly mixed up a ‘sham trust’ that does not actually exist with an ‘alter ego’ trust, which does in fact exist. If a trust does not exist, then it could not be sequestrated, so they shot themselves in the foot with this argument. In the REM v VM case of 2018 the Court confirmed the distinction between ‘sham trusts’ (when the trust does not exist) and ‘alter ego trusts’ (where a litigant sought to ‘pierce the veneer’ of a trust as the alter ego of a trust founder or trustee). Labelling a trust as an ‘alter ego trust’ is a remedy aimed at combating the abuse of an existing trust – “an equitable remedy in the ordinary, rather than technical, sense of the term; one that lends itself to a flexible approach to fairly and justly address the consequences of an unconscionable abuse of the trust form in given circumstances. 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”.
The Court found that Mr Osborne did not have a claim against the Cockin Trust for the following reasons - the claim was not liquidated and there was no debt owed by the trust to Mr Osborne. It was held that Mr Osborne’s claim was against the deceased estate, not against the trust itself. Mr Osborne accordingly had no standing to sequestrate the trust, and that sequestration is not the appropriate remedy for resolving a dispute about a debt. If assets appearing to be those of the trust were actually the insolvent’s assets, it was not the creditor who could recover them. It was only the trustees of the insolvent deceased estate who had standing and power to do so.
The Court held that Mr Osborne should rather have proved his claim against the insolvent deceased estate and then insisted on an enquiry into whether there was any claim by the estate against the trust for return of cattle or damages. In the absence of a contractual or other claim against a trust, and where the creditor alleges that the trust is the alter ego of the debtor, it cannot claim the sequestration of the trust unless it can show that the trust is its debtor and is insolvent.
If you decide to attack a trust directly, you can ask a court to declare that the trust’s assets be treated as your debtor’s personal assets instead of that of the trust. The REM v VM case of 2018 confirmed that you may consider one of the following lines of attack:
You can claim that the trust is a sham and does not actually exist and that the assets belong to someone else instead. You will have to demonstrate that the founder did not intend establishing the trust.
If it is clear that the trust does exist, you can approach a court to “go behind the trust form” or to “pierce its veneer” and to disregard “the ordinary consequences of [the trust’s] existence”. The goal is then for the Court to declare the trust assets to be assets in the controlling trustee’s personal estate.
~ Written by Phia van der Spuy ~