The recent judgment of the North Gauteng High Court in First National Bank (“FNB”) v Stefanus Britz ("Mr Britz”) and 6 others (handed down on 20 July 2011) (“FNB Case”) demonstrate at least two main instances where a trust may be exposed to be not what it is purported to be. These instances are: (i) where, in divorce proceedings, one of the divorcing parties alleges that assets that are purported to be owned by a trust are actually owned by the other party to the divorce proceedings and (ii) where the creditors of a person are looking for assets to attach to satisfy a judgment against such person. The FNB Case, concerns the later instance.

In the FNB Case, FNB provided the Izani Trust (of which Mr Britz and Mrs Britz (Mr Britz’s wife) were the only co-trustees) with an overdraft facility. Mr and Mrs Britz entered into a suretyship agreement with FNB binding themselves as sureties and co-principal debtors with the Izani Trust in respect of the said overdraft facility. The Izani Trust could not service its debt in respect of the overdraft facility until an amount of about R 5 63 363.46, plus interest (“Outstanding Amount”) became due and payable by the Izani Trust to FNB. In the case which was a precursor to the FNB Case, judgment was granted in favour of FNB for repayment of the Outstanding Amounts by the Izani Trust and Mr and Mrs Britz (as sureties). The warrant of execution was subsequently issued against Mr and Mrs Britz in their personal capacities and in their capacities as trustees of the Izani Trust.

When the Sheriff went to the house where Mr and Mrs Britz resided to execute the judgment, he could not find sufficient disposable assets to satisfy the warrant of execution.
The seemingly tangled web of trusts started to unravel. Mr Britz and Mrs Britz said that they had donated the house furniture and all of their movable assets to the 14 Ackermannstraat Trust (of which Mr and Mrs Britz were the only trustees). Therefore, the Sheriff could not attach the movable assets because they belonged to the 14 Ackermannstraat Trust and not Mr Britz and Mrs Britz in their personal capacities.

It appeared from the trust deed of the 14 Ackermannstraat Trust, among other things, that (i) the Brizelle Trust was the sole beneficiary of the 14 Ackermannstraat Trust, (ii) the Brizelle Trust had power to remove and replace any trustee of the 14 Ackermannstraat Trust and (iii) the 14 Ackermannstraat Trust will exist until it is terminated by the trustees (Mr and Mrs Britz).

It further transpired that (i) the house where Mr and Mrs Britz resided was registered in the name of the Brizelle Trust (the occupation of the trust property by Mr and Mrs Britz family was expressly allowed in terms of the trust deed of the Brizelle Trust), (ii) Mr and Mrs Britz were the only trustees of the Brizelle Trust, (iii) Mr and Mrs Britz had power to appoint additional trustees and (iv) Mr and Mrs Britz and their children were the sole beneficiaries of the Brizelle Trust.

FNB clearly saw through the ruse engineered through the Izani Trust, the 14 Ackermannstraat Trust and the Brizelle Trust. In order to attach assets purported to be owned by both the 14 Ackermannstraat Trust and the Brizelle Trust, FNB applied for a court order declaring all such assets to be assets of Mr and Mrs Britz in their personal capacities and to be executable by FNB in order to recover the Outstanding Amounts.

FNB argued that (i) the 14 Ackermannstraat Trust and the Brizelle Trust were Mr and Mrs Britz’s “alta egos” (second selves), and (ii) but for the 14 Ackermannstraat Trust and the Brizelle Trust, Mr and Mrs Britz would have acquired in their own names assets supposedly belonging to the said trusts. Mabuse J agreed with FNB.

Mabuse J affirmed the seminal principle set down in the case of Badenhorst v Badenhorst (by the Supreme Court of Appeal in 2006) that a person who alleges that assets that purportedly belong to a trust in fact belongs to a person, must prove that such person controlled the trust and but for the trust would have acquired and owned the said assets in his or her own name and that such control must be de facto (in practice) and not de iure (in law).The court in Badenhorst said that to determine whether or not a natural person has de facto control, it is necessary to first have regard to the terms of the trust deed and secondly to consider the evidence of how the affairs of the trust were conducted.

Indeed, in the FNB Case, the trust deeds of all the three trusts and the evidence of the management of the affairs of the 14 Ackermannstraat Trust and the Brizelle Trust were considered and Mabuse J concluded that –

• through the provisions relating to the appointment of trustees, Mr and Mrs Britz controlled, or had power to control, the affairs of the trusts;

• there was no lease agreement between Mr and Mrs Britz and the Brizelle Trust in terms of which Mr and Mrs Britz would justify the alleged tenancy by them of the house supposedly owned by the Brizelle Trust;

• there was no evidence that the Brizelle Trust operated any bank account through which any rent would have been paid;

• there was no evidence that Mr and Mrs Britz (as trustees of the trusts) had convened and held any trustees’ meetings; and

• when the purported sale of the movable assets from Mr and Mrs Britz to the 14 Ackermannstraat Trust occurred, there was no delivery of the assets from Mr and Mrs Britz to the 14 Ackermannstraat Trust; therefore, Mr and Mrs Britz had not relinquished control of the movable assets to the 14 Ackermannstraat Trust (as required by the law applicable to trusts).

The court declared that all of the assets purportedly owned by the 14 Ackermannstraat Trust and the Brizelle Trust were in fact owned by Mr and Mrs Britz and that such properties were executable by FNB for payment of the Outstanding Amounts.

Siyabonga Shandu, a director at corporate and commercial law firm, Tony Tshivhase Incorporated says that there seem to a conventional wisdom that one may “protect” his or her assets from creditors through “housing” them in a trust. He adds that “even the high tax rate in respect of trust (currently at 40 %) seems not to deter people from utilising a trust as a structuring vehicle. It is however clear from the FNB Case that if a trust arrangement is not used for proper commercial or estate planning purposes, South African courts will not hesitate to declare that the assets do not belong to the trust but to the individual who used the trust as a structuring vehicle”.

“There is no “one size fits all” when it comes to the formation of trusts, a trust deed (a founding document) of each trust must be structured and drafted properly, having regard to the intentions of the founder. Further, the trust must, once it has been formed, be administered properly (i.e. minutes of trustees’ minutes must be properly kept, the trustees must not agree to all instructions from the founders (especial in family trusts),” he says.

“There is no doubt that a trust will remain an important feature of business arrangements in South Africa; however, in light of the FNB Case, it is advisable that founders of trusts who are not certain whether or not the trusts they may have formed achieve the purpose for which they were formed and whether or not such trusts have been administered by the trustees properly, must seek appropriate legal advice to avoid their trusts being declared veneers used by their founders as a mechanism to shield personal assets from creditors,” Shandu adds.

For further information contact:
Siyabonga Shandu, Director, Tony Tshivhase Inc.
Tel: +27 (0)11 656 0804
Email: SiyabongaS@tshivhaseinc.com

Tony Tshivhase Inc. is a boutique law firm based in Johannesburg, Woodmead, Sandton. The Firm provides a full range of corporate and commercial legal services to its private and public sector clients.