02 Jul SUING AN INSOLVENT DEBTOR – CAN YOU RECOVER FROM HIS TRUST?
Your debtor owes you a fortune, but when his estate is sequestrated there is nothing in his own name. However, you find out that he is the trustee of a wealthy family trust with lots of assets that you think are really his – can you recover from his trust?
The answer is yes, you can, but only under certain circumstances, and only by choosing the right line of attack. A recent Supreme Court of Appeal (SCA) case illustrates.
A Ponzi scheme, a suicide, and R11m worth of missing cattle
- A former farmer and cattle dealer committed suicide, leaving debts of R35m and many local farmers and businessman defrauded in what had become a Ponzi scheme. The scheme involved “investment contracts” whereby farmers placed cattle on farms hired by the dealer for grazing and eventual division of their progeny.
- The dealer’s deceased estate was sequestrated as insolvent.
- A major creditor (who had lost 1,501 head of cattle with an estimated value of R11m) thereupon applied to the High Court for the sequestration of a farm-owning family trust of which the insolvent had been one of the trustees. The creditor alleged that the trust was the insolvent’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 High Court refused to sequestrate the trust, and the SCA agreed, holding that the creditor’s claim was against the deceased estate, not against the trust itself. The creditor accordingly had no standing to sequestrate the trust but in any case –
- If the creditor alleged that his cattle were held or had been misappropriated by the trust, he should have sued the trust for their return or for damages rather than apply for its sequestration.
- If the trust were indeed a sham, it couldn’t be sequestrated (you can’t sequestrate something that doesn’t exist in law).
- If assets appearing to be those of the trust were actually the insolvent’s assets, it wasn’t the creditor who could recover them. It was only the trustees of the insolvent deceased estate who had standing and power to do so.
- What the creditor should have done, said the Court, was to prove his claim against the insolvent deceased estate and then insist on an enquiry into whether there was any claim by the estate against the trust for the return of cattle or damages.
Attacking a trust 101
If you decide to attack a trust directly, you can ask a court to declare that trust assets be treated as your debtor’s personal assets. Per a 2014 High Court decision, you need to distinguish between two different lines of attack here. Either –
- You can try to establish that the trust is a sham and doesn’t actually exist; or
- If the trust isn’t a sham and does exist, you can still ask 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 court could, for example, declare trust assets to be assets in the trustee’s personal estate.
Which line you should follow is a highly technical decision – ask your lawyer for specific advice.