May 2023

South Africa

Law Over Borders Comparative Guide:

Family Asset Protection: Divorce, Finance and the Media

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Introduction

The question arises in matrimonial proceedings whether trust assets should be included or excluded for the purpose of determining a party’s estate.

As a general rule, if a trust has been properly formed (i.e., is a valid trust and not a sham), then it is likely that none of the trust assets will form part of any divorce settlement or court order, and the assets will continue to be uninterruptedly held in trust (Walter D Geach Trust Law in South Africa (2017) at 440).

Broadly in the instance of a trust being a “sham” (a valid trust never came into being), or a court piercing the veneer of a trust (based on company law principles related to piercing the corporate veil) distinct remedies are available. On the basis of the so-called Badenhorst principle a court may make an order against a party based on the value of assets held in trust by a party with control after the trust. The actio Pauliana, where assets are fraudulently alienated, is also discussed.

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1 . Divorce and trusts

Trusts are recognized and regulated by the Trust Property Control Act 57 of 1988, and based on English and Roman Dutch rules, as developed by the courts. A legal relationship is created by agreement between the founder and the trustees. Ownership of trust assets vest in the trustees who exercise fiduciary duties for the benefit of beneficiaries. Assets exist separately from the founder, trustees and beneficiaries.

If a trust is valid, it is unlikely that the trust assets will form part of any divorce settlement where a divorce is filed in South Africa.

Trust property does not automatically form part of a party’s estate in divorce proceedings. The courts regard a trust as a legitimate estate planning tool and have been reluctant to include such assets as part of a party’s estate upon divorce. Whether the trust’s veneer should be pierced and whether the trust was created to devalue the other party’s claims, will depend on each case’s circumstances, the trust’s formation and its use. 

In P A F v. S C F (788)/2020) [2022] ZASCA 101 the Judge noted:

  • There is a distinct difference between a trust being the “alter ego” of a trustee and a trust being a “sham”.
  • If a trust is the so called “alter ego” of a trustee, it does not follow that the assets of such trust vest in the estate of the trustee. 
  • It must be found that the trust was a “sham”, and created and administered fraudulently.

Van Zyl and Another NNO v. Kaye NO & Others 2014 (4) SA452 (WCC) (endorsed by the Supreme Court of Appeal) held “maladministration of an asset validly vested in a properly founded trust does not afford a legally cognisable basis that the trust does not exist, or that the asset no longer vests in the duly appointed trustees”.   

“Going behind the trust form…essentially represents the provision by a court of an equitable remedy…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.”

This is derived from common law and not from any general discretion a court may have. In the context of accrual determination on divorce, it “is not based on the authority of the Matrimonial Property Act 88 of 1984 (MPA) or in the exercise of a statutory discretion”, but “on a factual inquiry that has revealed trust form abuse, upon which the piercing of the trust veneer follows”.

In a sham trust the transaction will have no legal effect, and the ostensible founder will remain the owner of the trust assets and neither the trustee(s), nor the beneficiaries will acquire any rights with regard to these assets. The “trust assets” will be taken into account as assets in the spouse’s personal estate. 

Alter ego trusts, where a person exercises de facto control over trust property, only describes the nature of the control exercised, and does not equate (as a sham does) to a juridical basis for taking trust assets into account for the purposes of patrimonial claims (REM v. VM 2017).

The use of the trust form to evade an obligation, whether relating to accrual or maintenance, will generally be sufficient for the court to pierce the veneer of the trust to prevent unconscionable abuse of the form of the trust. 

The actio Pauliana is a Roman law remedy applied in the context of fraud on creditors generally, where the debtor had impoverished himself to the detriment of his creditors, e.g. by alienations, incurring liabilities or allowing rights to lapse. The remedy is available where transfer of assets is made into trust by a spouse with the intention of defrauding a marriage partner or their potential matrimonial claims in an impending divorce action gratuitously or without proper consideration in fraud of the creditor.

A spouse who transfers property to a trust to defeat an accrual claim does so in fraud of the other spouse’s contingent claim to share in the accrual, and a claim under the actio Pauliana may apply.

In PAF v. SCF, it was held that: “Spouses with accrual claims acquire a protectable contingent right against each other, which the law will protect in circumstances of irregularity and a lack of bona fides.”

If there has been unconscionable abuse of the trust form to avoid an obligation, the court may pierce the veneer of the trust and deem certain trust assets to be a part of the spouse’s personal estate. 

In marriages concluded before 1984 (when the accrual system came into effect), in a trust over which the relevant spouse has de facto control of trust assets (such that may enable him/her to utilize the trust as an alter ego), the court is empowered to take such assets into account when calculating an equitable distribution on divorce, but not to actually distribute trust assets.

The South African court will have no jurisdiction over assets in a foreign jurisdiction. If the South African court has jurisdiction in a divorce, the domicile of the husband at date of the marriage determines the marriage regime applicable to the parties’ marriage. In terms of S7(9) of the Divorce Act, and the rules of South African private international law, the South African court has the same power as a competent court of the foreign state concerned to order that assets be transferred from one spouse to the other spouse. Disclosure may take into account the law of the foreign jurisdiction. 

An argument exists that trusts are sacrosanct as separate entities and should be dealt with in terms of South African law.

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1.1. Financial disclosure

In terms of Rule 35 of the Uniform Rules of Court, in the case of a divorce filed in South Africa, a party has to make discovery on oath of any and all documents in the action, which are, or have at any time, been in the possession or control of such party and relevant to the action, and to disclose where such documents are, if not in his possession. Further and better discovery may be requested. A formal request for further particulars with detailed questions for information (and not documents) may be submitted. 

Relevance is decided by the court having regard to the issues and the pleadings in which disputes are delineated (Swissborough Diamond Mines (Pty) Ltd v. Government of the Republic of South Africa 1999 (2) SA 297 (T) at 311A).

Disclosure is relevant to the type of marriage in South African law, as follows:

  • Marriage in community of property. An undivided joint estate is formed and the parties’ ability to contract independently is limited. 
  • Marriage out of community of property prior to the commencement of the MPA in 1984. A redistribution order (in terms of Section 7(3) of the Divorce Act) as the court deems just and equitable may be granted. 
  • Marriages out of community of property with PNA after 24 November 1984:
    • The accrual regime. A party claims 50% of the difference between the accrual of the parties’ respective estates (except for exclusions). It sometimes states that a party may not establish a trust without the other party’s consent and may exclude loan accounts in and distributions from a trust.
    • Marriages out of community of property excluding the accrual regime. This regime excludes any kind of redistribution claims. The Constitutional Court in February 2023 will consider the possible incorporation of a discretionary redistribution claim.

Personal maintenance claims. Section 7(2) of the Divorce Act 70 of 1979 (“Divorce Act”), provides inter alia that a court must consider the parties’ existing means, in exercising their discretion as to the existence and content of a personal maintenance claim. “Means” include a party’s access to funds, from a trust. 

Disclosure, relating to a trust entails, inter alia:

  • Distributions, loan accounts, journal entries, relevant resolutions.
  • If a trust has been joined to proceedings and faces a claim to pierce the veil or that dispositions to a trust be set aside then the historical trust resolutions, disposition of assets to the trust, financial and management statements, bank statements, journal entries, notes, tax returns, dividend policies, the trust deed, valuations of assets, etc, may be relevant. 
  • Documents regarding the trust’s subsidiaries (which is debatable as to relevance). A new judgment has put relevance in issue in these instances. 
  • Documents required by expert accountants.

Where divorce proceedings are filed in South Africa, if a trustee is a party to proceedings and the trust is governed by South African law, the financial documents relevant to the disputes between the parties, on the pleadings, shall be discovered.

Subpoenas may be issued against trustees and the trust’s subsidiaries and the relevance thereof may be challenged. 

The South African court has no jurisdiction to order disclosure by trustees of an offshore trust unless the trustees are parties to the proceedings. Proceedings are launched in the jurisdiction where the trustees are, in terms of the laws of that jurisdiction. A South African law court may, on application, request a foreign court to interrogate the trustees in terms of a questionnaire.

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1.2. Financial orders

In a case involving a South African trust and South African divorce proceedings, a maintenance order only lies against a spouse personally. However, the spouse’s means and income, assets and liabilities and access to funds will be taken into account, such as historical access to funds from the trusts. A court will not make an order against the trustees for personal maintenance obligations or make a distribution to the other spouse, even if that spouse is a beneficiary. The trustees will exercise a fiduciary discretion, taking into account the other beneficiaries, which may be tested in court. 

A spouse beneficiary, who has been ordered to pay either income or capital to their spouse by a court cannot be required to do so from an uncertain contingent future right to trust assets. The discretion to distribute trust benefits rests with the trustees and is not vested in the beneficiaries. 

The spouse’s credit loan account in the trust may be attached by warrant of execution.

Where divorce proceedings have been filed in a foreign jurisdiction and an order has been validly granted, that order will be implemented in South Africa. 

In terms of section 13 of the Divorce Act, the validity of a divorce order granted in a court of a foreign country or territory shall be recognised by a court in South Africa, if, on the date on which the order was granted, either party to the marriage was domiciled in the country or territory concerned, whether according to South African law or according to the law of that country or territory, or was ordinarily resident in that country or territory or was a national of that country or territory and provided there were legitimate proceedings and/or a legitimate order had been issued. 

Where court orders made in divorce proceedings filed in South Africa require payment of income and/or capital against trustees of trusts governed by the law of South Africa, if the trustees are party to the proceedings, the trustees are bound to the order. This is, however, highly unusual.

Beneficiaries do not have vested rights in a discretionary trust.

A spouse beneficiary does not have a vested right to trust benefits. The discretion to vest assets rests with the trustees. The trustees cannot be forced to make a distribution. The benefit has to be accepted by the beneficiary to accrue. A beneficiary can call up a loan account, depending on the terms thereof. 

Where the trust assets are situated both inside and outside of South Africa, the South African court will only have jurisdiction over assets in its area and will apply South African law.

In a case involving a South African trust and foreign divorce proceedings, if there is no order against the trustees, the trustees have no obligations, except their fiduciary obligations in terms of the trust deed.

Where the court has determined that it is likely that the spouse beneficiaries will be able to obtain distributions from the trusts for the purposes of paying all or part of the divorce award the trustees would have no obligations to make distributions to the spouse beneficiary. Distributions would be at the discretion of the trustees exercising their fiduciary duties and applying the provisions of the trust deed.

A South African court would not have jurisdiction in regard to trust assets outside its area, but has jurisdiction over assets within South Africa. Should a valid order against trustees be registered in South Africa, the South African court will implement the order.

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1.3. Enforcement

Should a party be in contempt of a court order, the court can order a term of imprisonment or a fine to be paid and make a costs order. The applicant has the onus to prove that the court order was granted, served or that the respondent had knowledge of the court order, and that the court order was not complied with. A presumption arises that the non-compliance is wilful and mala fide. The respondent has an evidentiary burden to show reasonable doubt and, failing which, contempt will be established. This form of civil contempt is a crime, and can be prosecuted. A committal could be ordered in both civil and criminal proceedings.

If financial disclosure is not complied with, provided a court is of the view such disclosure is relevant, and the trust is a party, the trustee may be compelled to reply, failing which the trustee may be in contempt.

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2 . Prenuptial and postnuptial agreements (PNAs)

PNAs are recognised and enforceable in South African law. Section 6 of the MPA deals with the requirements relating to PNAs and Section 21 regulates the amendment of matrimonial property regimes postnuptially. 

Section 87(2) of the Deeds Registries Act 47 of 1937 governs the formality requirements of PNAs executed outside SA. It is attested by a notary, or otherwise entered into in accordance with the law of its place of execution. It shall be registered in a deeds registry within 6 months after the date of execution. The PNA has to be notarially executed before the marriage. 

If the PNA is a foreign agreement, provided that the PNA has been validly concluded in terms of the foreign jurisdiction, effect will be given to it. 

The South African court shall have the same power as a competent court of the foreign state would have had in regard to the PNA.

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2.1. Procedural requirements

A Notary executes a PNA. 

The contract must be concluded before marriage and registered in the Deeds Office before or after marriage, if signed in South Africa within three months and outside SA within six months of signature.

Postnuptially, application may be made to the High Court for an order to amend the regime in terms of section 21 of the MPA, after which a PNA is concluded and registered.

A PNA executed in accordance with the forms required by the law of the place of execution, should be recognised as being formally valid and binding everywhere, (ex parte Spinazze and Another NNO 1985 (3) SA650(A)).  

There are no legislative or judicial guidelines prescribing time for consultation, reflection, independent legal advice and/or financial disclosure. This is currently under discussion by the South African Law Reform Commission (SALRC). 

As a general rule South African courts uphold the provisions of PNAs and do not have an overarching discretion to divide matrimonial assets on an equitable basis in conflict with the provisions of a PNA after 1 November 1984.

The widening of the South African court’s equity discretion to override the provisions of PNAs, executed after 1 November 1984, is being considered by the SALRC generally and the Constitutional Court (limited to marriages by PNA excluding accrual sharing).

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2.2. Spouse’s financial claims

Waiver of personal maintenance is contrary to public policy (ST v. VCT 2018(5) SA479 SCA). PNAs are usually limited to the election of a matrimonial regime. Parties may agree in the PNC to exclude distributions they receive from a trust or loan accounts a party may have in existing trusts, from a sharing regime, and agree that assets will not be disposed of to a trust and/or a new trust formed without the parties as beneficiaries, or without their consent.

Trustees cannot be bound by the PNA and are not parties to the PNA. 

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2.3. Children’s financial claims

The High Court is the upper guardian of children. Any financial claims relating to children cannot be fixed or capped in the PNA, would not be enforceable and contrary to public policy. 

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3 . The media and divorce/family law proceedings

Subject to the authorisation granted by a court in exceptional circumstances, the publication of the identity of, and any information that may reveal the identity of, any party or child in any divorce proceedings before any court, is prohibited. Failure to comply with the order will amount to contempt of court.

The special privacy of children and the principle of open justice, as well as freedom of expression, which enables public scrutiny of the courts, will have to be balanced. 

Section 28(2) of the Constitution precludes the media from publishing the names and further particulars of a minor child.

In practice, the media reports on family law matters unlawfully from time to time, if they are considered to be in the public interest. A member of the media cannot record the proceedings without making an application to court first.

Court documents are publicly available from the court registrar. The media physically attends court hearings (which are public), but may not record the proceedings, unless an application to court for a permit is made. 

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3.1. Reporting restrictions

A party may apply to have the court file sealed in limited circumstances, e.g. in the event of competing rights and the right to privacy or harm to a minor child. Proceedings relating to a minor are usually held in camera. Anonymous publication may have limited value for parties involved in a high profile case and may create further curiosity in the public arena. High profile cases may be classified as exceptional circumstances, but the factors for exceptional circumstances are undefined. A court would look at whether publication is in the interests of justice. The public may have an interest in the information, particularly the parties’ identity. 

The identities of the parties have been published internationally, on BBC and CNN, which renders the prohibition ineffective.

EXPERT ANALYSIS

Chapters

Austria

Bernhard Motal
Johannes Gasser

Bermuda

Craig MacIntyre
Jonathan Casey

England and Wales

Marcus Dearle
Rahanna Choudhury

France

Charlotte Butruille-Cardew

Hong Kong

Marcus Dearle

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Giovanni Cristofaro
Raul-Angelo Papotti

Jersey

James Sheedy
Simon Thomas

Liechtenstein

Bernhard Motal
Johannes Gasser

New Zealand

Anita Chan KC
Richard Reeve

Scotland

Gillian Crandles
Zaynab Al Nasser

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