The Supreme Court of Appeal of South Africa holds that where there is evidence of abuse of the trust by the trustee in a divorce case involving property distribution, the courts can look behind the trust form in order to prevent its abuse
MJ K v II K (360/2021)
 ZASCA 116
Supreme Court of Appeal of South Africa
Zondi, Schippers and Mabindla-Boqwana, JJA; Matojane and Smith, AJJA
July 28, 2022
Reported by Faith Wanjiku and Bonface Nyamweya
Family law– divorce – property distribution after divorce- parties married out of community of property subject to the accrual system – determination of accrual – whether assets of trusts of which the husband was a trustee and the close corporation of which he was a sole member should be regarded as belonging to husband for purposes of determining the accrual of his estate – what was the legal basis to pierce the veneer of trusts not established-Matrimonial Property Act, 1984, sections 3 and 4; Divorce Act 70 of 1979, section 7.
Family law– divorce – property distribution after divorce- parties married out of community of property subject to the accrual system – determination of accrual – whether assets of trusts of which the husband was a trustee and the close corporation of which he was a sole member should be regarded as belonging to husband for purposes of determining the accrual of his estate – what were the proprietary consequences of a marriage out of community of property subject to an accrual system- Matrimonial Property Act, 1984, sections 3 and 4; Divorce Act 70 of 1979, section 7.
The respondent sued the appellant at the High Court for a decree of divorce. After joining the Koens Besigheids Trust, Koens Familie Trust, Bulhoek Trust (the trusts) and the 9th appellant as parties in the divorce proceedings, the respondent amended her particulars of claim so as to include a prayer for an order declaring that the assets of the trusts and the 9th appellant be taken into account in determining the value of the accrual in terms of sections 3 and 4 of the Matrimonial Property Act 88 of 1984 (the Act). The basis for her amended claim was that the trusts and the 9th appellant were the alter ego of the appellant. In support of her claim for the assets of the trusts and the 9th appellant to be regarded as assets of the 1st appellant, the respondent alleged that during the marriage, the 1st appellant established the trusts and the 9th appellant over which he assumed sole de facto control.
At all relevant times during the subsistence of the marriage, the 1st appellant made no distinction between the income and expenses of the trusts and the 9th appellant and his income and expenditure. The control and management of the trusts and the 9th appellant lay solely with the 1st appellant. The respondent asserted that the 1st appellant ensured that his personal friend, the 3rd appellant was appointed as a trustee of all the trusts, who was a trustee in name only. All the trust deeds of the discretionary trusts were worded in such a manner as to give the 1st appellant wide-ranging powers so that he managed the trusts and the 9th appellant without input from any third parties, including other trustees, and the 1st appellant held no meetings of trustees or members.
The High Court, after examining the terms of the trust deeds of the relevant trusts and the manner in which their affairs were conducted, found that the assets of the three trusts were controlled by the 1st appellant. The High Court concluded that the 1st appellant transferred the assets to the trusts with the dishonest and fraudulent purpose of frustrating the respondent’s claim to the accrual of the estate. It stated that the appellant, before he became aware of the respondent’s infidelity, conducted his businesses through his companies and close corporations, but after the discovery of the respondent’s infidelity, the 1st appellant transferred all the assets to the trusts, in some instances, for no value. That resulted to the appeal.
- Whether assets of trusts of which the husband was a trustee and the close corporation of which he was the sole member should be regarded as belonging to the husband for purposes of determining the accrual of his estate at the time of divorce.
- What was the legal basis to pierce the veneer of trusts not established at the time of divorce?
- What were the proprietary consequences of a marriage out of community of property subject to an accrual system?
Relevant provisions of law
Matrimonial Property Act 88 of 1984
Section 3- Accrual system
(1) At the dissolution of a marriage subject to the accrual system, by divorce or by the death of one or both of the spouses, the spouse whose estate shows no accrual or a smaller accrual than the estate of the other spouse, or his estate if he is deceased, acquires a claim against the other spouse or his estate for an amount equal to half of the difference between the accrual of the respective estates of the spouses.
(2) Subject to the provisions of section 8(1), a claim in terms of subsection (1) arises at the dissolution of the marriage and the right of a spouse to share in terms of this Act in the accrual of the estate of the other spouse is during the subsistence of the marriage not transferable or liable to attachment, and does not form part of the insolvent estate of a spouse.
Section 4- Accrual of estate
(a) The accrual of the estate of a spouse is the amount by which the net value of his estate at the dissolution his marriage exceeds the net value of his estate at the commencement of that marriage.
(b) In the determination of the accrual of the estate of a spouse—
(i) any amount which accrued to that estate by way of damages, other than damages for patrimonial loss, is left out of account;
(ii) an asset which has been excluded from the accrual system in terms of the antenuptial contract of the spouses, as well as any other asset which he acquired by virtue of his possession or former possession of the first-mentioned asset, is not taken into account as part of that estate at the commencement or the dissolution of his marriage;
(iii) the net value of that estate at the commencement of his marriage is calculated with due allowance for any difference which may exist in the value of money at the commencement and dissolution of his marriage, and for that purpose the weighted average of the consumer price index as published from time to time in the Gazette serves as prima facie proof of any change in the value of money.
(2) The accrual of the estate of a deceased spouse is determined before effect is given to any testamentary disposition, donation mortis causa or succession out of that estate in terms of the law of intestate succession.
Divorce Act 70 of 1979
Section 7- Division of assets and maintenance of parties
A court granting a decree of divorce in respect of a marriage out of community of property—
(a) entered into before the commencement of the Matrimonial Property Act, 1984, in terms of an antenuptial contract by which community of property, community of profit and loss and accrual sharing in any form are excluded, or
(b) entered into before the commencement of the Marriage and Matrimonial Property Law Amendment Act, 1988, in terms of section 22(6) of the Black Administration Act, 1927 (Act 38 of 1927), as it existed immediately prior to its repeal by the said Marriage and Matrimonial Property Law Amendment Act, 1988, may, subject to the provisions of subsection (4), (5) and (6), on application by one of the parties to that marriage, in the absence of any agreement between them regarding the division of their assets, order that such assets, or such part of the assets, of the other party as the court may deem just be transferred to the first-mentioned party.
- The setting up of trusts was without any ulterior motive on the part of the 1st appellant. According to him, he did not expect that the respondent would file for divorce. By all accounts, the respondent benefitted from the assets of Koens Familie Trust, which it had accumulated when the 1st appellant managed it. That enabled both of them to live a comfortable life. It was the respondent’s evidence that the 1st appellant deposited R20 000 every month into its bank account, which she then used for household necessaries. The respondent further testified that her decision to seek a divorce from the 1st appellant caught the 1st appellant by complete surprise. The contemplation of a future divorce could, therefore not have been a reason for the 1st appellant to create the trusts. Moreover, the respondent acted as a trustee of the Bulhoek Trust since its formation and was part of the decision by the trustees of that Trust to purchase the Hartenbos property.
- The respondent averred that she joined those entities because she had also contributed to the growth of their assets. She alleged that as part of her contribution, she had managed civils and ran the administration of the trusts and the 9th appellant.
- The High Court’s conclusion that the appellant transferred the assets to the trusts with the purpose of concealing them through fraud, dishonesty and improper purpose of avoiding his obligation to account to the respondent for the accrual of his estate was incorrect. That conclusion was not based on the case the respondent had advanced both in her pleadings and during her evidence and was not the case the appellant was called upon to meet. During argument, counsel for the respondent struggled to point to any specific evidence showing transfer of assets by the appellant from his account(s) to the trusts and the 9th appellant at the relevant periods, i.e. after the discovery of the infidelity, different to how he conducted his affairs from when those entities were established.
- The High Court ordered that the veneer of all the three trusts be pierced to ascertain the accrual of the appellant’s estate. Before considering the correctness of the High Court’s conclusion, it was necessary to comment briefly regarding the proprietary consequences of a marriage out of community of property subject to an accrual system. Since community of property was excluded, each party maintained their respective separate estates. Under that regime, a claim (an accrual claim) arose at the dissolution of the marriage for an amount equal to half of the difference between the accrual of the respective estates of the spouses.
- The statutory definition made it clear that the trust founder had to relinquish at least some of his or her control over the property to the trustee, which therefore required that there had to be a separation of ownership (or control) from the enjoyment of the trust benefits so derived. The separation of enjoyment and control was designed to ensure that the trustees in whom the assets of the trust vest were impartial and that they exercise diligence in protecting the interests of the trust beneficiaries. Section 12 provided for the separation of the trust assets from the personal assets of a trustee unless the trustee was also a beneficiary of the same trust. The mere fact that the assets vested in the trustees and did not form part of the appellant’s estate did not per se exclude it from consideration when determining what had to be taken into account when calculating the accrual.
- Where there was evidence of abuse of the trust by the trustee, the courts could look behind the trust form in order to prevent its abuse. The evidence that the trusts were created as an estate planning tool was not disputed. The appellant’s evidence was that the principal objective of creating the trusts was to protect their assets to ensure that the respondent and his children, especially their mentally challenged daughter, would be cared for. The respondent and the two children were also capital beneficiaries of the trusts. It was not clear from the evidence on which the High Court based its findings that the 1st appellant used the trusts and the 9th appellant as his alter ego.
- The High Court’s reliance on Badenhorst v Badenhorst  ZASCA 116;  2 All SA 363 (SCA) (Badenhorst) was misplaced. The issue in Badenhorst concerned a just and equitable distribution of assets in terms of section 7(3) of the Divorce Act 70 of 1979. The parties there were married out of community of property before the Matrimonial Property Act was enacted, and their marriage was therefore not subject to the accrual system. The redistribution order was made on the basis that Mr Badenhorst was found to have had full control of the trust and that he used the trust as a vehicle for his business activities.
- The court did not find that the trust was a sham or had been abused or made an order that the assets of the trust were to be regarded as Mr Badenhorst’s property. It did not go behind the trust form. Going behind the trust form was a remedy that would generally be given when the trust form was used in a dishonest or unconscionable manner to avoid an obligation. The evidence accordingly did not support the respondent’s contention that those trusts were established with the fraudulent object of defeating any of the patrimonial claims of the respondent.
Appeal upheld with costs.
Paragraphs 2 and 6 of the High Court order were set aside and replaced with the following order:
The plaintiff’s claim for an order that the assets of the Koens Besigheids Trust, the Koens Familie Trust, the Bulhoek Trust and the 9th appellant were to be used to calculate the accrual of the first defendant’s estate was dismissed with costs, including the costs of two counsel where so employed.
Relevance to Kenyan jurisprudence
The Constitution of Kenya, 2010, in article 45 (1) and (3) says that the family is the natural and fundamental unit of society and the necessary basis of social order, and shall enjoy the recognition and protection of the State, and that parties to a marriage are entitled to equal rights at the time of the marriage, during the marriage and at the dissolution of the marriage.
Under section 2 of the Matrimonial Property Act No. 49 of 2013, contribution is defined to mean both monetary and non-monetary contribution. Non-monetary contribution includes: Domestic work and management of the matrimonial home; Child care; Management of family business or property; and Farm work.Section 7 of the same Act stipulates that ownership of Matrimonial Property depends on each spouses’ contribution to wit: –
Subject to section 6(3), ownership of matrimonial property vests in the spouses according to the contribution of either spouse towards its acquisition, and shall be divided between the spouses if they divorce or their marriage is otherwise dissolved.
Section 9 of the Act recognizes contribution through improvement of a property acquired before or during the marriage in the following terms:
Where one spouse acquires property before or during the marriage and the property acquired during the marriage does not become matrimonial property, but the spouse makes a contribution towards the improvement of the property, the spouse who makes a contribution acquires a beneficial interest in the property equal to the contribution made.
Section 14 of the Act provides that:
Where matrimonial property is acquired during marriage-
(a) In the name of one spouse, there shall be a rebuttable presumption that the property is held in trust for the other spouse; and
(b) In the names of the spouses jointly, there shall be rebuttable presumption that their beneficial interests in the matrimonial property are equal.
In the case of PWK v JKG 2015 eKLR the Court held that:
Where the disputed property is not so registered in the joint names of the spouses but is registered in the name of one spouse, the beneficial share of each spouse would ultimately depend on their proven respective proportions of financial contribution either direct or indirect towards the acquisition of the property.
Moreover, in AWM v JGK  eKLR, the court held that:
The totality of my analysis of the evidence presented before me is that the Applicant made substantial monetary contribution towards acquiring, developing and improving the matrimonial properties especially the matrimonial home. She also made substantial non-monetary contribution, which cannot be quantified in monetary terms. I am therefore satisfied that, basing my decision on the peculiar circumstances of this case, I am satisfied on a balance of probabilities that the Applicant has proved her case to the required standard.
However, the court in T M W v F M C  eKLR stressed that it was against public notice to entertain matrimonial disputes as it would accelerate the break-up of the family involved, hence peace and reconciliation should be fostered. Alienation of lands between spouses during unbroken coverture did not augur well for the well-being of the family as a unit.
This case is thus important to the Kenyan jurisprudence since it clarifies on property distribution in a divorce case as it asserts that where there is evidence of abuse of the trust by the trustee in a divorce case involving property distribution, the courts can look behind the trust form in order to prevent its abuse.