WRITTEN BY COLLEEN MECHANIC
19 JULY 2022
The Importance of Calculating Accrual in a Divorce
In any divorce, it goes without saying that both parties aim to retain as many assets as possible. In some cases, a spouse might maliciously attempt to hide certain assets in order to exclude them from the accrual calculation.
When Does the Issue of Hiding Assets become Relevant In Divorce Proceedings?
In marriages both in community of property and out of community of property with the application of the accrual system, parties are required to disclose their assets. For purposes of this article, we will only focus on marriages out of community of property with accrual.
During divorce proceedings, there comes a time when the parties are required to furnish full particulars of the value of their estates so that the accrual values can be determined. Unfortunately, this is where several unscrupulous parties attempt to hide assets out of the reach of their spouse.
Why Would a Party Attempt to Hide Assets in a Trust?
One method such parties employ is placing assets they wish to exclude from the accrual calculation in a trust. This is because the default position in our law is that Trust property does not form part of the beneficiaries’ personal estate, except insofar as a trust beneficiary is entitled to same.
The assets that form part of the trust will be excluded from the accrual calculation and the other party will have a smaller claim against their estate.
When can the Court Disregard this Default Position Relating to Trust Property?
There are two instances in which a Court can disregard this rule – where it finds that a trust is a sham or when it finds that there has been an abuse of the trust form.
What Happens if the Court Finds That the Trust is a Sham?
The notion of a trust being a sham is premised upon the trust not existing, in which case no effect will be given to the transaction and the ‘founder’ will remain the owner of the ‘trust assets’.
What Happens When the Trust Form has been Abused?
On the other hand, where the court finds that the trust form has been abused, it will recognise the validity of the Trust but still order that the Trust veneer be pierced in order to disregard the ordinary consequences of its existence for a particular purpose.
How Does this Take Effect in Case Law?
The Supreme Court Of Appeal recently ruled on such a matter in PAF v SCF (788/2020) [2022] ZASCA 101 (22 June 2022), where the applicant, a wealthy businessman, attempted to hide his assets in an offshore Trust in order to place those assets outside the scope of the accrual calculations.
In this matter, the parties were married out of community of property, subject to the accrual system, and the applicant (husband) wished to divorce the respondent (wife). In calculating the accrual, it was common cause that the applicant’s estate had grown by a more considerable value and had shown a greater accrual than that of the respondent. The respondent thus filed a counterclaim, claiming payment of an amount equal to one-half of the difference between the accruals in the parties’ respective estates.
Twenty days before the divorce hearing, the applicant founded a Trust under the British Virgin Islands laws, with his brother’s assistance, a solicitor practicing in that jurisdiction. The following day, the applicant irrevocably and unconditionally agreed to donate £115 000 (at the time, equivalent to R2 205 362) to the Trust. He also transferred £125 000 (at the time, equivalent to R3 377 481) into his father’s bank account, purportedly repaying a loan made to him by his father approximately 25 years earlier.
In justification of the establishment of the Trust, the applicant attempted to explain that the parties’ minor daughter was listed as the Trust’s sole beneficiary and the applicant’s brother would be the sole trustee. The applicant and the respondent are only residual trustees and the applicant thus has no control over the Trust assets. The respondent was, however, angered by these attempts by the applicant to reduce his estate’s value. She thus amended her counterclaim to include a prayer that the calculation of the accrual should take the value of the two transactions into account.
WHAT DID THE HIGH COURT DECIDE IN PAF V SCF?
The decree of divorce was subsequently granted, and the High Court later held that the two transactions were made with the “fraudulent intention” of depriving the respondent of her rightful accrual claim. The court ordered, inter alia, that the value thereof should thus be included in the calculation of the applicant’s assets for the purposes of calculating the accrual.
The applicant requested and was granted leave to appeal to the full court but failed to do so timeously. The applicant then approached the full court, requesting condonation of the late prosecution of the appeal and leave to introduce further evidence on appeal. He did, however, abandon his appeal against the court’s order in respect of the payment to his father. Both of the applicant’s applications were dismissed and the applicant then approached the Supreme Court of Appeal, requesting that special leave should be granted against the full court’s Orders and, if granted, the merits of the case.
WHAT WAS ARGUED IN THE SUPREME COURT OF APPEAL IN THE MATTER OF PAF V SCF?
In attempting to justify the establishment of the Trust, the applicant noted that he had obtained a written legal opinion regarding the lawfulness of doing so and had been advised that same would not be unlawful as his reasons for the donation were legitimate. Apparently, he had not introduced this evidence originally as it was not deemed necessary to do so, but he felt that it proved that the donation was not done for the purposes of reducing the respondent’s accrual claim.
The Court discussed various case law setting out the criteria as to whether evidence should be admitted on appeal. The applicant’s application was dismissed again. They also gave short shrift to the applicant’s request for condonation, stating that the applicant had not sufficiently satisfied the onus which fell on him to satisfy the Court that condonation should be granted.
It was further argued that, in her amended counterclaim, the respondent had accepted the various formalities in respect of the Trust, thus accepting that the Trust was legitimately established for the benefit of the parties’ minor daughter. The applicant, therefore, argued that the Trust could not be held to have been a sham. The Court elected to view the respondent’s claim as an allegation that, by creating the Trust and donating to it, the applicant abused the Trust form to reduce the respondent’s accrual claim. Her counterclaim was thus a request that the Court go behind the Trust form, or “pierce the Trust veneer”, and order that the value of the donation be taken into account when determining the accrual.
The court discussed the fact that when a court pierces the Trust veneer, it does so on the basis of its common law power, which was transplanted from the principles of piercing the corporate veil in the realm of company law.
It thus concluded that the High Court was correct to conclude that it was entitled to go behind the trust form and order that the value of the donation to the trust be taken into account as part of the applicant’s assets in calculating the accrual. The applicant’s application for special leave to appeal was thus refused with costs, with the Court noting the “strange timing” of the applicant’s actions.
WHAT ARE THE IMPLICATIONS OF PAF V SCF?
This case is a stark reminder that the Trust form does not provide protection in instances where the Trust is established with the fraudulent intention of depriving one’s spouse of their rightful accrual claim. Where such allegations are raised, our Courts are urged to carefully examine the facts of each case to determine whether there has indeed been an abuse of the Trust form and, if so, our Courts will not hesitate to exercise their common law power to pierce the Trust veneer and thus prevent prejudice to the aggrieved spouse’s accrual claim.
If you have a suspicion that your spouse is hiding assets to reduce your accrual claim, speak with one of our top family and divorce lawyers today to ensure that all the assets are taking into account and divided in a fair manner.
DISCLAIMER: Information provided in this article does not, and is not intended to constitute legal advice. READ MORE
