Piercing of the corporate veil and the applicability to trusts

LawFuel.com – Under South African law, a court will look past the corporate veil (its status as a separate legal entity) of a company to hold natural persons behind the entity personally liable for the debts of the company where the company has been misused to perpetrate deceit or fraud. A similar principle can be applied to strip the façade of the separate legal personality from a trust to get to the trustee.

Facts of Rees & Others v Harris & Others

Harris, a representative of various companies, alleged that the Aljebami Trust, of which Rees was a trustee, was merely the alter ego of Rees. Harris also sought to hold Rees personally liable for losses incurred by the Trust, in respect of investments it had made in an unlawful and fraudulent Ponzi scheme.

Harris directed substantial amounts of monies to entities controlled by Rees, for further investment by Rees. After the fraudulent investments were uncovered, Rees had relocated to Switzerland. In order to bring Rees before the South African courts, Harris sought to pierce the veneer of the Trust in order to attach the assets of the Trust, as if the assets were those of Rees.

The court held that piercing of the veil is an exceptional act. The separate legal personality of a corporate entity is to be recognised and upheld, except in the most unusual circumstances. The circumstances where a court will disregard the distinction between a corporate entity and those who control it depend on a close analysis of the facts of each case, considerations of policy and judicial judgment.

There must at the very least be some misuse or abuse of the distinction between the entity and those who control it, giving them an unfair advantage. There will be no piercing unless the members of the entity dominate the finances, policies and business practices, to the extent that the corporate entity had no separate mind, will or existence of its own in the relevant transaction.

Harris alleged that Rees was always the front man in relation to the investments. Rees would advise Harris as to the financial viability of the investments and Harris relied completely on the knowledge, know-how and candidness of Rees. Rees for all intents and purposes controlled all the assets of the Trust. Harris alleged that Rees used the alter ego of the Trust to siphon investors’ funds through various of Rees’ bank accounts to perpetuate various frauds through a Ponzi scheme and was now hiding behind the veil of the Trust. The court had to decide whether this justified the stripping of the separate legal personality of the Trust.

Nature of a trust

A trust does not have legal personality like a company. It is an accumulation of assets and liabilities, which constitute the trust estate. A trustee is in a position of trust; he or she must act in a fiduciary capacity in accordance with the trust deed. Consequently a trustee may be negligent if he or she fails timeously and diligently to act in the interests of the trust, to protect those interests against unlawful or unwarranted intrusion.

The court held that in appropriate circumstances, the veneer of a trust can be pierced in the same way as the corporate veil of a company. It follows that if a legitimately established trust is used in an improper fashion by its trustees to perpetrate deceit or fraud, the natural person behind the trust’s veneer can be held personally liable for the debts of the trust.

Finding on the facts

Despite the fact that it was clear that the functional separation between control and enjoyment of the Trust by Rees was lacking, the court found that there was nothing to suggest, on a balance of probabilities, that the assets of the Trust were in fact the assets of Rees in his personal capacity. Harris failed to discharge the burden of proof to establish that Rees, exclusively of his wife who was his co-trustee, controlled the Trust to such an extent that the assets of the Trust were effectively Rees’ own.

When can a trust’s veil be pierced?

If the facts of a particular case show the use or abuse of a trust by a trustee, to use the trust as his or her alter ego, the veneer of a trust can be pierced and the trustee held personally liable for the debts of the trust. Accordingly, the assets of the trust could, in appropriate circumstances, be considered to be those of the trustee, provided the court makes a finding to this effect, which would more often than not be easier said than done.

Kate Scott-Shaw is an associate at Norton Rose.

ENDS

For further information please contact:

Candice Collins, communications specialist, Norton Rose South Africa
Tel +27 11 685 8630; Mob: +27 79 892 9369
[email protected]

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