Trading Trust Debt and Personal Liability

by Johan Oosthuizen


Debtor

Separation of risk is one of the main benefits of using the trust vehicle to hold assets and to conduct business. There are different types of trusts that are utilised to achieve this separation of risk (Trading, Family, Property, etc.).

What risk are we attempting to separate from whom and what? The type of risk in question here is creditors who has a claim to our personal estates and also to certain trusts in our portfolio – this does not include our Family Trust as we keep this trust completely creditor free. We are thus fragmenting our business into different entities to protect higher risk ventures from low or no-risk ventures.

This principle has been challenged in the Supreme Court in M v M 2017 (3) 371 (SCA), where the appellant created a trust and other entities every time he pursued new business ventures. The object was to isolate each business so that the financial demise of one would not affect the financial viability of any of the others. The Court held that this was “obviously a legitimate business activity” and the trust in question had to be viewed as part of the appellant's overall business strategy. The Court therefore confirmed that utilising a trust for this purpose is not proof that the trust is used merely as an alter ego or that this is an abuse of the trust form.

The next question is whether or not trustees and beneficiaries (also other trusts as beneficiaries) are exposed in their personal estates to the risks involved in the day-to-day carrying on of business of the trust. This question was dealt with in Ex Parte Milton NO 1959 (3) SA 347 (SR), where the court accepted the voluntary surrender for liquidation of the trust and classified the trust entity as a debtor in the ordinary meaning of the word. Strictly speaking, a trust does not possess a distinct legal persona, and the significance of the Court's finding is as follows: A trust can borrow money through its trustees, but creditors may only look to trust property to satisfy their debts due to the trust being the debtor in the ordinary meaning of the word, and not the trustees.

When will trustees and beneficiaries be liable for the debts of a trust? There are two ways in which a trustee or beneficiary may be held liable. The first is if such person or entity binds itself as security for the satisfaction of the trust's debts. Secondly, if a beneficiary receives a benefit which has risk attached to it, for instance, a property as benefit and the rates & taxes as liability.

We can conclude that it is an established principle in South-African law that trusts may be used for the separation of liabilities, and this fact in no way affects the validity of the trust vehicle even if this was the main objective of the separation of assets into trust. We can also conclude that a trust gives as much protection, if not more, than any competing entity available.

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