In sickness and in health: Are pension fund proceeds included in an insolvent estate even when hidden through collusive dealings between husband and wife?

This appeal, heard from the Gauteng Division of the High Court, primarily considered whether a pension benefit paid out to an insolvent, Mr. Moreau, before his estate was sequestrated enjoyed the protection provided in section 37B of the Pension Funds Act 24 of 1956 (Pension Funds Act). The secondary issue was whether certain dispositions made by the insolvent to his then wife, Mrs. Moreau, and the second appellant, Iprolog (Pty) Ltd (Iprolog) should be set aside in terms of the provisions of the Insolvency Act 24 of 1936 (Insolvency Act).

The factual background illustrates that Mr. Moreau received a pension payout two years prior to his sequestration and that such monies received were almost immediately disposed of to both Mrs. Moreau and Iprolog. Iprolog, in turn, purchased immovable properties with the money received from Mr. Moreau. The trustees of Mr. Moreau’s insolvent estate successfully obtained an order in the court a quo which set aside the dispositions and interdicted Mrs. Moreau and Iprolog (the appellants) from alienating the immovable properties indirectly purchased with the pension monies. Iprolog was registered on 6 April 2009, with Mr. Moreau becoming sole director on 30 April 2009. Shortly thereafter, on 5 May 2009, Mr. Moreau and Mrs. Moreau became trustees of the Les Baux Family Trust (the Trust), which in due course became the sole shareholder of Iprolog. On 18 May 2009, a full court ordered Mr. Moreau to pay one of his creditors, Lowveld Cooperative Investments (Lowveld) the sum of R726, 638.35, interest and costs, an order which he immediately applied to appeal.

On 31 May 2009, Mr. Moreau requested payment of his provident fund benefit from Mindkey Corporate Selection Retirement Fund (Mindkey). Mindkey subsequently paid out Mr. Moreau’s provident fund and he received a sum of R4,639,000.00. Within a period of 8 days after receiving his provident fund payment, Mr. Moreau transferred R3,500,000.00 into the trust account of an attorney, for the benefit of Iprolog. The balance of R1,023,867.00 was paid directly into the account of Mrs. Moreau. Mr. and Mrs. Moreau had been married out of community of property for almost 29 years and, according to the appellants, Mrs. Moreau had filed for divorce in April 2009, without claiming patrimonial relief or maintenance, a mere two days after Mr. Moreau applied to appeal the judgment granted in favour of Lowveld against him.

The payment to the trust account of the attorney was alleged to be for purposes of the proprietary consequences of their divorce, in line with certain terms agreed upon in Mr. and Mrs. Moreau’s antenuptial agreement. The antenuptial agreement provided that Mr. Moreau would purchase a property for Mrs. Moreau for R100,000.00. It was alleged that the equivalent current value of such sum amounted to R3,722,213.14 in 2009. The balance of R1,023,867.00 which was paid directly to Mrs. Moreau allegedly represented a loan amount which comprised unpaid wages for a period which Mrs. Moreau worked for Moreau and Associates, Mr. Moreau’s business in which he was a financial advisor.

In terms of the divorce settlement agreement reached between the parties, Mr. Moreau undertook to pay Mrs. Moreau a large sum of maintenance on a monthly basis, various other expenses with Mrs. Moreau retaining ownership of two farms situated in Mpumalanga, which had been purchased by Iprolog with monies received from Mr. Moreau. A final decree of divorce was granted on 21 August 2009, incorporating the settlement agreement reached between the parties. Shortly thereafter, on 2 November 2009, Mr. Moreau resigned as a director of Iprolog and was replaced by Mrs. Moreau.

In May 2010, Lowveld instituted proceedings for the sequestration of Mr. Moreau’s estate, as his unsatisfied judgment debt, interest and costs had escalated to an amount of R2,027,587.74. In October and November 2010, in the midst of the proceedings, the farms purchased by Iprolog in Mpumalanga were sold and a portion of the proceeds were used to purchase an immovable property in Edenvale in Gauteng (the Edenvale property). Mr. Moreau moved to the property in March 2011 and was joined by Mrs. Moreau in April 2011. The parties alleged that their co-habitation was due to Mrs. Moreau’s ill-health and that Mr. Moreau felt morally obliged to care for her. They continued to jointly occupy the Edenvale property until the judgment in relation to the sequestration proceedings was handed down in the court a quo.

On 1 August 2011, a final order of sequestration was granted against Mr. Moreau. The trustees appointed to administer his insolvent estate (Trustees) launched an application on 1 March 2013, to have the payments made to Iprolog and Mrs. Moreau set aside. The Trustees alleged that collusion occurred between Mr. and Mrs. Moreau in terms of which Mrs. Moreau would be stripped of his assets and income to avoid paying his debt to Lowveld. This allegation by the Trustees was based on various factors such as the allegation that Iprolog was “the alter ego and corporate veil” of Mrs. Moreau and Mr. Moreau; by making the Trust the sole shareholder of Iprolog they sought to distance themselves from the company and “create a further trench which had to be crossed by any creditor seeking to gain access” to Mr. Moreau’s pension monies; their separation occurred only after the full court upheld Lowveld’s appeal and that their divorce was “merely a sham” and “window-dressing”.

The appellants attempted to rely on section 27B of the Pension Funds Act which provides that pension monies are exempt from attachment. They denied any disposition of monies from Mr. Moreau to Iprolog and claimed that it was a loan granted by Mrs. Moreau to the Trust and the Trust loaned the same amount of Iprolog.

The learned judge in the court a quo considered section 37B of the Pension Funds Act and concluded that, since Mr. Moreau received his pension monies before his estate was sequestrated, it no longer enjoyed the protection which the section provides to pension money. It was reasoned that, at the moment the money was received, it formed a part of the estate of Mr. Moreau. It was found that there had been clear collusion between Mr. and Mrs. Moreau in order to prejudice Mr. Moreau’s creditors. The court a quo therefore set aside the dispositions in terms of section 31 of the Insolvency Act.

The SCA confirmed that section 37B of the Pension Funds Act means that, while pension money is within the control of the pension fund, it cannot be included in the insolvent assets. It protects only the pension benefit of a person whose estate is sequestrated, which Mr. Moreau’s estate was not when he received his pension pay-out. The effect of a sequestration order is to divest an insolvent of his or her estate and to vest it in a trustee. When Mr. Moreau received the payout, his estate had not as yet been sequestrated and there was thus no insolvent estate or trustees to speak of. Section 37B of the Pension Funds Act therefore could not find application when the payment was affected. Consequently, Mr. Moreau could not bring himself within the legal exception, and payment could only have been made into his regular estate. Mr. Moreau’s then disposal of those monies in the manner in which he did, renders them susceptible to attack. If a pension benefit is received before a beneficiary’s estate is sequestrated, section 37B of the Pension Funds Act does not find application.

The SCA referred to the case of Jones & Co. v Coventry [1909] 2 KB 1029 which conveyed an important statement and held the following –

“Pension, when it has been paid to the person entitled to receive it, ceases any longer to be pension; it has lost its character of pension, just like dividends which, after payment, lose the character of dividends. It becomes part of the pensioner’s ordinary money. . ..”

The appellants further unsuccessfully attempted to rely on section 37A(1) of the Pension Funds Act which protects any benefit or right to any benefit provided for in the rules of a registered pension fund payable to a member of such fund, against any reduction, transfer, cession, pledge, hypothecation, attachment or judicial execution. However, the SCA held that this sections means “any member or former member of the association by which such fund has been established’, while in the second category, ‘member’ means ‘a person who belongs or belonged to a class of persons for whose benefit that fund has been established”.

Significantly, in respect of both categories, the definition excludes “any person who has received all the benefits which may be due to that person from the fund and whose membership has thereafter been terminated in accordance with the rules of the fund”. Mr. Moreau is therefore excluded from protection under section 37B of the Pension Funds Act by this definition, as he had received all the benefits and his membership of the provident fund had been terminated thereby. The learned judge further referred to Van Aartsen v Van Aartsen 2006 (4) SA 131 which held that –

“it could also be argued that once [the beneficiary] had received his pension payout, it was no longer a pension benefit as intended in the Act, but rather a sum of money, that is, a movable thing and not a legal right or claim”.

The SCA confirmed that the court a quo correctly applied section 31 of the Insolvency Act which provides specifically for collusive dealings. Section 31 provides that “After the sequestration of a debtor’s estate the court may set aside any transaction entered into by the debtor before sequestration, whereby he, in collusion with another person, disposed of property belonging to him in a manner which had the effect of prejudicing his creditors or of preferring one of his creditors above another”. The appellants, referring to the divorce settlement, which was made an order of court, further unsuccessfully attempted to rely on the definition of disposition in the Insolvency Act insofar as that it does not include disposition in compliance with an order of the court. The SCA held that the exclusionary provisions in terms of section 2 of the Insolvency Act do not apply to the payment made to Iprolog and therefore it could be set aside. However, the second payment made to Mrs. Moreau is considered in a different light as it was made after the final decree of divorce between the parties and therefore notionally protected by the exclusionary provisions of section 2.

The SCA found that the founding affidavits of Mr. and Mrs. Moreau indicated clear collusion and that the entire premise of their case rested on the existence of such collusion. It was considered to be a carefully designed plan by Mr. Moreau to keep his pension payout from his creditor, Lowveld, and that Mrs. Moreau and Iprolog were an integral part of such plan. The divorce between the parties was undoubtedly a sham, which had become evident by their continued co-habitation of the Edenvale property. This conclusion is inescapable by considering the timeline of events and that Mrs. Moreau instituted action for divorce a mere two days after Mr. Moreau’s leave to appeal was dismissed by court and her involvement in the settlement agreement which granted her all Mr. Moreau’s assets and money. The court concluded that neither of the protective provisions of section 37B or 37A of the Pension Funds Act applied to Mr. Moreau’s pension payout. Furthermore, it was held that the dispositions made by Mr. Moreau to Mrs. Moreau were made in clear collusion in order to prejudice a creditor, Lowveld. As a consequence, these dispositions were able to be set aside pursuant to the provisions of section 31 of the Insolvency Act. Based on these considerations, the appeal failed. Both the payments to Iprolog and Mrs. Moreau were set aside, and the respondents were ordered to repay those monies to the applicants.

The judgment clearly illustrates that pension monies cannot be shielded from attachment if there are elements of collusion present and that the court will examine the true intention of the parties whilst entering into transactions or disposing of monies. Pension money ceases to have special status the moment it is paid to an individual and therefore forms part of any estate which may be sequestrated thereafter.