Category Archives: Trusts

DISCUSSION OF TWO HIGH COURT DECISIONS DEALING WITH TRUSTS

by Marthinus Cronje

Kidbrooke Place Management Association v Walton
(18932/2012) [2015] WCHC (25 March 2015)

Any person who has an interest in the trust property may apply for the removal from office of a trustee and not only a beneficiary of the trust.

The purchase of immovable property by trustees from a trust is something that is required by custom in South Africa to be sanctioned by a court. Not only did the trustees not see fit to seek such sanction, they failed to take independent advice or make prior disclosure to the beneficiaries of their actions.

No disclosure was made by the trustees of the willingness by FNB to write off that part of the Trust’s debt that exceeded R1,74 million. There was also no disclosure to the management committee of the precise nature of the personal interest of trustee and another person, or of the personal gain they stood to realise in a transaction. The fiduciary duty as trustees behoved the trustees to have made full disclosure before embarking on the undertaking. They should not have proceeded without the informed consent of the beneficiaries. Disturbingly, the respondent in his answering affidavit appears to dispute the necessity for prior or informed consent to have been obtained. Contrary, to the respondent’s assertions in this connection, it would seem that whatever disclosure did occur, was made only after searching questions were raised and pursued and the information provided in response to these enquiries was incomplete and, at least in certain respects, not always correct.

There was no disclosure that the commissions were paid to an entity (Code Design) controlled by the respondent, or that they generated an income for the first respondent in the form of that entity’s profits. The respondent’s conduct in this regard points to an inadequate appreciation of the nature of his fiduciary duties with the result that he failed to properly distinguish the proprietary affairs of the Trust from those of his own. It is disturbing that even in his answering affidavit, the respondent gives no indication – even with benefit of the opportunity for reflection – of being astute to how his conduct deviated from that expected of a trustee in his position. The trustee’s ‘profound misappreciation’ of his duties and obligations signifies a risk that he may act in breach of his fiduciary duty in other respects should he remain in office. The contention that the payment of commission to an entity controlled by the trustee was known to various persons, such members of the management committee and certain of the other rights-holders, also does not avail the trustee. It does not address the common law requirement of prior informed consent from all the beneficiaries, or the requirements of the trust deed.

A trustee, even though innocent, whose position involves a conflict of interest and duty may be removed from office by the court. The sufficiency of the cause for removal is to be tested by a consideration of the interests of the trust.

The prosecution of the current application is manifestly the precursor to further proceedings in which a proper accounting for and disgorgement of unauthorised profits will be sought from the trustee. He would have been well advised in the circumstances to have appreciated, with regard to the best interests of the administration of the trust, the untenability of his continuing in office in the context of the claims that it is intended to advance against him, and to have resigned. His failure to do so, and decision instead to oppose the application for his removal has exposed the Trust to potential liability for the costs of this application – all in defence of his own position. This affords an unsettling further indication of a material lack of insight by the respondent as to the legal character of his position as a trustee and serves only to confirm the conclusion that the interests of the Trust and its beneficiaries will be best served by the removal of the respondent from his position as trustee.

Regard was had to the clear intention of the founders of the Trust that the first respondent should be a trustee for as long as he should wish. However, it is regarded as more important in the whole conspectus of the matter to have regard to the best interests of the Trust in the context of events that subsequently unfolded.

Groeschke v Trustee, Groeschke Family Trust And Others
2013 (3) SA 254 (GSJ)

A trust inter vivos can be amended by a signed resolution to amend the trust deed where the resolution was lodged with the Master. Section 4(2) of the Trust Property Control Act, 57 of 1988 does not provide that, if a trust document is not lodged with the Master, the variation would not be valid; it simply enjoins the trustee to lodge it. As well, the section does not require an application to amend. Neither does the section stipulate a time frame for the lodgement of the document or the form and content of the document. The section also does not require the lodgement of a complete, amended deed of trust after the amendment; it requires only the lodgement of the document amending the deed. It is quite clear that the lodgement of a deed of trust and of the documents amending that deed is required under sections 2 and 4 of the Act simply in order to facilitate, for example, the identification of the terms of a trust and the powers, rights and obligations that flow from them. Hence, non-compliance with these sections, despite their peremptory tone, is not met with a suspension or even the invalidation of a trust.

A trust deed varied without the beneficiary’s consent after the latter has accepted the benefits conferred by the trust deed is invalid, but it can be varied by the contracts where the beneficiary has not accepted benefits. A trust with a sole trustee who is also the sole beneficiary cannot be validly created: Land and Agricultural Bank of South Africa v Parker and Others 2005 (2) SA 77 (SCA) at paragraph 19. However, if at some time after the creation of a trust the circumstances had changed so that the beneficiaries of that trust were also its trustees, the position might be undesirable, but it would also not cause the trust to fail. Section 7 empowers the Master, even in the absence of, or notwithstanding any provision in the trust instrument, to appoint any person whom he deems fit as trustee or as a co-trustee with any serving trustee.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.

IN TRUSTS WE TRUST

by LUCINDE RHOODE (Website)

Creditors as parties to litigation often find themselves in a predicament where the individual they have a claim against has assets of insignificant value, but being a trustee of a discretionary trust owning substantial assets.

Creditors are left with little else to do but to ask a court to “go behind the trust” to try and find assets against which it can execute a judgment.

Allegations of a trust being a debtor’s “alter ego” or “a sham” often find their way into pleadings and are often used interchangeably.

Our courts have to date mostly shied away from declaring assets registered in a trust to be regarded as assets falling within the personal estate of one of such trust’s trustees, in the hope of being able to execute a judgment against the assets of such trust, and the recent judgment of VAN ZYL AND ANOTHER NNO v KAYE NO AND OTHERS 2014 (4) SA 452 (WCC) has made it even more difficult to do so.

In the VAN ZYL matter Binns-Ward J had to determine whether two immovable properties, one registered in the name of a trust and the other in the name of a company, must be treated as assets in the insolvent estate of one Mr Kaye.

The trust in question was a family trust of which Kaye, his wife and an attorney were the trustees. The property owned by the trust was used by Kaye and his family as their family home. The beneficiaries of the trust were Kaye, his wife and their descendants.  It appeared from the facts before court that financial transactions might have been recorded in the books of various entities over which Kaye exercised control in a manner that did not represent a correct representation of the flow of funds.

The court clarified the difference between finding that a trust is a sham and going behind a trust.  To hold that a trust is a sham, in other words non-existent, will be a finding of fact inter alia on the basis that the requirements for the establishment of a trust were not met, in which event the “trustees” of the trust acted as agents of Kaye when acquiring the property.

The court found that even a delinquent discharge by trustees of their responsibilities, resulting in only one trustee exercising unfettered de facto control over the trust assets or the maladministration of an asset of the trust is not enough to justify a finding that a trust is a sham, that the trust does not exist or that an asset no longer vests in the trust.  All that it does is call into question the fitness of the trustees to hold office.

Going behind the trust form, on the other hand, entails accepting that the trust exists, but disregarding for given purposes the ordinary consequences of its existence. This might entail, the court found, holding the trustees personally liable for an obligation ostensibly undertaken in their capacity as trustees, or holding the trust bound to transactions seemingly undertaken by the trustees acting outside the limits of their authority or legal capacity or in cases where the trustees treat the property of the trust as if it were their personal property and use the trust essentially as their alter ego.  As this is an equitable remedy, it is a remedy that will generally be given when the trust form is used in a dishonest or unconscionable manner to evade a liability or avoid an obligation and not in a situation where a creditor seeks relief against a debtor who is a trustee of a trust.

The court pronounced that there is nothing untoward in trusts being established for the purposes of holding family homes separately or even for a trustee personally paying the mortgage bond and maintenance expenses in respect of such property.

The court went on to find that even if it were to be accepted that Kaye administered the trust without proper regard to his fiduciary duties and in a sense treated it as his “alter ego“, that does not, in itself, make the trust a sham, nor does it vest ownership of the trust’s assets in the trustees of his insolvent estate.

So what does this all mean?  It appears that this judgment is a further nail in the coffin for creditors trying to recover debs from debtors who as part of their estate planning registered all “their” assets in trusts.

As this avenue has now become more difficult to explore parties to transactions will have to be more astute to ensure they have sufficient security in place in respect of debts due to them, in the form of suretyships or security bonds.

Lucinde Rhoode – Director-Dispute Resolution – Cliffe Dekker Hofmeyr Inc – Cape Town

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.