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The trustees of a trust must conduct its affairs in accordance with the trust law.

The courts have the power to strip away the "veneer" of a trust

The core idea of a trust is that it achieves a separation between the ownership of assets and the right to enjoy the benefits of those assets. The trustees, in their capacity as such, are the owners of the trust assets, while the benefit of those assets (such as the income they produce) is enjoyed by the trust beneficiaries. The trustees must therefore manage the trust and its assets for the benefit of the trust beneficiaries, and not for their personal benefit.

Legitimate objectives of a trust

This structure of a trust can be used to achieve a variety of legitimate objectives.

For example, a person who intends to embark on a business that may prosper, but may turn out to be financially disastrous, could decide to form a trust to hold his major personal assets so that they are beyond the reach of his creditors if his business fails and he goes insolvent.

A trust may be established by a person who wishes to set up a legal structure which will, after his death, provide financial support to his surviving spouse and his children.

A person may be disinclined to bequeath assets to a child whom he perceives to be financially irresponsible, so he may set up a trust to hold those assets in order that they can be responsibly administered and invested by a trustee and distributed to the child in accordance with the latter's needs.

All of these are legitimate objectives of a trust.

The abuse of a trust

What the law frowns on, however, is the situation where a person creates a trust in which the same persons are both trustees and beneficiaries. (Strictly speaking, there is no legal impediment in doing so, except that a person cannot be the sole trustee and also the sole beneficiary of a trust.)

However, to use the language of Cameron JA in Land and Agricultural Bank of South Africa v Parker 2005 (2) SA 77 (SCA) such a structure debases the core idea of a trust, namely the separation of ownership and enjoyment.

Moreover, a serious abuse of the trust structure occurs where a person establishes a trust, arranges for various assets to be transferred to the trust, and then, in his capacity as trustee, fails to conduct the affairs of the trust in the manner required by law. It is also an abuse of a trust where a person creates a trust, transfers assets to the trust, and then simply treats the trust assets as though they were his own.

It is a principle of trust law that, unless the trust deed provides otherwise, all decisions by the trustees must be taken "jointly", in other words, all the trustees must participate in the decision.

Consequently, even where the trust deed provides that decisions of the trustees need not be taken unanimously, and that a decision supported by a majority of the trustees will bind the trust, all the trustees must participate in the decision and vote on the requisite trustees' resolution, even if only to vote against it.

A recent High Court judgement stands as a warning

An example of the abuse of a trust appears from the recent decision of the Western Cape High Court in van der Merwe NO v Hydraberg Hydraulics; van der Merwe NO v Bosman CC 2010 (5) SA 555.

In this case, the trust deed provided that there was to be a minimum of three trustees. However, the two trustees who effectively managed the affairs of the trust simply ignored the existence of the third, so-called "independent" trustee, and did not involve him in the management of the trust nor did they consult him when taking decisions as trustees.

In its judgement, the court remarked that this trust bore the "unwholesome hallmarks" of the kind of trust in which there is no proper separation between the ownership and the enjoyment of trust assets. The provisions of this particular trust deed, moreover,
were such that the third and ostensibly independent trustee effectively held office at the pleasure of the two dominant trustees, and they would always be in a position to outvote him.

In such a trust structure, said the court, the trustees who were also beneficiaries of the trust were able to effectively sideline the independent trustee so that he ceased to perform his proper role in the conduct of the trust's affairs.

The judge said that this would be an appropriate case for the court to disregard the "veneer" of the trust and hold the trustees personally liable for the contractual obligations of the trust. However, in the circumstances of this particular case, the judge said that he was unable to make such an order because the contracts in question that the trust had entered into for the sale of certain immovable property were invalid for lack of compliance with the formalities required by the Alienation of Land Act of 1981.

The judgment in this case, however, stands as a warning that the courts have the power, where a trust has been abused, to disregard the legal existence of the trust and to hold the trustees personally liable to perform the contractual obligations undertaken by the trust.

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