In the hands of inexpert trustees, trusts are fraught with pitfalls
Acts on behalf of a trust by an unauthorized trustee are a nullity
Trusts are an invaluable tool, particularly in financial, tax and estate planning. Or to put it more accurately, trusts when drafted and managed by an expert are an invaluable tool.
Regrettably, the law allows anyone to draft a trust deed or to give advice on trusts. The result is that many trust deeds are poorly drafted, and many trusts are administered by people who are lamentably ignorant of trust law.
There are many pitfalls for the inexpert when it comes to trusts. One such pitfall is to delay registering the trust deed in the office of the Master of the High Court - and sometimes to neglect to register it at all.
Another common pitfall is for the trustee to enter into transactions on behalf of the trust - for example, the purchase or sale of property - before receiving the required authorization from the Master to act as trustee.
The legal consequences of such lack of authorization were the subject of the recent decision of the Supreme Court of Appeal in Lupacchini NO v Minister of Safety and Security 2010 (6) SA 457 (SCA).
In this regard, the Trust Property Control Act 57 of 1988 provides in section 6(1) that-
Any person whose appointment as a trustee … comes into force after the commencement of this Act shall act in that capacity only if authorized thereto in writing by the Master [of the High Court].
As the court pointed out, a trustee's appointment as such is effected by the trust deed, but section 6(1), quoted above, precludes a trustee from acting as such until he or she has received written authorization from the Master of the High Court.
This means that a trustee who has not received such authorization cannot acquire rights for the trust, nor contractually incur liabilities on behalf of the trust. Consequently, any contract purportedly entered into by an unauthorized trustee does not create any legal rights or obligations for the trust. This can enmesh the trust in legal disputes, particularly where money or property has changed hands before the irregularity comes to light.
The question before the court in the present case was whether legal proceedings instituted by a trustee who has not received authorization from the Master are a complete nullity.
The Supreme Court of Appeal pointed out that in 1926 the Appellate Division had laid down in the case of Schierhout v Minister of Justice that it is a fundamental principle of our law that anything done contrary to a direct legal prohibition is void and of no effect.
However, said the Supreme Court of Appeal, later decisions of the courts have said that this is not a fixed and invariable rule, and the question whether such an act is void depends on the proper interpretation of the legislation in question.
The Supreme Court of Appeal said that a strong pointer in favour of the proposition that it is implicit in the Trust Property Control Act that the acts of an unauthorized trustee are void is that there is no criminal sanction for so acting, and that the legislature must have intended such acts to be void for otherwise a contravention of the prohibition would have no consequences at all.
In the result, the court held that the acts of a trustee who has not received authorization from the Master in terms of section 6(1) of the Trust Property Control Act are indeed a nullity.
In the particular matter before the court, this meant that the legal proceedings instituted by the trustee on behalf of the trust (namely, an action for damages against the State) were a nullity.
Although the reported judgment does not say so, it is likely that the trust's claim in this regard had, in the interim, become prescribed (that is to say, had become extinguished by the passage of time) and that the legal proceedings in questions could therefore not be commenced afresh when authorization was received from the Master.