JOHANNESBURG - I met a trustee a trust last week, who was confident he could manage “his” trust alone, as a result of a resolution he got signed by all trustees, which empowers him to do as he wishes with the trust’s assets. Such a red flag was raised, as many people are of the opinion that they can retain control over trust assets and act alone without really involving other trustees in the decisions. They were obviously not educated that such actions may have serious repercussions for the trustees, as well as the trust's assets.
Trustees are the guardians of the trust assets and have a duty to manage these assets in the best interests of the beneficiaries, as outlined in the trust deed. The Trust Property Control Act clearly stipulates the duties of trustees. Section 9(1) of the Trust Property Control Act states that a trustee shall, in the performance of his/her duties and exercise of his/her powers, act with the care, diligence and skill which can reasonably be expected of a person who manages the affairs of another person. It is important to note that “skill” encompasses more than simply acting in good faith. Trustees may be proved negligent, not only if they invested in risky investments, but also if they invested capital too conservatively, resulting in the capital not growing sufficiently.
All trustees have a fiduciary duty to beneficiaries, not just certain trustees. They may not act in a way that violates this duty or outside the parameters of the trust deed. If their actions (alone or with other trustees) contravene either the provisions of the act or the trust deed, they could find themselves personally liable for losses suffered by the trust.
Trustees must be aware that they can be held personally liable even if only one trustee has signing power on behalf of the trust and that person makes a poor decision that finds all the trustees liable for his/her negligence. This is onerous. In a dispute, the courts will enquire as to what any other person, who takes care of people’s affairs, would have done under similar circumstances.
A court will ignore the fact that the trustee, for example, was a family member, and was therefore deemed to be acting within the family’s best interests.
In a 2002 court case, it was held that a trustee may be removed from office, even if he/she acted bona fide (sincerely). It was argued that a trustee’s office should be terminated by the court if he/she allowed maladministration of the trust by the other trustees, without acting on it. It further argued that mala fides (acting in bad faith) or even misconduct are not necessary requirements for the removal of a trustee. This view of the court is a strong warning to trustees who should be aware of this view, and the possible consequences for turning a blind eye or being excluded from trustee decisions.
Any provision in a trust deed that exempts a trustee from liability for negligence is void, and a trustee may be held liable for any losses suffered by beneficiaries if it is found that the trustee did not act with the required degree of care and skill in the administration of the trust assets. A trust deed should always have a severability clause, excluding such illegal provisions. The entire trust deed may be deemed null and void if this clause is found to have been omitted.
All trustees, whether independent or not, are charged with the responsibility of ensuring that the trust functions properly to the greatest benefit of the beneficiaries. These responsibilities include, but are not limited to:
- Ensuring compliance with the provisions of the trust deed.
- Ensuring compliance with all statutory requirements.
- Management of trust assets.
- Conducting of proper trustee meetings.
- Recording of proper minutes of all meetings and decisions by the trustees.
- Proper maintenance and safekeeping of minute books.
The courts have, in various cases, established the “Joint Action” rule, whereby trustees are required to act jointly in dealing with trust property.
The rule specifically means that:
Co-trustees are required to always act jointly in terms of trust administration. Even when the trust deed stipulates that the majority of trustees can make a decision, the resolutions must be signed by all trustees.
If there is more than one trustee, and there is no provision in the trust deed to determine how decisions should be made, a unanimous vote will be required in matters of substance (in terms of a 2003 court case).
It is a fundamental rule of trust law that, in the absence of contrary provisions in the trust deed, the trustees must act jointly if the trust’s estate is to be bound by their acts. The rule derives itself from the nature of the trustees’ joint ownership of the trust property. Since co-owners must act jointly, trustees must also act jointly (in terms of a 2004 court case). Also when dealing with third parties, the Joint Action Rule applies. This also stems from joint ownership (in terms of a 2005 court case).
When dealing with third parties, even if a decision can be made by the majority of trustees, as per the trust deed, all trustees are required to be involved in the decision. All trustees must be notified during the decision-making process, bearing in mind that a trust operates on resolutions (in terms of a 2011 case).
A trust itself cannot be sued because it is not recognised as a legal person in South Africa, unless a statute defines it as such. The trustees, in their official capacity, however, can be sued. An indemnity clause in the trust deed, which exempts trustees from liability for breach of trust, is void and does not exempt a trustee from actions involving ordinary or gross negligence, or intentional wrongdoing. Criminal liability may be imposed upon a trustee who commits a crime during the course of the trust’s administration, for example, through theft or fraud.
Trustees are jointly and severally liable for damages (delict). Beneficiaries or third parties, such as creditors, who have suffered a loss as a result of breach of trust, are entitled to bring a damages claim against the trustees.
Trustees can be sued for damages by beneficiaries if deemed to have acted negligently, both when acting in good faith and when intentionally acting wrongfully.
A co-trustee who was not involved in such a breach of trust may still be liable for any wrongful action of another trustee. For example, where the “innocent” trustee is aware of a breach of trust by co-trustees.
Many trustees are unaware of the requirement for trustees to act jointly and often abuse the majority decision provision in trust deeds. If you're a trustee and are either not sure whether decisions are made without your knowledge and involvement, or are knowlingly excluded, you need to act before you're held liable for your inaction.
Phia van der Spuy is founder of Trusteeze.
The views expressed here are not necessarily those of Independent Media.
- BUSINESS REPORT