Who shall guard the trustees?

Many beneficiaries of large trusts have suffered financially as a result of the poor decisions made or even fraud committed by the trustees. These losses seem particularly galling when one considers the obvious connotations of the words “trust” and “trustee”.

Alex Eliott, director at legal firm Knowles Husain Lindsay, questions whether there is still a place for trusts in our commercial and legal landscape, adding that if there is, the rules of the game must be spelled out. In short, in this era of hyper-regulation, trusts are in desperate need of proper, some, any regulation.

Looking at this issue, Eliott says the losses suffered would not be so surprising if one asks the question:

What is the legal nature of a trust (not what a trust can be used for)?

The answer is not simple; particularly if one considers that the commercial foundation of western civilisation is based on the concept of private ownership.

But, nobody owns a trust.

Beneficiaries might have at most a “vested interest” in a trust, which means nothing more than that they can be taxed. And, since a trust cannot be owned, beneficiaries cannot own their interests in a trust, and accordingly their status as beneficiaries cannot be sold.

Moreover, a trust cannot, in its own name own anything either. Any property it may acquire must be held by the trustees in their representative capacities. The trustees however do not own the property themselves.

Therefore, the underlying assets exist in a kind of legal limbo.

The basis for the existence of a trust is no less problematic if one asks how the functions of the trust are performed.

A trust cannot do anything at all, except through the trustees in their representative capacities. If all the trustees were to die in a plane crash, the trust would for all intents and purposes cease to exist. In other words, a trust has no separate existence apart from its trustees.

If the trustees are the mind, body and soul of a trust, where do the trustees get their mandate and their powers from?

From a written trust deed (although oral trusts are still legal in this country): The trust deed is essentially a private contract between the founder of the trust and the initial trustees. There are no laws governing the contents of a trust deed; and the terms of the deed cannot be varied by the trustees except in terms of the deed (or an application to Court in exceptional circumstances), just as a private contract cannot be varied except in terms of the contract.

And how then are trustees appointed and removed?

Again, this can only happen in terms of the trust deed. There are no laws governing qualifications and disqualifications of trustees; and no laws governing the appointment and removal of trustees – save that in terms of the Trust Property Control Act no. 57 of 1988, the Master of the High Court can remove a trustee on the basis of various disqualifications.

The Act consists of 27 concise sections. It confers considerable powers on the Master, but no rights on beneficiaries (other than, thankfully, the right to go to Court).

It imposes on trustees a general duty to act with care, diligence and skill, but in its brevity gives virtually no content to that duty.

A curious counterpoint to the benevolent neglect that characterises the Act is that a newly appointed trustee may not act unless and until he/she has received written consent (called Letters of Authority) from the Master of the High Court.

Since the existing Letters of Authority must be submitted to the Master to obtain a new one, the entire group of trustees is hamstrung until the new Letters of Authority is issued. This draconian provision can leave the trust’s affairs in limbo for months or even years if the Master delays in providing; or even refuses to provide new Letters of Authority.

Here again, the Act does not set out the requirements for “registration” of a new trustee or the circumstances under which the Master can refuse to provide Letters of Authority (save that the Act provides that the Master can require the Trustee to put up security). In practice, the Master’s office has its own set of rules, which are not within the public domain.

Further, the Act does not impose any disclosure obligations on the trust, whether this be to report to the Master or to the beneficiaries. There is no law creating an obligation for the trust to appoint an auditor, or even maintain financial records. The Act provides only that the Master may call on a trustee to “account for his administration and disposal of trust property”.

There is also no law conferring any sort of remedy if beneficiaries feel oppressed by the trustees. (These matters could be dealt with in the trust deed but, if they are not, there is nothing the beneficiaries can do about it.)

Further, there is very little literature or guidelines for the corporate governance of trusts; and only a handful of textbooks available on the law of trusts. Although there is a body of case law on the subject.

If one compares trusts to companies, the difference in the level of regulation is staggering.

There are hundreds, if not thousands, of textbooks on company law; there is an enormous body of judicial precedent on company law; and the Companies Act no. 51 of 1977, which is already comprehensive, is about to be surpassed by an even more comprehensive Companies Bill. The reporting and disclosure obligations of companies, the requirements for the appointment and removal of company officers, and the obligations of company officers, are all codified. The corporate governance of companies is the subject of many codes and works of literature. The concept of private ownership is firmly embedded in the structure of a company.

It should not be surprising therefore, that most business people have a sound grasp of what the legal nature of a company is, how it is structured, what the difference is between shareholders and directors, what the duties of directors are, and so forth.

In the virtually unregulated environment of a trust, it is therefore unsurprising that most business people do not understand what the legal nature of a trust is, or what trustees are supposed or obliged to do, or what the remedies are of beneficiaries who are unhappy with the performance of the trustees.

It is but a short step from that point to disastrous consequences for the beneficiaries, particularly the beneficiaries of a large trust. Which is why the need for proper regulation of trusts.