Independent trustees now required

One of the most well-known legal institutions used to achieve specific financial outcomes in practice is a trust. Recent developments with respect to the appointment of independent trustees are of interest to those using trusts to structure their financial affairs.

Anyone who has recently attempted to register trustees with the Master of the High Court will have discovered that the Master now generally requires that an independent trustee be appointed. An examination of the Trust Property Act, which governs the Master’s responsibilities with respect to registering trustees, reveals that the Act does not impose this condition. So where, then, does this requirement now come from? The answer is that it comes from the Parker case, discussed below.

Trust deed requirements

In the Parker case, the Land Bank had lent some R16 million, a very large sum of money in anyone’s view, to a trust which had been established in 1992 by Mr Parker. The beneficiaries were Parker, his wife and their descendants. The first trustees were Mr and Mrs Parker and their attorney, who was an independent trustee. He, however, resigned in 1996. The Master of the High Court was not advised, as required by the Trust Property Act of this until 1998.

According to the trust deed, there had to be at least three trustees but when the attorney resigned he was not replaced. Accordingly, from 1996 to 1998, the trust had only two trustees, contrary to the specific provisions of the trust deed. The trust operated with only two trustees until June 1998 when the Parkers appointed their son as the third trustee. The son, however, was neither consulted nor advised of his appointment and two Parkers continued to make decisions without involving the son, the third trustee.

The trust had purported to borrow very large sums of money from the Land Bank and soon was unable to meet its obligations towards the bank. In September 2000 the bank obtained a provisional sequestration order against the Parkers and the trust. The provisional order was confirmed by the High Court on the 27th of October 2000. The trust decided to appeal to the full-bench of the High Court against the final sequestration order. It was successful on appeal. The bank then launched a further appeal, this time to the Supreme Court of Appeal (SCA), against the full-benches decision.

In defence

The defence of the trust was that since the trust had only two trustees, and not three as required by the trust deed, the trust was not bound by the decisions made by the two trustees. One must express the view that this defence is not really cricket. If successful (as it was), trustees could knowingly violate the trust provisions, borrow large sums of money, and then raise the defence that the trust is not bound because some or other trust provision was not complied with.

If this were possible this would introduce a massive moral hazard risk, even the risk of outright fraud. Banks and other institutions would find the risk of dealing with trusts so great, that it probably would not be in their interests to deal with trusts. Not surprising the High Court rejected this defence calling it ‘nonsense’ and ‘opportunism’. The full bench, however on appeal, agreed with the trust’s argument. I must admit that I am beginning to find the Roman law position much more sensible. According to the Roman law deeds, not words, binds the parties. If someone takes millions, that person cannot then be heard to say, ‘I am not bound’.

Round-about solution

The solution of the Supreme Court of Appeal to this problem was somewhat round-about. The court agreed with the Full bench of the High Court. The trust was not bound by the decision of two trustees acting contrary to the provisions of the trust deed, which required three trustees. It then went on to point out that at the same time only two trustees had signed the documents to lodge the appeal to the full-bench and since two trustees could not act legally on behalf of the trust, the authorisation to launch the appeal to the full-bench was invalid.

The full-bench High Court appeal was thus invalid and accordingly the original High Court decision stood. This thus confirmed provision sequestration order. I do not recall any other High Court decision being set aside by the SCA because the parties did not have authority to launch the action.

Supreme Court of Appeal’s view

Now, unrelated to the issues as finally resolved, the Supreme Court of Appeal discussed the appointment of trustees. It can be argued that the remarks of the SCA on this point are obiter. The SCA was concerned that in many instances involving trusts the separation between control of the trust and enjoyment of the benefits is inadequate. This is particularly so where the trustees are also the beneficiaries.

The SCA continued to note that more adequate separation between control and enjoyment ‘can be achieved by insisting on the appointment of an outsider as trustee to every trust in which (a) the trustees are all beneficiaries and (b) the beneficiaries are all related to one another.’ And hence the current practice of the Master asking for the appointment of independent trustees.

Implications

Problems are bound to arise because there is no requirement in the Trust Property Control Act to appoint independent trustees. When asked by the Master to appoint an independent trustee, advisers who do not read court judgments will be hard pressed to understand where this requirement has come from. Logically they will turn in vein to the legislation. The Master may well, in asking a trust to appoint an independent trustee, go well beyond the limited circumstances the SCA had in mind. It seems a better approach will be for parliament to amend the legislation to reflect the SCA’s decision.