Two sisters had created the Arathusa Trust in 1999.  Its only assets were all the shares in Manyeleti (Pty) Ltd, a company that owned a farm which was part of a game reserve.  The beneficiaries of the trust, described as “potential beneficiaries”, appear to have comprised members of the family of the founding sisters.  All the potential beneficiaries had been afforded the right to visit the farm with their families for vacations on a rotational basis.  When a difference of opinion arose between De Kock, the son of one of the founding trustees, and the rest of the family over the development of the farm for commercial use, the trustees amended the trust deed and removed him as a beneficiary.  De Kock approached the High Court for reinstatement, and the matter was settled on the basis that the purported amendment was to be regarded as of no force and effect and invalid.  The settlement was made an order of court.

It appears that the parties then entered into a dispute about the terms of the settlement, which culminated in De Kock approaching the High Court again.  De Kock sought an order that what he described as his “vested rights” under the trust be reinstated and that the existing trustees be removed and replaced by “independent and impartial” trustees to be appointed by the Master of the High Court.  The trustees contended that De Kock, as a “potential beneficiary”, had no vested right in the trust property and accordingly had no rights to protect.  The court found that the trustees had unlawfully discriminated against De Kock, because the law did not allow them to withhold the benefit enjoyed by the other beneficiaries simply because the rest of the family “had issues with him”.  Accordingly, the court ordered De Kock’s reinstatement as a beneficiary, and further that the Master should appoint an additional independent trustee in consultation with the other family members and “other interested parties”, (without identifying these parties in the judgment).  The court made a punitive costs order against the trustees.

Before the SCA the trustees and the other family members sought to appeal against the High Court’s decision and sought a determination of three issues: (i) whether leave to appeal should be granted; (ii) whether De Kock, as a discretionary beneficiary, had acquired rights as against the trustees which were capable of protection; and (iii) if so, whether the court had been correct in granting the reinstatement order, directing the Master to appoint an additional trustee, and issuing a punitive costs order.

The trust deed clothed the trustees with the power in their discretion to allow any beneficiary free use and enjoyment of the property.  The trust deed provided that the right of any beneficiary under the trust would vest only on payment or transfer to the beneficiary.  This did not include loans to a beneficiary.

Both sided argued on the question whether or not the right of access to the farm afforded to a beneficiary was a vested right.  The trustees were at pains to point out that they had not yet selected beneficiaries.  No vesting of rights was consequent, so the argument went, on the occasional occupation by beneficiaries.  They made much of the fact that the company, not the trust, owned the farm and it was the company that had the exclusive right to allow access to the farm.  The court made short shrift of this contention, pointing out that, as the shareholders of the company in their office as trustees, the trustees were making the decisions.  This left for consideration the question whether De Kock, as a “potential” beneficiary, had a right to protect.

The court rejected as misplaced De Kock’s submission that he had acquired vested rights.  Read in the context of the purpose and the other provisions of the trust deed, the occasional right of use on a rotational basis did not amount to vesting.  It then addressed point (ii) above and referred to the SCA decision in Potgieter & another v Potgieter NO & others [2011] ZASCA 181; 2012 (1) SA 637 (SCA) where the court found that: “The import of acceptance by the beneficiary is that it creates a right for the beneficiary pursuant to the trust deed, while no such right existed before.  The reason why, after that acceptance, the trust deed cannot be varied without the beneficiary’s consent, is that the law seeks to protect the right created for the first time.  In this light, the question whether the right thus created is enforceable, conditional or contingent should make no difference. The only relevant consideration is whether the right is worthy of protection, and I have no doubt that it is. Hence, for example, our law affords the contingent beneficiary the right to protect his or her interest against mal-administration by the trustee…”

Based on this dictum, De Kock was entitled to protect his discretionary right against maladministration by the trustees.  The withdrawal from him of the privilege of having a vacation on the farm constituted differential treatment without a justifiable basis, prompted by his attitude towards development of the farm for commercial purposes.  A trustee had the fiduciary duty towards all the beneficiaries of a trust irrespective of the nature of their rights.  This was so, even if a beneficiary was obstructive and contrarian.

As to the instruction to the Master to appoint an additional independent trustee, the court had this to say: “It is clear that there was a dispute of fact pertaining to [De Kock’s] allegation that the trustees did not attend to the affairs of the trust to the point where a letter of demand was issued against the trust.  The court a quo merely stated that the appointment of another independent trustee might quell the acrimony between the parties and restore the role of the trustees to what it should be. The third [trustee] is a chartered accountant by profession and is therefore qualified to properly understand the responsibilities of trusteeship. In the absence of facts conclusively showing that the third [trustee] would not be able to play that role, there is simply no legal basis for an order directing the Master to appoint an additional trustee.  The need for the appointment of an additional trustee was simply not established in this matter.  In any event, .in terms of the trust deed decisions must be arrived at consensually.  That would mean that the family and all the potential beneficiaries have to reach agreement, which obviates any need for the appointment of a further trustee.”

When it came to the punitive costs order, in light of the court’s findings the trustees had had a measure of success.  Despite the attempts of De Kock to defend the “unsustainable” punitive costs order, the decision as to costs was that the punitive element was removed from the High Court’s order and the costs of the appeal were to be borne by the respective parties.

The total costs of these two actions must have been astronomical, and one cannot but think that there must have been less expensive ways to resolve a family dispute.

The case, Hyde Construction CC v Deuchar Family Trust 2015 JDR 1544 (WCC), involved a long drawn-out and still unresolved dispute between the parties relating to the construction of a house on a property owned by the trust. The dispute went to arbitration, where the Association of Arbitrators (Southern Africa) appointed one Du Toit as arbitrator. It transpired that Du Toit had in 2009 been involved as the plaintiff in litigation in which Adv DJ Coetsee, counsel for the Trust in the present matter, successfully represented the defendant. It seems that the sight of Coetsee at the arbitration triggered in Du Toit a decision to apply for condonation and a late application for leave to appeal against the 2009 decision. Du Toit supported his application with a scathing attack on Coetsee.

This led the Trust to seek Du Toit’s removal as arbitrator. Hyde Construction opposed this application in the Western Cape High Court, although Du Toit did not do so. He did, however, file an explanatory affidavit in which he made further remarks highly critical of Coetsee. The court of first instance granted the Trust’s application and ordered Du Toit’s removal.

So much for the background. The issue actually before the full bench of the court was a contention by Hyde Construction that the trust was not properly before the court and that the order of the court of first instance removing Du Toit was invalid. Its reason was that in the original papers Mr Deuchar had stated that he and his wife were the trustees of the trust, whereas in fact their two major children were also trustees. In later papers Deuchar admitted his error, but stated that since 2007 he had been operating on a resolution of trustees authorising him to sign all documents relating to the development of the property. He submitted that the children, who had become trustees in 2009, had tacitly authorised their father to act on their behalf. In any event, contended the father, the omission could be cured by ratification.

Not so, argued counsel for Hyde. Citing Land and Agricultural Bank of South Africa v Parker & Others 2005 (2) SA 77 (SCA), counsel submitted that the general principle of ratification does not apply to trusts. The effect of Parker and other cases was that “the unauthorised institution of proceedings by a trust cannot be ratified by a subsequent decision of the trustees”. The court found that these cases address the position where the number of trustees is less than the minimum required in terms of the trust deed. As Cameron JA stated in Parker, where fewer than the specified number of trustees are in office “the trust suffers from an incapacity that precludes action on its behalf”. In this type of situation there can be no question of ratification because the purported action is invalid in the first place.

In the present matter the prescribed number of trustees was present, so they had capacity to act. The authority issue could thus be cured by ratification.

In the past year or so several decisions by the High Court and the Supreme Court of Appeal have been of interest in the trust field. It’s questionable whether any of them have made new law, but they are of interest.

I start with Potgieter and Another v Potgieter , familiar to all of us I’m sure, but it was cited in a couple of the cases I’ll be discussing in this article. In any event, it provides a few lessons worth repeating, not least the danger of using templates from your precedent bank without carefully reading them.

Mr Potgieter established a trust in 1999 with his two then minor children as the capital beneficiaries. The preamble to the trust deed provided that the beneficiaries (the minor children) had indicated their acceptance of the benefits conferred upon them. The trust deed empowered the trustees to amend the capital beneficiaries but only during Mr Potgieter’s lifetime and then only in favour of descendants of the children or members of Mr Potgieter’s family. Four years later the Potgieter marriage foundered and a new Mrs Potgieter entered the scene. In 2006 the trust deed was amended as a result of which the minor children, who by this time had attained majority, lost their exclusive status and were joined as potential capital beneficiaries by the three children of the new Mrs Potgieter by her previous marriage. The vesting date was amended as well, from (at the latest) the date on which the younger of the two capital beneficiaries turned 25, to a date to be determined by the trustees. Mr Potgieter died in 2008, after which it seems that his two children became aware of the amendments.

They contested the validity of the amendments on the grounds that as capital beneficiaries they had not consented to them. The respondents, being the new Mrs Potgieter, her children and the attorney who had drafted the trust deed and was also a trustee (and more about him anon) contended that at the time of the amendments the original beneficiaries had not yet accepted their benefits. The trust deed, according to this argument, was a stipulatio alteri. Consequently it was not necessary for them to consent.

The children relied on the acceptance recorded in the preamble and argued that, because they had still been minors at the time, their father, in signing the trust deed had been acting as their natural guardian and had accepted on their behalf. In answer to this the attorney deposed that the pronouncement in the preamble was no more than “a vague and loose statement” without meaning and never intended to form part of the document. It had unintentionally found its way into the document because he had slavishly copied a precedent. The court had short shrift with this submission and found that, astute businessman that Mr Potgieter was, when he initialled each page of the trust deed he must be taken to have accepted each element of the document.

The court a quo had found for the children but had then made what it called an “equitable” decision to divide the assets five ways between the respective children. The SCA found no basis for this decision and granted judgment entirely in favour of Mr Potgieter’s aggrieved children.

Lessons: Check your precedents;

A trust deed is a stipulatio alteri until the beneficiaries accept the benefits.

Grainco (Pty) Ltd v Broodryk NO en Andere offers an interesting contrast with the 2004 SCA decision in Nieuwoudt v Vrystaat Mielies (Edms) Bpk . Much of the argument revolved around whether a particular cheque was a liquid document and also whether the National Credit Act, 2005 applied. For our purposes, however, the relevant factors are that a trust owned a farm operated by one of the two trustees, the son of the other trustee, his 82-year-old mother. The son incurred a debt with the plaintiff in the name of the trust in the course of the farming operations. The plaintiff sought provisional judgment against the trust, in response to which the respondents took refuge in a provision of the trust deed that any decision of the trustees had to be unanimous, although they were empowered to authorise one or more of them to sign any document relating to the business of the trust. The mother had not expressly approved the transaction in question.

Evidence before the court indicated that the son had for many years conducted the business of the trust with the plaintiff and other entities. It would be naïve to accept that the son consulted and obtained the approval of his mother every time he transacted on behalf of the trust. The inescapable inference was that the son had a general authority from his mother to conduct the business of the trust. Judgment went for the plaintiff.

In re Heydenrych Testamentary Trust and Others produced no new law but confirmed that the courts may use their power under section 13 of the Trust Property Control Act, 1988 (TPCA) to amend provisions of trust deeds that are in conflict with the Constitution. We have, of course, several recent decisions in this area relating to funds established for students at the universities of Cape Town and Kwazulu-Natal respectively.

The first of the four charitable testamentary trusts in question was that of the late Mr B J Heydenrych. He executed his will in 1943, when according to the mores of the times it perhaps wasn’t repugnant to provide for financial assistance limited to “European boys of good character of the Protestant faith…at least one half [of whom]…shall be of British descent” to qualify for the civil service or as pharmaceutical chemist.

The second was that of Dorothy Helen Houghton, who in her will executed in 1989 provided for bursaries for two or more boys of the white population group to attend Oundle School in England followed by tertiary studies at Oxford or Cambridge, in both instances funds permitting. If it ceased to be possible to send boys to Oundle School, St Andrew’s College in Grahamstown or any other South African School with the same aims and objectives as Oundle would be acceptable.

The third trust was the George King Trust, established under the will of George King, who had executed his will in 1987. It provided for financial assistance to enable promising music students of good character in needy circumstances to study at the University of Cape Town, provided that the recipients, selected by the university, were “members of the white group of Protestant faith”.

The Women’s Legal Centre was joined as amicus curiae, and it provided evidence of research it had carried out relevant to the matters in issue. As to the Heydenrych trust, it found that women remain under-represented amongst students who qualify in chemistry, while in the civil service women are over-represented in the lower levels and under-represented in senior positions. Regarding the Houghton trust, Oundle School had been co-educational since 1990, and both Oxford and Cambridge admit women. The judgment does not refer to any comment by the Centre on the King trust, perhaps because its provisions are self-evidently unacceptable.

The court had to consider whether it had the power to vary the respective trust provisions under section 13 of TPCA, which provides that the court may delete or vary or make any order in respect of any provision if it finds that the founder:

• did not contemplate or foresee; and which

• hampers the achievement of the objects of the founder; or

• prejudices the interests of beneficiaries; or

• is in conflict with the public interest.

Evidence was led that it was scientifically impossible to differentiate any two individuals into distinct racial subspecies. Hence, there was currently no white group in South Africa. So “European” and “white” were offensive, arbitrary and an undefined and meaningless concept. Thus these references in the Heydenrych and King trusts were unacceptable. As for “British”, the SCA had already decided in Curators, Emma Smith Educational Fund v University of Kwazulu-Natal that the constitutional imperative to remove racially restrictive clauses that conflict with public policy takes precedence over freedom of testation.

As for the Houghton trust, the fact that the testatrix limited the class of beneficiaries to boys was understandable insofar as Oundle was a boys’ school at the time she executed her will. However, the fact that it had later become co-educational rendered that provision unfairly discriminatory. Finally, Mr Heydenrych could not have foreseen in 1943, firstly that women would actually enter the field of chemistry and secondly would one day comprise a major element of the civil service staff complement. Given that, following City Council of Pretoria v Walker , there is no need to prove an intention to discriminate in order to prove unfair discrimination, it followed that the innocently included provisions of the Heydenrych and Houghton trusts were discriminatory and liable to be varied.

The same arguments applied to the Heydenrych and King stipulations about the Protestant faith.

In re BOE Trust Ltd & Others BOE was appealing against a High Court decision on the Jean Pierre de Villiers Trust, created in terms of the will of the late Mrs DB de Villiers in memory of her late husband, a leading applied chemist. After providing for the care of a domestic assistant, the will stipulated that the remaining income should be used for small bursaries to assist white MSc graduates in organic chemistry from any of four nominated universities to pursue doctoral studies overseas, provided they returned to in South Africa for a period decided by the trustees. She retained this stipulation despite her sister’s written warning that it might not be given effect to because it was discriminatory. The testatrix nevertheless retained the provision. She also provided that, should it for any reason become impossible to carry out the terms, the income of the trust was to be distributed equally between a number of named charitable organisations.

Predictably, the four universities declined to participate, which led BOE to apply to the High Court for removal of the word “white”. The High Court refused to delete the word “white” on the grounds that the testatrix had, by contrast with the Emma Smith situation, foreseen the possibility that the bursary bequest might prove impossible to carry out, and had included the specific alternative bequest to the charities in this event.

On appeal to the SCA, BOE contended that “impossible” in this instance meant objectively impossible, such as an absence of qualifying candidates, not because the universities concerned would not accept the restriction to white graduates. The SCA rejected this argument, finding that the testatrix, being aware of the possibility that the universities might decline to participate, had made specific provision for that eventuality. In confirming the freedom of testation principle, the court stated that failure to do so would “fly in the face of the founding constitutional principle of human dignity”, which “allows the living, and the dying, the peace of mind of knowing that their last wishes would be respected after they have passed away”. Consequently, because the universities made it impossible to carry out the main provision, the second came into operation.

Comment: An unacceptable discriminatory provision in a trust deed does not of itself entitle the courts to amend the provision.

Pancoal & Another v Wurdeman & Others dealt with the consequences of a breakdown in relationships between trustees. Two of the trustees had paid about R508 000, partly to their own attorney and partly to the trust’s attorney. The payments were made without the blessing or at the instance of the other two trustees, who applied for an order requiring repayment of the amount into the trust’s bank account. Pending resolution of this dispute, both parties applied for orders regarding future administration of the trust. The applicants wished that, in order to be valid, all decisions be made unanimously, while the respondents strove for majority rather than unanimity. The judgment doesn’t describe what the provisions of the trust deed are, but one can infer that they differ from these blanket requests. The court found that there was before it no valid reason to make an order beyond the terms of the trust deed. For it to do so, the court would have to act in terms of section 13 of the TPCA, which was discussed above relating to the Heydenrych, Houghton and King trusts. In the absence of evidence of any of the conditions catered for in section 13, the court declined the invitation.

Comment: mere inconvenience, or a desire to achieve a particular aim, will not of themselves persuade the court to override the terms of a trust deed.

Raath v Nel illustrates the fact that when you establish a trust, ownership and enjoyment are separated, and sometimes this can have unexpected consequences. Mr Nel was a dynamic and successful businessman and game farmer. The court described him as “the quintessential self-made man”, whose business philosophy was to maintain a hands-on approach in respect of all his businesses. Small wonder, then, that his businesses, especially Koos Nel Auto, which seems to have been the core business in his interests, suffered serious setbacks as a result of his grave deterioration as a result of the negligence of Dr Raath, the anaesthetist who had attended to him during an operation on 1 May 2000. Mr Nel sued Dr Raath for compensation for future medical expenses general damages and, the crucial aspect of the case, about R1,6 million for loss of income during the period from May 2000 to March 2003, until he recovered from the serious physical and emotional deterioration that had blighted his personal and business life after the operation.

Unfortunately for Mr Nel, on 1 April 2001 Mr Nel had sold his shares and loan account in Koos Nel Auto to the Koos Nel Trust, which he had established for estate planning and estate duty considerations. The R1,5 million loss of income was based on the losses of Koos Nel Auto. However, it was the trust and not Mr Nel that had suffered the loss. The court found that Mr Nel’s loan account with the trust would have increased by some R645 000 and awarded him this amount instead of the R1,6 million he had claimed.

Comment: The fallacy of the belief that establishing a trust has only positive implications is illustrated.

The most recent decision is GP Groeschke v Trustee, Groeschke Family Trust and Others . Three questions were in issue in this case: is it necessary to apply to the Master for approval to amend a trust deed; may a trustee be a beneficiary; and what is the effect of a sole trustee becoming the sole beneficiary? Seven years after the date of a trustees’ resolution removing him as a beneficiary, and three years after the death of his father the founder of the trust, the founder’s son challenged the validity of the resolution as an amending instrument. His argument was that the resolution was no more than an expression of intent; that an amendment must be by application and must be effected in the trust deed itself.

The resolution consisted of several changes to the trust deed, only the first three of which are here relevant:

1. That a certain Benigna Offwood be appointed as alternative trustee;

2. That the applicant be removed as a beneficiary;

3. That the founder be appointed as the capital beneficiary.

The court considered the validity of the resolution by starting with the principle that a trust deed is a contract akin to a stipulatio alteri. There was nothing before the court to show that the applicant had accepted the benefit of a beneficiary under the trust. The power of the founder to amend the trust deed during his lifetime was not in dispute.

Section 4(2) of the TPCA stipulates that when a trust deed is varied, the trustee must lodge the amendment with the Master. However, this does not mean that the failure to do so or delay in doing so invalidates the amendment until it has been lodged, as contended for by the applicant. In any event, the parties agreed that in due course, the date of which is uncertain, the resolution had been lodged with the Master.

The applicant then submitted that the court should construe the paragraphs of the resolution discretely and not as part of one multifaceted amendment. Thus, if the appointment of Offwood was found to be invalid it would invalidate the rest of the paragraphs. The court rejected this submission as “entirely inappropriate”. There were further arguments involving the appointment of Offwood, who seems in due course to have been appointed as executrix of the founder’s deceased estate, but the main point that emerges from the decision is that, provided the trust deed provides for its amendment, it is not necessary for the Master to approve it, and neither does the validity of the amendment depend on its submission to the Master. Lodgement is an administrative requirement imposed by the TPCA, not a condition of validating the amendment.

The court found that, although it isn’t satisfactory for the sole trustee to be the sole beneficiary, if this happens through intervening circumstances it doesn’t invalidate the trust.

Still unresolved is how a discretionary beneficiary accepts the benefits. In Ras & Others v Van der Meulen & Another the SCA confirmed that only a beneficiary may apply for the removal of a trustee, not, as decided by the High Court, if the person has only “sufficient interest in the matter”. The dispute between the parties was whether Van der Meulen had been properly removed as a beneficiary despite her not being party to the resolution. The trustees averred that she had never accepted the benefits, which she denied, claiming that by her actions, although not by formal acceptance, she had accepted the benefits. The SCA referred back to the High Court the dispute about her status. We await the resolution of this dispute with interest. The basis on which the court decides whether or not she did accept the benefits might resolve the uncertainty.

November 2013