Do trustees and directors have similar fiduciary duties?
March 3rd, 2023 10:38
Even though a trust is a unique entity, people often try to make sense of its nature by comparing it to a company, as a company is a well-known entity through which people operate their businesses.
Both a trustee and a director have similar fiduciary duties bestowed upon them. A fiduciary duty is an onerous, legal obligation (a duty of loyalty and care) of a person managing property or money belonging to another person to act in the best interests of such a person. These fiduciary duties are manifested either through the acts that govern trusts and companies, or by common law. Common law – also known as judicial precedent, judge-made law, or case law – is the body of law developed by judges and Courts. Common law stands on equal footing with statutes, which are adopted through the legislative process. The defining characteristic of common law is that it arises as a legal precedent that can be applied to similar situations.
A trustee, therefore, has to be more careful and cautious with the affairs of the trust than they would be with their own affairs. Whereas an individual can take personal risks in managing their own investments and affairs, they must take greater care when dealing with trust assets and avoid any business risk as far as possible (Sackville West v Nourse case of 1925). This view was confirmed in the Estate Richards v Nichol case of 1999, where it was stated that a person in a fiduciary position, such as a trustee, is obliged to adopt the standard of the prudent and careful person.
Fiduciary duties include the duty of care, diligence and skill, the duty to avoid conflict of interest (impartiality) and to act in the best interests of their shareholders and beneficiaries. The duties of trustees arise through the provisions of the Trust Property Control Act, our common law and the trust instrument. It was held in the Doyle v Board of Executors case of 1999 that one of the principal characteristics of the office of trustee is that it is fiduciary in nature and that a trustee holds trust assets in a fiduciary capacity. The Court held that a trustee’s duty of “utmost good faith” towards all trust beneficiaries was pertinently founded on such trustee’s occupation of a fiduciary office and not from the trust instrument as held in the Hofer v Kevitt case of 1996. 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. The trustees owe a fiduciary duty to the beneficiaries of the trust – irrespective of whether the beneficiary has a vested right or is a contingent beneficiary whose right to trust income and capital will only vest on the happening of some uncertain future event (Griessel v de Kock case of 2019). A trustee’s fiduciary duty may require a trustee to obtain guidance from professionals when a particular matter does not fall within their skills or knowledge.
When considering the liabilities imposed on a director and trustee for breach of their duties, there is a clear difference between the liabilities imposed by the Companies Act and the Trust Property Control Act. Although the Companies Act comprehensively deals with liabilities should the director breach their duties, the Trust Property Control Act merely provides for the removal of a trustee and does not deal with further liabilities. The liabilities for breach of their fiduciary duties imposed onto trustees are based solely on our common law, because the Trust Property Control Act is not a complete codification of the law of trusts in South Africa. An example of such a case is the van Zyl v Kaye case of 2014 that “Going behind the trust form, on the other hand, entails accepting that the trust exists, but disregarding for given purposes the ordinary consequences of its existence. This might entail holding the trustees personally liable for an obligation ostensibly undertaken in their capacity as trustees.”
The Master of the High Court regulates trusts by ensuring adherence to the wishes of the founder. If the trustees fail to do so, it may result in the removal of a trustee, request for security and/or appointment of a co-trustee. These measures require modification and updating to create stricter liabilities trustees should they fail in their duties. Currently there seems to be a lack of uniformity between court judgements.
A spouse, child, family member or family friend will often accept trusteeship without realising the burden that comes with it. Many people accept trusteeship but claim ignorance when things go wrong. All trustees are expected to actively participate in trust matters, and one is not allowed to leave the business of the trust in the hands of others. Be mindful, therefore, of using the services of a trust administrator, thinking that it excuses you from being actively involved in the management of the trust – because it does not!
~ Written by Phia van der Spuy ~