A problematic case for trustee decision-making which needs fixing - 24 June 2023

On 26 May 2023, the Supreme Court of Appeal delivered judgment in a matter between Shepstone & Wylie attorneys and the trustees of the Penvaan Property Trust.  It becomes clear upon reading of this case that strong reliance was placed by the Court on its interpretation (in many peoples’ views incorrectly so) of the trust deed, which unfortunately was not well crafted. The Court (unfortunately) interpreted the trust deed in a peculiar way, given the fact that it is fraught with problematic clauses and unwise structuring. These issues have seemingly resulted in a new strange requirement of how trustees ought to make decisions. The problematic trust deed may, therefore, to a degree be blamed for this adverse outcome for Shepstone Wylie.

The problematic trust deed

The trust deed requires the husband, who did not physically participate in the relevant meeting, to be the chairman at all meetings and to have a casting vote. That in itself is an absolute no-no, as it may be indicative of an alter-ego trust (an extension of oneself).

The powers granted to the trustees in terms of the trust deed are as follows – “Any Trustee shall have the power to deal with the trust property and trust income for the benefit and purpose of the Trust in their discretion for which purpose they are granted all necessary powers and authority including (but without limitation) the powers stated in the appendix.” The appendix requires the trustees to exercise their powers “for the purposes and benefit of the Trust”. On the interpretation of the Court, this requirement seems to clash with the specific power subsequently listed in the appendix allowing trustees to “guarantee the obligations of any beneficiary” (power 16), which is the subject matter of this case. Although the Court stated that “The trust deed does not envisage that a suretyship should be concluded on behalf of a trustee or a beneficiary for their personal debts”, it was specifically provided for in power number 16. The Court held that signing a surety for the wife’s obligations was not in the interest of the trust. One would have to consider the purpose/objective of the trust to fully understand what the founder envisaged.

The trustees’ decision-making is not well structured in the trust deed, which led to the adverse interpretation by the Court. Under the clause heading “Disagreement between trustees” it states that “At and for each meeting of Trustees, the Trustees present, in person or by proxy, shall elect a Chairperson; provided for as long as Thomas Wilhelm Volker is a Trustee, he shall be Chairperson. In the event of any disagreements arising between the Trustees at any time the view of the majority shall prevail. Should there be an equality of votes, the Chairperson shall have a second or casting vote”. This implies that as a starting point, the trustees have to deliberate in a meeting, and if they do not all agree, the husband is required to act as chairperson and could make a decision on his own. This problematic clause was not addressed by the Court.

The wording dealing with how trustees are to make decisions is spread in the trust deed and it appears as if the Court did not read the trust deed as a whole, but rather relied on the one clause (26) in the appendix stating that “Provided the Trustees unanimously agree, to conduct business on behalf of and for the benefit of the Trust, and to employ trust property in such business”. This, however, is but one of the specific powers provided to trustees and the trust deed treats these envisaged “business” activities as more risky, onerous activities, which require the unanimous vote of all trustees. This clause does not deal with the general term “business” of the trust. Under the clause heading “Meetings of trustees” it states that “The Trustees may meet together for the despatch of business”. It, therefore, appears that the Court erroneously applied the requirements of clause 26 in the appendix to the entire trust deed and concluded that this trust runs on unanimous votes. Nowhere else in the trust deed, but for this specific power granted to trustees, is a unanimous vote required.

Where did the Court go wrong?

The Court ignored the steps to be followed to constitute a valid meeting (including the fact that all trustees received the notice and the required quorum was present after various attempts by the trustees who did cooperate) and solely relied upon the fact that there was no disagreement between the trustees present at the meeting, and therefore the majority decision rule was basically inapplicable in this instance. In the van der Merwe NO and others v Hydraberg Hydraulic CC case of 2010 the court held that “It is evident, however, that in order to qualify as ‘a meeting’, all the trustees in office would have to receive notice thereof so as to be able to participate in it if they so wished.” Clearly, this requirement was met in this case.

The Court held that “in the case of trusts, joint and unanimous conduct in the alienation, handling and management of trust assets was a prerequisite”. That is a dangerous statement, as the minority trustee can basically use this mechanism to veto decisions of the trustees, basically similar to a ‘casting vote’. This will lead to the abuse of trusts. The le Grange case correctly held that the obligation to act jointly does not imply that the minority has to agree with the majority or that votes have to be unanimous for any decision to be binding on the trust. The van der Merwe case also confirmed that “unanimity amongst the trustees is not required in order for decisions to be made effectively in respect of transactions concerning the administration of the trust and the dealing with its assets in terms of the powers conferred on the trustees in terms of clause 6 of the trust deed. It is sufficient if the relevant decision enjoys the support of a majority.”

Conclusion

If the wording of the trust deed was unquestionable, the majority decision rule should have been applied and the two trustees could have made a valid decision after the husband seemed to just not have pitched for the duly constituted meeting, and therefore obstructed a trustee decision. It seems that he did not fulfill his fiduciary duties to participate in trust matters.

The trustees should have relied less on having a physical meeting, but should rather have had discussions via email (for example) including the obstructive trustee to demonstrate his inclusion and then they could rely on the le Grange case which requires trustees to either agree with, disagree with or abstain from a decision. It was discussed in the le Grange case that nothing in the trust deed suggests that the donor intended ‘meeting’ to be restricted to “meeting physically in the presence of one another”, as the donor could not have contemplated the technological revolution since the creation of the trust.

This case cannot set a new requirement that all trustee decisions are to be made unanimously. It was held in the van der Merwe case and confirmed in the le Grange case that “even though the trust deed which provided that majority decisions would bind the dissenting or absent trustees it could not avoid the application of the rule that the ‘minority is obliged to act jointly with the other trustees in executing the resolution adopted by the majority”. Therefore even the dissenting trustee is obliged to sign a duly authorised resolution of the board of trustees and cannot use that as a mechanism to veto transactions.