July 15, 2022
“Love is grand. Divorce is a hundred grand.” (Anon)That’s a great scenario whilst the marriage prospers, but what happens on divorce? A recent High Court decision addressed one such scenario – Trusts may be formed for a variety of reasons, and the purpose and structure of each trust will inform the choice of trustees. When it comes to families aiming to preserve and protect family assets for future generations, often both spouses are appointed not only as beneficiaries, but also as trustees.
‘Not the Titanic’ – this marriage took six years to sinkIn 2014, whilst a marriage was (as the Court put it in a judgment rich in nautical imagery) “still in calm waters”, the spouses formed four trusts. Two were called business trusts, one a property trust, and the fourth a family trust. Naming choices aside, the critical issue is that both spouses had been appointed as trustees. Regrettably in 2015 the couple “drifted” apart and their marriage “ran aground and settled on the rocky shores of the divorce courts door” with the institution of divorce proceedings. “Unlike the Titanic” observed the Court, the relationship took six years more to be finally laid to rest – the divorce was only granted in 2021.
The ex-spouses apply for each other’s removal as trusteeThe ex-husband then applied to the High Court for removal of his ex-wife as trustee of all four trusts on the grounds that she had breached her duties as trustee. Most significantly, he said, she had failed to attend trustee meetings for some five years despite being invited to them.
- Her main defence was that, in the context of the ongoing divorce proceedings, her ex-husband’s conduct made it impossible for her to attend to her duties as trustee.The Court was unconvinced by her various allegations in this regard, and two aspects in particular bear mention –
- She complained that being in the minority her decisions were overruled – not an excuse for failing to attend meetings held the Court.
- Her ex-husband failed to provide a vehicle to enable her to attend meetings – again no excuse, said the Court, there being a provision in the trust deed for virtual meetings.
- Also counting against her was the fact that she was living in a trust-owned property “but fails to maintain such and pays no rent at all despite receiving the amount of R10 000,00 per month towards property expenses incurred.”
- Finding that she had not been involved in the trust’s affairs and did nothing to safeguard them, the Court ordered her removal as trustee.
What are a trustee’s duties?Per the Trust Property Control Act: “A trustee shall in the performance of his/her duties and the exercise of his/her powers, act with the care, diligence and skill which can reasonably be expected of a person who manages the affairs of another”.
Must a trustee be impartial?The Court: “It is not required of a trustee to be total[ly] impartial or [to have] no connection with the beneficiaries, but rather that he or she is capable of bringing the necessary independent mind to bear [to] the business of the trust and of deciding what is in the interests of the trust.”
When will a court remove a trustee?The court has a discretion which it must exercise “with circumspection”. Per the Court: “The court has to be satisfied that the requested removal will be in the best interest of the trust and the beneficiaries … a mere conflict of interest between trustees and beneficiaries or amongst the trustees [is] insufficient for the removal of a trustee … the overriding question is always whether or not the conduct of the trustee imperils the trust property or its administration”. There is no requirement to prove bad faith or misconduct, rather “the essential test is whether such disharmony, as in the present matter, imperils the trust estate or its proper administration … It is therefore clear that the court may remove a trustee from office in the event that such removal will be in the interest of the trust and its beneficiaries.” (Emphasis supplied) In closing… If you are faced with a divorce scenario, avoid a situation such as the ex-spouses in this matter faced by making sure that all questions around any trusts involved – such as who is to remain as trustee, who is to remain as beneficiary and so on – are resolved as part of the divorce process, and not left for future resolution. Even better, take professional advice upfront when setting up trusts on how to avoid any future disputes that may arise should your marriage ever sail into stormy waters. Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.
March 19, 2019
“Animosity and difference of opinion are not sufficient to have a trustee removed from office and/or for the majority of trustees to unilaterally force another to vacate his/her office…” (Extract from judgment below)
When family infighting impacts a family trust, an early casualty is often the relationship between the appointed trustees and beneficiaries, and/or between the trustees themselves.
And if that results in irreconcilable differences and conflict between the trustees, the only answer may be for one or more of the trustees to be replaced. First prize of course will always be to achieve this with a voluntary resignation – but what happens if a trustee refuses to resign? Can the majority forcibly remove him/her?
A recent High Court decision dealt with just that question.
3 professionals v the beneficiary’s mother
- A “valuable property” in Knysna is owned by a trust created for the benefit of a couple’s daughter (11 years old at the time, now 30). There are four trustees appointed by the Master of the High Court (“the Master”) issuing “letters of authority” to two auditors and an attorney (“the professionals”), and to the beneficiary’s mother. The father farms the property through a company and a close corporation. Although no family feud is specifically mentioned in the judgment, it seems clear that the father is in one camp, and the mother and daughter in the other.
- The trust deed contained this clause – “The office of a TRUSTEE shall be vacated if …. the majority of TRUSTEES request a TRUSTEE to resign.”
- The trustees fell out in a dispute over the father’s loan account, with the professionals proposing that the trust should pay the father interest on his loan, and the mother objecting on the basis that payment of interest had never been agreed to.
- This was discussed in a telephonic trustees’ meeting, and resulted in the professionals writing to the mother to say she was removed as trustee for three reasons – “1) all items discussed were either rejected or opposed; 2) she made false allegations against the applicants and 3) she admitted that she did not have sufficient knowledge to fulfil her duties as trustee”. The Master then pointed out to the professionals that they could not resolve to remove the mother, only to request her to resign. They did so in a second letter to the mother.
- The mother refused to resign and the professionals asked the High Court to order that the mother “has lost her office as trustee”. Their attitude was that they were acting in terms of the trust deed, no reasons for the decision had to be given, and the Master had no option but to issue new letters of authority.
- The clause itself might seem pretty clear, the professionals clearly believed that they were acting entirely within their mandate and they presumably commenced their litigation with high hopes of success. But it was not to be…
- The Court, for the reasons we discuss below, held for the mother, who accordingly remains a trustee.
Ambiguity, showing good cause, and ubuntu
The Court’s reasons for its decision contain some important principles that anyone involved in a trust would do well to take note of (with some thoughts on how to deal with each issue in brackets) –
- The trust’s removal clause, held the Court, was ambiguous when it provided that a request (involving a choice) for resignation shall (peremptory – no choice) lead to vacation of office. The clause, said the Court, “must be interpreted to read that there must be good cause for such a request and that the trustee shall vacate his/her office only in the event of an acceptance of the request”. (Make sure the trust deed is clear and unambiguous).
- Secondly, an implied term should be read into the clause requiring good cause to be shown – to allow trustees to remove another without producing reasons “would be against public policy and the principles of ubuntu, reasonableness and fairness”. (Make sure you can show fairness and good cause for decisions).
- Thirdly, the professionals had failed to prove any justification for their action. They could not rely on the clause without giving reasons for their decision and proving that they took their decision “based on the discretion of a good person acting reasonably”. (Make sure you can justify your actions as reasonable).
- Fourthly, the resolution to request the mother’s resignation “should have been taken on a properly constituted trustees’ meeting and upon proper notice of their intention”. Instead, they took decisions “secretly and without notifying [the mother] in advance. They also “failed to give proper notice in compliance with the provisions of the Trust Act.” (Comply with all procedural formalities).
- Finally, said the Court, there was no deadlock between the trustees – “Decisions in the interests of the trust and trust beneficiary can be taken by the majority of trustees during a properly convened meeting on condition that sufficient notice of all matters to be considered is given. It is not necessary to remove the first respondent in order to conduct the business of the trust in a lawful manner.” (Be sure that removal is actually necessary).