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According to s 1 of the Trust Property Control Act 57 of 1988, a ‘trust’ means ‘the arrangement through which the ownership in property of one person is by virtue of a trust instrument made over or bequeathed’ to another person, the trustee, or to the beneficiaries of the trust, ‘to be administered or disposed of according to the provisions’ in the trust deed. The trust deed is a legal document and must, therefore, comply with common law principles, the Constitution and public policy.
The fiduciary office is one of the distinct characteristics of the trust as a legal institution. The trustee, (the administrators of the legal institution), derives their authority from s 9 of the Trust Property Control Act, the trust deed, and the common law. Trustees are fiduciaries, and their duty includes the legal obligation to act exclusively in the best interests of the beneficiaries. ‘Fiduciary’ alludes to ‘trust’ and a breach of that trust, is considered by most, to be exceptionally treacherous.
Alex Eliott ‘Who guards the trustees?’ (2007) December Without Prejudice 55 confirms the fact, that a trust cannot exist separately from its trustees and claims further, that beneficiaries of large trusts, suffer financially because of trustees making poor decisions, including committing fraud in their representative capacities. According to Eliott, the trust as a legal institution in South Africa – in the current era of ‘hyper-regulation’ – is in desperate need of proper regulation. As things now stand, the vulnerable beneficiary has only the legislature and the courts to depend on.
Walter Geach and Jeremy Yeats Trusts: Law and Practice (Cape Town: Juta 2008) at 204 states that the importance of keeping a minute register from the inception of a trust, ‘cannot be overemphasised’. It is alleged that the minute register – as a record of all the resolutions discussed and decided on by the trustee, represent prima facie evidence before a court in any dispute against the trustees. The minutes reflect the attendance at each meeting, as well as the content of and the reasons for each resolution decided on. As set out in s 17 of the Trust Property Control Act, all records must be kept for at least five years, post the termination of a trust. A beneficiary has the right to request the legal reason/s taken in a resolution and the proof of the consequential administration thereof.
A breach in the fiduciary duty is viewed as an extremely serious violation of the law. The power of the fiduciary is not ‘unbridled’, as stated by Eben Nel (‘Unfettered, but not unbridled: the fiduciary duty of the trustee Wiid v Wiid NCHC (unreported) 13-01-2012 case no 1571/2006’ (2016) 37 Obiter 436) due to the demanding requirements, which are intrinsic to the relationship. These regulations strictly prohibit profit-making (usually financial) and a conflict of interest, both of which go beyond the fiduciaries’ power in the meeting of their obligations. Strictly prohibited actions, include inter alia, secret personal gain, in the form of undisclosed commissions, discounts, bribes and allocations, as well as any other advantages, which may benefit a trustee personally.
Eliott ((op cit) at 55) states, that the topic of trustees, who fail their fiduciary duties is a popular one, because the prejudiced beneficiary is the one who must seek justice and hence directly pay for the misuse and abuse by trustees. In Tijmstra NO v Blunt-MacKenzie NO and Others 2002 (1) SA 459 (T) at 460, the court’s finding was: ‘Whenever trust assets are endangered a trustee should be removed’. According to Kirk-Cohen J, the grounds for the removal of a trustee, include some of the following reasons, viz –
Walter Geach Trust Law in South Africa (Cape Town: Juta 2017) at 42-44 discusses the rights regarding loan accounts in detail. An allocation to a beneficiary does not automatically amount to a payment of the benefit in cash. Such an allocation could be to a loan account or not. In the latter instance, Geach suggests that a loan agreement should be drawn up. The agreement must indicate repayment and interest terms. If the funds or investment is held on behalf of the beneficiary, there should not be a loan account and any accruing income or benefit should be paid directly to the beneficiary. If this is not done, it could amount to a form of theft, as stated by CR Snyman Criminal Law (Durban: LexisNexis 2014) at 490-502. Snyman then discusses embezzlement, also termed ‘theft by conversion’ as a form of theft, which occurs where X appropriates or takes over the money of Y. Phia van der Spuy Demystifying Trusts in South Africa (Createspace 2017) at 34 confirms that the beneficiary who receives an allocation, must pay the tax on such benefit, consequently thereby vesting a right of absolute ownership.
Theft of credit, the unlawful and unofficial appropriation of trust funds, occurs where money belonging to the beneficiary is used for a purpose, not authorised by the trust deed, or intentionally misused by the trustee. To burden loan accounts by increasing the liability for one of the spouses in a divorce, is an attempt to defraud and to financially prejudice the other spouse. A forensic audit is advisable for the protection of prejudiced spouses in these circumstances.
Considering the fact, that there is no legal certainty regarding the creation of a trust, when transferring either or both joint and family assets, the possibility of a mistake, resulting in an invalid contract is a conceivable reality. Richard Christie and Victoria McFarlane The Law of Contract in South Africa (Durban: LexisNexis 2006) at 322-325 states that if the purported acceptance (by the trustee) does not correspond with the offer, no contract comes into being because the parties are not ad idem.
In Williams v Evans 1978 (1) SA 1170 (C) at 1174H, Broeksma J accepts the proposition that if parties entered into a contract with a common belief as to the future state of affairs the contract may fail if the belief fails, which constitutes a material fact, namely, that the parties would not have entered into a contract, if they had known, that their expectations would not materialise. Christie and McFarlane ((op cit) at 329) declare that the time has come to reconsider the significance of the common mistake of law. They state that if Mouton v Hanekom 1959 (3) SA 35 (A) permits the rectification of a common mistake of law, it would be inconsistent to not permit recission, as well. If then, there is no certainty in law, in respect of the rights and interests of parties in the founding of a trust, by the transfer of joint assets (WT and Others v KT 2015 (3) SA 574 (SCA); Du Toit v Du Toit (GP) (unreported case no 59114/16, 21-11-2017) (Rabie J) decided as a stare decisis of WT and Others v KT), courts are in serious jeopardy by ignoring and eliminating the development of the basic principles of common and trust law, under the rule of law.
A material mistake is a matter of fact and a fundamental mistake, concerns the law. Christie and McFarlane ((op cit) at 319-320) state that if the mistake is caused by X, Y is entitled to rescind the contract, if the mistake is sufficiently material, providing that Y can show, that he or she would not have entered the contract if they had in fact known the truth. This lacuna and uncertainty in trust law should be viewed as unconstitutional prejudice in terms of human rights, as well as substantive gender-inequality, which requires an urgent amendment and rectification by the legislator and the courts, accordingly.
‘Misrepresentation’ was employed in argument in the case of WT and Others v KT, reflecting the present stare decisis on the division of joint-trust assets in a divorce. Misrepresentation is a concept, which indicates an untrue or misleading statement of fact made by one party to another during negotiations. Christie and McFarlane ((op cit) at 271) state that if misrepresentation is committed by a third party, who acts in collusion with or as the agent of one of the contracting parties, the innocent party can rescind the contract. Such a third party could be the drafter of the trust deed, a legal adviser, or the auditor of the founder. In Musgrove & Watson (Rhod) (Pvt) Ltd v Rotta 1978 (2) SA 918 (R) at 925, Goldin J held that where a person signs a contract because of being fraudulently deceived by a colluding third party, regarding the contents and character of that contract, ‘no valid contract comes into effect’.
Silence may also amount to a misrepresentation. In S v Heller and Another (2) 1964 (1) SA 524 (W) at 537, the court examined the circumstances in which concealment can constitute fraud. Trollip J held in this regard that there must be ‘a duty to disclose’ (founder and auditor) and that the breach:
‘[M]ust have been wilfully committed by the accused: (a) in circumstances as to equate the non-disclosure with a representation of the non-existence of that fact (this constitutes “the perversion of the truth”), (b) with knowledge of its falsity … , (c) with intent to deceive, and (d) resulting in actual or potential prejudice to the representee.’
According to EM Burchell and PMA Hunt South African Criminal Law and Procedure (Cape Town: Juta 1976) at 593, a co-owner is guilty of theft, when joint-property is dealt with the intention to permanently deprive the other co-owner of the full benefit of their ownership. Burchell and Hunt define two categories of co-owners namely, partners and couples married in community of property. The motive for hiding joint-assets in a trust can be proved by the beneficial consequences for only one of the spouses after the transfer or by the unlawful legalising of arbitrary power-control clauses, in favour of the founder. The significance of conscious consent for the proven validity of the transaction, was ruled by the SCA in Marais and Another NNO v Maposa and Others 2020 (5) SA 111 (SCA) at para 17-18; 25-31 and 45. If there was no written consent, the transaction is void. Where a claim alleges ‘lawful’ possession in Y, it designates ‘lawful’ as against the alleged thief, concerning a possession, that the alleged thief had no right to disturb.
South African law records the following propositions, viz: If Z aids and abets the thief X, assisting him before the initial contrectatio, Z is a socius and guilty of theft, if he agrees before stealing the property, to assist in some other way after the theft and then does so without doing anything, that could be called a contrectatio. The person, who receives stolen property on the other hand, is deemed in almost every case to have committed theft. The person (trustee), who innocently receives stolen property and later learns the truth and brings about the contrectatio of it, is a thief by virtue of taking it, but not a party to the original theft nor a receiver of stolen property.
However, the continuing crime doctrine cannot make him a thief because he lacks possession. If Z, for example the trust expert, the ‘architect’ or drafter of the contract, the lawyer or the auditor assists the thief X (founder), after the contrectatio, he is a thief and not just an accessory to the theft because the crime continues. If the crime continues in future, Z by his continuing control of the theft commits a present contrectatio and will in future commit further contrectationis by the providing of advice, relating to the stolen property or money laundering or how to dispose of the stolen property. In order for Z to be accused of assisting the thief, after the original contrectatio, not only must the thief’s conduct not be reported, but there must also be other features, which show that Z abused his duty in office or neglected his duty, by concealing the theft, thus assisting the thief X. Even if Z no longer provides help to the thief and X disposes of the property to another receiver, Z is still regarded as having protected X or having helped him to escape. Trust experts, auditors and lawyers should think long and hard about this legal principle and the criminal cause of action, in respect of assistance.
In conclusion, both misrepresentation and the fabrication of truth in constituting an agreement, during the transfer of ownership in joint property, is a matter of major concern, since it does not exclude mass conduct of lawlessness and anarchy in trust law, as is confirmed by the observation of trust authorities. It is relatively easy to uncover criminal conduct. The trust deed and the minutes of the administration by the trustees would provide substantiated evidence in black on white.
Marietjie Du Toit LLB (Unisa) LLM (NMU) is an accredited mediator of the Social Justice Foundation in Mossel Bay.
This article was first published in De Rebus in 2023 (Aug) DR 15.
