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The Fidentia judgment highlights the legal duties of trustees

Trusts have, for many years, been a favoured vehicle of the wealthy. There are two principal reasons for this. Property held in a trust is not subject to estate duty, so that the wealth of the older generation can pass assets to the younger generation without being depleted by this tax. Moreover, assets held in a discretionary trust cannot be seized by personal creditors of the trustees or beneficiaries, if the latter encounter financial trouble.

The core idea of a trust

The core idea of a trust is that assets held in the trust are managed by one category of person (the trustees) for the benefit of another category of persons (the beneficiaries). However, it is legally permissible for a trustee to be a beneficiary of the trust, so long as he is not the only trustee as well as being the only beneficiary.

However, the High Court of South Africa has recently expressed grave concern at the “debasement” of the core idea of a trust that occurs when there is insufficient separation of the management of the trust (by the trustees) and the right to enjoyment of the trust’s income and capital (of the beneficiaries).

An egregious abuse of a trust

The most egregious abuse of a trust in our law reports is the recent case involving one J Arthur Brown, in which the Cape High Court gave judgment on 4 June 2007.

The court found, on the evidence laid before it, that Brown (as trustee of the Brown Family Investment Trust) had engaged in the “systematic looting of funds” administered by the Fidentia group of companies of which Brown was the “directing mind” and “controlled their assets virtually single-handedly”.

The court held that the Brown Family Investment Trust had been created “for the purpose of hiding the theft of funds from the Fidentia companies”. Brown had, said the court, misappropriated many millions of rand from the companies and used the money to purchase, inter alia, expensive business premises in Century City, Cape Town, which were then registered in the Deeds Office in the name of the Trust. The court stated that the Trust was merely Brown's "alter ego" and that it did not conduct itself in an independent manner. The essential notion of trust law from which one must proceed is that enjoyment and control should be functionally separated. The vehicle of a trust ought not to be used to escape the constraints imposed by corporate law, as was the case in respect of Brown.

It is somewhat surprising that the court in this case did not rule, unequivocally, that the Trust in question was a complete sham and devoid of any legal existence. In other words, that there was never an intention to bring a trust, in the true sense of the word, into existence, and it never operated as a genuine trust.

The trust had forfeited ownership of the property

In effect, though, the order eventually made by the court was tantamount to such a finding. Thus, the court ordered that Brown and his co-trustees “have forfeited all right, title and interest to and in” the business premises in question which had been registered in the name of the Trust, and that the curators of the Fidentia group of companies must sell those properties and utilise the proceeds in the manner appropriate to the curatorship of the Fidentia companies.

Although this case is a particularly egregious example of a total dereliction of duty by trustees, it emphasises the fact that all trustees owe strict legal duties to display the utmost good faith in managing the affairs of the trust, that they must ensure that proper accounts are kept, must ensure that the trust assets are kept separate from their own, and that they cannot allow their personal interests to conflict with those duties.

These principles are just as applicable to ordinary family and trading trusts and the trustees of such trusts should have no illusions as to their legal obligations and the severe consequences, both criminal and civil, that can flow from a breach of those duties.

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