Here is an intesting article about whether the beneficiaries of a trust can order the trustees to follow the beneficiaries' instructions. [Note that the reference to the Parker decision is not quite correct: it must be the Land & Agricultural bank etc]



One of our panellists, Prof Bob Williams, looks at how the relationship between the beneficiaries of a trust and the trustees is governed by law.

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ARE TRUSTEES OBLIGED TO FOLLOW THE BENEFICIARIES’ INSTRUCTIONS?



South African case law on trusts is somewhat thin, and useful guidance can be gleaned from overseas jurisdictions. It must be borne in mind, however, that whilst the South African law of trusts has its historical origins in foreign legal systems, it is now a uniquely South African institution (see Cameron, De Waal & Wunsh, Honore’s South African Law

of Trusts, 5th ed, p 2) and overseas precedents will not be slavishly followed by our courts.



The decision, late last year, of the New Zealand High Court in Burns v Steel [2006] 1 NZLR 559deals with the fundamental question – are trustees of a trust obliged to carry out the beneficiaries’ directions? And in particular, where a trust holds shares, are the beneficiaries entitled to instruct the directors how to cast their votes when exercising the voting rights attaching to those shares?



South African law has a strong basis of principle

The first instinct of a South African trust lawyer, schooled in Roman-Dutch law’s principle-based tradition, would be to say something along the following lines. A trust, while not a legal persona (except for tax purposes) is an institution in which the trustees hold property for the benefit of beneficiaries. In an ownership-trust (as distinct from a bewind trust) the trustees are the legal owners of the trust property and must exercise their powers, as owners, in accordance with their fiduciary duty to act in what they honestly believe to be the best interests of the beneficiaries. But trustees are not the puppets or agents of the beneficiaries, and if the understanding between the parties was that they were to be mere puppets, the courts might hold that the entire trust was a sham– a disguised transaction, entered into in fraudem legis. Hence, where a trust owns shares, the trustees, not the beneficiaries, as owners of the shares, must decide, in accordance with their fiduciary duty, how to exercise the votes attaching to such shares.



The authority for these propositions is to be found (as to disguised transactions) in Zandberg v Van Zyl 1910 AD 302 at 309 and Erf 3183/1 Ladysmith (Pty) Ltd v CIR (1996) 58 SATC 229 (AD) at 239 and (as to sham trusts) in Agricultural and Land and Agricultural Bank of South Africa v Parker 2005 (2) SA 77 (SCA) at [37.3].



English law is less rooted in general principles

In contrast to Roman-Dutch law, English law tends not to approach a factual scenario by seeking out and applying a general principle. South African lawyers are thus more shocked than their English counterparts by the decision of the English court of appeal in Butt v Kelsen [1952] Ch 197 which held that, in the circumstances of that case, the beneficiaries of a trust were entitled to direct the trustees (who were also directors) as to how they must cast the votes attaching to shares held by the trust. In fairness, however, it must be said the correctness of Butt v Kelsen has since been doubted even by English lawyers.



In Burns v Steel [2006] 1 NZLR 559, the judgment now under scrutiny, the court shied away from laying down a rigid principle that trust beneficiaries never, in any circumstances, have a right to give directions to the trustees which the latter must obey. However, the court held (at [38]) that:



“even beneficiaries who are sui juris and absolutely entitled to trust property do not have untrammelled rights over the trust property or to control the exercise by the trustees of their duties. Re Brockbank [1948] Ch 206 is authority for the proposition that beneficiaries who, together, are absolutely entitled to trust property are not entitled to control the exercise by the trustees of the fiduciary power of appointing new trustees. Vaisey J held that beneficiaries in these circumstances must choose between two alternatives. They must either keep the trusts of the will on foot (in which case the trusts continue to be executed by the appointed trustees) or the beneficiaries and the trustees may, by mutual agreement, extinguish the trusts.”



A South African lawyer would have no quarrel with these propositions in the context of our own law of trusts, nor indeed with the statement at paragraph [64] of the judgment that:



“I am satisfied that the trustees are not mere ciphers and that they have active duties and discretions both as executors and trustees. As executors, the defendants are obliged to get in the assets of the deceased, pay the expenses, and distribute the residue in accordance with the terms of the will. And, as trustees, they have the fundamental obligation to adhere to the terms of the trust and to act in the best interests of the beneficiaries.”



A significant difference between the English and the South African law of trusts

One of the important differences between the English and the South African law of trusts is that, in English law, beneficiaries are regarded, even in the case of a discretionary trust, as having an equitable interest in trust assets. In the South African law of trusts, trust beneficiaries are regarded as having personal rights against the trustee, whereby they can oblige the trust to carry out the terms of the trust, but no right in rem in trust assets, unless and until the trustees actually vest those assets in the beneficiaries.



Consequently, it is a fairly small leap for English law to hold that, since trust beneficiaries have, in essence, equitable ownership of trust assets, they have the right to direct the trustees to deal with those assets in a particular way. In South African law, the chasm is too broad to leap, since trust beneficiaries are regarded as having only personal rights against the trustee until such time as the trustees actually vest the assets in the beneficiaries.




*This article was first published by Siber Ink as a part of the Corporate Law, Partnerships and Trusts Sibergramme 3/2006 and is reused here with permission. Click here for more information on the
Corporate Law, Partnerships and Trusts Sibergramme. RC (Bob) Williams,
BA LLB (Cape) LLM (London) H Dip Tax (Wits) PhD (Macquarie), is also a LawSure panellist.