Do the courts really have the power to terminate a trust?

by | Jun 11, 2020 | Advisory Services

Yes, they do. It doesn’t happen very often, but South African law gives the courts the power to terminate a trust if the trust’s object is no longer attainable. Deepa Singh explains the ins and outs…

The basics

Before we consider the possible termination of a trust, we need to go all the way back to the beginning and look at the foundation of said trust. In order to establish a valid trust, the following legal requirements must be met:

1. The founder must intend to create a trust.
2. The creation of the trust must be by means of a written agreement, a testamentary writing, or a court order.
3. The trust property must be clearly defined.
4. The trust must be established for an object of purpose, that is the trust property must be intended to be applied for the benefit of a specific or determinable person(s), or with an eye to a determined or determinable aim.

Understanding the object/purpose of a trust

As mentioned earlier, the courts have the power to terminate a trust if the trust’s object is no longer attainable. But what does this mean?

The object or purpose of the trust may not conflict with a particular legal rule, boni mores (‘good morals’) or public policy. The trust object must also be lawful and defined with reasonable certainty.

The object can be personal or impersonal and may be for the benefit of one or more named or ascertainable persons or classes of persons, including juristic persons and trustees on behalf of other trusts and/or for one or more impersonal objects such as the education or the development of the community at large or a specific group of individuals.

If a person or class for whose benefit the trust is intended is not named or determinable, the trust fails for want of a certain object. It is the duty of the trustees to ensure that the object of the trust is achieved, even long after the demise of the founder. The founder’s intentions are of utmost importance.

A trust deed is a special type of contract, namely, “stipulatio alteri” – a contract for the benefit of a third party. This contract may be varied from time to time according to the specifications of the trust deed. However, the object of the trust may not be varied.

If the objective and purpose of the Trust can no longer be achieved or if there is a statutory prescription as to the period the Trust may continue to endure, then the Trustees may terminate the Trust.

But what if things change?

Sometimes, the provisions of the trust deed give rise to consequences which the founder did not foresee. Consequences which might impede the objects of the founder, prejudice a beneficiary or even go against the public interest.
Luckily, Section 13 of the Trust Property Control Act, 57 of 1988, deals with this very scenario. Section 13 empowers the court to vary trust provisions if a trust instrument contains any provision which brings about consequences which, in the opinion of the court, the founder of a trust did not contemplate or foresee and which:

a) hamper the achievement of the objects of the founder; or
b) prejudice the interests of beneficiaries; or
c) are in conflict with the public interest.

The court may, on application of the trustee or any person who has sufficient interest in the trust property, delete or vary any provision or make any order which the court deems just, including an order whereby particular trust property is substituted for particular other property, or an order terminating the trust.

Section 13 in action

In the recent matter of S NO and Another v PJN S Familie Trust and Others [2020], the North Gauteng High Court was called on to rule on Section 13 of the Trust Property Control Act.

The facts are as follows:
• J (wife) and P(husband) were married in 1989. Prior to the marriage P purchased a fixed property which later became the family home (the property).
• P acted as the founder and is also a trustee and income beneficiary of the PJN S Familie Trust (the Trust). J was also a trustee and income beneficiary of the Trust. Their two children are the capital beneficiaries of the Trust.
• In 2001, J and P started a business together and the home was transferred to Esteab Investments (Pty) Ltd (Esteab). All the shares in Esteab are held by the Trust.
• A mortgage bond was registered over the property and a usufruct (the right to enjoy the use and advantages of another’s property) in favour of P was also registered. P’s version of events is that this was done with J’s knowledge, which J denies.
• The marriage ended in divorce in 2010. The property did not form part of the agreement in the divorce proceedings.
• J brought an application as first applicant in her capacity as a trustee of the Trust, and as second applicant in her personal capacity, for an order terminating the Trust, removing a restrictive condition from the title deed of the property (the usufruct), and for the sale of the property.
• She alleged that P appropriated the property which was prejudicial to the beneficiaries of the trust, did not hold board meetings of Esteab nor trustee meetings of the Trust.
• P resided in the fixed property together with their son.
• J avers that the trust was formed with the object of providing a family home. As the parties are now divorced, the need for a family home has fallen away and the court ought to grant an order for the dissolution of the trust.
• P’s case was that the object of the trust was at all times to place the property out of the reach of creditors and protect it from the risks attendant to the business they entered into.
• The court (Mokose, J) examined the requirements of Section 13 and pointed out that there are two requirements before the court can change the provisions of a trust instrument, for example, by ordering the termination of the trust outside of the provisions of the deed.
• Firstly there is the subjective requirement that the instrument or any provision in it brings about consequences not contemplated or foreseen by the founder, and secondly the objective test that the consequences bring about any of the grounds in paragraphs (a) to (c) of Section 13.
• The court applied the principles espoused in the Plascon – Evans case: “averments set out in the respondents’ affidavit should be accepted unless they are far-fetched or clearly untenable. Accordingly, to succeed in the relief the applicants must prove the jurisdictional provisions of Section 13.” In other words, the onus was on J to prove her case beyond all doubt.
• The court also noted that the capital beneficiaries of the trust were not parties to the application, nor did they provide any form of supporting affidavits which indicated that the application sought was self-serving and not in the interest of all the beneficiaries.
• In view of the fact that P’s averments were not far-fetched or untenable, J accordingly laid no basis to enable the court to find that circumstances existed which brought about consequences that P, as founder of the Trust, did not contemplate or foresee and therefore the application in terms of Section 13 failed on application of the first test of jurisdictional fact.
• The court further dismissed J’s request for the cancellation of the usufruct as same was not brought in terms of any of the enabling legislation for the cancellation of the usufruct.
• The request for the division of the trust assets was also dismissed and the court viewed this as an attempt “to take a second bite of the cherry.”

What does it mean for me?

This judgement indicates that the courts apply the requirements of Section 13 strictly. One would need a watertight case to convince the court to grant an order to terminate a trust under this section. In this matter the founder was still alive and could attest to his intention, but the matter could perhaps have turned out differently if the founder had not been alive.

Fiduciary practitioners and Trustees should always remain cognisant of the trust objectives and provisions of the trust deed to prevent an interested party from attempting to bring an application for the termination of the trust.

The team of experts at Sentinel International offers comprehensive trust review services to ensure that your trust deed remains up to date and compliant. For more information please contact Deepa Singh: Alternatively, call our Johannesburg offices on 011 656 2722.

Deepa Singh, LLB
Admitted Attorney
Sentinel International Advisory Services (Pty) Ltd
Peterson and Another NNO v Classen and Others 2006 5 SA 191 [CPD] at 196 G
Honoré 120 et seq: Oosthuizen 604-605; Deedat v The Master 1995 2 SA 377 [A] 383E-384B and Du Toit 3.2.4 and 3.2.4
Plascon – Evans Ltd v Van Riebeeck Paints (Pty) Ltd [1984] ZASCA 51; 1984 (3) SA 623 (A)
Southern African Legal Information Institute (SAFLII)
The Fiduciary Institute of Southern Africa (FISA)