Be Careful When Transacting with Trusts and Trustees – Shepstone & Wylie Case Analysis.

Background: 

Shepstone & Wylie Attorneys filed a lawsuit against a trust as a surety for unpaid legal fees. The trust countered the claim by arguing that the deed of suretyship was invalid because it lacked the signatures of all trustees, a requirement specified in the trust deed.

Court Findings: 

In the case of Shepstone and Wylie Attorneys v Abraham Johannes de Witt N O and Others,  the Supreme Court of Appeal examined the validity and enforceability of a resolution passed by a majority of trustees, which authorized the deed of suretyship. The following key findings emerged:

Joint and Unanimous Action: 

Trusts are bound by their respective trust deeds, which define the parameters within which they must operate. Importantly, the trust deed delineates how trustees must exercise their powers and authority. It was reinforced that trustees must act jointly and unanimously in making decisions and resolutions. This collective approach safeguards the interests of the trust and its beneficiaries, except when the trust deed explicitly provides for majority decisions.

Resolution Signature Requirement: 

To achieve external validity, a resolution must be signed by all trustees. The court stressed that even when a majority decision is allowed within the trust deed, the signatures of all trustees are essential for an agreement to be legally binding in dealings with third parties.

Case Analysis: 

The court examined the specific trust in question, known as The Penvaan Property Trust. A majority of its trustees signed a deed of suretyship, which bound the trust as a surety and co-principal debtor for the debts of one of the trustees, Mrs Volker. However, this decision was made during a trustees’ meeting from which one trustee was absent. Despite the absence, the two present trustees passed the resolution authorizing the deed of suretyship and subsequently signed it.

Court’s Decision: 

The central issue in dispute revolved around whether the court below was correct in upholding the trust’s defence, which argued that the resolution authorizing the deed of suretyship was invalid. The lower court had found that the resolution lacked the unanimous support of all trustees due to one trustee’s absence during the decision-making process.

The Supreme Court of Appeal ruled in favour of the lower court’s decision, affirming that the trustees had not acted jointly as required by the trust deed. In essence, the resolution was not unanimous because it did not have the participation of all trustees, making both the resolution and the deed of suretyship invalid and unenforceable against the trust.

Conclusion: 

The Shepstone & Wylie case serves as a reminder of the importance of adhering to trust deed provisions when transacting with trusts and their trustees. This legal precedent underscores several crucial points:

Trust Deeds Govern Trust Operations: 

Trusts are legally bound by their trust deeds, which delineate the manner in which they must function, including the powers granted to trustees. Compliance with these provisions is imperative to maintain the integrity of trust agreements.

Joint and Unanimous Action: 

Trustees must work in harmony, acting jointly and unanimously, especially when making decisions involving trust assets and obligations. This principle protects the trust’s interests and ensures that resolutions are valid in dealings with third parties.

Resolution Signatures are Crucial: 

To validate agreements externally, all trustees must sign resolutions, even if the trust deed permits majority decisions. This signature requirement ensures that trust decisions are legally binding in transactions with external parties.

In practical terms, the Shepstone & Wylie case highlights the need for meticulous attention to detail when dealing with trusts, which are frequently used in various commercial and property-related transactions. Parties, particularly financial institutions, must exercise prudence and seek legal counsel to ascertain that all trust-related requirements are met to avoid the potential consequences of transacting with a trust on shaky legal grounds. As this case illustrates, an invalid trust resolution can invalidate an entire agreement, making it challenging or impossible to revive. Therefore, it is imperative to navigate trust transactions with caution and precision, ensuring strict adherence to the trust deed and related legal requirements.