Cases of interest – when may a beneficary bring an action against the trust?

when may a beneficiary may bring an action against the trust or the trustees or bring an action for the preservation or restitution of trust assets, when the trustees won’t or fail to do so?

In our experience the issue raised above is a common one. On many occasions warring spouses, sibling rivalry, disgruntled and aggrieved beneficiaries and even beneficiaries of broad based trusts such as share incentive trusts or BEE trusts, may result in one or more beneficiaries wanting to take action against the trustees or third parties for the restitution of trust assets or for the due payment or delivery or use of assets or cash due to said beneficiaries.

The definition, rights and position of the beneficiary in terms of the provision of the trust deed needs to be carefully and properly examined before any action or demands a beneficiary believes they are entitled to are embarked upon.

Beneficiaries can be specifically named or averred to in a specific class, further some trust deeds differentiate between income and capital beneficiaries (a distinction we deem to be restrictive and antiquated as a result of the introduction of CGT, however in certain instances it may have application). The nature of the trust i.e. whether it is a bewind, vesting, testamentary or discretionary trust will also have a major bearing on what rights a beneficiary may have.

It is immediately becomes apparent that we face a quagmire of note if we are to deal with all the different types of trusts. We will accordingly limit this article to inter- vivos discretionary trusts, as beneficiaries have the most limited rights in this type of trust.

It must be borne in mind that in many instances trustees of a discretionary trust, have wide absolute and unfettered discretion to deal with trust assets and to make, act and take decisions that might appear unjust or inequitable to a beneficiary but will be sound, beyond reproach and unchallengeable by a beneficiary.

All trustees and beneficiaries should be cognisant of the fact that the Master may remove a Trustee (presumably at the instance of a report by a beneficiary under section 20 (2) e) or an interested party may make application to the relevant High Court for the removal of trustee. Whilst this is a remedy available to a beneficiary, neither the Master or the High Court will indulge a vexatious or frivolous application. Very good, if not exceptional grounds need be made to have a trustee removed on the basis as mentioned, save that if it is clear that a trustee is not carrying out their duties or Acting delinquently etc, that the appropriate action will result in the removal of such a trustee.

The above being said, the courts in Sackville West vs Nourse 1925 AD, held that a trustee is required to show greater care in administering trust property than might be expected when dealing with is own property. The latter sets out the standard expected of trustees and leads to the common law proposition which has been confirmed by our courts that a beneficiary has a personal right against a trustee/s for the proper management of the trust, as the trustee holds a fiduciary office which imposes on a trustee the duty to act in the utmost good faith in administering the trust.

Once we have established the position of the beneficiary, we need to clarify whether the beneficiary has a vested or a contingent right as differing consequences flow dependant on which category a beneficiary falls into.

In the event that a beneficiary has a vested right to an amount, asset or other right, then in such an event the aggrieved beneficiary has the usual remedies in law available to them to enforce or protect their rights, such as;

1.    Instituting legal action against the defaulting trustees to enforce the provisions of the trust deed in order to effect payment or transfer.

2.    An aquilian for breach of trust maybe brought against a trustee by a beneficiary in the event that proper grounds form such action exist, i.e. there must have been a wrongful act and the beneficiary will suffer a patrimonial loss, hence this action ebing restricted to beneficiaries with a vested right.

3.    A beneficiary may bring an action for the recovery of property against a third party who knowingly colluded with a trustee in the transfer of such property.

The vexing and often perplexing issues arise when a beneficiary has a mere contingent right, how do they go about enforcing their purported rights?

Our law continues to evolve in this regard, as will be evidenced by the following scenarios;

1.    The courts in Doyle vs Board of Executors 1999 (2) SA, held that beneficiaries are entitled to have access to the books of account of the trust even though they only have a contingent right. The court did stress certain limitations on those rights and further that the beneficiary could not interfere with the Trustees discretion.

2.    A beneficiary may at common law bring an application to interdict the trustees from selling or transferring property contrary to the provisions of the trust deed even though such beneficiary only has a contingent right.

3.    The gist of this article turns on a particular principle known as the Beningfield exception, this principle was gleaned from the case between Beningfield v Baxter 1886 12 AC 167 (Privy Counci)  and adopted in to our law in a judgement handed down in Gross v Pentz 1996 (4) SA where the Supreme Court of Appeal held the following;

It is a general proposition that the trustees are the proper persons to act on behalf of the trust, this is termed a representative action, which are actions to recover trust assets, nullify transactions, or recover damages.

The above needs to be distinguished from actions brought by beneficiaries in their own right and are termed direct actions and include actions against trustees for maladministration, trust benefits etc.

The exception relates to the position where a trustee should take action in a representative capacity but fails to or won’t because the trustee has acted delinquently. The exception therefore allows any beneficiary including a contingent
beneficiary the right to bring an action on behalf of the trust.

4.    The Bophuthatswana High Courts took the exception a step further and allowed the beneficiaries the right to bring an action on behalf of the trust even though it was not attributable to delinquency, error or impeachability. We are of the opinion that the court in this instance cast the net a little wide, albeit that a just result was achieved for the beneficiaries.

In closing we trust that it is apparent that beneficiaries do have recourse to protect and enforce their rights. The Beningfield exception affords beneficiaries very powerful rights.

A word of caution to planners, ensure that your trust deed affords you the necessary protective rights and a word of caution to beneficiaries, please note that the remedies listed above can only be availed if your rights have been prejudiced. Willy nilly actions will not be indulged and litigation is a costly business, be warned.