A Trust as a Borrower or Guarantor in Financing Arrangements: Insights from Shepstone Wylie Attorneys v. Abraham Johannes De Witt NNO and Others
The case of Shepstone Wylie Attorneys v. Abraham Johannes De Witt NNO offers significant insights into trust law, particularly regarding the obligations of trustees and the enforceability of loan agreements and deeds of suretyship in relation to trusts. Central to this case is the requirement for unanimous decision-making among trustees in respect to the third-party transactions and the legal implications when this principle is not followed.
Understanding Trusts and Suretyship
A trust, as defined by section 1 of the Trust Property Control Act 57 of 1988, “is not a separate legal entity but rather an arrangement in which one or more parties hold property for the benefit of the person or class of persons.” This arrangement emphasizes the separation between ownership and control. Trusts, like companies, act through the decisions of their trustees, who are bound by fiduciary duties to act jointly when dealing with trust property. There are two types of trusts in South Africa, namely testamentary trusts and living (inter vivos) trusts. A testamentary trust is set up in terms of the will of a testator and only comes into effect after the death of the testator. An inter vivos trust or living trust is set up during the lifetime of the founder and is a contract between the founder and the trustees(s). Inter vivos is a Latin phrase which means “while alive” or “between the living”. The inter vivos trust is particularly relevant in this context, as it applies directly to the situation described in the article.
Under the National Credit Act 34 of 2005 (“NCA”), a trust may qualify as a juristic person if it has three or more trustees or if its asset value meets or exceeds R1 million or if it has a trustee which is a juristic person. This classification affects the trust’s obligations under the NCA, particularly regarding credit agreements. For example, a trust with fewer than three trustees is considered a natural person and is subject to NCA protections.
A deed of suretyship is an agreement where a third party, known as the surety, agrees to fulfil the obligations of a debtor if the debtor defaults. For the suretyship to be valid, it must comply with the General Law Amendment Act 56 of 1956 (the “GLAA“), it must be in writing and signed. With the increasing use of electronic signatures, questions arise about whether they satisfy the “in writing” requirement under the GLAA. In some cases, an “advanced electronic signature” may fulfill this requirement. For a detailed discussion on this issue, see https://dkvg.co.za/lets-talk-e-signatures/.
Case Background and Court Findings
In the Shepstone Wylie case, the KwaZulu-Natal Division of the High Court dismissed an appeal by the appellant seeking to hold the Penvaan Property Trust (the “Trust“) liable under a deed of suretyship. The suretyship had been signed by two of the Trust’s three trustees, but without the third trustee’s involvement. According to the trust deed, clause 13.4 required the presence of at least two trustees to constitute a quorum for decision-making.
While the court accepted that internal decisions of the trustees could be valid with a majority, the court ruled that the external agreement, in this case the suretyship, was invalid without the participation of the third trustee. Trustees, when dealing with trust property or entering into binding external agreements, must act jointly. Even when the trust deed allows for majority decisions internally, external transactions require unanimous approval. Therefore, while internal disagreements among trustees may exist, they must present a unified front in dealings with third parties.
Considerations When Dealing with Trusts in Financing Transactions
This case underscores the importance of carefully considering the legal status of trusts when they act as borrowers or guarantors in financing transactions. While the case at hand dealt specifically with suretyships, the principles established apply equally to loan agreements and other binding financial transactions involving trusts.
Key considerations include:
- Trust Resolution: Has a resolution been lawfully passed authorizing the trust to enter into the agreement?
- Trustee Identification: Who are the trustees of the trust (check the latest letter of authority issued by the master)?
- NCA Implications: How many trustees does the trust have, and does it qualify as a juristic or natural person under the NCA?
- Trust Turnover: What is the trust’s annual turnover, and does this trigger NCA obligations?
- Signature of Trustees: Is the resolution signed by all trustees, thereby ensuring the transaction is valid and binding?
Additionally, it is crucial to recognize that, under the NCA, if a trust binds itself as a surety and falls within the NCA’s scope, the suretyship may ((if linked to an agreement considered a credit agreement) be treated as a credit agreement. This introduces additional requirements for the agreement’s enforcement. Compliance with the NCA’s procedural and substantive protections is essential, as the NCA imposes specific requirements when dealing with protected persons, including certain trusts. These requirements may include, for example, specific enforcement procedures that must be followed in the event of default. It is, however, pivotal to mention that a suretyship on its own is not necessarily a credit agreement (or protected under the NCA), whether the NCA provisions apply will depend on the merits of a specific financial transaction.
Conclusion
The Shepstone Wylie case serves as a valuable reminder of the complexities involved in transactions with trusts, especially when it comes to ensuring that all trustees act unanimously together in external agreements. Legal practitioners and financiers must exercise caution to ensure that all necessary authorizations and resolutions are properly executed to avoid the pitfalls of invalid transactions. Furthermore, understanding how the NCA may apply to trusts in financing arrangements is essential to avoiding legal complications, especially in cases involving suretyships or loan agreements.
Written By: Sikhona Makhasi
Candidate Legal Practitioner
Finance | Tyger Valley
Phone: +27 21 914-4020