The Supreme Court of Appeal (“SCA”) has issued a stern warning to attorneys who set up a trust for the benefit of a plaintiff who receives damages from the Road Accident Fund (“RAF”), to ensure that the trust deed properly reflects its intended purpose.
The background to the recent decision in Snyman v De Kooker N.O. and Others is that the RAF was ordered to pay approximately ZAR5 million in damages to Snyman. Her attorney was ordered to set up an inter vivos trust to protect the capital for Snyman's exclusive benefit. Additionally, the RAF was ordered to pay Snyman's legal costs, including for the establishment and administration of the trust.
Snyman's attorney created a standard inter vivos trust, which accorded her (the attorney) expansive rights as the nominal founder of the trust (as if she was the source of the capital - rather than the RAF), and the three trustees were given free rein to manage the capital as if Snyman was a minor or incapacitated and had to be protected against herself.
This was entirely at odds with what the High Court intended, especially as Snyman was regarded as “definitely capable of managing her own financial affairs on a day-to-day basis, but (she) would need assistance with large amounts”.
Once the trust was established, the trustees ignored Snyman's requests for an accounting. When the trustees were eventually forced to do so they provided only a rudimentary accounting. It transpired that the trust had paid, inter alia, consulting fees, portfolio management fees, financial intermediary fees, insurance, investment and administration costs (which the trustees had not bothered to recover from the RAF) of about ZAR900,000, which substantially exceeded the sum of ZAR536,000 paid to Snyman as income over the same period. Worse still, some of the trustees themselves benefitted from the fees expended by the trust.
Snyman approached the High Court for relief. She was successful at first instance but lost on appeal by the trustees to a full bench. She was refused leave to appeal but the SCA granted special leave to appeal to her. Snyman succeeded in the SCA to terminate the trust and obtain a full accounting from the trustees.
Disconcertingly, the SCA observed, in a footnote, that of the ZAR5 million awarded to Snyman, more than ZAR1.6 million appears to have been appropriated by Snyman's attorney in the litigation against the RAF as a contingency fee.
By the time Snyman approached the High Court to terminate the trust, nearly 50% of the total damages awarded to her had been consumed by her attorney and the administration of the trust supposedly set up for her benefit.
The SCA held that the wording of the trust deed was inappropriate to achieve the purpose for which it had been established. When a court orders the establishment of a trust, as in this case, then that court should review the terms of the proposed trust deed and not leave it to a hapless plaintiff's attorney to do so unsupervised.
The sole purpose of the trust set up by Snyman's attorney should have been to protect the capital received from the RAF for the exclusive benefit of Snyman. The trust deed should not have afforded any residual authority to Snyman's attorney as the nominal founder of the trust.
Secondly, Snyman should have had insight into the decisions of the trustees, who ought not to have enjoyed free rein. For example, the trustees had the right, in their sole discretion, to determine the remuneration payable to themselves, to charge professional fees for their services, and to conclude contracts with the trust for their personal benefit.
The SCA accordingly ordered that the trust be terminated and replaced by a new trust deed, the wording of which will be subject to the approval of both the High Court and the Master.
The SCA also ordered that, despite the termination of the trust, the trustees should nevertheless still account properly and fully to Snyman for their administration of the trust, duly substantiated with primary source documents, inter alia for the difference between the capital paid out by the RAF and what was received by the trustees, how the capital was invested or spent, and whether the trustees themselves had any financial interest in the conduct of the trust beyond their remuneration as trustees.
Because the trustees had failed to account adequately to Snyman and had not looked after her interests properly, the SCA ordered that they personally pay the legal costs of the proceedings rather than for the trust to bear such costs.
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