Secondly, Mr and Mrs V were in the middle of divorce proceedings, and the Trust had signed a deed of suretyship for Mrs V’s legal costs in favour of Shepstone and Wylie (the suretyship), the law firm representing her in the divorce proceedings.

Essentially Mrs V had given notice to the other two trustees for a meeting to consider whether the Trust would (i) oppose the sequestration and (ii) grant the suretyship.

Ultimately, Mr V did not attend the meeting and the remaining two trustees resolved that the Trust would (i) oppose the sequestration and (ii) stand as surety for Mrs V’s legal costs arising from the divorce proceedings. Following this, the issue contested from the High Court through to the Constitutional Court was whether the suretyship was binding on the Trust given that, even though the meeting was quorate and all three trustees (including Mr V) received notice of the meeting, the resolution was passed in the absence of one trustee.

The Supreme Court of Appeal (SCA) dismissed Shepstone and Wylie’s appeal, saying that the Trust could not be held liable as the suretyship was not properly authorised on the basis that only two out of three trustees had approved the decision to grant the suretyship. It held that trustees, when dealing with trust property, are always required to act jointly – even when the trust deed provides for majority decisions – and that all resolutions must be signed by all trustees in order to be legally effective.

This issue was then taken all the way to the Constitutional Court, which ultimately criticised the SCA’s restrictive view that all external decisions binding third parties require unanimous approval and emphasised that the validity of a trust’s contract or decision depends on the requirements of the trust deed. In other words, although common law requires trustees to act jointly in order to bind a trust, to the extent that a trust deed allows for majority decisions, then any decisions taken on that basis are legally valid and binding – provided of course that all quorum and notice requirements are met.

Following a proper reading of the Penvaan trust deed, the Constitutional Court established that only majority support was required and, accordingly, the absence of one trustee did not invalidate the resolution. The suretyship was therefore valid and binding on the Trust.

Key takeaways

Although subtle, the judgment carries commercial implications, with trusts frequently appearing as borrowers, guarantors or security providers in corporate financing transactions. Banks naturally rely on trusts to validly authorise their entry into the agreements to which they are a party as part of the transaction and the Penvaan saga underscores the importance for lenders of reviewing the trust deed to determine the level of support (i.e. majority versus unanimous) that is required for certain decisions to be made – similar to how, in the context of companies, one would review the company’s memorandum of incorporation to ensure that it has the necessary capacity and authority to enter into the agreements to which it is a party.

The root of this dispute arguably lies in the ambiguous wording of the trust deed regarding decision-making. The key lesson for trusts is accordingly to ensure that these requirements are clear, leaving minimal room for interpretation, particularly in relation to the level of support that is required from trustees in order for the trust’s decisions to be properly authorised.

While the default common law position requires trustees to act jointly to bind a trust, the Penvaan Trust’s protracted journey through the courts highlights two lessons to bear in mind as part of the goal to mitigate risk and avoid potential disputes involving trusts.

Firstly, founders of trusts should ensure that the requirements regarding majority or unanimous approval are clearly stipulated when preparing the trust deed in order to avoid the risk of decisions being challenged by creditors down the line.

Secondly, for banks or other creditors concluding corporate transactions with trusts, this judgment is a reminder of the principle that there is no “one size fits all” when it comes to trusts. Parties must always fall back on the trust deed and its decision-making requirements to ensure that resolutions are properly adopted and the agreements they approve are duly authorised. If the trust deed expressly allows for majority support from the trustees to bind the trust to certain agreements or assume certain obligations, then a majority level of support from the trustees will suffice, despite the common law position which requires trustees to act jointly (assuming of course that all quorum and notice provisions are followed). If the trust deed is ambiguous on this issue, it would be wise for banks providing the funding/creditors to adopt a more conservative approach and require that the resolution of the trust takes the form of a written resolution (as opposed to minutes of a meeting) whereby all the trustees sign and approve the resolution to ensure that the decision is validly authorised and the agreements which the trust enters into as part of the transaction are legally binding.