Brief Summary

Trusts — Breach of trust — Locus standi of beneficiaries — Action instituted by a beneficiary against trustees for breach of trust — Defendants contending that beneficiary lacked standing due to trustee's resignation — Court held that beneficiary retains locus standi to pursue action despite trustee's resignation, as standing is determined at the time of action's institution. The testator's will established a trust with his surviving spouse and children as beneficiaries. One child, Andre Gideon Pentz, sued the trustees, including Sidney Gross, for breach of trust related to the sale of trust property below market value. The defendants argued that the plaintiff lacked standing after Gross resigned as trustee. The court concluded that the plaintiff had locus standi to bring the action, affirming the lower court's ruling that the special defences regarding standing were legally unsound.

Comprehensive Summary

Summary of Judgment

Introduction

The proceedings were an appeal to the Supreme Court of Appeal (then the Appellate Division) arising from an exception taken to portions of an amended plea raising special defences of locus standi. The appeal did not concern the merits of the alleged breach of trust; it concerned whether the plaintiff-beneficiary was legally entitled to litigate in the manner pleaded.

The appellants were Sidney Gross, Pieter Nicholaas Pentz, and Groote Post Farm CC (the first, second and third defendants in the trial court). The respondent was A G (Andre Gideon) Pentz, one of the testator’s children and a beneficiary under a testamentary trust, who had instituted action in the Cape of Good Hope Provincial Division.

Procedurally, the respondent instituted action in June 1992 for (i) the removal of Gross as trustee and (ii) an order that the first three defendants pay R530 250 to the trust. The defendants initially excepted to the particulars of claim (including on locus standi), but those exceptions were dismissed by Brand J (after an amendment was permitted). After pleadings had progressed and the matter went to trial in February 1995, the defendants sought to amend their plea again to introduce special defences denying locus standi (including an alternative based on Gross’s prior resignation as trustee). The plaintiff excepted to the newly introduced special defences. Scott and Thring JJ upheld the exception and declared the special defences bad in law. With leave, the defendants appealed to the Supreme Court of Appeal.

The general subject-matter of the dispute was whether a trust beneficiary (with only a contingent interest) may sue in a representative capacity to recover compensation for loss allegedly caused to a testamentary trust by a trustee’s breach of trust, and whether the presence of a co-trustee affects that standing.

Material Facts

The testator, Nicolaas Petrus Pentz, died on 12 May 1976. His will created a testamentary trust for the benefit of his surviving spouse, Doreen Laura Pentz, and his four children (including the respondent). The will nominated Mrs Pentz and Mr Sidney Gross (the testator’s attorney) as executors/administrators and thus as trustees. The trust’s income and capital provisions meant that, at the relevant times, the children had no vested right to either future income or capital; their interests were contingent.

The trust held a 35% interest in an entity initially incorporated as a private company and later converted into a close corporation, Nico Pentz Investments CC (NPI). NPI owned land including erf 14755 in the Milnerton municipal area (“the property”).

On 12 August 1991, NPI sold the property to Groote Post Farm CC for R435 000 (“the first sale”). Shortly thereafter, on 14 August 1991, Groote Post signed heads of agreement to sell the property to Equikor Partners in Property Trust No 2 for R2 700 000, and on 25 October 1991 Groote Post concluded a deed of sale to Equikor for that price (“the second sale”), subject to “special conditions” involving zoning guarantees and service/road/electricity obligations.

In the respondent’s pleaded case, the first sale was alleged to have occurred below the “net market value” of the property (alleged to be not less than R1 950 000, being R2 700 000 less not more than R750 000 for compliance with the special conditions). It was pleaded that the first sale, at that price, benefitted Groote Post at the expense of, among others, the trust.

The respondent pleaded that, at the time of the first sale, Pieter Pentz was the sole or controlling member of Groote Post, and that the first sale was effected with the knowledge and consent of Gross and Pieter Pentz, both allegedly knowing the net market value. It was further pleaded that Gross could have prevented the first sale but failed to do so, and that he acted with an intention to benefit Groote Post at the trust’s expense, alternatively that he negligently failed to ascertain true value; the first sale was therefore pleaded as a breach of trust “in relation to” Gross. Pieter Pentz and Groote Post were alleged to have knowingly participated in that breach.

The pleaded quantification of the trust’s loss was R530 250, being 35% of R1 515 000 (the alleged undervalue difference of R1 950 000 minus R435 000). The relief sought included an order that the defendants pay this amount to the trust (and initially also Gross’s removal, which became moot after his resignation).

A further pleaded fact material to the locus standi dispute was that Gross resigned as trustee on 21 September 1992, after the institution of action. The defendants’ amended plea relied on that resignation to allege that the respondent lacked standing to continue and that standing vested in Mrs Pentz as sole trustee.

Legal Issues

The central legal questions were whether, on the pleadings, the respondent (a beneficiary with contingent rights) had locus standi in judicio to institute and pursue a representative action on behalf of the trust to recover compensation from an allegedly delinquent trustee and alleged knowing participants; and whether Gross’s resignation altered that position.

The dispute primarily concerned questions of law (the content of the locus standi rule in trust and estate administration) and the application of those legal rules to the pleaded facts, because the matter arose on exception, which required the issue to be assessed on the respondent’s pleaded cause of action.

A further legal issue arose from the existence of co-trustees: whether a beneficiary may rely on the recognised exception permitting beneficiary litigation where the trustee’s conduct is impeached, in circumstances where there is another trustee who could, at least in principle, sue on behalf of the trust.

The Supreme Court of Appeal delivered two judgments reflecting different approaches. The majority judgment (Corbett CJ) recognised and applied an exception to the general rule and held the special pleas were bad in law; a minority judgment (Harms JA, with F H Grosskopf JA concurring) would have upheld the appeal in part, emphasising pleading requirements and a narrower view of the exception.

Court’s Reasoning

The majority (Corbett CJ) accepted as a general rule of South African law that the proper person to litigate on behalf of a trust (or deceased estate) in respect of claims belonging to the trust/estate is the trustee (or executor), and that a beneficiary ordinarily lacks standing to bring such proceedings. This was treated as the “general rule” governing representative actions, namely proceedings brought to recover assets, set aside transactions, or recover damages for the trust estate.

The majority distinguished representative actions from what it described as “direct actions”, being litigation by beneficiaries in their own right against trustees for maladministration, for failure to pay what is due, or for improper distributions. On the pleadings, the relief sought was payment of compensation to the trust, and the respondent’s interest in the trust income and capital was contingent. The majority therefore characterised the claim as a representative action, to which the general rule would ordinarily apply, and rejected the submission that it was a direct action.

Having identified that the claim was representative in nature, the majority recognised an exception (derived principally from Beningfield v Baxter) permitting a beneficiary to sue where the trustee’s own acts and conduct in relation to the trust are impeached, because a delinquent trustee cannot be expected to sue himself. The majority endorsed this exception as a necessary and practical modification to the general rule, reasoning that otherwise beneficiaries would be driven to a cumbersome process (such as seeking removal and replacement of trustees as a precursor to recovery proceedings).

The majority also addressed whether the exception was confined to beneficiaries with vested rights. It held that even beneficiaries with contingent interests have a vested interest in the proper administration of the trust and may bring such representative proceedings under the exception.

A further controversy concerned whether the exception could apply where there was an “innocent” co-trustee (here, Mrs Pentz) who could sue. The majority regarded it as impractical and undesirable, at the locus standi stage, to require a claimant to establish (potentially only after a full trial) whether the co-trustee is legally liable or not merely to found standing. To resolve this procedural difficulty, the majority adopted a rule for purposes of deciding locus standi: where there are joint trustees and a breach of trust is alleged against one, both trustees should be assumed to be liable for the breach when deciding the beneficiary’s standing. On that approach, the respondent fell within the exception and had standing; accordingly, the special defence denying locus standi (paragraph 16.2) was bad in law.

As to the alternative special defence (paragraph 16.3), the majority agreed with the court a quo that Gross’s resignation after institution of action did not deprive the respondent of locus standi which existed when proceedings commenced, even if it might have resulted in the remaining trustee acquiring standing as well. The plea was therefore bad in law.

The minority judgment (Harms JA) framed the decisive question differently. It treated the “ultimate issue” as whether the respondent, suing in a representative capacity, had made the necessary allegations bringing himself within the terms of the Beningfield exception, understood as an exception limited to a situation where it is impossible for the trust to sue through the proper litigant because the trustee whose conduct is impeached would otherwise have to sue himself.

On that approach, Harms JA held that the pleadings did not allege facts suggesting that the trust could not sue Gross through the other trustee, Mrs Pentz. He rejected the notion that the mere possibility that Mrs Pentz might be jointly and severally liable for any breach by Gross could found the required impossibility. He stressed that locus standi, while procedural, is also substantive; the litigant must allege and prove standing, and a court cannot confer standing for reasons of expediency. He further considered that the pleaded breach did not concern a “common charge” of joint trusteeship administration but rather concerned Gross’s failure to use his personal position and interest in NPI to prevent the loss; on that basis, Mrs Pentz was characterised as a “disinterested trustee” capable of suing.

Harms JA also cautioned that expanding beneficiary standing in such circumstances would generate practical difficulties (such as control of litigation, settlement authority, and potential multiplicity of actions), and he preferred to confine the exception to its narrow rationale of impossibility caused by the delinquent trustee’s own position. He would therefore have dismissed the exception to paragraph 16.2 (and upheld the appeal to that extent), while otherwise agreeing with the Chief Justice.

Outcome and Relief

The majority judgment dismissed the appeal and upheld the decision of the court a quo that the special defences in paragraphs 16.2 and 16.3 of the amended plea were bad in law. The appeal was dismissed with costs, including the costs of two counsel.

A minority would have upheld the appeal in respect of paragraph 16.2, but this did not affect the final order because the majority prevailed.

Cases Cited

Krige and Others v Scoble and Others 1912 TPD 814.

Cumes v Estate Cumes and Others 1950 (2) SA 15 (C).

Du Toit v Vermeulen 1972 (3) SA 848 (A).

Segal and Another v Segal and Others 1976 (2) SA 531 (C).

Nyati v Minister of Bantu Administration and Others 1978 (3) SA 224 (E).

Asmal v Asmal and Others 1991 (4) SA 262 (N).

Pentz v Gross and Others 1996 (2) SA 518 (C).

Sackville West v Nourse and Another 1925 AD 516.

Boyce N O v Bloem and Others 1960 (3) SA 855 (T).

Yorkshire Insurance Co Ltd v Barclays Bank (Dominion, Colonial and Overseas) 1928 WLD 199.

Adam v Jhavary and Another 1926 AD 147.

Atmore v Chaddock (1896) 13 SC 205.

Clarkson N O v Gelb and Others 1981 (1) SA 288 (W).

Berger and Others v Aiken and Others 1964 (2) SA 396 (W).

Beningfield v Baxter (1886) 12 AC 167.

Lindeque and Others v Lindeque (1889) 3 SAR 77.

Estate Bazley v Estate Arnott 1931 NPD 481.

Van Rensburg v Registrar of Deeds 1924 CPD 508.

Mare v Grobler N O 1930 TPD 632.

Braun v Blann and Botha NNO and Another [1984] ZASCA 19; 1984 (2) SA 850 (A).

Loedolff v The Present Orphan Chamber and the Surviving Members of the Former Orphan Chamber 1 Menz 486.

Adam and Others v Dada and Others 1912 NPD 495.

Niekerk v Niekerk 1 Menz 452.

Wessels en Andere v Siziodale Kerkkantoor Kommissie van die Nederduitse Gereformeerde Kerk, OVS 1978 (3) SA 716 (A).

Cabinet of the Transitional Government for the Territory of South West Africa v Eins 1988 (3) SA 369 (A).

Jacobs en 'n Ander v Waks en Andere [1991] ZASCA 152; 1992 (1) SA 521 (A).

Mars Incorporated v Candy World (Pty) Ltd [1990] ZASCA 149; 1991 (1) SA 567 (A).

Legislation Cited

Transvaal Law 12 of 1870.

Rules of Court Cited

Uniform Rules of Court, Rule 33.

Held

The majority held that a trust beneficiary ordinarily lacks standing to sue in a representative capacity on behalf of the trust because such proceedings are generally to be brought by the trustee, but that an exception exists where the trustee’s own conduct is impeached and the trustee cannot be expected to sue himself. The majority recognised this exception as part of South African law, held it may be invoked by beneficiaries with contingent interests, and held that the existence of a co-trustee does not defeat standing at the exception stage because, for locus standi purposes, the trustees should be assumed to be liable for the alleged breach.

The majority further held that the first defendant trustee’s resignation after institution of action did not deprive the plaintiff of locus standi to continue proceedings.

The minority held that the plaintiff had not pleaded facts bringing the case within the limited rationale of the exception (impossibility created by the delinquent trustee’s inability to sue himself), because the other trustee could sue on behalf of the trust; it would therefore have upheld the appeal regarding the denial of locus standi.

LEGAL PRINCIPLES

The general principle applied was that, in proceedings to enforce rights vested in a trust or deceased estate, the proper litigant is the trustee or executor in whom the estate/trust property vests for purposes of administration; beneficiaries ordinarily lack standing to bring representative actions seeking recovery for the trust/estate.

A recognised exception applies where the trustee’s own acts and conduct in relation to the trust are impeached, such that the trustee cannot be expected to sue himself. In that circumstance, a beneficiary with a sufficient interest in proper administration may sue in a representative capacity to obtain relief that would ordinarily be sought by the trustee.

The majority accepted that beneficiaries with contingent interests nonetheless have a vested interest in the proper administration of the trust sufficient to invoke the exception in appropriate circumstances.

In assessing locus standi on exception where there are co-trustees, the majority adopted a procedural approach that, for purposes of locus standi, both trustees should be assumed liable for the alleged breach so as not to make standing depend on potentially trial-bound determinations about the co-trustee’s liability. The minority rejected any expansion beyond the strict impossibility rationale and emphasised that a litigant must allege and prove locus standi on the pleaded case, with no general principle permitting standing to be conferred for expediency.

Gross and Others v Pentz (414/95) [1996] ZASCA 78; 1996 (4) SA 617 (SCA); [1996] 4 All SA 63 (A); (22 August 1996)