This article is intended only to give a brief overview of what is meant with “fiduciary duties” and how this applies to trustees and/or to directors of a company. Trustees and directors should seek professional advice if they are not certain about their duties and responsibilities. There are many helpful articles to be found on the internet if you browse under “Directors’ duties and/or trustees’ fiduciary duties”.
1. Trusts and Trustees
The trustees of a trust stand in what is known as a fiduciary relationship to the trust. This fiduciary relationship is regulated by:
The trust instrument;
In general, trustees must act jointly and in accordance with the trust instrument by which they were appointed.
Simply put, a trust is an arrangement in terms of which the property or affairs of a person or of the trust are controlled by the trustees for the benefit of another person or of the trust in terms of the trust instrument.
2. What is the nature of a Body Corporate established in terms of the Sectional Titles Act (“STA”)?
A Body Corporate is a separate legal entity and not a trust. The trustees of a Body Corporate stand in the same fiduciary relationship to the Body Corporate and its members as that of trustees in relation to a trust and therefore the same principles apply. The conduct of the trustees is governed in terms of the provisions of the Sectional Titles Act, the Rules of the Scheme and our common law.
3. What is a fiduciary duty?
A fiduciary duty is a legal obligation of one party to act in the best interest of another. A fiduciary is therefore an individual in whom another has placed the utmost trust and confidence to manage and protect his property, money or affairs. A fiduciary duty requires total trust, good faith and honesty. The most common example is a trustee of a trust, but fiduciaries can include attorneys, guardians, administrators of estates, trustees of a Body Corporate, etc.
Fiduciary duties are also imposed on directors of companies in respect of their dealings with the company. Although specific duties may be imposed on trustees, the general characteristics of the fiduciary duty contain the following elements:
(A) Good faith:
This requires for the trustee to, at all times and in all circumstances, act with the utmost good faith towards the trust and always in its best interest and to avoid any personal advantage or benefit. Trustees of a Body Corporate must therefore act in good faith and in the interest of their members and avoid any personal conflict or benefit.
Good faith requires that a trustee acts honestly and without any ulterior motive and to disclose any conflict of interest.
(B) To adhere to the provisions of the trust instrument:
Trustees must give full and proper effect to the trust instrument and the intentions of the founder of the trust. Trustees can only do what the trust instrument authorises them to do and it is therefore necessary that trustees are fully conversant with the provisions of the trust instrument.
(C) Exercise an independent discretion:
A trustee must exercise his discretion independently, which means that he should decide for himself and not accept or merely follow what is advanced by his co-trustees.
A trustee must exercise his discretion in good faith and with due care and consideration of the matter under consideration and he must therefore consider the pros and cons when exercising his discretion on a matter. To exercise his own discretion may hold that a trustee needs to receive guidance from other professionals such as attorneys or auditors where the aspects under consideration do not fall within his own skills or knowledge.
A trustee would therefore be negligent where he exercises his discretion on a legal matter, where he lacks knowledge on the legal position or consequences of his decision.
(D) A trustee must act as a reasonable man:
This common law requirement requires from a trustee to act with due care and diligence as a bonus et diligence pater familias, i.e. as a reasonable man. A trustee is required to be more careful and prudent with the affairs of the trust than he would be with his own affairs.
Where a trustee can take personal risks with, for example investments, he must take greater care when handling trust property or the affairs of others and should therefore avoid any business risk.
4. Fiduciary duties of Body Corporate Trustees
The fiduciary position of trustees is established in terms of Section 40 of the STA, which stipulates that “each trustee of a Body Corporate shall stand in a fiduciary relationship to the Body Corporate”. See our webpage for a full extract of Section 40.
Section 40(2) of the STA stipulates that the “fiduciary relationship” implies that a trustee shall in relation to the Body Corporate:
i) Act honestly and in good faith (which holds that he shall exercise his powers to manage the affairs of the Body Corporate in the interest and for the benefit of the Body Corporate and shall not act without, or exceed, his powers);
ii) Avoid any material conflict between his own interests and those of the Body Corporate.
For more on the fiduciary duties of Body Corporate trustees please refer to our April 2012 Newsletter on www.eyslaw.co.za
5. Directors’ Fiduciary Duties
The duties of directors, in addition to existing common law duties, include both a fiduciary duty and a duty of reasonable care.
Section 76(3) of the Companies Act, No. 71 of 2008, clearly defines the standards of directors’ conduct and stipulates:
Subject to subsections (4) and (5), a director of a company, when acting in that capacity, must exercise the powers and perform the functions of director,
(a) in good faith and for a proper purpose;
(b) in the best interests of the company; and
(c) with the degree of care, skill and diligence that may reasonably be expected of a person
(i) carrying out the same functions in relation to the company as those carried out by that director; and
(ii) having the general knowledge, skill and experience of that director.
Section 76(4) stipulates that a director would have satisfied his obligations concerning “best interest” and “degree of care, skill and diligence”, if the director has taken reasonably diligent steps to become informed about the matter.
In terms of Section 76(1), a “Director” includes a prescribed officer or a person who is a member of a committee of a Board of the company or of the Audit Committee of the company, irrespective of whether such person is a director of the company (please refer to our webpage for a full extract of Section 76).
In conclusion, directors of a company owe the same fiduciary duties to the company as that of trustees in respect of a trust.
Article by Elmo-York Stuart