9
need of financial assistance through no fault or moral defect on their own part. If there be no applicants in any year or if there be a surplus of income after rendering such assistance as the Trustees shall deem desirable, then the Trustees may devote the income or the surplus thereof to the second object of the Trust. (b) Secondly, to assist such Institution of a charitable nature as the Trustees may from time to time select provided only that the Institutions selected shall have as their chief object the welfare, education, and/or maintenance of children orphaned or otherwise lacking the support of their parents or either of them, whether such children be European, Coloured or Native, provided further, however, that in selecting the particular Institution to be benefitted and the proportions payable to each respectively, the Trustee
shall as far as possible endeavour to benefit Institutions in England and in South Africa in equal shares."
If the trust is to endure for a long period, if not in perpetuity, it is clear, having
regard to the effect of inflation on the value of money, that the trustees will be
obliged to invest the assets of the trust in such a way as not only to provide
adequate income but also to obtain a capital growth to the extent of at least
preserving the capital in real terms. Should the capital invested - which is now in
10
the region of R4 million - be permitted to erode in value in real terms, it is
inevitable that the real income available for the trust beneficiaries will increasingly reduce and, unless the process is arrested, eventually cease to be of any significance.
Investigations carried out by the appellants show that many if not most of the potential beneficiaries in the first category live in England. There are also, it would seem, potential beneficiaries living in Canada. As far as the second category is concerned, the will expressly directs the trustees as far as possible to benefit institutions in England and South Africa in equal terms.
Finally it is necessary to refer to certain provisions in the will which confer powers of investment on the appellants. I shall ignore the provisions of clause 12 dealing with the powers of the trustees which were held to be invalid by the Court a quo; although the invalidity was, of course, a consequence of the
11
extensive nature of those powers. In terms of clause 4 of the will, the appellants
in their capacity as administrators were afforded power in relation to the residue
of the estate-
"... at their own absolute discretion [to] retain, release or reinvest any proceeds of any realisation of the whole or part in such manner and upon such security as to my Administrators may seem fit."
Clause 11 (in terms of which the appellants were appointed as executors and
administrators) similarly confers wide powers. After dispensing with the need for
the furnishing of security, the clause concludes:
"My Executors shall have the power to sell, deal with and dispose of any asset in my Estate and my said Administrators shall in addition to the powers of investment conferred upon them in Clause 4 of this my Will, have full power at their absolute discretion to realise or acquire property, both movable and immovable, also power to settle, adjust or compromise any claim due to or by me or my Estate, and power to deal with any investments and to apportion or discriminate between capital and interest in their discretion."
It is apparent from these provisions that the deceased had considerable confidence
12
in the appellants, being his chosen executors and administrators, and intended
them to have wide discretionary powers of investment.
In Sackville West v Nourse and Another 1925 AD 516 this Court had occasion to consider the standard of care required of a trustee in relation to trust property. It was held that the standard was higher than that which an ordinary person might generally observe in the management of his or her own affairs. Such a person, it was pointed out, was free to do what he liked with his property and not infrequently selected investments which were of a speculative nature, particularly when the potential profits were high. A person in a fiduciary position such as a trustee, on the other hand, was obliged to adopt
the standard of the prudent and careful person, that is to say, the standard of the bonus et diligens paterfamilias of Roman law, and was accordingly, as Kotze JA concluded at 535, "obliged, in dealing with and investing the money of the beneficiary, to observe due care and
13
diligence, and not to expose it in any way to any business risks". The need to
avoid risks was emphasized in the judgments of both Solomon ACJ and Kotze JA. Both contain dicta to the effect that a trustee is obliged to avoid investments which are "attended with risk" (at 520) or involve "business risks" (at 535) and which cannot be made without "safety and security" (at 534).
On the strength, no doubt, of these and similar dicta it was for many years the generally accepted practice for trustees, who had not been given wider powers of investment, to confine the investment of trust property to what are called trust or trustee investments. These include government or municipal stocks, fixed deposits, loans on mortgage bonds and also immovable property. (See for eg Jonsson v Estate Jonsson and Others 1945 NPD 66 at 70; Peffers, NO and Another Attorneys, Notariess and Conzveyancers Fidelity Guarantee Fund Board of Control 1965(2) SA 53 (C) at 55G - 56A.) But whether or not an investment
14 can be said to have been prudent or made with due care and diligence is a question
which can only be decided on the facts of each particular case (Colonial Banking
and Trust Co Ltd v Estate Hughes and Others 1932 AD 1 at 15 - 16); and
circumstances change. An investment considered prudent in earlier times may
rightfully be regarded as quite imprudent in the context of modem conditions. The
ongoing and rapid decline in the value of money brought about by inflation, which
has become a feature of our economy in the course of the past few decades, may
well result in a sharp decline in the value of a monetary security within a relatively
short period of time. In order to preserve the capital of the trust in real terms and
so ensure the continued production of income, particularly in the case of a trust
intended to be of long duration like the present, a trustee in such circumstances is
of necessity obliged to invest in real assets with potential for capital growth. Such
an investment, viz one where the capital is not fixed, necessarily involves some
15 element of risk; but the risk may be unavoidable if the capital of the trust is to be
preserved in real terms. The acceptance of this element of risk as being
unavoidable if the trust is to serve its purpose has inevitably led in more recent
times to a change in investment thinking which involves a movement away from
the more conservative approach developed in an age when inflation was either
non-existent or of little consequence. In principle, therefore, I can see no
justification at this stage for a hard and fast rule which precludes the investment
of trust funds in quoted shares or licensed unit trusts; nor do I understand the ratio
in Sackvelle West v Nourse and Another, supra, as imposing such a limitation on
the investment of trust property. (The same may be said of s 9 of the Trust
Property Control Act 57 of 1988 in terms of which a trustee is required to act
"with the care, diligence and skill which can reasonably be expected of a person
who manages the affairs of another".)
16 This was acknowledged in Ex parte van Hasselt 1965(3) SA 553 (W)
where an order was granted investing a curator bonis with authority to invest and
reinvest the patient's funds in preferent and ordinary shares on the Johannesburg
Stock Exchange. Similar orders were granted in Ex parte Wagner NO: In Re de
Bie 1988 (1) SA 790 (C) and Ex parte Ewing NO:In Re Sheridan 1995(4) SA 101
(D). In the Van Hasselt case, Hiemstra J, after referring to the Sackville West
case and the effect of the declining value of money on guilt-edged securities,
expressed himself as follows, at 555 H:
"The seventeenth and eighteenth century writers referred to by the Appellate Division in 1925 expressed no preference for a particular type of security. They merely insist on prudence on the part of a trustee. To suggest that investment in a portfolio of shares ipso facto involves so much 'uncertainty and risk' that the whole undertaking automatically betrays lack of 'due care and diligence' is in my view unrealistic."
I agree. Nonetheless, it must not be overlooked that every investment in shares
(and unit trusts) carries with it the inherent risk of capital loss. A trustee
17 exercising due diligence and care will bear this in mind when purchasing shares
both in regard to their selection and the balance of his share portfolio. He will
accordingly avoid investments which are of a speculative nature. The extent to
which it will be prudent to invest in the share market must necessarily depend on
the circumstances of each case. Generally speaking, however, a trustee will as far
as is practicable seek to spread the investments of the trust over various forms of
undertaking in order to obtain a balance of stability and growth in the capital value
of the trust and the income it produces.
The Court a quo was prepared to authorize the appellants to invest trust funds in the purchase of quoted shares, and licensed unit trusts, but subject to the restrictions to which I have previously referred. It is these restrictions which form the subject matter of the present appeal and to which I now turn.
The basis upon which they were imposed is set forth in the following
18
passage in the judgment of Farlam J:
"In regard to the relief set out in para (d) of the rule nisi, I do not think it appropriate for the applicants to have the power sought. In my view, it would be more appropriate to give a power to invest an amount not exceeding 50% of the value of the trust estate in shares quoted on the Johannesburg Stock Exchange, or licensed unit trusts, subject to the trustees obtaining advice from an independent stockbroker before buying and selling shares or unit trusts and such stockbroker approving all such investments and reinvestments in writing, and subject further to the rendering of quarterly reports to the Master setting out details of investments made in shares or unit trusts. This was ordered at least as far as shares were concerned in Ex parte Ewing NO; In re Sheridan 1995 (4) SA 101 (D) and I agree with the approach set out therein. It was argued that the requirement of the approval of an independent stockbroker is unnecessary because the Board of Executors has its own highly competent investment analysis and research staff. That may be so, but
it is still desirable that independent stockbroking advice and approval be obtained." (259J - 260C)
It is convenient to consider seriatim each respect in which the order granted by the
Court a quo departed from paragraph (d) of the rule nisi which, as I have
indicated, reflected the order sought in the notice of motion.
19
The first is the restriction that no more than 50% of the value of the
trust estate is to be invested in shares or unit trusts. There is nothing in the evidence to support the imposition of such a limit. On the contrary, Bechet in his affidavit stressed the need for flexibility in the administration of a trust, particularly one intended to be of long duration. The need for flexibility would seem to be self evident. The prudence of an investment and, indeed, of the overall spread of investments depends upon the circumstances prevailing at any particular time. Once it is accepted that a trustee may legitimately invest trust funds in shares and unit trusts I have difficulty in appreciating what justification there can be for the imposition of an arbitrary limit on the
percentage of the value of the trust that may be so invested. What is prudent in particular circumstances may vary from well below 50% to well above it. The trust is intended to be of long duration. It is the trustees who will be best placed to make appropriate ad hoc decisions
20
from time to time as to what investments will best serve the interest of present and
future beneficiaries of the trust. The Court is not in a position to do so in advance. As counsel for the appellant pointed out, the 50% limit could preclude the appellants from achieving a spread of investments which they consider prudent in the circumstances. Other anomalies may also arise. Counsel postulated the case of the appellants being compelled to dispose of shares at an inappropriate time for no better reason than that the value of the trust's share portfolio with the passing of time had increased so as to exceed the 50% limit, or the appellants finding themselves precluded from purchasing shares which they consider prudent to acquire or from participating in a favourable rights issue without first disposing of shares or unit trusts which they would otherwise have wished to retain.
The Court a quo gave no reasons for imposing the 50% limit. It appears to have done so solely on the basis that a similar order was granted in the
21
Ewing case. But in that case, as in the Wagner case, this is all that was asked for.
Both were cases in which a curator bonis approached the court for greater powers than those originally afforded. In neither was the appropriateness or otherwise of such a limit considered by the Court. In the Van Hasselt case on which the judgments in Wagner and Ewing relied, no limit was imposed. In my view, therefore, the 50% limit imposed by the Court a quo was unjustified.
The second difference between the order sought and the order granted is that in the latter the appellants were restricted to purchasing shares quoted on the Johannesburg Stock Exchange as opposed to "any Licensed Stock Exchange". No reason was given for this restriction. In the Ewing case the curator bonis was authorised to purchase shares quoted on the Johannesburg Stock Exchange but once again this is all that was asked for. In the circumstances of the present case I can see no reason for this restriction, particularly in the light of modem
22 developments. It should also not be overlooked that approximately 50% of the
beneficiaries in the present case will be people living in foreign countries. The
extent of any such off-shore investment would of course be limited by local
legislation.
Next is the requirement that the appellants obtain advice and approval
in writing from an independent stockbroker before investing or reinvesting in
shares or unit trusts. This requirement, too, was contained in the order granted in
the Ewing case; but once again was one included in the terms of the relief asked
for. On the facts of the present case the provision in question would seem to me
to be neither necessary nor appropriate. As previously indicated the appellants,
according to the evidence, will enjoy the benefit of advice from a team of
investment experts at the Board which consults with the major stockbroking firms
in South Africa as well as the senior management of companies in which
23
investment is being considered. The trustees comprise the Board and a partner in
a well-established firm of attorneys; in other words the Board is not the sole trustee. It is clear from the terms of the will that the testator had full confidence in the appellants. I can see no reason why their investment decisions should be subjected to the veto of some unspecified stockbroker;
nor was any reason given by the Court a quo why they should be, save that it was desirable. To my mind the requirement is both unnecessary and contrary to the tenor of the will.
Finally, there is the requirement that the appellants render quarterly reports to the Master setting out details of investments in shares or unit trusts. The Master in his report did not suggest such a requirement. It has its origin once again in the order made in the Ewing case; but here too the order simply reflected the relief claimed. In the Van Hasselt case a similar order was sought. The Master expressed his misgivings about it. At 555H - 556A Hiemstra J said the following:
24
"The Master rightly submits that, if the power should be granted, he does not want to be charged with the duty of approving share
investments. That was the difficulty in Pratt's case, to which I have referred above. Share dealings were authorised, but subject to the approval of
the Master. The Master is however not equipped for the discharge of such a duty, which involves great expertise and minute attention to detail. I do not think he should be burdened with such a responsibility."
This observation is as true today as it was in 1965.I can think of no good reason
why such an order should have been made in the present case; nor was any reason
advanced by the Court a quo. The Master, in any event, has wide powers in terms
of s 16(1) of the Trust Property Control Act 57 of 1988 to call upon trustees at any
time to account to him for their administration of trust property.
It follows from the aforegoing that the order made by the Court a quo
in substitution of paragraph (d) of the rule nisi is wholly at variance with the order
which this Court would have made sitting as a Court of first instance. Save for the
reference to Ewing's case and the view expressed that the substituted order was
25
"more appropriate" or was "desirable", no reasons were given by the Court a quo
for departing from the relief claimed. As pointed out above, the Ewing case affords no support for the substituted order. To the extent, therefore, that the Court a quo relied on that case to justify its order, in my view, it misdirected itself. In all the circumstances, this Court is entitled to interfere even if it is accepted that the discretion exercised by the Court a quo was a discretion in the strict sense and hence of the kind considered in such cases as Ex parte Neethling and Others 1951 (4) SA 331 (A) at 335 E; Commissioner of Inland Revenue v Da Costa 1985 (3) SA 768 (A) at 775 F - G, and Ontvanger van Inkomste, Lebowa, en 'n Ander v De Meyer NO 1993 (4) SA 13 (A) at 28 B - D. (For an example of a "discretion" of a different nature, see Knox D'Arcy Ltd and Others v Jamieson and Others [1996] ZASCA 58; 1996 (4) SA 348 (A) at 360 D - 362 G.)
It follows that in my view the appeal must succeed.
26
The following order is made:
(a)
The appeal is upheld and the judgment of the Court a quo is altered to the extent that paragraph (d) of the rule nisi dated 7 November 1995 is made final and the paragraph (d) substituted by the Court a quo is deleted.
(b)
The costs of the appeal, including those occasioned by the employment of two counsel, are to be paid out of the trust estate
D G SCOTT
SMALBERGER JA)
HARMS
JA) - Concur
ZULMAN JA)
PLEWMAN JA)
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