Can trustees sell trust property to their own company?

The Supreme Court of Appeal (SCA) recently deliberated on whether a court sanction is necessary to validate the sale of shares owned by a trust to a company controlled indirectly by two of the trustees of the trust. This matter was addressed in the case of Kuttel vs Master of the High Court and Others.

Peter Clark Kuttel, also known as “Padda” passed away on the 20th of May in 2019. He was the husband of Joy and the father of Peter, Francois, and Adrian. During March in 1981, a trust was created with Padda Kuttel being the donor. The couple named the trust the Padjoy Trust, who, along with a chartered accountant, served as the initial trustees of the trust.

The trust was established to acquire and hold assets for the upkeep of Padda and Joy, who were to benefit from it following Padda’s retirement from being a successful businessman. Upon the couple’s demise, the trust’s assets would be distributed equally among Peter, Francois, and Adrian.

The trustees of the trust were Padda Kuttel, until his death, Joy Kuttel, until her death a week before the application was heard, Francois, Adrian and two independent trustees, John Levin and Barry Adams, attorneys of considerable experience and expertise.

Peter was the only son who was not a trustee. Writing the majority judgment, Judge Clive Plasket said, “no doubt, the enmity between Peter and his father, in particular, as well as with the family more generally, probably also contributed to him being the only beneficiary who is not a trustee.”

In 2012, the trustees decided to restructure the trust’s assets as well as those of another related trust. The process was concluded in mid-2013. The sale of the trust’s shares in Southern Ropes (Pty) Ltd to Grace Investments Thirty-Two (Pty) Ltd, a company indirectly controlled by Francois and Adrian, was one part of a bigger process of consolidation of the trust’s assets.

Peter applied to the Western Cape Division of the High Court for an order setting aside the sale by the trust of its shares in Southern Ropes. His application was dismissed with costs, as was his application to the high court for leave to appeal to a higher court. On petition to the Supreme Court of Appeal, it was ordered that Peter’s application for leave to appeal be referred for oral argument.

Three issues arose to determine whether Peter had reasonable prospects of success:

• whether the approval of the court was required for the validity of the sale of the shares;
• whether the transaction was open and bona fide; and
• whether Peter had been treated unfairly by not being allowed to bid for the shares.

The Supreme Court of Appeal found that:

• Peter did not require court approval for the sale of the shares because the rule he relied on applied only to transactions where a trustee purchases the immovable property from a trust;
• considering Francois and Adrian’s disclosure of their interest, the fair determination of the purchase price, and the terms of the trust deed, the transaction was conducted openly and bona fide; and
• to the extent that Peter was treated differently from his brothers, that differentiation was justified in the context of the powers of the trustees, the purpose of the transaction, the effect of the transaction and the fact that Peter as a beneficiary had no right to bid for the shares.

The Supreme Court of Appeal dismissed Peter’s application for leave to appeal with costs.

Reference List:

• Kuttel v Master of the High Court and Others (819/2021) [2022] ZASCA 156

WRITTEN BY JAN VAN ZYL