The fiduciary relationship of trustees

Section 8(1) of the Sectional Titles Schemes Management Act 8 of 2011 (the “STSM Act”) states that each trustee of a body corporate must stand in a fiduciary relationship to the body corporate.

The trustees stand in a fiduciary relationship towards the body corporate, while the managing agent stands in a contractual relationship towards the body corporate, and is still under the supervision of the trustees who maintain their fiduciary obligation to the body corporate.

What does fiduciary relationship mean?

In very simple terms, “fiduciary relationship” means a relationship of the utmost trust.

Section 8(1) of the STSM Act states that the ‘‘fiduciary relationship’’, implies that a trustee:

(a) must in relation to the body corporate act honestly and in good faith, and in particular
(i) exercise his or her powers in terms of the STSM Act in the interest and for the benefit of the body corporate; and
(ii) not act without or exceed those powers; and

(b) must avoid any material conflict between his or her own interests and those of the body corporate, and in particular
(i) not receive any personal economic benefit, direct or indirect, from the body corporate or from any other person; and
(ii) notify every other trustee of the nature and extent of any direct or indirect material interest which he or she may have in any contract of the body corporate, as soon as such trustee becomes aware of such interest.

What happens when trustees act in breach of their fiduciary relationship?

Section 8(3) of the STSM Act sets out that a trustee of a body corporate who acts in breach of his or her fiduciary relationship, is liable to the body corporate for:

(a) any loss suffered as a result thereof by the body corporate; or
(b) any economic benefit received by the trustee by reason thereof.

The exception

In terms of section 8(4) of the STSM Act any particular conduct of a trustee does not constitute a breach of a duty arising from his or her fiduciary relationship to the body corporate if such conduct was preceded or followed by the written approval of all the members of the body corporate where such members were or are cognisant of all the material facts.

What happens when trustees have a personal interest in matters?

PMR 6(3) states that a trustee who has any direct or indirect personal interest in any matter to be considered by the trustees must not be present at or play any part in the consideration or decision of the matter concerned.

Duties of trustees

The reason why trustees are given this legislative fiduciary duty of trust is due to the fact that they are responsible for all the executive functions of the body corporate.

Section 7(1) of the STSM Act states that the functions and powers of the body corporate must, subject to the provisions of the STSM Act, the rules and any restriction imposed or direction given at a general meeting of the owners of sections, be performed and exercised by the trustees of the body corporate holding office in terms of the rules.

Furthermore, Chapter 4 to the Regulations made under the Community Schemes Ombud Service Act 9 of 2011 sets out the promotion of good governance training and education of scheme executives (trustees). Regulation 14(1) states that a scheme executive must:

(a) take reasonable steps to inform and educate himself or herself about the community scheme, its affairs and activities and the legislation and governance documentation in terms of which the community scheme operates;
(b) take reasonable steps to obtain sufficient information and advice about all matters to be decided by the scheme executives to enable him or her to make conscientious and informed decisions;
(c) unless excused by the chairperson of the scheme executives on reasonable grounds
(i) attend all meetings of the scheme executives; and
(ii) attend the community scheme’s annual general meeting, if it holds such a meeting;
(d) exercise an active and independent opinion with respect to all matters to be decided by the scheme executives; and
(e) exercise due diligence in relation to any business of, and necessary preparation for and attendance at meetings of, the scheme executives or any committee to which such scheme executive is appointed.

In terms of regulation 14(2) the obligations of a community scheme executive are in addition to and do not derogate from the fiduciary obligations of a scheme executive in terms of the common law or any applicable statute.

Indemnity of trustees of fiduciary relationship

PMR 8(4) states that the body corporate must indemnify a trustee who is not a managing agent against all costs, losses and expenses arising as a result of any official act that is not in breach of the trustee’s fiduciary obligations to the body corporate.

Fidelity insurance

PMR 23(7) A body corporate must take out insurance for an amount determined by members in general meeting to cover the risk of loss of funds belonging to the body corporate or for which it is responsible, sustained as a result of any act of fraud or dishonesty committed by a trustee, managing agent, employee or other agent of the body corporate.

Chapter 4 to the Regulations made under the CSOS Act set out the promotion of good governance training and education of scheme executives (trustees). Regulation 15 states that:
(1) Every community scheme must insure against the risk of loss of money belonging to the community scheme or for which it is responsible, sustained as a result of any act of fraud or dishonesty committed by any insurable person.
(2) An “insurable person” means any
(a) scheme executive;
(b) employee or agent of a community scheme who has control over the money of a community scheme;
(c) managing agent; or
(d) contractor, employee or other person acting on behalf of or under the direction of a managing agent, who in the normal course of the community scheme’s affairs has access to or control over the monies of the community scheme.
(3) The minimum amount of the fidelity insurance cover is the total value of
(a) the community scheme’s investments and reserves at the end of its last financial year; and
(b) 25 per cent of the community scheme’s operational budget for its current financial year.
(4) The insurance cover must
(a) provide for payment of a loss by the insurer to the community scheme within a reasonable period after reasonably satisfactory proof of the loss has been furnished to the insurer; and
(b) not require that criminal or civil proceedings be taken or completed against the insured person before payment is made under the insurance policy.
(5) A community scheme is not obliged to obtain fidelity cover for an insurable person if that person has delivered to the community schemes written proof that
(a) the monies of the community scheme are covered by fidelity insurance that complies with the requirements of sub-regulations (3) and (4); and
(b) the insurer concerned has noted the community scheme’s interest in the application of the proceeds of the policy and undertaken not to cancel or withdraw cover without giving the community scheme at least 30 days written notice.

Disqualification from office

The provisions of the prescribed management rules that deal with disqualification from office further shows that a person who cannot act with the utmost trust toward the body corporate is unsuitable to hold such position.

The disqualification provisions that relate to a loss of ability to hold a fiduciary relationship with the body corporate are as follows:

PMR 6(4)(b) states that a trustee ceases to hold office if that trustee is declared by a court to be of unsound mind.

PMR 6(4)(c) states that a trustee ceases to hold office if that trustee is or becomes insolvent and the insolvency results in the sequestration of that trustee’s estate.

PMR 6(4)(d) states that a trustee ceases to hold office if that trustee is convicted, or has been convicted in the Republic or elsewhere, of theft, fraud, forgery, perjury or any other offence involving dishonesty.

PMR 6(4)(e) states that a trustee ceases to hold office if that trustee is sentenced to imprisonment without the option of a fine.

PMR 6(4)(f) states that a trustee ceases to hold office if that trustee is removed from an office of trust on account of misconduct in respect of fraud or the misappropriation of money.

PMR 6(4)(g) states that a trustee ceases to hold office if that trustee is removed from office by ordinary resolution of a general meeting; provided the intention to vote on the proposed removal was specified in the notice convening the meeting.

PMR 6(4)(h) states that a trustee ceases to hold office if that trustee is or becomes disqualified to hold office as a director of a company in terms of the Companies Act, 2008 (Act No. 71 of 2008).

PMR 6(4)(i) states that a trustee ceases to hold office if that trustee fails or refuses to pay the body corporate any amount due by that trustee after a court or adjudicator has given a judgment or order for payment of that amount.