The Constitutional Court this week dismissed an application by the Living Hands Umbrella Trust (LHUT) for leave to appeal against the Supreme Court of Appeal’s judgment in favour of Old Mutual Unit Trust Managers (OMUT).
“The Constitutional Court has considered the application for leave to appeal. It has concluded that the application should be dismissed with costs as it bears no reasonable prospects of success,” the court said in an order issued on Tuesday.
Xola Stemela, one of the two trustees who brought the application, told Moonstone yesterday they will consider the implications of the order. “Thinking broadly, though, the consequences of the order are not great for the beneficiaries. It was always a remaining hope to all of us. Options, if any the trust has, relating to availability of further funding are limited.”
The litigation between LHUT and OMUT stems from the Fidentia scandal, one of South Africa’s most significant financial fraud cases.
LHUT (previously, the MATCO Trust) held trust assets on behalf of beneficiaries of deceased members of the Mineworkers Provident Fund. The trust held funds for the members’ dependants, most of whom are widows, orphans, guardians of minors, and breadwinners.
In 2002, OMUT was appointed as an investment adviser to the trust administration company, Mantadia Asset Trust Company, in respect of the trust funds under management. OMUT designed the investment portfolio and was contracted to buy, sell, and switch units in the portfolios forming part of collective investment schemes on Mantadia’s instruction.
In 2004, Fidentia Holdings acquired Mantadia, which was renamed Living Hands (Pty) Ltd, and the trust was renamed the Living Hands Umbrella Trust. Fidentia Asset Management (FAM), a wholly controlled subsidiary of Fidentia, was appointed as the trust’s discretionary investment manager.
FAM called up the trust’s entire investment portfolio held with OMUT. Before paying out the funds, OMUT raised concerns with the trust’s administrator and FAM about the validity, scope, and intended impact of FAM’s instructions to liquidate the trust portfolio and transfer the funds to FAM.
After numerous correspondences, and instructions from the trust’s administrator, OMUT paid more than R1.13 billion to the trust’s account, which had come under Fidentia’s control. From the date of receipt of the payments from OMUT, the trust paid more than R1.2bn into bank accounts held by Fidentia and its controlled companies.
Fidentia used the funds to defray business expenses and to acquire property and private equity investments for the Fidentia group. All assets bought were held in the names of Fidentia-owned companies, without any indication that they were held on behalf of the trust.
Fidentia was placed into final curatorship in 2007 following an investigation by the then Financial Services Board into the group. As part of the curatorship process, the plaintiffs recovered some R403.8 million, of which R272.6m was distributed to the plaintiffs after deducting expenses.
Living Hands, the administrator and sole corporate trustee of LHUT, instituted action in the High Court to recover damages of R861 222 095 (amended during the trial to R854 640 000) from OMUT. The second and third plaintiffs were two trustees of the trust.
Although the plaintiffs argued that the loss suffered was a result of Fidentia’s wrongdoing, they alleged that OMUT did not take sufficient steps to safeguard the funds before implementing the transfer to the trust’s account that was under the control of Fidentia. This should have included OMUT’s satisfying itself that FAM would preserve the funds for the benefit of the beneficiaries and act in a prudent and honest manner when managing the funds.
In July 2022, the High Court found that OMUT owed a direct duty of care to the trust under section 71 of Collective Investment Schemes Control Act (CISCA) that ranked higher than its contractual obligations towards the trust administration company. It ordered OMUT to R854 650 643 as damages and R854 650 643 as interest according to the in duplum rule – more than R1.7bn in total.
The High Court’s judgment was regarded as having far-reaching implications for the financial services industry. Every financial institution administering or managing a fund would not only have duties to its principal but also to those to whom the principal owed duties. It also had implication for anyone who is obliged to report a “suspicious” transaction to a regulator.
Supreme Court of Appeal clears OMUT
Old Mutual appealed against the High Court’s decision, arguing against the extent of its liability and asserting it had adhered to the relevant regulatory and fiduciary standards.
In May this year, the SCA overturned the High Court’s ruling.
Judge Ashton Schippers, who wrote the decision, said Living Hands intentionally misappropriated the funds and consequently was the author of its own misfortune. Yet, it asked that liability for damages be imposed on OMUT because OMUT negligently enabled the misappropriation by repaying the funds to Living Hands in accordance with the OMUT agreement and Living Hands’ authorised instruction.
“The proposition needs merely to be stated to appreciate its absurdity,” Judge Schippers said.
He said OMUT acted as any reasonable investment manager would have done. It ensured that the instruction from Living Hands was properly authorised, and then acted upon it as it was contractually bound to do.
“OMUT had no duty to involve itself in the inner workings of the trust, and it was not permitted to refuse to comply with a duly authorised instruction to call up the funds. On this basis alone, the plaintiffs failed to prove wrongfulness. Aside from this, it is clear from the evidence that OMUT could not, and did not, foresee that if the funds were repaid to the first plaintiff, they would be dissipated to the prejudice of the trust and its beneficiaries. Rather, the evidence points the other way,” the judgment stated.
The SCA also concluded that OMUT did not breach its statutory duties.
Section 71 of CISCA did not extend beyond OMUT’s contractual relationship with MATCO/Living Hands. It did not impose a duty on OMUT to act in the best interests of the trust and its beneficiaries. Instead, OMUT’s obligations were to treat the assets as trust property and deal with them according to CISCA, the deed, and in the best interests of the investor (Living Hands).
OMUT’s obligations under CISCA were to Living Hands – not to the trust and its beneficiaries. Consequently, the High Court’s interpretation that section 71 imposed on OMUT a legal duty to deal with money or assets in the best interests of the trust, which “ranks higher” than its contractual obligations to Living Hands, was incorrect.
Similarly, the Protection of Funds Act and the Trust Property Control Act did not impose a duty on OMUT to avoid harm to the trust and its beneficiaries. They require financial institutions to act with utmost good faith and proper care towards the principal (Living Hands), but not to second-guess lawful instructions from the principal or anticipate the principal’s misuse of funds.
The nature of the harm and how it occurred – the loss of the funds because of Living Hands’ own theft and fraud after it had issued a duly authorised instruction to OMUT to release the funds – were not contemplated by the constitutional and statutory provisions on which the plaintiffs relied.
The plaintiffs failed to prove there was a legal duty on OMUT not to cause the financial loss, on account of the contractual relationship arising from the OMUT agreement and the provisions of the trust deed. “There was no contractual relationship between OMUT and the trust and its beneficiaries. That relationship was between the first plaintiff, a trust administration company, and OMUT,” Judge Schippers said.
