11 - Trustees: Fiduciary Duties Flashcards
What is the role and significance of a trustee’s powers under common law?
A trustee has all the powers available to them under common law to manage property, appearing to the outside world as if they were the absolute owner of the trust property.
These extensive powers are necessary for the proper management and administration of property for the benefit of the beneficiaries, but they also create a risk of abuse.
The fiduciary relationship and duties are designed to prevent this abuse, applying strict rules to ensure trustees do not prioritise their own interests over those of the trust.
Who can be a fiduciary?
A fiduciary is someone who undertakes to act for or on behalf of another in a particular matter, creating a relationship of trust and confidence.
The following can be fiduciaries:
- Trustees (owe duties to beneficiaries)
- Company directors (owe duties to the company)
- Business partners (owe duties to each other)
- Agents (owe duties to their principal)
- Senior employees with access to confidential information (owe duties to their employer)
- Solicitors (owe duties to their clients)
What is the core fiduciary duty of a trustee (no conflict, no profit)?
The core fiduciary duty of a trustee is based on the principles of loyalty and the ‘no conflict’ and ‘no profit’ rules:
No conflict rule: The trustee must not place themselves in a position where their own interests conflict with those of the trust or beneficiaries.
No profit rule: The trustee must not make an unauthorised personal profit from their position or use the trust’s property to make a profit. If the trustee acts for their own benefit and makes a personal profit, they must account for that profit and pay it over to the trust.
What are the implications of a trustee breaching their fiduciary duty?
If a trustee breaches their fiduciary duty by making a personal profit:
- The court will apply strict liability, and the trustee will have to account for that profit, regardless of their honesty or the effort they put into making the profit.
- The trust does not need to have suffered any loss, and the fact that the trust may have chosen not to take up the opportunity is irrelevant.
- This strict rule serves as a deterrent, ensuring trustees are always motivated by the best interests of the trust.
When can trustees keep a personal profit?
Trustees can keep personal profits in the following situations:
- If authorised by the declaration of trust.
- If all beneficiaries are 18 years or over, are fully informed, and give their consent.
- If authorised by a court order or by statutory provision.
What is self-dealing in the context of fiduciary duty?
A trustee may be tempted to sell to, or purchase property from, the trust, effectively selling trust property to, or purchasing trust property from, themselves.
The trustee is the legal owner of trust property and has the power to sell it.
If a trustee engages in this type of transaction, they place themselves in a position of conflict.
For instance, if a trustee is purchasing land from the trust:
- As the seller, acting in the interests of the trust, they want the purchase price to be as high as possible.
- As the buyer, acting in their own self-interest, they want the purchase price to be as low as possible.
Beneficiaries can set the transaction aside at a later date, known as the ‘self-dealing rule’.
The transaction is not automatically void; beneficiaries may decide the transaction was a good deal for the trust.
The self-dealing rule has been applied strictly; the courts do not consider whether the trustee has paid fair value or acted honestly.
How does competition with the trust relate to a trustee’s fiduciary duty?
- Where the trust includes a business, the trustee must not set up their own business in competition.
- If they do so, they will be liable to account for any profits made by their competing business.
- Beneficiaries can obtain an injunction to prevent the trustee from setting up a competing business if they become aware of such plans.
What are the circumstances under which a trustee can demand remuneration for their services?
Trustees cannot demand payment from trust funds unless authorised by:
Express provision in the trust deed: A clause authorising remuneration in the declaration of trust.
Beneficiary consent: Beneficiaries aged 18 or over can agree to remuneration, but it must be fair with full disclosure of relevant facts.
Court order: The court can order remuneration if it is in the beneficiaries’ interests and the fees are not excessive compared to other professionals.
TA 2000: A trust corporation or a trustee acting in a professional capacity is entitled to receive reasonable remuneration, provided other trustees have agreed in writing. E.g., a financial advisor acting as a trustee is entitled to remuneration, but a dentist acting as a trustee is not.
Reasonableness will depend on the nature of the services, size of the trust, and attributes of the trustee.
How do incidental profits, such as commissions and directors’ salaries, relate to fiduciary duties?
Trustees must not make unauthorised profits from the trust, including incidental profits from third parties.
- Example: A trustee receives commission for placing trust business with a particular firm and must account for it unless authorised by the trust deed.
Regarding directors’ salaries, if a trustee-director is appointed due to their trusteeship, they must surrender any salary to the trust unless there is authorisation.
- Example (a): A trustee who becomes a director independently of the trust’s shareholding can keep their salary.
- Example (b): If a trustee only becomes a director due to their trusteeship, they must account for their salary to the trust.
How does a trustee’s use of information or opportunity affect their fiduciary duties?
A trustee is liable to account for profits received by exploiting an opportunity belonging to the trust or using confidential information for personal gain.
Example: In Boardman v Phipps, a solicitor acting for the trustees gained valuable information about a company and made a profit by purchasing shares, which he had to surrender to the trust.
The court maintained that the slightest possibility of conflict obliges trustees to pay personal profits to the trust, regardless of their honesty or the trust’s lack of interest in the opportunity.
Trustees need authorisation from beneficiaries or the court to exploit opportunities that belong to the trust.
What remedies are available to beneficiaries when a trustee breaches their fiduciary duty by obtaining unauthorised personal profit?
Beneficiaries are entitled to bring either:
(a) A personal claim:
- The trustee must pay over their unauthorised profit to the trust.
- This claim does not follow the usual loss measures from contract or tort.
- The trustee is not compensating for any loss caused by their actions; the trust may not have suffered any loss.
- Example: If a firm pays commission to a trustee for placing trust business, and the trust profits significantly from the firm’s services, beneficiaries can still bring a personal claim against the trustee for the commission, even if the trust has not suffered a loss.
- The trustee must surrender any unauthorised personal profits secured by virtue of their position.
(b) A proprietary claim:
- A proprietary claim seeks to recover property owned by the trustee that represents the personal profit they received.
- Example: If a trustee makes an unauthorised profit of £400,000 by exploiting an investment opportunity belonging to the trust and uses this profit to buy shares in Astrid plc, beneficiaries could require the trustee to convey the shares to the trust.
- This claim is particularly attractive if the shares have increased in value, as the trust would benefit from this appreciation.
Provide a summary of fiduciary duties.
Who can be a fiduciary:
Fiduciary relationships extend far beyond trusts. Solicitors acting in commercial, corporate and employment departments have to have a good working knowledge of fiduciary duties.
The core fiduciary duty:
A fiduciary relationship is one of the utmost loyalty. A fiduciary must work whole- heartedly and solely for their principal. A trustee’s attention and effort must be concentrated wholly on the trust. They must not use their position as fiduciary to secure a personal profit.
They cannot allow their own self- interests to conflict with the interests of their principal. If they do so, however honest and well- intentioned they might be, they will be held to account.
Breaches of fiduciary duty:
Over the years, the courts have come across various examples of the ways in which trustees can prefer their own self- interests. These range from purchasing trust property, to the receipt of profits from third parties, to the exploitation of information or opportunities that properly belong to the trust.
In each case, the trustee allowed their own self- interest to conflict with the interests of the trust.
Authorisation as a defence:
If the trustee secures a personal profit from their position as trustee, they will only be allowed to keep that personal profit if (a) the trust deed allows this, (b) the beneficiaries consent (the trustee must secure the consent of all beneficiaries, who must be 18 years or over and fully informed of the material facts) or (c) the court or statute authorises this.
Remedies:
If the trustee obtains a personal profit in breach of fiduciary duty, the beneficiaries can either (a) bring a personal claim against the trustee requiring the trustee to account for their profits (whether or not the trust has suffered a loss)
or (b) bring a proprietary claim if the trustee has used their personal profits to purchase property.
