12 - Remedies Against Trustees: Personal Claims Flashcards
What are the two main categories of claims that beneficiaries can bring against trustees for breaches of duty?
Beneficiaries can bring two main categories of claims against trustees:
Personal claims: These are claims for monetary compensation against the wrongdoing trustee(s). The claim is ‘personal’ as the trustee(s) must satisfy the claim from their own property or funds.
Proprietary claims: In these claims, the beneficiary seeks the return of property owned by the trust or in the hands of the trustee representing trust property. The claim is ‘proprietary’ because the beneficiary targets specific property, utilising ‘tracing rules’ to trace trust property into the hands of the trustee.
What conditions must be met for a beneficiary to bring a personal claim against a trustee, and what limitations exist?
A beneficiary can seek compensation through a personal claim if a trustee’s wrongdoing causes a loss to the trust.
Key points include:
- The claim is against the trustee personally, requiring them to satisfy it from their own property or funds.
- A personal claim is only viable if the trustee is financially solvent; assessing the trustee’s financial standing is advisable before bringing such a claim.
Limitations on personal claims include:
- Insolvency: If the trustee is insolvent, the beneficiary ranks as an unsecured creditor in bankruptcy, recovering little to nothing.
- Use of trust property: If trust property was used to buy something the beneficiary deems attractive, a proprietary claim should be asserted to recover that property.
- Time limitation: Personal claims can be statute-barred six years after the breach date, while proprietary claims are not subject to such limitation.
How do the circumstances of trusteeship influence whether a personal or proprietary claim should be pursued?
Circumstances influencing the choice between personal and proprietary claims include:
Example 1: If a trustee, Breesha, sold £250,000 worth of trust investments without proper financial advice, Fynn, the beneficiary, must bring a personal claim against her for the loss, as no trust property was taken out, so a proprietary claim is not possible.
Example 2: If Asher, another trustee, buys a valuable painting with trust money and later becomes bankrupt, Iona, the beneficiary, should pursue a proprietary action to recover the painting, as it would not be part of Asher’s bankruptcy assets.
Example 3: If Asher is solvent, Iona may pursue a proprietary claim for the painting, and if it turns out the painting’s value decreased, she can also bring a personal claim for the remaining loss.
What constitutes a breach of trust and how must a beneficiary identify it to bring a personal claim against a trustee?
The trustee must have done something wrong in the running of the trust, e.g., a breach of powers or duties.
For example, if trustees Susan and Yvonne sign blank cheques to speed up trust business, and Susan uses those cheques to steal £50,000 from the trust, she has clearly breached trust.
However, if she cannot be found, the beneficiaries may bring a claim against Yvonne for breaching her duties of care by allowing Susan to misuse the cheques.
hat conditions determine which trustees can be subject to a personal claim, and how is liability structured among them?
To bring a personal claim against a trustee, that trustee must be in breach of trust.
Key points include:
- Trustees are not vicariously liable for the defaults of co-trustees.
- If a trustee has breached trust, causing loss, they can be named as a defendant in a personal claim.
- If multiple trustees have breached trust, their liability is joint and several, meaning beneficiaries can choose to claim against all or an individual trustee for the full loss.
For instance, in the case of trustees Rose and Matthew, Rose breached trust by purchasing prohibited investments, while Matthew breached trust by failing to supervise her. They are both jointly and severally liable, allowing beneficiaries to claim against the wealthier trustee, Rose, for the full loss.
How is causation established in a personal claim against trustees for breach of trust?
To successfully claim compensation, beneficiaries must establish causation, demonstrating that the trustees’ breach of trust caused the loss suffered. This involves:
- Satisfying the ‘but for’ test, showing that the loss would not have occurred but for the breach of trust.
- If the loss would have happened regardless of the breach, the personal claim will fail.
For example, in the case of trustees Susan and Yvonne, Yvonne’s failure to supervise and correct Susan’s misconduct enabled the loss to happen. Had Yvonne acted correctly, Susan would likely not have been able to steal £50,000 from the trust. Therefore, Yvonne is jointly and severally liable for the loss despite Susan being more morally culpable.
hat challenges do beneficiaries face in proving causation regarding investment decisions made by trustees?
Beneficiaries can face difficulties in proving causation in personal claims related to trustees’ investment decisions due to the following reasons:
- The beneficiaries must show that the trustees’ decisions constituted a breach of trust and that this breach caused the loss.
Example:
- In the case of Nestle v National Westminster Bank plc, although the trustees failed to make proper investments, Edith Nestle could not demonstrate that no reasonable trustee would have acted similarly given the complexities of the trust’s interests.
- The Court determined that the trustees’ investment inactivity did not amount to a breach, as another reasonable trustee might have made the same decisions.
- Without evidence that the trust fund would have been worth more under different management, the claim failed, illustrating the challenge beneficiaries face in establishing a direct link between the trustees’ actions and the resulting loss.
What is the value of a personal claim for breach of trust regarding compensation for beneficiaries?
So long as the beneficiaries can satisfy the necessary elements of a personal claim, they can recover compensation equal to the loss to the trust, plus interest from the date of breach. Key points include:
- The rate of interest is at the discretion of the court.
- It is usually the rate allowed on the court’s short-term investment account.
- The compensation reflects the actual loss suffered due to the trustees’ breach of trust.
What defences might trustees use against personal claims for breach of trust?
The following defences might be available to a trustee facing a personal claim for breach of trust:
Exemption clauses in the trust deed that can relieve trustees from liability for negligent or innocent breaches; such clauses are void if they attempt to exclude liability for fraudulent breaches.
Knowledge and consent of the beneficiaries; if all beneficiaries have consented to the course of action constituting a breach of trust, they cannot subsequently bring a claim against the trustees. The consent must be fully informed and freely given.
Section 61 of the Trustee Act 1925, which grants the court discretion to relieve trustees from liability, wholly or in part, if they acted honestly and reasonably and ought fairly to be excused.
Limitation and laches; A personal claim for breach of trust is subject to a six-year limitation period starting from the date of breach, with specific rules for minors and remainder beneficiaries.
What is the significance of limitation periods and laches in personal claims for breach of trust?
Limitation Period: A claim is subject to a six-year limitation period as per Section 21 of the Limitation Act 1980, usually starting from the date of breach. Proprietary claims are not subject to the limitation period.
For minors, the limitation period begins when they reach the age of 18 years; for remainder beneficiaries, it starts when their interest falls into possession (i.e., when the life tenant dies).
The six-year period does not apply against trustees who have committed a fraudulent breach of trust.
Doctrine of Laches: In the absence of a statutory limitation period, laches may prevent a claimant from asserting a personal claim if:
- The claimant knows the facts giving rise to the breach of trust.
- The claimant delays in taking action.
- This delay either constitutes acquiescence or waiver of the breach, or causes detriment or prejudice to the trustee.
Delay alone is typically insufficient; the court requires evidence of prejudice. For example, in Schulman v Hewson [2002] EWHC 855 (Ch), a defence of laches succeeded where the claimant delayed approximately 15 years to start proceedings, despite knowing of the breach, leading to difficulties in the defendant’s ability to prove their defence due to the death of witnesses and destruction of documents.
How do exemption clauses function in the context of breach of trust?
Exemption clauses can protect trustees from liability for breach of trust if included in the trust deed. Important points include:
- Such clauses can relieve trustees from liability for negligent or innocent breaches but are void if they try to exclude liability for fraudulent breaches.
- Professional trustees who cause a settlor to include a clause in a trust deed that has the effect of excluding or limiting liability must, before the creation of the trust, take reasonable steps to ensure that the settlor is aware of the meaning and effect of the clause.
- Any ambiguity in the clause will be interpreted strictly against that professional trustee.
In what circumstances can beneficiaries consent to a breach of trust, and what are the implications?
Beneficiaries can consent to a breach of trust, which means they cannot later bring a claim against the trustees. Key points include:
- The consent must be fully informed and freely given.
- The consenting beneficiaries must be adults and of full capacity; a minor cannot give valid consent.
- If only one beneficiary consents to a breach of trust, that beneficiary can no longer bring any personal claim against the trustees, but the other non-consenting beneficiaries can still pursue a claim.
What does Section 61 of the Trustee Act 1925 state regarding trustee liability?
Section 61 of the Trustee Act 1925 states that the court has discretion to relieve trustees from liability if:
- They acted honestly and reasonably, and ought fairly to be excused.
- For instance, a lay trustee like Katie, who makes an honest mistake regarding entitlement, may be excused from liability, while a professional trustee, such as a solicitor, is unlikely to receive the same level of sympathy from the court.
What is the nature of equitable indemnity among trustees in breach of trust?
Equitable indemnity allows a trustee who is sued for breach of trust to recover a full indemnity from a co-trustee who:
- Acted fraudulently while the other trustees acted in good faith;
- Is a solicitor who exercised such a controlling influence that the other trustees blindly followed their advice without questioning it;
- Benefited personally from the breach of trust; or
- Is also a beneficiary who benefited from the breach, with the indemnity limited to the value of their equitable interest, which will be impounded to meet the claim.
Example:
In a trust created in 2008 for beneficiaries Aled and Fiona, valued at £500,000, John, a solicitor, and Sadie, a waitress, are appointed as trustees.
- The trustees advanced £200,000 to Aled, which breached the trust, as any advancement of capital was limited to half the value of each beneficiary’s presumptive share (up to £125,000 each).
- Upon discovering this, Fiona brings a personal claim against both trustees.
- Sadie argues that she wanted to be involved in the management but was advised by John that the advancement was appropriate.
- In these circumstances, Sadie may be able to claim an equitable indemnity against John, meaning John will ultimately bear the financial consequences of any compensation awarded to Fiona.
What is the basis for contribution among trustees under the Civil Liability (Contribution) Act 1978?
Pursuant to Section 1 of the Civil Liability (Contribution) Act 1978, the court can:
- Order a co-trustee to make a contribution that is just and equitable, having regard to the extent of that co-trustee’s responsibility for the loss.
- The contribution can be up to 100% of the compensation ordered by the court.
- When deciding how to exercise its discretion, the court will primarily reflect on the blameworthiness of the co-trustees involved in the breach of trust.
