6.5 Liability of Trustees

Question 1

What are the expectations placed on trustees?

Answer 1

Trustees are expected to carry out their duties in accordance with the terms of the trust instrument (or the law) and exercise their powers properly

Question 2

What is a breach of trust?

Answer 2

Trustees fail to carry out their duties, either by omission or carrying out an act, which result in a loss suffered by the trust.

The trust is required to be compensated fully for any loss caused by the trustee’s breach

Question 3

How are trustees liable for breach of trust?

Answer 3

Trustees are personally liable for any loss suffered by the trust. There is joint and several liability for a breach of trust to beneficiaries where breach has led to a loss to the trust fund.

Trustees are also liable in respect of breaches of contract and tort involving trust property (they can be indemnified out of the trust property though)

Trustees are personally liable to the beneficiaries for profits gained from breach of trust or loss caused to the trust.

Question 4

Name some examples of situations where trustees can commit a breach of trust?

Answer 4

1) [Wrong recipient] Where they pay trust money to the wrong person

2) [Profit from position] By making a profit out of their position

3) [Unauthorised investments] By investing trust funds in unauthorised investments

Question 5

What are the two distinct remedies available to beneficiaries when there is a breach of trust and the trust suffers a loss?

Answer 5

1) [Tracing] Recovering trust property through tracing: Property that still exists and is identifiable in the hands of the trustees or other persons who have received it

2) [Damages] Claiming damages from the trustee should attempt to recover trust property prove unsuccessful / partly successful

Question 6

What is the rule with recovering trust property and Equity’s darling?

Answer 6

Property cannot be recovered from a bona fide purchaser for value without notice that it was received in breach of trust

Question 7

What is the rule with trustees and compensating for loss?

Answer 7

The trustee is required to compensate the trust fully for any loss caused. They are liable to place the trust in the position that it would have been in had no breach been committed.

(No need to look into causation, foreseeability, remoteness)

Question 8

How does the court determine the liability of trustees when a breach of trust occurs?

Answer 8

Trustees are jointly and severally liable for a breach of trust to their beneficiaries where that breach has led to a loss to the trust fund.

N.B: A trustee will only be liable for their own defective acts or omissions

Question 9

What are some defences available to trustees for a breach of trust? (5 defences)

Answer 9

1) Exemption clause in the trust deed
2) Limitation - proprietary claims are not time-barred
3) Laches (Delay)
4) Consent of the beneficiaries
5) Statutory relief under the TA 1925

Question 10

Explain the defence of an exemption clause in a trust deed for a breach of trust

Answer 10

An exemption clause in the trust deed may protect a trustee who commits a breach of trust.

However, they would still have needed to perform their duties honestly, in good faith and for the benefit of the beneficiaries.

Not available if trustee was aware (had knowledge) that their acts were contrary to interests of the beneficiaries (or recklessly indifferent to those interests)

Question 11

Explain the defence of limitation for a breach of trust

Answer 11

Limitation period has passed - claim is time-barred.

Breach of trust claims - limitation period is 6 years from the date of breach, which is when the right of action accrues.

Period starts when beneficiary’s interest has vested (e.g upon turning 18).

Question 12

What is the exception to the limitation rule for breach of trust?

Answer 12

No limitation period applies where the trustee has acted fraudulently or taken trust property for themselves.

Beneficiaries will not be precluded from taking action in order to recover trust property in these circumstances

Question 13

Explain the defence of laches (delay) for a breach of trust

Answer 13

Can be used even where no limitation period applies.

Equitable doctrine - court will use discretion where there has been an unreasonable delay on the part of the claimant in making their claim and where this delay has prejudiced the trustee.

Should the judge find that the defence applies, they can refuse to allow the claim to proceed.

Question 14

Explain the defence of beneficiary consent for a breach of trust

Answer 14

The beneficiary needs to:
- Have provided informed consent
- Given this consent freely and not been under any undue influence in providing consent
- Have attained the age of majority
- Have capacity

No need to show that the beneficiary has benefitted from the breach, although if this is the case, the court may take it into account.

Question 15

How can a trustee benefit from statutory relief under the Trustee Act 1925?

Answer 15

TA 1925 offers statutory relief for trustees where a breach of trust may have occurred but may be justified: s61 and s62

Question 16

Explain the provision of s61 of the TA 1925 for statutory relief

Answer 16

s61 TA 1925 Statutory Relief - If a trustee may be liable for breach of trust but has acted honestly and reasonably, and ought fairly to be excused, the court may relieve them either wholly or partly from personal liability for the same.

N.B: Provision does NOT apply if trustee is found to be negligent

Question 17

Where is the burden of proof placed to fulfil s61 TA 1925?

Answer 17

On the trustee - the trustee should prove that they acted properly, discharged their duties as any ordinary person of business would if dealing with their own property.

Question 18

Explain the provision of s62 of the TA 1925 for statutory relief

Answer 18

S62 TA 1925 Statutory Relief - Beneficiary requests in writing that the trustee commit a breach of trust

The court has discretion to use the beneficiary’s interest in the trust to indemnify the trustee who has committed a breach.

N.B: Not necessary to show that the beneficiary actually benefitted from the breach

Question 19

Explain what is meant by ‘tracing’?

Answer 19

Tracing is the process of identifying trust property as it moves through hands, whether in its original format or as a substitute asset

Question 20

What are the advantages of proprietary claims? (there is an interest in the land)

Answer 20

1) Proprietary claims offer priority to the beneficiary of a trust over any other creditors in the event of bankruptcy. This allows them to assert a claim to any increase in the value of the trust property.

2) Proprietary claims are also not time-barred

Question 21

What are the equitable proprietary remedies available?

Answer 21

1) Equitable ownership of the property
2) Equitable charge or lien
3) Subrogation to the interests of a third party creditor

Question 22

Explain how the remedy of ‘equitable ownership of the property’ works for tracing

Answer 22

Full / partial ownership depending upon the share of trust property used.

The equitable owner can force a sale of the property to recover the trust funds, even if they are only entitled to a minority share in a shared property

Question 23

Explain how the remedy of ‘equitable charge or lien’ works for tracing

Answer 23

This remedy places a hold over the property to allow the claimant to recover the value of trust money

Question 24

Explain how the remedy of ‘subrogation to the interests of a third party creditor’ works for tracing

Answer 24

Where trust funds are used to pay off a secured debt, the claimant can assume the position of the repaid secured creditor and revive the debt

Question 25

What are the 2 prerequisites for a tracing claim as outlined by Diplock’s case?

Answer 25

• A fiduciary relationship: the trustee/beneficiary relationship
• An equitable proprietary interest in the property being traced - beneficiaries can generally establish a proprietary interest in the property

Question 26

Where can property be traced to?

Answer 26

Into the hands of:

1) [Trustee] The trustee who has received property in breach of trust

2) [Third party with knowledge] A third party who received it with knowledge that it was received in breach of trust

3) [Innocent volunteer] An innocent volunteer who has received trust property without paying consideration and without any knowledge of the breach of trust

Question 27

When will a proprietary claim not succeed?

Answer 27

Where the property is traced into the hands of Equity’s darling (bona fide purchaser for value without notice) - good faith buyer who has purchased the property and given consideration as they are unaware that it was the subject of a breach of trust

Question 28

What is the rule with Re Hallett?

Answer 28

Where trust property is in the hands of the breaching trustee, Re Hallett gives the beneficiary priority over the interests of the wrongdoer

Question 29

What is the rule with Foskett v McKeown?

Answer 29

When the defendant mixes trust property with their own and uses the mixed funds to purchase a new asset, Foskett v McKeown allows the beneficiary to claim a proportionate share of the new asset

Question 30

What happens when there is a simple substitution of the trust asset for an alternative asset?

Answer 30

The beneficiary can choose to assert a beneficial interest over the new property (useful when this has appreciated in value).

Alternative remedy is to request a charge against the property to raise the money to reimburse the trust

Question 31

What happens where trust property has been mixed with the funds of another beneficiary?

Answer 31

Other party does not have to give priority to the claimant - their shares would be divided proportionately

Question 32

What happens where trust property has been mixed with that of an innocent volunteer?

Answer 32

The claimant can only gain a charge against the property to reimburse the trust fund

Question 33

What happens where trust property has been spent on an unsecure asset or has been dissipated?

Answer 33

It is no longer possible to trace the asset

Question 34

What are the potential defences to a tracing claim?

Answer 34

1) Equity’s darling: A claim will fail if D is a bona fide purchaser for value without notice

2) Dissipation: It will not be possible to trace the trust property if the funds have been dissipated

3) Inequitability: A proprietary claim will not be granted where it would be inequitable in all the circumstances to prioritise the claimant’s interests over those of an innocent volunteer