Fiduciary Duties

Question 1

Who can be a fiduciary

Answer 1

Someone who has undertaken to act on behalf of another in circumstances that give rise to a relationship of trust and confidence.

E.g.
a) trustees, who owe fiduciary duties to beneficiaries;
(b) company directors, who owe fiduciary duties to their company;
(c) business partners, who owe fiduciary duties to each other;
(d) agents, who owe fiduciary duties to their principal;
(e) senior employees with access to confidential information, who owe fiduciary duties to their employer; and
(f) solicitors, who owe fiduciary duties to their client.

Question 2

The core fiduciary duty

Answer 2

The fiduciary must not:
(a) put themselves in a position where their own interests conflict with the interests of their principal (the ‘no conflict’ rule); and
(b) make an unauthorised personal profit from their position or use their principal’s property to make such a profit (the ‘no profit’ rule).

If the trustee acts for their own benefit rather than the trust’s and makes a personal profit, the trustee will be obliged to account for that profit, ie pay it over to the trust.

Liability is applied strictly.

Question 3

When trustees can make a personal profit

Answer 3

Trustees can keep personal profits if:
(a) this is authorised by the declaration of trust;
(b) all the beneficiaries are aged 18 years or over, know the full facts and consent; or
(c) this is authorised by a court order or by statutory provision.

Question 4

Breaches of fiduciary duty - self-dealing

Answer 4

If a trustee sells property to, or purchases property from, the trust, the trustee will put themselves in a position of conflict.

Rule has been applied strictly. The courts do not consider whether or not the trustee has paid fair value for the property or whether the trustee was acting honestly.

A trustee cannot get around the self-dealing rule by retiring from the trust before purchasing trust property. If the trustee has retired with the object of purchasing trust property, then they will still be caught by the rule and the beneficiaries will still be able to set the transaction aside.

Question 5

Breaches of fiduciary duty - competition with the trust

Answer 5

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. If the beneficiaries become aware that the trustee is planning to set up a competing business, they can obtain an injunction to prevent this from happening.

Question 6

Breaches of fiduciary duty - remuneration of trustees

Answer 6

Trustees cannot demand payment for their services from trust funds unless authorised by:

(a) Express provision in the trust deed.
(b) The beneficiaries consenting.
If the beneficiaries are all 18 years or above, they can agree to pay the trustees remuneration. However, the agreement must be fair and the trustees must make full disclosure of all relevant facts, otherwise the beneficiaries can set aside the agreement at a future date.
(c) Court order.
The court should order remuneration if it is in the interests of the beneficiaries because, for instance, the trust needs the skill of the trustee in question and their fees are not excessive compared with those of other professionals.

d) A trust corporation can receive renumeration and
A trustee acting in professional capacity who is not a sole trustee, and where the other trustees have agreed in writing.

Whether or not a trustee is entitled to charge fees for their work, trustee can be reimbursed from the trust fund for any expenses properly incurred when acting on behalf of the trust (such as the cost of travelling to trustee meetings).

Question 7

Breaches of fiduciary duty - incidental profits

Answer 7

• Commission
  Fiduciary duty also prevents trustees from making incidental profits (the receipt of money from third parties)
• Directors salary
  If trustee and director in company that’s part of trust, have to surrender salary to trust, if they acquired the directorship only by virtue of being a trustee.

Question 8

Breaches of fiduciary duty - use of information or opportunity

Answer 8

A trustee is liable to account for any profits they receive where they received that profit by exploiting an opportunity that belonged to the trust.

A trustee who makes use of confidential information for their own personal gain when they only became aware of the information due to their trusteeship will have to account for any profits they receive.

Question 9

Remedies

Answer 9

If a trustee breaches their fiduciary duty and they have not obtained authorisation to keep any personal profit, the beneficiaries are entitled to bring either:

(a) a personal claim that the trustee pays over their unauthorised profit.

and/or

(b) a proprietary claim.
A proprietary claim will seek to recover property owned by the trustee that represents the personal profit they received.