Fiduciary Duties and Breach of Trust

Question 1

What is the effect of a self-dealing transaction, i.e. where the trustee sells trust property to himself?

Answer 1

Sale becomes voidable by any beneficiary as of right.

Question 2

What is the effect of a fair-dealing transaction, i.e. where the trustee purchases the beneficial interest of any of the beneficiaries?

Answer 2

Transaction can be set aside unless trustee shows

1. Took no advantage of his position
2. Made full disclosure to the beneficiary
3. Transaction was fair and honest

Question 3

Why was the defendant held not to have infringed the self-dealing rule in Holder v Holder?

Answer 3

While he was in name an executor of the will pursuant to which the trust property was sold, he had attempted to renounced that role and had taken no part in the administration of the estate or his duties as executor. Consequently, when he purchased the properties through an agent, there was no conflict of duty and interest.

Question 4

When is the no-profit rule engaged?

Answer 4

Where a fiduciary acquired the profit from a position he was only in by virtue of his position as fiduciary

Question 5

Where the fiduciary has expended significant skill and effort in achieving an unlawful profit, what remedy does he have?

Answer 5

May be entitled to remuneration for valuable services, but this is only to be sparingly authorised - Guinness v Saunders

Question 6

Ratio of Murad v Al-Saraj?

Answer 6

Equity defines ‘profit’ as including all the benefit which the fiduciary has received during the course of the fiduciary relationship, and not merely just the benefit which flows directly from the particular breach of fiduciary duty.

Question 7

Where is a proprietary remedy preferred to a personal remedy against a fiduciary in breach of the no profit rule?

Answer 7

Where the fiduciary still holds the profit or a substitute property (A-G v Reid)

Question 8

What is the limitation period on actions for breach of trust? 3 qualifications?

Answer 8

6 years of the breach EXCEPT

1. Fraud committed by trustee
2. Actions for recovery of property currently in the trustee’s possession or which has been converted to his use
3. Rolling breaches, which reset the clock every day (e.g. bad investments that are ongoing)

Question 9

Are passive trustees liable for the default of an active trustee?

Answer 9

Yes, jointly and severally - barring special circumstances

Question 10

When are lay trustees not liable for the defaults of professional trustees?

Answer 10

Only if the professional trustees exert such influence over the decisions of their fellow lay trustees that they effectively control them (Head v Gould).

Question 11

When will trustees be liable for breaches before their appointment?

Answer 11

Not liable unless they had knowledge to make them suspicious of maladministration

Question 12

4 step process for a prudent new trustee?

Answer 12

1. find out the terms of the trust,
2. inspect the trust instrument and documentation,
3. ensure the trust property is vested in the names of all the trustees and
4. make enquiries where he has any suspicions of past
   breaches

Question 13

When are retired trustees liable for breaches committed after their retirement?

Answer 13

Once they have retired from the trust, retired trustees are no longer liable for any breaches, unless they knew that a breach may well occur

Question 14

2 cases in which trustees may seek indemnity from their fellow trustees?

Answer 14

Where those fellow trustees acted fraudulently or were

professional trustees effectively controlling their decisions.

Question 15

When can retiring trustees seek an indemnity from (i) fellow trustees; and (ii) the beneficiaries?

Answer 15

(i) not minors and have capacity

(ii) not minors, have capacity and have knowledge of the nature of any breach

Question 16

What is the effect of a beneficiary instigating, requesting or consenting in writing to any breach, which causes loss to the trust property and therefore other beneficiaries (2 effects, 3 prerequisites)

Answer 16

3 prerequisites - (i) no fraud; (ii) beneficiary knew the facts; and (iii) beneficiary acted of his own free will

2 effects - (i) trustee is entitled to be indemnified and to any other relief from the court; and (ii) the beneficiary may not sue on that breach and must make up any loss out of his own interest (which can be impounded to indemnify the trustee and any person claiming through him)

Question 17

3 advantages of a proprietary remedy over personal remedy for breach of trust?

Answer 17

1. gives the claimant priority over general
   creditors on insolvency,
2. allows him to claim any increase in the value of the property, and
3. has no statutory limitation period.

Question 18

3 equitable proprietary remedies that can follow a tracing claim?

Answer 18

1. Ownership (note even proportionate ownership enough to force a sale)
2. Equitable lien over property to recover the value of the money traced into the property
3. Subrogation to revive a debt where owner’s money used to pay off debt

Question 19

Property can be traced into the hands of which three categories of persons? When does tracing stop?

Answer 19

1. The fiduciary in breach
2. A person guilty of knowing receipt and
3. An innocent volunteer.

No tracing to Equity’s Darling.

Question 20

Remedy where trust money deposited in defendant’s account?

Answer 20

Under Re Hallett the beneficiary will have a charge over the account for the amount of money misappropriated.

Question 21

Remedy where asset purchased only using claimant’s money?

Answer 21

Under Re Hallett, the beneficiary can choose:
i) Ownership of the property (choose if the property has
appreciated in value); or
ii) A charge over the property for the amount of money
spent on it (choose if the property has depreciated in
value) .

Question 22

Remedy where asset purchased with mixed monies of defendant and claimant?

Answer 22

Under Foskett v McKeown, the beneficiary can choose:
i) Ownership of a proportionate share (choose if the property has appreciated); or
ii) A charge over the property for the amount of money
spent on it (choose if the property has depreciated in
value).

Question 23

Remedy where asset purchased with mixed monies of innocent third party and claimant?

Answer 23

Where all the parties are innocent victims of the mixing, the only option is to share rateably (Re Diplock)

Question 24

Remedy where claimant’s money spent improving a house owned by an innocent volunteer?

Answer 24

Depends on whether house’s value increased (if not, trust money is dissipated). If value increased, then claimant is entitled to a lien up to the amount of trust money spent.

Question 25

Three presumptions that the claimant can choose between where his money has been paid into defendant’s account and then monies are paid out?

Answer 25

1. The defendant (trustee) is presumed to have spent his
   own money first (Re Hallett - use if sufficient money left).
2. If later payments have been dissipated, and the first
   money spent is on a traceable asset, the defendant is
   instead presumed to have protected the trust fund by
   dissipating his own money (Re Oatway - use if insufficient money left).
3. The claimant may also be able to cherry-pick if there are sufficient funds left - choose which payments were his and which were defendants (Shalson v Russo - choose payments that were not dissipated and/or increased in value)

Question 26

When is cherry picking not allowed (2 situations)?

Answer 26

Cherry picking is not allowed where it prejudices the claims of others (i.e., multiple beneficiaries) or lets the claimant double-recover

Question 27

What is the lowest intermediate balance rule?

Answer 27

If the defendant spends the beneficiary’s
money and his account balance drops below the total trust monies misapplied, any money paid into his account from his own funds cannot be used to repay the beneficiary - these payments are not traceable because they were never the beneficiary’s in the first place.

Question 28

What is the difference between a deposit account and a current account where there are payments by a defendant in and out of a bank account containing money belonging to multiple beneficiaries?

Answer 28

Deposit account - the balance in the fund is shared rateably between the beneficiaries.

Current account - the rule is first-in-first-out per Clayton’s case, save where this is (i) impractical; (ii) unjust; or (iii) the fund is intended to be shared rateably

Question 29

What are three defences to a proprietary claim?

Answer 29

1. Equity’s Darling
2. Dissipation; or
3. Inequitable

Question 30

Why was the beneficiary’s claim to a lien refused in Re Diplock?

Answer 30

The money had been used to improve existing hospital facilities and the money could only be repaid by selling the hospital, so it would have been inequitable to recognise the beneficiary’s lien and allow them to force a sale.

Question 31

Boscawen v Bajwa gloss on Re Diplock?

Answer 31

lnequitability should be confined to the facts of Re Diplock - it only applies to situations where an innocent volunteer spends a donation on a pre-owned asset.

Question 32

When does the personal action in Re Diplock lie? What is the defence and what are its requirements?

Answer 32

Available against those who have received money wrongly paid out in the maladministration of a deceased’s estate - these third party recipients can be sued for the balance sum and interest after the trustee has been sued.

Defence of change of position - extraordinary expenditure in reliance of receipt of the money (i.e. not repayment of debts), in good faith

Question 33

What are the 3 grounds on which a stranger to a trust can be liable to a beneficiary?

Answer 33

1. Dishonest assistance
2. Knowing receipt
3. Intermeddling - liable as a constructive trustee in the same way as an express trustee

Question 34

What are the 2 elements of dishonest assistance?

Answer 34

1. Actus reus - anything making the breach of trust easier (passive suspicion does not suffice - Abou Rahmah), must have some causative effect
2. Mens rea - dishonesty, i.e. his knowledge of the relevant transaction was such as to render his participation contrary to normally acceptable standards of honest conduct (suspicion suffices - Barlow Clowes)

Question 35

What are the 3 elements of knowing receipt?

Answer 35

1. Situational - disposal of the claimant’s assets in breach of fiduciary duty
2. Actus reus - Beneficial receipt of assets traceable to the claimant
3. Mens rea - Knowledge on the part of the defendant that the assets were subject to a breach of trust, sufficient such that it would be unconscionable for him to retain the benefit of the receipt

Question 36

Four general bars to an order for specific performance

Answer 36

1. Type of contract (e.g. contract for service, contract for sale of unique goods, performance not clearly defined)
2. Supervision - no SP if the compliance with the order requires constant supervision by the court
3. Mutuality - both parties must be able to obtain SP against the other
4. Unnecessary hardship to defendant or a third party
5. Unclean hands - the claimant must have clean hands and be willing to perform all his own obligations under the contract

Question 37

Test for search order (5 steps)

Answer 37

1. Extremely strong prima facie case
2. Potentially very serious damage to claimant
3. Clear evidence defendant has the relevant item in possession
4. Real possibility defendant will destroy or hide the evidence
5. Proportionate response to a claim

Question 38

4 requirements for enforcement of search order?

Answer 38

1. Between 9.30 and 17.30
2. In the presence of an independent solicitor
3. In the presence of the defendant
4. No forced entry (though if Df refuses he will be in contempt of court)

Question 39

3 requirements for interim mandatory injunction

Answer 39

1. Not enough time to go to full trial and wait for SP - i.e., urgency
2. High degree of assurance that the claimant will win at full trial
3. Will not have the same effect as SP, or SP would be an appropriate remedy

Question 40

3-step test for interim prohibitory injunction

Answer 40

1. There is “a serious question to be tried” (SOME chances of success)
2. Balance of convenience and adequacy of damages - (i) if injunction refused; (ii) if injunction wrongly granted; (iii) other factors
3. Favour preservation of the status quo ante - last state of affairs before the last wrong alleged, which generally favours granting the injunction

Question 41

3 step analysis for freezing order.

Answer 41

1. Good arguable case (fairly likely to win)
2. Legally owns assets in the jurisdiction
3. Real risk that defendant will dispose of or remove the assets

Question 42

3 defences to applications for injunctive relief

Answer 42

1. Claimant’s conduct - unclean hands
2. Laches - failure to seek remedy at earliest opportunity
3. Acquiescence by claimant in the alleged breach, which has been relied upon by the claimant