Large Group 8

Question 1

What can beneficiaries do when a trustee breaches their duties?

Answer 1

Beneficiaries can:

• Bring a personal claim for compensation to recover financial losses caused by the breach of trust.
• Bring a proprietary claim to recover trust property or its traceable substitute if the trustee has wrongfully taken the property.

Question 2

What is a personal claim for breach of trust?

Answer 2

A personal claim allows beneficiaries to sue the trustee personally for the loss caused to the trust fund. The compensation awarded is for the financial loss suffered by the trust.

Question 3

What is a proprietary claim for breach of trust?

Answer 3

A proprietary claim allows beneficiaries to recover specific trust property or a traceable substitute (e.g., property bought with stolen trust money).

Beneficiaries have priority over other creditors if the trustee is bankrupt.

Question 4

What is the key difference between personal and proprietary claims?

Answer 4

A personal claim seeks financial compensation for the loss, while a proprietary claim seeks the return of specific trust property or a substitute asset. In cases of bankruptcy, a proprietary claim gives beneficiaries priority over other creditors.

Question 5

What is the significance of the case Pilkington regarding trustees’ powers?

Answer 5

The case of Pilkington clarified that trustees can use trust funds for the advancement or benefit of beneficiaries, such as saving taxes or paying for education.

Question 6

What happens if a trustee mismanages investments, as in Harry’s case?

Answer 6

If a trustee’s mismanagement of investments causes a loss to the trust, beneficiaries can sue the trustee in a personal claim for compensation equal to the loss (e.g., Harry caused a 30% loss to the trust fund).

Question 7

What is the tracing process, and why is it important?

Answer 7

Tracing is the process of following the property or its substitute through different transactions to determine whether beneficiaries can recover it in a proprietary claim. If trust property has changed form, beneficiaries must trace it to establish ownership.

Question 8

What is a clean substitution in tracing?

Answer 8

A clean substitution occurs when trust property is directly exchanged for another asset without being mixed with other money. Beneficiaries can claim the substitute property or sue for compensation.

Question 9

What happens when trust property is mixed with other funds, as in a mixed substitution?

Answer 9

In a mixed substitution, where trust money is mixed with the trustee’s own money to purchase an asset, beneficiaries can either:

• Claim a proportionate share of the asset based on the trust’s contribution.
• Bring a personal claim for compensation secured by a charge over the asset.

Question 10

What is the rule in Re Hallett’s Estate?

Answer 10

In Re Hallett’s Estate, the court held that a trustee is presumed to spend their own money first when withdrawing from a mixed bank account. This presumption allows beneficiaries to claim the remaining money or assets as trust property.

Question 11

What happens if the trustee’s own money is lost first, as in the casino example?

Answer 11

If the trustee’s own money is lost first (e.g., gambling losses at a casino), the trust property is presumed to remain intact, allowing beneficiaries to claim any remaining property or assets purchased.

Question 12

What is the rule in Re Oatway?

Answer 12

Re Oatway is an alternative rule that benefits beneficiaries by allowing them to claim assets bought with mixed funds, even if the trustee’s own money was spent first. It ensures beneficiaries do not lose out if tracing under Re Hallett would disadvantage them.

Question 13

What happens if trust property is dissipated, as in the case of expensive holidays?

Answer 13

If trust property is dissipated (e.g., spent on holidays or luxury goods), it cannot be recovered through a proprietary claim, and beneficiaries must pursue a personal claim instead.

Question 14

What is the case of Roscoe v Winder about?

Answer 14

Roscoe v Winder established that beneficiaries can only trace trust funds that are still in the account. If the balance drops to zero or is spent, beneficiaries cannot claim subsequent funds paid into the account unless the trustee intended to repay the trust.

Question 15

How does the Limitation Act 1980 affect claims for breach of trust?

Answer 15

The Limitation Act 1980 bars personal claims for breach of trust after six years from the date of the breach, except for fraudulent breaches, which have no time limit. The equitable doctrine of laches may also bar claims if beneficiaries delay unreasonably in bringing an action.

Question 16

What is the doctrine of laches?

Answer 16

Laches is an equitable doctrine that prevents a beneficiary from bringing a claim if they delay for an unreasonable amount of time, and it would be unfair to allow the claim to proceed.

Question 17

What happens if a trustee becomes bankrupt?

Answer 17

If a trustee becomes bankrupt, beneficiaries are advised to bring a proprietary claim because it gives them priority over other creditors. Personal claims rank alongside other creditors’ claims and may result in minimal recovery.

Question 18

What is the trustee’s liability when co-trustees breach their duties?

Answer 18

Trustees are not vicariously liable for the breaches of their co-trustees unless they contributed to the breach by failing to monitor or prevent it. For example, trustees who sign blank checks may be liable for failing to take reasonable care.

Question 19

What is the rule of joint and several liability for trustees?

Answer 19

Trustees are jointly and severally liable for breaches of trust, meaning beneficiaries can sue one or more trustees for the entire loss, even if only one trustee was primarily responsible for the breach.

Question 20

Can trustees claim an indemnity or contribution from co-trustees?

Answer 20

Trustees can claim an indemnity from a co-trustee who acted fraudulently or improperly benefited from the breach. Alternatively, they can claim a contribution from co-trustees under the Civil Liability (Contribution) Act 1978 based on each trustee’s responsibility for the loss.

Question 21

What is the impact of exclusion clauses in trust instruments?

Answer 21

Exclusion clauses in trust instruments may protect trustees from liability for losses, except where the loss was caused by fraud (which includes dishonesty). The validity of an exclusion clause depends on its wording and the trustees’ behaviour.

Question 22

How can trustees be excused from liability under Section 61 of the Trustee Act 1925?

Answer 22

Section 61 of the Trustee Act 1925 allows the court to relieve trustees from liability if they acted honestly, reasonably, and ought fairly to be excused. However, the court is reluctant to excuse trustees who were negligent or passive in their duties.

Question 23

What can beneficiaries do if a trustee is not honest in their handling of the trust?

Answer 23

Beneficiaries can sue the trustee personally for breach of trust and seek compensation for any loss caused to the trust fund. If the trustee has acted dishonestly, exclusion clauses in the trust instrument cannot protect them, and no limitation period applies to the claim.

Question 24

What is the court’s approach to breaches of fiduciary duty as compared to ordinary breaches of trust?

Answer 24

Breaches of fiduciary duty are governed by a stricter regime than ordinary breaches of trust. If a trustee has acted in breach of fiduciary duty, such as benefiting personally from the trust, the court can impose stricter remedies, including requiring the trustee to account for any profit made, even if the beneficiaries suffered no loss.

Question 25

What is a knowing receipt claim?

Answer 25

A knowing receipt claim arises when a third party (not a trustee) knowingly receives trust property or its traceable substitute, which has been wrongfully taken from the trust. The recipient is liable to return the property if they knew or ought to have known that the property came from a breach of trust.

Question 26

What is an equitable charge and how is it used in proprietary claims?

Answer 26

An equitable charge is a type of security interest that beneficiaries can place over trust property or a substitute asset in a proprietary claim. It ensures the beneficiaries’ right to compensation is secured by the property in question. It acts similarly to a mortgage over the property, giving beneficiaries a priority claim.

Question 27

How do limitation periods apply to claims for breaches of trust?

Answer 27

The Limitation Act 1980 sets a six-year limitation period for bringing personal claims for breach of trust. However, this does not apply to fraudulent breaches or claims to recover trust property. Additionally, the equitable doctrine of laches may apply if the beneficiaries delay too long before bringing a claim.

Question 28

What is the significance of the case Target Holdings Ltd v Redferns for breach of trust claims?

Answer 28

Target Holdings Ltd v Redferns clarified that for a personal claim for compensation to succeed, the beneficiaries must show that the trustee’s breach of trust caused a loss to the trust fund. If the loss would have occurred even without the breach, the claim will not succeed.