Liability of Trustees

Question 1

What questions should be asked in relation to breach of trust by trustees?

Answer 1

(1) Did the trustee(s) act in accordance with their powers?

(2) If so, did they comply with their trustee duties?

Question 2

What are examples of acting outwith trustee powers?

Answer 2

• making an unauthorised investment
• wrongful distribution
• misappropriation of trust property (this would also be a breach of fiduciary duty)

Question 3

What happens if a trustee has misapplied or misappropriated trust property?

Answer 3

The beneficiaries may seek to recover the property itself (or its traceable proceeds)

Question 4

What happens if the trustee has misapplied or misappropriated trust property and it is not possible or desirable to recover the trust property or the breach has not involved a misapplication of trust property?

Answer 4

The beneficiaries instead may seek an equitable compensation to reflect loss

Question 5

Are trustees liable for losses that did not arise as a result of a breach of duties by them?

Answer 5

No - they are not insurers.

If trustees comply with all their duties and loss still occurs (ie market dip) then trust fund must bear loss.

Question 6

How is loss to the trust fund to be assessed?

Answer 6

Loss is to be assessed at the date of trial rather than date of breach and involves taking an account to determine the expected value of the trust fund.

If actual value of trust fund is lower than the expected value of the trust fund, then trustees will be personally liable to compensate the trust fund for the difference

Question 7

What is relevance of the breach when doing the calculation to ‘take an account’ of loss to the trust fund?

Answer 7

Misapplication of trust funds and other types of breaches will attract different remedies

Question 8

What will the court take into account will considering value of loss in cases of breach by misapplication of trust fund?

Answer 8

Court will ‘falsify’ account of trusts.

This requires the trustees to return the trust fund to the same position it would have been in if the misapplication had not occurred, ideally restoring the same type of property to the fund.

If not possible to restore the same type of property to the fund, the trustees will need to pay equitable compensation in lieu (to the value of the property that should have been restored.

Question 9

If the misapplication has instead resulted in a gain rather than a loss to the trust fund, what can beneficiaries opt to do instead?

Answer 9

They can elect to affirm the transaction instead

Question 10

What will the court take into account when considering value of loss in cases of breach other than that by misapplication of trust fund?

Answer 10

The court will ‘surcharge’ or make ‘reparation claim’.

Court will look to assess expected value of the trust fund if the breach had not occurred. Trustee will be required to pay equitable compensation for loss of which the breach can be shown to be a ‘but for’ cause.

Court will consider what a hypothetical prudent body of trustees would have done in the circumstances

Question 11

How does the court’s approach to assessing loss change if the trust is a bare commercial trust oppose to a traditional trust?

Answer 11

Loss caused by breach of bare commercial trust will only be assessed on a ‘but for’ basis

Question 12

Can trustees generally offset losses with gains to trust fund?

Answer 12

No. Trustees to assessed to standards on every transaction, not their average performance.

Question 13

When can trustees offset losses with gains?

Answer 13

Where they arise from the same transaction or course of dealings (ie both from the one breach)

Question 14

What possible defence may the trust instrument provide trustees who breach trust?

Answer 14

May be an exemption clause which limits or excludes the trustee’s liability for particular sorts of breach

Duty still exists but trustees will be protected from breach

Question 15

Are there limitations to exemption clauses?

Answer 15

Yes - cannot exclude liability for fraudulent breaches (ie trustee acted dishonestly)

Question 16

How could consent of beneficiaries provide a defence for trustees who breach trust?

Answer 16

Trustees will not be liable if they receive the fully informed consent of all the beneficiaries

Even if they do not get the consent of all beneficiaries, they will have a partial defence against those beneficiaries who do consent

Question 17

What is the effect of beneficiaries instigating or requesting a breach of trust?

Answer 17

Trustees will have a defence against them or just partial defence if not all the beneficiaries

Question 18

How can beneficiaries acquiesce to breach of trust? What is the effect of this?

Answer 18

Beneficiaries can acquiesce by indicating through words or actions that they consent to breach by trustees.

This gives trustees defence against them

Question 19

When will trustees be able to impound a beneficiaries interest?

Answer 19

When they instigate or request a breach of trust.

Court also has discretion to allow such a remedy via statute and common law where beneficiary has consented (in writing for statute, not in writing common law)

Question 20

For a beneficiary’s interest to be impounded, is it necessary to show that they benefitted from the breach?

Answer 20

Not where they instigate or consent under statute power.

It is necessary under the common law power where they consent but not in writing.

Question 21

What is impounding a beneficiaries interest?

Answer 21

Where beneficiaries interest in trust funds is used to indemnity the trustees against claims by other beneficiaries

Question 22

What is the statutory limitation period for bringing a claim for breach of trust?

Answer 22

Six years from breach.

No limitation period where fraudulent breach or for proprietary claims against the trustee

Question 23

What difference does the beneficiary interest in the trust make to the statutory limitation period?

Answer 23

Six year period only runs from breach of duty if the beneficiary has a vest interest.

If they have a future interest, the limitation period only starts to run when their interest vests in possession

Question 24

How is the limitation period effected where the trustee is also a beneficiary and receives an unfairly large distribution from the trust?

Answer 24

Only excess can be recovered after the normal six-year period

Question 25

What protection may the equitable defence of laches afford trustees?

Answer 25

Will provide protection against breach before statutory limitation period has expired, if trustees can argue that beneficiary has waited too long to bring a claim.

Question 26

When will the equitable defence of laches succeed?

Answer 26

When the beneficiary has waited too long to bring a claim.

Trustees must prove that the beneficiary knew of the breach but has delayed their claim unacceptably making it unconscionable for the beneficiary to asset their beneficial interest

Question 27

What possible protection does s 61 TA 1925 provide trustees?

Answer 27

Court has discretion to grant relief under s 61 where trustees ‘acted honestly, reasonably, and ought fairly to be excused for breach of trust’

Court will not use s 61 lightly as may deny beneficiaries a claim.

Question 28

When is the court most likely to apply relief under s 61 (trustees ‘acted honestly, reasonably, and ought fairly to be excused for breach of trust’)?

Answer 28

Where the trustee has inadvertently acted outside their powers

Where the trustee is a lay trustee (unlikely to prove professional trustee acted reasonably for breach of trust)

If a lay trustee has sought advice before acting

Question 29

What liability do trustees have?

Answer 29

They are jointly and severally liable for breach of trust

Question 30

If one trustee ends up compensating the trust fund for the entire loss, does that trustee have any options as to sharing the burden of compensation?

Answer 30

Yes - can seek contribution from other co-trustees under the Civil Liability Contribution Act 1978

Question 31

What is the starting point for the court when considering a claim under Civil Liability Contribution Act 1978?

Answer 31

Provided the parties are both liable for the loss, then court has discretion to require one party to pay to the other ‘just and equitable’ contribution.

Starting point is this court will presume equal responsibility

Question 32

When will the court depart from the starting point of equal contribution for claims under Civil Liability Contribution Act 1978?

Answer 32

Where one party is more or less culpable for loss

Question 33

When is the court likely to award a contribution which amounts to a full indemnity under Civil Liability Contribution Act 1978?

Answer 33

• particular trustee is morally culpable for the breach, such as cases where the trustee has misappropriated trust property for their own benefit
• trustee is also a beneficiary
• trustee acts as a solicitor to the trust and the breach is committed in reliance on their advice

Question 34

When is a full indemnity likely to be awarded against a solicitor who is a trustee?

Answer 34

• where breach is committed on reliance of their advice and that it is reasonable to rely on their advice
• unlikely where solicitor did not have controlling influence over other trustees or where they were actively supported/assisted by co-trustees