LIABILITY OF TRUSTEES Flashcards
Who can claim?
- Beneficiaries
- Objects of powers
- They do not have a right to receive some of the trust assets, but they can have a right to make the trustee consider giving them some of it
- Co-trustees
- Charity Commission
- Attorney General
- Enforcers and protectors
Types of breach
Failure to account
Failure to obey
Lack of care
Conflicting interests or duties
Failure to account
One of the primary duties of the trustee is to keep accounts and to provide those accounts when required to do so, so that they can be reveiwed by those who are entitled to view them
Failure to keep or to provide notes is a breach of trust
Failure to obey
Generally unauthorised investments or disbursements
Acts which are contrary to the terms of the trust instrument
Lack of care
Poor performance of duties
E.g. failure to invest / imprudent investments or disbursements
Conflicting interests or duties
Receiving bribes or investing in own company
Remedies
Orders to carry out the terms of the trust
Removal / replacement of trustees
Adjustment of the account or equitable compensation
Disgorgement of gains
Adjusting the account
- One of the trustee’s primary duties is to keep trust accounts and, when required, to provide them to those entitled to receive them
- Importantly, the trustees can be required to make up any shortfall out of their own pockets
- The trustee will only be liable for unauthorised investments, where the trustee has not used due care and skill / the action was in conflict of interest or duty
The account can be adjusted by the beneficiaries to …
- Remove unauthorised disbursements (falsify the account – deleting an unauthorised transaction, which results in consequential amendments)
- The trustee has to make good the trust assets
- Add missing receipts (surcharge the account)
- If there is money that ought to have been received but was not, you can surcharge the account
- Possibility of personal liability – the trustee may be required to personally make up the difference if there is a shortfall
Poor performance v unauthorised conduct
- Poor performance: liability requires some form of negligence
- Response is to surcharge the account
- Unauthorised act: liability is strict
- Response is to falsify the account
- If we accept this, that there is a distinction between poor performance and unauthorised conduct in terms of whether liability is strict or requires negligence of lack of care, then classification becomes very important
Nestle v National Westminster Bank
FACTS: involved a trustee (bank) was said to have performed various duties under the trust poorly. The argument of the fact of poor performance was made out – the bank did various things in breach of its obligations and how it varied out the trust (it misunderstood the meaning of one of the clauses of the trust, it did not regularly review investments, it did not get legal advice in relation to its obligations
HELD: C fails because she was unable to show that she suffered a loss because of these breaches
Target Holdings v Redferns
FACTS
- Target agrees to lend £1.7m to Crowngate to purchase a title to land. Price said to be £2m. This is a lie:
- (1) the price is only £775k; and
- (2) the purchaser is Panther (a related company).
- Redferns, the solicitors handling the transaction, is aware of the Crowngate scheme. It releases the loan moneys to Panther, and reports (falsely) that completion and purchase have taken place.
- Following a series of land flips, Crowngate purchases the land for £2m.
- Crowngate becomes insolvent. When Target sells the land, it is valued at only £500k.
- Target sues Redferns for the £1.2m shortfall
Target Holdings v Redferns
HELD
- Although there was a breach of fiduciary duty, it would not have changed the financial position of the claimant had it not occurred
- The loss did not result in Target’s loss, so they did not get the shortfall
- Trustees are not liable for a beneficiary’s loss if that loss is not a consequence of the breach. Damages payable for money paid out in breach of trust may be reduced by inevitable losses which would have run in any event.
AIB Group v Redler
FACTS
The borrowers owned a house but with a charge in favour of Bank B (they owed the bank £1.5m). The bank thus had an interest in the house whilst the borrowers owed them money. The borrowers decided to take a loan of £3.3m from bank A with the idea that the house will also be used as security in relation to that loan. Bank A engages solicitors and tells them that they want a first ranked charge on the house
- The solicitors, who are holding the money in trust, are meant to pay £1.5m to bank B to dissolve their charge so that there is just a single charge on the house and pay the balance on the money to the borrowers
- In reality, £1.2m goes to Bank B and £2.1m to the borrowers, meaning Bank B still has the 1st ranked charge because the liability has not been discharged. The borrowers still owe £300k to Bank B
- Then the property market collapses and the borrowers default and the house is sold for £1.2m
AIB Group v Redler
Summary
Bank A makes loan of £3.3m in relation to house valued at £4.25m
When the borrowers later default and the house is sold by Bank B (as first charge holder), the sale price is £1.25m
After Bank B takes its £300k, Bank A is paid only £868k
AIB Group v Redler
QUESTIONS
- It is clear that the solicitors acted in breach of some duty, but is it an instance of poorly performed duties or an entirely unauthorised disbursement?
- Bank A should receive £300k or £2.5m?
- If falsification - £2.5m
- Shows the significance of classification
AIB Group v Redler
HELD
The actual cause of the loss has nothing to do with what the solicitors did, but the collapse of the property market
The court uses principles of causation to say that equitable compensation is around the £300,000 mark
AIB was distinguished in Main v Giambrone, on the basis that the trustee in that case had no ‘active duties’ whatsoever
Yip and Lee
The Commercialisation of Equity
There is an unsatisfactory pattern of judicial reasoning, exhibiting a preference for a degree of flexibility, in commercial adjudication. This has resulted in a lack of doctrinal coherence and the lack of development of equitable principles
The lack of specialist Chancery expertise has resulted in the commercialisation of equity jurisprudence
Rights and defences of trustees in action for breach of trust
Denial
Consent
Exemption
S61 Trustee Act
Limitation period
Denial of liability
Trustee may resist the argument that a disbursement was unauthorised
Contribution or indemnity from another trustee
Where there is more than one trustee, what kind of liability is there
Where there is more than one trustee, those trustees are joint and severally liable but not vicariously liable
- No vicarious liability = each trustee must be independently liable in their own right
- But there is no such thing as a ‘sleeping trustee’: Bahin v Hughes
- Joint and several liability = any one of the trustees can be liable to pay the full amount when they were acting together, or ought to have been acting together
- But a trustee may be able to get a contribution from a fellow trustee
Contribution or indemnity from another trustee
Independent liability
The trustee who commits a breach is personally liable and the other trustees are not liable unless they are independently liable in their own right because they also committed the breach of trust or because they did not participate in the decision-making process
The latter theory means that a sleeping / passive trustee neglects their duty by not participating in the decision making [Bahin v Hughes]
Contribution or indemnity from another trustee
Contribution of payment
If two or more trustees are liable, but only one trustee is required to pay for the loss, then normally he or she can require fellow trustees to contribute
S2(1) Civil Liability (Contribution) Act: gives the court discretion to award a just and equitable contribution from one party to another
Contribution or indemnity from another trustee
Full indemnity
In some cases, a full indemnity is available, although this right tends to only arise when one trustee bares the full liability of the breach of trust, which tends to be construed fairly narrowly. The right to an indemnity arises where 1 trustee bares the full liability of the breach
- One trustee caused the breach by his or her own fraud
- One trustee is solely responsible for the breach (esp. a solicitor whose advice is taken by a lay trustee)