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)
Full indemnity
Re Partington
2 trustees of a fund (solicitor and widow), and a solicitor undertook the administration of the trust and made an unauthorised investment
The widow was able to obtain a full indemnity from the solicitor because he acted negligently and did not provide full information, and it was acceptable for the widow to rely on the solicitors skill and experience, and it was also noted that there were high standards of skill and care expected from the solicitor
Full indemnity
Head v Gould
A trustee/solicitor managed the trusts legal business, but the co-trustee was not able to get an indemnity because he was an active participant in the breach of trust, and his participation was not due to the advice of the solicitor-trustee
Consent
- The trustee had the consent of the beneficiaries or some for acts that were in breach of trust
- The trustee will not be liable to any beneficiaries who requested or consent to the breach with full knowledge and understanding
- The consent of all beneficiaries is not required. This arguments relates only to the beneficiaries that provided consent
- Beneficiaries must be sui juris (of full age and of sound mind)
- It is not necessary that the beneficiaries know that the act is a breach of trust or that they benefit from the breach
- Interest used to indemnify the trustee and anyone claiming through them
Re Pauling’s Settlement Trust
FACTS
Relates to a marriage settlement trust where the wife had a life interest and the remainder was to go the children
The trustee also had the power with the wife’s consent to advance up to half of each child’s expected share
The family were in ongoing financial difficulty and the trustee made advancements that were alter challenged
One argument raised by the trustee was that there was consent from the children in relation to the payments
Re Pauling’s Settlemtn Trust
RULING
Transactions were examined by the CoA one-by-one to understand the full factual matrix and the knowledge of the beneficiaries to determine whether their consent was given in full knowledge
Undue influence also considered – one of the observations was the influence and role of the father, who was very commanding
s62 Trustee Act
Discretion to impound the beneficiaries interest
- This power arises where a beneficiary was actively involved in the breach, and here the beneficiaries interest under the trust can be used to indemnify the trustee or anyone claiming through them
- Applies where the beneficiary actively encouraged the breach
Exemption Clauses
- Some trust instruments contain clauses that
- Modify or relieve trustees of certain duties and/or
- Exclude liability for a breach of duty
- A settlor would want to exempt a trustee from liability for poor performance of their duties because of
- The onerous obligations placed on the trustee and the existence of strict liability may deter people from becoming trustees.
- Further, a number of breaches can arise where trustees act in good faith and reasonably
- Further, liability can be particularly hard on lay trustees – there is a concern that the liabilities that can be occurred might mean that lay people would be reluctant to agree to become a trustee
- Limits on the scope of a permissible exemption clause
Armitage v Nurse
- The ‘irreducible core’ may not be excluded: the duty to perform the trust honestly and in good faith for the benefit of the beneficiaries
- Liability for negligence – and even gross negligence – can be excluded
- The clause here only permitted liability for the trustee’s “own actual fraud,” which Millet LJ held to require dishonesty and he accepted the definition of dishonesty as
- An “intention on the part of the trustee to pursue a particular course of action either knowing that it is contrary to the interests of the beneficiaries or being recklessly indifferent whether it is contrary to their interests or not”
- This interpretation meant that a great deal of conduct was excluded because the only requirement is dishonesty
- Suggested that an intentional but good faith breach is excluded
Armitage v Nurse
Why was this decision controversial?
A controversial decision. In response, the Law Commission published a consultation paper in 2003 proposing that any exemption clause purporting to relieve trustees from negligence or worse would invalid at law
After consultation, they decided to recommend no legislative change
Walker v Stone
- In Armitage v Nurse, it was suggested that an intention but good faith breach is not dishonest
- However, in Walker v Stones, the meaning of ‘dishonesty’ for a solicitor-trustee include an objective element
- Here the CoA was resistant to the argument that dishonesty was purely subjective in the exemption clause
- Here, the trustees were partners of a law firm, and the instrument excluded all liability apart from wilful fraud or dishonesty
- The CoA accepted that the trustees could act dishonestly even if they thought they were acting in the best interest of their beneficiaries if no reasonable solicitor/trustee could have formed the view that they were acting in the best interests of the beneficiaries
- This doesn’t seem to reflect the high standard of care we expect from professional trustees
s61 Trustee Act
- Provides that they can be excused from liability when they have acted honestly and reasonably
- Arguments under s61 were rejected in Re Pauling’s Settlement Trust (because the trustees breach manifested a conflict of interest) and in Santander UK v RA Legal Solicitors
- S61 was successfully pleaded in Evans v Westcombe
- A lay administrator was partly relieved who distributed rights in the reasonable belief that one beneficiary of the estate had died
Santander v RA Legal Solicitos
FACTS
- The bank (the mortgagee) agreed to lend £150k to an individual so that they could purchase a property, and the solicitors were acting for both the lender and the purchaser
- A second firm of solicitors represented fraudulently that they were acting for the vendor (as it turned out, the person identified as a vendor had never agreed to sell the mortgagee
- Mortgage paid money to solicitors on trust, who paid it to the (alleged) vendor’s solicitors the day before completion, which never takes place
- Vendor’s solicitors only pretending to act for the vendor and absconded with the funds
- At trial, the solicitors were relieved from liability due to the operation of s61
- This was overturned on appeal
Santander v RA Legal Solicitors
RULING
The breach related to the release of the funds without completion taking place, however at trial that is was held that despite this breach, s61 applied and this was because of the conclusion that the loss had in substance been caused by the fraud of the vendors solicitors and that this was not something the solicitors could not be responsible for
Overturned that the solicitors did not prove they had acted reasonably; they failed to show that they had acted reasonably and had failed to comply with the Law Society’s requirements and thus created a greater risk of loss
Santander v RA Legal Solicitors
Etherton C, two stages of application of s61
- The trustee must satisfy the court that they acted honestly and reasonably
- If the court is satisfied, the court then has to decide whether the trustee ought fairly to be excused, and whether to exercise its power to relieve the trustee wholly or partly from personal liability for the breach of trust
The claimant might point to numerous ways in which the trustee behaved unreasonably, but not all will be relevant because they have nothing to do with the loss
“… it is wrong in principle to cast on the beneficiary the onus of identifying the trustee’s unreasonable conduct and of satisfying the court of its causal connection to the loss suffered. The beneficiary may not be in a position to know all that occurred in the chain of events leading to the breach”
Limitation period
- Limitation period for breach of trust is 6 years: s21(3)
- Does not start running until
- Infant becomes an adult [s28(1) + s38(2)]
- Future interest falls into possession [s21(2)]
- Does not apply to
- Fraud to which trustee was a party [s21(1)a]
- Recovery of trust assets or their proceeds in trustee’s possession or converted to the trustee’s own use: [s21(1)b]
