LIABILITY OF TRUSTEES

Question 1

Who can claim?

Answer 1

• 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

Question 2

Types of breach

Answer 2

Failure to account

Failure to obey

Lack of care

Conflicting interests or duties

Question 3

Failure to account

Answer 3

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

Question 4

Failure to obey

Answer 4

Generally unauthorised investments or disbursements

Acts which are contrary to the terms of the trust instrument

Question 5

Lack of care

Answer 5

Poor performance of duties

E.g. failure to invest / imprudent investments or disbursements

Question 6

Conflicting interests or duties

Answer 6

Receiving bribes or investing in own company

Question 7

Remedies

Answer 7

Orders to carry out the terms of the trust

Removal / replacement of trustees

Adjustment of the account or equitable compensation

Disgorgement of gains

Question 8

Adjusting the account

Answer 8

• 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

Question 9

The account can be adjusted by the beneficiaries to …

Answer 9

• 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

Question 10

Poor performance v unauthorised conduct

Answer 10

• 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

Question 11

Nestle v National Westminster Bank

Answer 11

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

Question 12

Target Holdings v Redferns

FACTS

Answer 12

• 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

Question 13

Target Holdings v Redferns

HELD

Answer 13

• 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.

Question 14

AIB Group v Redler

FACTS

Answer 14

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

Question 15

AIB Group v Redler

Summary

Answer 15

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

Question 16

AIB Group v Redler

QUESTIONS

Answer 16

• 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

Question 17

AIB Group v Redler

HELD

Answer 17

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

Question 18

Yip and Lee

The Commercialisation of Equity

Answer 18

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

Question 19

Rights and defences of trustees in action for breach of trust

Answer 19

Denial

Consent

Exemption

S61 Trustee Act

Limitation period

Question 20

Denial of liability

Answer 20

Trustee may resist the argument that a disbursement was unauthorised

Question 21

Contribution or indemnity from another trustee

Where there is more than one trustee, what kind of liability is there

Answer 21

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

Question 22

Contribution or indemnity from another trustee

Independent liability

Answer 22

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]

Question 23

Contribution or indemnity from another trustee

Contribution of payment

Answer 23

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

Question 24

Contribution or indemnity from another trustee

Full indemnity

Answer 24

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)

Question 25

Full indemnity

Re Partington

Answer 25

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

Question 26

Full indemnity

Head v Gould

Answer 26

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

Question 27

Consent

Answer 27

• 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

Question 28

Re Pauling’s Settlement Trust

FACTS

Answer 28

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

Question 29

Re Pauling’s Settlemtn Trust

RULING

Answer 29

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

Question 30

s62 Trustee Act

Answer 30

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

Question 31

Exemption Clauses

Answer 31

• 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

Question 32

Armitage v Nurse

Answer 32

• 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

Question 33

Armitage v Nurse

Why was this decision controversial?

Answer 33

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

Question 34

Walker v Stone

Answer 34

• 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

Question 35

s61 Trustee Act

Answer 35

• 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

Question 36

Santander v RA Legal Solicitos

FACTS

Answer 36

• 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

Question 37

Santander v RA Legal Solicitors

RULING

Answer 37

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

Question 38

Santander v RA Legal Solicitors

Etherton C, two stages of application of s61

Answer 38

1. The trustee must satisfy the court that they acted honestly and reasonably
2. 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”

Question 39

Limitation period

Answer 39

• 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]