Ls 15, 16, 17 The Duties of Trustees

Question 1

Bray v Ford [1896] AC 44

Answer 1

There would appear to be two principles, laid down by Lord Herschell in Bray v Ford:

(a) a fiduciary cannot profit from his fiduciary position (although note the trustee’s
entitlement to payment either under the terms of the trust instrument or by virtue of the Trustee Act 2000);

(b) a fiduciary must not allow his personal interest to prevail over his duty of loyalty to
his principal.

Question 2

Reading v Attorney-General [1951] AC 507

Answer 2

• Concerns CTs.
• Facts
o Mr Reading was stationed in Egypt as an army sergeant. Smugglers paid him to ride in their lorries, while they were doing their smuggling of illegal spirits, while visibly wearing his army uniform, hence making a search less likely. Mr Reading got between £1,000 and £4,000 each time, but was caught. The Crown seized the money he was paid and put him in prison. Mr Reading claimed that the money should be returned under an action for money had and received. The Crown argued it was entitled to retain the sums, which must have been received in ‘trust’ for the Crown.
• Held
o The HL held that the Crown could retain the money for many reasons, including that Mr Reading was in a fiduciary position. He was required to give up all unauthorised profits to his principal, the Crown.
o Lord Porter quoting Denning J – said
♣ That the money should be given to the Crown upon the doctrine of ‘unjust enrichment’. Moreover
♣ ‘The uniform of the Crown, and the position of the man as a servant of the Crown were the sole reasons why he was able to get this money, and that is sufficient to make him liable to hand it over to the Crown.’

Question 3

Keech v Sandford (1726) Sel Cas 61

Answer 3

• The case holds that a trustee owes a strict duty of loyalty so that there can never be a possibility of any conflict of interest.

Question 4

Holder v Holder [1968] Ch 353

Answer 4

• Summary
o Danckwerts LJ – The true rule is not that a trustee may not purchase trust property but that a purchase of trust property by a trustee is voidable within a reasonable time at the instance of a beneficiary; but the court may sanction such a purchase and if the court can do that there can be no more than a practice that the court should not allow a trustee to bid. It is a matter of discretion of the judge.

Question 5

Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378

Answer 5

• Concerns the rule against directors and officers from taking corporate opportunities in violation of their duty of loyalty. The court held that a director is in breach of his duties if he takes advantage of an opportunity that the corporation would otherwise be interested in but was unable to take advantage. However, the breach could have been resolved by ratification by the shareholders, which those involved neglected to do.
• Facts
o Regal owned a cinema. They took out leases on two or more. However, the landlord first wanted them to give personal guarantees. They did not want to do that. Instead the landlord said they could increase share capital to £5,000. Regal itself put in £2,000, but could not afford more. Four directors each put in £500, Mr Gulliver got outside subscribers to put in £500 and the board asked the company solicitor to put in the last £500. They sold the business and made a profit of nearly £3 per share. But then the buyer brought an action against the directors, saying that the profit was in breach of their fiduciary duty to the company. They had not gained fully informed consent from the shareholders.
• Held
o The HL reversing the HC and the CA, held that the defendants had made their profits ‘by reason of the fact that they were directors of Regal and in the course of the execution of that office’. They therefore had to account for their profits to the company. The principle was stated by Lord Russell:
♣ ‘The rule of equity which insists on those who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon questions or considerations as whether the property would or should otherwise have gone to the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having in the stated circumstances been made.’

Question 6

Boardman v Phipps [1967] 2 AC 46 HL

Answer 6

• Where persons are in the position of agents for trustees for the purposes of using the trust shareholding to extract knowledge of the affairs of a company, the knowledge so acquired is trust property and they must account to the trust for any profit made out of it. Such persons may, however, be entitled to payment on a liberal scale for their work and skill.

Question 7

Guinness plc v Saunders [1990] 2 AC 663 HL

Answer 7

• The decision in this case is that only a board of directors had the power to award special remuneration to a fellow director. The former director’s claim in ‘quantum meruit’ failed under the principle that a trustee could not profit from the trust deed unless such profit was expressly provided for.
• In this instance the articles of association did not so provide and the former director could not prove he had a contract with the board of directors for the payment of special remuneration.

Question 8

Edge v Pensions Ombudsman [2000] 3 WLR 79 at pp 100-101 – CA

Answer 8

• CA held –

1. Trustees must always consider the ‘main purpose’ of the scheme (to provide retirement and other benefits for employees of the participating employers). This involves considering the position of the employer.
2. The duty to act impartially requires a discretionary power to be exercised for the purpose for which it was given, giving proper consideration to the matters which are relevant and excluding matters which are irrelevant. A preference for one set of beneficiaries may be the result of a proper exercise of the power.
3. That the trustees had taken their decision correctly and there were no grounds upon which the Ombudsman could properly have found that they had acted in breach of trust.

Question 9

1. Duties in outline

In addition to the core fiduciary duties, the trustees are subject to the following:

Answer 9

(i) The duties on acceptance of office relating to the need to familiarise oneself with the terms, conditions and history of the management of the trust.
(ii) The duty to obey the terms of the trust unless directed to do otherwise by the court.
(iii) The duty to safeguard the trust assets, including duties to maintain the trust property, as well as to ensure that it is applied in accordance with the directions set out in the trust instrument.
(iv) The duty to act even-handedly between beneficiaries, which means that the trustees are required to act impartially between beneficiaries.
(v) The duty to act with reasonable care, meaning generally a duty to act as though a prudent person of business acting on behalf of someone for whom one feels morally bound to provide.
(vi) Duties in relation to trust expenses.
(vii) The duties of investment, requiring prudence and the acquisition of the highest possible rate of return in the context.
(viii) The duty to distribute the trust property correctly.
(ix) The duty to preserve the confidence of the beneficiaries, especially in relation to Chinese wall arrangements.
(x) The duty to act gratuitously, without any right to payment not permitted by the trust instrument or by the general law.
(xi) The duty to account and to provide information.
(xii) The duty to take into account relevant considerations and to overlook irrelevant considerations, failure to do so may lead to the court setting aside an exercise of the trustees’ powers.

Question 10

Westdeutsche Landesbank v Islington [1996] AC 669.

Answer 10

• Concerns the circumstances under which a resulting trust arises. It held that such a trust must be intended, to must be able to be presumed to have been intended. In the view of the majority in the HL, presumed intention to reflect what is conscionable underlies all resulting and constructive trusts.

Question 11

Speight v Gaunt (1883) 9 App Cas 1

Answer 11

• A trustee investing trust funds is justified in employing a broker to procure securities authorized by the trust and in paying the purchase-money to the broker, if he follows the usual and regular course of business adopted by ordinary prudent men in making such investments.

Question 12

Learoyd v Whiteley (1887) 12 App Cas 727

Answer 12

• Trustees invested trust money on the security of a 5% being advised by competent valuers’ report that the property was a good security for the amount invested. The valuers’ report was in fact based upon a valuation of more than double the amount invested and upon the supposition that the concern was going, but the report did not state this, nor distinguishing between the value of the land and that of the buildings, machinery etc. The trustees acted bona fide upon the report without making any further inquiries. The security having failed –
• Held
o That the trustees had not acted with ordinary prudence, and were liable to make good the money with interest at 4% from the date of the last payment; and that the tenant for life was not liable to return the trustees 1%, which was claimed on the ground that the higher interest was due to its being a hazardous security.

(i) Under statute:-

Trustee Act 2000, s.1:

“(1) Whenever the duty under this subsection applies to a trustee, he must exercise such care and skill as is reasonable in the circumstances, having regard, in particular –

(a) to any special knowledge or experience that he has or holds himself out as having, and
(b) if he acts as trustee in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect of a person acting in the course of that kind of business or profession.
(2) In this Act the duty under subsection (1) is called “the duty of care”.”

Question 13

Duty to invest

Answer 13

1. The power of investment under TA 2000

*Trustee Act 2000, s 3(1)
“…a trustee may make any kind of investment that he could make if he were absolutely entitled to the assets of the trust.”

2. The statutory duty of care

**Trustee Act 2000, s.1 (supra)

3. The duty to prepare standard investment criteria

**Trustee Act 2000, s.4.

“4(1)… a trustee must have regard to the standard investment criteria.

(3) The standard investment criteria in relation to a trust are –
(a) the suitability to the trust of investments of the same kind as any particular investment proposed to be made or retained and of that particular investment as an investment of that kind, and
(b) the need for diversification of investments of the trust, in so far as is appropriate to the circumstances of the trust.”

4. The duty to take expert advice

**Trustee Act 2000, s.5.

“(1) Before exercising any power of investment … a trustee must … obtain and consider proper advice about the way in which, having regard to the standard investment criteria, the power should be exercised.

(3) The exception is that a trustee need not obtain such advice if he reasonably concludes that in all the circumstances it is unnecessary or inappropriate to do so.”

Question 14

*Cowan v Scargill [1985] 2 Ch 270

Answer 14

• Concerns the scope of discretion of trustees to make investments for the benefit of their members. It held that trustees cannot ignore the financial interests of the beneficiaries.
• Obiter in Cowan, however, has been doubted in Harries, which held that trustees are entitled to consider the social and moral interests of the beneficiaries where they related to the express or implied objects of the trust.
• Facts
o The trustees of the National Coal Board pension fund had £3,000 million in assets. 5 of the 10 trustees were appointed by the NCB and the other 5 were appointed by the National Union of Mine workers. The board of trustees set the general strategy, while day to day investment was managed by a specialist investment committee.
o The NUM wanted the pension fund to (1) cease new overseas investment (2) gradually withdraw existing overseas investments and (3) withdraw investments in industries competing with coal. This was all intended to enhance the mines’ business prospects. The five NCB nominated trustees made a claim in court over the appropriate exercise of the pension fund’s powers.
• Held
o Megarry VC held the NUM trustees would be in breach of trust if they followed the instructions of the union, saying ‘the best interests of the beneficiaries are normally their best financial interests’, so if investments of an unethical type ‘would be more beneficial to the beneficiaries than other investments, the trustees must not refrain from making the investments by virtue of the views that they hold.’ Only if all beneficiaries, all of full age, consent to something different is it possible to invest ethically.
• Significance
o The case did not lay down a rule that pension funds or other trustees must single-mindedly act in their beneficiaries’ exclusive financial interest, nor did it say that pension trusts cannot invest ethically if they have opted for such an investment in their trust deeds.

Question 15

Bartlett v Barclays Bank Trust Co Ltd [1980] Ch 515

Answer 15

• When assessing compensation to make good breaches of trust, a court will consider the depletion of the trust assets, as well as other types of lost income, but no account will be taken of the tax liability of individual beneficiaries to reduce the compensation payable.

Question 16

••Nestle v National Westminster Bank plc [1993] 1 WLR 1260

Answer 16

• Although a bank had failed in its duties as trustee to review the trust investments and had failed to take legal advice on the scope of its powers, it was not liable to a plaintiff who had failed to prove loss as a result of the bank’s breaches of duty.

Hoffmann J:
“A trustee must act fairly in making investment decisions which may have different consequences for differing classes of beneficiaries. … The trustees have a wide discretion. They are, for example, entitled to take into account the income needs of the tenant for life or the fact that the tenant for life was a person known to the settlor and a primary object of the trust whereas the remainderman is a remoter relative or stranger. Of course, these cannot be allowed to become the overriding considerations but the concept of fairness between classes of beneficiaries does not require them to be excluded. It would be an inhuman rule which required trustees to adhere to some mechanical rule for preserving the real value of capital when the tenant for life was the testator’s widow who had fallen upon hard times and the remainderman was young and well-off.”

Question 17

*Cowan v Scargill [1985] 2 Ch 270, 289, per Megarry V-C:

Answer 17

Megarry VC:
“[the trustee’s obligation is to] take such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he feels morally bound to provide. This duty includes the duty to seek advice on matters which the trustee does not understand, such as the making of investments, and, on receiving that advice, to act with the same degree of prudence. Although a trustee who takes advice on investments is not bound to accept and act on that advice, he is not entitled to reject it merely because he sincerely disagrees with it, unless in addition he is acting as an ordinary prudent man would act.”

Megarry VC.
‘It is the duty of trustees to exercise their powers in the best interest of the present and future beneficiaries of the trust, holding the scales impartially between the different classes of beneficiaries.’

Question 18

Edge v Pensions Ombudsman [2000] Ch 602, 627:

Answer 18

“the so-called duty to act impartially … is no more than the ordinary duty which the law imposes on a person who is entrusted with the exercise of a discretionary power: that he exercises the power for the purpose for which it is given, giving proper consideration to the matters which are relevant and excluding from consideration matters which are irrelevant. If pension fund trustees do that, they cannot be criticized if they reach a decision which appears to prefer the claims of one interest – whether that of employers, current employers or pensioners – over others. The preference will be the result of a proper exercise of the discretionary power.”

Question 19

**O’Rourke v Derbishire [1920] AC 581 (right to information only if proprietary right) HL

Answer 19

• Professional privilege as a ground for resisting production of documents by trustees is not displaced by the fact that the solicitor consulted is himself a trustee and is acting as professional adviser to himself and his co-trustees.

per Lord Wrenbury
“[A beneficiary] is entitled to see all the trust documents because they are trust documents and because he is a beneficiary. They are in a sense his own. Action or no action, he is entitled to access to them. This has nothing to do with discovery. The right to discovery is a right to see someone else’ document. A proprietary right is a right to access to documents which are your own. … A beneficiary has a right of access to the documents which he desires to inspect upon what has been called in the judgments in this case a proprietary right. The beneficiary is entitled to see all trust documents, because they are trust documents, and because he is a beneficiary. They are, in this sense, his own.

Question 20

**Re Londonderry [1965] Ch 918, [1964] 3 All ER 855, 860, per Harman LJ

Answer 20

“I would hold that, even if documents of this type ought properly to be described as trust documents, they are protected for the special reason which protects the trustees’ deliberations on a discretionary matter from disclosure. If necessary, I hold that this principle overrides the ordinary rule. This is in my judgment no less in the true interest of the beneficiary than of the trustees. Again, if one of the trustees commits to paper his suggestions and circulates them among his co-trustees, or if inquiries are made in writing as to the circumstances of a member of the class, I decline to hold that such documents are trust documents the property of the beneficiaries. In my opinion such documents are not trust documents in the proper sense at all. On the other hand, if the solicitor advising the trustees commits to paper an aide-memoire summarising the state of the fund or of the family and reminding the trustees of past distributions and future possibilities, I think that must be a document which any beneficiary must be at liberty to inspect. … I cannot think that communications passing between individual trustees and appointors are documents in which beneficiaries have a proprietary right.” (no obligation to give reasons for decisions nor to disclose confidential information)

• Although, in general, beneficiaries are entitled as a matter of proprietary right to inspect the trust documents, this does not apply to: (1) Documents leading to the exercise in good faith of a discretion where the trustees are not bound to give their reasons for the decision, (2) Letters between individual trustees or between individual trustees and beneficiaries.

Question 21

**Schmidt v Rosewood Trust Ltd [2003] 2 WLR 1442, 1463, per Lord Walker:-

Answer 21

“… no beneficiary … has any entitlement as of right to disclosure of anything which can plausibly be described as a trust document. Especially when there are issues as to personal or commercial confidentiality, the court may have to balance the competing interests of different beneficiaries, the trustees themselves, and third parties. Disclosure may have to be limited and safeguards may have to be put in place.”

Question 22

Crowe v Stevedoring Employees Retirement Fund [2003] PLR 343

Answer 22

• Facts
o In the course of certain proceedings, the plaintiff sought disclosure of, and/ or rights of inspection over, certain documents which were in possession of, or under the control of, a trustee.
• Issue
o What were the parameters relating to information that could properly be obtained by a beneficiary of a trust and what relevance did this have in relation to a superannuation scheme?
• Decision
o Re Londonderry’s Settlement should be followed however inappropriate this may sometimes seem in relation to a superannuation scheme. However, the matter in issue were governed by the decision in Hartigan v Rydge and in this respect what was restricted was access to documents which are of a class which would or might reveal the reasoning process of the trustees.

Question 23

*Breakspear v Ackland [2008] 3 WLR 698

Answer 23

• Summary
o In the context of family discretionary trusts, the principle established in Londonderry’s Settlement, namely that the process of the exercise of discretionary dispositive powers by trustees was inherently confidential, applied to wish letters.
• Facts
o The claimant beneficiaries brought proceedings seeking (1) the disclosure of a wish letter and oral statements as to his wishes sent or communicated to the then trustees by the de facto settlor of the relevant settlement; (2) the setting aside of a purported addition of the second defendant (D) as a beneficiary of the settlement together with the setting aside of a purported appointment of income to her.
• Held
o Allowing the claim for disclosure, that trustees and the court when deciding whether to grant a request for disclosure of a wish letter were exercising a discretion rather than adjudicating a proprietary right of beneficiaries to see trust documents; that the exercise by trustees of their dispositive discretionary powers was an essentially confidential process, and that confidentiality existed for the benefit of the beneficiaries.

Question 24

Re Beloved Wilkes Charity (1851) 3 Mac & G 440

Answer 24

• Where trustees are appointed to execute a trust according to discretion, they are not bound to state reasons for any conclusion at which they may arrive in fulfilling the duty imposed on them: their discretion must, however, be exercised with an absence of indirect motives, with honesty of intention, and with a fair consideration of the subject; and the duty of the Court generally is to see that the discretion of the trustees has been thus exercised, and not to deal with the accuracy of the conclusion at which they may have arrived.

Question 25

**Schmidt v Rosewood Trust Ltd [2003] 2 WLR 1442

Answer 25

• Facts
o S appealed against a decision to set aside an order for disclosure of accounts and information relating to trusts set up by his father who died intestate, and another settlor. S contended that he was entitled to disclosure by virtue of his discretionary interests or expectations under the settlements evidenced by his father’s letter of wishes to the trustees and as administrator of his father’s estate.
o R, the sole trustee of both settlements, contended that S was not a beneficiary in any sense of the word under the two settlements, and that his father was not a settlor of the trusts since he was never more than ‘a mere object of a power who as such had no entitlement to trust documents or information’ since the right or claim to disclosure depended on a proprietary interest in the trust property.
• Held
o Allowing the appeal and restoring the disclosure order, that on the facts, S had a strong claim to disclosure in both his personal capacity and as his father’s personal representative. In his personal capacity, S was no more than a possible object of the very wide power conferred by the trust to add any number of beneficiaries. However, the right to seek disclosure of trust documents was one aspect of the court’s inherent jurisdiction to supervise, and if necessary to intervene in, the administration of trusts. There was no authority for the proposition that the right to seek the court’s intervention depended on entitlement to a fixed and transmissible beneficial interest.

Question 26

Ultraframe (UK) Ltd v Fielding, [2005] EWHC 1638 (Ch), per Lewison J:

Answer 26

‘The taking of an account is the means by which a beneficiary requires a trustee to justify his stewardship of trust property. The trustee must show what he has done with that property. If the beneficiary is dissatisfied with the way that a trustee has dealt with trust assets, he may surcharge or falsify the account. He surcharges the account when he alleges that the trustee has not obtained for the benefit of the trust all that he might have done, if he had exercised due care and diligence. If the allegation is proved, then the account is taken as if the trustee had received, for the benefit of the trust, what he would have received if he had exercised due care and diligence. The beneficiary falsifies the account when he alleges that the trustee has applied trust property in a way that he should not have done (e.g. by making an unauthorised investment). If the allegation is proved, then the account will be taken as if the expenditure had not been made; and as if the unauthorised investment had not formed part of the assets of the trust. Of course, if the unauthorised investment has appreciated in value, the beneficiary may choose not to falsify the account: in which case the asset will remain a trust asset and the expenditure on it will be allowed in taking the account.’

Question 27

Pilkington v IRC [1964] AC 612

Answer 27

1. • Nothing in the Trustee Act 1925 s32 restricts the manner or purpose of advancement under the power thereby conferred. If the whole provision made is for the benefit of the beneficiary advanced, it is no objection to the exercise of the power that other persons benefit incidentally as a result of the exercise.
   • The money can be applied by way of settlement on the beneficiary or may be paid to him on condition that he settles it, and neither course involves any unauthorized delegation of the trust. The advancement need not be ‘personal’ to the beneficiary in the sense of serving any immediate need of his.
2. • An advancement directly into a new settlement is to be treated for the purposes of the rule against perpetuities in the same way as a special power of appointment, and so for this purpose the trusts of the new settlement must be read back into the original settlement.

Question 28

Re Pauling’s Settlement Trusts [1964] Ch 303

Answer 28

• Where a bank undertakes to act as a paid trustee, and places itself in a position where its duty as trustee conflicts with its interest as a banker, the court will be very slow to grant relief under the Trustee Act 1925 s61.
• 2.
• The power under a clause in a settlement to raise part of the expectant or presumptive share of a child and to pay it to the child ‘for his or her own absolute use’ can only be exercised for the benefit of the child to be advanced, and a trustee cannot properly leave the child entirely free to apply the sum for that purpose without any responsibility on his part to inquire as to its application.
• 3.
• If trust money is advanced for an express purpose, the child advanced is under a duty to carry out that purpose, the child advanced is under a duty to carry out that purpose and cannot properly apply it to another purpose; and if any misapplication comes to the trustee’s notice, the trustee cannot safely make further advances for a particular purpose without making sure that the money is applied for that purpose.
• 4.
• A trustee who carries out a transaction in breach of trust with the beneficiary’s apparent consent may still be liable if he knew or ought to have known that the beneficiary was acting under the undue influence of another, not withstanding that the trustee received no benefit from the breach of trust.

Question 29

**Re Hastings-Bass [1975] Ch 25, 40, per Buckley LJ

Answer 29

“where … a trustee is given a discretion as to some matter under which he acts in good faith, the court should not interfere with his action notwithstanding that it does not have the full effect which he intended, unless (1) what he had achieved is unauthorised by the power conferred upon him, or (2) it is clear that he would not have acted as he did (a) had he not taken into account considerations which he should not have taken into account, or (b) had he not failed to take into account considerations which he ought to have taken into account.”

Question 30

*Mettoy Pensions Trustees v Evans [1990] 1 WLR 1587, 1624, per Warner J

Answer 30

“If, as I believe, the reason for the application of the principle is the failure by the trustees to take into account considerations which they ought to have taken into account, it cannot matter whether that failure is due to their having overlooked (or to their legal advisers having overlooked) some relevant rule of law or limit on their discretion, or is due to some other cause. … [I]t is not enough that it should be shown that the trustees did not have a proper understanding of the effect of their act. It must also be clear that, had they had a proper understanding of it, they would not have acted as they did.”

Is this saying the same thing? This positive version of the rule was applied in a number of cases including:

Question 31

*Burrell v Burrell [2005] EWHC 245, [15], per Mann J

Answer 31

• Summary
o Trustees had to consider the fiscal consequences of their acts and a failure to do so was capable of leading to the application of the principle in Hastings-Bass, if it was clear that they would not have acted as they did if they had appreciated the true fiscal position. In the instant case, that principle led to a deed of appointment being declared invalid so far as it appointed on discretionary trusts that gave rise to an immediate charge to inheritance tax.
• Facts
o The claimant trustees T sought to set aside part of a deed of appointment on the footing that they failed to appreciate, consider and take into account the fact that the appointment generated very considerable inheritance tax liabilities.
o The first claimant B was the chairman of, and a shareholder in a successful company. He settled some of his shareholding on his son by creating an accumulation and maintenance settlement under which his son was to take an interest in possession in capital and income when he attained the age of 18, but until he reached the age of 35 the interest was liable to be divested by an appointment by the trustees if they chose to make one in favour of a ‘wider class’ of beneficiaries.
o Very soon after the son acquired his interest in possession B became concerned at the size of the dividends the company was likely to declare and the amount of income his son would receive. B discussed with solicitors how his son’s access to income could be restricted. The appointment of the assets on new discretionary trusts was suggested. It was in the minds of all parties that any appointment of assets was to be done in such a way as not to attract a charge to inheritance tax so far as possible.
o The solicitors drafted a deed of appointment for the assets to be retained until the son reached his 25th birthday. The deed gave rise to a chargeable transfer and corresponding charge to inheritance tax in relation to the appointment.
• Held
o Granting declaration on favour of claimants that the solicitors negligently failed to give full consideration to the tax consequences of the appointment and T did not think that a charge to tax would arise in respect of the deed of appointment in relation to discretionary trusts.

Question 32

Abacus Trust Company (Isle of Man) Limited v NSPCC [2001] STC 1344

Answer 32

• Summary
o The trustees of a settlement had a duty to consider the financial consequences of a proposed deed of appointment before executing it, including any consequent liability by the trust or its beneficiaries to tax; failure to do so vitiated the exercise of the trustees’ power and rendered the deed void.
o Held
♣ That the trustees had a duty to consider the fiscal consequences of a proposed deed of appointment before executing it, including any consequent liability by the trust or its beneficiaries to tax, therefore their failure to follow the advice of counsel when it was evident that had it been followed the deed would not have been executed before the specified date, vitiated the exercise of the trustees’ power and rendered the deed void.

Question 33

Green v Cobham [2002] STC 820

Answer 33

• Summary
o The present trustees of an offshore will trust sought a declaration that a deed which appointed certain funds to be held on accumulation and maintenance trusts for the benefit of the testator’s granddaughter was void. It was submitted that the trustees would not have acted as they had if consideration had been given to the capital tax consequences of the appointment. The court held that it was clear that the trustees of the will trust would not have made the appointment if they had had regard to the possible capital gains tax consequences of the settlement.
• Facts
o G, trustees of an offshore will trust, sought a declaration that a deed appointing funds to an accumulation and maintenance settlement in favour of the testator’s 16-year-old granddaughter was void. G contended that the deed amounted to an invalid exercise of the previous trustees’ discretionary power of appointment, submitting that their failure to have regard to the capital gains tax consequence of the deed had led to an appointment of funds with a significant risk that the will trust might become a UK resident trust for capital gains tax purposes.
• Held
o Granting a declaration in favour of the claimant, that it was clear that the trustees would not have proceeded to make the appointment had they paid proper regard to the likely capital gains tax outcome. The deed was consequently invalid.

Question 34

Futter v Futter [2010] EWHC 449, per Norris J

Answer 34

“When the Court of Appeal fashioned for the trustees of the 1947 settlement upon Captain Hastings-Bass a stout shield against an attack upon the validity of their decisions by the Inland Revenue, the members of the court cannot have supposed that they were creating for such trustees a powerful weapon enabling them to attack their own decisions in the face of objections by the Inland revenue. But that, of course, is what has occurred … The trustees wish to take advantage of [their] failure to perform their duties in order to enable the beneficiaries to avoid paying the tax liability consequent upon the trustees’ decision.”

Although Lightman J in Abacus Trust Company (Isle of Man) Limited v NSPCC was of the view that a breach of trust on the part of the trustees was essential for the application of the principle, other cases decided that it was not.

A further area of controversy was whether it was necessary that the trustees would have acted differently had they taken into account the consideration they had omitted to take into account, or whether it would be sufficient if they might have acted differently.

The courts were undecided on whether, if the conditions of the principle were satisfied, they should find the act of the trustees to be void or voidable.

Question 35

*Re Hastings-Bass [1975] Ch 25

Answer 35

• Facts
o By a settlement made in 1947 property was settled on a protected life interest for HB and then subject to a power of appointment, for such son of HB as should first attain 25 within 21 years of HB’s death.
o Thereafter HB had four children: His eldest son, W, was born in 1948. By a settlement made in 1957, W’s aunt settled £500 on W for life, and then subject to a power of appointment, for W’s children at 21, with remainders over: the settlement gave the trustees an absolute discretion to give W, at 21, the whole or such part of the capital as they thought fit.
o In Jan 1958, HB, by a revocable deed of appointment, appointed that the 1947 trustees should stand possessed of the 1947 trust funds for W at 25 absolutely.
o In 1958, in the exercise of their statutory power of advancement under s32 of the Trustee Act 1925, the 1947 settlement trustees transferred funds out of the 1947 settlement to the 1957 settlement trustees to be held on the trusts of the 1957 settlement. In making the transfer, the 1947 trustees had as a primary consideration the saving of estate duty.
o HB died in 1964. The trustees took out a summons to determine whether or not estate duty was payable on HB’s death contending that the exercise of the power of advancement was effective to the extent that there had been created in the transferred funds a life interest for W.
o The revenue claimed that the funds remained subject to the trusts of the 1947 settlement. At the time when the transfer was made it was not thought that there would be any infringement of the perpetuity rule but it was now common ground that, as W was not a life in being at the date of the 1947 settlement, all the powers and beneficial trusts of the advanced fund other than W’s interest were void for perpetuity. It was also common ground that if the transfer was effective to create a life interest in possession in W in the transferred funds no estate duty became payable on those funds on HB’s death.
o Plowman J held that the 1947 settlement trustees never effectively exercised the power of advancement so that the transferred funds remained subject to the 1947 trusts and estate duty became payable on HB’s death.
• Held
o On appeal by the trustees, appeal allowed.
1. That when trustees advanced funds by way of sub-settlement under s32 TA 1925 and such advancement infringed the rule against perpetuities such parts of the sub-settlement as did not infringe the rule might take effect if the trustees had directed their minds to the right considerations and if the effect of the advancement could reasonably be regarded as beneficial to the person intended to be benefited.
2. That the trustees’ prime consideration in making the advancement was the benefit to W of an immediate and indefeasible life interest in possession and, since the failure for perpetuity of the ulterior trusts of the sub-settlement did not decrease that element of direct benefit to W, there was no reason to suppose that the trustees had failed to ask themselves the right questions or to arrive in good faith at a reasonable conclusion.
3. That the 1947 trustees did ‘apply’ part of the capital of the 1947 settlement funds within the meaning of s32 of the Act, notwithstanding that there was created only a limited beneficial interest in income but no effective beneficial trust of capital.

Question 36

AMP v Barker [2001] PLR 77, per Lawrence Collins J

Answer 36

• Summary
o In proceedings commenced by AMP against the trustees of its non-contributory pension scheme, AMP sought a declaration that amendments to the rules of the scheme previously approved by the trustees had been vitiated by error or their failure to take into account a material consideration.
o The error in question concerned the failure to appreciate the fact that the proposed increase in the pension benefits payable to those employees retiring as a result of incapacity would increase dramatically the benefits payable to ‘early leavers’, who under the rules of the scheme were also treated as if they were retiring on grounds of incapacity. The court held that rectification was available in circumstances where the wording used had been intended but where it had had a different impact to that which had been contemplated and further, that the beneficiaries of the scheme were not bona fide purchasers of the amended scheme such as to prevent rectification.

Question 37

(a) The leading Supreme Court case : re-interpreting Hastings-Bass

** Futter and Another v HMRC, Pitt and Another v HMRC [2013] UKSC 26

Where the trustees exercise a power in a way that is within the scope of the power, but where the exercise has unexpected and undesirable consequences:

Answer 37

(i) whilst it is the case that they must take into account relevant
considerations and not take account of irrelevant ones, “for the rule to apply, the inadequate deliberation on the part of the trustees must be sufficiently serious to amount to a breach of fiduciary duty. Breach of duty is essential. Only breach of fiduciary duty justifies judicial intervention.” The Supreme Court agreed with the Court of Appeal that where the trustees establish that tax is a relevant consideration and uses proper care and diligence in obtaining advice, they cannot be in breach of duty, and their decision set aside, merely because the advice turns out to be wrong.
(ii) the rule can apply both where the trustees would and might have acted
differently. “To lay down a rigid rule of either ‘would not’ or ‘might not’ would inhibit the court in seeking the best practical solution in the application of the Hastings-Bass rule in a variety of factual situations”;
(iii) the trustees act is not void but it may be voidable at the instance of a
beneficiary who is adversely affected. (NB where the trustees purport to act outside of their powers, the exercise will be void.) It is the beneficiaries and not the trustees who must take action to set aside the disputed exercise of a power: “In general it would be inappropriate for trustees to take the initiative in commencing proceedings of this nature. They should not regard them as uncontroversial proceedings in which they can confidently expect to recover their costs out of the trust fund.”

Question 38

**Armitage v. Nurse [1998] Ch 241, per Millett LJ:

Answer 38

“[T]here is an irreducible core of obligations owed by the trustees to the beneficiaries and enforceable by them which is fundamental to the concept of a trust. If the beneficiaries have no rights enforceable against the trustees there are no trusts. But I do not accept the further submission that there core obligations include the duties of skill and care, prudence and diligence. The duty of trustees to perform the trusts honestly and in good faith for the benefit of the beneficiaries is the minimum necessary to give substance to the trusts, but in my opinion it is sufficient … a trustee who relied on the presence of a trustee exemption clause to justify what he proposed to do would thereby lose its protection: he would be acting recklessly in the proper sense of the term.”

Question 39

*Spread Trustee Co Ltd v Hutcheson [2011] UKPC 13

Answer 39

• A trustee could rely on a clause in Guernsey trust relieving him from liability for breaches arising from his own gross negligence where those breaches had occurred before the coming into force of the Trusts Law Acts.
• Facts
o T was the sole trustee of two settlements made in Guernsey.
o The beneficiaries claimed that it had been grossly negligent in failing to identify and investigate breaches of trust on the part of previous trustees. Some of those breaches had occurred before, and some after, the coming into force of the Trusts Acts. The Acts provided that a trust could not contain a clause relieving a trustee of liability arising from his own fraud or wilful misconduct, as well as liability arising from gross negligence.
o Each of the settlements contained a clause exonerating the trustee from liability for losses to the trust, except those arising as a result of his ‘wilful and individual fraud and wrongdoing’.
o Two preliminary issues arose for determination:
♣ Whether the inability of a trust to relieve a trustee of liability for a breach of trust arising from his own gross negligence applied to breaches occurring before the Trust Acts came into force.
• Held
o Allowing the appeal that the Law as originally enacted did not preclude a term in a trust instrument from excluding a trustee from liability for a breach of trust arising from his won gross negligence.
o Armitage and nurse applied.

Question 40

Bogg v Raper (1998/99) 1 ITELR 267

Answer 40

• Summary
o Wills; exemption clauses; reliance by will draftsman on standard exemption clause protecting executors and trustees where subsequently appointed as trustee.
• Facts
o B brought an action against the trustees and executors appointed under her husband’s will, claiming, inter alia, that they were in breach of their duties by failing to take appropriate action to prevent the main asset of the estate becoming worthless.
o B contended that the first defendant, a solicitor, and the fourth defendant, an accountant, had obtained a benefit under the will in the form of an exemption clause which protected them from liability arising from their own negligence in relation to the execution of the powers and trusts of the will and that, as they had assisted the testator in drawing up his will, they were in a fiduciary position and were obliged to establish that the testator had received full and independent advice concerning the effect of the clause, failing which they could not rely upon it.
o B appealed against a decision allowing the appeal of the first, fourth and other defendants and dismissing the action against them.
• Held
o Dismissing the appeal, that the exemption clause did not confer a benefit on those responsible for advising the testator in the preparation of his will, but merely defined the extent of the potential liabilities of the trustees and executors and that it applied to all the trustees and executors and not only to those parties who assisted in drawing up the will.
o In any event, a solicitor could derive a benefit under a will which he had prepared and, since the will in the instant case had been admitted to probate, it was presumed that the testator knew and approved of its contents. A solicitor was under a duty to explain the usual terms under which trustee and executors would be appointed and was entitled to inform the testator that he himself would insist on a wide exemption clause and would not accept office without one.

Question 41

*Walker v Stones [2001] QB 902

Answer 41

• W, beneficiaries under a family trust, appealed against an order which refused their applications to re amend their statement of claim and join additional defendants and which dismissed their claim in its entirety, in proceedings instituted against the trustees for breach of trust.
• W contended that the judge had erred in his conclusion that the principle in Newman precluded the advancement of claims against a trustee, S. The court held that the principle established by Prudential Assurance v Newman, namely that a beneficiary could not sue a trustee for damage to a company in which the trust had a controlling interest in circumstance where the company possessed its own right of action, would not prevent a party from the pursuit of an otherwise valid claim in a situation where the claimant could establish the breach of some legal duty owed to him personally and additionally that such breach had resulted in a personal loss to him as distinct from a loss incurred by a corporate body in which he had a financial stake.