Remedies against trustees

Question 1

Personal claims

Answer 1

If a trustee’s wrongdoing causes the trust to suffer a loss, the beneficiaries can seek compensation for the trust.

Claim is against the trustee personally.

Before bringing such a claim, the beneficiary should ideally assess the financial standing of the trustee.

Question 2

Personal claims - breach of trust

Answer 2

The beneficiary must identify a breach of duty (often referred to as a ‘breach of trust’). The trustee must have done something wrong in the running of a trust.

Question 3

Personal claims - which trustees can be the subject-matter of a personal claim?

Answer 3

Trustee must themselves be in breach of trust.

Trustees are not vicariously, or automatically, liable for the defaults of their co-trustees.

If more than one trustee has breached trust, their liability is joint and several - can chose who they bring claim against and can be for fill loss.

Question 4

Personal claims - causation

Answer 4

Beneficiaries must establish causation – that the trustees’ breach of trust caused the loss suffered.

Must satisfy the ‘but for’ test – that the loss would not have occurred but for the breach of trust.

It can sometimes be difficult to bring a personal claim against trustees in relation to investment decisions they have taken.

Question 5

Personal claims - the value of the personal claim

Answer 5

Can recover compensation equal to the loss
to the trust, plus interest from the date of breach.

The rate of interest is at the discretion of the court, but is usually the rate allowed on the court’s short-term investment account.

Question 6

Personal claims - defences

Answer 6

(a) an exemption clause in the trust deed;
(b) knowledge and consent of the beneficiaries;
(c) s 61 of the TA 1925; or
(d) limitation and laches.

Question 7

Personal claims - defences - exemption clauses

Answer 7

Settlor can include an express clause in the trust deed exempting trustees from liability for breach of trust -
can relieve trustees from liability for negligent or innocent breaches, but is void insofar as it tries to exclude liability for fraudulent breaches.

Professional trustees who cause a settlor to include a clause in a trust deed that has the effect of excluding or limiting liability.
Any ambiguity in the clause will be interpreted strictly against that professional.

Question 8

Personal claims - defences - knowledge and consent of the beneficiaries

Answer 8

If the beneficiaries have all consented to a course of action that constitutes a breach of trust (whether before the action occurred or afterwards), they cannot subsequently bring a claim against the trustees.

Consent must be informed and freely given.
Beneficiaries must be adults.

If only one beneficiary consents to a breach of trust, that beneficiary can no longer bring any personal claim against the trustees, but the other non-consenting beneficiaries can.

Question 9

Personal claims - defences - Section 61 of the Trustee Act 1925

Answer 9

Court has a discretion to relieve trustees from liability, wholly or in part, if they acted honestly and reasonably, and ought fairly to be excused.

Question 10

Personal claims - limitation and laches

Answer 10

6 year limitation period.
Period starts from the date of breach.

For minors time starts when they reach 18.

For remainder beneficiaries, times starts when their interest falls into possession (when life tenant dies).

The limitation period does not run against trustees who have committed a fraudulent breach of trust.
Court might still have regard to the equitable doctrine of laches.
Laches will prevent a claimant from asserting a personal claim where:
(a) the claimant knows the facts that gave rise to the breach of trust;
(b) the claimant delays in taking action; and
(c) this delay is deemed to be reluctant acceptance or causes detriment or prejudice to trustee e.g. wait so evidence trustee can use is destroyed.

Question 11

Indemnity and contribution

Answer 11

There are two possibilities:
(a) the defending trustee may be able to claim the full amount of compensation from a co-trustee under an equitable indemnity; or
(b) the defending trustee may be able to claim a contribution towards the compensation from a co-trustee under the Civil Liability (Contribution) Act 1978.

Question 12

Indemnity and contribution - equitable indemnity

Answer 12

A trustee who is sued for breach of trust can recover a full indemnity from a co-trustee who:
(a) acted fraudulently when the others acted in good faith; or
(b) is a solicitor who exercised such a controlling influence that the other trustees blindly followed the solicitor’s advice; or
(c) has benefited personally from the breach; or
(d) is also a beneficiary and benefited from the breach

Question 13

Indemnity and contribution - contribution

Answer 13

Court can order a co- trustee to make a contribution that is just and equitable having regard to the extent of that co-trustee’s responsibility for the loss.

That contribution can be anything up to 100% of the compensation ordered.

Court will primarily take into account the blameworthiness of the co-trustees.

Question 14

Proprietary Claims

Answer 14

Enables beneficiaries to recover the asset and bring the asset back within the trust’s control.

If a trustee uses trust money to purchase something in their own name, the beneficiaries can assert a proprietary claim against that new asset so long as they can identify that the new asset represents trust property.

Equity deploys various ‘tracing rules’ to trace the beneficiaries’ equitable interests into new forms of property.

Question 15

Proprietary Claims - tracing rules - mixed asset (trust + trustee funds)

Answer 15

The beneficiary has the option of:
(a) claiming a proportionate interest in the mixed asset. The beneficiary should take this option where the mixed asset has increased in value; or
(b) suing the trustee for compensation for the loss to the trust and take a charge (or ‘equitable lien’) over the mixed asset for the amount that the trust has lost. The beneficiary should take this option where the mixed asset has decreased in value.

Question 16

Proprietary Claims - tracing rules - withdrawals from a mixed bank account (trust + trustee funds)

Answer 16

• Tracing rule 1: Re Hallett
  Provides that the trustee is deemed to spend their own money first.
  Can take the benefit of any increase in value in the assets into which they are tracing.
• Tracing rule 2: Re Oatway
  Provides that the beneficiary has a first charge on the mixed fund (ie the amount sitting in the trustee’s bank account) or any property that is purchased from that fund.

The trustee must wait until the beneficiary’s claim is satisfied before the trustee can get any of the property.

Question 17

Proprietary Claims - tracing rules - limitation

Answer 17

The trust’s interests cannot be traced beyond what is known as the ‘lowest intermediate balance’ – the lowest balance to which the account sank before extra money was paid in.

Question 18

Proprietary Claims - tracing rules - mixed asset (trust + trust funds)

Answer 18

An individual (such as a solicitor), however, may be a trustee of several trusts.

Tracing should not favour one set of beneficiaries to the disadvantage of others.

The beneficiaries of each trust will share in the mixed asset purchased (ie rateably in the same proportion as their funds contributed to the purchase price).

Question 19

Proprietary Claims - tracing rules - withdrawals from a mixed bank account (trust + trust funds)

Answer 19

• Tracing rule 1: Clayton’s Case
  The first money paid in is the first money paid out.
• Tracing rule 2: Barlow Clowes v Vaughan
  Only applied if it does broad justice having regard to the competing claims that must be disentangled.

Generally each investor (or trust) takes a rateable share in any remaining assets.

Can be departed from where:
- it is impossible to apply FIFO (eg where the records are so poor that ordering payments chronologically cannot be accurately undertaken);
-FIFO would result in injustice; or
-the application of FIFO would be contrary to the parties’ intention.

Question 20

Proprietary Claims - tracing rules - withdrawals from a mixed bank account (trust + trust + trustee funds)

Answer 20

(a) you should first apply the rules from (Re Hallett and Re Oatway) with the aim of pushing as much of the trustee’s own money into dissipation as possible (‘everything is presumed against the wrongdoer’); and

(b) you should then apply the rules from (Clayton’s Case and Barlow Clowes v Vaughan) to allocate any remaining assets between the two (or more) innocent trusts.

Question 21

Proprietary claims against other fiduciaries

Answer 21

Fiduciary relationships can also bring proprietary claims to recover property that has been misappropriated by their fiduciaries.

Same tracing rules apply.