Remedies Against Trustees Flashcards
what remedies do Bs have when Ts have breached their duties?
- Bs can bring a personal or proprietary (or both) claim against a T where they have breached their duty(ies)
o B would bring both claims if T did not have the means to compensate using money/property alone
who pays for these claims?
- Bs will need to fund these claims themselves
what should Bs check before bringing a claim?
- Bs should check T has the money or property otherwise the claim is pointless
re: personal claim
when can B bring this claim?
Bs can either bring a claim against a T for:
o Loss suffered by the trust (B will need to prove the breach caused the loss); or
o Unaccounted profits (trust need not have made a loss)
re: personal claim
who is this claim brought against?
- The claim is brought against the wrongdoing T(s) only
o Innocent co-Ts are not vicariously liable for the actions of other Ts
re: personal claim
how are the responsible Ts liable?
o Ts that have breached the trust are jointly and severally liable (Bs might therefore bring the claim against the wealthiest wrongdoing T)
re: personal claim
if B is successful, what can they recover?
- If B is successful, they can recover compensation equal to the loss + interest from the date of breach
re: personal claim
if successful, how is the interest rate determined?
o Interest rate is determined by the court but it is usually the rate allowed on the court’s short term investment account
re: personal claim
what are the elements to this claim?
1) B must identify a breach of duty
2) This breach must have caused the loss (or unaccounted profits)
* The but for test applies
This is more difficult for investment claims. B will need to prove that T made a decision that no other reasonable T would have made.
re: personal claim
what is the position in relation to investment claims?
This is more difficult for investment claims. B will need to prove that T made a decision that no other reasonable T would have made.
re: personal claim
what defences are available?
- exemption clause
- consent of Bs
- court order
re: personal claim
explain exemption clause
i.e. provision in the trust exempting Ts from liability for breach of trust
Applicable to innocent and negligent breaches but not fraud
Re professional Ts, any ambiguity in the clause is interpreted against T
re: personal claim (exemption clause)
what breaches does this apply to?
Applicable to innocent and negligent breaches but not fraud
re: personal claim
explain consent of Bs
If all Bs have consented to a course of action that constitutes a breach, they cannot subsequently bring a claim
Bs can consent before or after the breach has taken place
Bs must be at least 18, have capacity and all the information
If one B consents, that B can no longer bring a claim, but the others can
re: personal claim
explain court order
- The court can relieve Ts from liability (wholly or in part), if they acted honestly, reasonably and ought fairly to be excused
- Courts are reluctant to excuse passive trustees
re: personal claim
what can be a barrier to this claim?
limitation and laches
re: personal claim
explain limitation
B must bring a claim within 6 years of the date of breach. Exceptions:
o B is a minor clock starts when they turn 18.
o B is a remainder man clock starts when their interest is in possession
o Fraudulent breach no limitation period, but doctrine of laches might apply
re: personal claim
what can B bring a claim, even if limitation has expired?
o B is a minor clock starts when they turn 18.
o B is a remainder man clock starts when their interest is in possession
o Fraudulent breach no limitation period, but doctrine of laches might apply
re: personal claim
when will laches prevent C from asserting a claim?
Laches will prevent C from asserting a personal claim where:
o They knew of the facts that gave rise to the breach;
o They delay in taking action;
o The delay constitutes acceptance/waiver of the breach or causes detriment of prejudice to T
i.e. B knows the facts, doesn’t bring a case for 15 years and T is prejudiced because a witness has now died.
re: personal claim
what is laches?
Laches is a legal doctrine that prevents a claimant from bringing an equitable claim if they delayed in asserting their rights
re: personal claim
if one guilty T is sued, do they have recourse to the other Ts?
they can seek an equitable indemnity or contribution under the Civil Contribution Act
re: personal claim
when can an equitable remedy be obtained?
from a co-T who:
o Acted fraudulently when others acted in good faith;
o Is a solicitor who exercised such a controlling influence other Ts followed blindly;
o Has benefitted from the breach; or
o Is also a B who benefitted from the breach (the indemnity is limited to the value of their equitable interest)
They can sue for a full indemnity (unless they are a B)
re: personal claim
explain a contribution under the Civil Contribution Act
The court can order a co-trustee to make a contribution up to 100% that is just and equitable having regard to the extent of their responsibility for the loss
re: proprietary claim
what can B seek the return of using this claim?
Bs can bring a proprietary claim to seek the return of:
o Property owned by the trust; or
o Property that represents TP (this will require tracing)
re: proprietary claim
when might B bring this claim where T has not accounted for profits?
Give an example
If T breached FD by not accounting for profits, they can bring this claim to recover property T subsequently purchased with the profits
i.e. T buys shares with unaccounted profits. They can either bring a personal claim for the sum of the profits, or if T purchased something with the profits, they can bring a proprietary claim to recover that property. This would be advisable if the property has or is likely to go up in value i.e. share
re: proprietary claim
when will this claim fail?
- The claim will fail if there is no property
re: proprietary claim
how does this claim differ to a personal claim?
- Proprietary claims are not subject to any statutory limitation period (however the doctrine of laches does apply)
re: proprietary claim
what is tracing?
- the process of identifying a new asset as the substitute for the old, allowing B to assert a proprietary interest in the new asset.
re: proprietary claim
when is equitable tracing available?
- Equitable tracing is only available where there is a F relationship (i.e. T – B)
re: proprietary claim
what will be a barrier to this claim?
if B has agreed to the transfer of the asset
re: proprietary claim
what happens once the asset has been traced?
- Once the asset has been traced, there is evidence B has a proprietary interest in the property and so has the basis for a proprietary claim
re: proprietary claim
what remedies are available?
There are a number of remedies, i.e.:
o Order for compensation
o Direct transfer to original owner
o Property be held on resulting or constructive trust (not covered)
o Subject property to a charge
re: proprietary claim
what situations do the tracing rules recognise?
The tracing rules recognise B would have an interest in the new asset where:
- clean substitution
- mixed property
re: proprietary claim
what is the position when T has the original trust property?
- Tracing isn’t required here required as the TP can be identified in its original form
re: proprietary claim
what remedies are available where T has the original property? in what circumstances should B take seek remedy?
1) Asset value has increased B should claim the property
2) Asset value has decreased B should claim compensation for the loss to the trust and take a charge / lien over the property for the sum of the loss
o Charge/lien allows B to sell the property if T does not pay the compensation
re: proprietary claim
explain clean substitution
T sold the TP and purchased a new asset with the sale proceeds
re: proprietary claim
what remedies are available where there has been clean substitution? in what circumstances should B take seek remedy?
1) Asset value has increased B should claim the new property
2) Asset value has decreased B should claim compensation for the loss to the trust and take a charge / lien over the property for the sum of the loss
re: proprietary claim (mixed property)
what are mixed assets?
- asset purchased using several sources of money
o The asset has been purchased directly i.e. the trust money doesn’t actually enter T’s account (this would fall under the mixed funds category)
re: proprietary claim (mixed property)
what are mixed funds?
a mix of trust money and T’s money
re: proprietary claim (mixed property)
what are the possible situations under this head?
1) Mixed Asset - Trust Funds & Trustee Money
2) Mixed Asset – Various Innocent Party Funds
3) Mixed Funds – Trust Funds & Trustee Money
4) Mixed Funds – Trustee Funds + Various Innocent Party Funds
re: proprietary claim (mixed property)
explain Mixed Asset - Trust Funds & Trustee Money
- i.e. an asset has been purchased directly using trust money and the balance has been paid using T’s money
re: proprietary claim (mixed property)
what are the remedies re: Mixed Asset - Trust Funds & Trustee Money
Asset value has increased claim a proportionate interest in the mixed asset
o T bought shares for £10k. T paid for these using £5k of trust money and £5k of their own money. The shares have increased to £20k. B should claim a 50% interest in the shares to reflect their initial contribution, so B would receive £10k (i.e. ½ of £20k)
Asset value decreased B should claim compensation for the loss to the trust and take a charge / lien over the property for the sum of the loss
o The shares have decreased to £8k. B can seek compensation for the full loss (£10k). If T cannot pay the £10k, B can enforce the charge, meaning the shares will be sold and B will be paid from the proceeds of sale.
re: proprietary claim (mixed property)
explain Mixed Asset – Various Innocent Party Funds
T is a solicitor and has access to multiple trusts. T uses funds from various trusts to buy an asset (not any of their own money)
re: proprietary claim (mixed property)
what are the remedies for Mixed Asset – Various Innocent Party Funds
Each trust can assert a proportionate interest in the mixed asset (as above)
o The sum they recover will be affected by any increase/decrease in value of the mixed asset
- B could seek compensation for the loss suffered to the trust, but this could not be secured by a lien because the mixed asset
re: proprietary claim (mixed property)
explain Mixed Funds – Trust Funds & Trustee Money
- i.e. T withdraws money from the trust fund into their own bank account and uses the mixed funds to make withdrawals
- Some withdrawals may dissipate the trust money, i.e. holidays, bills – this cannot be recovered. However, if T has purchased assets, the trust money can be traced to these (giving B an equitable right)
- B can apply the rule that gives them the best outcome
re: proprietary claim (mixed property)
what rules apply to Mixed Funds – Trust Funds & Trustee Money
Re Hallet
Re Oatway
re: proprietary claim (mixed property)
explain Re Hallet
- T is deemed to have spent their own money first
- The order Ts money and the trust money went into Ts bank account does not matter as T’s money will always be applied to expenditure first, but the order of the expenditure is important because T’s money is applied to the withdrawals in chronological order
- Will likely achieve a good outcome where T has a large bank balance
- If application of this rule would mean that B’s money could not be traced to an asset (and instead on something that as has dissipated i.e. a bill, holiday etc), the Re Oatway should be used.
re: proprietary claim (mixed property)
what remedies are available when Re Hallet is used?
- Asset value has increased claim a proportionate interest in the mixed asset
- Asset value decreased B should claim compensation for the loss to the trust and take a charge / lien over the property for the sum of the loss
re: proprietary claim (mixed property)
explain Re Oatway
- B is entitled to the first charge on the mixed fund or any property purchased from that fund
re: proprietary claim (mixed property)
what remedies are available when Re Oatway is used?
- Asset value has increased claim a proportionate interest in the mixed asset
- Asset value decreased B should claim compensation for the loss to the trust and take a charge / lien over the property for the sum of the loss
re: proprietary claim (mixed property)
explain Mixed Funds – Trustee Funds + Various Innocent Party Funds
what are the possible scenarios?
- i.e. T puts money from multiple trust funds into their own account
Scenario 1: T has dissipated some of the assets
Scenario 2: T has not made any withdrawals
re: proprietary claim (mixed property)
what rules apply to Scenario 1: T has dissipated some of the assets?
Clayton’s case
Barlow Clowes v Vaughan
re: proprietary claim (mixed property)
explain Clayton’s case
- First money paid into the account is the first money paid out
- This rule will only be applied if it does broad justice having regard to competing claims needing to be disentangled
re: proprietary claim (mixed property)
explain Barlow Clowes v Vaughan
Clayton can be departed from where:
o It is impossible to apply Clayton (i.e. the records are so poor payments cannot be ordered accurately); or
o Clayton would result in injustice; or
o The application of Clayton would be contrary to parties’ intention
If Clayton’s is departed from, then each trust will take a share of the remaining assets that is proportionate to their initial contribution
re: proprietary claim (mixed property)
what rules are applied in Scenario 2: T has not made any withdrawals?
- Re Hallett & Re Oatway are used to dissipate the T’s assets
- Then Clayton and Barlow are used to try an allocate any remaining assets between the trusts
re: proprietary claim (mixed property)
what is a limitation where there are mixed funds?
Lowest Immediate Balance Rule
re: proprietary claim (mixed property)
when will the Lowest Immediate Balance Rule apply? What is this rule?
i.e. T spends all of the mixed funds. They then receive more money. B will not have any recourse to the new money, the new money does not replace the dissipated trust money.
* B’s proprietary claim is limited to the lowest immediate balance (LIB)
* The LIB is the balance of the account before the new money was paid in.
when is there no point in bringing a proprietary claim?
if there is no property i.e. the trustee has spent the money on intangible items i.e. paying bills, on holidays
when might a proprietary claim be preferable over a personal claim?
- if the property is still available (especially if T is bankrupt)
- limitation doesn’t apply (but laches does apply)
why is a proprietary claim better than a personal claim when T is bankrupt?
because T has no money to satisfy a personal claim. The trust would just become an unsecured creditor. The trust would recover the property (even though T is bankrupt) because the property actually belongs to the trust.
when are tracing rules used?
when the property doesn’t exist in its usual form (unless there has been a clean substitution) and so the tracing rules are applied against T’s property to establish a proprietary right to allow B to bring a claim
