The duties of express trustees Flashcards
Brittlebank v Goodwin
Obtaining trust information
It is long established that trustees should inform adult beneficiaries who have an interest in possession, that is, the right to income from the trust assets or a right to use trust assets about the existence of the trust and the nature of their interest in the trust
Re Beloved Wilkes
obtaining trust information - reasons for discretionary decisions
Trustees cannot be compelled to give reasons for their discretionary decisions:
and if they disclose reasons, they will be open to court scrutiny
Schmidt v Rosewood Trust Ltd [2003] UKPC 26, [2003] 2 AC 709
right to disclosure - obtaining trust information
Issue: Whether the right to disclosure could be regarded as a proprietary right. It was argued that since Vitali and Vadim were the objects of a mere power (rather than a fixed or discretionary trust), they had no proprietary interest in the trust property and consequently no right to disclosure.
Principle: Being able to get info does not depend on having fixed, definite assurance of getting beneficiary interest.
The court is standing behind the trustee and is able to supervise the trust – large jusrisdiction to supervise the performance of trust.
Held, 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,O’Rourke v Darbishire [1920] A.C. 581, [1920] 2 WLUK 152considered andHartigan Nominees Pty Ltd v Rydge (1992) 29 N.S.W.L.R. 405applied. Therefore, the object of a discretion, including a mere power, such as S, could also be entitled to protection from a court of equity.In the present case there was no suggestion that the trusts were a sham or tainted with illegality and therefore the court’s intervention was not inappropriate.
Vitali Schmidt was a wealthy senior executive director of Lukoil, a very large Russian oil company, and the co-settlor of two substantial Isle of Man discretionary trusts. Over $105m was ultimately under trust control. The terms of the trusts were somewhat muddled and poorly drafted and their operation somewhat opaque. Distribution was controlled via the exercise of powers of appointment—with very wide discretion as to who might be the objects of the wealth—rather than allocating specific beneficial interests to particular individuals in the trust deeds. The judgment hints the purpose was tax avoidance and camouflage to avoid publicising the true owners of the wealth.
Vitali died unexpectedly, but after writing letters indicating he wished his son to take his share from both trusts. These were at least expressions of wishes as to the discretionary appointment of the trust property. Given the trusts’ opacity and other suspicions, his son Vadim wished to obtain information about them. He relied on his two capacities: personally, as a beneficiary under the trusts; and in his capacity as administrator of his father’s estate. The trustees refused on the grounds that the son was not a beneficiary under the trusts and his father was only the object (beneficiary) of a power.
The first instance judge ordered the disclosure of the documents. The trustees appealed, and the Staff of Government Division of the High Court of the Isle of Man allowed the appeal. Vadim appealed to the Privy Council. The Privy Council did not have enough information to make an order for disclosure, but allowed the appeal and remitted the case to the High Court of the Isle of Man for further consideration.
Re Londonderry’s settlement
right to disclosure - obtaining trust information
Held:
- Trustees entitled to withhold or redact documents that might reveal their reasons for coming to a decision on use of a dispositive power
- The absolute discretion was given to the trustees and not to the courts
- ‘Nothing would be more likely to embitter family feelings and the relationship between the trustees and members of the family were the trustees obliged to state their reasons for the exercise of the powers entrusted to them. It might indeed well be difficult to persuade any persons to act as trustees were a duty to disclose their reasons, with all the embarrassment, arguments and quarrels that might ensue, added to their present not inconsiderable burdens.’
- The defendant requested the trustees to supply her with copies of the:
o (a) Minutes of the meetings of the trustees
o (b) Agenda and other documents prepared for the trustees’ consideration
o (c) Correspondence relating to administration of the trust passing between:
(i) trustees, (ii) trustees and solicitors to the trustees, (iii) trustees and
beneficiaries - The trustees took the view that, in the interests of the family as a whole, they ought
not to disclose the documents unless they were under a duty to do so
Breakspear v Ackland
right to disclosure - obtaining trust information
(Briggs LJ)
‘…it is in the interests of beneficiaries of family discretionary trusts, and advantageous to the due administration of such trusts, that the exercise by trustees of their dispositive discretionary powers be regarded, from start to finish, as an essentially confidential process. It is in the interests of the beneficiaries because it enables the trustees to make discreet but thorough inquiries as to their competing claims for consideration for benefit without fear or risk that those inquiries will come to the beneficiaries’ knowledge. They may include, for example, inquiries as to the existence of some life-threatening illness of which it is appropriate that the beneficiary in question be kept ignorant. Such confidentiality serves the due administration of family trusts both because it tends to reduce the scope for litigation about the rationality of the exercise by trustees of their discretions, and because it is likely to encourage suitable trustees to accept office, undeterred by a perception that their discretionary deliberations will be subjected to scrutiny by disappointed or hostile beneficiaries, and to potentially expensive litigation in the courts.’
The wish letter should be disclosed.
While the general rule is that wish letters are confidential, the trustees are seeking court sanction of the scheme of distribution, which would require the disclosure of the wish letter to to the court, as it is necessary for the court to consider the reasons for the exercise of the trustees’ discretion, which would, in turn, require the court to see the wish letter. Had the trustees not been seeking court sanction of the scheme, the letter would not have been disclosed.
Principle:
The beneficiaries sought the disclosure of a ‘wish letter’, which had been written to the trustees by Basil, the settlor, as well as disclosure of oral communications from Basil to the trustees
Eaves v Hickson
holding trustees to account - strict liability for consequences
Held: It was held that the father was to be personally liable for the loss occasion, so the children had to give the money back.
It is also clear from this case that dishonesty/fraudulence of the trustees was not necessary for this liability (despite what Lord Selbourne said in Barnes v Addy)
Reasoning:
- terms of trust allowed for distribution to William’s children (meaning children of marriage)
- William’s marriage certificate was forged to show an earlier date, in order to pretend that his children were born of his marriage
- Although trustees had distributed money from the trust to the children in good faith, this was ultra vires and they were liable to repay the entire amount spet
Facts: In this case there was a trust set up for the benefit of a man’s children, who could not benefit from the trust as they were illegitimate (i.e. born out of wedlock). He forged a marriage certificate so they could benefit from the trust.
Perrins v Bellamy
holding trustees to account - strict liability
- ‘My old Master, the late Lord Justice Selwyn, used to say: “The main duty of a trustee is to commit judicious breaches of trust”’ (Lindley LJ, p. 798)
Held: trustees were excused from liability
Trustees held certain properties on trust. They were advised by solicitors that they had a power of sale over the properties, and a surveyor recommended that the properties be sold.
The trustees, therefore, sold the properties, but it transpired that this was in breach of trust and that the advice received from their solicitors was incorrect.
The beneficiaries argued that it would not be fair to relieve the trustees from liability for the breach, because the trustees had failed to seek the directions of the court.
Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71
holding trustees to account - proper purposes rule
Klug v Klug
holding trustees to account - proper purposes rule
Neville J: ‘she has not exercised her discretion at all’ (p. 71)
=> It was for improper purposes
Mother had power of appointment, and refused to accept the daughters’ request for appointment on the basis that she had married a Frenchman.
Re Pauling Settlement Trusts
holding trustees to account - proper purposes rule
Held: void actions – purpose of powers was to benefit those being paid
‘The family were a united family, who, at all material times, lived beyond their means and were continually in grave financial difficulties.’ (p. 303)
Trustees exercised power of appointment to distribute money to bfs, knowing that parents were demanding’.
Grand view private trust Ltd v Wang – PC case
holding trustees to account - proper purposes rule
Issue: InGrand View Private Trust Co Ltd v Wen-Young Wong,1the Privy Council considered the validity of a decision by a trustee of a Bermudan discretionary trust, set up for the benefit of the settlors’ descendants, to exclude those descendants as objects and add itself as sole object in its capacity as sole trustee of a Bermudan purpose trust set up by the same settlors for various purposes. In particular, the Privy Council considered the relevance of the trust’s overarching purpose (or ‘substratum’) to the trustee’s purported exercise of this power.
Held: The decision had been taken by the GRT trustee for an improper purpose and was void
The Board held that the power of addition and exclusion was a fiduciary power and therefore subject to duties and restrictions imposed by equity. The Board agreed with the Court of Appeal that the following questions were relevant when considering the validity of the exercise of a power by a trustee:
- whether the way in which the power has been exercised is in accordance with the express or implied terms of the power (the ‘scope of power rule’);
- whether the trustee has given adequate deliberations as to whether and how it should exercise the power; and
- whether the use of the power by the trustee, although within its scope, was for an improper purpose ie a purpose other than the one for which it was conferred (the ‘proper purpose rule’).
The Board rejected an argument from the Wang family members that the trustee lacked the necessary power to exclude them and add the trustee of the Wang Family Trust as the sole beneficiary. The decision taken by the trustee of the Global Resource Trust fell within the scope of the power as drafted in the trust deed. The key issue in the appeal was whether the use of the power was consistent with its proper purpose.
The Board considered the trust instrument, and the circumstances surrounding its creation, and concluded that the purpose of the Global Resource Trust was to benefit the family members of the settlors and the trustee’s decision to replace the family members as beneficiaries with the trustee of the Wang Family Trust was inconsistent with the purpose for which the power of addition and exclusion was conferred.
[55] …the proper purpose rule… involves identifying the purpose for which the power has been exercised and asking whether such purpose is a purpose for which the power has been given.
The Grand View case involves two discretionary Bermuda-law trusts, the Global Resource Trust (GRT) and the Wang Family Trust (WFT), established in 2001. The GRT benefited the settlors’ descendants, while the WFT, a purpose trust, provided no benefit to the Wang family. Both trusts had powers to modify their beneficiary classes.
In 2005, the settlors, deeming their children adequately provided for in their wills, directed the GRT trustee to exclude all family members as beneficiaries, designate the WFT trustee as the sole beneficiary, and transfer all GRT assets to the WFT. This action was contested by Wang family members in 2018.
At first instance, the Bermuda Supreme Court invalidated the GRT trustee’s actions, declaring them void. However, the Bermuda Court of Appeal overturned this decision and granted leave to appeal to the Judicial Committee of the Privy Council (JCPC). After a three-day remote hearing in March 2022, the JCPC delivered its judgment on 8 December 2022.
Pitt v Holt; Futter v Futter [2013] UKSC 26
holding the trustee to account - inadequate deliberation - conjointed
NB: In the Court of Appeal three-part test had to be satisfied in order for a mistake to be operative: (i) there had to be a mistake; (ii) it had to be of the relevant kind; and (iii) it had to be of sufficient gravity (at [103]). For limb (ii) a distinction was confirmed: the mistake had to go to the immediate legal effect of the decision, not its consequences. InPitt v Holt, since the mistake went only to consequences, not to effect, rescission was refused.
Wider questions:
One wider matter is the difference of approaches between the Court of Appeal and the Supreme Court. As regards mistake, Lord Walker, with whom all the other members of the court agreed, made significant observations (at [123], [128]):
> It would also be contrary to the general disinclination of equity to insist on rigid classifications expressed in abstract terms … The court may and must form a judgment about the justice of the case.
This is in contradistinction to the tendency of much of modern equity where the trend has been to greater ‘concretisation’ of its tests into rigid limbs and strict logic (Hudson,Swaps, Restitution, and Trusts(Sweet & Maxwell 1999) 88). Pitt v Holtjoins cases such asBCCI v Akindele[2001] Ch 437 (CA) with its broad appeal to ‘unconscionability’ andPatel v Mirza[2016] UKSC 42, [2017] AC 467, which also rejected a rigid test. It is a triumph for the more traditional approach to equity, in contradistinction to ‘fusion’ where concrete common law principles are adopted
InPitt v HoltandRe Futter, the UKSC held that the dispositions in both Pitt and Futter could not be set aside under the rule, however, the trust settlement in Pitt could be set aside under the equitable doctrine of mistake.
The Supreme Court rejected this compartmentalisation and the distinction between effect and consequences in favour of a singular test: only if the mistake is sufficiently grave shall the disposition be voidable (at [122]–[123]). In effect Lloyd LJ’s three-limb test was rolled up and the rigid distinction between different types of mistake rejected, although where the mistake is to effect, it is likely to be graver. On the facts ofPitt v Holt, the mistake was of sufficient gravity to justify avoiding the transaction.
For inadequate deliberation, Lloyd LJ thought the appropriate test was that the inadequate deliberation had to be such that it amounted to a breach of fiduciary duty (at [70]). In both cases the trustees had relied on professional advice and had therefore deliberated sufficiently. The problem was the advice was wrong and this was not enough. There were therefore no breaches of fiduciary duty and rescission was refused. The Supreme Court agreed.
Facts: Following a workplace injury, Mr Pitt won damages from his employer: this money was settled on trust by Mrs Pitt, acting as her husband’s receiver (a fiduciary role).
The trust incurred an unexpected tax liability owing to incorrect legal advice
Tried to rely on the ‘Rule in Re Hastings-Bass’: trustees (and other fiduciaries) could apply to have a decision set aside if they would have decided differently had they considered a relevant matter, or omitted an irrelevant matter, in making their decision
- Was used to allow trustees to unwind tax avoidance schemes after they realised the tax advice was incorrect
- The rule was ‘[an] exampl[e] of that comparatively rare instance of the law taking a seriously wrong turn’ (Longmore LJ in Pitt v Holt [2012] Ch 132 (CA))
- Until correction in Pitt v Holt, limiting jurisdiction to unwind trustees’ decisions
- and, for Lecture 18, expanding rescission on the ground of equitable mistake
.
Re Hay’s settlement Trusts
holding trustees to account - whether or ot to exercise the power or not
*‘…the duties of a trustee which are specific to a mere power [of appointment] seem to be threefold. Apart from the obvious duty of obeying the trust instrument, and in particular of making no appointment that is not authorised by it, the trustee must, first, consider periodically whether or not he should exercise the power; second, consider the range of objects of the power; and third, consider the appropriateness of individual appointments.’ *
The power was valid, the delegation was invalid
In a trust deed trustees were directed to hold trust funds for any persons (with the exception of the settlor, her husband and Ts) or purposes they appoint with 21 years of settlement
Trustees executed the deed of appointment, transferring the funds to another discretionary trust with themselves as the trustees, with the power to appoint beneficiaries of both the fund and income among any person in the world
Nieces and nephews sought to claim the money
Bahin v Hughes
holding trustees to account - Duty to act unanimously - joint liability
Trustees are liable for their own breaches, and jointly and severally liable for joint breaches.
Hughes was an active trustee and Edwards was not. Despite this, due to the joint and several liability of the trustees, “all the trustees were in the wrong, and everyone equally liable” to indemnify the beneficiaries including Edwards
Nestle v National Westminster Bank [1993] 1 WLR 1260 (CA) 1279
holding the trustee to account - the duty of impartiality
Nestlé makes it clear that trustees are to be judged (absent breach of fiduciary duty) on the basis of outcomes, not behaviour. It is by no means certain this is right. One argument is that the onerous burdens of trusteeship ought not to let trustees escape this way. Accordingly, Stauch and Watt [1998] Conv 352 criticise the causal requirement that saved the trustees from liability since a well-made decision could have produced the results their poor decisions did. They intimate that it leads to ‘immunity’ (at 357). Instead, outcome should go not to liability but quantum. Then, the courts should be bolder about inferring loss and ordering compensation for it. Do you agree? Or is this too punitive, going against statements in cases such as Vyse v Foster (1872) 9 Ch App 309 (CA Ch) 333 that equity does not award exemplary (or punitive) compensation, where the amount is unrelated to the actual loss?
It was held that, whilst the bank was under a duty to maintain balance between beneficiaries, it could not be established that the claimant had suffered loss as a result of the bank’s management of the fund.
The case centered on trustees’ duties in managing investments, focusing on (i) when poor trust fund management constitutes a breach of trust, and (ii) balancing capital and income for different beneficiaries. A 1922 trust provided for a testator’s widow and descendants, with Georgina, the sole remaining beneficiary by 1982, becoming absolutely entitled to the fund.
The trustees had a narrow view of their investment powers, failing to diversify or regularly review the portfolio. This led to poor capital growth, with the fund losing real value. Both John and George, income beneficiaries living abroad, influenced the trustees to invest their shares in tax-efficient British government securities, enabling them to receive tax-free income.
Georgina argued that the trustees’ failure to diversify and balance the interests of income and capital beneficiaries caused significant financial loss, claiming the £269,000 fund should have exceeded £1 million. She sought an account of the returns that should have been made and compensation.
