Topic 3: Remedies for Breach of Duty of Administration

Question 0

Where there is multiple trustees,who is held liable?

Answer 0

As the trustees act as one, they have joint liability.
Every trustee at the relevant time, can be sued in respect of a breach of trust, even where the trust is breached by just one trustee.

Question 1

Who may sue the trustee for a breach of duty of administration?

Answer 1

1. Either the beneficiaries or

2. A co trustee or successor trustee

Question 2

What is the concept of several liability?

Answer 2

Where the plaintiff chooses to sue any one of the trustee, that trustee can seek contribution from the other trustees.

Question 3

What is the distinction between a personal and proprietary remedy?

Answer 3

• A person remedy/claim is a claim for the defendant himself to pay compensation for the loss to the trust estate.
• A proprietary claim is a claim for the asset in the Defendant’s hands which represent the misappropriate or misapplied trust assets.

Question 4

What are the benefits of a proprietary claim?

Answer 4

1. The plaintiff gets priority over other creditors; and

2. The plaintiff is entitled to the increase in value of the property.

Question 5

What is the aim of compensation?

Answer 5

It is to place the plaintiff in the position he/she would have been in had the trustee appropriately carried out his undertaking.

Question 6

What is the main rule for compensation for a breach of duty of administration?

Answer 6

1. There is no remoteness rule - Re Dawson.

2. All losses flowing from the breach are recoverable, the defendant is liable to make good, the whole deficit.

Question 7

What are the facts of Re Dawson?

Answer 7

• D was trustee of deceased father’s estate
• Being administered in NSW, but some estate located in nZ
• D made an unauthorised payment to someone in NZ pounds.
• This was a breach of duty however main problem: currency exchange.
• At the time the payment was made, Aus and NZ currency equal.
• At time of trial, NZ had appreciated against Aus, therefore NZ worth more than Aus

Courts held:

• Exchange rate was at date of judgement (therefore D had to pay more).
• the court rejected D’s argument that fluctuations in currency levels can’t be readily predicted.
• It was irrelevant, D is liable for all losses flowing from breach.

Question 8

How is the remoteness principle applied in Adamson v Reid?

Answer 8

Recall the facts:
- Sold house for money, didn’t invest.

Court held:
- Amount of interest that would have been earned if the money was invested in government bonds was granted.
This is to ensure the trust estate was placed in what it would have been in at the date of judgment.

Question 9

Which case applied the Re Dawson rule?

Answer 9

Youyang v Minter Ellison

Question 10

What are the facts of You yang v Minter Ellison?

Answer 10

• Y company trustee invested 500k in scheme run by ECCL.
• Minter Ellison acted as solicitors for promotes of the scheme
• Y paid via cheque to ME.
• Their duty was to hold onto money until certificate of deposit was issued, then they would release it to EECL.
• Certificate of deposit was not issued in it’s appropriate form, but someone at ME mistakenly paid 500k to ECCL
• ECCL went into liquidation and money invested in scheme was lost
• Y suffered loss

Court held:

• Must take into account ME’s undertaking.
• Their only obligation was to hold onto 500k until a particular event occurred.
• Their breach was that they paid without the event occurring
• Compensate loss was 500,000 and Y was entitled to recover it regardless of the fact that if things went appropriately they would still have made a loss
• Different from Re Dawson because in this case, ME only had one obligation whether else trustees in other cases have duties to invest.

Question 11

Does the beneficiary have a claim against third parties where the funds have been misappropriated to them?

Answer 11

• Yes, they are required to make restitution of payment, but is limited to what they received.
• It is a restitutionary measure, not compensatory. (Re Diplock)

Question 12

What are the facts and relevance of Re Diplock?

Answer 12

Claims against third parties.

• Executors of will to apply residue of Diplock’s estate for ‘charitable and benevolent objects”
• Too broad so trustee had discretion to choose either purpose
• Didn’t have s104 when this was decided
• Trustees paid out a sum of 203k to 139 different institutions

Court held:

• Because it was too broad, and for non charitable purpose, trust was invalid.
• Therefore any act the trustee did was invalid
• Payments to 139 institutions therefore not authorised
• Because it was mistake as to law, can’t recover
• test applied was whether: at time of payment, did recipient receive anything more than he/she was properly entitled to receive? If so had to pay it back
• 139 institutions had to pay sum of money received back to Diplock’s next of kin

Question 13

When can a claim be brought against a third party?

Answer 13

The claimant must exhaust all remedies against the trustee to restore the trust estate before bringing a claim against a third party : Ministry of Health v Simpson

Question 14

Which section of the Trust Act concerns recovering from third parties in a PERSONAL claim?

Answer 14

s113 Trust Act - which extends ONLY to personal claims

Question 15

What are the relevant sections of s113 TA?

Answer 15

s113(1) -

S113(2) - except by leave of the court, must enforce against trustee first, then third party.

Question 16

When can’t a claimant claim against a third party?

Answer 16

s113(3):

(a) - where they have received in good faith
(b) - altered their position in reliance on the property; and
(c) - court thinks it would be inequitable to enforce remedy

Question 17

What suffices to a third party altering their position using the trust property?

Answer 17

• It must be something irreversible.

- For example, not a car because a car could be sold and money given back

Question 18

What is tracing?

Answer 18

It is the basis of a proprietary claim to trace the trust property into an asset in the hands of the Defendant: Foskett v McKeown

Question 19

What are the facts of Foskett v McKeown?

Answer 19

• Murphy was a real estate agent. He supposedly had 200 lots in Portugal
• He persuaded 200 English people to make deposits on those lots.
• He then applied money to pay premiums on life insurance. He paid for 5 premiums.
• He committed suicide which was covered by life insurance policy (they were special)
• money went to deceased’s estate
• 200 prospective buyers sought to be entitled to money

Court held:

• they were entitled to money from the TWO life insurance premiums which were paid using trust property
• They could trace it and evidence showed it was paid using trust property
• Claim to an amount proportionate to what they had paid.

Question 20

What are the two rules when the trustee mixes the trust property in with his own?

Answer 20

1. Re Hallett’s Estate Rule

2. Re Oatway’s Rule

Question 21

What is the Re Hallett’s Estate rule?

Answer 21

-Where there is a dissipation of money using the mixed funds, the law presumes that the trustee uses his/her money first, then the trust money.

Question 22

What is an example of the Re Hallett’s Estate rule?

Answer 22

Brady v Stapleton

Question 23

What are the facts of Brady v Stapleton?

Answer 23

• Trustee held 32,380 shares on trust in a particular company, of the same class
• Trustee also held 1,300 shares in his own capacity of the same company.
• Trustee transferred 17,000 trust shares to a third party, which was unauthorised.

Court held:

• He gave away his shares first, so the 1,300 gone and gave away so many of the trust estate shares as to make up the difference = 15,700.
• Therefore remaining shares belonged to trust

Question 24

What is Re Oatway’s Rule?

Answer 24

Where the money is withdrawn to make a proper investment, it is deemed to have spent the trust money first and then the trustee’s money.

E.g. 
-5k from trustee, 5 k from trust
- He makes two withdrawals:
	5k to buy shares now worth 7k
	5k to spend on holiday.
Courts will hold: 
- First 5k spent deemed to be trust money, so beneficiaries now entitled to share as they can trace their money into it

Question 25

What are the two rules when the trust property of TWO trusts are mixed?

Answer 25

1. Proportionate Distribution Rule; and

2. First in First out

Question 26

What is the Proportionate Distribution Rule?

Answer 26

• The totality of the trust fund becomes the denominator
• The amount each trust put into the mixed fund becomes the numerator.

e. g.
- if Trust A contribute 6k and Trust B contribute 4k
- Then (e.g. there is a dissipation) the remaining funds in the bank, 6/10 goes to A, 4/10 goes to B.

Question 27

What is the First in and First out rule?

Answer 27

-The deposits are applied in the order they are received.

E.g. C pays 5k, 5k remaining in bank
- If A paid first into the mixed fund, then 5k of the 6k is deemed to be spent first.
- The remaining 5k, A gets 1k, B gets 4k.
So very different results if apply different rules

Question 28

Which rule is preferred where the two trust funds are mixed?

Answer 28

The Proportionate Distribution rule is to be used unless it is impractical.

It is impractical where there is a LONG series of transactions because the proportions need to be determined after each transaction : Clayton’s Case.

Question 29

What if the trustee mixes own money, along with mixed funds of two trusts?

Answer 29

1. Apply Re Oatway and Re Hallett’s rules first

2. Then work out the trust’s proportions.

Question 30

What is the case if the trustee unauthorisedly gifts trust property to a volunteer and the third party volunteer purchases an asset with the money?

Answer 30

The beneficiaries and the third party take the shares of the asset that has been purchased according to their contributions. (Re Diplock)

Question 31

What is the case of Re Diplock regarding third party purchase of an asset using misappropriated trust funds?

Answer 31

• One of the 139 institutions given a donation was to a hospital
• Hospital used money to improve wards

Court held:
- It is proportionate sharing.
- However in this case, a new asset wasn’t purchased.
- It was improving an existing asset which no evidence of icnrease in value. The funds had been dissipated with no surviving value
= Two wards could not be separated from the hospital so value could not be put on asset
- The only way to enforce proprietary remedies is to be able to force the sale of asset
- SO court held, next of kin’s case would necessarily fail on this case because of the type of expenditure

Question 32

Can the plaintiff combine a proprietary and personal claim?

Answer 32

• The plaintiff does have a choice of election between the remedies, but they cannot claim both: Scott v Scott.
• Where they make a proprietary claim but the asset has dropped in value, they cannot claim compensation for the lost amount.
• A proprietary claim is essentially accepting Trustee’s breach and treating it as if it was an authorised transaction. It would be contradicting if P could recover compensation for a deemed authorised transaction.