Trustee Liability: General Protection of Trustees

Question 1

When can actions be taken to protect trustees and personal representatives?

Answer 1

1. When the trust is first established
2. During the administration of the trust - but before a potential breach is committed
3. After a breach has been committed

Question 2

What can be done at the outset to protect trustees?

Answer 2

Trustee can chose not to act or

Settlor can include an ouster or exemption clause in the TI

or take out trustee liability insurance

Question 3

What is an ouster clause?

Answer 3

If trust is created in a deed or a will T may be involved in drafting of that doc

Ouster clauses can be included to remove a duty that they would otherwise have

Not all duties can be ousted

Question 4

What is an exemption clause?

Answer 4

Limits or excludes trustee liability for particular sorts of breach

This is different to an ouster clause because the duty still exists but trustee will be protected from personal liability if they breach it

A trustee cannot rely on this if they have acted dishonestly

Question 5

Why is protecting trustees during administration important?

Answer 5

There may be uncertainty as to powers or duties - trustees may be unsure because TI may be hard to interpret.

There may be unidentified or missing beneficiaries and T must still fulfil their duties to distribute but will be liable for breach of trust if B is later found

Question 6

What can be done about uncertainty of the TI?

Answer 6

The trustee may seek legal advice and rely on it and act accordingly BUT this will not prevent liability for breach of trust if the legal advice is incorrect

The steps that can therefore be taken are:
1. Court direction - trustee that relies on this will not be liable even if there is a subsequent claim from a beneficiary. Expensive though.

2. Apply to HC under s48 of Administration of justice act to rely on counsel opinion
3. Surrender the discretion to court
4. Obtain beneficiary consent

Question 7

What happens if the trustee applies for a s48?

Answer 7

No hearing so cheaper than court order

The steps are:
1. Seek a written legal opinion from a person satisfying s71 - so a barrister or solicitor with 10 years experience and
2. Apply to HC authorisation to rely on the legal opinion

This is the best option for interpreting the TI.

Question 8

Why might a trustee want to surrender discretion to the court?

Answer 8

If there is a dispute between the trustees about how they should exercise duties or

if there is a conflict of interest

Court makes the decision for the trustees

Usually trustees cannot simply give up all their powers and obligations and leave the court to administer the trust on an ongoing basis.

Question 9

When might a trustee seek a beneficial consent?

Answer 9

When trustees are unsure of their powers

When they know that if they do something it will breach the trust or one of their dutioes

Question 10

when is the option to seek beneficiary consent available?

Answer 10

Only if all the Bs are known, locatable, adult and of sound mind.

Question 11

What are the conditions for obtaining beneficiary consent?

Answer 11

The beneficiaries must be given full information to enable them to provide consent - if T withholds important information about their actions they will not be able to rely on the consent obtained

If consent is obtained from some beneficiaries, the T will have a partial defence to the breach of trust by those beneficiaries but not against other beneficiaries that did not consent.

Question 12

What options are available to Ts after the breach?

Answer 12

Bs can affirm the action - defence of acquiescence

Defence against beneficiaries who instigate or request the breach - but only a partial defence if there are other Bs who did not

Question 13

What is the defence of impounding a beneficiary’s interest?

Answer 13

Available where the beneficiary instigates or requests a breach

Only available against that beneficiary

T can impound on that B’s interest - means using some of all of the B’s share of the trust to indemnify the trustees against a claim by other beneficiaries

Court has discretion to do this under s62 TA 1925

There is no requirement to show B benefitted from the breach

Also applies where the beneficiary has consented to the breach IN WRITING, or the court can exercise common law discretion which does not require consent in writing but does require B to have benefitted from the breach.

Question 14

What are the statutory limitation periods for a breach of trust?

Answer 14

Limitation period for bringing a claim for a breach of trust is 6 years

BUT only applies to claims by Bs with interests vested in possession.

For Bs with future interests the period of limitation starts running when the interests vests.

Limitation period does not apply to fraudulent breaches or proprietary claims against the trustees

If T is also a B, and received an unfairly large distribution, only the excess can be recovered after 6 years UNLESS T acted dishonestly or unreasonably in making the distribution, in which case it may be possible to make a claim for the full amount of the payment.

Question 15

What can the trustee do in regards to defending the limitation period?

Answer 15

Where the limitation period has not yet expired, T can use equitable defence of laches.

Means T can argue B waited too long to bring the claim.

T has to demonstrate that the B knew of a breach but has delayed their claim unacceptably, making it unconscionable for the beneficiary to assert their beneficial interest.

Question 16

What if all of these protections do not apply?

Answer 16

T can seek a relief under s61 TA 1925

Question 17

What does s61 offer?

Answer 17

Gives the court discretion to excuse a trustee in circumstances where the trustee acted honestly and reasonably and ought fairly to be excused for the breach of trust

T bears the burden and has to establish

1. Honesty
2. Reasonableness
3. They ought fairly to be excused

Question 18

In what cases is s61 most likely to be used?

Answer 18

By lay trustees and not professional ones

Question 19

What can a trustee do against a third party if liable?

Answer 19

Take action against a third party eg against an adviser that gave advice that was relied upon in making the trust breach

if T does this he may be able to prevent a personal claim for a breach of trust altogether as they would have taken action to recover the funds on behalf of the trust

Question 20

What happens if one of the trustees is liable and there are other trustees?

Answer 20

Trustees are jointly and severally liable - so one trustee may end up compensating the trust for the whole loss

T can seek a contribution from co trustees under the Civil Liability Contribution Act 1978

Question 21

What claim can a negligent trustee make under the act?

Answer 21

Where two or more parties are liable for the same damage the court has discretion to require one party to make a just and equitable contribution

While the court will presume equal responsibility they may depart from this presumption where the facts indicate that it would be fair to do so

Unequal contributions will reflect differing levels of culpability for the loss. T may have delegated a function to a different T. T with the responsibility may be seen to be more at fault.

Question 22

Can the court allow full indemnity?

Answer 22

The court may allow a contribution amounting to a full indemnity but only in 3 cases:

1. A particular t is morally culpable for the breach such as cases where the trustee has misappropriated trust property for their own benefit
2. A trustee is also a beneficiary
3. A trustee acts as solicitor to the trust and the breach is committed in reliance on their advice

Question 23

What steps need to be taken once a breach has occurred in advising a trustee on the scope of their liability?

Answer 23

1. Check TI for exemption clauses

2 Consider if any of the partial defences apply - so reliance on court direction, instigation, consent, acquiescence, statutory limitation rules, laches, s61 TA.

4. If there is likely to be a successful claim - check for insurance or indemnity from beneficiaries
5. identify if there are nay potential claims against third parties
6. If a trustee is required to pay equitable compensation, consider the Civil Liability Contributions Act 1978 against co trustees or third parties.