Trustees: liability Flashcards
What is the difference between trustee duties and fiduciary duties?
- Trustee duties = to comply with terms of trust and exercise functions in accordance with prescribed standards of care and skill
- Fiduciary duties = to not create conflict between personal interests and duties to the Bs or make unauthorised profit
THIS ELEMENT IS CONCERNED WITH BREACH OF TRUSTEE DUTIES
In what 2 ways can Ts commit a breach of trust?
- Acting outside their powers (e.g. distributing trust property to someone other than B/making unauthorised investment)
- Failing to act in accordance with their duties (e.g. falling below standard of care expected from them)
What 4 issues must be considered when there is a breach of trust?
I.e. Ts have not acted in accordance w their powers/complied with duties
- Who has breached trust
- Is there anything that could exclude/limit liability of any Ts
- What remedy should be awarded
- If more than one T is liable, how should liability be apportioned between them
What breach will be harder to prove than the other?
A T falling below standard expected of them is harder to establishthen a T acting outside their duties - will involve analysis of specific facts e.g. failure to consider standard investment criteria/to comply with DOC/to properly monitor investments
How would Ts be expected to monitor shareholding in private company? Difference in holding small number of shares v majority shareholding?
Monitor investments to ensure it produces appropriate amount of income and capital growth
- Hold small number of shares = not much Ts can do beyond reviewing information given to them as shareholders
- Hold majority shareholding = gives Ts power over the company which they are expected to make use of to safeguard investment e.g. appoint director etc.
Why is it likely that more than one T will be liable for a breach in different ways? In what manner will they be liable?
- Trusteeship is joint office - so if one T may acted outside their powers, another will have failed to monitor this action of their co-T
- Where multiple Ts have breached, they are joint and severally liable
When will a T be liable for a breach of trust that occurred before their appointment?
- Will not be liable for a breach which took place before T was appointed, but if on appointment a T discovers breach of trust occurred, they should commence proceedings to recover from former T
- Failure to do this = liable for own breach
Upon retiring, how can Ts ba liable for breaches of trust during their time as T and after they retire?
2 for after they retire
- Will be liable for any breaches they commit during time as a T even after they have retired
- Can be liable for breaches of trust that occur after they retire if a) the T retired to facilitate the breach or b) T parts with trust property in retiring without due regard so loss is suffered when property transferred to new Ts
What from the trust instrument can be used to exclude/limit the liability of Ts? What is the limit of this?
An exemption clause! Other than where breach is fraudulent
Where there is no exemption clause, how can the T rely on the court for relief?
They can rely on s61 TA - court has discretion to excuse T where they ‘acted honestly and reasonably and ought fairly to be excused for the breach of a trust’
E.g. where Ts have sought/relied on legal advice before taking action
Will not be used lightly! Can be used to excuse some Ts but not others
What is the limitation period for bringing a claim of breach? How is this different for Bs with future interests?
- 6 years from the breach for claims by Bs with interests vested in possession
- For Bs with future interests, limitation period only starts to run when their interest vests in possession
What 2 things does the limitation period not apply to?
Fraudulent breaches or proprietary claims against T (i.e. claims to recover trust property/traceable proceeds from T)
E.g. 10 years ago T used money from trust fund to purchase house and B only just discovered - does not matter that limitation period has expired, B can make a proprietary claim for trust property rather than a personal one
What can be recovered from the T after the normal 6 year period if they have received an unfairly large distribution from the trust? When can the full amount be claimed?
Only the excess - unless T acted dishonestly/unreasonably in making distribution; in which case may be possible to make claim for full amount
What can be obtained to protect Ts from liability and what is their effect? How can this be paid and what does this not protect against?
- Indemnity insurance (common for professional Ts) to prevent T personally bearing cost of breach
- Useful to ensure that T does not have to personally compensate creditors of the trust for acts undertaken in their capacity as T (may be required to do if trust fund insufficient to meet liability)
Can usually have insurance premiums paid out of trust fund as expense!
Does not protect against fraudulent breaches
What is acquiescence and consent and what is the effect of both on (any) B making a claim?
- Acquiescence = B is passive; knows there is a breach but does not take action
- Consent = positive act of authorisation from B
- In both cases - relevant B is barred from making a claim - but other Bs can still bring one
Must be able to get consent from all Bs e.g. if one B is a minor but the rest are adults, consent from the adults is not enough!
What might the court do when a B has actively encouraged a breach?
Use discretion to ‘impound’ the B’s interest under the trust; compensation is paid out of their share where it is ‘just to do so’
What remedies are available to Bs in the case of a breach of trust where T misapplies property (and is not possible to recover)?
Depends on the nature and consequences of breach…
- T misapplies trust property = Bs can seek to recover property (or traceable proceeds)
- If not possible/desirable to recover property or if breach has resulted in loss of value of trust fund = Bs may seek compensation (to reflect loss of asset)
- Bs may remove T from office
What losses caused by their breach will a T be liable for?
I.e. what must be shown
Only for losses where their breach can be shown to be a ‘but for’ cause
On what date is the loss assessed?
The date of trial, not breach
How will the loss be assessed/valued in cases of misapplied property, failure to make specified investment, or acted in breach of duty when investing?
- Misapplied property = loss is the value of asset
- Failure to make an investment = profit the fund would have made if invested
- Breach when investing = investments that a hypothetical prudent T would have made
Can a T be liable for losses where they have not breached their duty? (see example)
E.g. T makes prudent investment (after considering criteria and obtaining propert advice) and the ivnestment drastically falls in value due to market forces
Trust fund will bear the loss, but T may become liable if they continue to hold investment notwithstanding its poor performance
Would be a breach of duty to review
Can a T set off the losses caused by a breach of trust against profits they have made on other investments/transactions?
- Generally no - they are not assessed on average performance
- But it is possible to offset losses against profits when they arise from the same transaction/course of dealing
E.g. Bartlett - Ts had majority shareholding but failed to supervise - company made 2 investments in property: one profitable but other large loss - Ts could offset profit against the loss as they arose from same breach (failure to monitor company’s speculative investments)
What does joint and several liability mean for Bs?
They can choose who to sue and recover the full amount from any one of the Ts
What might a T do if only they are sued for the full amount of loss to trust fund?
Seek a contribution from co-Ts
What court does the discretion have where two or more parties are liable for the same damage?
Under Civil Liability Contribution Act
The court can require one party to make a ‘just and equitable’ contribution to another; meaning contribution may not necessarily be equal between parties
Liability will presumably be equal but can depart on facts
What is a full indemnity and what is its effect? What are the conditions for it to be awarded and when is it more common for it to be awarded?
Under Civil Liability Contribution Act
- Where the court recognises that some Ts are more culpable than others
- Effectively exempts T from liability for a breach
- Rare; will only be awarded where indemnifying T has benefitted from breach (inc where they are also a B) where a T is found to be solely responsible for the duty that was breached
- Common to be awarded where there is a disparity of knowledge/experience between Ts (e,g, where one T is a solicitor and other relies upon their advice)
Re Parington - two Ts, one solicitor and another testator’s widow - solicitor took sole responsibility for administration and negligently made an unauthorised investment, failing to inform widow = court awarded full indemnity on basis it was reasonable for widow to have relied on solicitor’s advice
cf Head - lay trustee took active role in breach and solicitor did not have controlling influence = no indemnity
What protection can be taken by Ts/PRs from when the trust is first established?
3 things
- Ouster clause
- Exemption clause
- Trustee liability(/indemnity) insurance
for clauses - Ts can be involved in drafting of document
What does an ouster clause do? What is its limit?
Entirely removes a duty that would have existed otherwise - cannot remove all T duties (would otherwise be meaningless)
E.g. removal of duties that ordinarily arise where trust holds majority shareholding in company
What does an exemption clause do?
And how is it different to an ouster clause?
- Limits/excludes liability for particular sort of breach (bar fraud/dishonesty)
- Cf ouster clause: duty still exists but T protected from personal liability should they breach it
What will T liability/indemnity insurance do? What can it not protect and how can it be paid for?
Insures aginast personal liability for breach of trust
- Can protect against negligence but not fraudulent breaches
- Premiums can sometimes be paid out of trust fund expense
Will relying on legal advice for interpretation of trust terms protect Ts during administration?
Relying on legal advice does not necessarily prevent Ts from liability for breach - good legal advice will tell Ts to take further steps to protect themsevles…
What protection can be taken by Ts/PRs during administration?
Re uncertainty of powers/duties where trust instrument hard to interpret
(Not considering where Bs are unidentified/missing)
- Seeking out court directions
- Applying to High Court under s48
- Surrendering discretion to court
- Obtaining B’s consent
What is the benefit of seeking out court directions?
E.g. about ambiguous wording of trust instrument etc.
Ts who act in accordance with directions will not be liable even if there is a subsequent claim from a B
Safest but is expensive!
What does a s48 application enable Ts to do and when is it particularly useful? When can it not be used?
Where there is a question about the construction of terms of will/trust…
* T will seek written opinion from person satisfyin s71 (barrister/solicitor of 10 years) - then will apply to High Court for authorisation to rely on legal opinion
* Useful where no disagreement between Bs and Ts but Ts want clarity
HC will not grant order without hearing argument if there’s a dispute
When will Ts surrender discretion to court and what will the court do?
Where there is a dispute between Ts, Ts surrender discretion to court who make a decision for them (rather than simply seeking directions)
What must be the case for Ts to surrender to the court?
Is an exceptional course of action: only where Ts are deadlocked in discretion/precluded from acting due to conflict of interest on specific problem that needs addressing
Ts cannot simply give up all powers and leave court to administer
When will Ts seek fully informed consent of Bs and only when can this be an option? What is the result of this?
- Will be done where they are unsure of powers/duties or want to do something they know will be a breach of trust/FD
- Only an option if all Bs known, locatable and over 18 (and of sound mind)
Fully informed consent of all Bs = no liability!!
What are the limits to obtaining B’s consent?
2
- If T’s withhold important information they cannot rely on consent; must be fully informed
- If consent is only obtained from some Bs; Ts only have a partial defence to breach of trust against claims by those Bs but not others
What potential reliefs/defences are available for protecting Ts after a breach has occurred?
- Beneficiary instigation/consent/acquiescence
- Statutory limitation rules/defence of laches
- Stautory relief under s61
- Civil Liability Contributon Act (see further up)
Bulk of this is mentioned in the opening element (cards near the top)
What is a case of instigation and what can be done here to B??
- Where Ts have defence against Bs who instigated/requested breach
- Ts (or court) may be able to impound B’s interest to use some/all of B’s share of trust fund to indemnify T against claim from non-instigating Bs
Partial defence against innocent Bs
Must the instigating B have benefitted from the breach to have their interest impounded?
No!
Can impounding be used where the B has given consent? What is the difference here between statute and common law?
Yes
- In statute = where B has provided consent in writing (no requirement for benefit)
- In common law = does not require consent in writing (but does require benefit)
Will consent also be a partial-defence?
Yes, unless all Bs have consented
What is acquiescence?
Refers to how a B may not have consented to breach before it was carried out, but will subsequently affirm the action = gives T a defence of acquiescence against Bs who have indicated after a breach consent to action taken
What is the equitable defence of laches and what must T demonstrate to use it?
- Where the limitation period has not expired, T can argue that B has waited too long to bring a claim
- Requires T to demonstrate B knew of breach but has unacceptably delayed claim
Fact-specific
What discretion does s61 give the court re giving relief to T and what are the 3 requirements to be shown by T?
If none of previous defences apply
- Gives court discretion to excuse a T where they ought to be excused
- Ts must establish 1) honesty 2) reasonablenes and 3) that they ought to be farily excused
Not used lightly as it can deny (some) Bs a remedy
But will leave other Ts liable!
What is the most likely case which s61 will apply to? Can professional Ts rely on it?
Where T has inadvertently acted outside powers - more likely to be successful with lay Ts (esp if they sought advice before taking action)
Harder for professional to show they acted reasonably
Re Evans - individual acted as executor of father’s estate, believed a B (brother) to be dead she sought legal advice and upon that took out missing B insurance - brother was alive and insurance did not cover loss - court agreed appropriate to grant relief under s61
When can claims be made against third parties?
Where T took negligent advice from a professional e.g. lawyer/financial adviser
Can prevent personal claim for breach of trust altogether if they identify negligene early and take swift action against adviser
What are the 5 practical steps to be taken once a breach of trust has occurred?
- Check trust instrument for exemption clause
- Consider whether any of the following provide a full or partial defence: reliance on court directions, instigation/consent/acquiescence, stautory limitation rules/laches, statutory relief under s61
- Check for relevant insurance if there is likely to be a successful claim
- Identify whether any potential claims against (negligent) third parties
- If a T is required to pay equitable compensation, consider the Civil Liability Contribution Act
What are the protections available for Ts when distributing?
I.e. missing or unknown Bs
To not be liable if any come forward later with a claim
- Benjamin orders
- S27 notice
- Retaining a fund
- Payment into court
- Missing B insurance
- Obtaining indemnity from Bs
All are considered in Wills so are omitted here - bar retaining a fund
How will retained funds work and what is their downside?
- Ts retain a fund setting aside trust assets in order to be able to dischagre liabilities if missing Bs come forward after distribution
- Downside = prolongs administrative duties as may be holding for long time + difficult to quantify interests of known and unknown Bs!
