Unit Seven

Question 1

Before being able to sue a trustee for compensation for breach of trust, the claimant must be able to point to a breach of trust on the part of the trustee. This question looks again at some breaches of trust by way of reminder.

Under the terms of a will, Zainab is holding £50,000 on trust for Alice contingently on her attaining 21. Alice is currently 19. The sum represented the residue of the estate.

Which ONE of the following is NOT likely to constitute a breach of trust on the part of Zainab?
(A) Alice asks for the income from her share of the trust fund. Zainab refuses.
(B) Without taking advice, Zainab invests the trust fund in a friend’s private company.
(C) Alice asks for £10,000 from the trust fund capital for university fees and expenses. Zainab refuses.
(D) Zainab decides she does not want to be a trustee anymore, and, as Alice is over 18 , arranges for the entire trust fund to be transferred to Alice.

Answer 1

The answer is C. This is not a breach of trust because Zainab has a discretion under s32 Trustee Act 1925 whether or not to advance the £10,000. A refusal, provided not for an improper reason, is not a breach of trust.

Question 2

Is the following statement TRUE or FALSE?

To sue a trustee for compensation, the beneficiary must prove that the trustee has breached the trust and that the breach has caused loss.

Answer 2

The statement is TRUE. The beneficiary can sue the trustee if they can show a breach of trust by that trustee and that the breach caused loss to the trust. Both elements must be present. See Nestle v National Westminster Bank, where the bank trustee had breached its duty of care when investing the trust fund (e.g. it had failed to review the trust investments regularly) but the beneficiary’s breach of trust action was unsuccessful because she could not show that the breach had caused loss to the trust fund. She failed to establish that the trust fund would have been worth any more had it been managed by a reasonable trustee carrying out all his duties.

Question 3

A trustee has stolen trust property, sold it and used the proceeds to buy a car.

Which ONE of the following statements is CORRECT?
(A) The beneficiaries can bring a personal claim to recover the car.
(B) If the trustee is bankrupt, the beneficiaries would be advised to bring a personal claim to gain priority over the trustee’s ordinary unsecured creditors.
(C) A claim for compensation for loss to the trust is a proprietary claim.
(D) The beneficiaries could recover the car in a proprietary claim.

Answer 3

The answer is D. The car is property which represents the stolen trust asset. The beneficiaries can exert their proprietary rights over this replacement property.

A is not correct because an action to recover the car is a proprietary claim.

B is not correct because personal claims against a bankrupt trustee do not have priority over ordinary unsecured creditors; it is proprietary claims which give priority.

C is not correct because a claim for compensation is a personal claim

Question 4

On 25th May, Mark, a trustee of a local playgroup charity, steals £500 cash from the charity, and pays it into his personal bank account, which has a balance of £200. On 30th May, Mark writes a cheque for £700 to pay his credit card bill. On 20th June,Mark’s account is credited with his monthly salary of £1,500.

Is the following statement TRUE or FALSE?

Using a proprietary claim, the charity can reclaim £500 from Mark’s account.

Answer 4

The statement is FALSE. A proprietary action seeks to recover the original £500 belonging to the charity. However, this has been dissipated. Mark’s normal monthly salary credit is not taken as replacing the £500 (Roscoe v Winder). The charity will, however, have a personal action against Mark for £500.

Question 5

Which ONE of the following statements is CORRECT?
(A) Trustees are vicariously liable for breaches by their co-trustees.
(B) Trustees who have breached the trust are jointly and severally liable to the beneficiaries.
(C) Passive trustees cannot be sued by the beneficiaries.
(D) Trustees do not owe a duty to watch over their co-trustees.

Answer 5

The answer is B. Where more than one trustee is found to be in breach of trust causing loss to the trust, there is joint and several liability for that loss. This means that the beneficiaries can select whether to bring a claim against one of the trustees in breach, or all of them.

A is not correct because trustees are not vicariously liable for the acts of their co-trustees. They are liable only if they have personally breached a duty causing the loss.

C is not correct because passive trustees who do not play an active role in the administration of the trust can still be sued for breach of trust if this failure to act causes loss.

D is not correct because there is a duty to be active in the trust and to watch over and correct the conduct of co-trustees.

Question 6

Which ONE of the following statements is CORRECT?
(A) The time limit for bringing a personal claim for breach of trust against a trustee is six years from the date the cause of action accrued.
(B) Proprietary actions to recover trust property from a trustee are never time-barred.
(C) Claims for a fraudulent breach of trust must be brought within six years.
(D) A trustee can avoid liability for a breach of trust by retiring within the limitation period.

Answer 6

The answer is A. See s21(3) Limitation Act 1980.

B is right insofar as the Limitation Act 1980 lays down no time limit to recover trust property from a trustee, but such actions are still subject to the equitable doctrine of laches.

C is not correct because s 21(3) of the Limitation Act 1980 says that any limitation period laid down by the Act shall not apply to a fraudulent breach of trust.

D is not correct because a trustee will be liable for a breach committed while they were a trustee, even if they retire before the beneficiary takes action against them.

Question 7

Is the following statement TRUE or FALSE?

The ability to bring a proprietary claim and to use equitable tracing rules applies only to claims by beneficiaries against trustees who have misappropriated trust money.

Answer 7

The statement is FALSE. The principals in other fiduciary relationships are able to bring proprietary claims to recover misappropriated property and to use equitable tracing rules to identify their property. For instance, a company can use equitable tracing against a director who has misappropriated company property as the misappropriation is a breach of the director’s fiduciary duties to the company and this is sufficient to establish the necessary equitable interest.

Question 8

Six months ago, a trustee made an unauthorised withdrawal of £100,000 from the trust’s bank account. They paid this sum into their own account at Metropolis Bank which had an existing balance of £50,000. Later, they withdrew £125,000 to buy a luxury yacht. The trustee then paid off some of their debts with the £25,000 remaining in the account. The yacht is now worth £175,000. The trustee has been declared bankrupt.

Which ONE of the following statements is CORRECT?
(A) The presumption from Re Hallet will produce the best result for the beneficiaries.
(B) Under Re Oatway, the beneficiaries could claim a charge over the yacht to secure the £100,000.
(C) The beneficiaries will never be able to claim a proportionate share of the yacht in this situation.
(D) The beneficiaries will not be able to claim the yacht because this asset will be sold to pay off the trustee’s creditors.

Answer 8

The answer is B. In Re Oatway, it was held that the beneficiaries’ charge subsists on each and every part of the bank account and any asset purchased with it. This would enable the beneficiaries to assert that it funded £100,000 of the £125,000 used to buy the yacht. Therefore, the beneficiaries could claim a charge over the yacht to secure the £100,000.

Question 9

Which ONE of the following is NEVER a defence to a breach of trust action?
A) The beneficiaries (who are all adults with capacity) have given their fully informed consent.
(B) There is an exemption clause in the trust instrument.
(C) The trustee obtained retrospective consent from the settlor.
(D) The trustee acted honestly and reasonably and ought fairly to be excused.

Answer 9

The answer is C.

Options A, B and D are all defences to a breach of trust action.

Question 10

A company director buys a car using their own funds and money misappropriated from the company.

Which ONE of the following statements accurately describes the company’s rights in respect of the car?
(A) The company could claim ownership of a proportionate share of the car.
(B) The company could only claim a charge over the car to secure the amount of trust money used in its purchase.
(C) The company can claim ownership of the whole car.
(D) The company cannot claim a proprietary remedy because the company’s money is no longer identifiable due to mixing.

Answer 10

The answer is A. This is one of the options available to the company because the director, a fiduciary in breach of their fiduciary obligations to the company, has mixed trust funds with their own money to purchase a single asset.

B is not correct because the company can either claim a charge or ownership of a proportionate share (Foskett v McKeown).

C is not correct because the car was not purchased exclusively with the company’s money.

D is not correct because equitable tracing allows a company to identify company property even though it has been mixed. Equitable tracing is available to the company even though they were the legal owner of the stolen money. The director owed fiduciary duties to the company. These have been breached which allows equitable remedies to be at the company’s disposal

Question 11

X, Y and Z are trustees. X has dishonestly taken £100,000 from the trust and has disappeared. X’s breach was made possible because Y and Z allowed trust assets to be vested in X’s name alone.

Which ONE of the following statements is CORRECT?
(A) The beneficiaries can only sue X.
(B) X, Y and Z are jointly and severally liable. If Y and Z are sued, they can recover an indemnity from X if they can find him
(C) X, Y and Z are jointly and severally liable. If Y and Z are sued, they can recover a contribution from X. The Civil Liability (Contribution) Act 1978 overrides the equitable indemnity rules.
(D) The beneficiaries can only sue X because Y and Z are entitled to a full indemnity.

Answer 11

The answer is B. An indemnity is available to Y and Z against X as X has fraudulently obtained a benefit from the necessary funds).

A is not correct because Y and Z can be sued because they are in breach of their duty to ensure the trust property is vested in the names of all the trustees.

C is not correct because the equitable indemnity rules still apply in appropriate cases (e.g., where, as here, one of the trustees has been fraudulent).

D is not correct because the indemnity rules do not affect beneficiaries. Beneficiaries can recover from any of the trustees who are liable, and it is up to the trustee who is sued to recover from their co-trustees.

Question 12

Is the following statement TRUE or FALSE?

A personal remedy is satisfactory where the defendant is solvent but if the defendant proves to be insolvent the claimant will rank as an ordinary creditor and may have to accept a pro-rata settlement with the other creditors.

Answer 12

The statement is TRUE. A personal claim is directed at the individual defendant and a successful claim ranks alongside the claims of other creditors if the defendant is bankrupt.

Question 13

Over the last eight years, a trustee paid themselves unauthorized remuneration (amounting to £ 20,000) from the trust. The money was paid into a bank account and eventually used to buy a car.

Which ONE of the following statements is CORRECT?
A) All actions for breach of trust are statute-barred after 6 years.
(B) The beneficiaries could bring a personal claim for £20,000 or a proprietary claim for the car.
(C) A personal claim would be pointless as the trustee no longer holds the money.
(D) A proprietary claim cannot succeed where the property has changed in form.

Answer 13

The answer is B. In this case, the beneficiaries would seek to recover trust property not correctly paid out as remuneration. They could do this either via the personal claim to recover the amount paid out or the proprietary claim to recover the property that represents that cash sum.

A is not correct because while the Limitation Act s21(3) lays down a limitation period of six years for breach of trust actions, this limit does not apply to actions in respect of a fraudulent breach of trust nor actions to recover trust property.

C is not correct because a personal claim does not depend on the trustee still having the trust property; it must be satisfied out of the trustee’s own funds.

D is not correct because equitable tracing can identify trust property even though it has changed in form or been mixed with other funds.

Question 14

A trustee (a doctor) takes a two-month holiday. While they were away, their co-trustee wrongly misappropriates £30,000 from the trust fund and disappears.

Which of the following best describes the doctor’s position?

A The doctor will be vicariously liable to the beneficiaries for the loss to the trust fund.
B) The doctor will not be liable to the beneficiaries for the loss.
(C) The doctor will be liable to the beneficiaries for only half the loss.
(D) The doctor could be liable to the beneficiaries for the entire loss.
(E) The doctor could be liable to the beneficiaries and will have no remedy against their co-trustee.

Answer 14

Option D is correct. This is because the trustees are jointly and severally liable to the beneficiaries. Where more than one trustee is in breach, the beneficiaries could elect to bring a claim against all the trustees together. Alternatively, ‘several’ liability means that they could sue one trustee for the whole loss (so, Option C is wrong).

Question 15

Six months ago, a trustee took £20,000 from the trust’s bank account and paid it into their own bank account. This brought the balance of the account to £25,000. The trustee made the following withdrawals from the bank account.
(1) The trustee withdrew £6,000 to pay off their credit card bills.
The trustee then withdrew £19,000 which they used to buy a motorboat
(2) The trustee subsequently paid their monthly salary of £2,000 into the bank account.

Which of the following statements best describes the position in respect of payment into or withdrawals made from the bank account?
(A) The trustee would have used their own money to pay off the credit card bill.
(B) The trustee has dissipated all the trust’s money.
(C) The trust can claim the £2,000 remaining in the bank account.
(D) The trust cannot claim the motorboat as the trust’s money has been mixed in the bank account.
(E) The trust will only be able to take a lien on the motorboat.

Answer 15

Option A is correct. Under Re Hallet, the guilty trustee is presumed to spend their own money from a mixed bank account first. This would mean that the £5,000 which was already in the account before the deposit of the trust’s money would have been used to settle the credit card bill.

Question 16

An estate agent and a solicitor are trustees of a family trust created five years ago. The beneficiaries of the trust are the settlor’s husband for life, reminder to her children, who are both adults. Three years ago, the husband persuaded the trustees to use trust money to buy a villa on the Greek island of Crete for him to use as a holiday home. The value of the villa has plummeted in the last two years.

Which of the following best describes the trustees’ position in respect of the villa’s loss of value?

(A) The trustees will not be liable to the beneficiaries for the loss in value of the villa as there has been no breach of trust.
(B) All the beneficiaries will be able to sue the trustees for compensation as there has been a breach of trust which caused loss.
(C) The trustees could be liable for compensation equal to the fall in value of the villa and the wasted costs of the purchase with interest.
(D) As both trustees were involved in the purchase of the villa, any claim for compensation by the beneficiaries must be brought against both of them.
(E) Only the solicitor will be liable for the loss as they are a professional trustee.

Answer 16

Option C is the correct answer. The total compensation payable to the trust will be equal to the fall in value of the villa and the wasted costs of purchase with interest. Under s62 Trustee Act 1925, where a trustee commits a breach of trust at the instigation or request or with the consent in writing of a beneficiary, the court has a discretion to impound some or all of the beneficiary’s equitable interest to meet the claim. When exercising its discretion, the court will consider whether the beneficiary benefited or was intended to benefit from the breach. Here the husband instigated the breach and has benefited from it. If his share in the trust is insufficient to cover the amount of the claim, the trustees will have to pay the shortfall.

Question 17

A company director wrongly uses £10,000 from the company with £5,000 of their own money to buy shares for their own benefit. The director has been declared bankrupt. The shares are now worth £18,000.

Which of the following best describes the company’s position in relation to the shares?
(A) The company cannot claim the shares as the trust money has been dissipated.
B) The company could claim all the shares.
(C) The company should claim a lien over all the shares to achieve the best outcome.
(D) The company could recover two-thirds of the shares.
(E) The company will rank with all the director’s other creditors in any claim it makes.

Answer 17

Option D is correct. With a mixed asset purchase (company money joined with the director’s own money to buy one asset), equitable tracing is available to the company because of the director’s breach of fiduciary duty. The case of Foskett v McKeown says that the company could claim a proportionate interest in the shares. The company contributed two thirds of the purchase price. The company can claim two thirds of the shares including any increase in value. This means that the company would be able to claim two thirds of £18,000, recovering £12,000 from any sale.

Question 18

Two trustees, a teacher and a pharmacist, hold a trust for a beneficiary. Six months ago, the pharmacist stole £50,000 from the trust’s bank account. The teacher had no idea the pharmacist would do this when they agreed to put the trust’s bank account into the pharmacist’s own name.

Can the beneficiary bring a claim against the teacher to recover the £50,000?
(A) No, because any action against the teacher must be brought within a reasonable time.
(B) No, because the teacher is not vicariously liable for the pharmacist’s actions.
(C) No, because the teacher has not benefited from the breach.
(D) Yes, because the teacher breached their duties when agreeing to put the trust’s bank account into the pharmacist’s sole name.
(E) Yes, because trustees are always liable to the beneficiaries for a loss to the trust fund.

Answer 18

Option D is correct. Trustees owe a duty of care to the beneficiary (to attain the standards of an ordinary prudent person of business in the management of their own affairs, Speight v Gaunt). Also, trustees have a duty to keep property under their joint control and to monitor the actions of their co-trustees. Agreeing to put the trust’s bank account in the pharmacist’s sole name (and failing to monitor what they were doing with it) would breach these duties. Given that these breaches have caused the loss to the trust, the beneficiary could bring a claim against the teacher to recover the loss.

Question 19

A solicitor is a trustee of two trusts, a fixed interest trust and a discretionary trust. It has been discovered that the solicitor has been stealing money from both trusts.

Three months ago, the solicitor stole £40,000 from the fixed interest trust and paid it into a new bank account in the solicitor’s own name.

A month later, the solicitor stole £20,000 from the discretionary trust and paid that into the same account. The solicitor then put £5,000 of their own money into the account.

The solicitor withdrew £25,000 from the account and lost it gambling at a casino. The facts have now come to light and the solicitor has been made bankrupt.

Which of the following statements best describes the position regarding the remaining balance in the account?
(A) The fixed interest trust will be able to claim the £40,000 remaining in the bank account.
(B) The discretionary trust will be able to claim the £40,000 remaining in the bank account.
(C) The fixed interest trust and discretionary trust will have to share the balance remaining in the bank account and it could be up to a court to decide how much each trust gets.
(D) £5,000 of the balance remaining in the bank account will be available to the solicitor’s creditors as the solicitor’s money was added to the account last.
(E) The fixed interest trust and discretionary trust will have to share the balance equally.

Answer 19

Option C is correct. Here both claimants to the balance are innocent victims of the solicitor’s actions. In this circumstance, the starting presumption is derived from Clayton’s case – the first money into the account is the first money out. This means that £20,000 of the money from the fixed interest trust would have been lost at the casino and is dissipated and irrecoverable. As a starting point, the fixed interest trust would, therefore, be able to claim only £20,000 of the remaining balance in the account (Option A is, therefore, wrong).

Question 20

There are two trustees of a family trust. One is an accountant, the other an engineer. Both trustees have breached their investment duties to the trust, causing the trust fund to reduce in value, although neither were fraudulent when doing so. The beneficiaries sue the engineer for the entire loss. The engineer would like a full indemnity from the accountant to recoup what they have had to pay to the beneficiaries.

Will the engineer get a full indemnity?
(A) Yes, because a trustee who is sued by the beneficiaries can always recover their full loss from co-trustees who are also in breach.
(B) Yes, because the accountant is a professional trustee.
(C) No, because as the beneficiaries elected to sue the engineer, he has no remedy against the accountant.
(D) No, because trustees are joint and severally liable to the beneficiaries.
(E) No, because the engineer would have to seek a contribution from the accountant.

Answer 20

Option E is correct. In the circumstances, a full indemnity is not going to be available to the engineer. However, the engineer could ask the court to order a contribution from the accountant under the Civil Liability (Contribution) Act 1978. The court will order such a contribution as is “just and equitable” having regard to the responsibility of the respective trustees for the loss.

Question 21

A woman is a trustee of a family trust and a charitable trust.

She takes £10,000 from the family trust without authorisation and pays this into a bank account in her own name, which already contains £20,000. She uses the balance of £30,000 to buy a car and subsequently closes the account. The car has depreciated in value and is now worth £24,000.

She takes a further £5,000 from the family trust and then £10,000 from the charitable trust without authorisation, paying each sum in turn into a separate bank account in her own name from which she makes the following withdrawals (in order): £10,000 to buy company shares; and £5,000 on a holiday.

Which of the following represents the best available result for the family trust?
(A) 100% interest in the car and 50% interest in the shares.
B) One-third interest in the car and 50% interest in the shares.
(C) One-third interest in the car.
(D) An equitable lien for £10,000 over the car and 50% interest in the shares.
(E) An equitable lien for £10,000 over the car.

Answer 21

Option D is correct. The car represents a mixed asset (trust + trustee funds). As the car has gone down in value, the best result here is for the beneficiaries of the family trust to assert an equitable lien for £10,000 over the car so that the family trust can recover in full the £10,000 that was originally taken by the trustee. The company shares represent a withdrawal from a mixed bank account (trust + trust funds). Applying Clayton’s Case and FIFO, the £5,000 taken from the family trust will be allocated against the company shares giving the family trust a 50% interest in those shares.

Question 22

A trustee takes £40,000 from a trust fund without authorisation and pays this into a bank account newly opened in their own name. They subsequently transfer £20,000 of their own money from another account.

They then withdraw (in order): £10,000 to buy company shares; £30,000 to spend on a painting; and £20,000 to pay off his debts. A month later, they receive the sum of £20,000 for completing some unrelated consultancy work. The company shares have subsequently increased in value to £15,000.

Which of the following represents the best available result for the beneficiaries should they bring a proprietary claim?
(A) Two-thirds of the painting.
(B) The painting.
(C) The painting and the company shares.
(D) One-third of the painting and the full balance now sitting on the account.
(E) The company shares and the full balance now sitting on the account.

Answer 22

Option C is correct. The trustee has mixed trust funds with their own in a bank account and then made various withdrawals from that account. We must therefore use the tracing rules in Re Hallett and Re Oatway to work out the best result for the beneficiaries.

Re Oatway enables the beneficiary to assert a charge over the mixed fund and any withdrawals made from that fund. The beneficiary can choose to trace their interests into those withdrawals or funds that provide best value. Best value here is represented by option C. If the beneficiary can assert a proprietary claim against the company shares, it is likely that they can also assert a claim against the increase in value of those company shares. The appreciating company shares, and the painting therefore represent the best possible outcome for the beneficiary.

Question 23

A management consultant and an insurance broker are trustees. The management consultant and insurance broker agreed that, in order to speed up the running of trust business, they should pay the trust fund into a bank account that allows withdrawals of any amount by only one signatory.

The management consultant takes £50,000 from the trust’s bank account without authorisation and pays this into a newly opened bank account. They subsequently pay in £20,000 of their own money. From this account, they make the following withdrawals (in order): £10,000 to pay for a luxury holiday; £10,000 to pay off personal debts; and £50,000 to purchase company shares.

The management consultant is now bankrupt. The company, whose shares they purchased, is now in insolvent liquidation.

Which of the following best describes whether the insurance broker can be named as a defendant to any claim that the beneficiaries might bring?
(A) No claim will be brought against the insurance broker because they did not commit a breach of trust.
(B) No claim will be brought against the insurance broker because they do not hold any property of value that the trust can trace into.
(C) No claim will be brought against the insurance broker because the beneficiaries are required to assert a proprietary claim against the company shares.
(D) A claim could be brought against the insurance broker for the £50,000 that the trust has lost plus interest.
(E) A claim could be brought against the insurance broker for the £50,000 that the trust has lost plus interest, but the insurance broker will be able to secure a sizeable contribution from the management consultant for the part they played in that loss.

Answer 23

Option D is correct. This question is designed to remind you that beneficiaries can choose to bring personal and/​or proprietary claims against their wrongdoing trustees.

Option D correctly identifies that the beneficiaries can bring a personal claim against the insurance broker for the full amount that her co-​trustee stole from the trust. The insurance broker is in breach of trust. They agreed to pay the trust funds into an account that could be emptied by just one of the trustees. As such they failed to act as an ordinary, prudent businessperson and failed to supervise the activities of their co-​trustee. This breach caused the loss that the trust has sustained.