Liability of Trustees Flashcards
What questions should be asked in relation to breach of trust by trustees?
(1) Did the trustee(s) act in accordance with their powers?
(2) If so, did they comply with their trustee duties?
What are examples of acting outwith trustee powers?
- making an unauthorised investment
- wrongful distribution
- misappropriation of trust property (this would also be a breach of fiduciary duty)
What happens if a trustee has misapplied or misappropriated trust property?
The beneficiaries may seek to recover the property itself (or its traceable proceeds)
What happens if the trustee has misapplied or misappropriated trust property and it is not possible or desirable to recover the trust property or the breach has not involved a misapplication of trust property?
The beneficiaries instead may seek an equitable compensation to reflect loss
Are trustees liable for losses that did not arise as a result of a breach of duties by them?
No - they are not insurers.
If trustees comply with all their duties and loss still occurs (ie market dip) then trust fund must bear loss.
How is loss to the trust fund to be assessed?
Loss is to be assessed at the date of trial rather than date of breach and involves taking an account to determine the expected value of the trust fund.
If actual value of trust fund is lower than the expected value of the trust fund, then trustees will be personally liable to compensate the trust fund for the difference
What is relevance of the breach when doing the calculation to ‘take an account’ of loss to the trust fund?
Misapplication of trust funds and other types of breaches will attract different remedies
What will the court take into account will considering value of loss in cases of breach by misapplication of trust fund?
Court will ‘falsify’ account of trusts.
This requires the trustees to return the trust fund to the same position it would have been in if the misapplication had not occurred, ideally restoring the same type of property to the fund.
If not possible to restore the same type of property to the fund, the trustees will need to pay equitable compensation in lieu (to the value of the property that should have been restored.
If the misapplication has instead resulted in a gain rather than a loss to the trust fund, what can beneficiaries opt to do instead?
They can elect to affirm the transaction instead
What will the court take into account when considering value of loss in cases of breach other than that by misapplication of trust fund?
The court will ‘surcharge’ or make ‘reparation claim’.
Court will look to assess expected value of the trust fund if the breach had not occurred. Trustee will be required to pay equitable compensation for loss of which the breach can be shown to be a ‘but for’ cause.
Court will consider what a hypothetical prudent body of trustees would have done in the circumstances
How does the court’s approach to assessing loss change if the trust is a bare commercial trust oppose to a traditional trust?
Loss caused by breach of bare commercial trust will only be assessed on a ‘but for’ basis
Can trustees generally offset losses with gains to trust fund?
No. Trustees to assessed to standards on every transaction, not their average performance.
When can trustees offset losses with gains?
Where they arise from the same transaction or course of dealings (ie both from the one breach)
What possible defence may the trust instrument provide trustees who breach trust?
May be an exemption clause which limits or excludes the trustee’s liability for particular sorts of breach
Duty still exists but trustees will be protected from breach
Are there limitations to exemption clauses?
Yes - cannot exclude liability for fraudulent breaches (ie trustee acted dishonestly)
How could consent of beneficiaries provide a defence for trustees who breach trust?
Trustees will not be liable if they receive the fully informed consent of all the beneficiaries
Even if they do not get the consent of all beneficiaries, they will have a partial defence against those beneficiaries who do consent
What is the effect of beneficiaries instigating or requesting a breach of trust?
Trustees will have a defence against them or just partial defence if not all the beneficiaries
How can beneficiaries acquiesce to breach of trust? What is the effect of this?
Beneficiaries can acquiesce by indicating through words or actions that they consent to breach by trustees.
This gives trustees defence against them
When will trustees be able to impound a beneficiaries interest?
When they instigate or request a breach of trust.
Court also has discretion to allow such a remedy via statute and common law where beneficiary has consented (in writing for statute, not in writing common law)
For a beneficiary’s interest to be impounded, is it necessary to show that they benefitted from the breach?
Not where they instigate or consent under statute power.
It is necessary under the common law power where they consent but not in writing.
What is impounding a beneficiaries interest?
Where beneficiaries interest in trust funds is used to indemnity the trustees against claims by other beneficiaries
What is the statutory limitation period for bringing a claim for breach of trust?
Six years from breach.
No limitation period where fraudulent breach or for proprietary claims against the trustee
What difference does the beneficiary interest in the trust make to the statutory limitation period?
Six year period only runs from breach of duty if the beneficiary has a vest interest.
If they have a future interest, the limitation period only starts to run when their interest vests in possession
How is the limitation period effected where the trustee is also a beneficiary and receives an unfairly large distribution from the trust?
Only excess can be recovered after the normal six-year period
