Topic 6 - Protection and Liability of Trustees

Question 1

What is the primary concern for trustees regarding their role?

Answer 1

Liability for breach of trust.

Question 2

What are the three key times when actions can be taken to protect trustees?

Answer 2

• When the trust is first established
• During the administration of the trust
• After a breach has been committed.

Question 3

What is an ouster clause?

Answer 3

A clause that entirely removes a duty that a trustee would otherwise have.

Question 4

What is an exemption clause?

Answer 4

A clause that excludes or limits liability for breach of trust, while the duty still exists.

Question 5

True or False: An exclusion clause can limit a trustee’s liability for fraudulent breaches of trust.

Answer 5

False.

Question 6

What is trustee liability insurance?

Answer 6

Insurance against personal liability for breach of trust.

Question 7

What should trustees do if they are uncertain about their powers or duties?

Answer 7

Seek legal advice on the interpretation of the trust terms.

Question 8

What is the safest action for trustees unsure of their obligations?

Answer 8

Seek directions from the court.

Question 9

Under which act can trustees apply for High Court authorisation to rely on legal opinion?

Answer 9

Section 48 of the Administration of Justice Act 1985.

Question 10

What does surrendering discretion to the court involve?

Answer 10

The court making a decision for the trustees when there is a dispute.

Question 11

What is required for trustees to obtain full protection when seeking beneficiary consent?

Answer 11

Fully informed consent from all beneficiaries.

Question 12

What is a Benjamin order?

Answer 12

A court order allowing trustees to distribute trust property based on the assumption of a missing beneficiary’s status.

Question 13

True or False: A Benjamin order can be granted without any inquiries into the status of the missing beneficiary.

Answer 13

False.

Question 14

What does section 27 of the Trustee Act 1925 allow trustees to do?

Answer 14

Publish a notice to put unknown beneficiaries on notice of their intention to distribute the fund.

Question 15

What must trustees do if they decide to retain a fund for missing beneficiaries?

Answer 15

Hold trust assets to discharge liabilities if missing beneficiaries come forward.

Question 16

What is the purpose of paying money into court under section 63 of the Trustee Act 1925?

Answer 16

To give the court legal control over the funds when beneficiaries cannot be located.

Question 17

What is missing beneficiary insurance?

Answer 17

Insurance taken out by trustees to guard against risks of unknown beneficiaries emerging after distribution.

Question 18

Fill in the blank: A common example of a situation where trustees might seek court directions is when the _______ of the trust instrument is ambiguous.

Answer 18

wording.

Question 19

What is a potential consequence for trustees who distribute trust property based on incorrect assumptions?

Answer 19

Liability to beneficiaries who later come forward.

Question 20

What happens if consent is obtained only from some beneficiaries?

Answer 20

Partial defense against claims by consenting beneficiaries but not from others.

Question 21

What do trustees need to demonstrate before a Benjamin order is granted?

Answer 21

They must make full inquiries about the missing beneficiary.

Question 22

What is the risk associated with retaining a fund for missing beneficiaries?

Answer 22

Difficulties in quantifying respective interests of known and unknown beneficiaries.

Question 23

What is the main advantage of taking out missing beneficiary insurance?

Answer 23

Protection against future claims from beneficiaries who emerge after distribution.

Question 24

What is the purpose of taking out insurance for trustees?

Answer 24

To guard against the risk of missing or unknown beneficiaries emerging after the trust fund has been distributed.

Trustees can claim on the insurance policy if a beneficiary later comes forward.

Question 25

What is one option available to trustees who cannot identify beneficiaries?

Answer 25

To seek an indemnity from the beneficiaries to whom they plan to distribute. ## Footnote This involves beneficiaries promising to reimburse the trustees if they are successfully sued by other beneficiaries later.

Question 26

What are the practical steps trustees should take after a breach of trust occurs?

Answer 26

1. Check the trust instrument for an exemption clause. 2. Consider available defenses. 3. Check for relevant insurance. 4. Identify potential claims against third parties. 5. Consider Civil Liability Contribution Act 1978 claims. ## Footnote Defenses may include reliance on court directions or statutory relief under 61 TA 1925.

Question 27

What is a breach of trust?

Answer 27

A situation where a trustee fails to act in accordance with their powers or duties, causing loss to the trust fund. ## Footnote This includes unauthorized acts or failing to comply with applicable duties.

Question 28

What constitutes a breach of fiduciary duty?

Answer 28

Breaching the no-conflict or no-profit rule or self-dealing, even if trustee duties are otherwise complied with. ## Footnote An example includes a trustee making a profitable investment while also taking a secret commission.

Question 29

What remedies might beneficiaries seek for a breach of trust?

Answer 29

1. Personal claim against the trustee for compensation. 2. Proprietary claim over an asset held by the trustee. 3. Rescission of a transaction. ## Footnote Remedies aim to restore the trust fund rather than payable to individual beneficiaries.

Question 30

What happens if there is no loss or profit from a breach?

Answer 30

There may be no remedy, but beneficiaries might still seek to remove or replace the trustee. ## Footnote Even a technical breach without impact may lead to loss of confidence in the trustee.

Question 31

How are co-trustees held liable for breaches of trust?

Answer 31

Co-trustees are jointly and severally liable for breaches. ## Footnote They must act together and failure to do so may result in liability.

Question 32

What are statutory defenses available to trustees?

Answer 32

Trustees may rely on statutory limitation periods or seek court directions to authorize actions that would otherwise constitute a breach. ## Footnote This includes checking the trust instrument for authorization.

Question 33

What is the significance of joint and several liability for beneficiaries?

Answer 33

Beneficiaries can recover the full amount from any one of the liable parties, not exceeding their loss. ## Footnote This allows beneficiaries to join multiple parties in the same action.

Question 34

What must a trustee do upon discovering a breach of trust that occurred before their appointment?

Answer 34

Commence proceedings to recover from the former trustee. ## Footnote Failure to act may result in liability for the new trustee.

Question 35

What are the two cases where a retired trustee may still be liable for breaches?

Answer 35

1. If the trustee retired to facilitate the breach. 2. If they parted with trust property improperly, causing loss. ## Footnote This liability persists even after retirement.

Question 36

What is the liability of a trustee after retirement?

Answer 36

A trustee continues to be liable for breaches committed during their time as a trustee, even after retirement, except in specific cases. ## Footnote The two exceptions are: (1) if the trustee retired to facilitate a breach, or (2) if the trustee transferred trust property without due regard.

Question 37

What should be considered if a breach of trust has occurred?

Answer 37

* Did the breach cause any loss? * Are there any defenses available to limit or exclude trustee liability? * How should liability be apportioned among multiple trustees?

Question 38

What can beneficiaries seek if a trustee has misapplied trust property?

Answer 38

Beneficiaries may seek to recover the property itself or its traceable proceeds. ## Footnote Proprietary claims are addressed in the context of equitable claims and tracing.

Question 39

When can beneficiaries seek equitable compensation?

Answer 39

When recovery of trust property is not possible or desirable, or if the breach does not involve misapplication of trust property.

Question 40

Are trustees liable for losses due to market forces?

Answer 40

No, trustees are not liable for losses resulting from prudent investments that fall in value due to market forces beyond their control.

Question 41

How is loss assessed in the case of a breach of trust?

Answer 41

Loss is assessed at the date of the trial, involving 'taking an account' to determine the expected value of the trust fund.

Question 42

What is 'falsifying' the account?

Answer 42

It requires trustees to restore the trust fund to the position it would have been in if the misapplication had not occurred.

Question 43

What happens if the misapplication of trust funds results in a profit?

Answer 43

Beneficiaries can elect to affirm the transaction instead of seeking restitution.

Question 44

What is 'surcharging' in the context of breach of trust?

Answer 44

Surcharging assesses the expected value of the trust fund as if the breach had not occurred and requires equitable compensation for the loss.

Question 45

What case established a less rigid approach to the distinction between falsification and surcharging?

Answer 45

Target Holdings v Redferns [1996] AC 421.

Question 46

What does the equitable doctrine of 'laches' refer to?

Answer 46

It allows trustees to argue that a beneficiary has waited too long to bring a claim, making it unconscionable for them to assert their interest.

Question 47

What is the limitation period for bringing a claim for breach of trust?

Answer 47

The limitation period is six years from the breach for beneficiaries with vested interests.

Question 48

What are exemption clauses in trust instruments?

Answer 48

Clauses that limit or exclude trustee liability for specific breaches, except for fraudulent breaches.

Question 49

What must trustees demonstrate to seek relief under s 61 TA 1925?

Answer 49

* They acted honestly * They acted reasonably * They ought fairly to be excused for the breach.

Question 50

In what situations is s 61 TA 1925 more likely to be applied?

Answer 50

In cases where a trustee inadvertently acts outside their powers, such as making an unauthorized investment.

Question 51

What does it mean for trustees to have 'joint and several liability'?

Answer 51

Each trustee can be held individually responsible for the entire amount of the breach, as well as collectively with other trustees.

Question 52

Under what circumstances can trustees offset losses against profits?

Answer 52

When the losses and profits arise from the same transaction or course of dealing.

Question 53

What is the implication of the case Bartlett v Barclays Bank Trust Co Limited [1980] Ch 515?

Answer 53

It illustrates that trustees can offset profits against losses from the same breach.

Question 54

What is the legal provision that allows for relief under certain circumstances when a trustee mistakenly believes a beneficiary is dead?

Answer 54

s 61 TA 1925 ## Footnote This section provides for the court's discretion to grant relief in specific situations involving trust administration errors.

Question 55

What does apportionment of liability refer to in the context of trustees?

Answer 55

The division of liability for breach of trust among trustees ## Footnote Trustees are jointly and severally liable, meaning one may compensate the entire loss and seek contribution from co-trustees.

Question 56

What is the Civil Liability Contribution Act 1978?

Answer 56

An Act allowing parties liable for the same damage to claim contributions from each other ## Footnote Specifically, s 1(1) allows claims when two or more parties are responsible for the same damage.

Question 57

Under the Civil Liability Contribution Act 1978, how does the court determine contributions?

Answer 57

The court has discretion to require a 'just and equitable' contribution ## Footnote This includes presuming equal responsibility but allows for deviations based on fairness.

Question 58

What factors may lead to unequal contributions among trustees?

Answer 58

Differing levels of culpability, delegation of functions, and expertise ## Footnote A trustee with specialized skills may face higher liability if a breach occurs under their responsibility.

Question 59

In what rare cases may a court award a full indemnity to a trustee?

Answer 59

When a trustee is morally culpable, is also a beneficiary, or acts as solicitor to the trust ## Footnote Full indemnity cases are exceptional and depend on specific circumstances.

Question 60

What was the outcome in the case of Re Partington (1887)?

Answer 60

A full indemnity was awarded to the widow due to reliance on the solicitor trustee's advice ## Footnote The solicitor's negligence in unauthorized investment led to this decision.

Question 61

What was the ruling in Head v Gould [1898] regarding indemnity?

Answer 61

No indemnity was awarded because the lay trustee was actively involved in the breach ## Footnote The solicitor trustee lacked controlling influence, making indemnity inappropriate.

Question 62

Can trustees seek contributions from third parties for breach of trust?

Answer 62

Yes, including professional advisers and third parties involved in the breach ## Footnote This can also include those benefiting from the breach, known as accessory or knowing recipients.

Question 63

What might happen if beneficiaries recover from a third party?

Answer 63

The third party may sue the trustee for contribution ## Footnote This situation arises under the Act when beneficiaries pursue claims against others involved in the breach.