Breach of Trustee and Fiduciary Duties PDF

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Breach, Strangers and Tracing

Breach of Trustee and fiduciary duties

Definition of a breach •

In Tito v Waddell (No.2) [1977] 1 All ER 442 Megarry VC quoted the following :

‘every omission or violation by a trustee of a duty which equity lays on him…is a breach of trust’ -per Pomeroy’s Equity Jurisprudence •

‘[a trustee] commits a breach of trust if he violates any duty which he owes as a trustee to the beneficiaries’ - per Professor Scott- Scott on trusts (3

rd

edition

1967) For a trustee to be fund in a breach – this violation has to result in a loss of this course of action the beneficiary can pursue.

Scope of trustee’s liability breach of trust •

Trustees are only liable for their own breaches – not vicarious liable for the breaches of their co-trusties. However, as trusties are expected to act jointly it’s quite common that the co -trustee may be found in breach of their duty of care in favour to prevent their co-trustee from committing the breach that they did.

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There is a duty to act jointly

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However, trustees cannot ‘close their eyes’

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Trustees are personally liable for the breaches they commit-Bishopsgate Investment Management Ltd v Maxwell No.2 [1994] 1All ER 261

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If several are in breach, liability is joint and several

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If trustee is found liable for breach of trust may rendered bankrupt.

Breach, Strangers and Tracing

Bishopsgate Investment Management Ltd v Maxwell No.2 [1994]

Facts: Robert Maxwell owned the merry newspaper group, lots of financial scandals surrounding him and he drowned in mysterious circumstances in 1991 in the Canary Islands. After his death, it appeared he had breached his fiduciary duties as he used the money from his employee’s pensions to keep the newspaper afloat. He was left with a debt of £400 million pounds. During this litigation is also concerned his brother Ian Maxwell he acted as the company director – he allowed this to happen by signing of transfers to Robert’s private companies including bank transfers. In his defence he tried to argue he couldn’t be held liable for the breach as his inactivity caused no loss to the pension fund – it was the actions of his brother that caused loss to the pension fund.

The C.O.A held where a fiduciary has committed a breach, or an omission proper compliance would had prevented the loss and therefore causation was established therefore Ian Maxwell was to be found liable.

*Whilst there is no vicarious liability there’s going to be a heavy burden on the co-trustee; if one trustee is in breach in particular if it’s fraud, it’s going to be hard for the co – trustee to prove that they did act jointly and weren’t be negligent in discharging their own duty of care.

* Trustee liability breach is what we call joint and several this mean if several trustees are liable for a breach of trust then the beneficiary may pursue a remedy against all of them, or just single one of them out and pursue one of them for whichever remedy they choose to pursue.

Breach, Strangers and Tracing

Three Main Breach of Trust Scenarios…

1. Failure to carry out one or more of his duties •

The duty can be under the trust deed, statute or general law

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fails in duty to act in the interests of the beneficiaries

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fails in duty to consider objects in discretionary trust

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fails to act on duty to invest

2. Failure to carry out a duty or power with the requisite standard of care •

fails to exercise sufficient skill in duty of investing

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fails to exercise sufficient skill in power of delegating

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fails to exercise sufficient skill in seeking advice

*Applies where trustee is carry out their duties or exercising their powers.

3 Trustee acts outside powers or outside terms of trust deed •

the trustee does something they have no power to do -‘ULTRA VIRES’ e.g. invest funds to someone who is not a beneficiary.

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They apply discretionary trust funds to persons not within object class- Lloyds TSB bank Ltd Plc v Markandan & Uddin (A firm) [2012] EWCA Civ 65

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the trustee invests in high risk securities when trust deed explicitly removes such investment powers

Lloyds TSB Bank Ltd Plc v Markandan & Uddin [2012] A firm of solicitors who held mortgage loans funds from a bank held on trust until completion. However, the solicitors where paying out the money to a fictitious firm as part of a fraudulent scheme, despite the solicitors for arguably being a victim in this fraud; it was held that had acted in breach as they acted outside the terms of the trust. They technically advanced the trust funds before completion as stated in the terms of the trusts.

Breach, Strangers and Tracing

*The terms of the trust are powerful – where a trust instrument itself does outline what a trustee may do or not do, the trustee must comply to that otherwise they will be in breach.

Injury = Financial loss

Financial to the trust fund due to: •

Failure to carry out positive duties of trust administration and investment

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Fraud -may include acts such as borrowing money from the trust fund or stealing money by mortgaging trust property for the trustees’ own game.

Liability for breach of trustee duty is strict- this means that there is no need to establish or carelessness on the part of the trustee. If they have committed a breach irrespective of their intentions. *S.61 of The Trustee Act [1965] – allows the court to spare a trustee from liability if they believe they have acted honestly and reasonably.

Causation: Target Holdings v Redferns [1995] 3 All ER 785 Held: Lord Browne Wilkinson took the view that the loss suffered by Target had been caused by the fraudulent valuation of the property and not by Redferns breach of trust. The breach of trust had been remedied by Redferns acquiring the mortgage security which Target had required from them. Redferns had provided the service which Target had required originallythe loss arose from different circumstances (the fraud of others). Consequently, Target would therefore not be entitled to claim compensation for breach of trust against Redferns. Beneficiary must show causation – the loss occurred gave rise to the trustees breach of duty . Facts: Target a finance company and the defendants where a firm of solicitors. Target had entered into an agreement to advance a loan which was secured by way of a mortgage on a commercial property. The borrower under the loan had instructed Redferns who was acting as

Breach, Strangers and Tracing

Target’s solicitors; that the commercial property in question was worth £2 million pounds failing to disclose that they themselves have only paid £775 thousand for it. Relying on this false evaluation, Target instructed Redferns to hold £1.5 million pounds on trust for the borrows and advance the money on completion of the mortgage. Redferns Solicitors however, advanced the money to the borrower before completion. When Target went on to sell the commercial property -this was the security of the loan. They found that it was worth much less they’ve been worth to believe; therefore, they made a significant loss. As for the people they lent the money too had disappeared; they sought to sue Redferns to make up this loss for the trust fund.

Target’s argument was essentially that Redferns had breached there trustees duty by advancing the loan money before completion on the mortgage.

The court held the loss from the trust fund did not flow from that breach, it flowed from a different set of circumstances therefore Target could not claim compensation from Redferns.

* Ratio decidendi: This loss must ‘flow’ directly from the breach of trust – it can’t be unrelated

Primary personal remedies for breach of trust =Equitable Compensation

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This is a personal remedy. – trustee is personally liable to account of the loss made

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This means the breaching trustee has to pay the quantum of loss suffered by the trust fund flowing directly and indirectly from the breach of trust

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“The trustee is liable to place the trust estate in the same position it would have been in if no breach of trust had taken place.”: Re Dawson [1966] 2 NSWR Street J

*Trustee will pay compensation to make up for the less that they caused in breaching their trustee’s duties.

Breach, Strangers and Tracing

*Beneficiaries tend to use their primary personal remedies first so they personally act against breaching trustees. (if that doesn’t help proprietary remedies may be a second option) Quantification of Compensation Damages

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Loss to the trust fund is calculated at date of hearing not calculated from the day of the breach itself - Target Holdings Ltd v Redferns (A Firm) [1995] 3 All ER 785

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Where trustee is in breach from failing to invest of the requites standard of care then the amount of compensation owned will be based on the amount, that a reasonable prudent trustee would had achieved over that time period.

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In the case of investment - the value a prudent trustee would have been able to achieve- Nestle v National Westminster Bank [1994] 1 All ER 118

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No offsetting? Dimes v Scott (1828) 4 Russ 195 cf. Bartlett v Barclays Bank [1980] Ch 515

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In Dimes v Scott (1828) – there’s a general rule that trustees are not allowed to offset any profits they make against any losses they make in different transaction.

*Offsetting was permitted in the case of Barlett v Barclays Bank [1980] The trustee was question was held liable for breach of trust for failing to supervise the board directors of the company, in which the trust held the controlling shareholding. The director of this company had made two main investments; one was a success made a profit, second was a failure which made a loss. It was held that it was possible to offset the loss of someone’s project against the profit of the other.

Breach, Strangers and Tracing

Joint and Several Liability and Contributions If more that one trustee is in breach they are joint and severally liable – If a beneficiary decides to pursue one trustee for the entire loss – that trustee can claim a following contribution from his fellow breaching trustees -via s. 1 &2 CLA [1978] Contribution From co-trustee in breach – Civil Liability (Contributions) Act (1978) s. 1&2 Trustees may also seek contribution from their co -trustees, if their co – trustees act is taken to a professional. See Charter plc v City Index ltd [2006] EWHC 2508 (ch); Re Partington (1888) 57 LTR 654; Bahin v Hughes (1886) Ch. D 390 Re Partington (1888) Facts: Mr Partington and Mr Allen where both co-trustees who were liable for a breach. Mr Allen was a solicitor and he had promised Mr Partington that he would invest well. However, he invested in an improper mortgage and had failed to give Ms Partington enough information for her to decide if this was a good investment or not. Consequently, Mr Allen had to pay a contribution to Ms Partington for his role in the breach.

Bahin v Hughes (1886) - If both trustees where in breach but one got money into his own hands, he must pay a contribution to the co-trustee. Although, they are still in breach did not seek to benefit from the breach in the same way.

Indemnity from a beneficiaryA trustee who is liable for a breach of trust may also leave a contribution for the beneficiary, if the beneficiary in question either consented to the breach or they instigated it. This is per s.62 of the Trustee Act [1965]. Where beneficiary instigates or consents –s.62 TA1925:

Breach, Strangers and Tracing

The rule in Chillingsworth v Chambers [1896] 1 Ch 685 – where one of the trustees who is in breach is also a beneficiary under the trust and they intended to personally profit from the breach. This trustee beneficiary must indemnify other trustees to the extent of their beneficial interest in terms of the trust.

Excuses/defences to breach of trust 1. Beneficiary’s consent: Fletcher v Collis [1905] 2 Ch 24 ; Holder v Holder [1968] 1 all ER 665; Boardman v Phipps [1966] 3 All ER 721; Re Pauling’s Settlement Trust [1964] Ch 303

Fletcher v Collis [1905] – where the trustee seeks to rely on the beneficiary’s consent is proving whether the beneficiary knew what they were consenting to.

For a trustee to rely on this they must establish that the beneficiary fully understood what they were agreeing to; no need to appreciate that it would constitute a breach. If the trustee can’t rely on the beneficiary’s consent they make seek to rely on s 61 of the Trustee Act 1925 – this provision provides that trustees can be excused if they committed the breach in good faith and acted honestly and reasonably. This is discussed in Parent v Blentmy (1898) the court held to be excused from the breach the trustee must had acted reasonably, however, this would practically be impossible to prove if the nature of the breach is the trustee has failed to attain the recklessness standards of care when discharging their duties. This case makes clear that a trustee who is negligent will not be able to rely on this provision in their defence – their negligence will never be found to be reasonable.

2. s.61 TA 1925: Trustee acted honestly and reasonably and ought fairly to be excusedSantander v RA legal solicitors [2014] EWCA civ. 183 The C.O.A clarified a number of factors when determining if the solicitor in question had acted reasonably. 1) Extent which best practice or usual practice has been adopted 2) Relevant of any losses that cause the relationship to the breach

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3) The seriousness of departure from good practice 4) The court clarified that these standards applied to both professional and laid trustees

However, it will obviously be harder for professional trustees to prove that they had acted reasonably. As they are held to a higher standard of care – seen in cases of Partington and Barltett – also seen under S.1 Trustee Act 2000.

Defences to breach of trust

3. The Limitation Act 1980 s.21 imposes a 6 year time limit (If a breach is a criminal breach then there is no time limit imposed). (see Statek Corporation v Alford [2008] EWHC 32 (ch) Gwembe Valley Development co ltd v Koshy and Others [2003] EWCA Civ 1048 If beneficiaries are seeking a proprietary remedy i.e., they wish to recover trust property, then the claim is not subject to a time limit, however, any other actions e.g. personal actions for breach of trust in terms of claims for equitable compensation, are limited to a 6 year time limit. E.g. if it’s been 7 years since the trustee breached their trustee duties, then the Limitation Act will put a block on any call for equitable compensation.

4. ‘laches’ may come into play – Fisher v Brooker and others (2009) The Times , 12th August (HL) (See also Williams v Central Bank of Nigeria [2014] UKSC 10 It’s practically unjust for the court to grant a remedy because the claimants conduct indicates a waiver of their rights, a claimant can’t unduly delay an action. However, generally this has not applied in cases to breach of trust – e.g. Fisher v Broker and Others (2009) Facts: (In which one of the composers of Procol Harum’s A Whiter Shade of Pale’ sought to enforce his authorship after a delay of over thirty years). Lord Neuberger said: Although I would not suggest that it is an immutable requirement, some sort of detrimental reliance is usually an essential ingredient of laches, in my opinion.

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The HL did not think that the delay, in itself was a bar to equitable relief. There were no evidential problems and any prejudice on the part of the defendants was balanced by the fact that they had not had to account for royalties to the composer until he indicated that he intended to enforce his rights.

Breach of Fiduciary Duty

Fiduciary breach in its contemporary context

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Government rows with RBS over bankers bonuses

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RBS directors then threaten to resign as they feel to not give workers bonuses would be to breach their fiduciary duties

BBC News (2010) ‘Royal Bank of Scotland announces £3.6bn of losses’ (25th February) •

Robert Maxwell Scandal- Bishopsgate Investment Management Ltd v Maxwell No.2 [1994] 1All ER 261

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lessons learned from the collapse of Carillion inquiry?

Breach of fiduciary scenarios:

1. Fiduciary uses confidential information – e.g. Peter pan case 2 Fiduciary used an opportunity belonging to their principal – e.g. company directors – Industrial Developments Consultants Ltd v Cooley [1972] 3. Fiduciary makes unauthorised remuneration – e.g. Re Mcaden – fiduciary might use their capacity - e.g. if they’re a trustee and the trust fund has a majority shareholding, if they use that to vote themselves as company director and draw in a salary for that work then they’re making unauthorised remuneration. 4. Fiduciary acts in competition with the interests of the (trust) principal- Re Thomson -George Coulson – held that it would be a breach of fiduciary duty for a yatch broking business to set up for himself independently as yacht broker.

Breach, Strangers and Tracing

6. Fiduciary breaches the self - dealing or fair dealing rules - Self dealing rule that the trustees can’t purchase trust property and that is automatically voidable if they do. The fair dealing rule is that the trustee may purchase a beneficial interest under a trust as long as it’s been fairly negotiated under the beneficiary. Heavy burden on the trustee to show that they did. 7. Fiduciary takes a bribe – when acting in their fiduciary capacity. In HongKong v Reed – Reed was the public prosecutor in Hong Kong and received a bribe in that capacity.

Industrial Developments Consultants Ltd v Cooley [1972] Facts: Nevel Cooley was the director of the consultancy limited they were a company that provided constructive consultancy services. On behalf of this company he entered a negotiation with these gas board with a contract build in new depos. However, the Gas Board refused to enter into the contract with Cooley’s company, as they had a policy not to enter into contracts with development companies. The Gas Board offered this offered this opportunity with Cooley personally and he accepted this position and left his role as manager director of the IDC by saying that he was suffering from a serious illness. Judge Roskill held that he was liable to the account for the profit he had made from entering into the contract with Gas Board as he allowed his duty and interest to conflict.

Breach, Strangers and Tracing

Liability for breach of fiduciary duty

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Liability is strict: Bray v Ford [1896] AC 44

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Irrespective of honesty: Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378 ‘ the profiteer, however honest and well intentioned , cannot escape the risk of being called up to account’

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Irrespective of no real sensible possibility of conflict: Boardman v Phipps[1967] found to have breached the no conflict rule - he purchased this controlling interest in a company partially owned by the trust and he was still acting as the trust s...