Duty to Invest - Lecture note 7 PDF

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This set of notes explains the trustee's duty to invest...

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Trustees’ Power, Duties and Rights DUTY TO INVEST There is duty to invest but discretion how you invest. This discretion is circumscribed by the ordinary prudent person standard of care that operates to prevent speculation by the trustee. (a) Under the trust instrument In carrying out her or his duty to invest, must a trustee be concerned solely with financial advantage to the trust? * Cowan v Scargill [1985] Ch 270 Involves a pension fund, much of which was contributed by its members, reinforced the trustees’ duty to secure the best financial return for the members. Megarry VC: ‘ The starting point is the duty of trustees to exercise their powers in the best interests of the present and future beneficiaries of the trust, holding the scale impartially between different classes of beneficiaries. This duty of trustees towards their beneficiaries is paramount. They must, of course, obey the law; but subject to that, they must put the interests of their beneficiaries first (= put aside their own personal interests and views) When the purpose of the trust is to provide financial benefits for the beneficiaries, as is usually the case, the best interests of the beneficiaries are normally their best financial interests.’ * Harries v The Church Commissioners for England [1992] 1 WLR 1241 Exceptional circumstance where investment would be inconsistent with moral views. Eg: a charity’s objects conflict with investments of a particular type. It tempers with decision in Cowan v Scargill where trustees can make investments, if it can be shown that overall financial performance would not be harmed and that it would be consistent with the purpose of the trust. Facts: The applicant sought a declaration that the Commissioners were obliged to have regard to the object of promoting the Christian faith and not to act in a manner which would be incompatible with that object when managing the assets of which they were trustees. The plaintiffs said that the commissioners in making investment decisions attached overriding importance to financial considerations, and that they were only prepared to take non-financial considerations into account to the extent that they did not significantly jeopardise or interfere with accepted investment principles.

Held: -

Plaintiff lost. The Church Commissioners were entitled to take ethical considerations into account in forming an investment policy provided there was no risk of detriment to the trust funds.

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Ethical investments putting financial return at risk were not open to the trustees. Investment should aim for best return, and be chosen only not to conflict with any express aims of the charity and should not be used to make moral statements

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When property was held by trustees for the purpose of generating money, then prima facie, the purposes of the trust were best served by the trustees seeking to obtain the best return which was consistent with commercial prudence and in most cases, the best interests of the charity required that the trustees’ choice of investments be made solely on the basis of well-established investment criteria.

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The difficulty with justifying an omission to invest on the grounds of morality is that ‘there is no identifiable yardstick which can be applied to a set of facts so as to yield one answer which can be seen to be ‘right’ and the other ‘wrong’. * Nestle v National Westminster Bank plc [1993] 1 WLR 1260 To maintain an action in breach of trust, the beneficiaries must prove that he trustees made decisions regarding the investments that would not have been made by an ordinary prudent business person, and that a quantifiable loss to the trust estate has resulted from this.

* Re Mulligan (deceased) [1998] 1 NZLR 481 Facts: The co-trustees of a testamentary trust were the testator’s widow and a trustee company. For 25 years prior to the widow’s death, the trust estate was invested in a fixed-interest securities. During this time, trustee company unsuccessfully persuaded the widow to allow investment in share to counter the effects of inflation. Widow refused. When she died, the real value of the trust capital was only a small proportion of what it had been 25 years earlier. The residuary beneficiaries sued the trustees for breach of trust on the basis that the investment strategy constituted a breach of the trustee’s duties of impartiality and to act personally. Held: - Breach of trust because trustee company should have exercised an independent judgment , not deferred in the face of opposition to diversification by the widow. Concept: -

The courts may find a trustee liable for the gain he or she should have made in

investing trust property and to this end, may quantify the resultant loss to the trust fund by reference to the standard of a reasonable trustee similarly positioned. (b) Statutory discretion to invest Trustee Act 1898 (Tas), Pt 2 6. Power of trustee to invest A trustee, unless expressly forbidden by the instrument creating the trust, may – (a) invest trust funds in any form of investment; and (b) at any time, vary an investment or realise an investment of trust funds and reinvest money resulting from the realisation in any form of investment. 7. Duty of trustee (1) Subject to any provision to the contrary in an instrument creating a trust, a trustee, in exercising a power of investment – (a) if the trustee's profession, business or employment is or includes acting as a trustee or investing money on behalf of other persons, must exercise the care, diligence and skill that a prudent person engaged in that profession, business or employment would exercise in managing the affairs of another person; or (b) if the trustee is not engaged in such a profession, business or employment, must exercise the care, diligence and skill that a prudent person of business would exercise in managing the affairs of another person. (2) A trustee, in exercising a power of investment, must comply with any provision of the instrument creating the trust that is binding on the trustee and requires the obtaining of a consent or an approval or a compliance with any direction with respect to trust investments. 78. Subject to the instrument creating the trust, a trustee must, at least once in each year, review the performance, individually and as a whole, of the trust investments. 8. Matters to which trustee may have regard (1) Without limiting the matters that a trustee may take into account when exercising a power of investment, a trustee, so far as is appropriate to the provisions of the trust, may have regard to any one or more of the following: (a) the purposes of the trust and the needs and circumstances of the beneficiaries; (b) the desirability of diversifying trust investments;

(c) the nature of existing trust investments and other trust property; (d) the need to maintain the real value of the capital or income of the trust; (e) the risk of capital loss or depreciation; (f ) the potential for capital appreciation; (g) the likely income and the timing of the income return; (h) the length of the term of the proposed investment; (i) the probable duration of the trust; (j) the liquidity and marketability of the proposed investment during, and on the determination of, the term of the proposed investment; (k) the aggregate value of the trust estate; (l) the effect of the proposed investment in relation to the tax liability of the trust; (m) the likelihood of inflation affecting the value of the proposed investment or other trust property; (n) the costs, including any commission, fee, charge or duty payable, of making the proposed investment; (o) the results of a review of any existing trust investments. (2) A trustee may – (a) obtain and consider independent and impartial advice reasonably required for the investment of trust funds or the management of the investment, from a person whom the trustee reasonably believes to be competent to give that advice; and (b) pay out of trust funds the reasonable costs of obtaining the advice. 9. Law and equity preserved (1) Any rule or principle of law or equity that imposes a duty on a trustee exercising a power of investment including, without limiting the generality of those duties, rules and principles that impose – (a) a duty to exercise the powers of a trustee in the best interests of all present and future beneficiaries of the trust; or

(b) a duty to act impartially towards beneficiaries and between different classes of beneficiaries; or (c) a duty to take advice; or (d) a duty to invest trust funds in investments that are not speculative or hazardous – continues to apply except so far as it is inconsistent with this or any other Act, or the instrument creating the trust. (2) Any rule or principle of law or equity that relates to a provision in an instrument creating a trust that purports to exempt, limit the liability of, or indemnify a trustee in respect of a breach of trust, continues to apply. (3) If a trustee has a duty to take advice relating to 12D. Court may take into account investment strategy If a trustee has been charged with a breach of trust in respect of a duty under this Part relating to the trustee's power of investment, the court, when considering the question of the trustee's liability, may take into account – (a) the nature and purpose of the trust; and (b) whether the trustee had regard to the matters set out in section 8 so far as is appropriate to the circumstances of the trust; and (c) whether the trust investments have been made under an investment strategy formulated in accordance with the duty of a trustee under this Part; and (d) the extent to which the trustee acted on the independent and impartial advice of a person competent, or apparently competent, to give the advice.

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S6 do what you like

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S 8 indicates the things trustee have to have regards to in exercising discretion.

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S9 duty of impartiality remains- ‘in the best interest of beneficiaries’, ‘not speculative or hazardous’ (eg: gambling) (a) Court’s “expediency” jurisdiction

- The court may authorise the investment of trust funds in a manner not provided for by the trust instrument or the trustee legislation pursuant to its ‘expediency’ jurisdiction.

47. Power of Court to make orders in certain cases not provided for by trust instruments, &c. (1) Where in the management or administration of any property vested in trustees, any sale, lease, mortgage, surrender, release, or other disposition, or any purchase, investment, acquisition, expenditure, or other transaction is, in the opinion of the Court, expedient, but the same cannot be effected by reason of the absence of any power for that purpose vested in the trustees by the trust instrument, if any, or by law, the Court may by order confer upon the trustees, either generally or in any particular instance, the necessary power for the purpose, upon such terms, and subject to such provisions and conditions, if any, as the Court may think fit, and may direct in what manner any money authorized to be expended, and the costs of any transaction, are to be paid or borne as between capital and income. (2) The Court may rescind or vary any order made under this section, or may make any new or further order. (3) An application to the Court under this section may be made by the trustees, or by any of them, or by any person beneficially interested under the trust. (4) This section does not apply to trustees of a settlement for the purposes of the Settled Land Act 1884. (5) The powers conferred on the Court by this section shall extend to all property vested in trustees for charitable, religious, or public trusts or purposes, whether by or under any Act or otherwise, and notwithstanding any provision to the contrary in the Act or the trust instrument....