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complete full-year notes...

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The Duties of Trustees 

Trustee Act 1956: not much reference to duties

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Trusts Act 2019, Part 3: mandatory v. default duties

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Mandatory duties in ss 23-27 = must be performed by the trustee and may not be modified or excluded by the terms of the trust (s 22)

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Default duties in ss 29-38 = must be performed by the trustee unless modified or excluded in accordance with s 5(4)-(5) [Schedule 2] (s 28)

s 23 Duty to know terms of trust

A trustee must know the terms of the trust. 

s 24 Duty to act in accordance with terms of trust

A trustee must act in accordance with the terms of the trust. 

s 25 Duty to act honestly and in good faith

A trustee must act honestly and in good faith. 

s 26 Duty to act for benefit of beneficiaries or to further permitted purpose of trust

A trustee must hold or deal with trust property and otherwise act— (a) for the benefit of the beneficiaries, in accordance with the terms of the trust: (b) in the case of a trust for a permitted purpose, to further the permitted purpose of the trust, in accordance with the terms of the trust. 

s 27 Duty to exercise powers for proper purpose

A trustee must exercise the trustee’s powers for a proper purpose. * Duty to know terms of the trust 

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Trustee has a duty to become thoroughly acquainted with the terms of the trust which he or she has undertaken to carry out. New Trustees might become responsible for breach of trust by earlier trustee if they don’t properly inquire. This includes all documents relating to, or affecting, the trust property.

* Duty to act in accordance with terms of the trust  Terms of the trust express settlor’s wishes.  A trustee undertakes to carry out the wishes of the settlor as expressed (e.g. in a deed or a will), and having undertaken to do this, is bound by this undertaking. EXCEPTIONS  Variation by unanimous consent of the beneficiaries (s 122)  If trust terms are impossible to carry out  Court may sanction deviation from trust terms (by statute or by inherent jurisdiction) *Duty to act for benefit of beneficiaries:

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The duty of impartiality can be seen as part of the wider duty to act in the beneficiaries’ best interest. The trustee must consider all beneficiaries. Generally financial interests, but in some circumstances other factors can be taken into account, e.g. if the beneficiaries have a social or religious belief then such can be taken into account in investment decisions, even if they are not the best financially. Note 2019 statutory wording: “in accordance with the terms of the trust”

Cowan v Scargill [1985] Ch 270 (Ch) summary in Chevalier-Watts & Tappenden book at pp. 186-187    

Fund set up to provide retirement or injury benefits for English coalminers or their widows and children if they were killed. There were 10 trustees, five from a union and five others. There were wide powers of overseas investment, and in energy interests other than coal. In 1982 the union members refused to approve any investments in any energy interests other than coal They wanted to protect the British coal industry. The court said a broad investment diversification plan was better than a narrow one, and was better for the financial interests of all the beneficiaries which included those not in the mining industry and widows and children.

Duty of impartiality: A trustee is required to be impartial, and the difficulty most arises between the issues over life tenants and those who are to get what is left over (residual beneficiaries). This can involve issues of preserving and enlarging capital of the trust, against producing the maximum income. See Trusts Act 2019, s 35  Impartially not necessarily = equally.  A trustee must act fairly re: all beneficiaries. Two different aspects to the duty:  The trustee must act impartially between individual beneficiaries.  The trustee must act impartially between different classes of beneficiaries. Re Mulligan (Deceased) [1998] 1 NZLR 481 (HC) Widow = life interest Nieces & nephews = remainder interest  Trustees = widow + trustee company  Timeline  1949: Will-maker died.  1965: Farm sold. Trust fund value = $108,000.  1965-1990: Fixed interest investments. Income à widow. But low growth due to inflation.  1990: Widow died. Estate ($690,000) à her family. Trust fund = almost $102,000.  Will-maker’s nieces and nephews sued for breach of trust  

“Breach of trust is alleged. The central allegation is that the trustees took no steps to protect the capital of the trust against the impact of inflation.”  “[A] trustee must be even-handed as between income and capital beneficiaries. It is this duty which is at the heart of the present dispute.” Held: trustees had not acted impartially but rather had consistently favoured the interests of the widow Trustee company should not have deferred to widow’s view Both trustees = breach of trust 

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Manukau City Council v Lawson [2001] 1 NZLR 599 (HC) “It was held not to be appropriate in that [English] case to refer to a duty of impartiality. Trustees exercising such a discretionary power must not take into account irrelevant, irrational or improper factors but provided they avoid doing so they are entitled to choose to prefer some beneficiaries over others. On the other hand the impartiality principle applies where the rights of the life tenant and remaindermen are set out in the trust instrument. There is often a need in such cases for a trustee to make an apportionment between income and capital. In such circumstances there is a duty of impartiality…” Duty to avoid conflict of interest: See Trusts Act 2019, s 34 Re Mulligan (Deceased) [1998] 1 NZLR 481 (HC) 

Self-evident conflict of interest  Preoccupied with maximising the income return.  Not interested in taking into account the interests of the nieces and nephews.  The wife’s own interests took precedence.

Boardman v Phipps [1967] 2 AC 46 (HL) (on Learn under ‘Selected Other Trusts’) Duty not to profit: Keech v Sandford (1726) Sel Cas T King 61; 25 ER 223   

Lease of a market - held on trust for a child. Trustee took renewal of the lease in his own name. Held: trustee held the lease and any profit on a constructive trust for the child.

Boardman v Phipps [1967] Boardman = solicitor to trustees Tom Phipps = a beneficiary  John Phipps = another beneficiary & plaintiff None of them = a trustee “… And it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict … it means the reasonable man looking at the relevant facts and circumstances of the particular case would think that there was a real sensible possibility of conflict;  

not that you could imagine some situation arising which might, in some conceivable possibility in events not contemplated as real sensible possibilities by any reasonable person, results in a conflict.” Lord Cohen’s judgment gives 2 reasons for holding Boardman and Tom Phipps to account:  The use of the information acquired during the negotiations  Conflict of interest between Boardman’s role as the trust’s solicitor and his actions in taking over the company. Another breach of fiduciary duty. House of Lords majority:  Boardman and Tom Phipps had, as a result of their fiduciary position, obtained the opportunity to make a profit and the knowledge that a profit was there to be made.  So they held the profit they had made on a constructive trust for the beneficiaries.  But they were entitled to ‘liberal’ compensation for their efforts. Duty to act for no reward Trusts Act 2019, s 37: A trustee must not take any reward for acting as a trustee, but this does not affect the right of a trustee to be reimbursed for the trustee’s legitimate expenses and disbursements in acting as a trustee (see section 81(2)). (Per s 81(2), expenses or liabilities incurred by a trustee when acting reasonably on behalf of the trust may be reimbursed or paid directly from trust property.) 

A duty to invest

Under s13A, a trustee may invest any trust funds whether at the time at the state of investment or not, in any property and any such investment may be subsequently varied. Property is defined as meaning not just real estate, but including real and personal property, and any estate share or interest in any property, real and personal, any debt, anything in action, and any other right or interest whether in possession or not. This section gives a general permission to invest in anything. If however the trust document specifies investments or excludes investments then this must be followed. 

A duty to take due care

In making investments trustees must take into account s13B – the overarching guiding principle which states a trustee exercising power or investment shall exercise the care, diligence and skill that a prudent person of business would exercise in managing the affairs of others, and such applies to all trustees. So the standard is that of a prudent person in that business; the ‘prudent person test’. Under s13E a trustee must take certain things into account when making an investment, such as the need for diversification, the nature of existing trust investments and other trust property, the need to maintain the real value of the capital and income of the trust, the risk of capital loss or depreciation, the likely income return, the length of term of the proposed investment, the duration of the trust, tax liability, inflation and so on. Duty to invest prudently: s 30: When exercising any power to invest trust property, a trustee must exercise the care and skill that a prudent person of business would exercise in managing the affairs of others, having regard, in particular, —

a. to any special knowledge or experience that the trustee has or that the trustee holds out as having; and b. if the person acts as a trustee in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect of a person acting in the course of that kind of business or profession. Potential problems include: a. Trustees might not invest at all b. Trustees might make an unauthorised investment that loses money c. Investment may be authorised but made at a bad time, or was a bad choice (losing money) d. Trustees might leave money in a particular investment for too long (losing money) Re Mulligan (Deceased) [1998] 1 NZLR 481 (HC) “Loss of trust money, or in this case diminution in the real value of a trust fund, does not of itself render a trustee liable. It must be shown that the loss or diminution arose from some failing on the part of the trustee, which can be properly characterised as a breach of trust.” Young v Hansen [2004] 1 NZLR 37 (CA) NZCA indicated that unless agreement to the contrary, trusteeship is not usually part of a solicitor's ordinary business. Duty to act unanimously: Rodney Aero Club Inc v Moore [1998] 2 NZLR 192 (HC) s 38: If there is more than 1 trustee, the trustees must act unanimously. Trustees’ obligations to keep and give trust information: Erceg v Erceg [2017] NZSC 28  When a beneficiary asks for disclosure of trust documents, trustees must evaluate fact  Presumption of disclosure  But “The greater the scope of the request and the remoter the interest of the beneficiary, the more room there will be for argument about the appropriateness of disclosure.”  Here, court refused to order disclosure of ANY trust document “…given the unusual features of this case, disclosure should not be ordered even in relation to Category 1 documents… We agree with the Courts below that the interests of the beneficiaries of the trusts will be better served by declining to order any disclosure in this case… The risk of harassment by the applicant is significant and the benefits of disclosure being made are outweighed by that potential detriment.” (at [101]) Trusts Act 2019, ss 45-55 For assessments: use Trusts Act 2019 provisions for these obligations (not Erceg factors) unless specifically asked about Erceg 5.4 Trustees’ right to apply to the court for directions: Trusts Act 2019, ss 133(1), 134 A trustee may apply to the court for directions about—  the trust property; or  the exercise of any power or performance of any function by the trustee.

134Protection of trustee while acting under direction of court (1)A trustee acting under any direction of the court must be treated as having discharged the trustee’s duties as a trustee in relation to the direction, even though the order giving the direction is later declared invalid, overruled, set aside, or found to be otherwise ineffective. (2) However, subsection (1) does not indemnify a trustee for any act done in accordance with a direction of the court if the trustee has acted in bad faith in— (a)getting the direction; or (b)acquiescing in the court making the order or giving the direction. 5.5 Selected beneficiaries’ rights: Right to ask court to review certain trustee acts/omissions/decisions: Trusts Act 2019, ss 126-127 126Court may review trustee’s act, omission, or decision (1)The court may review the act, omission, or decision (including a proposed act, omission, or decision) of a trustee on the ground that the act, omission, or decision was not or is not reasonably open to the trustee in the circumstances. (2)The court may undertake a review on the application only of a beneficiary. (3)The review must be conducted in accordance with section 127. (4)This section and section 127 do not limit or affect— a. the court’s jurisdiction to supervise trusts, including its jurisdiction under the Charitable Trusts Act 1957; or b. the Attorney-General’s powers and duties with respect to charitable trusts, including powers and duties under theCharitable Trusts Act 1957. 127Procedure for court’s review of trustee’s act, omission, or decision (1)An applicant for a review under section 126 must produce evidence that raises a genuine and substantial dispute as to whether the act, omission, or decision in question was or is reasonably open to the trustee in the circumstances. (2)If the court is satisfied that the applicant has established a genuine and substantial dispute, the onus is on the trustee to establish that the act, omission, or decision was or is reasonably open to the trustee in the circumstances. (3)If the court is satisfied on the balance of probabilities that the act, omission, or decision was not or is not reasonably open to the trustee in the circumstances, the court may (but subject to subsection (4))— (a)set aside the act or decision, or direct the trustee to act in the case of an omission: (b)restrain the trustee from acting or deciding in the case of a proposed act or decision, and direct the trustee to act in the case of a proposed omission: (c)make any other orders that the court considers necessary. (4)The court must not make an order that affects— (a)a valid distribution of the trust property that was made before the trustee had notice of the application; or (b)any right or title acquired by a person in good faith and for value. Right to terminate the trust: Trusts Act 2019, s 121 121Termination of trust by unanimous consent of beneficiaries

(1)A trustee must terminate the trust and distribute the trust property on being required to do so by all of the beneficiaries who together hold all of the beneficial interest in the trust property if the conditions set out in subsection (2) are satisfied. (2)The conditions for the termination of the trust are that— (a)every beneficiary consents to requiring the trustee to terminate the trust and distribute the trust property; and (b)the trustee receives a request to terminate the trust and distribute the trust property from or on behalf of each beneficiary; and (c)if any of the beneficiaries is a beneficiary described in section 124(2), the court has made an order under section 124 approving the termination of the trust on behalf of that beneficiary. (3)The condition in subsection (2)(b) is satisfied if— (a)the beneficiaries provide a written request to the trustee to terminate the trust and distribute the trust property; and (b)the notice is signed by each beneficiary or by the duly authorised agent of that beneficiary

Trustee’s liability for breach of trust: Criminal liability: e.g. Crimes Act 1961, s 229 

There are a lot of property offences in the act and some of these could apply when you have a trust, s220 theft by person from special relationship so applies to beneficiaries.

Civil liability – remainder of this handout    

Is there a trust? Breach of trust (breach of duty)? Trustee relief from breach? (should they be excused from the breach of duty, kind of like a defence) If not to the third question, then look at the beneficiaries’ remedies?

1. Was there a breach of trust? Any of the duties in the act or statute then if you breach any of those then the second question will apply. Examples: - trustees can’t invest in shares - Doing what is forbidden or not doing what is required - Another way is doing more than is permitted - Breaches can be done without knowledge. It can be done without knowing it is a breach. The 2019 statute is really important as before that there was no set list so there was no way to know what a breach was, but you were still liable. 

Trusts Act 2019, s 13(b) “the trustee is accountable for the way the trustee carries out the duties imposed on the trustee by law.” “In general, a trustee is fully liable for the loss suffered by the trust property by the wrongful act of a fellow trustee: liability of trustees is joint and several, even if there are varying degrees of blameworthiness (or none at all).” - Butler textbook at 261 5.7 Relief from trustee liability: Types of relief:

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Exclusion clauses in the trust terms Indemnity Beneficiary acquiescence/consent/confirmation/release Trustee acted under court’s direction (Trusts Act 2019, s 134) Trustee acted “honestly and reasonably” (Trusts Act 2019, s 131) [Trustee’s liability for delegate’s acts limited, s 72 – not examinable]

Exclusion clauses in the trust terms: A clause in the trust clause can limit the liability of trustee. These clauses can make being a trustee more attractive as there’s less of a risk. s40 “The terms of a trust must not limit or exclude a trustee’s liability for any breach of trust arising from the trustee’s dishonesty, wilful misconduct, or gross negligence.” Any such clauses are invalid (s 42) There is an extent to how much the exclusion clauses can exclude. 44Court consideration of gross negligence (1) This section applies when a court is deciding whether a trustee has been grossly negligent for the purposes of section 40, 41, 75, or 82. (2) The court must consider, having regard to the factors in subsection (3), whether the trustee’s conduct (including any action or inaction) was so unreasonable that no reasonable trustee in that trustee’s position and in the same circumstances would have considered the conduct to be in accordance with the role and duties of a trustee. (3) The factors to which the court must have regard are— (a) the circumstances, nature, and seriousness of the breach of trust; and (b) the trustee’s knowledge and intentions relating to the breach of trust; and (c) the trustee’s skills and knowledge that are relevant to the role of trustee; and (d) the purpose for which the trustee was appointed; and (e) any other circumstances, including whether the trustee has been remunerated for the role, or characteristics of the trustee that are relevant to the role of trustee; and (f) the type of trust, including, without limitation, the degree to which the trust is part of a commercial arrangement, the assets held by the trust, how the assets are used, and ho...