Equity & Trust: Breach of Trust PDF

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Summary

Breach of Trust- A breach of trust refers to any act on the part of a trustee which amounts to a contravention of his or her duties or is in excess of his or her power. o Trustee commits a breach of trust when he fails to carry out his or her duties properly or exceeds them.- A trustee can only be m...

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Breach of Trust -

A breach of trust refers to any act on the part of a trustee which amounts to a contravention of his or her duties or is in excess of his or her power. o Trustee commits a breach of trust when he fails to carry out his or her duties properly or exceeds them.

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A trustee can only be made liable for breach of trust if that breach has resulted in an unauthorized gain to the trustee, or has caused the trust to suffer a loss o Make a profit or for his own personal benefit. o By his negligent or wrongful act, the beneficiaries suffer loss or damages.

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Breaches of trust fall into two categories: i) Misapplication of trust property o Using the property for something else that is not provided in the trust instrument. o i.e. Unauthorized investments, gain personal benefits. ii) Failure to administer the trust with due care and skill. o What a reasonable and prudent trustee would do in that situation

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The trustee’s liability for breach of trust is personal. o This means that the trustee is liable to the full extent of their estate; liability attaches to them.

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The trustee’s liability is also strict. o This means that the trustee’s state of mind is not relevant to a consideration of whether a breach has occurred. o If the trustee delegated an agent, the court would look in the consideration whether the trustee has supervised and appoint the agent reasonably and prudently.

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The remedy available to the beneficiary against a trustee is compensation for the breach. 1) Where it is a misapplication of trust property o The remedy is to restore the lost funds. 2) Where it is failure to administer o It is the difference in value between the trust fund if it had been correctly administered, and the trust fund as it was actually administered.

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Obviously, the latter claim can be difficult to prove o The trustee will be liable for all losses which flow from the breach.  Nestle v National Westminster Bank plc [1993] 1 WLR 1260  The claimant said that the defendant bank as trustee of her late father’s estate had been negligent in its investment of trust assets

Held: The claimant had failed to establish either a breach of trust or any loss flowing from it, though there was not much for the bank to be proud of in its administration of the trusts. Various way in which breach of trust may occur: o Investment of trust monies in unauthorised investment o Taking a profit from the trust not authorised by the trust instrument or by the court o Manipulating the investments to benefit one beneficiary at the expense of the others o Negligently allowing trust property to remain under the control of one trustee o Paying the trust property to the wrong person 

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1.0. Liability of trustee is personal and not vicarious -

A trustee’s liability for breach of trust is in general limited to breaches for which he himself was responsible and generally not for those of his co-trustees. Townley v Sherborne (1634)  Liability is personal and NOT vicarious  Trustee is liable for his own breach & not for those of his co-trust.  i.e. not liable for breach by another trustees, only liable for failure to prevent a breach by another trustee  One of several trustees had received certain rents.  The question was, whether the others were liable for his receipts.  Held: 1) That where lands are conveyed to two or more upon trust, and one receives the rents, his co-trustees shall not be liable unless some purchase, fraud, or evil dealing seems to have been in them to prejudice the trust, for they being by law joint-tenants, every one of them may receive either all or as much of the rents as he can come by. 2) That it is no breach of trust to permit one of the trustees to receive the rents 3) That if, however, a trustee, having allowed his co-trustee to receive rents, subsequently leaves in the co-trustee’s hands the money that has been received, he is liable therefore. Re Haji Ali (decd); Hasbah v Mohamed Zain [1933] MLJ 135  Liability is personal in nature, not vicarious  One of the three executors was a semi illiterate woman who had little or no business knowledge.  One of the other two executors was proved to have committed various breaches of trust.  On the liability of the three executors for the breach of trust of one of them, the court held that the semi-illiterate executrix acted reasonably and honestly and ought fairly to be excused.  The other two trustees were jointly liable for the breaches committed by the defaulting trustees

2.0. Liability of the trustee is compensatory

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Compensated by monetary compensation A trustee who fails to comply with his duties is liable to make good the loss to the trust estate. Even there is no loss, the trustee is accountable for any profit made in breach of trust. Compensation is to put the Plaintiff (beneficiary) in a position as he would have been in, had he not sustained the wrong or which he was being compensated.  Target Holding Ltd v Redfern (A Firm) and Another  The claimants, mortgagees, loaned a company £1.525 million, to be secured by way of a mortgage on property which was fraudulently made to appear to be worth £2 million, but in reality was worth only £775,000.  The defendants, a firm of solicitors, were not parties to this fraud and acted for the purchasers and the mortgagees.  The purchasers became insolvent and the claimants repossessed the property and sold it for £500,000.  The claimants sued the firm of solicitors.  The firm conceded that it acted in breach of trust by paying out the mortgage funds without authority, but argued that it was not liable to compensate the claimant for the loss suffered because its breach did not cause the loss sustained by the claimant.  The firm of solicitors alleged that the claimants’ loss was wholly caused by the fraud of the third parties.  The House of Lords decided in favour of the firm of solicitors and Redferns did not have to repay the 1.49 mill.  Only losses that were caused by Redferns breach of the trust terms could be recovered  The claimant company advanced the same amount of money, obtained the same security and received the same amount on the realisation of that security, with or without the breach of trust committed by the defendant.  The House of Lords held the breach did not cause a loss because despite releasing the money early that would not have prevent the fraud going ahead; so the claim failed on this ground  If there is no loss caused by the breach there is no liability  Lord Browne-Wilkinson explained: o [T]he basic equitable principle applicable to breach of trust is that the beneficiary is entitled to be compensated for any loss he would not have suffered but for the breach.

3.0. Breaches before Appointment -

A trustee is not liable for breaches of trust committed before his appointment in the absence of evidence indicating a breach of trust. On appointment, he or she should examine the books and documents relating to the trust and should ensure that the trust property is vested in him.  Re Strahan  Generally, a trustee is not liable for breaches committed before appointment as trustee where there is no evidence indicating a breach has occurred

4.0. Breach of Trust 4.1. Purchase of unauthorised investment: - If a trustee makes or purchase unauthorized investment, they will be liable for the loss incurred on realizing it. - Depends on the type of investment, if trustee have invested in good faith and did all the reasonable enquiries before investing.  Knot v Coltee (1852) 16 Beav 77  A testator, who died in 1844, directed his trustee to invest in government stocks and land in England and Wales.  In 1845 and 1846 the executor-trustee invested part of the estate in Exchequer bills which in 1846 were ordered into court and sold at a loss.  In 1848, the court declared that the investment was improper.  If, however, the investment had been retained, its realisation at the time of the declaration in 1848 would have resulted in a profit.  The court held that the trustee was liable to compensate the estate for the difference in value of the assets in 1848 and the sale proceeds in 1846.  Where the court held that the trustees were liable for the original sum invested less the amount received as proceeds of sale.  Muthuraman Chettiar v Ee Kong Guan & Anor [1934] 3 MLJ 31  Trustees should be ordered to pay damages: that amount will be the sum which the shares would have realised if they had been sold in 1925. 4.2. Improper retention of investment - If a trustee improperly retains an authorised investment, he will be liable for the difference between the present value (or selling price) and the price which it would have raised if it had been sold at the proper time.  Fry v Fry (1859) 27 Beav 144  A house should have been sold for 1000 pound in 1836  Refused an offer for 900 pound in 1837  Then a railway was built which resulted in the house still not being sold by 1856 when trustees die.  Beneficiaries sued for loss to trust fund, alleging neglect by trustees to sell as trust terms required.  Held: Liability is strict, liable to compensate for difference between actual value at time of trial and offer received.  Trustee’s estate liable for the difference between 900 and the value when finally sold. 4.3. Improper sale of authorised investment

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If a trustee improperly sells authorized investments, he or she must replace them or pay the difference between the price received and the cost of replacement.

 Re Bell’s Indenture  When an authorised investment is improperly sold, the beneficiaries may require the trustees either to account for the proceeds of sale or to replace the investment, valued at the date of judgement.  Re Massingberd’s Settlement (1890) 63 LT 296  The trustees of a settlement had power to invest in government securities.  In 1875 they sold Consols (authorised investments) and reinvested in unauthorised mortgages.  Some time later, Consols had risen in value.  In an action for an account the court held that the trustees were required to replace the stock sold or its money equivalent.  The trustee was held liable for the differences between what the mortgage yielded and what would have been received if the money had remained invested in the authorised securities. -

Section 6(2) Trustees Act: Trustees before making any investment should obtain proper advice on the question whether the investment is satisfactory o Protection to the trustee

5.0. Failure to invest -

Trustees should invest within reasonable time. Failure results in them being liable for interest lost if the property is not invested. A trustee who unreasonably fails to find an investment will be chargeable with interest.

 Byrchall v Bradford  If a trustee is required to make a specific investment and fails to make any investment, and the price of the specific investment has risen, he will be liable to purchase as much of that investment as would have been purchased at the proper time.

6.0. Employment of trust fund in trade -

A trustee who employs trust funds in his trade or business is liable to account for the profits he makes, or for the sums involved with interest. Difficult question may arise when the trustee employs a mixed fund, being partly his or her own and partly trust money.

7.0. Nature of liability of trustee or trustees 7.1. Personal liability - Liability of a trustee involved in a breach of trust is personal in nature. - Personal liability is also known as ‘personal claim’ or claim in personam.

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Trustee will not be liable if the trust funds lose value because there is a general decline in the market value of the trust assets.

 Re Chapman [1896] 2 Ch 763  A trustee who is honest and reasonably competent is not to be held responsible for a mere error in judgment when the question which he has to consider is whether a security of a class authorized, but depreciated in value, should be retained or realized, provided he acts with reasonable care, prudence, and circumspection.  Where the trustees retain an authorised investment, they will not be liable for breach of trust unless their conduct falls short of the ordinary prudence required of trustees 7.2. Liability between trustees - Where two or more trustees are liable for a breach of trust their liability is ‘joint’ and ‘several’.

 Fletcher v Green  A beneficiary may claim the whole loss by suing all or some or any one of those who are liable, and may levy execution for the whole sum against any one -

It is important to address the liability between trustees by way of making reference to these: o Contribution o Indemnity

7.2.1. Contribution - The Old Rule: All trustees who were liable for the loss had to bear that loss equally which the compensation will be divided equally, provided that the liability was borne equally. - All of them shall be jointly liable for the breach of trust.

 Fletcher v Green  Joint liabilities of trustees required an equal sharing of the liability, regardless of fault, and therefore that one trustee who had paid more than his share of liability for a breach of trust was entitled to equal contribution from the other trustees who were also liable.  Bahin v Hughes [1886] 31 Ch D  Hughes was an active trustee and Edwards was not.  Despite this, due to the joint and several liability of the trustees, “all the trustees were in the wrong, and everyone equally liable” to indemnify the beneficiaries including Edwards  Principle: A passive trustee was liable with the active trustee. -

Under the modern English Law, Civil Liability (Contribution) Act 1978 which gives the court discretion in relation to the amount to be recovered against two or more trustees or defendants who are liable in respect of the damage – the amount recoverable against any defendant shall be “such as may be found by the court to be just and equitable having regard to the extent of that person’s responsibility for the damage in question.”

o Court have discretion to determine the amount of compensation to be paid by each trustees.

 Syed Mohamed bin Ali Alsagoff v Roland Farrer (1934) SSLR 347  A trustee as a fiduciary is not allowed to put himself in a position where his or her personal interests would conflict with his or duties as trustee 7.2.2. Indemnity - A trustee may be given an indemnity for the loses against his co-trustee as opposed to a mere contribution. -

Examples or cases where indemnity has been awarded: 1) Fraud o Where one trustee alone is fraudulent, the other will not be liable at all, and no question of contribution or indemnity arises;  Bahin v Hughes [1886] 31 Ch D  If both in breach but one alone has made personal use of trust money, the latter must indemnify his co-trustee. 2) If the active trustee was also a solicitor and has exercised such controlling influence that the other trustee has been unable to exercise an independent judgment  Re Partington (1887)  Mrs Partington and Mr Allen, a solicitor, were trustees who were liable for a breach of trust.  The trust fund was invested in an improper mortgage which resulted in a loss.  Mr Allen had assured Mrs Partington that he would made a good investment on behalf of the trust.  He failed in his duties to verify statements by the borrower, he failed to give proper instructions to the valuers, and he did not give sufficient information to Mrs Partington to enable her to exercise an independent judgment.  The court held that Mrs Partington was entitled to claim an indemnity from Mr Allen

 Goodwin v Duggan  Two trustees were liable for a breach of trust  One had misused trust funds for his own benefit but the other was liable for having improperly delegated her duties to him.  Both trustees were liable for breach of trust, but the honest (but passive) trustee was entitled to be indemnified fully by the trustee who had benefited from the breach 3) If the co-trustee was a beneficiary under the trust, then the breach may be made good out of his or her own beneficial interest as far as possible before applying the contribution rule.  Re Rhodesia Goldfields

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When a person who is a trustee and beneficiary participate in a breach of trust, he may not claim any share of the trust estate until he has made good his liability as trustee.

 Chillingworth v Chambers [1896] 1 Ch 685  Where a trustee is also a beneficiary and participates in the breach of trust, he is required to indemnify his co-trustee to the extent of his beneficial interest  Thus, the trustee/beneficiary’s property is taken first to meet the claim against the trustees.  If the loss exceeds the beneficial interest, the trustees will share the surplus loss equally in so far as it exceeds the beneficial interest -

Section 35 of the Trustees Act 1949: Implied indemnity of trustees 1) A trustee shall be chargeable only for money and securities actually received by him notwithstanding his signing any receipt for the sake of conformity, and shall be answerable and accountable only for his own acts, receipts, neglects, or defaults, and not for those of any other trustee, or of any banker, broker, or other person with whom any trust money or securities may be deposited, nor for the insufficiency or deficiency of any securities, nor for any other loss, unless the same happens through his own wilful default. 2) A trustee may reimburse himself or pay or discharge out of the trust premises all expenses incurred in or about the execution of the trusts or powers. o Trustee chargeable only for money and securities actually received by him, and not for the acts of other agents, unless the same happens through his own wilful default.

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Section 64 of the Trustees Act 1949: Power to make beneficiary indemnify for breach of trust 1) Where a trustee commits a breach of trust at the instigation or request or with the consent in writing of a beneficiary, the Court may, if it thinks fit, and notwithstanding that the beneficiary may be a married woman restrained from anticipation, make such order as to the Court seems just, for impounding all or any part of the interest of the beneficiary in the trust estate by way of indemnity to the trustee or persons claiming through him. o If the breach is done with the consent of the beneficiary, then the court will allow indemnity. o If trustee commits breach with consent in writing of beneficiary, court make order as it deem for impounding all or any part of interest of beneficiary in trust estate by way of indemnity

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Section 66 of the Trustees Act 1949: Indemnity o This Act and every order purporting to be made under this Act, shall be a complete indemnity to all persons for any act done pursuant thereto, and it shall not be necessary for any person to inquire concerning the propriety of the order, or whether the Court by which the order was made had jurisdiction to make it.

8.0. Criminal liability of a trustee

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Criminal liability of trustee is brought within the general law of theft. Thus, a trustee would have committed theft if he or she dishonestly appropriates property ‘belonging to another with the intention of permanently deprive the other of it.’

9.0. Defences for trustee 9.1. Acquiescence or consent from the beneficiaries - A liability for breach of trust may be negated if the act complained of was acquiesced in or consented to by the beneficiaries, all being sui juris. - The defence, including release, is conditional on the beneficiaries being in possession of full knowledge of all the material facts.  Saroja d/o MN Muthupallaniappa v Muthuraman s/o M Karuppiah  The beneficiary is to have the full facts surrounding the transaction  Spellson v George (1992) 26 NSWLR 66  A beneficiary found himself in a difficult position with hi...