breach of trust

BREACH OF TRUST & DEFENCES

Learning Outcome

Students will be able;

1) To define what is a breach of trust.

2) To understand the basis of liability

3) To learn on personal liability to the beneficiaries

4) Nature of Liability

5) Measure of Liability

6) Defences

What is a Breach of Trust

Failure to comply with duties laid upon trustee by the trust instrument and also by equity

May be in a positive action, eg;- investing in an unauthorised investment- Maladministration that cause losses to trust

property Settlor-trustee is liable to the same extent as

any other trustee although trust was created by the same person.

Nature of Liability

1) Personal Liability to beneficiaries

2) Liability Inter Se : Contribution and Indemnity

3) Criminal Liability

4) Defences

Basis of liability

Liability is compulsory. Compensation to the beneficiaries for

whatever loss Restoration to the beneficiaries of the

property if an unauthorised profit has been made.

Objective is not to punish trustee but to compensate beneficiary.

Unless in the case of technical breach which the court authorised

Personal Liability to the Beneficiary

Compensation to beneficiaries. Remedy sought is compensation for breach. Target Holdings v Redferns [1995] 3 WLR 352. HOL : - the principle on compensation for breach is the

same as damages at common law.- a trustee who committed a breach of trust was

not liable to compensate the beneficiary for losses which the beneficiary would have suffered if there had been no such breach

Liability is Personal Not Vicarious

A trustee is liable personally for his own breach of trust

- A trustee is liable for his own wrong and not for those of his co-trustee.

- Unless if there is a breach by co-trustee, trustee will be at fault

i) for leaving the matter in the hands of a co-trusteeii) Standing by while breach is committediii) Allowed trust fund to remain in sole control of a co-

trustee.iv) Failed to take steps to obtain redress after the

trustee was aware of the breach

S35 of the Trustee 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.

Re Lucking’s WT [1968] 1 WLR 866

Lucking had committed a BOT in entrusting large sums of money to a manager,without adequately supervising him.

His fellow trustee, Block, was not liable for Lucking’s BOT, but entitled to rely on what Lucking had told him about the company’s affairs.

Bahin v Hughes (1886) 31 Ch D 390

A passive trustee was liable to the same extent as an active one.

In this the breach was a breach by a co-trustee but trustee left the matter in the hand of trustee without inquire or stand by to see that breach is committed.

Breaches before Appointment

A trustee is not liable for breaches of trust committed before his appointment.

A trustee should on his appointment examine any documents and books relating trust.

If he discover a breach, action should be taken against the former trustee

Breach After Retirement

A trustee remain liable after retirement for breaches committed by him during his term of office.

If he died, his estate will be liable. He will not be liable if breach is

committed after his retirement He will be liable if he retire in order to

facilitate a breach of trust

Head v Gould (1989) 2 Ch 250

Kekewich J “… In order to make a retiring trustee liable for a trust committed by his successor you must show and show clearly that the very breach of trust was in fact committed was not merely the outcome of the retirement and appointment took place… It will not suffice to prove that the former trustee rendered easy or even intended a breach of trust, if it was not in fact committed. They must proved to have been guilty as accessories before the fact of the impropriety actually perpetrated.

Breach of Trustee – Beneficiary

Where trustee in breach is also a beneficiary, his beneficial interest bears the loss against the other beneficiaries.

A trustee will be required to indemnify his co-trustees to the extent of his beneficial interest and not merely the extent that he has personally received some benefit from the breach.

Chillingworth v Chambers [1896] 1 Ch 685

Criminal Liability

Breach of trust is not a criminal offence But there is a breach of trust

committed in respect of criminal offence

Bankruptcy of a defaulting trustee

If a liable trustee for breach of trust becomes bankrupt, the claim (breach) is provable in his bankruptcy

Measure of liability Trustee liable for the restitution of the

money or thing, or value of the thing, and to account for profit made or loss caused.

a)      Payment to wrong person or misapplication of Trust funds.

Increased rate of interest plus principal amount payable

b)      Sale of authorised and purchase of unauthorised investment

DEFENCES A TRUSTEE MAY TAKE

Introduction

A trustee who has committed a Breach of trust may be able to escape personal liability by bringing the case within a few ground in the case of RE PAULING’S SETTLEMENT TRUST (1964) Ch 303

Facts of the case

The children of the Younghusband’s family sued to recover from the trustee who managed their mother’s marriage settlement.

The children were in many occasion faced financial difficulties. Main financial sources was Mrs Younghusband’s marriage settlement where she was the tenant for life.

The trustee in this settlement has the power to advance the trust fund up to ½ of the presumptive share of each children

Several advances were made to the children who on some occasion received independent legal advice s to their right under the settlement.

The mother’s consent was obtained in every case.

1954 : an advancement was made in order to avoid estate duty on the death of the mother – children were aware that advancement might be in breach of trust.

1958 : the children brought an action against the trustee claiming £29,160 on the ground that this sum had been improperly paid out by way of advancement

The trustee depends relied on the consent and acquiescence of the advanced beneficiaries.

i) Beneficiaries, before the breach consented to or participated in breach

A beneficiary who has participated in or consented to or participated in breach

Wilmer LJ “that if the trustee can established a

valid request or consent by advanced beneficiary to the advance in question that is a good defence

ii) Release or Acquiescence

After the breach, beneficiaries wither formally or informally showed their approval through ‘release or acquiescence

Refers to the conduct of the beneficiaries after breach

A release may be formal or inferred from conduct

iii) Expiration of 6 years

No action against trustee personally after expiration of 6 years period of the Limitation Act 1953.

Except in cases regarding fraud

iv) Statutory relief s63 of Trustee Act

Power to relieve trustee from Personal Liability

If it appears to the court, the trustee has acted honestly and reasonably and ought to be excused for the breach of trust, the court may relieve him either wholly or partly from personal liability.

RAJA ENA JAINAB ABIDEEN (1930) SSLR 212.

Three requirements that trustee ought to be fairly excused.

A) trustee had acted honestly Trustee had acted reasonably –

depends on the ctc of the case Court will take into account the conduct

of parties, trustee and beneficiary.

v) Advice of Solicitor - Trustee

What need to be proved is that the trustee in committing breach of trust acted on the advice of solicitor.

vi) Breach by a Single Trustee Alone

If breach is committed by one trustee, the co-trustee will not be held liable.

Dicta in Bahin v Hughes; ‘But as far as cases had gone at present,

relief has only been granted against trustee who has himself the benefit of BOT or between whom a relation which will justify the Court in treating him as solely liable

vii) Exemption Clause in the Trust Document

If the trust document has specify matters which could exclude trustee from breach, then the trustee will not be liable.

Statutory Indemnities.

Section 31 – 35 & s64 of the Trustee Act 1949.