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Chapter 3 Trustees
Equity and Trusts II (Multimedia University)
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Chapter 2 Trustees
Duties and Powers
Duties
The general principle:
o Trustees have discretion as to whether or not they will exercise a power
o If after a proper consideration they decide on good faith not to exercise, beneficiaries
will not be allowed to complain
o Duties and powers vary according to the character of the trust
o Some kinds of power are in principle widely available to trustee – most are now
statutory and serve to facilitate the management of trust.
A trustee may not use the powers which the possession of the legal estate in the
trust property confers on him in law except in a proper way for the legitimate
purposes of the trust. If he is about to exercise a power improperly, he may be
restrained by injunction.
Duty of Invest
o Investment means:
o To employ money in the purchase of anything from which interest or profit is
expected.
o Re Power [1947] Ch. 572
- Purchase of a house for occupation by a beneficiary, and produce no income
was held not to be an investment
o Profit making activity: Example - purchase shares in a company
o Section 2(2) of the Trustee Act 1949
- Trustee is under an obligation to invest the funds in authorized securities
according to the powers given by the trust instruments or under the Trustee
Act 1949 –
o Must be fair to the income beneficiaries as well as those entitled to the corpus.
o Must be honest and avoid risky or speculative investment
must be able to generate the income
o Trustee Act 1949 – range of investment authorised is very limited
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o The basic proposition in respect of a trustee’s exercise of investment power is
that he or she is to take such care as an ordinary prudent person would for the
benefit of other people for whom he or she felt morally bound to provide . in case
of Re Whitely (1886) 33 Ch. D. 347
The duty of a trustee is not to take such care only as a prudent man would
take if he had only himself to consider; the duty is rather to take such care
as an ordinary prudent man would take if he were minded to make the
investment for the benefit of other people for whom he felt morally bound
to provide.
Duty of Invest
Learoyd v Whiteley (1887) 12 App Cas 727 Lord Watson:
o As a general rule. the law requires of a trustee no higher degree of diligence in
the execution of his office than a man of ordinary prudence would exercise in
the management of his own affairs. Yet he is not allowed to have the same
discretion in investing the monies of the trust as if he were a person sui juris
dealing with his own estate. Businessmen of prudence may, and frequently do,
select investments which are more or less of a speculative character but it is
the duty of a trustee to confine himself to the class of investments which are
permitted by the trust and likewise to avoid all investment of that class which
are attended with hazard.
- The trustee one invest in that property is not supposed to be applied in
speculative investment.
o Re Mulligan (Decd) [1988] 1 NZLR 481
- Prudence provides a flexible standard, one which will change with economic
conditions and in the light of contemporary thinking and understandingly.
Accordingly, it follows that in judging the past performance of trustees, one
must apply the standards of the relevant period. There is a risk of applying
the wisdom of hindsight and of passing judgment on the basis of modern
day standard … I accept that a trustee is neither a surety, nor an insurer, of
the fund for which he is responsible.
- -CHOOSE OTHER CRYTO-CURRENCY which is more [Link], Eg
bitcoin is speculative investment 10 years ago.
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o Bartlett v Barclays Bank Trust Co Ltd (No. 2) [1980] 1 Ch 515
-A higher degree of care is expected from someone like a trust cooperation
which carries on a specialized business of trust management. A trust
corporation holds itself out in its advertising literature as being above ordinary
mortals. With a specialist staff of trained trust officers and managers, with ready
access to financial information and professional advice dealing with and solving
trust problems day after day, the trust corporation holds itself out, and rightly,
as capable of providing an expertise which would be unrealistic to expect and
unjust to demand from the ordinary man and woman who accepts, probably
unpaid and sometimes reluctantly from sense of family duty, the burdens of a
trusteeship.
Express powers of investment
o Trustee may be given wide power by the trust instrument to select investments.
Re Harari’s Settlement Trusts [1949] 1 All ER 233
o The power conferred on the trustees was formulated as being investments “ as
the trustees may think fit”.
o The court held that trustees had power ‘under the plain meaning of those words
to invest in any investments which they honestly think are desirable investment’.
To hold otherwise would really to read words into the settlement which are not
there”.
Khoo Tek Keong v Ch’ng Joo Tuan Neoh [1934] AC 529
-The trustees were authorized “to invest all moneys liable to be invested in such
investments as they in their absolute discretion think fit”. The trustees made a
loan, and charged interest, on the security of jewellery as well as another loan to
chetties but without any security. The privycouncil held, given the wide power
conferred pursuant to the investment clause, that the first loan was proper but the
second loan was not, and that the second amounted to a breach of trust. A
properly rafted provision may on the hand authorize unsecured personal loan.
Duty to invest
Statutory range of investment – Part II of the Trustee Act 1949 Section 4 to 15
o Section 4 provides in respect of authorised investment
o Section 4(1)(a) – 4(1)(f), Section 4(2)
o Section 5 provides for further powers of investment
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o Investment in securities in Section 5 is dependent on the conditions set out in
Section 5(3)
o Section 6 – Choose investments – Section 6(1), 6(2) to 6(4)
o Section 6(1)(a), (b)
o Section 6(2) obtain proper advice
o Proper advice is the advice of a person who is reasonably believed by the
trustees to be qualified to give it by his ability in the practical experience of
financial and other matters relating to the proposed investment.
o Section 6 (3) (a)
o Section 8(1) – trustee may invest in any of the securities mentioned or referred to
in Section 4, notwithstanding that the same may be redeemable and that the
price exceeds the redemption value.
o Section 8(2)
o Section 9 – Discretion to invest
o Section 12 – trustee lending money on the security of property
o The requirement under Section 12(1)(a), (b) & (c)
o Section 13 - Liability for loss y reason of improper investment
o Section 14 – Powers supplementary to powers of investment
Lending of monies
o Section 15 – Power to deposit at banks and to pay calls
o Section 59 – Enlargement of power of investment
Section 59(1), (2)
Lee Brothers Plantation & Realty (M) Sdn Bhd v Lee Yeow Teng [199] 1 CLJ 133
o Some of the lands purchased were held by the owners who are father as trustee
for their children.
o The defendant who is beneficiary of the trust feared that certain lands to be sold
by other family members and lodged caveats on these lands. L applied for
removal of these caveats.
o The legal issue is whether the trustees had the power to sell the said lands which
were trust property.
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o Held:
o [1] As a beneficiary of the trust, D has the right to the lands under the trust for his
benefit. The trustee did not obtain a Court order to sell the trust properties nor
was there consent by D. [2] D therefore has a caveatable interest and can
maintain the caveat even though he had acquired and received the benefit.
o Section 59(1) – Enlargement of powers of investment
o Section 59(2)-
o Wilkie v Equity Trustees Executors and Agency Co Ltd [1909] VLR 277
- First, those ordinarily recurring repairs which more fully apportion to the
enjoyment of the tenant for life and which last only for a short time – such
as papering and painting. Income must bear all such repairs.
- Secondly, where structural repairs are very great or considerable they are to
be charged wholly to corpus, because the advantage obtained from them
tells very much more in favour of the remainderman.
- Thirdly, there is a middle position where one has repairs which are
structural in some degree, being more than the ordinary carries out a class
of repairs which is midway between the two classes indicated.
- The rule is that trustees should be trusted in their just discretion to
appropriate the proportion which either should bear. That can only be
determined specifically how much should be borne by the life tenant and
how much by the estate in remainder.
Duty to convert
o The law requires the trustees to act impartially in dealing with beneficiaries.
o A trustee must act impartiality between life tenant and remainderman.
Remainderman is:
Persons who inherits or is entitled to inherit property upon the termination
of the estate of the former
Usually this occurs due to the death or termination of the former owner’s
estate, but this can also occur die to a specific notation in a trust passing
ownership from one person to another.
Example: to John for life, and then to Jane
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The rules governing investment by trustees are an attempt to strike a
balance between the provision of income for the life tenant and the
preservation of the capital for the remainderman.
Settlor-> trustee (t2) beneficiaries(b1) b2 (remainderman)
Nestle v Westminster Bank Plc [1994] 1 All ER 118
-The trustee must act fairly in making investment decisions which may
have different consequences for different classes of beneficiaries.
It hold the skill equally between tenant for life and the remainderman.
This duty forms the basis of the specific rules of conversion and
apportionment.
Duty to convert – to deal with under-productive property , the trustee owe
a duty to the beneficiary to convert or re-investment the property into
securities produce higher rate of earning.
Howe v Earl of Dartmouth (1802) 7 [Link] 137
- In respect of a gift by will of residuary personalty, the trustees are required
to sell the wasting, hazardous and unauthorized investments. Wasting
assets would cover, for example, royalties, copyrights and race horses.
- Future, revisionary and other properties yields no income.
Duty to apportion
o Where there is a duty to convert, there is, in the absence of an intention that life
tenant shall enjoy the income until sale, a duty also to apportion fairly between
the life tenant and the remainderman the original property pending conversion.
o In Howe v Dartmouth, there is no necessity for the apportionment of income.
The life tenant is thus entitled to all the income from the trust fund. And the
interest of remainderman is that of capital.
Duty to distribute
o A failure on the part of a trustee to distribute the trust property to those entitled
under the terms of the trust instrument amounts to a breach of trust.
o Eaves v Hickson (1861) 30 Bear 136
Where the trustees were required to make good the loss arising from the
payment to the wrong person on account of a document which was
forged.
The trustee has to compensate the beneficiaries if he fail to distribute.
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o Section 32 (1), (2) of the Trustee Act 1949
o IF the beneficiaries sued the trustee for failing to distribute the property, the
trustee should make an advertisement to prove that the trustee tries to relocate
the trust.
o Section 32(3),
o Benjamin Order - An issue sometimes facing a plaintiff is establishing the identity
or whereabouts of persons to whom the deceased’s estate or part of the estate
should be distributed and the inability, despite adducing all available evidence, of
ruling out the possibility that a person exists or that person had descendants who
might still be alive.
o Where this is so, they can seek BO and will enjoy protection where they
distribute in accordance with the terms of the order.
o The order is made pursuant to the court’s power to authorise the distribution of
the assets of an estate even if not all beneficiaries or creditors are known. The
court must satisfied that all practicable inquiries has been undertaken.
o Re Aldhous [1955] 1 WLR 459
o For example, no beneficiaries responded to the advertisement and the executor
caused to be paid the estate money to the Crown, being bona vacantia.
o It was held that the executor was protected by s.27 of English Trustee Act 1925
in respect of proceeding brought by the next-of-kin.
Duty to provide account and information
o A trustee is required to maintain accurate accounts which ought to be made
available on demand for inspection by the beneficiaries.
o Pearse v Green (1819) 1 Jac & W 135
-The court said that the first duty of an accounting party whether an agent,
trustee a receiver or an executor to be constantly ready with his accounts. A
trustee is thus required to maintain accurate accounts which ought to be made
available on demand for inspection by the beneficiaries.
o Re Londonderry’s Settlement [1965] Ch 918 – Categories of trust documents
-It is the duty of trustee to keep the trust documents in list.
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-defines the meaning of trust document.
-The trust document is defined as :
-[Link] documents which are in possession of trustee
[Link] documents that contain the terms and information about the trust which
the beneficiaries entitle to know.
[Link] letters that communicate between respondent, trustee and solicitors.
O’Rourke v Darbishire [1920] A.C. 581
o The court explained that a beneficiary has a right of access to the documents he
desires to inspect upon what has been called in the judgements in this case a
proprietary right. The beneficiary is entitled to see all trust documents, because
they are trust documents, and because he is a beneficiary. They are, in this
sense, his own.
Schmidt v Rosewood Trust Ltd [2003] 2 AC 709
o To the effect that proprietary right is neither sufficient nor necessary. In this case,
it was held that the issue of access to trust documents is to be viewed as an
aspect of the court’s supervisory control over the administration of trusts.
o The Privy council explained that “ a beneficiary’s right to seek disclosure of trust
documents, although sometimes not inappropriately described as a proprietary
right, is best approached as one aspect of the court’s inherent jurisdiction to
supervise, and where appropriate intervene in , the administration of trusts.
o Section 27(4) of the Trustees Act 1949 provides no general duty to have the
accounts in fact audited.
Delegation by trustees: employment of agent
o The general position in equity is that trustees cannot delegate in respect of the
management of trust, and if they employ agents for the purpose, they remain
liable to the beneficiaries.
o The law has allowed exception to this. Agent may be employed in ministerial
matters and that trustees are not to be made liable for loss attributable to the acts
or defaults of agents, the trustees shall remain liable unless they can show that
they have exercised care of a reasonable man of business in respect of both
selection and supervision.
o Section 28 Trustees Act 1949
o Section 30 Trustees Act 1949
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o The trustee can appoint someone to deal with someone who is abroad.
o Section 35 Trustees Act 1949
o Wilful default = look at case law
o Section 23 Trustees Act 1949 – Devolution of powers or trust
Re Vickery [1931] 1 Ch 572
o An executor defendant employed a solicitor who, is unknown to him. The
defendant had at a time been suspended from practice and who later absconded
having received money belonging to the estate.
o The court held that having applied s.23(1), the defendant could not be liable
since the mistake was one of judgment and, the loss was not attributable to the
defendant’s wilful default.
o The trustee employs the solicitor to do some litigation work. The solicitors have
not license or the license has expired. In this case, it concerns whether the
solicitor is liable or not? The trustee in this case is held not liable in normal
capacity. A normal layman cannot ensure that the works are practiced, thus he is
not liable.
Re Trusts of Leeds City Brewery Ltd’s Deed [1925] Ch 532
o The trustee in this case was worded in the general form so that it could not be
contended that they were liable for any matter or thing done or omitted unless it
could be shown that the loss so occasioned arose from their wilful default.
Re City Equitable Fire Insurance Co [1925] Ch 407
o He tries to explain the meaning of ‘wilful default’.
o The court held that a person is not guilty of wilful neglect or default unless he is
conscious that, in doing the act, which is complained of, or in omitting to do so,
and act which it is set he ought to have done, he is committing a breach of duty,
or recklessly careless, whether it is a breach of his duty or not.”
o WILFUL DEFAULT means that the person is knowing what he is omitting or
doing, and conscious whether an act or omission which he done is causing a
consequence. His reckless or careless cause the breach of trust.
Maintenance
o The power to apply income for maintenance and to accumulate surplus income
during a minority is provided for under Section 36 of the Trustees Act 1949.
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Advancement
o Establishment in life of the beneficiary who was the object of the power or at any
rate some step that would contribute to the furtherance of his establishment.
o Section 37 of the Trustees Act 1949
Pilkington v Inland Revenue Commissioners [1964] AC 612
o First, the word “advancement” means that the establishment in life of the
beneficiary who was the object of the power or at any rate some step that would
contribute to the furtherance of his establishment. It means any use of the money
which will improve the material situation of the beneficiary.
o There is a distinction for advancement.
o First is advancement in the sense of improving the beneficiaries’ situation.
o It refers that the power to carry out the operation of anticipating an interest is not
conferred by the word “advancement” but by those words of the section which
expressly authorize the payment or application of capital money for the benefit of
a person entitled.
o Second is advancing money out of beneficiaries’ expectant interest.
o It refers to the operation of finding money by way of anticipation of an interest not
yet absolutely vested in possession of. If it is vested, it is belonging to an infant.
o For example, advancing the money for the education fee of the children.
o The benefits of remainderman is dependent on the life span of the first beneficiary. If
first beneficiary die, the second beneficiary cannot enjoy the interest. As first
beneficiary should enjoy the benefits first. Thus, discretion is given to the trustee
Powers
Sale of trust property
o Power to sell some or all trust property is usually given by the trust instrument.
o Fry v Fry (1859) 27 Beav 144
o The trustees are liable to make up, out of their own pocket money, the difference
between selling price and the offer price.
“If the trustee does not sell the property at the market price, The overriding
principle to be applied in this case was that the party who failed with respect to “a
proceeding” should pay costs to the party who succeeded.
o Section 16 of the Trustees Act 1949
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o “power of trustee for sales to sell by auction
o Section 17 of the Trustees Act 1949
o Power to sell subject to depreciatory conditions
Power to insure
o Trustees are under no duty to insure the trust property unless the power to insure
is stated in any express provision in the trust instrument.
o Re McEacharn (1911) 103 L.T. 900
The principle is that unless the trust instrument gave some express or
implied direction concerning insurance of the trust property, the trustee
was not under a duty to insure. Thus a trustee would not be liable for any
loss arising from a failure to insure:
o Section 24 (1) , (2) of the Trustees Act 1949
S.24 (1) A trustee may insure against loss or damage by fire any building
or other insurable property to any amount, including the amount of any
insurance already on foot, up to the full value of the building or property,
and pay the premiums for the insurance out of the income thereof or out of
the income of any other property subject to the same trusts without
obtaining the consent of any person who may entitled wholly or partly to
the income.
S.24 (2) This section does not apply to any building or property which
a trustee is bound forthwith to convey absolutely to any beneficiary
upon being requested to do to.
Power to compound liabilities
o Trustees are given a wide discretion in settling claims which may be made by
third persons against the trust estate or by the trust estate against third persons.
o Re Shenton [1935] Ch. 651
o The trustee has power to allows for extension of time for the payment ,
compromise, abandon or submit dispute to arbitration or otherwise settle any
claim. It is discretion of the trustee to determine whether he want to pursue the
payment. The legal fee has to be derived from the benefits of the estate for the
trustee.
o 1, extended time
o [Link]
o [Link]
o 4. Submit the dispute to the arbitration or other resolution method.
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A trustee should distribute funds in accordance with the terms of the deed. A trustee will
be guilty of a misdemeanour if he pays to any creditor a sum larger in proportion to the
creditor’s claim than paid to other creditors entitled to the benefit of the deed unless the
deed authorises him to do so or unless such payments are made to a creditor entitled to
levy distress or a preferential creditor
o Re Brogden [1948] Ch. 206 - A wide power of this nature is of great practical
importance in enabling the trustee to make reasonable compromise instead of
being obliged to litigate in respect of every possible claim, or risk liability for
breach of trust if he fails to do so.
o Tutorial questions
o A trustee may engage somebody else to replace him and carry out his duties
temporarily. Explain this by reference to statutory provision and further explain
the procedure involved.
o Ted is the sole trustee of an exhaustive discretionary trust of income. The
objects of which are the nephews and nieces of Sarah. Sarah has two nephews,
Darren and Tim and one niece, Rene. 10 months ago, Ted lent Darren the sum
of $20,000 out of his (Ted’s) own money. Tim and Rene have now learned that
Ted has decided to pay the entire income of trust for the present year, some
$15,000 to Darren. Tim and Rene claimed that Ted exercised his discretion
under the trust in Darren’s favour only in order to allow Darren to have sufficient
funds to repay the loan from Ted. Rene and Tim wish to have the proposed
exercised of the discretion prevented, and further wish to compel Ted to
distribute the income for the present year among all three objects equally.
Discuss
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