Trustees Powers and Duties and the Rights of Beneficiaries
(A) The Duties Rights and Powers of Trustees
• Mostly arise in context of express trust.
• Trustees have powers due to the holding of property.
Distinguish between a power and a duty
• Power allows for the exercise of discretion. When someone who has power to exercise discretion, there are principles to decide whether made the correct decision.
• Powers must be used “bona fide” and for a proper purpose
• Exercise of a power is reviewable (cf administrative law principles). A judge will not usurp the administrative decision. Judicial review is about errors on the face of the record; has the decision maker taken into account irrelevant considerations, have they used the power for improper purpose, have they made a decision that no reasonable decision maker could have made. Judges will not make a new decision on the merits, only look at the process of decision making to decide whether the trustee used their discretion properly. This will be based on procedural rather than substantive tests.
Re Beloved Wilkes’ Charity
Facts: Churchmen charged with the choice of a young man for religious training, with preference to be given to candidates from a particular parish. They decided there were no appropriate candidates from the preferred parish, and chose someone from outside the parish.
Held: It was within the trustees’ power to choose someone outside the preferential clause, and there was nothing to show that they went outside the powers provided. Churchmen did not reveal any reasons for their decision and didn’t say anything. Had they set out reasons, they would have left the possibility that someone would read the record and find some bias or something to challenge the decisions. Court will not substitute its own judgment. Trustee does not have to provide reasons or records of their deliberations.
Duty to obey the terms of the trust
• With the trust powers, trustees acquire a set of duties set out in the trust.
Youyang Pty Ltd v Minter Ellison
Facts: Firm of solicitors held money on trust for a client, Y, to enable them to complete a transaction for the client on certain terms. Transaction didn’t go in accordance with the terms of the trust and Minter Ellison had to pay back 500K that they paid out.
Did Y lose that much money because of Minter’s mistake? Minter argued the loss was not due to their mistake but the fact that the decision to enter into the arrangement was bad and it was a dud transaction.
Held: Minter’s argument was not considered. Minter had to reconstitute the trust fund and pay back the money they had paid out. The firm had a duty to obey the terms of the trust. Trustees’ responsibilities are strict, and they couldn’t pay out the money from the trust unless they followed the requirements.
Can a trustee ever deviate from the terms of a trust?
Chapman v Chapman
Facts: not relevant
Ct identified 4 categories of cases where trustee may deviate from the terms of the trust.
1. To make allocations to infant beneficiaries
2. To deal with unforeseen difficulties (e.g. postpone a sale to save taking a loss i.e. it would benefit the beneficiaries)
3. To provide maintenance for needy beneficiaries. (e.g. beneficiary can’t get inheritance until 30 but they starve before 30 and die, they need the money)
4. To compromise or settle disputes between beneficiary claimants (without fear of allegations of breach of trust) - there is a presumption that reasonable settlements will not be disturbed by the courts, provided that both parties new what they were doing.
Duty to keep accounts and inform beneficiaries
Hartigan Nominees v Ridge
Facts: Media magnate (Sir Norman) owned lots of trade magazines had a family trust with money that could be transferred every year. He provided memorandum of wishes to trustees telling them how to exercise their discretions. He didn’t mention a particular person in the memo. Person wanted this memo revealed. Sir Norman did not want the document revealed.
Issue: This matter concerned an assertion that a trustee had a “duty” to reveal a memorandum from the settlor guiding the trustee’s discretion in a discretionary trust.
Held: Trustees don’t have to reveal reasons for making choices and any documents they do create about the use of their powers need not be disclosed to beneficiaries on request as a matter of trust law. Held that the memorandum of wishes was the property of the trustees and not a “trust document”. Hence it did not have to be revealed to the beneficiaries.
Re Londonderry’s Settlement
Facts: Defendant was an income beneficiary under a settlement where trustees had power to appoint shares. She wanted documents including (a) minutes of meetings between trustees, (b) agenda prepared for trustees’ consideration and (c) correspondence relating to administration of trust.
Held: Trust documents are the property in equity of the beneficiaries and the beneficiaries have the rights of inspection, BUT trustees are not obliged to reveal reasons for their decisions. Here the trustees were not obliged to reveal documents (a) and (b) as they did not contain information that the beneficiaries were entitled to know. In category (c) correspondence between trustees themselves and between trustees and beneficiaries did have to be disclosed. BUT letters from trustees’ solicitors to trustees were deemed “trust documents” in which beneficiaries had a proprietary right.
Duties to exercise care
Trustees must often make investment decisions. When they make investment decisions, what standard of skill and competence is required of them? What matters must they consider in making their choices?
Re Speight; Speight v Gaunt
Facts: The trustees put a broker in charge of the investments which broker did not successfully manage and there were losses suffered as a result. In this case, there was an attempt to hold a trustee liable for losses caused by the failure of a broker to make investments.
Held: Standard of care for trustees exercising investment powers is “to conduct the affairs of the trust as the ordinary prudent man of business would conduct his own”. The Court said that if the trustees would have put the funds with the broker (as ordinary prudent men) then there is no case to answer. Trustees did not owe a duty of strict liability, they did not provide a guarantee against the loss of the trust fund. Court favoured the side of the “honest trustee” and was reluctant to fix the trustee with any liability on the contract.
What matters can trustee take into account?
Trustee cannot bring in their own ethical considerations.
Cowan v Scargill
Facts: Coal mine union-appointed trustees refused to invest in oil and overseas investments, so as to protect their own industry and avoided investment in foreign countries such as South Africa, with whom they had political diagreements. The pension fund was for coal miners and was for the provision of financial benefit.
Held: Under a trust for the provision of financial benefits, the paramount duty of trustees the trustee must act in the financial best interests of beneficiaries. Trustees were in breach of their duties under the trust because the decision-making wasn’t guided by profitable investment and was guided by irrelevant considerations.
Harries
Large trust fund holding church property. Provided pensions for clergy and income for church. Trustees wanted to maximize the investment for the church. Much better for the investment to be used for the needs of others. They tried to put pressure on the trustees to use the money to do good, feed homeless etc. The ‘do gooders’ lost.
Harries v Church Comrs for England
Facts: Church faction attempt to force trustees (for a trust holding a large amount of property) to invest in charitable projects (such as housing for the homeless) instead of high yield investments, as this is what they thought Jesus advised in the Bible. The trust was to pay for outgoings for the church and pensions for the clergy, etc. Trustees stipulated that the money had to be used to benefit the financial best interests of the church, this was ethical business practice.
Held: It was held that the trust property was to be invested to ensure the financial best interests of the beneficiaries were realised. The Church faction lost.
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continued
Is there room for “ethical investment” policies?
If
the trust was set up to include specific ethical duties, or if there
was a charitable purpose for the trust, then the financial best
interests will not be the only requirement. Must be able to
demonstrate they are acting in the long term best interests of the
beneficiaries. These are primarily financial interests but not always.
Trustee Act 1925 (NSW)
• codifies rights and duties of trustee with respect to investment.
• See p33 course outline ss14-14DB, 90, 91
S14 - Powers of investment
S14A - Duties of trustee in respect of power of investment
S14B - Law and Equity preserved
S14C - Matters to which trustee is to have regard when exercising powers of investment
S14D - Powers of trustee in relation to securities
S14DA - Power to purchase dwelling-house as residence for beneficiary
S14DB - Guidelines for trustees
S90 - Court may take into account investment strategy in action for breach of trust
S90A - Power of Court to set off gains and losses arising from investment
Duty to pay correct beneficiaries
• Have to give money to right beneficiary, even if they pay the wrong beneficiary first.
• This will occur even where you cannot get the money back from wrongly paid beneficiaries.
• Trustees do use scope of court to give directions if they can’t determine who the beneficiaries are.
Merriman v Perpetual Nominees
A
trustee who has overpaid a beneficiary as a result of a mistake of law
or fact may recoup the payments out of other moneys due or to become
due to the beneficiary under the same trusts, whether capital or
income, and whether or not the underpaid beneficiary is the trustee
himself.
Fiduciary Duties
• See earlier in the course
•
Trustee Act 1925 (NSW) s85 – The Court has a statutory power to excuse
breaches of trust where the trustee “has acted honestly and reasonably,
and ought fairly to be excused”
Powers of Maintenance and Advancement
Maintenance
a power to pay out of trust income sums to pay for necessaries for
beneficiaries, despite terms of the trust requiring accumulation on
income (allows them to maintain themselves and keeps them alive)
Advancement
a power to pay out capital to beneficiaries to advance them in their
lives or materially improve their situation in life. (E.g. pay them a
scholarship to allow them to get an education.)
• See Trustee Act 1925 (NSW) ss43, 44. (Casebook p802)
S43 - Maintenance and accumulation
S44 - Advancement
Pilkington v Inland Revenue Commissioners
Facts:
Trustees proposing to take a sum out of beneficiary’s share and set it
apart for her upon the trusts of a new settlement for her benefit. Here
the property was settled but not immediately payable to the
beneficiary, so a question arose as to whether the property could be
used in the interim by way of a lump sum payment to make advancements
to them for their benefit.
Held: The circumstances need not be
personal to the beneficiary. It was held that the payment could be made
in these circumstances.
Rights to reimbursement and indemnity
• A trustee is entitled to reimbursement from the trust of all expenses incurred in executing trusts and powers.
• A trustee is entitled to be indemnified against liabilities incurred while carrying on trust business.
Re Raybould
Facts: Trustee runs a colliery. Colliery causes land subsidence so neighbours sued.
Held:
Trustee can claim an indemnity from the trust assets, so long as the
trustee has been acting diligently and reasonably and in accordance
with the terms of the trust
Vacuum Oil Co v Wiltshire
Facts: not important (complex)
Held:
Executors/trustees indemnity ranks ahead of both beneficiaries and
other third parties e.g. creditors, subject to the proviso that
trustees were acting properly and as trustees not in their personal
capacity.
What if trust assets are insufficient to satisfy the
trustee’s claim for reimbursement or indemnity? Can the trustee Claim
against the beneficiaries?
Hardoon v Belilios
Facts: P
was employee (clerk) of a sharebroker, D, who registered shares in P’s
name, but only as a nominee for the sharebroker who received all the
dividends. There was a trust here and the sharebroker became the sole
beneficial owner of the shares (which he could not disclaim) while
legal title was vested in the clerk. The company went into liquidation
and a call was made on the partly-paid shares. P claimed an indemnity
from D.
Held: The Court held when a sole beneficiary, B, is sui
juris, the trustee’s right of indemnity extends beyond the trust
property to a personal right against B. Here the sharebroker was liable
and obliged to indemnify the plaintiff for the calls paid by him.
Does it extend to more than one beneficiary?
JW Broomhead (Vic) Pty Ltd (in liq) v JW Broomhead Pty Ltd
Facts:
The trustee of a unit trust, a company, went into liquidation. It had
properly incurred liabilities while conducting a building business for
the unit holders. It was unable to obtain a complete indemnity out of
the trust assets, and the liquidator therefore sought indemnity from
the unit holders.
Held: The right of personal indemnity
extends to a case ‘where there is more than one beneficiary and all of
them are sui juris and entitled to the same interest as absolute owners
between them.’ i.e. the interest must be a vested absolute interest, it
does not mean that each unit holder must have the same number of units.
Can a trust instrument be so drafted to avoid this risk to unit holders or beneficiaries? Yes
McLean v Burns Philp Trustee Co Pty Ltd
Facts:
A clause in the trust deed expressed that ‘Neither the trustee nor the
manager shall have any claim of any nature against any unit holder for
any liabilities incurred in connection with any investment or in
respect of any action taken by either of them hereunder’.
Held:
The clause operated to deny the trustee rights against the beneficiary,
and consequently there was no right to which the creditors of the trust
could be subrogated.
There was no personal liability on the part of unit holders of the trust in question.
Subject to two qualifications there was no matter of public policy which militated against limitation of liability of this kind.
1.
A purported exclusion of liability with respect to negligence or
breach of trust would be read as strictly as possible. (doesn’t apply
to unit holders, only trustees)
2. Courts will not allow such clauses to be used as cloaks for fraud.
(B) The Rights of Beneficiaries
Rights of Beneficiaries
Right to extinguish the trust
Saunders v Vautier
Facts:
A testator left shares in Indian companies to be held on trust for
Daniel until he was 25. At age 21, Daniel sought to transfer the legal
title in the shares to himself
Held: Despite the direction in
the trust, Daniel could transfer the shares and extinguish the trust
immediately because he was of correct age and full capacity.
“A
beneficiary who is sui juris (over 18 and legally competent), solely
entitled to the trust property and whose interest is vested, may
require the trustee to transfer the trust property title as the
beneficiary directs, notwithstanding any direction in the trust
instrument to the contrary.” (I.e. may extinguish the trust)
What if there is more than one beneficiary?
Manfred v Maddrell
Facts:
Testator left property comprising mortgages, war bonds and cash on
trust to divide income three ways (2 daughter and widow). Two daughters
sought distribution of their 2/3 of the shares immediately. The widow
opposed this distribution.
Held: A proportionate share of property may be distributed, so long as the value of the remaining property is not prejudiced.
Before
making the decision the court will consider the convenience of the
division and the risk of prejudice to the interests of other
beneficiaries.
Due to the nature of the property involved (cash,
bonds which are dividable and tradeable), it was possible to pay out
daughters and preserve the one share in its original form for the
widow, leaving it unharmed by the extraction. The court will be more
reluctant to divide real estate, as the value of one share may be less
than the value of the sale price divided by three.
Youyang Pty Ltd v Minter Ellison
Held: Beneficiary has a right to be put back in the position they would be in ‘but for’ the breach of trust.