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.