LAWS3114 Lecture 2

Trustee’s Duties and Powers

Point 3 onwards in the learning guide

It is possible to draw up different lists of trustee’s duties depending upon the level of abstraction at which one considers the matter. Compare Evans, Equity and Trusts (2nd ed) pp 493-521, Cope, Equitable Obligations: Duties, Defences and Remedies Chapter 1 and Bank of New Zealand v New Zealand Guardian Trust Co Ltd [1999] 1 NZLR 664, 686-687 per Tipping J.

  • We can’t reduce the breach of trustee’s duties to something as simple as the moral wrong in a breach of contract. It can be classified in many ways
  • If you go to the quoted chapters in the books above you will find that Evans gives a long list of fairly specific things that trustees have to do – these are concrete. Cope will take a more abstract view and manages to reduce it to four categories.
    • Carry out trust
    • Care in trust affairs
    • Honestly in good faith
  • If you compare the detail you will find that they do not contract each other, they just impose a different classification on trustee’s duties. The detail is the same but the structure of the concepts are different.
  • You could compare the 4 fold classification to one used by Tipping J in of New Zealand v New Zealand Guardian Trust Co Limited [1999]. He categorised it as follows:
    • Duty to preserve trust property
    • Fidelity and loyalty
    • Care and skill
  • The following threefold classification provides a convenient framework for considering trustee’s duties:-
    • duties of administration
      • must deal with the trust estate to the benefit of the beneficiaries;
      • in accordance with the terms of the trusts
      • this could be seen as analogous with a duty to perform a contract, this is obviously not a contract but this can be likened in the abstract to the duty to perform a consensual undertaking
    • duties of loyalty and confidence
      • loyalty to the beneficiary in the sense that you have to refrain from using the office of trustee to further his or her own personal interests
      • these are described as ‘fiduciary duties’
      • you can also include a duty to keep confidences in this
    • duties of care and skill
      • this is a duty to exercise reasonable care and is therefore analogous in the abstract with the Donaghue v Stevensen duty
  • When you are reading the cases it won’t necessarily use the same freehold classification as is described in these lectures. Certainly, the 3 categories may not be kept distinct in the case law, but attempt it with the view that this is a way to see what and how the cases were decided.
  • The 3 fold classification can lead us to come to the appropriate remedy
  • Topic 2 goes into those three fold ideas in more detail

Duties Of Administration

A. Content Of Duties

  • This covers a larger view of many more specific duties
  • A number of more specific duties could be seen under the duty of administration
  • What binds all the ideas together is the concern with the operation of the trust for the beneficiaries
  • There are 3 principle aspects to this duty, which are our 3 sub-headings

1. “Getting in” the Trust Property

  • In order to deal with the trust property, the trustee must have the ownership of the trust property
  • It is a duty to ‘get in’ the trust property – to identify and control it in order to apply it to the beneficiaries
  • Identifying
  • Locating
  • Putting in trustee’s name
Partridge v Equity Trustees Executors and Agency Co Ltd (1947) 75 CLR 149
  • The defendant company, were a company which was engaged in the business of acting as a trustee for other people
  • The defendant company was trustee of a deceased estate
  • The estate was owed several thousand pounds called William Hartley Pty Ltd
  • This was a debt which was owed to the testator when the testator passed that debt owed to the testator was owed to the estate
  • The final clause of the deceased’s will
    • Shall not press for debts… gives the debtor’s time… invests a power to make a decision whether to press for payment of the debt.
    • This could be seen as a power to postphone the debt collection
    • It is a bit much to say that there is a duty, but merely there is a power
    • In 1929, 3 years after the testator’s death, the debt had not been paid
    • The defendant trustee entered into a compromise agreement which meant that William Hartley would pay off the debt in certain ways. The agreement was not complied with by William Hartley
    • In early 1936 the defendant agreed to allow the outstanding amount (2150 pounds) for another 5 years at 5% p.a.
    • In 1938 William Hartley Pty Ltd went into liquidation and the available assets are distributed among the other secured creditors in proportion to what you are owed
    • The residuary beneficiaries were not happy and sued for a breach of trust because they fail to recover the debt and they are now worse off by 2150 pounds.
    • The trial judge made a finding of fact that if had the trustees pressed for repayment in 1932 that William Hartley would have been able to pay
    • Matter ended up in HCA by Williams J (agreed with by Starke and Dixon JJ)
      • P. 163 in report: “the overriding duty of the trustees in this case was to get in the debt.”
      • Can postpone the debt but does not forgive the debt.
    • The power has to be exercised with the ultimate duty in mind
    • Argued perhaps that if enforcement of the debt drives the company into liquidation it might compromise the ability to get the debt
    • There is a power to postpone, but it is so that the trustees can decide what is the most expeditious way to deal with the debt
    • There is an overriding duty to deal and collect the debt
    • The trustee’s really had just let the matter go until they got to 11 or 12 years after the testator had died and the debt was not recoverable.
    • Failed in a duty to ‘get in’ the trust estate.

2. Maintaining the Value of Trust Property

  • Manage the trust property so as to let it operate to the ends for which it was established
  • This is to manage it for those ends and not to other ends
  • This covers ideas of misappropriation outside of the terms of the trust, or pays the wrong beneficiary.
  • There is a duty to maintain and maximise the value of the trust property
  • Duty to ensure it is used for the benefit of the objects of the trust and not wasted away
  • This is not simply a matter of putting the property in a safe place, you need to maintain the value and guard it against the ravages of inflation
  • That is why there is a duty to invest the trust property
Investment
  • This is to protect the estate against inflation etc.
Adamson v Reid (1880) 6 VLR(E) 164
  • Trustee of a deceased estate sold some land which belonged to the estate
  • The will didn’t contain any provisions about investing or impose any duties
  • Trustee retained the proceeds for 6 months without doing anything
  • Judge said that the trustee had acted improperly, any money that isn’t distributed immediately needs to be invested. This is to protect against inflation
  • The remedy – the trustee was liable to pay to the beneficiaries compensation measured by the rate of interest that would have been earned that the money been invested in government bonds
Acquiring property?
Elder’s Trustee and Executor Co Limited v Higgins (1963) 113 CLR 426
  • Deceased estate which involved an interest in 2 cattle grazing properties
  • According to Mr Higgin’s will, the trustees had the power to continue on the grazing business until it was distributed amongst the children when they all turned 21
  • 2 properties – The Brook and was owned entirely by the Higgin’s estate, the other was Burnt Oak and was held by the estate under an agreement between the testator and his sisters.
  • Option had to be exercised why the lease was running
  • Cattle roamed over both properties and The Brook would not be commercially viable unless it was operated alongside Burnt Oak.
  • Trustee’s failed to exercise the option to purchase Burnt Oak and the estate lost access for the grazing business.
  • Dixon CJ, McTiernan, Windeyer JJ
  • The question to ask is ‘is this an asset which we had to acquire in order to maintain the value of what we already own?
  • Trustee’s failed to administer the trust
Insuring trust property?
  • Trusts Act 1973 s 47
    • s 47(1) “A trustee may insure against loss or damage, whether by fire or otherwise, any insurable property, and against any risk or liability against which it would be prudent for a person to insure if the person were acting for himself or herself.”
    • Gives the trustee a power to insure
    • It does not impose a duty to insure
    • Trustee’s have a discretion as to whether they insure the trust property
    • A failure to insure is not in itself a breach
    • There are some case law in insurance by asking whether a reasonable prudent person would insure and that it put into s 47

Pateman v Heyen (1993) 33 NSWLR 188

3. Carrying Out the Terms of the Trust

  • There may be rules of law which restricts the way trustee’s can perform the administration, if this is the case then they must follow those rules of law
  • If a trustee has the power to do something they must maintain within the scope of its powers
Armitage v Nurse [1997] 2 All ER 705, 710 (Millett LJ)
  • A breach of trust may consist of an actual misappropriation or misapplication, or merely a dealing outside of the powers
  • Both of these things are a failure to carry out the trustee’s undertaking, which are under the duty to administer the trust
  • This is all under the notion of unauthorised conduct
  • Trustee will be liable for all consequences whether it was wilful, innocent or negligent. It is simply a matter of doing something unauthorised. If you breach a contract, it is simply that you have breached the contract.
  • Example
    • Let’s say there is a deceased estate and the trustee is distributing the will to the beneficiaries
    • The trustee pays the wrong beneficiaries
    • This occurred because the trustee did not read the will properly - negligence
    • Just because it was negligence featuring does not make the breach a breach of duty of care and skill
    • The consequence was that the trustee did something they were not authorised to do and the wrong beneficiary was paid. Whether it was negligence, wilful or innocent is besides the point as it is a breach of a duty to administer properly.
Authorised investments
  • There are 3 potential types of breach of trust
    • Adamson v Reid – a failure to invest at all unless it states they have the discretion or shall not invest
    • If the trustee invests in a way that is not authorised by law or the trust instrument
    • If the trustee stays within the terms of the trust but does not exercise proper care or skill
  • This can be fitted in abstractly into our 3 categories of what is defined as a breach in trust
  • In this section, we are concerned with the second point – investing in a way that is not authorised by law or the trust instrument. It is a matter of authorisation.
  • If it is authorised and turns out to be a losing investment, then the trustee will not be liable as it was an authorised investment, despite being a bad investment. This is of course being subject to not being negligent i.e. investing in a tomato farm in Antarctica or some fruity junk
  • If the investment is unauthorised, then the trustee had better hope that the investment makes a profit
  • It is the duty of the trustee to make a judicious breach of the trust i.e. if it makes money no one is going to whinge
  • An investment can be authorised in 3 ways:
    • The terms of the Trusts Act 1973
    • The trust instrument (as a general rule this overrides the Trusts Act)
    • By the Supreme Court – courts of equity have a supervisory position in the administration of trusts and preserve the jurisdiction to authorise a trustee’s investment. This is held under s94 of the Trusts Act 1973. (Section 5 of the Act defines ‘court’ as the Supreme Court)

Trusts Act ss 21, 23, 24, 94

21 Power of trustee to invest

A trustee may, unless expressly forbidden by the instrument creating the trust—

  • (a) invest trust funds in any form of investment; and
  • (b) at any time, vary an investment or realise an investment of trust funds and reinvest an amount resulting from the realisation in any form of investment.
  • If you look at the old copy of the Trusts Act 1982 there is a big long list of types of investments and a trustee could invest in those only, unless it was authorised by the instrument. This was changed in 2000.
  • The freedom is now given, except there is a catch.
  • The catch is in Section 23
23 Law and equity preserved

(1) A rule or principle of law or equity imposing a duty on a trustee exercising a power of investment continues to apply except so far as it is inconsistent with this or another Act or the instrument creating the trust.

  • This in essence means that what was a trustee’s duty in the past is one in the future

(2) Without limiting the rules or principles mentioned in subsection (1), they include a rule or principle imposing—

  • (a) a duty to exercise the powers of a trustee in the best interests of all present and future beneficiaries of the

trust; and

  • (b) a duty to invest trust funds in investments that are not speculative or hazardous; and
  • (c) a duty to act impartially towards beneficiaries and between different classes of beneficiaries; and
  • (d) a duty to obtain advice.
  • In the lecture he gives the example of a graph of a highly fluctuating and wild investment and illustrates that many things effect shares and is not necessarily predictable
  • They may mean that there is a risk that over the period of the investment you will be worse off
  • Shares are a speculative investment
  • So after reading s 23(2)(b) then shares might be off limits – however there is some contradiction and way around it in academic literature
  • It can avoid being speculative by investing in a diverse portfolio of shares
  • Refer to article by WA Lee
  • Lee, WA, “The Investment of Pension Funds” in Finn (ed), Equity and Commercial Relationships, LBC, Sydney, 1987, Ch 10
    • What was observed is that when you have a trust fund which is a very large fund in a large amount of money, what you can do is you can buy shares in 20 or so companies and if you, in your portfolio have shares that operate in different industries and are effected by different factors, it is unlikely that it will fall in one heap on the one day. If this is the case you can reduce your level of risk to the point that the investment is not speculative.
    • You need to invest in a representative sample of the market so you won’t do any better or any worse than the market as a whole
  • The lecturer then showed a graph of a more smooth line on a graph and therefore argues that the graph is not caught too severely by the prohibition in s 23(2)(b)
  • This has not been tested in the courts but certainly the big superannuation funds do so by authorising it in the trust deed (think for example my Superannuation Fund in Sunsuper which absolutely invests in the sharemarket). There is also the benefit that in large superannuation funds that endure over a long period of time, no one is withdrawing all their beneficial interest at once.
s 23(2)(c) a duty to act impartially towards beneficiaries and between different classes of beneficiaries;
Impartiality
  • If the beneficial title is divided between a life estate and a remainder interest 23(2)(c), it will effect your investment strategy because some types of investments which produce a lot of income in the short term, those investments are going to unduly favour the life tenant
  • On the other hand if the ivestment doesn’t produce a lot of income now but is solid for long term capital appreciation it will benefit the later beneficiaries.
  • If you have such a situation you will have to navigate this

Harries v Church Commissioners for England [1992] 1 WLR 1241

Re Mulligan [1998] 1 NZLR 481
  • Trustee’s Own Discretion
    • Testator died in 1949 and left a legacy of $24,000 and left a life interest in his farm to his wife
    • Left the remainder to his nieces and nephews
    • Trustees were the widow and a trustee company
    • The trusts estate kept the farm until 1965 and was sold in 1965.
    • The proceeds of the sale went to fixed interest securities.
    • Persisted until the widow died in 1990
    • On numerous occasion the offices of the trust company tried to persuade the widow to invest in shares and their argument was that fixed interest securities weren’t keeping pace with inflation
    • Both trustees had to act unanimously
    • Investing in shares was authorised in the will (Clause 9 of the will p. 495)
    • The value of the capital when she died was a fraction of what it had been when it was sold in 1965. It had gone backwards
    • Pankhurst J:
      • Where you have a life tenant and remainder beneficiaries a trustee has to be even handed with these remainder beneficiaries
      • This is where the capital value had not been maintained
      • It is not necessarily a breach of trust
      • The mere fact that the capital value has not been maintained is not a breach of trust
      • What the trustee has to do is to consider the needs of the life tenant but must also consider the remainder beneficiaries
      • There is a need to avoid investments that produce more income now but also to avoid sacrificing income now because you do have a life tenant to look after
      • This was a case where it was clear that the estate would of been worth much more had it been invested in shares over that 25 year period.
    • The trustees are subject to strict liability, they didn’t stand up to the widow and therefore it went backwards. They perhaps should have taken her to court or kept pressing the case until they get a consensus. The fact that the old woman was being difficult was not a sufficient excuse.
24 Matters to which trustee must have regard in exercising power of investment

(1) Without limiting the matters a trustee may take into account when exercising a power of investment, a trustee must, so far as they are appropriate to the circumstances of the trust, have
regard to the following matters—

  • (a) the purposes of the trust and the needs and circumstances of the beneficiaries;
  • (b) the desirability of diversifying trust investments;
  • (c) the nature of and risk associated with existing trust investments and other trust property;
  • (d) the need to maintain the real value of the capital or income of the trust;
  • (e) the risk of capital or income loss or depreciation;
  • (f) the potential for capital appreciation;
  • (g) the likely income return and the timing of income return;
  • (h) the length of the term of the proposed investment;
  • (i) the probable duration of the trust;
  • (j) the liquidity and marketability of the proposed investment during, and at the end of, the term of the proposed investment;
  • (k) the total value of the trust estate;
  • (l) the effect of the proposed investment for the tax liability of the trust;
  • (m) the likelihood of inflation affecting the value of the proposed investment or other trust property;
  • (n) the cost (including commissions, fees, charges and

duties payable) of making the proposed investment;

  • (o) the results of a review of existing trust investments.
Cowan v Scargill [1985] 1 Ch 270
  • Scargill (started Socialist Labor Party) was one of ten trustees, and was one of 5 trustees appointed by National Union of Mine Workers and the other 5 were appointed by the employer)
  • Wanted to amend the investment plan for the scheme for the pension fund
  • Wanted to eliminate all overseas investments particularly in South Africa and also wanted to eliminate investments from energy companies that compete with coal
  • Employer appointees didn’t want to do it unless the court said they had to, so they sought the court’s supervisory jurisdiction
  • McGarry BC
    • This is in course reader
    • Read from bottom of p. 286 “I turn to the law”… to the top of p. 289. The core of these are as follows:
      • The starting point is that the trustees have a duty to exercise powers in the benefit of future beneficiaries
      • The purpose of the trust here was to provide financial benefits for the beneficiaries
      • It is a pension fund to pay a retirement benefit to British coal miners
      • The interests are only those that the trust was established to further, perhaps some political purpose may be in their interests but not their best immediate financial interests.
      • The trustees were using a diversification strategy and their portfolio included shares that operated in different sectors of the economy. If all overseas investments and diverse lucrative industries are excluded then they would be compromising the financial interests of the beneficiaries.
      • The purpose of the trust was to provide retirement benefits
      • Financial considerations are paramount and Union agendas were not in their interests for the purposes of the trust.
      • Justice McGarry did address the issue on p.292 and rejected the argument that ‘saving British jobs’ is not sufficient. It would be compromising the interests of retired people for those that weren’t retired.
      • Possible exceptions to the rule regarding financial considerations: maybe if the investment is unsafe because of political instability in the country in question (e.g. we want to withdraw investments from the Zimbabwean information technology field, as it is unlikely there are any computers in Zimbabwe anymore haha)
      • If your only concern is that you don’t like the Apartheid government in South Africa at the time, that is not sufficient as investment was fine in the area.
      • If all of the beneficiaries are strictly opposed to certain industries (e.g. alcohol, tobacco, gambling etc, then maybe the trustees might be justified in refusing to invest in those industries despite the returns being more solid. However this argument may be a little generous to humour the idea rather than an actually decent and sufficient legal argument).

Trustee’s Own Discretion

Re Brockbank [1948] Ch 206
  • Deceased estate – 2 trustees
  • Mr W wanted to retire as a trustee
  • Mr B’s decision as to who should be appointed
  • Wanted to appoint Lloyd’s trustees. Mr B didn’t want this. They were a professional trustees company and would charge substantial fees to act as a trustee.
  • Mr Bates looked at what remained to be done was not so complex that the services of a professional trustee were required.
  • Widow and kids took Mr B to court. The court backs up Mr Bates.
  • Court said: what we have here is a power to appoint a new trustee invested in the existing trustee. It’s a discretionary power vested in the trustee, and if others could dictate how the power could be exercised then the power couldn’t exist.
Trusts Act s 54
  • Trustee can’t just go to the stock exchange to purchase shares, has to engage stock brokers
  • If trust estate is going to engage in litigation – it’s perfectly appropriate for the trustee to engage lawyers through the estate – as long as the trustee is making the ultimate decision.

B. Remedies for Breach

Preliminary Matters

  • Who may sue?
    • Co-trustee or beneficiary or successor trustee
  • Joint and several liability
    • All of the trustees are jointly and severally liable
    • If there is a trust with 3 trustees, A, B and C, even if the breach of trust is primarily the fault of C, because of being jointly liable, then the plaintiff can sue A, B AND C joined as defendants.
    • Several liability – several liability is the notion that the plaintiff could sue any of the trustees as an individual.
    • Same trust, A’s fault. The plaintiff could just sue C for whatever compensation is payable. You’d sue C because they have the money – plaintiff doesn’t have to deal with the fact that A doesn’t have the money – can just sue C.
  • Personal remedy or proprietary remedy?
    • Damages is a personal remedy
    • In equity claims we use the word compensation instead of damages.
    • Account – a disgorgement remedy – the gain that the trustee has gotten as a result of the breach (an account of the gain!). Still a personal remedy.
    • 3rd type of personal claim – personal claim against somebody else. Restitution of monies received (if monies are paid to a 3rd party). Not a compensatory claim – the 3rd party is obliged to pay back what they have received.
    • Proprietary claims – different in that the defendant isn’t asked to pay. The defendant has property which represents what was taken from the plaintiff. The amount can be traced into property in the defendant’s hands.
    • Proprietary claims against property in the trustee’s hands or a 3rd party’s hands.

Foskett v McKeown [2001] 1 AC 102, 130 (Lord Millett)

2. Personal Remedies against a Trustee

(a) Compensation
  • Equitable compensation is analogous, but not identical to, common law damages. Does the measure of compensation vary according to the nature of the duty breached? The loss which is compensable, is the loss that is caused by the breach of duty.
    • The measure of loss is not reduced for unforeseeable intervening events. If these events increase the loss of the trust – tough luck!
    • The trustee is responsible for any consequence of departing from their duties.
    • If the trustee is responsible for avoiding any consequence of departing from their duty, whether or not the consequences are foreseeable, is irrelevant.
    • If an unforeseeable supervening event occurs which increases the loss of the trust, then the trustee’s liable is increased accordingly.
  • Re Dawson [1966] 2 NSWR 211
    • Mr Dawson was a trustee of his deceased father’s estate. In breach of trust (without dishonesty) Mr Dawson made a payment to an agent. The payment was in NZ money. At the time of the payment Australian money and NZ money were equal (1=1). By the time of the court proceedings, the NZ currency was worth more than the Australian currency. The proceedings were in NSW, so the compensation was to be paid in Australian currency. Question whether the exchange rate was the original payment, or at the date of the compensation. Did the amt of compensation have to increase? The court said the amt was in the exchange rate as at the date of the judgement.
    • Single judge decision of the Supreme Court of NSW – but is cited widely.
  • Target Holdings Limited v Redferns [1996] AC 421
    • Cited Re Dawson with approval
  • Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484
    • Cited and followed Re Dawson with approval
    • Facts: Youyang was the trustee of a discretionary trust – the Bill Hayward Discretionary Trust. Youyang decided to invest $500K in an investment scheme run by EC Consolidated Capital Ltd (ECCCL). Minter Ellison acted as solicitors for ECCCCL. When someone wanted to invest in the scheme – the investor draws a cheque and gives it to Minter Ellison and Minter Ellison would deposit the money into their trust account. It was a term of the agreement (the subscription agreement) that Minter Ellison would not release the funds from its trust account until a certificate of deposit in the appropriate form had been issued. The certificate of deposit in the appropriate form was never issued. Minter Ellison, notwithstanding the lack of certificate, released the $500K to ECCCCL. ECCCCL went into liquidation shortly afterwards and the money invested in the scheme was lost.
    • At trial of the matter, the trial judge observed that even if a proper certificate had been issued, and ECCCCL had not gone into liquidation, part of the money would have been lost anyway. The trial judge limited the compensation to $414,009. So the plaintiff Youyang is limited to recovering that amount.
    • The HCA said what the trial judge said was incorrect. The HCA affirmed the rule from Re Dawson – what sum of money is needed to restore the trust estate to the position it would have been in if the trustee had acted properly (paragraph 35). The court went on to emphasise that you have to consider the precise content of the trustee’s undertaking. There is a sense in which this case is different from Re Dawson – that was a deceased estate, where as this case, the trustee Minter Ellison had one duty – to hold the $500K in its trust account until a certificate was issued. They failed in this duty! Today there would be $500K in the Minter Ellison trust account if they didn’t release the funds, thus the compensation is $500K.
(b) Account
  • Disgorgement
  • It is not a property claim.
  • Accounts acquire greater prominence when discussing breach of fiduciary duties, not really much in breaches of duties in administration
  • Example: if a trustee were to take money from the trust bank account and go to the races and bet the money and win, the trustee has made a profit by misappropriating trust property. The claim would be the account of the money made, though a proprietary remedy might be a better idea… Why? No idea.
(c) Third Party Claims
(i) Innocent Volunteers

Re Diplock [1948] Ch 465
Ministry of Health v Simpson [1951] AC 251
Trusts Act s 113

(ii) Knowing Receipt or Assistance

See Topic 3

3. Proprietary Remedies

(a) What is tracing?

“Tracing is a process of identifying preliminary or ancillary to the assertion of rights in respect of the value identified.“
Birks, P, Restitution – The Future, Federation Press, Sydney, 1992 at 113

“Tracing is…merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property.”

*Foskett v McKeown [2001] 1 AC 102, 128 (Lord Millett)

(b) Trustee Mixing Trust Property with Own Property

Re Hallett’s Estate (1880) 13 ChD 696
Brady v Stapleton (1952) 88 CLR 322
Re Oatway [1903] 2 Ch 356