Alex Jarvis

Trustee Duties & Defences Problem Question Structure:

1) Is there a fiduciary relationship, being ‘a relationship of trust and confidence’ (Bristol

and West Building Society v Mothew) (don’t have to repeat this for every scenario if
you’ve already established that there is)

2) Is there a Breach of Fiduciary duty? Two breaches, either a no profit breach, or a no

conflict breach.
No profit can be:
 breaching trust to gain profit (Keech v Sanford),
 using principles property or exploiting opportunities because of their position of a
fiduciary, only allowed if every beneficiary consents (Boardman v Phipps),
 gaining director fees if becoming director because of trust fund (re macadam).
No conflict can be:
 self-dealing (buying trust property) (Ex.P James),
 Competing (re thompson),
 Fair-dealing (buying beneficiaries beneficial interest) or competing. Fair dealing will be
allowed if trustee can prove he acted fairly, there was no undue influence, and he gave
full value of what it’s worth (Thomspon v Eastwood)

3) Defences: was there beneficiaries’ consent, or did the trust instrument authorise
such action? Or was there permission by the court?

4) Remedy: FHR vs Cedar Capital says in any case where an agent receives a benefit
which results from a breach of the fiduciary duty owed to his principle, the
trustee/agent holds it on trust automatically for its principle and the beneficiary can
has a proprietary claim, and can trace into it regardless of trustee being bankrupt
(AG for HK v Reid) in that case, Bribe money received by Reid, and the land acquired
after using that money, was held on constructive trust for the claimant.
If the asset/home/property has already been sold to a bonafide purchaser then that
is the end of the ability of the beneficiaries to trace into it. They can after the sale
proceeds and/or make a personal claim.

Apply the above structure to every issue separately

Alex Jarvis
Step 1) is there a fiduciary relationship, being ‘a relationship of trust
and confidence’ (Bristol and West Building Society v Mothew)
Apply: There is a relationship of trust and confidence between … and the beneficiaries; … is the
trustee of the trust and is in a fiduciary relationship with the beneficiaries.

Step 2) is there a Breach of Fiduciary duty; there are two breaches of

fiduciary duty, it’s either a no profit breach, or a no conflict breach.
Apply: The potential breach here is (choose from examples below)

No conflict breach

 Self-dealing (purchasing trust property)

A trustee cannot buy property from the trust because there can be a conflict of interest due to
a trustee wanting to get the most from the property, but in personal capacity he would ideally
want to pay the least for it (Ex.P James). Even if it went to auction, there would be potential
conflict, which is enough to trigger a conflict. If the trustee is buying it through a company, he
has shares in. However, his shareholding is important to discuss, the courts can lift the
corporate vail of this company, and if it turns out that he is a minority shareholder, he may not
be classified as self-dealing (Farrars v Farrars), but if he’s a majority shareholder then he will (Re
Thompson). So, if he is a majority shareholder, and the sale goes through, then the status of the
sale, is not void, but it will be classed as voidable if the beneficiaries decide to choose whether
or not to the set the sale aside. If Ronald is a minority shareholder, then it’s not necessarily set
aside. And the company has to prove that the beneficiaries have got a fair price. A company can
be distinct from a shareholder (farrers v farrers) – the onus is on the company to show that
they’ve got the best price for the sale. But he got three valuations and tried to get the highest
sum for it.

No profit breaches

 Trustee investing in a company which he works for

There is potentially a breach if there is a conflict of interest in such instances where a trustee
invests in a company for which he works for. Ask whether he got consent of the beneficiaries? If
not then you can’t do this and make profit from doing so (Williams v Barton). If the commission
is made by the bank, to itself, rather than to the trustee personally then it’s not a Williams v
Barton situation, and may be allowed. But if the commission is shared between the trustee and
the company he invested in, then he’s benefiting in a personal capacity, even if he’s simply
being promoted with incentives for doing such work.

 Mixing own money with trusts money

Alex Jarvis
It is also a breach of trust to mix trust assets with the trustee’s assets. The trustee will have
made a personal profit, and if he is exploiting an opportunity that he wouldn’t have come
across if he wasn’t a trustee, then this wouldn’t be allowed (brown v irc). In Brown v IRC. Where
a solicitor kept and loaned out money they were holding on behalf of clients in an account. The
lawyers kept the interest that was paid on those accounts, which wasn’t allowed and had to be
paid back to the beneficiaries.

 Paying yourself a director’s fee as a trustee and making profit and dividends

There can possibly be a breach of fiduciary duty, in regards to any salary, you cannot pay
yourself a director’s fee otherwise you must account for that fee back to the trust (Re
Macadam). Macadams says there must be a causal link between you receiving the salary as a
director and your position as a trustee. Re Gee says if you become appointed independently,
and not by trust votes using the trust fund, then you may be able to keep the director fees. So if
you use trust votes to votes against yourself, and you still become a director, then you can keep
the director fee/salary. For example, if a trustee has has 60% of the shareholding, and the trust
has 40%, then the trustee can use the 40% to vote against himself, and he will still be a director,
because he has his own 60%, so applying Re Gee, it may work.
If you become a director before you become a trustee, then you should be allowed to keep
your director fees as well (Re Dover). See how the trustee found out about the company, was it
through the trust? If so then there is probably a link thus he should account for the all profits,
because he acquired the shares in breach of fiduciary duty (Boardman v Phipps)

Step 3) defences
Apply: Look to see if the breach was authorised by the beneficiaries, or trust instrument, or
the court? If not told, then be open. We need to have a very specific clause in the will. In holder
v holder, the Court allowed the trustee to get away a no conflict (self-dealing) breach because
the property was bought via auction, and the beneficiaries were fully aware of what was
happening. The trustee also didn’t have anyone under his control, and on top of that the
beneficiaries were pushing him to go ahead with the sale. So, there was technically the defence
of beneficiary’s authorisation. The auction process itself was arranged by other trustees too.
However, this was a complete one-off case, and isn’t good law to use for exceptions.

Step 4) Remedies
Apply: The main thing to ask in these scenarios is if there is a causal link between being a
trustee, and making personal profit. Although this approach was disputed in Murad, Boardman
v Phipps says the minute you show that link then the court can say there’s a breach and that
will strip the profits; FHR v Cedar says these profits will be held on constructive trust for the
beneficiaries. According to FHR v Cedar capital, for any breach of fiduciary duty, you will always
get a proprietary remedy. This means you can trace into assets, and go after the increase in
value. If the asset/home/property has already been sold to a bonafide purchaser (equities
darling), then that is the end of the ability of the beneficiaries to trace into it. They can make a
personal claim and/or go after the sale proceeds but that’s it.

If a trustee exploits an opportunity, he only came across due to being a trustee, and
generated interest on top of the trust money, then he cannot keep the interest. – if there has
been breach of fiduciary duty, you should be stripped from all your profits (murad v al saraj).
However, if we do strip the trustee of all his profits, the court can have the power to reward
Alex Jarvis
people for their efforts and remuneration. Courts don’t always reimburse, if a trustee has been
reckless and careless with his breaches, but in Phipps, Boardman was acting in good faith, so
trustee needs to be act in good faith to be reimbursed. Look at the facts.

If a beneficiary has consented to a trustee making the company more profitable, then this can
possibly be used as a defence. The consent doesn’t have to be in writing (Boardman v Phipps)
but other beneficiaries need to consent too. The beneficiary that consented can’t sue the
trustee for the director’s fees but the other innocent beneficiaries could. For any beneficiary’s
consent need to be valid, they need to also be sui juris.