2013 ZA Q1

As express trustees, Richard and Sheryl owe personal obligations to the beneficiaries
under this family trust, such as duties to keep accurate trust accounts, to obey the
terms of the trust, and to take due care when they exercise their powers under the
trust to deal with trust assets. Any breach of these duties is a breach of trust.

They also owe fiduciary duties to exercise their powers only for the purposes for
which they were granted and not to benefit themselves or for any other improper
purpose. This category of duties, however, must not be confused with those duties
stated in the previous paragraph. In Bristol & West Building Society v Mothew, the
Court of Appeal held that a breach of duty care by trustees is not a breach of their
fiduciary duties. A breach of fiduciary duties often occurs when the trustees do
something that they are entitled to do under the trust but act for an improper
purpose.

The trustees used £250,000 from the trust to purchase a flat in France for Olive to
occupy for four years while she attended university there. They sold it recently for
£200,000.

This gives rise to an issue pertinent to the trustees’ power to invest trust assets. It
should be noted that trustees typically have power to invest trust assets. Such power
either comes from the trust instrument or from the general power of investment
provided by the Trustee Act 2000 (“the Act”). The question does not say that there is
any express provision in the trust instrument that governs the trustees’ power to
invest; therefore, the trustees can derive that power of investment from the Trustee
Act 2000.

On the fact, the trustees are permitted under section 3(1) to make the investment
because they hold the legal estate in the trust assets and hence are absolutely
entitled to them at common law. However, section 3(3) does not permit them to
make any investment in land other than lending money by way of mortgage. The
investment in the flat is therefore not permitted. The trustees cannot rely on the
exception provided under section 8 either because the flat is in France not in the UK
even though it is purchased for the occupation of a beneficiary. Therefore, the
investment is unauthorized and hence amounts to a breach of trust. In my opinion,
the beneficiaries of the trust should bring a personal claim instead of a proprietary
claim against the trustees because the value of the flat had dropped and the
beneficiaries will not be able to recover the losses caused by the breach to the trust
fund by claiming a proprietary right in the flat. It will be better for them to ask the
court to make the trustees personally liable.

As said in the beginning, one of the duties of the trustees is to keep the trust
account. In a breach of trust situation, the beneficiaries can make the trustees
account for their dealings with the trust assets. This is called the accounting process.
Through the process, the beneficiaries can falsify and surcharge the account. To
falsify the account means to disallow the unauthorized disbursement from the trust
fund and make the trustees restore the value of the losses caused to the trust fund
by the breach plus interest. In this case, the beneficiaries will do so by asking the
court to order the trustees to restore to the trust the original £250,000 that was
wrongfully disbursed plus interest. Even though the decrease in value (i.e. £50,000)
of the flat was not due to the breach but the poor performance of the property
market in France, the trustees will also be liable to restore the £250,000 in full. This is
because the principles for causation of loss in equity are different to those in tort or
contract.

To avoid this unfair result, the trustees can try to rely on the recent decisions in
Target Holdings v Redferns and in AIB Group v Mark Redler. In both cases, the
courts refused to falsify the account and instead awarded a remedy for consequential
loss. They said the claimant may only recover for a loss caused by a defendant’s
wrongful act, and the compensation is calculated to put the claimant in the position
he would have been in but for the defendant’s wrong. So if the court follows these
decisions, they will probably award £200,000 as equitable compensation because the
£50,000 loss was not caused by the breach itself. But it is unlikely that the court in
our present case will do so because, in the AIB case, AIB Group were originally
entitled to falsify the account but they chose not to do so and instead accepted the
unauthorized disbursement and proceeded on its own to negotiate with Barclays
ultimately to acquire the latter’s consent to the second charge over the property to
secure the full value of its loan to the borrowers. In other words, in so doing AIB
Group adopted the solicitors’ expenditure of the funds as a valid expenditure of the
trust moneys. Secondly, after the overpayment to the borrowers, they could easily
have claimed back the overpayment of £300,000 from the borrowers because the
latter were not entitled to receive the money and were holding the money on
constructive trust for AIB Group. But AIB Group failed to do so. To borrow the
terminology from common law, the AIB Group failed to mitigate their losses.
But the present situation is very different. The beneficiaries did not adopt the
unauthorized purchase of the flat and they were also not given any opportunity to
mitigate their loss of the £50,000. To not allow them to falsify the account and claim
back the entire amount of £250,000 will also be more unfair to them than to the
trustees because after all it is the beneficiaries who are the culprit of the causation of
the loss. Had they not undertaken the unauthorized purchase of the flat, the £50,000
loss would not have been incurred. Therefore, as Professor Penner said, it cannot
generally be the rule that a beneficiary is no longer entitled to falsify the account and
has only a remedy for consequential loss. So it is likely that the court will order the
trustees to restore the £250,000 in full.

Richard is a big supporter of organic foods. He convinced Sheryl that they should invest
£150,000 of trust funds in shares in several organic food companies. Those shares are
now valued at £100,000.

Again we have to first determine whether this investment is a misapplication of trust

fund or negligence/ failure to act of the trustee in managing the trust fund. There is
no violation of section 3 and section 8 of the Act and hence no misapplication of
trust fund. But has there been any negligence on part of the trustees?

When trustees make investment of trust assets, they are subject to various duties
listed under the Act. Section 5(1)(2) requires trustees to obtain and consider proper
investment advice before they make their investment. It is clear that Richard and
Sheryl did not seek any advice before they made the investment. So there is a breach
of the section.

Cowan v Scargill and Harries v Church Commissioners for England also suggests that
trustees should not make trust investment based on their own social and ethical
view. They should only make investment because it is beneficial to the beneficiaries.
This is justified because of the fiduciary relationship between trustees and
beneficiaries.

Being fiduciary to beneficiaries means that trustees should exercise their duties and
powers in the best interest of the latter. But here, Richard decides to invest in organic
foods just because he supports them. There seems to be a conflict of interest
between Richard’s personal preference and the best interest of the beneficiaries.

Therefore, the investment in organic foods amounts to a breach of duty, and the
beneficiaries may ask the court to surcharge the account and order the trustees to
make good the amount that should have been earned had they invested properly.

The trustees paid £50,000 to Josh.

The trustees are given a power of appointment under the trust to pay income to the
former spouse of a deceased beneficiary. Since this power of appointment is given to
trustees, it is of fiduciary nature given the fiduciary relationship between trustees
and beneficiaries. Trustees have a duty to consider exercising the power in favour of
objects of the power. If Josh wants to be entitled to the income, he needs to prove
that he is an object of the power and the test is the any given postulant test –
whether a given person is or is not a member of the class – as laid down in the case
of McPhail v Doulton. But the problem is that Dwayne and Josh were never married.
It is therefore unlikely that Josh will fall within the class, and there is a misapplication
of trust money by the trustees. Other beneficiaries can ask the court to falsify the
account and order the trustees to restore the £50,000 that has been paid. There is
also a potential liability of Josh as recipient of the trust money. The beneficiaries can
compel him to transfer the money back to the trustees so that the trustees can
restore the money to the trust. However, if the money has already been dissipated
by Josh and the trustees are bankrupt or have run away, the beneficiaries can also
bring a personal claim against Josh to ask the court to order him to dig into his own
pocket to make good the £50,000 paid wrongfully because as he received the money
he has been holding it as a constructive trustee. This is called recipient liability. In
order for Josh to be personally liable, the beneficiaries need to prove that he
received the £50,000 trust money in breach of trust and at some point he has
become aware that it was paid in breach of trust (Williams v Central Bank of
Nigeria). But there is not enough information in the present fact to enable us to draw
a conclusion.