Duties and powers of trustees

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This article is a topic within the subject Property, Equity and Trusts 1.

Contents

Required Reading

Introduction

Upon acceptance, a trustee becomes subject to the duties and rights of that office.

  • Duties are imperative: a trustee is impelled to act in some way.
  • Powers are facultative: a trustee may exercise those rights if the need arise.

Duties

Duties on Accepting the Trust

[1] The first duty of a trustee is to see that he has been properly appointed, and what the trust property consists of.[2] In doing so, the trustee obtains and acquaints himself with all documents concerning the trust and with the state of the trust property.[3]

  • This knowledge, once acquired, must be retained for the period of the trusteeship.
  • Where a trust has already been in existence, the trustee must seek information about the trust from previous trustees.[4]

Duty of Loyalty

[5] In basic terms, the duty of loyalty dictates that the trustee must adhere to all the terms of the trust. More particularly, this means:

  • A trustee cannot depart from the words of the trust with approval of the court.
  • A trustee cannot impeach a trust.
  • A trustee who has accepted his appointment, and not disclaimed himself, cannot question the validity of the trust.

[6]

  • A trustee is bound to defend the trust against those who challenge it.
  • A trustee should not place himself in a position of conflict with the trust.
  • If the trust contains an express power of variation (allowing the trustee to change the terms of the trust), a trustee will not be considered as breaching his duty of loyalty if he exercises that power.
  • A trustee must act in good faith, and not seek to achieve anything else but the interests of the trust.
  • A trustee must place the interests of the beneficiaries (especially financial) over any other interest.
    • Note that this requires the trustee to always accept the best offer (as long as it is legal), regardless of any sort of considerations (such as honour etc).[7]

The last duty was discussed in Cowan v Scargill:[8]

  • Facts: The beneficiaries were all related to the coal mining business, and the trustees refused to invest the trust money in business which competed with the coal business (ie, a moral consideration).
  • Held: the interests of the beneficiary are mainly seen as financial (they rarely go into moral interests etc). The failure to place the beneficiaries' financial interest over the the trustee's moral interest amounted to a breach of the duty to place the interests of the beneficiaries over any other interest.

However, it has been recognised that in the cases of particular groups with particular concerns, other interests might supersede financial interests.[9]

Duty to Preserve Trust Property

[10] This duty is fairly straightforward. Besides the commonsense conception of preservation, the duty also entails:

  • If so specified, the trustee must invest the trust fund properly (more below).
  • The trust must ensure that debts owed to the trust are repaid.
    • A trustee that has not attempted to collect debts, or that has not done enough to collect debts, may be liable for the money lost (this could include the failure to commence court proceedings).[11]

There has been some debate regarding whether the trustee has a duty to insure the trust property. In NSW, the authority for this is Pateman v Heyen:[12]

  • Facts: the trustee insured the property initially, but forgot to renew it. The property then burnt down.
  • Held: The trustee must insure the trust property as a prudent would be expected to act if he owned the trust property. In other words, the court employs an objective standard and determines whether the conduct of the trustee in insuring the trust property fell below that of the prudent person).
    • This means sometimes full market value insurance will be required, sometimes partial etc.
    • When the trust is not making any money with which insurance can be paid, it is reasonable not to insure the property.

Duty to Invest the Trust Fund Properly

[13] A trust might specify that the trustee is to invest the funds of the trust. In that case, there will be a duty to invest the trust fund properly.

  • An investment contrary to a trust specifications is an immediate breach.
  • In practice, however, settlors often grant wide powers of investment upon trustees.
  • s 14 of the Trustee Act 1925 (NSW) also gives trustees a practically unfettered discretion to invest, except where expressly prohibited by the instrument.

The following rules apply for when determining whether the trustee has invested the fund properly:

  • Firstly, the trustee's actions cannot be judged in hindsight; they must be judged on the basis of the facts and circumstances in existence at the time of the decision.[14]
  • The trustees are not meant to be infallible investors - they are merely expected to act prudently in investing the funds. If a trustee acted with due diligence and good faith, but then made a reasonable mistake or error of judgment which ended up in damage to the trust fund, he will not be deemed in breach of the duty to invest properly.[15]
    • This does not mean that the trustee can make speculative investments...he must act with due diligence.[16]
  • Under ss 90 - 90A, courts now use the ‘portfolio theory’ in determining the prudence of a trustee’s investments.
    • This means that rather than looking at the individual investment in question, they will look at the overall ‘investment strategy’ of the trustee. Certain losses may be offset by other gains in the portfolio of investments, so as to not constitute an imprudent investment. Under the old rules, investments were viewed individually.

The issue of an honest, prudent investor making an error of judgement came up in Re Speight; Speight v Gaunt:[17]

  • Facts: the trustee employed a stockbroker who fraudulently misappropriated the funds. This resulted in a loss to the trust.
  • Held: since the trustee acted honestly and with reasonable due diligence, was held not to be liable for the loss.
    • 'A trustee ought to conduct the business of the trust in the same manner that an ordinary prudent man of business would conduct his own, and that beyond that there is no liability or obligation on the trustee'.[18]

Whilst it has been noted that speculative investments are usually a breach of the duty, the trust instrument itself may sometimes authorise the trustee to engage in speculative investments. In such an instance, the trustee is still under a duty to act prudently and in good faith in exercising those express powers. This issue was discussed in Re Whiteley; Whiteley v Learoyd:[19]

  • Facts: the trustees invested in a brick-pit business that went into liquidation. The amount they lent was less than the security they had. The beneficiaries sought restitution from the trustees in the circumstances.
  • Held: The money advanced by the trustees was substantially more than the value of the business, meaning it was a seriously imprudent investment.


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End

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References

Property Textbook refers to Edgeworth et all, Sackville and Neave's Property Law Cases and Materials, 8th edition, Lexis Nexis, 2008.

Equity Textbook refers to Evans, Equity and Trusts, 3rd edition, Lexis Nexis, 2012.

  1. Equity Textbook, pp. 464-5 [31.2-31.3]
  2. Harvey v Olliver (1887) 57 LT 239
  3. Hallows v Lloyd (1888) 39 Ch D 686.
  4. Harvey v Olliver (1887) 57 LT 239; Hallows v Lloyd (1888) 39 Ch D 686.
  5. Equity Textbook, pp. 565-7 [31.4-31.7]
  6. McGregor v McGregor [1919] NZLR 286.
  7. Cowan v Scargill [1985] Ch 270
  8. [1985] Ch 270
  9. Harries v Church Comissioners for England [1992] 1 WLR 1241.
  10. Equity Textbook, pp. 567-9 [31.8-31.9].
  11. Re Brogden; Billing v Brogden (1888) 38 Ch D 546; Partridge v Equity Trustees Executors and Agency Co Ltd
  12. (1993) 33 NSWLR 188.
  13. Equity Textbook, pp. 569-81 [31.10-31.29]
  14. Nestle v National Westminster Bank [1994] 1 All ER 118, 134.
  15. Re Chapman [1896] Ch 763, 768.
  16. Sidley v Huntly (1900) 21 LR (NSW) Eq 14.
  17. (1883) 22 Ch D 727.
  18. (1883) 22 Ch D 727, 739.
  19. (1886) 33 Ch D 347.
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