The Personal Nature of a Trustee’s Liabilities
Geoffrey Shindler examines the range of personal risks inherent in acting as a trustee, from the personal nature of covenants to some potential criminal offences
(taken from Isssue No 13 – October 2000)
Victorian values (and before)
Whilst no doubt silently applauding their good nature and personal self-sacrifice, Judges through the ages have given trustees something of a hard time. Lord Hardwicke said in 1747 that a trust
`if faithfully discharged with no small degree of trouble and anxiety is an act of great kindness in anyone to accept it`;
Knight -v- Earl of Plymouth (1747) 3 Atk 480.
Although he refused to extend the duties of trustees Mr Justice Kekewich said that the duties of trustees were `quite onerous enough`; see Hallows -v- Lloyd (1888) 39 ChD 686. Fourteen years earlier in Payne -v- Evens (1874) LR 18 Eq 356 Sir James Bacon VC said
`no doubt the court acts with strictness and rigour against trustees because it requires for the public interest that the duties assumed by trustees should be discharge with the utmost punctuality and regularity. When trustees have failed in these duties and wrong has been done in consequence of that failure the court is in the habit of visiting the trustees with severity`
A comment which seems to sum up neatly the whole of one aspect of Victorian England.
Three modern cases
But what of the more recent past and the present? Three cases will suffice to show that nothing much has changed since 1747 or 1874 or 1888. It is still an onerous and thankless office. If anything it is more difficult – so much so that some professional individuals are now thinking twice before accepting the dubious honour of an invitation to act as trustee, or even as executor.
First a tax case; Howarth’s Executors -v- IRC  STC (SCD) 162. Here executors of an estate distributed all of the assets before the Inheritance Tax liabilities had been discharged in full. A promise from the legatee to discharge the outstanding liabilities was not honoured. Reluctantly, or so they said, the Revenue pursued the personal representatives and the court had little option but to find the personal representatives liable to pay the outstanding tax. The payment of Inheritance Tax is a personal liability of the personal representatives, at least to the extent that assets come into their possession or ought to have come into their possession. Let personal representatives of all kinds be on notice: never distribute the assets of the estate to any beneficiary, however plausible, however financially embarrassed he may be (and perhaps especially when he is financially embarrassed) and however desirable it might be to wind up the administration – without having first secured payment of the IHT liabilities either by making payment of them or reserving cash in full to pay any outstanding balance with interest.
Next consider the plight of the trustees of club property who took out borrowing to finance building of a new clubhouse, Marston Thompson & Evershed -v- Bend and Others (1997) Law Society Gazette 15 October 1997 at p39. The loan was secured by a mortgage on the club’s property, the property being vested in the four trustees who signed the mortgage deed. The loan agreement expressly described the borrowers as trustees and in that capacity they acknowledged receipt of the money which they covenanted to repay. The club failed to repay and the issue arose as to whether the liability to repay was that of the club, and could be discharged only from the assets of the club, or whether the liability was a personal liability of the trustees. Chadwick J found that merely describing oneself as a trustee does not limit one’s liability. An extra statement to that effect is required if a trustee is to limit his or her liability, and thereby avoid the exposure to personal risk. So this was a case where trustees had to accept personal liability even though the documentation described them as trustees. Mere description is not sufficient. What is necessary is a clause in the document to the effect that the lender will seek repayment from the assets secured by the charge and not from those covenanting to repay. If the lender is not prepared to accept such a limitation of liability then the trustees of the club should either resign and let someone else take the risk or, more likely, obtain a valid indemnity from all of the club members to the effect that they will become jointly and severally liable for the loan.
The final case of the modern trilogy, also in 1997, is Perring -v- Draper  EGCS 109. Here charity trustees were opposed to trustees of a private family trust. The trustees of the family trust purchased a 12 year residue of a lease. The charity trustees, who became the plaintiffs in the action, by their surveyor, told the family trustees that the latter would enjoy the same protection as that conferred upon the charity trustees by clause 3 of the lease which declared that the lessor’s covenant would not bind them personally except while acting as trustees. Until the lease expired the family trustees remained in possession and five years later, having been offered a new lease, they sought and received the assurance of the charity trustees that their position as regards personal liability would remain unchanged. Assuming a degree of legal knowledge that he patently did not have the surveyor for the charity trustees told the family trustees that their liability could be equated with that of the directors of a limited company. The family trustees did take a new lease of the premises backdated for five years. There was a rent review to take effect from the time the new lease was entered into, 1989. Four years later the arbitrator made his award which was an annual rental of £19,000, the annual rental for the previous five years from 1984 to 1989 being at £2,000 pa.
Were the family trustees liable for the arrears of rent from their personal resources or only to the extent that they held trust property? The lease itself had been surrendered. In the Queen’s Bench Division Mantell J held that the private family trustees were personally liable for the rent arrears and there was no protection under the general law limiting the liability of the trustees to the value of the trust fund. In order to have that protection the family trustees would have had to have shown that their liability had been limited either by an express contractual arrangement with the landlord or by a representation which could form the basis of an estoppel defence. The former did not exist and the statements of the surveyor of the plaintiff did not amount to the latter.
Compensation from the trust fund?
Thus far thus clear, if somewhat harsh. So does a trustee have any protection at all, implied by law, in a contractual situation? Probably not. A trustee certainly has the right to compensate himself out of the trust fund for all expenses properly incurred by him acting as trustee, as there is no reason why he should be out of pocket; see Hardoon -v- Belilios  AC 118. Indeed that is the whole essence of the position of a trustee because a trust has no independent legal existence – a jurisprudential concept that we have to drum into our students and other professionals with alarming regularity the point apparently being one incapable of easy understanding. Why should a trust not be like a company? – Because it is not.
Indeed even the common-law right (reinforced by s.30(2) Trustee Act 1925) to an indemnity from the trust fund itself can be limited. First, the contractual arrangement has to be one which is permitted by the trust instrument, expressly or by implication (and the latter is very rare); secondly, the transaction has not only to be permitted but also prudent. And finally, a trustee is not entitled to reimbursement out of the trust fund in respect of a proper transaction if there has been a prior, but unremedied, breach of trust; see British Power Traction & Lighting Co Ltd  2 Ch 470. Here the third party of the trust creditor cannot recover from the fund the monies owed by the trustee to the trust and the trustee can only pay out of the trust fund the net amount left in the fund. The trustee remains personally liable to the creditor for the balance.
Just in case you think that the position could not get worse, let me mention the word `crime`. Nothing could be further from the mind or actions of a good trustee, but nevertheless there are certain circumstances where a trustee can be liable for a criminal act when acting as trustee. In her article in Trusts & Estates Law Journal March 1999 p4 Jennifer Chambers lists the following as statutes where the trustees could become involved in crime: Water Resources Act 1991,s.85; Health and Safety at Work etc Act 1974; Charities Act 1993; Occupiers Liability Acts 1957 and 1984. Two months later the same journal contained an article by Louise Woodhead and Susan Taylor on the subject of trustees and crime. They pointed out four separate offences under the Charities Act 1993 for which the trustees may be liable.
The recent case of X -v- ABC  WTLR 11 brought home to trustees their potential liabilities under the Environmental Protection Act 1990 which amongst other things make criminal offences out of the illegal deposit of waste or a failure to exercise a due care in its disposal. And, you are quite right, prison is a possible sanction.
Is there no end to this catalogue of woe? Is death the only cure? Well so far as death is concerned personal representatives have another source of concern. What happens if, following faithfully the wishes of the deceased, they decide to commit his mortal remains into a plot of land for the privilege of which they sign a grave maintenance agreement. Now, such a grave agreement can be a serious matter. Perhaps it was the deceased himself who, in rude good health at the time and with a cavalier disregard for the well being of his executors and of his own pending mortality, entered into that agreement. Does such an obligation bind the estate? Seemingly it does; after all it is not more than a contractual obligation that clearly envisages the issue of death so there can hardly be an implied provision that it ends at death, and can last for 21 years thereafter. Indeed in one sense the contract only begins at death. If that contract provides for annual or other regular payments how can the personal representative wind-up the estate? If he stands in the shoes of the deceased, the contracting party, then he takes the liability for payment. Either he persuades the cemetery company to enter into a deed of novation so that he is formally discharged in favour of the beneficiaries or he has to take an indemnity from the beneficiaries and hopes that indemnity is satisfactory as to time, amount and ability to pay. Otherwise he simply cannot wind up the estate at least without an application to the court asking for directions.
What about potential contingent liabilities? If an LPR has knowledge of them he is liable to discharge them if and when the contingency is fulfilled – perhaps many years into the future. Meanwhile the beneficiaries would just have to be patient. That is really not good enough for a civilised legal system. The potential liabilities of deceased Members of Lloyds was the paradigm case. The issue, at least in so the far as Lloyds is concerned, was resolved in Re Yorke  4 All ER 907, sponsored by the Society of Trust and Estate Practitioners, a way round that problem was found. But at least in Re Yorke there was present an alternative issuer who could satisfy any future debt – not so the case where there is simply a contingent liability. All an LPR can do is hope that a s.27 Trustee Act 1925 notice does not bring forth any claims.
Let us turn now to the position of a custodian trustee, one appointed pursuant to the provisions of Public Trustee Act 1906. A custodian trustee, as you would expect, must have the custody of all securities and documents of title relating to the trust assets but of course does not manage the trust. That is something carried out by the managing trustees who were described as such in contrast to the custodian trustee. In general trust law a trustee is responsible both for the custody of his own trust documents and also for the management and administration of the trust. When a custodian trustee is appointed, by necessary inference the roles are divided. A custodian trustee is obliged to perform all acts necessary to enable the managing trustees to exercise their powers but is not obliged to carry out any activity which might result in a breach of trust or involve a personal liability following upon the custodian trustee in respect of any action. So you would have thought that if a custodian trustee enters into a lease he would not be responsible for the payment of rent and that responsibility will fall upon the managing trustees. In practice the position does not seem to be quite so straight forward as that. The custodian trustee would be well advised when entering into a lease to ensure that the managing trustee is made a party to the same document and the liabilities of the custodian trustee are expressly limited. The cases referred to earlier of Marston and Perring suggest that, out of an abundance of caution if nothing else, the custodian trustee should protect himself in this way. If the custodian trustee alone enters into the lease as lessee and there is no express reference to the limitation of his liability all one can be certain of in the event of a default by the managing trustees is an argument. How many custodian trustees have entered into leases without the benefit both of managing trustees joining them and without an express limitation on their liability?
Landlord and tenant
Finally, to the issue of property owing by the trustee, in the context of landlord and tenant. How has the Landlord and Tenant (Covenants) Act 1995 affected the position? First, note that the doctrine of privity of contract has not been abolished by the advent of the Act. It merely restricts the liability of the Tenant and any Sureties to pay any amounts due in respect of a fixed charge under, inter alia, a tenant covenant or an agreement of guarantee. However, privity of contract has been substantially circumscribed by a statutory restriction on the ability of a landlord to recover from the former tenant or his guarantor certain fixed sums that might be due under a tenant covenant or agreement made by the guarantor. Most of the provisions of the 1995 Act apply only to new tenancies but s.1(2) of the 1995 Act provides that ss.17-20 apply to both new and other (i.e. existing) tenancies.
Whether you think the 1995 Act help or hinders the trustee depends on a combination of factors: old or new tenancy, trustee as landlord or tenant. One thing is quite certain; as with so much of the present law relating to the personal liability of the trustee or executor life is not getting any easier.
Come back 1747 all is forgiven.
Geoffrey Shindler is a partner and Head of Trusts and Estates at halliwell landau in Manchester. He is also Vice-President of the Society of Trust and Estate Practitioners.