Using the Court to solve Trustee Problems

Dawn Goodman of Messrs Withers)
(taken from Issue No 1 – July 1996)

 

The Trustees’ protection

Under  s.61 Trustee Act a trustee must have acted not only honestly and reasonably and ought fairly to be excused from the breach of trust but he must also be excused for omitting to obtain the court’s directions in the mater in which he committed the breach.      If there is a problem capable of simple resolution by an application to the court under   s.57 Trustee Act or for directions it will be difficult to persuade the court that relief should be granted.     Paid  trustees are more likely to be relieved of liability because the standard expected of them is higher – see National Trustee Co of Australasia Limited v General Finance Co of Australasia Limited  [1905] AC 373 and Bartlett v Barclays Bank Trust Co Limited [1980] 1 Ch 515 – Brightman J:

‘…  a higher duty of care is plainly due from someone like a trust corporation which carries on a specialised business of trust management.    A trust corporation holds itself out in its advertising literature as being above ordinary mortals.   With a specialist staff of trained trust officers and managers, with ready access to financial information and professional advice, dealing with and solving trust problems day after day, the trust corporation holds itself out, and rightly,  as capable of providing an expertise which it would be unrealistic to expect and just to demand from the ordinary prudent man or woman …`

The breadth of assistance which the court can give in solving problems

The courts can assist by:

  • Summons under O85r2

Determining an issue or giving directions in accordance with its ancient jurisdiction.

Most common law jurisdictions exercise similar jurisdiction.   In England RSC 0.85r2 encapsulates the position:

‘An action may be brought for the determination of any question or for any relief which could be determined or granted as the case may be in an administration action and a claim need not be made in the action for administration or execution under the direction of the court of the estate or trust in connection which the question arises or the relief is sought.’

If trustees have brought the full relevant facts to the attention of the court an order directing them to take particular action will protect them against a relied on that direction.     It is particularly important to secure directions where a lay trustee relies on a professional trustee’s advice; if a breach of trust is found to have been committed, the professional will be liable to indemnify the lay trustee as in Wohlleben v Canada Permanent Trust Company (1976) 70 DLR (3rd) 257.

The facility to refer to the court for directions tends to be under used.     In re Buckton [1907] Ch 406 Kekewich J indicated+ that the court will be lenient towards over cautious trustees.

Note that charity trustees should not apply to the court for directions unless authorised by the Charity Commissioners or with the leave of the court because of the Charity Commission’s powers to make orders under s.26 Charities Act 1993or to provide guidance by letter of opinion and advice under s.29.

  • Concerns about interpretation or construction of trust documents – construction and rectification proceedings

Construction summonses are proceedings under RSC Order 85 Rule 2.  NoteWatson v National Children’s Home The Times October 31 1995.

Note the provision in ss.21 and 22 of the Administration of Justice Act 1982 which serves as aids to interpretation in the case of a will.    Note also the expedited procedure under s.48 of the Administration of Justice Act 1985: if there is no dispute and the opinion of Counsel of not less than 10 years’ standing on the interpretation of the will or settlement can be exhibited to the supporting affidavit the application can be dealt with without hearing argument.

The power to rectify in the case of a lifetime settlement is wider than that relating to a will: in re Butlins Settlement Trust [1976] Ch 251 Brightman J said that rectification was available not only where there had been an omission or a clerical error but also where words were used intentionally under a mistaken impression as to their meaning.   Contrast s.20 of the Administration of Justice Act 1982: the court can only rectify to enable the testator’s intentions to be carried into effect if there was a clerical error  or a failure to understand his instructions (in addition to its old power to omit words from probate).

  • Concerns as to the extent of trustees’ or PRs’ powers

Settled Land Act cases – use s.64 SLA (see Hambro v Marlborough  [1994] Ch 158) Ordinary trusts/will trusts – use s.57 TA which provides that claim that they have acted in breach of trust if they the court can make an order conferring the requisite power on the trustees either generally or for a specific purpose if the court considers it expedient to do so.

It can be very useful to make an application under s.57 if working under an old-fashioned will or lifetime settlement which does not contain modern form powers and the absence of those powers is hampering the administration of the trust.

  • Variation of Trusts Act applications

May assist if you wish to rearrange the beneficial interests to take advantage, for instance, of tax planning schemes or to seek a variation to incorporate a charging provision.

  • Applications to resolve the absence/inadequacies of a charging clause

s.42 TA enables the court, on appointing a corporate trustee, to fix its remuneration.   (Similar effect can be achieved by an application for the appointment of an administrator pendente lite under s.117 Supreme Court Act 1981 or of a substitute personal representative under s.50 Administration of Justice Act 1985).

The court also has inherent jurisdiction to authorise a trustee to take remuneration see re Duke of Norfolk’s Settlement Trust [1982] 1 Ch 61 and re Drexel Burnham Company UK Pension Plan [1995] 1 WLR 32.

But note Foster v Spencer: The Times 14 June 1995 – past remuneration was authorised but the court declined to permit future payment for the trustees’ services on the basis that, now that the difficult tasks had been performed, the remaining tasks before  the trustees did not call for any special expertise on their part and that even if the trustees were unwilling to proceed on the basis that they were unremunerated others might now be willing to step into their shoes.

So what common trustee problems can be resolved by application to the court for directions?

The possibilities are endless but situations where the court’s guidance has been sought are:

  • on novel points

Such as on the treatment of the Zeneca shares following the ICI demerger –Sinclair v Lee [1993] Ch 497.

  • on investment policy

Where there is a disagreement as to investment policy.    See Cowan v Scargill [1984] 2 All ER 750 and Harries v Church Commissioners for England [1992] 1 WLR 1241.

  • whether assets should be sold and if so, in what manner at what price

Sales of assets such as the mansion house or items to which beneficiaries are firmly attached may result tin considerable animosity against trustees.       In such situations the court may be asked to sanction not only the principle of sale but also the manner in which the sale is to be arranged.

  • whether to compromise

Although s.15 TA gives trustees and PRs wide discretion in settling claims by or against the trust or estate and they are not liable for loss caused by anything done by them in the exercise of their powers under this section (provided it is done in good faith and after properly considering the matter) in cases of doubt or difficulty the trustees or PRs can apply to the court to sanction the compromise.     The court will then consider what is best from the point of view of the beneficiaries as a whole and pay particular attention to the interest of minors see re Earl of Strafford [1980] Ch 28.

  • bringing or defending proceedings

If trustees engage in third party or external litigation and win they can take their costs from the trust fund but in the event that they do so and lose they may be left meeting the costs of that litigation and the costs of their opponent from their own pockets : they should apply for a Beddoe Order (after in re Beddoe [1893] 1 Ch 549).     The trustees must put the full facts to the court and produce an opinion of Counsel on the merits of the proposed action or defence so that the court can make a balanced judgment as to whether or not the litigation should be pursued at the expense of the trust fund.      The beneficiaries will be joined as parties to that application and will have the opportunity of making representations.

Some difficult problems which arise in the context of a Beddoe application are:

  • where proceedings are contemplated against former trustees.    One of the primary duties of a trustee on accepting office is to ensure that the trust property has not been depleted by the activities of former fiduciaries.    If the new trustee considers that a breach has been committed he ought to take advice and seek directions as to whether or not action should be taken.
  • where the external or third party litigation to be defended or brought is against a beneficiary.       Use the practice in re Moritz [1960] 1 Ch 251.
  • Where the trustees are defending an attack on the whole of the trust fund on the basis that:

(i)    the deceased’s estate was actually held on trust wholly for another or was contractually committed by the      deceased to another as in re Dallaway (deceased) [1982] 3 All ER 118 and Evans v Evans and others [1985] 3 All ER 289 or

(ii)    where it is alleged that the trust should be set aside because it was a disposition intended to defeat creditors (as in Alsop Wilkinson v Neary (1995) 1 All ER 431) or

(iii)    it is alleged that the trust is a sham and accordingly that the whole of the trust fund is held on resulting trust for the settlor (as inRahman v Chase Bank (CI) Trust Company Limited   (1991) J LR 103 and Midland Bank Limited v Wyatt (1995) 1 FLR 696 or

(iv)    where an heir under a civil code or Islamic law jurisdiction seeks to claw back from the trust assets the sum required to make up his portio legitime.

In all these cases the trustees are left in the difficult position that they may have no fund at the end of the day from which they take their costs as a matter of quasi contract.     The court can allow the trustees to take their costs before handing the fund over to the successful claimant.   But in Alsop Wilkinson v NearyLightman J made it plain that the notion that trustees of settlements have a duty to defend actions challenging the validity of settlements and are entitled to their costs irrespective of the outcome is not correct or in accordance with modern authority.     He considered that where the case was in effect a dispute between rival claimants to the beneficial interest in the subject matter of the trust the duty of the trustees was to remain neutral and in the absence of any direction to the contrary to offer to submit to the court’s direction leaving it to the rival claimants to fight out their battle.

Doubtful liabilities

It  may be advisable to seek directions on whether to discharge doubtful liabilities such as taxes levied by a foreign revenue authority which would not be enforced in this country.    Note re Tucker [1987-88]   JLR 473 but see  Lord Cable [1976] 3 All ER 417.

  • Application for a Benjamin Order

The jurisdiction to make a Benjamin Order -after re Benjamin [1902] 1 Ch 723 is quite extensive – leave can be given to distribute on the basis that a person died without issue, that all debts and liabilities have been ascertained, that a person is presumed dead or where an original settlement has been lost on the basis that the trusts are those established by secondary evidence.

A Benjamin Order relieves Trustees or PRs of liability should the hypothesis upon which they are permitted to act turn out to have been incorrect.

Disclosure of trust documents

Trustees will sometimes be faced with the dilemma of whether they should comply with a beneficiary’s request for disclosure of trust documents, particularly if that request is made by a beneficiary who is attacking or is about to attack the trust. The courts tend to be reluctant, even in those circumstances, to decline to order disclosure of trust documents (as defined in re Londonderry’s Settlement[1965] Ch 918),  but may attach conditions to the making of that order as inLemos v Coutts &  Co (Cayman) Limited [1992-3] CILR 490.

Some topical problems can be addressed by an application to the court unders.57 Trustee Act.

Two major current causes of concern for trustees can be disposed of quite simply by means of an application to the court under s.57 TA to enlarge the trustees’ powers: the placing of assets with  nominees and delegation to investment managers.  See Anker Petersen v Anker Petersen, Baker J  6   December 1990 (unreported) following the charity case, Steel v Wellcome Custodian Trustees  Ltd[1988] 1 WLR 167 but note that the Charity Commission can make an order under s.26 Charities Act 1993 extending charity trustees’ powers.

© Dawn Goodman, November 1995