Rights and RemediesRights and Remedies

Associate Professor Cameron Associate Professor Cameron StewartStewart

Appointment, retirement and Appointment, retirement and removal of trustees removal of trustees

Only a legal person (a nat ural person or Only a legal person (a nat ural person or corporation) with the capacity to hold and corporation) with the capacity to hold and deal with property can be appointed as a deal with property can be appointed as a trustee trustee

If, for whatever reason, a prospective trustee If, for whatever reason, a prospective trustee is unable to take up the office of trustee, the is unable to take up the office of trustee, the trust will not fail trust will not fail

Most trusts will contain an express power of Most trusts will contain an express power of appointment. In the absence of an express appointment. In the absence of an express power of appointment, most jurisdictions have power of appointment, most jurisdictions have granted powers of appointment to particular granted powers of appointment to particular classes of individuals classes of individuals

Appointment, retirement and Appointment, retirement and removal of trustees removal of trustees

RetirementRetirement

Removal -If the trust instrument is Removal -If the trust instrument is silent on the issue of removal, only the silent on the issue of removal, only the court has the power to remove a court has the power to remove a trustee who wishes to remain in office. trustee who wishes to remain in office. The welfare of the beneficiaries is the The welfare of the beneficiaries is the dominant consideration in determining dominant consideration in determining whether or not it is proper to remove a whether or not it is proper to remove a trustee trustee

Rights of trustees Rights of trustees

The right to reimbursement and The right to reimbursement and exoneration exoneration

The right of contributionThe right of contribution The right to impound a beneficial The right to impound a beneficial

interestinterest The right to get directions from the The right to get directions from the

courtcourt

Powers of trustees Powers of trustees

Powers of salePowers of sale Powers of managementPowers of management Powers of maintenance and Powers of maintenance and

advancementadvancement Powers of investmentPowers of investment

Duties of trustees Duties of trustees

Duty to obey the terms of the trustDuty to obey the terms of the trust Duty to inquireDuty to inquire Duty to keep accounts and give Duty to keep accounts and give

information to beneficiaries -information to beneficiaries -Re Re Londonderry’s SettlementLondonderry’s Settlement

Duty to correctly pay beneficiariesDuty to correctly pay beneficiaries Duty not to profit from the trustDuty not to profit from the trust

Duties of trustees Duties of trustees

Duty to act impartially between Duty to act impartially between beneficiariesbeneficiaries

Duty to sell trust property Duty to sell trust property Duty to investDuty to invest Duty to act personally, unfettered Duty to act personally, unfettered

and unanimouslyand unanimously Duty to consider the exercise of trust Duty to consider the exercise of trust

powerspowers

Interests of beneficiariesInterests of beneficiaries

Fixed and discretionaryFixed and discretionary Exhaustive non exhaustiveExhaustive non exhaustive TaxationTaxation Family LawFamily Law ImmigrationImmigration

Rights of beneficiaries Rights of beneficiaries

The right to compel performanceThe right to compel performance The right to restrain a breach of trustThe right to restrain a breach of trust The right to possession of trust The right to possession of trust

propertyproperty The right to approach the courtThe right to approach the court The right to informationThe right to information The right to extinguish the trustThe right to extinguish the trust Right to traceRight to trace

Personal remedies Personal remedies Equitable compensationEquitable compensation Youyang Pty Ltd v Minter Ellison Morris Fletcher Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 (2003) 212

CLR 484 at 500, a unanimous High Court said:CLR 484 at 500, a unanimous High Court said: [T]here must be a real question whether the unique [T]here must be a real question whether the unique

foundation and goals of equity, which has the institution of foundation and goals of equity, which has the institution of the trust at its heart, warrant any assimilation even in this the trust at its heart, warrant any assimilation even in this limited way with the measure of compensatory damages in limited way with the measure of compensatory damages in tort and contract. It may be thought strange to decide that tort and contract. It may be thought strange to decide that the precept that trustees are to be kept by courts of equity the precept that trustees are to be kept by courts of equity up to their duty has an application limited to the up to their duty has an application limited to the observance by trustees of some only of their duties to observance by trustees of some only of their duties to beneficiaries in dealing with trust funds. beneficiaries in dealing with trust funds.

Personal remedies Personal remedies

Set-offSet-off Account of profitsAccount of profits Just allowanceJust allowance Personal claims against third partiesPersonal claims against third parties

Proprietary remedies — tracing Proprietary remedies — tracing

Tracing is available as a remedy in Tracing is available as a remedy in common law as well as in equity. common law as well as in equity. Common law tracing differs from Common law tracing differs from equitable tracing in that equity rec equitable tracing in that equity rec ognises that a beneficiary retains his ognises that a beneficiary retains his or her property rights over trust or her property rights over trust property in cases where the trust property in cases where the trust property is mixed with other property property is mixed with other property or converted into a new type of or converted into a new type of property property

Proprietary remedies — tracing Proprietary remedies — tracing Foskett v McKeownFoskett v McKeown [2000] 3 All ER 97: [2000] 3 All ER 97:

Tracing is thus neither a claim nor a remedy. It is Tracing is thus neither a claim nor a remedy. It is merely the process by which a claimant merely the process by which a claimant demonstrates what has happened to his property, demonstrates what has happened to his property, identifies its proceeds and the persons who have identifies its proceeds and the persons who have handled or received them, and justifies his claim handled or received them, and justifies his claim that the proceeds can properly be regarded as that the proceeds can properly be regarded as representing his property. Tracing is also distinct representing his property. Tracing is also distinct from claiming. It identifies the traceable proceeds from claiming. It identifies the traceable proceeds of the claimant’s property. It enables the claimant of the claimant’s property. It enables the claimant to substitute the traceable proceeds for the to substitute the traceable proceeds for the original asset as the subject matter of his claim. original asset as the subject matter of his claim. But it does not affect or establish his claim But it does not affect or establish his claim

Proprietary remedies — tracing Proprietary remedies — tracing The existence of a prior fiduciary The existence of a prior fiduciary

relationship is an essential pre requisite to relationship is an essential pre requisite to a claim of tracing in equity a claim of tracing in equity

The effect of grounding tracing in the The effect of grounding tracing in the exclusive jurisdiction is to substantially exclusive jurisdiction is to substantially limit its availability. Many commentators limit its availability. Many commentators have been critical of this view of tracing’s have been critical of this view of tracing’s origins because, in the absence of a prior origins because, in the absence of a prior fiduciary relationship, any person whose fiduciary relationship, any person whose property is stolen by a thief will be unable property is stolen by a thief will be unable to trace that property in common law or to trace that property in common law or equity, if the thief mixes the property equity, if the thief mixes the property

Proprietary remedies — tracing Proprietary remedies — tracing In addition to the requirement that there be a In addition to the requirement that there be a

pre-existing fiduci ary duty between the parties, a pre-existing fiduci ary duty between the parties, a claimant seeking to trace trust property must also claimant seeking to trace trust property must also establish that he or she had an equitable interest establish that he or she had an equitable interest in the property prior to the breach of fiduciary in the property prior to the breach of fiduciary duty and that the property now lies in the hands duty and that the property now lies in the hands of the defendant. of the defendant.

In equity it does not matter, for the purpose of In equity it does not matter, for the purpose of identification, that the property has become identification, that the property has become mixed with other property. Nor does it matter mixed with other property. Nor does it matter that trust funds have been used to purchase that trust funds have been used to purchase other property. other property.

Equity presumes that the trust property continues Equity presumes that the trust property continues to exist in both situations to exist in both situations

Tracing property into the hands of Tracing property into the hands of trusteestrustees

If trustees misappropriate trust prop erty and use If trustees misappropriate trust prop erty and use it exclusively to purchase other property in their it exclusively to purchase other property in their own name, equity allows the beneficiaries to own name, equity allows the beneficiaries to trace the funds into the newly acquired property trace the funds into the newly acquired property

The beneficiaries can choose to enforce their The beneficiaries can choose to enforce their beneficial interests in the new property by eitherbeneficial interests in the new property by either asserting beneficial ownership of it, or by bringing asserting beneficial ownership of it, or by bringing a personal claim against the trustee for breach of a personal claim against the trustee for breach of trust. This claim can be enforced by an equitable trust. This claim can be enforced by an equitable lien or charge over the new property lien or charge over the new property

Mixed property — the rule in Mixed property — the rule in Re Re Hallett’s EstateHallett’s Estate

Equity presumes in such Equity presumes in such circumstances that, once funds are circumstances that, once funds are mixed in an account, any following mixed in an account, any following transactions come from the trustee’s transactions come from the trustee’s per sonal funds first. Any funds per sonal funds first. Any funds remaining in the account are treated remaining in the account are treated as trust funds as trust funds

The lowest intermediate balance The lowest intermediate balance rulerule

How do you calculate beneficial How do you calculate beneficial proprietary interests in cases where proprietary interests in cases where deposits and withdrawals are made over deposits and withdrawals are made over time to accounts of mixed funds?time to accounts of mixed funds?

The lowest intermediate balance rule The lowest intermediate balance rule states that the beneficiaries’ claim is states that the beneficiaries’ claim is limited to the lowest account balance in limited to the lowest account balance in the period starting from the date of the period starting from the date of mixture to the date of the claim against mixture to the date of the claim against the account. the account.

Tracing valuable purchases from a Tracing valuable purchases from a mixed fundmixed fund

An exception to the rule in An exception to the rule in Re Hallett’s EstateRe Hallett’s Estate applies when applies when the fiduciary makes a purchase of valuable property from the fiduciary makes a purchase of valuable property from the mixed fund and then proceeds to dissipate the rest of the mixed fund and then proceeds to dissipate the rest of the account. In such circumstances the fiduciary is not the account. In such circumstances the fiduciary is not entitled to use the rule in entitled to use the rule in Re Hallett’s EstateRe Hallett’s Estate to prevent to prevent tracing into the valuable property. In tracing into the valuable property. In Re OatwayRe Oatway [1903] 2 [1903] 2 Ch 356, a trustee misappropriated trust funds by placing Ch 356, a trustee misappropriated trust funds by placing them in his account and then pro ceeded to use two-thirds them in his account and then pro ceeded to use two-thirds of the money to buy shares. The rest of the account was of the money to buy shares. The rest of the account was then dissipated. The court found that the trust property then dissipated. The court found that the trust property should be traced into the shares, overturning the should be traced into the shares, overturning the presumption in presumption in Re Hallett’s EstateRe Hallett’s Estate that trans actions come that trans actions come from the trustee’s personal funds first. from the trustee’s personal funds first.

Tracing mixed funds into Tracing mixed funds into appreciating propertyappreciating property

In cases where trustees mix funds In cases where trustees mix funds and profitably invest the mixture, and profitably invest the mixture, beneficiaries will ordi narily be beneficiaries will ordi narily be entitled to a proportionate share of entitled to a proportionate share of any gain made by the investment any gain made by the investment

Mixed property in the hands of Mixed property in the hands of trustees from more than one trusttrustees from more than one trust

Unfortunately, it is not unusual for Unfortunately, it is not unusual for defaulting trustees to mix funds from defaulting trustees to mix funds from more than one trust. In this situation more than one trust. In this situation two rules can be applied to apportion two rules can be applied to apportion whatever property remains between whatever property remains between the different beneficial interests the different beneficial interests traced into the mixed fund. traced into the mixed fund.

Mixed property in the hands of Mixed property in the hands of trustees from more than one trusttrustees from more than one trust

The general approach — The general approach — pari passupari passu

For example, if $3000 from Trust A For example, if $3000 from Trust A together with $2000 from Trust B together with $2000 from Trust B were used to purchase 500 shares of were used to purchase 500 shares of equal value, 300 shares would be equal value, 300 shares would be held in favour of Trust A and 200 held in favour of Trust A and 200 shares in favour of Trust B.shares in favour of Trust B.

Mixed property in the hands of Mixed property in the hands of trustees from more than one trusttrustees from more than one trust

The rule in The rule in Clayton’s caseClayton’s case

It displaces the It displaces the pari passupari passu rule and rule and states that all beneficial interests in a states that all beneficial interests in a mixed bank account are subject to a mixed bank account are subject to a ‘first in, first out’ rule.‘first in, first out’ rule.

Mixed property in the hands of Mixed property in the hands of trustees from more than one trusttrustees from more than one trust

Presume that a trustee mixes $1000 from Trust A Presume that a trustee mixes $1000 from Trust A with $2000 from Trust B and $3000 from Trust C, with $2000 from Trust B and $3000 from Trust C, in successive days, totalling $6000. in successive days, totalling $6000.

On the next day the trustee withdraws $2000 On the next day the trustee withdraws $2000 from the account, leaving a balance of $4000. from the account, leaving a balance of $4000. Under the rule in Under the rule in Clayton’s caseClayton’s case the withdrawal is the withdrawal is presumed to come from Trust A’s funds and from presumed to come from Trust A’s funds and from Trust B’s funds. Trust B’s funds.

The remaining funds in the account are therefore The remaining funds in the account are therefore said to be traced to Trust B for an amount of said to be traced to Trust B for an amount of $1000, and Trust C for an amount of $3000. $1000, and Trust C for an amount of $3000.

Mixed property in the hands of Mixed property in the hands of trustees from more than one trusttrustees from more than one trust

The rule in The rule in Clayton’s caseClayton’s case is difficult is difficult to apply where the facts concern to apply where the facts concern large estates with complex bank large estates with complex bank accounts. It also works unfairly accounts. It also works unfairly against the first victims of a breach against the first victims of a breach of trust, by practi cally eliminating of trust, by practi cally eliminating their attempts to trace. their attempts to trace.

Mixed property in the hands of Mixed property in the hands of trustees from more than one trusttrustees from more than one trust

In Australia it has been found that if there In Australia it has been found that if there are large numbers of beneficiaries it is are large numbers of beneficiaries it is better to apply the better to apply the pari passupari passu rule to rule to prevent injustice: prevent injustice: Re Australian Home Re Australian Home Finance Pty LtdFinance Pty Ltd [1956] VLR 1. [1956] VLR 1. More More recently, Campbell J overviewed the entire recently, Campbell J overviewed the entire history of the rule in history of the rule in Clayton’s caseClayton’s case and and decided that it should not be applied in decided that it should not be applied in Australia: Australia: Re French Caledonia Travel Re French Caledonia Travel [2003] NSWSC 1008 [2003] NSWSC 1008

Tracing property into the hands of Tracing property into the hands of third partiesthird parties

Bona fide purchasers for value Bona fide purchasers for value without notice of the breach of trust without notice of the breach of trust are immune from tracing claims are immune from tracing claims

However, if a third party recipient However, if a third party recipient has actual or constructive knowledge has actual or constructive knowledge of the breach of fiduciary duty, or if of the breach of fiduciary duty, or if the recipient is a volunteer, the the recipient is a volunteer, the property may be traced into his or property may be traced into his or her hands. her hands.

Tracing property into the hands of Tracing property into the hands of third partiesthird parties

Foskett v McKeownFoskett v McKeown [2000] 3 All ER [2000] 3 All ER 97, a trustee misappropriated money 97, a trustee misappropriated money from the trust fund and used it to from the trust fund and used it to pay the last two of five premiums on pay the last two of five premiums on a life insurance policy. The policy a life insurance policy. The policy was in favour of the trustee’s was in favour of the trustee’s children. After the trustee’s suicide, children. After the trustee’s suicide, the children received the policy the children received the policy money money

Tracing property into the hands of Tracing property into the hands of third partiesthird parties

The beneficiaries under the trust claimed The beneficiaries under the trust claimed that they were entitled to trace their that they were entitled to trace their money through the policy into the sum money through the policy into the sum paid out by the insurers. They believed paid out by the insurers. They believed they were entitled to a proportionate they were entitled to a proportionate share of the policy money. share of the policy money.

The majority of the Court of Appeal upheld The majority of the Court of Appeal upheld the beneficiaries’ claim but limited it to the beneficiaries’ claim but limited it to the amount of the two premiums together the amount of the two premiums together with interest. The beneficiaries were with interest. The beneficiaries were denied a proportionate share of the policy denied a proportionate share of the policy proceeds. proceeds.

Tracing property into the hands of Tracing property into the hands of third partiesthird parties

A majority of the House of Lords upheld an appeal by A majority of the House of Lords upheld an appeal by the beneficiaries: the beneficiaries: . Lord Browne-Wilkinson said at 102:. Lord Browne-Wilkinson said at 102:Therefore the critical question is whether the assets Therefore the critical question is whether the assets now subject to the express trusts of the purchasers now subject to the express trusts of the purchasers trust deed comprise any part of the policy moneys, a trust deed comprise any part of the policy moneys, a question which depends on the rules of tracing. If, as a question which depends on the rules of tracing. If, as a result of tracing, it can be said that certain of the result of tracing, it can be said that certain of the policy moneys are what now represent part of the policy moneys are what now represent part of the assets subject to the trusts of the purchasers trust assets subject to the trusts of the purchasers trust deed, then as a matter of English property law the deed, then as a matter of English property law the purchasers have an absolute interest in such moneys. purchasers have an absolute interest in such moneys. There is no discretion vested in the court. There is no There is no discretion vested in the court. There is no room for any consideration whether, in the room for any consideration whether, in the circumstances of this particular case, it is in a moral circumstances of this particular case, it is in a moral sense ‘equitable’ for the purchasers to be so entitled sense ‘equitable’ for the purchasers to be so entitled

Defences Defences

Consent, acquiescence and releaseConsent, acquiescence and release LachesLaches

Relief from liability Relief from liability

Indemnity provided in the trust instrument Indemnity provided in the trust instrument Indemnity provided by co-trusteesIndemnity provided by co-trustees Excusing a breach of trust- acted honestly Excusing a breach of trust- acted honestly

and reasonably, and ought fairly to be and reasonably, and ought fairly to be excused for the breach of trust and for excused for the breach of trust and for omitting to obtain the direction of the omitting to obtain the direction of the Court in the matter in which the trustee Court in the matter in which the trustee committed the breach committed the breach