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EQUITY AND TRUSTS

TRUSTEES 1

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Trustees and their role in

administration of the trustFirst we will considersome generalprinciplesandthen:

Appointmentandretirement oftrustees

Powers

Breach

Remedies

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General Principles

Istrusteeship a privilege?

Trusteessubjectto many dutiesand powers

Personalliability

Majority paid professionalsprovision forpaymentusually madein the trustinstrument

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Duties and Powers A duty isan obligation andmust be carried out /

powersare discretionary - conferan element of

choice upon the trustee asto whetherto exercise it ornot.

Dutiesand powers oftrusteesare impliedinto trusts

by the rules oflaw (statutory and equitable).

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Effect of trust deed Scope of the dutiesand powers outlinedin the trust

instrument trustinstrumentis first place to see ifithasvariedimpliedrules.

Normally are varied particularly where trustee isprofessionalproviding forremuneration, trusteesliability + increase trustees powers.

Implied powersbefore the Trustee Act 2000 (TA

2000), were quite narrow

did notallow trusteesmodern investment opportunities. Most expresstrustsvary statutory and common law ruleswillprobably continue to do so.

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Old and new rules will need

consideration Next few lectures will concern generallaw i.e.

the default position, in particularthe TA 2000.

TA 2000 does not codify the law, certain areasstillgovernedby the oldrules.

Will examine both oldandthe new rulesandidentify whichrulesapply in any given situation.

NB itisimportantto familiarise yourself withthegeneral statutory and case law provisions ANDthe common waysthey are alteredby expressterms.

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The standard of care

S1 TA 2000 provides general standard of care. See Schedule1 :investment, acquisition ofland, appointment ofagents.

When standarddoes notapply e.g. when exercising duties on beingappointed, exercising powersunderthe TA 1925 orTLATA 1996, then

general equitable duty of care applies: see Speightv Gaunt (1883) 9App. Cas. 1. The trustee shouldhave taken allthose precautionswhichan ordinary prudent man ofbusiness wouldhave taken inmanaging similaraffairs ofhis own.

NB duty of care can be expressly excluded (Sch1, para7): if or in sofar as it appears from the trust instrument that the duty was not

meant to apply Professionally draftedtrustinstrumentsusually include express

exemption clause excluding the statutory duty of care (willalsoexclude the general equitable duty of care).

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Commencement and

termination of trusteeship

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Appointment of trustees

Anyone with necessary capacity to manageown affairschildren notunders20 LPA1925 (can be trustees ofresulting trustsee

e.g. Vinogradoff [1935] Wn 68). Corporations: mustsatisfy trust corporation

statusdefinition: (a) public trustee, trusteein bankruptcy, treasury solicitor(b) court

appointee, (c) listin s3(4) Public Trustee Act1906.

Most private truststrust corporationsarebanks.

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Appointment of trustees S14(2) Trustee Act 1925 sole trustee

cannot give validreceipt

S34 TA 1925 land: 4 trustees maximum.

Does notapply to personalty but

generally adheredtoo

S36(6) TA 1925 appointment ofadditionaltrustees.

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Appointment of trustees

Appointment ofthe firsttrustees made by

settlor. Can appointself oranyone withnecessary capacity and who agrees.

Can give powerin trustto othersto appoint.

Ifthere are no trustees willing andable to act

when the trust firsttakes effect court will notallow trustto fail forwant oftrusteesand willmake an appointment.

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Appointment of subsequent

trustees Trustisindependent ofsettloronce commenced so no

powerofappointment

Can retain this powerby including itin the instrument

Subsequenttrustees who else can appoint?

S.36 TA 1925 deals withappointment ofadditional /

substitution trustees.

Additionaltsacttogetherwith existing trustees when

numbersdrop / expertise needed (musthave reftorestrictions e.g. S34 TA 1925).

Substitutionsreplace one ormore existing trustees.

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S.36 TA 1925

Additionaltrustees can be appointed where asole trustee (otherthan at. corporation wasappointed) orno more than 3 trustees.

Appointee (by orderof priority):(a) person namedin trustinstrument

(b) surviving / continuing trustees

If no appointmentthen can request courtunders41 TA 1925.

S36 saysmay appointanotherperson i.e.nothimself.

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Appointment by substitutionNecessarily involvesretirement / death / removaloftrustee

Appointercan appointselfunlike s36(6)Who can appoint? Anyone named forthis purposein trustinstrument (in orderof priority):

Surviving orcontinuing trustees

Personalreps oflasttrustees The court should notbe used where others can

appoint even when bensask forreferral.

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S.36(1) TA 1925Sets out circumstances forappointment:

(1) Trustee dead

(2) Trustee remains outside of UK for>12 months(3) Trustee unfit orrefusesto act

(4) Trustee isinfant

(5) Trustee asksto be discharged

Benshave no influence (otherthan in ts ofland orwhereprovided forin tinstrument) + there is no statduty to takeaccount oftheirviews. Bens can influence when all ofage/competent/represent whole beneficial entitlementseeSaundersv Vautier (1841) 4 Beav.115.

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S11 TLATA 1996

Position modifiedin respect ofts ofland:

S11 obligation to consult withbens who are entitledtointerestin possession + to give effectto majority wishes

(n.b. can be excludedin instrument)S19 where no person to appoint new tsand bensare of

full age / capacity andare entitledto entirety oftproperty: can direct one ormore tsto retire / appointnew trustees

S20 benshave similarright where trustee is mentallyunable andthere is no one unders36 TA 25 to appoint.

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Retirement of trusteesRetirement: s.36(1) TA 1925

Outgoing trustee retires on appointmentof new trustee

Can be usedto bring about forcedretirement (butrestrictedto sitsset outabove).

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RetirementS39 TA 1925: retirement withoutsubstitution permittedif:

two trustees orcorporation remain

deedis completed

consent of co-trusteesandanyonewith powerofappointment obtained(by deed)

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Ss 19 & 20 TLTA 1996

Contain provisionsthat may be usedby

bensto obtain trustee retirement.

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Removal of trusteesCan be done by othertrustees (e.g.by

refusalto take partin appointment of

new trustee but only where Act ortrustinstrument provides)

Where trustee agrees = retirement.

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Removal under s41 TA 1935

Courthas powerto appoint newtrustee assubstitute orin addition.

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Courts inherent powers

Courthasinherent powerto remove

trustees even where fit providedthisis

forbenefit oftrust.

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DisclaimerAppointmentastrustee can be disclaimed

Provided: must nothave done any actto

indicate acceptance

Disclaimercan be oral / written impliedby

conduct (e.g.inactivity) Evidence neededto avoid future liability.

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Vesting of trust property

T property mustbe vestedin trustees

Settlormustdo this orcause itto be done bymethodappropriate to type of property

Can self-declare astrustee

If property is nottransferredto trusteesthen itwillbe incompletely constituted.

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Vesting

Existing trusts normally contain vesting

declaration see s40 TA 1925

S40: ifappointment made by deedand

it containsvesting declaration property

becomesvestedin trustees.

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Trustees duties and

powersIn thissection we will considerthe following:

1. The actionstrustees MUST take in theadministration ofthe trust (DUTIES).

2. The mattersabout whichthey have a

CHOI

CE (powers).3. The standard of care in relation to duties

and powers.

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Initial duties

Upon appointmenttrusteesunderduty to to familiarisethemselves withthe details ofthe trusts, the trust property andthe terms ofthe trustinstrument

+

To collectin andsafeguardthe trustassets. The trustees mustmake sure thatthe trust property isin astate ofsecurity andunderthe joint control ofallthe trustees. NB the extent ofthisduty: Re Brogden (1888) 38 Ch. D 546; Buttle v Saunders[1950] 2 AER 193. Must ensure no breachby previoustrustees

Trusteeshave a continuing duty to safeguardthe assetsandthedocuments giving title. Continuing duty also to ensure thattheassetsremain vestedin the joint names ofallthe trustees.

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Duty to invest

Trusteeshave aduty to investbutapower

overwhatto investin

Suchinvestmentsare governedby statutory

default provisions (previously TrusteeInvestment Act 1961 (TIA 1961) now TA 2000

orby express powerin trustinstrument).

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TIA 1961Appliedin so faras not expressly excludedby trust

TI

A listedauthorisedinvestmentsin Schedule 1(narrower low riskand widerrange higherriskinvestments). Trustees permittedrisky investmentsin equities for firsttime.

Widerrange investments governedby certain criteria:quoted companies / shares fully paidup / companywith capital of1m + dividends paid forprevious fiveyears.

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TIA 1961Imposedduties

6(1) requiredregard fordiversification +

suitability ofinvestment

6(2) certain investmentsrequiredadvice

to be soughtby trustee

6(3) requirementto determine when to

seekadvice aboutretainedinvestments.

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TIA 1961Consideredrestrictive land / private company shares not

permitted

Splitting funda crude form ofrisk management potentiallylowering returns

Requirements of widerrange investmentsactually made themlow risk

Requirement foradvice burdensome

Act normally excludedtherefore.

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Express clausesExpress clausesusedto allow forwiderinvestment. Re Harari [1949] 1 AER 430

such clausesshouldbe given plain / literalmeaning

Example ofasimple express clause:

To investas freely asifthey were absolutely

beneficially entitled

.Trusteesthereby permittedto investasifabsolute owners.

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Trustee Act 2000

Trustee Act 2000 now governstrusteespowers ofinvestment where no expressprovision made (i.e..they are default

powers).

Appliesto alltrusts whether createdbefore orafterit comesinto force.

Existing trusts now have the new investmentpowers.

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General power of

InvestmentS.3 TA 2000 general powerofinvestment:

atrustee may make any kind ofinvestment

thathe could make ifhe were absolutelyentitled to the assets ofthe trust

Note thatthe general powerofinvestment

does notauthorise the purchase of land

(governedby S.8).

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Meaning of invest?

Whatdoes invest mean? See Re

Wragge [1919] 2 Ch 58:

to apply money in the purchase of

some property from whichinterest or

profitis expectedand which property is

purchasedin orderto be held forthesake ofthe income whichit will yield

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When is an investment an

investment?Whetherthe powerto investderives from s3 oranexpress clause we needto know what countsasaninvestment?

Re Power [1947] Ch 572 house foroccupation by abeneficiary producing no income notan investment.

Modern judicialattitudes investmentsthataccrue invalue consideredlegitimate see fore.g. Cowan v

Scargill [1985] Ch 270, perMegarry VC theprospects ofthe yield ofincome and of capitalappreciation bothhave to be consideredin judgingthe return from the investment.

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Principles governing

investment Harriesv Church Commissioners perNicholls VC: trustees

shouldseek the maximum return, whetherby way ofincome orcapital growth Known as concept of

maximum ortotalreturn. EN 22 (explanatory note) the trustees can investin a

way which whichis expectedto produce an income orcapitalreturn.

No definition ofinvestmentin TA 2000. ENsare not partofthe Act isitincome producing (traditionalapproach) orcan investmentinclude income orcapitalappreciation inaccord with modern judicialview?

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Investments in landS.8 TA 2000 specialrulesre land:investmentsin freehold orleaseholdland.

UnderTI

A 1961 investmentsin land notpermitted exceptby express clause (but noteeffects of Re Wragge and Re Power).

Authorisedin UK ifthe landis:

(a) asan investment

(b) foroccupation by abeneficiary

(c) forany otherreason

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Protection for beneficiariesTrustees notabsolute owners ofassets.Beneficiaries may feelinclinedto investspeculatively.Law Commission consideredthatbeneficiaries needprotection againstinvestmentrisks. Legislation to setoutspecifiedtrustee duties when making investment.Hence:

S4 StandardInvestment Criteria

4(3):

- (a) suitability

- (b) diversification

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Investment criteria EN 23 investments mustbe suitable. Suitability

relatesbothto the kind ofinvestment proposedandto the particularinvestmentasan investment ofthat

kind Includes considerationssuchasthe size andrisk of

the investment, appropriate balance between income/capital growth (life tenantsincome and capital forremainder man)

Includesany relevant ethical considerations

But compare Cowan/Harriesre ethicalconsiderations.

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Investment criteria In Cowan trustees must putaside theirown

personalinterestsandviews

In Harries investmentsto be made solely onthe basis ofinvestment criteria

Trustees can only make a financially

disadvantageousinvestmentdecision for

ethicalreasonsin extremely limitedcircumstances e.g. where aims conflict with

aims of charity (e.g.tobacco/cancer)

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Standard investment

criteria Undercriteriathere is need fordiversification

Modern portfolio theory

See Hoffmann J.in Nestle v NationalWestminsterBank PLC (1stinstance, 29th

June 1988 unreportedaffd [1994] 1 All ER118 CA)

Trusteesjudgedby the standards of currentportfolio theory risklevel of entire portfolioratherthan the riskattaching to eachinvestmenttaken in isolation.

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Trustees subject to duty of

careDuty of care containedin s1 TA 2000.

EN 25 asthe exercise of the powerof

investmentissubjectto the duty of care

in S1, trustees may needto have regard

to othermattersin addition to the SIC.

However, the SIC willbe of centralimportance in every case.

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Advice

TIA 1961 requiredadvice to be soughtand considered foranythingotherthan

low riskinvestments. (See LC Report 260) UnderTA 2000:

S. 5 before investing trustees musthave obtain and consider

properadvice withregardto SIC

Unless 5(3) T reasonably concludesitunnecessary orinappropriate

EN 26: example of where investment = small cost ofadvice isdisproportionate

Trustees possessthe skills

Ss(4) properadvice advice of person reasonably believedbyT to be able to give it

Ss (2) advice when reviewing aboutvarying investments.

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Other safeguards

NB statduty of care set outin S1TA 2000 applies when exercisingthe powerofinvestment, whencarrying outthe section 4 and 5

dutiesand exercising the powerundersection 8 to buy land

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General investment duties

Cowan v Scargill [1985], perMegarryVC:

Duty oftrusteesto exercise theirpowersin the bestinterests ofthe presentandfuture beneficiaries ofthe trust, holdingthe scalesimpartially between the

different classes

Thisisa paramountduty.

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Two points to note Bestinterests = financialinterests (but caveat

below) power ofinvestment mustbe

exercisedto yieldthe bestreturn, judgedinrelation to the risks ofthe investmentin

question; income yield & capitalappreciation

bothto be considered

Ts mustact fairly between the beneficiaries.

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Also

Ts must putaside own interestsandviews

Ts may needto actdishonourably ifrequired (seeButtle v Saunders [1950] 2 All ER 193)

Caveat benefitdoes notinevitably andsolelymean bens financialbenefit. If only bensare alladults withstrict moralviews might notbe to theirbenefitto make investmentsto whichthey morally

object. In v.rare cases Ts can take into a/c non-financial considerationsleading to actual financialdisadvantage.

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Standard of care Tsunderduty to meetstandard of care in Learoyd

v Whiteley (1887) the duty including the duty toseekadvice on matters T does notunderstandand on receiptacting withsame degree ofprudence.

UnderLearoyd standard forinvestmentissuchcare isasan ordinary prudent man wouldtake ifhe were mindedto make investment on behalf ofothers forwhom he felt morally boundto provide.NB Replaced by S1 TA 2000.

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C

owan v ScargillFacts: mineworkers pension fund. V wideinvestment powers. Ten trusteesaidedbyexperts. Five from NUM refusedinvestmentplan unless overseasinvestments withdrawnand no energy industriesin competition withcoal.

Courtheld: Tsin breachunlessadoptinvestmentstrategy hadto actin bestinterests ofbensand putaside personalviews.

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Review of investments

Review requirementsundersection 4(2) trusteemust from time to time review the trustinvestmentsand considerwhetherthey shouldbevaried

EN 24 S4(2) codifiesthe common law position,underwhich atrustee witha powerofinvestmentmustundertake periodic reviews oftheinvestments: Nestle v National WestminsterBank(supra)

Must obtain and considerproperadvice whenreviewing see S.5(2).

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When will these powers

apply?Powerofinvestmentunders3 appliesto alltrusts

TA Ss 6 powerisadditionalto any powers conferred on trusteessubjectto any restriction

Ss 9 & 10 contain similarprovisionsregarding landunders8. NB poweroftrustee to apply to courtunderVariation of Trusts

Act 1958 ors57 TA 1925 to widen investment powers. Raresince TIA 1961 because difficultto extendbeyond modernpowersin statute. Re Kolb principle: Re Kolbs WT [1962] Ch.531, compare with Trustees ofthe British Museum v AG [1984]

1 WLR 418). Investment powers now extendedunderTA 2000.

Furtherdutiesand powers willbe consideredin the nextlecture.