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Lecture

10. Trusteeship - Rights & Liabilities

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Department
Law
Course
JSB171
Professor
All Professors
Semester
Spring

Description
RIGHTS OF T RUSTEES (Indemnity & Effect of Bankruptcy) Right to Remuneration • Original rule—no right to remuneration, unless within trust document o If clause giving right to remuneration inserted by trustee  court examine harshly— will not give effect unless express and capable of explanation • Court has the jurisdiction to administer remuneration: s101(1) • In determining amount—may take remuneration for— s101(2) (unless contrary direction in the instrument) o Professional and business charges for business transacted, o Time expended, o Acts done by persons connected with the firm;  Includes acts which could have been done by a trustee even where not in the business • Business able to withdraw money out of a trust for proper claims of remuneration, so long as the charge was a floating charge: Perpetual Trustees WA Ltd v Kelly (1993) Right to apply to court to get cost for something questionable • Trustees right to apply to court to determine s96(1) o interests of the beneficiaries o Discretion or power exercised which might later be called into question  authorisation for advantageous act, outside of trust powers • Court has power to make an order that the costs will be taken out of the estate: s100 Rights of indemnity (beneficiaries behaving badly) Pay reasonable expenses from trust [Trustee pays  refunded from trust] Trustee can reimburse themselves from trust for reasonable expenses incurred in the execution of their duties: s72 A trustee may reimburse himself or herself for or pay or discharge out of the trust property all expenses reasonably incurred in or about the execution of the trusts or powers. • An equitable charge over the trust property until the indemnity is satisfied • Cannot be excluded by trust instrument: s65 o Cf. at general law • Limits o Trustee acting in breach of trust liable for own cost  BUT If some beneficiaries consenting to unauthorised acts, only they are liable  BUT if made in good faith & a benefit is conferred on the trust, court may allow allowance for costs incurred o Trustee in debt to the trust must repay debt before recovering remedy Exonerate liabilities from beneficiary [Beneficiary pays liability directly] Andrew Trotter LWB241 Trusts Trustee can require beneficiary of legal age and capacity to pay reasonable liabilities: Hardoon v Belilios [1901] AC 118 (trustee forcing beneficiary to pay for shares) = Without paying out of their own pocket first • Immaterial whether the beneficiary created the trust • Can also be against multiple beneficiaries: Broomhead v Broomhead [1985] VR 691 (trustee corporation—directors beneficiaries  directors required to pay corporation’s liabilities) o In proportion to their beneficial interest o even where members are insolvent, or beneficiary has disclaimed his interest → Creditors can recover from trustee; trustee has right to subrogation—indemnified by beneficiaries o Claim against beneficiaries personally if trust property does not satisfy debt o Trustee in breach → right of subrogation lost; claim against trustee personally o Non-trust creditors of trustee → recoupment but not exoneration On Bankruptcy of trustee • Trust property is not divisible against the creditors of a bankrupt trustee: s116(2)(a) Bankruptcy Act. o Except where creditor had a personal right to be paid out of the trust (right of recoupment)  Right of recoupment—can satisfy the trust and non-trust creditors  Right of exoneration (indemnity)—can only satisfy trust creditors (although conflicting authorities) • Options open to beneficiary: o Trustee acting in breach of trust → unsecured creditor o No ruling on the breach of trust → may be able to trace the property (identify it as trust property and it can be removed from the bankruptcy) - Loss may be proven on a bankruptcy: Bick v Motley (1935) - Discharge from a bankruptcy will not include personal actions for a fraudulent breach of trust: s153(2)(b) Bankruptcy Act 1966 • Payments made by an insolvent trustee can be set aside as a voidable preference: s 122 Bankruptcy Act o because other creditors would have had access to the property through a right of exoneration o Unclear whether a beneficiary is a creditor under s 122  beneficiary is a creditor if a trustee has admitted that a sum is payable to a beneficiary: Octavo Investments v Knight (1979) Payment of money into the court • Trustee is able to have the trust money paid into court, and have it dealt with by the rules of the court: s102 Trusts Act. o Could be done where:  Need to pay an infant’s share: Re Hill [1924]  Where it is difficult to determine an entitlement to trust moneys: Hockey v Western [1898] Andrew Trotter LWB241 Trusts LIABILITIES OF TRUSTEES Courts have a wide power to review decisions of trustees on application of beneficiary or other person with interest: s8(1) • Court cannot review unfettered discretion if given: Karger v Paul (all estate left to husband on trust with unfettered discretion—paid all out to himself—nothing left for remainder  consistent with purposes of trust) • Court considers whether trustee has acted— o in good faith, o upon genuine consideration and in accordance with the purposes of the discretion was given: Karger v Paul (all estate left to husband on trust with unfettered discretion— paid all out to himself—nothing left for remainder  consistent with purposes of trust) Liability for breach of trust = fiduciary duty | duty of care in investment | duty to strictly conform to and carry out the trust • Liability for trustees joint and several (due to failure to supervise): Re Harrison [1891] o UCPR obligation to sue all defendants if jointly and severally liable: r64(1) UCPR EXCEPT— o If default is committed by co-trustee acting as agent and there was no default in choosing co-trustee as agent o If the court chooses to excuse a trustee: s76 TA (if “has acted honestly and reasonably, and ought fairly to be excused”) • Trustee may seek a contribution from the solvent co-trustees: Bahin v Hughes (1886) EXCEPT trustee must pay all where— o profited from the breach of trust → indemnification to the extent of the benefit received; o acted as agent and reliance on the co-trustee as agent was justified o trustee is a beneficiary under the trust → all of beneficial interest and then ordinary right of contribution: Chillingworth v Chambers [1896] 1 Ch 685 (P&D trustees of a will—one becomes beneficiary—improper investment  no right to claim contribution for breach from other trustee → trustee who was beneficiary paid all loss—able to be paid for out of beneficial interest)  Extends to amount of beneficial share and not just the benefit received Liability after end of trusteeship • Death of trustee → estate must make good the liability of the trustee: Gibbons v Taylor(1956) • Bankruptcy o Loss may be proven on a bankruptcy: Bick v Motley (1935) o Remain liable for fraudulent breach of trust: s153(2)(b) Bankruptcy Act • Retirement o Remains liable for own breaches but not for successor: Head v Gould [1898] o New trustee is not liable for braches of his or her predecessors: Re Straham (1856)  UNLESS discovers the breaches and takes no action Immunity clause • Limitation of liability is not contrary to public policy: Helvetic Investment Corporation Pty Ltd v Knight (1984) • Where exclusion of liability is for negligence or breach of trust, court will construe it narrowly: Hollier v Hollier Motors AMC Ltd [1972] Andrew Trotter LWB241 Trusts • Will not be allowed to cloak a fraud, especially against creditors: Armitage v Nurse [1997] Andrew Trotter LWB241 Trusts R EMEDIES FOR B REACH OF T RUST • Aim—to put beneficiary in the position they would have been in if no breach occurred: Re Dawson [1966] • Beneficiaries must elect between— o personal remedies: compensation for losses arising for breach of trust o proprietary remedies: recovering misappropriated property which still exists in identifiable forms Personal Remedy—Equitable Compensation [→Defences] • Breach of trust causes loss → equitable compensation or account of profits o Equitable compensation is a liability in the nature of a debt: Wickstead v Browne (1992) • To place the trust in the same place as if no breach was committed: Re Dawson [1966] • Assessed at date of judgment: Re Dawson [1966] o consider the increases and decreases as at the date of judgment o interest on money lost to trust –  Mere negligence → simple interest  Wilful default → compound interest • Must be causal connection between the breach of trust and the losses to the trust estate: Target Holdings Ltd v Redferns (a firm) [1995] (negligent loan for L2 million) o Compensation not recoverable for losses that would have been suffered in any case o Not responsible for intervening acts of third parties: Youyang Pty Ltd v Minter Ellison (2003) Methods of Assessment • Failure to make a gain which would have otherwise accrued to trust: Elders Trustee v Higgins (1963) o Failure to invest → principal + profit or interest that would have obtained o Discretion to choose between two investments → only principal + interest: Robinson v Robinson (1851) • Setting off losses and gains— o Under common law—permissible only where the gain relates to the same transactions, same breach of trust: Barclay’s Bank v Bartlett (Bank able to set off profit made on one project against loss made on another) o Statute—gains resulting from any investment may be set off whether in breach of trust or not: s30C (wider) • Loss— o Fall in value of poor investments o Fall in value of retained trust assets which should have been sold: Jaffray v Marshall o Money lent → may charge the trustee with principal plus profit made • Account of profits made on breach o BUT trustee may be able to keep their commission: Boardman v Phipps [1967] Nature • Equitable compensation is a liability in the nature of a debt: Wickstead v Browne (1992) Andrew Trotter LWB241 Trusts Proprietary remedies—following & tracing Trust property can be recovered through the process of following or tracing where it remains identifiable. (→Gives beneficiary priority in bankruptcy) Takes effect as— • Constructive trust—Used to confer beneficial ownership o Useful when—value of property ↑ • Equitable charge/lien—security over the property which may be discharged by payment of money, or out of proceeds of sale of property, can have charge over money o Useful when—value of property ↓ • Subrogation—Where
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