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Breach of trust

- A trustee liable for breach of trust if he fails to perform his duties properly or exceeds them
- A breach of trust occurs if a trustee does any act which he ought not to do or fail to do any
act which he ought to do
- A breach of trust will also arise with respect to any act of commission or omission in the
administration of a trust
- The beneficiary is required to establish a causal connection between the breach of trust and
the loss suffered either directly or indirectly by the trust
- If the trust suffers no loss, the beneficiary is entitled to claim any profit accruing to the
trustees as a result of a breach

1. Liability of trustee is compensatory


- The objective is not to punish trustee but to compensate beneficiary
- A trustee who fails to comply with his duties is liable to make good the loss to the trust esate
- The purpose is to put the beneficiaries in a position as he would have been in had he not
sustained the wrong or which he was being compensated

Target Holdings Ltd v Redfern ( A Firm) and anor – the plaintiff had agreed to lend 1525000 on the
security of 2 properties which were apparently being purchased for 2000000 but which were in fact
being acquired for 775000. The defendant solicitors who were acting in the normal for the
purchasers and the plaintiff mortgage, were holding the mortgage advance on trust for the plaintiff
with authority to release it to the purchaser only upon receipt of the duly executed conveyances and
mortgages of the property. However, they release the fund several days before the execution of
these documents. The subsequent loss made by the plaintiff as the result of insufficiency of the
mortgage securities would have been incurred even if the defendants had complied with their
instructions.

The court held the obligation of a trustee who had committed a breach of trust was to put the trust
fund in the same position as it would have been if no breach had taken place but the decision was
revised by the House of Lords and stated by holding that the plaintiff did not suffer any loss which
could be attributed to the solicitors premature payment

2. Liability of the trustee is personal and not vicarious


- A trustee is liable for his own wrong and not for those of his co-trustee unless if there is a
breach by co-trustee, trustee will be at fault

Townley v Sherborne – the court held that a trustee is liable for his own breaches and not for those
of his co-trustee

- A trustee is liable to pay money out of his own pocket to compensate for a loss to the trust
which known as personal claim

Hasbah v Mohamed Zain – where one of the three executors was a semi-illiterate woman who
had little or no business knowledge. One of the two other two executors was proved to have
committed various breaches of trust. On the liability of the three executors for the breach of
trust of one of them

The court held that semi-illiterate executrix acted reasonably and honestly and ought fairly to be
execused. The other two trustees were jointly liable for the breaches committed by the
defaulting trustees. They were not entitled to any relief under sec 60 of Trustee Ordinance 1929
3. Breaches before appointment
- A trustee is not liable for breaches of trust committed before his appointment in the
absence of evidence indicating a breach of trust
- On appointment, trustee should examine the books and documents relating to the trust and
should ensure that the trust property is vested in him
- If in the course of his inquiries he discovers a breach of trust, he should take steps against
the former trustees unless for some reason he can show that such proceedings is useless

4. Breaches after retirement


- A trustee remain liable after retirement for breaches committed by him during his term of
office. If he died, his estate will be liable
- He will not be liable if the breach is committed after his retirement
- He will be liable if he retire in order to facilitate a breach of trust

Head v Gould – a property was settled on Mrs Head for life with remainder to her 3 children. The
settlement contained an express power of advancement. As mrs head was continually in financial
difficulties, her daughter asked the trustees for advance on her share to help her mother. The
trustee did and when the daughter share was exhausted, she pressed more and the trustee refused
in circumstances asked to be released from the trusteeship, suggesting that new trustees should be
sought who are willing to make the advance. The trustee was replaced and advances were made to
help mrs head and the trust property were sold off. As a result, the entitlement of one the other
children was lost.

The court held that as regards to the old trustees, they were not liable for the breaches ccommitted
by the new trustee.

5. Breaches of trustee – beneficiary


- Where trustee in breach is also a beneficiary, his beneficial interest bear the loss against the
other beneficiaries
- This liability applies although the beneficial interest was acquired by him derivatively even
by purchase

Chillingworth v Chambers – a trustee will be required to indemnify his co-trustees to the extent of
his beneficial interest and not merely the extent that he has personally received some benefit from
the breach

Remedies to the beneficiaries

1. Personal remedy / liability


- When there is breach of trust committed by the trustee, he will be personally liable to the
beneficiaries for any benefit which he receives as a result as well as any loss suffered by the
trust
- Trustee is liable to pay money out of his own pocket to compensate the loss to the trust

Re Charpman – trustee will not liable if the trust fund loses value because there is a general
decline in the market value of the trust assets
Segbedzi v Segbedzi – a trustee who by his own neglect allowed his fellow trustees to sell the
principal asset of the trust at an under value was held liable even though he did not participate
actively in the breach.

2. Joint liability
- Where two or more trustees are involved in committing a breach, their liability is joint and
several and the beneficiaries may sue all or any of them
- They are required an equal sharing of the liability regardless of fault

Bahin v Hughes – a testator left 2000 to be held on trust by his daughters. Miss Hughes, Mrs
Edwards and Mrs Burden for the benefit of Mr Bahin for life, remainder to her children. Miss Hughes
managed the trust affairs alone and invested the funds in a mortgage which was an authorised
investment. The security proved insufficient and Mr Bahin sued all the trustees for losses. Mrs
Edwards and Mrs Burden claimed indemnity on the ground that they had not participated in the
administration of the trust

The court held that a passive trustee was liable with the active trustee

3. Indemnity – s35, s64, s66


- A trustee may be given an indemnity for losses against his co-trustee as opposed to a mere
contribution
- Example of indemnity can be awarded
1. Fraud – where one trustee is fraudulent, the other will not be liable
2. Solicitor and trustee – solicitor-trustee had exercised such controlling influence that the
other trustee unable to exercise independent judgement as they acted on the advise or
control of the solicitor

Re Partington – the court held that the solicitor-trustee undertook the whole administration of the
trust and he had not communicated sufficiently with the other trustee concerning the affairs of the
trust

3. Beneficiary and trustee- if the co-trustee was a beneficiary under the trust, then the
breach may be made good out of his own interest as far as possible before applying the
contribution rule

Defence to a claim for breach of the beneficiaries

1. Knowledge and consent of the beneficiaries


- A beneficiary who has freely consented to or concurred in a breach of trust is not entitled to
renege on his promise and bring a claim against the trustees
- In order to be estopped from bringing a claim against the trustees, the beneficiary is
required to be full age and sound mind with full knowledge of all the relevant facts and to
exercise independent judgement
- If a trustee participated in a breach of trust, consent in it, he will not be able to claim against
the trustee

Spellson v George – consent include active encouragement or inducement, participation with or


without direct financial benefits and express consent. Consent may also inferred from silence and
lack of activity with knowledge. The trustee must know something of the consent prior to the
breach.
Nail v Punter – the husband of a life tenant under a trust encouraged the trustees to pay him money
from the trust fund in breach of trust. The life tenant commenced proceedings against the trustees,
but died shortly afterwards. The husband became a beneficiary and continued the action against the
trustees breach of trust

The court held that the action could not succeed because the husband was a party to the breach

- The trustee are required to prove that the consent was not obtained as a result of undue
influence

Re Pauling’s Settlement Trust – the trustees claimed that the children were not entitled to bring an
action because they had consented to the advancements. The court rejected this argument and
decided that the consent was not freely obtained from the children because they were under the
influence of their parents who benefited from the advancements

2. Statutory Protection – s63, s64


- Under the inherent jurisdiction of the court, a beneficiary who instigated the breach of trust
may be required to indemnify the trustees
- The section 63 provides three main ingredients for granting relief, namely:

(a) the trustee acted honestly;


(b) the trustee acted reasonably; and
(c) the trustee ought fairly to be excused in respect of the breach and omitting to obtain
directions of the court.
These ingredients are cumulative and the trustee has the burden of proof

Perrins v Bellamy - The trustees of a settlement were erroneously advised by their solicitor that they
had a power of sale. They sold the leaseholds comprised in the settlement, thereby diminishing the
income of the plaintiff, the tenant for life. The plaintiff commenced an action against the trustees for
breach of trust.

The court in its discretion granted relief to the trustees for they acted in good faith in reliance on the
advice of their solicitors

Limitation – s22(1) x limitation time (fraud/breach trust) s22(2) limitation 6 yrs – no longer in
possession – recover trust

- The limitation periods concern the time limits during which a beneficiary is entitled to
pursue a cause of action in respect of trust property.

Re Timmins – the court held that the intention of the statute was to give a trustee the benefit of the
lapse of time when, although he had done something legally or technically wrong, he had done
nothing morally wrong or dishonest, but it was not intended to protect him where, if he pleaded the
statute, he would come off with something he ought not to have, ie, money of the trust received by
him and converted to his own use.