Remedies and Replacements of Trustees - Case Study Example

Question One. In our present case, Georgina Haversham willed her properties in favour of her grand children, Estelle and Peter, appointing Cathy andDavid as trustees. According to the Trustees Act 2000, trustees have to hold and apply the trust property for the benefit of other persons, known as the beneficiaries and they have a fiduciary duty to always act in the best interests of the trust and in accordance with the purposes set down in the trust deed and the general trust law. A discretionary trust is formed when no individual person has any right to receive income or capital and it is left to the trustees discretion to decide as to who is to benefit from a given list of beneficiaries, when they are to benefit and to what extent. A variant of this type of trust is an accumulation and maintenance trust, which is also termed as a grandchildren's trust. Its use is to benefit a particular child or children who are under a specified age, when they become entitled to the income by right and frequently to the capital also. The trust deed, at times will give the trustees certain discretionary powers permitting them to decide as to which of the beneficiaries will receive the income or capital of the trust. The trust deed generally gives clear instructions as to the trustees' administrative powers for routinely dealing with trust property. In our case, since, the trust deed is silent with regard to the administrative powers of the Trust the law will take its own course for proper administration of the trust. Seven years ago, Cathy took 50,000 from the trust and used it on a new kitchen and a conservatory. If the trustee becomes bankrupt or dies, or the trustee transfers assets in breach of trust then the beneficiaries have the right to claim their equitable ownership of the trust assets against the trustee's trustee in bankruptcy in other words the individual appointed by the court who takes charge of a bankrupt person's assets, or his personal representative on death, or the transferee of trust assets transferred in breach of trust. Two of Georgina's grandchildren who were alive at her death, namely Estelle, now aged 21 years and Peter, now aged 23 years came to know that the Trust property was misappropriated by Cathy. Since, seven years ago Estelle and Peter were minors and also they came to know about this fraud only recently, the limitation for claiming their rights begins from the day from which they came to know about this fraud. Hence, they can proceed against Cathy's court appointed trustee in order to recover 50,000. In Barnes v Addy, it was held that a third party may be liable as constructive trustee if it "receives and becomes chargeable with some part of the trust property" , this is known as the first limb or knowing receipt or where they "assist with knowledge in a dishonest and fraudulent design on the part of the trustees", this is termed as the second limb or knowing assistance; which held that tracing, may provide a proprietary remedy to the plaintiff along with the personal liability of the defendant including return of property (Barnes v Addy, 1874). The beneficiaries' interest in the trust money binds not only Cathy but also her successors in title, including volunteers who either receive trust property or its traceable proceeds. Hence the trust amounts paid to Bob by Cathy can be fully recovered at the suit of the beneficiaries. The remedy available to Estelle and Peter is that they can move the court to transfer the Tippit shares, in which Bob had invested their trust money, and hand over the painting for value to them. Bob invested the amount of 40,000, which was given by Cathy under the pretext that she had won the amount in a lottery. Bob added 20,000 of his money to the bank account without knowing the fraud committed by Cathy. Since he is an innocent third party his liability is limited to the amounts given to him by Cathy. In 2004 Bob withdrew 20,000 and bought a painting whose value is 5,000 at present. In respect of this painting the law will keep track of its value and reimburse it to the beneficiaries according to the tracing procedure. The beneficiaries can claim their Trust assets from Bob, in accordance with the provisions of the Trustees act. In 2005 he further withdrew 30,000 from his bank account and invested in shares in Tippit plc. The present value of these shares is 60,000. In respect of third parties, if they exchange the assets for shares then the law will trace the value of the shares into the original amount received by these third parties. Tracing stops only when the asset into which the value is traced is lost or destroyed, or the evidence of the substitutions made is lost or the asset is exchanged for a non asset, in our example Bob has spent the remaining amounts in his account to defray expenses for a holiday and to clear the outstanding balance in his credit card account. Therefore these amounts cannot be recovered as tracing has stopped due to the extinguishment of the assets. Regarding the 13,000 credit balance, this constitutes his salary amount and therefore cannot be claimed by the beneficiaries. Cathy as required of a trustee should have protected the trust property for the benefit of the beneficiaries. Instead she misappropriated trust money for the purpose of renovating her house and for giving money to her business partner. This is a breach of trust or of an obligation imposed by the trust deed or by law. In Armitage v Nurse, it was held that there was no protection for fraud on the part of a trustee (Armitage v Nurse, (1998). Ch 241, 251). A trustee's duties are the administering of the trust property for the benefit of the beneficiaries in accordance with the purposes set down in the trust deed, to act in good faith in the interest of the beneficiaries, avoiding a conflict of interest. Further, trustees have to act according to the trust deed or the general law otherwise they will be committing a breach of trust. Trustees can be held personally liable for any shortfall suffered by the trust fund if, deeds not authorized by the trust deed or the general law are committed, like payment to non-beneficiaries or the making of an unauthorised investment, standard of care was not met in carrying out an action authorised by the trust deed and a trustee had been involved in a conflict of interest. Further a trustee is personally liable for the breaches of trust of his or her co-trustee. According to the recent provisions of the Trustee Act 2000, new safeguards to protect beneficiaries have been incorporated and they are in the form of statutory duties of care as applicable to trustees. A trustee has to exercise skill and care commensurate to "the circumstances of the case making allowance for his or her special knowledge, experience or professional status" (Section 1(1)(a) and (b). Trustee Act 2000). This new duty proffers a standard for gauging the manner of the exercise of a power by trustees. If the beneficiary of a trust is dissatisfied with its administration, he or she may remove one or all of the trustees and at times the trust deed may incorporate such express power to remove a trustee. Nevertheless, it is possible to remove a trustee, 1. under section 26 of Trustees Act or 2. by the provisions of TLATA (Sections 19 and 20 of the Trusts of Land and Appointment of Trustees Act 1996). Hitherto, the beneficiaries could not appoint or remove trustees (Re Brockbank, (1948). Ch 206). The TLATA provisions now permit beneficiaries to appoint and remove trustees, if there is no person nominated to appoint new trustees in the trust instrument, the beneficiaries are of full age and capacity and are absolutely entitled to the trust property (Section 19(1). Trusts of Land and Appointment of Trustees Act 1996). This allows the beneficiaries to retain control of the trust without having to terminate it. 3. The court has an inherent power to remove a trustee, and it will do so if there is "something which induces the court to think either the trust property will not be safe or that the trust will not be properly executed in the interests of the beneficiaries"(Wrightson v. Cooke, (1908) 1 Ch. 789). Trustees have a fiduciary obligation of loyalty towards beneficiaries and the consequent specific duties that they have to observe are, first, they must act in good faith (Re Second East Dulwich (1899) 68 LJ Ch 196); second, they must not make an unauthorized profit from their trust (Bray v Ford. 1896); third, they must not place themselves in a position where their duty and interest conflict (Keech v Sandford, 1726) and trustees must not act for their own benefit or for the benefit of a third party, without the informed consent of the beneficiaries of the trust (Boardman v Phipps, 1967). Hence, Cathy is liable for the losses caused by her fraudulent behaviour. Since, she has been declared bankrupt they have to proceed against the co trustee. David, the co trustee, cannot claim exemption stating that he is ignorant of Cathy's embezzlement of trust shareholdings. He should have been more vigilant in respect of the goings on in the trust account and as a co trustee he has been negligent in respect of his duties. Therefore, the beneficiaries can claim damages from him for the loss suffered by them. David's co trusteeship can be terminated as he is guilty of a serious breach of trust and is therefore unfit to be a trustee. The beneficiaries once they attain majority can remove any or all trustees if they are unanimous in their decision and this is independent of David's consent. As such Cathy is divested of all powers of a trustee due to having committed breach of trust and also because she has become bankrupt. Question Two Objects, in the context of a trust refer to its beneficiaries. For a trust, other than a purpose trust to be valid, beneficiaries must be either ascertained or ascertainable. This constitutes the beneficiary principle, which requires that there must be someone in whose favour the court can enforce the trust. The identification of such beneficiaries can be either by the settlor or testator naming them individually or by specifying a class or group of such individuals. Traditionally, the complete list test was applied to discretionary trusts as a test for certainty in a manner analogous to that obtaining for fixed trusts. This state of affairs was established by the Court of Appeal in the very significant case of IRC v Broadway Cottages Trust, in which it held that for the objects of a fixed trust to be sufficiently certain the relevant class must be described in a manner that makes it possible for the trustee to make a complete or definite list of all the beneficiaries (IRC v Broadway Cottages Trust,1955). This argument raises two apparent problems, which are discussed in the sequel. The first is that when the court executes a trust, it should do so in order to give effect to the wishes of the settlor. This creates a major difficulty in as much as that if a complete list of beneficiaries could be drawn up, the court would be in a position to order an equal distribution to all the beneficiaries. However, in the absence of the court assuming the role of the trustee it would have to rest content with being unable to do any more than this. If it had been the settlor's intention to bring about a uniform distribution of income, the settlor would have made such a specification in the trust instrument itself. The fact that the settlor permitted the trustees to exercise discretion indicated that a uniform distribution was exactly what the settlor was avoiding. The conclusion is that it is not necessarily easier for the court to supervise a discretionary trust when the complete list of beneficiaries is known in advance, than when it is not. The second is that in the case referred to above, there was an establishment of a rule for certainty in discretionary trusts that was quite dissimilar to that prevailing in a power of appointment. Such distinction between the tests for certainty in mere powers and discretionary trusts was considered by many to be illogical, because in many cases it was almost impossible to determine from the construction of the trust whether the trustees had the power of discretion or not. In Re Ball, Hand v Ball the settlor left money to a class specified as my dependents. It was held that since it was impossible to ascertain what dependant connoted the trust failed for uncertainty of object (Re Ball, Hand v Ball, 1947). Accordingly, in McPhail v Doulton, a trust was set up for the company staff, which also included the relatives and dependants of staff (McPhail v Doulton,1971). The House of Lords confirmed the test for certainty stating that a discretionary trust is valid only if it is conceptually certain, and seized the opportunity to reverse the decision taken in Broadway Cottages, and make the test of certainty in discretionary trusts the same as for mere powers. When this test is applied to discretionary trusts, the test for certainty of objects is whether it is possible to determine whether a particular object is, or is not, entitled to benefit. This new test for certainty has been the source for a great deal of confusion, as was clearly evidenced when a case was remitted back to the Court of Appeal, as Re Baden No 2, who clarified the terms relative to connote next of kin or nearest blood relation and the term dependant to mean any person who was wholly or partly dependant on another. It also held that any person satisfying these conditions could be deemed to be a beneficiary. In this manner it finally held that the trust was valid. The reasons for arriving at such a conclusion are stated in the sequel (Re Baden No 2, 1973). In this judgement the discussion was centered on classification of tests as semantic or evidential when an object is or is not entitled to a benefit. In a semantic test precise meaning of a class is possible. As an illustration, a trust for the benefit of a company's employees is semantically certain, because there is usually no doubt about what the word employee connotes. On the other hand, a trust for the benefit of someone's friends is semantically uncertain, as the term friend by itself cannot be defined precisely. Further, if the is or is not' test is an evidential test, then in respect of any person it must be possible to determine with certainty whether that particular person belongs to a specified class or not. It is in general true that an evidentiary test can be applied only if the semantic test is satisfied. The most rigorous reason was that which was imposed by Stamp LJ in this. The requirement is that in respect of any person it should be possible to determine without any ambiguity whether that person is, or is not a member of a conceptually certain class. In other words this requires that both conceptual and evidential certainties are to be present for the trust to be valid. Practically, the disparity between this test and the complete list' test is marginal. The diametrically opposite point of view was that which was expressed by Megaw LJ in this case, who held that a trust would not fail for uncertainty so long a it was possible to say, of a sufficient number of people, as to whether they fell within the terms set out by the settlor. This test does not distinguish conceptual certainty from evidential certainty; and further it admits a measure of uncertainty in the boundaries of the class, and appreciable amount of uncertainty in the evidential requirements. The viewpoint of Sachs LJ in this case lies between these two extremes. He held that the trust would succeed if it would be possible to determine theoretically if any given person was inside or outside it. That is, he required semantic certainty, but not evidential certainty. Most of the authorities have accepted Sachs' view as the best compromise. On this basis a trust will be practicable, to the extent that if a person presents himself to the trustees as a potential beneficiary, the trustees will know the conceptual basis on which to make the determination. This view has the defect that it permits the creation of trusts which cannot be managed properly. Despite their superficial similarities, a trust and a power are dissimilar. Moreover, the trustees in a trust are duty bound to disburse benefits and are not merely possessors of a right to do so. Since they are duty bound their use of discretion is subject to being challenged in a court of law. This makes trustees vulnerable if while defending their actions, they are unable to demonstrate that they took into account the relative merits of all potential candidates for the benefits of the trust. Although the test based on Sachs viewpoint is successful in preventing a situation, wherein the trustees are unable to establish if a person approaching them is entitled to the benefits of the trust it is nevertheless, important to note that only a trust that satisfies the complete list' test permits the trustees to be certain that they are able to exercise their discretion in favour of all objects. In a discretionary trust the trustees exercise wide discretionary powers. If the objects are uncertain then the purpose of forming the trust itself is defeated. Hence, the test for certainty of objects aids in identifying the beneficiaries and ensures that the purpose of setting up the trust is served. As such it is consistent with the interests of settlors, the rights of potential objects and the duties of trustees. References Armitage v Nurse, (1998). Ch 241, 251. Barnes v Addy, 1874 LR 9 Ch App 244. Boardman v Phipps (1967) 2 AC 46. Bray v Ford (1896) AC 44. IRC v Broadway Cottages Trust, (1955). 1 Ch 20 CA. Keech v Sandford (1726) 2 Eq Cas Abr 741. McPhail v Doulton, (1971). AC 424; (1971). 2 All ER 228. Re Baden No 2, (1973). 1 Ch 9: (1972). 2 WLR250; (1972) 2 All ER 1304. Re Ball, Hand v Ball, (1947/Ch 228:(1947). 1 All ER 548. Re Brockbank, (1948). Ch 206. Re Second East Dulwich (1899) 68 LJ Ch 196. Section 1(1)(a) and (b). Trustee Act 2000. Sections 19 and 20. Trusts of Land and Appointment of Trustees Act 1996. Section 19(1). Trusts of Land and Appointment of Trustees Act 1996. Trustee Act 2000. Royal Assent accorded on 23rd November 2000. Crown Copyright 2000. Wrightson v. Cooke, (1908) 1 Ch. 789. Bibliography. 1. Hayton DJ and Mitchell C, Commentary and Cases on the Law of Trusts and Equitable Obligations (12th ed., 2005) London: Thomson Sweet and Maxwell 2. Hudson, A, Equity and Trusts (4th ed., 2003) London: Cavendish Publishing Ltd 3. Martin J E, Hanbury and Martin's Modern Equity (17th ed., 2005) London: Thomson Sweet and Maxwell 4. Pettit P H, Equity and the Law of Trusts (10th ed., 2005) Oxford: Oxford University Press 5. Pearce R and Stevens J, The Law of Trusts and Equitable Obligations (3rd ed., 2003) London: Butterworths 6. Virgo G (ed.), Maudsley and Burn's Trusts and Trustees- Cases and Materials (6th ed., 2002) London: Butterworths Read More