Equity and Trusts Regulations Critique - Essay Example

College Equity and Trusts work Introduction Misappropriated trust funds especially those which have been handled by bankrupt trustees could be very problematic especially if funds were spent and not invested. Recovery of such funds may be difficult hence leaving the beneficiaries to suffer. Trustees are persons entrusted with the responsibility over a property for other persons who are the actual beneficiaries. The Trustee Act 2000 of the United Kingdom mandates the duties of trustees covering five areas: duty of care required from the trustees, the power of trustees to invest, their power to appoint nominees and agents, their power to purchase land, as well as their power to receive remuneration for work done as a trustee1. On this paper, trust beneficiaries are advised on how to recover misappropriated funds by their trustee. Discussion Nature of Trust Jeremy Fanshawe, being a the trustee of the estate of his late father with sole beneficiary as his son, Kelvin as well as trustee of a small family trust or “joint trust” where the beneficiaries are his ex-wife Lydia and their adopted daughter Miriam, has a sensitive role in not only ensuring that the trusts are managed effectively but also beneficiaries received their share. As trustee, he has the fiduciary duty to enforce the agreed contents of the contract he has signed with his late father as well as the small family trust or joint trust2. Under the UK law, he is required a duty of care which is Part 1 of the Act wherein as trustee, Jeremy is expected to be reasonable3: “(a) to any special knowledge or experience that he has or holds himself out as having, and (b) if he acts as trustee in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect of a person acting in the course of that kind of business or profession”4. This would require Jeremy to have prior knowledge and sufficient effort exerted to determine the viability of conducting the business about purchase of art works by the artist Farrah Foster as an investment. Whilst his first purchase, a painting, indeed increased value from £13,000 to £26,000, the manner of which this “investment” has been undertaken without clear purpose and process. £20,000 worth of money was transferred from the joint trust account to his personal current account. Section 2 of the Schedule specifies that “when exercising any corresponding power, however conferred” 5 under Compounding Liabilities. On Part II Investment Section 4, it was required under Standard investment criteria, the trustee upon exercising power of investment, whether arising under this Part or otherwise, the trustee must have expertise to the standard investment criteria6. On the same manner, The Act also provides that: “Application of duty of care Investment: 1The duty of care applies to a trustee—(a) when exercising the general power of investment or any other power of investment, however conferred; (b) when carrying out a duty to which he is subject under section 4 or 5 (duties relating to the exercise of a power of investment or to the review of investments).” 7 This meant that a consultation with the beneficiaries as well as accredited persons in the art field should have been undertaken by Jeremy prior to his investment and purchase of a claimed work or sculpture of the artist Farrah Foster as in the case of Westdeutsche Landesbank v. Islington8. Consultations before beneficiaries’ trust funds are invested or put into other uses was confirmed in the case of Halifax Mortgage Services Ltd. v. Stepsky9; Banco Exterior International SA v. Thomas10; Barclays Bank v. Thomson11; and Dunbar Bank plc v. Nadeem and another12. The duty of care is expected from Jeremy prior to and during the purchase of artworks and as such, subject to audits and valuations of trust property13. Under the Act, Jeremy is mandated to secure advice before investing money from the trust fund. Necessary precaution should have also been shown prior to transferring any fund from the trust to his bank account14. Another protection that Kelvin and the joint trusts can invoke is Section 4(3) of the Act that required Jeremy to scrutinise the standard investment criteria thus: the need to check the suitability of investment for the trust, and the importance of diversification and that trustees like Jeremy are mandated to invest solely in the financial interests15 of Kelvin, his wife and adopted child. Tracing and Equitable Remedies Under the law of equity, tracing is a legal process that provides clarification to what happened to Kelvin’s and the joint trusts wherein the persons involved or who handled or received the trust funds were identified. The process will also ask the court to award a proprietary claim against the property which was now on Jeremy’s and the private dealer of the fake sculptor by Farrah Foster. Accordingly, it was described at length as: It is merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property. Tracing is also distinct from claiming. It identifies the traceable proceeds of the claimants property. It enables the claimant to substitute the traceable proceeds for the original asset as the subject matter of his claim. 16 In a case where trustee used money from misappropriated funds to purchase two annual premiums, the court upheld the rights and claims of the beneficiaries of the trust17. Under the tracing process, Kelvin, Jeremy’s his ex-wife, Lydia, and their adopted daughter, Miriam may recover the painting or proceeds of sales of the painting of Farrah Foster including the fake sculpture, the donation to Save the Water Vole charity amounting to £10,000 upon establishing that their funds had been used in all instances. Where the dubious art dealer may be traced, the £20,000 worth may also be recovered as third party recipients of trust funds could be liable to return the fund such as the case for Foskett v McKeown18. There are some advantages to using the tracing process for the case of Kelvin, Lydia and Miriam. First of all, the use of the so-called proprietary remedy in contrast with simple personal claim, allows the three beneficiaries to lay claim on the goods or properties of Jeremy who has now been declared bankrupt, therefore, insolvent. Another advantage is the application of this trust fund claims to other fund recipients aside from Jeremy himself: thus, the art dealer, the charity Save the Water Vole, and other beneficiaries of the fund19. One of the complications of tracing on this case will be the fact that there were two separate trusts: Kelvin’s, and that of Lydia and Mirriam. The tendency would be that the misappropriated funds have been mixed up. In this case, the claimants will be treated rateably20. Another is that tracing is limited to properties that are specific or ascertainable. This meant that the fund spent by Jeremy can be followed clearly and that those already spent on a spa, or even the third party Save the Water Vole purchases cannot be easily established with the presence of the fund or its continuity21. The process requires the existence of the money as a separate fund or a part of a mixed fund and must be properly established. In case of a third party who may be innocent about the misappropriated trust fund spends the fund, tracing may be impossible. This may become applicable to Save the Water Vole as well as the vendors of vacation packages purchased by Jeremy. Conclusion Tracing is the most appropriate legal process that Kelvin, Lydia, and Miriam can resort to in order to recover the funds misappropriated by Jeremy. By declaring bankruptcy thereby becoming insolvent, trustee Jeremy has made the process more complicated. Recovering the actual funds misappropriated by Jeremy may become difficult for the claimants or beneficiaries due to the various violations committed by trustee as well as the mixing of the funds in the expenditures of Jeremy. Kelvin, Lydia, and Miriam are best advised not to expect the exact amount or value of properties that may be recovered from Jeremy based on tracing the misappropriated trust funds. However, the advantage of tracing should be enforced in full in order to recover funds from the trust that had third party beneficiaries including the charity Save the Water Vole and the art dealer who disappeared. In addition, the beneficiaries may also lay claim on the properties of Jeremy in this instance and the Farrah Foster painting. However, those spent on perishable goods or services such as the vacation of Jeremy cannot become subject for tracing. Bibliography: Banco Exterior International SA v. Thomas [1997] 1 WLR 221; [1997] 1 All ER 46 Barclays Bank v. Thomson [1997] 4 All E.R. 816 Cowan v Scargill [1985] Ch 27 Dalecoast Pty Ltd v Guardian International Pty Ltd [2001] WASC 199 (1 August 2001) Dunbar Bank plc v. Nadeem and another [1998] 3 All E.R. 876 Foskett v McKeown [2001] AC 102 Halifax Mortgage Services Ltd. v. Stepsky [1996] Ch. 1; [1995] 4 All ER 656 Hudson, A. Equity and Trusts (6th ed.). Routledge-Cavendish, 2009. Keefe v Law Society of NSW (1998) 44 NSWLR 451 Part 1, Trustee Act 2000, 2000 Chapter 29. Accessed from http://www.legislation.gov.uk/ukpga/2000/29 Pettit, P. Equity and the Law of Trusts. Butterworths, London: 1993. Pp. 516 Schedule 1, Section 2, Application of Duty of Care, 4: Compounding Liabilities of Trustee Act 2000, 2000 Chapter 29. Accessed from http://www.legislation.gov.uk/ukpga/2000/29 SCHEDULES Section 2. SCHEDULE 1, Trustee Act 2000, 2000 Chapter 29. Accessed from http://www.legislation.gov.uk/ukpga/2000/29 Section 4, P 1, Part II, Trustee Act 2000, 2000 Chapter 29. Accessed from http://www.legislation.gov.uk/ukpga/2000/29 Shindler, G. "Trustee Act 2000: A Practical Guide on Some Key Features". Elder Law & Finance (Jordan Publishing, Vol. 1, 2001 Westdeutsche Landesbank v. Islington [1996] 1 AC 669, Read More