The Legal Structure of a Trust Agreement - Essay Example

The legal structure of a trust agreement vest the rights of the bondholders or e owners upon the trustee through the trust agreement. According to the case of Highberry Ltd. V Colt Telecom Group Plc (No. 2) (2003) EWHC 2815 the trustee has the right to “represent the holder in dealing with the issuer and to enforce action on their collective behalf”. Subject to the provisions of the deed, the trustee shall represent the owner and since rights of representation have passed from owner to trustee, the owner shall not be allowed to represent him/herself unless there is a breach of the agreement, which will render the deed as unenforceable. As held in case of Highberry Ltd v Colt Telecom Group Plc (No.2) (2003), a no action clause is valid thus provisions such as “no bondholder or owner may take enforcement action against the issuer following a default unless the trustee, having become obliged to act thereon, has failed to do so” is valid. Can a trustee hire a sub-trustee to carry on the duties and obligations? Generally yes. Where the trustee hires an agent to execute the duties and responsibilities entailed in the trust agreement, such agent shall function as the alter ego of the trustee thus, whatever actions the agent takes, it shall be considered as the act of the trustee. In the event of breach of trust on the part of the agent, generally, the trustee becomes liable. In the event where a breach of trust takes place, will the trustee have an action against the agent or his co-trustees? Generally, yes, subject to defenses available under the law. To get a good grasp of the duties and responsibilities of a trustee and it agent, let us discuss the duties and responsibilities of the trustee and its agent to disclose any interest on certain transactions. Under Chapter 29 Part 1 of the Trustee Act 2000 , the trustee has the duty to “exercise such care and skill as is reasonable in the circumstances, having regard in particular- (a) to any special knowledge or experience that he has or holds himself out as having (applied in the case of Speight v Gaunt (1893) 9 App Cas 1 at 19) 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 (applied in the case Barlett v Barclays Bank Trust Co. (1980) Ch 515 at 534).” The degree of care in transacting business for and in behalf of the owner binds the trustee to deliver what is in the best interest of the owner. As the trustee and its agent are considered as alter ego, the action of one shall be considered as the action of the other, thus both can be help liable in the event of breach. In the case of Henderson v Merrett Syndicates (1995) 2 AC 145 at 205, the Court ruled that same rules apply as in the case of negligence. Therefore, where the trustee become obliged to act and defend the property in trust, the failure of the trustee to act accordingly would constitute a statutory breach as well as a breach of the agreement. Will a sense of moral obligation exonerate the trustee in a case of breach of trust? Apparently not, in the recent case of X v A and others [2005] All ER (D) 379 (Nov) [2005] EWHC 2706 (Ch), the Court ruled that references to the sense of obligation felt by the trustee has nothing to do with the obligation to discharge what is contained in the trust deed. In this case, the trustee holds a trust on a marriage settlement where the wife asked for an advance to discharge her obligation to a charity. Although in this case the trustee gave an advance to the wife based on a moral obligation, the Court ruled that it is not for the trustee to decide on this matter. We must always remember that not all actions of the trustee, which are beneficial to the owner, shall be exempt from breach of trust. In case of The Law Debenture Trust Corporation Plc v. Acciona S.A., Concord Trust (2004) EWHC 270 (Ch) discussed in full the term “beneficial interest”. A depositive part of the case reads “The fundamental issue…is that they were entitled to be heard and block (if they thought appropriate) any transaction whether it was beneficial or not”. Although this does not give a blanket authority on the owner to interfere in the management of the problem, which is subject to a trust agreement, this defines the parameters on when and how a breach of trust is committed. Note that in the case of Concord Trust v Law Debenture Trust Corp Plc (2005) 1 All E.R. (Comm) 699, where the trustee performed an act upon which it became legally bound to act it could not be sued for breach or for negligence. Peter Smith J. in the case of Law Debenture Trust Corporation PLC v Acciona SA [2004] EWHC 270, Ch D stated that the trustee has the duty to protect the interest of the owner. The ultimate purpose for having a trustee is convenience on the part of the owner. What then is the protection of the trustee? A trust deed may contain provisions, which safeguards the rights for the trustee. As discussed earlier, the authority of the trustee emanates from the provisions of the deeds subject to statutory limitations and laws governing breaches of contracts. In the case of doubts as to the interpretation and meaning of the provisions of the deed, the provisions thereon shall be construed strictly against the trustee following the provisions of Section 2(2) Unfair Contract Terms Act 1977. Note that Section 2(2) requires the “satisfaction of the requirements of reasonableness.” Protection of the Trustee A “no action” clause, which is inserted into the trust deed, can protect the trustee against legal actions by the owner. “No action” clauses generally confers immunity from suit and allows the trustee to act on his or her own volition provided that his or her action does not injure the properties of the owner. A “no action” clause is subject to inherent statutory limitations such as the provisions on good faith and equitable transaction. In the case of Derry v Peek (1889) L.R. 14 App. Cas. 337, the Court ruled that a trustee may only be guilty of fraud if there is intent to defraud and would only be liable for damages where it can be showed that “such loss or damage shall be caused by his own actual fraud.” Until now, the doctrine of Derry v Peek is still very much applicable. Under the “no action” clause as enunciated in the case of Highberry ltd v Colt Telecom Group Plc (No.2), the trustee has the right to determine what action to take in case of default or imminent default. The trustee shall ascertain and rely on its judgment as to where or not to take actions. In any event when a trustee is called upon to perform an act to prevent losses, the trustee has the right to choose the best action to take. The rules in exercising its duties and functions of representation involve exercise proper discretion, rationality of action, the decision must be made after careful study and the matters acted upon must be relevant. In the event where the trustee exceeds the bounds of his rights and responsibilities, such actions in excess of authority shall be subject to redress under the provisions of the Trustee Act 2000, Section 192(2) of Companies Act 1985 the and the Misrepresentation Act 1967. The duty of care of the trustee should be the paramount consideration. However, an owner cannot hold action against a trustee for holding another trust even if such is connected with a business competitor. As decided in the case of Kelly v Cooper (1993) A.C. 205 and in case of Prince Jefri Bolkiah Appellant v. KPMG (A Firm) Respondents [1999] 2 W.L.R. 215, the Court ruled that a trustee may engage in business with other clients including those competing companies as long as it maintains confidentiality of information. Confidentiality, however should be maintained regarding the transactions of each client by maintaining and keeping separate segments of the trustee company where the information of such transaction should be confined. Transactions of competing clients should not be mixed otherwise it will constitute breach of trust and would be actionable. At the expiration of the trusteeship agreement, the obligation of the trustee to keep all information generated during the trusteeship agreement shall be held inviolable. According to the case of Kelly v Cooper (1993) A.C. 205 ,any information divulge by the trustee even after the agreement have indeed shall be considered as a breach of trust and is generally justiceable. Read More