Equity Law and Fiduciary Duties of Trustees - Essay Example

EQUITY LAW] QUESTION Introduction A fiduciary duty is arole that is assigned to a person who is supposed to undertake to act in the interests of another person to the exclusion of her or his own interests (Cockburn & Wiseman, 1996, p. 39). Both trustees and directors have fiduciary duties that they owe the beneficiaries and the company respectively. In this essay, the fiduciary duties of trustees are compared with the fiduciary obligations owed by directors to their companies, with regard to the law relating to trustees’ and directors’ fiduciary duties. Finally, the reason as to why the fiduciary duties of trustees and the fiduciary obligations owed by directors to their companies should be different is provided. Fiduciary Duties of Trustees Trustees are required to act on the interests of the specified beneficiaries. This means that beneficiaries of a trust expect that trustees owe them fiduciary duties. Trustees ought to be loyal, transparent and honest and act within the principles of integrity and good faith. In addition, personal interests of trustees should not be left to conflict with the interests of the beneficiaries. A trustee should not benefit from his or her position, except in cases where it is authorised expressly by the trust (Enfield, Cheshut, Hoddesdon, & Royston, 2009, p. 1). A trustee should account for any profits that s/he realises and is not normally allowed to purchase trust property. A trustee should have the best interests of the beneficiaries as his or her fiduciary duty. This means that a trustee has a duty to act for a proper purpose of the trust and in the best interests of the beneficiaries, both in future and at present. In Cowan v. Scargill [1985] Ch 270, it was asserted that trustees should act within the best interests of the beneficiaries, especially in cases where the trust aims at providing financial benefits (Great Britain Law Commission, 2013, p. 76). In this case, half of the trustees of a mineworkers’ pension scheme denied approval of an investment plan that allowed for overseas investment. This is because investing overseas was against the pension scheme’s policy and would be against the interests of the beneficiaries (Watt, 2012, p. 307). Trustees are Duty to act prudently (Paul Thornton, 2011, p. 54). In cases that involve investments, trustees should only invest with wealth maximisation as the only motive (Solomon, 2007, p. 292). It is worthy to note that trustees should not only seek to maximize returns in the short term while ignoring long term effects such sustainability and environmental and social impact (Great Britain Law Commission, 2013, p. 7). Finally, it a law requirement that trustees should make decisions for the proper purpose of the trust (Stamford & Ransome, 2013, p. 126). Fiduciary Duties of Directors Directors are required by law not prioritise their interests above the interests of the company. It should be noted that directors are perceived as fiduciaries, and as such are regarded as trustees of shareholders. They are not to make any misapplication on the assets of a company. Directors are also treated as trustees of the money of the company that they have a duty to manage (Hannigan, 2012, p. 277). Directors are required to be loyal, and this is a fiduciary duty. For instance, in Towers v Premier Waste Management Ltd [2011] EWCA Civ 923, a director had taken a loan from the company’s client, with no interest. The loan had not been approved by the company while the director had not disclosed the loan. The director has breached his loyalty duty to the company and had placed himself in a situation where conflict of interest arose (Abbott, Moran, & Robertson, 2014). The director manages property either in terms of the company itself or the company’s assets. According to the Common Law UK, a director owes fiduciary duty to the company. Company interest or shareholder interests come first, and directors ought to act in good faith to enhance company success. They should cater for employee interests. Directors should relate well with suppliers and clients while ensuring fair treatment to all and caring for the environment, as well as, maintaining the company’s ethical reputation (Cahn & Donald, 2010, p.335). Similarities between the Fiduciary Duties of Trustees and Directors A fiduciary duty arises when the fiduciary is supposed to act on behalf of the beneficiary. This is supposed to be done while the fiduciary acts on discretion as far as the resources belonging to the beneficiary are concerned. There are various similarities between the fiduciary duties of trustees to beneficiaries and the fiduciary duties of directors to the company. First, directors and trustees should act within the powers granted to them, either by the company or by the trust. The Companies Act 2006 specifies that must act in accordance with the company’s constitution, just like trustees’ duty to obey the terms of the trust (Burrows, 2013, p. 144). Secondly, Directors and trustees must act in a way to promote success- interests of employees or beneficiaries. They should also exercise independent judgement in execution of their duties. Both directors and trustees have a fiduciary duty of applying reasonable care, skill and diligence and avoiding conflict of interest. Directors are required to ensure that the company achieves its objectives just like trustees are obliged to direct affairs of the trust to achieve its purposes (Bloomfield, 2013, p. 106). Differences between the Fiduciary Duties of Trustees and Directors There are various differences between the fiduciary duties of trustees and those of a director. A trustee holds property in his own name while a director does not hold company property in his own name. Therefore, a trustee is a principal, owner or master of trust property while a director is a paid servant of a company (Saharay, 2008, p. 271). Also, a trustee can enter into a contract in his or her own name while a director has to do so under the company’s seal. Finally, a trustee can be allowed to mix trust property with his own property while director is not allowed to mix company property with his own property. Reason for the Differences Given that trustees are appointed to perform different roles compared to the role of directors, there various differences between the fiduciary duties of directors and those of trustees. The duties of a trustee, especially a trustee of a will or marriage settlement have very little resemblance with the duties of directors. Directors are quasi trustees and not trustees in the strict sense (Saharay, 2008, p. 271). This is because trustees are appointed to manage a trust fund and advise the beneficiaries while directors are only liable for management of the company and not advising shareholders. QUESTION 2 Introduction Aziz died two years ago, leaving a collection of paintings and £300,000 to Pranav and Ishan to hold on trust for Aziz’s grand-daughters, Harini, Rishika and Sanvi, to be allocated funds when they reach 21. Aziz’s validly Will did not have express administrative provisions. Harini, having turned 22 years, was given her share of the fund when she attained 21 years of age. Recently, Pranav purchased a painting from the trust at auction, paying £12,000, a high price because he was keen to acquire the painting to add to his collection of art by the same artist. In the following subsections, advice is provided to the beneficiaries about the extent to which they can challenge the trustees’ decisions. Also, advice about the possibility of the beneficiaries working with different trustees, after ending the trust is provided. Finally, the legality of the beneficiaries’ bid to recover the painting that Pranav bought at auction, because they strongly believe that it should be kept in the family is discussed. (a) i) Could Trustees help Sanvi and Rishika when they requested for Funds, and on what Basis, if any? Trustees ought to discharge their duties. On the other hand, trustees do not need to exercise powers. In this case, it was under the discretion of Pranav and Ishan to decide whom they could have helped between Rishika and Sanvi. Therefore, the power of making the decision on whether to help Rishika, Sanvi, both or none had been vested in them. For instance, Pranav and Ishan could have helped Rishika when she requested funds because she asked for money from the trust to pay for university tuition fees and living expenses, but she had not attained the stipulated age. Though payment of tuition and living expenses are in the best interests of the beneficiary, it is possible that Pranav and Ishan could not considered that and award her the funds she requested. None of the beneficiaries had the legal right to enforce the trustees to award them the requested funds. On the other hand, Sanvi’s request could be honoured by Pranav and Ishan because the £20,000 she asked for was meant to fund a series of proposed art trips to European cities. However, it should be borne in mind that a trust is created when duty is imposed on the trustee. There should be beneficiaries because they are responsible for enforcing duty. A trustee should ensure that s/he strictly complies with the terms of the trust. Therefore, the duties and direction s specified in the trust instrument such as a Will should be adhered to. Their negligence can result into losses and trustees can be liable for this (Blackwell, 2014, p. 277). ii) Can Sanvi and Rishika challenge the Trustees’ Refusal of their Requests? Sanvi and Rishika cannot challenge the trustees’ refusal of their requests. Though beneficiaries have a right and the legal right of forcing trustees to perform their duties through court action, they have no right of enforcing trustees to exercise power. An excellent example is the requirement on trustees to perform their duty of distributing trust property at the right time and to relevant beneficiaries. If the trustees fail to perform this duty, that is the only time that beneficiaries have the right of forcing trustees to perform such duties by getting a court order. However, in this case, the will stated clearly that beneficiaries had to attain an age of 21 years before they could be given funds from the trust. Given that trustees have no fiduciary duty of exercising their power, beneficiaries cannot force trustees to do so. If trustees perform their duty of considering whether to exercise power and they decide not to exercise it, beneficiaries have no option. Court cannot intervene in matters pertaining to trustees’ powers. (b) Can the Beneficiaries replace the Trustees or bring the Trust to an End? Under section 19 of the Trusts of Land and Appointment of Trustees Act 1996, the beneficiaries can ask a trustee to retire. This is only possible, if all the beneficiaries specified in the trust document agree to have the trustees replaced (Clements & Abass, 2011, p. 175). In this case, Harini is now 22, Rishika is 19 and Sanvi is 17. All the three, Harini, Rishika and Sanvi have to be in agreement and they should present their request of ending the trust in writing, informing the trustees the reasons for their demand. However, the beneficiaries should have to wait until Sanvi reaches 18 years before they can propose to end the trust. This is because this provision applies only when all the beneficiaries are sui juris. Using the rule in Saunders v. Vautier, all the beneficiaries who have a full and equitable interest in a trust fund can direct the trustees on how to deal with the trust in terms of management (Hudson, 2013, p.126). This rule was initially applied in Saunders v. Vautier [1841] 4 Beav 115. A trust of stock was set for Vautier to accumulate the dividends for him until he reached 25 years. At the age of 21 years, Vautier asked for an immediate transfer of the property to him. He was granted his request by the court because he had an absolute interest in the trust property (Webb & Akkouh, 2011, p.29). All the beneficiaries should be having an equitable interest in the trust fund and all of them should be sui juris (Hudson, 2013, p.126). This means that they should have attained eighteen years and above and they should be acting collectively. Therefore, the rule in Saunders v. Vautier may be used by beneficiaries to rearrange the terms of a trust. Provided all the beneficiaries have attained a majority age and are acting collectively, then they can call for the termination of the trust and disposal of property in a manner that they think is fit (Hudson, 2013, p.126). Beneficiaries should also have a sound mind to make decisions. Therefore, this rule allows beneficiaries to demand the trust fund from the trustees. In addition, the beneficiaries can request the court to intervene and end the trust. This is possible if the beneficiaries utilise section 41 of the Trustee Act 1925. This application is likely to be successful in ending the trust. This is because the court can remove the trustees on the basis that they have breached their duties. It is under the jurisdiction of court to remove a trustee and replace him or her with another. This may be done with the court’s inherent jurisdiction to ensure that there is proper administration of the trust. In Letterstedt v Broers [1884] 9 AC 371, HL, a beneficiary who was under a trust that was created by will, accused a trustee for misconduct in administration of the trust (Ramjohn, 1998, p. 756). It was declared that trusts had to be executed properly, using the welfare of the beneficiaries as the main guide. Court may decide to remove a trustee where there is evident friction or hostility between the trustee and the beneficiaries because this can hinder the proper administration of the trust (Ramjohn, 1998, p.756). This removal of a trustee by court is called compulsory removal. However, the trust may not be ended on the basis that the trustees have failed in their duties because they have performed the duties required of them properly, but for one unlawful activity. The sole reason behind this occurrence is that Pranav purchased a painting from the trust at auction recently. Pranav incurred £12,000 in the transaction, a high price because he was keen to acquire the painting to add to his collection of art by the same artist. This is breaching the fiduciary duty of a trustee requiring them to avoid conflict of interest. It is a legal requirement that a trustee should disclose any interest in transactions that involve the trust. In this case, Pranav, being one of the trustees, should have disclosed his interest in the paintings. Had Pranav desisted from purchasing the painting from the trust at action, the fiduciary duty of avoiding conflict of interest could not have been breached. Though Pranav paid a high price, the fiduciary duty of avoiding conflict of interest was breached. (c) Is it Possible, and on what Basis can the Beneficiaries recover the Painting? In this case, there is a personal conflict of interest. This is because the trustee purchases property himself from a trust of which he is a trustee (Kessler & Pursall, 2006, p. 85). Pranav purchased a painting from the trust at auction. Pranav paid a high price, but he paid the amount because he was keen to acquire the painting to add to his collection of art by the same artist. This is a personal interest, which the trustee should not have allowed to conflict with the transaction of the trust. The transaction that Pranav carried out is violation of a trustee’s fiduciary duty. The law requires that a trustee should not purchase any property belonging to the trust. This is self dealing, which is highly prohibited. Similarly, a trustee should not purchase trust property from a beneficiary. In case, a trustee purchases property from a beneficiary, s/he must prove that the purchase is fair. The trustee should also ensure that s/he provides proof that s/he has not taken advantage of his or her position. A trustee should try to avoid transactions that are in conflict of interest. It is a breach of trust when a trustee sells to himself or herself the trust’s property. In Tito v. Waddell, it was held that if a trustee sells trust property to himself, the sale is voidable by any beneficiary, as much as the transaction may be perceived to be very fair in all standards (Watt, 2012, p. 330). Though there it is no expressly stated that trustees should limit themselves from purchasing trust property, such an action may result into a voidable purchase. In Aberdeen Railway Co v Blaikie [1854] 1 Macq 461, 47, it was held that trustees should desist from personal interest, which conflicts with the interests of those that they are obliged to protect (Sealy & Worthington, 2013, p. 374). Similarly, in this case, Pranav was in contrast with the interests of the beneficiaries, who want to recover the painting that Pranav bought at auction, because they strongly believe that it should be kept in the family. Trustees should control and preserve trust property. A trustee is only liable for wrong doing that s/he does individually (Blackwell, 2014, p. 277). In this case, Ishan is not liable because he did not purchase any property belonging to the trust. Based on the fact that the trustee, Pranav, engaged in a voidable purchase of the trust’s property, it is evident that the trustee breached his or her fiduciary trust. The beneficiaries can then file a suit in a court of law, upon all of them attaining the majority age, to have the painting returned. Given that the transaction in which Pranav engaged can be made void to have the painting recovered; Harini, Rishika and Sanvi should seek redress from court. References Abbott, J., Moran, N., & Robertson, J., 2014. 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Equity and Trusts Law Directions. Oxford : Oxford University Press. Webb, C., & Akkouh, T., 2011. Trusts Law. London: Palgrave Macmillan Press. Read More