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Trustees DutiesWhat do the terms of the trust deed specify?Trust instrument can alter any statutory/equitable duties normally required of trustee (Trustee Act s 2(3)).If clauses exempt certain duties then do not refer to relevant sections below.NOTE: Trust deed can be departed from in certain circumstances:Court order or statute requires it;All sui juris beneficiaries permit departure (FIT only); orCourt permits/directs departure (s 63) – terms of deed cannot be carried out, in interests of beneficiaries, etc. Has an investment been made?s 5 – Can invest in anything at any point in time unless trust deed expressly prohibits.Dependent on what is being held for investment purposes – if an asset isn’t allowed for investment it cannot be invested.What standard of prudence is required of the trustee?If just beginning to invest:s 6(1) – Must invest prudently.(a) Professional – standard of prudent person in that profession.HLB v Trust Company – Over-cautious investments, claimed GFC justified decision but court found plenty of equivalent investments with higher yields and so failed.Trustee companies – Trustee will be liable, directors of company as third parties (ASC v AS Nominees).(b) Non-professional – standard that prudent person would exercise in managing another’s affairs.If ongoing management of investments:Equitable duty of prudence.Standard is to invest with the care an ordinary prudent man of business would extend towards own affairs (Speight v Gaunt).Bartlett v Barclays – Upheld Speight; speculative investment should have been averted by more involvement in shareholder meetings, failed prudence test.Nestle v Nat West – Do not need to be brilliant investor, just prudent. Over-conservative decisions causing losses in long-run indicative of failed prudence test.Have reviews been performed adequately?Every time new investment made, must check status of older investments (s 8(1)(o)).Otherwise should check investments at least annually (s 6(3)).If GFC situation, court likely to hold that review should have been done then even if trustees are satisfying the minimum requirement.Have the following rules and provisions (s 7(1)) been followed?Get in trust assets (i.e. take control of trust)Permanent Trustee v Perpetual TrusteeAvoid conflicts of interest/profit from roleTrustee is fiduciary, so subject to conflicts and profits rules (Chan v Zacharia).Must avoid acting for two masters (Farrington v Rowe).Must adequately disclose any actions that would be in breach of fiduciary duty (Boardman v Phipps).Trustee purchasing beneficiary’s interest/trust property (Clay v Clay):Fair Dealing Rule – Initially valid, if challenged set aside unless trustee:Shows no advantage taken of position as t’ee, full disclosure made, and fair/honest transaction.Self Dealing Rule – If trustee sell property to himself, void as matter of right if beneficiary challenges no matter how honest and fair.Keep trust assets separate (ASC v AS Nominees).Act gratuitously (i.e. T’ee not acting for their own benefit)At equity, trustee not to be paid for services, and profits are not to be made (Williams v Barton).Generally overridden by trust deed.s 77 – Court can award payment to trustee.In re Drexel – Trustees could distribute funds evenly to beneficiaries even though they were also beneficiaries. They were not using their position unfairly or trying to profit unfairly.Act personally (T’ee not delegating duties)Cannot delegate without express authority, except in cases of necessity (s 30).Trustee must ultimately make all decisions regarding the trust.Can appoint an agent to implement trustee decisions (s 28).Speight v Gaunt – Not liable for agent’s misappropriation because it was in the ordinary course of business to employ an agent to perform stockbroking duties.Trustee not responsible for other’s acts unless t’ee makes wilful default (s 36).Dalrymple – T1 executed blank cheques to T2 who misappropriated them. T1 knew of obligation to protect trust property, so by leaving funds with T2 was acting negligently, amounting to wilful default.Consider and not act under dictationMust not fetter exercise of discretions, must not act under whim of another person.Re Brockbank – Trustee is not obliged to be dictated to by beneficiaries, even if it involves appointment of new trustee, as could result in breach of trust.Re Mulligan – Must balance all interests of beneficiaries, ignoring remainderman in favour of life tenant unacceptable.Co-trustees must act unanimously:Beath v Kousal – Even when co-trustees involved in litigation on estate’s behalf, if an expense is to be claimed against trust both co-trustees must consent.Keep accounts and informRe Londonderry’s Settlement – Trust documents defined as: trust instrument, accounts, matters touching on legal status of trust, agendas/minutes.Hartigan Nominees (most authoritative decision) – Memorandum of wishes is not a trust instrument, as such documents limited to property of the trust.cf Schmidt – Agreed with minority (Kirby P) in Hartigan that Londonderry wrong; not proprietary right, but part of court’s inherent jurisdiction. Also see Breakspear.Did the trustee insure the trust?s 23 – Trustee may insure against loss/damage.However, NOT REQUIREDHave the s 7(2) provisions been followed?(a) Act in the best interest of present/future beneficiariesParamount duty of trustees is to act in the beneficiaries’ best financial interests (Cowan v Scargill; Harries v Church Commissioners).(c) Act impartiallyBetween individual beneficiaries – cannot prefer one type of beneficiary/individual over others (Re Mulligan).Re VBN v ARPA – Upheld Edge v the Pension Commissioners as to definition of duty to act impartially:Exercise power for purpose for which given; give proper consideration to relevant matters; Exclude irrelevant matters.Don’t have to favour all beneficiaries equally – regard interests of trust as a whole.(d) Take advice when requiredOnly on matters outside the trustee’s expertise, such as management of investments, if advice is needed.If under duty to take advice, reasonable costs are payable out of trust fund (s 7(4)).Has the trustee made non-speculative investments (s 7(2)(b))?Modern Portfolio Theory:Maximise growth through diversification of investments, spread between conservative and high-risk investments.‘Line-by-Line’ prudent and risk-averse portfolios might not keep with inflation, causing losses of real value (Nestle v Nat West).Trustee Acts 7(2)(b) – Duty not to invest in speculative investments.Seems to favour line-by-line investments.However, s 8(1) favours MPT, as does s 12C (regular review/formulation of investment strategy), and s 12D (extended set-off jurisdiction for gains/losses).Ultimately, so long as trustee keeps portfolio balanced can use either style of investment.Defences?s 12C – Court considers the following in action for breach of trust:(a) Nature and purpose of trust;(b) Whether trustee regarded matters in s 8;(c) Whether trustee made investments pursuant to an investment strategy in accordance with ss 4-12F; and(d) The extent trustee acted on independent and impartial advice of a competent person in that field.s 12D – Doesn’t allow relief from responsibility.However, may set off losses sustained by trust against gains resulting from other investments, whether in breach of trust or not. s 67 – If trustee acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the Court, can be relieved from liability wholly/partly.Beneficiary consent.However, beneficiary must have consented by having the opportunity to state a final view – cannot give approval at preliminary stage and be locked out of further discussions (Spellson v George).Matters to which a trustee must have regard when investingTrustee Act 1958 (Vic) s8(1) does not permit avoidance by the trust instrument and the s8(1) provides the minimum checklist of matters a trust must have regard to when investing.s 8(1)(a) - Primarily the most important is (a) since it is the purpose of the trust and the needs and circumstances of the beneficiaries.Also important and common to all trusts – (a), (b) and (c). (1) Without limiting the matters that a trustee may take into account when exercising a power of investment, a trustee must, so far as they are appropriate to the circumstances of the trust, have regard to-the purposes of the trust and the needs and circumstances of the beneficiaries; andthe desirability of diversifying trust investments; andthe nature of and risk associated with existing trust investments and other trust property; andthe need to maintain the real value of the capital or income of the trust; andthe risk of capital or income loss or depreciation; andthe potential for capital appreciation; andthe likely income return and the timing of income return; andthe length of the term of the proposed investment; andthe probable duration of the trust; andthe liquidity and marketability of the proposed investment during, and on the determination of, the term of the proposed investment; andthe aggregate value of the trust estate; andthe effect of the proposed investment in relation to the tax liability of the trust; andthe likelihood of inflation affecting the value of the proposed investment or other trust property; andthe costs (including commissions, fees, charges and duties payable) of making the proposed investment; andthe results of a review of existing trust investments.Rights of Trustees Right to Indemnity - Out of Trust assetss 36(2) – ‘a trustee may reimburse himself or pay or discharge out of the trust [assets] all expenses incurred in or about the execution of the trusts or powers’Trustee entitled to pay for expenses ‘properly occurred’ on behalf of the trust from trust funds.Default position – can be amended in trust deed.‘Properly incurred’ expenses?Nolan v Collie – Properly occurred means expenses incurred by trustee when acting (i) within power, (ii) with standard of prudence required, and (iii) in good faith.NOTE: Nolan rejected NSW case Gatsios, which suggested trustee has ROI unless acted outside powers, in breach of duty or was otherwise criminal or fraudulent.Can extend to payment of court awards against trustee for conduct in administration of trust (Re Raybould).Earthworks done by trustee business damaged neighbour’s property, but trustee’s could claim ROI due to their proper running of the coalmine.Effect of trustee’s ROI on trust assetsIf trustee properly incurs expenses when carrying out trust duties, ROI allowed.ROI acts as equitable charge/lien, taking priority over beneficiaries’ interests (Octavo; Buckle).ROI and Third Parties:Trust creditors can get at trust assets to satisfy the expenses incurred by the trustee in carrying out the trust (Octavo; Buckle).Creditors can subrogate to trustee’s right and sue for trust assets directly (Octavo; Buckle).i.e. Creditors pay damages, then sue trustee to recover some/all of the sum they lost.If trustee insolvent, creditor can still obtain trust assets, as they are relying on trustee’s ROI (Octavo).However, can only get assets to extent of ROI.Limitations on ROI:RWG Management – Where loss caused by trustee’s breach, can be set off against ROI. If balance remains at the end in favour of the trustee, ROI survives to the extent of the balance and a lien would arise to the extent of the balance. Conversely if no money left and the ROI not covered, the ROI is completely lost.Statutory provisions exist to make directors of corporate trustees liable in certain circumstances (Corporations Act s 197).Include breach of trust by corp, the corp acted outside scope of powers as trustee, term of trust exists limiting/denying ROI.Right to Indemnity - Against Beneficiaries PersonallyTrustees can claim directly from beneficiary:Hardoon – a single sui juris beneficiary who is absolutely entitled under FIT.In Victoria this extends to multiple adult beneficiaries (Broomhead).Rights and Remedies of BeneficiariesRight to call for trust propertyBeneficiary who is sui juris, with absolute, vested and indefeasible interest in trust can require transfer of trust funds to him and terminate trust (Saunders v Vautier).If multiple beneficiaries, all must consent (Stephenson v Barclays Bank).Laycock v Ingram - three reasons why couldn’t use Saunders (basically how to avoid this principle if you’re the testator):Defeasible trust - could lose right to income if Family Court put charge over trust or she went bankrupt.Discretionary trust - If went bankrupt trust would become discretionary, no longer fixed interest.Contingent interest - Children only get property if mother doesn’t go bankrupt.NOTE: If trustee has an unsatisfied ROI, this must be resolved before the rule can be invoked (CPT Custodians).i.e. Must pay the trustee any outstanding remuneration before cancelling a trust.Right to remedies for breach of trustPrinciples of CompensationThe objective of a compensation claim is to restore the trust fund – obligation on trustee is to make restitution to the estate, not to particular beneficiaries (Re Dawson; Youyang).Equitable compensation different from CL compensation and does not involve concepts of foreseeability and causation (Re Dawson; Youyang).Two types of personal remediesEquitable compensation: Available when trust suffers a loss – apply ‘but for’ test.Account of profits: Use when trustee makes improper profits – provides recovery in amount of trustee’s gain.See Boardman v Phipps (even innocent breach requires account of profits), Chan v Zacharia. Only breach of trust to be proven, not foreseeability.Must elect one of the above to use (Tang Man Sit).Proprietary remediesIf proven via means of tracing, can give rise to constructive trust or equitable lien (i.e. mortgage-like security).Rules of tracingMoney shared equally and proportionally in Australia – Foskett.Clayton’s Case formed original principle – ‘first in, first out’.Barclow Clowes (UK) – Clayton’s won’t apply if impractical or causes injustice, or expensive to implement (not binding in Aus).Exceptions:Re Hallett’s Estate - if trustee mixes trust funds with own money, they are presumed to withdraw their own money from bank account first.Re Oatway - if mixed funds used for investment, beneficiaries cannot claim full ownership of investment.If account balance of mixed fund reduced to nothing, the right to trace lost – must use personal remedy instead, if anything at all.Right to remove trusteeTrust-related appointments 41 – Appointment of new trustee if previous one:(i) Dead; (ii) Out of Vic for more than year without appointing delegate; (iii) Wishes to retire; (iv) Refuses/unfit to act.Following people can appoint trustee:Any person nominated by the trust deed to appoint a new trustee, and, failing that; The surviving trustees, and, failing that; The personal representatives of the last surviving or continuing trustee.Court-related appointments 48 – Court can remove trustee whenever ‘it is expedient to do so’.e.g. Trustee may be bankrupt, convicted of indictable offence, mental patient, is corporation in liquidation.However, balance between trustee’s shortcomings and interests of beneficiaries – if in best interests of latter trustee can be ordered to remain (Re Matheson).Court’s inherent jurisdictionCourt has such jurisdiction to remove a trustee.Hill v Fry - Removal justified because son, the trustee, was disputing the will and so was not administering trust in a disinterested manner.Monty Financial Services - Where conflict of interest between trustee and beneficiaries occur, it does not necessarily mean that T must be removed.In this case though, removal was justified. ................
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