EQUITY AND TRUSTS

1. EQUITY AND TRUSTS TRUSTEES 1

2. Trustees and their role in administration of the trust First we will consider some general principles and then: • Appointment and retirement of trustees • Powers • Breach • Remedies

3. General Principles Is trusteeship a privilege? • Trustees subject to many duties and powers • Personal liability • Majority paid professionals provision for payment usually made in the trust instrument

4. Duties and Powers • A duty is an obligation and must be carried out / powers are discretionary - confer an element of choice upon the trustee as to whether to exercise it or not. • Duties and powers of trustees are implied into trusts by the rules of law (statutory and equitable).

5. Effect of trust deed • Scope of the duties and powers outlined in the trust instrument – trust instrument is first place to see if it has varied implied rules. • Normally are varied particularly where trustee is professional – providing for remuneration, trustees’ liability + increase trustees’ powers. • Implied powers before the Trustee Act 2000 (TA 2000), were quite narrow – did not allow trustees modern investment opportunities. Most express trusts vary statutory and common law rules – will probably continue to do so.

6. Old and new rules will need consideration • Next few lectures will concern general law i.e. – the default position, in particular the TA 2000. • TA 2000 does not codify the law, certain areas still governed by the old rules. • Will examine both old and the new rules and identify which rules apply in any given situation. • NB it is important to familiarise yourself with the general statutory and case law provisionsAND the common ways they are altered by express terms.

7. The standard of care • S1 TA 2000 provides general standard of care. See Schedule1 : investment, acquisition of land, appointment of agents. • When standard does not apply e.g. when exercising duties on being appointed, exercising powers under the TA 1925 or TLATA 1996, then general equitable duty of care applies: see Speight v Gaunt (1883) 9 App. Cas. 1. The trustee should have taken all those precautions which an ordinary prudent man of business would have taken in managing similar affairs of his own. • NB duty of care can be expressly excluded (Sch1, para7):“if or in so far as it appears from the trust instrument that the duty was not meant to apply”  • Professionally drafted trust instruments usually include express exemption clause excluding the statutory duty of care (will also exclude the general equitable duty of care).

8. Commencement and termination of trusteeship

9. Appointment of trustees • Anyone with necessary capacity to manage own affairs – children not under s20 LPA 1925 (can be trustees of resulting trust see e.g. Vinogradoff [1935] Wn 68). • Corporations: must satisfy trust corporation status – definition: (a) public trustee, trustee in bankruptcy, treasury solicitor (b) court appointee, (c) list in s3(4) Public Trustee Act 1906. • Most private trusts trust corporations are banks.

10. Appointment of trustees • S14(2) Trustee Act 1925 sole trustee cannot give valid receipt • S34 TA 1925 land: 4 trustees maximum. Does not apply to personalty but generally adhered too • S36(6) TA 1925 appointment of additional trustees.

11. Appointment of trustees • Appointment of the first trustees made by settlor. Can appoint self or anyone with necessary capacity and who agrees. • Can give power in trust to others to appoint. • If there are no trustees willing and able to act when the trust first takes effect court will not allow trust to fail for want of trustees and will make an appointment.

12. Appointment of subsequent trustees • Trust is independent of settlor once commenced – so no power of appointment • Can retain this power by including it in the instrument • Subsequent trustees who else can appoint? • S.36 TA 1925 deals with appointment of additional / substitution trustees. • Additional t’s act together with existing trustees when numbers drop / expertise needed (must have ref to restrictions e.g. S34 TA 1925). • Substitutions replace one or more existing trustees.

13. S.36 TA 1925 • Additional trustees can be appointed where a sole trustee (other than a t. corporation was appointed) or no more than 3 trustees. • Appointee (by order of priority): (a) person named in trust instrument (b) surviving / continuing trustees • If no appointment then can request court under s41 TA 1925. • S36 says “may appoint another person” i.e. not himself.

14. Appointment by substitution Necessarily involves retirement / death / removal of trustee Appointer can appoint self unlike s36(6) Who can appoint? Anyone named for this purpose in trust instrument (in order of priority): • Surviving or continuing trustees • Personal reps of last trustees • The court – should not be used where others can appoint even when bens ask for referral.

15. S.36(1) TA 1925 Sets out circumstances for appointment: (1) Trustee dead (2) Trustee remains outside of UK for >12 months (3) Trustee unfit or refuses to act (4) Trustee is infant (5) Trustee asks to be discharged Bens have no influence (other than in t’s of land or where provided for in t instrument) + there is no stat duty to take account of their views. Bens can influence when all of age/competent/represent whole beneficial entitlement see Saunders v Vautier (1841) 4 Beav.115.

16. S11 TLATA 1996 Position modified in respect of t’s of land: S11 – obligation to consult with bens who are entitled to interest in possession + to give effect to majority wishes (n.b. can be excluded in instrument) S19 – where no person to appoint new ts and bens are of full age / capacity and are entitled to entirety of t property: can direct one or more ts to retire / appoint new trustees S20 – bens have similar right where trustee is mentally unable and there is no one under s36 TA 25 to appoint.

17. Retirement of trustees Retirement: s.36(1) TA 1925 Outgoing trustee retires on appointment of new trustee Can be used to bring about forced retirement (but restricted to sits set out above).

18. Retirement S39 TA 1925: retirement without substitution permitted if: • two trustees or corporation remain • deed is completed • consent of co-trustees and anyone with power of appointment obtained (by deed)

19. Ss 19 & 20 TLTA 1996 Contain provisions that may be used by bens to obtain trustee retirement.

20. Removal of trustees Can be done by other trustees (e.g. by refusal to take part in appointment of new trustee – but only where Act or trust instrument provides) Where trustee agrees = retirement.

21. Removal under s41 TA 1935 Court has power to appoint new trustee as substitute or in addition.

22. Courts’ inherent powers Court has inherent power to remove trustees even where fit provided this is for benefit of trust.

23. Disclaimer Appointment as trustee can be disclaimed • Provided: must not have done any act to indicate acceptance • Disclaimer can be oral / written implied by conduct (e.g. inactivity) • Evidence needed to avoid future liability.

24. Vesting of trust property T property must be vested in trustees Settlor must do this or cause it to be done by method appropriate to type of property Can self-declare as trustee If property is not transferred to trustees then it will be incompletely constituted.

25. Vesting Existing trusts normally contain vesting declaration see s40 TA 1925 S40: if appointment made by deed and it contains vesting declaration property becomes vested in trustees.

26. Trustees’ duties and powers In this section we will consider the following: 1. The actions trustees MUST take in the administration of the trust (DUTIES). 2. The matters about which they have a CHOICE (powers). 3. The standard of care in relation to duties and powers.

27. Initial duties Upon appointment trustees under duty to to familiarise themselves with the details of the trusts, the trust property and the terms of the trust instrument + To collect in and safeguard the trust assets. The trustees must make sure that the trust property is in a state of security and under the joint control of all the trustees. NB the extent of this duty: Re Brogden (1888) 38 Ch. D 546; Buttle v Saunders [1950] 2 AER 193. Must ensure no breach by previous trustees Trustees have a continuing duty to safeguard the assets and the documents giving title. Continuing duty also to ensure that the assets remain vested in the joint names of all the trustees.

28. Duty to invest Trustees have a duty to invest but a power over what to invest in Such investments are governed by statutory default provisions (previously Trustee Investment Act 1961 (TIA 1961) now TA 2000 or by express power in trust instrument).

29. TIA 1961 Applied in so far as not expressly excluded by trust TIA listed authorised investments in Schedule 1 (narrower – low risk and wider range – higher risk investments). Trustees permitted risky investments in equities for first time. Wider range investments governed by certain criteria: quoted companies / shares fully paid up / company with capital of £1m + dividends paid for previous five years.

30. TIA 1961 Imposed duties 6(1) required regard for diversification + suitability of investment 6(2) certain investments required advice to be sought by trustee 6(3) requirement to determine when to seek advice about retained investments.

31. TIA 1961 Considered restrictive – land / private company shares not permitted Splitting fund a crude form of risk management potentially lowering returns Requirements of wider range investments actually made them low risk Requirement for advice burdensome Act normally excluded therefore.

32. Express clauses Express clauses used to allow for wider investment. Re Harari [1949] 1 AER 430 such clauses should be given plain / literal meaning Example of a simple express clause: “To invest as freely as if they were absolutely beneficially entitled”. Trustees thereby permitted to invest as if absolute owners.

33. Trustee Act 2000 Trustee Act 2000 now governs trustees’ powers of investment where no express provision made (i.e.. they are default powers). Applies to all trusts whether created before or after it comes into force. Existing trusts now have the new investment powers.

34. General power of Investment S.3 TA 2000 general power of investment: a trustee may make any kind of investment that he could make if he were absolutelyentitled to the assets of the trust Note that the general power of investment does not authorise the purchase of land (governed by S.8).

35. Meaning of invest? What does “invest” mean? See Re Wragge [1919] 2 Ch 58: “to apply money in the purchase of some property from which interest or profit is expected and which property is purchased in order to be held for the sake of the income which it will yield”

36. When is an investment an investment? Whether the power to invest derives from s3 or an express clause we need to know what counts as an investment? • Re Power [1947] Ch 572 – house for occupation by a beneficiary producing no income not an investment. • Modern judicial attitudes – investments that accrue in value considered legitimate see for e.g. Cowan v Scargill [1985] Ch 270, per Megarry VC “the prospects of the yield of income and of capital appreciation both have to be considered in judging the return from the investment.”

37. Principles governing investment • Harries v Church Commissioners per Nicholls VC: trustees should seek “the maximum return, whether by way of income or capital growth…” Known as concept of maximum or total return. • EN 22 (explanatory note) – the trustees can invest in a way which which is expected to produce an income or capital return. • No definition of investment in TA 2000. ENs are not part of the Act – is it income producing (traditional approach) or can investment include income or capital appreciation in accord with modern judicial view?

38. Investments in land S.8 TA 2000 special rules re land: investments in freehold or leasehold land. Under TIA 1961 investments in land not permitted except by express clause (but note effects of Re Wragge and Re Power). Authorised in UK if the land is: (a) as an investment (b) for occupation by a beneficiary (c) for any other reason

39. Protection for beneficiaries Trustees not absolute owners of assets. Beneficiaries may feel inclined to invest speculatively. Law Commission considered that beneficiaries need protection against investment risks. Legislation to set out specified trustee duties when making investment. Hence: • S4 Standard Investment Criteria • 4(3): • - (a) suitability • - (b) diversification

40. Investment criteria • EN 23 – investments must be suitable. “Suitability” relates both to the kind of investment proposed and to the particular investment as an investment of that kind • Includes considerations such as the size and risk of the investment, appropriate balance between income/ capital growth (life tenant’s income and capital for remainder man) • Includes any relevant ethical considerations • But compare Cowan/Harries re ethical considerations.

41. Investment criteria • In Cowan – trustees must put aside their own personal interests and views • In Harries – investments to be made solely on the basis of investment criteria • Trustees can only make a financially disadvantageous investment decision for ethical reasons in extremely limited circumstances e.g. where aims conflict with aims of charity (e.g. tobacco/cancer)

42. Standard investment criteria • Under criteria there is need for diversification • Modern portfolio theory • See Hoffmann J. in Nestle v National Westminster Bank PLC (1st instance, 29th June 1988 unreported affd [1994] 1 All ER 118 CA) • Trustees judged by the standards of current portfolio theory – risk level of entire portfolio rather than the risk attaching to each investment taken in isolation.

43. Trustees subject to duty of care Duty of care contained in s1 TA 2000. EN 25 – as the exercise of the power of investment is subject to the duty of care in S1, trustees may need to have regard to other matters in addition to the SIC. However, the SIC will be of central importance in every case.

44. Advice TIA 1961 required advice to be sought and considered for anything other than low risk investments. (See LC Report 260) Under TA 2000: • S. 5 before investing trustees must have obtain and consider “proper advice” with regard to SIC • Unless 5(3) T reasonably concludes it unnecessary or inappropriate • EN 26: example of where investment = small – cost of advice is disproportionate • Trustees possess the skills • Ss(4) “proper advice” – advice of person reasonably believed by T to be able to give it • Ss (2) advice when reviewing about varying investments.

45. Other safeguards NB stat duty of care set out in S1 TA 2000 applies when exercising the power of investment, when carrying out the section 4 and 5 duties and exercising the power under section 8 to buy land

46. General investment duties • Cowan v Scargill [1985], per Megarry VC: Duty of trustees to exercise their powers in the best interests of the present and future beneficiaries of the trust, holding the scales impartially between the different classes • This is a paramount duty.

47. Two points to note • Best interests = financial interests (but caveat below) – power of investment must be exercised to yield the best return, judged in relation to the risks of the investment in question; income yield & capital appreciation both to be considered • Ts must act fairly between the beneficiaries.

48. Also • Ts must put aside own interests and views • Ts may need to act dishonourably if required (see Buttle v Saunders [1950] 2 All ER 193) • Caveat – benefit does not inevitably and solely mean bens financial benefit. If only bens are all adults with strict moral views might not be to their benefit to make investments to which they morally object. In v. rare cases Ts can take into a/c non-financial considerations leading to actual financial disadvantage.

49. Standard of care • Ts under duty to meet standard of care in Learoyd v Whiteley (1887) the duty including the duty to seek advice on matters T does not understand and on receipt acting with same degree of prudence. • Under Learoyd standard for investment is such care is as an ordinary prudent man would take if he were minded to make investment on behalf of others for whom he felt morally bound to provide. NB Replaced by S1 TA 2000.

50. Cowan v Scargill Facts: mineworkers pension fund. V wide investment powers. Ten trustees aided by experts. Five from NUM refused investment plan unless overseas investments withdrawn and no energy industries in competition with coal. Court held: Ts in breach unless adopt investment strategy – had to act in best interests of bens and put aside personal views.