#10983 - Rights Of Trustees - Trusts

Rights of Trustees

Indemnity: A trustee needs the right of indemnity because they incur all the debt of the trust personally. That is why they get the ROI, “The price paid by (the beneficiary) for the gratuitous and onerous services of trustees”.

1. Right of Indemnity – Out of the trust fund

• S 36(2) A trustee may reimburse himself from the trust assets for expenses properly incurred in the administration of the trust.

  • The trustee may pay directly out of the trust assets (right of exoneration) or pay personally then reimburse himself (right of reimbursement)

  • Trust instrument can also give expanded rights of indemnity, eg indemnification out of another fund

• What power or duty does the expense related to? (refer to improper exercise)

  • Power: dictated by trust fund

  • Duty: equitable/statutory duties

• Is it a properly incurred expense?

  • Properly incurred expenses:

    • Expenses that are incurred by a trustee when acting

      • Within power

      • In good faith

      • With the requisite standard of prudence

    • This will depend on the nature of the expense. IDENTIFY:

      • Legal costs

        • Costs to defend negligence of a third party that leads to loss to the trust is still property if the Ts have not been reckless or improper Re Raybould

        • Legal costs (including legal costs of defending an action for breach of trust brought about by B unless they acted unreasonably in pursuing litigation) Hayman v Equity Trustees

          • Until an order for costs has been made, the trust cannot be wound up Hayman

          • Even if the defence exhausts the trust funds, it is still properly incurred Macedonian Church

      • Management expenses

        • Costs associated with running the trust that are not in breach of trust e.g. postage, preparation of accounts, bank fees, rates on property, taxation, solicitor’s fees Nolan

      • Damages (tortious or breach of contract)

        • Expenses incurred by damages claimed against trustee (Re Raybould)

        • Breach of statue/breach of contract (common occurrences of financial life –Gatsios) however argue that this only applies to damages Nolan

        • Not every breach of legal duty counts as an improper course of conduct, even if a tort was committed it might be possible for the trustee to seek indemnity Re Raybould

      • Other

  • Improperly incurred expenses (onus on the beneficiary to prove)

    • Victorian case (binding) Nolan - strict

      • Breaches of duties which require strict compliance (reasonableness is irrelevant) and associated costs are improperly incurred

        • Duty to keep and render accounts

        • Fiduciary duties

        • Exercise of the investment power?

          • Nolan might just refer to when the T invest in something that he is not supposed to

        • Duty to adhere to the terms of the trust

      • Unclear whether breaches of less strict duties would be improper, perhaps even investment – not automatically excluded, question of fact

      • In certain circumstances a trustee who has acted outside power may have a ROI available if they have acted in good faith, and the breach benefited the trust RWG Management, Nolan v Collie

        • A determination of the trustee’s actions have benefited the trust in some “undefined way” will not be sufficient to permit the trustee to recoup the expense

    • NSW case Gatsios - relaxed (Nolan says this is just restricted to where the T is found liable for damages)

      • Conduct in breach of trust, in excess of powers or culpable neglect of other duties Spigelman CJL Gatsios

      • Grossly improper frolics Mason J Gatsios

      • Breaches of trust, fraud, criminal penalties Meagher J Gatsios

      • Breaches of the TPA are unremarkable and do not make the costs improperly incurred Gatsios

• If the trustee has a right of indemnity, what results?

  • Places a lien over the trust property in the trustee’s favour, which takes priorities of the beneficiary’s rights so the beneficiary can’t call for the property until the trustee has been reimbursed Buckle

    • It is a fully-fledged proprietary right

    • Property still subject to the T’s lien is not trust property Octavo Investments v Knight

    • If total amount of ROI exceeds value of trust assets, trustee is entitled to all

  • If the T has an unsatisfied ROI, the trust consists of property owned by the B and T, thus the trust property to which the T is entitled then falls outside the definition of “trust property” in the Bankruptcy Act and becomes available for distribution to creditors

    • Creditors can subrogate to the T’s right and sue directly (only for assets secured by the lien) Re Raybould

  • Change of circumstances of Trustee:

    • If a T holding a ROI becomes bankrupt, the right passes to trustee in bankruptcy/liquidator

    • If T died, ROI forms part of his/her estate

    • Loss of T’s office does not affect accrued ROI Gatsios

• Can the ROI be excluded through the trust deed?

  • In Victoria, RWG indicates that a T can accept office without a ROI. Section 2(3) confers trustee duties subject to the trust instrument. They are entitled to do this (freedom of contract)

    • Document must clearly express that the trustee is not meant to be bound

      • “J Smith, Trustee” is only descriptive

      • “J Smith, as trustee at not otherwise”/ “as trustee only” indicates no personal liability

  • In NSW, ROI can’t be excluded because it is a necessary incident of the trust and wasn’t just for the benefit of the T, but the T’s creditors also JA Pty Ltd v Jonco

    • Policy wise makes sense as if ROI is excluded, only person bearing any risk is somebody who is dealing with the T without knowing the terms of the trust (creditor)

• Can the indemnity be lost or reduced through breach of trust?

  • The right of indemnity can be set off against liability from the trustee’s breach of trust RWG Management v CCA

    • Therefore T not required to pay the loss into court, and the indemnity may just be reduced RWG

• Is there a trustee company?

  • S 197 Corporations Act Explanation

    1. The creditors can sue the directors of a trustee company personally if:

       1. The company has not discharged, and cannot discharge, the liability, AND

       2. The company cannot get access to the ROI because there has been:

          • A breach of trust by the corporation

          • The corporation’s acting outside the scope of its powers

          • A term of the trust denying or limiting liability

       • The person is liable both individually and jointly with the corporation

       • Note* doesn’t include when the corporation cannot pay merely because they do not have enough trust assets out of which they can be indemnified

• No Tax: Because we can’t say for certain what a B’s right is while a ROI remains outstanding, we can’t tax the trust

2. Right of Indemnity – From the beneficiaries (if assets aren’t enough)

• Rationale: those who take the benefit should also bear the burden, unless there is a good reason why the T should not bear the burden personally.

• Which beneficiaries are personally liable?

  • Those who are absolutely entitled Hardoon v Belilios

  • Those who are sui juris - competent JW Broomhead

    • Beneficiaries who are not sui juris are not liable for the trustee’s expenses and the trustee has no right to claim that money JW Broomhead

  • It doesn’t matter if the payment was not expressly requested by the beneficiaries, they will still be liable Balkin v Peck

• Which beneficiaries are not personally liable Hardoon v Belilios

  • Tenants for life (likely a discretionary object can’t either as they may not receive any benefit)

  • Infants (but do they become liable for an expense already incurred once they become sui juris?)

  • Special Trust: where the trust instrument itself says the T can’t pursue the B’s personally (can only use assets then)

  • Capital beneficiaries: as there may not be any funds left

• Instances of sub-trust

  • T can sue either. Assignee must indemnify T, but T can still obtain indemnity from original B (who will then pursue the assignee). Doesn’t mean B is relieved from liability JW Broomhead

• Multiple beneficiaries

  • If they all together own the entire property (absolutely entitled), they must indemnify in proportion to their interests JW Broomhead

  • Effect of disclaimer

    • If a B disclaims their interest (and never received any benefit) they will be relieved from liability JW Broomhead

    • If they do this, their share will not be imposed upon the remaining Bs, or on the person they were jointly entitled with (to a particular share) JW Broomhead

  • Effect of insolvency of one of the B’s

    • Their share is not spread among the solvent unit holders, and you must pursue the others in their proportions JW Broomhead

  • More difficult arrangements (if one party is capital beneficiary and other is life tenant)

    • If people start out as only one class, and end up as absolutely entitled, the courts will extend the liability to them Balkin v Peck

    • Unclear of alternative situation

    • What if one party is sui juris and other are not? Probably can cut them out JW Broomhead

• Can a third party be subrogated into the rights of the T to go against the B’s personally?

  • ROI against B is a personal right,...