Breach of trust

the nature of liability and defences

1. 1. Breach and Absence of Equitable Authority - the trustee wrongfully exceeds the equitable authority conferred upon him or her by the trust instrument 2. Personal and Proprietary Remedies - both remedies can be claimed upon the trustee who breaches of trust 3. Third parties involved in the breach of trust - refer to constructive trust Ex: knowing assistance Case: Royal Brunei Airlines Sdn Bhd v Tan               Personal liability 1. Liability of the trustee is compensatory 2. Liability is personal, not vicarious - Nothing to do with co-trustee - s30,61 England Trustee Act - s63 Malaysia Trustee Act 3. Breaches before Appointment - not liable case: Re Strahan case: Re Forest of Dean Coal Mining Company 4. Breaches after Retirement - not liable - case: Head vs Gould 5. Trustee-beneficiary - liable, not allowed to claim beneficial interest Criminal liability - s405,406 Penal Code - case: Bahru Zaman Bin Ali v PP   1. Consent or Acquiescence case: Re Kerr case: Re Pauling’s Settlement Trust 2. STATUTORY PROTECTION AND DEFENCE s63 Trustee Act 1949 … honestly and reasonably, and ought fairly to be excused for the breach of trust case: Re Umpherstone s44 Trustee Act 1949 - the court has power to make beneficiary indemnify for breach of trust 3. LACHES s22 Limitation Act 1953 case: Nelson v Rye 4. DISCHARGE IN BANKRUPTCY - bankruptcy relief for breach of trust BREACH OF TRUST (a trustee does any act which he or she ought not to do or fail to do any act with regard to the administration of the trust or with regard to the beneficial interest) NATURE OF LIABILITY PERSONAL AND CRIMINAL LIABILITIES DEFENCES

2. NATURE OF LIABILITY Breach and Absence of Equitable Authority A trustee is found guilty of a breach of trust if he fails to do what his duty requires, or if he does something that he is not entitled to do in the trust . Personal and Proprietary Remedies Personal remedies are traditionally enforced by requiring the trustee who breach of trust to be responsible and account for his stewardship of the trust fund. the trustee may liable to a proprietary remedy as recovering the original trust assets or their traceable proceeds from the trustee if the trustee had been found in the misapplication of the trust assets.

3. Third parties involved in the breach of trust Constructive trustee CASE: Royal Brunei Airlines Sdn Bhd v Tan FACT: Royal Brunei Airlines appointed Borneo Leisure Travel Sdn Bhd to be its agent for booking passenger flights and cargo transport around Sabah and Sarawak. Subsequently, Royal paid money to Borneo. Mr Tan was Borneo Leisure Travel’s managing director and main shareholder. Borneo Leisure Travel, with Mr Tan’s knowledge and assistance, paid the money received from Royal into its current account and used it for its own business. The contract had being terminated as Borneo Leisure went insolvent. HELD: the defendant was liable personally as a constructive trustee since he had dishonestly caused or permitted the company to commit a breach of trust, knowing the company was not authorized to do what it did.

4. PERSONAL LIABILITY OF TRUSTEES TO BENEFICIARIES 1. Liability of the trustee is compensatory A trustee who fails to comply with the duties imposed upon him by equity and by the trust instrument is liable to make good to the beneficiaries the loss to the trust estate. Even if there is no loss, the trustee is accountable for any profit made in breach of trust.

5. 2. Liability is personal, not vicarious personal claim, claim in personam section 30 of England Trustee Act 1925 : a trustee is liable for his own breaches and not for those of his co-trustees unless the trustee is guilty of wilful default. section 61 of England Trustees Act 1925 a trustee can be excluded from the liability if the court considers that the trustee had acted honestly and reasonably. section 63 of Malaysia Trustee Act 1949 If it appears to the Court that a trustee, whether appointed by the Court or otherwise, is or may be personally liable for any breach of trust, whether the transaction alleged to be a breach of trust occurred before or after the commencement of this Act, but has 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 in the matter in which he committed such breach, then the Court may relieve him either wholly or partly from personal liability for the same

6. Case: Armitage v Nurse SIGNIFICANT: The Court of Appeal held that in English law trustee exemption clauses can validly exempt trustees from liability for all breaches of trust except fraud. In other words, the trustee was exempted from liability for loss or damage ‘unless such loss or damage shall be caused by his own actual fraud’.

7. 3. Breaches before Appointment A trustee is not liable for breaches of trust committed before his appointment CASE: Re Strahan CASE: Re Forest of Dean Coal Mining Company FACT: whether ¬Barrett as a director was liable to the company for failing to take steps to recover money which were due to the company from one Johnson under a transaction which had been taken place three years before Barrett’s appointment. HELD: Jessel M.R. held that whatever might have been in the case of a trustee in the strict sense, a director was no such duty.

8. 4. Breaches after Retirement A trustee remains liable after retirement for breaches committed by him or her during his term of office; and similarly his or her estate remains liable even after his death Not liable for the act done by others after retirement unless his retirement is for the purpose to facilitate a breach of trust.

9. Case: Head vs Gould FACT: a property was settled on Mrs. Head for life with remainder to her three children. The settlement contained an express power of advancement. As Mrs. Head was continually in financial difficulties, her daughter asked the trustees for advances on her share to help her mother. The trustees did so. However, the daughter pressed for more when the daughter’s share was exhausted. Therefore, the trustees refused to give her more. Subsequently, the daughter asked the trustees to be released from the trusteeship and suggested that new trustees should be sought who are willing to make the advance. The trustees then were replaced by the daughter and further advances were made in order to help Mrs. Head. As a result, the trust property was sold off to do so. It caused one of the children was lost to the entitlement. HELD: the old trustees were not liable for the breaches committed by the new trustees.

10. 5. Trustee-beneficiary If the trustee in breach is also a beneficiary, then his beneficial interest bears the loss caused by the breach against the other beneficiaries. a trustee, who is a beneficiary, is in default and liable to the trust estate, then he will not be allowed to claim against his beneficiaries for the beneficial interest until he made good his default

11. CRIMINAL LIABILITY OF TRUSTEES England section 5(2) of Theft Act 1968 : it provides that “any person having the right to enforce the trust is regarded as the person to whom the subject matter of the trust ‘belongs’. Thus a trustee would have committed theft if he or she dishonestly appropriates property ‘belonging to another’ with an intention of permanently depriving the other of it.

12. section 405 of Penal Code criminal breach of trust a person is entrusted in any manner over property or dominion over property and the person dishonestly convert to his own use or dishonestly uses or disposes the property in violation of any direction of law or any legal contract or wilfully suffers any other person, he is commit criminal breach of trust. section 406 of Penal Code - punished with imprisonment for a term not exceeding ten years and with whipping, and shall also be liable to fine.”

13. three elements to prove CBT 1. the trustee must be in entrustment or is in a dominion over a property . CASE: Bahru Zaman Bin Ali v PP FACT: the accused, a clerk at parcel office who acted as trustee of this company, had received 50 cents for a ticket but no receipt was given. HELD: as an employee, he was entrusted by his employer to receive the money. Therefore, his act was amount to a criminal breach of trust.

14. the accused or the trustee must have control over the property even though not in physically in possession over that property. In other words, as long as the trustee owns a duty to look after the trust property, he will be responsible for the trust property even though he was not physically possessed that property. Case: Yeoh Teck Chye v PP FACT: the accused was a bank manager. He had approved a cheque for an overdraft facility which he has no power to do so. Then, he had been charged for criminal breach of trust as he had exceeded his duties which conferred by his employer. HELD: although there was no entrustment but here was a dominion on the part of the accused as he was bank manager and responsible for the money disbursed .

15. 2. the criminal breach of trust happened in the circumstance where the trustee dishonest misappropriate or convert to his own use of the property. section 23 and 24 of Penal Code: dishonest is defined as an intention of causing wrongful gain or wrongful loss to another person . 3. there must be the trustee dishonestly disposes the property in violation of any direction of law or legal contract. Case: Mohd Adil v PP FACT: the accused as a headmaster of a school had deducted the salary of teachers for a society fund. However, there was no payment was made to the fund. HELD: he was committed to criminal breach of trust as the accused as a trustee to the society fund but failed to deposit the money to the fund.

16. DEFENCES CONSENT OR ACQUIESCENCE A liability for breach of trust may be negatived if the act complained of was acquiesced in or consented to by the beneficiaries, all being sui juris. Case: Re Kerr FACT: the trustees of a sheep farming property included the amount of remuneration they were charging the trust in the trust accounts provided to the beneficiaries. They were being overpaid considering the work they were doing. However, the beneficiaries had full notice of the amounts received and they had not raised any objections for nearly five years. Thus, the issue arose was whether the trustee was a breach of trust and the defense of acquiescence could be raised HELD: the trustees were not liable to replay the amounts that they had received because the conduct of the beneficiaries amounted to acquiescence to the payments.

17. 2. STATUTORY PROTECTION AND DEFENCE section 63 of Malaysia Trustee Act 1949 If it appears to the Court that a trustee, whether appointed by the Court or otherwise, is or may be personally liable for any breach of trust, whether the transaction alleged to be a breach of trust occurred before or after the commencement of this Act, but has 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 in the matter in which he committed such breach, then the Court may relieve him either wholly or partly from personal liability for the same

18. Case: Re Umpherstone FACT: a will established two charitable trusts for the award of scholarships. The trustees mixed the funds of the two trusts and failed to make any appointments for about forty years. However, in fact, the trustees were unsure what to do and there was no question of dishonesty. Although the mixing of funds was sensible although wrong but there was no loss caused to the corpus of the fund. Besides, there was no one had been disadvantaged by the failure to make appointments. The trustee has been sued for breach of trust. HELD: the trustee was not liable as there was no dishonesty or loss. The trustee was ought fairly to be excused.

19. section 44 of Trustee Act 1949 it states that the court has the power to make beneficiary indemnify for breach of trust. “ Where a trustee commits a breach of trust at the instigation or request or with the consent in writing of a beneficiary, the Court may, if it thinks fit, and notwithstanding that the beneficiary may be a married woman restrained from anticipation, make such order as to the Court seems just, for impounding all or any part of the interest of the beneficiary in the trust estate by way of indemnity to the trustee or persons claiming through him.”

20. 3. LACHES Equity aids the vigilant not the indolent, this is an equity maxim which means delay defeats equity. A beneficiary who seeks for equitable relief must do so within a reasonable time. section 22(2) of Limitation Act 1953 “ an action by a beneficiary to recover trust property or in respect of any breach of trust, not being an action for which a period of limitation is prescribed by any other provision of this Act, shall not be brought after the expiration of six years from the date on which the right of action accrued: Provided that the right of action shall not be deemed to have accrued to any beneficiary entitled to a future interest in the trust property, until the interest fell into possession .” Case: Nelson v Rye FACT: a musician claimed an account of earning wrongfully retained by his manager in breach of fiduciary duty. HELD: rejected claim since claim made after 6 years

21. Exception to laches section 22(1) of Limiatation Act 1953 “ No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or to recover from the trustee trust property or the proceeds thereof in the possession of the trustee, or previously received by the trustee and converted to his use.” That means that in the breach by fraudulent act or fraud, the trustee would not able to raise the defence of laches.

22. CASE: North American Land Co vs Watkins FACT: an agent had been sent to America to buy land for his company. He bought it and subsequently duly conveyed to the company. However, the agent made and retained profit for himself. The company realized and took an legal action to claim back the money after six years. HELD: succeeded the claim based on two grounds, first that the agent was in the position of a trustee and had retained the trust money, and second that his conduct had been fraudulent.

23. 4. DISCHARGE IN BANKRUPTCY A claim in respect of a breach of trust is provable in bankruptcy, and in general, an order of discharge releases a bankrupt from all the bankruptcy debts. Thus , bankruptcy relief for breach of trust is possible if it is shown that there has been no element of fraud.