Challenging trustees decisions

Having received the information a beneficiary has asked for (or was given even without asking), what if the beneficiary is not happy about what has happened? 

This month, we consider the beneficiaries´ rights to challenge trustee decisions and, where possible, to seek a remedy for a breach of trust. We will also consider how trustees can limit the risk of a challenge by a disgruntled beneficiary and we look at a recent case illustrating how a beneficiary may win an argument in court and yet potentially lose financially.

Different trusts and different rights

Clearly, the type of trust in question and the kind of entitlement that a particular beneficiary has under the trust will be of paramount importance in determining the potential scope for any challenge.

A beneficiary with a fixed right under a trust, such as, say, a life interest, will have more rights and therefore a better chance of upholding them in any court action than a beneficiary of a discretionary trust where his/her potential entitlement depends solely on the trustees exercising their discretion. This is not to say that beneficiaries of discretionary trusts would not be able to challenge trustees' decisions. As mentioned in last month's article, it is fundamental to the law of trusts that the court has jurisdiction to supervise and, if appropriate, intervene in the administration of a trust, including a discretionary trust. However, to succeed in any proceedings against a trustee, the aggrieved beneficiary will need to show that the trustees acted in breach of their powers and duties under the trust.

Let us now look in more detail at how a trustee's decision can be challenged in the court.

The grounds for challenging a trustee's decision

The legal grounds for challenging trustees’ decisions essentially fall into the following five categories:

• (1) The step taken following the trustees’ decision was outside the scope of the trustees' powers. A challenge on this ground would involve an examination of the trust documents to determine the scope of the trustees’ powers, and analysis of the effect of the trustees’ act, to ascertain whether it falls within the scope of the powers. If it does not, then the act will be void.

• (2) The trustees’ decision was within the scope of the trustees’ powers, but the trustees committed a breach of trust in failing to give proper consideration to relevant matters (or took into account irrelevant matters). This is obviously going to be more difficult to prove. If the court finds the trustees have committed a breach of trust, then the act will be voidable at the court’s discretion. It has been said that, for example, trustees must inform themselves of relevant matters before taking a decision, which may include tax considerations. A common complaint raised by beneficiaries is that the trustees slavishly followed the wishes of the settlor. There is no reason why trustees should not follow the settlor’s wishes provided they can demonstrate that they have given thought to the matter themselves.

• (3) The act was within the scope of the trustees’ powers but was exercised for a purpose, or an intention, which was outside of the power being exercised (commonly referred to as a “fraud on a power”). There is no need for a beneficiary to demonstrate that the trustees acted dishonestly (though they may well have done). Where the power has been exercised improperly, then the trustees' act will be void.

• (4) The trustees had a conflict of interest in making the decision in question. Here, a beneficiary must show that the conflict was neither inherent in the circumstances of the trust when it was created nor expressly authorised by the terms of the trust. The trustees must then demonstrate that the decision was one which any reasonable trustee might have taken and that it was not influenced by the conflict.

• (5) The act was a result of a mistake by the trustees (either a mistake of law or of fact). The mistake must be of sufficient gravity for the court to set it aside.

The remedies available to beneficiaries

There are a number of remedies available to beneficiaries depending on the specific problems encountered with the trust in question but, of the more general remedies, there are four types.

The first is an order for an account on the basis of wilful default. This remedy is most useful where a trustee has acted in breach of trust, for example by spending trust money on their own expenses or otherwise dealing with the trust property in an unauthorised manner. If the court finds that the trustee has acted in breach, then they will be obliged to restore the trust property to what it would have been but for the breach.

The second remedy is an order directing the trustees to take or refrain from taking a particular course of action. Of course, the beneficiary will have to satisfy the court that the trustees should or should not act in a particular way.

The next remedy is that of equitable compensation. If a beneficiary can prove a loss as a result of the trustees’ breach of a fiduciary duty and the position cannot be restored, then the court may make an order of equitable compensation.

In extreme cases, a beneficiary may apply for an order for the administration of the trust. This should really be the last resort and only to be contemplated if there is no other remedy available, in particular if it is not possible to remove and replace the trustees. If the court has to step into the shoes of the trustees and administer the trust, there will have to be hearings for even the smallest matters. Jarndyce v Jarndyce comes to mind and so this remedy is almost never used these days.

In any of the above circumstances, an application could also be made for removal of the trustee acting in breach and an appointment of a replacement trustee. However, case law shows that even in cases where a trustee was found to be in breach of trust, it does not follow that the court will necessarily remove and replace him/her.

Lastly, there is of course the ultimate remedy available in some cases, namely where all the beneficiaries are ascertained and of full age and capacity, i.e. that they can bring the trust to an end (under the rule in Saunders v Vautier, 1841). It may be that a threat of such an outcome might be sufficient to stop an errant trustee from committing a breach in the first place.

Trustees’ actions to limit their liability

Occasionally, trustees find themselves in a situation where they have difficulty in making a decision. Often this will be the case with the trustees of discretionary trusts where they may have to weigh up conflicting beneficial interests or may be facing external pressures. There may be a fear of a challenge from a disgruntled beneficiary which trustees will be keen to avoid. In such circumstances, both statute and common law principles allow a trustee to invoke the court’s supervisory jurisdiction of a trust by making administrative trust applications to seek the court’s approval.

The four categories of such applications were recited in the decision in Public Trustee v

Cooper [2001] WTLR 901 as follows:

1. A construction application: is a particular action within the trustee’s powers?

2. A blessing sought for a particularly significant or momentous course of action: is a particular course of action a proper exercise of the trustee’s powers?

3. A trustee asking the court to decide upon a course of action: these applications involve the court taking a decision in place of the trustee because the trustee is genuinely conflicted.

4. Retrospective blessing sought for a particular action: were the trustees right to pursue a course of action?

As can be seen from the above, all the remedies, both those available to trustees and the beneficiaries, require court action. Just making an application for a remedy will inevitably involve a great deal of effort and costs.

How to win and potentially lose at the same time

A relatively recent case provides a good example of difficulties that can arise even where a trust beneficiary successfully challenges a trustee in court (Price v Saundry & Anor [2019] EWCA Civ 2261). This concerned a trust holding a number of buy-to-let properties under which a Mrs P Price and a Mrs V Saundry were the beneficiaries. Mrs Saundry was also one of the trustees, having become one following the death of her husband who was the original trustee. Mrs Price was not happy with a number of matters, including the fact that Mrs Saundry appointed her brother as additional trustee in breach of trust, that she attempted to purchase one of the properties for herself at undervalue and that there had been numerous payments out of the trust to Mrs Saundry's family members which should not have been made. The High Court found in Mrs Price's favour and ordered Mrs Saundry to repay certain funds back to the trust. However, the judge said he could not be certain that Mrs Saundry was guilty of serious misconduct and so she was still entitled to be indemnified for her legal costs from the trust funds. Mrs Price could also claim her costs from the trust fund, the net result of which was, of course, that despite her win in the court, Mrs Price found herself much worse off financially as the value of the trust fund would be substantially diminished. She appealed and fortunately for her, the Court of Appeal reversed this part of the judgment (on the basis that the High Court judge failed to recognise the serious misconduct on behalf of Mrs Saundry) and ordered Mrs Saundry to pay both her and Mrs Price's costs from her personal account.

It may be useful to add that in England and Wales, in relation to reimbursement of a trustee from the trust fund, the rule is found in section 31(1) of the Trustee Act 2000. It provides that "A trustee (a) is entitled to be reimbursed from the trust funds, or (b) may pay out of the trust funds, expenses properly incurred by him when acting on behalf of the trust."

In the present case, the decision was that Mrs Saundry's legal expenses were not properly incurred when acting on behalf of the trust. Indeed, the Court of Appeal quoted from the judgment in Armitage v Nurse & Ors [1998] Ch 241, that "it offends all sense of justice to allow a trustee to recoup themselves of the trust fund for the costs of unsuccessfully defending themselves in relation to breaches of trust" and also adding "for doing so in relation to serious misconduct".

Comment

Challenges to trustees’ decisions often become acrimonious and frequently involve claims for breach of trust, and applications for the removal of the trustees. Any court proceedings are likely to be drawn out and costly. Given the technical nature of the arguments that have to be presented, legal advice would be essential. And remember that, even with the best legal advice, once the case goes to court, one half of all the lawyers are inevitably wrong. In short, applications to the court should be seen as a last resort, but the remedy is there if needed.