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Trustee liability

The potentially compounding cost of breach

The words “breach of trust” are frequently bandied around in the context of trusts.  It is generally accepted that such breach is bad and is to be avoided.  However, the full cost of a breach of trust is not always fully appreciated.  While it is understood for the best part, that if a trustee does wrong (is in breach) then that trustee is liable for any loss.  Less understood is that the trustee can also be liable for interest on the loss, and, in extreme cases, that interest can be compounded. 

Decided cases provide, it not absolute rules, some useful guidance.  As a starting principle compound interest is not imposed for the purpose of punishment; rather, in the trust context it is imposed when the courts are of the view that justice requires such an award.  Not entirely helpful perhaps.  At what point will justice intervene?  Generally, this can be expected where not only has the trustee acted wrongly, but the trustee has also profited from his or her wrongdoing, which will not always be the case, and in fact, which more often that not, is not the case.  However, where the trustee in breach has used trust monies in trade (or other personal enterprise), so that the trustee has profited from the trust monies, then compound interest may be awarded.

This can be re-stated as a 2 step test.  The first step is to identify the breach of trust, and where that is the case, then step two is to determine whether there was a degree of personal profit.

The next consideration, regardless of whether any interest is compounding or not, is from what date the interest runs.  While in some matters, courts routinely apply interest from the date of judgment, there is no fixed rule.  In a trust context the starting point where a beneficiary has been deprived of trust funds is to apply interest from the date the funds were first wrongly applied.  Where a matter has taken some time to get to court, this can still amount to a significant penalty even if only simple (non-compounding) interest.

References:

  • Equitycorp Industries Group Ltd (in stat man) v R (no 51) [1196] 3 NZLR 690 at 696, 697
  • Wallerstein v Moir (No 2) [1975] QB 373 (CA) at 397
  • Victoria Street Apartments Limited (In Liquidation) v Treasury Technology Distribution Limited & Ors CIV-2009-404-008377 unreported judgment of Duffy J delivered 15 December 2011

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