The recent decision in Selkirk v McIntyre raises the largely unappreciated issue regarding the extent to which a trustee can make recovery from a co-trustee on account of liability that has been incurred by the trustee. The case also addresses (once and for all might be an optimistic assessment) whether the fact that a co-trustee undertook a passive role exonerates that trustee from liability (to save you reading the decision the answer is a resounding no).
Trustees act personally in a joint and several capacity. That means if the trustees don’t meet the trust’s GST liability (for example), Inland Revenue can seek to recover the whole amount owing from trustee A. It is then up to trustee A to seek to recover from trustee B, C etc.
This case did not seek to challenge the trustee’s liability for the GST. The matters for consideration were the:
- extent to which the paying trustee could recover from his co-trustee
- relevance, if any, of the professional trustee’s passive role (that is, is it my fault if I left the day to day trust administration to my co-trustee?)
Personal liability of trustees
While we talk about “the trust”- that is “my” trust, “her” trust, “his” trust – the fact is trusts are not legal entities. The “legal face” of a trust is the trustee(s). Trustees are the legal owner of trust assets and it is trustees who are liable for trust debts.
“Liabilities incurred by a trustee in relation to a trust are always the personal liabilities of the trustee … A creditor has a personal right to sue a trustee and to get judgment and make the trustee bankrupt.” See the Supreme Court judgment in Macalister Todd Phillips Bodkins v AMP (emphasis added).
When trustees incur liability it is joint and several. This means that when liability arises, if there is more than one trustee a creditor can pursue any trustee.
However, when a trustee incurs liability, that trustee can then sue to recover a proportionate share (and in limited cases all of the cost) from any co-trustees.
Liability of co-trustees
The ability to recover from a co-trustee arises from the concept of “equitable right to contribution”, which enables any parties who share a liability to share equally in the payment of that liability. This reflects the unfairness that would otherwise be the case. Relevantly in this regard, the comparative culpability of each trustee is not generally a relevant factor.
For this reason Mr Selkirk was entitled to be reimbursed for half of the amount paid to Inland Revenue as well as half of his legal fees in relation to the matter.
But could he or should he get more? That is, is Mr Selkirk entitled to a full indemnity from his co-trustee?
Although the normal position is one of equal contribution, there are limited (read exceptional) circumstances where one trustee must fully indemnify another. Where this is the case the paying trustee is entitled to recover the full amount paid from a co-trustee.
The circumstances in which a trustee will be entitled to a full indemnity are summarised as follows:
- if one of the trustees is a solicitor, a co-trustee who has relied on that trustee’s advice can claim an indemnity from the solicitor trustee (the solicitor-trustee rule)
- where a trustee receives a personal benefit from a breach of trust from which the other trustee(s) did not participate, the trustees are entitled to an indemnity from the defaulting trustee. However, the indemnity is limited to the amount of personal benefit received (the personal benefit rule)
- a fraudulent trustee must indemnify any innocent co-trustees – but not any other fraudulent trustees (the fraudulent trustee rule)
- a trustee who is also a beneficiary who benefits from a breach of trust is not entitled to an indemnity from any co-trustees to the extent of the trustee-beneficiary’s interest (the trustee-beneficiary rule). Note that there are divergent views on how the trustee-beneficiary’s beneficial interest is accounted for.
To paraphrase, to be entitled to an indemnity a trustee must have acted innocently and reasonably, and there must have been a breach of trust by a co-trustee. A trustee will not be entitled to a full indemnity if the trustee has:
- participated in any breach of trust
- abdicated responsibilities and a breach occurred as a result of a co-trustee’s erroneous actions.
Application of principles of indemnity to the case at hand
Mr Selkirk sought a full indemnity due to his own lack of culpability, his role as a “passive trustee” and the fact that he had diligently “chased” his co-trustee to get the trust’s accounts in order. While some might consider the four year lapse in this scenario mitigated against such diligence (during which time the debt owed to Inland Revenue grew from $93,480.36 to $518,027.94), nothing turned on this point.
Given the evidence available to the Court, the Court could not identify any rule that would ground a full indemnity for Mr Selkirk. The result was that while his co-trustee was liable to share the cost, Mr Selkirk remained liable for half.
Regarding his role as a “passive” trustee, the Court made some strong points that any trustee would be wise to take on board.
- Passive trustees have been unsuccessfully seeking the court’s assistance since the development of contribution and indemnification as equitable remedies (bless them for trying but at what point will the message sheet home?) referring to the robust comments from the 1812 decision in Lingard v Bromley where it was noted that “The Defence is of a Kind, which a Court of Justice is very unwilling to listen: that, having undertaken a Trust, they abdicated all Judgment of their own in the Performance of it; and did whatever the Plaintiff desired: “without examining” (as they say in so many Words) “into the Matter, or Ground, of the Proceeding”. Nothing could be more mischievous than to hold, that Trustees may thus act; and avoid Responsibility by throwing the Burthen upon the Person, in whom they have reposed this blind Confidence.”
- Courts should be vigilant against allowing any indemnity for passive trustees because if it existed “… it would act as an opiate upon the consciences of the trustees; so that instead of each [beneficiary] of the trust having the benefit of several acting trustees, each trustee would be looking to the other or others for a right of indemnity, and so neglect the performance of his duties. Such a doctrine would be against the policy of the Court in relation to trusts …”: Bahin v Hughes.
- In the case at hand there was no evidence of any systems or procedures aimed at ensuring GST was accounted for on the sale of each property.
- Equity does not recognise the concept of active and passive trustees. All trustees are equally accountable to the beneficiaries.
Post script for trustees
If you are reading this and feeling worried, what are your options? If you are not confident that you can work with your co-trustee(s) to manage the trust, retirement should be considered. This may not by itself relieve you of all liability, but it will draw a line in the sand regarding quantum.
If you are a professional trustee and your operating model is to leave day-to-day management to co-trustees this practice should be reviewed as a matter of urgency. Generally the hands off approach happens because clients want or require an independent trustee, but either the client is unwilling to see trust income being dissipated in payment of trustee fees, or the trustee is reluctant to seek fees in addition to any fees for professional services.
This position needs to be re-visited by many of the large number of trusts in existence in New Zealand. Being a trustee is a risky business. The risks can be largely, but not entirely, mitigated through good management – but this comes at some cost. As professionals we need to be more comfortable selling trustee services. If we are paid for our risk and time we can do the job better – not just for our own advantage but our client trust’s too. When issues as to trust validity arise, being able to evidence genuine trust management (and the invoices for the same) can be invaluable in ensuring the protection of trust assets.
- Selkirk v McIntyre  NZHC 575
- Macalister Todd Phillips Bodkins v AMP  1 NZLR 485
- Bahin v Hughes 31 ChD 390
- Power v Hoey (1871) 19 W.R 916
- Baynard v Wooley (1855)
- Chillingwoth v Chambers 1 Ch 685
- Lingard v Bromley  1 V & B 114; 35 ER 45
- Lord Goff of Chieveley and Garth Jones, The Law of Restitution (7th ed, Sweet & Maxwell, London, 2007)
- Andrew Butler (ed) Equity and Trusts in New Zealand (2nd ed, Brookers Wellington, 2009)