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Trustee liability

Honesty is more than just a virtue

Being a trustee is a risky, and at times, costly business.  This has been confirmed in the Court of Appeal decision in Spencer v Spencer, which largely upholds the High Court decision. The facts of this case are discussed in Trustees, be afraid, very very afraid. While the Court of Appeal decision does clarify some of the facts relied upon by the High Court, there is little difference in the basic factual matrix. The issue for the trustees was that once the court was satisfied there had been breaches of trust, the question became – were the trustees entitled to be indemnified from the trust. The short answer was largely, no. The reason being that the trustees had not acted honestly. Honesty is an essential aspect of most (but not all) indemnity clauses contained in deeds of trust. It is also an essential element for reliance on the indemnity contained in s. 73 of the Trustee Act 1956.

The Court of Appeal decision highlights the need to carefully analyse and assess who knew what when. Once armed with this information the Court of Appeal determines first, when did the trustees know the parameters of the powers in the deed? (interestingly the trustees are not deemed to necessarily know this. Although in this regard, due to an intervening rectification it may be that the case can be limited to its facts). Having established that the trustees did not know, at the relevant time, that the management fee in question could not be properly paid; the trustees were not out of the woods. The next enquiry was to the reasonableness of the fee. Finding that the fee charged by the related company was excessive the trustees were found not to have acted honestly to the extent of the over-payment. The case provides an extensive consideration of what it is to act honestly in the context of a trustee.

Usefully the Court of Appeal reviews the relevant case law on the subject, noting that the proposition previously relied upon “dishonesty means “simply not acting as an honest person should” judged by an objective standard.” [para 126] truncates the original passage from Royal Brunei v Tan [1995] 3 All ER 97 and omits the requirement of a subjective element. The Court of Appeal concluding that in New Zealand “the assessment of a trustee’s honesty comprises both subjective and objective elements. A critical first step is to establish what the trustee actually knew about the terms of the trust relevant to the breach alleged and whether the trustee knew that the impugned conduct amounted to a breach of trust… The second step requires an assessment of whether, in the light of what the trustee knew, he or she acted in the way an honest person would in the circumstances. This is to be assessed on an objective basis.” [131]

And the real killer – A trustee who believes his or her actions or omissions were in the best interests of the beneficiaries will not necessarily be entitled to protection.

While it will be a relief for professionals and trustees that omitting to charge interest on beneficiary advances and charging money spent ostensibly on a child beneficiary to the beneficiary’s account are not, of themselves breaches of trust; the clarification regarding the high standard of honesty required of a trustees means that many trustees should be looking to whether they are prepared to take the risk of trusteeship, or ir so, how best to protect themselves.

The trustees in Spencer are again found personally liable for decisions made for the benefit of one beneficiary (Mr Spencer) at the cost of the others. The case warrants reading as there are some distinguishing facts – particularly the fixed beneficial interest for Mr Spencer’s disabled son. The core message though is that actions many trustees would consider acceptable often will not be. The costs for getting it wrong are high.

References:

Spencer v Spencer [2013] NZCA 449

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