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by • February 25, 2012 • Probate, TrustsComments (0)1368

Trusts and Probate claim concerning solicitors

NOTE: This article was published in February 2012 and reflects the law as it stands on the date of publication and not at any later date.

TRUSTS AND PROBATE CLAIM CONCERNING SOLICITORS

Introduction

A solicitor may be involved in the administration of a trust or estate:

(a)  in the capacity of a professional trustee or personal representative; and/or

(b)  as a solicitor advising the trustees or personal representatives.

In his capacity as trustee or personal representative, the solicitor will owe equitable duties to the beneficiaries of the estate or trust. He may be liable for a breach of trust, or devastavit.

In his capacity as a solicitor advising the trustees/ personal representatives, the solicitor will owe common law duties of care in contract and tort to the trustees/personal representatives and, perhaps, also directly to the beneficiaries.

Some breaches by trustees or personal representatives can be committed entirely innocently or inadvertently, e.g. where the trustees or personal representatives invest in assets in which they have no power to invest. In such a case, the trustees’ intentions and motives are irrelevant; it is also irrelevant whether they have been negligent.

The trustees/personal representatives may, however, have a claim in negligence against a solicitor who carelessly failed to advise them not to make the wrongful investment.

Trustees are also under a duty, under the Trustee Act 2000, and in equity, to exercise reasonable care and skill in their management of trust property. Clearly, they can only be liable, in this respect, if they have been “negligent”. If a solicitor advising them is responsible for their negligence, they may have a claim against the solicitor.

Duties of a solicitor/personal representative

 

 

In Younger v Saner [2002] EWCA Civ 1077 the following propositions were accepted, with regard to the nature of the equitable duty, owed to the beneficiaries of an estate, of a solicitor who acts as the administrator of an estate (in that case in securing income for the estate):

 

(a)  As a professional trustee the solicitor is required to show the degree of care and skill to be expected of an experienced solicitor.

 

(b)  The solicitor is under no obligation to use his own money, or the firm’s money, on financing the administration of the estate, or to expose himself to the risk of personal liability without adequate protection.

 

(c)  Questions of causation and loss should be dealt with on the same principles as would apply in contract and tort (subject to the unresolved question as to whether a beneficiary could be under a duty to mitigate his loss).

 

 

No general duty on solicitors to advise beneficiaries

 

There is no general duty owed by solicitors, acting in the administration of an estate, to advise beneficiaries of that estate as to their rights, or even to notify beneficiaries of their entitlement whilst the estate is being administered. This was established in Cancer Research v Ernest Brown & Co [1997] STC 1425. A brother and sister died within 18 months of each other. The majority of the brother’s estate passed to the sister, and the majority of her estate to 7 charities. A legal executive in the defendant firm acted in the administration of the estate of the sister.

 

The legal executive in the defendant firm failed to advise the charities that they were beneficiaries of her estate. The charities claimed that, if they had been so advised within 2 years of the brother’s death, they would have executed a Deed of Variation of the brother’s Will redirecting his estate from the sister to the charities. As it was, the charities did not become aware of their entitlement until after the 2-year period for executing a tax-effective Deed of Variation had passed.

 

Harman J dismissed this claim on the basis that an executor is under no duty to inform a legatee of the legatee’s prospective entitlement to the legacy (Re Lewis [1904] 2 Ch 656, at 658).

 

It followed that, a solicitor acting in the administration of the estate, is under no separate duty to notify a legatee of the legatee’s entitlement unless instructed to do so by the executor. Indeed, Harman J could not see how solicitors owed any obligation to the residuary beneficiaries in the administration of the estate. Their only duty was owed to the executors. In any event, there was certainly no duty on a solicitor to advise the charities as to the facilitation of a tax-avoidance scheme.

 

However, it must, at the very least, be good practice to advise a beneficiary of his or her entitlement and/or of the opportunity to save IHT by executing a Deed of Variation.

 

 

Wrong notification of entitlement

 

 

If, however, a solicitor does, in fact, advise as to a beneficiary’s entitlement, but does so negligently, causing loss to the beneficiary who has relied upon that advice, the solicitor may be liable to the beneficiary.

 

In Martin v Triggs Turner Bartons [2010] PNLR 3, a solicitor/personal representative advised the widow of the deceased that she was not entitled to a widow’s pension, and undertook to investigate the matter. The solicitor did not chase up the issue of pension entitlement with the DSS. The widow was, in fact, entitled to pension benefits of just over £25,000 that she could have claimed, but for the solicitor’s negligence in failing to pursue the matter on her behalf.

 

It was accepted that Cancer Research v Ernest Brown establishes that an executor does not generally owe a duty to a beneficiary in connection with the affairs of a beneficiary. However, the solicitor had assumed responsibility to advise the widow as to her pension entitlement, and undertaken to make investigations. The widow had reasonably relied upon the advice and undertaking. The solicitor had, therefore, assumed a duty of care to the widow, but failed in that duty, causing loss to the widow.

 

The solicitor also advised the widow (who had a life interest in the income of the residuary estate) that the index-linked element of a national savings certificate was not income, but capital, to which certain charities were entitled. This advice was wrong. The index-linked element was income, to which the widow was entitled. It was held that the solicitors had given negligent advice, causing loss to the widow. It was not possible to adjust the accounts, so as to credit the widow with the index-linked element: the estate accounts had been signed and could not be re-opened without the consent of the charities.

 

Failure to notify personal representatives

 

There is no English authority as to whether a solicitor, who has agreed to store the Will, owes a duty of care to the executors of the estate in respect of loss suffered by a negligent failure to locate the executors and notify them of the existence of the Will. However, in the Australian case of Hawkins v Clayton (1988) 164 CLR 539 it was held that such a duty was owed. The solicitors made little or no effort for 6 years to trace the executor causing loss (a fine for late payment of estate duty, and diminution in the value of estate property allowed to fall into disrepair). Such loss was recoverable, being loss of the exercise or enjoyment of the rights of ownership by an executor who does not know of his entitlement.

 

It is submitted that an English court would reach the same conclusion on the basis that a solicitor is entrusted with the custody of a Will in order to ensure that the Will is safeguarded for the benefit of the executor, so that it can be produced promptly for probate for the ultimate benefit of the beneficiaries. However, the duty would only arise if the solicitors are aware of the death of the testator. They may hold a number of old Wills in storage. They are not bound regularly to inquire as to whether the testator has died.

 

 

Delay in obtaining a grant

 

In Chappel v Somers & Blake [2003] WTLR 1085 the solicitors instructed to act in the administration of the estate did nothing to obtain a grant of probate for almost 5 years with after which the executrix obtained a grant of probate through another firm.  The executrix claimed loss of income from two properties comprised in the residuary estate during the period of delay. The failure by the solicitors to obtain a grant promptly amounted to negligence. The issue was whether the executrix (who had no interest in the residuary estate) had suffered any loss which she could claim.

 

The solicitors applied to strike out the action contending that any alleged loss had been suffered by the residuary beneficiary, to whom the properties had been devised, and not by the executrix in her capacity as such. Neuberger J held that the executrix represented the interest of the deceased owner of the property and was, therefore, the person entitled to recover damages. During the period of administration she was the person entitled to income from the properties comprised in the estate. Those properties did not, during the period of administration, vest in the residuary beneficiary. The executrix was liable to account to the beneficiary for any damages received. The executrix had herself suffered a loss because she has lost the income that she would have received if probate had been obtained and the assets are administered promptly. Therefore, the proper claimant was the executrix, not the residuary beneficiary.

 

However, an executor, even a professional executor, cannot be liable to beneficiaries for delay in obtaining a grant, as an executor is not bound to accept office (Re Stevens [1898] 1 Ch 162).

 

 

Failure to collect in assets

 

Personal representatives have a duty to collect in the assets of the estate (Administration of Estates Act 1925). In Younger v Saner [2002] EWCA Civ 1077 a solicitor was appointed as the administrator of the estate of T. The principle asset of the estate was a 100% shareholding in Company A, which had in turn a contingent interest in Company B. Both companies were part of a complex corporate structure set up in order to carry on the business of managing a hotel . One of T’s children took possession of the hotel, and failed to account to the estate in respect of rents and profits. The beneficiaries sued the solicitor for failure to take steps to take steps to recover such rents and profits.

 

The claim failed on the factual basis that there was nothing that the solicitor/administrator could usefully have done to secure income for the benefit of the estate. The business, in fact, belonged not to T, or his estate, but to Company B. It would have done no good to have made an application for the appointment of a receiver to receive the income. The claim to the income could only have been enforced with the support of Company B, who would not have given their consent.

 

However, in principle, there may be a claim against a solicitor/personal representative in respect of a failure to take adequate steps to secure income, or other property to which the estate is entitled, from a third party.

 

 

Distribution with notice of claim

 

In Lane v Cullens [2011] EWCA Civ 547 H had made a claim to be entitled to the main asset of an estate in 1998. Legal aid was revoked in 1999. However, H’s claim was not withdrawn. In early 2001, the administrator of the estate distributed £20,000 to his brother, which his brother failed to repay. Soon after, in April 2001, H obtained a declaration that he was beneficially entitled to the main asset of the estate. The administrator was personally ordered to pay to H the £20,000, which he had distributed to his brother. The administrator sued the solicitor, who had acted in the administration of the estate, in negligence. He sought to recover damages of £20,000 on the basis that he would not have made any distributions if he had been warned not to do so, given that there was an outstanding claim against the estate.

The claim was struck out on the grounds that it was statute-barred. The negligence claim was brought more than 6 years after the distribution was made. The cause of action accrued when the administrator had made a distribution with notice of H’s claim. He suffered loss at that date, not when H’s claim was established.

 

In principle, therefore, there may be a valid claim by a personal representative against the estate’s solicitor in respect of the solicitor’s failure to warn the personal representative not to make a distribution, when a claim against the estate has been made, and not withdrawn. The moral of the tale is to advise against making a distribution, without the sanction of the Court, where notice of a claim has been received, even if it appears unlikely that the claim will be pursued.

 

Miscellaneous criticisms

 

In Kershaw v Micklethwaite [2010] EWHC 506 (Ch), various criticisms or allegations were levelled against Executors:

 

(a)       The Executors had failed to value correctly the assets;

 

(b)       The Executors had failed to update the claimant and keep him properly informed about the estate’s administration: estate accounts were only provided a week before the trial;

 

(c)       The Executors had failed properly to identify the extent of the estate;

 

(d)           There was a breakdown in relations between the claimant and the executors and a lack of confidence in their competence.

 

An action was commenced by some of the beneficiaries for the removal of the personal representatives. The claim was rejected on the grounds that there was little scope for substantial criticism, even if things could have been handled better in some respects. Furthermore, the Executors’ remaining functions were “of a simple character”, with the result that there was little point in removing them. The friction between the personal representatives and the claimant beneficiary was not of itself a reason for removing the executors, as it did not prevent or substantially impede the administration of the estate.

 

 

Incorrect valuations in IHT returns

 

Solicitor personal representatives should be careful not to submit inaccurate valuations in IHT returns, or else they may be liable for penalties. They are under a duty to take “reasonable care” (Finance Act 2007, Sch. 24, para. 1A).

 

In Robertson v IRC [2002] STC (SCD) 242 a Scottish solicitor valued an English cottage at £50,000 (described as an estimate). A subsequent formal valuation valued the cottage at £315,000. A corrective account was submitted and all the tax paid in time. However, the Revenue sought to impose penalties under s. 247(1) IHTA 1984 on the basis that the solicitor had not made the fullest inquiries possible in the circumstances and had, therefore, negligently submitted an incorrect return. The claim for penalties was dismissed on the basis that there had been an urgent need to obtain a grant in order to sell a Scottish property before winter set in. It was, therefore, reasonable not to wait for professional valuations and to rely on estimates.

 

In Cairns v RCC [2009] UKFTT 67 (TC) a solicitor, acting in the administration of an estate, lodged a Form IHT200 valuing a property at £400,000. He relied upon a heavily qualified valuation obtained about 9 months before death. The property was ultimately sold for £600,000, and this value was accepted as the value at the date of death. HMRC sought to impose penalties on the solicitor on the basis that he had negligently delivered an incorrect account. HMRC’s claim was dismissed. The only possible criticism of the solicitor was that he should have declared that the value of £400,000 was a provisional estimate, since it was based on a heavily qualified valuation. However, this was a minor error of no consequence.

 

The moral of both these cases is that, if a solicitor is to submit an estimated valuation, it should clearly be declared that the value is a provisional estimate. If there is a difficulty in obtaining an actual valuation, HMRC should be informed of the nature of the difficulty (IHT & Trusts Newsletter, August 2009).

 

With regard to land, it is advisable to instruct a qualified valuer on the correct basis, i.e. on the basis of a hypothetical sale in the open market under normal market conditions, marketed properly with no discounts for a quick sale the time of year etc. The valuation should include any development or hope value, and the valuer’s attention should be drawn to any matters relevant to hope value.

 

If, before a grant, the solicitor personal representative has reason to believe that a valuation may be wrong (e.g. because a substantially higher offer has been received), the solicitor should ask the valuer to reconsider and, if necessary, amend the valuation.

 

Care should be taken about valuing household and personal goods (see the guidance in the April 2006 Newsletter).  It is necessary, for instance, to explain why any assets, which are valueless, have no value.

 

Professional advisers, who are not themselves personal representatives, cannot be subject to penalties. However, they may be liable in negligence to the personal representatives.

 

 

Equitable duties of trustees with regard to investments

 

Trustees owe equitable duties (a) act prudently and safely; (b) to act fairly between beneficiaries; and (c) to acquire the best return for the beneficiaries.

 

Prior to the Trustee Act 2000, the general equitable duty of care owed by a trustee was a duty to take the care of an ordinary prudent businessman in managing his own affairs (Speight v Gaunt (1883) 9 App Cas 1). However, when investing trust property, the trustee’s duty was not to take such care only as a prudent man would take if he had only himself to consider; the duty was to take such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide (Re Whiteley (1886) 33 Ch D 347, at 358).

 

A paid trustee was expected to exercise a higher standard of care than an unpaid trustee. A higher degree of care was also expected of a trust corporation carrying on a specialized business of trust management on the basis that it holds itself out in its advertising literature as being above ordinary mortals (Bartlett v Barclays Bank Trust Co [1980] 1 All ER 139, at 152).

 

 

Trustee Act 2000

 

Trustees also owe specific duties, with regard to investments, under the Trustee Act 2000.

 

A general power of investment is conferred by the Trustee Act 2000 on trustees (s. 3). Subject to complying with “standard investment criteria” and obtaining and considering proper advice, a trustee may make any kind of investment that he could make if he were absolutely entitled to the assets of the trust (s. 3(1)). The general, statutory power of investment can, however, be excluded or restricted.

 

Trustees must:

 

(a)  in exercising any power of investment (whether express or statutory) have regard to the “standard investment criteria” (s. 4(1));

 

(b)  from time to time review the investments of the trust and consider whether, having regard to the standard investment criteria, they should be varied (s. 4(2));

 

(c)  obtain and consider proper advice, having regard to the standard investment criteria, before exercising any power of investment, and in reviewing investments, unless it is reasonably considered unnecessary or inappropriate (s. 5).

 

The standard investment criteria, in relation to a trust, are:

 

(a)  the suitability to the trust of investments of the same kind as any particular investment proposed to be made or retained and of that particular investment as an investment of that kind, and

 

(b) the need for diversification of investments of the trust, in so far as it is  appropriate to the circumstances of the trust (s. 4(2)).

 

Trustees should:

 

(a)  understand the extent of their investment powers, taking legal advice if necessary;

 

(b)  have particular regard to the need to obtain a good spread of investments so as to reduce risk;

 

(c)  review the investment portfolio at regular intervals (at least yearly, or even on a constant monitoring basis): it is not sufficient to leave the whole of the trust fund invested in equities, without consideration of alternative types of investment (e.g. land), simply because those equities have performed satisfactorily;

 

(d)  consider what class or types of investments they consider suitable, and then whether a specific investment of that type is suitable;;

 

(e)  take care to ensure that the trust fund is not retained as cash, but is invested (subject to holding part of the trust fund in the form of cash deposits as part of a reasonable and prudent investment strategy);

 

(f)    obtain advice from a person who is reasonably believed by the trustee to be qualified to give it by his ability in, and practical experience of, financial and other matters relating to the proposed investment (s. 5(4));

 

(g)  only reject investment advice if there are reasonable grounds for doing so;

 

(h)  put on one side their own social or political views, eschewing moral considerations, and having regard only to financial considerations, unless investments are of equal financial merit, or all the beneficiaries are adult and capable, and agree that the trust fund should be invested in accordance with their moral, ethical or political preferences (Cowan v Scargill [1980] Ch 270).

 

(i)    confine themselves to the class of investments permitted by the trust, and avoid all investments which are attended with hazard, taking a predominantly risk-averse strategy.

 

In some cases, it may be justifiable not to diversify having regard to the circumstances of the trust, e.g. a trust of the matrimonial home. In Gregson v HAE Trustees [2008] EWHC 1006 (Ch) there was a settlement of shares in a company by the founders of the company. It was the intention of the settlors that the shares should be retained, so that the settlors’ family should retain control of the company. Substantially all the assets of the trust consisted of the shares in the company. The company became insolvent, and the shares worthless. A beneficiary sued the trustees alleging a failure to diversify the investments. It was held that the trustees did not, on the facts, have any duty to diversify since the clear intention of the settlors was that the trustees should continue to hold the shares in the company. Trustees can properly take into account matters such as the nature and purposes of the settlement, the terms of the trust instrument, any letter of wishes, and the shareholdings of other family members.

Trustees will be liable for failure to exercise their statutory duty of care under s. 1 of the Trustee Act 2000 in making and reviewing investments. However, they are entitled to be judged according to the “modern portfolio theory”, which emphasises the risk level of the whole portfolio, rather than the risk attaching to each investment taken in isolation (Nestle v National Westminster Bank [2000] WTLR 795, at 802). A large fund with a widely diversified portfolio of securities might justifiably include modest holdings of high risk securities which would be imprudent or out of place in a smaller fund. In such a case it would be inappropriate to isolate one particular investment out of a vast bulk and to enquire whether that can be justified as a trustee investment.

 

 

Personal representatives and investment

 

The statutory investment duties in the Trustee Act 2000 apply to personal representatives (s. 35 of the 2000 Act). They must have regard to suitability and diversification, and review investments from time to time.

 

The personal representatives should consider whether or not to sell investments held by the deceased at the date of death, and/or reinvest. Their primary consideration will be whether it is necessary to sell in order to pay debts, legacies, IHT and professional fees. However, they will also be concerned to maximise the value of the estate for the benefit of the beneficiaries.

 

The degree of investment risk, or the narrowness of the investment portfolio, which the deceased was prepared to contemplate, may not be suitable for the personal representatives. The terms of any investment management agreement with an investment adviser should be reviewed and revised defining investment aims, risk profile etc.

 

The personal representatives should consult with beneficiaries about whether or not to sell, if a sale is not necessary for administration purposes. A residuary beneficiary may have a right to the assets of the estate, rather than sale proceeds, if those assets do not need to be sold to pay debts etc (Re Marshall [1914] 1 Ch 192; Re Sandeman’s Will Trusts [1937] 1 All ER 368; Re Weiner’s Will Trusts [1956] 2 All ER 482; Re Duker [1987] 3 All ER 193).

 

It is a good idea to consider early distribution to beneficiaries. This may enable the personal representatives to avoid the risk of retaining higher-risk investments, or the need to consider issues of investment diversification.

 

Personal representatives are subject to the statutory duty of care in exercising their powers of investment, when reviewing investments, and in taking advice regarding investments. However, the statutory duty does not apply to omissions. Subject to exclusion clauses, personal representatives will be liable for losses caused by their “wilful default”, i.e. negligence, which can include omissions.

 

A representative who had acted honestly and prudently in retaining an authorised security in a falling market was found not to be liable (Re Chapman [1896] 2 Ch 736). In Re Tebbs [1976] 1 WLR 924 it was a common ground that a representative had been guilty of wilful default in selling assets at a low and outdated probate valuation despite repeated warnings that to sell at other than the current market price would be improper.

 

 

Duty not to delegate their duties unless expressly authorised

 

The general principle is that trustees may not delegate their duties and functions to another, unless expressly authorised to do so by the trust instrument. They are required to exercise their own judgment and discretion.

 

However, most modern trust instruments permit delegation. There are also numerous statutory exceptions. Under the Trustee Act 2000 trustees are thereafter given wide powers of collective delegation to agents (s. 11). Trustees are also given powers to appoint nominees and custodians (ss. 16-20).

 

Such powers are particularly useful in the context of investment. In recent years it has become increasingly common for investors to delegate investment discretions to fund managers and/or to appoint nominees so that share transactions can be carried out with minimum delay.

 

Where an agent is authorised under s. 11 to exercise the general power of investment, the agent must have regard to the standard investment criteria.

 

A trustee is not liable for any act or default of the agent, nominee or custodian unless he has failed to comply with the statutory duty of care (a) when entering into the arrangements under which the person acts as agent, nominee or custodian, or (b) when carrying out his reviewing duties under s. 22 (s. 23(1)).

 

Trustees are under a duty to review the activities of their agents, custodians and nominees, to consider whether they are under a duty to exercise their “powers of intervention”, and to exercise such powers of intervention if they consider that there is a need to do so (s. 22 of the Trustee Act 2000). A power of intervention includes a power to give directions to the agent and a power to revoke the authorisation or appointment. The statutory duty of care will apply to these obligations.

 

The performance of investment managers, and the terms of any investment policy statement, should be reviewed regularly. It is suggested that reviews should be at least yearly, or more often if matters of concern arise. It may be appropriate to assess performance by reference to benchmarking against a chosen index or performance factor.

 

Trustees could be sued by beneficiaries if they have failed to comply with their duties of appointment, supervision and intervention. They could be liable for failure to sack an underperforming investment manager, or for failure to sue for loss to the trust fund by reason of underperformance. They should actively consider suing. It may be that trustees will escape liability for negligence by reason of an appropriately worded exclusion clause. However, such a clause would probably not absolve them from liability if they have decided not to sue on the basis that this would be embarrassing or cause reputational difficulties.

 

 

Claims against trustees

 

The case of Nestle v National Westminster Bank plc [1994] 1 All ER 118 demonstrates the need to prove the causal link between the breach and the relevant loss.

 

Trustees had managed the investment of a family trust between 1922 and 1986. The trust amounted to £269,203 in 1986. It was alleged by the beneficiaries that if properly invested over that same period the trust fund should have amounted to over £1 million, or £400,000 even if it had risen only in line with the cost of living. However, the court held that the beneficiaries had failed to prove that the trustees had been guilty of breaches of trust which had caused loss.

 

It was accepted that the trustees wrongly considered that the investment clause in the trust deed was more limited than it, in fact was, and that they had failed to conduct periodic reviews of their investments. However, it could not be presumed that, if the trustees had appreciated the extent of their investment powers and conducted periodic reviews, they would have made better investments with the result that there would have been no loss.

 

The claim was dismissed because the beneficiaries could not prove that these failures had caused the trustees to adopt an investment policy, which no ordinary prudent trustee would have adopted, and that such an investment policy had caused loss. Indeed, the trustees were able to show that their investment policy was in line with other trustees’ investment policies in similar circumstances.

 

It was, therefore, necessary to prove that prudent trustees would, if they had properly reviewed their investments, have diversified the trust fund, by purchasing more equities; and that, if they had done so, the trust fund would now be worth more than it was. There was no expert evidence to that effect and, therefore, there was no basis upon which the court could reach the conclusion that the trustees had caused a diminution in the value of the trust fund.

By contrast, in Re Mulligan[1998] 1 NZLR 481, out of a desire to favour the life tenant-widow of the testator-settlor, the trustees did not diversify at all by investing in equities, but invested the proceeds of the testator’s farm in high-yielding investments allowing depreciation of the value of capital. The New Zealand High Court held that the trustees should in 1972 have diversified to the extent of investing 40% of the capital in equities which would have appreciated at 75% of an appropriate index of equities.

 

Duty to act impartially between beneficiaries

 

It is the duty of trustees to act in the interests of the beneficiaries as a whole. The trustees must, for instance, act even-handedly, giving equal weight to the interests of a life tenant (entitled to income) and the remaindermen (entitled to capital). Clearly, this impacts upon the choice of investments.

 

However, trustees are entitled to take into account the income needs of the life tenant, or the fact that the life tenant was a person known to the settlor. Such considerations could not be allowed to become overriding, but the concept of fairness between classes of beneficiaries do not require them to be excluded. It would be an inhuman law which required trustees to adhere to some mechanical rule for preserving the real value of capital when, for instance, the life tenant was the testator’s widow who had fallen upon hard times, and the remaindermen were young and well-off  (Nestle v National Westminster Bank plc [2000] WTLR 795).

 

If trustees are minded to take into account the relative financial positions of the beneficiaries, they should obtain verification of the facts.

 

Improper distributions

 

A trustee or personal representative must distribute capital and income of the trust to those entitled thereto, as specified in the trust deed. If a trustee transfers trust property to the wrong person, he will be liable for a breach of trust, even where he has acted honestly and reasonably. It does not matter, for instance, that the trustee may have made a mistake as to the construction of a will or settlement.

 

A trustee may recover an overpayment from a beneficiary out of any interest still retained by that beneficiary in the trust fund, or out of future payments of income to which that beneficiary is entitled.

A trustee has tracing claim against the beneficiary, but the property must be identifiable.

 

Change of position

 

The trustee may also have a personal claim against the beneficiary to recover any payment made to a beneficiary on the basis that the payment was made under a mistake. However, such a claim will be subject to the defence of change of position (Lipkin Gorman v Karpnale Ltd [1992] 4 All ER 512).

The defence of change of position will be available to defendants who have incurred extraordinary expenditure in reliance on their receipt of the benefit which forms the subject-matter of the claim: i.e. because having received the benefit, they have decided to spend their money in ways that they would not otherwise have contemplated. A defendant who changes his position in anticipation of a benefit which is subsequently paid to him can also raise the defence (Dextra Bank & Trust Co Ltd v Bank of Jamaica [2002] 1 All ER (Comm) 193). In the event that a defendant changes his position by purchasing an asset which remains in his possession at the time when the claim is made, he cannot rely on the defence to the extent that he remains enriched by his possession of the asset.

 

Therefore, a beneficiary who has spent the distribution on a holiday will no longer be enriched, and will have a defence of change of position. A beneficiary may also have changed his position by spending money on augmenting the value of an existing asset to which he attaches special worth. It might be unfair to expect the beneficiary to sell the asset to fund the repayment.

Generally, a recipient who has paid off debts earlier than he would otherwise have done will not have a defence of change of position. The recipient will be no worse off if he has to repay the trustees, rather than the lender. The defence will be available if and to the extent that the trust property has been stolen, destroyed, or depreciated in value, through no fault of the recipient.

There must be some causal link between the receipt of the payment and the change of position. It is not enough that the recipient has experienced a downturn in his fortunes since receiving the payment. The burden of proving change of position lies on the recipient.

The defence will not be available if the recipient is guilty of bad faith. This may include a case where the recipient has good reason for believing that the payment was made by mistake, but pays the money away without first making enquiries of the person from whom he received it (Fea v Roberts [2006] WTLR 255). Bad faith is capable of embracing a failure to act in a commercially acceptable way and sharp practice of a kind that falls short of outright dishonesty as well as dishonesty itself. However, this formulation excludes negligence, and a defendant can raise the defence although he negligently failed to recognise the flawed nature of the transfer by which he was benefited. Defendants can also raise the defence although they have changed their position by making foolish investment decisions: if they honestly believe that money is theirs’ to spend as they choose, then they cannot be penalised for spending it unwisely: Haugesund Kommune v Depfa ACS Bank [2010] EWCA Civ 579 [125].

 

 

Section 61 of the Trustee Act 1925

 

However, there is some mitigation in that, by virtue of s. 61 of the Trustee Act 1925, a trustee may be relieved from liability for breach of trust if the trustee has acted honestly and reasonably and ought reasonably to be excused.

 

An example of a case where relief was given is Re Evans [1999] 2 All ER 777. The defendant had distributed her mother’s intestate estate to herself on the assumption that her brother, from whom she had not heard for 30 years, was dead. She sought legal advice, and had purchased a missing-beneficiary policy covering about half of the capital value of the estate (which proved insufficient to meet her brother’s claim when he reappeared four years later). The court held that she was entitled to partial relief. The estate was relatively small; she was a lay person; she had acted on the advice of her solicitors; and some provision had been made for her brother’s potential claims.

 

The court retains a residual discretion to determine whether to grant relief. Even if the trustee has acted honestly and reasonably, the court must still consider whether the trustee should fairly be excused having regard to all the circumstances. In general, however, a trustee who has acted honestly and reasonably should be excused from liability.

 

The trustee may be relieved “wholly or in part”. In Re Evans the defendant’s liability was limited to the amount which could be met from a sale of a house forming part of the estate, which was still at her disposal.

 

 

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Trustees may protect themselves against the claims of beneficiaries of whom they are unaware by advertising in accordance with s. 27 of the Trustee Act 1925. Advertisements may be placed in the London Gazette, or in a newspaper circulating in a district in which any land vested in the trustees or owned by the deceased is situated. The notice must require any person interested to send notices of claims to the trustees or personal representatives within the time specified in the notice, not being less than 2 months. The trustees must also make all the searches which an intending purchaser would make or be advised to make. At the end of the specified period, the trustees may distribute the estate having regard only to the claims of which they have had notice.

 

The section only protects trustees and personal representatives from claims of which they have no notice. It is possible to have notice of a forgotten fact, and a fact known to an agent may be imputed to the principal (MPC Pension Trustees v AON Trustees Ltd [2010] WTLR 1331). It also does not prevent tracing claim between beneficiaries. Nor does it offer any protection where the identity of a beneficiary is known, but not his or her whereabouts.

 

Indemnities and retentions

 

Trustees may seek indemnities from beneficiaries to whom distributions are made, but this is not likely to be attractive. They could also take out missing beneficiary insurance, or reserve a substantial retention.

 

 

Application to Court for directions

 

Trustees and personal representatives may be advised to make an application to Court for directions, or for authorisation to distribute on a particular footing, e.g. that a beneficiary is dead (a Benjamin order).

 

The Court may order that known beneficiaries should be entitled to a distribution immediately. The practical effect is that the cost of tracing further beneficiaries falls on those beneficiaries (CPR Practice Direction, 40A, para. 7).

 

The Court may authorise a distribution on terms, e.g. that the trustees or personal representatives retain a sum of money, or the beneficiaries give security, where there are claims by potential creditors. The retention or security is for the benefit the potential creditors. The effect of the court order will be to absolve the personal representative from personal liability even to the extent that the retention or security is insufficient (see Re Yorke [1997] 4 All ER 907).

 

In Re K [2007] EWHC 622 (Ch) the administrators of an estate made an application to Court for authority to distribute the estate without reference to the claims of a number of disputed and potential creditors (“the Potential Creditors”). The estate was substantially insolvent if the Potential Creditors had good claims for the amounts claimed. Some of the Potential Creditors had instituted proceedings, against the deceased or his estate, which had not been pursued to judgment. The Deceased’s brother had instituted proceedings against the estate, which became subject to the automatic stay. There were other Potential Creditors who had not initiated proceedings.

 

The Judge dealt with the question of whether the Potential Creditors should be notified of the application. The Judge came to the clear conclusion that notification would not be appropriate, because notification carried the obvious risk of stirring up claimants who have been dormant for a long time, and who might easily misinterpret notification of the application as in some way constituting an invitation to proceed with their claims when they would otherwise not do so.

 

Some of the actions that had been commenced in Re K had been dormant for periods ranging from approaching 6 to approaching 13 years.  In these circumstances it was submitted that the actions were vulnerable to being dismissed for want of prosecution or struck out as an abuse of process. The Judge concluded that he was not in a position to decide, in the absence of evidence and argument from the relevant Potential Creditors, whether these actions should be dismissed on to prosecution or struck out as an abuse of process.  Nevertheless, on the evidence presently available to him, it seemed to him that the scale of the delay in each case was both inordinate and invited the inference that the claim had been abandoned.  In addition, it was likely that the delay would have significantly prejudiced the possibility of a fair trial of the claims. Accordingly, he considered that he was entitled to proceed on the basis that the claims were prima facie liable to be dismissed for want of prosecution or struck out as an abuse of process.

 

The Judge went on to conclude that there must come a time when the administrators are entitled to say that they have waited long enough for the Potential Creditors to pursue stale claims, and that it would be unjust to make creditors (whose claims had been admitted) or the beneficiaries wait any longer.

 

In the event, the Judge gave sanction to a distribution of the estate without reference to the claims of the Potential Creditors, subject to a retention of £50,000 for a period of 3 years, to cover the administrators’ costs of funding the defence of any proceedings brought or revived against the estate.

 

In Re K (deceased) [2007] EWHC 622 (Ch) administrators applied for the Court’s sanction to pay certain admitted creditors, and to distribute the estate to the beneficiaries without referring to claims of certain potential creditors, who had threatened or even instituted claims against the trustees. The administrators were authorised to pay creditors and distribute, without reference to a number of stale claims, subject to a retention of £50,000 to cover future litigation costs.

 

 

CHARLES HOLBECH,

NEW SQUARE CHAMBERS,

LINCOLN’S INN.

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