Liability of Trustees

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    The general equitable rule is that individual trustees are only liable for their own breaches of trust and not for the breaches committed by their co-trustees but can a trustee avoid liability by pleading ignorance by not fully participating in the administration of the trust?

    To find the answers to this question we must look at the equitable principles on which trusts law is based. Equity does not recognise a ‘sleeping or ‘passive’ trustee. This rule goes as far back as 1886 and the case of Bahin v Hughes where Lord Justice Cotton said; “It would be laying down the wrong rule that where one trustee acts honestly, though erroneously, the other trustee is to be held entitled to an indemnity who by doing nothing neglects his duty more than the acting trustee”.

    On this basis a trustee would be liable for breaches of their co-trustees to the extent that they were negligent of fell below the standard of prudence in monitoring their cotrustees’ behaviour.

    Where two or more trustees are liable for a breach of trust they are jointly and severally liable. This means that that a beneficiary is entitled to sue either trustee or both of them for the loss incurred. If he sues just one of them then that defendant must pay the full amount and is left to bring an action against his co-trustees to recoup their share.

    The Civil Liability (Contribution) Act 1978 gives the court a discretion to apportion the share of liability to each trustee according to the relative individual responsibilities for the loss. In certain cases a trustee, though himself liable for breach of trust, may demand that his co-trustee indemnify him for any compensation he must pay. The effect of this is to make the co-trustee alone pay for the loss.

    Two of the circumstances in which this may occur were stated in Bahin v Hughes. The first is ‘where one trustee has got the money into his own hands, and made use of it, he will be liable to his co-trustee to give him an indemnity’.

    Second, a trustee can claim an indemnity from a professional trustee if that trustee has exercised a controlling influence over the trust (Head v Gould). A third circumstance occurs when a trustee is a beneficiary under the trust. Special considerations apply because of this dual status.

    It is vitally important for testators to select their trustees very carefully or to appoint a professional trustee.

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    Matt Walkden Will Writer

    About Matt Walkden

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