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How Do You Attack An Errant Trustee?

Posted: Friday, 19 May 2023 @ 11:46

How Do You Go About Attacking the Conduct of an Errant Trustee?

The Trust instrument

First focus on the trust instrument.

This is a key document, which trustees should disclose to beneficiaries if requested. 

The same applies to supplemental documents such as:

•        Deeds of appointment and retirement of trustees.

•        Instruments adding assets to the trust.

•        Instruments varying the trust.

The trustees may wish to redact information that does not relate to the beneficiary making the request (for example, by obscuring the names of other beneficiaries in a deed). If a beneficiary requests redacted information, the trustees ought to inquire why (there might be a valid reason, so they should not refuse outright).

The trust instrument is the document which creates or sets out the terms of the trust. It can be something as straightforward as a will which leaves assets to minor children, a settlement deed or declaration of trust comprising many pages.

Whatever it is, there is a pretty good chance that it will set out, or refer to / amend legislation which sets out, the trustees’ powers and duties.

It may also set out the person or persons who may or may not appoint, remove, or substitute trustees of the trust and how they can do that. e.g many trusts provide for no fewer than two trustees with power to appoint and remove trustees and some trusts extend that power to beneficiaries acting unanimously or, particularly in the case of offshore trusts, to protectors.

Focus on the legislation.

Trustees can also be removed without the court’s intervention by fellow trustees if one or more of many conditions is met. These conditions are set out in s.36 Trustee Act 1925 which provides:

“(1) Where a trustee, either original or substituted, and whether appointed by a court or otherwise, is dead or remains out of the United Kingdom for more than twelve months, or desires to be discharged from all or any of the trusts or powers reposed in or conferred on him, or refuses or is unfit to act therein, or is incapable of acting therein, or is an infant, then, subject to the restrictions imposed by this Act on the number of trustees, —

(a) the person or persons nominated for the purpose of appointing new trustees by the instrument, if any, creating the trust; or

(b) if there is no such persons, or no such person able and willing to act, then the surviving or continuing trustees or trustee for the time being, or the personal representatives of the last surviving or continuing trustee; may, by writing, appoint one or more other persons (whether or not being the persons exercising the power) to be a trustee or trustees in the place of the trustee so deceased, remaining out of the United Kingdom, desiring to be discharged, refusing, or being unfit or being incapable, or being an infant, as aforesaid.”

Also consider s.36 (9) Trustee Act 1925 which lays down that where a trustee who lacks capacity is also a beneficiary of the trust then it is necessary to make an application for that person’s removal to the Court of Protection; the court which deals with matters of physical and mental welfare.

How to Prove That the Trustee Is Unfit?

This can be very subjective and will be disputed. Being ‘unfit’ depends on the circumstances of the case.

Generally, a person who has been made bankrupt or convicted of a fraudulent offence will most likely be deemed to be unfit to act as will a trustee guilty of a significant breach of trust or of acting in a way which causes a conflict as between their personal position and their duty to the beneficiaries, known as their ‘fiduciary duty’.

Even if a trustee is removed under s.36 Trustee Act 1925, it is entirely possible that they could challenge such a decision by way of court action.

Further, as is clear from s.36 Trustee Act 1925, this remedy is not automatically available to beneficiaries unless they are also trustees or they have power to remove trustees under the trust instrument.

If none of the above remedies are available then, then focus on the court to remove a trustee. 

Court Intervention 

The court can remove a trustee either by statutory power (under s.41 Trustee Act 1925) or under its inherent authority.

s.41(1) Trustee Act 1925 provides:

“The court may, whenever it is expedient to appoint a new trustee or new trustees, and it is found inexpedient difficult or impracticable so to do without the assistance of the court, make an order appointing a new trustee or new trustees either in substitution for or in addition to any existing trustee or trustees, or although there is no existing trustee.

In particular and without prejudice to the generality of the foregoing provision, the court may make an order appointing a new trustee in substitution for a trustee who lacks capacity to exercise his functions as trustee, or is a bankrupt, or is a corporation which is in liquidation or has been dissolved.”

As such, and assuming there is no other method open to a party to remove a trustee, the court may do so under s.41 Trustee Act 1925 where a trustee lacks capacity, is bankrupt or, if a corporation, in liquidation or has been dissolved.

If seeking to remove a trustee under s.41 Trustee Act 1925, you should ensure you have a replacement or substitute trustee available and that trustee should file at court what is known as a ‘consent to act’; a witness statement confirming the proposed replacement trustee’s agreement to act as a trustee.

This should be filed along with a ‘fitness to act’; a statement by somebody who knows the trustee and can vouch for their standing and suitability to act as a trustee.

Each case will be considered on its own facts.

A key case is Letterstedt v Broers (1884) 9 App Cas 371 in which Lord Blackburn, sitting in the South African court, said “

the acts or omissions must be such as to endanger the trust property or to shew a want of honesty, or a want of proper capacity to execute the duties, or a want of reasonable fidelity”;

"It must always be borne in mind that trustees exist for the benefit of those to whom the creator of the trust estate has given the trust estate”; and

“friction or hostility between trustees and the immediate possessor of the trust estate is not of itself a reason for the removal of the trustees. But where the hostility is grounded on the mode in which the trust has been administered.,.it is certainly not to be disregarded.”

Breaking the trust

Another method which can achieve the same aims is to break the trust. The principle is laid down in the case of Saunders v Vaultier (1841) Cr & Ph 240, which should be familiar to most trust and estate lawyers, and confirms that beneficiaries who are over 18, have capacity and, together, are absolutely entitled to the trust property i.e. unanimous, can ‘break the trust’.

This mirrors the language of s.19 Trusts of Land and Appointment of Trustees Act 1996.

In short, this means that the beneficiaries can bring the trust to an end and take their respective shares or, in the case of a life interest or discretionary trust, agree amongst themselves how much each should receive.