Breach of Trust. Syed Rahman of Rahman Ravelli examines what constitutes breach of trust

Last month, a futures fund which is now in liquidation launched proceedings in the High Court against its asset manager and its officers. The proceedings were prompted by allegations that its funds had been put into high-risk investments in a fraudulent breach of trust and fiduciary duty.

Old Park Capital Maestro Fund Ltd (in liquidation) is a fund that was managed by Old Park Capital Ltd, an asset manager. The fund bringing the lawsuit was based in the Cayman Islands and was created in November 2013. The lawsuit alleged that Old Park Capital Ltd invested $5 million of the fund in "extremely high risk" unsecured debt securities - in breach of its investment agreement and strategy – and, in particular, that the Chief Investment Officer and co-founder of Old Park Capital Ltd, Bruno Pannetier, made the investment “in his self-interest” in fraudulent breach of trust, as a trustee of the assets of the funds. The fund has also sued the former Chief Operating Officer for his alleged breach of duty.

While the case has yet to be concluded, it will centre on issues such as the relationship between a trust and its trustees, the trustees’ duties and how these can be breached. 

A Trust and its Trustees

A trust is not a legal entity. Trustees, unlike company directors, deal with the property themselves, not on behalf of (or authorised by) the trust. When a trust is established, trustees are appointed to manage the trust for the beneficiaries. Trustees are often appointed by way of deed or some other document which created the trust. Every trust must have at least one trustee.

In general, the trustees may be one or more individuals or a company or corporation. The choice of trustees is important, as they control the trust’s assets. In this case, it appears that the Maestro Fund was set up as a trust and  appointed Old Park Capital Ltd as its asset manager, which assumed the role of trustee.

A Trustee’s Duties

In short, a trustee’s duties can be broken down into two key areas:

Statutory duty of skill and care: All trustees have a duty to manage and protect the trust assets diligently and prudently. The Trustee Act 2000 imposes a statutory duty of skill and care on trustees carrying out certain functions, This duty of care can be excluded or modified by express provisions in the trust document. It requires trustees to act with reasonable care and skill in all circumstances.

(Non-statutory) fiduciary duties: In addition to the statutory duty of skill and care, a trustee has a fiduciary duty. This means that a trustee is legally and morally bound to the beneficiaries of the trust.

As such, trustees must:

• comply with the trust instrument
• act in the best interests of the beneficiaries
• act impartially between the beneficiaries
• avoid being in a position where their own personal interests conflict
• not make a personal profit from their trusteeship, unless they are authorised to do so
• keep proper records and accounts for the trust and keep the beneficiaries informed
• limit their discretion to act in the future
• act personally (with the exception of some limited permitted delegation powers)
• act in good faith and with honesty and integrity
• take control of trust property

What Constitutes a Breach of Trust?

A trustee who contravenes the terms of the trust or fails to carry out their duties will be in breach of trust. A beneficiary with an interest in the trust may then seek to bring a claim for breach of trust.

Trustees are jointly and individually liable for breach of trust to their beneficiaries where the breach has given rise to a loss. Breaches can range from minor, more technical breaches through to failure to act in accordance with their duties and fraud. Examples of breach of trust could include mismanagement of the trust assets (including investing trust assets in a way not permitted), a transfer of assets to a beneficiary who should not have received them or self-dealing by a trustee.

If a trustee is found to have acted in breach of trust, they are required to compensate the trust fund from their own personal resources for the loss caused. Injunctions can also be sought to prevent the breach continuing. Beneficiaries may also seek the removal of the trustee.

What are the Defences to a Breach of Trust Claim?

Limitation: The usual defences of limitation and laches are available to a trustee seeking to defend a breach of trust claim. The limitation period - which is the prescribed statutory time period allowed for making any claim for breach of trust - is six years. If a beneficiary’s interest has not yet vested, then the six-year period will run from the point the interest vests. No such period is applicable in the instance of fraud and/or recovery proceedings. In the aforementioned case, therefore, the defendants would not be able to run the limitation argument.

Exemption clause: An express clause in the trust deed may exempt a trustee from loss or damage. In accordance with the statutory relief under Section 61 of the Trustee Act 1925, the court may relieve a trustee wholly or partly from personal liability for a breach of trust if the trustee is found to have acted honestly, reasonably and ought fairly to be excused for the breach and for failing to obtain court directions.

Beneficiary consent: It is also a defence if the beneficiaries consented to the breach, providing they were of full age and capacity and were acting free of undue influence and gave informed consent. It is not necessary for them to have benefitted from the breach.

Delay: If there is an unreasonable delay on the part of the claimant in pursuing a breach of trust claim and that delay has given rise to prejudice to the trustee’s position, then the court may use its discretion to not permit the claim to proceed.

Conclusion

A trustee has wide and far-reaching responsibilities to the beneficiaries of a trust. These responsibilities, along with the nature of trusts, often make it necessary for trustees, beneficiaries, executors and other parties to seek informed legal advice if any problems have arisen or appear about to do so.