Time Limits for Breach of Trust: Discretionary Trusts & Dishonest Assistants, Exams of Law

Download Time Limits for Breach of Trust: Discretionary Trusts & Dishonest Assistants and more Exams Law in PDF only on Docsity! The Association of Contentious Trust and Probate Specialists (ACTAPS) Annual Lecture United Kingdom 4 May 2010 Some Crucial Aspects of Section 21 Limitation Act 1980 The Honourable Mr Justice David Hayton, Judge of the Caribbean Court of Justice The Association of Contentious Trust and Probate Specialists (ACTAPS)was established on Monday 8th September 1997 for lawyers specialising in contentious trust and probate work. The objects of The Association of Contentious Trust and Probate Specialists (ACTAPS) are to: Provide a forum for specialists; To exchange experience, know-how and an appreciation of the law and statutes in this specialist area; To hold seminars, conferences and meetings for the discussion of contentious trust and probate issues; To promote the enhancement of the specific skills specialisation and expertise in this area by the provision of education and training and To enable representations to be made to the appropriate governmental and judicial bodies in relation to contentious trust and probate issues. Page 1 of 22 Remarks By The Honourable Mr Justice David Hayton, Judge of the Caribbean Court of Justice, On the occasion of The Association of Contentious Trust and Probate Specialists (ACTAPS) Annual Lecture 4 May 2010 For the Association of Contentious Trust and Probate Specialists s 21 of the Limitation Act seems a worthy topic for my talk. In the time available I shall primarily focus upon whether or not any statutory limitation period applies in two cases: the case of breach of trust actions by objects of a discretionary trust or power (especially now that the Perpetuities and Accumulations Act 2009 allows accumulations for 125 years) and the case of actions against a dishonest assistant in a breach of trust or other fiduciary duty. In the absence of any forensic argument before me it has, of course, been easy to persuade myself of the provisional views I am about to utter: if contrary submissions were made I may be persuaded to take a different view. The starting point for examining the position of discretionary objects is that when s 8 of the Trustee Act 1888 first provided for the Statute of Limitations to protect non-fraudulent trustees against actions for breach of trust it provided that time “shall not begin to run against any beneficiary unless and until the interest of such beneficiary shall be an interest in possession.” Page 4 of 22 exercise their discretion one way or another, while the latter only have a right to require the trustees to consider whether or not they might exercise their discretion, and that back in 1973 Templeman J in Re Manisty’s Settlement3 considered that the latter’s “only right and only remedy” for a breach of trust was to seek removal of the trustee. Both types of objects, however, are alike in having no present or future rights of enjoyment of trust property, having instead only an expectation or hope of benefiting under the trust, though - as emphasised in Schmidt - both are alike in having the right to invoke the inherent jurisdiction of a court of Equity to supervise, and if necessary, intervene in, the administration of a trust. As held by the Jersey Royal Court in Freeman v Ansbacher (Trustees) Jersey Ltd4, such intervention must extend in appropriate circumstances to ordering reconstitution of the trust fund5 eg by way of a money payment accruing to the trust fund as a substitute for performance of the trustee’s primary obligations or as reparation for making good damage caused by a breach of trust. If, however, trustees appoint an absolute or life interest in trust assets to an object, such object receives a proprietary interest in possession in such assets, just as a remainderman with a future interest in capital receives a proprietary interest in possession in capital that is validly advanced to him by the trustees or released to him by the life tenant, as pointed out by Wilberforce J (as he then was) in Re Pauling’s S.T.6 There, although there had been some valid advancements to the remaindermen, so conferring interests in possession in the advanced property more than 6 years 3 [1974] Ch 17 at 25 4 [2009] JRC 003 5 Objects of discretionary trusts have this right: Joel v Mills (1857) 4 K & J 458; Cosser v Radford (1863) 1 De G J & S 585. 6 [1962] 1 WLR 86 at 115. Also Kennon v Spry [2008] HCA 56 at [49]. Page 5 of 22 before some invalid advancements for the life tenant’s benefit rather than her adult children’s benefit as remaindermen, time could not run against the children in respect of the invalid advancements regarded as still within the trust fund until the children’s interests therein fell into possession. It follows that if a trustee makes an appointment of trust property to O, an object of a discretion, so that O receives an absolute or limited interest in possession in the appointed property, this has no relevance if more than 6 years later there is a breach of trust affecting the trust property in which O has no present or future entitlement. As to such property, a trustee cannot try to avoid future problems by now appointing to O some small interest in possession in other trust property. A second feature to bear in mind is that if there is a beneficiary with an interest in possession that interest will normally be injured by a breach of trust, so that such beneficiary can normally be expected to take action within six years of discovering the breach. If there is a beneficiary with a proprietary interest in remainder, vested or contingent, indefeasible or defeasible, time does not run against him until such interest falls into possession, but if inaction may make it more difficult later to undo the harm caused by the breach, such remainderman (if of full capacity at that stage) may well take action fairly speedily. Thus there may well be no need for objects of discretions to take action. Indeed, because objects only have hopes they may see no point in bringing any action requiring the trustees to make good the value of the trust fund. In special cases, however, as will be shown, they may have realistically high hopes of significant appointments in their favour that will justify such an action. Page 6 of 22 Finally, instead of proceeding to a breach of trust action against the trustee, objects of a discretionary trust or fiduciary power of appointment may invoke the inherent jurisdiction of a court of Equity to supervise and if necessary intervene in the trustee-beneficiary relationship eg so as to compel production of accounts7 and disclosure of matters pertaining to the trustee’s trusteeship and to compel proper administration of the trust.8 It appears, however, that by necessary implication from the Limitation Act this inherent supervisory power cannot be exercised to require the trustee to make good a loss where all breach of trust claims are barred by the Limitation Act and that if a loss has to be made good then any barred beneficiary will not be able to benefit from this. Recent cases on s 21(3) and its rationale In Armitage v Nurse9 Millett LJ (as he then was) put forward his rationale for the proviso to s 21(3) treating a right of action as not having accrued to “any beneficiary entitled to a future interest in the trust property until the interest fell into possession.” “The respondents submit that the policy to which s 21(3) gives effect is that it would be unfair to bar a plaintiff from bringing a claim unless and until he is of full age and entitled to see the trust documents and so has the means of discovering the injury to his beneficial 7 Att-Gen v Cocke [1998] Ch 414 at 420-421: where there is no claim to recover trust property and no claim for breach of trust there remains a duty to account at the core of the fiduciary obligation enabling a beneficiary or object of a fiduciary duty to discover whether or not there has been a breach of trust, with costs reserved until a breach is discovered and not found to be barred. See also Paragon Finance v Thakerar [1999] 1 All ER 400 at 416, W Swadling, chapter on “Limitation” in P Birks & A Pretto (eds) Breach of Trust (2002) at pp 336-337. 8 Schmidt v Rosewood Trust Ltd [2003] 2 AC 709 at [51], Kennon v Spry [2008] HCA 56 at [74] and [25], Wingate v Butterfield Trust (Bermuda) Ltd [2008] WTLR 357 at [28] 9 [1998] Ch 241 at 261. Page 9 of 22 will apply in respect of that property but not the rest of the trust property in respect of which the object only has hopes. This accords with the position under the 1888 Trustee Act at a time when the focus was upon fixed interests in trust property, though some fiduciary or personal powers of appointment or advancement might be vested in trustees or some special individual like a widow, while a discretionary trust could arise on the bankruptcy of a life tenant under a protective trust. Under the 1888 Act time did “not begin to run against any beneficiary unless and until the interest of such beneficiary shall be an interest in possession.” It thus seems that an object of a discretion had to receive a beneficial interest in possession before ranking as a “beneficiary” and this position has continued under s 19(2) of the 1939 Act and s 21(3) of the 1980 Act. The position of discretionary objects Thus when trust property is appointed so as to confer a beneficial interest in possession on an object of a discretionary trust or power, he will have six years to complain of any breach of trust in respect of that property eg if receiving a seaside cottage that the trustee in breach of trust had allowed to fall into a dilapidated state. If, however, the trustee’s breach of trust concerned other trust property no statutory limitation periods apply to any action brought by a discretionary object to have the trustee make good the trust fund, though one might ordinarily expect there to be beneficiaries with interests in possession or remainder who would be taking such action within the statutory periods permitted to them. Indeed, one might wonder why a discretionary object would bother to spend the time, trouble and money to try to have a trustee make good a loss, whether occurring one, five, ten or fifteen or fifty Page 10 of 22 years ago, especially when a discretionary object by definition has no present or future entitlement and so needs to curry favour with the trustee in the hope that the trustee may exercise his discretionary power in the object’s favour. One can, however, envisage a range of scenarios where a discretionary object finds it worthwhile to sue trustees, especially under trust laws permitting accumulation of income for extensive periods, even English law under the Perpetuities and Accumulations Act 2009 extending the permitted accumulation period from 21 to 125 years. A duty to accumulate precludes any interest in possession as does the existence of discretionary trusts. There can be many trusts where no interest in possession subsists till the end of the perpetuity period, whereupon either an ultimate discretionary trust to distribute the capital between a class of objects will arise or, in default of exercise of discretions, capital will pass to a particular person or charitable entity which may or may not be ascertainable until the trust has been in existence for many years or, indeed, until the end of the perpetuity period. Where there is a default beneficiary with a future interest in remainder falling into possession at the end of the trust period, the time for his right of action against the trustees will run from the expiry of the trust period. The default beneficiary will then have six years in which to bring the trustees to account for their stewardship of the trust property during the whole trust period. It will be no answer for the trustees to say that they had earlier made discretionary distributions (perhaps accompanied by a formal winding up of the trust) such that there was no trust property in which the default beneficiary could have any proprietary interest. The beneficiary can claim the distributions were improper so that but for breaches of trust there would have been property in Page 11 of 22 which he would have had an interest in possession at the termination of the trust period. The statutory expression “the trust property” in the Limitation Act is “an abstract rather than a concrete concept”, like the concept of “the trust fund”13, as pointed out in Johns v Johns,14 for, otherwise, the trustees could easily act improperly so as to evade or nullify all obligations to beneficiaries with future interests. Where at the end of a trust period objects of a discretionary trust between them receive all the trust property, acquiring interests in possession therein, then time will run from the end of the trust period, whether receiving fractional parts of the trust fund or sums of money or other assets that can be reduced to fractional values of the trust fund. The objects can each argue that the value of their receipts would have been larger but for breaches of trust by the trustees eg distributing trust assets to non-beneficiaries, recklessly or negligently investing the trust fund, selling designated assets (like Microsoft shares acquired soon after its creation) without the requisite consent of a protector or investment advisor. It would seem that such an argument can also be used in favour of a recipient receiving trust property as an object of a discretionary power as opposed to a discretionary trust. What then of the position of the object of a discretionary trust or power who in the lifetime of a trust, as opposed to the end of a trust, receives an appointment in accordance with the settlor’s letter of wishes of, say, half the trust assets on attaining a certain age, but who suspects there may 13 An incorporeal concept retaining its identity till duly terminated: see FW Maitland , “State, Trust and Corporation” in 1911 Collected Papers CUP 2003, pp 94-95 14 [2004] 3 NZLR 202, [2005] WTLR 529 at [60] – [63] and appearing by implication from Re Pauling’s ST [1962] 1 WLR 86. Page 14 of 22 In Statek Corporation v Alford18 Evans-Lombe J in obiter dicta19, after examining relevant case law, opined that s 21(1) (a) applied to prevent time running against a dishonest assistant in a fraudulent breach of fiduciary duty because an action against such a defendant by a beneficiary under an trust was an action “in respect of a fraudulent breach of trust or other fiduciary duty.” He was fortified by Danckwerts J’s broad view of “in respect of” in GL Baker v Medway Building & Supplies Ltd and dicta of Millett LJ (as he then was) in Paragon Finance v Thakerar20 indicating that there was a case for saying that a principled system of limitation would also treat a claim against an accessory as barred only when the claim against the principal was barred – and under s 21(1) time did not run against a fraudulent trustee. Thus he refused to follow the decision of deputy judge, Richard Sheldon QC, in Cattley v Pollard21, who had been fortified by the following dicta in Dubai Aluminum Company Limited v Salaam22 where Lord Millett referred to the position of a dishonest assistant in a breach of fiduciary duty. “He never claims to assume the position of trustee on behalf of others and he may be liable without ever receiving or handling the trust property. If he receives the trust property at all he receives it adversely to the claimant and by an unlawful transaction which is 18 [2008] EWHC 32 (Ch). 19 At [108] – [126], the ratio being that the defendant as de facto director was a fiduciary ranking as a trustee within s 21(1). 20 [1999] 1 All ER 400 at 412 21 [2007] Ch 353 22 [2003] 2 AC 366 at [141] Page 15 of 22 impugned by the claimant. He is not a fiduciary or subject to fiduciary obligations and he could plead the Limitation Acts as a defence to the claim.” The deputy judge treated these dicta and the approach as a whole of Millett LJ in Paragon Finance to distinguishing fiduciary constructive trustees from non-fiduciary constructive trustees, as amounting to a rejection of any case for saying that a principled system of limitation would treat a claim against an accessory as barred only when the claim against the principal was barred. The distinction between fiduciaries and non-fiduciaries is a greater principle. I agree with the deputy judge but, more significantly, so did Lord Hoffmann in the Hong Kong Final Court of Appeal decision, Peconic Industrial Development Limited v Lan Kwok Fai23. As to the broad view of Danckwerts J and of Evans Lombe J on the expression “in respect of”, Lord Hoffmann said24 “it simply means that the beneficiary must be claiming against the trustee on the ground that he has committed a fraudulent breach of trust. If it had been intended to include claims against dishonest assisters or other non-fiduciaries on the ground that they were accessories to the breach of trust, the language would have been a good deal clearer.” I concur. 23 [2009] HKFCA 17, [2009] WTLR 999 24 Ibid at [25]. Page 16 of 22 Lord Hoffmann’s dicta also indicate that the open-ended liability under s. 21(1) is restricted to claims against fraudulent trustees, so supporting the view that a claim against a third party who innocently received trust property, whether from a fraudulent trustee or an innocent trustee, should merely be subject to the six year limitation period under s21(3). The key is not whether the trustee- transferor was a fraudulent or an innocent trustee, but that he was a trustee, while the recipient was an innocent third party. After all, the underlying rationale for limitation periods being inapplicable to a trustee is that the possession of the trustee from the outset was taken for and on behalf of the beneficiaries and so was treated as the possession of the beneficiaries.25 This is not the position where there is an innocent recipient. 3. Conclusions on actions by “a beneficiary under a trust” Having dealt with the appropriate defendant under s 21(1), one needs to consider who can rank as the appropriate claimant when on its face the benefit of s 21(1) is restricted to “an action by a beneficiary under a trust”. Within s 21 it is noteworthy that s 21(2) focuses upon a trustee who is “also a beneficiary under the trust”, s 21(3) concerns “an action by a beneficiary to recover trust property or in respect of any breach of trust” and s 21(4) prevents a beneficiary from benefiting if ranking as “a beneficiary as against whom there would be a good defence under this Act”. We have seen that s 21(3), subject to subsections (1) and (2), lays down a limitation period of six years for breach of trust actions by a beneficiary entitled to a present or future interest in the trust property, though time does not run against the latter till the interest falls into possession. Section 25 Halton International Inc v Guernroy Ltd [2006] EWCA Civ 801 at [22] Page 19 of 22 The need from the trustee’s viewpoint is for there to be enough to persuade the judge in his discretion that there is no need for any order as to accounts29 or as to information and documentation. From the viewpoint of the object of a discretionary trust or power, he has to persuade the judge to require information and documentation relating to significant but obscure areas where there is some reasonable cause for suspicion in the light of the uncooperative stance of the trustee, though this suspicion could ultimately prove groundless: the trustee, however, was in control of matters and should not have left the position as unclear as it is. If the beneficiary’s suspicions are fulfilled then the court can go on to order an account on a footing of wilful default or, perhaps, an account of profits30. Trustees have to act responsibly in looking after others’ property and in accounting for this fiduciary task31 and the court, in the exercise of its powerful supervisory jurisdiction, will make the trustees act responsibly. 4. Objects and the Law Commission Report No 270 on Limitation of Actions Finally, one needs to consider the impact of Law Commission Report No 270 on Limitation of Actions. The Law Commission, not having the benefit of Schmidt v Rosewood Trust Ltd decided in March 2003, did not deal with the position of objects of discretionary trusts and powers, though 29 No common account ordered in Wingate v Butterfield Trust (Bermuda) Ltd [2008] WTLR 357 where there were accounts for underlying companies: orders were made, however for disclosure of certain information with supporting documentation. 30 See Glazier v Australian Men’s Health (No 2) [2001] NSWSC 6 dealing with English & Australian authorities (reversed on appeal on other grounds: Meehan v Glazier Holdings Pty Ltd (2002) 54 NSWLR 146) 31 “the taking of an account is the means by which a beneficiary requires a trustee to justify his stewardship of trust property. The trustee must show what he has done with that property”: per Lewison J in Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch) at [1513] Page 20 of 22 the draft bill in clause 22(3) states “This Act does not apply to a civil claim made by the Attorney General or the Charity Commissioners for England and Wales with respect to a charity or the property or affairs of a charity.” The reason for this, set out in para 4.111 of the Report, is that “in the case of charitable trusts it may be some time before evidence of any breach of trust reaches the attention of anyone in a position to take action against the trustees.” This, of course, is also the position in the case of lengthy accumulation trusts featuring only objects of discretionary trusts and powers who may not be in a position to take action against the trustees till they receive appointments of capital at the end of the trust period. The proposed core limitation regime for civil claims is set out in subclauses (1) and (2) of clause 1 of the draft bill as follows (1) It is a defence to a civil claim that the claim was not made before the end of the period of three years from the date of knowledge of the claimant32. (2) It is also a defence to a civil claim that the claim was not made before the end of the period of ten years from the starting date in relation to the cause of action on which the claim is founded33. Under the long-stop (2) it seems that an object of a discretion remains in a well-protected position because by clause 3(1) the “starting date” is the date on which the right of action accrued and, as 32 By cl 37(1) the onus is on the claimant to prove that the claim was made before the end of the limitation period applicable to the defence. 33 By cl 37(2) the onus is on the defendant to prove that the claim was not made before the end of the limitation period applicable to the defence. Page 21 of 22 discussed earlier, the right of action does not appear to accrue to an object until acquiring an interest in possession in the trust property affected by the breach of trust. An object, however, could be barred under the primary provision in (1) because the claimant must bring his “civil claim”34 before the end of the period of three years from the date of knowledge of the claimant, so an object having only hopes of receiving trust property but who somehow acquires knowledge of a breach of trust is capable of being detrimentally affected - and a person’s knowledge extends to “knowledge which he might reasonably have been expected to acquire (a) from facts observable or ascertainable by him or (b) where he has acted unreasonably in not seeking expert advice, from facts ascertainable by him with the help of such advice.”35 Unfortunately, an object of a discretionary trust or power does not receive the benefit of the dispensation from the limitation regime that clause 22(1) provides: “No limitation period under this Act which applies to a civil claim by a beneficiary to recover trust property or the proceeds of trust property shall run against him during any period in which he is entitled to a future interest in the trust property.” Objects of discretions, of course, only have hopes and are not entitled to any future interest, though they fall within the mischief covered by this dispensation and so ought to have a similar dispensation where needed to deal with the primary three year limitation period. Indeed, should not the dispensation for both objects and those with future interests extend to personal actions for breach of trust as well as to proprietary actions to recover trust property or the 34 Being a claim in civil proceedings in which “the claimant seeks (a) a remedy for a wrong, (b) restitution, or (c) the enforcement of a right”: cl 1(4). 35 Clause 4(1)