Surcharging and Falsifying the Accounts

An irreducible core obligation of Trustees is to provide accounts of the trusteeship of the trust property to the beneficiaries (inc Members) {Armitage v Nurse [1997] EWCA Civ 1279}.

It is then up to the beneficiaries to falsify and surcharge those accounts.

A falsification is a showing of an entry which is false and needs to be corrected.

A surcharge is showing of an omission where there should be a credited item.

Examples of where a falsification will occur:

  • The Trustee has made an unauthorised transfer of trust assets to another party such as the Principal Employer where the Trust Deed does not allow such a transfer
  • The Trustee has made an unauthorised distribution of an amount $x to a beneficiary that is not in accordance with the Trust Deed
  • The Trustee has made an unauthorsed investment such as a holiday home held by the Trust but for the Trustee’s own use.

Under the maxims of Equity – “Equity looks on as done that which ought to have been done“, because the Trustee has no power under the trust to act as listed above, the Trustee is regarded to having spent his own money on these transactions and so the Trustee is liable to make good the loss to the trust funds because had it not been for the unauthorised transfer the loss would not have occurred {Clough v Bond (1838) 3 My & Cr 490, 496-497 endorsed in Target Holdings v Redferns [1995] UKHL 10; [1996] 1 A.C. 421,434}.

If assets worth $x had been wrongfully transferred and will cost twice that to replace, the the Trustee will have to pay $2x to restore the trust fund the assets that were lost but for the Breach of Trust {Target Holdings v Redferns [1995] UKHL 10; [1996] 1 A.C. 421; Re Massingberd (1890) 63 L.T. 296}..

Examples of where a surcharge will occur are where the Trustee fails to exhibit the requisite duty of care in:

  • Negligently failing to sue a former trustee for breach of trust
  • Negligently failing to sue a third party for breach of contract in relation to the Trust Property
  • Negligently failing to sue a third party for some tort in respect to Trust Property
  • Negligently supervising an authorised agent.

In Target Holdings v Redferns {[1996] 1 A.C. 421,439} Lord Browne- Wilkinson stated that compensation should restore to the trust fund or to the beneficiaries ” a loss in fact suffered by the beneficiaries and which, using hindsight and common-sense, can be said to have been caused by the breach”:

In Glazier v Australian Men’s Health (No. 2) [2001] NSWSC 6, Austin J covered the various forms of account available as a Court Order:

  • Order for an account of administration
  • Order for an account of administration in common form
  • Order for an account of administration on basis of willful default
  • Order for account of profits for specific equitable wrongdoing

An Order for an Account of Administration

For example, the Court routinely orders the taking of accounts of the administration of an estate by an executor, or upon the dissolution of a partnership, or of the administration of property by a mortgagee in possession, or of a trust fund such as a solicitor’s trust account. In such a case the making of the order need not imply any wrongdoing by the defendant.

An Order for an Account of Administration in the Common Form

The Supreme Court in any State can make an order for an account of administration in the common form which requires the Trustee to account only for what has actually been received and what has been disbursed such as contributions, general administration expenses, taxes and benefit distributions to beneficiaries.

The Beneficiary can then seek to falsify or surcharge those accounts to ascertain what is owed by the Trustee. The making of the order need not imply any wrongdoing by the Trustee {Partington v. Reynolds (1958) 4  Drew 253, 256}.

It is important to appreciate that, as Kindersley V-C put it, this process “supposes no misconduct” In particular:

  • It is not necessary to plead or prove breach of trust in order to gain an order for the taking of a common account. It is enough that the defendant is an accountable party {Dowse v Gordon [1891] AC 190,204; Partington v Reynolds (1858) 4 Drew 253, 255-56 (“It is sufficient that the Defendant holds the office“)
  • In the taking of the account there is no question whether the trustee has committed any breaches of his trust. the only questions are (i) what assets the trustee has actually received in his fiduciary capacity and (ii) whether the dispositions he has made were authorised by the terms of the trust.
  • If the account shows that the trustee has misapplied trust property then he will be personally liable to replace it, in money taken from his own pocket if he cannot replace the actual asset. But an order enforcing this liability must not be confused with an order charging the trustee with damages for breach of trust {British American Elevator Co V Bank of British North America [1919] AC 658 (PC) 663-66; Ahmed Angullia bin Hadjee Mohamed Salleh Anguillia V Estate and Trust Agencies (1927) Ltd [1938] AC 624 (PC) 637}.

The misapplication of Trust Property can be put right by the taking of a common account.

But what if the trust has sustained a loss by reason of the Trustee’s breach of duty?

Instead of suing for damages a beneficiary can claim by means of the accounting procedure. The Beneficiary’s claim was to surcharge the Trustee’s account beyond his actual receipts in the amount of the loss. The basis of this surcharge will be wilful default.

In NSW the Uniform Civil Procedure Rules 2005 provides the device through which the party seeking the account can challenge the accounts put forward is to surcharge and falsify. A surcharge, called a charge in the Rules {Regulation 46.7}, shows an omission for which credit ought to have been given, while a falsification (or error), shows a charge that has been wrongly inserted.

The NSW Court Rules require that notice be given of any challenge to the accounts with particulars of the surcharge and the grounds for the falsification. Falsification includes amounts that were either not paid by the accounting party or were paid improperly {Glazier Holdings v Australian Men’s Health (No.2) [2001] NSWSC 6 at [38].

A similar provision is provided in the Federal Court Rules 1979 under Rule 39.6.

The Victorian Supreme Court (General Civil Procedure) Rules 2005 also provide a similar provision under Section 52.05 (Notice of charge, error in account).

An Order for an Account of Administration on the Basis of Willful Default

A general account on the footing of wilful default covers the same ground as a common account but also encompasses surcharges for loss occasioned by the trustee’s wilful default.

If there is evidence of misconduct by the Trustee, the Supreme Court can make an order for an account of administration on the basis of willful default

The well established rule is that a plaintiff, in order to be entitled to an account on the basis of willful default must allege in his pleading, and prove, at least one example of willful default on the part of the defendant – see Sleight v Lawson (1857) 3 K & J 292; 69 ER 1119.

The order is `entirely grounded on misconduct‘, the defendant being required to account not only for what he or she has received, but also for what he or she might have received had it not been for the default: Partington v Reynolds [1858] ENGR 461; (1858) 4 Drew 253,255-6; [1858] EngR 461;62 ER 98,98-9. To obtain an order for the taking of accounts in common form against a Trustee, for example, the Beneficiary need only show that the defendant is the Trustee, and need not show anything about the defendant’s dealings with the Trust Property; whereas to obtain an order on the basis of willful default the plaintiff must allege and prove `that there is some part of the Trust Property which ought to have been and might have been received by the defendant, and which he has omitted to receive by his own willful neglect or default‘: Partington v Reynolds, at 256 (ER at 99).

The court may make an order that general accounts be taken on the footing of willful default if at least one instance of willful default has been proved. However the court has a discretion whether to make such an order. The test is this: `is the past conduct of the trustees such as to give rise to a reasonable prima facie inference that other breaches of trust not yet known to the plaintiff or the court have occurred?’ (Re Tebbs [1976] 1 All ER 858, 863; see also Russell v Russell (1891) 17 VLR 729).

The purpose of a general account on the footing of wilful default is to sort out thoroughly mismanaged trusts or to uncover concealed misconduct. The master is granted a “roving commission” to inquire into all aspects of the trustee’s administration of the trust property under his care {Re Stevens [1897] 1 Ch 422, 432; Bartlett v Barclays Bank Trust Co Ltd (No.2) {1980] Ch 515, 546; Coultard v Disco Mix Club Ltd [2001] 1 WLR 707,734}.

In Meehan v Glazier Holdings Pty Ltd [2002] NSWCA 22 the appeal court held:

“It is then necessary to return to what amounts to wilful default, and to ask whether the matters found by Austin J were instances of wilful default. In an accounting by a trustee, the underlying concept is that through breach of trust the trustee has failed to obtain for the trust that which would have been obtained if the trustee’s duties had been discharged. There may be simple failure to get in an asset of the trust; sale of a trust asset at an undervalue has been treated as wilful default, presumably because of failure to obtain for the trust the full value of the asset (re Tebbs); failure to obtain rent for a stranger’s occupation of a trust property has been treated as wilful default (Bartlett v Barclays Bank Trust Co Ltd (No 2) (1980) 1 Ch 515). The breach of duty need not be conscious wrongdoing (Bartlett v Barclays Bank Trust Co Ltd (No 2) at 546). But wilful default is not coextensive with breach of trust: there may be a breach of trust which is not wilful default (see in Re Wrightson: Wrightson v Cooke (1908) 1 Ch 789 at 799-800; Russell v Russell (1891) 17 VLR 729 at 732; In Re Wood; Ebert v Union Trustee Company of Australia Ltd (1961) Qd R 375 at 378).”

Cotton LJ stated in Re Owens (1882) 47 LT 61 (CA) ; if executors “do that which is their duty not to do, or omit to do that which it is their duty to do then that is wilful neglect and default

An accounting on the footing of willful default leads to an order requiring the defendant to replenish funds wrongfully depleted by him or her and in that sense to make restitution for the benefit of the plaintiff.

An Order for an Account of Profits for a Specific Equitable Wrongdoing

An order for an account of profits is made where specific wrongdoing such as breach of trust or fiduciary duty has been found or is suspected. It is usually ancillary to the grant of an injunction: Colbeam Palmer Ltd v Stock Affiliates Pty Ltd [1968] HCA 50; (1968) 122 CLR 25, 34.

The accounting for profits were there has been a breach of fiduciary duty is covered in Warman International Ltd v Dwyer [1995] HCA 18.

In Bartlett v Barclays Trust Co (No 2) [1980] Ch 539 Brightman J found that the defendant was liable to replenish a trust fund depleted by unauthorised speculative investment, because it had failed to exercise its skill and expertise to investigate the investment proposal and intervene to safeguard the interests of the trust, and thereby prevent the investment from occurring.

Brightman J stated:

“Wilful default by trustee in this context means a passive breach of trust, an omission by a trustee to do something which, as a prudent trustee, he ought to have done – as distinct from an active breach of trust, that is to say, doing something which the trustee ought not to have done. If an instance of such wilful default is pleaded and proved, as are a number of such instances in the present case, the court is entitled to order an account on the footing of wilful default. It is otherwise if the plaintiff has merely alleged and proved one or more active breaches of trust. That does not necessarily entitle a plaintiff to a roving commission, which would be afforded by an account on the footing of wilful default.’

His Lordship said, without elaborating, that the distinction between wilful default and active breach of trust could be seen by comparing the judgments in Re Stevens [1898] 1 Ch 162 and Re Wrightson [1908] 1 Ch 789 . In Re Stevens the wrongdoing (held, in fact, not to amount to wilful default) was the executors’ failure to obtain and produce probate to the insurer under a policy of insurance on the life of the testator. The policy had been mortgaged for more than its value, and for seven years the estate incurred interest on the amount owing under the mortgage. If the executors had acted promptly to secure payment of insurance proceeds to the mortgagee, interest would have been limited to the balance owing after that payment. In Re Wrightson, on the other hand, there were specific allegations that the trustees had made certain investments in breach of trust, and had been guilty of other misconduct not specified in the law report.

Brightman LJ’s observations were taken up by Kennedy J in Gava v Grljusich [1999] WASC 13, at para 22ff. In that case two of the beneficiaries of a deceased’s estate took proceedings for the removal of the trustees of the estate, on a number of grounds.

Wilful Default

The words ‘default’ and ‘wilful’ axe relative terms. Each case must depend upon its own circumstances. A concise summary of their meaning is given by Sirling, L.J., in Bennett v. Stone (1903) 1 Ch 509:

According to the rule laid down in Re Young and Harston’s Contract (1886) 31 Ch D 168 168, a vendor commits a default if he fails to do something which he ought reasonably to do, regard being had to the terms of the contract which he has entered into with the purchaser, and is guilty of wilful default if he so fails when be is a free agent and knows what he is doing and intends to do what he does.

To this may be added as an obvious corollary that an honest mistake, the result of oversight or inadvertence, is not wilful unless persisted in after the attention of the vendor has been called to it.

In Reg v. Senior (1899) 1 QB 283, Lord Russell of Killowen, C.J., in a different context, explains ‘wilfully‘ to mean:

that the acts if done deliberately and intentionally not by accident or inadvertence, but so that the mind of the person who does the acts goes with it”.

In Re Young and Harston’s Contract (1886) 31 Ch D 168, a decision of the Court of Appeal in 1885, Bowen LJ says that the expression is “not a term of art” and that it has a simple, not a technical meaning. ‘Default‘ means nothing more, nothing less, than not doing something which you ought to do or not doing something which is reasonable in the circumstances. ‘Wilful‘, “implies nothing blameable” but merely means that the person acted as a free agent, that he knows what he is doing and that he intends to do what he is doing.

 In Ultraframe (UK) Ltd v Fielding & Ors [2005] EWHC 1638(4) (Ch at [1513] it was stated:

“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. If the beneficiary is dissatisfied with the way that a trustee has dealt with trust assets, he may surcharge or falsify the account. He surcharges the account when he alleges that the trustee has not obtained for the benefit of the trust all that he might have done, if he had exercised due care and diligence. If the allegation is proved, then the account is taken as if the trustee had received, for the benefit of the trust, what he would have received if he had exercised due care and diligence. The beneficiary falsifies the account when he alleges that the trustee has applied trust property in a way that he should not have done (e.g. by making an unauthorised investment). If the allegation is proved, then the account will be taken as if the expenditure had not been made; and as if the unauthorised investment had not formed part of the assets of the trust. Of course, if the unauthorised investment has appreciated in value, the beneficiary may choose not to falsify the account: in which case the asset will remain a trust asset and the expenditure on it will be allowed in taking the account”.

Davis J in Liberty Teal Griffin v David Raymond Coe [2012] NSWSC 412 stated at [180]:

[180] Wilful default in the present context means “a passive breach of trust, an omission by a trustee to do something which, as a prudent trustee, he ought to have done – as distinct from an active breach of trust, that is to say something which the trustee ought not to have done“: Bartlett v Barclays Bank Trust Co Ltd (Nos 1 & 2) [1980] 1 Ch 515 (at 546) per Brightman LJ. Martyn and Caddicks (eds), Williams, Mortimer and Sunnucks on Executors, Administrators and Probate, 19th ed (2008) Sweet & Maxwell (“Williams”) (at [61-28]) cites this passage from Bartlett to explain the meaning of wilful default in the executorial context. Bartlett was a case concerning wilful default by trustees. However it is in my view apt for Williams to treat the duties of executors and trustees as analogous so as to apply principles concerning wilful default developed in the trust context in a work dealing with executors and administrators.

[181] It is also apt to refer to a passage from Meehan v Glazier Holdings Pty Ltd [2002] NSWCA 22; (2002) 54 NSWLR 146] (at [65]) in which Giles JA (Sheller and Beazley JJA agreeing) addressed the issue of what constitutes wilful default, again in the context of an accounting by trustees, as follows:

[65] It is then necessary to return to what amounts to wilful default… In an accounting by a trustee, the underlying concept is that through breach of trust the trustee has failed to obtain for the trust that which would have been obtained if the trustee’s duties had been discharged. There may be simple failure to get in an asset of the trust; sale of a trust asset at an undervalue has been treated as wilful default, presumably because of failure to obtain for the trust the full value of the asset (Re Tebbs); failure to obtain rent for a stranger’s occupation of a trust property has been treated as wilful default (Bartlett v Barclays Bank Trust Co Ltd (Nos 1 & 2) [1980] 1 Ch 515). The breach of duty need not be conscious wrongdoing (Bartlett v Barclays Bank Trust Co Ltd (No 2) (at 546)). But wilful default is not co-extensive with breach of trust: there may be a breach of trust which is not wilful default (see Re Wrightson; Wrightson v Cooke [1908] 1 Ch 789 at 799-800; Russell v Russell [1891] VicLawRp 139; (1891) 17 VLR 729 at 732; Re Wood (decd); Ebert v Union Trustee Company of Australia Ltd [1961] Qd R 375 at 378).” (emphasis added)

In  Juul v Northey [2010] NSWCA 211 the Court of Appeal held that:

An allegation of wilful default should be pleaded and particularised: (at [191], [204] – [206]).

Perpetual Trustee Co v Watson (No 1) (1927) 28 SR (NSW) 39; Re Wrightson [1908] 1 Ch 789; GP Stuckey and CD Irwin, Parker’s Practice in Equity (New South Wales), 2nd Ed (1949) Law Book Company referred to

The distinction between those two forms of accounts was explained by Giles JA in Meehan(at [13] – [14]) as follows:

“13…Under [an order for taking accounts in common form] the accounting party accounts only for what has actually been received and disposed of.The other party to the accounting can challenge the accounting party’s account by asserting that more was received (in the old terminology, surcharging) or by asserting that less was disposed of (in the old terminology, falsifying).14 There is an alternative basis for taking accounts. An order may be made for taking accounts on the basis of wilful default (sometimes the words are wilful neglect and default). Under such an order the accounting party must account not only for what has actually been received, but also for what should have been received: that is, for what would have been received if the relevant duties of the accounting party had been properly discharged. Thus in Partington v Reynolds [1858] EngR 461; (1858) 4 Drew 253 at 256; [1858] EngR 461; 62 ER 98 at 99 it was said that on this basis an executor or administrator must account ‘not only for what he has received, but also for what he might, without his wilful neglect or default have received, although he has not received it’.

15 … An accounting on the basis of wilful default is more onerous than an accounting in common form, and can result in the accounting party having to pay more to the other party to the accounting..

McLauchlan v Prince [2001] WASC 43

Gava v Grljusich [1999] WASC 13

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