New Trustees – Breach of Trust by Former Trustees

An important duty of any Trustee who takes office is to commence legal proceedings against a former Trustee to recover Trust Property that was passed away in Breach of Trust by the former Trustee or Trustees.

A Trustee who discovers a breach of duty must rectify it {Harvey V Oliver (1887) 57 LT 239; Millar’s Trustees v Polson (1897) 34 SLR 798}

If a new Trustee discovers that Breaches of Trust have been committed by a previous Trustee, he must obtain satisfaction for the breaches from the old trustee, just in the same way as an original trustee must get in any part of the trust estate that is outstanding {Re Forest of Dean Coal Mining Co. (1878) 10 Ch.D. 450 at 451,452}

If the former Trustee was a corporate Trustee, the new Trustee may also sue the former Trustee’s directors for their role in participating and procuring the Breach or Breaches of Trust.

In Young v Murphy [1996] 1 VR 279 in the Supreme Court of Victoria it was held that:

A defaulting trustee remains obliged, notwithstanding his own wrongdoing, to make good the trust property and, if necessary, to institute proceedings to make good the loss against those who participated in the wrongdoing. Accordingly the new trustees had standing to sue the directors of the former trustee for alleged participation in, and procurement of, breaches of trust by the former trustee.

The new trustees had standing to enforce the liability of directors of the former trustee under Section 19(2)(b) of the Trustee Companies Act 1984 (Vic). {Note: Section 19 was repealed by the Trustee Companies Legislation Amendment Bill 2010}.

A trustee’s rights of action in tort and in contract against the trust’s auditors, arising out of a contract made with the auditors by the trustee in the administration and for the purposes of the trust, are trust property. Accordingly the new trustees had standing to sue the trust’s auditors.

The new trustees had standing to sue the former trustee’s professional indemnity insurer to enforce the relevant insurance policies.

Brooking J stated in Young and Murphy: “Putting to one side the special case of charitable trusts, a trustee who has committed a breach of trust may be sued in respect to that breach either by a beneficiary (including someone representing his estate) or by a co-trustee or successor trustee: Occidental Life Insurance Co. of Australia Ltd v Bank of Melbourne (unreported, Full Court, 26 Nov 1991). Proceedings to have a breach of trust redressed may be taken by a beneficiary against a trustee, or a former trustee or the estate of a former trustee, or a stranger to the trust who has become liable to redress the breach of trust. Such proceedings may also be taken by a trustee against a co-trustee, or a former trustee or the estate of a former trustee, or against a stranger to the trust who as become liable as mentioned;Scott on Trusts ss 294 and 294.1; Bogert, Handbook on the Laws of Trusts ss 157 and 166; Re Cross; Harston v Tension (1881) 20 Ch. D. 109; Space Investments Ltd v Canadain Imperial Bank of Commerce Trust Co (Bahamas) Ltd [1986] 1 WLR 1072 at 1074. Where it is a new trustee who takes proceedings to redress a breach of trust committed before his appointment, he can sue without the aid of a vesting order; Re Bennet [1096] 1 Ch 216 at 230-1 per Stirling LJ; Scott on Trusts, s 109. Indeed, recognition of the right to sue precedes the invention of the vesting order by the Trustee Act 1850 (13 & 14 Vict c.60). That recognition is founded on general equitable principles.

Brooking J noted: “The standing of a trustee to take proceedings to have a breach of trust redressed against a trustee or former trustee or a stranger who has become liable to redress a breach of trust is well recognised. Not only may a trustee take such proceedings, but he runs the risk of himself committing a breach of trust if he fails to do so: Scott on Trusts, s 177, 223 and 123.3, Law of Trusts and Trustees, s 592, Handbook of the Law of Trusts, s 97; Re Brogden (1888) 38 CH.D. 546. His obligations to take proceedings is part of his duty to get in the trust estate, which includes rights of action against co-trustees or former trustees and strangers for breach of trust”.

The principle is shortly stated in Snell’s Equity, 29th ed, at pp 286-7, where it is said of new trustee:

If … he discovers that breaches of trust have committed, he must obtain satisfaction fro them from the old trustee, just the same way as a original trustee must get in any part of the trust estate which is outstanding; and the only excuse fro not doing so is that it would be useless to tale proceedings against the old trustees.

“Snell rightly cites Re Forrest of Dean Coal Mining Co. (1878) 10 Ch D 450 for the proposition. The right and duty of a successor trustee to sue his predecessor for breach of trust is in Re Lane’s Will A. 97 A 587 (1916) correctly founded on his duty to obtain all the property that belongs to the trust and for that purpose to get in from the preceding trustees or their representatives whatever the successor trustee finds to be necessary to reimburse the trust estate for losses sustained through breach of trust”.

In Scott on Trusts (s 200.2) it is said that a co-trustee is not debarred by his own misconduct from maintaining a suit to redress a breach of trust committed by a trustee, since the purpose of the suit is to maintain the interests of the beneficiaries.

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