Remuneration of trustees
Trustees can only claim payment for their services if authorised to do so by one of the following:
(a) Express provision in the trust deed.
(b) The beneficiaries consenting.
(c) Court order.
(d) The Trustee Act 2000. Save where the trust deed makes any provision about remuneration:
(i) a trust corporation, or
(ii) a trustee who acts in a professional capacity and who is not a sole trustee, and where the other trustees have agreed in writing, is entitled to receive reasonable remuneration.
Trustees are also prohibited by their fiduciary duty from making incidental profits from third parties, such as a commission for taking trust business to a particular firm.
If the trust takes a substantial shareholding in a company, it makes fiduciary sense to secure an appointment on the board of directors. If a trustee acquires the directorship solely because of the trust, however, they must surrender the associated salary to the trust itself.
A trustee must account for any profits they receive by virtue of their trusteeship, including by making use of confidential information thus acquired. See for example the case of Boardmann v Phipps.
Remedies in Breach of Fiduciary Duty
If a trustee is not authorised to any personal profit and breaches their fiduciary duty, the beneficiaries can respond with:
- a personal claim. A beneficiary may bring a personal claim against the offending trustee, who must then pay the claim out of their own funds.
- a proprietary claim. This will seek to recover property from the trustee commensurate with the personal profit they received.
If the trustee is sufficiently solvent, a personal claim is an obvious way to recover illegitimate profits, but if they have already invested the profits wisely, it may be more advantageous to claim against property than the trustee.
Personal claims can only be made against trustees who are personally in breach of trust. If more than one has breached trust, they have joint and several liability, so the beneficiaries can either bring a claim against them all, or single out a particularly culpable individual.
The claimant must establish causation, showing that the loss only occurred because of the breach of trust. If successful, the compensation will be equal to the loss to the trust plus interest.
A trustee facing a personal claim for breach of trust can make the following defences:
(a) an exemption clause in the trust deed, if the settlor included an express clause exempting trustees from liability for breach of trust.
(b) knowledge and consent of the beneficiaries, if the beneficiaries all knew about and consented to the course of action deemed a breach of trust, whether before or after the action occurred.
(c) s 61 of the TA 1925 gives the court discretion to relieve trustees from liability, wholly or in part, if they acted honestly and reasonably, and ought fairly to be excused.
d) limitation and laches, under s 21 of the Limitation Act 1980, which says personal claim for breach of trust is subject to a six-year limitation period (except where trustees have committed a fraudulent breach of trust). Even in the absence of a statutory limitation bar, the Court could recognise the equitable doctrine of laches, which could prevent the claim where:
- the claimant knows the facts that gave rise to the breach of trust;
- the claimant delays in taking action; and
- this delay causes detriment or prejudice to the trustee.
If just one trustee is sued for the entire loss, they may wish to seek to have other trustees in breach share the burden of paying monetary compensation. There are two ways to do this:
- claiming the full amount of compensation from a co-trustee under an equitable indemnity; or
- claiming a contribution towards the compensation from a co-trustee under the Civil Liability (Contribution) Act 1978.
A trustee who is sued for breach of trust can recover a full indemnity from a co-trustee who:
(a) acted fraudulently while the other trustees acted in good faith; or
(b) is a professional who thus had a disproportionate influence, with the other trustees simply following their advice; or
(c) has benefited personally from the breach; or
(d) is also a beneficiary who benefited from the breach, which would mean the indemnity is limited to the value of their equitable interest, and this can be impounded to meet the claim.
Pursuant to s 1 of the Civil Liability (Contribution) Act 1978, the court can also order a co trustee to make a just and equitable contribution, having regard to the extent of that co-trustee’s responsibility for the loss, of anything up to 100% of the compensation ordered.
A proprietary claim can be made directly against any property a trustee has simply retained illegitimately. If they have sold trust property and used the proceeds to buy another asset, a proprietary claim will enable the beneficiaries to recover the new asset – a so-called ‘clean substitution’ – as it is treated as if it belongs to the trust.
In that case, the beneficiaries have two choices:
(a) to take the substitute property (especially if it has increased in value).
(b) to sue the trustee for compensation for the loss and take an ‘equitable lien’ over the property for the same amount.
If a trustee mixes trust funds with their own money or money belonging to someone else, different tracing rules are used, depending on the situation, in order to identify trust property.
The beneficiary can:
(a) claim a proportionate interest in the mixed asset (especially if it has increased in value); or
(b) sue the trustee for compensation for the loss to the trust and take an ‘equitable lien’ over the mixed asset for the same amount (especially if the mixed asset has decreased in value).
If a trustee has paid money into their own bank account and subsequently withdrawn sums, it is difficult to distinguish between their personal property and trust property.
The first tracing rule, derived from Re Hallett’s Estate (1880) 13 Ch D 696, provides that the trustee is deemed to spend their own money first. This is just one application of the equitable maxim that ‘everything is presumed against a wrongdoer’. If this rule works to benefit the wrongdoing trustee, then, equity will apply another tracing rule to ensure a better result for the beneficiary.
This alternate tracing rule is set out in Re Oatway  2 Ch 356, and provides that the beneficiary has a ‘first charge’ on the mixed fund or on any property purchased from it. This means the beneficiary gets ‘first choice’ and is therefore able to choose how best to satisfy their proprietary claim.
The tracing rules do face certain limitations. For example, if a trustee spends all the money in a bank account containing a mixture of their own and trust money, and subsequently pays in new money.
In Roscoe v Winder, a company was sold under an agreement that included a promise by the purchaser to collect the book debts owed to the vendor on their behalf. The purchaser collected and paid £455,000 into his bank account, and failed to account for the money due to the vendor. He them withdrew money from the account, reducing it to £25,000. He later paid in funds from an unrelated source, and died with a balance of £358,000. The vendor then claimed to be beneficially entitled to this sum, but it was held that the maximum they were entitled to trace was £25,000, on the ground that when the balanced reached that floor, the purchaser had denuded the account of all the trust moneys except that £25,000.
It is also possible that a trustee could take money in breach of trust from more than one trust, and mix them all together. The beneficiary of each trust would then have to use tracing rules to unravel what it owns. Given that all the trusts are innocent of the trustee’s wrongdoing, however, equity must use a different set of tracing rules in order to treat each innocent trust equally.
The first tracing rule comes from Clayton’s Case (1816) 1 Mer 572, and states that, as between two or more innocents, the first money paid in is the first money paid out – First In, First Out (FIFO). Thisis a rule of convenience, and while it has been reaffirmed by subsequent cases, courts indicate that it will only be applied if it does broad justice with regard to the competing claims that must be disentangled.
In Barlow Clowes International Ltd (in liquidation) v Vaughan  4 All ER 22, the Court of Appeal indicated that the FIFO rule in Clayton’s Case can be departed from where:
• it is impossible to apply FIFO (e.g., where the records are so poor that ordering payments chronologically cannot be accurately undertaken);
• FIFO would result in injustice; or
• the application of FIFO would be contrary to the parties’ intention.