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Court of Appeal turns its sights towards dishonest trustees

By Tony Johnson - 25 Oct 2013

The recent Court of Appeal decision in Spencer v Spencer is a further indication of the Court's renewed interest in the actions of trustees. In this case, the Court found the trustees were personally liable for losses arising out of the various breaches of duty.

The Court determined the trustees were in breach of their duties:

to make proper efforts to recover a debt due to the Trust
in allowing a trustee (through his company) to charge management fees; and
in failing to collect rents that were payable to the Trust.

The Court then turned to the issue of whether the trustees would be personally liable for losses arising from the breaches.

The trustees relied on a clause in the Trust Deed that indicated:

"NO trustee acting or purporting to act in the execution of the trusts of these presents, shall be liable for any loss not attributable to his or her own dishonesty or to the wilful commission or omission by him or her of an act known to be a breach of trust…"

The trustees' argument was that they thought their decisions were appropriate and that they had not acted, or intended to act, dishonestly.

The Court had no problem rejecting the trustees' position.

The critical first step for the Court was to establish whether the trustees actually knew about the terms of the Trust relevant to the breach and whether the trustees knew their conduct amounted to a breach of trust. Importantly, the trustees' knowledge might include constructive knowledge arising from wilful blindness. Honesty was to be assessed on an objective basis. A trustee who believed his or her actions or omissions were in the best interest of the beneficiaries, was not necessarily entitled to protection.

Here, the Court determined the trustees had acted dishonestly.

This decision again reiterates the need for caution on the part of trustees. Trustees are the guardians of assets held on behalf of all beneficiaries. If you are a beneficiary or a trustee and issues have arisen from a decision that has been taken or a decision that is being contemplated, obtaining legal advice is often the most prudent way forward. We are available to assist.