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Trustees powers of investment and delegation

The issues involved here, relates to trustee’s powers of investment and delegation of investment powers by trustee. The trustees’ investment duty is not to achieve a particular out come, but rather to invest the fund in a particular way, and that is prudently and fairly.[1] The Trustee Act 2000 provides a framework for the exercise of trustee investment powers. The traditional standard of a prudent man of business that was formulated in Speight v Gaunt (1883) 9 App Cas has been reformulated by section 1 of the trustee Act 2000, as a duty to exercise such care and skill as is reasonable in the circumstances.[2] However, it remains true that trustees must avoid investments that are hazardous.[3]

A trustee has very wide powers to invest in any type of investment they choose and at the same time they also have a duty to be prudent when choosing any particular investment. Tim and Tom have wide investment powers and at the same time they have to be very prudent when exercising those powers, if they breach their trust in this respect they may be personally liable to compensate the beneficiaries for any loss caused. However the beneficiaries, Carol, David and Eleanor will have to establish that they invested improperly and that the improper investment has actually caused the trust fund to suffer a quantifiable loss. Even if it were conceded that the trustees had invested imprudently and that the trust fund had a loss, the significant obstacle would be to prove that it was the trustees’ imprudence that caused the loss.[4]

‘A trust is a situation in which property is vested in someone (a trustee), whom is under legally recognised obligations, at least some of which are of a proprietary kind, to handle it in a certain way’.[5] Trustees must invest in a manner that is prudent in the light of the current investment practise.[6] A trustee has a duty to respect the fact that the property is not beneficially their own and keep it safe, and to manage and invest it.[7] Previously the general law would not allow trustees to participate in the market as if they were absolute owners of the fund.[8] That could only be achieved by the terms of the trust instrument.[9] However, as a result of part 11 of the Trustee Act 2000 every trustee ‘may make any kind of investment that he could make if he were absolutely entitled to the assets of the trust’.[10] This power enables trustees to hold investments jointly or in common with other persons. Section 3 of the Trustee Act 2000 introduced the trustee general power of investment. The law recognises trustees to have the same investment powers as absolute owners; however trustees’ are accountable to the beneficiaries. In Harvard College v Amory (1830) 26 Mass (9 Pick) 446, Justice Putman stated, ‘’all that can be required of a trustee to invest, is, that he shall conduct himself faithfully and exercise a sound discretion. He is to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested’’.[11]

The Trustee Act 2000 repeals the old scheme for investment laid down by the Trustee investment Act 1961. The notes to the 2000 Act reads as follows: ‘’the law governing the powers and duties of trustees, particularly the relevant provisions of the Trustee Act 1925 and the Trustee investment Act 1961, has not kept pace with the evolving social and economic role which trusts now fulfil. This discrepancy has been brought in to sharp focus by fundamental changes in the conduct if investment business during the last ten years such as the introduction of the CREST system on the London Stock Exchange. The situation is now so serious that the view is widely held that that it is very difficult for such trustees acting under the terms of trust instruments which make no specific provisions as to investment powers, to satisfy their paramount duty to act in the best interests of the beneficiary’’.[12]

Sigmund died in 2004 and left a will to be held by his trustees Tom and Tim on a discretionary trust.

Riddall, defines a discretionary trust as, ‘’one under which discretion is conferred by the settlor on the trustees to decide which member or members of a class of beneficiaries should be entitled to the trust property’’.[13]

According to section 4 (3) of the Trustee Act 2000, trustees are required to take in to consideration while investing the trust fund, to consider the suitability to the trust of investments of the type proposed.[14]

A trustee in exercising any power of investment must have regard to the standard investment criteria and trustees must also from time to time review the investments of the trust and consider whether, having regard to the standard investment criteria, they should be varied.[15] A trustee before exercising any power of investment must obtain and consider proper advice about the way in which, having regard to the standard investment criteria, the power should be exercised. Tim and Tom had a duty to periodically review the investment, which Ingvar had undertaken. Tom and Tim failed to do that. In Nestle v Westminster Bank Plc (1996) 10 (4) TLI 11, the court held inter-alia that the bank should regular reviews of the investment under its control, the court further held that because the claimant had failed to show that the bank’s breaches of duty had resulted in a loss to the fund and on that basis the appeal was dismissed. In Bartlett and Others v Barclays Bank Trust Co Ltd (No 1) (1980) Ch 515, the court held inter-alia that the trustees’ had breached their trust because it had failed to adequately to supervise one of the trust instruments. Brightman J said, ‘’what the prudent man of business will not do is to content himself with the receipt of such information on the affairs of the company as a shareholder ordinarily receives at annual general meetings. Since he has the power to do so, he will go further and see that he has sufficient information to enable him to make a responsible decision from time to time either to let matters proceed as they are proceeding, or to intervene if he is dissatisfied’’.[16]

Trustees ‘’before exercising any power of investment, whether arising under this part or otherwise, a trustee must (unless the exception applies) obtain and consider proper advice about the way in which, having regard to the standard investment criteria, the power should be exercised’’.[17] The proper advice should be sought from a person who is reasonably believed by the trustee to be qualified to give it by his ability in and practical experience of financial and other matters relating to the proposed investment.[18] In this case, Tim and Tom sought the advice of Ingvar. Ingvar is a businessman who specialises in importing frozen fish to the UK. It is very doubtful, that Ingvar is qualified to give proper advice on investment matters due to his limited experience of financial and other matters relating to the proposed investment.

Trustees may wish to delegate their investment powers to a professional such as an investment manager authorised under the financial services legislation.[19] Section 11 of the Trustee Act 2000 lists functions that may not be delegated by trustees. Investment powers of the trustee are omitted from the list, therefore it means that the trustees, Tom and Tim can delegate their powers of investment to Ingvar. However, where investment powers are delegated, the agent must satisfy the requirements relating to the standard investment criteria and the duty to review the investments from time to time.[20]

The agent is not required to obtain advice, before embarking on any investment if he is the kind of person from whom the trustees could properly have obtained advice.[21] In this particular case, because Ingvar is not a financial consultant and he appears to have limited knowledge of financial matters, he should be sought advice before investing in the bank shares.

The delegation of investment powers by the trustees must be done by an agreement in writing or evidenced in writing.[22] In this case, the agreement between the trustees, Tom and Tim and Ingvar was orally done. Further more, the trustees must prepare a policy statement that gives guidance as to how the functions they are delegating should be exercised in the best interests of the trust, and the agent must agree to comply with it.[23] Unless, the trust instrument provides otherwise, trustees who delegate, must keep the arrangements under review, including the review of any policy statement.[24] Generally, trustees are not liable for the default of agents that they have delegated their investment duties to unless; they have failed to comply with the statutory duty of care when making the appointment and reviewing the arrangements.[25] The duty of care applies in particular to the selection of the person, who is to act on behalf of the trustees, the terms upon which he is to act, and the preparation of a policy statement where assets management functions are delegated.[26] In this case, it appears that the trustees Tom and Tim have not complied with the statutory duty of care when they appointed Ingvar. More over, the appointment was made orally. The appointment should have been made in writing or evidenced in writing. The trustees also failed to review the arrangement they had with Ingvar. The trustees should have prepared a policy statement that gives guidance as to how the functions they are delegating should be exercised in the best interests of the trust, and the agent must agree to comply with it. This was not done.

Carol, David and Eleanor could sue the trustees Tom and Tim for failing to comply with the statutory duty of care that is required of them when delegating their investment powers to Ingvar and also for failing to review the arrangement they had with Ingvar. In short they delegated their powers to Ingvar, but they failed to exercise any supervision. . However, despite the fact that the trustees failed to appreciate the scope of their investment powers and also failed to conduct regular reviews, the beneficiaries will still need to prove that these failures resulted in wrong investment decisions and loss. In Nestle v National Westminster Bank plc (1996) 10 (4) TLI 11, the court held inter alia that although that the investments fell woefully short of maintaining of maintaining the real value of the fund, failure to maintain the value was not in itself a breach of trust, as to do so would require extra ordinary skill and luck and would at times be impossible.[27] See also Jones v AMP Perpetual Trustee Company NZ Ltd (1994) 1 N.Z.L.R.

Bibliography

Gardner, S (1990) An introduction to the Law of Trusts, Second Edition, Oxford University Press, Oxford

Haley, M and McMurtry, L (2006) Equity and Trust, Sweet and Maxwell, London

Harris, J.W (1975) Variation of Trust, Sweet and Maxwell, London

Hayton, D.J (2003) The Law of Trusts, Fourth Edition, Sweet and Maxwell, London

Hayton, D.J (2003) Underhill and Hayton Law of Trust and Trustees, Sixteenth Edition, Butterworths LexisNexis, London

Hudson, A (2004) Understanding Equity and Trusts, Second Edition, Cavendish Publishing, London

Martin, J.E (2005) Hanbury and Martin, Modern Equity, Seventeenth Edition, Sweet and Maxwell, London

Oakley, A.J (1996) Trends in contemporary trust law, Oxford university press, Oxford

Penner, J.E (2002) The Law of Trusts, Butterworths LexisNexis, London

Pettit, P.H (2006) Equity and The Law of Trusts, Tenth Edition, Oxford University Press, Oxford

Reed, P and Wilson, R (2001) The Trustee Act 2000: A Practical Guide, Jordan, Bristol

Riddall, J.G (2002) The Law of Trusts, Lexis- Nexis Butterworths, London

Thurston, J (1998), A Practitioner’s Guide to Trusts, Second Edition, Tolley Publishing, Croydon

Todd, P and Wilson, S (2005) Text Book on Trusts, Seventh Edition, Oxford University Press, Oxford

Watt, G (2007) Todd and Watt’s Cases and Materials on Equity and Trust, Oxford University press, Oxford

Watt, G (2006) Trusts, Second Edition, Oxford University Press, Oxford

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Footnotes

[1] Todd and Watt (2007) p.429

[2] Hanbury and Martin (2005) p.550

[3] Hanbury and Martin (2005) p.550

[4] Todd and Watt (2007) p.428

[5] Gardner (1990) p.246

[6] Todd and Watt (2007) p.428

[7] Gardner (1990) p.246

[8] Watt (2006) p.307

[9] Watt (2006) p.307

[10] See section 3 (1) Trustee Act 2000

[11] (1830) 26 Mass (9 Pick) 446 at p.461 citied in Todd and Watt (2007) p.433-444

[12] See Note 6 of the Trustee Investment Act citied in Watt (2006) p.307

[13] Riddall (2002) p.283

[14] Watt (2006) p.313

[15] See Section 4 Trustee Act 2000

[16] citied in Watt (2006) p.316

[17] See Section 5 (1) Trustee Act 2000

[18] See Section 5(2) Trustee Act 2000

[19] Hanbury and Martin (2005) p.548

[20] See Section 13 (1) Trustee Act 2000

[21] See Section 13 (2) Trustee Act 2000

[22] See Section 15 Trustee Act 2000

[23] Hanbury and Martin (2005) p.549

[24] See Section 20 Trustee Act 2000

[25] Hanbury and Martin (2005) p.550

[26] Hanbury and Martin (2005) p.550

[27] Hanbury and Martin (2005) p.551


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