UEQ3622– EQUITY & TRUST II

DUTIES AND POWER OF TRUSTEE

INTRODUCTION • A trustee may or may not do certain act or acts in the discharge of his or her duty. • The substance of it all is discretion, and the court will not interfere with decisions which are honestly arrived at.

Cont. • A trustee may not use the powers which the possession of the legal estate in the trust property confers on him in law except in a proper way for the legitimate purposes of the trust. • If he is about to exercise a power improperly, he may be restrained by injunction.

Courts Power  The court may interfere where the power has been exercised mala fide, or where the trustee has taken into irrelevant factors or alternatively has not taken into relevant factors:  judicial interference –justified- where trustee  (a) took into considerations which he should not have taken into , or

 (b) failed to take into considerations which he ought to have taken into ".

Test of unreasonableness • The test is one of unreasonableness- how unreasonable was the trustee –must have evidence relating to mala fide; • A decision that some other trustees may not have opted for is not necessarily unreasonable for the purpose, but a decision that is clearly perverse could not stand.

Cont. • Under the English Trustee Act 2000, (s l)- a standard of conduct imposed on trustees is one to exercise such care and skill as is reasonable in all circumstances; • Unreasonableness is measured in the sense that no reasonable trustee could rationally in the circumstances of the particular case have done as such would justify judicial intervention; • In exercising trust powers, trustees must be unanimous, but the rule does not extend to duty ;

Trust instrument and Trustee Act 1949 • Section 2(2) of the Trustee Act 1949 – • statutory powers, unless otherwise stated, apply if and so far only as a contrary intention is not expressed in the trust instrument, and have effect subject to the of that instrument.

DUTY TO INVEST • A trustee is under a duty to invest the trust funds in investments authorised for the purpose, specifically as authorised by the trust instrument, by legislation or by the court; – i)express provisions; – ii) statutory provision – TA 1949 Part II (s4 – s15); – iii) court order;

Investment Duties Must be fair to the income beneficiaries as well as those entitled to the corpus; Must be honest and avoid risky or speculative investments; The guideline – take such care as an ordinary PRUDENT person would for the benefit of other people for whom he or she felt morally bound to provide as per Re Whiteley

Cont. • Lord Watson further explained in Learoyd v Whiteley; – general rule - the law requires of a trustee no higher degree of diligence in the execution of his office than a man of ordinary prudence would exercise in the management of his own affairs.

– Yet he is not allowed the same discretion in investing the moneys of the trust as if he were a person sui juris dealing with his own estate.

Cont. • Businessmen of prudence may, and frequently do, select investments which are more or less of a speculative character but it is the duty of a trustee to confine himself to the class of investments which are permitted by the trust and likewise to avoid all investments of that class which are attended with hazard.

Cont. Panckhurst J for the New Zealand High Court explained in Re Mulligan (Decd):

 ... prudent provides a flexible standard, one which will change with economic conditions and in the light of contemporary thinking and understanding.  Accordingly, it follows that in judging the past performance of trustees one must apply the standards of the relevant period.  There is a risk of applying the wisdom of hindsight and of ing judgment on the basis of every day standard ... I accept that a trustee is neither a surety, nor an insurer, of the fund for which he is responsible….

Cont. • Cowan v Scargill, per Robert Megarry VC; • Honesty and sincerity are not the same as prudent and reasonableness, • The law, as a matter of policy, may demand a higher standard from professional trustees, including trust corporations.

Cont. • In Bartlett v Barclays Fund Trust Co Ltd (No 2); • The

principle : trustee must act in the best interest of Beneficiaries;

• The issue: to what extent trustee must act in the best of interest of beneficiaries? • Social & political views may affect the investment decision if lead to the best return, financially of income & capital

Cont. • Cowan v Scargill [1985] Ch 270 is an English trusts law case, concerning the scope of discretion of trustees to make investments for the benefit of their . • The trustees of the National Coal Board pension fund had £3 billion in assets. Five of the ten trustees were appointed by the Board and the other five were appointed by the National Union of Mineworkers, led at the time by Arthur Scargill. A of experts advised all. The National Union of Mineworkers wanted the pension fund to withdraw all overseas investments and withdraw investments in any companies in an industry that competed

Cont. Judgment by Megarry VC; NUM trustees would be in breach of trust if they followed the instructions of the union, saying ‘the best interests of the beneficiaries are normally their best financial interests.’ Refusal amounted to breach of fiduciary duty; Only if all beneficiaries, all of full age, consent to something different is it possible to invest ethically, see Harries v Church Commissioners for England.

Cont. Trustees may even have to act dishonorably (though not illegally) if the interests of their beneficiaries require it. In other words, the duty of trustees to their beneficiaries may include a duty to "gazump", however honorable the trustees. Definition of Gazumping  Gazumping is the term used to describe this situation where the seller of an asset accepts a purchase offer, having already accepted another lower offer from another potential buyer. In other words, the seller changes his deal to sell to a second buyer who offers more money;

Investment powers • 1) Express powers of investment; • Refer to the express provisions in the trust instrument; • In Re Harari's Settlement Trusts, the power conferred on the trustees was formulated as being investments "as the trustees may think fit". • Khoo Tek Keong v Ch’ng Joo Tuan Neoh (1934) AC 529;

Cont. If stated in the trust instrument that an investment ought to yield an income; then trustees must purchase property with intention to rent not for occupation of the beneficiary Re Power’s Will Trusts ; If the intention is to allow a beneficiary to occupy a trust property free of rent, then such a power ought to have been provided for in the trust instrument.

Cont. 2)Lending Monies from the Trust Fund; the trust instrument may properly allow trustees to lend money. Nevertheless, "it ought to be rung into the ears of everyone who acts in the character of trustee“ that Even on clear authority lending in return of a personal promise or of personal property is not permissible and thus constitutes a conduct amounting to a breach of trust.

Cont.  3) Statutory range of investment:

Express provisions in respect of investments by trustees in Part II of the Trustees Act 1949, specifically ss 4 to 15. Section 4 of the Act provides in respect of authorised investment. Section 4(1)(a) - covers investments in securities of the Federal Government/Government of the State of Sabah or the State of Sarawak/the Republic of Singapore.

Cont. • s 4(1)(b) - trustees can invest in any securities the interest on which is or shall be guaranteed by Parliament or the Federal Government • s 4(1)(c) - permits trustees to invest in or upon titles to immovable property in Malaysia which are either freehold or grant in perpetuity or leases, but not mining leases, with unexpired term of at least 60 years at the time of investment; provided that for the purpose:

Cont. Proviso s4(1)(c) – (i) the land to which any such title relates shall be situate within the limits of any City Municipality, Town Council or Town Board area; and (ii) there be erected on the land to which such title relates houses or other buildings the gross rental whereof, together with the land appurtenant thereto, is at the of such investment not less than seven per centum of the purchase price of the land, in the case of a purchase price, or of the value of such land, as ascertained under paragraph l2(1)(a), in the case of a charge.

Cont. • Section 4(1)(d) - investment in fixed interest securities issued in Malaysia with the approval of the Treasury by any public authority established under Federal or State Law; • Section 4(1)(f) - investment in loans the principal and interest of which is or shall be guaranteed by the Federal Government; • Section 4(1)(e) authorises loans to an approved company provided that the company complies with the requirements of s 4(2), namely that:

Cont. • (a) the paid-up ordinary share capital of the approved company is not less than five million ringgit; • b) the approved company has paid a dividend at the rate of not less than five per centum upon such ordinary share capital during each of the last three years prior to the time of investment, and where the approved company is a company which has acquired the assets and liabilities of another approved company, payment of a dividend by that other company during each of the last three years prior to the time of such acquisition shall be treated as payment by the approved company; and

Cont. • (c) the total amount of the borrowings of the approved company from all sources, whether trustee or not, accepted by the approved company on loan and deposit, and including interest due thereon and not repaid by the approved company, does not at any time exceed two-thirds of the amount, excluding prospective interest, for the time being secured to the approved company from its borrowers.

Cont. • Section 5: • investment specified in s 4 shall include any security to which the section applies and any units, or any shares of the investments subject to the trust, of a unit trust scheme approved by the YDPA by notification published in the Gazette. • The provisions apply to any securities issued by a company prices for which are quoted on the Stock Exchange of Malaysia.

Cont. • S6-Choosing Investments; • Must comply with s6(2) – to obtain proper advise; – i) either advise of a stockbroker obtained through the trustee’s bank manager; – ii) from ant; • This provision has no application to the PublicTrustee and to trust companies as defined under the Trust Companies Act 1949.

Cont. • Investment in securities under s 4 discussed earlier may be redeemable and the price must exceed the redemption value- as per s 8(1), • Further, under s 8(2), he or she may retain until redemption any redeemable stock, fund, or security which may have been purchased in accordance with the powers of the trustee Act 1949.

Cont. • Trustee’s Discretion to invest; • S9 - a restatement of the general principle: – it provides that every power conferred by ss 4 and 8 shall be exercised according to the discretion of the trustee, but subject to any consent or direction, with respect to the investment of the trust funds, required by the trust instrument, or by written law.

Cont.  4) Trustees lending money on the security of property;  Should not be liable if he/she can properly lend;  Comply with s12(1) :  (a) that in making the loan the trustee was acting upon a report as to the value of the property made by a person whom he reasonably believed to be an able practical surveyor or valuer instructed and employed independently of any owner of the property, whether such surveyor or valuer carried on business in the locality where the property is situate or elsewhere;

Cont. • (b) that the amount of the loan does no exceed two third parts of the value of the property as stated in the report; and • (c) that the loan was made under the advice of the surveyor or valuer expressed in the report.

Cont. There appears to be a difference of judicial opinion pertaining to the question as to whether the valuer must be, as a matter of fact, independently instructed, or that a trustee would be protected on of his or her reasonable belief in respect of the same. Re Walker - the valuer to have been as a matter of fact employed independently of the owner; Re Solomon and Re Somerset - suggest that a reasonable belief on the part of the trustees would be adequate.

Cont. • 5) Liability investment;

for

loss

occasioned

by

improper

• Section 13(1) of the Trustee Act 1949 provides that where a trustee improperly advances trust money on the security of a charge which was proper at the time of investment in all respects for a smaller sum than is actually advanced, the liability of the trustee to make good extends only to the sum advanced in excess with interest ; • Shaw v Cates (1909) 1 Ch 389;

Powers supplementary to powers of investment s 14 of the Trustee Act 1949 further provides as follows: Lending of monies (1) Trustees lending money on the security of any property on which they can lawfully lend may contract that such money shall not be called in during any period not exceeding five years from the time when the loan was made, provided interest be paid within a specified time not exceeding ten days after every monthly or other day on which it becomes due, and provided there be no breach of any covenant by the chargor contained in the instrument of charge for the maintenance and protection of the property.

Cont. • Can put charge on land sale • (2) the proceeds are liable to be invested, contract that the payment of any part, not exceeding two-thirds, of the purchase money shall be secured by charge of the land sold, with or without the security of any other property, but the charge, if any buildings are comprised therein, shall contain a covenant by the chargor to keep the buildings insured against loss or damage by fire to the first value thereof.

Cont. • (3) The trustees shall not be bound to obtain any report as to the value of the land or other property to be comprised in such charge, or any advice as to the making of the loan, and shall not be liable for any loss which may be incurred by reason only of the security being insufficient at the date of the charge. • (6) subject to the consent of any person whose consent to a change of investment is required by law or by the instrument, if any, creating the trust. Shaw v Cates [1909] 1 Ch 389.

Cont. • (7) Where the loan referred to in subsection (1), or the sale referred to in subsection (2) is made under the order of the Court, the powers conferred by those subsections respectively shall apply only if and as far as the Court may by order direct.

Power to deposit at banks and to pay calls • s 15: • s 15(1) provides that trustees may, pending the negotiation and preparation of any charge, or during any other time while an investment is being sought, pay any trust money into a bank and that all interest payable be applied as income; • s 15(2) - the trustees to apply capital money subject to a trust in payment of the calls on any shares subject to the same trust ;

Enlargement of powers of investment • The matter of enlargement of trustees' power of investment is provided for in the wider context of the court power to authorise dealings with trust property and is dealt with under s 59.

s59(1) Ct Order to grant additional powers • Where in the management or istration of any property vested in trustees, any sale, lease, charge, surrender, release, or other disposition, or any purchase, investment, acquisition, expenditure, or other transaction, is in the opinion of the Court, expedient, but the same cannot be effected by reason of the absence of any power for that purpose vested in the trustees by the trust instrument, if any, or by law, the Court may by order confer upon the trustees, either generally or in any particular instance, the necessary power for the purpose, on such , and subject to such provisions and conditions, if any, as the Court may think fit and may direct in what manner any money authorized to be expended, and the cost of any transaction, are to be paid or borne as between capital and income.

Cont. • Lee Brothers Plantations & Realty (M) Sdn Bhd v Lee Yeow Teng [1991] 1 CLJ 133; • Mohamed Salleh v Lau Siok Kee [1974] 1MLJ 102. • S59(2): • In amplification and not in derogation of the generality of the foregoing powers the Court may by order under subsection (1) -

Cont. • (a) authorize the trustees to make any investments in or upon titles to immovable property which are not authorized by paragraph 4(1)(c); • authorize any trustees who are chargees of land to buy in any such land at any auction of such land held under an order of Court or in exercise of a power of sale vested in the trustees;

Cont. • authorize the trustees to raise any funds for the improvement of lands or houses which are vested in or belong to the trust; or authorize the doing by the trustees of any act which appears to the Court to be beneficial to the trust estate or to the beneficiaries. • For the purpose, an application may be made by the trustees, or by any of them, or by any person beneficially interested.

Cont. • One specific question may be raised: improvement to buildings and the like in a nature of capital expenditure, or more of an income nature. • In Re Syed Hashim Bin Kassim (decd) the court held that permanent improvement fell into the former category.

Cont. • the dicta of Madden CJ in Wilkie v Equity Trustees Executors and Agency Co Ltd; • 1st - those ordinarily recurring repairs which more fully apportion to the enjoyment of the tenant for life and which last only for a short time – such as papering and painting. Income must bear all such repairs.

Cont. • 2nd - where structural repairs are very great or considerable they are to be charged wholly to corpus, because the advantage obtained from them tells very much more in favour of the remainderman

Remainderman • Person who inherits or is entitled to inherit property upon the termination of the estate of the former owner. • Usually this occurs due to the death or termination of the former owner's life estate, but this can also occur due to a specific notation in a trust ing ownership from one person to another.

Cont. • For example, if the owner of property makes a grant of that property "to John for life, and then to Jane," Jane is entitled to a future interest, called a remainder, and is termed a remainderman.

Cont. • 3rd - there is a middle position where you have repairs which are structural in some degree, being more than the ordinary recurring repairs which a tenant, as between landlord and tenant ordinarily carries out - a class of repairs which is midway between the two classes indicated.

Cont. • The cost of these should be borne in due proportion by income and corpus ... [T]he rule is that trustees should be trusted in their just discretion to appropriate the proportion which either should bear. • That can only be determined when you come to consider the particular repair, and consider specifically how much should be borne by the life tenant and how much by the estate in remainder.

DUTY TO CONVERT • The law requires the trustees to act impartially in dealing with beneficiaries. • Thus, where a conflict of interest arises between beneficiaries, for example, between a life tenant and a remainderman, the trustees are expected to be fair to all and not favour one to the prejudice of the other; • As an extension of this broad proposition, they must act fairly in discharging investment duties which may have different repercussions in respect of different classes of beneficiaries;

Cont. • An example of this is where the trustees invest with a view to securing the highest income which may benefit the life tenant yet may harm the interest of the remainderman since the capital value of the latter's beneficial interest may be affected.

Cont. • Nestle v Westminster Bank Plc,Hoffmann J : • [t]he trustee must act fairly in making investment decisions which may have different consequences for different classes of beneficiaries. • There are two reasons why I prefer this formulation to the traditional image of holding the scales equally between tenant for life and remainderman. • For the purposes of ensuring that a degree of fairness is maintained, the developing law has established a set of rules, notably those related to the duty of trustees to convert and to apportion.

Cont. The rule in Howe v Dartmouth; applies in respect of a gift by will of residuary personally upon trust for persons in succession, in which case the trustees are required to sell: i) Wasting, hazardous and unauthorised investments. Wasting assets would cover, for example, royalties, copyrights, and race horses. ii) Future, reversionary and other properties yielding no income.

Cont. • After the disposal of the above assets, the trustees are to invest the proceeds in investments which are authorised, specifically those falling within the provisions of the trust instrument, or the Trustee Act 1949 . • The rule applies subject to statute and any express or implied contrary intention on the part of the testator. • The rule has no application to inter vivos settlements, nor to realty.

DUTY TO APPORTION • The duty to apportion income is corollary to the rule respecting the duty to convert. • In the absence of any duty to convert, pursuant to the trust instrument or under the rule in Howe v Dartmouth, there is no necessity for the apportionment of income. • The life tenant is thus entitled to all the income from the trust fund, and the remainderman's interest is that of the capital.

Cont. • On the other hand, where there is a duty to convert on any of the above grounds, a question remains as to the status of the relevant property pending disposal. • If there are express provisions in the trust instrument as regards this, there are established rules See Hanbury and Martin, Modern Equity, 16th edn, pp 556-564