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Investment Notes

GDL Law Notes > GDL Equity and Trusts Notes

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Equity & Trusts : Investment Investment
?????Positive duty on trustee to invest trust property for benefit of beneficiaries. Cannot let it stagnate; or only limited growth; or deteriorate in value.
?????The power of investment varies (trust instrument; or TA 2000): o Express provisions in trustee deed: In majority of cases, eg if you employ a trust lawyer to compose trust deed for you. Most trust deeds drafted well will include powers---wil outline what trustee will/won't do, can even indicated the specific types of investment to be made. o Statute--But some informal trust deeds/small ones, don't express provisions for investment powers: then statutory provisions, TA 2000, apply. Trustee Act (TA) 2000:
? (1) Introduces new statutory duty of care
? (2) Widens the range of investments o Under old law, extremely limited invested options for trustees unless trust instrument contained broad powers of investment (as many did). o TA widens the possibilities. o NB, s8: equitable interests in land and overseas investments in land, remain unauthorised investments.
? (3) Deals with remuneration for trustees o Under old law, trustees could not charge unless trust instrument had an express charging clause. o This has now changed for professional trustees.
? (4) Allows delegation of investment decisions o Under old law: trustees not able to delegate investment decisions unless authorised by trust instrument. Could not employ a manager to run discretionary portfolios. o Now changed:
? Structure of TA, 6 parts: o Part I---new statutory duty of care. o Part II---Trustee investment powers (other than land) o Part III-Trustee investment powers over land. o Part IV---Agents/nominees and delegation. o Part V-Remuneration o Part VI--Miscellaneous

Section 1, TA 2000, Duty of Care

1 ??? ?Originated from case law. S1 is a codification of duty of care from case law.
??? ?Codified case law duty: Speight v Gaunt, Re Whiteleys
? ?? ? 'Prudent man of business' test, Speight v Gaunt (1883); Re Whiteleys.
? ?? ? S1(1): 'T(s) must exercise such care and skills as is reasonable in all the circumstances', having regard in particular: o (a) to any special knowledge or experience that he has or holds himself out as having, o and (b) if he acts as a trustee in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect of a person acting in the course of that kind of business or profession.
? ?? ? Objective and subjective elements
??? ?S1(1)(a) is partially a subjective test: if a trustee holds themselves out as being particularly expert on investment, they will be judged by a higher standard.
??? ?S1(1)(b) is an objective test: the standard in (b) will always apply to a professional trustee. (a) may apply, depending on how the trustee has advertised themselves.
??? ?Objective 'reasonable' test; but subjective element of taking into account 'all the circumstances.'
? ?? ? So professional v lay trustee o A professional trustee: will be held to a much higher duty of care/higher standard, because 'in their circumstances', their experience and knowledge, the care/skill is higher. o CF lay trustee: lower duty. o So the subjective element, 'all the circumstances', of the objective 'reasonable' test.
? Under old law (which the TA codifies) o there was an equitable duty of prudence (Speight v Gaunt (1883), Re Whiteley, Whiteley v Learoyd (1886)). o This is the duty of a trustee to be prudent & exercise the degree of care they would in conducting their own affairs, but mindful they are dealing with another's property. o It subsequently developed that a paid trustee was expected to exercise a higher degree of diligence and knowledge than an unpaid trustee (Re Waterman's WT (1952)). o And a professional corporate trustee was expected to use the special care and skill which it professed itself to have in its advertising materials and dealings with the trustee (Barlett v Barclays`(1980)).
? The intention of Law Commission with TA was to codify the common law duty.

2 ?

NB: the equitable duty is still relevant, as the new statutory duty of care only applies to some aspects of a trustee's work.
? ?? ? The Duty of Care applies, not only to investments. When does the duty---not to all functions, but those listed in Schedule 1 TA: o Applies 'when exercising' statutory or other powers of investment, acquiring land, compounding liabilities, insuring trust property, and 'when entering into' arrangements for hiring agents, nominees and custodians. o Exercise of statutory/express power of investment (doesn't matter where power of investment comes from, still subject to statutory duty of care). o When using the SIC. o When you obtain and consider proper advice (duty of care applies when choosing who to take advice from). o Applies to Power to acquire land (duty of care in deciding what land to purchase/invest in/let beneficiary reside in). o Applies to delegations. o Does not appear to cover an omission to consider exercising those powers/entering into those arrangements. However, such an omission would seem to fall wthin the statutory duty when 'carrying out' duties in ss4, 5 and 22 respectively. These relate to: exercise of power of investment; review of investments; or review of agents, nominees and custodians. o So only re power of insurance is it necessary to fall back on the equitable duty of care.
? ?? ? Statutory duty of care applies to trusts whenever created, before or after TA 2000
? ?? ? Excluding the duty, Schedule 1 Para 7: the duty care be partly or completely excluded by the trust instrument. Interaction with equitable duty:
? ?? ? Investment o Re Whiteley (1886): trustee must take 'such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally obliged to provide'. = a high, objective standard, emphasizes need for cautious investment strategy. o A paid trustee historically expected to exercise a higher standard of diligence/knowledge than unpaid trustee (Re Waterman's WT). o And a corporate trustee expected to use special care & skill which they held themselves out as having in dealings with the settlor and their advertising materials (Bartlett v Barclays). o Where risk attaches to an investment: o historically, a trustee needed to avoid all investments associated with risk (Learoyd v Whiteley). 3

o More recently---the fund as a whole should not be put at risk (Nestle v National Westminster Bank (1993)---modern portfolio theory---see below---look at risk of the whole portfolio o Modern portfolio theory---part of this duty would involve keeping the investments under review, buying & selling as necessary. i.e. trustees shouldn't hold onto investments indefinitely. o In light of Nestle v NatWest (1994), CA, this aspect (reviewing investments) of the duty to act prudently may be more apparent than real, due to difficulties in proving that particular losses flowed from a breach of duty. Claim re not regularly reviewing investments failed---C could not prove the damage had flowed from the breaches of trust. CA held: C must prove that, as a result of misinterpretation of the investments powers or failure to review the instruments, or both, 'the trustees made decisions they should not have made or failed to make decisions they should have made'---decisions which no prudent trustee would have made or failed to make, even if properly aware of their powers of investment. o Leggatt LJ: investment performance 'is to be judged not so much by success, as by absence of proven default'. o Thus, even if trustees fail to perform their investment duties, they will still escape liability if the beneficiaries fail to prove the trustees' lapse resulted in loss to the trust fund. As in the tort of negligence, proof of breach of duty gets you nowhere unless you can prove that particular damage flowed from the breach. o In Re Mulligan (1998), NZ: losses were proved by Cs in circumstances where the trustees had much favoured the life tenant at the expense of the claimant remaindermen (not even-handed). Cs had lost the possibilities of capital growth and protection against inflation that would have been provided had the trustees invested in company shares rather than fixed-income securities. HELD: the trustees should have diversified.
? ?? ? In exercising their distributive role (exercising powers of appointment or advancement or maintenance), rather than managerial role, rather than speak of duties of care and skill the courts focused upon the need to survey the field of possibilities and to be adequately informed so to be able to act as a sensible trustee should. o Pitt v Holt (2013), SC: court's focus was n the trustee taking care to try to obtain adequate advice, to prevent them from making a distribution they would not have made but for ignoring a relevant consideration/taking account of an irrelevant consideration.

Trustee Investment Powers


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