House of Lords - Explanatory Note
Trustee Bill [H.L.] - continued          House of Lords

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Clause 23: Liability for agents, nominees and custodians

81.     Clause 23 defines when a trustee will be liable for the acts or defaults of any agent, nominee or custodian or his or her permitted substitute. This provision will enhance the protection of beneficiaries by replacing the unsatisfactory provisions of section 23 and section 30 of the Trustee Act 1925 (as interpreted in Re Vickery [1931] 1 Ch 572) with the standard duty of care under clause 1. These sections are to be repealed by the Bill.

82.     Under the present law, in the absence of express provision in the trust instrument, the liability of trustees for the actions of their agents is governed by statute. The principal provisions are sections 23(1), 23(2), 23(3) and 30(1) of the Trustee Act 1925. However, doubts have been expressed as to the effectiveness of these provisions. Section 23(1) exonerates trustees who acted in good faith from loss resulting from the appointment of their agents. It is uncertain whether trustees are still required to act with reasonable prudence in appointing an agent. Section 23(2) has a limited application to agents appointed to deal with trust property abroad. Section 23(3) gives trustees a limited power to appoint certain agents and preserves the liability of trustees if assets are left in the hands of the agents longer than is necessary. However, the provision is a dead letter as the delegation can be effected under section 23(1) without the said liability. Under section 30(1) a trustee is chargeable only for moneys and securities actually received by him or her. The trustee is not liable for any loss caused by the act or default of anyone else unless it is caused by his own wilful default (i.e. a conscious breach, or reckless performance, of duty). Trustees will therefore seldom be liable for loss caused by an agent. However, in cases where section 30 does not apply (for example where an agent is employed simply to transmit trust money or property form one person to another) a higher standard is required of the trustees. They will be liable if they fail to act with reasonable prudence. The provisions of section 30 in particular have been the subject of much criticism and comment.

83.     Clause 23(1) makes clear that a trustee who satisfies the duty of care (clause 1 and Schedule 1 paragraph 3) in relation to the appointment and review of the appointment (clause 22) of an agent, nominee or custodian will not be liable for the acts and defaults of the appointee.

84.     "Entering into arrangements" includes the selection of the agent, nominee or custodian, the determination of the terms of the appointment and, if applicable, the preparation of a policy statement under clause 15(2) (schedule 1 paragraph 3(2)).

85.     Clause 23(2) governs the liability of trustees for the acts or defaults of any permitted substitute of an agent, nominee or custodian. Under clauses 14(2)(a) and 20(2)(a), trustees may only authorise or appoint an agent, nominee or custodian on terms that permit the appointment of a substitute where it is reasonably necessary for the trustees to agree to such terms. Having agreed such a term, the trustees will only be liable for the acts or defaults of a substitute agent, nominee or custodian if they failed to comply with the duty of care under clause 1 when agreeing that a substitute could be appointed or when carrying out their duties of review under clause 22 in so far as they relate to the use of the substitute.

86.     Clauses 24 to 27 make certain supplementary general provisions in relation to the use of agents, nominees and custodians by trustees.

Clause 24: Effects of trustees exceeding their powers

87.      Clause 24 provides that appointments of agents, nominees or custodians under Part IV are not invalidated by any failure of the trustees to respect the limits of their powers. This provision is intended to facilitate dealings by third parties with agents, nominees and custodians appointed by trustees. It will have the effect that third parties will not need to satisfy themselves that the trustees have complied with the requirements of the Bill. Examples of the kinds of mistakes which trustees might make include: the appointment under clause 11 of a person as an agent who is in fact a beneficiary of the trust contrary to clause 12(3); the authorisation of an agent on terms which prevent the trustees as trustees of land from consulting with the relevant beneficiaries under section 11(1) of the Trusts of Land and Appointment of Trustees Act 1996 (clause 13(4)); or an appointment on terms which permit the agent to appoint a substitute where that is not reasonably necessary. Indeed, even where an agent is authorised to exercise a function which is not a "delegable function" as defined in clause 11, the authorisation will be valid.

88.     Clause 24 does not, of course, relieve trustees of any of their obligations under the Bill. They will still be liable for any loss incurred by the trust as a consequence of an ultra vires appointment. In addition, if a person is authorised to exercise a function as an agent, that person may also be liable, as trustee de son tort, if the function in question is not properly delegable under clause 11. Both parties to the appointment have therefore an interest in ensuring that the appointment can properly be made.

Clause 25: Sole trustees

89.      The powers of delegation conferred by Part IV are exercisable by the trustees collectively. Clause 25 makes clear that with one exception Part IV of the Bill applies equally to a trust with a sole trustee as to a trust with a body of trustees. The exception is that a trust corporation which is a sole trustee need not appoint a custodian of any securities payable to bearer forming part of the trust property (clause 18). References to the trustees are therefore to be taken to include sole trustees except in clauses 12(1) and (3) and 19(5).

90.     Clause 12(1) authorises the appointment under clause 11 of the appointment of one of a number of trustees as agent. Clause 19(5) permits the appointment of a trustee which is a trust corporation or two or more trustees as nominees or custodians under clauses 16, 17 or 18. These exceptions are necessary to make clear that a sole trustee cannot be his or her own agent, nominee or custodian. Clause 12(3) prohibits the appointment of a beneficiary as an agent under clause 11.

Clause 26: Restriction or exclusion of this Part etc.

91.      Clause 26 provides that the powers to appoint agents, nominees and custodians conferred by Part IV are in addition to any other powers vested in the trustees but are subject to any limitations in the trust instrument or legislation. In short, the powers are general default provisions which will not override specific provision. 'Subordinate legislation' is defined in clause 6(2). Clause 26 is to the same effect in relation to Part IV as are clauses 6 and 9 in relation to Part II and III respectively.

Clause 27: Existing trusts

92.      Clause 27 provides that Part IV applies irrespective of the date of creation of the trust. This is intended to bring the benefit of the new powers to the greatest possible number of trustees and beneficiaries. Part IV, like Parts II and III, does not apply to authorised unit trusts or schemes under sections 34 and 35 of the Charities Act 1993 (clauses 37 - 38). However, Part IV does apply with modifications to occupational pension trusts (see clause 36(4) - (8)).

Part V: Remuneration

93.     These clauses relate to professional charging clauses and the reimbursement of expenses incurred by trustees. The provisions of the Bill will govern the remuneration of 'professional' trustees in two ways: first, by setting down rules of construction for express professional charging clauses in trust instruments; and secondly, by providing for the remuneration of certain trustees when there is no express professional charging clause in the trust instrument. The new provisions will, in general terms, apply to all services provided after Part V comes into force irrespective of the date of creation of the trust (see clause 33 below). The creation of an implied professional charging provision is likely to be of the greatest benefit to old trusts, informally created trusts and trusts arising on intestacy whilst the new rules of construction will benefit all professional trustees.

94.     The general rule under the present law is that trustees should not be paid for acting as such. This rule is founded on the principles that trustees are not allowed to derive any benefit from trust property and that to allow them to be paid might give rise to conflicts of interest and duty. Despite the general rule, the present law does permit trustees to be remunerated in certain circumstances. The three most significant of these are where the trust instrument so provides; where payment is authorised by statute (for example, Trustee Act 1925 s 42, Judicial Trustee Act 1895 s 1(5); Public Trustee Act 1906 ss 4(3) and 9) and when ordered by the court under its inherent jurisdiction to secure the good administration of trusts. Modern trust instruments will almost invariably contain an express professional charging clause. The absence of such a clause would make it unlikely that a professional trustee would accept office in relation to the trust but would not prevent the trustees delegating administrative functions to the professional as an agent. However, the mere presence of an express charging clause may not itself be sufficient to reward a professional trustee properly. First, such clauses are strictly construed against the professional trustee. Thus, unless the trust instrument provides to the contrary (as modern trust instruments will usually do) the professional trustee with the benefit of a charging clause will only be able to be paid for services which could not have been provided by a lay trustee. Second, remuneration under a professional charging clause is in some cases regarded as a gift or legacy rather than an expense of the administration.

Clause 28: Trustee's entitlement to payment under trust instrument

95.     Clause 28 introduces the new rules of construction of express professional charging clauses in trust instruments. Clause 28(1) provides that the new rules will apply in favour of trust corporations and trustees acting in a professional capacity. Subsection (4) explains that to satisfy the condition that a trustee (other than a trust corporation) must be acting in a professional capacity, there must be a close nexus between the profession or business in the course of which the trustee acts and the services which he or she provides as trustee. However, it is not necessary for the trustee to act in the course of a profession or business which has the management or administration of trusts as its primary focus in order for the condition to be met. A solicitor, accountant or banker, for example, could meet the condition.

96.     The new rules for the interpretation of professional charging clauses are set out in clauses 28(2) and (3). These new rules will apply in relation to trusts whenever created (clause 33(1)) provided that the application of the new rules is not inconsistent with the terms of the trust instrument (clause 28(1)(c)). Nevertheless, the new rules only apply in relation to services provided on or after the commencement of clause 28 (clause 33(1): see clause 42(2) as to commencement).

97.     Clause 28(2) reverses the present common law rule which requires an express charging clause to be strictly construed against the trustee, so that, unless the trust instrument contains contrary provision, a professional trustee, who has the benefit of such a clause, may only be remunerated for services which could not have been provided by a lay trustee. Where clause 28(2) applies, the services for which a trust corporation or a trustee acting in a professional capacity may be entitled to payment include services which are capable of being provided by a lay trustee (that is, a person who is not a trust corporation and who does not act in a professional capacity - clause 28(5)).

98.     Clause 28(3) contains the second new rule of construction of express charging clauses. Under the present law, payments under express charging clauses are treated for many purposes as a gift and not as remuneration for services rendered. The new rule reverses this rule of construction for the purposes of section 15 of the Wills Act 1837 (which renders void gifts made in a will to a witness to the will and gifts to the spouse of such a person). The change will enable trustees to be paid for work done in connection with testamentary trusts even where they witness the will under which the trust arises.

99.     In addition, by virtue of clause 28(3)(b) such payments will in future be treated as remuneration for services for the purposes of determining their priority as against other payments due from the deceased's estate (Administration of Estates Act 1925 s 34(3)). Thus, in relation to the administration of the estate, the trustee's charges will become an expense of the administration. Clause 33(2) prevents this provision from having an effect upon priorities in the administration of estates where the death occurred before clause 28 comes into force.

Clause 29: Remuneration of certain trustees

100.     In general terms clause 29 creates an implied professional charging clause applicable to all non-charitable trusts which do not make provision for remuneration of professional trustees. The remuneration of charitable trustees is dealt with in clause 30.

101.     Clause 29(1) confers upon every trust corporation which acts as a trustee the right to receive "reasonable remuneration" (as defined by clause 29(3)) from the trust funds (defined in clause 39(1)) for any services that it provides on behalf of the trust unless the right is negated in the circumstances mentioned below. The right applies even if the trust corporation is a sole trustee, but does not apply if the trust corporation is a trustee of a charitable trust (clause 29(1)(b)).

102.     Clause 29(2) provides, subject to certain conditions and exceptions, for all other trustees of non-charitable trusts to receive reasonable remuneration for any services they provide on behalf of the trust. However, unlike trust corporations under clause 28, other trustees do not have an automatic entitlement to such remuneration. The entitlement is not available to sole trustees and is dependent upon the trustee acting in a professional capacity (see clause 28(4)) and upon the agreement in writing of each of the other trustees. In determining whether to give such agreement, trustees will be subject to their paramount duty at common law to act in the best interests of the present and future beneficiaries of the trust.

103.     Clause 29 (3) defines "reasonable remuneration" in relation to the provision of services by a trustee. In determining the level of remuneration that is reasonable in the circumstances, regard must be had not only to the nature of the services provided, but also to the nature of the trust and the attributes of the trustee. Remuneration authorised under clause 29 will, by definition, be regarded as remuneration for services (and not as a gift) for all purposes, and will be payable out of the income or capital funds of the trust (see the definition of "trust funds" in clause 39(1)).

104.     Clause 29(4) provides that remuneration may be paid even if the services provided could have been provided by a lay person (that is, a person who is not a trust corporation and who does not act in a professional capacity - see clause 28(5)).

105.     Clause 29(5) specifies that the new power of remuneration will be excluded by any provision about the trustee's entitlement to remuneration in the trust instrument or in legislation. The right to be remunerated in clause 29 is therefore in the nature of a default provision. The phrase 'subordinate legislation' is defined in clause 6(3).

106.     Clause 29(6) makes clear that appointment as an agent, nominee or custodian does not exclude a trustee from clause 29.

Clause 30: Remuneration of certain trustees

107.     Clause 30 makes provision for the remuneration of charitable trustees. As mentioned, clause 29 does not permit the remuneration of charity trustees (clause 29(1) and (2)). Although the Law Commission concluded that there was a strong case for including charitable trustees within the scope of clause 29, it recognised that further consultation was probably necessary before a decision could be taken. No such consultation has yet taken place. If the outcome of such a consultation were to be that charitable trustees should be able to be paid in like manner to trustees generally, and no other provision were made in the Bill, primary legislation would be necessary. Accordingly, clause 30 confers a power upon the Secretary of State to make provision by statutory instrument, subject to a negative resolution procedure (clause 30(4)), for the remuneration of charitable trustees.

108.     The provisions of clauses 28 and 29 apply in relation to services provided when those clauses are in force whenever the trust was created (clause 33(1)). Remuneration payable under these clauses may be paid out of the income or capital funds of the trust (see the definition of "trust funds" in clause 39(1)).

109.     Under the present law trustees have power to pay agents and to be reimbursed out of the trust fund for the expenses they incur in carrying out their duties (Trustee Act 1925 ss 23(1) and 30(2))). This power is subject to the general rule that trustees only have power to pay proper costs incident to the execution of the trust (Holding and Management Ltd v Property Holding and Investment Trust Plc [1989] 1 WLR 1313, 1324). Clauses 31 and 32 will clarify the law by bringing together the existing statutory power and the common law qualification. Sections 23 and 30 of the Trustee Act 1925 will be repealed by the Bill (clause 40 and schedule 3).

Clause 31: Trustees' expenses

110.      Clause 31 makes provision for the reimbursement of trustees' proper expenses. Clause 31(2) makes clear that appointment as an agent, nominee or custodian does not exclude a trustee from clause 31. Clause 32 makes provision for the payment of reasonable remuneration and proper expenses to agents, nominees and custodians who are not trustees.

111.     These provisions apply in relation to services provided, or expenses incurred, when the provisions are in force whenever the trust was created (clause 33(1)), but do not affect the operation of either section 15 of the Wills Act 1837 or section 34(3) of the Administration of Estates Act 1925 in relation to deaths occurring before they come into force (clause 33(2)). See the notes to clause 28(3) for a description of sections 15 and 34(3).

112.     Remuneration and expenses payable under these clauses may be paid out of the income or capital funds of the trust (see the definition of "trust funds" in clause 39(1)).

PART VI: Miscellaneous and Supplementary

Clause 34: Power to insure

113.     Clause 34 creates a new power to insure. Under the present law there is probably a common law power (and sometimes even a duty) to insure trust property, but this is not entirely certain. In addition, there are different statutory powers to insure under the Trustee Act 1925 s 19 and the Trusts of Land and Appointment of Trustees Act 1996 s 6(1). The power under section 19 is limited to three-fourths of the full value of the property and does not apply to bare trustees. The new power will replace these provisions with a clear general default statutory power for trustees to insure trust property as if they were absolute owners. The new provision is based upon the provisions which now apply to trustees of land by virtue of section 6(1) of the 1996 Act.

114.     Clause 34(1) does this by inserting a new power to insure into the Trustee Act 1925 in substitution for the existing section 19. Subsection (1) of the new section 19 confers a power upon all trustees to insure any trust property (whether land or personal property) against such risks and in such sums as they see fit. Trustees will be able to pay the insurance premiums out of the income or capital funds of the trust (see new section 19(5)).

115.     Trustees will be subject to the new statutory duty of care under clause 1 when exercising the power to insure under the new section 19 or any corresponding power conferred by the trust instrument (see Schedule 1, paragraph 4). The duty of care will therefore apply, for example, to the selection of an insurer and to the terms on which insurance cover is taken out.

116.     The new power to insure will apply to all trustees including bare trustees irrespective of when the trust was created (clause 34(3)) but will only be a default power (as is the case in relation to the existing section 19 of the Trustee Act 1925 by virtue of Trustee Act 1925 s 69(2)).

117.     The exercise of the power by bare trustees (defined for these purposes in new section 19(3)) will however be subject to the qualification in the new section 19(2). This provides that bare trustees must comply with any direction from the sole beneficiary or all the beneficiaries (as the case may be) that any trust property is not to be insured or is only be insured on certain conditions. The rationale for this qualification is that where the beneficiaries are together absolutely entitled to the trust property, they have power under the general law of trusts to bring the trust to an end (Saunders v Vautier (1841) 4 Beav 115; 49 ER 282). To the extent that any such directions are given, the trustees may not delegate their power to insure. This is so that the beneficiaries can ensure compliance with the directions they have given (see new section 19(4)). The concept of a 'delegable function' referred to in new section 19(4) is defined in clause 11(2) of the Bill.

118.     Clause 34(2) makes a minor consequential drafting amendment to section 20(1) of the Trustee Act 1925. Section 20(1) provides that insurance monies received by trustees against loss or damage of trust property are capital monies.

Clause 35: Personal representatives

119.     Clause 35 applies the Bill to personal representatives. The effect of clause 35(1) is that in relation to the matters contained within the Bill personal representatives have (subject to clause 35(2) - (4)) the same powers and duties in relation to the administration of an estate of a deceased person as trustees have in relation to a trust. This is consistent with the policy of the Trustee Act 1925 (see s 68(1)(17)).

120.     Clause 35(2) provides the necessary textual adjustments to achieve this end. Clause 8(1)(b) requires special treatment (clause 35(2)(b) and (c)) because it confers power to acquire land for occupation by a beneficiary. The general provision (clause 35(2)(b)) equating beneficiaries with persons interested in the estate of the deceased would therefore be too wide for the purposes of occupation of trust property because it would include creditors. Clause 35(2)(c) therefore gives that expression a more restricted meaning in relation to clause 8(1)(b).

121.     The effect of clause 35(3) is that remuneration paid to a personal representative will in future count as an administration expense for the purposes: (a) of section 34(3) of the Administration of Estates Act 1925 (see notes to clause 28(3) above); and (b) of, in the case of insolvent estates, any provision giving reasonable administration expenses priority over preferential debts. The categories of preferential debts listed in schedule 6 to the Insolvency Act 1986 are (in ascending numerical order of priority): debts due to the Inland Revenue; to customs and excise; social security contributions; contributions to occupational pension schemes; remuneration of employees; and levies on coal and steel production. The remuneration of personal representatives will therefore have priority over legacies and other debts of the deceased. Clause 35(4) prevents subsection (3) from having an effect upon priorities in the administration of estates where the death occurred before the clause comes into force (see clause 42).

Clause 36: Pension schemes

122.      Clause 36 governs the application of the Bill to occupational pension schemes established as trusts under the law of England and Wales (clause 36(1)). An occupational pension scheme for these purposes is a scheme which has, or is capable of having, effect in relation to a description or category of employment so as to provide benefits payable on termination of service, death or retirement or in respect of earners with qualifying service in an employment of any such description or category (Pension Schemes Act 1993 s 1).

123.     Trustees of occupational pension schemes are in a special position. The investment powers of the trustees of such schemes and related powers of delegation are conferred by section 34 of the Pensions Act 1995. Section 34(2) confers on pension trustees a power to delegate their discretion to make any decision about investments to a fund manager who satisfies certain requirements and prohibits the delegation of such matters in any other way except under section 25 of the Trustee Act 1925 (delegation by individual trustees). By virtue of section 47 of the Pensions Act 1995, occupational pension trustees are required, where the assets of the scheme include investments, to appoint a fund manager and can appoint nominees and custodians (Occupational Pension Scheme (Scheme Administration) Regulations 1996 SI 1715 r 2(c)). Consequently, Parts I, II and III of the Bill do not apply to such occupational pension trustees when carrying out their investment functions; nor does Part IV in so far as it confers power to appoint nominees and custodians or, in relation to investment functions, an agent (clause 36(3)(5) and (8)). Conversely, the new general duty of care may apply to the trustees of occupational pension trusts in relation to matters other than investment, agency for investment purposes and the appointment of a nominee or custodian (clause 36(2)) and such trustees may delegate non-investment functions under Part IV (clause 36(5). However, for the protection of pension scheme beneficiaries, pension trustees are expressly prohibited from delegating any function to the scheme employer or to a person who is connected with, or an associate of, the scheme employer (clause 36(6)). 'Employer' is defined by virtue of clause 36(7)(a) as the employer of persons in the description or category of employment to which the scheme in question relates and, if regulations so provide, persons who have been the employer in relation to the scheme (Pensions Act 1995 s 124(1) and 125(3)). Persons are connected with a company if they are a director or shadow director or an associate of such a person or the company (Insolvency Act 1986 s 249). Whether or not a person is an associate is determined by the application of section 435 of the Insolvency Act 1986. This section is lengthy but spouses and close relatives are associates, as are business partners and their respective spouses and employers and employees.

 
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Prepared: 21 January 2000