|Trustee Bill [H.L.] - continued||House of Lords|
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Clause 8: Power to acquire freehold and leasehold land
39. Clause 8(1) gives trustees the power to acquire freehold or leasehold land in the United Kingdom as an investment, for occupation by the beneficiaries or for any other reason. This provision is broadly modelled on section 6(3) and (4) of the Trusts of Land and Appointment of Trustees Act 1996. The express duty to have regard to the interests of the beneficiaries in exercising powers under section 6(5) of the 1996 Act is not replicated in the Bill. However that provision merely clarifies what is already the law and the omission of an equivalent provision is not intended to diminish the obligations of trustees.
40. The phrase 'freehold or leasehold land' is defined in clause 8(2). In England and Wales it means a legal estate in land. The only estates in land which are capable of being legal estates are an estate in fee simple absolute in possession and an estate for a term of years absolute. These estates correspond to freehold and leasehold respectively (Law of Property Act 1925 s 1(1)). Trustees may also acquire the equivalent interests in land in Scotland and Northern Ireland.
41. Having acquired land a trustee must be able to deal with it effectively. Following the precedent of section 6(1) of the Trusts of Land and Appointment of Trustees Act 1996, clause 8(3) gives trustees who acquire land the powers, for the purpose of exercising his or her trustee functions, of an absolute owner in relation to the land. For example, trustees will have the power to hold land jointly with other persons, have powers of sale and leasing, and power to grant mortgages in respect of land.
42. Clauses 9 and 10 have a similar effect in relation to the application of Part III of the Bill as clauses 6(1) and 7(1)-(4) respectively in relation to Part II.
Clause 9: Restriction or exclusion of this Part etc.
43. Clause 9 makes it clear that the power to acquire land is in addition to trustees' other powers but is subject to any restrictions or exclusions laid down in the trust instrument or by any enactment or subordinate legislation (defined in clause 6(2)). The new power is therefore a default provision.
Clause 10: Existing trusts
44. Clause 10 provides that the power to acquire and deal with land created in Part III applies to all trustees, whenever the relevant trust was created, other than those trustees who, immediately before Part III comes into force, have powers conferred by statute or subordinate legislation (defined in clause 6(2)) to invest or apply trust funds. Thus, the new power does not apply to the trustees of a settlement under the Settled Land Act 1925 or to trustees of trusts subject to the Universities and Colleges Estates Act 1925 unless the power is conferred under or by virtue of the Bill or some other enactment (clause 10(2)).
45. The general duty of care imposed by clause 1 of the Bill applies to the exercise of the new statutory power to acquire land under clause 8; to the exercise of any power to acquire land under the trust instrument and, in both cases, when exercising any power in relation to the land acquired (Schedule 1 paragraph 2).
46. By virtue of paragraph 42(1) of Schedule 2 to the Bill the present restriction on the scope of the powers of trustees of land in section 6 of the Trusts of Land and Appointment of Trustees Act 1996 to land in England and Wales is removed so that the powers of trustees of land will have the same powers in relation to the acquisition, management and disposal of land will be applicable as other trustees.
Part IV: Agents, Nominees and Custodians
47. Clauses 11- 15 set out the powers of collective delegation that trustees have in default of express powers being conferred by the trust instrument. They do not relate to delegation by individual trustees, which continues to be governed by section 25 of the Trustee Act 1925 and section 1 of the Trustee Delegation Act 1999. Clauses 16 20 govern trustees' powers to appoint nominees and custodians in cases where the trust instrument contains no express powers to do so. Clauses 21 23 provide for the review by trustees of, and liability of trustees for, their agents, nominees and custodians. Clauses 24 - 27 deal with supplementary matters.
48. These powers of delegation are subject to the duty of care created by clause 1 (Schedule 1 paragraph 3) and will take effect as a default provision applicable to all trusts except pension trusts, authorised unit trusts, or funds established under schemes made under sections 24 or 25 of the Charities Act 1993 (see clauses 36 - 38).
49. Under the present law the trustees of a trust cannot, as a collective body, delegate their dispositive duties to distribute the trust property to those entitled to it under the trust, or their fiduciary discretions (that is powers implying a personal discretion such as the selection of trust investments or the decision whether or not to sell or lease trust property) without express authority in the trust instrument. The Law Commission considered that in view of the increasingly specialised nature of the tasks required to be undertaken by trustees, some of the restrictions on trustees were now a serious impediment to the administration of trusts and that far 'from promoting the more conscientious discharge of the obligations of trusteeship, the prohibition on the delegation of fiduciary discretions may force trustees to commit breaches of trust in order to achieve the most effective administration of the trust.' The Commission concluded that in relation to trusts which were not charitable trusts the characterisation of powers of investment and some powers of management as in all respects fiduciary and therefore non-delegable was outmoded and that in general terms the proper distinction to be drawn in a modern law of trusts for the purpose of ascertaining whether a particular function ought to be delegable was between administrative powers (which would be delegable) and distributive powers (which would not).
50. In relation to charitable trusts the present law is mitigated by the power of the Charity Commissioners to authorise dealings with trust property which would not otherwise be within the powers of the trustees (Charities Act 1993 s 26) but the perceived problems of the law remain. Unfortunately the Commission's proposals for trusts generally cannot be applied to charities without some refinement. This is because the concept of charitable purposes is much wider than the particular charitable objects for which the trust exists. A prohibition on the delegation of distributive functions, that is functions relating to charitable purposes, would narrow the powers to delegate of charitable trustees. The appropriate distinction in relation to charitable trusts is between the functions which relate to the generation of income to finance the charitable purposes of the trust and the carrying out of those purposes. Different provision is therefore made in the Bill for charitable and non-charitable trusts.
Clause 11: Power to employ agents
51. Clause 11(1) provides that, subject to the provisions of Part IV, trustees may delegate any or all of their 'delegable functions' to an agent. For the reason already given, the nature of the functions which may be delegated will in part be governed by whether the trust is charitable or not. In the case of non-charitable trusts to which clause 11 applies, the trustees may delegate any function except (a) a function relating to the distribution of the trust assets; (b) a power to allocate fees or other payments to capital or income; (c) a power to appoint a trustee; and (d) a power conferred by the trust instrument or an enactment (i) to delegate a trustee function or (ii) to appoint a nominee or custodian.
52. Clause 11(3) sets out the functions that a trustee of a charitable trust may delegate. Paragraph (a) ensures that non-discretionary (as opposed to discretionary) functions that can now be delegated under section 23(1) of the Trustee Act 1925 will continue to be delegable. Paragraphs (b) and (c) provide for income generating activities to be delegated except in so far as the income is derived from profits of a 'trade which is an integral part of the carrying out the trust's charitable purpose'. Fund raising activities which are an integral part of carrying out the trust's charitable purpose would therefor not be delegable. The concept of a 'trade which is an integral part of the carrying out the trust's charitable purpose' is defined in clause 11(4).
53. Examples of fund raising activities which are not delegable would include the charging of fees by a school operating as a charitable trust. Paragraph (d) enables further functions to be made delegable by order made by the Secretary of State (defined in the Interpretation Act 1978 schedule 1, as one of Her Majesty's principal Secretaries of State). Clause 11(5) provides that the order will be made subject to a negative resolution procedure.
Clause 12: Persons who may act as agents
54. Clause 12 defines the persons who may act as agents for the trustees under clause 11. Subject to the prohibition on the appointment of beneficiaries (clause 12(3)) and to the requirement that if two or more persons are appointed they must exercise the function delegated jointly, there are no restrictions on the persons whom trustees may appoint as their agents under clause 11. Thus, the trustees may delegate to one of their number or to their nominee or custodian (clause 12(1) and (4)). The prohibition on the appointment of a beneficiary as an agent for the trustees will prevent the use of clause 11 to avoid the restrictions on delegation by trustees of land to a beneficiary under section 9 of the Trust of Land and Appointment of Trustees Act 1996. Under section 9 the delegation of a trustee function relating to land to a beneficiary is permitted if the beneficiary is of full age and beneficially entitled to an interest in possession in the trust land. Such delegation must be by power of attorney granted jointly by all the trustees and the beneficiary is subject to the same duties and liabilities as the trustees.
Clause 13: Linked functions etc
55. Clause 13 provides that, subject to the exceptions specified below, an agent authorised to act under clause 11 is subject to any specific duties or restrictions attached to the function delegated. The reference to specific duties does not include the duty of care imposed by clause 1 of the Bill. That duty is limited to trustees and does not apply to an agent in the performance of the agency. Nevertheless, agents will owe a separate duty of care to the trustees under the general law of agency.
56. As the example given in subsection (1) of clause 13 suggests, the obligation to comply with specific duties and restrictions attached to the trustee function delegated under clause 11 will most commonly apply in cases where the trustees delegate their investment function. In these cases the agent will be obliged to have regard to the standard investment criteria in accordance with clause 4. The agent may also be required to obtain and consider proper advice in accordance with clause 5. However, it will usually be the case that the person appointed to exercise the trustees' powers of investment as an agent would be able, if he were a trustee, to utilise the exception in clause 5(3). This fact is recognised by clause 13(2). Clause 13 (1) is, however, not restricted to investment. For example, sections 36 - 39 of the Charities Act 1993 impose restrictions on dispositions and mortgages of land owned by charities. If charity trustees delegate functions in relation to land under clause 11(3)(b), the agent will be required to comply with the requirements of the 1993 Act in carrying out those functions.
57. Clause 13(3), (4) and (5) relate to the duties imposed by section 11(1) of the Trusts of Land and Appointment of Trustees Act 1996. These duties require some trustees of land, in the exercise of their functions in relation to trust land, so far as practicable, to consult certain beneficiaries and, so far as consistent with the general interest of the trust, to give effect to their wishes. The beneficiaries are those of full age and beneficially entitled to an interest in possession in the land (Trusts of Land and Appointment of Trustees Act 1996 s 11(1)). This duty can be excluded and does not apply to trusts of land created or arising under a will made before the 1996 Act came into force (Trusts of Land and Appointment of Trustees Act 1996 s 11(2) and (3)).
58. The duty to consult beneficiaries under section 11(1) of the 1996 Act is not delegable. Delegation under clause 11 is therefore only permitted on terms that allow the trustees to consult and give effect to the wishes of the beneficiaries (clause 11(4)). Consistently with this, an agent under clause 11 is not obliged to consult under section 11(1) (clause 11(5)).
Clause 14: Terms of agency
59. Clause 14 relates to delegation generally and clause 15 imposes special restrictions in relation to the delegation of asset management functions. Trustees who fail to comply with these requirements will be liable for breach of trust. The general rule in relation to delegation under clause 11 is that trustees will be free to decide the terms of the appointment of the agent (clause 14(1)). The basis upon which the agency will have effect will be governed by the general law of agency. This freedom is however subject to various restraints. First, the exercise of the power to delegate under clause 11 or the trust instrument will be subject to the duty of care (clause 1 and schedule 1 paragraph 3(1)(a) and (d)). Second, there are some specific restrictions: trustees may not delegate on terms which permit the agent to appoint a substitute; which restrict the liability of the agent or his substitute to the trustee or any beneficiary; or which permit the agent to act where a conflict of interest may arise. However, these restrictions will not apply if it is reasonably necessary to delegate on such terms (clause 14(2) and (3)). Third, in the case of asset management functions and remuneration, the provisions of clauses 15(2) and 29 to 32 respectively apply. The restraints in the first and third categories of restriction are described in relation to the relevant clauses.
60. The second is a pragmatic response to the realities of modern fund management which nonetheless ensures that adequate protection is given to beneficiaries by imposing a test of reasonable necessity on the trustees. Under the present law, subject to an exception for property abroad under section 23(2) of the Trustee Act 1925, trustees may only allow sub-delegation by their agent if authorised to do so under the trust instrument. This does not correspond to modern conditions where the appointment of a fund manager will often be essential to the efficient and effective management of the assets of the trust. Clause 14(3)(a) flows from this. As the standard terms of business of fund managers generally require limits on liability and the ability to act despite a conflict of interest, the ability to appoint a manager would amount to little in practice if trustees were unable to accept such terms (see clause 14(3)(b) and (c)).
Clause 15: Asset management: special restrictions
61. Clause 15 places special requirements on trustees in relation to the delegation of their asset management functions. That is, their functions relating to the investment of trust assets and the acquisition, disposal and management of trust property (clause 15(5)). First, although there is no requirement of writing in relation to agency agreements generally, the terms of an agreement authorising the agent to exercise asset management functions on behalf of the trustees must be in writing or evidenced in writing (clause 15(1)) and must require the agent to secure compliance with the trustees' guidance as to how the functions are to be exercised for the time being (clause 15(2)). This guidance must be in writing or evidenced in writing (clause 15(4)) and must be framed with a view to ensuring the functions will be exercised in the best interests of the trust (clause 15(3)). The document containing or evidencing the guidance is referred to in the Bill as a 'policy statement' (clause 15(2)(a)). The policy statement must be prepared before the agent is authorised to act, but can be revised or replaced (clause 15(2)(a) and (b)(ii)). The duty of care under clause 1 applies to the preparation of a policy statement (schedule 1 paragraph 3(2)(c)).
62. For example, if trustees delegate their powers of investment to an agent, they must enter into an agreement with the agent at the outset setting out the investment objectives of the trust. Such an agreement may include considerations as to liquidity of assets to meet the needs of the trust, the desired balance between capital growth and income yield, and any "ethical" considerations relevant to the investment policy of the trust. The policy statement may expand upon the manner in which the duties imposed by clause 4 (duty to invest and to review investments having regard to the standard investment criterion) should be discharged in respect of the trust. In relation to the delegation of functions relating to the acquisition and management of land on behalf of the trust, the policy statement may include considerations as to the value and type of property that may be acquired, and the quality of title required. Where relevant it may also consider the terms upon which land may be let, sold or charged. The requirement for a policy statement only applies where the trustees delegate their discretion in relation to the matters concerned. It does not apply, for example, in cases where the trustees obtain investment advice but take decisions on investment matters themselves.
63. The duties of trustees with respect to keeping the delegation of functions (and any policy statement) under review are contained in clause 22.
Clause 16: Power to appoint nominees
64. Clauses 16 to 20 govern the powers of trustees to appoint nominees and custodians in cases where the trust instrument contains no express powers to do so.
65. In this context a nominee is a person appointed by the trustees to hold trust property in his or her own name. Thus, a person may be registered as the owner of certain shares in a company but may in fact hold them as nominee for a trust. A custodian is defined as a person who undertakes the safe custody of some or all of the assets of the trust or of any documents or records concerning the assets (clause 17(2)).
66. The powers to appoint nominees and custodians are conferred by clauses 16 and 17. These powers are conferred on trustees of all trusts except pension trusts, authorised unit trusts, or funds established under schemes made under sections 24 or 25 of the Charities Act 1993 (see clauses 36 - 38). In addition, these powers do not apply to trusts which have a custodian trustee as the trust property will be vested in the custodian trustee (clauses 16(3) and 17(4): see section 4(2) of the Public Trustee Act 1906). Nor do the powers apply if the trust instrument or legislation provides to the contrary (clause 26(b)).
67. Under the present law the ability of trustees of private trusts to employ nominees and custodians is largely governed by two common law principles. The first is that a trustee is under a duty to take such steps as are reasonable to secure control of the trust property and to keep control of it. This prevents trustees from placing assets in the name of nominees or custodians and from using powers of delegation to disguise the appointment of a nominee or custodian. Second, where there are two or more trustees they have a duty to ensure that the title to the trust property is in their joint names so that it can only be transferred with the consent of all. It follows that in the absence of express authority in the trust instrument or statute trustees can neither vest property in nominees nor place trust documents in the custody of a custodian. To do so would result in breach of trust. The Law Commission considered that the present law was unduly restrictive. In particular it did not enable trustees to use nominees (a) to provide an administrative service in relation to investments; (b) to facilitate dealings by a discretionary fund management; (c) as a method of using CREST; and (d) in relation to overseas investments traded by a computerised clearing system. In short the present law prevented many trustees from participating in the benefits of modern investment management.
68. The duty of care (clause 1) will apply to the appointment of a nominee or custodian under clauses 16 and 17 or the trust instrument (schedule 1 paragraph 3(1)(b), (c) and (d)).
69. Notwithstanding the fact that a person appointed to act as a nominee (whether under clause 16 or an express power in the trust instrument) may act as a bare trustee, it is not intended that the appointment of a nominee should affect the fiduciary relationship of the trustees to the beneficiaries of the trust.
70. Subject to the provisions of Part IV of the Bill (clauses 11-27) clause 16(1) gives trustees power to appoint a person to act as their nominee and to vest the relevant assets in the nominee provided that the appointment is in writing or evidenced in writing (clause 16(2)) and the trust does not have a custodian trustee (clause 16(3)).
Clause 17: Power to appoint custodians
71. Clause 17(1) makes similar provision for trustees to appoint a person as a custodian. As mentioned clause 17(2) defines 'custodian'.
72. Although clause 17 confers a power to appoint a custodian, there is one situation in which a custodian must be appointed. Under clause 18(1) trustees (other than sole trustees who are trust corporations (clause 25(2)) who retain or invest in securities payable to bearer must appoint a custodian of those securities unless the trust instrument provides to the contrary (clause 18(2)). This provision replaces section 7(1) of the Trustee Act 1925 but does not replicate the requirement in that section that the custodian must be a "banker or banking company" charged with the collection of income from the securities. Paragraph 1(2) of Schedule 3 to the Bill provides that any banker or banking company holding any bearer securities deposited with him under section 7(1) will be deemed to be a custodian appointed under clause 18.
Clause 19: Persons who may be appointed as nominees or custodians
73. For the better protection of the beneficiaries clause 19 restricts the persons who may be appointed nominee or custodian under clauses 16, 17 and 18 to persons who are either carrying on business as a nominee or custodian (whether with to without other activities) or are a body corporate controlled (see below) by the appointing trustees (clause 19(1) and (2)). It is intended that the use of such bodies corporate will allow trustees to use special purpose vehicles for nominee or custodianship purposes. In addition, trustees of charitable trusts (other than exempt charities) must comply with any guidance about the selection of a nominee or custodian issued by the Charity Commissioners (clause 19(4)). Subject to these constraints, a trustee which is a trust corporation may be appointed a nominee or custodian as may two or more trustees (whether or not trust corporations) if they are to act jointly. However, a single trustee other than a trust corporation may not be appointed (clause 19(5)). Clause 19(6) provides that a person appointed as custodian or agent may also be appointed nominee by the trustees. Clause 19(7) makes similar provision in relation to appointments of custodians. These provisions reciprocate the effect of clause 12(4) in relation to the appointment of agents.
74. The terms 'charitable trust' and 'exempt charity' are defined in clause 39(1) of the Bill.
75. The test for determining whether a body corporate is controlled by trustees for the purpose of clause 19(2)(b) is defined in section 840 of the Income and Corporation Taxes Act 1988 (see clause 19(3)). This section provides that 'control' in relation to a body corporate means the power of a person to secure (a) by means of the holding of shares or the possession of voting power in or in relation to that or any other body corporate; or (b) by virtue of any powers conferred by the articles of association or other document regulating that or any other body corporate, that the affairs of the first mentioned body corporate are conducted in accordance with the wishes of that person. Control may therefore be direct or indirect.
Clause 20: Terms of appointment of nominees and custodians
76. Clause 20 has a similar effect in relation to the appointment of nominees and custodians as clause 14 has in relation to the appointment of agents.
Clause 21: Application of sections 22 and 23
77. Clauses 21 to 23 provide for the review by trustees of the appointments of agents, nominees and custodians (clause 22) and the liability of the trustees for such persons (clause 23). Clause 21 defines when clauses 22 and 23 respectively will apply. That is, where trustees have appointed an agent, nominee or custodian under clauses 11, 16, 17 or 18 or under the trust instrument: provided that in the latter case, the terms of the trust instrument are consistent with clause 22 or 23 (as the case may be) (clause 21(2) and (3)).
Clause 22: Review of agents, nominees and custodians
78. Where it applies clause 22(1) imposes a single duty with three elements on trustees during any agency, nomineeship or custodianship. First, they must keep under review the terms of the appointment and how the person appointed is performing. This obligation means that the trustees must keep under review the question of whether the person who has been appointed to act for the trust is a suitable person to do so, and whether the terms on which that person acts are appropriate. In addition, the trustees must keep under review the manner in which the agent, nominee or custodian is performing his or her functions. The duty to "keep under review" does not oblige trustees to review the arrangements at specific intervals or in a particular way. The manner in which the duty should be discharged will depend upon what is reasonable in the circumstances. Second, if circumstances make it appropriate, the trustees must consider whether to exercise any power of intervention (defined in clause 22(4)) that they have: for example, to give directions or to revoke the appointment. Circumstances in which it would be appropriate for trustees to do this may arise, for example, where the agent, nominee or custodian is not carrying out his or her functions effectively, or where the trustees have cause to doubt the suitability of the person in question to continue to act for the trust. Finally, if the trustees consider that there is a need to exercise a power of intervention, they must do so.
79. Clause 22(2) makes specific provision in relation to agents authorised to exercise 'asset management functions' (see clause 15(5)). In these cases the duty under clause 22(1) includes consideration of whether the current policy statement (see clause 15) is being complied with; whether it should be revised or replaced and, if so, to revise or replace it accordingly (clause 22(2)). Any revision or replacement must be in, or evidenced in, writing and must be formulated with a view to ensuring that the functions will be managed in the best interests of the trust (clause 15(3) and (4) as applied by clause 22(3)).
80. When carrying out their duties under clause 22, trustees are subject to the duty of care under clause 1 (see Schedule 1, paragraph 3(e)).
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