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
account irrelevant factors or alternatively has not
taken into account relevant factors:

judicial interference justified- where trustee

(a) took into account considerations which he should not

have taken into account, or

(b) failed to take into account considerations which he ought

to have taken into account".
 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 terms 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

passing 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
members.

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 panel 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 Chng 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 Powers 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 trustees bank manager;
ii) from accountant;
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.
Trustees 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 account 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 for loss occasioned by improper
investment;

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 administration 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 terms, 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 passing 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