#3121 - Investment - GDL Equity and Trusts

Introduction

- Trustees under duty to invest trust fund for benefit of beneficiaries – source of power to invest:

• 1. trust instrument.

• 2. statute: Trustee Act 2000 – applies where trust instrument silent.

  • came into force 1 Feb 2001: repealed Trustee Investments Act 1961.

  • applies to all trusts (whenever created).

- TA 2000: fixes problems with old law.

• 1. new statutory duty of care.

  • old law: common law duty of prudence (Speight v Gaunt [1883]; Re Whitely; Whitely v Learoyd [1886]).

  • but common law duty still relevant: statutory duty only applies to some aspects of work.

• 2. widens range of investments.

  • old law: extremely limited options.

  • but still limited – s8 TA 2000: equitable interests in land + overseas land not authorised investments.

• 3. remuneration for professional trustees allowed.

  • old law: trustees could not charge unless express charging clause in instrument.

• 4. allows delegation of investment decisions.

  • old law: no delegation unless authorised by trust instrument could not invest in discretionary portfolios.

- Structure of TA 2000: 6 parts.

• Part I: new statutory duty of care.

• Part II: trustee investment powers (other than land).

• Part III: trustee investment powers over land.

• Part IV: agents/nominees and delegation.

• Part V: remuneration.

• Part VI: miscellaneous.

Part I TA 2000: Statutory Duty of Care

• s1(1): whenever duty applies, t. must exercise care + skill reasonable in circs., having regard to:

  • (a): any special knowledge or experience t. has or holds himself out as having; and

    • partially subjective test: t. judged by higher standard if holds self out as expert.

  • (b): professional trustee – any special knowledge or experience that it is reasonable to expect of person acting in course of that kind of business/profession.

    • objective test: always applies to professional trustee.

• s2: Schedule 1 – provisions about when duty of care applies.

• Schedule 1: application of duty of care.

  • para 1: investment.

  • para 2: acquisition of land.

  • para 3: agents, nominees and custodians (inc. selection, determining terms, policy statement).

  • para 7: duty can be wholly/partly excluded by trust instrument.

- When does duty apply?

• only those functions listed in Schedule 1: conferred by trust instrument or TA 2000; whenever created.

• poss. only active performance, NOT omissions of exercise of power/duty.

- Interaction with common law ‘duty of prudence’ – Re Whiteley [1886].

• high standard: t. must ‘take such care as a reasonably prudent man would take if he were minded to make an investment for benefit of others for whom he felt morally obliged to provide’.

  • but content dep. on circs: e.g. size of fund, t’s expertise, circs. of beneficiaries (inc. tax status).

• avoiding risk: more liberal attitude recently.

  • historically: t. must avoid all investments attended with risk – Learoyd v Whiteley.

  • more recently: t. must ensure fund as whole not put at risk – Nestle v Nat West Bank plc [1993].

    • [Hoffman J]: standard of care – current portfolio theory: emphasises risk to entire portfolio, not each investment taken in isolation.

• duty to review investments + buy/sell as necessary: but low standard of care?

  • breach: c. must prove ts. decisions/lapses resulted in loss to fund – Nestle v Nat West Bank plc.

    • facts: bank misinterpreted investment clause, failed to seek advice, neglected to conduct reviews of investments 1927-1959 CoA: not liable.

    • [Leggatt LJ]: performance judged by absence of proven default, not by success.

  • TA 2000: standard of care for review unclear – result uncertain.

• interaction with statutory duty unclear:

  • common law duty objective duty: sets different standard of care from TA 2000 –

  • common law duty still applies where statutory duty does not: e.g. exercise of powers of maintenance + advancement; possibly omitting to act.

  • where statutory duty applies: in addition to or instead of common law duty?

- Outstanding issues – future case law needed to clarify:

• 1. interaction between 2 limbs of statutory duty (objective + subjective).

• 2. scope of ‘business/profession’.

• 3. interaction with common law duty.

• 4. whether omission to exercise power in Sch. 1 governed by statutory duty.

Parts II + III TA 2000: Trustee Investment Powers

- General power of investment – s3 TA 2000.

• s3(1): t. can make any investment that he could make if he were absolutely entitled to assets.

• s3(3): t. CANNOT invest in land under s3 (except loans secured on land) – see s8.

• trust instrument overrides – s6.

- investments in land – s8 TA 2000.

• s8(1): t. can acquire legal estate (s8(2)) in freehold/leasehold land in UK – (a) as investment; (b) for b. to occupy; or (c) for any other reason.

• apparent exclusions: equitable interests in land + land overseas.

• trust instrument overrides – s9.

- Contrast with old law: no general power – closed list of assets set out in Schedules to TIA 1961.

• 3 types of assets:

  • 1. narrower range investments: min. of trust assets.

  • 2. wider range investments.

  • 3. excluded investments: 1. land; 2. shared in unquoted company; 3. shares in quoted company which did not fulfil conditions (inc. paying dividend in each of last 5 years).

• problematic: restrictions on investments + no power to delegate investment decisions.

  • ts. could not get best returns: could not invest in land or modern discretionary portfolios.

  • ts. could not purchase land for b. to occupy: did not count as investment.

  • trust instruments routinely extended powers.

• new law: s3 + s8 + power to delegate v. broad: solves problems:

  • 1. t. may invest in land.

  • 2. t. may purchase property for b. to occupy.

  • 3. t. may invest in discretionary portfolio.

  • 4. t. not restricted by risk averse schedule can invest for greater returns.

  • in future, trust instruments may narrow powers.

- What is an investment?

• old law: property purchased in order to be held for sake of income it will yield – Re Wragg [1919].

  • not property held for capital appreciation alone: inc. house bought for b. to occupy.

• TA 2000: undefined – but: apparently can be income or capital growth or both.

Controls over Investment Powers in s3 + s8 TA 2000.

- T. subject to statutory duty of care – s1.

- T. must regularly review investments + vary if necessary – s4(2).

• vs. old law: no statutory obligation to review.

• suggested in case law: Nestle v Nat West Bank plc.

- T. bound by standard investment criteria (SIC) – s4(3).

• before exercising any investment power (initial investment + review) – t. must consider 2 tests:

  • s4(3)(a): suitability to type of investment + of particular investment.

  • s4(3)(b): need for diversification of trust investments, so far as appropriate in circs.

• aim: balanced portfolio of assets – proposal considered in context of whole portfolio.

• cannot be excluded by contrary intention.

- T. must obtain + consider proper advice – s5.

• t. must take advice before exercising any investment power (s5(1)) + when reviewing (s5(2)).

• exception: if t. reasonably concludes that in all circs. unnecessary/inappropriate – s5(3).

• vs. old law: only had to obtain advice for some investments (Sch 1 Parts II + III TIA 1961).

- T. must act in b’s best financial interests: cannot take into account ethics etc.

• ts. must not refrain from investments because of their views: Cowan v Scargill [1985]: [Megarry VC].

  • facts: ts. of National Coal Board pension fund appointed by NUM wanted to stop investments in industries competing with coal not allowed.

• unless ethical investments no less profitable: Harries v Church Commissioners for England [1992].

  • facts: c. (Bishop of Oxford) argued church commissioners’ purpose to promote faith, should put ethical considerations above financial considerations no: valid to take ethical considerations into account only to extent that profitability not harmed.

• exception: consent of all beneficiaries sui juris.

- Common law duties: to act fairly between beneficiaries + to obey trust instrument.

• balancing interests of different beneficiaries problematic – esp. successive interests: must balance investments for income yield (benefit life tenant) vs. investments for capital growth (benefit remainderman).

- Controlling shareholding: ts. must ensure adequate flow of information to safeguard interest – Bartlett v Barclays Bank Trust Co Ltd [1980].

• reason: enable ts. to make use of controlling interest should this be necessary to safeguard investment (i.e. shareholding) prevent company taking unreasonable risks etc.

• methods of ensuring adequate flow of information:

  • representation on board by t. or nominee – Re Lucking’s WT [1968]: [Cross J].

  • but: other methods can also suffice – Bartlett v Barclays Bank Trust Co Ltd: [Brightman J].

    • e.g. receipt of agenda/minutes of board meetings; monthly management accounts; reports etc.

• not personal duty: t. not on board entitled to rely on info from representative – Re Lucking’s WT.

  • facts: trustee L director of company signed blank cheques sent by manager D; D drew more than entitled + L discovered this but kept signing cheques L in breach once realised + liable for losses, but: other trustee B not guilty of breach (had relied on L).

Part IV TA 2000: Delegation

- General rule: trustee cannot delegate – but: exceptions.

• old law: power to delegate administrative functions but not decisions (unless power in trust instrument).

  • limited investment: prevented investment in discretionary portfolio funds.

• s11 TA 2000: t. can delegate delegable functions to agent (app. to all trusts whenever created).

- Statutory duty of care applies to delegation – Schedule 1 para 3 TA 2000....