s.61 Trustee Act 1925 – when does it provide relief from breach of trust?

 In Trusts

Disclaimer: LawSkills provides training for the legal industry and does not provide legal advice to members of the public. For help or guidance please seek the services of a qualified practitioner.

s.61 Trustee Act 1925

In Lloyds TSB Bank plc v Markandan & Uddin [2010] EWHC 2517 (Ch) (HC); [2012] EWCA Civ 65 (CA) solicitor trustees attempted to relieve themselves of liability for breach of trust, first under section 61 of the Trustee Act 1925 and then by dint of a wider argument based on unfairness.

The relevant provision

Section 61 provides as follows:

Free LawSkills Newsletter

If you like our articles, why not subscribe to our free monthly newsletter with regular Private Client news, views and advice from leading legal minds. It's quick, easy and you can unsubscribe at any time if you no longer want to receive it.

Sign Up Now

If it appears to the court that a trustee, whether appointed by the court or otherwise, is or may be personally liable for any breach of trust, whether the transaction alleged to be a breach of trust occurred before or after the commencement of this Act, but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the court in the matter in which he committed such breach, then the court may relieve him either wholly or partly from personal liability for the same.

Under this provision, the court has discretion as to whether or not it grants relief. Before it can exercise its discretion, it must be satisfied:

1.  that the trustee in question acted both reasonably and honestly and,

2.  that it would be fair to excuse the trustee, having regard to all the circumstances of the case.

The burden of proving these points is on the trustee seeking relief.

In order to show reasonableness, a trustee will in general need to demonstrate that he or she treated the trust property in a way that a prudent man of business would deal with his own property. Lay people, acting as unpaid trustees are more likely to find themselves excused under this provision than professional, remunerated, trustees. However, whether the discretion will be exercised ultimately turns on the facts of each case.

Lloyds TSB v Markandan: the facts

In Lloyds TSB v Markandan, the Defendant solicitors were instructed by the Claimant mortgage lender and a purported borrower to carry out the conveyancing in respect of the purchase of a residential property. The firm was retained by the Claimant under the terms of the Council of Mortgage Lenders Handbook for England and Wales which provided that it held the loan sum on trust for the Claimant until completion.

The Defendant was contacted by another firm which stated that it acted for the vendors. That firm gave its address as Holland Park and said it was the London branch of a Luton based firm which was properly registered with the Law Society. On receipt of replies to requisitions on title from the vendors’ solicitors, the Defendant paid the loan sum (less fees, tax, costs and disbursements) to vendors’ solicitors, despite the fact that the documentation necessary for registration had not been received. The Defendant reminded the vendors’ solicitors that it was still awaiting the signed contract, transfer and discharge certificates but these were not provided. Instead, most of the loan sum was returned to the Defendant and the vendors’ solicitors asked that it be transferred into a different account. The Defendant again asked for the transfer form and the vendors’ solicitors stated that they undertook to forward it. On this basis, the Defendant remitted the loan sum to the vendors’ solicitors.

Unbeknownst to both the lender and solicitors, there was no borrower, no solicitors for the vendors and the persons named as vendors had no idea that their property was the subject of a mortgage application because the property was not on the market. The entire process had been a fraud. The persons pretending to be the vendors’ solicitors had appropriated the name of a totally unassociated firm and were not solicitors at all. They made off with the loan sum.

The trust

Both the High Court and Court of Appeal found that the trust on which the Defendant held the loan sum permitted its payment to the vendors’ solicitors on “receipt of the documents necessary to register title or, if paying away before that stage, on receipt of a solicitor’s undertaking to provide such documents” (HC, at [30]). As the ‘vendors’ solicitors’ were not, in fact, solicitors, there had been no undertaking and the Defendant had not had the authority to remit the loan sum. There had, therefore, been a breach of trust.

Trying to find the back door

The Defendant claimed at first instance that it should be given relief from this breach under section 61. However, Rodger Wyand QC, sitting as a deputy judge of the High Court, found that while the Defendant had acted honestly, it had not acted reasonably in that it had failed to determine whether there was actually an office of the properly registered Luton firm in Holland Park (as specifically required by the Handbook) and had paid the loan sum over, even though the requests for the necessary documentation had not been complied with.

This finding was not challenged on appeal. Instead, the Defendant sought to allege that the Claimant lender had been put on notice that there were questions as to the integrity of the borrower’s loan application and that this information had not been passed on to the Defendant.

In fact, so the Defendant said, the Claimant had instructed the Defendant on a fraudulent transaction and completion in that transaction must mean “completion according to the transaction’s own fraudulent terms” (CA, at [56]). Effectively, as Rimer LJ summed up, the Defendant was claiming that “it would be unjust to hold a solicitor to be in breach of trust by parting with the loan money on such a purported completion when he was as much a victim of the fraud as the lender” (CA, at [58]). This submission was roundly rejected. While the court felt sympathy for the Defendant, it bore in mind that relief would have been available to the Defendant under section 61, if it had not been for its own unreasonable behaviour.

Conclusion

It is not possible to achieve the same result as the section 61 relief by this circuitous route. Trustees therefore need to continue to ensure that their decisions will stand up to scrutiny and fall to be classed as reasonable because, even where a third party fraud is concerned, their actions still need to be justifiable in accordance with section 61 principles. Whether this means following the terms set out in the relevant handbook, guidelines or practice note, taking legal or investment advice where required or just using common sense, trustees should make sure that they act with care and efficiency at all stages of administration of a trust.

Naomi Winston, Ten Old Square, 11 April 2012

Free LawSkills Newsletter

If you like our articles, why not subscribe to our free monthly newsletter with regular Private Client news, views and advice from leading legal minds. It's quick, easy and you can unsubscribe at any time if you no longer want to receive it.

Sign Up Now
Recent Posts