Trustees' liability for breach: proprietary claims - Situati...

Learning Outcomes

This article examines the circumstances under which a trustee can be held liable for a breach of trust through a proprietary claim, even when the original trust property itself has not been misappropriated or diminished. It focuses on breaches of fiduciary duty where the trustee derives an unauthorised personal benefit. After studying this article, you should understand the nature of fiduciary duties, how they can be breached without affecting the trust property, the key case law such as Boardman v Phipps, and the proprietary remedies available to beneficiaries, primarily the account of profits and the imposition of a constructive trust over the benefit received by the trustee. You should also be able to distinguish personal and proprietary responses to fiduciary wrongdoing; explain when bribes and secret commissions are held on constructive trust (FHR European Ventures); identify when directors’ fees and commissions must be surrendered; and apply the requirements for fully informed consent, court authorisation, or trust instrument authorisation as potential defences or exceptions.

SQE1 Syllabus

For SQE1, you are required to understand trustee liability for breach via proprietary claims in situations where the trust property has not changed, with a focus on the following syllabus points:

• The nature and scope of fiduciary duties owed by trustees.
• Situations constituting a breach of fiduciary duty, such as unauthorised profits and conflicts of interest.
• The principles governing proprietary claims against trustees for benefits obtained through breach.
• The remedies of account of profits and constructive trusts in this context.
• The distinction between personal and proprietary claims against trustees.
• Key case law illustrating these principles, notably Boardman v Phipps.
• Modern position on bribes and secret commissions (FHR European Ventures LLP v Cedar Capital Partners Ltd).
• Equitable allowance and when a court may remunerate a fiduciary even after breach.
• Interaction with bankruptcy and priority of proprietary claims.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following best describes a trustee's fiduciary duty?
   1. A duty to maximise the financial return of the trust fund at all costs.
   2. A duty to act solely in the best interests of the beneficiaries, avoiding personal profit and conflicts of interest.
   3. A duty to follow the beneficiaries' instructions regarding trust administration.
   4. A duty to ensure the trust property never decreases in value.
2. A trustee uses confidential information obtained while managing the trust to make a profitable personal investment. The trust's own assets remain unaffected. Has the trustee breached their duty?
   1. No, because the trust property was not harmed.
   2. No, if the trustee honestly believed the investment would also benefit the trust indirectly.
   3. Yes, because they made an unauthorised profit from their fiduciary position.
   4. Yes, but only if the trust could have made that specific investment itself.
3. What is the primary remedy sought when a trustee makes an unauthorised profit from their position, even if the trust fund itself suffered no loss?
   1. Damages for negligence.
   2. Rescission of the trust.
   3. An account of profits.
   4. Specific performance.

Introduction

Trustees owe strict duties to the beneficiaries of the trust. These duties, known as fiduciary duties, require trustees to act with utmost loyalty and in the best interests of the beneficiaries. A breach of these duties can lead to liability, even in situations where the trustee has not directly misappropriated or caused loss to the trust property itself. This article focuses on proprietary claims that arise when a trustee breaches their fiduciary duty by making an unauthorised personal profit or gaining an advantage due to their position, despite the trust assets remaining unchanged. Understanding these principles is essential for advising beneficiaries on how to recover gains improperly made by trustees.

Key Term: Fiduciary Duty
An obligation to act solely in the best interests of another party (the principal or beneficiary), characterised by loyalty, good faith, and the avoidance of conflicts of interest or unauthorised personal profit.

Fiduciary Duties of Trustees

The relationship between a trustee and a beneficiary is fiduciary in nature. This imposes fundamental obligations on the trustee beyond the basic duty to comply with the terms of the trust instrument. Equity applies these duties strictly, recognising the practical risk that personal interests can skew decision-making.

Key Term: Conflict of Interest
A situation where a person's personal interests could compromise their judgment, decisions, or actions in their professional or official capacity, particularly concerning their duty to another party.

Key Term: No-Profit Rule
The principle that a person in a fiduciary position must not make any unauthorised profit from that position.

Core fiduciary duties include:

• Duty of loyalty: act solely in the interests of the beneficiaries.
• No-conflict rule: avoid placing oneself in a position where personal interests conflict, or may possibly conflict, with duty to the trust.
• No-profit rule: do not make any unauthorised profit from the fiduciary position.

The strictness of these rules is longstanding. In Keech v Sandford, a trustee who could not renew a lease for the trust was prohibited from taking the lease for himself; any benefit arising from his position had to be held for the trust. More generally, Bray v Ford and Aberdeen Railway Co v Blaikie Bros emphasise that avoiding conflicts and unauthorised profits is of “universal application” to fiduciaries.

Key Term: Duty of Confidentiality
A fiduciary must keep information obtained in the course of the fiduciary relationship confidential and must not exploit that information for personal gain.

Key Term: Fully Informed Consent
Valid consent requires full disclosure of all material facts to all adult beneficiaries of full capacity, given freely and before the fiduciary acts.

Breach Without Loss to Trust Property

A breach of fiduciary duty can occur even if the trust fund suffers no loss, or even benefits from the trustee's actions. The focus is on the trustee's conduct and whether they have improperly benefited from their role. Typical situations include:

• Using confidential information obtained through trusteeship for personal gain (Boardman v Phipps; duty of confidentiality).
• Exploiting a corporate or investment opportunity discovered in the course of trust work for personal profit (Regal (Hastings) Ltd v Gulliver is frequently cited by analogy).
• Receiving a secret commission or bribe in relation to trust business (modern law: such benefits are held on constructive trust for the beneficiaries).
• Retaining directors’ fees where appointment or remuneration arises from the trust’s shareholding or votes (fees must usually be accounted to the trust unless an exception applies).

Key Term: Secret Commission
A payment or fee taken by a fiduciary from a third party in relation to fiduciary business without full disclosure and consent of the principal/beneficiaries.

Key Term: Bribe
A corrupt payment or advantage offered or received to influence fiduciary conduct; in equity, bribes received by fiduciaries are treated as trust property to prevent unjust enrichment and deter disloyalty.

The modern position on bribes and secret commissions is set out by the Supreme Court in FHR European Ventures LLP v Cedar Capital Partners Ltd [2014] UKSC 45: a bribe or secret commission received by a fiduciary is held on constructive trust for the principal, conferring a proprietary interest and priority against the fiduciary’s creditors. This settled earlier uncertainty and ensures beneficiaries can trace and recover such gains.

The Principle in Boardman v Phipps

The House of Lords decision in Boardman v Phipps [1967] 2 AC 46 is a landmark case illustrating the strict application of fiduciary duties, particularly the no-conflict and no-profit rules, even where the trust property was not misused and the trust benefited from the fiduciaries' actions.

Facts

The trust held a minority shareholding in a poorly performing company. Boardman (the trust's solicitor) and Tom Phipps (a beneficiary) decided to attempt to gain control of the company to reorganise it. Using information obtained while acting for the trust, and purporting to represent the trust (though lacking full authority from all trustees), they attended company meetings. They subsequently purchased further shares personally, eventually gaining control and making the company profitable. Both the trust and Boardman and Tom Phipps personally profited significantly from the reorganisation. Another beneficiary sued, claiming the personal profits made by Boardman and Tom Phipps should be held on trust for the beneficiaries.

Decision

The House of Lords held, by a majority, that Boardman and Tom Phipps were liable to account for their personal profits to the trust. They had breached their fiduciary duties because:

1. They used information gained from their position acting for the trust (treated as confidential information derived from the fiduciary position) to make a personal profit.
2. There was a real possibility of conflict between their personal interests (in purchasing shares) and their duty to advise the trustees (e.g., whether the trust should seek authorisation to increase its holding).
3. They had not obtained the fully informed consent of all the beneficiaries for their actions.

The court ordered that the profits be held on constructive trust for the beneficiaries, although it also awarded Boardman and Tom Phipps generous remuneration (an equitable allowance) for their work and skill, acknowledging they had acted honestly (albeit in breach) and had benefited the trust.

Key Term: Equitable Allowance
A discretionary allowance the court may award to a fiduciary who has acted honestly but in breach, reflecting skill, effort or expenses expended; it reduces the amount to be disgorged under an account of profits.

Key Term: No-Profit Rule
The principle that a person in a fiduciary position must not make any unauthorised profit from that position.

Boardman v Phipps demonstrates that honest motive, beneficiary benefit, or absence of loss is not a defence to a claim for unauthorised profits. The appropriate response is disgorgement (account of profits) and, where suitable, the imposition of a constructive trust over the profits or asset acquired.

Proprietary Remedies

Where a trustee makes an unauthorised profit in breach of fiduciary duty, the beneficiaries may seek both personal and proprietary responses. In this context:

• Account of profits is a personal equitable remedy that strips wrongful gains.
• Constructive trust is a proprietary remedy over the profit or asset obtained through breach.

These responses can be combined: a constructive trust secures the asset and any increase in its value; an account of profits secures disgorgement where a proprietary claim is impractical or inappropriate.

Key Term: Account of Profits
An equitable remedy compelling a defendant (often a fiduciary) to disclose and surrender net profits made through wrongful conduct, such as breach of trust or fiduciary duty.

Key Term: Constructive Trust
A trust imposed by law, regardless of the parties' intentions, where equity considers it unconscionable for the person holding legal title to property (the constructive trustee) to retain the full beneficial interest, often due to wrongful conduct like breach of fiduciary duty.

Account of Profits

Account of profits aims to strip the fiduciary of unauthorised gains rather than compensate for loss. Key features:

• The remedy targets net profits actually made; reasonable expenses and, in some cases, equitable allowance may be credited to the fiduciary.
• Honesty and lack of trust loss are irrelevant: the objective is deterrence and loyalty enforcement.
• Calculating the quantum may require detailed disclosure and forensic analysis; the court may make broad assessments where precision is impractical.

Courts have emphasised that the measure focuses on benefits obtained as a result of the breach. Where profits are intermingled with legitimate gains, the court separates the portion causally linked to the breach. In practice, where the breach permeates the entire transaction (e.g., opportunity, information, or appointment arose from the fiduciary position), the whole profit may be liable to disgorgement subject to equitable allowance.

Constructive Trust

Constructive trusts may be imposed over:

• The asset acquired using confidential information or opportunity derived from the fiduciary position (Boardman).
• Bribes and secret commissions received in breach (FHR European Ventures).
• Directors’ fees where appointment was obtained by the use of trust shares or voting power, or where remuneration flows from the fiduciary position.

Where a constructive trust is imposed:

• The trustee holds legal title on trust for the beneficiaries.
• Beneficiaries acquire a direct proprietary interest, enabling tracing and priority over unsecured creditors, including in bankruptcy.
• If the asset increases in value, beneficiaries take the uplift; if the asset decreases, beneficiaries may elect to claim a charge or equitable lien and pursue a personal claim for any balance.

Key Term: Equitable Lien
A proprietary security (charge) over property to secure a sum due (e.g., the amount of trust money misapplied), allowing sale and recovery from proceeds with priority over unsecured creditors.

The choice between constructive trust and equitable lien typically rests with the beneficiaries, taking into account value movements and enforcement priorities.

Directors’ Fees and Commissions

Fiduciaries appointed as company directors because of trust shareholdings often must account for director’s fees unless:

• The directorship predated the trusteeship, or
• Appointment was secured independently of trust votes (the fiduciary would have been appointed even if trust votes had been cast against them), or
• The trust instrument authorises retention of fees, or
• The court or all sui juris beneficiaries authorise retention after full disclosure.

Similarly, trustees must account for incidental commissions or benefits obtained from placing trust business (Williams v Barton). Transparency and authorisation are essential to avoid breach.

Worked Example 1.1

Anna is a trustee of the Bell Family Trust, which owns shares in TechCorp Ltd. Through attending board meetings as a representative of the trust, Anna learns confidential information about TechCorp's upcoming revolutionary product launch. Before this information is public, Anna uses her personal savings to buy shares in TechCorp. The share price triples after the product launch. The trust's own shareholding also increases in value. Can the beneficiaries claim Anna's personal profit?

Answer:
Yes. Anna obtained the confidential information solely due to her position as trustee. Using this information for personal gain is a breach of her fiduciary duty (no-profit rule and potentially no-conflict rule). The beneficiaries can seek an account of profits, requiring Anna to surrender the profit she made. Alternatively, they could argue for a constructive trust over the shares Anna bought or the profit realised, giving them a proprietary interest in the gain. The fact the trust also benefited or suffered no loss is irrelevant to Anna's liability for her personal profit.

Worked Example 1.2

David is a trustee for a trust holding commercial properties. He is responsible for appointing managing agents. He appoints an agency run by his cousin, without disclosing the relationship. The agency performs adequately, and the fees charged are standard market rates. However, David secretly receives a £1,000 'introduction fee' from his cousin's agency.

Is David liable to the trust?

Answer:
Yes. David is liable for breach of fiduciary duty. He placed himself in a position of conflict of interest by appointing a relative without disclosure. More significantly, he breached the no-profit rule by accepting a secret commission. The beneficiaries are entitled to demand that David account for the £1,000 profit he made. The fact that the agency performed well or charged fair rates does not excuse David's breach in profiting personally and having a conflict of interest.

Worked Example 1.3

Lara, a trustee, negotiates a sale of trust property. The buyer’s broker pays Lara a £20,000 “success fee” secretly, unrelated to the price paid by the trust. Lara argues the trust suffered no loss and the fee was standard market practice.

Answer:
Lara must surrender the £20,000. A secret commission received in the course of fiduciary business is unauthorised profit. Under FHR European Ventures LLP v Cedar Capital Partners Ltd, a bribe or secret commission is held on constructive trust for the beneficiary. The beneficiaries may assert a proprietary claim to the commission and any traceable proceeds, with priority over Lara’s creditors. The absence of loss and market practice do not provide a defence.

Worked Example 1.4

A trust holds 35% of the shares in Alpha Ltd. The trustees vote to appoint trustee Sam as a director of Alpha. Sam receives an annual director’s fee. Must Sam account for the fees to the trust?

Answer:
Generally yes. Where a directorship is obtained by use of trust votes or arises from the fiduciary position, fees are incidental profits and must be accounted to the trust unless authorised. Sam could retain the fees only if, for example, he would have been appointed independently of the trust’s votes, the trust instrument expressly permits retention, or all adult beneficiaries consent after full disclosure. Absent such authorisation, the fees are recoverable from Sam by account of profits and may be impressed with a constructive trust.

Worked Example 1.5

Maya, a trustee, identifies a development opportunity while managing trust land. Without approaching the trust or seeking consent, she incorporates a company and personally acquires adjacent land to exploit the opportunity. The company makes substantial profits. The trust land remains unchanged, and Maya argues the opportunity was not suitable for the trust.

Answer:
Maya is in breach of fiduciary duty by exploiting a corporate opportunity arising from her position. The profits are liable to disgorgement by account of profits; the court may also impose a constructive trust over profits or assets acquired. It is not a defence that the opportunity was unsuitable for the trust or that the trust suffered no loss. If Maya acted honestly and added value, the court may grant an equitable allowance for her skill and efforts, but the unauthorised profits must be surrendered.

Defences

A trustee facing a claim for making an unauthorised profit may have limited defences:

• Authorisation by trust instrument: the trust deed may expressly permit the trustee to retain specified profits or engage in potentially conflicting transactions.
• Informed consent: the trustee obtained the fully informed consent of all adult beneficiaries of sound mind before acting. Consent requires full disclosure of all material facts; mere acquiescence or partial disclosure is insufficient.
• Court approval: the trustee obtained prior approval from the court for the transaction.

Other points:

• Good faith, honesty, or beneficiary benefit: not defences to a claim for unauthorised profits. Equity focuses on loyalty and deterrence.
• Limitation and laches: proprietary claims to trust property or its traceable proceeds are not subject to the six-year statutory limitation period (though laches may apply). Personal claims for account of profits may be subject to equitable laches where delay causes prejudice; however, for claims to recover trust property or where fraud is involved, statutory limits do not run against the beneficiaries.
• Equitable allowance: even where breach is found, the court retains discretion to award a fair allowance for work and skill that added value (Boardman v Phipps). This mitigates the quantum of the account but does not excuse liability.

Key Term: Equitable Allowance
A discretionary reduction of the amount payable under an account of profits to reflect honest fiduciary effort, skill, or expenses, awarded to avoid unfairness while upholding the no-profit rule.

Key Term: Directors’ Fees
Remuneration paid to a trustee appointed as a director. Where appointment or payment arises from the fiduciary position or use of trust votes, the fees are incidental profits that must ordinarily be accounted to the trust unless authorised.

Key Term: Corporate Opportunity
A business opportunity arising within the scope of a fiduciary’s duties. Exploiting such an opportunity personally without authorisation breaches the no-profit/no-conflict rules and triggers account of profits and, where appropriate, constructive trust.

Revision Tip

Remember the strictness of fiduciary duties. Arguments that the trustee acted honestly, that the trust suffered no loss, or even that the trust benefited from the trustee's actions, are generally not defences to a claim for unauthorised profits derived from the fiduciary position. The key is whether the trustee improperly benefited due to their role. Where consent is relied upon, ensure it is fully informed consent of all adult, competent beneficiaries and given prior to the transaction.

Key Point Checklist

This article has covered the following key knowledge points:

• Trustees owe strict fiduciary duties, including loyalty, no-conflict, and no-profit rules.
• A breach of fiduciary duty can occur even if the trust property is not misappropriated or diminished in value, or even if the trust benefits.
• Fiduciaries must not use their position, information, or opportunities arising from the trust for personal gain without authorisation.
• Boardman v Phipps illustrates strict liability for unauthorised profits and conflicts of interest, and the potential for equitable allowance.
• Bribes and secret commissions received by fiduciaries are held on constructive trust for the beneficiaries (FHR European Ventures), supporting proprietary claims and tracing.
• Beneficiaries can pursue an account of profits (personal remedy) and seek constructive trusts over profits or assets (proprietary remedy), and may elect an equitable lien where appropriate.
• Proprietary claims confer priority over unsecured creditors and allow beneficiaries to take increases in value.
• Directors’ fees and incidental commissions must typically be accounted to the trust unless pre-existing appointment, independent selection, instrument authorisation, court approval, or fully informed beneficiary consent applies.
• Defences are limited; fully informed consent, trust instrument authorisation, or prior court approval may protect the fiduciary. Honesty and lack of loss do not.
• Courts may grant equitable allowance to avoid unfairness where honest effort added value, without excusing the breach.

Key Terms and Concepts

• Fiduciary Duty
• Conflict of Interest
• No-Profit Rule
• Duty of Confidentiality
• Fully Informed Consent
• Account of Profits
• Constructive Trust
• Equitable Lien
• Secret Commission
• Bribe
• Equitable Allowance
• Directors’ Fees
• Corporate Opportunity