English Court of Appeal defines the limits of a trustee’s indemnity
In a recent decision, the English Court of Appeal has provided helpful guidance on the limits of a trustee’s right to be indemnified out of the trust fund for their legal costs in litigation concerning the trust. The decision will be of interest to trustees in offshore jurisdictions, such as the BVI, where the statutory rules concerning a trustee’s right to indemnification are similar to those in England and Wales.
In Price v Saundry and Another,1 the claimant was a trust beneficiary and had filed proceedings seeking to remove the trustees, one of whom was the first defendant. The beneficiary alleged that various payments authorised by the trustee were improper and amounted to a breach of trust. The parties to the claim agreed to dispense with the claim to remove the trustees provided that the trustee would produce a final account of the capital and income of the trust and the dealings with it. Following the account, the court at first instance found that the trustee was liable to pay sums exceeding £50,000 to the trust. However, it also allowed the trustee to be indemnified from the trust fund for the costs of defending the proceedings and it is on this point that the claimant beneficiary appealed.
The Court of Appeal, having regard to section 31(1) of the Trustee Act 2000, found that the trustee was not entitled to be reimbursed from the trust fund because her legal expenses had not been properly incurred when acting on behalf of the trust. The Court of Appeal found that, whilst the taking of an account in common form does not presuppose that there has been misconduct on the part of the trustee, in this case the account revealed serious misconduct and breaches of trust. The Court of Appeal found that the trustee had been acting on her own behalf in defending the proceedings and that it would offend all sense of justice in allowing the trustee to an indemnity from the trust fund.
The decision is indicative of the limitations that may be applied to trustee indemnities in offshore jurisdictions, such as the BVI, where the legislation provides similar rights to trustees to be indemnified from the trust assets (section 31(2) of BVI Trustee Ordinance 1961 replicates the wording of the predecessor to s.31(1) of the English Trustee Act 2000).
1 EWCA Civ 2261