Trustee cannot plead ignorance and avoid personal liability

26 February 2017

Trustees are charged with onerous responsibilities. They must take those responsibilities seriously. A trustee cannot plead ignorance of the Trust’s affairs to avoid liability. In a recent case, a trustee learnt this lesson the hard way. He was found personally liable to pay $137,000 to a lender for failing to meet the standard of care that the law requires of him.

The case of FAI v Crawley

FAI lent Edward Johnston $300,000. Two Trusts guaranteed the loan and signed the loan agreement. Mr Johnston signed for one of the trustees under a power of attorney the trustee had given him. The main asset of the Trusts was a property occupied by Mr Johnston. In the loan application, Mr Johnston grossly overstated his financial position and that of the Trusts.

Mr Johnston did not make the payments due under the loan agreement. FAI sued Mr Johnston and the two trustees of the Trusts on two grounds: firstly, they had breached the loan agreement and the guarantee by warranting that they had provided the correct financial information to FAI; and secondly, they had breached their warranty that they would not sell the Trusts’ property. (Soon after FAI had issued proceedings, and without FAI’s knowledge, the Trusts had sold the property at less than its market value.)

Limitation of liability clause not a “silver bullet”

The only way FAI was going to recover the full amount owed to it was to successfully claim that the trustees were personally liable and that the clause in the documents limiting their personal liability did not apply because they had been negligent.

The Court of Appeal had to interpret the clauses in the loan agreement and guarantee. Based on the wording of these documents it decided that the trustees’ liability was limited to the assets of the Trusts in respect of the incorrect information provided so the trustees were not personally liable on the first ground. However, the Court found the trustees were personally liable for the loss FAI suffered on the second ground – for selling the Trusts’ property without FAI’s knowledge. The clause limiting their liability did not apply because they had not fulfilled their duties as trustees.

The Court said that one of the trustees could not rely on his lack of knowledge of the borrowing from FAI and the sale of the Trusts’ property (because Edward Johnston had signed the documents under a power of attorney) to withstand the allegation that he had breached his obligation not to sell the property without the consent of FAI. The Court said he had no appreciation of his responsibilities as trustee and took no steps to fulfil those responsibilities. He should have familiarised himself with the affairs of the Trusts, he should have acted in the best interests of the beneficiaries and he should have kept himself informed about the borrowing from FAI.

Avoiding personal liability

If you are a trustee, the law says you are personally liable unless the document you sign specifically limits your liability to the assets of the Trust. If you do not wish to be personally liable, firstly you should make sure such a clause is included in the document you sign. Secondly, you must understand and comply with your duties as trustee - because this limitation of liability does not normally apply if you do not do so. Included in your duties are the duties to: be familiar with the Trust Deed and the assets owned by the Trust,  obey the terms of the Trust, treat the beneficiaries impartially, exercise reasonable care, invest the Trust Fund, act yourself and not hand over your powers to anyone else, not deal with or profit from trust property and account to the beneficiaries promptly.

If you are in any doubt as to your responsibilities as trustee, you should take professional advice.

Please email me at [email protected] with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.

Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.


Barbara McDermott