This case is connected with cases of violation of the trustee’s obligations to the money entrusted to them and legal ways to compensate for the damage caused to the trust. In particular, we are talking about two different trusts that suffered serious financial damage due to selfish and irresponsible policies led by Cher, a trustee of both funds. In this case, the trust has a problem with an untrustworthy person in charge of the fund’s money who left the country declaring bankruptcy. This requires justification on the part of the trust itself as a malicious violation of legal obligations, which include saving money and not misusing it.
In English law, this situation is called “insolvency” and refers to those situations when the creditor cannot be satisfied with the activities of the trustee to whom the trust money is entrusted. The initial action in case of dissatisfaction with the creditor is their necessary removal from any opportunity to control the money. A trustee who declares himself bankrupt must be replaced by another more competent person or at least removed from his position of influence. The Insolvency Act, created in 1986, particularly its Section 298(4), clarifies how an unscrupulous trustee can be legally disposed of (Charity Commission for England and Wales, 2018). The first stage is an appeal to the court, drawn up according to the principle of just cause. This procedure, therefore, requires a logical justification and lies with the responsibility of the creditor and their eloquence and knowledge of jurisprudence.
Although Cher, the trustee of the target trust, made some successful investments, most of the money entrusted to her was lost in a worthless investment in a scam Internet company. Frauds of this kind are rarely able to get a sufficiently thorough investigation since they belong to the field of cybercrime, so it would hardly be possible to count on the return of the invested money or the imposition of responsibility on the Internet scammers. However, Cher thus failed in the basic task of the trust, which is to save money with integrity and impartiality. Cher’s behaviour must be interpreted as a clear and risky violation since she took exactly the amount of money entrusted to her in a given sum. It should be added that this was an amount significantly higher than the previous amount of money in the trust account. Based on this, the removal of Cher is a fairly reasonable action that can be implemented in court. As a result, the court may appoint an Official Receiver or a special insolvency practice (The Insolvency Service, 2021). Eventually, they will take the remaining property and return it to the creditors – in this case, it will be the remaining 40,000 pounds.
It is important to note in court that Cher acted without the knowledge of the beneficiaries or the trust itself, withdrawing money and transferring it to her account, which can be considered a clear violation of the ethics of the trust. The notion of “vigour” introduced in Re Keypak Homecare Ltd is irrelevant to Cher’s actions, given that they circumvent the interests of the trust. Also, the fact that Cher paid off a personal loan with gold coins from the fund’s money is the reason for a court filing against her and the demand for reimbursement of the funds spent.
The fact that Cher declared herself bankrupt as a trust could have led to the trust being closed and its funds diverted to a court-appointed adjuster. However, in this situation, Cher’s bankruptcy has no legal basis and is not a reason for the dissolution of both funds. According to Lord Brown-Wilkinson (BAILII), the judge who heard the case Target Holdings Ltd v Redferns, one of the fundamental principles of awarding damage at common law is the principle of causation. The concept of causality is clearly observed and provable in this case. Considering that the money would not have been lost if Cher had not transferred it to her account, it is fair to require the trustee to refund the funds and freeze the money in her current account, which the Foundation wholly owns.
Given that Cher is bankrupt and out of the country, there is no way to call her to full responsibility for what could be categorized as a crime. In fact, trustees are extremely rarely prosecuted, even though the amount stolen or recklessly invested by Cher is extremely high. A potential opportunity to recover the lost money would be the liquidation of the purchased painting in the long term. Considering that the painting has doubled in price in just two years, it is possible to assume that its further growth may occur in a progression. The painting is considered the property of Cher, which is liquid and therefore eligible for damages to both trusts. The next trustees of both funds should confiscate Cher’s eccentric acquisitions to redistribute the lost wealth. The same should be done with the coins purchased by Cher for the stolen money with which she paid a large loan. Having made the decision to freeze Cher’s property acquired with money stolen from the fund, it is possible to multiply its value in such a way as to compensate for all the damage without a trace.
Thus, the trusts are legally entitled to seek reparative compensation for Cher’s unfair and inconsistent handling of money. Reparation exists in contrast to the qualitative one, which assesses the ability of the trust to work in the event of its successful performance, but this underperformance cannot be calculated. Her filing for bankruptcy should be taken solely as a loophole in the law, removing her liability and shifting her to non-trusts. In addition, the context of Cher leaving the country implies the possible concealment of money allegedly invested in an Internet scam. However, in English jurisdiction, it is permissible to confiscate the valuables of a trustee who violated the conditions of trust in a large amount.
This issue is also related to the boundaries within which it is permissible for a trustee to act concerning trust money under the parameters of trust agreements within the framework of English jurisprudence. Traditionally, it is considered an unspoken and fundamental rule on which a trustee’s very principle is that they are not entitled to spend money for their own benefit and receive any profit from a power of attorney. However, some cases do not come down to one fundamental rule in which it is permissible to use the profits of the trust, requiring separate consideration. In particular, it is required to consider those cases when the receipt of profit by a trustee should be deferred to the trust fund.
Cases of “bare trust” specifically described in paragraph 31 of the state technical manual are also called nomineeships. These are examples of such an agreement between the owner and the fiduciary, in which the latter does not have any discreteness, that is, independence in financial management (The Insolvency Service, 2021). Based on this principle, the trustee finds himself in an inseparable need to act solely on the instructions given by the beneficiary. For example, if an equity broker manages the money of a trust consisting of several beneficiaries, he must strictly follow the instructions even if they themselves receive money in the process of working with dividends. Thus, in such discrete cases, the trustee formally earns profit, but all of it goes to the trust due to the fact that it is earned exclusively from the directive of the beneficiaries.
Based on section 31.5.188, in such cases, the broker, also called the nominee, being a fiduciary, must be aware of how they will be affected by a possible resolution before entering into a contract (The Insolvency Service, 2021). The fiduciary must remember that he acts solely in the interests of the client. The broker’s requests for payment for his services should be considered in sufficient detail concerning the conscientiousness of the work performed since they are not related to the real profit of the trust fund.
Similar cases are possible when the trustee must return the accumulated money to the fund; however, implemented in the context of much greater powers with which the fiduciary is provided when concluding a trust contract. Discretionary trusts mean that the fiduciary receives personal authority to manage the money of all beneficiaries (The UK Government). Moreover, with such powers, the fiduciary is able to redistribute money from separate sectors paid by different beneficiaries and even control payments to beneficiaries in the case of such an initial agreement. One of the most noteworthy discretionary trusts of this type is the so-called accumulation trust. In these types of relationships between the fiduciary and the beneficiary, the former get the opportunity to accumulate money but without the ability to dispose of them. This money must be sent directly to the trust fund until some time when the beneficiaries can use it – these situations often occur in the case of a long-term contribution or the transfer of inheritance money.
Discussing the principles of inheritance in the United Kingdom, one should note a special type of trust called accumulation and support. Specifically, this type of trust is a fraction of the accumulation trust and also implies the preservation of the money multiplied by the trustee to be sent to the trust fund (Charity Commission for England and Wales, 2018). It should be added that in all cases, saving money must be accompanied by strict adherence to formal reporting. A striking example of an accumulation-supporting trust is a hereditary trust transferred by older relatives to their descendants who have not reached a sufficiently creative age to independently manage large sums of money. In such cases, the trustee is discretely able to accumulate earnings and increase the wealth of the trust but must use the money exclusively for the needs of the beneficiary, specifically indicated by the senior relative who made the transfer of rights to the trust money. For example, trustees may be forced to pay for the education of a child, maintain comfortable conditions for their growth, and generally use money in every possible way to their advantage.
There may be cases when the trustee is obliged to hold the trust money until a certain date and, upon its occurrence, transfer the money to the beneficiary, relieving himself of all further obligations. This type of interest of the beneficiary in the money invested in the trust is called contingent and implies that they can receive money only if they perform some action, for example, find a life partner. Such contingent interests in the trust are often simultaneously defeasible since the breach of connection with the event may formally terminate the trust arrangement. In all these cases, the trustee is in control of the money until it is transferred to the beneficiary, including new money earned by the trust. There may also be cases where the principle of disbursing money from a trust fund to a beneficiary is based on the fact that they have filed bankruptcy papers.
Thus, evaluating the above cases can be divided into the following categories. In the first category, there are agreements related to the preservation of the interests of clients who are at the same time independent investors, as a result, requiring a share and profit from the trustee. Fiduciaries, depending on the contract, are in such cases either obliged to constantly coordinate actions with the beneficiaries or, on the contrary, receive certain freedoms from them in the distribution of money, although the possibility of preserving the profit received in the trust by the fiduciary is legally excluded. Another case is when the trustee holds money that should go to another person, the beneficiary-heir. In this case, the responsibility of the trustee is no less great since it consists not only of retaining profits but also in using them for the benefit of the beneficiary even before the trust money is handed over to him.
References
BAILII. (n.d.). Target Holdings v Redfern [1995] UKHL 10. United Kingdom House of Lords Decisions.
Charity Commission for England and Wales. (2018). The essential trustee: What you need to know, what you need to do. GOV.UK.
The Insolvency Service. (2021). Technical guidance for Official Receivers. GOV.UK.
The UK Government. (n.d.). Trusts and taxes. GOV.UK.