Do Trustees Have Personal Liability in Litigation?

Acting as a trustee requires understanding and complying with the duties, responsibilities and liabilities attached to the role.

Trustees can find themselves in hot water even due to wholly honest and well-intentioned actions that cause damage to the trust’s assets. 

A trustee may also take actions that they find themselves personally responsible and financially liable for.

Reckless or dishonest behaviour carries a risk of personal exposure and liability. 

However, even honest, well-meaning trustees must be cautious of actions or omissions that damage the trust, even if unintentional.

Can Trustees Be Held Personally Liable in Litigation?

A trust is not a separate legal entity. Any court proceedings must be brought against a trustee in their official capacity. Trustees can be held personally liable in litigation unless a Beddoe Order is in place. 

Trustees have statutory duties and responsibilities and, without the protection of a Beddoe Order, can find themselves liable for costs in a court action even though the trustees may not personally benefit from any infractions.

A Beddoe Order effectively indemnifies a trustee for expenses incurred whilst executing their role and duties, including bringing or defending a claim in court.

Beddoe Orders are named after the case, Beddoe [1893] 1 Ch.547 in the Court of Appeal. The Beddoe case established the right of a trustee to apply to the court for permission to protect themselves and the trust from an adverse costs order. 

A Beddoe Order application is made under Part 64 of the Civil Procedure Rules. A Beddoe Order should be in place before a trustee embarks on bringing or defending a claim. Otherwise, there is no cost protection, and the trustee(s) is left fully exposed to the risk.

What are the Trustee’s Liabilities and Duties?

Duty to Exercise Care and Skill

Trustees have a statutory duty to exercise care and skill in the operation and administration of a trust contained in Section 1 of the Trustee Act 2000.

Fiduciary Duties

A trustee has a range of fiduciary duties, including a duty of loyalty to administer the trust solely in the interest of the beneficiaries.

There is also a duty of prudence which requires adherence to an objective standard of care in managing trust property.

Liability for Acts and Omissions

For “acts of reasonable management”, the trustee can be indemnified for the value of any claim. However, a trustee’s negligent or dishonest act or failure to act can create personal liability.

If a claim exceeds the value of the trust’s assets, the trustee may still be personally liable for the shortfall even if the trustee acted in the reasonable management of the trust.

Suppose the trustee did not act reasonably when incurring liability. In that case, they may not be entitled to any indemnity, even for a claim that doesn’t exceed the trust’s assets. 

Liability for Loss

A trustee causing loss to the trust is liable to the beneficiaries. This may be due to a wholly innocent and inadvertent mistake or a misinterpretation of the trust. Such liability highlights the importance of taking professional legal advice when discharging a trustee’s duties.

Sometimes, a trustee deliberately misappropriates assets from the trust fund, which creates personal and unlimited liability for losses suffered by the beneficiaries.

Liability to Third Parties

Trustees often make contracts with third parties — for instance, a bank lending money to the trust. A trustee is directly liable to the lending institution under the law of contract.

A trustee’s liability isn’t limited to the extent of the trust’s assets if the value of the third-party claim exceeds them.

Liability to Creditors

Trustees have a liability to the creditors of any bankrupt beneficiary who has been paid sums of money that aren’t recoverable.

It’s good practice for trustees to make regular bankruptcy searches against beneficiaries before making capital payments, plus annual searches regarding income beneficiaries.

Liability to the Revenue

Trustees are responsible for completing and submitting tax returns to HMRC and paying any tax assessed as a result.

The trust’s assets won’t offer recompense to a trustee for penalties caused by significant delays in the payment of taxes.

Trustees also have a statutory responsibility to advise HMRC of any circumstances which may give rise to a liability for Inheritance Tax.

Extent of Liability

Each trustee’s liability does not usually reach beyond the extent of their own acts and omissions to the behaviour of other trustees.

However, a trustee can be guilty of wilful default if they’re reckless in reporting the negligent conduct of a co-trustee or witness any losses without taking steps to prevent it. This is in contravention of the statutory duty of care as contained in the Trustee Act 2000.

Conclusion

Trustees manage the trust’s assets — a significant responsibility that comes with fiduciary duties owed to the beneficiaries and the potential of personal liability.

It is usual for a trust document to protect trustees against liability for loss to the trust. However, a trustee can’t be protected from proven claims of fraud or dishonesty. Of more common concern are acts intended as innocent and well-intentioned but judged to be naive or misinformed. Such acts can constitute mismanagement and make the trustee personally liable.

As a trustee, both at the signing of the trust deed and throughout the performance of your duties, it’s essential to seek legal advice to avoid accidental acts or omissions which could create personal liability.                                                                                                                                                     

Our specialist litigation team have acted in many trust disputes, including claims and defences arising out of pension and commercial trusts. Using our experience and the law in this area it can be possible to position beneficiaries to benefit from unknowing trustees having personal liability. Alternatively we also advise trustees involved in disputes the steps and necessary protections they need to try to avoid personal liability from arising. 

If you consider any of the above might be applicable or relevant to you don’t hesitate to contact our expert team at Helix Law for professional advice and further information.