Factual and Procedural Background
This appeal concerns the circumstances under which a trustee is entitled to indemnification from the trust fund for costs incurred and awarded against her in litigation. The dispute arose from a claim initiated by the Appellant against the First Respondent and another individual, who were trustees of a trust declared in 2009. The trust involved interests in certain properties and their proceeds, held upon trust for the Appellant and another party as tenants in common. Following the death of the original sole trustee, the First Respondent became trustee by virtue of personal representation, and subsequently appointed an additional trustee, who later died and was replaced by his widow as a party in the proceedings.
The Appellant commenced proceedings in 2016 seeking removal of the existing trustees and their replacement with professional trustees, alleging refusal to appoint the Appellant as trustee, an attempt to purchase trust property at an undervalue, and lack of financial disclosure. This aspect is referred to as the "Removal claim".
Prior to the hearing of the Removal claim, the parties agreed to focus on an accounting of the trust, leading to an order in 2017 that the trustees produce a final account verified by witness statement, with directions for objections and replies. This is referred to as the "Account claim".
After several account submissions and objections, the Account claim proceeded before a High Court judge. An issue arose concerning whether a particular property was trust property, which was resolved in favour of it being included in the trust. This is referred to as the "Rectification claim".
The judge made a series of ex tempore decisions during the Account claim, resulting in amendments to the account and a finding that the First Respondent was liable to repay over £52,000 plus interest to the trust. The judge made no order on costs for the Removal claim except that the trustees were entitled to indemnity costs from the trust fund on an indemnity basis. For the Account claim, the First Respondent was ordered to pay the Appellant's costs on a standard basis up to a certain date and on an indemnity basis thereafter, with the First Respondent entitled to indemnity costs from the trust fund excluding those relating to the Rectification claim.
The appeal concerns the First Respondent’s entitlement to indemnity for costs of both the Removal and Account claims.
Legal Issues Presented
- Whether the trustee is entitled to be indemnified from the trust fund in respect of costs incurred and awarded against her in litigation, specifically in relation to the Removal claim.
- Whether the trustee is entitled to be indemnified from the trust fund for costs incurred and awarded against her in relation to the Account claim.
- How the principles governing trustee indemnity apply to costs arising from litigation involving allegations of breaches of trust and misconduct.
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Turner v Hancock (1882) 20 Ch D 303 |
Trustee’s right to indemnity from trust fund unless misconduct established |
Confirmed as foundational authority on trustee indemnity; indemnity lost only upon misconduct or breach causing loss |
| Re Buckton [1907] 2 Ch 406 |
Classification of trust litigation for costs and indemnity purposes |
Used to categorize litigation types affecting indemnity entitlement |
| McDonald v Horn [1995] ICR 685 |
Categories of trust litigation and indemnity rules for trustees |
Applied to distinguish trustee indemnity in different types of litigation |
| Alsop Wilkinson v Neary [1996] 1 WLR 1220 |
Three categories of trustee disputes affecting indemnity and costs |
Adopted to analyze the nature of the litigation and indemnity applicability |
| Armitage v Nurse [1998] Ch 241 |
Trustee exoneration clause and indemnity for costs, including unsuccessful defence |
Applied to assess when trustees lose indemnity for costs, emphasizing misconduct as key |
| Easton v Landor (1892) 62 L.J. Ch 164 |
Costs properly incurred means not improperly incurred; misconduct affects indemnity |
Referenced to clarify the standard for costs being "properly incurred" |
| In re Beddoe, Downes v Cottam (1893) 1 Ch 547 |
Trustee indemnity and costs standards |
Supported the principle that misconduct may deprive trustees of indemnity |
| In re Grimthorpe Dec'd [1958] Ch 615 |
Trustee indemnity and misconduct |
Used to reinforce the scope of misconduct affecting indemnity |
| In re Hodgkinson, Hodgkinson v Hodgkinson [1895] 2 Ch 190 |
Costs orders and trustee indemnity in context of administration disputes |
Distinguished from the present case to support indemnity entitlement |
| Re Spurling's Will Trusts [1966] 1 WLR 920 |
Trustee’s lien for costs of defending breach of trust claims unless misconduct |
Applied to affirm trustees’ right to indemnity unless misconduct is shown |
| Walters v Woodbridge 7 Ch D 504 |
Trustee indemnity for costs of defence in breach of trust claims |
Reinforced principle that indemnity lost only by misconduct |
| Partington v Reynolds (1858) 4 Drew 253 |
Nature of account claims and misconduct |
Referenced to distinguish types of accounts and implications for indemnity |
Court's Reasoning and Analysis
The court analyzed the trustee’s entitlement to indemnity in light of statutory provisions, Civil Procedure Rules, and established case law. Section 31(1) of the Trustee Act 2000 provides trustees the right to reimbursement of expenses properly incurred when acting on behalf of the trust. This right is subject to the trustee not having acted unreasonably, for their own benefit, or with misconduct.
The court acknowledged the categories of trust litigation as established in Re Buckton, McDonald v Horn, and Alsop Wilkinson v Neary, distinguishing between "trust disputes," "beneficiaries disputes," and "third party disputes," with differing implications for indemnity.
Regarding the Removal claim, the court found that since the claim was not concluded and no findings were made on the merits, there was no basis to conclude that the trustee acted unreasonably or for personal benefit. Therefore, the trustee was entitled to indemnity for costs incurred in defending the Removal claim.
In relation to the Account claim, the court disagreed with the lower judge’s approach that the claim was merely an accounting exercise without allegations of wrongdoing. The court found that the adjustments made to the account revealed serious breaches of trust and misconduct by the trustee, such as improper payments and failure to account for trust property proceeds.
The court emphasized that in such hostile litigation involving breaches of trust, the trustee’s indemnity may be lost or curtailed. The adverse costs order against the trustee and the failure to beat a Part 36 offer were material indicators that the costs were not properly incurred on behalf of the trust.
Consequently, the court concluded that the trustee was not entitled to indemnity from the trust fund for costs incurred and awarded against her in relation to the Account claim.
Holding and Implications
The court made the following rulings:
- The appeal concerning the trustee’s indemnity for costs of the Removal claim is dismissed. The trustee remains entitled to indemnity from the trust fund for those costs as the claim was not concluded and no misconduct was found.
- The appeal concerning the trustee’s indemnity for costs of the Account claim is allowed. The trustee is not entitled to indemnity from the trust fund for costs incurred and awarded against her in respect of the Account claim due to findings of serious breaches of trust and misconduct.
The decision directly affects the parties by clarifying the circumstances in which a trustee may lose indemnity for litigation costs, particularly distinguishing between claims not concluded or involving no misconduct and hostile claims revealing breaches of trust. No new precedent was set beyond the application and clarification of established principles.