Contents

Chapter 11
Other powers of the court under the
Trustee Act

Section 74 – Beneficiary indemnity for breach of trust

Proposal
P45
(1) New legislation should retain without substantive amendment the beneficiary indemnity for breach of trust contained in section 74 of the Trustees Act 1956.
(2) The proviso concerning "married women restrained from anticipation" should be repealed.
Please give us your views on this proposal.

Current law

11.20If a trustee commits a breach of trust at the instigation, request or with the written consent of a beneficiary, the court may indemnify the trustee. All of the beneficiary’s entitlements may be confiscated or impounded by the court in order to make good the loss and indemnify the trustee. The right to confiscate a beneficiary’s interest is subject to the discretion of the court.

11.21In practice the provision enables trustees to give effect to compromises and settlements reached by beneficiaries. The most common use made of it is where a Family Protection Act 1955 or similar claim is settled. In such cases a compromise arrangement may require the trustees to depart quite substantially from the terms of the trust stated in a will. Where the beneficiaries have agreed to such an arrangement and the trustee acts on this at their behest, it seems only right that the beneficiaries should accept responsibility for any departure from the terms of the trust. Although mainly applicable to trusts under a will, interests under lifetime trusts may also be compromised by agreement with the beneficiaries.

11.22In cases where beneficiaries simply consent to a breach of trust, but do not do this in writing, section 74 is not available and beneficiaries cannot be made to indemnify trustees. However, at equity they cannot sue the trustees for any loss they suffer as a result of any breach to which they consented. In such circumstances the beneficiaries are also liable to account to the trust for any profit they may have made from the breach of trust.

11.23Finally, the section, as currently drafted, contains a very antiquated proviso stating that the court may make an order impounding the property “notwithstanding that the beneficiary may be a married woman restrained from anticipation”. This proviso predates legislative changes giving married women full and equal status under law and is now unnecessary.

Options for reform

11.24The options are:
(a)retaining the current beneficiary indemnity provision (with no change to its scope);
(b)broadening the provision to cover consents to a breach of trust that are not in writing; or
(c)repealing the provision.

Discussion

11.25The few submitters who commented on this issue favour retention of the current provision with no change to its scope. Submitters consider retention of this type of provision necessary to deal with the types of compromise situations discussed above. All submitters also agreed that the proviso, which many point out was already obsolete in 1956, should be removed.

11.26Submitters expressed no interest in the possibility of extending the scope of a replacement provision to cover situations where beneficiaries give verbal but not written consent to a breach. We consider that there would be evidential as well as other practical difficulties in doing this anyway. In our view the better option is to retain the current requirement for written consent. It is reasonable to expect prudent trustees to obtain written consent from beneficiaries if they wish to be indemnified against a departure from the terms of the trust. Our preferred approach is therefore to retain the current beneficiary indemnity provision with no change to its scope.