Discussion Paper on Trusts and Trust Administration

Forming part of a wider review of Trust Law in Scotland, the Scottish Law Commission
has produced a Discussion Paper on Trusts and Trust Administration (SLC Discussion
Paper No 126), which looks at the assumption, resignation and removal of trustees,
the powers that trustees have to deal with the administration of the trust
estate, and the involvement of the Courts in aspects of these procedures.

28 January 2005

Forming part of a wider review of Trust Law in Scotland, the Scottish Law Commission
has produced a Discussion Paper on Trusts and Trust Administration (SLC Discussion
Paper No 126), which looks at the assumption, resignation and removal of trustees,
the powers that trustees have to deal with the administration of the trust
estate, and the involvement of the Courts in aspects of these procedures.

Scottish Law Commission recommendations to remove restrictions on the powers
of investment of trustees of Scottish trusts (whether charitable, public or
private) are already contained in the Charities and Trustee Investment (Scotland)
Bill, currently being considered by the Scottish Parliament, which will enable
trustees to consider a wider range of investment options, which may produce
a better return, while still taking appropriate care to safeguard the capital
of the trust.

Further aspects of trust law, in particular constitution, termination and
accumulation of income, will be the subject of a future stage of the Commission's
review. While the proposals in this Discussion Paper are not intended to affect
existing legislation or rules relating to pension or unit trust trustees, the
powers and duties of such trustees could be affected by the enactment of some
of these proposals, for example the introduction of a general management power.

Many aspects of trust law in Scotland are uncertain or unclear, and the commercial
realities of 21st century business practices do not always sit well with the
restrictions and limitations imposed by current trust requirements. The aim
of many of the Commission's proposals is to clarify and modernise existing
law and procedure, not necessarily to effect any major change, but to provide
a basic framework which would apply to the powers and duties of trustees, in
the absence of appropriate provision in the individual trust deed.

Main areas covered by the Discussion Paper

The Discussion Paper considers the issues concerning effective decision-making
by trustees, and majority and quorum rules. Trustees' powers of appointment
of agents, delegates, nominees and custodians are considered along with a proposal
for the introduction of general management powers to do any administrative
act not contrary to the trust purposes. The appointment, resignation and removal
of trustees and the courts' involvement in those processes are looked at, as
well as the issue of whether or not beneficiaries should be able to appoint
new trustees in any circumstances. Other roles of the courts in the area of
trusts are also reviewed which include suggestions for a greater role to be
assumed by the sheriff courts. Advances from the trust estate in advance of
the due date of payment to beneficiaries in need are also covered.

Making Decisions

Effective decisions of trustees have to be binding on present and future
trustees and within the trustees' powers. The Commission considers the requirements
on trustees to consult and exchange views in relation to trust business and
to meet where the position is unclear. Given that in practice many decisions
are made these days following on correspondence, telephone calls or e-mails
between the trustees, the Paper proposes that, except where there is provision
to the contrary in the trust deed, all trustees should be given prior notice
of the matters to be decided and a chance to put forward their views at a meeting
or by any other means.

Unless the trust deed provides differently, a decision must be made by a
quorum (being a majority of the acting trustees) for it to be effective. The
Commission considers that the use of this term in trust law is potentially
misleading and that the rule should relate to the normal meaning of the number
of people that have to be present before a meeting is able to transact business,
and should take account of the specialities of sine qua non trustees,
joint trustees and trustees with a personal interest, where a simple majority
rule does not apply.

Appointment of Agents, Delegates and Nominees

Trustees have various powers to delegate their functions to others. A new
statutory provision is proposed which would replace the existing outmoded provision
and allow trustees a general power to appoint and pay agents. The extent to
which trustees may delegate their powers and which powers may be delegated
come under scrutiny. Generally delegation of ministerial or administrative
functions is allowed, although discretionary functions may not be delegated.
However it can sometimes be difficult to draw the distinction between functions,
and the Commission queries whether new statutory provisions might bring more
clarity in this area.

The use of nominees by trusts is explored. Trustees are under a duty to keep
the trust estate under their control and are liable for any losses arising
out of a breach of this duty. The Commission is of the view that trustees should
be allowed to use nominees, there being a number of perceived benefits to such
arrangements and, provided nominees are carefully selected and monitored, the
trustees should not be liable.

General Management Powers

The administrative powers of trustees are listed in the Trusts (Scotland)
Act 1921, and include powers to sell or lease, or borrow on the security of,
trust property, and to exercise rights in relation to securities of a company
in which trust monies are invested, and trust deeds often provide for many
additional powers. To simplify matters and allow greater flexibility, the Commission
proposes that trustees should have all the administrative powers in relation
to trust property as though they were the actual beneficial owners, provided
of course that such powers are exercised in accordance with the trust purposes
and the trustees' fiduciary duties and their duty of care. Alternatively the
current list of powers contained in legislation could be widened.

Appointment, Resignation and Removal of Trustees

Trustees have the power to assume or appoint new trustees unless the trust
deed provides otherwise. The court also has powers of appointment. The Paper
looks at whether any clarification is required in relation to current arrangements
and also considers whether in certain exceptional circumstances beneficiaries
should have powers of appointment of new trustees. Some reform of the arrangements
for resignation by trustees is proposed.

If there is no provision in the trust deed for removal of trustees they can
be removed only by the courts. This can involve costly and time-consuming legal
proceedings where removal is considered necessary, which may arise for example
where a trustee refuses to resign or is suffering from mental incapacity. While
the Commission suggests preservation of the current position, it proposes that
the other trustees also be entitled to remove a trustee who has been convicted
of a crime involving dishonesty, imprisoned, or certified as mentally incapable.
However the Commission does not support allowing beneficiaries to remove trustees
or the automatic disqualification of trustees in certain circumstances.

The Role of the Courts

Courts may review decisions made by trustees in the exercise of their discretionary
functions in certain circumstances, and the Commission proposes that there
should be no change to the arrangements, but seeks views on the current position.
Trustees may look for guidance from the courts in connection with questions
or disputes relating to the trust estate, either by lodging a petition for
directions or submitting a special case to the Court of Session, or they can
raise an action of multiplepoinding where there are competing claims.

In addition however, the Commission looks at whether the court should be
empowered to grant an order authorising the trustees to make payments from
the estate on the basis that a specified event has or has not happened or will
not happen. In such situations the trustees might not wish to take the risk
of distributing the estate to the currently entitled beneficiaries in case
someone else may become entitled and sue the trustees. If such an order is
granted by the court, the trustees acting in accordance with the order should
not be personally liable, if the basis on which the court made the order turns
out to be wrong, unless the trustees concealed facts or acted fraudulently.
True beneficiaries should still be entitled to recover the trust estate from
those to whom it had been distributed.

The Commission recommends that the court should have power to confer additional
administrative and managerial powers in relation to the trust estate on the
trustees provided this would be of benefit to the future administration of
the trust estate.

Most trust litigation in Scotland is dealt with in the Court of Session.
The Commission proposes that it should be possible in most applications to
opt for the sheriff courts instead, which may be less costly and more convenient.

Advances of Capital to Beneficiaries in need

If there is no specific provision in the trust deed, then making an advance
of capital requires the approval of the court, whose powers are restricted
to allowing advances to children with insufficient income for their maintenance
or education, or adult beneficiaries in unforeseen circumstances requiring
an advance to be made. New and less limiting statutory powers are proposed
for the making of such advances to be exercisable by the trustees rather than
the courts.

The Commission have asked for comments on this Discussion Paper by 31
March 2005

The Discussion Paper may be viewed on the website of the Scottish Law Commission