Chris Edwards-Earl
Trustees can sometimes be concerned whether their indemnity – their right to use fund assets to cover expenses incurred through the appointment – can always be relied on even when they are faced with extreme challenges, such as unsuccessful litigation.
There are ways that trustees can protect themselves from such concerns in advance, such as through seeking Court approval for their proposed course, if it is momentous or there is significant risk (through a Beddoe-type application, for example, where they pursue litigation and have legal fees to pay). Arranging with the sponsoring employer for costs to be paid by them directly can certainly help, and securing their buy-in for the action will be important. But without this kind of Court blessing or arrangement, trustees can be left feeling exposed.
The Courts have provided comfort, in a recent decision dealing with a private trust, that where the trustees conduct themselves reasonably when incurring costs, even where they are defending themselves against challenges brought against their own appointment as trustees, they will not be deprived of their right to recover their costs from the fund assets.
The trustees in this case had not sought relief from the Court first before relying on trust assets to defend themselves, but that didn't stop the Court siding in their favour on those costs being paid out of the trust.
In Smith & others v Campbell & others, the beneficiaries sought to remove all four trustees after there was a relationship breakdown between them and the trustees.
The Court found that most of the allegations of misconduct were unfounded. It concluded, however, that there was sufficient evidence of entrenched hostility on the part of one trustee, and the corroborating agreement of another, that this amounted to a legitimate ground for intervention, with them both being removed and an independent trustee added to the remaining board of trustees. Good news for the beneficiaries then?
However, there then followed a judgment on how the costs incurred by the trustees in defending their position should be addressed.
Costs hearings are not usually that interesting, but this one is notable. The standard position would be that costs follow the victors, but the court decided that, not only could the claimants not recover their costs from the unsuccessful trustees, but also the trustees' costs of unsuccessfully defending their position could still be taken out of the fund assets.
The court concluded that the trustees' right would only be denied where they acted in bad faith or in self-interest (applying another recent Court of Appeal case of Price v Saundry).
The defence of a trusteeship removal claim which includes numerous allegations of breach of trust and misconduct does not, of itself, mean the trustees acted for a benefit other than that of the trust, and it can be proper and reasonable for trustees to defend such allegations.
The claimants on the other hand acted unreasonably by exaggerating their allegations, failing to engage in pre-action correspondence, refusing mediation, and ignoring a settlement offer.
The fact that the beneficiaries' claims were successful didn't matter. The beneficiaries therefore had to bear their own costs and watch as the trustees recovered all of their legal costs from the trust fund. This pyrrhic victory illustrates that trustees, whether or not they win in the end, may still recover their costs provided their conduct in the litigation was reasonable and they were acting in the interests of the trust.
Chris Edwards-Earl is a partner at Stephenson Harwood
