DECEMBER 2015

PART B

QUESTION 2

QUESTION

Mark is one of the two trustees of a trust. Last month, Mark discovered that early last year, his co-
trustee, Harry, had withdrawn RM 200,000 from the trust account and deposited the money into
his personal account which had RM50,000 of his own money. Two weeks later, Harry withdrew
RM50,000 from his account and used the money as a down payment in a house for his parents. On
1 August of the same year, Harry withdrew RM50,000 to purchase shares in a company in his
wife’s name. The shares are now worth RM80,000. On 15 August, Harry spent RM30,000 on a
family vacation in Milan, Italy. A few months later, Harry donated RM10,000 from his account to
an old forks’ home for their daily expenses.

Marks wants to know his rights and liabilities, if any, in the above matter. Based on relevant
authorities, advise Mark.

(20 marks)

ANSWER

Date Trustee’s money in Trust money Total in bank account

account
RM50,000 RM200,000 RM250,000
Early last year Trustees took out RM200,000 (i) RM250,000
Two weeks later Trustee took out RM50,000 as a down payment RM200,000
in a house for his parent (ii)
1st August Trustee withdrew RM50,000 to purchase shares RM150,000
in a company in his wife’s name (iii)
- Shares worth RM80,000 (iv) RM230,000
15 August Harry spent RM30,000 on a family vacation in RM200,000
Milan, Italy (v)
Few months later Harry donated RM10,000 from his account to RM190,000
an old folks home for their daily expenses (vi)

Explanation (i)

Harry had withdrawn RM200,000 from the trust account and deposited the money into his personal
account which had RM50,000 of his own money.

The mixed fund rule is applicable. This is due to trustee takes trust money (RM200,000) and pays it
into his own bank account which is in credit of RM50,000- mixing trust money with his own personal
money. Total RM250,000 in trustee’s account.

The entire mixed fund is subject to an equitable charge for the repayment of RM200,000 with
interest to the beneficiaries.

The fact that the beneficiaries have an equitable charge over the money gives them a priority over
general creditors in their claim for RM200,000 if the trustee become insolvent.
Explanation (ii)

Trustee mixes trust money (RM200,000) with his own money (RM50,000) in one bank account. He
then takes RM50,000 from his account and used the money as a down payment in a house for his
parents. Balance, RM200,000 in the account.

In Re Hallet, the trustee is presumed to use his own money first before using the trust money.

The court presumes that a trustee would spend his own money when making an unauthorized trust
investment. After all, the investment is unauthorized, so why would he spend trust money?.

The trustee is deemed to spent his own money first, and so the remaining RM200,000 is subject to
an equitable charge. This is because he is not allowed to argue in his own favour that he behaved
improperly by spending someone’s else money before he spent his own.

Explanation (iii)&(iv)

In the case of Re Oatway [1903] 2 Ch 356, there a trustee had an account of his own money (pound
4,077) and then he added trust money. (pound 3,000) to the account. Later he bought shares out of
a mixed account amounting to pound 2,137. At the time of the purchase of the shares enough
money remained in the account was dissipated. It was held that the court refused to allow the
trustee to claim in priority to the claim by the beneficiaries.

In applying the fact of the question with the case of Re Oatway, based on Re Hallet’s estate, the
money spent on the shares was the trustee’s personal money. After all, the rule is that he spent his
own money first.

Re Oatway held that because of the breach, the beneficiaries were entitled to an equitable charge
on the shares which were then worth RM 80,000 for their RM50,000 trust money and interest.

“The order of priority in which the various withdrawals and investments may have been respectively
made is wholly immaterial”.

What if the shares had increased more in value? Example shares are now worth RM80,000.

According to Hayton &Marshall, based on Re Oatway, the beneficiaries could elect to adopt (ratify)
the unauthorized investment as if they were purchased with the trust property. So the whole
RM80,000 became the trust property.

The alleged trust money used to purchase the share was RM50,000.

And RM80,000-RM50,000=RM30,000. Beneficiaries could also make a personal claim of RM30,000.

So, beneficiaries would end up with RM80,000 worth shares and claim of RM30,000 against trustee.

Explanation (v) & (vi)

As mentioned in the fact of the question, on 15th August, Harry spent RM30,000 on a family vacation
in Milan, Italy. A few months later, Harry donated RM10,000 from his account to an old folks’ home
for their daily expenses.

The rule in Re Oatway stated that by withdrawals which are dissipated (used up), for example on
living expenses, a holiday, a racehorse which died. If dissipated, then tracing is physically impossible.
According to basic reading of Re Hallett’s Estate the trustee should be deemed to have withdrawn
his own money first. That means that the balance the used of family vacation and donation was the
trust money.

However, in Re Oatway, the court preferred a more sophisticated analysis and refused to allow the
trustee in breach to have priority over the beneficiaries’ claim.
APRIL 2007

PART C

QUESTION 1

QUESTION

Tom, who died in April 2006, made a will in June 2005. In his will, he appointed Alan, Ben and
Charlie and his trustees and executors of his estate. In the will, Tom gave RM100,000 to Donald,
his childhood friend. Unknown to Tom, Donald had died in April 2005 and is survived by his son,
George.

In addition, Tom gave his remaining properties to his trustee on trust for the benefit of his two
sons, Eddy and Freddy, who are now 8 and 9 years old respectively.

In June 2006, Charlie who was a manager of a local bank, was appointed as the bank’s branch
manager in Tokyo. He therefore met Alan and Ben and told them of his intention to retire from
being a trustee. Alan and Ben agreed and both of them stayed as trustees.

In August 2006, Alan and Ben, as trustees, invested in the motorcar industry. Alan initially did not
agree as he knew that the local motorcar industry was in a slump. Ben, however, managed to
convince Alan stating that, as the vice president of the Malaysian Car Traders Association, he hope
that the said industry would recover although he did not know exactly when this would happen.

In October 2006, Alan and Ben made another investment by buying a piece of land which had a
bungalow house erected on it. They bought the said property for RM1,000,000. They then rented
it out for RM5,000 a month to factory workers in Shah Alam.

In January 2007, Alan and Ben received information that the motorcar industry was worsening due
to tight financial controls of the local banks. They decided to discuss the matter in Genting
Highland. Unfortunately, tragedy struck, and both Alan and Ben died when their car fell into a
ravine. The relief workers found both Alan and Ben dead at the scene of the accident.

Treating each of the questions below separately, answer the following:-

a) Based on relevant statutory provisions and/or decided cases, what advice would you give
to the trustees as to possible ways a trustee could retire and in particular, the situation
involving Charlie
(6 marks)

Issue

Whether Charlie can be remove from Tom’s trust

Law

There are three conditions where a trustee can be removed from a trust. Firstly, express condition or
provision of testator as in trust instrument. Secondly, removal by statutory provision as in Trustee
Act. Thirdly, removal by court decision.

Section 40(1)(b) Trustee Act state that a trustee can be remove from trust if he/she is dead, remain
out of Malaysia for twelve months of continuous and uninterrupted period, desire to discharge from
all or any part of the trust, refuse or unfit to execute, incapable of acting, or a minor.
Section 40(1)(a) state that only person nominated in trust instrument will appoint the new trustee.

In the case of Ligar Fernandez v Eric Claude Cooke, where trustee continue absence from Malaysia
for over twelve months, rendered him legally incapable of acting as trustee. Period of absence must
be more than twelve months of continuous and uninterrupted.

Application

Charlie who was a Manager of a local bank was appointed as the bank’s branch manager in Tokyo.
He therefor met Alan and Ben and told them of his intention to retire from being a trustee. Alan and
Ben agreed and both of them stayed as trustee.

If Charlie gone abroad of Malaysia for twelve continuous and uninterrupted months, he can be
remove from the trust as per stated in Section 40(1)(b) of Trustee Act. However, if he come back to
Malaysia even for a while within 12 months, the provision can’t be executed. However, the fact that
Charlie left the trust to Alan and Ben may become a condition where he can be remove. If Charlie
expressly desire to be discharge from the duty of trust either part of it or all of the trust, he can be
remove from the trust.

Conclusion

Based on the law and case provided, we can conclude that Charlie may be remove if he out of
Malaysia for over twelve continuous and uninterrupted months or he expressly desire to be
discharge from the duty of the trust.

b) The decision of trustees to invest in the motorcar industry seems to have violated certain
principles pertaining to investment of trust property and/or other duties of a trustee.
Based on decided cases, explain which principles were violated and in what manner they
were violated.
(6 marks)
Issue
Whether the act of the trustee had violated certain principles pertaining to investment of
trust property

Law
Fiduciary duty of a trustee is a trustee is not entitle to receive any benefit from his position
as a trustee. The position of a trustee is one of personal confidence, thus a trustee must not
allow the duty he owes to a beneficiary to come into conflict with his personal interest, or
else he will be liable to account for any profit made by him.

This can be refer to the case of Bray v Ford where it was held by Lord Herschell that it is an
inflexible rule that a person in a fiduciary position is not, unless expressly provided, entitled
to make a profit, he is not allowed to put himself in a position where his interest and duty
conflict.

A trustee has a duty to not allow his interest and duties to conflict. This can be refer to the
case of Bray v Ford where a trustee is not allowed to put himself in a position where his
interest and duty conflict. “ It is an inflexible rule of a Court of Equity that a person in a
fiduciary position, is not unless otherwise expressly provided, entitled to make a profit, he is
not allowed to put himself in a position where his interest and his duty conflict.
 A trustee who derives any incidental profits from his position as a trustee will be held in
breach of the trust.

Application
It has been mentioned in the fact of the question that in August 2006, Alan and Ben as
trustee invested in the motorcar industry. Alan initially did not agree as he knew that the
local motorcar industry was in a slump. Ben, however managed to convince Alan stating that
as the Vice President of The Malaysian Car Traders Association, he hopes that the said
industry would recover although he did not know exactly when this would happen.

What contribute to worst case scenario is when in January 2007, Alan and Ben received
information that the motorcar industry was worsening due to tight financial controls of the
local banks.

Alan and Ben had violated the fiduciary duty of a trustee where Ben as the Vice President of
Malaysian Car Trader Association had used his power as a trustee where the conflict duty
arise.

As mentioned in the case of Bray v Ford, a trustee is not allowed to put himself in a position
where his interest and duty conflict. This is done by Ben , the trustee of Tom and the vice
president of Malaysian car Traders Association where he had invest the money in motorcar
industry where this industry is at loom at that time. What lead to worst case scenario when
in January 2007, motorcar industry was worsening due to tight financial controls of the local
banks. Thus, this shows that the trustee had misused the money by investing in the business
which is in conflict rule.

Besides, if the business invested derives any incidental profits from his position as a trustee,
he will be held in breach of trust.

Conclusion
Both Alan and Ben had breach the fiduciary duty of the trustee by investing the trustee’s
money in the business which is in conflict rule.

c) Based on statutory provisions alone, explain whether the decision of the trustees to buy
the particular piece of land was correct or otherwise.
(6 marks)

Issue

Whether the decision of the trustees to buy the particular land was correct or otherwise

Law

Investment can be define in the case of Re Wragg where to invest includes to apply money
in the purchase of some property from which interest or profit is expected.
This can be mentioned in the case of Tan Soo Lock v Tan Jiak Choo where if it can be inferred
from the will that the trustee is to collect income from the trust property, there is a duty to
invest.

Trustees may choose to make investments approved under S.4 provided that they are not in
contrary to the authorized investment clauses in the trust instrument.

Section 3 define authorized investment as investments authorized by the trust instrument or

by law.

Principle of investment are (i) invest trust fund in their hands, (ii) s.4 to 15 (iii) need for
diversification (iv) investment made through advice or agent.

Section 6 define duty of trustees in choosing an investment. In exercising the power of

investment, a trustee must consider (i) The need for diversification of the investments of the
trust. A trustee has power to change the nature of investment, despite there being an
express provision against it in the trust instrument, provided that the all the beneficiaries (in
full legal capacity) have agreed. (ii) The degree of risk involved in the particular investment.
(iii) The suitability of the investment to the trust. Where a trustee has made an authorized
investment, he may still be held liable if the investment is not suitable for the purpose of the
trust.

Section 6(2) described that a trustee whose power of investment is limited to that
authorized under Section 4 shall, before exercising such power to invest, obtain proper
advice on whether the investment is satisfactory.

The trustee must obtain such advice before he invests.

Section 6(3) stated that proper advice is the advice of a stockbroker obtained through the
trustee’s bank manager or the advice of an authorized accountant.

Section 6(5) prescribed that such advice must be given or confirmed in writing.

An investment is regarded as satisfactory if it was made in consideration of the factors in

section 6(1).

Section 6(4) stated that it is up to the trustee to decide when it would be desirable to obtain
the advice and consider it.

If the investment is made through an agent, the trustee will not be liable for the default of
the agent, provided that he was employed in good faith and in absence of the trustee’s own
willful default.

Standard of care required from trustees in making an investment can be describe in the
case of Speight v Gaunt where trustees must exercise the standard of care of an ordinary
prudent businessman acting in his own affairs.
The trustee is not expected to possess knowledge of a specialist in investments. This is
mentioned in the case of Learoyd v Whiteley where the general rule requires a trustee to
exercise a degree of diligence in the execution of his office no higher than a man of
ordinary prudence would exercise in the management of his own private affairs. However,
he is not allowed to exercise the same discretion in investing the money of the trust as if he
were a person dealing with his own property.

Standard of care required from professional trustees (trust corporations or banks)

mentioned in the case of Bartlett v Barclays Bank Trust where professional trustees view
themselves as having expertise which would be unrealistic to expect a prudent man to have,
they must be judged by the standard of skill and expertise that they profess to have.

Application

As mentioned in the fact of the question, in October 2006, Alan and Ben made another
investment by buying a piece of land which had a bungalow house erected on it. They
bought the said property for RM1,000,000. Then, they rented it out for RM5,000 a month to
factory workers in Shah Alam.

The trustees had perform the duty of trustees in choosing an investment. This is because by
buying the said land, trustee had consider all the duties of trustees as mentioned under
Section 6(1) where (i) the trustee need for diversification of the investment of the trust. This
is due to by buying the said land, the said land will increase in the term of value and
furthermore the monthly income will be generate consistently.

The degree of risk involved in the particular investment has also been considered. This is
because buying an asset will surely increase the value from time to time. By the time the
beneficiary reach the age of majority, they will enjoy the benefit of the will.

The suitability of the investment to the trust. Even though the act of trustee of buying the
land is consider as authorized investment, they must be held liable if the investment is not
suitable for the purpose of the trust. Thus, they must exercise their duty by ensuring the
investment will give return in the future.

Conclusion

After considering all the relevant factors and duties of trustees in choosing an investment,
the decision of the trustees to buy the particular piece of land was correct.

(d) What will happen to the RM100,000 given by Tom to Donald, since Donald had died?
Give reasons for your answer.
(6 marks)
Issue

RM100,000 given by Tom to Donald since Donald had died

Law
Pecuniary gift is a general gift of money. As an example, RM1,000 to be given to Ali.

Application

As mentioned in the fact of the question, Tom gave RM100,000 to Donald, his childhood
friend. Unknown to Tom, Donald had died in April 2005 and is survived by his son, George.

Thus, Donald is not entitle for the will since the beneficiary had not survived testator. This is
because, George had died in April 2005 while Tom died in April, 2006. Thus, the gift is lapse.
The descendant is not entitle to inherit the gift.

Conclusion

The beneficiary, Donald had not survived testator. Thus the gift of RM100,000 is lapse and it
cannot be inherit by the descendant.

(e) Since both of the trustees dies, who are the possible person/s who should be the next
trustee?
Give reasons for your answer.
(6 marks)
According to Section 40(1) when a trustee died , the new trustee can be appointed either by
the way of court order or nomination by previous trustee.

Section 23(1)state that there is automatically termination by death of the trustee. Section
23(2) state that personel representative of last trustee will substitute the dead trustee.

Section 40(8) give the provision relating to the trustee who died , personal representative to
the trustee willing to act in the execution.

Section 18 of Birth and Death Registration Act 1957 state that a person in Malaysia can be
register dead on condition body was found.

Application

A tragedy struck and both Alan and Ben died with their car fell into the ravine. The relief
workers found both Alan and Ben Dead at the scene of the accident.

It has been mentioned in the fact of the question that the relief workers found both Alan
and Ben dead at the scene of the accident. Based on Section 18 of Birth and Death
Registration Act, Alan and Ben can be register as dead since their dead body has been found
by the relief workers.

Refer to Section 40(8), if Alan and Ben has personel representative, the personal
representative will substitute Alan and Ben as a new trustee. However, if Alan and Ben did
not have personel representative who willing to be a new trustee, Court may nominate new
trustee as per Section 40(1).

Conclusion
Alan and Ben can be removed from the trust since their body has been found. But,
nomination of new trustee will depend on whether Alan and Ben has personel
representative that willing to act as trustee. If only Alan and Ben didn’t nominate other
before their missing, Court may nominate a new trustee as per Section 40(1).