By Declaration of Trust dated 6 July 2009 made between the Appellant and the First Respondent’s husband the latter declared that he held the properties set out in the schedule and the net proceeds of sale and the net income until sale upon trust for the parties thereto as tenants in common in equal shares. The First Respondent became a trustee as a result of being her husband’s sole personal representative. Subsequently she appointed her brother as an additional trustee and, after his death, his executrix was substituted as a party. The Appellant brought a claim seeking an order removing the then trustees of the trust and their replacement with professional trustees on several grounds. In the event, however, an order was made by consent vacating the pre-trial review and the trial of the removal claim and giving direction for the then trustees to produce a final account of the capital and income of the trust and the dealings with it.
Three attempts having been made to lodge accounts in accordance with the directions and objections having been lodged, the claim was heard by HHJ Paul Matthews and in a series of ex tempore judgments, he found the First Respondent liable to pay an aggregate sum of £52,701.54 plus interest in the agreed sum of £4,000 to the credit of the trust. By an order dated 3 May 2019 the judge firstly made no order as to costs in relation to the proceedings in relation to the removal claim save that the trustees be entitled to their costs out of the trust fund on the indemnity basis.
Secondly, as to the costs of a claim for an account, the First Respondent was ordered to pay the Appellant’s costs up to 28 December 2018 (being the date of the expiry of a Part 36 offer) subject to a detailed assessment on the standard basis, if not agreed; and in relation to her costs thereafter subject to a detailed assessment on the indemnity basis, if not agreed. He went on to order that, save for the costs attributable to a rectification claim (which had been dismissed), the First Respondent be entitled to an indemnity from the trust fund in relation to not only her own costs but also the adverse costs order made against her. After the judgment had been given, he clarified several points on written submissions – having not found any misconduct or breach of trust causing loss to the trust fund, there was no basis for concluding that the First Respondent was not entitled to an indemnity even in respect of the adverse costs order and, in any event, he was not aware of any authority for distinguishing the case where the trustee was also a beneficiary from the case where the trustee was not a beneficiary or was defending a third party’s claim and could see no principled reason for doing so. For similar reasons he concluded that she was entitled to her indemnity even after the expiry of the Part 36 offer. The Appellant appealed.
Held (allowing the appeal in part):
The source of trustees’ right to an indemnity was to be found in s31(1) of the Trustee Act 2000 and the provisions of the Civil Procedure Rules could only be a commentary upon and complimentary to it. Indeed, it was an attempt to codify the law as it then stood in relation to s30(2) of the Trustee Act 1925. The test for whether the indemnity was available or has been lost or curtailed was best expressed in the form of two questions: were the expenses properly incurred; were the expenses incurred by the trustee when acting on behalf of the trust? Depending on all the circumstances a trustee may be deprived of his indemnity if there is a finding of a breach of trust causing loss to the trust or other misconduct is established against the trustee. Misconduct in this context should be construed widely to include not only misconduct in the sense of dishonesty but also conduct which was unreasonable in the circumstances. On the facts of this case, in relation to the removal claim, the judge was entitled to take the view that he was not in a position to decide about the First Respondent’s conduct in defending it because those proceedings were never concluded and, therefore, the court had not been required to decide whether in the circumstances it was in the best interests of the beneficiaries to remove the trustees. Similarly, he was entitled to take the view that he was not in a position to decide that, in defending the removal claim, the First Respondent was acting other than for the benefit of the trust and, therefore, could not decide that she had committed misconduct in relation to its defence which would justify her being deprived of her indemnity.
In the circumstances, the trustee was entitled to the benefit of the doubt and, in the absence of more, the mere fact that she had defended the removal claim was insufficient from which to conclude that she was acting on her own behalf and not that of the trust. It followed that the appeal in relation to the trustees’ indemnity in respect of her costs of the removal claim be dismissed. However, in relation to the First Respondent’s costs of the account claim and of the adverse costs order made against her, the judge approached this aspect of the matter in the wrong way. Whilst it was correct that the mere taking of an account in common form does not in itself suppose that there has been misconduct, unlike an account taken on the basis of wilful default, this does not mean that, on the taking of an account in common form, breaches of trust causing loss to the trust fund and/or other misconduct may not be found and that in the circumstances the trustee may be found not to have acted properly and not to have acted on behalf of the trust. The judge misled himself in this respect because he did not refer back to s31(1) of the Trustee Act 2000 but concentrated on sub-paragraphs (a) to (c) of Practice Direction 46. It was not the case of merely correcting the trustees’ accounting. On the contrary, the account revealed some serious misconduct and breaches of trusts, such as the retention of the proceeds of sale of a former trust property and a payment of her husband’s income tax liability and personal accountant’s fees from the trust fund. Essentially the account claim was hostile litigation brought by a beneficiary and the judge failed to address the question whether the trustee was acting on behalf of the trust in providing the account or was acting for herself.
The very nature of the matters which had been found upon the taking of the account and which led to the order that the First Respondent credit the trust with over £52,000 plus £4,000 interest was sufficient for the judge to make an adverse costs order against her and should have led him to the conclusion that there was misconduct and breaches of trust of a nature which warranted the removal of the indemnity. In unsuccessfully defending herself against breaches of trust and serious misconduct, the First Respondent was clearly acting on her own behalf and not that of the trust. Indeed, it offended all sense of justice to allow a trustee to recoup herself from the trust fund for the costs of unsuccessfully defending herself in relation to breaches of trust and serious misconduct. Similarly, the judge failed to give any weight to the failure to meet the Part 36 offer and for these reasons the appeal should be allowed in respect of the First Respondent’s costs and the adverse costs order made against her in relation to the account claim.JUDGEMENT Lady Justice Asplin:  This appeal is concerned with the circumstances in which a trustee is entitled to be indemnified from the trust fund in respect of costs incurred by her and awarded against her in litigation.  The issue arises in the context of a claim which was commenced by the Appellant, Mrs …