The Importance of Being Neutral

CHARLES COOPER CONSIDERS THE SIGNIFICANCE OF TRUSTEES DECLARING AND MAINTAINING NEUTRALITY IN THE COURSE OF LEGAL PROCEEDINGS

Where a trustee or personal representative is a party to legal proceedings, the general rule is that they are entitled to be paid the costs of those proceedings out of the relevant trust fund or estate (CPR 46.3; s.31(1) Trustee Act 2000). This is often referred to as their being ‘entitled to an indemnity’ for their costs (CPR PD46.1). This indemnity applies not only to those legal expenses incurred by the trustee, but also the costs of another party which the trustee has been ordered to pay (Re Raybould [1900] 1 Ch 199, 202; Bonham v. Blake Lapthorne Linnell [2006] EWHC 2513 (Ch) [120-123]).

However, there are important exceptions to the general rule, including: (i) that they were not a party to proceedings in their capacity as anything other than trustee (CPR 46.3); (ii) that costs were not improperly incurred (PD46.1.1; s.31(1) Trustee Act 2000); (iii) that proceedings were not brought by the trustee for an improper purpose (Davies v. Watkins [2012] EWCA Civ 1570); (iv) that the trustee is not guilty of ‘misconduct’ (Turner v. Hancock (1882) 20 ChD 303 (CA); Re Jones [1897] 2 Ch 190; Re Londonderry’s Settlement [1964] Ch 594, 614; Armitage v. Nurse [1998] Ch 241).

In essence, many of these exceptions apply where the trustee has failed to maintain neutrality.

For example, whether the costs were properly incurred may depend on whether the trustee had first obtained directions from the Court to bring or defend proceedings, acted solely in the interests of the trust or estate, or acted in some way unreasonably in bringing/defending/conducting the proceedings (PD46.1.1).

In Turner v. Hancock the trustee had alleged that the trust owed him money, when in fact he owed money to the trust, but the Court of Appeal held (at 307-8) that an innocent breach of trust was ‘no ground for depriving him of his costs in the absence of misconduct’.

In Shovelar v. Lane & Ors [2011] EWCA Civ 802, the Court of Appeal held that the executors were not entitled to be indemnified by the estate. Per Ward LJ (at [48]):

‘…the executors did not conduct themselves reasonably… Although they had at an early stage written of their need “to steer a median course” and “to be guided by the court” they did not adopt that position of neutrality in their defence. They did not indicate that they would be bound by the decision of the court and hold the estate to abide that decision. They did not seek directions from the court. Instead, they assumed the role of defendants and          when the defence was amended to join the family members, they, the executors, continued              their stout resistance. They did not stand aside.’

In Davies v. Watkins the trustee had rejected an offer to purchase a trust asset and had sought directions from the Court on how to deal with the asset under the principles in Re Beddoe [1893] 1 Ch 547. While the judge at first instance had held that it was inappropriate for the trustee to get his costs of the application from the estate as he had not sent a pre-action protocol letter and should have engaged with the offer to purchase, the Court of Appeal held that, in seeking the directions of the Court the trustee was following the general guidance given consistently by the Courts and he could expect to be entitled to an indemnity, that the offer to purchase had not been in satisfactory terms and there was no pre-action protocol which related to Beddoe applications – accordingly that there was no improper conduct on the part of the trustee to justify disapplication of the rule.

A more recent example is the case of Stoney-Anderson v. Abbas [2023] EWHC 2964 (Ch). In that case there were allegations that the personal representative had not acted solely in the interests of the trust or estate, yet he fought his removal until it was too late to make any real difference as to costs. HHJ Matthews held (at [63]) that:

‘Even without proof that any of the wrongdoing alleged was true, it ought to have been obvious that, in the state of family relations, and in light of the allegations made against him, the administration of the estate would not be carried out effectively and properly so long as he remained executor. Yet he continued to opposed the orders sought until a week before the disposal hearing. In my judgment, this is a sufficient basis for depriving the first defendant of his executor’s indemnity.’

With a real risk of trustees being ordered to pay costs personally, it is worth ensuring that their neutrality is both declared and maintained throughout the course of legal proceedings.

March 2024

To read more about Charles, please see his Chambers profile here.