LAW 556 : ADMINISTRATION OF TRUSTS

ASSIGNMENT 2 (10%)

NAMES STUDENT ID

ANIS TASNIM BINTI MOHD FUAD 2017678006

NURHAYATI BINTI ABDUL LATIF 2017678222

WAN AYUNI SYAHIRAH BINTI WAN 2017683576

AMRAN

CLASS : LAWB04O
SUBMITTED TO : DR. JOHN CHUAH
DATE OF SUBMISSION : 24th MAY 2019
ASSIGNMENT 2 (10%)
1. DISCUSS the duties of investment of a trustee from the
perspective of common law and the Trustee Act 1949.

2. Explain how a loan made by a trustee to an authorized

company in Malaysia can be properly undertaken without
infringing the Trustee Act 1949 and the possible defences
available to the trustee.
1. DISCUSS the duties of investment of a trustee from the perspective of
common law and the Trustee Act 1949.

Duties of investment of trustees may be elicited from the trust deed,

Trustee Act 1949 and common law. Duties of investment can be
discussed from two perspectives which are common law and Trustee Act
1949.

Under common law, duties of investment of a trustee may be

illustrated in a lot of cases. In Re Estate of Lee Wee Nam (1982),
trustees (executors of estate) owe fiduciary duties to beneficiaries. In Ng
Ah Kiang v Foo Choo Choon (1908), thus trustees personal interest and
duties to the beneficiaries cannot conflict, namely a duty to avoid conflict
of interest. In Shaik Lebbar Mericar v Haji Mohd Eusope (1929), a
trustee has a duty to pay estate debts when he has received certain income.
If a trustee is abroad the court will appoint an interim receiver of the
income of the estate to do so. In Aroozoo v Aroozoo (1937), trustee
cannot falsify accounts for the purpose of setting up adverse title of 3rd
party against the beneficiary.

In Ewe Keoh Neoh v Ng Aun Thye (1934), a beneficiary who had

transferred all his interest in the estate to a mortgagee can no longer
demand the trustee (executor) to account - a privilege that now belong to
mortgagee -. Trustees must act unanimously and majority decision will
not suffice as it will not bind other trustees who dissent and beneficiary.
Further the majority decision will not be a legal transaction and this has
been enlightened in the case of Puncak Klasik Sdn Bhd (no 2) (1996).
In Veerasamy Krishnasamy v Jannaki Ammal (1947), trustees who are

1
also beneficiaries has to apply to court for directions when they are in
doubt.

In Luke v South Kensington Hotel Co (1879), in the case of private

trusts, the general rule is that where there is more than one trustee, they
must in the exercise of their functions, act unanimously. A majority of
trustees cannot ordinarily rule against the minority. In case there is
absolute deadlock, on application of one or other of the trustees or a
beneficiary, the intervention of the court may be the only way to break
the deadlock. In Re Estate of Tambi bin Osman (1929), an
administrator is a trustee (or when trustee is also executor) he had the
power to sell for distribution even if there were no debts and had a duty to
give valid receipts for the proceeds of sale of land.

For deviation, it can be seen in the case of Harrison v Randall

(1851), if the trustee deviates from the trust deed, he has the the
obligation to satisfy the court that the deviation was necessary or
beneficial.
There are two approaches which are, strict construction approach and
liberal approach. For strict construction approach, can be referred to
Bethell v Abraham (1873), where trustees were conferred power to
continue or change securities from time to time as the majority deems fit.
It was held that it did not authorize substantive change of investment
outside the authorized range of investment. As for liberal approach, in the
case of Re Peczenic ST (1964), it was held that the trustees were
authorized to invest in anything of these types which was properly able to
be treated as an investment but not to invest merely on personal securities
which was not in the list of authorized investment.

2
 Trustees also has a duty to act honestly and prudently. Thus loans
given by the trustees without security constitute a breach of trust and this
can be seen in the case of Khoo Teh Keong v Chng Joo Tuan Ngoh
(1934). In Speight v Gaunt (1893), a trustee would discharge his duties
if he takes all the precautions in managing which an ‘ordinary prudent
man of business’ would take in managing affairs of his own. This has
been followed by Bartlett v Barclay Bank Trust (1980), professional
corporate trustee is liable of trust if loss is caused to the trust fund
because it neglects to exercise the special care and skill which it professes
to have.

There are also three golden duties in investment. Firstly, duty to act
fairly between beneficiaries. In Nestle v National Westminster Bank,
the trustee and life tenant has responsibility to prevent the trust fund from
into the disrepair but to maintain the value of the trust fund for the
reminderman.

Secondly is the duty to make the best investment return. In Cowan v

Scargill, the duty is to generate the best available trust fund regardless of
other consideration. Where the purpose of trust is to provide financial
benefits for the beneficiaries than the best interest of the beneficiaries are
their best financial interest.

Thirdly, is the duty to act prudently and safely. To act prudently may
entail low risk investment which may not reap the best financial return. In
Learoyd v Whiteley, trustee must act as businessman of ordinary
prudence and to avoid all investment in a hazardous nature. In Bartlett v
Barclays Bank (1980), trustees can take prudently taken risk but not to
put the trust fund in hazard.

3
 Under Trustee Act 1949, a trustee must know how to invest and
made good profit. Failure in exercising trust power is not a breach of
trustee’s duties but failure to execute duties of a trustee is a breach of
trust. There seems to be a duty on the part of trustee to invest trust funds
and not merely a power to do so. In simpler words, failure to invest is a
breach of trust. In Section 3 of Trustee Act 1949, trust corporation is
also subject to such duties to invest.

In Tan Soo Lock v Tan Jiah Choo (1930), it stated that a trustee
who are not investing the trust funds (idle) are charged 6% interest pa.
whilst an interest rate of 4% is chargeable on trustees in breach of duties
and 5% as penalty rate. In Khoo Keong Keong c Ch’ng Joo Tuan Neoh
(1930), here the trustee lend third party money without independent
evaluation and jewellery was used as a collateral and made loans without
securities. Trustee argued he acted honestly and reasonably. It was held
that the investment of jewellery was not authorized as there was no
breach of trust. In the latter, there was a breach of trust though the trustee
acted honestly, he did not act prudently by making unsecured loans. The
fact he followed the practice of the testator in making such loans failed to
exonerate him.

In the event there is a conflict between the Trustee Act 1949 and the
trust deed, Section 3 of Trustee Act 1949 stated that trust deed shall
prevail. What constitutes authorized investment depends on the
construction of trust deed/will which must be read as a whole.

In Tan Soo Lock v Tan Jiah Choo (1930), trustee was given
absolute discretion to postpone sale and conversion /partition (among

4
heirs) of the trust property of the trust property for the purpose of
investment and to carry on the testator’s business. The business should be
developed and partition only when it is practical to do so. Part of the trust
pro was mortgaged for the purpose of the business and the mortgage was
authorized.

In Re Wragg, to invest means to apply money in the purchase of

some property from which interest or profit is expected. The accepted
view is that investment is a duty which the trustees must execut. This can
be seen in Tan So Lock v Tan Jiak Choo whereby it would be a breach
of trust to leave trust funds lying idle an uninvested. One of the ways is
by investing the trust property as the profit of investment would benefit
the beneficiaries.

Where the trust instrument does not expressly prohibit certain

investments, investments authorised under the trust instrument may be
made.

In Re Harari’s Settlement: Any express power of investment under

the trust instrument should not be interpreted restrictively. If the trust
instrument allows the trustee to invest as he thinks fit, the court will
construe the power to invest widely. In Re Lake: Where a trustee makes
an unauthorised investment, they will be liable for any loss incurred.

Trustees may also choose to make investments approved under

Section 4 provided that they are not in contrary to the authorised
investment clauses in the trust instrument. Loans to approved companies
(Subject to the requirements in Section 4(2)). In Section 3, an approved
company is a company incorporated in Malaysia, or if incorporated prior

5
to Malaysia day, in Sabah or Sarawak and having a place of business in
Malaysia.

Section 4(2)(a) stated that no trust fund is to be invested unless the

paid-up ordinary share capital of an approved company is not less than
five million ringgit. Before making any investment, the approve company
must have a paid-up ordinary share capital of not less than five million
ringgit. Section 4(2)(b) stated that the approved company must have paid
a dividend at the rate of not less than 5% during each of the last three
years prior to the time of investment. Section 4(2)(c) stated the total
amount of the borrowings of the approve company from all sources, shall
not exceed two-thirds of the amount excluding prospective interest, for
the time being secured to the approve company from its borrowers.

Other types of investment is the trustee can sell shares belonging to

the trust and buy other authorised shares (authorised by the trust
instrument or statute). Trustees also can sell land under the trust property
in order to buy another piece of land or other shares. If the trust
instrument does not expressly provide the trustees with power to sell or
deal with the trust property, the trustee or beneficiary can apply to the
court under Section 59(1) for such power to be granted, where the court
considers it expedient.

All types of investment must be made according to standard of a

prudent businessman in order for the trustee to avoid being held liable for
breach of trust.

In Re Powers, testator who gave all his residuary estate to trustee to

invest in any manner in his absolute discretion as if he were the sole

6
beneficiary including the purchase of freehold property. It was held that
the purchase of freehold property is only allowed as a form of investment
but not as a home for the beneficiary (testator’s children/wife). In Re Lim
Yew Teoh (1935), mortgage property (here trust security for loan given
by trustee) was foreclosed and this constitute proper investment where the
bene should be entitled to the income. In MPM Murugappa v OA of
Madras, the approval of the guardian of minor beneficiary to certain
unauthoriz e d investment could not validate them.

In Dilworth v The Commissioner of Stamps (1899), the word

‘include’ the purchase of freehold property cannot be taken to mean that
it can include the purchase outside the ambit of investment since it
enlarge the meaning of investment. In Re Wragg (1919), there is a
distinction between buying property for generating income and for the
purpose of occupation. In Achi Thayar v Balkis Nachial, selling trust
property by trustee/executor to wife raises a strong presumption against
the validity of sale which can however be rebutted by evidence to show
independence of the wife’s action.

In Burrell v Burrell, this is because there is a close relationship

between husband and wife and the inference is the husband could benefit
himself. In Re Syed Hashim Bin Kasim, permanent improvements to the
trust property constitute authorized investments such as installing
residential building to land to enhance its value.

If trust instrument requires consent of a person to change investment

then the entire Section 14 is subject to such consent. The trustee has a
power to change nature of investment, even if the trust deed prohibits the
change of nature of investment the trustee can do so provided all the

7
beneficiaries agree and the court has given the consent. This can be seen
in the case of Quah Heng Lian v Seow Tiang Tin.

In conclusion, trustees do have several duties and these duties are

stipulated by the Trustee Act 1949 and also derived from common law
cases. It is fundamental for every trustee to carry out the terms of the trust
with honesty and reasonably.

8
2. Explain how a loan made by a trustee to an authorized company in
Malaysia can be properly undertaken without infringing the Trustee
Act 1949 and the possible defences available to the trustee.

Section 4 to Section 15 and Section 68 of Trustee Act 1949 lay down

the statutory duty to invest. Guidelines on investment could also be laid
down by the trust instrument. So long as the trust instrument guidelines
are not bad in law or are not against the public policy they override the
statutory provision in case of conflict and this had been spelt out in the
case of Re Coliseum Stand Car Service Ltd.1

As a matter of fact, Section 3 of the Trustee Act defines authorised

investments as investments authorised by the trust instrument, if any,
creating the trust for investment of money subject to the trust or by law. If
there is no conflict the Trustee Act 1949 act as a supplement to the
guidelines of the trust instrument. Section 3 of the Trustee Act 1949
defines an approved company as a company that is incorporated in
Malaysia, or if incorporated in Malaysia or, if incorporated prior to
Malaysia Day, in Sabah or Sarawak and having a place of business in
Malaysia. The company has its sole or primary object the promotion of
home ownership by advancing for the purchase of lands and buildings
sums of money, repayable by instalments of principal and interest over a
fixed period of years, not exceeding at any time the valuation of such
lands and buildings made by an approved valuer. An approved valuer is a
registered or licensed surveyor or a licensed appraiser and includes any
other person approved by the Minister.

1
[1972] 1 MLJ 109

9
 In Tan Soo Lock v Tan Jiak Choo & Anor, the court said that the
extent of the powers including power to invest a power of trustee under a
will can only be determined by reading a will.2 Lord Rusel in this case
had pointed out that what governed a sale of trust property did not govern
as a naked case of the executor selling a a testator’s specifically devised
property. Their Lordships agree with the statement of the law as to a sale
by a trustee to his wife as laid down by the Court of Appeal in this case
and also as laid down in the Scottish case of Burrell v Burrell3 referred
to in Court of Appeal.
Section 4 has to be read with Section 6(2) and Section 6(3) which will
be further discussed below. They keyword in Section 6(1) is
diversification. The reason why is there a need to diversify everything is
to even out the risk. In the case of Nestle v National Westminster Bank
plc4, to the effect that trustees who fail to follow a proper investment
policy may be required to make good to the trust fair compensation. If
trustees were directed to make a specific investment at all or invested in
something else, they will be required to provide the amount of that
specified investment that could have been purchased with the trust funds
at the time when the investment should have been made.
Section 6(2) which lays down that before investing in unit trusts the
trustee must obtain proper advice at intervals under Section 6(4) as to
whether the investment is satisfactory. Section 6(2) concerns on
restriction which the power of restrict has been stated in Section 4. If the
trustee act by investing outside the purview of Section 4, then there is a
breach of trust.

2
[1930] SSLR 109
3
[1953] SC 333
4
[1994] 1 All ER 118

10
 There are restrictions enumerated in Section 4 which can be seen in
Section 4(1)(e) which is there must be an interest payback from the
authorized company to the trustees as it is a form of investment.
Next in Section 4(2)(a), no trust fund is to be invested unless the
paid-up ordinary share capital of the approved company is not less than
five million ringgit. . This shows that the trustee must invest in a big,
strong and healthy company. The money paid to buy company shares is
for the purpose to invest.
Next, the approved company must also have paid a dividend at the rate
of not less than 5% upon such ordinary share capital during each of the
last three years prior to the time of investment. Where the approved
company is a company which has acquired the assets and liabilities of
another approved company such latter approved company must also have
paid dividend each of the last three years prior to the time of acquisition.
If the latter taken over approved company has paid dividend, it is treated
as payment by the former approved company under Section 4(2)(b).
Section 4(2)(c) stated that no trust funds shall be invested under
Section 4(1)(e) unless the total amount of the borrowings of the approved
company from all sources, whether trustee or not, accepted by the
approved company on loan and deposit, and including interest due and
thereon not repaid by the approved company, does not at any time exceed
two thirds of the amount, excluding prospective interest, for the time
being secured to the approved company from its borrowers.

11
 A trustee is liable for loss by reason of improper investment. Section
13(1) provides that when a trustee improperly advances trust money on
the security of charge which would at the time of investment be a proper
investment in all aspects for smaller than is actually advanced thereon,
the security shall be deemed an authorised investment for the smaller sum,
and the trustee shall only be liable to make good the sum advances in
excess thereof with interest. This section applies to investments made
before as well as after the commencement of the Trustee Act.
If a trustee does not exercise his duty as he deemed to be in breach of
duty and so, he has committed a breach of trust. Where a trustee does not
invest trust property, he is not immune from liability. He is still
considered to be in breach of trust. However, there are a few defences
available.
Trust corporations are also trustees. They may also be liable for
breach of trust. The relevant provisions on breach of trust are set out in
Section 10-13, 27(1)(2) and Section 63 of the Trustee Act 1949.

Section 12 deals with loans and investments by trustees which are not
chargeable as breaches of trust. In so far the land is concerned, trustee
must be careful to determine whether land is suitable for investment and
money advanced must be less than the value of the land. Under Section
12 in making loans to other people the trustee must fulfill the following
conditions :
1) he acted on valuation report of the valuer
2) the amount of loan advanced does not exceed two third parts of
value of property as stated in the report; and
3) that the loan was made under the advice of a surveyor/valuer
expressed in report

12
 The role of court is to indemnify trustee from breach of trust. The
trustee shall not be chargeable with breach of trust provided that (a), (b),
and (c) applies. A trustee shall not be charged with breach of trust only
upon the ground that in making the loan he dispensed either wholly or
partly with the production or investigation of the lessor’s title. A trustee
shall not be charged with breach of trust only upon the ground that in
purchasing, (or in lending money upon security) and property he has
accepted a shorter title than the title which a purchaser acting with
prudence and caution would have accepted. Section 12 applies to
transfers of existing securities as well as to a new securities and to
investments made before as well as after the commencement of this Act.
In a case where the borrower pays the surveying fee or where the
surveyor is the wife, husband or child, it is highly unlikely that the
surveyor will be considered independent which is requirement under
Section 12. It is submitted that the surveyor must, in addition, be able,
practical and independent.
In Re Tan Tye, certain lands were owned by the trust fund. One or
two pieces of land were acquired by the government and government
determined the price. For four to five years the trustee did not demand the
money, therefore, the money was kept by the government. Various
investment opportunities were not taken up during that period. An action
was brought against the trustee for breach of trust. The court found the
trustee liable for breach of trust for not discharging properly the duty to
invest.
Section 14 deals with the supplementary powers of investment. These
power include briefly, in case of loans for five years that interest be paid
within a specified time not exceeding 10 days after every month, where
land is sold then 2/3 of such purchase money shall be secured by charge
of the land sold then 2/3 of such purchase money shall be secured by

13
charge of the land sold with or without the security of any other property,
where any other security of a company is subject to a trust , the trustees
may concur in any scheme or arrangement for the reconstruction of the
company, and/or for the sale of all or any part of the property and
undertaking of the company to other company, for the acquisition of the
securities of the company or control thereof by another company, and/or
amalgamation of the company with another company and so on.
Section 14 stated that trustee lending money on authorized property
may contract that the term loan cannot be called within 5 years provided
that the interest of loan must settled in period not exceeding 10 days after
every month. Further, chargor cannot breach the covenants in charge
instrument. The chargee here is the trustee. Section 14(3) stated that
trustee is not required to obtain any report on value of the land charged or
the making of such loans. Trustee is not liable for any loss by reason only
that the security on loan is insufficient. This section justify deficit of
trustees by paying short of money.

There are also various ways by which trustees can be released from
such liability for a breach of trust may not have a personal liability.
Section 63 is empowered to relieve trustee from personal liability. A
trustee has a duty not only to act honestly but also reasonably. This means
the trustee must be in good faith and also be a prudent man. In Re Stuart5,
the onus of showing that he acted not only honestly, but reasonably, rests
on the trustee. In Re Kay,6 although the court has refused to fetter its
discretion and insists that each case must be dealth with according to its
own circumstances, it is helpful to look at some of the decisions,
particularly on the question of reasonableness. Also, in Re Turner,7

5
[1897] 2 Ch 583
6
[1897] 2 Ch 518
7
[1897] 1 Ch 536

14
trustees may acting ‘reasonably’ if they observe the same standard of
conduct that a person of ordinary intelligence and diligence exercise over
their own affairs. Further, in Chapman v Browne8, the trustees were held
not to have acted reasonably where they have never really considered
whether the security was one that was right and proper for trustee to take,
and in Wynne v Tempest,9 the court refused a relief where a trustee left
the trust money in the hands of his co trustees, a solicitor, without a
sufficient reason. Further illustration of refusal of relief by the court is
Ward-Smith v Jebb,10 in which the trustee had acted unreasonably on an
erroneous understanding of the law. In Barraclough v Mell,11 it has been
held that if a trustee had acted grossly negligently in breaching her trust
obligation, then the relief under Section 63 will not be available to the
trustee. On this basis, trustee must acted honestly and also reasonably to
be exempted liability on breach of trust.
However the effects to Section 63 are the court may relieve trustee
from liability wholly or partly as there is no full indemity. This can be
illustrated in the case of Re Evans (decd)12 where it had clearly it had not
been unreasonable for the defendant to assume that her brother was no
longer alive. Consequently, the judge concluded that the defendant ought
to be granted partial relief. In the case of Khoo Tek Keong v Ch’ng Joo
Tuan Ng oh & Anor13, the court said that the trustee never really
considered the question whether the dispositions of the trust fund were
prudent and right to make as a trustee and that he ought not to be excused
for his breaches of trust. On appeal, the Privy Council approved the loans
the trustee made on the security of jewellery but disapproved the loans

8
[1902] 1 Ch 785
9
[1897] 13 TLR 360
10
[1964] 108 SJ 919
11
[2005] EWHC B17 (Ch)
12
[1999] 2 All ER 777
13
[1934] SSLR 32 PC; MD Vol. 4 para 930

15
made to Chetties without security and found the trustee liable and in
breach of trust. Finally, in Re Lord De Clifford’s Estate,14 it may or
may not be reasonable to act without seeking the directions of the court,
according to circumstances.
Under Section 63 a seven-step process has to be fulfilled before a
trustee may be so relieved as follows : (i) if it appears to the court that a
trustee (ii) whether appointed by the court or otherwise (iii) ir or may be
personally liable for any breach of trust, (iv) whether the transaction is
alleged to be a breach of trust occured before or after the commencement
of the Act (v) but has acted honestly and reasonably , and ought fairly to
be excused for the breach of trust and (vi) for omitting to obtain
directions of the court in the matter in which he committed such breach,
(vii) then the court may relieve either wholly or partly from personal
liability for the same.
Trustees and personal representatives are also given protection.
Section 64 provides indemnity to the trustee. To obtain this indemnity,
the trustee must show that a beneficiary acted with knowledge of facts,
although he may not have known that it amounted to a breach of trust.
This had been strengthen in the case of Rehden v Wesley15, where it
stated whether a beneficiary has consented to or concurred in a breach of
trust is a question of fact, no particular formalities is required. It
empowers a court to make a beneficiary indemnify for breach of trust
where the court thinks a trustee has committed a breach of trust at the
instigation or request or with the consent in writing of the beneficiary.
Trustee can be released from responsibilities for breach of trust where the
beneficiaries participates in or consents to a breach of trust. If this is the
case, the beneficiary may not proceed against the trustee. In Brice v

14
[1900] 2 Ch 707
15
[1861] 29 Beav 213, 215, per Romilly MR

16
Stokes16, Evans v Benyon17 and Spellson v George18, a beneficiary who
consents to or concurs in a breach of trust or subsequently confirms it or
grants a release to the trustees or even merely acquiesces in it, will not, in
general, be able to succeed in a claim against the trustees. Also,
Wilberforce J stated in Re Pauling’s Settlement19, accepted the principle
in Evans v Benyon20, which it stated that a person, who, knowing that a
trustee was distributing a settled fund, consented to and was active in the
distribution, could not afterwards claim against the trustees even though
he did not know at the time he was beneficially interested and although
he did not know the division was a breach of trust. However, it should be
noted in this case the court was, in fact, of opinion that he knew both of
his beneficial interest and of the breach of trust. All the members in Court
of Appeal of Holder v Holder21, expressly approved the general
statement of the law made by Wilberforce J in Re Pauling’s
Settlement.22
The beneficiaries must be: (i) sui juris; (ii) sane; and (iii) have full
knowledge before they can release the trustee. This has been illustrated in
the case of Nail v Punter.23 Hence, what happen when Section 64 is
invoked ? The answer is, the beneficiary who consent for breach of trust
cannot sue the trustee. Furthermore, the court may, and not withstanding
that the beneficiary may be married woman restrained from anticipation,
make such order as to the court seems just, for impounding all or any part
of the interest of the beneficiary in the trust estate by way of indemnity to
the trustee or persons claiming through him. This section applies to

16
[1805] 11 Ves 319
17
[1887] 37 Ch D 329
18
[1992] 26 NSLWR 666
19
[1961] 3 All ER 713
20
[1887] 37 Ch D 329
21
[1968] Ch 353
22
Supra
23
[1832] 5 Sim 555

17
breaches of trust committed as well as before as after the commencement
of this Act.
Section 66 provides a complete indemnity to any one who acted
under the provisions of this Act and every order purporting to be made
under this Act. In simpler words, the ‘person’ which refers to the trustee
will be automatically indemnified if he follow everything in the Trustee
Act 1949. This shows that the trustee must comply with every single
terms in the Act and also fulfill all the semantic of the trustees.

In conclusion, trustees can escape liability of breach of trusts if any of

the defences is applied.

18