Self-dealing by intermeddling

The thesis of this post is that the equitable doctrine of self-dealing applies to ‘intermeddling’.

A person who intrudes upon the affairs of a deceased testator, before obtaining a grant of probate, may be treated as having assumed the executorship.

Such an ‘intermeddler’ is called a tort executor or an ‘executor de son tort’ (i.e. of his own wrong). The concept is derived from the principle that a person who has assumed authority where he has none, is accountable as if he had that authority, Pollard v Jackson [1993]. Depending upon the circumstances, such a person may also become a constructive trustee for those entitled to the assets. The fact a person intermeddles without any grant may be a reason why such a person is not merely an executor de son tort but is also a constructive trustee, James v Williams [2000].

Scope of the self-dealing rule
‘A purchase of trust, or other self-dealing transaction by a trustee, may be impugned under … the self-dealing rule … [which broadly speaking is] based on the conflict rule that a trustee must not put himself in a position where there is a conflict between his interest and duty, and has the effect of rendering the transaction voidable.’ [Lewin on Trusts, 18th ed (‘Lewin’), paragraph 20-58].

I submit that the rule applies in its strict form to a trustee (including a trustee under a constructive trust); an executor; and an executor de son tort.

‘[The] rule applies in its strict form not only to trustees strictly so called; it applies also to all who, though differing in name, are invested with the like fiduciary character, such as an … executor … an executor de son tort’ [Lewin paragraph 20-84, citing Mulvany v Dillon [1810]].

The ‘… constructive trustee, although not expressly appointed as a trustee, has assumed the duties of a trustee before the events which are alleged to constitute the breach of trust’ and is therefore a true trustee (Blackstone’s Civil Practice 2018, paragraph 10.38, which also states, ‘When considering the boundary between cases where the defendant is a true trustee under an express or constructive trust, sand those where he is not, the key factor is whether there is trust property (Clarke v Marlborough Fine Art (London) Ltd [(2001).’)

I further submit that the ‘… rule applies to self-dealing transactions other than purchases of trust property by a trustee … [whilst noting that] the presence of a conflict of interest, or a conflict of duties in different fiduciary capacities, does not in the case of all transactions concerning the trust property involve the application of the self-dealing rule in its full severity. Sometimes the conflict operates merely to impose a burden on the trustee to prove that the transaction in question was fair and reasonable and that he took no advantage of his position as trustee.’ [Lewin, paragraph 20-64].

If therefore the trustee fails to discharge the burden of proof, then the self-dealing transaction is voidable ex debito justitiae (i.e. ‘as of right’) at the suit of e.g. a residuary beneficiary [‘B’] because ‘the self-dealing rule is an application of the wider principle that a man must not put himself in a position where duty and interest conflict’, Re Thompson’s Settlement [1986] 1 Ch.99, 115.

Where the rule applies B may prevent an intended sale by injunction and if the sale has already taken place, the range of possible orders against a purchaser for value without notice include:
– a reconveyance of the property to the trust;
– an order for an account of profits (where the trustee has sold at a profit); and
– equitable compensation (where the trustee has sold at a loss).

Exceptions to the rule

Section 41 of the Administration of Estates Act 1925 which confers wide powers of appropriation on a ‘personal representative’ provides:

‘(1) The personal representative may appropriate any part of the real or personal estate, including things in action, of the deceased in the actual condition or state of investment thereof at the time of appropriation in or towards satisfaction of any legacy bequeathed by the deceased, or of any other interest or share in his property, whether settled or not, as to the personal representative may seem just and reasonable, according to the respective rights of the persons interested in the property of the deceased:

Provided that—
an appropriation shall not be made under this section so as to affect prejudicially any specific devise or bequest;
(ii) an appropriation of property, whether or not being an investment authorised by law or by the will, if any, of the deceased for the investment of money subject to the trust, shall not (save as hereinafter mentioned) be made under this section except with the following consents:—
(a) when made for the benefit of a person absolutely and beneficially entitled in possession, the consent of that person;
(b) when made in respect of any settled legacy share or interest, the consent of either the trustee thereof, if any (not being also the personal representative), or the person who may for the time being be entitled to the income:
If the person whose consent is so required as aforesaid is an infant or lacks capacity (within the meaning of the Mental Capacity Act 2005) to give the consent, it shall be given on his behalf by his parents or parent, testamentary or other guardian, . . or a person appointed as deputy for him by the Court of Protection, or if, in the case of an infant, there is no such parent or guardian, by the court on the application of his next friend;

no consent (save of such trustee as aforesaid) shall be required on behalf of a person who may come into existence after the time of appropriation, or who cannot be found or ascertained at that time;

(iv) if no deputy is appointed for a person who lacks capacity to consent, then, if the appropriation is of an investment authorised by law or by the will, if any, of the deceased for the investment of money subject to the trust, no consent shall be required on behalf of the said person;

(v) if, independently of the personal representative, there is no trustee of a settled legacy share or interest, and no person of full age and capacity entitled to the income thereof, no consent shall be required to an appropriation in respect of such legacy share or interest, provided that the appropriation is of an investment authorised as aforesaid.

(1A) The county court has jurisdiction under proviso (ii) to subsection (1) of this section where the estate in respect of which the application is made does not exceed in amount or value the county court limit.
(2) Any property duly appropriated under the powers conferred by this section shall thereafter be treated as an authorised investment, and may be retained or dealt with accordingly.
(3) For the purposes of such appropriation, the personal representative may ascertain and fix the value of the respective parts of the real and personal estate and the liabilities of the deceased as he may think fit, and shall for that purpose employ a duly qualified valuer in any case where such employment may be necessary; and may make any conveyance (including an assent) which may be requisite for giving effect to the appropriation.
(4) An appropriation made pursuant to this section shall bind all persons interested in the property of the deceased whose consent is not hereby made requisite.
(5) The personal representative shall, in making the appropriation, have regard to the rights of any person who may thereafter come into existence, or who cannot be found or ascertained at the time of appropriation, and of any other person whose consent is not required by this section.
(6) This section does not prejudice any other power of appropriation conferred by law or by the will (if any) of the deceased, and takes effect with any extended powers conferred by the will (if any) of the deceased, and where an appropriation is made under this section, in respect of a settled legacy, share or interest, the property appropriated shall remain subject to all trusts and powers of leasing, disposition, and management or varying investments which would have been applicable thereto or to the legacy, share or interest in respect of which the appropriation is made, if no such appropriation had been made.
(7) If after any real estate has been appropriated in purported exercise of the powers conferred by this section, the person to whom it was conveyed disposes of it or any interest therein, then, in favour of a purchaser, the appropriation shall be deemed to have been made in accordance with the requirements of this section and after all requisite consents, if any, had been given.
(8) In this section, a settled legacy, share or interest includes any legacy, share or interest to which a person is not absolutely entitled in possession at the date of the appropriation, also an annuity, and “purchaser” means a purchaser for money or money’s worth.
(9) This section applies whether the deceased died intestate or not, and whether before or after the commencement of this Act, and extends to property over which a testator exercises a general power of appointment, including the statutory power to dispose of entailed interests, and authorises the setting apart of a fund to answer an annuity by means of the income of that fund or otherwise.’

‘Where assets are being appropriated by a personal representative in satisfaction of his own interest as a beneficiary in the estate, self-dealing questions arise (Kane v Radley-Kane [1999] 1 Ch 274). If the personal representative wishes to take the asset himself, agreement to the act of appropriation and to the valuation used, with all the interests affected by the appropriation, will be necessary. This is because the transaction places the personal representative in a position of conflict between his personal interests and his duty toward the other beneficiaries of the estate. Without the agreement of those also interested, the personal representative must satisfy his beneficial interest by the appropriation of cash or assets which have an open and independently verifiable value such as quoted stocks and shares.’ (‘A Practitioner’s Guide To Legacies’, by Martyn Frost, Paul Saunders, Arabella Saker, Geoffrey Shindler, Tim Stone, Richard Wilson’ (2003) Lexi Nexis Tolley, paragraph 12.3).

As James Kessler QC and Charlotte Ford state in paragraph 21.50 and footnote 105 of ‘Drafting Trusts and Will Trusts’ (13 ed),

In the absence of an express power of appropriation under the terms of a will, ‘[the] powers conferred by the general law are inadequate … (1) Section 41 AEA 1925 confers the power on personal representatives, but not on trustees, (2) Section 7 TOLATA 1996 confers a power of appropriation in relation to land in England and Wales. (3) Section 15(b) TA 1925 confers power to sever and apportion “blended trust funds or property”. It is considered that this gives trustees power to appropriate whenever trustees hold trust property in undivided shares – so the power overlaps with (1) and (2) above. This is significant since this power (unlike the above) does not require any beneficiary to consent. (4) The extent to which the common law allows appropriation is unclear. The old cases are discussed in Kane v Radley-Kane [1999] Ch 274.’

It is also worth noting that:
An appropriation cannot take place if the value of the asset exceeds the entitlement of the beneficiary (although the beneficiary could purchase the asset from the personal representatives).

Had there been a purchase by a person connected with the trustee, then ‘in practice it is prudent for trustees to consider seeking the consent of the beneficiaries or the directions and if necessary sanction of the court before selling trust property to their spouses (or civil partners).’ [Lewin, paragraph 20-77] – where the trustees include a professional trustee (such as a solicitor) a trustee resolution or minute should therefore have been drafted to record the seeking of consent/directions in default of which the evidential presumption is that no such consent or directions were in fact sought.
‘The traditional way of dealing with residuary gifts is to vest the residue in the trustees on trust for sale with power to postpone the sale. Where there is an outright gift of residue and no continuing trust will come into being, it may be better to vest the residue in trustees but to rely upon the powers of executors to give effect to the terms of the will. Where the residuary estate will or may be subject to a trust, it is suggested that it is vested in the trustees on an express trust for sale with power to postpone the sale. In the case of land, a power to postpone the sale is implied by Trusts of Land and Appointment of Trustees Act 1996, s4 but it may be desirable to include an express power to postpone for the personalty which, invariably, will form part of the residuary estate … It is in many cases not necessary to include an express trust for sale but many practitioners continue to do so and lay executors often appreciate an express statement of their powers …

[For example, Precedent Form 11.1 (Creation of trust for sale with debts, inheritance tax etc to be paid out of proceeds) provides],
“My Trustees shall hold [the rest of] my estate on trust for sale [with power to postpone sale] to pay executorship expenses and debts … and any inheritance tax in respect of property passing under this will”.’ Parker’s Modern Will Precedents 7th Ed (2011) by Michael Waterworth.

As Professor Lesley King [‘King’] states in paragraph 8.9.2 of the ‘Probate Practitioners Handbook’ published by the Law Society (April 2018), whilst, ‘Every trust for sale of land created by a disposition on or after 1 January 1997 has an implied power for the trustees to postpone sale. Property of an intestate is no longer held on a trust for sale. Before [TLATA came into force on 1 January 1997] it was standard practice to include an express trust for sale (with power to postpone sale) to avoid the complication of the Settled Land Act 1925. It is no longer necessary to include a trust for sale for this reason. Trustees of a ‘trust of land’ as defined by TLATA 1996 have all the powers of an absolute owner, including sale. [However, there is] some point to including an express trust for sale to deal with the possibility of a continuing trust of personalty … Where a will creates a continuing trust, s.11 [TLATA] imposes an obligation on trustees of land to consult beneficiaries of full age with an interest in possession when exercising any function in respect of land’.

‘Once the PR has ascertained the amount of residue available to the residuary beneficiary and, if appropriate, obtained approval of the estate accounts it is likely that the PR then holds the remaining assets as trustee. If, however, other assets or liabilities were discovered, the PR would have to deal with these assets or liabilities as PR since that office is never lost.’ [King, paragraph 8.10.1].