Breach of duty – The taking of an account against defaulting charity trustees

As a general rule the High Court has jurisdiction to enforce the observance or redress breaches of all trusts, charitable as well as private. The jurisdiction in the case of charities is more extensive than in the case of private trusts, where the trust is charitable, the court has jurisdiction not only to enforce it and to redress all breaches, but also, in certain circumstances, to make schemes for the administration of the charity and to alter or modify the trust to a greater or less degree by virtue of the cy-pres doctrine.’ (Halsbury’s Charity Law (2020), paragraph 10.23).

Thus, if it is established that the stated objects of a charitable gift fail, either:

·       the property can be applied cy-pres; or

·       the whole gift fails, giving rise to a resulting trust in favour of the donor.

The duties of trustees of charitable trusts do not differ in principle from those of non-charitable trustees. Their primary duty is to execute the trust in accordance with its terms, and with the general law, in the interests of the intended beneficiaries, i.e. the ‘objects’ of the charitable trust. See HMG Guidance – The essential trustee: what you need to know, what you need to do:

The essential trustee: what you need to know, what you need to do – GOV.UK (

Charity trustees who use trust money for their own purposes, or for purposes not in accordance with the trust, or who negligently allow others to misappropriate it, are strictly liable to make good any deficiency or loss, and the court is severe with trustees who willfully, corruptly or negligently misapply trust property.

It is a breach of trust for trustees to divert a charitable fund given for one object to another not contemplated by the Donor.

The assets owned by a charity cannot be used to indemnify a person injured by a breach of trust committed by a trustee of the charity.

A threatened application of charity property for non-charitable purposes may be restrained by injunction.

With the exception of exempt charities and charitable companies, charity trustees must ensure that accounting records are kept which are sufficient to explain all of the charity’s transactions, and which are such as to:

·       disclose at any time, with reasonable accuracy, the financial position of the charity at that time; and

·       enable the trustees to ensure that where any annual statements of account are prepared by them, those statements comply with the statutory requirements.

The primary personal equitable remedies available in relation to breach of fiduciary duty are:

·       rescission;

·       equitable compensation;

·       an account of funds;

·       an account of profits; and

·       injunctions.

In contrast to proprietary remedies, personal remedies operate against the person of the defendant wrongdoer irrespective of whether he retained property that may have been the subject of the claim.

Taking an account is simply a process that can be employed in order to assess the state of the trust fund. In this respect, the taking of an account can enforce the trustees’ primary duty to provide information … and keep accurate accounts of the trust. All express trustees owe a primary duty to account for their administration of the trust fund, including all receipts, investments, and distributions. Taking an account may lead to the enforcement of primary or secondary obligations. When an account is taken, two principal problems may be revealed: the trustees may have misappropriated assets from the trust fund, for example by making unauthorised investments; or alternatively, the trustees may have breached their duty in failing appropriately to safeguard the value of the fund, which will be the case, for example, where they have negligently failed to diversify the types of assets held by the trust. In the first situation, a [claimant] might falsify the unauthorised disbursement; in the second, the account might be surcharged to bring its value up to the appropriate level. Significantly, the trustee will be liable to compensate the trust fund from their own resources whether the account is falsified or surcharged.’

(Davies, Paul and Graham Virgo (2019). Equity & Trusts – Text, Cases And Materials. Third edition. Oxford University Press, p.806).

‘Where the beneficiary complains that the trustee has misapplied trust money, he falsifies the account, that is to say, he asks for the disbursement to be disallowed. If, for example, the trustee lays out trust money in an unauthorised investment which falls in value, the beneficiary will falsify the account by asking the Court to disallow both the disbursement and the corresponding asset on the other side of the account. The unauthorised investment will then be treated as having been bought with the trustee’s own money and on his own behalf. He will be required to account to the trust estate for the full amount of the disbursement – not for the amount of the loss. That is what is meant by saying that the trustee is liable to restore the trust property; and why common law rules of causation and remoteness of damage are out of place … Where the beneficiary elects to falsify the account, the unauthorised investment is not shown as an asset, the disbursement is disallowed, and the trustee is accountable in every respect as if he had not disbursed the money. He is liable to restore the money to the trust estate; as notionally restored it remains subject to all the trust’s powers and provisions of the trust as if it had never been dispersed; and the account is taken accordingly. …

If the beneficiary is dissatisfied with the way in which the trustee has carried out his trust – if, for example, he considers that the trustee has negligently failed to obtain all that he should have done for the benefit of the trust estate, then he may surcharge the account. He does this by requiring the account to be taken on the footing of wilful default. In this context “wilful default” bears a special and unusual meaning: it means merely lack of ordinary prudence or due diligence. The trustee is made to account not only for what he has in fact received, but also for what he might with due diligence have received. Since the trustee is, in effect, charged with negligence, and the amount by which the account is surcharged is measured by the loss occasioned by his want of skill and care, the analogy with common law damages for negligence is almost exact. Although he is a fiduciary, his duty of care is not a fiduciary duty. In this context it must be right to adopt the common law rules of causation and remoteness of damage to their fullest extent. The trustee’s liability is enforced in the course of taking the trust account rather than by an action for damages, but the obligation of skill and care is identical to the common law duty of care.’ ‘(‘Equity’s Place in the Law of Commerce’ by Lord Millett, (1998) 114 LQR 214, 225-7).

As a general rule accounts are to be taken against the trustees from the date at which the misapplication commenced. Where the misapplication has been innocent, accounts are usually directed from the commencement of the action. However, they may also be ordered from;

·       the date at which notice was given to the trustees questioning the propriety of the application; or

·       the date of the decree declaring the application improper.

Where a charity trustee uses trust funds for trading purposes, he is accountable to the charity for any profit made, or for interest at the rate of 5%.

Since the decision of the House of Lords in Sempra Metals Ltd v. IRC [2007] UKHL 34, the Court has had the power to make an award of compound interest where that is necessary to achieve full restitution.

‘Questions relating to charities may be compromised and the terms of the compromise confirmed by the court. Trustees for charities have power to compromise claims under the Trustee Act 1925. In addition, a compromise may be approved by the Charity Commission under the Charities Act 2011. Where the Attorney General is a party to any legal proceedings affecting a charity, no compromise can be enforced without his sanction. The Attorney General is a necessary party to all charity proceedings, other than any commenced by the Charity Commission, and must be joined as a defendant if he is not a claimant. In proceedings, other than charity proceedings, which concerned the interests of the charity, the Attorney General, if not the claimant, should generally be made a defendant. … Thus where proceedings are necessary to test the validity of an alleged charitable gift, even where the class to benefit is a foreign community, or to determine whether a claim to the benefit of a charity is properly founded, or to enforce the execution of a charitable purpose or to remedy abuse or misapplication of charitable funds, or to administer a charity, the Attorney General is generally a necessary party, and is normally the proper claimant. He represents the beneficial interest, in other words the objects, of the charity. Even if all the subscribers to a charitable fund are made claimants, a claim for the regulation of the charity is defective unless the Attorney General is also a party.’

(Halsbury’s Charity Law (2020), paragraphs 11.13 and 11.15).