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Are you the trustee of a commercial trust? Perhaps you are in a partnership and hold the legal title for partnership property. You may even be an unwitting trustee, such as if you have taken your customers’ money before they receive their goods or borrowed a loan for a specific purpose. In that case, it is vital to understand your duties and responsibilities as a commercial trustee.
This article will first explain the general concepts behind commercial trusts and what certain terms mean. It will then list the key duties and certain powers.
Key Concepts
Trusts can be a confusing area of law, even for lawyers. We explain some key terms below.
Trust Instrument vs Implied Trusts
A trust instrument is a document that outlines the creation of the trust. It will:
- outline the terms of the trust;
- detail who the beneficiaries are; and
- explain how the trust is to be managed.
In a commercial context, trusts can also arise automatically in certain circumstances. These are called “implied trusts” because the law will imply a trust when certain circumstances are met, including:
- bankruptcy and insolvency;
- some kinds of customer prepayments;
- the supply of goods under credit;
- ownership of partnership property; and
- lending money for an expressly stated purpose.
Where there is an implied trust, and you are the trustee, the law will hold you to the same standards as someone who has expressly agreed to act as a trustee.
Beneficiaries
The beneficiaries are the individuals that stand to benefit from the trust. Some common examples:
- employees to an employee pension plan;
- investors that have contributed to certain kinds of investment funds;
- customers that prepaid for the supply of goods in certain circumstances; and
- lenders that have lent money for a specific purpose.
Though beneficiaries ultimately stand to gain something from the trust, crucially, they do not own the trust property. Instead, as a trustee, you are the legal owner. In general, this means you have the power to transfer, sell, or purchase on behalf of the trust. But as the saying goes, with such power comes significant responsibilities.
Duties of a Trustee
A commercial trustee will have several duties that they must follow when managing trust property. We explore these duties below.
A Fiduciary Duty
The relationship between a trustee and a fiduciary is one of the closest relationships the law recognises. As legal owners of the trust property, trustees can act as if the property was their own. This is why it is very easy for a trustee to act dishonestly. As a result, the law imposes a fiduciary duty on the trustee.
A fiduciary duty is a special kind of relationship between certain groups of people. Where there is a fiduciary duty, the fiduciary (you as a trustee) must act in the utmost good faith towards the person you owe the duty to (the beneficiaries). Your own personal interests must never, under any circumstances, interfere with this duty.
This means you must never:
- enter into competition with the trust; and
- make any “incidental” profit from the trust (other than what you may be allowed to pay yourself for your services as a trustee), including using any information you gained from the trust to benefit personally.
For the latter, this applies even if you acted with good intentions or did not intend to breach your fiduciary duty. This is known as strict liability. The law will not hear any excuses.
Specific Duties
Apart from the fiduciary duty you owe to beneficiates, there are several other key duties to note. We outline these specific duties in the table below.
| A duty to… | Explanation |
| Invest |
This duty is relevant where the trust holds a sum of money. This money must be put to work, either to grow (“capital appreciation”) or to produce income (“dividend payments”). This is an important duty. Notably, there are a lot of rules as to what constitutes a good investment versus a bad one. |
| Act personally and not passively | If you are a trustee, you must take an active role in the management and administration of the trust. If you fail to prevent another trustee from doing something unlawful (such as stealing trust property), you can be held liable for your failure to act. |
| Observe the terms of the trust | Where there is a trust instrument, you must follow the rules it lays down. |
| Act impartially between beneficiaries | You must not show favouritism towards one beneficiary at the other beneficiaries’ expense. |
| Act unanimously | Where there is more than one trustee, all trustees must agree to reach the same decision. |
| Exercise reasonable care and skill | The standard is “the prudent man of business”. That means that you must act as would any sensible person in the commercial world would. |
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Consequences of Breaching Duties
In general, you should be aware that the law holds trustees to the highest of standards. If you breach a trustee duty, you can be held civilly liable. Likewise, the court can order you to repay the trust from your own personal assets. This applies even if you did not intend to breach your duties. You may also face criminal liabilities in certain circumstances.
Key Takeaways
As a commercial trustee, you have lots of duties because you hold the legal title to trust property. The law imposes lots of obligations on a trustee to protect the beneficiaries. Apart from their fiduciary duties, commercial trustees have a duty:
- to act independently and in unison with other trustees;
- to invest the trust property; and
- not to prejudice any beneficiary.
Failure to abide by these duties can result in civil and criminal liability. The court has broad powers to come after your personal assets in the event of certain breaches.
If you need help with commercial trusts, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Duties you owe as a trustee include a fiduciary duty, a duty to invest trust property, a duty to observe the terms of the trust instrument, a duty to act impartially between beneficiaries, a duty to act unanimously, and a duty to exercise reasonable care and skill.
The law holds trustees to a high standard. A court can hold you civilly and criminally liable for breaches of certain duties. Likewise, a court can come after your personal assets to recover any loss to the trust which you caused.
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