Fiduciary Duty Of Trustees Under Malaysian Law.

29 November, 2019

Being a trustee is not merely havingthe powers to administer the propertyof a trust fund, but it comes with awider scope of duties and responsibilities.

As much as directors have fiduciaryduties in exercising their directorshipin managing a company, similarly,trustees also owe fiduciary dutiestowards thebeneficiaries of the trustfund.

In identifying the fiduciary duties oftrustees, an important issue to beestablished beforehand is whetherthere exists a fiduciary relationshipbetween trustees and beneficiaries. InChirnside v Fay [2007] NZSC 68, thelearned judge in his judgment hadprovided the definition of fiduciarywhich comes from the word fiducia,meaning trust, confidence, and faith.

The judge further elucidates the wordfiduciary to be a relationship of trustand confidence in which a person isentitled to rely on another. In the caseof LAC Minerals Ltd v InternationalCorona Resources Ltd (1989) 61 DLR(4th) 114 at 90, the judge’s explanationis as follows:

“…there are certain relationshipswhich are almost per se fiduciarysuch as trustee and beneficiary,guardian and ward, principal andagent…”

From the above excerpt, it is clear thatthere is a fiduciary relationship existingbetween trustees and beneficiaries.When we discuss about the duties oftrustees in Malaysia, an Act legislatedfor this purpose is the Trustee Act 1949(hereinafter referred to as “the Act”).

Despite the presence of a specificlegislation governing matters relatingto the powers of trustees, it is statedunder the Act itself that the powersconferred by the Acton trustees are inaddition to the powers conferred bythe instrument creating the trust (hereinafterreferred to as “instrument”)and those powers will only apply ifthere is no contrary intentionexpressed in the instrument and iseffectively subject to the terms of theinstrument.1

It is well understood from the provisionthat reference should be madeto the provisions laid down in theinstrument creating the trust beforereferring to the Trustee Actinmatters relating to the powers oftrustees.

However, the Act only conferspowers to the trustees but does notexpressly address the issuessurrounding the fiduciary duties oftrustees in exercising their responsibilitiestowards the rightful beneficiaries.

Hence, as provided underthe Civil Law Act 1956, relianceshould be made to Common Law inthe absence of any local legislation.2 Under the Common Law, thetwo core elements governingtrustees in the discharge of theirduties are first, prohibiting the fiduciaryfrom acting in a situation wherethere is a conflict between thefiduciary duties and his or herinterest and secondly, the fiduciaryis prohibited from making a profitout of his or her fiduciary position.3 Ina rather simplified form, theseelements are known as the“no-conflict rule” and “no-profitrule”.4

In general, the primary dutyimposed on the trustees is a duty ofloyalty to the person for whom theyare acting. Firstly, the trustee mustadminister the trust only for theinterest of the beneficiaries. The twomain indicators for disloyalty takeplace when the trustees engage inself-dealing or get along withinconflict of interest. Self-dealingmeans that the trustees attainbenefits from the transaction madeupon the trust property. With regardto this, even if a trustee attempts toprove that he acts in good faith andfor the benefit of the beneficiaries, itis still insufficient for to escape fromliability. Hence, it is a must for thetrustees to avoid any conflict ofinterest under all circ*mstances. Wewill first discuss on the element ofthe no-conflict rule.5 It s establishedunder this rule that the trustees

should exercise their duties in goodfaith and that the trustees mustnever be in competition with thetrust.

Good faith refers to honesty or sincerityof intention.6 According to N SBindra’s Interpretation of Statutes7which was cited in the case of TSivam a/l Tharamalingam (sebagaiwakil/ pentadbir kepada hartapusaka mendiang Nagamuthu a/lPeriasamy) v Public Bank Berhad,8good faith includes due inquiry andimplies not only an upright mentalattitude and clear conscience of aperson, but also the doing of an act,showing that ordinary prudence hasbeen exercised according to thestandards of a reasonable person.

The author, N S Bindra further statedthat ‘good faith’ precludes pretenceor deceit and also negligence andrecklessness.

In other words, the trustees are said tohave acted in good faith when theyact honestly, reasonably and fairly inthe best interest of the beneficiaries.Trustees must also not be in competitionwith the trust in the course ofcarrying out their duties and responsibilities.

This statement suggests thattrustees are prohibited to competewith a business which forms part ofthe trust assets.9

Why is it prohibited? This wasanswered by the court in the case ofRe Thomson [1930] 1 Ch 203 wherethe court established that the actionwould amount to an engagement inwhich he would have a personalinterest conflicting or which possiblymight conflict with the interests ofthose he was bound to protect.

Hence, the trustee could be said asbeing in breach of his or her fiduciaryduty by entering in such engagement.An example that explains thissituation is a trustee cannot set upindependently as a yacht broker if hewas a trustee of a yacht brokingbusiness.10 The law is concerned if thetrustee would end up making decisionsthat would conflict with thebeneficiaries’ interest since thetrustee may enter into dealings withthe yacht broking business as a yachtbroker.

However, this rule does notapply to businesses of different natureand/or subject matter since therewould be no element of competition.

Any transaction in which a trusteepurchases a trust property or sells hisown property to the trust rendersthe transaction as voidable. Thiswas established by Lord Eldon in ExP Lacey (1802) due to the fact that;

1) when the trustee acts as bothvendor and purchaser in a sale andpurchase transaction (e.g.: thetrustee acts as vendor in selling theproperty he personally owns to thetrust fund in which he is a trustee toor vice versa), he places himself inan obvious conflict of interest, and

2) it is impossible to determinewhether he has served the beneficiaries’interest properly in securingthe best price for them.

Apart from that, it is a fundamentalprinciple of trusteeship that trusteesmust not expect any remunerationin performing their duties in relationto the trust.11 Similar to the abovementionedlimbs under the no-conflictrule, this principle of non-remunerationis also based on the principlewhich disallows a fiduciary fromputting himself in a position wherehis or her personal interests wouldconflict with his or her duties as atrustee.12 In the case of Barret vHartley13, a trustee who successfullymanaged the trust business for sixyears had failed to secure remunerationfor his personal efforts in managingthe trust.

The next element is the no-profitrule. Lord Herschell in Bray v Ford14laid down as follows:

“…it is an inflexible rule of thecourt of equity that a person ina fiduciary position…is notunless otherwise expresslyprovided, entitled to make aprofit; he is not allowed to puthimself in a position where hisinterest and duty conflict…Iregard it rather as based on theconsideration that, there isdanger, in such circ*mstances,ofthe person holding the fiduciaryposition being swayed byinterest rather than by duty, andthus prejudicing those whom hewas bound to protect.”

The excerpt suggests that a personin a fiduciary position is not entitledto make any profit in the course oftheir trusteeship. Under the rule inKeech v Sandford,15 it is an establishedprinciple of law that a trusteemust not use his position as a trusteeto enrich himself. According to LordRussel, “the profiteer, howeverhonest and well-intentioned, cannotescape the risk of being called uponto account…”.16 It was also furtherstated that the person in fiduciaryposition must not utilise any informationwhich has come to them due totheir position to gain a profit and thisprinciple has been enumerated inBoard v. Phipps.17

Any profits received by a trustee willbe considered as unauthorizedprofit which includes incidental andsecret profits. A trustee usuallyhappens to receive incidental profitswhen the trustee receives a commissionby directing the trust to aparticular company. Reference canbe made to the case of Williams vBarton18 in which a trustee had acontract with a brokerage firmunder which he received a commissionon work for clients that he hadintroduced to them. The Court thendecided that thetrustee wasaccountable to the trust for thecommission he earned by directingthe trust business to the firm.

Meanwhile, trustees are said to haveobtained secret profits if they havereceived bribes or hidden commissions.

In the case of Islamic Republicof Iran Shipping lines v Denby,19 asolicitor accepted a ‘commission’ of$200,000 from the opposite side forsecuring the settlement of a legalaction brought by his client. LeggatJ said, “what he received was, quitesimply, a bribe and he was liable topay the sum to his client.” This showsthat trustees who have receivedsuch secret profits are liable to paythe beneficiariesof the trust fund theamount which they have profitedfrom.

The analysis of the case laws showsthat the relationship betweentrustees and beneficiaries isundoubtedly based on the principleof trust and confidence whichcreates fiduciary duties.

Currently, the governing laws in theavailable statutes and instrumentcreating the trust do not directlyaddress the fiduciary nature of thetrustees’ duties and powers.

Fiduciary Duty Of Trustees Under Malaysian Law. - Conventus Law (2024)