Being a trustee is not merely having the powers to administer the property of a trust fund, but it comes with a wider scope of duties and responsibili-ties. As much as directors have fiduci-ary duties in exercising their director-ship in managing a company, similar-ly, trustees also owe fiduciary duties towards the beneficiaries of the trust fund. In identifying the fiduciary duties of trustees, an important issue to be established beforehand is whether there exists a fiduciary relationship between trustees and beneficiaries. In Chirnside v Fay [2007] NZSC 68, the learned judge in his judgment had provided the definition of fiduciary which comes from the word fiducia, meaning trust, confidence, and faith. The judge further elucidates the word fiduciary to be a relationship of trust and confidence in which a person is entitled to rely on another. In the case of LAC Minerals Ltd v International Corona Resources Ltd (1989) 61 DLR (4th) 114 at 90, the judge’s explana-tion is as follows: “…there are certain relationships which are almost per se fiduciary such as trustee and beneficiary, guardian and ward, principal and agent…”
From the above excerpt, it is clear that there is a fiduciary relationship existing between trustees and beneficiaries. When we discuss about the duties of trustees in Malaysia, an Act legislated for this purpose is the Trustee Act 1949 (hereinafter referred to as “the Act”). Despite the presence of a specific legislation governing matters relating to the powers of trustees, it is stated under the Act itself that the powers conferred by the Act on trustees are in addition to the powers conferred by the instrument creating the trust (here-inafter referred to as “instrument”) and those powers will only apply if there is no contrary intention expressed in the instrument and is effectively subject to the terms of the instrument.1.
It is well understood from the provi-sion that reference should be made to the provisions laid down in the instrument creating the trust before referring to the Trustee Act in matters relating to the powers of trustees. However, the Act only confers powers to the trustees but does not expressly address the issues surrounding the fiduciary duties of trustees in exercising their responsi-bilities towards the rightful benefi-ciaries. Hence, as provided under the Civil Law Act 1956, reliance should be made to Common Law in the absence of any local legisla-tion.2 Under the Common Law, the two core elements governing trustees in the discharge of their duties are first, prohibiting the fiduci-ary from acting in a situation where there is a conflict between the fiduciary duties and his or her interest and secondly, the fiduciary is prohibited from making a profit out of his or her fiduciary position.3 In a rather simplified form, these elements are known as the “no-conflict rule” and “no-profit rule”.4 In general, the primary duty imposed on the trustees is a duty of loyalty to the person for whom they are acting. Firstly, the trustee must administer the trust only for the interest of the beneficiaries. The two main indicators for disloyalty take place when the trustees engage in self-dealing or get along within conflict of interest. Self-dealing means that the trustees attain benefits from the transaction made upon the trust property. With regard to this, even if a trustee attempts to prove that he acts in good faith and for the benefit of the beneficiaries, it is still insufficient for to escape from liability. Hence, it is a must for the trustees to avoid any conflict of interest under all circumstances. We will first discuss on the element of the no-conflict rule.5 It s established under this rule that the trustees should exercise their duties in good faith and that the trustees must never be in competition with the trust.
Good faith refers to honesty or sinceri-ty of intention.6 According to N S Bindra’s Interpretation of Statutes7 which was cited in the case of T Sivam a/l Tharamalingam (sebagai wakil/ pentadbir kepada harta pusaka mendiang Nagamuthu a/l Periasamy) v Public Bank Berhad,8 good faith includes due inquiry and implies not only an upright mental attitude and clear conscience of a person, but also the doing of an act, showing that ordinary prudence has been exercised according to the standards of a reasonable person. The author, N S Bindra further stated that ‘good faith’ precludes pretence or deceit and also negligence and recklessness. In other words, the trustees are said to have acted in good faith when they act honestly, reasonably and fairly in the best interest of the beneficiaries. Trustees must also not be in competi-tion with the trust in the course of carrying out their duties and responsi-bilities. This statement suggests that trustees are prohibited to compete with a business which forms part of the trust assets.9 Why is it prohibited? This was answered by the court in the case of Re Thomson [1930] 1 Ch 203 where the court established that the action would amount to an engagement in which he would have a personal interest conflicting or which possibly might conflict with the interests of those he was bound to protect. Hence, the trustee could be said as being in breach of his or her fiduciary duty by entering in such engage-ment. An example that explains this situation is a trustee cannot set up independently as a yacht broker if he was a trustee of a yacht broking business.10 The law is concerned if the trustee would end up making deci-sions that would conflict with the beneficiaries’ interest since the trustee may enter into dealings with the yacht broking business as a yacht broker. However, this rule does not apply to businesses of different nature and/or subject matter since there would be no element of competition.
