Wifull Default

A trustee can breach the trustees duty by either doing things that a trustee should not do or by failing to do things a trustee should do.

In the first case this is an active breach of trust, in the second case this is referred to a “Wilfull Default”.

Wifull default was discussed at length by EM Heenem J in IN RE ELLIS; ELLIS -v- ELLIS [2015] WASC 77

142 Much confusion and mistaken analysis can follow unless the meaning of the concept of ‘wilful default’ as a basis for taking an account is strictly observed in its technical meaning. In ‘Wilful Default’ by J E Stannard (1999) 43 The Conveyancer and Property Lawyer at 345 the learned author wrote:

The meaning of the words ‘wilful default’ has long been an embarrassment to judges and a stumbling block for students of equity.

143 As his article demonstrates, authorities in the past have given a great variety of meanings to that term with widely disparate content according to the particular area of the law or doctrine in which it is employed. A common meaning attributed to the phrase is the definition given by Romer J in Re City Equitable Fire Insurance Co [1925] Ch 407, 430 which held that wilful default could not be established unless a person ‘was conscious that in doing the act which is complained of, or omitting to do the act which is said he ought to have done, he is committing a breach of his duty, or is recklessly careless whether it is a breach of his duty or not’. That definition is accepted as correct in many statutory and contractual contexts and even with regard to deeds of settlement dealing with the potential liability of trustees as well as others occupying fiduciary duties such as directors of companies, which Re City Equitable Fire Insurance Co addressed.

144 However, this is certainly not the meaning of the phrase as a technical term in courts of equity or when describing the obligation of an accounting party to account on the basis of wilful default. Nor is it applicable to an executor, a trustee, a partner or former partner after dissolution, or a mortgagee in possession (see Stannard, (346), (359) in situations examining the basis for the obligation to account by such persons.

145 Wilful default in this context focuses upon negligence or an omission to do something which ought to have been done. It is clear that specific knowledge, intention, or appreciation of the breach of duty are not requisite. As Stannard said (348):

It is not really possible to express a single test of what will amount to ‘wilful default’ by a party liable to account. All that can be said is that they have a number of duties to perform, failure to discharge which will make them liable to ‘wilful default’. Thus the mortgagee in possession, for example, has a duty to keep the property in repair, a duty to refrain from using it for unprofitable ventures, and a duty not to demise the property under unduly restrictive covenants. ‘Wilful default’ is simply failure to carry out one of these many duties. As such like ‘negligence’ it is a purely relative term and means no more than simple ‘default’ (citations omitted).

146 A full examination of the conceptual differences between these two bases for taking an account was conducted by Edelman J in Agricultural Land Management Ltd v Jackson [No 2] [324] – [325] and, in essence, at [347] – [349] where his Honour said:

In contrast with orders sought following a common account, the account which was taken on the basis of wilful default was substantially different. Those orders were dependent upon proof of a loss. An account taken on the basis of wilful default required the plaintiff to show that the custodial fiduciary, in breach of duty, failed to obtain a benefit for the fund. On the taking of the account the plaintiff could then ‘surcharge’ the account by the value of the rights that the custodial fiduciary would have obtained had the duty not been breached. As Dr Elliott and Professor Mitchell have observed, the historic difference between a claim based upon falsification of a common account and a claim based on surcharge of an account on the basis of wilful default has been concealed in modern cases which generally refer to both as ‘equitable compensation': Mitchell C, ‘Equitable Compensation for breach of fiduciary duty’ (2013) 66 CLP 307, 322. See also Elliott S and Mitchell C, ‘Remedies for Dishonest Assistance’ (2004) 67 MLR 16 and the summary of Dr Elliott’s thesis in Rickett C, ‘Equitable Compensation: Towards a Blueprint?’ [2003] SydLawRw 3; (2003) 25 Sydney L Rev 31 … Dr Elliott, whose writing has shone light and brought much clarity to this area of law, has suggested the use of the labels ‘substitutive compensation’ and ‘reparative compensation’ to differentiate the two types of claim. The former, based on the common account, describes a claim for the substituted value of the asset dissipated without authority: it demands that the trustee perform his or her duty to maintain the assets or fund. The latter, based on the account on the basis of wilful default, describes a claim for reparation for the loss suffered by breach of duty: Partington v Reynolds (1858) Drew 253, 255 – 256; [1858] EngR 461; 62 ER 98, 98 – 99 (Kindersley VC).

147 Some further insight into the scope of an order that a trustee should account on the basis of wilful default is provided by the observations of Brightman LJ in Bartlett v Barclays Bank Trust Co Ltd (No 2) (546) where his Lordship said:

Wilful default by a trustee in this context means a passive breach of trust, an omission by a trustee to do something which, as a prudent trustee, he ought to have done – as distinct from an active breach of trust, that is to say, doing something which the trustee ought not to have done.

148 The nature of an account on the basis of wilful default was considered fully by Kennedy J in Gava v Grljusich [1999] WASC 13, which was a subsequent step in the long-running litigation concerning that estate. It was after the decision of the Full Court to be mentioned later. At [24] – [33] his Honour undertook an examination of many authorities, leading to the conclusion that an account on the basis of wilful default is only ordered where at least one act of wilful default had been pleaded and proved. The distinctive characteristic is a breach by the accounting party by an omission rather than one of commission of some positive breach of trust. Reference was made to Re Symons (1882) 21 Ch D 757 where Fry J dealt with a case of alleged wilful default in the executors’ failure to receive some personal estate which they ought to have got in plus a positive allegation of a breach of trust in accepting interest on the balance of purchase moneys of real estate sold at a lower rate than should have been paid. His Lordship concluded that an account could be ordered on a wilful default basis if those allegations were proved or admitted.

149 Again, these are authorities dealing with actions for administration or other relief against trustees where distinct allegations of breach of trust or wilful default had been made and either proved or assumed to have been proved, before the order for an account on a wilful default basis was made. Even in cases where an active or positive breach of trust is alleged that is conventionally the subject of a prior allegation specifically to that effect, leading to an order for account to be taken in respect of that proven breach. Although, if the breach is of a positive nature rather than an omission or lost opportunity, the account will only be ordered on a common basis.

150 Furthermore, as appears from Bartlett v Barclays Bank Trust Co (No 2) 546 (Brightman LJ): The distinction between a wilful default, in the sense of a wrongful omission entitling the plaintiffs in appropriate circumstances to an account on the footing of wilful default, and an active breach of trust not so entitling the plaintiffs, can be seen by comparing the judgments in In re Stevens [1898] 1 Ch 162 and In re Wrightson [1908] 1 Ch 789.

151 Russell v Russell [1891] VicLawRp 139; (1891) 17 VLR 729 is another example of the distinction between a wilful default by a trustee and positive breaches of trust. As Webb J observed at 732: Breach of trust is not wilful default. A trustee living in occupation of the trust property is not wilful default. He is in occupation and will have to pay a fair occupation rent. 152 His Honour then went on, at 732, to deal with allegations of breaches of trust amounting to a neglect to keep property in repair; the trustee improperly paying himself out of the trust estate for effecting repairs; wrongful retention of moneys by way of commission on insurance being premiums paid and goods purchased. As to all of these matters, Webb J observed that those results would come out in the ordinary accounts. Or, as has been said, ‘wilful default is not coextensive with breach of trust. There may be a breach of trust that is not wilful default': G E Dal Pont, ‘Equity and Trusts of Australia’ (5th ed, 2011) 24.105.

153 This concept of wrongful omission by a trustee as constituting wilful default also appears in Tucker, Le Poidevin and Brightwell, ‘Lewin On Trusts’ (19th ed, 2014) where the learned authors observe that on an account on the footing of wilful default the trustees are charged not only with what they have actually received but are also surcharged with what they might have received apart from the wilful default or neglect, resulting in the claimant being given a roving commission to charge the trustees on taking the account with further capital or income which they should have obtained, for example, on the case of a sale or lease at an under value.

154 Dealing with the remedy of account by a trustee generally, Underhill & Heyton, ‘Law of Trusts and Trustees’ (Butterworths – 16th ed, 2003) 853 – 854 write: Where it transpires that the trustees have acted beyond their powers by doing something they are not authorised to do (eg, distributing trust money by way of gift to themselves or to someone else who is not a beneficiary or purchasing an unauthorised asset) the accounts will be falsified, deleting unauthorised entries of disbursements or transfers or acquisitions of assets, so that the appropriate sums or assets remain in the trust fund and the trustees must reconstitute the trust fund as it would have been but for the breach of trust, it being ‘well recognised that the basis on which a trustee is liable to make good a misapplication of trust money is strict and harsh, especially where there has been a huge depreciation in the value of the asset acquired’ as where there is a dramatic fall in the property market or the stock market. Where the trustees have not exceeded their powers, but have failed to act as they should have acted to comply with their equitable or statutory duties, their accounts will be surcharged to add the value that the trust fund would have had but for such failure. … The order for an account of administration in common form is available without any allegation of wrongdoing and requires the defendant to account only for what has actually been received, what has been disbursed in management expenses and what has been distributed. It is then open to the beneficiaries to falsify or surcharge items in those accounts, amending (or commencing) proceedings to seek the remedy of an account on a footing of wilful default as a response to at least one particularised breach of trust.

155 See also ‘Snell’s Equity’ (Sweet & Maxwell, 32nd ed, 2010) at [30-012] and [20-015].

Wilful default was considered by the Victorian Supreme Court in the following case:

Russell v Russell