Breach of Trust: Liabilities & Defences for Company Trustees

Trusts can be incredibly powerful vehicles-whether you're managing a family business succession plan or holding assets in a company structure. But that power comes with serious responsibilities. If you’re a company director acting as trustee, you’re not just looking after business as usual: you’re protecting someone else’s assets, and mistakes (or even just carelessness) can have big consequences.

So, what happens when a trustee breaches their duties-or in legal terms, commits a breach of trust"What could you be personally liable for" And are there any protections or defences company trustees can rely on? Whether you’re a first-time trustee, or a beneficiary worried something’s gone wrong, understanding these duties is crucial for keeping things above board and minimising risk.

In this Sprintlaw guide, we’ll break down the core duties for company trustees, what counts as a breach, the legal consequences (including personal liability), common defences, and practical steps to protect yourself. Let’s get started.

What Are the Main Duties of a Trustee?

First things first: what exactly does a trustee have to do? Let’s set the scene.

A trustee is the person (or company) given legal control over assets or property, managing them not for themselves but for the benefit of others (the beneficiaries). If your company has been appointed as a trustee, the directors carry out all the decision-making for the trust, acting in its best interests.

Trusteeship is fundamentally a relationship of trust-in legal terms, it’s “fiduciary”. That means strict obligations:

• Act in Good Faith: Always act honestly and with the beneficiaries’ best interests as the top priority.
• Follow the Trust Deed: The trust deed is your instruction manual. Trustees must stick to its terms unless all beneficiaries agree otherwise, or a court orders something different.
• Avoid Conflicts of Interest: Trustees can’t put themselves in a position where their own interests clash with their duties, or profit personally from their role (unless the trust deed specifically allows it).
• Act Impartially: Where there’s more than one beneficiary, trustees must be fair and even-handed-no favouritism unless the deed says otherwise.
• Properly Manage Trust Property: Look after trust assets diligently. This means safe investment, keeping proper records, and never mixing trust property with personal or company assets.
• Keep Accurate Accounts: Trustees must maintain up-to-date accounts and supply information to beneficiaries on request.

Missing any of these? That’s when questions about breach of trust come into play.

What Counts as a Breach of Trust?

A breach of trust simply means a trustee has failed to uphold their duties-whether by doing something they shouldn’t, or failing to do something required of them.

Some of the most common ways company trustees breach trust include:

• Misapplying Trust Assets: Using, paying out or investing trust funds contrary to the terms of the deed.
• Mixing Assets: Not keeping trust assets separate from personal or company property (commonly called “co-mingling”).
• Acting in Self-Interest: Making decisions that benefit the trustee, a director, or an associated business, without authority.
• Failing to Act Impartially: Favouring some beneficiaries over others, unless expressly permitted.
• Negligence or Poor Record-Keeping: Failing to safeguard assets, make prudent investments, or keep proper accounts.
• Withholding Information: Not providing accounts or information to beneficiaries when required.

Let’s look at a few realistic scenarios:

• A director who runs a company acting as trustee “lends” trust funds to their own business, without board approval or a clause in the deed. This is a classic breach of trust.
• A trustee has several beneficiaries but only gives detailed accounts to their relative, leaving the others in the dark. This could be seen as failing to act impartially and transparently.
• The trust’s investment portfolio is left unmanaged for years, resulting in lost value for no good reason. The court may hold the trustees liable for negligence.

No matter the scenario, the key question is always: did the trustee uphold their strict duty to the trust and its beneficiaries?

What Are the Legal Consequences of a Breach of Trust?

When a company (or individual) acting as trustee breaches the trust, things can get serious-fast. A breach isn’t just an internal “slap on the wrist”. Trustees (including company directors) can be held personally liable for losses suffered by the trust and beneficiaries as a result of their actions or omissions.

The main legal consequences include:

• Compensation for Loss: Trustees may have to put the trust back in the position it would have been in if the breach hadn’t occurred. This usually means making good any financial losses out of their own pocket.
• Restoration of Assets: If trust assets were misappropriated, they must be repaid or replaced.
• Removal as Trustee: The court (or sometimes beneficiaries) can seek to have trustees removed if there’s been a serious breach.
• Legal Action: Beneficiaries, co-trustees, or regulators may bring claims against the trustee for breaches of duty, which can include costs, interest and further damages.
• Reputational Impact: Allegations of breach can damage both the company and the directors’ reputation, even without a final judgment.

Importantly, company directors aren't automatically protected by the corporate “veil” when acting as a trustee. If there’s evidence of wrongdoing, they may be personally at risk.

If your trust has both a company and individual trustees, they can be jointly and severally liable for breaches-meaning claimants can pursue any or all of them for the full amount.

It’s critical to comply with your fiduciary duties from day one. If you’re not sure your legal foundations are solid, speak to a legal expert early on-our Articles of Association Review can also help you clarify your duties as a company director.

Are There Any Defences or Protections for Trustees?

If you find yourself accused of breaching trust duties, is there anything you can do? Fortunately, the law recognises that honest mistakes sometimes happen, and not all breaches are deliberate.

Key Defences to a Breach of Trust Claim

• Authorisation by the Trust Deed: If the action was permitted by the trust deed, there is no breach. Read your deed carefully before making decisions.
• Beneficiary Consent: If all beneficiaries (who are legally able) consented to the action, a trustee may avoid liability.
• Acting on Professional Advice: If you relied, in good faith, on appropriate legal or financial advice, and made reasonable inquiries, this may be a partial defence.
• Exclusion Clauses: Some trust deeds exclude or limit trustee liability for loss (as long as the trustee acts honestly, without deliberate misconduct or wilful negligence). Always check the extent of these clauses-but be wary, as courts read them narrowly.
• Statutory Relief: In some cases, the court has discretion under the Trustee Act 1925 to excuse trustees for honest and reasonable mistakes if they acted in good faith.

Trustee Indemnity: Will the Trust Pay My Legal Costs?

Generally, trustees are entitled to be indemnified (reimbursed) out of trust assets for expenses properly incurred in carrying out their duties. But, if you breach the trust by acting outside your powers or acting dishonestly, you may lose the right to indemnity.

This means you could be personally liable for legal costs and losses. It’s another reason it’s so important to act within your powers and document your decisions.

How Can Trustees Protect Themselves Against Breach?

If you’re acting as a trustee (especially as a company director), staying protected means combining good habits with robust legal documentation and advice. Here’s your starter checklist:

• Review the Trust Deed Regularly: Understand and follow its terms. If unsure, ask for legal guidance before taking action.
• Keep Accurate Records: Record every decision, meeting, and transaction involving the trust-including advice received and reasons for your choices.
• Seek Professional Advice: If in doubt, get independent advice from legal, financial or tax experts. This also helps support your defences if things go wrong.
• Communicate Transparently with Beneficiaries: Honesty and openness about trust affairs go a long way to preventing disputes.
• Maintain Separation of Assets: Never mix trust assets with company or personal funds. Open separate bank accounts, and make sure your accounting reflects this.
• Appoint or Consult Co-Trustees Cautiously: If there are multiple trustees, coordinate and keep everyone informed. Remember, one trustee’s actions can bind all, and you could be liable for another’s breach if you don’t act to stop it.
• Arrange Trustee Indemnity Insurance: Policies exist to help cover losses arising from honest mistakes-though they won’t protect deliberate wrongdoing.

It’s easy to get overwhelmed if you’re new to these concepts-so don’t hesitate to reach out and consult a corporate lawyer for tailored advice before signing on as a company trustee.

Can Trustees Limit Their Liability in the Trust Deed?

Many trust deeds include clauses that limit or exclude trustee liability for losses arising from honest mistakes, relying on professional advice, or actions taken in good faith. However, these clauses can never excuse fraud, deliberate wrongdoing, or wilful reckless conduct.

If you’re thinking about setting up a trust, engaging a lawyer to draft or review the deed is crucial. Avoid using generic templates-properly tailored trust documentation is one of your strongest protections as a trustee. For guidance on setting up legal documents correctly, explore our article on Essential Legal Documents For Business.

I’m a Beneficiary-What If I Suspect a Breach of Trust?

If you’re a trust beneficiary and something seems off-such as not receiving information, unclear dealings with trust assets, or unexplained losses-you may have rights to:

• Request accounts and trust documents from the trustee
• Ask for a review or removal of the trustee in serious cases
• Bring a legal claim to recover losses or replace a trustee

The first step is usually to raise concerns directly with the trustee in writing. If this doesn’t resolve the issue, seek independent legal advice. Sprintlaw’s guidance on protecting business information may also help you understand how transparency should work in your situation.

Key Takeaways

• Trustees owe strict duties to act in the best interests of beneficiaries, comply with the trust deed, avoid conflicts, keep accounts, and maintain separation of assets.
• A breach of trust occurs when these duties are broken, whether by action or inaction-examples include misapplying assets, acting in self-interest, or failing to maintain proper records.
• Trustees can be held personally liable for any losses, even when acting as a company director. The “corporate veil” doesn’t automatically protect you here.
• Defences to alleged breaches include acting within the deed, with beneficiary consent, or in good faith based on professional advice, but these will never excuse fraud or wilful neglect.
• Trustee indemnity may cover your reasonable expenses, but not losses arising from breaches or wrongdoing.
• Keeping thorough records, seeking professional advice, and ensuring legal documents are properly drafted are your best protection against inadvertent breaches.
• Beneficiaries have rights to access information, seek removal of the trustee, and claim compensation for losses caused by breach of trust.

If you’re unsure about your duties as a trustee, worried about liability, or need to set up watertight trust documentation, we’re here to help. Contact us for a free, no-obligation chat on 08081347754 or at team@sprintlaw.co.uk.