A unit trust deed typically has provisions for (a) a primary trust to the effect that whilst the unit trust is a going concern the trustee will hold the unit trust assets for the unitholders ’subject to the terms and conditions of the trust deed‘ and, in the case of an authorized unit trust, ‘all regulations made under section 81 of the Financial Services Act 1986′ and (b) a secondary trust for realization of assets and division of its proceeds upon the termination of the trust by the trustee.There is thus no question that the trustee holds the assets in the capacity as a trustee of an express trust. However, it has often been said that the trustee’s function in a unit trust is merely to hold the trust assets for the unitholders and that it does not actively manage them like ordinary trustees. The question therefore is in what character does the trustee hold assets: a custodial agent, a bare trustee or an active trustee?”‘

The answer to this question is important in determining the liabilities of unitholders. If the trustee holds properties as a custodial agent, the unitholders may be personally liable to third parties for all acts done within the scope of agency. If on the other hand the unitholders are not principals, but are merely beneficiaries of a trust, they cannot be liable for acts of the trustee who is acting as a principal. However, as beneficiaries, they may be under an obligation to personally indemnify the trustee under the principle of Hardoon v. Belilios.

FundsThe term ‘custodial agent‘ is in itself ambiguous. It may mean an agent having possession simpliciter, without legal title; it may mean an agent with the title of the property of the principal vested in it. In the former sense, the agent is a bailee.

If legal title to property belonging to another is vested in an agent, this fact alone is sufficient for courts of equity to characterize the trustee of a unit trust as a trustee. The question which then arises is simply whether the trustee has the additional character of an agent. An agent is under an obligation to obey the instructions of its principal. As indicated earlier, the unit trust deed, as a contract of all the parties, denies the existence of any entitlement of the unitholders to question the trustee’s dealing of the trust fund. There is no agency relationship in addition to the trust relationship. Therefore, the remaining question is whether the trustee is a `bare trustee‘ or an ‘active trustee‘.

There are two possible meanings of the term ‘bare trust‘. In Christie v. Ovington, Hall VC defined a bare trustee as: a trustee to whose office no duties were originally attached, or who, although such duties were originally attached to his office, would, on the requisition of his cestuis, be compellable in equity to convey the estate to them, or by their direction.

In short, it is a mere nominee or dummy for the true owner. This view is supported by cases such as Re Cunningham and Frayling and IRC v. Silverts.

In Morgan v. Swansea Urban Sanitary Authority, Jessel MR criticized the view expressed by Hall VC and took the view that a bare trustee was a trustee with no personal beneficial interest in the trust property. His view had support in the case of Re Blandy Jenkins’ Estate.

A third view combines both elements of the two. This is the approach taken in the fourth edition of Halsbury’s Laws of England which states:

A bare trustee is a person who holds property in trust for the absolute benefit and at the absolute disposal of other persons who are of full age and sui juris in respect of it, and who has himself no present beneficial interest in it and no duties to perform in respect of it except to convey or transfer it to persons entitled to hold, and he is bound to convey or transfer the property accordingly when required to do SO.

This approach has support in the judgment of Gummow J in the recent Australian case of Herdegen v. FCT.

Jessel MR’s definition is simply that of a trustee who happens to be not one of the beneficiaries. His Lordship’s view does not appear to serve any analytical purpose or to enlighten the duty aspect of the trust. The former view of Hall VC is preferred by standard trusts texts.

In a unit trust, the manager is the centre of activities. It makes the investment decisions, issues and redeems units, and performs a range of administrative tasks. However, an active manager does not imply a ‘duty- less’ trustee. The Financial Services (Regulated Schemes) Regulations 1991 contemplate the trustee of an authorized unit trust to act in two capacities, as a custodian of properties and also a supervisor of the manager. Under the Regulations, the trustee has responsibility to oversee that the manager will manage the scheme in accordance with the Regulations, the trust deed, and the scheme particulars, to ensure that the manager’s investment does not exceed its power, to ensure that the unit pricing arrangement is proper, and to report to the unitholders annually the conduct of the manager in the management of the unit trust.184 In respect of a non-authorized unit trust, similar supervisory functions of the trustee have been recognized by courts. Moreover, it can also be said that the office of the trustee carries with it residual powers and duties that will enable it to seek directions and remedies from the court for the benefit of unitholders.

In IRC v. Silverts, the Court of Appeal held that a custodian trustee who was bound by the provisions of the Public Trustee Act 1906 to give effect to the directions of the managing trustee was not a bare trustee. The reason for the court’s decision was that the custodian trustee had a duty not to obey directions that involved a breach of trust. A fortiori, a trustee such as the trustee of a unit trust with active duties to perform cannot be characterized as a bare trustee.

It follows from the above analysis that the trustee in a unit trust is neither a custodial agent with mere possession nor a bare trustee with no duties to perform. It is a paid trustee with active duties to perform.

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The Trustee-Unitholders Relationship: Custodial Agency, Bare Trust or Active Trust?