In re Pauling’s Settlement Trusts

A fiduciary power of advancement may be exercised only for the beneficiary’s benefit and for a good reason. The trustees must weigh that benefit against the interests of others under the settlement. If money is advanced for a stated purpose, the beneficiary must apply it to that purpose and the trustees must exercise appropriate supervision.

An adult beneficiary’s informed consent may answer that beneficiary’s claim arising from a breach of trust. Consent procured through presumed undue influence cannot do so where the trustee knew, or ought to have known, of the influence. Relief under section 61 of the Trustee Act 1925 remains available to professional trustees, but their professional status and any conflict between their fiduciary duty and commercial interest weigh strongly against relief.

The defendant bank was the sole and remunerated trustee of a marriage settlement. The settlor had a protected life interest, while her four children held expectant or presumptive interests. Clause 11 authorised the bank, with the settlor’s written consent, to advance up to half of a child’s share.

Between 1948 and 1954 the bank paid substantial capital sums, nominally for the children’s advancement, towards houses, furniture, family expenses and the settlor’s debts. Much of the money went directly into the settlor’s overdrawn account. The children sought restoration of the advances attributed to their respective shares.

Wilberforce J held the bank liable to restore part of the money: [1962] 1 WLR 86. Both sides appealed. The central questions concerned the proper scope of the advancement power, the effect of the adult beneficiaries’ consent and presumed parental undue influence, relief under section 61 of the Trustee Act 1925, acquiescence, and the credit to be given for benefits received.

1. Appeal allowed in part; cross-appeal dismissed. Willmer, Harman and Upjohn LJJ delivered a joint judgment on every issue except the extent of section 61 relief for the Hodson transaction. On that issue Harman and Upjohn LJJ formed the majority.

2. The two limbs of clause 11 did not differ substantially in ambit. As the power was fiduciary, an advancement required a good reason beneficial to the proposed advancee. The trustees had to weigh that benefit against the interests of those presently or prospectively entitled under the settlement. An unrestricted payment could be made where the trustees reasonably trusted the beneficiary to use it properly. An advance for a specified purpose required the beneficiary to perform that purpose and required appropriate supervision by the trustees.

3. An adult beneficiary’s valid request or consent was a defence to that beneficiary’s personal claim, even where the payment was a breach of trust. Presumed undue influence between parent and child was fact-sensitive and ordinarily lasted only a short time after majority. It weakened as the child became independent. Where the presumption applied, the parent had to establish a spontaneous and informed act of the child; independent advice was desirable but not invariably essential. On the facts, the bank could not rely on consents obtained from Ann and Anthony, but could rely on later consents from the emancipated beneficiaries.

4. The bank had to restore the purchase money for the Isle of Man house, £1,000 nominally advanced for its furniture, the recoverable advances concerning Ann, and £6,500 advanced through Anthony’s share. No deduction was permitted from Anthony’s recovery merely because he had incidentally benefited from family expenditure. The appeals concerning the later £5,350 advances and the separate £2,000 advance involving Francis and George were dismissed because valid consents protected the bank.

5. Section 61 of the Trustee Act 1925 could apply to a professional trustee, although professional status and a conflict between banking interests and fiduciary duty were adverse considerations. For the £2,600 Hodson transaction, the majority held that the bank must restore the money but should receive section 61 relief equal to the policies’ 1948 surrender value. Willmer LJ would have relieved the bank in full.

6. The limitation and laches defences failed. Acquiescence also failed because the beneficiaries neither knew nor ought to have known their rights before receiving legal advice in 1954, after which they acted without disqualifying delay.

• Court of Appeal: The appeal was allowed in part and the bank’s cross-appeal was dismissed. The extent of relief under section 61 of the Trustee Act 1925 for the Hodson transaction was determined by a majority.
• High Court: Wilberforce J held the bank liable to replace nearly £15,000 expended in breach of trust: [1962] 1 WLR 86.