Picture this. A trustee holds £200,000 for two young beneficiaries. He puts the whole lot into a single speculative tech start-up because a friend gave him a tip. The company collapses. The beneficiaries are furious. In the SQE1 exam, the question will not ask you whether the trustee was foolish — that is obvious. It will ask whether he has breached his duties, what he must pay, and whether anyone else can be chased for the loss.
Trusts Law sits inside FLK2, and the three certainties get most of the attention. But examiners love the back half of the syllabus: what trustees actually have to do, what happens when they get it wrong, and how a beneficiary recovers misapplied trust property. Let me walk you through the parts that win marks.
Trustee duties in SQE1 FLK2: the statutory and fiduciary core
A trustee wears two hats. There are the ordinary duties of competent administration, and there are the stricter fiduciary duties of loyalty. Mix these up in the exam and you will lose easy points.
The duty of care is now largely statutory. Under the Trustee Act 2000, a trustee must exercise such care and skill as is reasonable in the circumstances. The standard rises if the trustee has special knowledge — a professional trust corporation is held to a higher bar than a well-meaning family member. The old common law standard from Speight v Gaunt (the ordinary prudent person of business) still helps you understand the idea, but quote the Act first.
Investment is the duty examiners test most. The 2000 Act gives trustees a general power of investment — they can invest as if they owned the assets themselves — but it comes with conditions. They must apply the standard investment criteria: the suitability of the investment and the need for diversification. They must also take and consider proper advice unless it is reasonable to conclude that advice is unnecessary, and they must review investments from time to time.
Back to our opening trustee. Dumping the entire fund into one start-up fails diversification, almost certainly ignores proper advice, and ignores suitability for young beneficiaries. That is a clear breach of the Trustee Act 2000 — and the analysis should take you about three lines.
The fiduciary duties are different in character. A trustee must not allow a conflict between duty and personal interest, and must not profit from the trust without authority. The classic authority is Keech v Sandford, where a trustee who renewed a lease in his own name held it on trust for the beneficiary even though the beneficiary could not have obtained it. The rule is strict — fairness and good faith are no defence. Boardman v Phipps confirms that even an honest fiduciary who makes a profit must account for it.
Self-dealing and fair-dealing — a quick MCQ trap
If a trustee buys trust property, the self-dealing rule makes the transaction voidable by a beneficiary, no questions asked about price. If a trustee buys a beneficiary's beneficial interest, the fair-dealing rule applies and the trustee must show full disclosure and a fair price. The single best answer often turns on spotting which rule is in play.
Breach of trust and the trustee's personal liability
When a trustee breaches a duty and the trust suffers a loss, the trustee is personally liable to restore the value. The measure is restitutive: put the fund back into the position it would have been in had the breach not occurred. The leading modern statement is Target Holdings v Redferns, refined in AIB Group v Mark Redler — there must be a causal link between the breach and the loss claimed.
Two points reliably appear in FLK2 questions.
Trustees are liable jointly and severally. A beneficiary can pursue any one of them for the full loss, leaving that trustee to seek contribution from the others. So a trustee who personally took nothing can still be on the hook for everything.
A trustee cannot set off a gain on one breach against a loss on another, unless they form part of the same transaction or course of dealing (Bartlett v Barclays Bank). Watch for a fact pattern where the trustee says, "but my other risky investment did brilliantly" — usually that does not help.
Defences a trustee may raise
Know these because the right answer sometimes turns on a defence rather than the breach itself:
- Section 61 Trustee Act 1925 — the court may relieve a trustee who acted honestly and reasonably and ought fairly to be excused.
- Beneficiary consent — a beneficiary who is of full age and capacity and freely consented to the breach cannot later complain.
- An exemption clause in the trust instrument can exclude liability for ordinary negligence, but not for fraud or dishonesty (Armitage v Nurse).
- Limitation — the standard six-year period applies to many claims, but there is no limitation period for fraudulent breaches or where the trustee retains trust property (Limitation Act 1980, s 21).
Following, tracing and proprietary remedies
A personal claim against a trustee is only worth something if the trustee can pay. So the law lets a beneficiary assert a proprietary claim over the misapplied property itself, or over what it has become. This is the part candidates find fiddly, so let me keep it concrete.
Following means tracking the same asset as it moves from hand to hand. Tracing means identifying a new asset that represents the original — the process, not the remedy (Foskett v McKeown). Once you have traced into something, you can claim it.
Mixing in a bank account is the classic exam scenario. If a dishonest trustee mixes trust money with his own and then spends some, the courts apply presumptions in the beneficiary's favour:
- Re Hallett's Estate — the trustee is presumed to spend his own money first, so the trust money survives in the account.
- Re Oatway — but if the trustee spends first on an asset that rises in value and then dissipates the rest, the beneficiary can claim the surviving asset.
Where trust money is mixed with another innocent beneficiary's money (an honest mix), a more even-handed approach applies — often the rule in Clayton's Case (first in, first out) for current accounts, though courts will use a proportionate, pari passu split where first-in-first-out would be unfair. If the money is simply dissipated — spent on a holiday, with nothing to show for it — tracing stops. There is nothing left to claim.
Exam tip: a proprietary claim beats a personal one when the wrongdoer is insolvent, because you take priority over unsecured creditors and you capture any increase in value. Always check whether the traceable asset has gone up — that is usually why the examiner chose it.
Third-party liability: dishonest assistance and knowing receipt
FLK2 questions often add a stranger to the trust — a solicitor, an accountant, a friend who received the money. Two separate heads of liability arise, and they are commonly confused.
Dishonest assistance catches someone who helps a breach of trust along, even if they never received any trust property. The test from Royal Brunei Airlines v Tan is dishonesty judged by the objective standard of ordinary honest people, taking account of what the defendant actually knew. There is no need to show the trustee was dishonest — the accessory's own state of mind is what counts.
Knowing receipt catches someone who receives trust property for their own benefit knowing it was transferred in breach. The test from BCCI v Akindele is whether the recipient's state of knowledge makes it unconscionable for them to retain the benefit. Receipt is essential here; assistance alone will not do.
When you see a stranger in the facts, ask one question: did they receive the property, or merely help? That single distinction usually points to the correct answer.
How to revise this topic for the SQE1 FLK2 paper
Trusts Law rewards a structured approach. For every breach-of-trust problem, run the same chain in your head: identify the duty, prove the breach, establish the loss and causation, value the personal claim, then ask whether a proprietary claim and any third-party claim improve the beneficiary's position. Finish by checking the defences.
Because these are single best answer MCQs, the wrong options are usually true statements of law that simply do not fit the facts. Train yourself to eliminate. If the trustee never received property, knowing receipt is out. If the asset was dissipated, the proprietary claim is out. Cross off the impossible and the best answer becomes obvious.
Practise with timed questions rather than re-reading notes. Recall under exam pressure is a different skill from recognition, and it is the one the SQE actually measures.
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