The general rule is that a trustee, whether a trustee of a charitable or non-charitable trust, is entitled to be indemnified in respect of all his costs and expenses properly incurred in the execution of the trust. This includes legal costs incurred in connection with the proper bringing or defending of legal proceedings.
When will a trustee not be entitled to an indemnity out of trust funds?
In the case of Re Beddoe the Court stated that
…“a trustee who, without the sanction of the Court, commences an action or defends an action unsuccessfully, does so at his own risk as regards the costs, even if he acts on Counsel’s opinion…”
This means that any trustee involved in legal proceedings should consider whether they can avoid the risk of incurring personal liability for legal costs by seeking the Court’s prior approval of the proposed course of action in question. If there is any doubt in the trustee’s mind he should apply to the Court for guidance, or for what is known as a “Beddoe Order”.
However, the procedure is different for trustees of charitable trusts (see below).
When should a trustee consider applying for a Beddoe Order?
Whenever a trustee is involved in actual or potential litigation they should consider whether it is appropriate to apply to the Court for a Beddoe Order.
In many cases a Beddoe Order may not be necessary but the more risky and expensive the litigation is likely to be, the greater the need to consider applying for the protection that an Order can provide.
There may be occasions (for example where an application for an interim injunction is being considered) where there may not be time to obtain the Court’s approval prior to proceedings being commenced. However, a Court can retrospectively authorise an indemnity for the trustee if permission would have been given, had it been applied for.
What does an application for a Beddoe Order involve?
Broadly, an application is made to the Court to ask whether the issue in question is one which should be fought out or abandoned. If the Court gives permission to bring or defend the proceedings (or proposed proceedings) then the trustee will be entitled to an indemnity for legal costs out of trust funds whether the case is won or lost, assuming always that the trust funds are sufficient.
A trustee of a non-charitable trust can make an application directly to a High Court Judge. The Judge will not be involved in the substantive proceedings to which the application relates. The Court will expect certain evidence to be filed in support of the application. If the trustee does not give full disclosure, even if an Order authorising payment of legal expenses out of the trust fund is made, it may subsequently be unenforceable or set aside.
The Court will dispose of the application without an oral hearing if it considers that this will save time and expense, and a hearing is not necessary. If the trustee believes that an oral hearing is necessary he will need to explain why in his evidence.
Even if the application for approval is refused by the Court, the trustee will usually be entitled to be indemnified out of trust funds for costs incurred in relation to making the application itself.
However, before applying for a Beddoe Order trustees of charitable trusts must first approach the Charity Commission.
What do trustees of charitable trusts need to consider?
The position of trustees of charitable trusts is different to trustees of non-charitable trusts.
An application for a Beddoe Order is a ‘Charity Proceeding’ within the meaning of the Charities Act 2011. The Charities Act 2011 provides that Charity Proceedings cannot be entertained or proceeded with in any Court unless they have been authorised by an order of the Commission.
‘Charity Proceedings’ are defined as proceedings in any Court in England or Wales brought under the Court’s jurisdiction with respect to charities, or brought under the Court’s jurisdiction with respect to trusts in relation to the administration of a trust for charitable purposes.
If the substantive litigation in question is a ‘Charity Proceeding’ then a trustee has no option but to make an application to the Charity Commission.
A trustee must therefore first apply to the Charity Commission for authorisation to make the application to the Court for a Beddoe Order.
Will the Charity Commission always authorise an application to Court for a Beddoe Order?
No. The Charity Commission should not authorise a Beddoe application if it can use its powers to achieve the same result. In practice, the Charity Commission may give advice to the trustee which achieves the same result as a Beddoe Order. This means if the trustees act on the Commission’s advice they will be protected from actions for breach of trust. However, where the legal or factual issues are not straightforward, as is often the case, the Charity Commission may be reluctant to give advice in a way that will adequately protect the trustee.
So when would a trustee of a charitable trust need to apply for a Beddoe Order?
In some cases an application to the Charity Commission may remove the need to make an application to the Court for a Beddoe Order altogether. The Charity Commission could partially approve/refuse the application and/or can give directions to pursue it up to a certain level of costs or a particular stage in the proceedings. However, advice that the Commissioners might give is that the trustee should consider making an application for a Beddoe Order.
To obtain an Order protecting the trustees from personal liability in respect of legal costs trustees of non-charitable trusts can and should usually consider applying directly to the Court.
Trustees of charitable trusts must first seek the advice of the Charity Commission. In some cases, this may negate the need to apply to the Court at all.
In either case the trustee will usually have to obtain a written legal opinion setting out fully the strengths and weaknesses of the case, and will need to consider the position of the beneficiaries and their views, the proposed course(s) of action under consideration, as well as alternative dispute resolution options.