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Module 8 · Trustees' duties and investment

What this module covers and why it matters. Once a trust is validly constituted the trustee has to run it, and the largest single risk is how the trust fund is invested. This module sets out the trustee's core duty, the statutory investment code in the Trustee Act 1958 (Vic), the special problems of the prohibited investment and the ethical investment, and the relief a trustee can claim when things go wrong. It sits at the centre of the delinquent trustee problem that runs every year, where an investment breach is paired with a conflict or profit breach from Module 2 and an outright misappropriation with a tracing tail in Module 12. Master the investment ladder here and you have the spine of that whole answer.

How to use this guide. The scaffold below is the order to work a breach. Learn it as a ladder you climb rung by rung, because the examiner rewards a trustee assessed against each duty in turn rather than in a rush to the outcome. Revise from the worked boxes and from the provisions table, which maps every section to its exam use.

Cases at a glance

Cases and sources at a glance

The analytical scaffold

Work an investment breach up this ladder. Each rung is a distinct duty, and a trustee can breach at any rung.

1. Core duty. Start with the terms of the trust. The trustee must carry them out in good faith, and every investment power is read subject to them.
2. Power to invest. Confirm the power. Section 5 authorises investment in any form, subject to the deed.
3. Standard of care. Fix the standard by the trustee's character. Section 6(1)(a) sets a prudent professional's standard for a professional trustee and s 6(1)(b) a prudent person's standard for a non professional. Section 6(3) requires an annual review.
4. Prudence and speculation. Ask whether the investment is speculative or hazardous under s 7(2), assessed across the portfolio as a whole rather than holding by holding.
5. Factors and process. Check the s 8 factors, above all diversification and the purposes of the trust, and the s 12C process duties to take advice and set a strategy.
6. Express terms. Ask whether the investment breaks an express prohibition in the deed, which is a breach whatever its prudence and whatever one beneficiary says.
7. Ethical investment. Where the trustee has excluded an investment on moral grounds, run Cowan, Harries and Butler-Sloss.
8. Relief and remedies. Consider any exculpation clause and s 67 relief, then the remedies, including compensation, an account of profit, and s 12D offsetting, before the answer runs on into third parties and tracing.

Having set out the ladder we climb it in turn.

The core duty

What this section covers and why it matters. Before any statutory power is engaged the trustee is bound by the terms of the trust. This is the anchor for everything else, because a power the deed has cut down is not a defence.

Read the deed first. If it forbids a class of investment, the statutory power to invest in any form does not override it. Step 6 of the ladder returns to this point, because the express prohibition is one of the module's two recurring traps.

The investment ladder

What this section covers and why it matters. This is the mechanical core of the module. The Trustee Act builds a graduated code, and you apply it rung by rung. Learn the section numbers, because the examiner wants them pinned to the facts.

Start with the power and then fix the standard by who the trustee is. A trustee company or a solicitor trustee is held to the higher professional standard. A lay family member is held to the prudent person's standard. A missed annual review under s 6(3) is a quick process breach you should always check for.

The compass here is that you assess direction across the whole portfolio rather than judging one holding in isolation. A single volatile stock is not automatically a breach if the portfolio around it is balanced. A portfolio concentrated in one sector, by contrast, breaches the diversification factor in s 8(1)(b). Name modern portfolio theory and the efficient market hypothesis when you assess a concentrated holding, because the examiner uses those terms expressly.

Treat the process duties as a checklist that runs independently of outcome. A trustee who never took advice and never set a strategy has breached even if the investments happened to do well. Point this out early, because the facts often hand it to you before any question of prudence.

Breach of express terms

What this section covers and why it matters. The most heavily recycled trap in the module is the investment that breaks an express clause in the deed. The point is not whether the investment was clever. It is that the trustee was forbidden to make it.

Two traps sit inside this rule. The first is acquiescence by one beneficiary. One beneficiary saying the investment is no problem, or that the family is happy, ratifies nothing. Name the beneficiaries whose fully informed consent is missing, and remember that a minor among them cannot give the consent this rule requires. The second is the profitable breach.

Ethical investment

What this section covers and why it matters. Trustees are sometimes pressed to avoid an investment on moral grounds. The law asks whether that preference can be indulged at the beneficiaries' financial expense. This is also a named essay topic, so learn the line of authority as a sequence.

Weigh the two sides. Cowan sets the strict starting point that financial interest comes first. Harries softens it by allowing an ethical exclusion that carries no significant financial detriment. Butler-Sloss moves further still toward permitting trustees to weigh the purposes of the trust against pure return where the two conflict. The named essay content is s 7(2), Cowan, Harries, Butler-Sloss and the s 8(1)(a) purposes factor, so bring all five when you write on investment ethics.

Relief and remedies

What this section covers and why it matters. Even a trustee in breach may escape liability, in whole or in part, through an exculpation clause or a statutory discretion. Then the court fixes the remedy. This is the planted defence you should always test rather than assume away.

The twist is that a clause drafted to cover all breaches whatsoever does not do what it says. Read it down at the point of fraud or dishonesty, because that irreducible core cannot be excluded. Then turn to s 67 and apply the honest and reasonable test to the trustee's actual conduct rather than to the words of the clause.

The election between compensation and an account belongs to the plaintiff, subject to the bar on double recovery. A beneficiary cannot both recover the loss and take the profit on the same wrong. Where investments have moved in different directions, s 12D(1) lets the court offset a gain against a loss before it settles the sum.

The Trustee Act provisions mapped

This table is the module's comparison spine. Read each section across to what it governs and how it is used in an answer.

The stolen wages study

What this section covers and why it matters. The module carries one piece of essay content that is not a problem question tool. It is the study of the stolen wages claims, and it is taught here as prescribed reading rather than illustrated with invented facts.

Walker examines the historical control of the wages and savings of Aboriginal workers by state authorities in Queensland, where earnings were held and administered by the state on the workers' behalf. His argument is that ordinary trusts law can answer these Indigenous civil claims while leaving fiduciary law undisturbed. On his reading the state's role in holding those funds looks like the position of a trustee, so the trustee's non fiduciary duties of proper administration and investment supply a route to relief without extending fiduciary doctrine into new territory. That distinction matters, because fiduciary law in Australia is proscriptive and narrow, and asking it to carry the weight of historical injustice has repeatedly failed. Walker locates the claim in the trustee's positive administrative duties instead.

Treat this as essay material only. It must never be turned into invented drill facts about real claims.

How the examiners test this

This is insider guidance drawn from the recurring pattern rather than drama.

The delinquent trustee structure runs every year. It pairs an investment breach with a conflict or profit breach from Module 2 and often an outright misappropriation with a tracing tail in Module 12. Work the ladder in order, then the express prohibition, then the remedy. Resist the pull to jump straight to the outcome, because the marks are spread across the rungs.

Exculpation and s 67 appear as a planted defence. When you see a clause excusing all breaches, state the irreducible core from Armitage v Nurse, read the clause down at fraud, then run the honest and reasonable test in s 67 against what the trustee actually did.

The two recycled plants are the acquiescence trap and the profitable breach. When one beneficiary says the family is happy, name the missing consents. When a prohibited investment doubles, run the breach first and only then shift to the remedy election and s 12D offsetting. The investment ethics essay is the other place marks are won, and its named content is s 7(2), Cowan, Harries, Butler-Sloss and s 8(1)(a).

Consolidation. A trustee is judged against a graduated code. The core duty fixes the terms, the ladder from s 5 to s 12C measures the investing, the express prohibition overrides prudence, and the ethical cases balance return against conscience. When a breach is made out, test the exculpation clause and s 67, then fix the remedy with the plaintiff's election and s 12D offsetting in mind, before the answer runs on into third parties and tracing.

Take it to the practice bank

This module is drilled in the Equity and Trusts practice bank. Every problem there carries a realistic Pass answer, an H1 model answer, and an examiner's comment explaining the decisive fact and where the marks are lost.