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IAI Actuarial Core Principles · Business Management · Trusts and agency

Ms Iyer, a trustee, lends trust money on a mortgage that a prudent valuer would have rated as inadequate security. The borrower defaults and the trust loses ₹4 lakh. A beneficiary sues. Which statement best reflects the trustee's exposure?

Ms Iyer is liable to restore the loss. Lending on security that a prudent person would see as inadequate breaches the duty of care in investing, and a trustee is answerable for losses caused by breach. Personal gain is unnecessary, and being unpaid or blaming the borrower's default is no defence.

  1. ALiable only if she personally benefited from the loan
  2. BNot liable, because the loss arose from a third party's default
  3. CNot liable if she acted without payment as a trustee
  4. DLiable only if the trust deed expressly forbids lending
  5. Liable to make good the loss caused by her breach of the duty of prudence in investingCorrect

Explanation

Investing on inadequate security breaches the duty of care in investment, and a trustee who commits a breach is liable for the resulting loss. Personal benefit is not required. Being unpaid does not remove liability, and the borrower's default is the way the loss materialised, not a defence.

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