In order to grow the Binks Trust Fund Jeff and Samantha withdrew $500,000 from the Binks Family trust account at NAB (where it was earning nominal interest) and invested that sum in shares in a start-up mining company - Critical Minerals Pty Ltd (CM). Before embarking on this course of action they took advice from Rachel, an investment adviser at James Investment Advisers Pty Ltd. Rachel provided them with CM's past annual accounts (2 years' worth), directors' reports and related information about critical minerals and CM's business strategy. She told them that CM had potential as a good, but very high risk, investment opportunity.

Jeff had decided it was prudent to commission a second report into CM and proposed getting one from JB Jones Pty Ltd (a reputable Adelaide investment advising firm) but Samantha suggested that they engage another firm, Exxon Advising Pty Ltd (Exxon) on the basis that it had a good business relationship with Evans Accountants and Partners (recall that is where Samantha works ). Jeff agreed to this, reasoning to himself that Samantha, as an accountant, had more knowledge of investment advisers and firms than he, as a hotelier, had. 

Exxon's managing director - Oscar Pretorius - confirmed in a meeting with Jeff and Samantha that CM had the potential to return a yield of up to 25% per year but that such high returns were inevitably risky and that the market for critical minerals was still unknown. Oscar also suggested that further enquiries into one of directors of CM be carried out on the basis that the director in question (John Murphy) had only recently been appointed as a director of CM, was not well known in commercial circles and had not completed the Australian Institute of Directors course. Oscar assured Jeff and Samantha that the other 2 directors of CM were well known, extremely professional and well regarded. 

Samantha persuaded Jeff that further enquiries into John Murphy were necessary even though the fee Exxon was proposing for carrying out the further enquiries ($23,000) was high. Somewhat reluctantly Jeff agreed to commission the further enquiries by Exxon. These enquiries, which were carried out promptly because time was of the essence (see below) were inconclusive about John Murphy's expertise and experience. Jeff was concerned and suggested commissioning a third report from JB Jones. Samantha strongly disagreed. She pointed out that they didn't have any time to spare because the share offer in CM was closing very soon. She told Jeff that she although she didn't personally know either of the other 2 directors of CM, she was reassured by the fact that Oscar had said that both were well known and established directors in the mining industry. Jeff threw caution to the winds and told Samantha he agreed with her position.

Because there was such a short time frame to take up the offer of shares in CM (in fact the share offer closed 2 days after Exxon finished its enquiries into John Murphy). Jeff and Samantha did not have sufficient time to read the lengthy reports from either James Investments Advisers or Exxon in detail. They chose instead to rely on the summaries of both reports and on the verbal assurances they had received from the 2 firms about the potential high returns from this investment. Jeff and Samantha both concluded that CM had promising prospects and could provide good annual dividends plus a rise in the capital value of the shares - amounting to a high potential return on funds invested. Jeff, having put his misgivings about the lack of information on John Murphy to one side, was very excited about the prospect and believed that it represented a great opportunity to increase the overall value of Binks Family Trust Fund. Jeff and Samantha therefore purchased 50,000 shares in CM at a price of $10 per share as trustees of the Binks Family Trust.

Last week two of the directors of CM absconded, after stripping the company of its assets. It turns out that John Murphy has been involved in other company asset stripping ventures as well and had joined forces with one of CM's directors to implement the same scheme at CM. The 3^rd remaining director is very ill having suffered a stroke. CM's shares are now worth 5c each. Several other investors from Adelaide and Melbourne also lost large sums of money invested in CM. CM has no assets. It appears that John Murphy and his fellow director have left the country.

Sara is very upset about the investment and about the fact that the shares in CM are now practically worthless. Jeff wants to know if he and Samantha are liable for breach of trust in making what has turned out to be a bad investment.

In addition, yesterday Jeff discovered that Exxon had offered Samantha's son an opportunity to work at Exxon Investments as a trainee investment adviser provided that she, and Evans Accountants and Partners, referred business to Exxon.  Jeff did not know this fact when Samantha suggested engaging Exxon for the independent report.

Jeff told Sara that Samantha persuaded him to use Exxon Investments as a second adviser rather than JB Jones Pty Ltd. Sara now wants to know if any action can be taken against Samantha for not disclosing her son's employment at Exxon to Jeff before they engaged Exxon to advise on purchasing shares in CM. 

1. Are Jeff and Samantha  as trustees  potentially liable for effectively losing the sum of $475,000 given that the CM shares are now worth only $25,000?
2. Is Samantha liable for breaching her fiduciary duty as trustee?

Answer rating: 100% (QA)

Trustees are fiduciaries who owe certain duties to the beneficiaries of the trust such as the duty of loyalty the duty of prudence the duty of impartiality and the duty to account If trustees breach a... View the full answer