Anonymised, illustrative composite. The will named the widow as sole estate trustee and said nothing about carrying on a manufacturing business. She ran it anyway, for twenty-two months, on two different sets of duties she had not been told she was carrying.
At a glance
Her advisers treated this as one decision. It was two, and each attracts different rules.
The first is the decision to hold on to an illiquid, undiversified, unmanaged interest in a private company instead of realising it. That is a decision about trust property, and the Trustee Act has a standard for it.
The second is everything she did after she became a director of the corporation. A corporation is a separate legal person; the estate owns shares in it, and the estate trustee does not “run the business” in her capacity as trustee at all. She runs it as a director, and directors carry statutory duties and statutory liabilities that have nothing to do with the will. Conflating the two is how estate trustees end up believing an exculpation clause in a will protects them from an unpaid-wages claim. It does not.
At the date of death: $8.2 million of revenue, $1.35 million of normalised EBITDA, and an unsolicited approach at $5.6 million enterprise value. Twenty-two months later: $6.4 million of revenue, $410,000 of EBITDA, two of the four largest customers gone after quoting delays, no plant manager. The company sold at $3.9 million.
The beneficiaries’ complaint was arithmetic: $1.7 million of value had gone, and it had gone while one beneficiary was making every decision. Their claim was framed against her personally. She had also, over the period, paid $214,000 of professional fees out of the estate — an interim CFO, two failed recruitment mandates and a strategy consultant — and had drawn $180,000 of salary from the company.
Section 27(1) of Ontario’s Trustee Act carries the marginal note Investment standards and reads: “In investing trust property, a trustee must exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments.” Section 27(5) then lists criteria a trustee must consider in planning the investment of trust property, and s.27(2) permits investment in any form of property in which a prudent investor might invest.
Read what that section governs. It is a standard for investing, and its unit is trust property. Nothing in the Trustee Act confers a power to carry on the deceased’s business. There is no “carrying on business” section to cite — the Act deals with investments, delegation to agents, expenses, payment into court and the powers of personal representatives to convey land, and simply does not address the operation of a going concern. Where an estate trustee has that power at all it comes from the will, from the unanimous consent of the beneficiaries, or from an order of the court. This will gave none of the three.
The relief provision cuts in an unexpected direction. Section 35(1) allows a court to relieve a trustee who “has acted honestly and reasonably, and ought fairly to be excused for the breach of trust”. But s.35(2) says: “Subsection (1) does not apply to liability for a loss to the trust arising from the investment of trust property.” So relief is available for the operating decisions and closed off for the investment decision — and the decision to retain an unrealised private-company holding for twenty-two months is squarely an investment decision. The door most people expect to be open is the one that is shut.
On expenses, s.23.1(1) provides that “A trustee who is of the opinion that an expense would be properly incurred in carrying out the trust may” pay it from trust property or pay personally and recover. Section 23.1(2) is the sting: the court “may afterwards disallow the payment or recovery if it is of the opinion that the expense was not properly incurred in carrying out the trust”. The $214,000 was spent at her own risk.
The corporate side is separate. Once she took office as a director, s.134(1) of the Business Corporations Act (Ontario) required her to act honestly and in good faith with a view to the best interests of the corporation and to “exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances”, and s.134(3) provides that no provision in a contract, the articles, the by-laws or a resolution relieves a director from that duty. Section 131(1) makes directors “jointly and severally liable to the employees of the corporation for all debts not exceeding six months’ wages” that become payable while they are directors, plus up to twelve months of accrued vacation pay — subject to the procedural conditions in s.131(2). A wages exposure on a 34-employee payroll is a six-figure number, and no clause in a will touches it.
Nine months in, on new advice, she did three things. She obtained written consents from the three adult beneficiaries approving the retention of the shares and the continuation of the business, with a statement of the risks. She applied to the court for directions and an order approving the appointment of a corporate co-trustee. And she appointed an interim chief executive with actual manufacturing experience and stepped back to the board.
The claim against her settled without a finding: the beneficiaries accepted the consents as an answer to the period after month nine, and the estate absorbed the loss for the period before it. The $214,000 of professional fees was allowed in part, $61,000 disallowed. The sale closed at $3.9 million.
Compare the successor who was not ready to run it, where the person holding the wheel had a mandate and lacked the capability; here the reverse was true, and the missing mandate is what created the personal exposure.
An express power to carry on the business, a power to postpone conversion, an indemnity out of the estate and a nomination of a professional co-trustee are four clauses that would have cost a few hundred dollars at drafting. Their absence produced twenty-two months in which every decision the estate trustee made was made without authority and at her own risk, and a personal claim she settled rather than defended.
The tell is a will that appoints an estate trustee for an estate whose principal asset is an operating company, and then never uses the word “business”. Search the document. If the only powers are investment powers, the estate trustee has investment powers, and the company will need something else within a fortnight.
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