Category: Trusts & Trustee Law

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Does the Trustee’s right of indemnity have priority over the right of beneficiaries in relation to assets?

In Chief Commissioner of Stamp Duties (NSW) v Buckle, the High Court held that a trustee’s right of indemnity out of trust assets was not an encumbrance upon the interests of the beneficiaries.

Until the trustee’s right of reimbursement or exoneration has been satisfied, it is impossible to say what the trust fund is, in the sense that it is impossible to identify assets which are held solely upon trusts binding the trustee in favour of the beneficiaries.

The right of a trustee to be indemnified has priority over the right of beneficiaries in relation to the assets.

This make sense to me and although the High Court didnt have the need to mention it, this analysis operates conceptually in the same way that a partner’s interest in a partnership isnt known until there is an account taken of the partnership assets.

The trustee’s right of indemnity is a fantastic aspect of the law of trusts and is the basis on which all contractual claims are made through the Trustee against the Trust assets. More on this later.

Reference: Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 at 245-247 [47]-[51].

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Accounting for profits

Accounting for profits

  1. More recently in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd (2018) 92 ALJR 918; [2018] HCA 43 Kiefel CJ, Keane and Edelman JJ said (at [6]-[7]) (citations omitted):

In Consul Development Pty Ltd v DPC Estates Pty Ltd, in a passage accepted as authoritative by both sides in the present case, Gibbs J said that:

a person who knowingly participates in a breach of fiduciary duty is liable to account to the person to whom the duty was owed for any benefit he has received as a result of such participation.

So described, the liability to account and to disgorge benefits encompasses “any benefit” received by the knowing participant in a breach of fiduciary duty “as a result of” that participation. The benefit of a business connection is such a benefit. Foresters’ submission fails to come to grips at all with the fact that the benefit that Foresters stood to gain, and in fact acquired, from its participation in the various acts of disloyalty by Woff and Corby was not sporadic deposits from retail customers; it was the business connections of Lifeplan and FPM.

  1. Their Honours also said (at [13]-[16]) (citations omitted):

Quantification

Once it has been determined that a benefit or advantage has been caused by the acts of knowing assistance, there remains the question of quantification of the benefit to be disgorged. While it is true that equity will not require an errant fiduciary or a participant in a breach of fiduciary duty to account for an advantage which the breach of fiduciary duty has not caused or to which it has not sufficiently contributed, where causation is sufficiently established the onus is upon the errant fiduciary or participant to show that he or she should not account for the full value of the advantage. That onus is not discharged by mere conjecture or supposition giving the benefit of the doubt to a proven wrongdoer. The requirement of proof conforms with the obligation of a party charged with a breach of fiduciary duty to show why the full value of an advantage obtained in a situation of conflict of duty should not be disgorged.

There are two ways in which the wrongdoer might discharge that onus and reduce the extent of the liability to disgorge profits. The first way, which can involve notorious difficulties in attribution of costs, is by proving his or her entitlement to an allowance for costs incurred, and labour and skill employed. No issue of an allowance arises, or was relied upon, in this appeal because it was accepted that the expenses included in the discounted cash flow included an amount for the work and effort of Woff and Corby.

The second way, which was the focus of this appeal, is by demonstrating that the benefit or advantage is beyond the scope of the liability for which the wrongdoer should account for profits. A wrongdoer might prove that some profit or benefit is beyond the scope of liability for which he or she should account if the profit or benefit has no reasonable connection with the wrongdoing. For example, in Frank Music Corporation v Metro-Goldwyn-Mayer Inc, the Ninth Circuit Court of Appeals accepted that a copyright infringement by MGM Grand Hotel Inc in a performance at the MGM Grand Hotel entitled the plaintiffs to the profits directly from the performance. It also entitled the plaintiffs to a proportion of indirect profits, including from the consequential increase in hotel room bookings which were held to have a “sufficient nexus” with the performance. But the direct profit from the performance to be disgorged was limited to 9% because the copyright infringement comprised only the substantial part of Act IV in a 10-act performance. Nor did it entitle the plaintiffs to any profits made by the liable parent company, Metro-Goldwyn-Mayer Inc, as a result of “the advertising value” of the hotel.

No precise test has been prescribed for determining when it will be inequitable to account for a benefit on the basis that it has no reasonable connection with wrongdoing. Nor is there any need for such a test. All of the circumstances must be considered, including the nature of the conduct. It is pertinent here that the profits were from deliberate and dishonest conduct, and were those desired to be achieved.

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Legal principles: Mingling trust funds and onus

Mingling trust funds and onus (from [2018] NSWSC 1987)

  1. The fiduciary obligations arising if a trustee mingles or mixes trust funds with non-trust funds were explained in Cook v Addison(1869) LR 7 Eq 466 (at 470):

It is a well-established doctrine in this court, that if a trustee or agent mixes and confuses the property which he holds in a fiduciary character with his own property, so as that they cannot be separated with perfect accuracy, he is liable for the whole.

  1. This was applied by Ungoed-Thomas J in Re Tilley’s Will Trusts; Burgin v Croad [1967] Ch 1179 who said (at 1183) (citations omitted):

The words in that passage “so as that they cannot be separated with perfect accuracy” are an essential part of the Vice-Chancellor’s proposition, and indeed of the principle of Lupton v White. If a trustee mixes trust assets with his own, the onus is on the trustee to distinguish the separate assets, and to the extent that he fails to do so they belong to the trust.

  1. In Foskett v McKeown [2001] 1 AC 102; [2000] UKHL 29 Millett LJ said (at 133) (citations omitted):

The rule in equity is to the same effect, as Sir William Page Wood V-C observed in Frith v Cartland: “if a man mixes trust funds with his own, the whole will be treated as the trust property, except so far as he may be able to distinguish what is his own”.

  1. Australian courts have accepted these principles: Brady v Stapleton (1952) 88 CLR 322 at 336-9; [1952] HCA 62 (Dixon CJ and Fullagar J) and Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 109-10; [1984] HCA 64 (Mason J).
  2. In Raulfs v Fishy Bite Pty Ltd [2012] NSWCA 135 Campbell JA (with Meagher and Barrett JJA agreeing) said (at [95]):

Because Mr Chincotta paid various sums of money not derived from Heperu into the Westpac accounts, Allsop P held at [112] that the funds in that account were a mixture of trust funds and personal funds of the effective defaulting fiduciary, Mr Chincotta. Trust money that passes through a mixed fund can be traced into an asset that is still in existence when a court considers the matter. This arises through application of the principle that a defaulting trustee who withdraws from a mixed fund and dissipates the withdrawal is presumed to have dissipated his own money. Thus, it was open to Heperu to trace the trust funds from the mixed fund into any asset that had been purchased from the mixed fund: Scott v Scott (1963) 109 CLR 649 at 664. Further, if a withdrawal from the mixed fund was used to discharge a mortgage over real estate, tracing into that real estate could be effected by reason of Heperu being subrogated to the proprietary right of the mortgagee whose mortgage was paid out: Boscawen v Bajwa [1996] 1 WLR 328 at 340-1; Heperu v Belle at [135].

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Beneficiary actions – ‘Special Circumstances’

Source: Colin R Price & Associates Pty Ltd v Four Oaks Pty Ltd [2017] FCAFC 75

  1. Where “special circumstances” exist, a beneficiary under a trust such as Grovan may bring proceedings that ordinarily should be brought by the trustee in his, her or its own right against a third party or other beneficiary on any cause of action, legal equitable or statutory, that the trustee has against that defendant. The beneficiary must join the trustee and the third party as defendants if such special circumstances exist: TAL Life Ltd v Shuetrim (2016) 91 NSWLR 439; [2016] NSWCA 68 (TAL) at [54] (Leeming JA with whom Beazley P and Emmett AJA agreed); Lidden v Composite Buyers Ltd (1996) 67 FCR 560 (Lidden) at 563-564 (Finn J); Ramage v Waclaw (1988) 12 NSWLR 84 (Ramage) at 91-93 (Powell J); Sharpe v San Paulo Railway Co (1873) LR 8 Ch App 597 at 609-610 (James LJ). See too: Heydon JD and Leeming MJ, Jacobs’Law of Trusts in Australia (7th ed, Butterworths, 2006) at [2303].
  2. In Alexander v Perpetual Trustees WA Ltd (2004) 216 CLR 109; [2004] HCA 7 (Alexander) at [55]-[56] Gleeson CJ, Gummow and Hayne JJ (and see also Callinan J at [163]-[164] with whom McHugh J agreed at [67]) said that one reason for the restriction – to where there are “specialcircumstances” of a beneficiary’s right to sue a third party directly on a cause of action that ought to be properly brought by a trustee – was to avoid the vexation of the third party by multiple suits. Their Honours approved what Powell J said in Ramage at 91-92, that the “special circumstances” were not confined to collusion between the trustee and the third party or the insolvency of the trustee. Their Honours went on to say that the general principle was to be found in the following passage from Scott on Trusts (4th ed, 1989) Vol 4 at [282]:

    The interests of the beneficiaries of a trust are protected against a third person acting adversely to the trustee through proceedings brought against him by the trustee and not by the beneficiaries. As long as the trustee is ready and willing to take the proper proceedings against the third person, the beneficiaries cannot maintain a suit against him.

  3. In Alexander, Gleeson CJ, Gummow and Hayne JJ (at [56]) and Callinan J (at [163]) referred, with apparent approval, (as did Leeming JA in TAL at [54]) to the advice of the Privy Council given by Lord Templeman in Hayim v Citibank NA [1987] AC 730 at 748, namely:

    [The] authorities demonstrate that a beneficiary has no cause of action against a third party save in special circumstances which embrace a failure, excusable or inexcusable, by the trustee in the performance of the duty owned by the trustees to the beneficiary to protect the trust estate or to protect the interests of the beneficiary in the trust estate.

    (Emphasis added.)

  4. In Lidden (at 563-564) Finn J explained that the requirement for “special circumstances” should not be limited to claims that a trustee has against the third party for equitable relief, and that such action could also be brought by a beneficiary in respect of claims at common law or under statute. His Honour said:

    …it is not at all apparent to me why, today, we should insist on a multiplicity of suits – as the older equity rule, unmodified, would require – for the purpose of resolving a matter which gives rise to claims for other, as well as equitable, relief: cf Federal Court of Australia Act 1976 (Cth), s 22.

    The distinction between claims for equitable and for other relief has not commended itself to United States courts or text writers. Likewise it seems to have been ignored in observations made in Privy Council cases. So, for example, it is said in Scott and Fratcher, The Law of Trusts (4th ed), Vol 4, par 282.1:

    “If the trustee improperly refuses to bring an action against a third person who commits a tort with respect to the trust property, the beneficiaries can maintain a suit in equity against the trustee to compel him to do his duty and to bring the proper action against the third person. In the earlier law this was all that the beneficiaries could do. It was later held, however, that the whole controversy can be settled in a single suit, and in order to avoid multiplicity of suits the beneficiaries were permitted to join the third person as a co-defendant with the trustee, thus avoiding the necessity of two suits, one in equity by the beneficiaries against the trustee and another at law by the trustee against the third person. In such a proceeding the trustee is a necessary party defendant if he can be subjected to the jurisdiction of the court.”

    To illustrate this approach, this time in a contractual setting, the authors refer to observations of Lord Wright in the Privy Council in Vandepitte v Preferred Accident Insurance Corporation of New York [1933] AC 70 at 79:

    “a party to a contract can constitute himself a trustee for a third party of a right under the contract and thus confer such rights enforceable in equity on the third party. The trustee then can take steps to enforce performance to the beneficiary by the other contracting party as in the case of other equitable rights. The action should be in the name of the trustee; if, however, he refuses to sue, the beneficiary can sue, joining the trustee as a defendant.”

    I should add that to like effect in my view are the comments of the Privy Council in Hayim v Citibank NA [1987] AC 730 at 748, though the relief there sought was equitable. See also G G Bogert, G T Bogert and W K Stevens, The Law of Trusts and Trustees (Revised 2nd ed, 1977), par 869 where the subject is considered at length.

    In the absence of any compelling reason in a Judicature Act system to limit the right of a beneficiary to claim equitable relief alone, in light of the approach taken in the authorities I have referred to, and given the undesirability of adhering to an approach which promotes multiplicity of suits, I am prepared to hold that, provided the other – the “exceptional” or “special” circumstances – requirement of the rule is met, it is not necessary in a Judicature Act system that the relief be equitable or equitable alone that is sought by the beneficiary instituting proceedings for a trust.

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Alienation of real estate by gift

(Source: Isin v Ozen [2016] NSWSC 1480; [157]-[165] per Hallen J)

Alienation of real estate will be effective, in equity, by gift, if the gift is “complete”: Corin v Patton (1990) 169 CLR 540; [1990] HCA 12, at 558, 563 – 570, 582 – 583; Costin v Costin (1997) 7 BPR 15,167; [1997] NSW ConvR 55-811; Motor Auction Pty Ltd v John Joyce Wholesale Cars Pty Ltd (1997) 8 BPR 15,565.

To effect the gift, the donor must do everything that, according to the nature of the property, is necessary to be done in order to transfer the property and render the gift binding on the donor: Milroy v Lord (1862) 45 ER 1185; (1862) 4 De GF & J 264.

What that means, in the context of Torrens system land, was the subject of debate until, in Corin v Patton, Mason CJ and McHugh J held, at 559, that:

“… the principle is that, if an intending donor of property has done everything which it is necessary for him to have done to effect a transfer of legal title, then equity will recognize the gift. So long as the donee has been equipped to achieve the transfer of legal ownership, the gift is complete in equity. ‘Necessary’ used in this sense means necessary to effect a transfer. From the viewpoint of the intending donor, the question is whether what he has done is sufficient to enable the legal transfer to be effected without further action on his part.”

Deane J, at 582, dealt with the way in which it can be determined that the stage had been reached when a gift of real property under an unregistered Transfer is complete and effective in equity:

“That test is a twofold one. It is whether the donor has done all that is necessary to place the vesting of the legal title within the control of the donee and beyond the recall or intervention of the donor. Once that stage is reached and the gift is complete and effective in equity, the equitable interest in the land vests in the donee and, that being so, the donor is bound in conscience to hold the property as trustee for the donee pending the vesting of the legal title. In that regard, it is not a matter of equity ignoring the provisions of s 41 of the Act and treating the unregistered transfer as effective of itself to assign the beneficial interest in the land. It is simply that equity, acting upon the ‘fact or circumstance’ that the donor has placed the vesting of the legal title within the control of the donee and beyond the donor’s recall or intervention, looks at the substantial effect of what had been done and regards the gift as complete …”

It is, thus, now clear that for land held under the Torrens system, which is said to be the subject of the gift, the donee is unable to secure the registration of her or his title in her, or his, own name, without a transfer executed by the donors. The execution and delivery of the transfer is, therefore, to be regarded as “necessary” to be done by the donor.

In Brunker v Perpetual Trustee Co Ltd (1937) 57 CLR 555; [1937] HCA 29, Dixon J (with whom Rich J agreed), wrote at 602-603:

“That delivery of the transfer to the donee or the donee’s agents is a condition which must be fulfilled before such a right will arise, appears to me to be clear. It is only by the control or possession of the instrument that the transferee could effect registration without any liability to interference or restraint on the part of the transferor. Further, I think that the donee must obtain property in the piece of paper itself and property in the paper could pass only by delivery (Cochrane v Moore (1890) 25 QBD 57). If property in the transfer remained in the transferor, his power of recalling it must also remain. For he would be entitled to possession of the paper, he could refuse to present it for registration, and he could destroy it. But, if by delivery to the donee or someone as bailee for her, the transferor has given her property in the instrument itself, then unless some further condition is expressly or impliedly prescribed by the statute, it would appear that the instrument, assuming it to be registrable, may be registered by the transferee independently altogether of the donor, and in spite of any objection on his part.”

The judgment of McTiernan J, at 609, was to like effect.

However, the delivery of the Transfer, on its own, is not enough. In Corin v Patton, Mason CJ and McHugh J continued, at 560-561:

“Whether or not it is correct to say that the production of a certificate of title is ‘necessary’ to achieve registration of a transfer of Torrens system land, it is apparent that a gift of such land cannot be regarded as complete in equity while the donor retains possession or control of the certificate of title … That is because it can scarcely be said that the donor has done everything necessary to be done by him if he has retained the certificate of title, by virtue of the possession of which the gift might well be thwarted.

In the present case Mrs Patton gave no authority for the mortgagee bank to hand the certificate of title to Mr Corin for the purposes of registration …

Accordingly, the transactions failed to pass the equitable property in the land to Mr Corin, and it is unnecessary to consider under whose control the instrument of transfer was after execution. Further, because the gift was incomplete, Mrs Patton could have recalled the transfer at any time. But it is not strictly relevant to ask whether or not Mrs Patton could have recalled the gift; that is not a criterion but rather a result of the efficacy or otherwise of the gift.”

Deane J, after the passage quoted above, continued, at 583:

“In the present case, the fact that Mrs Patton had taken no step to enable Mr Corin to procure the production of the duplicate certificate of title which was held by the bank meant that she had not done all that was necessary to place the vesting of the common law title within Mr Corin’s control … The plain fact remains however, that registration of the transfer and vesting of the legal title could not be said to be within Mr Corin’s control for so long as he was not entitled to procure production of the document of title. In any event, it is apparent that it remained in Mrs Patton’s power to intervene to prevent the vesting of any legal interest in him.”

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Witness credibility (deceased estates)

(Source: Isin v Ozen [2016] NSWSC 1480)

It is plain that the credibility of witness evidence is critical (lets say determinative) in cases where conversations are alleged with a deceased (for want of a better word!).

There may or sometimes will usually be contemporaneous documents including where authenticity of such documents is not in issue.

What follows is some relevant considerations to keep in mind in how these conversations are assessed and effect creditibility.

Black J has recently repeated in Coyte v Norman; Centre Capital (Newcastle) Pty Ltd v B Scorer [2016] NSWSC 1242 at [9]:

“…the credibility of a witness and his or her veracity may be tested by reference to the objective facts proved independently of the testimony given, in particular by reference to the documents in the case, by paying particular regard to the witness’s motives and the overall probabilities”.

Where conversations are alleged with a party who is deceased, it was important to remember the principle expressed by Bryson AJ in Zahra v Francica [2009] NSWSC 1206 at [1] – [2]:

“In these proceedings the plaintiff makes claims against the deceased’s estate and the facts that he alleges depend for proof very largely upon his own evidence. In approaching his evidence and making findings on a matter he alleges, I bear in mind the need for careful scrutiny to which evidence in such a case should be subjected. This need is well established and was stated clearly by Isaacs J in Plunkett v Bull (1915) 19 CLR 544. Two more modern statements appear in the judgment of McLelland CJ in Eq in Eyota Pty Limited v Hanave Pty Limited (1994) 12 ACSR 785 at 789 in a passage which was cited with approval in the judgment of Sheller JA in Eggins v Robinson (2000) NSWCA 61 at [26]:

“… in a claim based on communications with a deceased person the Court will treat uncorroborated evidence of such communications with considerable caution, and will regard as of particular significance any failure of the claimant to bring forward corroborative evidence which was, or ought to have been, available.”

A clear re-statement of the principle showing its continuing applicability was made by Sheller JA in Eggins v Robinson ,see particularly pars [26] to [28] inclusive. Powell JA agreed with Sheller JA and Meagher JA reached the same conclusion although without referring to these authorities. It should be remembered that as appears in Sheller JA’s par [28] observations in the High Court of Australia in Neat Holdings Pty Limited v Karajan Holdings Pty Limited (1992) 67 ALJR 170 at 171 show that the standard of proof is not affected, and the relevant standard is proof on the balance of probabilities.”

Further, Bryson J had said in Day v Couch [2000] NSWSC 230 at [9]:

“Where a claim is made against the estate of a deceased person and knowledge of the facts on which the claim is based is no longer available to the legal personal representative of the deceased, judicial experience requires a careful approach to fact-finding, although there are no special rules relating to the burden or to the standard of proof: “[I]n cases of this sort the Court scrutinizes very carefully a claim against the estate of a deceased person. It is not that the Court looks on the plaintiff’s case with suspicion and as prima facie fraudulent, but it scrutinises the evidence very carefully to see whether it is true or untrue”: Plunkett v Bull [1915] HCA 14; (1915) 19 CLR 544 at 548-549 per Isaacs J. In Birmingham v Renfrew [1937] HCA 52; (1937) 57 CLR 666, which related to mutual wills, there were also expressions of caution: see per Latham CJ at 674 and Dixon J at 681-682. See too Grundel v The Registrar General(1990) BPR 97-340 at11,219 per McLelland J. These observations do not establish any legal standard of proof differing from the ordinary civil standard relating to the balance of probabilities, and there is no legal requirement for corroborative evidence.”

As was stated by Hallen J in Isin v Ozen [2016] NSWSC 1480 these principles need to be considered where conversations involve a deceased.

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Trustee – exercise of discretion

A helpful summary of the principles concerning the grounds on which the exercise of a trustee’s power can be challenged is found in a passage from the decision of Northrop J in Clerical Administrative and Related Employees Superannuation Pty Ltd v Bishop (1997) 76 IR 139, which was cited on appeal by Heerey J (Wilkinson v Clerical Administrative and Related Employees Superannuation Pty Ltd [1998] FCA 51; (1998) 79 FCR 469 at 480) and referred to by the High Court in Attorney-General for the Commonwealth v Breckler (1999) 197 CLR 87 at 99-100 ([7]) per Gleeson CJ, Gaudron, McHugh, Gummow, Hayne and Callinan JJ:

“Where a trustee exercises a discretion, it may be impugned on a number of different bases such as that it was exercised in bad faith, arbitrarily, capriciously, wantonly, irresponsibly, mischievously or irrelevantly to any sensible expectation of the settlor, or without giving a real or genuine consideration to the exercise of the discretion. The exercise of a discretion by trustees cannot of course be impugned upon the basis that their discretion was unfair or unreasonable or unwise. Where a discretion is expressed to be absolute it may be that bad faith needs to be shown. The soundness of the exercise of a discretion can be examined where reasons have been given, but the test is not fairness or reasonableness”.

See also the judgment of Kirby J, who regarded the summary as an accurate one, at 115 ([58]).

Example of such analysis

26 Accepting that where no reasons are given, the test is whether there has been a failure of the trustee to act “with an absence of indirect motive, with honesty of intention, and with a fair consideration of the issues”, a phrase used in Jacobs at [1610] and one based upon Truro LC’s words in In re Beloved Wilkes’s Charity [1851] EngR 375; (1851) 3 Mac & G 440 at 448[1851] EngR 375; , 42 ER 330 at 333, cited with approval by Sheller JA in Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405 at 441-442, the question is whether, when reasons are given by the trustee, a different test is to be used. Jacobs states at [1610] that if reasons are given “the court may consider the validity of such reasons and, if it feels that the reasons do not justify the decisions, may correct the decisions accordingly”. Wilkes’s and Hartigan are cited in support of this proposition.
27 In Karger v Paul [1984] VicRp 13; [1984] VR 161, McGarvie J said at 165-166:

“It is an established general principle that unless trustees choose to give reasons for the exercise of a discretion, their exercise of the discretion can not be examined or reviewed by a court so long as they act in good faith and without an ulterior purpose: Re Beloved Wilkes’ Charity [1851] 3 Mac and G 440; [1851] EngR 375; 42 ER 330; Duke of Portland v Topham [1864] EngR 339; (1864) 11 HLC 31; 11 ER 1242. For reasons given above, I would add the further requirement, so obvious that it is often not mentioned, that they act upon real and genuine consideration. In the context, it was in that sense that Lord Truro LC used the expression “with a fair consideration” in Re Beloved Wilkes’ Charity, at (42 ER) p. 333. In the case of an absolute and unrestricted discretion such as the discretion in the present case, the general principle is given unqualified operation: Gisborne v Gisborne (1877) 2 App Cas 300, at p. 305, per Lord Cairns LC; Tabor v Brooks (1878) 10 Ch D 273; Craig v National Trustees Executors and Agency Company of Australia Ltd. [1920] VicLawRp 101; [1920] VLR 569. The operation of the principle is discussed in Jacobs’ Law of Trusts in Australia, 4th ed., pp. 300-2.”

(emphasis added)
28 In addition to the obiter dictum in Karger, I have had regard, in this connection, to The King v The Archbishop of Canterbury [1812] EngR 102; (1812) 15 East 117, 104 ER 789; Wilkes’s; Re Knollys’ Trusts [1912] 2 Ch 357; Dundee General Hospitals Board of Management v Walker [1952] 1 All ER 896; Rydge v Hartigan Nominees Pty Ltd (unreported, Supreme Court of New South Wales, Young J, 12 September 1990), and on appealsupra; Meat Industry Employees Superannuation Fund v Petrucelli (unreported, Supreme Court of Victoria, Nathan J, 29 February 1992, BC9200730); Asea Brown Boveri Superannuation Fund No 1 Pty Ltd v Asea Brown Boveri Pty Ltd [1999] 1 VR 144; the passage from Wilkinson cited in Breckler and set out at [21] above; and a note of Mr David Maclean, ‘Beneficiary’s Right to See Confidential Trust Documents’ (1993) 67 ALJ 703, to which reference is also made in Jacobs. In Wilkes’s, Truro LC said at 448:

“it is to the discretion of the trustees that the execution of the trust is confided, that discretion being exercised with an entire absence of indirect motive, with honesty of intention, and with a fair consideration of the subject. The duty of supervision on the part of this Court will thus be confined to the question of the honesty, integrity, and fairness with which the deliberation has been conducted, and will not be extended to the accuracy of the conclusion arrived at, except in particular cases. If, however, as stated by Lord Ellenborough in The King v The Archbishop of Canterbury [1812] EngR 102;(15 East, 117), trustees think fit to state a reason, and the reason is one which does not justify their conclusion, then the Court may say that they have acted by mistake and in error, and that it will correct their decision; but if, without entering into details, they simply state, as in many cases it would be most prudent and judicious for them to do, that they have met and considered and come to aconclusion, the Court has then no means of saying that they have failed in their duty, or to consider the accuracy of their conclusion.”

(emphasis added)

29 I note that the learned authors of Jacobs, after setting out the general test, said at [1610]:

“The duty of the court generally is to see that the discretion of the trustees has been exercised in this manner and not to deal with the accuracy of the conclusion at which the trustees may have arrived.”

with Wilkes’s and Hartigan in the Court of Appeal cited in support.

30 In Dundee, it was argued that when reasons are given, the Court can more readily examine and correct the trustee’s decision. Lord Normand said at 900:

“It was said for the appellants that the courts have greater liberty to examine and correct a decision committed by a testator to his trustees, if they choose to give reasons, than if they do not. In my opinion, that is erroneous. The principles on which the courts must proceed are the same whether the reasons for the trustees’ decision are disclosed or not, but, of course, it becomes easier to examine a decision if the reasons for it have been disclosed. Lord Truro’s judgment in Re Wilkes’s (Beloved) Charity ought not to be construed as going beyond that.”

Lord Cohen expressed some support for the view that if the reasons given by the trustee, even on a matter for the trustee’s absolute discretion, demonstrate an approach that no reasonable person could have taken to the matter at hand, this is sufficient to demonstrate that the discretion has miscarried, but Lord Tucker did not, saying that in his view, nothing short of dishonesty on the part of the trustees in arriving at their decision would suffice (at 907). Lord Morton, whilst willing to adopt the appellant’s test for the purposes of the case, did not accept that it was an appropriate test. Lord Reid, whilst prepared to proceed on that basis, indicated that he wished to reserve his opinion on the point.
31 Even in Wilkes’s, where trustees had to determine who should be selected to be trained for the Church ministry, Truro LC, after having set out the passage referred to by Lord Normand, did consider whether there was anything in the trustees’ affidavits which laid the foundation “for any judicial conclusion that the trustees intentionally and from bad motives failed in their duty” (at 449), and his Lordship later referred to the fact that it had not been established that the trustees had adopted an exclusionary rule for which there was no warrant, which rather suggests that the Lord Chancellor was not intending to lay down a principle that the Court could, absent some established breach of the requirements, consider whether the trustees’ decision itself was erroneous or wrong. Ellenborough CJ’s approach in The Archbishop of Canterbury does not provide support for any wide power of review of the decision of the person exercising the discretion. In that case, a bishop, pursuant to a statutory provision, had to decide whether a candidate was suitable for appointment as a lecturer at a parish church, and the bishop had been ordered to provide an affidavit giving his reasons. His Lordship commented at page 141 of East’s:

“It only requires him first to approve, that is, before he licences; and in so doing, it virtually requires him to exercise his conscience duly informed upon the subject; to do which he must duly, impartially, and effectually inquire, examine, deliberate and decide. If the Court have reason to think that any thing is defectively done in this respect, it will interpose its authoritative admonition. The mandamus to license, if the party shall be found to be a fit person, is a solemn and peremptory call upon the bishop to adopt the requisite means for duly informing his conscience, in order to the correct and effectual exercise of this most important duty.”

and at page 146:
“what scales have we to weigh the conscience of the bishop?”; see also page 153 of East’s, where his Lordship said:

“Now if we were trying the validity and correctness of the bishop’s conclusions, and going into all the facts of the case (which I disclaim our authority for doing) there was before the bishop the evidence of a person who gives his information at an unsuspicious period, when there was no question depending and no interest to be served or prejudiced by it.”

32 In Esso Australia Ltd v Australian Petroleum Agents’ & Distributors’ Association [1999] 3 VR 642 at 652-653, Hayne J said that the Court “will not sit on general appeal from the decisions of the trustee”.
33 In Petrucelli, Nathan J, in setting out his views of the limits of review by the Court when reasons are advanced and after noting that the exercise of discretion means no more than arriving fairly at a conclusion from a number of options or alternatives, said at page 8 of BC9200730 that the Court’s function was to consider:

“(1) Whether the reasons relate to or are relevant to the discretion to be exercised. (2) Whether the reasons were arrived at in good faith and without an ulterior purpose (see Karger and Beloved Wilkes Charity (1851) 3 Mac and Eg 440; [1851] EngR 375; 42 ER 330). (3) Whether the reasons reasonably support the conclusion. (4) It is open to the court to look at evidence of the enquiries made by the trustees, the information they had and the manner of the exercise of their discretion, but only [so] far as to assess the viability of the exercise, not to impugn or replace it. (5) It is not open to the Court to examine the reasons for the purposes of exercising its own discretion. It is not open to the Court to examine the factual situation for the purposes of substituting its own discretion for that of the trustee because the Court might consider the trustee unwise or imprudent (see also Dundee Hospital v Walker (1952) 1 All ER 896). (6) It follows as a compelling matter of logic that the reviewable discretion is that which was exercised by the trustees at the time.”

34 Having regard to the authorities, and particularly what was said in Dundee, Rydge at first instance and Petrucelli, I proceed on the basis that where reasons are given, the Court can have regard to those reasons in forming a view as to whether the trustee has:

(1) acted for an indirect motive;

(2) acted without honesty of intention;

(3) acted without a fair or real and genuine consideration of whether and how the discretion should be exercised; and

(4) acted for a purpose beyond that for which the power and discretion were bestowed on it.
35 I am, with respect, attracted to the view expressed by Lord Normand that the principles on which the Court must proceed are the same whether reasons are given or not. When reasons are provided, the determination of whether breach has occurred may well be made easier, but this does not alter the test. I think this conclusion is consistent with the last sentence of the passage from Wilkinson cited in Breckler and set out at [21] above. From a practical point of view, I think it would be undesirable that trustees be discouraged from giving reasons for a decision, when asked, for fear that the provision of reasons would lead to a more expansive power of review than if they gave no reasons.

38 In Telstra Super Pty Ltd v Flegeltaub [2000] VSCA 180; (2000) 2 VR 276 at 284, Callaway JA expressed the view that if the decision were one which no reasonable trustee could make on the material before it, this would establish a breach. This approach was adopted by Bryson J in Sayseng v Kellogg Superannuation Pty Ltd [2003] NSWSC 945 at [62]; and see Hay v Total Risk Management Pty Ltd [2004] NSWSC 94, where these cases were reviewed and Burchett AJ said at [56]:

“the trustee’s decision, applying the test that has so far been accepted by the courts, will only be overturned if it is such as no reasonable trustee could have arrived at upon the material considered. However, a reasonable trustee would hold to a high standard in the consideration of such a matter, which involves important rights of a contractual nature.”

From Manglicmot v Commonwealth Bank Officers Superannuation Corporation [2010] NSWSC 363

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Trustee’s duties

Trustees duties:

(1) it owes its members a duty to act in the members’ best interests: see Cowan v Scargill [1984] 2 All ER 750 at 760 per Sir Robert Megarry VC:

“The starting point is the duty of trustees to exercise their powers in the best interests of the present and future beneficiaries of the trust, holding the scales impartially between the different classes of beneficiaries. This duty of the trustees towards their beneficiaries is paramount. They must, of course, obey the law; but subject to that, they must put the interests of their beneficiaries first. When the purpose of the trust is to provide financial benefits for the beneficiaries, as is usually the case, the best interest of the beneficiaries are normally their best financial interests.”

(2) it owes a duty to act impartially, excluding from consideration matters which are irrelevant and giving proper consideration to matters which are relevant: see Edge v Pensioners Ombudsman [1999] EWCA Civ 2013; [1999] 4 All ER 546 at 567.

(3) it owes members of the Fund a duty to exercise reasonable care, and it has been said that this duty will be discharged if it “takes in managing trust affairs all those precautions which an ordinary prudent man of business would take in managing similar affairs of his own”: Speight v Gaunt (1883) 9 App Cas 1 at 19 per Lord Blackburn, adopted in Austin v Austin  [1906] HCA 5 ;  (1906) 3 CLR 516  at 525, see also Elder’s Trustee and Executor Company Limited v Higgins [1963] HCA 48; (1962) 113 CLR 426 at 448; “a trustee is not a surety, nor is he an insurer”: see In re Chapman [1896] 2 Ch 763 at 775 per Lindley LJ.

(4) it must act honestly and in good faith: see J D Heydon and M J Leeming, Jacobs’ Law of Trusts in Australia (7th ed, 2006), LexisNexis Butterworths, Sydney (“Jacobs”) at [1608] and the cases there cited.

(5) it must take an informed view of whether or not to exercise its discretion and not act irresponsibly, capriciously or wantonly: see Jacobs supra;

(6) it must exercise its power with due consideration for the purpose for which the power was conferred and not some ulterior purpose: see Jacobs supra.

 

From Manglicmot v Commonwealth Bank Officers Superannuation Corporation [2010] NSWSC 363

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Trustees rights on removal (indemnification and exoneration)

Caterpillar Financial Australia Limited v Ovens Nominees Pty Ltd [2011] FCA 677

 If a corporate trustee is removed as trustee by the operation of a disqualification clause in the trust deed, the position is as follows:

(i)          notwithstanding the appointment of a new trustee, as the former trustee, it retains its right of indemnity and/or exoneration (described above). These rights may be enforced by its liquidator against the trust assets, although it is not clear how, as the former trustee, its liquidator would proceed to enforce them (at [18] and [20]);

(ii)         there is conflicting authority (Re Suco Gold Pty Ltd (in liquidation) (1983) 33 SASR 99 per King CJ and Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd[2008] NSWSC 1344 per Brereton J) as to whether, as the former trustee, it has the right to retain trust assets as security for any accrued right of indemnity as against any new or replacement trustee (at [19] and [21]–[25]);

(iii)        the position will be different where there has not been, and will not be, a new or replacement trustee appointed.  In that event, as the former trustee, it continues as bare trustee of the trust assets and retains its right of indemnity and/or exoneration and its lien over the trust assets ([26]); and

(iv)         however, as a bare trustee, its duties, powers and rights are limited to protecting the trust assets and that does not include any power of sale of the trust assets (at [26] and [28]);

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Trustees rights on liquidation (indemnification and exoneration)

Caterpillar Financial Australia Limited v Ovens Nominees Pty Ltd [2011] FCA 677

A corporate trustee enters liquidation, its position is as follows:

(i)          its right of indemnity, or exoneration, is retained (at [16]);

(ii)         it continues to have the right to meet creditors’ claims related to any liabilities incurred by it in its capacity as trustee, out of the trust assets (at [15]–[16]); and

(iii)        in addition, its liquidator has the right to claim costs and expenses incurred in winding up the corporate trustee insofar as that relates to its role as trustee and its liquidator has a right of indemnity against the trust assets in respect thereof and a right of exoneration against the trust assets in respect of any prospective liability (at [17]).