In brief – Court will not advise on commercial investment matters
Trustees making use of section 63 of the Trustee Act 1925 (NSW) to seek judicial advice must only do so when they have genuine doubt about the administration of the trust or the interpretation of the trust deed, rather than to seek advice about proposed commercial transactions.
Trustees cannot abdicate responsibility for commercial or business decisions
The Supreme Court of New South Wales has recently analysed the practice of professional trustees making applications to the court for judicial advice as to their functions and duties.
In Application by Perpetual Trust Services Limited as responsible entity for the Momentum AllWeather (A$) Absolute Return Fund  NSWSC 758, the court confirmed that, while this practice is sanctioned by legislation, it is not a method by which trustees can abdicate responsibility for making their own commercial or business decisions in respect of trust property.
In practice, trustees should therefore take care to ensure that applications to the court for judicial advice are properly limited to cases in which the trustee has genuine doubts as to the operation of the trust deed or the proper administration of the trust.
Trustee not obliged to expose itself to litigation
As the role of a trustee is fiduciary in nature, it carries with it a number of important powers and duties which must always be exercised in the best interests of the beneficiaries of the trust.
However, in exercising those powers or discharging those duties, the trustee is not obliged to take any risks and expose itself to litigation by the beneficiaries who might question the propriety of the trustee's exercise of a power or discretion by a trustee at a later date.
Trustees protected from litigation if following direction of the court
Enter section 63 of the Trustees Act 1925 (NSW), which has on some occasions been touted by some as akin to a "get out of jail free card" for trustees. It provides for trustees to approach the Supreme Court for its opinion, advice or direction on any question concerning the management or administration of the trust property or the interpretation of the relevant trust deed. The costs incurred by the trustee in doing so are usually met in full from the trust fund.
If the trustee acts in accordance with the opinion, advice or direction of the court, the trustee's actions will be protected from attack. Of course, if it transpires that the trustee has been guilty of any fraud or wilful concealment or misrepresentation in obtaining the opinion, advice or direction, protection will be lost.
Perpetual Trust Services required to realise the assets of Momentum Trust
In the Perpetual case, the plaintiff, Perpetual, was the responsible entity for the Momentum AllWeather (A$) Absolute Return Fund (Momentum Trust). One of the assets of the Momentum Trust was an interest in another fund known as the All Weather Absolute Return Fund. Through its investment in the fund, Perpetual held for the trust shares in DR Funds Limited.
Perpetual had terminated the Momentum Trust some years earlier and was in the process of winding it up. In the course of doing so, and as required by the trust deed, Perpetual was required to gather in and realise the assets of the trust. However, Perpetual began to doubt the extent of its duties in this regard, particularly in respect of the shares in DR Funds.
Perpetual applies to Supreme Court for advice on sale of shares
Relying on section 63 of the Act, Perpetual applied to the court for judicial advice in relation to the following questions:
- Whether the trust's indirect interest in DR Funds was an asset of the trust, such that Perpetual was obliged to realise that asset
- If the answer was yes, whether Perpetual had the power to postpone the sale of the asset if it thought it desirable to do so in the interests of the unit holders
Court not bound to give advice on commercial matters and usually inappropriate to do so
In considering Perpetual's application, the court formed the view that Perpetual's "doubt" in fact related to a commercial matter: namely, what decision Perpetual should make as to the investment in DR Funds.
Essentially, Perpetual had to make a commercial decision as to whether, and if so at what time, it should exit the DR Fund. The evidence was that an early sale would result in the relevant asset being sold into a secondary market for cash, and at a substantial discount.
Court declines to advise on commercial investment matter
The court found that, rather than being asked for advice as to the proper construction of the trust deed or the administration of trust property, it was really being asked to opine on a purely commercial investment matter peculiarly within the remit of Perpetual as trustee. The court said that it was ill-equipped to form any view about the matter and declined to answer Perpetual's questions.
In doing so, the court confirmed that it is not bound by section 63 to give advice, and that it would normally be inappropriate to give advice as to whether or not a trustee should enter into a commercial transaction.
In this case, the court considered that, despite its conclusions, the trustee had not engaged in misconduct in bringing the application and it was entitled to be paid its costs out of the Momentum Trust. However, trustees should be aware that if their conduct in bringing applications such as these is found by the court to be unreasonable, unnecessary, or to expose the trust fund to excessive expenses, such an indemnity may not be granted.
Section 63: a helpful tool, not an easy excuse
Section 63 is something of an exception to the court's ordinary function of deciding disputes between competing litigants. In practice it can operate as an extremely helpful facility pursuant to which trustees can obtain private advice.
However, it is clear that the court will not entertain a request by a trustee which it considers to be a thinly-veiled attempt to have the court conduct the business of the trust.
Trustees are therefore on notice that section 63 is not a method by which a trustee can abdicate responsibility for the proper administration of the trust. Requests for judicial advice should be limited to real issues concerning the administration of trust property or the interpretation of the trust deed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.