Australia: Because the Court said so: the benefits of judicial advice for trustees

A trustee should always consider whether to seek judicial advice in order to reduce the risk of potential claims against it for breach of trust and/or liability for the costs of any litigation commenced or defended on behalf of unitholders.

If a trustee is unsure about taking a particular course of action on behalf of its unitholders, it may wish to seek judicial advice from the Supreme Court.

Judicial advice generally involves a determination by the Court that a trustee would be justified in taking a particular course of action. Such advice acts as a trustee's safeguard from any potential claim for breach of trust if the trustee acts in accordance with the Court's advice.

Section 63(1) of the Trustee Act 1925 (NSW) provides:

"A trustee may apply to the Court for an opinion advice or direction on any question respecting the management or administration of the trust property, or respecting the interpretation of the trust instrument."

Broadly equivalent provisions exist in the Australian Capital Territory, Western Australia, South Australia and Queensland, albeit the scope and application of the provisions are not uniform.

Judicial advice is private advice which all trustees should consider seeking when contemplating a significant (or potentially contentious) decision on behalf of unitholders. In particular, the leading High Court authority on the subject suggests that a trustee "should" obtain judicial advice before defending litigation in its capacity as trustee (that said, the NSW Supreme Court has not interpreted this to mean that a trustee is obliged to do so or will necessarily lose any right to indemnity if it does not seek the advice before pursuing or defending litigation).

Under section 63(2) of the Trustee Act, the trustee will be taken to have discharged its duty as trustee in the subject matter of the application if it acts in accordance with any judicial advice obtained from the Court, provided that it has not been guilty of any fraud, willful concealment or misrepresentation in obtaining the judicial advice. Thus, it is crucial that a trustee discloses all relevant facts to the Court in its application for judicial advice.

When to seek judicial advice

A trustee will commonly seek judicial advice if:

  • the trustee intends to commence or defend legal proceedings;
  • the trustee is uncertain about the proper interpretation of a provision in the trust instrument;
  • the trustee wishes to vary or amend the trust instrument, however, is unsure whether the variations or amendments are within the trustee's power; or
  • a course of action or decision which the trustee is contemplating has the potential to give rise to a dispute between the trustee and one or more beneficiaries of the trust.

From a trustee's perspective, the benefit of judicial advice is the protection which it affords against liability for breach of trust. That said, there is clear authority that the purpose of judicial advice is also to protect the interests of beneficiaries.

The nature and effect of judicial advice

In Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of the Macedonian Orthodox Diocese of Australia and New Zealand & Anor [2008] HCA 42, the plurality of the High Court made the following observations:

  • section 63 is not limited to "non-adversarial" proceedings or proceedings other than those in which the trustee is being sued for breach of trust, or proceedings other than those in which one remedy sought is the removal of a trustee from office;
  • the only jurisdictional bar to the provision of judicial advice under section 63 is that the advice sought must concern a question respecting the management or administration of the trust property or a question respecting the interpretation of the trust instrument;
  • section 63 does not carry any implication that some discretionary factors are more significant or controlling than others. In particular, it does not provide that the adversarial nature of the proceedings about which the advice is sought, the tendency of the advice to foreclose an issue in those proceedings, or the fact that the trustee seeking the advice is being sued for breach of trust are of special significance; and
  • a trustee who is sued for breach of trust should take no step in defence of the suit without first obtaining judicial advice about whether it is proper to defend the proceedings.

Judicial advice for pursuing or defending litigation

Most trust deeds contain a provision entitling the trustee to be indemnified out of trust assets for expenses which it has incurred in the administration of the trust, provided that the expenses were incurred properly and in the absence of extenuating factors such as the trustee acting fraudulently or outside the scope of its powers. Indeed, there is a legislative provision to that effect in the Trustee Act.

In those circumstances, a question is sometimes asked as to why a trustee would obtain judicial advice before commencing or defending legal proceedings in its capacity as trustee. The answer is that the obtaining of judicial advice which approves the trustee's proposed course of action protects a trustee against any later allegation by a beneficiary that the trustee acted in breach of trust (and therefore, is not entitled to indemnity) in prosecuting or defending the litigation and funding it out of the trust. That protection can be enormously important to the trustee if it is ultimately unsuccessful in the primary litigation.

In Bideena Pty Ltd [2016] NSWSC 735, Bideena, as corporate trustee of the Bideena Super Fund, commenced proceedings in the Federal Court of Australia against six defendants alleging oppressive conduct within the meaning of section 232 of the Corporations Act. The defendants applied for security for costs on the basis of their contention that Bideena was required to obtain judicial advice before commencing those proceedings, otherwise it would not be entitled to indemnify itself out of the trust assets for any adverse costs order.

Bideena agreed to seek judicial advice, including as to whether it was appropriate for Bideena to continue to conduct the Federal Court proceedings and to indemnify itself out of trust property for the associated legal costs (notwithstanding Bideena's position that it was unnecessary for it to obtain judicial advice).

In providing the judicial advice sought by Bideena, the Court found:

  • a trustee is not obliged to seek judicial advice before bringing or defending a claim;
  • it was not necessary for Bideena to obtain judicial advice as to whether it was justified in pursuing the Federal Court proceedings as a condition of it having a right of indemnity from trust assets for any adverse costs order made in those proceedings; and
  • there was prima facie evidence supporting the allegations of oppression and thus, it was appropriate for Bideena to continue the Federal Court proceedings and indemnify itself out of trust property.

Judicial advice for other purposes

Aside from in respect of the pursuit or defence of litigation, a trustee can utilise judicial advice in many ways. For example, if a trustee is in doubt as to whether it would be justified in registering (or not registering) a transfer of units in the trust, it may be desirable first to seek judicial advice.

This could include any decision contemplated by the trustee in relation to the distribution of income or other trust property or the proceeds of redemption.

When will advice be refused?

It may be expected that an application for judicial advice will be refused if the application does not concern a question respecting the management or administration of the trust property or respecting the interpretation of the trust instrument. Further, judicial advice will typically not be provided when the advice sought is solely for the purpose of protecting the trustee, or is not in the best interests of the trust.

In NSW Trustee and Guardian v Wardy [2017] NSWSC 1466, the Court declined to provide judicial advice where:

  • the facts which were the subject of the advice sought were complex, uncertain and disputed by the beneficiaries, to the extent that the Court found such facts should be resolved by a contested hearing with evidence, cross-examination and judicial fact-finding; and
  • the advice (if given) would be of little utility and would predictably result in a further contested hearing between the trustee and beneficiaries.

What if judicial advice is not obtained?

In the event that a trustee has not obtained judicial advice, section 85 of the Trustee Act may be a "fall back" provision, in that it refers to "excusable breaches of trust". In particular, the section provides that, where a trustee is or may be personally liable for a breach of trust, the Court may relieve the trustee from liability for the breach if the trustee "acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the direction of the Court in the matter in which the trustee committed the breach." It is clear, therefore, that in order to obtain relief under section 85, one of the things for which the trustee must be excused is the failure to obtain judicial advice at the outset.

In light of the above, a trustee should always consider whether to seek judicial advice in order to reduce the risk of potential claims against it for breach of trust and/or liability for the costs of any litigation commenced or defended on behalf of unitholders.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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