A trustee has onerous statutory and general law duties and obligations to beneficiaries of the trust. The expected standard in the performance of its legal duties and obligations by a professional trustee, in the business of providing trustee services, is higher than that expected of an individual who is trustee.
The recent case of Kerr v Australian Executor Trustees (SA) Ltd; Australian Executor Trustees (SA) Ltd v Fuller and others trading as Sparke Helmore Lawyers  NSWSC 1279 is a good example of the higher expectation imposed on a professional trustee.
The case found that Australian Executor Trustees (SA) Ltd (AET) was guilty of a breach of trust even with AET's reliance on prior legal advice from Sparke Helmore Lawyers (the lawyers). This was despite the lawyers conceding in Court that their advice with its many assumptions and qualifications, was "useless and worthless". The problem for AET was that the judge, Stevenson J, concluded at  that part of the advice obtained "was one no reasonable trustee could have relied on."
AET was the trustee of a trust established by a 1964 trust deed. The trust was a commercial trust that involved a forestry scheme concerning pine forests growing on land owned by a company. The beneficiaries (investors) in the scheme were referred to as 'Covenantholders'.
The forestry scheme predated managed investment schemes which are now regulated by Chapter 5C of the Corporations Act 2001 (Cth). The forestry scheme was regulated by State legislation which required an approved deed containing a number of statutory covenants. The trust deed for the forestry scheme was an approved deed.
There were other agreements relating to the scheme that were entered into by AET and the various involved companies. AET had registered 'Encumbrances' over the scheme land to protect the interests of the investor beneficiaries.
Corporate acquisitions resulted in the involved companies granting a fixed and floating charge to ANZ Capel Court Ltd (ANZ) in February 2010. In early 2011, the involved companies decided to sell the land and the trees growing on the land. The trust deed provided that the sale of the land required the consent of AET.
The case revolved around the circumstances in which AET obtained legal advice and consented to the sale proposal.
After obtaining legal advice, AET consented to the sale proposal. In the events that happened, the involved companies were placed into external administration in September 2011, long before they were obliged to make any payment pursuant to the scheme and the proposal. The sale and other proceeds were lost and AET and the beneficiaries received no money at all.
AET commenced legal proceedings against the receivers of the involved companies claiming the receivers held the sale and other proceeds on trust for the investor beneficiaries. AET had success in the Victorian Supreme Court and the Victorian Court of Appeal. However, AET's claim was ultimately dismissed by the High Court of Australia in Korda v Australian Executor Trustees (SA) Ltd (2015) 255 CLR 62.
A beneficiary, Mr Armour, began to agitate in June 2015 for documents, information and explanations concerns the loss to the trust.
Sparke Helmore continued to act for AET. They denied any liability by AET, advised Mr Armour that any legal proceedings commenced by him had no prospects of success and that they would seek indemnity costs from him.
In January 2016, Mr Armour requested that AET cease to act as trustee or that it appoint an additional independent trustee to consider any possible legal claims against AET. He even offered to fund any further investigation. AET continued to refuse his requests.
Legal proceedings were commenced by Mr Armour for the appointment of an additional trustee. The Court appointed Mr David Kerr (Kerr) as an additional trustee of the trust to pursue claims against AET and their lawyers (Sparke Helmore).
Prudently, prior to commencing any proceedings, Mr Kerr obtained judicial advice from the NSW Supreme Court pursuant to s63 of the Trustee Act 1925 (NSW) that he would be justified in bringing the proceedings against AET and its lawyers.
It was claimed by Mr Kerr that AET breached its duty as trustee:
(a) to protect and vindicate the rights attaching to trust property, being described as the Encumbrances;
(b) by failing to comply with its duty expressly imposed under the trust deed 'to exercise all due diligence in carrying out its functions and duties and in watching the rights and interests of the beneficiaries; and
(c) in equity, to exercise the same care as an ordinary prudent businessperson would exercise in conducting the business as if it were their own.
AET cross-claimed by seeking to rely on the advice from Spark Helmore asserting it:
(a) did not breach its duty to the beneficiaries; or
(b) should be exonerated for any such breach or be excused from liability under s85 of the Trustee Act 1925 (NSW) or its South Australian equivalent.
An alternate claim was also made by Mr Kerr against Sparke Helmore which was similar to AET's claim against Sparke Helmore.
The amount of Mr Kerr's claim (with interest) to the conclusion of the hearing was estimated to be $82.46 million.
The Court found that AET had committed a breach of trust. It was in fact conceded during the hearing by counsel for AET that some of its decisions fell "below the standard of a prudent trustee". However, counsel for AET said that AET's answer to the breach of trust claim was to point to the Sparke Helmore advice.
AET had failed in a number of its duties as trustee. The failures included that it did not protect the trust properly by releasing the Encumbrances without first obtaining payment of the amounts owing or by procuring suitable substitute security. It also overlooked the ANZ fixed and floating charge to the detriment of the beneficiaries.
In relation to the Sparke Helmore legal advice, AET called a solicitor, Mr John Schembri, as an expert witness on its behalf. However, the Court held that notwithstanding the expert evidence, AET obtaining Spark Helmore's advice did not, without more, exonerate it from the consequences of its breach of trust. The Court found that the advice Sparke Helmore gave was not adequate, holding that any reasonable trustee would not have relied on that advice. In any event, the Court was satisfied that AET would have proceeded even if it had received adequate advice from Sparke Helmore. AET's cross-claim against Sparke Helmore failed.
In order to be excused from its breach of trust under s85 of the Trustee Act 1925 (NSW), AET had to establish that it "acted honestly and reasonably, and ought fairly to be excused."
It was noted at  of the judgment (in relation to a s85 exoneration) the relevant comments of the High Court in Elder's Trustee & Executor Co Ltd v Higgins (1963) 113 CLR 426 at :
"although a professional trustee is not beyond the protection of the section 'such a trustee would have to establish a strong case before the court would apply the section in its favour'.."
The Court held that AET was not excused for its breach of trust under s85 of the Trustee Act 1925 (NSW) or its South Australian equivalent.
Mr Kerr was entitled to recover equitable compensation from AET for the amount sought by him, except for a small amount dealing with AET's costs in related legal proceedings.
The case has many different lessons, depending on your perspective. Some of these lessons include:
- Trustees are ordinarily entitled to rely on legal advice. However, this does not obviate the need for the trustee to carefully review the factual assumptions and limitations on which the advice is based to ensure they are correct and appropriate in the circumstances.
- Trustees prudently seeking legal advice to protect their position and the interests of the beneficiaries need to think carefully about the purpose and scope of the advice being sought. This was a failing of AET in the case. The retainer with Sparke Helmore was to review the documents and give the requested specific advice – they should also have been retained to negotiate the terms of the transaction.
- A trustee prudently seeking legal advice to protect its position should not commit to a proposal or transaction before receiving the legal advice sought. Perhaps AET could have indicated in all communications that its consent was subject to legal advice and due diligence to ensure that the interests of the beneficiaries were properly protected.
- It is a fact of life that trustees are often faced with important commercial decisions that need to be made within pressing time limits. Sometimes the decision to be made in the best interests of the beneficiaries may not be entirely clear. At  Stevenson J said of AET's position:
"It is hard to contemplate a circumstance where AET could, consistently with its duties as trustee, consent to a sale......if to do so would materially prejudice the interests of Covenantholders (beneficiaries). It may be, however, that there could be a circumstance where AET could give such consent if there was some reduction in the protection afforded to Covenantholders; for example where some countervailing benefit was simultaneously to be conferred on the Covenantholders – such as prompt payment."
Trustees in a position of uncertainty and risk should keep in mind the comments of the High Court in the Macedonian Church case  HCA 42. It was said in that case it may be more prudent for trustees in difficult situations to first obtain the protection of judicial advice under s63 of the Trustee Act 1925 (NSW) rather than later relying on the uncertainty of the Court having to determine whether s85 can relieve the trustee from personal liability for breach of trust in the events that had happened.
Trustees, including professional trustees, perform a valuable and needed service. The law expects a high standard of professional trustees in the performance of their legal duties and obligations. Legal advice and/or judicial advice may be appropriate in difficult circumstances. However, prudent risk management requires trustees to ensure that the factual background and assumptions on which any legal advice or judicial advice is based on are correct and appropriate.
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.