Right to Indemnity and Exoneration

Trustees have a right to be indemnified for liabilities and expenses incurred in the proper administration of the trust {Southern Wine Corporation Pty Ltd (in Liq) V Frankland River Olive Co Ltd [2005] WASCA 236; (2005) WAR 162 – para 62; Worrall v Harford (1802) 8 Ves 4 at 8 per Lord Eldon LC}

This right is confirmed by statute:

A trustee may reimburse himself or pay or discharge out of the trust premises all expenses incurred in or about the execution of the trusts or powers” (Trustee Act 1958 of Victoria, Section 36 (2)).

In addition to a right to indemnity for expenses and liabilities “properly” incurred in the administration of the trust (eg Superannuation Fund) Trusts have an additional right of exoneration that allows them to draw directly on trust assets to discharge their duties, as opposed to paying out of their own funds and them seeking reimbursement {Refer to: Savage V Union Bank of Australia Ltd [1906] HCA 37;(1906) 3 CLR 1170}

The basic legal premise is that the Trustee’s right of indemnification against the trust assets is confined to liabilities and expenses that have been properly incurred in carrying out the trust. This premise is supported by Re Beddoe [1893] 1 Ch 547 at 558; Vacuum Oil Co. Pty Ltd v Wiltshire [1945] HCA 37; (1945) 75 CLR 319 at 335 and RWG Management v Commissioner for Corporate Affairs [1985] VR 385 at 394, 396 per Brooking J.

The principles stated in Re Beddoe were cited in the High Court of Australia in National Trustees Executors & Agency Co Of Australia Ltd V Barnes [1941] HCA 3;(1941) 64 CLR 268 especially at 277 per Williams J, with Rich ACJ concurring.

Rich ACJ and Williams J supported the proposition that a trustee is entitled to be indemnified out of the trust estate “against all his proper costs, charges and expenses incident to the execution of the trust“.

In Octavo Investments Pty Ltd v Knight [1979] HCA 61; (1979) 144 CRL 360  the High Court referred to Vacuum Oil and Co. In Commissioner of Stamp Duties (NSW) v Buckle the High Court [1998] HCA 4; (1998) 192 CLR 226) again referred with Approval to Vacuum Oil and Co and also referred to Re Beddoe itself.

In RWG Management Ltd v Commissioner for Corporate Affairs [1985] VR 385 at 396, Booking J said:

“A trustee’s right to be indemnified out of the Trust property is limited to liabilities or expenses that have been properly incurred in the execution of the trust: Stott v Milne (1884) 25 Ch D 710, p 715; Re Beddoe [1893] 1 Ch 547 at p 588. If, for example, a trustee incurs some liability by an act in relation to the trust property which is in excess of his powers, he has no right of indemnity: Leedham v Chawner (1858) 70 ER 191. The result is the same where liability is incurred as a result of conduct on the part of the trustee which is in breach of his duty, not as being in excess of power, but as being in breach of his duty to execute the trust with reasonable diligence and care: Ecclesiastical Commissioners V Pinney [1900] 2 CH 736 at pp 742-3, per Rigby LJ in a case of breach of contract; Bennett v Wyndam (1862) 4 De GF and J 259 and Re Raybound [1990] 1 Ch 199 in cases of tort”.

Spigelman CJ in Gatsios Holdings Pty Ltd v Mick Kritharas Holdings Pty Ltd [2002] NSWCA 29; (2002) ATPR 41-864 in relation to a case involving a liability in tort stated:

“The use of such terminology as conduct being “proper” or “reasonable“, cannot be regarded as a test of when a trustee is entitles to receive indemnity for outgoings incurred in the course of the execution of the trust. Such terminology generally records a conclusion which has been reached on other grounds.”

If expenses or liabilities were incurred outside the terms of the trust or in the course of a breach of trust then the Trustee will lose the right of indemnity {Strang V Strang [2009] NSWSC 760 at para 143}.

The Victorian Supreme Court of Appeal in Nolan v Collie [2003} VSCA 39 (2003) 7 VR 287 found that the test should be related as “not improperly incurred“, meaning that expenses and liabilities incurred in circumstances of bad faith, without power of in the absence of reasonable care and diligence would not be indemnified.

At Paragraph 51 Orimiston J A stated:

“The answer to what now seems to be a degree of confusion as to the nature of costs, expenses and liabilities for what a trustee can seek indemnification may well lie in the simple proposition of Lindley LJ in Re Beddoe to the effect that the words “properly incurred” are equivalent to the words “not improperly incurred“, as a proposition so abundantly obvious that it tends to obscure some of the complications which have been overlooked from time to time. In my opinion the use of the negative is intended to show what is “proper” and “improper” must be answered by reference to the circumstances and in particular by reference to the duty with which a trustee was obliged to comply or the power which a trustee is intending to exercise. The content of a trustee’s duties vary considerably, as do the obligations taken on when a power is exercised. A significant number of trustees’ duties require strict compliance so that failure to comply with that duty will necessarily lead to the conclusion that a particular cost, expense or liability has not been properly incurred. On the other hand, the more day to day functions of a trustee in the management of the trust require only that the trustee “exercise the same care as an ordinary, prudent of business would exercise in the conduct of that business were it his or her own” {Breen V Williams [1996] HCA 57; (1996) 186 CLR 71 at 137 per Gummow J}.

The proposition is derived from a number of well-known authorities such as Speight V Gaunt {(1883) 9 App Cas 1 at 19}; Austin v Austin {(1906) 3 CLR 516 at 525} and Fouche V Superannuation Fund Board {[1952] HCA 1;(1952) 88 CLR at 525}.

On the other hand, expenses and liabilities may be incurred where a trustee is engaged in activities which extend beyond mere management. The trustee may then be held to account far more strictly in all senses. Conventionally a contrast is drawn with the performance of what have been called proscriptive and prescriptive duties such as the duty to keep and render accounts, the duty not to allow a conflict between duty and interest and the duty not to obtain an unauthorised benefit from the trust {Re Whitely (1886) 33 Ch D 347 at 355 per Lindley LJ}. For the present purpose one may mention only one further strict duty recently described in the High Court as the duty “to adhere to the terms of his trust in all things great and small, important, and seemingly unimportant“{Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15; (2003) 212 CLR 484 at 498}. The fact that such breaches can now be excused under Section 67 of the Trustee Act 1958 was noted by the High Court as indicating merely the strictness of the obligation and the need for the legislation to relieve trustees who breached it. It would follow that expenses or liabilities incurred as a result of a breach of that duty must ordinarily be characterised as improperly incurred, without regard to the reasonableness of the trustees acts. It is obvious that there would be other breaches of these stricter duties which would lead to expenses and liabilities which were incapable of indemnification because each could be said to have been improperly incurred”.

If the beneficiaries are suing the trustee for breach of trust the trustee is entitled to retain trust funds as an indemnity for the Trustee’s legal costs in defending the claim {Hayman v Equity Trustees Ltd [2003] VSC 353}.

In the Federal Court of Australia Finkelstein J stated in Fitzwood Pty Ltd v Unique Goal Pty Ltd (In liquidation) [2001] FCA 1628 at [148]:

148 The general principle is that, subject to the terms of the trust, a trustee is entitled to be indemnified out of trust property in respect of the liabilities, costs and expenses properly incurred in connection with the performance of his duties and the exercise of his powers and discretions as trustee: Vacuum Oil Company Pty Ltd v Wiltshire [1945] HCA 37; (1945) 72 CLR 319; Octavo Investments Pty Ltd v Knight [1979] HCA 61; (1979) 144 CLR 360. The rule has been given statutory force, and in Victoria the relevant provision is s 36 of the Trustee Act 1958 (Vic).

149 Ordinarily a trustee is not entitled to indemnity for costs and expenses improperly incurred by him in the administration of the trust. Expenses will be improperly incurred if in incurring them the trustee exceeds his power, or otherwise acts in breach of trust. For example, if the trustee enters into an unauthorised agreement he may be personally liable to the other contracting party but is not entitled to indemnity from the trust estate. So, too, if the trustee acts in breach of duty.

Exoneration

Exoneration is the method that should be used in the case of Government Regulated Superannuation Funds, since this provides or a transparent disclosure of “General Administration Accounts” in the audited accounts of the Fund which are available to both Members and prospective Members of the Fund.

One of the largest funds, the $43 Billion AustralianSuper Fund, seeks to avoid transparent disclosure by paying a $144  million “service fee” to the corporate Trustee.

This then raises the question: “Was the the $144 million service fee used to pay for expenses “properly” incurred in the administration of the fund on behalf of the Members or were some of these monies utilised for other purposes?”

Government Regulated Superannuation Funds

The indemnification of the Directors of a corporate Trustee of a Government Regulated Superannuation Fund is limited by Section 57 of the Superannuation Industry Supervision Act 1993:

Subsection 57(2):  A provision of the governing rules of a superannuation entity is void in so far as it would have the effect of indemnifying a director of the trustee against:

(a)  a liability that arises because the director:

(i)  fails to act honestly in a matter concerning the entity; or

(ii)  intentionally or recklessly fails to exercise, in relation to a matter affecting the entity, the degree of care and diligence that the director is required to exercise; or

(b)  liability for a monetary penalty under a civil penalty order.

 

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