Arakella Pty Ltd v Paton (No.2)

Arakella Pty Ltd v Paton (No.2) (2004) 49 ACSR 706; [2004] NSWSC 605.

It is impossible to give effect to the terms of a trust unless the Trustee knows the terms of the trust. A Trustee cannot excuse a Breach of Trust by pleading that the Trustee was not aware of the terms of the trust.

Austin J in Arakella Pty Ltd V Paton (No.2) stated at [38]:

“The first duty of a trustee on appointment, and one of the most fundamental, is to become acquainted with the terms of the trust instrument. In the case of a corporate trustee, that duty is to be discharged on its behalf by its directors. I cannot see how it could be reasonable for the directors of Arakella to believe that they could administer the affairs of the Trading Trust without personally reaching an understanding of the way in which the trust instrument affected the operation of the GNS business. While company directors are permitted to delegate certain tasks, and to rely on others, within the limits prescribed by the Corporations Act and the general law, it is clearly not reasonable, in my opinion, for the directors of a corporate trust to rely on external advice from an accountant as to all structural matters, without any personal attention to the constitutional structure of the business”

The Directors of Arakella had sought to be excused by the court for a number of breaches of their duties under the trust deed.

Austin J stated at [27]:

“The effect of subsection 85(2) of the Trustee Act 1925 (NSW) was explained by Cohen J in Pateman v Heyen (1993) 35 NSWLR 188, 199:
“The court has a wide discretion but before it can exercise it the trustee must establish the three essential elements, namely that he or she has acted honestly, has acted reasonably and further, ought fairly to be excused for the breach. There have been many cases dealing with the application of the section, or its equivalent in other jurisdictions, but each case must be decided upon its own facts and circumstances. One of the matters to be looked at is whether the trustee is unpaid for services rendered, but it would seem that this is a fact to be taken into account when considering the third question, namely whether the trustee ought fairly to be excused for the breach.”

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