A Trustee’s “Duty of Care”

Sir George Jessel MR in Speight v Gaunt (1882) 22 Ch D 727, 739 sttaed:

“It seems to me that on general principles a trustee ought to conduct the business of the trust in the same manner that an ordinary prudent man of business would conduct his own, and that beyond that there is no liability or obligation on the trustee.

In the Court of Appeal in Learoyd v Whitely (1886) 33 ChD 347 Lindley LJ stated:

The duty of a trustee is not to take such care only as a prudent man would take if he had only himself to consider; the duty rather is to take such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide.

Finn J’s stated in ASC v AS Nominees Ltd (1995) 62 FCR 504:

“It is old and accepted law that in managing a trust business the trustee should exercise the same care as an ordinary, prudent business person would exercise in conducting that business as if it were his or her own: Speight v Gaunt (1883) 9 App Cas 1; Learoyd v Whiteley (1887) 12 App Cas 727; Knox v Mackinnon (1888) 13 App Cas 753. There is an equally well-accepted gloss on (or adjunct to) this in relation to trustee investments which is aptly described in Scott on Trusts, par 227.3 as the “requirement of caution”, That requirement is well expressed in King v Talbot (1869) 40 NY 76 to which Scott refers: ‘It… does not follow, that, because prudent men may, and often do, conduct their own affairs with the hope of growing rich, and therein take the hazard of adventures which they deem hopeful, trustees may do the same; the preservation of the fund, and the procurement of a just income therefrom, are primary objects of the creation of the trust itself, and are to be primarily regarded.’

The question of the “duty of care” required by a Director of a corporate Trustee was considered by the Federal Court of Australia.

Murphy J in the Federal Court of Australia in Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited (Receivers and Managers appointed) (in liquidation) (Controllers appointed) (No 3) [2013] FCA 1342 stated at [539]:

Scott and Ascher on Trusts (at 1210) describes the standard required of corporate or professional trustees in the following terms: A trustee who has greater skill or better facilities [than the person of ordinary prudence] is under a duty to use them. Moreover, a trustee who procures appointment by claiming to have a higher degree of skill or better facilities may incur liability for failing to use them. These principals apply, as well, to corporate fiduciaries. Thus the standard of care and skill applicable to a corporate or other professional trustee may well differ from that which applies in the case of an individual, non-professional trustee…

When the question is whether a corporate trustee has exercised proper care and skill, it may be important to consider the corporation’s internal organization, and whether that organization has functioned properly. Thus, when beneficiaries seek to surcharge a corporate trustee it is important, in proving that it acted prudently, for the trustee to be able to show that it gave careful consideration to the decision at hand, in accordance with its own internal procedures. It is crucial, therefore, for a corporate trustee to keep detailed records of all aspects of the administration of each of its trusts… (Citations omitted.)

I agree with the learned authors.

The Court continued at [541]:

The standard of care and caution expected of a corporate trustee must flow through to its directors. As Finn J said in ASC v AS Nominees1 at 517 : Where the trustee is itself a company the requirements of care and caution are in no way diminished. And here, unlike with companies in general, these requirements have a flow-on effect into the duties and liabilities of the directors of such a company. It was established early…that at least when, and to the extent that, directors of a trustee company are themselves “concerned in” the breaches of trust of their company, they are liable to the company according to the same standard of care and caution as is expected of the company itself.(Citations omitted.)

I respectfully agree.

The Court continued at [558]:

I have dealt with the thrust of the Directors’ contentions but I will now briefly deal with them by reference to the particulars alleged.

(i) Each Director failed to:

(A) consider and understand; and

(B) be satisfied that the directors of APCHL acting as a Board had considered and understood –

the effect of Deed of Variation No 7.

As I have said, a reasonable director in each Director’s position, with the knowledge that APCHL was a trustee and of the nature of the Amendments would have exercised care and been diligent to read and understand the effects of the Amendments before passing them on 19 July, and been careful to ensure that the Board also considered and understood the effects. The same must be true on 22 August. A reasonable director in each Director’s position on that date would have been careful to read and understand the effects of the Amendments before resolving to lodge them.

As I have said (at [277]-[310]), on 19 July the Directors failed to consider and understand the effects of the Amendments, and each of them failed to satisfy himself that the Directors acting as a Board had considered and understood those effects.

There is no evidence that any of the Directors considered the effects of the Amendments at the 22 August meeting. Some of the Directors’ evidence revealed serious misunderstandings of the effects of the Amendments which would have been obvious to the other Directors had the Board properly considered them. I infer that none of the Directors gave any consideration to the effects of the Amendments, nor were they careful to be satisfied that the Directors acting as a Board had considered and understood the effects of the Amendments.

(ii) Each Director failed to consider whether, and be satisfied that, there was a legitimate reason for APCHL to make the Amendments.

The Court continued at [59]:

While the Directors were entitled to rely on specialist legal advice, such reliance could not be at the expense of their non-delegable duty of care: ASIC v Healey2 at [162]. If they had exercised ordinary care they would have known that the advice should not to be relied on: Daniels v Anderson3 at 502 to 504. Had they exercised reasonable care the advice would have set them on a train of inquiry in relation to the question, and led to them seeking proper legal advice or perhaps a judicial direction: Property Force Consultants at 1059 to 1061; ASIC v Adler4 at [372(12)]. A reasonable director would not have relied upon the Madgwicks Advice in passing the Amendments, and would have considered it necessary to obtain unequivocal legal advice, to seek a judicial direction, or at least to seek the members’ approval.

The Court continued at [749]:

I say this first, because (as I said at [472] and following) the duty to act in the best interests of the members includes a requirement that the trustee strictly adhere to the terms of the trust. In making the decisions to pay the Listing Fee the Directors were acting outside the Constitution because the Amendments were invalid and there was no provision for payment of that fee.

The Court continued at [753]:

At one level the Directors’ contentions that their belief in the validity of the Amendments meant that they were acting in the members’ interests is based in the suggestion that the passage of time since the Amendments were approved and lodged somehow operated to wash away their earlier failures to comply with their statutory duties. I do not accept this. Each Director’s belief that the Constitution provided for the Listing Fee was the product of his failure when passing the Amendments and/or when passing the Lodgement Resolution to, amongst other things:

  • (a) act in the best interests of the members including by prioritising the members’ interests over APCHL’s interests;
  • (b) properly consider whether the Board had power to make the Amendments;
  • (c) properly consider the members’ right to have the Scheme administered for the fees set out in the existing Constitution; and
  • (d) exercise reasonable care and diligence.
  • The Court ruled at [766]:

    None of the Directors took any steps towards obtaining further legal advice or a judicial direction as to the Amendments or towards obtaining the members’ approval. I am satisfied that ASIC made out this allegation.

    Superannuation Fund Trustees

    Refer to the provisions of Section 52(2)(b) of the Superannuation Industry (Supervision) Act 1993.

    (b) to exercise, in relation to all matters affecting the entity, the same degree of care, skill and diligence as a prudent superannuation trustee would exercise in relation to an entity of which it is trustee and on behalf of the beneficiaries of which it makes investments;

    As for Directors of superannuation corporate Trustees refer to the provisions of Section 52(2)(b) of the Superannuation Industry (Supervision) Act 1993.

    (b) to exercise, in relation to all matters affecting the entity, the same degree of care, skill and diligence as a prudent superannuation entity director would exercise in relation to an entity where he or she is a director of the trustee of the entity and that trustee makes investments on behalf of the entity’s beneficiaries;

    Professional Trustees

    A higher standard of a “duty of care” is expected from professional trustees who are paid for their services. The leading case in Bartlett v Barclays Bank Trust Co Ltd [1980] Ch 515; [1980] 1 All ER 139. A summary of this case can be found on the following link:

    Bartlett v Barclays

     

    Notes:

    (1) Australian Securities Commission v AS Nominees Limited [1995] FCA 1663; (1995) 62 FCR 504

    (2) Australian Securities and Investments Commission v Healey and Others [2011] FCA 717; (2011) 196 FCR 291

    (3) Daniels and Others (Formerly Practicing as Deloitte Haskins & Sells) v Anderson and Others (1995) 37 NSWLR 438

    (4)Australian Securities and Investments Commission v Adler and Others [2002] NSWSC 171; (2002) 168 FLR 253

    (4b) Adler v Australian Securities and Investments Commission [2003] NSWCA 131; (2003) 46 ACSR 504


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