There are many reasons why a trustee might find itself in the position of bringing or defending a claim on behalf of a trust. The first thing that a trustee on the brink of commencing or defending litigation should do is seriously consider whether to seek judicial advice from the Court.

Judicial advice and the right of indemnity

When trustees incur expenses in the ordinary administration of a trust, they are generally entitled to be reimbursed or indemnified out of trust assets (under the general law and the Trustee Act 1925 (NSW)) provided that the expenses have been incurred properly (which would include, for example, that the trustee is not acting fraudulently or outside the scope of its powers).

Of course, things can become appreciably more complicated when it comes to litigation to which the trust is or may be a party. In such cases, it is usually advisable to consider making an application for judicial advice in relation to whether bringing or defending the proceedings is in the best interests of the trust, and if it is appropriate for the trustee to indemnify itself out of trust assets for its costs of such proceedings.

While it is possible to seek judicial advice in the general equitable jurisdiction of the court, most applications are made pursuant to section 63 of the Trustee Act 1925 (NSW). Before the court is able to give advice, however, the applicant must be able to point to a “question respecting the management or administration of the trust property or a question respecting the interpretation of the trust instrument”. The majority of the High Court in the Macedonian Orthodox case (2008) 237 CLR 66 confirmed that that requirement is the only “jurisdictional bar” that needs to be satisfied for the giving of judicial advice under section 63.

The evidence in support of an application under s 63 will generally include an opinion of Counsel that is kept confidential, and which goes towards satisfying the Court that the claim or defence has or sufficient prospects of success to warrant the trustee in proceeding with the litigation. It has been said that the content of Counsel’s opinion “will be a significant matter which the Court will take into account in determining whether or not to give the advice sought”: In the Application of NSW Trustee & Guardian [2014] NSWSC 423 at [27].

If a trustee acts in accordance with the opinion advice or direction of the court, provided that the court was fully informed of all the relevant facts, there can be no doubt or controversy in relation to whether the trustee has discharged its duty and is entitled to exercise its right of indemnity.

Does a trustee lose any right of indemnity if judicial advice is not sought?

In the recent case of Bideena Pty Ltd as trustee for the Bideena Pty Ltd Superannuation Fund [2016] NSWSC 735, his Honour Justice Sackar undertook a review of the case law on the subject of whether seeking judicial advice was obligatory for a trustee. The starting point of his Honour’s analysis was the following statement of the majority of the High Court in the Macedonian Orthodox case:

A necessary consequence of the provisions of s 63 of the Act is that a trustee who is sued should take no step in defence of the suit without first obtaining judicial advice about whether it is proper to defend the proceedings.

The High Court’s remarks may seem, at least at first glance, to imply that a trustee who conducts litigation without having first obtained judicial advice would lose any right to indemnity. However, Sackar J rejected that interpretation and said that the High Court was saying no more than that it was “desirable” for trustees who are unsure about bringing or defending a claim to seek advice under section 63.

Accordingly, choosing not to seek judicial advice merely exposes the trustee to a risk of a later finding that the costs of unsuccessfully litigating a claim were “improperly occurred”, and therefore are not covered by the right of indemnity. As Slattery J noted in Northey v Juul [2014] NSWSC 464 at [96]:

"properly" in this context means reasonably as well as honestly incurred, so that whilst trustees ought not be visited with personal loss on account of mere errors in judgment, which fall short of negligence or unreasonableness, mere bona fides is not the test.

Accordingly, assuming that the conduct of litigation was in the best interests of the trust (which would include consideration of, amongst other matters, whether the costs incurred by the trustee were proportionate to the issues and the significance of the case), there would seem to be no bar to indemnity for costs to litigant trustees (especially successful ones, but even unsuccessful ones) who did not obtain judicial advice to the effect that it was justified in prosecuting or defending proceedings.

Implications

  • Trustees who intend to bring or defend a claim should seriously consider whether to seek judicial advice.
  • Judicial advice may not be appropriate in every case and there may be good reasons for not seeking the advice, such as the amounts involved in the litigation, including the likely costs, or terms of the relevant trust deed.
  • Trustees may be allowed indemnity for the costs of litigation even if they do not seek judicial advice and even if they are unsuccessful in the proceedings, so long as the costs were reasonably as well and honestly incurred.
  • An opinion of Counsel is likely to be crucial in either scenario, and particularly if judicial advice was not obtained and the trustee is unsuccessful in the proceedings.