In this Insight, we examine recent Australia case law to look at the care which a trustee must take when placed in a position of trust and authority.


Case Study – Re Sir Colin and Lady MacKenzie Trust (No 2) [2020] VSC 335 (5 June 2020)

This case highlights the care which a trustee must take when placed in a position of trust and authority.

The case concerned an application for judicial advice seeking exoneration for its breach of a testamentary trust. The application was made by a professional trustee company to the Victorian Supreme Court under section 67 of the Trustee Act 1958 (Vic).

The breach concerned the distribution of a charitable gift after a condition requiring the trustee to cease making distributions in circumstances where the name of the Sir Colin MacKenzie Sanctuary had altered.

Section 67 empowers the Supreme Court to relieve a trustee from personal liability for breach of trust in circumstances where the applicant acted reasonably and honestly. Similar provisions operate in other states.

Section 67 provides:

If it appears to the Court that a trustee, whether appointed by the Court or otherwise, is or may be personally liable for any breach of trust, whether the transaction alleged to be a breach of trust occurred before or after the commencement of this Act, but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the Court in the matter in which he committed such breach, then the Court may relieve him either wholly or partly from personal liability for the same.

Similar provisions can be found in sections 85 and 86 of the Trustee Act 1925 (NSW).

The Sir Colin and Lady MacKenzie Trust was established under the will of Lady MacKenzie.

One third of the income of the trust was to be applied to the administration of the ‘Sir Colin MacKenzie Sanctuary’. However, the gift was conditional upon the name never being altered.

The Court found that the official name of the sanctuary was altered from ‘Sir Colin MacKenzie Sanctuary’ to ‘Sir Colin MacKenzie Zoological Park’ on 27 June 2002 and that as a consequence the gift lapsed, with the result that distributions made after that date by the trustee were in breach of trust as they were subject to a gift over provision in the will requiring income to be distributed pursuant to another gift in the will for ‘anatomical studies’.

Although the Court noted the breach was ‘passive’ and non-intentional and did not consist of any negligent or dishonest act by the trustee company, it nevertheless entitled the trust to be compensated for loss caused by the trustee.

In order to determine pursuant to section 67 whether it should relieve the trustee wholly or partly from personal liability for the breach, the Court was required to consider what it means for a trustee to act honestly and reasonably. Her Honour, Justice McMillan noted [at paragraph 26] citing various authority:

Honesty and reasonableness are to be viewed objectively, by reference to the welfare and interests of the trust. The Court must consider whether the trustee’s actions were in good faith,[11] and whether they acted with a degree of prudence that a person of ordinary intelligence and diligence would be expected to exhibit in the conduct of his or her own affairs.[12] That standard does not, however, require that the trustee engage in best practice in all respects. As the requirements are cumulative, honesty on the part of the trustee will not excuse actions that are nonetheless unreasonable. Unreasonableness may be identified by reference to several factors, including a failure to seek legal advice, or undue reliance upon another person.[13] Although negligence on the part of a trustee may be indicative of a want of honesty or reasonableness in a trustee’s actions, mere negligence is not in itself disentitling.[14]

Whether the Court ought fairly to excuse the breach required the Court to consider all of the circumstances and not just whether the trustee’s actions were honest and reasonable. The Court noted that the trustee’s actions could in some circumstances be in breach of the law but be  ‘sensible’ and not generating any loss or prejudice to the trust and therefore excusable or in other circumstances honest and reasonable, but nonetheless disentitling the trustee to relief.

In the case of professional trustee companies, such as the plaintiff, a more onerous burden is placed upon an applicant to satisfy the Court that it is entitled to relief.[1]

The Court held that the trustee could be partly excused for the breach for the period until it was placed on notice that the name of the sanctuary may have been changed, noting that it had compliance systems in place.

The Court expressed concern with evidence given on behalf of the trustee that its business practice was not to discontinue a trust distribution if it is satisfied it has been in ‘substantive compliance’ with the terms of a trust:

If there were any concern regarding whether or not a condition has been complied with, payments to which that condition is attached ought to have ceased immediately. It is not the role of the trustee to determine whether or not the gift has lapsed based upon its perception of ‘substantial compliance’. The appropriate course, …, is for the trustee to approach the Court for judicial advice as to how trust funds ought to be administered in such circumstances.

It found:

the plaintiff must prima facie make good the loss caused by the breach of trust so as to put the trust in the same position as if the breach had not been committed.

It also observed generally on the question of costs in an application to the Court seeking advice of this nature, the Court will generally permit the trustee to be indemnified for its proper costs of the application from the trust.[2]

In the circumstances the Court allowed the trustee to recover a proportion of its costs only for its partially successful application for exoneration for the breach of trust.

If this case study raises issues for you, please get in touch for a confidential discussion with Birchgrove Legal NFP Team today on (02) 9018 1067.

[1] Re Sir Colin and Lady MacKenzie Trust (No 2) [2020] VSC 335 at [28] citing Partridge v Equity Trustees Executors and Agency Co Ltd (1947) 75 CLR 149, 165 (Starke, Dixon and Williams JJ).

[2] At [48].

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