The Liability of Directors of a Corporate Trustee





The decision of the Supreme Court of South Australia in Hanel v O’Niell [2003] SASC 409 has reignited in that country the debate about the extent of the personal liability that may be faced by a director of a corporate trustee. The decision is founded in the particular statutory provisions that govern the liability of such directors under section 197 of the Australian Corporations Act 2001 (Cth). Because of that the case may not be of more general application. But it is nevertheless a signal of the preparedness of the South Australian Supreme Court to part with existing authority when it appeared to be in the interests of justice that personal liability be sheeted home to directors. It is moot whether or not New Zealand judges would be similarly prepared.

The purpose of this paper is to begin with an examination of the Hanel decision and then to consider the means by which, apart from the specifics of a provision such as section 197, directors of a corporate trustee might be held liable as fiduciaries to trust beneficiaries or to others dealing with their trust. The paper will consider those means by reference principally to the work done by David Pollard in 1996 and 1999, updating his examination of the salient principles by reference to cases decided in the time since his article prepared for The Association of Corporate Trustees in Britain in October 1999.

The Hanel Decision

The Hanel case concerned a shopping centre lease that was breached. A company called Daroko Pty Limited was a trustee of a trust and in that capacity was the tenant of premises in a shopping centre in Kingswood in South Australia. Mr O’Niell was the owner of the Centre. The sole director of Daroko was Mr Hanel.

In March 2001 Mr Hanel gave notice of the intention of Daroko to vacate the property it was leasing in the shopping centre. Daroko duly left the premises well before its lease was to expire. In essence Daroko abandoned its lease. Daroko’s financial position was such that it had no assets at all at that time. That was because Mr Hanel had caused the whole of its profits to be distributed to a beneficiary of the trust of which Daroko was trustee. Of crucial importance was the fact that under the deed by which Daroko’s trust was administered it was wholly indemnified in its capacity as trustee out of the assets of the trust.

Mr O’Niell obtained judgment against Daroko for the rent due over the balance of the lease from which Daroko had resiled and because of its position Daroko promptly failed to pay the judgment debt. Instead Mr Hanel appealed the judgment in proceedings that eventually found their way to the State Supreme Court. In the course of those proceedings the issue of Mr Hanel’s personal liability to Mr O’Niell was considered.

The key statutory provision considered in Hanel was section 197(1) of the Corporations Act. This provided:
A person who is a director of a corporation when it incurs a liability while acting, or purporting to act as trustee, is liable to discharge the whole or a part of the liability if the corporation:

(a) Has not, and cannot, discharge the liability or that part of it; and
(b) Is not entitled to be fully indemnified against the liability out of trust assets.

This is so even if the trust does not have enough assets to indemnify the trustees. The person is liable both individually and jointly with the corporation and anyone else who is liable under this sub-section.

The predecessor to section 197(1) had been interpreted to mean that where a corporate trustee was entitled to be indemnified out of trust assets, even if those assets were insufficient to indemnify the corporation for the relevant liability, the directors of the corporate trustee were not personally liable.

In a split decision the South Australian Supreme Court parted from that view. Mr Hanel had argued that personal liability under section 197(1) did not arise because the corporate trustee was entitled to a full indemnity under its trust deed. On that argument it did not matter that the Daroko Unit Trust of which Daroko was trustee did not have sufficient assets to be able to honour the indemnity. The majority of the South Australian Supreme Court refused to adopt this interpretation of section 197(1). It approached the application of the section as both a question of fact and law and held essentially that if there were no assets with which the corporate trustee could actually be indemnified; there was no entitlement to indemnity for the purposes of the section. Of the Judges who considered the matter, Gray J held that the words referring to an insufficiency of assets would have no meaning if it was enough that a hollow right of indemnity existed. Accordingly, the Judge found that the section should be construed so that directors of a corporate trustee would face personal liability for any debts incurred by the corporate trustee where there were insufficient trust assets to meet the debt.

This was an approach with which Mullighan J agreed and in his judgment he noted that it would be inconsistent for the purposive approach to the application of the section for directors of a corporate trustee to avoid personal liability because of a right of indemnity expressed in the trust deed, even in circumstances where the directors had brought about a depletion of the trust’s assets.

As noted, the Supreme Court of South Australia was split in its decision. Debelle J dissented and concluded that the wording of section 197 could not lead conclusively to the view that Parliament had intended to alter the previous law. The Judge found that a legal basis for full indemnity of the corporate trustee was sufficient to excuse any personal liability on the part of the corporate trustee’s directors and given that the indemnity in the Daroko trust deed was available to be pursued, albeit with doubtful results, the Judge held that Mr Hanel could not be personally liable under the section for Daroko’s debts.

The Hanel v O’Niell decision has led to the suggestion that in a number of important instances where corporate trustees typically hold assets of significant value, such as superannuation schemes, the potential liability of company directors has increased appreciably. This in turn has led to suggestions that corporate trustees ought routinely now to enter into contractual obligations subject to limited recourse, ie, limiting the recourse of the counterparty in any arrangement to the assets of the trust or limiting the liability of the trustee to one that is co-extensive with the quantum of its right of indemnity out of trust assets.

Equally importantly, the insurance industry is responding to the Hanel decision to ensure that directors’ and officers’ insurance cover is adequate to the potential liability that might arise as a result of the Supreme Court of South Australia’s interpretation of section 197 of the Corporations Act 2001. Suggestions have also been made that trust deeds in Australia should now routinely provide for the trustees’ indemnity to apply notwithstanding the existence of an unrelated breach of trust, thought this may not legally be effective to broaden the indemnity to cover a transaction which itself constitutes a breach of trust.

The Hanel decision has not been universally applauded in Australia. It was, however, upheld in Intagro Projects Pty Limited v Australia & New Zealand Banking Group Limited [2004] NSWSC 618. This was an action in the Supreme Court of New South Wales brought by ANZ. The bank asserted that two company directors were personally liable under guarantees granted by their company while it acted as a trustee. The Court in Intagro questioned aspects of the Hanel approach to section 197 of the Corporations Act. In part the Court noted that it seemed incongruous for directors of trustee companies to bear a personal liability as great as that imposed on directors elsewhere under the corporations law but without the defences granted to directors of companies operating other than as trustees. Despite its reservations, the Court felt that in the absence of an obvious construction of section 197 that was contrary to that adopted by the South Australian Supreme Court, it was bound to follow the decision despite its reservations.

Hanel was also considered in passing in another New South Wales case this year, Edwards v Attorney-General [2004] NSWCA 272. This case involved an application by trustee companies for directions, and by the directors of those companies for orders of the Court relieving them of personal liability. The case related to prospective asbestos claims which the corporate trustee anticipated might be brought against it. The application of section 197 was not directly in point in Edwards and the Court’s passing comments are accordingly dicta only. Nevertheless, the Court noted that had it been required to consider section 197 it was unlikely to have followed Hanel, stating that the construction adopted by the majority in that case was “unconvincing”.

The Hanel decision is an example of one of the six bases upon which the personal liability of directors of a corporate trustee has been assessed in recent years. Statutory liabilities include instances where criminal fines and penalties may also be imposed on directors. There is a body of case law and commentary dealing with the other possibilities for personal director liability.

Six potential bases for liability

Looked at at large, a director of a corporate trustee may be personally liable by six possible routes identified and commented on by Pollard. First, there is the question whether directors of a corporate trustee owe a direct fiduciary duty to persons dealing with the company in its trustee capacity, whether they are beneficiaries or other parties dealing with the corporate trustee.

Secondly, there is the possibility that directors of a corporate trustee may owe a duty of care in tort that transcends the relationship with the corporate trustee and once again gives rise to a direct obligation, responsibility and liability to beneficiaries and others dealing with the trustee.

Next there is the possibility that a director of a corporate trustee may be affected by or take up liability as result of the actions of another party who procures, aids, or assists in a breach of trust and does so dishonestly.

Fourthly, there is the possibility of an indirect fiduciary duty or tortuous duty of care, to be contrasted with the direct fiduciary duties referred to above. In this case the duties are owed not to the parties dealing with the company but to the trustee company itself. Those duties are then enforceable by the company or by a person acting in the stead of a company such as a liquidator. Alternatively the duties may well comprise an asset of the trust so that any new trustees or beneficiaries could enforce the duties against the director rather than being confined to action against the trustee company.

Fifthly, there are well known instances in which the corporate veil may be disregarded and set to one side, leaving the parties who are to all intents and purposes the head and brains of the trustee company, to be directly and personally responsible for the company’s actions as if the company had not existed.

Lastly, and as referred to above, various statutes impose liabilities on directors. In the usual course directors of trustee companies can be held responsible for reckless trading and similar activity, though having the benefit of defences in that regard that were noted as being absent in the application of section 197 of the Corporations Act in Hanel.

Do directors owe a direct fiduciary duty?

The debate here is whether the fiduciary duty owed by directors is to the corporate trustee or whether the duty goes beyond that and is owed to beneficiaries directly. The law stems from two early cases, Wilson v Lord Bury (1880) 5 QBD 518 and Bath v Standard Land [1911] 1 Ch 681.

In Wilson a company had been formed for the purpose of receiving money from depositors and investing it upon securities. The defendants were directors of the company. The plaintiff deposited with the company £1,000 upon terms that it would remain in the company’s hands for five years during which time the plaintiff would receive interest at the rate of 6 percent per annum. The arrangement was that the depositor would have the security of a mortgage and if the mortgage was discharged for any reason inside the five years, then it would be replaced by another. The company discharged the mortgage but did not replace it with another and dealt with the advance from the plaintiff as if it was part of the funds of the company, eventually going into liquidation. The plaintiff sued the defendants who were directors of the company on the basis that the defendants had exhibited gross negligence in their conduct as directors of the company. At first instance the Judge rejected evidence going to such negligence and directed a jury to find for the defendants, entering judgment for them and denying recovery sought by the plaintiff. The matter was appealed then to the Court of Appeal.

The Court’s judgment included these statements:
Being clearly of the opinion, as above stated, that there was no contract between the Plaintiff and the Defendants, and that there was not the relation of principal and agent between the Plaintiff and the Defendants, the question is whether there was the relation between the cestui que trust and trustees. I know of no principle or authority for saying that such a relation can be constituted by an agreement or any intercourse between the parties less direct than the agreement or intercourse, which forms the relation of principal and agent. As the agent of an agent is not thereby the agent of the original principal, so is neither the agent or trustee of a trustee thereby the trustee of the original cestui que trust.

At a later point the Court noted:
This being a contract alleged to be made by the company, I own but I have not been able to see how it can be maintained that an agent can be brought into this Court or into any other Court, upon a proceeding which simply alleges that his principal has violated a contract that he has entered into. In that state of things, not the agent, but the principal would be the person liable.

This statement was drawn from the decision of Cairns LJ in Ferguson v Wilson Law Rep 2 Ch 77.

Although the case was advanced on a basis that was essentially one of contract, the Court of Appeal did consider the possibility that a trust might exist in respect of the deposit of $1,000 but made it clear that unless the directors of the company by their acts changed their position they were, to use the words adopted by the Court, “strangers to the trust”.

They were not trustees by reason merely of their being directors. The clear distinction between the capacity of a trustee and the capacity of a director was supported by reference to Lord Selborne’s decision in Barnes v Abby Law Rep 9 Ch 244 in which the then Lord Chancellor had refused to render two solicitors liable when they had advised against a transaction but then been instructed by the trustee of the trust for whom they were acting to carry it out. The trustee was guilty of a breach of trust but neither solicitor was liable.

In Bath v Standard Land the company arranged with the plaintiff to manage, develop and realise his estates on certain terms as to remuneration. In the course of management it employed one of its directors who was a solicitor to act professionally for the estates and paid his bill of costs which included profit items. Another director who was an estate agent managed a business connected with the estate’s and yet another director who was an auctioneer acted in the auctions of all sales of the estate’s for his usual commission.

The issue was whether and to what extent the company was entitled to charge for the professional services of some of its directors and for the keeping of certain accounts. The majority of the Court considering the matter held that the directors of the company stood in a fiduciary position in relation to the company but not to the plaintiff himself and that the profit, costs, salary and commissions paid to the directors in their professional capacity might be allowed in taking the accounts between the plaintiff and the company under the agreement by which moneys were placed with the company by way of investment. The dissenting judgment was that of Fletcher Moulton LJ who held that the directors had full knowledge of the fiduciary character of the duties in which they were engaged in the name of the company and, as a consequence, could not use their position as de facto administrators of the trust to profit themselves or one another.

Neither of the two cases just cited were put to or considered by Dankwerts J in two cases in the 1950s that for some time were generally thought to support the view of directors having an independent direct fiduciary duty to beneficiaries of a corporate trustee. Those cases were Re French Protestant Hospital [1951] Ch 567 and Abbey & Malvern Wells Limited v Ministry of Local Government [1951] Ch 728. In both those cases the Judge held effectively that directors were directly liable to beneficiaries of the trusts in question where the trustee was actually a company.

The French Protestant Hospital case concerned an attempt by the board of the charitable trust that controlled a hospital to change some of the by-laws under which it operated, specifically to enable members of the Board to be remunerated. That attempt was resisted on the basis, inter alia, of the tenets of trust law that forbid a trustee from benefiting him or herself. Dankwerts J noted that although it may technically have been the case that the governors of the relevant charity were not themselves trustees, the Court was “bound to look at the real situation that exists.” He held that because the charitable entity that was the actual trustee was completely controlled by its Governor, Deputy Governor and directors, those persons were:
…as much in a fiduciary position as trustees in regard to any acts which are done in regard to the corporation and its property….Therefore, it seems to me plain that they are, to all intents and purposes, and for the purposes of this case, bound by the rules which affect trustees.

On this basis the directors were prevented from providing for their remuneration because to have allowed that would, in the Judge’s view, have allowed a profit to be made from the trust’s assets when none was stated as being due to those who exercised fiduciary duties in relation to them.

In Abbey & Malvern Wells the Court was required to consider whether certain town and country planning exemptions applied to a school for girls that was conducted pursuant to a trust deed but the assets of which were held in a company. Dankwerts J again presided and referred counsel to his then recent decision in French Protestant Hospital. He held that while the company could theoretically apply its assets to the making of profits, the company was controlled by persons who were not free agents. They were trustees of the trust deed who were enjoined from using the assets of the company in any way that was inconsistent with the objects of the deed. On this basis the Judge held that the assets of the company were in fact subject to the trusts which bound its directors, with the result that the exemptions in issue applied.

Despite the Judge’s comments to counsel, the decision in Abbey & Malvern Wells was different from the position of principle advanced in the French Protestant Hospital case. In the former Dankwerts J was not suggesting that directors necessarily had the same fiduciary relationship as their company because of the role they had in regulating the company’s activities, as he had in the latter. Instead he was suggesting that where, independently of the company, its directors were bound by trust to act in a certain way, a company might be caught by that and required as a result to act consistently with the director’s trust. In that sense the two cases are the opposite sides of the same coin.

The complaint aimed at these decisions is that in neither case was Dankwerts J referred to the decisions on Lord Bury or Standard Land. Had he been, he might not have been prepared to extend the scope of fiduciary obligations to the extent that he did. This was the point taken by Lindsay J in HR v JAPT [1997] OPLR 123 who was called upon to consider a claim brought against the corporate trustee of a pension scheme and several of the company’s directors.

Those familiar with the case will recognize it as one of the authorities that illustrate the ease with which pension funds have been applied to an employer’s purposes. The case involved the lending of substantial amounts from the fund to the employer without security and the increase of directors benefits from the pension plan on the basis of an ostensible surplus within the fund. In fact the fund was in deficit and when new trustees were appointed to the scheme they took proceedings against the directors of the former trustee company. One of those directors applied to have the personal claims against him struck out. That in itself is noteworthy. This was a strike out application in the context of which the Court had to be very clear that there was no tenable argument against the director in question.

Lindsay J considered the Lord Bury and Standard Land cases bound him. As decisions of the Court of Appeal he did not feel that there was any basis on which to distinguish them. Counsel for the applicant director had sought to do so on the basis that the trust company in HR administered only one trust and had a small issued share capital. The argument was that with a “one trust/one assets” corporate trustee one ought to be able to mount a claim against its directors more easily than if one was dealing with a trustee company that administered a number of trusts. With some apparent reluctance, given the circumstances of the case, Lindsay J found that no such distinction could be sustained.

In arriving at that decision he was fortified by reference to various Australian authorities, although he does not appear to have canvassed all of those that could be considered to support the approach taken in Bath v Standard Land. Nevertheless he held that the facts of the HR case presented an argument only that directors had acted as such and (alleged carelessness apart) in a manner that one might expect of directors of a trustee company and that this was insufficient to enable the Court to reach a finding of personal liability.

There was no appeal from the HR decision and it is doubtful that one would have succeeded given the approval of comments in Lord Bury by the Privy Council in Kuwait Asia v National Mutual Life Nominees [1991] 1 AC 187. Moreover in Williams v Natural Life Health Foods [1997] IBCLC 131, the House of Lords followed the Supreme Court of Canada in Edgeworth Construction Limited v MDLCA [1993] 3 SCR 206, in requiring an assumption of corporate liability before direct liability can arise.

The possibility of a direct fiduciary obligation between directors of a trust company and beneficiaries of the trust in question must therefore be doubtful. As counsel for the applicant in the HR case noted, it is difficult to understand why so many cases have dealt with the so called accessory or indirect liabilities of directors if a clear case had been made for them to be directly personally liable.

Do directors owe a direct duty of care?

The possibility of such a direct duty being owed was raised in the HR case. There the claimants against the director involved argued that a duty could arise in either of two ways. The first was a duty to act with care and skill said to be imposed on those who elect to act in the interests of others and the second was a separate and personal tortious liability for the acts of the company of which the person was a director.

The first of these two possibilities was based on the argument that directors assumed responsibilities directly to beneficiaries, drawn from two House of Lords cases. The first of those was Henderson v Merrett [1994] 3 WLR 354, a case in which their Lordships espoused concurrent contractual and tortious liability. The second was White v Jones [1995] 2 AC 207 in which they overcame what was considered to be a lacuna in the law to allow a claim for a disappointed potential beneficiary of a deceased estate.

Neither case was considered in HR to justify the argument that directors had taken on a direct duty of care. Their duty was owed to the company and to go beyond that risked doing violence to long-standing authority.

The second basis on which a direct duty in tort was asserted was that directors could be personally liable for their company’s actions where there were special facts. In this the claimants in HR relied on the Court of Appeal decision in Williams v Natural Life Health Foods [1997]1 BCLC 131.

That decision has a New Zealand connection in that the Court considered the case of Trevor Ivory v Anderson [1992] 2 NZLR 517 in which McGechan J held that an officer or servant of a company might, no matter his status, come under a personal duty to a third party in the course of his activities on behalf of the company. The test was whether there had been an assumption of a duty of care, either actual or implied. The case concerned the use of the herbicide “Roundup” on the property of a raspberry grower whose crop was severely affected. The allegations that were raised included personal liability on the part of the shareholder director of the one man company with which the grower had contracted.

McGechan J declined to find against the defendant saying that the establishment of a company and the holding out of limited liability made it clear to the world what was intended.

In Williams a director was sued for the misrepresentations contained in certain materials that his company had circulated to its clients about health foods. The Court of Appeal held that before personal liability could be established, some special circumstances were necessary that would set the case apart from the ordinary. Otherwise, the Court feared, the protection of limited liability would be effectively nullified in the case of a one man company. Such circumstances were found to exist because the offending brochure placed particular emphasis on the expertise and personal experience of the director.

No such special circumstances could be found by Lindsay J in HR who held that the director of the trust company had not over stepped the line to assume any additional responsibility. The decision is vindicated by the subsequent overturning of the Court of Appeal in Williams by the House of Lords in 1998 (see above) and the case law has since continued to reinforce the difficulty with which a director will be considered to have assumed a duty of care.

The approach taken in Trevor Ivory v Anderson has been applied most recently in Standard Chartered Bank v Pakistan National Shipping Corporation [2000] 1 Lloyds Rep 218, although it was then noted that Lord Cooke of Thorndon had, in his 1997 Hamlyn Lecture on Turning Points of the Common Law, commented that if the plaintiff in Trevor Ivory had reasonably thought that he was dealing with an individual the position might have been different. In Hogg Robinson Trustees Limited v Alsford Pensions Trustees Limited [1997] PLR 99, McGechan J’s refusal to assign personal liability when a director had done nothing but routine involvement in and through his company was also cited with approval. In that case Lindsay J dealt with a strike-out application that encompassed claims of both direct and indirect liability. While he was prepared to allow the latter to proceed (see below), he was not prepared to countenance the former.

Directors’ Accessory Liability

In a case of some considerable antiquity, Barnes v Addy (1874) LR 9 Ch App 244, the House of Lords held that a third party can be liable to beneficiaries of a trust where that party has been involved in a breach of trust by the trustee, in other words has procured or assisted the breach of trust by that trustee. The principle espoused in Barnes does not require the third party to have reaped any personal benefit or to have participated in the trust’s property in any way. It is sufficient that the person has intervened in the trust in some way so as to bring about the breach of trust by the trustee.

The case concerned the circumstances in which someone who is acting as an agent for trustees can himself be required to bear the responsibility of a trustee, if the transaction in which he acts is one where the trustee acts in breach of trust. The plaintiffs for the Barnes children, who had an interest in remainder (consequent upon a life estate in their mother) in a share of the residue of their grandfather’s estate. The will had appointed three executors and trustees but eventually, through deaths, only Mr Addy remained as trustee. He was married to one of the testator’s daughters, who also had a life interest, with remainder to her children, in a share of the testator’s residue.

Mr Barnes brought proceedings against Mr Addy alleging a breach of trust. The litigation was settled on terms that it would be dismissed and that the parties bear their own costs but afterwards Mr Addy decided to retire as a trustee of the share of residue held for the Barnes family and to appoint Mr Barnes as trustee in his place. Mr Addy called on his solicitor, Mr Duffield, to draw the necessary document and Mr Duffield advised against adopting this course. Mr Addy refused to accept his advice and Mr Duffield then advised that Mr Addy should take a deed of indemnity from Mr Barnes. Mr Duffield refused to proceed further unless the drafts of the necessary documents were approved by a solicitor on behalf of Barnes’ wife and children whereupon Mr Barnes engaged another solicitor to that purpose. The deeds to effect the change in trustee were executed but upon the trust fund being transferred into Mr Barnes’ name, he sold it and used the proceeds in his own business. Those proceeds were lost when he became bankrupt soon after. The Barnes children sought relief against Mr Addy and against the two solicitors, Duffield and Preston. The Vice Chancellor held that Addy was liable for breach of trust in connection with the loss of the funds but that the two solicitors were not liable.

In reviewing Barnes v Addy in Commonwealth of Australia v Booker International Pty Limited [2002] NSWSC 292, Campbell J noted Lord Selborne’s remarks:
It is equally important to maintain the doctrine of trusts which is established in this Court and not to strain it by unreasonable construction beyond its due and proper limits. There would be no better mode of undermining the sound doctrines of equity than to make unreasonable and unequitable applications of them.

Liability in terms of Barnes v Addy has in recent times come to be referred to under two limbs. The first limb in the case is generally described as imposing “recipient liability” and liability under the second limb is called “accessory liability”.

The recipient liability is essentially one that arises in circumstances where trust property comes into the hands of a person who can be required to disgorge it. That normally requires at least constructive knowledge of the trust claims over the property at the time the property is received. Accessory liability is directed towards those circumstances in which a person has procured or assisted a breach of trust. The extent of the liability was examined in Royal Brunei Airlines v Tan [1995] 2 AC 378, a decision of the Privy Council. This case was recently canvassed in our Court of Appeal in US International Marketing Limited v National Bank of New Zealand Limited [2004] 1 NZLR 589, a case concerning the duty of a bank to its customer where payment from the customer’s account could constitute a breach of trust owed to a third party. The test for accessory liability for breach of trust was examined by the Court of Appeal which rendered a unanimous judgment. The Court held that the scope of the duty which might give rise to accessory liability had been authoritatively determined in Royal Brunei. The following elements had to be satisfied:
(a) The existence of a trust. It was sufficient for this purpose that there be a fiduciary relationship between the trustee and the property of another person.

(b) A breach of trust.

(c) Assistance by the bank (or other person) in breach of trust.

(d) Dishonesty on the part of the bank, meaning for the purposes of the test, a dishonesty measured by reference to both objective and subjective elements.

Importantly, in relation to the requirement for dishonesty, the Court noted the Privy Council’s requirement that the accessory must act with “conspicuous impropriety”. The type of conduct likely to fall within that measure was discussed in Twinsectra v Yardley [2002] UKHL 12, in the course of which Lord Hoffman described a dishonest state of mind as one where there is a consciousness that one is transgressing ordinary standards of honest behaviour.

When Lindsay J came to consider this head of action brought in HR, he held that Royal Brunei dishonesty would be established in relation to a person
… unless there is a very good and compelling reason, to participate in a transaction if he knows it involves a misapplication of trust assets for the detriment of the beneficiaries or if he deliberately closes his eyes and deliberately chooses not to ask questions so as to avoid his learning something he would rather not know and then for him to proceed regardless.

It is generally considered that Royal Brunei dishonesty requires a high threshold to be established. For example, in Compac Computer Australia Pty Limited v Merry (1998) ALR 1, the Court held that directors of a company should not be regarded as having the requisite degree of knowledge that the company had breached the terms of an agreement that sale proceeds should be segregated and kept in a separate account. However, in Agip (Africa) Limited v Jackson [1991] Ch 547, it was held that a director need not be aware of the exact nature of the wrongdoing in question. It is sufficient for him to know that some illegal or wrongful activity is occurring without his being privy to its nature or scope.

Dog leg claims – indirect Fiduciary Duty or duty of care

The essence of the dog leg claim is that it gives rise to an asset in the company to whom a duty is directly owed. Directors owe a range of duties, fiduciary, contractual and otherwise, to their companies and can also owe duties if they are employed by those companies as well as acting in the capacity of director. A breach of duty to the company can, on the “dog leg” principle give rise to an action against the director by the company or by some other person standing in the company’s shoes, for example, new trustees of the trust in relation to which the company was a prior trustee.

In the HR case Lindsay J was invited to find that the director of the trust company owed a duty of care both fiduciary and tortuous to the company and that by breaching that duty the company had suffered loss. The nature of the loss was a claim by the beneficiaries of the pension scheme for the funds that had been lost on the director’s “watch”. The argument went that the claim by the trustee company against the director was an asset of the pension scheme which could therefore pass to the current trustees in whom most of the assets of the trust had been vested by operation of statute.

In the context of the application to strike out the claim against the director personally, the director argued that any duty of this type could be enforced only by the trustee company and not by the pension scheme or its beneficiaries. He argued that the proper procedure was for the then current trustees of the pension fund to bring a claim against the trustee company, force it into liquidation and require the liquidator of the company to take action in relation to a breach of duty by the director.

The Judge in HR considered it was at least arguable that an indirect claim based on fiduciary or tort duty could be brought by the present trustees or by beneficiaries of the pension fund, relying upon a comment in Royal Brunei to the effect that rights flowing from the duty of trustees to exercise reasonable skill and care form part of the trust property. He felt able to distinguish Young v Murphy (1994) 12 ACLC 558 which seemed to hold against any such indirect claim. It is noteworthy that in subsequent cases other Australian Courts appear to have suggested that, based upon the analysis made by the full court of the Supreme Court of Victoria in Young v Murphy, new trustees of a trust may well be entitled to pursue as successor trustees, claims arising out of the trusteeship of a prior corporate trustee though the dog leg claim appears to be the “long form” contemplated by Lindsay J rather than any ability on the part of beneficiaries to sue directors immediately.

There are some problems that are likely to arise with “dog leg” liability claims. Upon a full hearing on the law, the initial obstacle acclaimed as likely to encounter is whether the company has a right to sue its directors for breach of fiduciary duty, contract or common law obligations and whether any such right can properly be regarded as trust property. As noted above, while in HR the prospect of such a claim was acknowledged, the Supreme Court of New South Wales in Young v Murphy seems to have set its face against such a claim. In that case a distinction was drawn between contractual obligations undertaken by a third party, such as a valuer, providing services to the company in respect of a specific trust, and the general duties of the directors owed to the company itself. In the former case the benefit of the contractual obligations could be regarded as trust property but so far as the latter was concerned, the Court stated:
The business activity of the [trust company] as trustee of these trusts was itself the framework within which the directors came to perform the duties which they owed to the company by virtue of their office as director, but the duties which were owed are nonetheless general duties and are not owed to the company in some specific role or character – or at least they are not owed to the company in some specific role or character when the duties are alleged to have arisen only by virtue of the office which is held.

The distinction adopted by Lindsay J seems to have been based upon the action of the trustee company as trustee of a single trust, though the basis on which that might be sustained is questionable.

Naturally, even if the approach taken in Young v Murphy is correct, the possibility remains of a liquidator taking action against directors upon the winding up of the trust company and in that context, subject to possible limitation issues, it may be less relevant whether the right to sue the director constitutes trust property or not.


A review of the authorities relating to the various heads of claim that may be raised against directors of a trustee company establishes that there is no automatic personal liability but that in some circumstances, chiefly those where duties are owed to the trustee company and are breached, or where a director acts dishonestly or recklessly, personal liability may follow.


© G D Clews, 2004

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