In the world of Australian corporate governance, assuming the role of a Director or Officer within a corporate trustee or a responsible entity is no small feat. It entails the crucial responsibility of ensuring that the corporation or entity fulfils its trustee duties, whilst also being subject to the stringent provisions of the Corporations Act 2001 (Cth).
Within this intricate framework, a trustee must navigate a maze of obligations, including complying with general law fiduciary duties, the trust deed or scheme constitution duties, the Trustee Act 1925 (NSW), and the Corporations Act 2001 (Cth). General law fiduciary duties and specific duties set out in legislation work together. There are many overlaps, and the statutory duties do not replace general law fiduciary duties, so it’s not difficult to see why the stage is set for uncertainty, disputes, and litigation.
Corporate Trustees primarily handle the administration and management of trust assets, while responsible entities are responsible for overseeing and making decisions about managed investment schemes, often acting as the responsible party for investors. Trust law and litigation can be highly nuanced since the specific circumstances of each case will significantly impact the outcome.
This article will specifically discuss fiduciary duties under the Corporations Act 2001 (Cth) and examine how the courts give substance to, and deal with breaches of these duties.
Fiduciary duties under the Corporations Act
Section 601FD of the Corporations Act outlines the responsibilities and obligations of officers of responsible entities.
Officers must:
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act honestly;
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exercise the degree of care and diligence a reasonable person would exercise if they were in the officer’s position;
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act in the best interests of the members and, if there is a conflict between the members’ interests and the interests of the responsible entity, give priority to the members’ interests; and
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take all steps that a reasonable person would take if they were in the officer’s position to ensure the responsible entity complies with the Corporations Act 2001 (Cth), any conditions imposed on the responsible entity’s Australian financial services licence, the scheme’s constitution, and the scheme’s compliance plans.
Officers must not:
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make use of information acquired through being an officer of the responsible entity in order to gain an improper advantage for the officer or another person, or cause detriment to the members of the scheme; and
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make improper use of their position as an officer to gain, directly or indirectly, an advantage for themselves or any other person, or to cause detriment to the scheme’s members.
Directors’ duties
In addition, directors or other officers of a corporation that are appointed as a trustee must also comply with the director’s duties set out in the Corporations Act 2001 (Cth). The core directors’ duties include:
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Acting with reasonable care and diligence when exercising their powers and making business judgments.
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Acting in good faith in the best interest of the corporation and for a proper purpose.
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Not using their position to gain an advantage for themselves or someone else or cause detriment to the corporation.
Not using information obtained through their position to obtain an advantage for themselves or another person or cause harm or damage to the company.
How do the courts interpret these duties?
It is often stated that a trustee has a paramount duty to act in the best interests of the beneficiaries, and a duty to act bona fide, but how does that play out in practice?
In a matter dealing with a Mineworkers’ Pension Scheme, the High Court of England and Wales set out guidelines on the duties of trustees when investing assets in Cowan v Scargill [1985] Ch 270. Although this is a UK case, the principles have been followed in Australian cases. The Court stated in particular at [287]:
“The starting point is the duty of trustees to exercise their powers in the best interests of the present and future beneficiaries of the trust… This duty of the trustees towards their beneficiaries is paramount… When the purpose of the trust is to provide financial benefits for the beneficiaries, as is usually the case, the best interests of the beneficiaries are normally their best financial interests.”
The implication of this statement is that trustees must put aside their personal interests and views. The Court also noted the duty includes seeking advice on matters the trustee does not understand.
The duty to act in good faith
In The Bell Group Ltd (in liq) v Westpac Banking Corporation [No 9] [2008] WASC 239, the court dealt with directors’ duties to act in good faith and summarised the legal principles as follows:
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Whether directors acted bona fide in the company’s interests is largely (though by no means entirely) subjective. It is a factual question that focuses on the state of mind of the directors. The question is whether the directors (not the court) consider that the exercise of power is in the best interests of the company.
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The court does not substitute their own views about the commercial merits for the views of the directors on that subject.
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Statements by the directors about their subjective intentions or beliefs are not conclusive.
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In ascertaining the state of mind of the directors, the court is entitled to look at the surrounding circumstances and other materials that genuinely throw light upon the directors’ state of mind and the real purpose primarily motivating their actions.
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The directors must give real and actual consideration to the interests of the company. The degree of consideration will be dependent on the individual circumstances, but consideration must be more than a mere token: it must actually occur.
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The court can look objectively at the surrounding circumstances. The objective enquiry is made to assist the court in deciding whether to accept or discount the directors’ assertions about their subjective intentions and beliefs.
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The court may intervene if the decision is such that no reasonable board of directors could think the decision to be in the company’s interests (however regard must also be had to the business judgement rule).
The Court, however, pointed out at [4550] that “it is necessary to look closely at the facts of each individual case so as to identify the relationship between the parties, the functions that are to be performed within the relationship and the powers and duties attendant on the carrying out of the functions…For example, there are duties and obligations that a trustee has towards the beneficiaries of the trust (clearly a fiduciary relationship) that may not attend the relationship between partners (also clearly a fiduciary one).”
Section 601FD duties
In Australian Securities & Investments Commission v Lewski (2018) 362 ALR 286, The Court had to consider if the directors of a responsible entity breached their duties under section 601FD of the Corporations Act.
In this case, Australian Property Custodian Holdings Ltd (APCHL) was the responsible entity that created a unit trust called the Prime Retirement and Aged Care Property Trust. The trust business was retirement villages and aged care facilities. Mr Lewski and his family owned all the shares in APCHL. Mr Lewski was also a director.
In short, the board wanted to change the constitution, which involved APCHL receiving additional takeover and removal fees without consulting the members. Due to the amendment, Mr Lewski and his family would gain significantly.
The facts of the case are complex, and the matter went on appeal to the Full Federal Court and then again to the High Court. For the purposes of this article, we will focus on what the High Court said on appeal regarding the directors’ duties under section 601FD of the Act.
The duty of care and diligence
The High Court said that the test to determine whether there was a breach was an objective one. The degree of care and diligence required is “the degree of care that a reasonable person would exercise tailored to the circumstances of the responsible entity or director” [68].
The High Court agreed with the primary judge and found that the directors ought reasonably to have known their consideration of the amendment was inadequate. The High Court agreed that the directors did not read and understand the effects of the amendments before passing the resolutions and that the effects of the amendments were not considered by the directors acting as a Board. Although they obtained legal advice about the amendments before passing the resolution, that advice was equivocal and had left open a degree of uncertainty.
The duty to act in the members’ best interests, and to prioritise the members’ interests if there is a conflict between their interests and the interests of the responsible entity.
The Court held that a director cannot satisfy this duty by merely believing that they are acting in the member’s best interests – the belief must be objectively reasonable. To determine the interests of the members, one should look at the purpose and terms of the responsible entity. It is not a purely subjective test.
When prioritising the members’ interests, the Court held that the duty is not satisfied by an honest or reasonable belief:
“A contravention occurs when a director prioritises her or his own interests over those of the members, no matter how honest or reasonable the director was in doing so.” [72].
Although the directors honestly believed the constitution was amended, the Court held that none of the directors could reasonably have believed it was in the members’ best interests to bring the amendments into effect.
A director’s duty to the company not to use their position for an improper purpose
In Lewski, the High Court reiterated that honest beliefs do not justify improper use. The following paragraphs at [75] are particularly relevant here:
“Impropriety does not depend on an alleged offender’s consciousness of impropriety. Impropriety consists of a breach of the standards of conduct that would be expected of a person in the position of the alleged offender by reasonable persons with knowledge of the duties, powers, and authority of the position and the circumstances of the case.
When impropriety is said to consist of abuse of power, the state of mind of the alleged offender is important: the alleged offender’s knowledge or means of knowledge of the circumstances in which the power is exercised and his purpose or intention in exercising the power are important factors in determining the question whether the power has been abused.
But impropriety is not restricted to abuse of power. It may consist in the doing of an act which a director or officer knows or ought to know that he has no authority to do.”
In the circumstances, the amendment to the constitution provided both an advantage to the entity, APCHL, and an indirect advantage to the persons who would benefit from fees paid to APCHL. No reasonable person in the position of the director could have considered it proper to pass the resolution.
Conclusion
As a complex legal framework, it is important to understand how the courts interpret trustee duties in the context of corporate law. Navigating these duties in complex trust structu
