(c) the trustee had breached its duty as trustee.
12 The first two grounds were said to be encompassed in paragraph 18 of the proposed pleading. The third ground is encompassed in paragraphs 19 and 20.
Paragraph 18
13 Paragraph 18(a) does not plead with any precision what assets of the Trust Fund are not available to be used to satisfy the trustee's right to indemnity. I shall deal with the application, however, on the basis that the sub-paragraph would be amended to reflect counsel's submission, referred to in paragraph 11(a) above.
14 A trustee's right of indemnity in respect of liabilities incurred in execution of the trusts is a right either to be reimbursed from the trust estate if the trustee has discharged the liability out of its own property, or, if it has not, to apply the trust property in discharging the liability. (Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 at 245-246). In Chief Commissioner of Stamp Duties (NSW) v Buckle the High Court said that a Court of Equity may authorise a sale of assets held by the trustee so as to satisfy the right to reimbursement or exoneration, (at 247). In Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 367, the trustee's right of indemnity was described by Stephen, Mason, Aickin and Wilson JJ as follows:
"It is common ground that a trustee who in discharge of his trust enters into business transactions is personally liable for any debts that are incurred in the course of those transactions: Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319. However, he is entitled to be indemnified against those liabilities from the trust assets held by him and for the purpose of enforcing the indemnity the trustee possesses a charge or right of lien over those assets: Vacuum Oil Co Pty Ltd v Wiltshire . The charge is not capable of differential application to certain only of such assets. It applies to the whole range of trust assets in the trustee's possession except for those assets, if any, which under the terms of the trust deed the trustee is not authorised to use for the purposes of carrying on the business: Dowse v Gorton [1891] AC 190; [1891-4] All ER Rep 1230."
15 It seems to me, on the basis of these authorities and as a matter of common sense, that before a trustee can enforce a right of reimbursement or exoneration he must have trust assets in his possession or under his control from which to satisfy the right. If trust assets are held by third parties the trustee must obtain control of them, if necessary by invoking the assistance of the Court.
16 There is nothing in clause 17.4 or clause 19.2 which would preclude the trustee from tracing trust assets into the hands of any third party, including any beneficiary, so as to bring any trust assets held by a third party into the hands of, and under the control of, the trustee.
17 The words in the last sentence of paragraph 17.4, that the right of the trustee to be indemnified is limited to the assets of the trust fund in the hands of or under the control of the trustee, do not impose any limitation on the right of the trustee to have recourse to trust assets to satisfy that right. Those words serve only to emphasise the exclusion of the trustee's right to a personal indemnity from any beneficiary.
18 The Bank did not submit that the trustee's right of personal indemnity from beneficiaries is itself a trust asset. Clearly it is not. The exclusion of the right of personal indemnity is irrelevant to whether the trustee is entitled to be fully indemnified out of trust assets against a liability incurred whilst acting as trustee, or purporting so to act. Clauses 17.4 and 19.2 exclude the right of personal indemnity. They do not affect the right of the trustee to be indemnified out of trust assets.
19 Paragraph 18 of the proposed pleading relies solely upon the combined effect of clauses 17.4 and 19.2 of the Trust Deed. It raises no question of fact. In my view, the proposed amendment is futile because it is obviously bad in law. (Commonwealth of Australia v Verwayen (1990) 170 CLR 394 at 456.) It is not fairly arguable.
Paragraph 19
20 Two issues arise in relation to paragraph 19. The first is whether the alleged breach of trust is adequately pleaded. The second is whether the trustee would be disentitled from claiming indemnity by reason of the alleged breach of trust.
21 In paragraph 44 of its summons, Intagro contends that if the Court finds the first and second guarantees to be binding on the plaintiff, which it denies, then, it says that it is the fact that it did not enter into the guarantees as a trustee of any trust.
22 The Bank submitted that it should be inferred from this pleading that Intagro contends that it did not intend to act as trustee when it entered into the first or second guarantees. The Bank says that if the Court nonetheless holds that Intagro did do so, whilst not intending to do so, it inadvertently but negligently exposed the trust to a substantial liability and thereby breached its duty of care and diligence.
23 I think that paragraph 19 as amended during argument sufficiently pleads the facts giving rise to the alleged breach of duty. The facts relied upon are very simple and unless leave were given to amend the Bank would be precluded from relying on any additional matters as constituting the alleged breach. It is not possible to say on a pleading application whether the facts asserted would be sufficient to establish the breach. I do not think leave should be refused on the ground that the paragraph does not sufficiently plead the matters alleged to give rise to a breach.
24 Mr Rares SC, who appeared for the Bank, submitted that if Intagro acted in breach of its duties as trustee it was not entitled to be indemnified and there was therefore an arguable case which should go to trial that Intagro was not entitled to be fully indemnified against its liability under the guarantees out of the trust assets and hence the directors were personally liable. He cited RWG Management Limited v Commissioner for Corporate Affairs [1985] VR 385 where Booking J said at 396:
"A trustee's right to be indemnified out of the Trust property is limited to liabilities or expenses that have been properly incurred in the execution of the trust: Stott v Milne (1884) 25 Ch D 710, p. 715; re Beddoe [1893] 1 Ch 547 at p. 588. If, for example, a trustee incurs some liability by an act in relation to the trust property which is in excess of his powers, he has no right of indemnity: Leedham v Chawner (1858) 70 ER 191. The result is the same where a liability is incurred as the result of conduct on the part of the trustee which is in breach of his duty, not as being in excess of power, but as being in breach of his duty to execute the trust with reasonable diligence and care: Ecclesiastical Commissioners v Pinney [1900] 2 Ch 736 at pp742-3, per Rigby LJ, a case of contract; Benett v Wyndham (1862) 4 De GF and J 259; 45 ER 1183 and re Raybould [1900] 1 Ch 199, cases of tort. …… The whole question of the limits of a trustee's right to indemnity and the corresponding limits of the creditors power to reach trust property is elaborately discussed in Scott on Trusts , 3 ed, vol III, paras 224-248 and 268."
25 Mr Hammerschlag SC, who appeared with Mr Gyles for the directors, submitted that irrespective of whether the trustee's right of indemnity at general law was lost, it was entitled to be indemnified in respect of any liability in which it incurred by the express provision in clause 17.4 provided it acted in good faith. That was so whether or not the liability was incurred when acting in breach of trust. They submitted that as bad faith was not alleged the pleading disclosed no facts on the basis of which it was arguable that the trustee was not entitled to be fully indemnified out of the trust assets.
26 I accept that it is at least arguable that Intagro would lose its right at general law to be indemnified out of the trust assets for its liability in entering into the guarantee if in doing so it breached its duty of care and diligence. (Ecclesiastical Commissioners v Pinney [1900] 2 Ch 736 at 743; RWG Management Limited v Commissioner for Corporate Affairs at 396; Gatsios Holdings Pty Ltd v Nick Kritharas Holdings (in Liq) (2002) ATPR 41-864; [2002] NSWCA 29 at para 14 (per Spigelman CJ); Nolan v Collie (2003) 7 VR 287 at 303, 305-308).
27 The question then is whether the trustee's right of indemnity is extended by clause 17.4 of the Trust Deed.
28 There is no reason to doubt the validity of the express indemnity in clause 17.4. It only applies where the trustee acts in good faith. (McLean v Burns Philp Trustee Co Ltd (1985) 2 NSWLR 623 at 641; Armitage v Nurse [1998] Ch 241 at 252, 253-4).
29 Paragraph 19 does not allege any fact which could establish that Intagro was not acting in good faith. Indeed the paragraph proceeds on the basis that Intagro did not intend to act as trustee when entering into the guarantees. There is therefore no allegation that Intagro deliberately breached its trust or acted dishonestly towards the beneficiaries, or was recklessly indifferent as to whether the step taken was in accordance with the terms of the Trust Deed or was in the interest of beneficiaries. As Millett LJ said in Armitage v Nurse (at 253):
"… there is an irreducible core of obligations owed by the trustees to the beneficiaries and enforceable by them which is fundamental to the concept of a trust. If the beneficiaries have no rights enforceable against the trustees there are no trusts. But I do not accept the further submission that these core obligations include the duties of skill and care, prudence and diligence. The duty of the trustees to perform the trusts honestly and in good faith for the benefit of the beneficiaries is the minimum necessary to give substance to the trusts, but in my opinion it is sufficient. … a trustee who relied on the presence of a trustee exemption clause to justify what he proposed to do would thereby lose its protection: he would be acting recklessly in the proper sense of the term."
30 In a claim by the beneficiaries against Intagro for breach of trust, the onus would be on Intagro to plead the indemnity clause and to prove that it was acting in good faith. However, as here the Bank must establish that the trustee was not entitled to its indemnity, the Bank must plead facts which would take the case outside the scope of the indemnity. Thus the question becomes one of construction of clause 17.4.
31 In McLean v Burns Philp Trustee Co Limited Young J (as his Honour then was) said that Courts will be very careful in construing clauses which exclude liabilities for breaches of trust and will read such clauses as strictly as possible. A similar but perhaps less stringent approach is that the clause should be read no more widely than its language requires on a fair reading. (Walker v Stones [2001] QB 902). This is consistent with the principle that an exclusion clause is to be given its natural and ordinary meaning in the light of the contract as a whole, giving due weight to the context in which the clause appears including the nature and object of the contract; (Darlington Futures v Delco Australia Pty Ltd (1986) 161 CLR 500 at 510).
32 Mr Rares SC submitted that clause 17.4 should not be construed as extending an indemnity where the trustee acted in breach of trust. There was no express provision extending the indemnity to things done in good faith but in breach of trust. He submitted that the clause restated but did not extend the right to indemnity which a trustee enjoys at general law.
33 The indemnity in the present case can be compared with that considered by Brooking J in RWG Management Pty Ltd v Commissioner for Corporate Affairs which provided:
" In addition to the right of indemnity given by law to trustees the Trustee is and shall be entitled to be immediately indemnified out of the Trust Fund in respect of all liabilities and expenses incurred in the execution or purported execution of the powers, authorities and discretions conferred on it by or pursuant to this Deed and against all action (sic) proceedings, costs, claims and demands in respect of any matter or thing relating to the Trust or the activities of the Trustee in its capacity of Trustee of the Trust. "