Arakella v Paton (No.2)

The parties in this case were Arakella, the beneficiary of a trust, and Paton, a corporate trustee. The dispute concerned the liability of the trustee for breaches of the trust deed and the Corporations Act during the operation of a trading trust. The case was heard in the Federal Court of Australia. The primary issue before the court was whether the trustee should be relieved from liability for breaches of trust that occurred both before and after the trustee obtained legal advice. Specifically, the court had to determine whether the directors' failure to obtain legal advice and their initial reliance on an external accountant justified relief from liability for the breaches that occurred in the initial period. Additionally, the court had to consider whether the trustee's subsequent actions to minimise the breaches and restructure the trust warranted relief from liability for any breaches that occurred thereafter.

In addressing the issue, the court noted that the directors' initial failure to obtain legal advice and their reliance on an external accountant did not automatically relieve the trustee from liability. However, the court acknowledged that the directors' subsequent efforts to rectify the breaches and comply with the trust instrument and Corporations Act were commendable. The court concluded that the directors' actions after obtaining legal advice demonstrated a genuine effort to address the breaches and minimise the impact on the trust. As a result, the court found that the trustee should be relieved from liability for breaches that occurred after the directors obtained legal advice. However, the court did not grant relief for the breaches that occurred before the directors obtained legal advice, as the directors' failure to seek legal advice and their reliance on an external accountant were not sufficient grounds for relief.

The court's decision was that the trustee was not relieved from liability for breaches that occurred before the directors obtained legal advice, but was relieved from liability for breaches that occurred after the directors obtained legal advice and acted to minimise the impact on the trust. This outcome reflects a balanced approach, recognising the importance of seeking legal advice and taking corrective action while also holding trustees accountable for their initial failures. The court's decision provides guidance for trustees and beneficiaries in similar situations, emphasising the need for trustees to take proactive steps to address breaches of trust and comply with legal obligations.