Former trustees should act fast to preserve the status quo 6 min read
A recent New South Wales Court of Appeal judgment has resolved a difficult question concerning the law of corporate trustees, and serves as a practical reminder of the difficulties faced, in particular, by insolvency practitioners appointed to insolvent former trustees.
In this Insight, we explain the takeaways from the judgment and what it means for corporate trustees and insolvency practitioners.
- Although the law offers some protection to a former trustee to allow it to satisfy its right of indemnity, a successor trustee does not owe its predecessor a fiduciary duty.
- An important consequence of the successor trustee not owing a fiduciary duty is that the former trustee has more limited rights against third parties who receive trust assets that are the subject of its right of indemnity, even where those third parties have knowledge of its claim against the trust assets.
- A former trustee that is faced with the risk of its successor dissipating trust assets should act quickly to seek relief from the court, including by seeking the appointment of a receiver and, where necessary, interlocutory injunctive relief.
Jaken Properties Australia Pty Ltd v Naaman  NSWCA 214 is an appeal concerning the nature of the duty owed by a successor trustee to its predecessor.
The primary judge had found that the successor trustee owed its predecessor a fiduciary duty not to deal with trust assets so as to prejudice the predecessor's right of indemnity. The successor trustee, Jaken Properties Australia Pty Ltd, appealed this decision. The respondent to the appeal, Naaman, was a creditor of the former trustee who had subrogated to its right to be indemnified from the trust.
The significance of whether or not the successor owed a fiduciary duty arose because it had transferred trust assets to third party recipients. The primary judge found that several of those transfers occurred in order to defraud creditors. If the successor trustee owed its predecessor a fiduciary duty, those third party recipients would potentially be personally liable to the former trustee under Barnes v Addy (1874) LR 9 Ch App 244. That is, if a fiduciary duty existed, the former trustee would have stronger rights to make a personal claim against the third party recipients of the property.
The majority (Justices Leeming and Kirk) found that the successor trustee did not owe its predecessor a fiduciary duty. Chief Justice Bell, in dissent, took the opposite view.
It is common for insolvency practitioners to be appointed to insolvent former trustees. That is due, in part, to the popularity of the trading trust, and to the frequent inclusion of ejection clauses in trust deeds, which operate to automatically remove the trustee from office upon an insolvency event occurring.
The conventional approach taken by insolvency practitioners to satisfy a former trustee's right of indemnity against trust assets it no longer has ownership of is to apply to the court for the appointment of a receiver over those assets. This generally remains the most effective way for a former trustee to satisfy its right of indemnity. If the trust property includes land, the former trustee can take the interim step of lodging a caveat to protect its interest in it.
However, in cases where there is a risk that the successor trustee will dissipate trust assets, insolvency practitioners should consider promptly seeking interlocutory injunctive relief to preserve the status quo, even before the court hears an application to appoint a receiver. Of course, a practical difficulty for an external administrator is that they may be ignorant of the successor trustee's intentions – a point Chief Justice Bell recognised in his dissenting judgment. This is a difficulty for insolvency practitioners and former trustees that remains unresolved.
In any event, following Jaken Properties, it is clear that insolvency practitioners, former trustees, and subrogated creditors should not assume that they will be able to make a personal claim against third party recipients of trust property. This remains the case even in situations where the third party recipient gives no consideration and is aware of the former trustee's rights over the property.
The importance of a former trustee acting quickly to preserve the status quo is highlighted by the fact that, after trust assets have been disposed of by a successor trustee to third parties, it can become more difficult for the former trustee to satisfy its right of indemnity. That is because seeking the appointment of a receiver over the assets in the hands of third party recipients can present practical difficulties. For example:
- there may be several third party recipients, increasing the cost, risk and complexity of any application (compared with an application for the appointment of a receiver over the assets in the hands of the successor trustee);
- the third party recipients may have defences to the former trustee’s claim; and
- the third party recipients may themselves have diminished or disposed of the assets.
The practical point is that, wherever possible, the better course for an insolvency practitioner is to preserve the assets before they leave the successor trustee's hands.
The treatment of trusts in insolvency has long been the subject of calls for law reform. The desire for reform was most recently recognised by the Parliamentary Joint Committee on Corporations and Financial Services in its report into corporate insolvency in Australia, which we discussed in a previous Insight.
The issue addressed in Jaken Properties is one example of the many complexities that can arise in this area of the law. It underscores the importance of clarifying the powers of external administrators appointed to insolvent corporate trustees and the circumstances in which insolvent companies may be removed as trustees.
If you wish to discuss the potential impacts further, please do not hesitate to contact one of our experts below.