Clarification of the duties owed by insolvency practitioners appointed to corporate trustee entities 4 min read
Further to our previous Insight, the High Court has confirmed that a successor trustee does not owe a fiduciary obligation to a former trustee in respect of the entitlement of the former trustee to indemnification out of the trust assets. Nor does the successor trustee owe a fiduciary obligation to a former trustee in respect of the commensurate beneficial interest that the former trustee has in the trust assets.
Background
Anthony Naaman was a judgment creditor of a former trustee and was subrogated to the former trustee's entitlement to indemnification. Jaken Properties Australia Pty Limited (Jaken) was the successor trustee. During its time as the successor trustee, Jaken transferred trust assets to third parties leaving insufficient trust assets to satisfy the former trustee's entitlement to indemnification (Third Parties). Mr Naaman sought relief in the Supreme Court of New South Wales to enforce his judgment debt. Mr Naaman claimed that Jaken's transfers of trust assets to the Third Parties were part of a dishonest and fraudulent design in breach of fiduciary duties owed by Jaken to the former trustee.
The decisions
Supreme Court decision
At first instance, the primary judge determined that a successor trustee owes a former trustee a fiduciary obligation not to deal with the trust assets so as to destroy, diminish or jeopardise the former trustee's entitlement to indemnification. The court found that Jaken had 'engaged in a dishonest and fraudulent design to strip itself of assets that might otherwise be available to satisfy [the former trustee's] power of indemnity' to which Mr Naaman was subrogated. In light of the identified fiduciary obligation, the court found that the Third Parties had knowingly assisted in the dishonest and fraudulent breach of that identified fiduciary obligation, and were amenable to orders for equitable compensation and to account.
Court of Appeal decision
On appeal, Justice Leeming, with whom Justice Kirk agreed in separate reasons, concluded that Jaken did not owe a fiduciary obligation to the former trustee at any time. Instead, the majority held that the only final recourse the former trustee had against Jaken was the appointment of a receiver. While Justice Leeming accepted that a successor trustee 'is subject to a duty not to deal with [the trust] assets so as to prejudice the former trustee's entitlement to be indemnified from those assets', this duty was not fiduciary.
High Court decision
In Anthony Naaman v Jaken Properties Australia Pty Limited ACN 123 423 432 & Ors [2025] HCA 1, the sole question for determination was whether a successor trustee owes a fiduciary obligation to a former trustee in respect of the former trustee's entitlement to indemnification out of trust assets or the commensurate beneficial interest in the trust assets that the former trustee retains following replacement of the former trustee by the successor trustee. By a 4:3 majority, the Court held that a successor trustee does not owe such a fiduciary duty to the former trustee. The explanation for that answer lies in the nature of a trustee's entitlement to indemnification out of the trust assets being an entitlement to have the trust assets applied for the purpose of recouping expenditure or exonerating liability properly incurred by the trustee.
Further, the majority noted that one person does not come into a fiduciary relationship with another person merely by reason of holding property in which the other person has an equitable proprietary interest. Nor is a fiduciary relationship between the person holding the property and the other person having the equitable proprietary interest brought into existence merely by adding the circumstance that the person holding the property knows the other person has such an interest in the property or knows the other person claims to have such an interest in it.
In coming to its decision the Court noted that, all times since its replacement by Jaken:
- the former trustee was able to enforce its entitlement by bringing a proceeding against Jaken for final relief in the form of an order for the sale of the trust assets or for payment out of trust funds; and
- the former trustee was able to protect its entitlement from being destroyed, diminished or jeopardised by the conduct of Jaken by filing an interlocutory injunction or appointing a receiver.
However, despite being available to the former trustee, no such action was taken.
Given Jaken did not owe the former trustee a fiduciary obligation, the remedies of equitable compensation and account were not available to the former trustee against the Third Parties.
Key takeaways
It is not uncommon for insolvency practitioners to be appointed to insolvent former trustee companies. The conventional approach taken by insolvency practitioners to satisfy a former corporate trustee's right of indemnity against trust assets it no longer has ownership of is to apply to a court for the appointment of a receiver over those assets. This generally remains the most effective way for a former corporate trustee to satisfy its right of indemnity.
However, in cases where there is a risk that the successor trustee will dissipate trust assets, the High Court's decision tells us that insolvency practitioners should consider promptly seeking interlocutory injunctive relief to preserve the status quo, even before a court hears an application to appoint a receiver.
Should you wish to discuss further, please do not hesitate to contact one of our experts.