When a person (including a company) acts as trustee of a trust, that person has an entitlement to be indemnified out of the assets of the trust for expenses and liabilities properly incurred by the person in conducting the trust. Further, the person has a beneficial interest in the assets of the trust, commensurate with that entitlement. That interest takes priority over the interests of the beneficiaries of the trust in the assets of the trust.
That entitlement and that interest remain even after the person has ceased to be trustee of the trust.
When a person (“Former Trustee”) is replaced as trustee of a trust by another person (“New Trustee”), whilst the Former Trustee retains that entitlement and that interest, deriving the benefit from them is no longer directly within the control of the Former Trustee.
Where the Former Trustee has a liability, the Former Trustee can apply to the court requiring payment or the sale of the trust assets and payment out of the proceeds.
The question arises as to the extent to which the New Trustee is required to have regard to the Former Trustee’s rights and, for example, not to dispose of assets of the trust such that there is insufficient assets to reimburse the Former Trustee.
A recent High Court case (Naaman v Jaken Properties Australia Pty Limited [2025] HCA 1) involved a situation where a New Trustee had disposed of assets of the Trust such that there were not sufficient assts left to indemnify the Former Trustee for liabilities incurred by the Former Trustee. That disposal of assets was described as “a dishonest and fraudulent design to strip [the trust] of assets that might otherwise be available to satisfy [the Former Trustee’s] power of indemnity".
It was argued that the New Trustee owed to the Former Trustee certain obligations, or “duties”, called “fiduciary duties”, not to deal with the assets of the trust so as intentionally to destroy, diminish or jeopardise the Former Trustee's entitlement to be indemnified from the assets of the trust. The intent of the argument was to impose on the New Trustee an obligation to compensate the Former Trustee for the amount that the Former Trustee was not able to recoup from the assets of the trust by reason of the actions of the New Trustee.
Unfortunately for people in the position of the Former Trustee, the High Court decided that the New Trustee did not owe to the Former Trustee any such fiduciary duties.
Interestingly, that outcome arose from the views of 4 of the judges, whereas 3 of the judges were of the view that a New Trustee would be in a fiduciary relationship with a Former Trustee where the circumstances made it apparent that the Former Trustee had a right to be indemnified from the assets of the trust. Those judges were further of the view that the duty which arose was not to deal with the assets of the trust so as intentionally to destroy, diminish or jeopardise the Former Trustee's entitlement to be indemnified from those assets or, conversely, to hold and deal with the assets of the trust in a way that would not intentionally defeat the interest the Former Trustee had in that property.
The 4 judges said that where the Former Trustee has concerns as to being able to receive reimbursement there is “ample power” of the courts to preserve the assets of the trust by granting an injunction to restrain the New Trustee from disposing of the assets or to appoint a receiver to take possession of them.
Sometimes where a trustee is replaced the Former Trustee will be requested to sign a deed whereby the Former Trustee vests assets of the trust in the New Trustee. Before doing so the Former Trustee should ensure that it is adequately protected for any amounts for which the Former Trustee is liable or may become liable.