High Court clarifies that corporate successor trustees do not owe fiduciary duties to predecessors: what it means for insolvency practitioners and trust creditors
This was co-authored by Lee-Oz Lifschitz.
Insolvency practitioners and trust creditors should take note of the recent decision of the High Court of Australia in Naaman v Jaken Properties Australia Pty Limited [2025] HCA 1 (Naaman). The central question in this case was whether a successor trustee owed a fiduciary duty to its predecessor in respect to its right of indemnity and corresponding beneficial interest in the trust assets. By a 4:3 majority (Gageler CJ, Gleeson, Jagot and Beech-Jones JJ), the High Court’s response was “no”. Given the increasing use of trading trusts in Australia and invariably, the liquidation of some of them, we distil in this article the practical implications of this decision for liquidators and trust creditors of insolvent former corporate trustees.
Legal backdrop
The proprietary interest that a former trustee retains in the trust assets after replacement by a successor trustee is a right to indemnify themselves from the trust assets against properly incurred trust liabilities. This right allows the former trustee to exonerate themselves of debts to trust creditors and recoup their expenditure out of trust assets.
Importantly, when a liquidator is appointed to a former corporate trustee of a trading trust:
- the former trustee’s right of indemnity survives and is secured by an equitable lien or charge over the trust assets;
- control of the insolvent trustee’s right of indemnity passes to its liquidator; and
- unpaid creditors of the insolvent former trustee can claim against the trust assets by way of subrogation to the trustee’s right of indemnity.
How does Naaman impact liquidators and trust creditors?
The High Court’s decision means that liquidators of insolvent former corporate trustees are on notice that they should take pre-emptive action to preserve trust assets sooner rather than later, when there is a risk that the successor trustee will frustrate the former trustee’s indemnity rights.
Otherwise, former corporate trustees and trust creditors could be at the mercy of a fraudulent successor trustee, leaving insufficient trust assets to satisfy recovery claims. This would undermine the interests of liquidators of former trustees in recovering costs, expenses and remuneration out of the trust assets.
What happened?
Briefly, the matter involved Mr Naaman, a judgment creditor of a former trustee, Jaken Property Group Pty Ltd (JPG). JPG retired and was replaced by a successor trustee, Jaken Properties Australia Pty Ltd (Jaken). JPG and Jaken were controlled by related parties. Shortly after, JPG was placed into voluntary liquidation and was subsequently deregistered.
Pursuant to a court order and declaration, Mr Naaman obtained judgment against JPG for $3.4 million (Judgment Debt) and sought to enforce the Judgment Debt by way of subrogation to JPG’s right of indemnity.
However, through a series of transactions, Jaken transferred $3.6 million of trust assets to third parties, leaving insufficient assets to satisfy JPG’s indemnity claim. The third parties were found by the Supreme Court of New South Wales to be knowingly involved in Jaken’s maladministration of the trust assets or to have received trust assets otherwise than as bona fide purchasers for value without notice.
The decisions
At first instance, Kunc J of the Supreme Court of New South Wales found that a successor trustee owes a fiduciary duty to a former trustee not to deal with the trust assets in a way that destroys, diminishes or jeopardises the former trustee’s right of indemnity. Kunc J’s decision was overturned by the majority in the Court of Appeal of the Supreme Court of New South Wales (Leeming JA and Kirk JA), with Chief Justice Bell dissenting.
The High Court decision
The majority of the High Court affirmed the Court of Appeal’s decision that a successor trustee does not owe a fiduciary duty to its predecessor.
We summarise the key points underpinning the majority’s reasoning here.
- A trustee’s beneficial interest (generated by its right of indemnity) is different to the ordinary beneficiaries’ beneficial interests in the trust assets. This distinction lies in the final equitable relief available to each to enforce or protect those interests. A trustee’s interest does not impose personal liability on the successor trustee but instead is limited to an entitlement to realise trust assets to satisfy its right of indemnity.
- A trustee’s beneficial interest does not attract a fiduciary obligation binding the successor trustee, notwithstanding that its beneficial interest takes priority over that of ordinary beneficiaries. Even if the former trustee is vulnerable due to a successor trustee’s clandestine dealings with trust assets in a manner adverse to the former trustee’s right of indemnity, this in itself is insufficient to establish a fiduciary duty.
- Since Jaken did not owe JPG a fiduciary obligation, Mr Naaman had no basis to obtain orders for equitable compensation and to account against the mala fide third party recipients of the dissipated trust assets.
Key takeaways
Naaman is a cautionary tale that liquidators of insolvent former corporate trustees should promptly seek early court intervention to protect trust assets when there is a risk that the successor trustee will undermine the former trustee’s right of indemnity. The case illustrates the pitfalls when precautionary actions are not taken in time.
In practice, insolvency practitioners can secure a former trustee’s right of indemnity by applying to a court for a final order that there be a sale of the trust assets and payment of the former trustee’s indebtedness out of the proceeds or trust funds.
But before this final order is made, taking steps to mitigate the risk of asset dissipation may be necessary including:
- seeking an interlocutory injunction to restrain the successor trustee against apprehended dissipation of trust assets;
- applying to a court for the appointment of a receiver over the trust assets;
- lodging a caveat if the trust assets include interests in land.
Where liquidators are only aware of contingent or potential creditors of the insolvent former corporate trustee, careful consideration is still required to safeguard creditors’ interests before it is too late.
Of course, not every instance is clear-cut. There may be no notice or warning of a successor trustee’s ulterior motive to dispose trust assets. As Chief Justice Bell pointed out in the Court of Appeal judgment, the appointment of a receiver is unlikely to be granted without evidence substantiating the apprehended risk. Another issue which the minority of the High Court noted is that the process of seeking relief might be too complicated, too time consuming or futile when the nature and number of fraudulent steps taken by the successor trustee are overwhelmingly complex or the trust property no longer exists.
In any event, whether interim remedies should be sought must be weighed against the practical and commercial reality of the circumstances. Subject to the value of the trust estate, incurring significant court application costs might not be an attractive option.
What lies ahead?
Although not discussed in the Namaan decision, creditors of the insolvent former trustee faced with a situation where the former trustee and successor trustee are controlled by the same ‘fraudulent people’ should consider winding up the former corporate trustee and seeking the appointment of an independent third-party liquidator to help protect trust assets.
Additionally, practitioners involved in preparing trust deeds can learn from Naaman. Careful consideration is required when drafting trust deeds as there may be mechanisms to protect a corporate trustee’s right of indemnity beyond the available equitable remedies following its replacement and insolvency.
Notably, the majority acknowledged that its decision was reached at the level of equitable principle. It remains to be seen whether a different decision would be reached on another set of facts.
