Insolvent trustees and trust assets
Insolvency Update – Autumn 2013
Trust instruments frequently include a right on the part of the Trustee to be indemnified out of the trust property in respect of liabilities which the trustee may properly incur in the course of performing its duties as trustee. Section 197 of the Corporations Act 2001 (Cth) provides for a director to become personally liable for the debts of the trustee if the trustee is not entitled to be fully indemnified out of the trust assets because a term of the trust deed denies it that right. This means in practice that very few trustees have no right of indemnity.
The case of Trim Perfect Australia Pty Limited (in liq) v Albrook Constructions Pty Limited  NSWSC 153 summarises the principles applying to a trustee’s right of indemnity against trust assets. The case has subsequently been followed (with little variation to its principles) and the bottom line is that the trustee has an equitable lien over the trust assets .
But what if there is a change of trustee? Many professionals are unaware that section 9 of the Trustee Act 1925 (NSW) provides for legal title to trust property to vest in a new trustee (where there is a change of trustee) upon the registration of a deed of appointment in the office of the Registrar General without the need of a conveyance. Exceptions apply. So changing the trustee is an easy way to avoid the trust’s former creditors, it would seem.
Nevertheless, in Apostolou’s case (2010) 77 ACSR 84, Finkelstein J held that the appointment of a new trustee does not remove the old trustee’s right of indemnity and that the old trustee can continue to retain possession of that property until it is paid what is due. Even if the old trustee does not retain possession, the former trustee has a right to ensure that the new trustee does not take steps which will destroy, diminish or jeopardise the old trustee’s right of security, which continues to subsist.