September 29, 2022

How Trustee Law Works

A semi-recent case from the NSW Supreme Court provides some timely reminders about how trust law works, even if a trustee of a trust is replaced by a new trustee.

  1. A trust cannot incur a debt, only the trustee can.
  2. Assets of a trust are held for the benefit of beneficiaries, but those assets are subject to the trustee’s right of indemnity to cover its costs and debts incurred in performing its duties/obligations for the trust.
  3. A former trustee of a trust is generally entitled to this indemnity, but it depends on the terms of the trust deed and any relevant trust legislation in your jurisdiction.
  4. This right of indemnity may be in the form of a “right of exoneration” (ie the right to be covered for debts incurred on behalf of the trust).
  5. Or it may also be in the form of a “right of recoupment” (ie the right to be covered by trust assets for debts/costs paid for by the trustee from its own monies).
  6. This right of indemnity is a proprietary right, which confers an equitable lien in favour of the former trustee over the trust. This lien may likely elevate the former trustee to a position higher than, for instance, a secured creditor of the successor trustee.
  7. A new or successor trustee owes a fiduciary duty to the former trustee, including not to deal with the assets of the trust in a way that might “destroy, diminish or jeopardise” the former trustees’ right of indemnity.
  8. A creditor of the former trustee is subrogated to the right of the former trustee to not only the right of indemnity, but also to enforce that fiduciary duty.
  9. To the extent the successor trustee breaches this fiduciary duty, that creditor may take appropriate legal steps to impugn any unlawful dealings/transactions by the successor trustee.

Link to case


Article written by Matthew Hudson (Associate Director) – Brisbane

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