Trustee right of exoneration

Trustee insolvency – the High Court has cleared up the. Can a trustee modify the trustee right to indemnity? What is the liability of a trustee? Can creditors recover from a trustee?

Is a trustee a legal entity?

Properly understoo a trustee’s right of indemnity, especially the ‘exoneration arm’ of the right of indemnity , is no more than a right to have trust assets applied to meet trust debts. It confers upon the trustee no interest in the trust assets themselves, or the proceeds thereof. The pervasive use of trading trusts in Australian commerce means that this question continues to feature prominently in matters of greatest concern to insolvency practitioners in everyday practice.

Lane v DCT is an important review of a line of recent authorities to the effect that the trustee’s right of indemnity (in particular, the right of exoneration) is “trust property” available only for distribution among trust creditors. The decision is a timely discussion of an issue which remains a source of significant uncertainty for insolvency practitioners (in particular, the basis for their right to priority of payment of their costs and remuneration) and which is currently the subject of consideratio. See full list on jws.

This in turn could support an argument that the statutory priority rules in s 5(including the priority claims of liquidators for their remuneration) should apply to the distribution of the assets of an insolvent trading trust. However, in the absence of further judicial consideration of this issue, Lane v DCThighlights the increasing importance for insolvency practitioners of pragmatic judicial application of equitable principles (rather than statutory priority rules) in seeking priority payment of their costs and remuneration out of trust assets.

This is particularly evident given the ubiquity of corporate trading trusts in modern commercial life and the consequent frequency with which insolvency p. The trust was a discretionary trust of which Mr Lee’s children were beneficiaries. When Mr Lee became bankrupt, Messrs Khatri and Lane (the Bankruptcy Trustees) were appointed as trustees of Mr Lee’s bankrupt estate. Shortly prior to his bankruptcy, Mr Lee sold a Subway franchise he operated as trustee. Justice Derrington made the following key findings regarding the trustee’s right of indemnity: 1. His Honour expressed disagreement with the characterisation by Robson J in Amerind of the indemnity and accompanying lien as “trust property”, noting that such a view was inconsistent with prior statements from the High Court to the effect that a trustee’s right of indemnity forms part of a trustee’s personal estate which passes to the bankruptcy trustee or liquidator in the event of the trustee’s insolvency.

Derrington J also noted that trust creditors’ entitlements of subrogation to the trustee’s indemnity and accompanying lien were consistent with the view that the indemnity was held solely for the benefit of beneficiaries and therefore was a “trust asset”. Derrington J noted that Robson J’s treatment of the trustee’s indemnity and lien as trust property was also inconsistent with the High Court’s findings in Chief Commissioner of Stamp Duties (NSW) v Buckle2 and CPT Custodian Pty. The case, Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth,was the final stage in the Re Amerind2appeal process concerning the receivership of a trustee. The High Court settled two controversies by holding: 1. It said that security interests granted by trustees over circulating trust assets could be circulating security interests an to that extent, rank a. Trustees continue to have rights of indemnity out of trust assets.

It was this right that was the subject of the decision. Insolvency practitioners will welcome the clarity. Liquidators of trustees can now clearly use trust assets to pay their fees and expenses in relation to the trust. When the relevant company is trustee of multiple trusts, some issues need to be worked out as to allocation between trust funds.

As discussed above, if a trustee properly incurs liabilities as trustee it has a right to discharge those liabilities by paying the relevant creditors out of trust assets.

Unless they hold security, those creditors do not have direct access to trust assets. There is no special insolvency regime applicable to trusts and trustees. If a company that is a trustee becomes insolvent, it may be placed in liquidation, administration or receivership. But trust law also applies. How do trust law and corporate insolvency law intersect?

Should trust assets be dealt with under those provisions? Does corporate insolvency law apply to assets held on trust? Are they regarded as assets of the company for that purpose?

If so, to what extent? There have been two questions about which courts have come to conflicting views: 1. A company, Amerind Pty Lt was the trustee of a trading trust and carried on business solely in that regar so it held only trust assets and trust liabilities. As trustee , it owed money to a secured creditor, to employees, and to various unsecured creditors. Like all trustees, it had a right of exoneration to pay those trust liabilities out of trust assets.

The secured creditor, a bank, held a registered PPSA security interest over all assets, including ADI accounts, funds paid under a factoring arrangement, and tax refunds and other miscellaneous receivables. Amerind suffered financial difficulties, and the bank appointed receivers. The receivers had realised most of the assets. They paid the bank debt in full out of the proceeds of fixed assets of the trust and were in a position to retire. A dispute arose in relation to competing claims to the receivership surplus: 1. The unsecured creditor relied on two grounds of appeal for saying that s4did not apply.

PPSA, and therefore there was no circulating security interest. There were three separate judgments, with only subtle differences in approach between them. Under each, it said that trust property available for exoneration was property of the company. The Commonwealth made two alternate submissions. Under the first, said the trust property was therefore available for all creditors, not just trust creditors (along the lines of the Victorian decision, Re Enhill).

Trading and investment trusts are extremely common in Australia. Routinely, trustees of such trusts are companies. One might hope that there would be a clear and recognised regime where they are insolvent, and as to the rights of creditors. And the position of trust creditors is not ideal This decision is a significant advance in some areas and has provided some much-needed clarity to some important issues, but other issues and difficulties remain. Judgments in the High Court themselves noted that questions may arise in the following areas.

While commentators have recognised some uncertainty, the market has operated on the assumption that they would rank equally. This view has been fortified by case law and has considerable merit on principle and policy. It remains to be seen whether this will be disturbed by the express reservation of the issue by three High Co.

The issue now appears to be resolved that a trustee company’s right of exoneration over the trust assets is property of the trustee company. The Full Court was clear in their view in obiter that trust assets may only be applied in payment of trust debts in exercise of a trustee’s right of exoneration (not non-trust debts). Their Honours also addressed and made clear their position as to the lack of liquidators’ power to sell trust assets, and the need for court order. Subject to the rights of exoneration or reimbursement provided in NRS 163. If it is right that a trustee ’s failure to reduce or eliminate an external liability never goes to the question of the trustee ’s right to an indemnity, such conduct will only ever fall to be considered as a subsequent breach of trust, which in principle may be covered by an exoneration clause.

To suggest its presence has implications for a. Liability of a trustee and the right of indemnity against trust assets Liability of a trustee. Therefore, a trustee is personally liable for all liabilities incurred in performing the trust, including debts to third parties. This personal liability subsists unless there is a clause in the contract with. The right of recoupment in the trust funds being transferred beneficially to the bankrupt estate, available to meet claims of both trust and non.

Putting to one aside the issue of what may be legitimate costs, this right is either one of exoneration or recoupment. Thus it is important to remember that the Doctrine is based on an inference with reference to all the facts of the particular case in question. Yes, right of indemnity is property of the bankrupt trustee. Proceeds of rights of exoneration only available to trust creditors.

When a trustee enters into a contract with a third party it is personally liable on that contract unless it contains a term that excludes personal liability.