Corporate successor trustees are exempt from owing fiduciary duties to their predecessors, according to a clarification from the High Court. This decision could significantly impact insolvency practitioners and trust creditors.

Corporate successor trustees are exempt from owing fiduciary duties to their predecessors, according to a clarification from the High Court. This decision could significantly impact insolvency practitioners and trust creditors.

In the landmark case of Naaman v Jaken Properties Australia Pty Limited [2025] HCA 1, the High Court of Australia has issued a stark warning to liquidators and trust creditors about the risks of not acting promptly to preserve trust assets when a successor trustee undermines the right of indemnity of a former trustee.

The central question in the Naaman 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. 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.

This decision has significant implications for liquidators and trust creditors. Specifically, it means that if a successor trustee transfers trust assets away improperly—such as to third parties involved in maladministration—this can frustrate the former trustee’s right of indemnity and thereby weaken liquidators’ ability to recover costs, expenses, or remuneration.

The former trustee's right of indemnity, generated by its right of indemnity, is different to the ordinary beneficiaries' beneficial interests in the trust assets. This proprietary right of indemnity takes priority over beneficiaries' interests and survives, being secured by an equitable lien or charge over the trust assets.

Liquidators and trust creditors face significant risks of not recovering trust assets if they do not act proactively to preserve trust assets before a successor trustee can dispose of or dissipate those assets. Implications for liquidators and trust creditors include:

1. They should take early, pre-emptive legal action to preserve trust assets before a successor trustee can dispose of or dissipate those assets.
2. There must be increased vigilance where former and successor trustees are related parties, as conflicts and asset shifting may be more likely.
3. Liquidators must be aware that the successor corporate trustee does not owe fiduciary duties to the predecessor trustee that protect the latter’s indemnity rights, which limits remedies and increases reliance on courts to uphold proprietary rights.
4. Creditors may need to pursue enforcement by subrogation to the former trustee’s right of indemnity, but may face difficulty if trust assets have been improperly transferred and third-party recipients are complicit or not bona fide purchasers.

In some cases, seeking interlocutory injunctions, appointing a receiver over the trust assets, or lodging a caveat on interests in land may be necessary to mitigate the risk of asset dissipation. 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.

The case involved Mr Naaman, a judgment creditor of a former trustee, Jaken Property Group Pty Ltd, who sought to enforce a judgment debt by way of subrogation to the former trustee's right of indemnity. Jaken Properties Australia Pty Ltd, the successor trustee, transferred trust assets to third parties, leaving insufficient assets to satisfy the former trustee's indemnity claim.

In summary, Naaman v Jaken Properties underlines the necessity for liquidators and trust creditors to act promptly and assertively to safeguard trust assets against actions by successor trustees that threaten the priority right of indemnity held by former trustees. 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.

Read also:

• Deepwater Horizon Oil Spill: BP Faces Record-Breaking Settlement - Dubbed 'Largest Environmental Fine Ever Imposed'
• Lawsuit of Phenomenal Magnitude: FIFA under threat due to Diarra's verdict, accused of player injustice
• Expansion of railway systems, implementation of catenary systems, and combating fires: SNCF adapting to the summer heatwave
• Citizen Thekla Walker, Minister, advises: "Let's focus on our own homes first"