iStock_000021761319_ExtraSmall

Because the trust in not an entity recognized by law, the liabilities referred to in the balance sheet of the trust are really liabilities of the trustee. The rule is that a trustee is personally responsible for liabilities, including debts properly incurred by him in the course of administering the trust property: see Octavo Investments Pty. Ltd. v. Knight (1979) 144 C.L.R. 360, 367.

A creditor has no direct claim or remedy against the trust assets, but must look to the trustee personally: Worrall v. Harford (1802) 8 Ves. Jun. 4, 8; 32 E.R. 250, 252; Re Evans (1887) 34 Ch.D. 597.

The trustee in turn has in respect of the liabilities so incurred, the right to be indemnified out of the trust assets. He also has, in general, a right to be indemnified by the beneficiaries personally, including those beneficiaries who may have acquired their interest in the trust assets by assignment from another beneficiary: Hardoon v. Belilios [1901] A.C. 118. The right to a personal indemnity of this kind is not relevant or relied on in this instance because here the trust instrument in cl. 18.3 expressly excludes that right: cf. Hardoon v. Belilios [1901] A.C. 118, 127.

The right of the trustee to indemnity from the assets is an incident of the office of the trustee and is inseparable from it: see Worrall v. Harford (supra). For that reason it is probably incapable of being excluded. The Trust Act 1973 – 1981 now contains a statutory expression of the right to such indemnity which is not capable of being excluded by the trust instrument: s. 65. In the exercise of his right of indemnity the trustee may resort to the trust assets for the purpose of discharging liabilities incurred but not paid, and also for the purpose of reimbursing himself in respect of liabilities paid by him out of his own funds: Jennings v. Mather [1901] 1 Q.B. 108; affd. [1902] 1 K.B. 1; Octavo Investments Pty. Ltd. v. Knight (1979) 144 C.L.R. 360, 371. For that purpose he has a lien or right of retention over the trust assets pending such payment or reimbursement.

That approach was affirmed in the Supreme Court of New South Wales in JA Pty Ltd v Jonco Holdings Pty Ltd (2000) 33 ACSR 691 at 706, 713-14 per Santow J at [87]. See also Jessup v Queensland Housing Commission [2001] QCA 312 at [14].

The statutory regime in most Australian states other than Queensland supports a power to limit the right to indemnity. See the following passage from Halsbury’s Laws of Australia:

[430-3795] Provision in the trust instrument: Except in Queensland and South Australia, the trust instrument may expressly provide that the trustee’s right to indemnity and reimbursement may be denied or reduced in specific circumstances, or generally. 1 In that such a clause purports to oust a fundamental aspect of trusteeship, for the court to give effect to it, the settlor’s intention to exclude or restrict the trustee’s right of indemnity must be stated in clear terms. 2 In Queensland the statutory right of indemnity applies irrespective of anything to the contrary in the trust instrument. 3 A similar outcome would appear to be the case in South Australia, where the trustee legislation does not make the right of indemnity subject to the trust instrument.

 

Services
Services

We specialise in providing tax, accounting, and strategic advice to business owners, high net worth individuals and their families.

Learn about BPC Accounting Services
Contact Us

Phone us on (03) 8602 6100 or contact us via our online enquiry forms.

Send an email enquiry