In its first judgment of 2025, the High Court held, by a 4-3 majority, that a successor trustee does not owe a fiduciary obligation to a former trustee in respect of:
- the entitlement of the former trustee to indemnification out of the trust assets, or
- the commensurate beneficial interest that the former trustee has in the trust assets.
Background
A trustee has an entitlement at common law and in equity to be indemnified from trust assets for expenses and liabilities that they have properly incurred in the execution of the trust. That entitlement allows the trustee to either be reimbursed after paying the expense, or to have the liability settled directly from the trust assets.
When there is a change in trustee, and title in the trust assets has passed from one trustee to another, the former trustee obviously loses the ability to deal with those assets. However, the former trustee does not lose the right to be indemnified from those assets.
The question now resolved by this case is whether the new trustee owes a fiduciary obligation to the former trustee in respect of that right of indemnity or interest in the trust assets.
Briefly, the facts in this case concerned a dispute that arose after a successor trustee took control of the trust and transferred assets to third parties, diminishing the funds available to satisfy the former trustee’s right of indemnification. Mr Naaman, as a judgment creditor of the former trustee, was subrogated to the former trustee’s right to indemnification. Jaken Properties Australia Pty Limited was the successor trustee. Mr Naaman claimed that the transfers were in breach of fiduciary duties owed to the former trustee.
It was crucial for Mr Naaman to establish the relationship, so that he could obtain orders against the third parties who had received the assets.
At first instance, the Supreme Court of NSW found that the relationship between former and successor trustee did attract fiduciary duties. This was overturned by the NSW Court of Appeal, which accepted that there is a duty for the successor trustee to not prejudice the former trustee’s rights of indemnification – without going as far as to find a fiduciary relationship exists.
No fiduciary obligation between trustees
Amongst its reasons, the majority of the High Court noted the warnings from its previous decisions about too readily finding the existence of a fiduciary relationship where one in contract or tort is more appropriate. It appeared to fire a warning shot to lower Courts not to “superimpose” a fiduciary relationship “merely to overcome perceived shortcomings in the nature or extent of the remedies available to enforce or protect other applicable institutions of the common law or of equity”.
Whether this stops practitioners from chancing their arm on pleading a fiduciary relationship as an all-purpose gap filler remains to be seen.
The Court further held that the interest that a former trustee retains in the trust assets is an equitable proprietary interest, and a person does not come into a fiduciary relationship with another person merely by reason of holding property in which the other person has an equitable proprietary interest. If that were sufficient, every equitable mortgagee (among many other examples) would be owed fiduciary obligations by the mortgagor.
The Court also rejected Mr Naaman’s argument for the existence of a fiduciary relationship by refence to notions of vulnerability and incoherence – which it said were not the touchstone of a fiduciary relationship.
The vulnerability arises from the risk of the new trustee dealing with the assets in a way adverse to the interests of the former trustee’s entitlement, without notice. The Court adopted the maxim of “too bad, so sad”, finding that this was in an inevitable risk in the transfer of the trust assets, and was in truth “no more than a complaint that the equitable remedies available” are inadequate.
Satisfying the former trustee’s indemnity
Since a retiring trustee cannot retain trust assets to secure their indemnity, the question arises as to how they can ensure they receive payment.
The answer, according to the Court, is to seek an interlocutory injunction (pending a final order of the sale of trust assets or payment out of trust assets), or seek the appointment of a receiver over the trust assets.
The minority was willing to recognise a fiduciary relationship between the former and successor trustee, noting that a relationship may be fiduciary where a person has undertaken to perform a function for, or has assumed a responsibility to, another.
Conclusion
The decision confirms that the administration of trustee transfers is primarily guided by equitable proprietary rights and statutory duties, not fiduciary obligations between trustees. For trustees (both retiring and successor), it is a timely reminder to ensure appropriate coverage in deeds of retirement and appointment.
Additionally, for retiring trustees (including insolvency practitioners who are often appointed to insolvent former trustee companies), the most effective method of enforcing a former trustee’s right of indemnity remains seeking the appointment of a receiver by the court, save for circumstances where there is a risk of the trust assets being diminished – this decision highlights the need to consider seeking in injunctive relief to preserve those assets.
Naaman v Jaken Properties Australia Pty Limited [2025] HCA 1.
Want Litigation & Dispute Resolution updates delivered straight to your inbox? Click here to subscribe.