How Naaman v Jaken Properties Australia impacts insolvency practitioners: key takeaways from the High Court decision
The High Court of Australia has found, by a 4:3 majority, that a new trustee does not owe a fiduciary duty to a former trustee regarding the former trustee’s right to indemnification from trust assets or their corresponding beneficial interest in those assets.[1]
This article looks at the impact of the decision from an insolvency perspective.
Starting point
The majority started their reasoning with basic principles concerning a trustee’s right to indemnification from trust assets. Those principles are well known and can briefly be stated that:
- a trustee has the right to indemnification from trust assets for expenses and liabilities properly incurred while managing the trust. This right is exercised by either recouping past expenses paid personally by the trustee or by paying existing liabilities directly from trust funds;
- a trustee has a corresponding beneficial interest in the trust assets, which takes priority over the beneficiaries’ interests. This beneficial interest is secured by an equitable lien or charge on the trust assets; and
- a trustee’s right to indemnification and their corresponding beneficial interest in the trust assets (being the lien or charge) continue even if the trustee is replaced by a new trustee.
Insolvency practitioners know that many trust deeds contain provisions that automatically remove an insolvent company as trustee, but don’t always replace it. The basic principles mentioned above also apply in that situation.
The facts and decisions in the Courts below
The appellant (Mr Naaman) was a judgment creditor of a former trustee (JPG) subrogated to JPG’s entitlement to indemnification from trust assets. The subrogation right (being Mr Naaman’s right as a creditor to step into JPG’s shoes) arose in equity. The primary judge (Justice Kunc) held that the new trustee (Jaken) owed a fiduciary duty to JPG not to ‘destroy, diminish or jeopardise’ JPG’s entitlement to indemnity from the trust assets.
The primary judge found that Jaken dishonestly and fraudulently breached this duty by transferring trust assets to third parties leaving insufficient trust assets to satisfy JPG’s entitlement to indemnification. Importantly, those third parties were found to have ‘knowingly assisted’ Jaken’s breach and were found liable to Mr Naaman based on the second limb in Barnes v Addy (1874) LR 9 Ch App 244. In simple terms, the liability of those third parties depended on Jaken’s alleged duty to JPG.
Decision of the majority of the High Court
In summary, the majority found that Jaken did not owe the alleged fiduciary duty to JPG, so the third parties were not liable to Mr Naaman. This is because:
- a former trustee, like JPG, can seek a final order from a court for the sale of trust assets to satisfy its right of indemnity relying on its lien or charge, which takes priority over the beneficiaries’ interests;
- in the meanwhile, a former trustee can seek an interlocutory order for an injunction, or the appointment of a receiver, to stop the new trustee from dealing with the trust assets; and
- although the categories of fiduciary relationship are not closed, the fact that a new trustee holds property subject to the former trustee’s right to indemnity is not enough to create a fiduciary duty.
Takeaways for insolvency practitioners
Insolvency practitioners should take note of the following from the decision:
- they should continue to seek orders to appoint themselves as receiver to trust assets when an insolvent corporate trustee has been automatically removed under the trust deed;
- when appointed to a former corporate trustee entitled to indemnification from trust assets held by a new trustee, where appropriate:
- seek an interlocutory injunction to stop the new trustee from dealing with the trust assets or seek to appoint a receiver over those assets; and
- seek a final order for judicial sale of the trust assets to satisfy the former trustee’s right of indemnity in the trust assets.
If you have questions about the implications of recovery action by an insolvent trustee from trust assets, please contact our Restructuring and Insolvency team.
[1] Naaman v Jaken Properties Australia Pty Ltd [2025] HCA 1.
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