Trustees are personally responsible for expenses and liabilities during their trusteeship. However, it is a fundamental entitlement of every trustee that they have a right to be indemnified from the trust’s assets for those expenses and liabilities, where they have been reasonably incurred. Although personally liable, they are not required to pay out of their own pocket. This right has been recently endorsed and reaffirmed by the Supreme Court,[1] and is enshrined in the Trusts Act 2019.[2]

The trustee’s right of indemnity is a proprietary one, attaching to the property of the trust – a trustee has an equitable lien over which it can enforce its indemnity. Given this, a former trustee has an indemnity from the trust’s assets (in respect of liabilities incurred while trustee), even where they have been replaced as trustee and the trust’s assets are in the new trustee’s name.[3]

Complications

Complications can arise. What happens where two (or more) trustees claim an indemnity, and there are insufficient trust assets for them both? And what duties does a current trustee owe to a former one to protect the value of assets against which it is indemnified?

Both questions are yet to be determined by the New Zealand courts. However, recent decisions of senior courts overseas provide guidance as to how these questions might be resolved in New Zealand.

Priority between trustees’ rights to be indemnified

At issue in Equity Trust (Jersey) Ltd v Halabi were trusts that had insufficient assets to meet the indemnities of their successive trustees. The Privy Council was tasked with determining whether trustees had a priority over the trusts’ assets, based on when they were appointed; or, whether they ranked equally in their claim to be indemnified.[4]

The Court noted that the issue had not previously been considered in the common law world. In the absence of guiding precedent, a 4:3 majority determined that “sufficiently powerful reasons of justice, equity, fairness and common sense” favoured a pari passu rule, ranking all trustees as having an equal claim to the trusts’ assets, regardless of when their interest arose.[5]

By contrast, the minority favoured an approach that saw trustees’ claims ranking in accordance with the order in which the trustees were appointed. This was said to be consistent with the general equitable rule that the “first in time prevails”.[6]

Duties owed to former trustees

In Naaman v Jaken Properties Pty Ltd,[7] the High Court of Australia was required to determine whether a trustee’s right to be indemnified gave rise to fiduciary obligations owed by current trustees to former ones.

In 2016, judgment was entered against a former trustee in favour of Mr Naaman. However, there were insufficient assets in the trust to meet the former trustee’s liability. Mr Naaman (as a subrogated creditor of the former trustee) brought proceedings against the current trustee (Jaken), alleging that it had transferred the trust’s assets out to third parties, in breach of its fiduciary duties to the former trustee.

The Supreme Court of New South Wales determined that Jaken owed fiduciary duties to the former trustee and had breached that duty by stripping the trust of assets that would otherwise be available to meet the former trustee’s indemnity. This meant that third parties who knowingly assisted the breach were liable to account to Mr Naaman. The Court of Appeal overturned the Supreme Court’s decision, finding that whilst Jaken was under a duty not to prejudice the former trustee’s entitlement to an indemnity, this was not a fiduciary duty. Given this, the former trustee’s only way of holding Jaken to account was by the appointment of a receiver.

By a 4:3 majority, the High Court of Australia found that the duty is not a fiduciary one. In the majority’s view, merely holding property in which a former trustee has an interest did not give rise to a fiduciary relationship.[8] By contrast, the minority considered that a former trustee’s right to indemnity entitled the former trustee “to expect that the successor trustee will act in relation to trust assets in the interests of the former trustee to the exclusion of its own or a third party’s interests”. This was said to be the “irreducible core of the fiduciary obligation”.[9]

The New Zealand position

The issues before the Privy Council in Equity Trust, and the High Court of Australia in Naaman are yet to be resolved in the New Zealand courts.

The majority and minority judges in both decisions suggest that both issues are finely balanced. A New Zealand court may favour consistency with the ultimate findings of the senior courts in other Commonwealth jurisdictions, though the minority judgments are comprehensive, and will provide ample scope for debate before a New Zealand judge.

For trust practitioners and those insuring them, Naaman and Equity Trust underscore that indemnity rights – often treated as a safeguard – can introduce uncertainty, priority disputes, and unexpected exposure.