The Federal Court found that where a trust deed provides for the cessation of a corporate trustee upon the appointment of an administrator or upon a resolution for its liquidation (and there is no replacement trustee appointed), the corporate trustee retains its right of indemnity and continues as bare trustee but does not have the power to sell the trust assets.  However, the Court was persuaded to grant relief to the liquidators of the trustee (who had sold trust assets) on the basis they had not been advised by their solicitors of the disqualification clause and they commenced proceedings for relief almost immediately after being advised of the issue.  When appointed to a corporate trustee, administrators and liquidators should carefully review the terms of the trust deed to identify any insolvency disqualification clause and if necessary, seek Court approval to enable the sale of the assets and to protect their right of indemnity against the trust assets.

Mr Pleash and Mr Albarran were appointed as joint and several administrators, and subsequently liquidators, of Suncoast Restoration Pty Ltd (Suncoast) which was the sole trustee of the Allen’s Asphalt Staff Superannuation Fund (the Trust Fund).  Unbeknownst to Mr Pleash and Mr Albarran, the Trust Fund Deed contained a disqualification clause stipulating that the trustee ceases to be a trustee on the appointment of an administrator or upon a resolution for its liquidation.  Accordingly, from the point at which administrators were appointed to Suncoast, Suncoast became a bare trustee of the assets of the Trust Fund, and did not have the power to sell the assets.  In turn Mr Pleash and Mr Albarran did not have power to sell the assets as part of the winding up of Suncoast.

In granting relief to Mr Pleash and Mr Albarran under section 1318 of the Corporations Act 2001 (Cth), Reeves J made the following findings and observations about the elements of section 1318:

  • The person seeking relief must have reason to apprehend that a claim will or might be made - There must be an objective basis for the apprehension, and ‘might’ refers to a possibility that is real, rather than fanciful or remote.  The patent nature of the breach of trust (sale of assets by bare trustees who lacked power of sale) was sufficient to form an objective basis for the conclusion that a claim might be made.
  • The claim concerned must be in respect of negligence, default, breach of trust or breach of duty - Despite the fact that Mr Pleash and Mr Albarran sold the assets unwittingly as bare trustee and that the sales were at market value, the sales were beyond their powers as liquidators and therefore constituted breaches of trust for the purpose of section 1318(2).
  • The person has acted honestly and ought to be excused - Mr Pleash and Mr Albarran were not advised by their solicitors of the fact that Suncoast was a bare trustee and that it therefore lacked the power to sell the assets and, in the absence of such legal advice, it was not reasonable to expect that they as liquidators would be aware of these facts.  The honesty of Mr Pleash and Mr Albarran was supported by the fact that they commenced these proceedings almost immediately after being informed by their solicitors of the issue.

Reeves J also held that, despite the intervening breaches of trust by Mr Pleash and Mr Albarran as liquidators, they were both entitled to be indemnified by the Trust Fund for liabilities incurred by Suncoast in its capacity as trustee and for the costs of the winding up.  In so finding, Reeves J considered previous case law to the effect that when a corporate trustee incurs a liability on behalf of the trust, its right of indemnity is secured by an equitable lien or equitable charge over the assets and such right is retained after the trustee becomes a bare trustee as a result of the commencement of liquidation. 

See the case.