It is well established that if a trustee company goes into liquidation then:
- The company retains:
- its right to indemnity out of the assets of the trust for liabilities incurred on behalf of the trust;
- an equitable lien or charge over the trust assets to secure its right of indemnity; and
- its right of exoneration out of the trust assets in respect of prospective liabilities;
- the company continues to have the right to deal with the trust assets, in accordance with the terms of trust, to satisfy any liabilities in respect of which the rights of indemnity or exoneration attach, including the power to sell trust assets;
- the liquidator of the trustee company:
- is entitled to claim costs and expenses incurred in winding up the trustee to the extent that they relate to its role as trustee;
- has a right of indemnity against the assets of the trust in relation to such costs and expenses; and
- has a right of exoneration against the trust assets in respect of any prospective liability.
However, many trust deeds provide that in the event of insolvency the trustee's role as trustee is automatically terminated.
In this situation, and notwithstanding the appointment of a new trustee, the old trustee retains its rights of indemnity and exoneration.
But a dilemma, arises, as confirmed in a recent Federal Court judgement (1), where there is no new trustee and no prospect of a new trustee being appointed.
The Court in Suncoast Restoration said that in circumstances where "there has not been, and will not be, a new or replacement trustee appointed…" the old trustee:
- "continues as a bare trustee of the trust assets";
- retains its rights of indemnity and exoneration; BUT
- in its role as bare trustee the old trustee's powers and duties:
- are limited to protecting trust assets; and
- DO NOT include the power to sell trust assets.
Insolvency Practitioners appointed to Corporate Trustees should, therefore, take care to:
- Review the terms of the trust deed and to ascertain whether there is automatic disqualification of the trustee upon liquidation/insolvency; and
- Determine whether there is or will be a replacement trustee.
If the answer to point (a) above is "yes" and the answer to point (b) above is "no" then the Corporate Trustee is, thereafter, a bare trustee only and it has no power of sale.
In these circumstances a liquidator should seek Court approval in order to enforce the trustee's, and the liquidator's, rights of indemnity and exoneration against trust assets.