Former trustee's right of indemnity against new trustee

In the recent decision of Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344, Brereton J of the Supreme Court of New South Wales held that a former trustee's right of indemnity out of trust property did not entitle the former trustee to retain possession of the trust assets as against the new trustee as security for its right of indemnity. This case is interesting in that Brereton J refused to follow a statement to the contrary by King CJ in Re Suco Gold Pty Ltd (1983) 1 ACLC 895, a decision of the Full Court of the Supreme Court of South Australia, which Brereton J concluded was obiter and not binding authority.

In Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd, the former trustee's office was automatically terminated upon it being wound up in insolvency pursuant to the trust deed. The new trustee sought declarations that it had been validly appointed as new trustee and declarations that the loan accounts (and causes of action to recover them) were assets of the trust which were vested in the new trustee.

Brereton J held firstly that the loan accounts (and causes of action to recover them) were assets of the trust, which were vested in the former trustee whilst it was validly appointed, but which trust vested in the new trustee upon the registration of the deed of appointment in accordance with section 9 of the Trustee Act 1925 (NSW). The former trustee therefore had no standing to pursue the causes of action for the loan accounts, as the standing was held by the new trustee.

Brereton J reviewed the applicable case law and held that the former trustee's right of indemnity was an equitable lien, which right could only be remedied against the trust by judicial sale or the appointment of a receiver. Brereton J determined that the authorities did not provide in addition a right of possession of trust assets to a former trustee as further security for its indemnity against the new trustee (as opposed to the right of possession a trustee holds against beneficiaries as security for its indemnity). However, if the trust assets were in jeopardy in the hands of the new trustee, the former trustee could take steps to ensure that the new trustee did not destroy, diminish or jeopardise the former trustee's right of security.

It will be interesting to observe how the reasoning in this case is treated by Victorian courts, as well as in superior courts in New South Wales and other state and federal courts. The issue may ultimately call for resolution by the High Court. The case can be viewed by following this link: http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/nsw/NSWSC/2008/1344.html?query=2008%20NSWSC%201344