Insolvency Alert: Bare trustee's right to indemnity - 23 June 2011

In an important decision, the Full Court of the Federal Court has clarified a bare trustee's right to indemnity out of the property of a trust.

Here, Partner Darrell Jardine and Associate Jason Down discuss this important decision and what Liquidators need to be aware of.

Key points you need to know

  • In liquidations of corporate trustees, liquidators need to carefully examine the terms of the trust deed to determine whether the role of the trustee is terminated on liquidation.
  • Liquidators must be alive to the limited nature of the role of a bare trustee.
  • Liquidators of bare trustee companies are entitled to be indemnified out of the property of the trust for the costs and expenses of litigation commenced to protect trust property.

Details of the decision

In Bruton Holdings Pty Ltd (In Liq) v Commission for Taxation [2011] FCAFC 79, the Full Court of the Federal Court has determined that a company in liquidation (Bruton) was entitled to indemnification from trust property for costs and expenses incurred during litigation it commenced to protect trust property even in circumstances where it was only a bare trustee of the assets of the trust.

A short summary of the facts are as follows:

  • Bruton was the trustee of a trust pursuant to a trust deed.
  • After a number of years as trustee, Bruton was placed into liquidation.
  • The terms of the trust deed provided that if the trustee went into liquidation then the office of the trustee was immediately terminated and vacated.

Therefore, from the time of the commencement of the liquidation, Bruton ceased to be the trustee of the trust and became the bare trustee of the assets comprising the trust fund.

A bare trustee is a trustee that holds the property of the trust for the beneficiaries without any interest in the property other than the interest existing by virtue of the office and the legal title as trustee and without any active duties to perform in respect of the property, other than to convey it to the beneficiaries as directed by them.

The question for determination in this case was whether the obligations of Bruton, as bare trustee, extended to opposing by litigation actions taken by the Commissioner of Taxation.

At first instance, the Court found that Bruton did not have a right of indemnity from the trust for expenses incurred in litigation commenced against the Commissioner for Taxation as the litigation was not part of Bruton's functions or responsibilities as bare trustee. However, on appeal, the Full Court overturned that decision and found that Bruton, as bare trustee, possessed powers and duties outside of the trust deed that obliged it to vindicate the rights attached to the trust property, which in this case meant commencing proceedings to protect that property.

For more information about this decision, please contact HopgoodGanim's Insolvency Team.