Newsletter
October 2010 Newsletter
No Indemnity for Wound-up Corporate Trustee, Says Court
The Federal Court has held that the basic principle that a trustee is entitled to be indemnified out of trust property for liabilities incurred in administering the trust does not apply to a corporate trustee in relation to expenses incurred after it has been wound-up and at which time it merely becomes a bare trustee in relation to the assets comprising the trust fund.
In this case, the corporate trustee had sought to be indemnified for expenses it had incurred in litigation it pursued against the Commissioner after it had been wound-up. This included litigation relating to the validity of a notice served on the trustee’s solicitors under s 260-5 of Sch 1 of the Taxation Administration Act 1953 requiring the solicitors to pay to the Commissioner the sum of $450,000 held on their trust account (in respect of an assessment for over $7m issued by the Commissioner to the trustee after it had been wound up). In Bruton Holdings Pty Ltd (in liq) v FCT (2009) 72 ATR 856, the High Court held that the notice was invalid as the Commissioner’s general power to issue a notice under s 260-5 was not available if a liquidator had been appointed to a company.
However, despite the trustee being successful in its High Court action, the Federal Court has now held that it was not entitled to be indemnified out of any trust funds for the costs of the litigation because, as a bare trustee in relation to those funds (from the time of its winding up), it was not part of its functions or responsibilities to institute the proceedings relating to the validity of the s 260-5 notice. As a result, the costs could not be said to have been ‘properly incurred’ by the trustee in the administration of the trust to enable it to be indemnified out of the trust funds. Likewise, in relation to subsequent interlocutory proceedings involving the Commissioner, the Court held that the trustee had no right of indemnification as the expenses it incurred were not incurred in the proper performance of its duties or exercise of its powers.
TIP: Generally, trust liabilities fall on the trustee personally since the trust assets are not an entity which in law can be regarded as a person liable. Nonetheless, the trustee may have a right to reimbursement out of the trust assets for amounts personally expended from the trustee’s own funds to discharge trust liabilities, or a right to be exonerated out of the trust assets in respect of a liability properly incurred. However, if the value of the trust assets is below the amount of the liability, the trustee bears the liability to the extent of the deficiency, unless the trustee has a right of indemnity against the beneficiaries or other persons related to the trust.
TIP: It should be noted that under s 197(1) of the Corporations Act 2001, if a trustee corporation cannot discharge a liability incurred by it while acting as trustee and is not entitled to be fully indemnified against the liability out of the trust assets, each person who was a director when the liability was incurred may be liable to discharge the liability. It should also be noted that the director’s exposure to liability is not affected by deregistration of the company: see, for example, Warton v Harris [2005] NSWSC 1168.
FCT v Bruton Holdings Pty Limited (in liquidation) [2010] FCA 978, Federal Court, Graham J, 3 September 2010