Retiring or Replaced Trustees Need to Protect Themselves

Naaman v Jaken Properties Australia Pty Limited [2025] HCA 1

Introduction

The High Court recently determined whether a successor trustee owes a former trustee a fiduciary obligation not to destroy, diminish or jeopardise the former trustee’s right of indemnification from the trust assets. By a 4 to 3 majority (Gageler CJ, Gleeson, Jagot and Beech-Jones JJ), upholding the decision of the majority of the New South Wales Court of Appeal (Leeming and Kirk JJA), the High Court decided that there was no such fiduciary duty.

Summary

Practically, the effect of the decision of the High Court and that of the New South Wales Court of Appeal, means that there is no direct claim in equity that the former trustee can make against its successor. Rather, the relief available to the former trustee was explained at paragraph 48 of the majority’s reasons in this way:

At all times since its replacement by Jaken, JPG has been able to enforce its entitlement as a former trustee by bringing a proceeding against Jaken in the Equity Division of the Supreme Court for final relief in the form of an order for the sale of the trust assets or for payment out of trust funds. At all times since its replacement by Jaken, JPG has also been able to protect its entitlement from being destroyed, diminished, or jeopardised by conduct of Jaken by seeking in such a proceeding an interlocutory injunction or the appointment of a receiver.

The minority of the High Court (Gordon, Edelman and Steward JJ) agreed with Bell CJ’s dissent in the Court of Appeal in finding that there was a fiduciary duty owed by a successor trustee to a former trustee “not to deal with the trust estate so as intentionally to destroy, diminish or jeopardise the former trustee’s entitlement to be indemnified from the trust estate.” (paragraph 54).

Practically, had the minority judgment prevailed, that reasoning would have provided a former trustee with a fairly neat remedy in response to the sort of conduct engaged in by the successor trustee in this case. The majority acknowledged the simplicity of the remedy, had the minority prevailed. However, this was not regarded as a factor in determining whether a fiduciary duty existed or not.

So where to from here?

While the facts of Naaman are fairly remarkable and the conduct of the successor trustee fairly extraordinary, one cannot simply assume that a former trustee might not find themselves in an analogous circumstance for far more benign reasons in which trust assets are destroyed, diminished or jeopardised by the conduct of the successor trustee undermining or eroding the value of their right to indemnity.  For Example, a successor trustee might become insolvent leading to the appointment of a receiver–manager, administrator or liquidator of the successor trustee.  There is a myriad of circumstances that could imperil the indemnity rights of a former trustee.

As a matter of prudence, therefore, at the time of removal or retirement as trustee, former trustees and those advising them might need to be more aggressive in protecting their rights than they would have been in the past by, for example, commencing proceedings of the kind referred to by the majority as soon as practicable.  Where real property is involved, the former trustee might be able to lodge a caveat – see paragraph [91] of Naaman as to the nature of the interest of former trustee in the trust property.

The question is more vexed where the relevant trust property is something other than real property.  If Court proceedings are brought, it certainly will be difficult for a Court to summarily dismiss such claims as being premature in light of Naaman – unless, for example, the relevant trust deed contained a mechanism to protect the interests of the former trustee.

In reality, where proceedings are commenced, the aim of all parties is likely to resolve the matter in a way that protects the former trustee without causing major disruption to the ongoing operation of the trust. In these circumstances, it will be in the interests of the successor trustees and the beneficiaries of the trust to reach a commercially sensible settlement with the former trustee.  In Western Australia, the prospects of the early resolution of disputes between former and successor trustees are significantly enhanced by the Supreme Court’s mandatory mediation process. Additionally, the flexibility commonly exercised in the Supreme Court of Western Australia in expediting certain matters to mediation, facilitates early and cost-effective resolutions.

On the commercial side, those setting up trusts might need to consider what mechanisms could be put in place to protect a former trustee’s rights to indemnity – especially where the trust assets do not include real property.  Commercially, well advised, prospective trustees should probably consider what contractual mechanisms might be put in place at the commencement of their appointment so that they are not only left with the remedies referred to by the majority in Naaman. Indeed, the absence of a direct mechanism protecting former trustees might make it difficult to find an initial or replacement trustee.  For this reason, it is in the interests of the appointor to include protective mechanisms in the trust deed. Further, it’s not really in the interest of ongoing trusts to have a former trustee selling assets or appointing a receiver to satisfy its indemnity. It makes more sense for there to be a commercially sensible and certain mechanism in place to protect former trustees and allow for a seamless transition between trustees.

We can help

If you are looking for advice or representation with respect to a dispute of the succession of a trustee, feel free to contact Chris Williams or David Marsh of Solomon Brothers. For advice on setting up a new trust or amending the terms of an existing trust to avoid costly and disruptive disputes, contact Michelle Hawksley.