Question

Jane Pty Ltd is the trustee of Moore Family Trust. The trust property is worth $450,000. Jane Pty Ltd runs a cafe on behalf of the trust. The trust deed notes that the trustee can only enter into contracts in relation to running the cafe. However, Jane Pty Ltd, on behalf of the trust, entered into several transactions worth $150,000. These transactions were in relation to building a railway in Sweden. Jane Pty Ltd pays the $150,000.

Advise Jane Pty Ltd on its right of indemnification from the trust property.

Answer 1

Here is my Answer for the above question

A trust is a legal relationship, imposing obligations on a trustee in respect of property. Normally a trustee is personally liable for obligations incurred in administering the trust. That is, even though the obligations are incurred as trustee, the trustee is still personally liable and can be sued and have its own assets applied to meet any judgment.

A trustee may however rely on a right of indemnity against trust assets to meet obligations incurred. The extent and operation of any indemnity is qualified by various factors .

A trustee manages trust property for the benefit of the beneficiaries and because of this a trustee is permitted to have recourse to the trust property to satisfy the debts incurred on behalf of the trust. This right of indemnity out of the trust fund of the costs, expenses and liabilities properly incurred in the execution of the trusts or powers is recognised by the general law and by statute.

The trustee's right of indemnity constitutes an equitable proprietary right (namely a charge or a right of lien) over trust assets. As the indemnity confers an equitable proprietary right upon the trustee, it serves effectively to confer on the trustee a beneficial interest in the trust assets according to the quantum of the trustee's unsatisfied indemnity. The right of indemnity has priority over any claims of the beneficiaries of the trust.

No right of indemnity arises as a matter of general law in respect of a trustee's remuneration. Any such right must be conferred expressly by the trust instrument.

The trustee's right to indemnity may be denied or reduced in the following circumstances

1. A breach of trust relating to the subject matter of the indemnity will bar a trustee from the right of indemnity in relation to it. Therefore, a trustee who commits a breach of trust cannot claim recoupment until the trustee has provided compensation for that breach.

2. The trust instrument may expressly provide that the trustee's right to indemnity may be denied or reduced in specific circumstances or generally.

3. Where trustees overpay some beneficiaries at the expense of others and make good the shortfall to the latter out of their own pocket, they are not, in the absence of mistake entitled to recoup from the trust estate. A trustee, may however, be entitled to an indemnity in this situation if the trustee was induced by a beneficiary to prematurely hand over that beneficiary's entitlement under the trust.