Bare trustee’s entitlement to be indemnified out of trust property
Last week, we reported on the powers of bare trustees in a winding up. This week, we report on the recent case of Bruton Holdings Pty Limited (In Liq) v Commissioner of Taxation [2011) FCAFC 79 in which the Full Federal Court considered whether a bare trustee was entitled to indemnification out of trust property for the costs of undertaking litigation in order to protect the trust property.
Bruton Holdings Pty Limited (Company) was trustee of the Bruton Educational Trust (the Trust). Under the trust deed, the Company was removed as trustee upon entering into liquidation. Consequently the Company became the “bare trustee” of the assets comprising the trust property and had limited powers to deal with the trust assets.
After entering into liquidation, the Company instigated proceedings to have a third party notice issued by the Commissioner of Taxation (Commissioner) declared void. The Company was ultimately successful in the High Court, with party/party costs awarded in its favour.
A dispute arose as to whether the Company was entitled to have the shortfall between the party/party costs and the overall cost of the litigation paid out of the trust property. The Commissioner sought a declaration from the Federal Court that the Company was not entitled to indemnification for the shortfall in costs out of the trust property.
At trial, Justice Graham of the Federal Court held that although the action taken by the Company was successful, “it was not the action of a trustee in the discharge of its then trust obligations” as a bare trustee and therefore the Company was not entitled to indemnification.
Full Court of the Federal Court Decision
On appeal, the Full Federal Court held that a bare trustee has powers and duties at general law to:
- get the trust property in;
- protect and maintain the trust property; and
- vindicate the rights attaching to the trust property.
The Full Court found that by challenging the third party notice issued by the Commissioner, the Company was in effect vindicating the rights attaching to the trust property by commencing litigation for the purpose of protecting the trust property.
Accordingly the Company, as bare trustee, was discharging its duty by challenging the notice and was entitled to indemnification for all of its costs.
This case confirms that the obligations of a bare trustee will often depend on the circumstances. If an insolvency practitioner appointed to a bare trustee company is considering commencing litigation, they must give consideration to whether that litigation is essentially defensive in nature and required in order to protect trust property. If so, they will be acting within their powers, and able to recoup the costs of commencing and pursuing litigation out of trust property.