A matter of trust: High Court rejects trust creditor claims against third party recipients of trust property

In a 4:3 split decision, the High Court of Australia clarified that a successor trustee does not owe a fiduciary duty to a former trustee in respect of the former trustee’s entitlement to indemnification from trust assets.[1]

The High Court judgment confirms that former trustees (and their trust creditors) have no independent recourse against a successor trustee for maladministration of trust assets, placing former trustees and their trust creditors in a difficult position to safeguard their interests. This is because such parties have limited visibility of the successor trustee’s decision-making process, thereby necessitating a former trustee or trust creditor to incur significant court application costs for pre-emptive protections. Simultaneously, given their limited access to relevant financial information, former trustees and their trust creditors retain limited means to overcome the high evidentiary threshold needed to prove imminent risk of trust asset dissipation. Compounding this problem further, costly court applications must be made urgently, as the remedies are constrained by their anticipatory nature. If trust assets are inappropriately dissipated before any such court applications are brought, the former trustee’s indemnification right may, in effect, be permanently frustrated. This has serious implications for parties, such as liquidators and trust creditors, whose interests depend upon the rights of the former trustee.

Relevant background

Anthony Naaman was in dispute with Jaken Property Group Pty Ltd (JPG), which was the trustee of the Sly Fox Family Trust (the Trust). In about 2007, in an apparent attempt to avoid adverse outcomes arising from the dispute:

• JPG was retired as trustee of the Trust, Jaken Properties Australia Pty Ltd (Jaken) was appointed as the successor trustee and the assets of the Trust were transferred to Jaken; and
• JPG entered voluntary liquidation and was ultimately deregistered.

In 2016, and following further proceedings, Mr Naaman obtained:

• judgment against JPG for $3.4 million (the Judgment Debt);
• a declaration that JPG was entitled (as against Jaken and generally) to be indemnified out of the Trust’s assets for its liabilities incurred as trustee, including for the Judgment Debt; and
• a declaration that Mr Naaman was subrogated to JPG’s right of indemnity.

Between 2012 and 2014 however, Jaken dissipated $3.6 million of Trust assets to put them beyond the reach of JPG.

In 2019, Mr Naaman sought, in effect, to enforce the Judgment Debt. The primary judge concluded that Jaken breached fiduciary duty owed to JPG, and that third parties knowingly received trust property subject to a fiduciary duty or knowingly assisted in Jaken’s dishonest and fraudulent design in breach of fiduciary duty.

A majority of the New South Wales Court of Appeal (Leeming JA, with Kirk JA agreeing) allowed an appeal, concluding that Jaken did not owe a fiduciary obligation to JPG at any time.

Mr Naaman appealed to the High Court on the sole ground that the Court of Appeal was wrong to conclude that Jaken, as successor trustee, did not owe a fiduciary duty to JPG, the former trustee, not to deal with trust assets to destroy, diminish or jeopardise JPG’s right of indemnity (by exoneration) from those assets.

Majority decision

By a 4:3 majority, the High Court held that a successor trustee does not owe a fiduciary duty to a former trustee in respect of the former trustee’s entitlement to indemnification out of trust assets or the commensurate beneficial interest that the former trustee retains in those trust assets following its replacement.

The explanation for this lay in the nature of a trustee’s entitlement to indemnification out of trust assets, being a limited beneficial interest in the trust assets that is commensurate with an equitable proprietary entitlement to have the trust assets applied for the purpose of recouping expenditure or exonerating liabilities properly incurred by the trustee.[2]. That beneficial interest is enforceable only by a court of equity making orders (upon the former trustee’s application) authorising the sale of the trust assets and payment of the former trustee out of the resulting proceeds.[3]

The majority considered that at any time prior to the making of any such final order, the court has power to protect the equitable proprietary interest of the former trustee from being destroyed, diminished, or jeopardised by conduct of the successor trustee, including through interim protection such as an injunction to restrain the successor trustee or appointing a receiver to take possession of the trust assets.[4] That power in turn reflects the successor trustee’s ongoing duty to deal with the trust assets in performance of the trust and subject to the former trustee’s beneficial interest.[5] However, the majority held that there was insufficient justification for ascribing a fiduciary standard to that duty, even though the former trustee may be vulnerable (in the interim period prior to the court’s intervention) to unnoticed and clandestine conduct by the successor trustee.[6] The majority considered that such vulnerability does not, by itself, justify the existence of a fiduciary relationship and amounts to no more than a complaint about the inadequacy of the equitable remedies already available to a former trustee.[7]. Consequently, a fiduciary relationship should not be superimposed on the relationship between a former trustee and successor trustee in order to overcome that perceived inadequacy, meaning that the remedies of equitable compensation and account were not available to JPG against the third party recipients of the dissipated trust assets.[8]

Minority decision

In a strident dissent, the minority held that a fiduciary relationship arises between the successor trustee and the former trustee. The basis for this view was that a successor trustee assumes a responsibility to the former trustee that entitles the former trustee to expect that the successor trustee will administer the trust assets in the former trustee’s interests to the exclusion of its own or a third party’s interests, including refraining from dealings that would intentionally destroy, diminish or jeopardise the former trustee’s entitlement to indemnity from the trust estate.[9] In describing this conflict of interest principle as the “irreducible core of the fiduciary obligation”, the minority emphasised that a successor trustee clearly owes fiduciary duties to a former trustee by reason of the former trustee being in the same position of vulnerability as the trust’s beneficiaries regarding disposition of the very trust assets for which the successor trustee has assumed responsibility by accepting appointment to replace the former trustee.[10]

Practical implications

The real-world implications of this decision are significant and controversial:

• Despite the unchallenged finding regarding Jaken’s involvement in a dishonest and fraudulent design specifically aimed at putting the Trust’s assets beyond the reach of JPG and Mr Naaman, Mr Naaman was nonetheless unable to enforce his judgment against those assets given the High Court majority’s findings on the absence of a fiduciary relationship between the former trustee (JPG) and the successor trustee (Jaken) and the consequential unavailability of the remedies of equitable compensation and account against those third parties.
• In this respect, the following practical legal and commercial consequences emerge:
  • The decision effectively places an onus on subrogated trust creditors to make expensive court applications for pre-emptive protection via the appointment of receivers to the trust and asset freezing orders. A practical difficulty here is the limited publicly available financial information regarding the small proprietary companies that are the typical entity interposed as corporate trustees. This compounds the difficulty for a trust creditor in seeking to meet the high evidentiary threshold associated with proving an imminent risk of asset dissipation.
  • A possible unintended effect of the majority judgment is that it may provide encouragement of similar schemes involving the interposition of a new trustee controlled by related parties to defraud or defeat creditors, including through the pursuit of conduct that would otherwise be regarded as illegal phoenixing activity. In the absence of the appointment of a liquidator to the successor trustee or determined action from ASIC, there may be insufficient deterrence of such misconduct, particularly if the asset dissipation occurs at a time well beyond the expiry of relevant statutory limitation dates.

This decision is particularly significant for junior or mezzanine lenders lacking the benefit of security over the whole of, or substantially the whole of the assets of a former trustee. If a successor trustee takes steps to alienate assets and the lender is unaware of those steps (given the information asymmetries referred to above), mezzanine lenders could be left without adequate remedies other than reliance on state-based legislation invalidating real property transactions made with the intention of defrauding creditors.[11] Importantly, no such alternative relief was sought by Mr Naaman against Jaken.

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Authored by:
Pravin Aathreya, Partner
Rachel Zagorskis, Senior Associate
Michael Arkadieff, Lawyer

[1] Naaman v Jaken Properties Australia Pty Ltd [2025] HCA 1.

[2] [2025] HCA 1 at [12], [19]-[26] per Gageler CJ, Gleeson, Jagot and Beech-Jones JJ.

[3] [2025] HCA 1 at [27] per Gageler CJ, Gleeson, Jagot and Beech-Jones JJ.

[4] [2025] HCA 1 at [28] per Gageler CJ, Gleeson, Jagot and Beech-Jones JJ.

[5] [2025] HCA 1 at [40] per Gageler CJ, Gleeson, Jagot and Beech-Jones JJ.

[6] [2025] HCA 1 at [42] per Gageler CJ, Gleeson, Jagot and Beech-Jones JJ.

[7] [2025] HCA 1 at [44] per Gageler CJ, Gleeson, Jagot and Beech-Jones JJ.

[8] [2025] HCA 1 at [33] and [44] per Gageler CJ, Gleeson, Jagot and Beech-Jones JJ.

[9] [2025] HCA 1 at [52]-[54], [74] and [78] per Gordon, Edelman and Steward JJ.

[10] [2025] HCA 1 at [54], [78]-[83], [95]-[96] per Gordon, Edelman and Steward JJ.

[11] For example, see section 37A of the Conveyancing Act 1919 (NSW) and section 172 of the Property Law Act 1958 (Vic).