The Privy Council has handed down judgment in two appeals dealing with the extent of a trustee's right to be indemnified out of trust assets for liabilities properly incurred. In New Zealand this right is provided for in the Trusts Act 2019 but the scope and application of this right draws heavily on equity and common law principles. It remains to be seen how this judgment will be applied in New Zealand, but it will undoubtedly be influential.
In short, the Privy Council held:
- The right of indemnity confers a proprietary interest in trust assets
- That right survives the transfer of trust assets to a successor
- Where there are competing claims for indemnification by successor trustees to an insufficient trust fund, the trustees claims rank pari passu as against the trust fund
- The trustee's costs in proving its claim are covered by the right of indemnification.
Although the Board's decision was determined under Jersey law, it will have a wider application and influence.
In both appeals, ETJL v Halabi; and ITGL v Fort Trustees [2022] UKPC 36, the facts are complex, but very brief summaries are as follows. In the Halabi appeal, there were eight discretionary Jersey trusts established by Madam Nouri, two of which were relevant to this appeal. The respondent in this appeal, Equity Trust, was the original sole trustee of the two relevant trusts for a period in the early 2000's until retirement. Proceedings were brought against two individuals and Equity Trust (on the basis it was vicariously liable for the actions of its employees) after the trustee's retirement. A settlement was ultimately reached in relation to the claims. Equity Trust relied upon indemnities provided in a Deed of Appointment and Removal of Trustees and sought to recover the settlement amount from the assets of the trusts, and the costs incurred in proving its claim.
The ITGL appeal concerned the Tchenguiz Discretionary Trust, another Jersey trust. ITGL was appointed original trustee, and later Bayeux Trustee was added as a co-trustee. Both were removed several years later by the trust protector and replaced with a new trustee. The replacement trustee was again replaced with successor co-trustees, Fort Trustees and Balchan Management. Proceedings were commenced against the original trustees, who (amongst other things) sought to be indemnified from the trust assets and asserted a lien over assets in their possession at the time of their replacement.
The decision is particularly important for its treatment of 'insolvent trusts' - a misnomer (as a trust is not a legal entity it cannot technically incur debts in its name), but a commonly used shorthand term to describe situations where the assets of the trust are insufficient to meet the amounts due under the trustee's right of indemnity. Here, there was a contest between successive trustees over whether one had a better claim to the trust fund than the other, in circumstances where there were insufficient assets to pay their respective full entitlements. Did the prior ranking claim have priority? Or should the claims rank equally, pari passu?
There were four primary issues on appeal
- Does the right of indemnity confer on the trustee a proprietary interest in the trust assets?
The Board unanimously held that the answer was yes - the right is a proprietary rather than possessory one. While a trustee's right of indemnity is a well established principle the particular controversy here arose because of the 'insolvency' of the trusts. The Court determined that "there is no doubt that a trustee is entitled to apply, or seek an order of the Court to apply, trust assets in its possession in payment of amounts due under its right of indemnity…" Those rights are not inconsistent with a proprietary interest in the trust assets but are rather practical means by which the charge is enforced.
- If so, does the proprietary interest of a trustee survive the transfer of the trust assets to a successor trustee?
Here, the appellants argued that if the right of indemnity confers a proprietary interest in the trustee, it is lost when legal title to or possession of the trust property passes (in this case to the replacement trustee). Again, the Board unanimously held that the proprietary interest survives the transfer of the trust assets to a successor trustee, although the Courts noted this was not an issue that had ever been considered by the English Courts. The Privy Council drew heavily from Australian authorities, given the prevalence of trading trusts in Australia, which are not so much a feature of the English commercial landscape.
- If so, does a former trustee’s proprietary interest in the trust assets take priority over the equivalent interests of successor trustees?
This was the key issue on appeal, and the Board split 4:3 in delivering judgment. The majority view (delivered in a judgment of Lord Briggs, with whom Lord Reed and Lady Rose agreed, and in a concurring judgment delivered by Lady Arden) was that trustees’ claims rank pari passu as against a trust fund which is insufficient to pay the claims in full. However, the minority view (held by Lord Richards and Sir Nicholas Patten) was that trustees’ claims rank according to the chronological order in which they were appointed. This view is supported by the general equitable principle that the "first in time prevails", and the minority saw no sufficient reason to depart from that principle.
Conversely the majority considered that there were "sufficiently powerful reasons of justice, equity fairness and common sense" to prefer the pari passu rule of priority, rather than the default "first in time" principle. This issue has not been considered before in the common law, and so is novel and important.
It remains to be seen how this matter would be dealt with by a New Zealand Court, particularly in light of the Board's split decision. We expect, however, that the New Zealand courts will be influenced by the majority's reasoning.
- Does a trustee’s indemnity extend to the costs of proving its claim against the trust if the trust is ‘insolvent’, in the sense that trustees’ claims to indemnity exceed the value of the trust fund?
On this issue the Board was again unanimous that the indemnity extends to the trustee's costs of proving its claim against the trust fund. This draws from well established principles that a trustee's right of indemnity extends to the reasonably incurred costs of defending proceedings against a trustee (provided there is no misconduct on the part of the trustee), Armitage v Nurse [1998] Ch 241, applied in New Zealand in Spencer v Spencer [2012] 3 NZLR 229.
The Board declined to determine an important and potentially critical issue of how the issue of priority might apply as between trustees and trust creditors, on the basis that leave was not sought to raise the issue, and it was not dealt with in the Courts below. There remains, therefore, room for further clarification of the law on these issues. Particular considerations apply in New Zealand where the rights of trust creditors to claim against Trust assets is expressly provided for under s86 of the Trusts Act 2019, which recognises a statutory right of subrogation (and also departed from the common law in certain respects). The majority reasoning (if followed in New Zealand) indicates trust creditor claims would rank equally with trustees' rights of indemnity, but it remains to be seen how these issues might fall to be applied in particular factual circumstances and in a New Zealand context.
Please contact Bridie McKinnon or Olly Peers if you have any questions about this article. Bridie and Olly are members of the firm's dispute resolution team, regularly acting on a range of contentious trust and estate matters.
