The High Court will consider a decision by the New South Wales Court of Appeal about whether a successor trustee owes a fiduciary duty to a former trustee.
A recent decision of the New South Wales Court of Appeal is going to be considered by the High Court of Australia after special leave was granted on 8 February 2024. The case raises numerous conceptual questions about the relationship between a successor trustee, a former trustee and the beneficiaries of the trust. A particular question that has practical implications for successor trustees is whether a successor trustee owes a fiduciary duty to a former trustee.
The Case
The New South Wales Court of Appeal in the case of Jaken Properties Australia Pty Ltd v Naaman [2023] NSWCA 214 (Jaken v Naaman) considered whether a successor trustee owed a former trustee a fiduciary duty to preserve trust property so as not to prejudice the former trustee’s entitlement to be indemnified out of trust property for expenses properly incurred by the former trustee.
The first appellant, Jaken Properties Australia Pty Ltd (Jaken), replaced the former trustee, Jaken Property Group Pty Ltd (JPG), as the trustee of the Sly Fox Family Trust (Sly Fox Trust). A judgment creditor of JPG, who was entitled to JPG’s right of indemnity out of the Sly Fox Trust, claimed that Jaken had breached its fiduciary duty to JPG by distributing trust assets to third parties resulting in insufficient trust assets to satisfy JPG’s right of indemnity.
At first instance, the primary judge, Kunc J, held that Jaken did owe a fiduciary duty to JPG to deal with trust assets in a manner that preserved JPG’s right to be indemnified for expenses properly incurred. However, this decision was reversed on appeal by a majority decision of Leeming JA and Kirk JA (Bell CJ dissenting) finding that a successor trustee does not owe a fiduciary duty to a former trustee at any time.
High Court appeal
In his dissenting judgement, Bell CJ examined the nature of fiduciary obligations and the circumstances in which they arise, finding that the characteristics of the relationship between a former trustee and its successor, particularly the vulnerability of the former trustee, give rise to a fiduciary obligation.
However, Kirk JA stated: “to find that a trustee owes a previous trustee a fiduciary duty with respect to management of the trust property sits uncomfortably with the nature of the relationship between a trustee and beneficiaries of the trust” (at [236]). Kirk JA reasoned that while there is no doubt that a trustee is entitled to reimbursement out of the trust assets in priority to the beneficiaries, it must be understood in the context of the relationship. As the role of the trustee is to further the interests of the beneficiaries imposing a fiduciary obligation on the successor trustee to its predecessor this may be at odds with a trustee’s relationship with the beneficiaries of the trust.
A finding that a successor trustee owes fiduciary duties to both its former trustee and the beneficiaries would bring greater complexity to the role of a trustee. After all, a fiduciary duty requires “absolute and disinterested loyalty”: see Ancient Order of Foresters in Victoria Friendly Society Limited v Lifeplan Australia Friendly Society Limited (2018) 265 CLR 1; [2018] HCA 43 at [67].
The High Court’s decision is likely to have important implications for trustees, particularly in insolvency scenarios. We will report back in due course.
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