Contents

Chapter 16
Trustee’s indemnity, corporate trustees and insolvency

Indicative draft provisions – trustee's indemnity

Part 2
Trustee’s indemnity

45 Trustee is personally liable for expenses and liabilities
A trustee is personally liable for an expense or a liability incurred by the trustee when acting as a trustee.
46 Trustee’s right to indemnity
(1) A trustee who reasonably incurs an expense or a liability when acting on behalf of the trust is entitled to—
(a) the payment or discharge of the expense or liability out of the trustee’s own funds and reimbursement from the trust property; or
(b) the payment or discharge of the expense or liability from the trust property.
(2) Subsection (1) applies regardless of any contrary intention expressed in the terms of the trust.
(3) Subsection (1) applies to a former trustee in relation to an expense or a liability incurred as a trustee acting on behalf of the trust.
47 Ranking of trust property
(1) For the purposes of section 46(1), the terms of the trust may rank the order in which the trust property must be applied to reimburse the trustee or pay or discharge an expense or a liability.
(2) However, the court may set aside a ranking of trust property under subsection (1) on the application of—
(a) the trustee; or
(b) a creditor; or
(c) a beneficiary.

Commentary

It should be noted that clause 45 does not prevent a trustee from agreeing in any contract with third parties, for example, that the trustee’s liability shall be limited to the trust assets.

Clause 46 modernises the language of section 38(2) Trustee Act 1956. It expands it to include reference to the trustee’s personal liability, and clarifies that the indemnity cannot be limited or excluded in the trust deed. Note that this recommendation concerns the trustee’s indemnity for expenses and liabilities incurred as trustee. R4 contains recommendations about how the indemnity clauses in trust deeds apply in situations where there has been a breach of trust by trustees.

Subsection (1) of section 38 (on liability of co-trustees) will also need modernising and re-enacting in trust legislation in a separate section. We consider that the latter part of section 38(2) (on trustees being paid for professional services) will be covered adequately by the duty to act without reward, which will apply unless expressly varied by the terms of the trust (see R3).

48 Creditor’s limited claim to trust property through trustee’s indemnity
(1) This section applies where—
(a) a trustee has incurred an expense or a liability to a creditor; and
(b) the creditor has given value; and
(c) the trust property has received a benefit from the transaction between the trustee and the creditor; and
(d) the creditor has acted in good faith.
(2) In a case to which this section applies, the creditor may claim to be indemnified out of the trust property as if the creditor were a trustee, notwithstanding that the trustee for any reason is not entitled to be fully indemnified.
(3) The creditor has not acted in good faith if the creditor had knowledge of any circumstances that excluded or limited the trustee’s indemnity.
(4) A claim under this section—
(a) is limited to the value given by the creditor; and
(b) must be paid in priority over any payment to a beneficiary, unless the court orders otherwise.

Commentary

This clause as drafted does not address the position of the Official Assignee in respect of R48. Provisions would also need to be included providing for the operation of this process in relation to a bankrupt or insolvent trustee. These have not yet been drafted.

Examples of circumstances where the trustee is not entitled to be fully indemnified include where the trustee was in breach of trust, or lacked capacity or authority in incurring the liability, or due to beneficiary cross-claims against the trustee.

It is not intended that a creditor relying on this provision would receive particular priority over other creditors in the event of bankruptcy or liquidation. If a creditor or the Official Assignee relies on this provision in an insolvency context to obtain payment via the trustee, it is intended that the proceeds would be distributed among creditors in a priority in accordance with ordinary insolvency law principles.

If a creditor relies on this provision and obtains a payment, and then subsequently the trustee is bankrupted or liquidated, the payment could nonetheless still be voidable under the insolvent transaction regime in section 194 Insolvency Act 2006 or section 292 Companies Act 1993, as appropriate.

It is also not intended that this provision would give the creditor a security interest in the trust assets via the trustee’s equitable lien.