30/10/2018

Normally, a trustee is personally liable for obligations incurred as trustee in administering the trust and this means the trustee can potentially be sued and have its own assets applied to meet any judgment.

However, a trustee has a right of indemnity out of the trust fund, which is recognised by law subject to the condition that the liability is incurred in proper execution of trust duties.  

In addition to the trustee’s right to an indemnity out of the fund which may appear in the relevant State jurisdiction, inserting a trustee’s right of indemnity clause is a common practice when drafting a trust deed, and more likely than not, you will find a clause to this effect in your trust deed.

While an effective indemnity clause may enhance the protection of trustees from personal loss and risk of insolvency, it can also be used to expressly provide that the trustee’s right to indemnity may be denied or reduced in specific circumstances.

One advantage of having a clear and effective indemnity clause is that it can improve procedural efficiency by clarifying the circumstances in which the trustees may rely on the indemnity.

Further, our experience suggests to us that often third parties such as a commercial bank request that such a clause be in place in the trust deed before agreeing to enter into a transaction involving the trust. This is due to the protection it offers to the third parties by providing them with a recourse to the assets of the trust in the event of the trustee’s default.

Another aspect of indemnity that should be considered - especially by new trustees - is in relation to the liability arising from the breaches of former trustees. Although in some states such as NSW, there may be implied indemnity in the legislation (i.e. s59 of the Trustee Act 1925 (NSW)), which covers this issue, it would still be a prudent approach for any new trustee to seek an express indemnity from the former trustee in order to mitigate the adverse effect of any previous breach of trust by the former trustees.

An indemnity can be an effective risk allocation tool and a carefully drafted indemnity clause may provide procedural efficiency as well as added protection for the trustees.

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222 or email info@townsendslaw.com.au to see how we can assist.