Successor Trustee Owes No Fiduciary Obligation to Former Trustee

In Naaman v Jaken Properties Australia Pty Limited [2025] HCA 1 the High Court has dismissed an appeal from the Court of Appeal of the New South Wales Supreme Court. In doing so, the Court held, by a majority of 4-3, that a successor trustee is not in a fiduciary relationship with a former trustee and therefore does not owe any fiduciary obligation to the former trustee not to deal with the trust estate so as to intentionally destroy, diminish or jeopardise the former trustee’s entitlement to be indemnified from the trust estate.

On 5 February 2025, the High Court of Australia delivered judgment in Naaman v Jaken Properties Australia Pty Limited,[1] a decision in which the principal issue was whether a successor trustee owed 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 in the trust asset held by the former trustee. A majority (Gageler CJ, Gleeson, Jagot and Beech-Jones JJ) found that no such fiduciary duty was owed, while the minority (Gordon, Edelman and Steward JJ) determined that a fiduciary duty was owed but not in the same terms as had been found by the New South Wales Court of Appeal.

Brief Summary of Facts

The appellant, Mr Naaman, had obtained a judgment against Jaken Property Group Pty Ltd (JPG) in the sum of $3,446,755.55 in respect of activities undertaken by JPG as the trustee for the Sly Fox Family Trust. After those activities but prior to the judgment being granted, JPG was removed as the trustee of the Sly Fox Family Trust and replaced by Jaken Properties Australia Pty Ltd (Jaken). The primary judge, Kunc J of the Supreme Court of New South Wales, found that Jaken had engaged in a dishonest and fraudulent design by stripping itself of trust assets (with such assets being transferred to third parties that were knowingly involved for no consideration) that might otherwise have been available to indemnify JPG with respect to the judgment obtained by Mr Naaman. Mr Naaman was entitled by way of subrogation in equity to the rights of JPG to be indemnified out of the assets of the trust.

The primary judge held that Jaken, as a successor trustee, owed JPG, as the former trustee, a fiduciary obligation not to deal with trust assets so as to destroy, diminish or jeopardise the former trustee’s entitlement to indemnification. The majority of the Court of Appeal (Leeming JA with whom Kirk JA agreed; Bell CJ dissenting) overturned the primary judge’s decision in this respect, finding that a successor trustee does not owe a fiduciary duty to the former trustee in that manner.[2]

The reasons of the majority

The majority of the High Court dismissed the appeal affirming the decision of the Court of Appeal, finding that as a matter of equitable principle a successor trustee does not owe a fiduciary obligation to a former trustee in respect of the entitlement of the former trustee to indemnification out of the trust assets or the commensurate beneficial interest that the former trustee has in the trust assets.[3]

In reaching that conclusion, the majority considered in detail the nature of the former trustee’s right of indemnification, its difference to the nature of the beneficial interest held by a cestui que trust (i.e. a beneficiary of a trust) and whether there was present (or rather an absence of) a fiduciary relationship. The majority said (emphasis added):

[12] The explanation for the answer to the question of equitable principle lies in the nature of a trustee’s entitlement to indemnification out of the trust assets being an entitlement to have the trust assets applied for the purpose of recouping expenditure or exonerating liability properly incurred by the trustee. Once the nature of the entitlement is appreciated to be so limited and so focused, there is insufficient justification for superimposing on the entitlement to indemnification and commensurate beneficial interest in the trust assets retained by a former trustee a personal fiduciary obligation on the part of the successor trustee to the former trustee, either generally or upon the successor trustee becoming aware of the former trustee having a claim to indemnification.

The majority described the nature of the relevant interest as follows (footnotes omitted, emphasis added, original italics):

[13] The interest which a trustee has in the trust assets that is commensurate with the entitlement of the trustee to be indemnified out of the trust assets for expenses and liabilities properly incurred in the execution of the trust has repeatedly been said in this Court to be properly characterised as a beneficial interest in the trust assets which takes priority over the beneficial interest that the cestuis que trust have in the trust assets.

[14] That the interest of the trustee can be properly characterised as a beneficial interest in the trust assets does not mean, however, that the difference between the beneficial interest of the trustee and the beneficial interest of the cestuis que trust is a difference only as to priority. The difference as to priority is a manifestation of a more fundamental difference in the nature of the two categories of beneficial interest.

[15]  The term “beneficial” is commonly used in equity as a cognate of “beneficiary” to describe the specific interest that a cestui que trust has in trust assets. But the term is sometimes also used to describe other equitable proprietary interests. That is how it has been used by this Court in this context.

[16]  The beneficial interest of the trustee and the beneficial interest of a cestui que trust are similar insofar as each is an equitable proprietary interest in the trust assets which arises from equity acting in personam to enforce or protect an underlying equitable entitlement. The difference between them stems from a difference in the underlying equitable entitlements of the trustee and the cestui que trust and flows through to differences in the orders that a court of equity can make to enforce or protect those underlying equitable entitlements.

[17]  The difference was manifest in the separate explanations of the two categories of beneficial interest given by three members of this Court in Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth. The difference was similarly reflected in prior descriptions of a trustee having an entitlement to be indemnified out of the trust assets as having a “lien or an “equitable charge over the trust assets to the extent of the entitlement in the sense that a court of equity can enforce the entitlement against the trust assets in the same way as a court of equity can enforce an equitable lien or other equitable charge against other property.

[18]  An equitable lien is a form of equitable charge over property which arises by implication of equity to secure the discharge of an actual or potential indebtedness. Like any other form of equitable charge over property, an equitable lien is enforceable by means of a court of equity making an order authorising or requiring sale of the property and payment of the indebtedness out of the proceeds of that sale or, where the property consists of a fund, by means of a court of equity making an order authorising or requiring payment out of that fund.

[19]  This Court emphasised in Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (in liq) that an equitable charge is an institution of equity, distinct from the institution of a trust, which confers on the chargee an equitable proprietary interest of a nature that is different from the equitable proprietary interest of a cestui que trust. The difference in the equitable proprietary interests of the chargee and of the cestui que trust reflects the difference in the final equitable relief available to each to enforce their underlying equitable entitlements. The final equitable relief available to the chargee is directed against the property the subject of the charge and is only for the purpose of satisfying out of that property the indebtedness that is secured by the charge. The final equitable relief available to the cestui que trust is directed not against the property held on trust but against the holder of the property and is for the purpose of ensuring performance of the trust. The difference between the two interests is encapsulated by Jaken’s submission that the trustee holds the trust property for the cestuis que trust but subject to the interest of the former trustee.

[20]  The distinction so emphasised in Associated Alloys between the nature of the equitable proprietary interest of a cestui que trust and the nature of the equitable proprietary interest of a chargee underlies the separate explanations given in Carter Holt Harvey of the beneficial interest that a cestui que trust has in the assets held on trust and the beneficial interest that the trustee has in those trust assets if and to the extent that the trustee has an entitlement to be indemnified out of them. The description of a cestui que trust “as having a beneficial interest in … the trust assets” was explained to be appropriate “[i]nasmuch as a court of equity will aid [the cestui que trust] in the enforcement of the terms of trust”. The appropriateness of describing an unindemnified trustee as having “a beneficial interest in the trust assets”, in contrast, was explained to be founded on the very different explanation that a court of equity “will assist the trustee to realise trust assets to satisfy the trustee’s right of indemnity” by reason of which “it is said that the trustee has an equitable charge or lien over the trust assets” although not “a charge or lien comparable to a synallagmatic security interest over property of another”.

…[after referring to the Privy Council decision of Equity Trust (Jersey) Ltd v Halabi [[2023] AC 877]

[23]  The proprietary interest of a trustee in the trust assets was explained in Halabi to arise in consequence of the entitlement of the trustee to indemnification out of the trust assets. The entitlement itself was explained as “no more and no less than the right to have the trust property applied in indemnifying the trustee against liabilities properly incurred”. The characteristics of the entitlement were identified as including two that are presently relevant.

[24]  First, it was said that the entitlement does not create a personal liability on the part of any person to indemnify a trustee or former trustee but is instead “a right to have the trust property applied in payment of [the indemnified] amount”. In this respect, it was explained:

There is simply the right to have the trust assets applied in the exoneration or reimbursement of the trustee. It is that equitable right, enforceable by an order of the court requiring the trust fund to be so applied, that creates the trustee’s proprietary interest. There is, in other words, no difference between the right of indemnity and the proprietary interest. The right of indemnity and the application of the fund in providing the necessary exoneration or reimbursement are one and the same thing.

[25]  Second, it was said:

[T]he remedy to enforce that right is an order that the trust property be applied in paying the amount due under the right of indemnity. It is the availability of this remedy which underlies the characterisation of the right of indemnity as conferring on a trustee or former trustee an equitable proprietary interest in the trust property, akin to that created by a conventional equitable charge. Equity acts in personam, so the order is not an order in rem but an order that the person holding the property must apply it so as to indemnify the trustee, but the effect is to create an equitable interest in the property. The position is analogous to the effect of specific performance as a remedy to enforce a contract of sale, which is to confer on the purchaser an equitable proprietary interest in the subject property.

[26] The second of those characteristics is of particular significance to the resolution of the question of principle in this appeal. The interest that a former trustee retains in the trust assets after replacement by a successor trustee — whether described in the language of this Court as a lien or a charge and as a beneficial interest or in the language of the Privy Council as a proprietary interest akin to that created by a conventional equitable charge and analogous to the equitable proprietary interest of a purchaser under a specifically enforceable contract of sale — is an equitable proprietary interest that arises from and is commensurate with the continuing ability that the former trustee has to obtain the assistance of a court of equity to enforce its entitlement to have the trust assets applied to recoup the former trustee’s expenditure or to exonerate the former trustee from liability.

[27]  The final orders that a court of equity can make on the application of a former trustee to enforce its entitlement to have the trust assets applied to recoup its expenditure or to exonerate it from liability include orders authorising and, if necessary, requiring the sale of the trust assets and payment of the former trustee out of the proceeds or payment of the former trustee from trust funds. Whatever form a final order might take, it would necessarily be an order made in a proceeding to which the successor trustee, as the current holder of the trust assets, would be a party and would necessarily be an order binding the successor trustee. The final order, although in personam, would enforce the entitlement of the former trustee to have the trust assets applied to recoup its expenditure or to exonerate it from liability. The order would not enforce any pre-existing obligation on the part of the successor trustee.

[28]  Pending the making of any such final order for the enforcement of the entitlement of the former trustee to have the trust assets applied to recoup its expenditure or to exonerate it from liability, a court of equity has ample power to ensure the efficacy of the final order and to protect the equitable proprietary interest of the former trustee from being destroyed, diminished, or jeopardised by conduct of the successor trustee. The available interim protection is by means of the court of equity, on the application of the former trustee, being able to make an interlocutory order either granting an injunction to restrain the successor trustee or appointing a receiver to take possession of the trust assets.

[29]  The availability of those forms of interlocutory order underpins the correctness of the observation by Brereton J in Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd that “the former trustee is entitled to ensure the new trustee does not take steps which will destroy, diminish or jeopardise the old trustee’s right of security, which subsists in the trust assets after their transfer to the new trustee”. Neither an interlocutory injunction nor the appointment of a receiver would enforce any pre-existing obligation on the part of the successor trustee to the former trustee, and neither form of interlocutory order would depend for its making on establishing any pre-existing obligation on the part of the successor trustee to the former trustee.

[30]  The important point for present purposes is that it is unnecessary to postulate the successor trustee owing any obligation to the former trustee for a court of equity to be able to protect the former trustee’s entitlement to indemnification out of and commensurate beneficial interest in the trust assets from being destroyed, diminished, or jeopardised by any conduct of the successor trustee. Whether a successor trustee owes any fiduciary obligation to a former trustee in respect of the entitlement to indemnification out of trust assets or the commensurate beneficial interest in the trust assets is accordingly to be answered at the level of equitable principle in the context of the absence of such need.

The majority then turned its attention to the absence of a fiduciary relationship, noting that the question for the High Court’s attention was not whether a fiduciary relationship should be recognised in a novel factual setting, but instead, whether a novel fiduciary relationship is to be recognised within the “heartland of the law of trusts”.[4] The majority observed:

[31]…a fiduciary obligation cannot exist other than as an incident of a fiduciary relationship and that a fiduciary relationship is a relationship of “absolute and disinterested loyalty” within the scope of which one party, the fiduciary, is recognised in equity as having a responsibility to act in the interests of the other party (or in their shared interests) to the exclusion of the fiduciary’s own interests.

The majority cautioned against a tendency to too readily classify a relationship as fiduciary when it might better be seen as purely contractual or giving rise to tortious liability and reasoned:

[33] Having regard to the onerousness of the responsibility that a fiduciary relationship entails, a fiduciary relationship should not lightly be imposed upon commercial parties who stand at arm’s length in respect of interests that are protected by other institutions of the common law or of equity. In particular, a fiduciary relationship should not be superimposed on another legal or equitable relationship merely to overcome perceived shortcomings in the nature or extent of the remedies available to enforce or protect other applicable institutions of the common law or of equity.

In rejecting the appellant’s argument that a fiduciary relationship was created, the majority determined that the holding of property in which a person has an equitable proprietary interest does not automatically create a fiduciary relationship,[5] and the trustee’s knowledge that an equitable proprietary interest is held does not change this position.[6] In support of this conclusion, the majority referred to Tanwar Enterprises Pty Ltd v Cauchi[7] where it was found that although a contract for the sale of land creates an equitable estate or interest in the subject property, “it is both inaccurate and misleading to speak of the unpaid vendor under an uncompleted contract as a trustee for the purchaser”. This is because the vendor, while subject to the terms of the contract of sale, is otherwise free to deal with the property without consideration of the interests of the purchaser.[8] The majority found this analogous with a former trustee’s beneficial interest.

The majority further dismissed an argument by the appellant that a fiduciary relationship was established (or at least evidenced by) the vulnerability of the former trustee, and that if the fiduciary relationship did not exist then there would be an incoherence due to the inconsistency of obligations owed to the former trustee compared to the obligations owed to a cestui que trust.[9]

The majority rejected the former argument on the basis that vulnerability is not the “touchstone” of a fiduciary relationship[10] and is instead only relevant to the extent that it suggests a responsibility of the fiduciary to act in the interests of the vulnerable party to the exclusion of the interests of the fiduciary. The majority stated that the vulnerability of the former trustee was no greater than that of a chargee under a conventional equitable charge and vulnerability to “unnotified and potentially clandestine conduct on the part of the successor trustee is the inevitable consequence of the transmission of the trust assets from one to the other”[11] and was “no more than a complaint that the equitable remedies available to a former trustee are inadequate.”[12]

In respect of the latter argument, the majority found that there was no incoherence (or inconsistency) where the nature of the beneficial interest (or rather, equitable proprietary right) held by a trustee was starkly different to the nature of the beneficial interest held by the cestui que trust (for the reasons set out above).[13]

Accordingly, the majority found that no fiduciary relationship existed, that at all times since it was replaced as trustee it had been able to enforce its entitlement as a former trustee by bringing a proceeding for final relief in the form of an order for the sale of the trust assets or for payment out of trust funds, and has been able to protect its entitlement from being “destroyed, diminished or jeopardised by conduct of [the new trustee] by seeking in such a proceeding an interlocutory injunction or the appointment of a receiver.”[14] Accordingly, the appeal was dismissed.

The reasons of the minority

The minority (Gordon, Edelman and Steward JJ) concluded that a fiduciary relationship did exist, in that the successor trustee was under an obligation not to deal with the trust assets so as to intentionally destroy, diminish or jeopardise the former trustee’s entitlement to be indemnified from the trust estate.[15] The basis of this position was that the successor trustee assumed a responsibility to the former trustee that would reasonably entitle the former trustee to expect that the successor trustee would act in relation to the trust assets in the interests of the former trustee to the exclusion of its own, or a third party’s, interests.[16] The minority concluded that the obligation not to allow a trustee’s personal interests to conflict with its objectively assumed duty of loyalty to the former trustee when dealing with assets to which the former trustee has an equitable proprietary right, was the “irreducible core of the fiduciary obligation”.[17]

The minority observed that a description of the former trustee’s equitable proprietary interest as a charge or lien was inaccurate due to the lack of securing of an underlying debt.[18] Instead, the reference to the former trustee’s interest being a “beneficial interest in the trust assets” demonstrated a close identity to that of a beneficiary of a bare trust in the sense that the successor trustee’s duty “involves no more than distribution of the trust fund to the extent of the indemnity”.[19] In circumstances of the appeal, where the successor trustee assumed a responsibility to the former trustee by accepting the appointment to replace the former trustee where it was objectively apparent that the right of indemnification existed, the minority stated that the former trustee must be entitled to expect that the successor trustee would act in its interests over the interests of the successor trustee and the beneficiaries.[20]

Further, the minority said that whilst it was common ground between the parties that certain orders of a preventative nature could be made by a court of equity to protect the former trustee due to the right of indemnity, there was no reason to infer that those remedies were exhaustive of how equity would respond to a successor trustee that had breached its duty. [21]

It was key in the minority’s reasoning that the successor trustee had knowledge of the fact that a former trustee had a proprietary interest in the trust assets, meaning that the former trustee’s indemnification had been activated by the existence of a liability and the successor trustee was on notice of the existence of that right of indemnity. Without this factor, the successor trustee could not have accepted the appointment in such circumstances to give rise to the expectation by the former trustee that the successor trustee would act in preference to the former trustee’s interests.[22] It was for this reason that the minority concluded that it was a requirement that the duty was to not “intentionally” destroy, diminish or jeopardise the former trustee’s entitlement to be indemnified from the trust estate.

On that basis, the minority would have allowed the appeal.

A link to the full decision may be found here.

[1] [2025] HCA 1

[2] Jaken Properties Australia Pty Ltd v Naaman (2023) 112 NSWLR 318; [2023] NSWCA 214

[3] Naaman v Jaken Properties Australia Pty Limited [2025] HCA 1 at [6]

[4] ibid at [32]

[5] ibid at [35]

[6] ibid at [36]

[7] (2003) 217 CLR 315

[8] Naaman v Jaken Properties Australia Pty Limited [2025] HCA 1 at [38]

[9] ibid at [41]

[10] ibid at [43]

[11] ibid at [42]

[12] ibid at [44]

[13] ibid at [45]

[14] ibid at [48]

[15] ibid at [54]

[16] ibid at [74]

[17] ibid at [54]

[18] ibid at [88]

[19] ibid at [89]

[20] ibid at [96]

[21] ibid at [91]

[22] ibid at [97] – [99]