Trustees’ Right of Indemnity
Trustee’s Right of Indemnity: Under general trust law, trustees have a right to indemnification for liabilities and expenses incurred in properly administering the trust under general trust law: Worrall v Harford (1802) 8 Ves 4, 8; 32 ER 250, 252 per L Eldon; Re the Exhall Coal Company (Limited); Re Bleckley (1866) 35 Beav 449; 55 ER 970 per Lord Romilly MR; and under s 81 of the Trusts Act 2019. Under s 81(3) the operation and enforcement of the indemnity in this section is governed by the rules of the common law and equity relating to trusts. The authorities show that the principal purpose of the right to indemnification is to ensure, as far as the trust assets permit, that the trustee is not required to bear liabilities which are not incurred for the trustee’s personal benefit. It is a right for the protection of the trustee: Equity Trust (Jersey) Ltd v Halabi [2022] UKPC 36 [2023] AC 877 at [69]; In re The Exhall Coal Co Ltd (1866) 35 Beav 449, 453; 55 ER 970, 971-972; and Jennings v Mather [1901] 1 KB 1, 6-7. Typically, this indemnity comes from the trust fund itself: the trustee can reimburse themselves out of trust assets for proper costs or liabilities.
The need for the right of indemnity arises because, in English law, a trustee is personally liable for all debts and obligations incurred by it in the course of acting as a trustee. The trustee is in law the absolute owner of assets but, by virtue of what equity recognises as obligations undertaken by or imposed on the trustee in respect of the assets and enforceable in equity against the trustee, the trustee cannot treat those assets as its own but must deal with them in accordance with those obligations. Equity will enforce those obligations on the application of the persons to whom the obligations are owed, generally the beneficiaries: Equity Trust (Jersey) Ltd v Halabi [2022] UKPC 36 [2023] AC 877 at [58].
Liabilities incurred by a trustee acting as such are enforceable at the suit of the creditor against the trustee personally, and judgments may be executed against the trustee’s personal assets. A judgment creditor may not, however, execute the judgment against assets held on trust, even if the judgment is in respect of a properly incurred “trust debt”, the reason being that the judgment is against the trustee personally in respect of a liability for which it is personally liable and such a judgment cannot be executed against assets held for others. The judgment creditor’s right of recourse to such assets is by way of subrogation to any unexercised right of the trustee to exoneration from the trust assets: Equity Trust (Jersey) Ltd v Halabi [2022] UKPC 36 [2023] AC 877 at [59].
The right of indemnity arises by operation of law, in the sense that it is a right conferred by equity on all trustees: Equity Trust (Jersey) Ltd v Halabi [2022] UKPC 36 [2023] AC 877 at [62]. In Worrall v Harford (1802) 8 Ves Jun 4, 8; 32 ER 250, 252 Lord Eldon LC said: “It is in the nature of the office of a trustee, whether expressed in the instrument or not, that the trust property shall reimburse him all the charges and expenses incurred in the execution of the trust. That is implied in every such deed.” In In re The Exhall Coal Co Ltd (1866) 35 Beav 449, 453; 55 ER 970, 971-972 (“Exhall Coal”), Lord Romilly MR said that the right of indemnity was “a right incidental to the character of trustee and inseparable from it”.
As a result, a trustee may retain the trust fund until they have been indemnified for present liabilities and for contingent or future liabilities: S and S Ltd v XYZ Ltd [2016] NZHC 26 applied in Hong v Kinnon & Kinnon (as trustees of the Cedar Lodge Trust) [2025] NZCA 117 at [33].
In S and S Ltd v XYZ Ltd [2016] NZHC 26 (footnotes and emphasis omitted), citing Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344; (2008) 74 NSWLR 550 , in which Brereton J in turn drew on Trim Perfect Australia Pty Ltd (in liq) v Albrook Constructions Pty Ltd [2006] NSWSC 153; and applied in Hong v Kinnon & Kinnon (as trustees of the Cedar Lodge Trust) [2025] NZCA 117 at [33] , the relevant principles were summarised as follows:
(a)As against a third party, a trustee is personally liable for debts and liabilities incurred as a trustee;
(b)The trustee has a right of indemnity out of the trust assets for expenses or liabilities incurred by the trustee by recoupment of expenditure and exoneration of liability;
(c)The right of indemnity is secured by an equitable lien over the trust assets, which arises by operation of law, confers a proprietary interest by way of security in the trust assets and takes priority over the claims of beneficiaries;
(d)The lien extends to all the trust assets, except for those specifically excluded by the trust deed;
(e)As the lien is equitable, the trustee can enforce it only by judicial sale or appointment of a receiver, not by sale out of court;
(f)The right of indemnity accrues at the time the obligation is incurred; …
(h)If the trust property is transferred to a new trustee, the lien survives and the new trustee takes subject to the lien of the old trustee — except in the case of a bona fide purchaser for value;
(i)A trustee is entitled to retain possession of trust property against a beneficiary until its indemnity is exercised.
As the Court of Appeal noted in Hong v Kinnon & Kinnon (as trustees of the Cedar Lodge Trust) [2025] NZCA 117 at [39]:
These are general principles only, not specific rules. Their application may turn on the circumstances in which the indemnity is invoked. It is important to bear in mind that a trustee’s indemnity has different aspects: reimbursement, exoneration, retention and realisation. A trustee who incurs a liability may discharge it out of his own pocket and then reimburse himself from the trust fund. Alternatively, he may discharge the liability by paying directly from the trust fund, so as to exonerate himself. A trustee may retain the trust fund until he has been indemnified for present liabilities and for contingent or future liabilities. A trustee may realise trust assets to meet his expenses and liabilities.
In Equity Trust (Jersey) Ltd v Halabi [2022] UKPC 36 [2023] AC 877, citing Palmer v Carey [1926] AC 703 (PC) at 706 –707, applied in Hong v Kinnon & Kinnon (as trustees of the Cedar Lodge Trust) [2025] NZCA 117 at [34], the Privy Council recently considered the scope of trustee’s indemnities. Lord Richards JSC and Sir Nicholas Patten, for the majority of the Board, summarised the position as follows:
[109] The right of indemnity enjoyed by a trustee does not … impose any personal obligation on any party to make payment. The trustee’s right is to payment out of the trust fund. It is a right to have the fund applied in reimbursement of liabilities already paid by the trustee or in exoneration of liabilities which the trustee is required to pay, net in either case of any amounts for which the trustee is accountable. It is a right that the court will enforce by an order for payment out of the fund, in effect an order for specific performance.
[110] It is the consequence of that right to equitable enforcement of the indemnity out of the trust property that the trustee has a proprietary interest in the trust property. This is not security for the payment of a debt, as in the case of an unpaid vendor’s lien or a solicitor’s lien, because there is no debt payable by any party to the trustee. The trustee’s right, enforceable in equity, is no more and no less than the right to have the trust property applied in indemnifying the trustee against liabilities properly incurred. Where such a right exists for payment out of a fund, which the court will enforce, the fund is subject to an equitable charge in favour of the person entitled to payment and it will in equity create a proprietary interest in the fund in favour of that person. This is a longstanding equitable principle, summarised by the Privy Council in Palmer v Carey … where Lord Wrenbury … referred to the “familiar doctrine of equity that a contract for valuable consideration to transfer or charge a subject matter passes a beneficial interest by way of property in that subject matter if the contract is one of which a court of equity will decree specific performance”.
Limitations on Trustees’ Rights of Indemnity: S 41 of the Trusts Act 2019 preserves this right of indemnity but also places limits on it, namely a trustee cannot be indemnified from trust property for liability arising from the trustee’s dishonesty, wilful misconduct, or gross negligence. S 40 complements s 41 by providing that a trust must not limit or exclude a trustee’s liability for any breach of trust arising from the trustee’s dishonesty, wilful misconduct, or gross negligence. Any clause in a trust deed purporting to give such an indemnity or to exempt the trustee from liability for serious breach of trust is invalid as contrary to public policy (Trusts Act 2019, s 42). These provisions reflect the long-standing common law rule that there is an irreducible core of trustee obligation that cannot be contracted away.
The right of indemnity gives rise to an equitable proprietary interest in the trust property generally: The right of indemnity gives rise to an equitable proprietary interest in the trust property generally: Equity Trust (Jersey) Ltd v Halabi [2022] UKPC 36 [2023] AC 877 at [105], Hong v Kinnon [2025] NZCA 117 at [37], and Octavo Investments Pty Ltd v Knight [1979] HCA 61; (1979) 144 CLR 360. This is not a charge or lien in the typical sense: Hong v Kinnon [2025] NZCA 117 at [37] applying the High Court of Australia in Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth of Australia [2019] HCA 20; (2019) 268 CLR 524 at [83]. It is sometimes referred to as a “beneficial interest”: see the discussion in Equity Trust (Jersey) Ltd v Halabi [2022] UKPC 36 [2023] AC 877 at [143].
Such a proprietary interest does not defeat the equitable ownership by the Trust but co-exists with it: Hong v Kinnon [2025] NZCA 117 at [37].
Former Trustees’ Right of Indemnity from the Successor Trustees: A trustee’s right of indemnity, whatever its nature, is not lost when a trustee ceases to be a trustee. Whether or not it is a purely personal right, it remains enforceable by the former trustee and, in the case of a formal insolvency of the trustee or the death of an individual trustee, it remains enforceable for the benefit of the trustee’s estate: Equity Trust (Jersey) Ltd v Halabi [2022] UKPC 36 [2023] AC 877 at [64] and [166], In re Suco Gold Pty Ltd (in liq) [1982] SASR 99, at [109], Coates v McInerney (1992) 6 ACSR 748, Dimos (trading as Leo Dimos & Associates v Dikeakos Nominees Pty Ltd [1996] FCA 590; (1997) 149 ALR 113, Rothmore Farms Pty Ltd (in provisional liquidation) v Belgravia Pty Ltd [1999] FCA 745; (1999) 2 ITELR 159, Southern Wine Corporation Ltd (in liq) v Frankland River Olive Co Ltd [2005] WASCA 236 at [30], Glazier Holdings Pty Ltd (in liq) v Australian Men’s Health Pty Ltd (in liq) [2006] NSWSC 1240, Ronori Pty Ltd v ACN 101 071 998 Pty Ltd [2008] NSWSC 246, Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344 at [21]; Pitard Consortium Pty Ltd v Les Denny Pty Ltd [2019] VSC 614 at [15], and Agusta Pty Ltd v Provident Capital Ltd [2012] NSWCA 26 at [44] and [83], Underhill & Hayton: Law of Trusts and Trustees, 19th ed, at para 81.1; Snell’s Equity, 34th ed, at para 44-004; Lewin on Trusts, 20th ed, at 17-057 and 17-058.
A successor trustee owes no fiduciary duty to a former trustee in respect of the former’s indemnity rights. The former trustee has a right of indemnity for liabilities incurred as trustee, which takes priority over beneficiaries’ interests. However, the new trustee is under no fiduciary obligation to preserve assets for the old trustee’s indemnity, so the old trustee’s only recourse is against the trust assets themselves: Naaman v Jaken Properties Australia Pty Ltd [2025] HCA 1 (High Court of Australia with a 4 to 3 majority). The outcome meant the former trustee’s claim against third parties (for knowing assistance in dissipation of trust assets) failed, since no duty was owed by the new trustee. The High Court advised that former trustees or trust creditors must rely on remedies like injunctions or court-ordered asset sales to enforce their indemnity, rather than any assumed duty by successor trustees.
Priority as between the proprietary interests of successive trustees: The proprietary interests of successive trustees in the trust assets are competing or equal. The interest of each trustee arises to protect the personal position of that trustee against the liabilities which it has incurred and for which it is liable. These are personal interests of each trustee and it is difficult to see that they can be regarded as not equal or competing, in the absence of special circumstances which would make it inequitable for an earlier appointed trustee to rely on its priority: Equity Trust (Jersey) Ltd v Halabi [2022] UKPC 36 [2023] AC 877 at [177]. In the view of the majority of Lord Briggs (with whom Lord Reed, Lady Rose and Lady Arden (at [279]), agreed) considerations of justice, fairness, equity, and common sense strongly militate in favour of the recognition between trustees of a pari passu general rule for enforcement between them of their liens over an inadequate trust fund: Equity Trust (Jersey) Ltd v Halabi [2022] UKPC 36 [2023] AC 877 at [277]. In the view of the minority Lord Richards and Sir Nicholas Patten (with whom Lord Stephens agreed) the interests of successive trustees rank as between themselves in the order of their creation, that being the date of appointment of each trustee: Equity Trust (Jersey) Ltd v Halabi [2022] UKPC 36 [2023] AC 877 at [211].
