To all Trustees: Warning, danger ahead!!

Case report: Naaman v Jaken Properties Australia Ltd [2025] HCA 1

The High Court in Naaman v Jaken Properties Australia Ltd [2025] HCA 1 has issued a salient warning to trustees who resign or are replaced '€“ take steps to protect and enforce your right of indemnity before trust assets are depleted. The High Court in majority held that although a former trustee is entitled to be indemnified out of the trust assets, this does not give rise to a fiduciary obligation between a former and successor trustee. The denial of the existence of the putative fiduciary obligation in this case removed the basis on which the primary judge granted equitable remedies against third parties who were engaged in a "dishonest and fraudulent design" to strip a trust of assets that might otherwise have been available to satisfy the former trustee of its right of exoneration.

Appeal Ground

The appeal before the High Court turned on the following question of equitable principle: "'€¦ whether a successor trustee owes a fiduciary duty to a former trustee re the former trustee's entitlement to indemnification out of trust assets or the former trustee's commensurate beneficial interest in the trust assets".

Background

It is necessary to state the backgrounds facts in some detail. The appellant, Mr Naaman, was a judgment creditor of Jaken Property Group Pty Ltd ("JPG"), the former trustee of the Sly Fox Family Trust ("the Trust"). In June 2005, JPG was appointed trustee of the Trust under a discretionary trust deed ("Trust Deed"). ' The Trust Deed conferred broad powers on the trustee to distribute or accumulate income and pay capital to the beneficiaries, any relative or related company. The second respondent, Mr Peter Sleiman, was the sole director and shareholder of JPG until at least 11 August 2006. ' ' Mr Slieman was also the Specified Beneficiary and Appointer of the Trust. In 2005 and 2006, JPG acquired properties:

• Two apartments in Melbourne for $640,000;
• Land in Kings Cross, Sydney for $8.9 million; and
• Land in Granville, NSW for $750,000.

On 6 November 2006, Mr Naaman issued proceedings in the Supreme Court of New South Wales against JPG. ' He claimed he was entitled to $2 million with interest and costs for the unpaid amount of a purchase price pursuant to a share sale agreement ("Guarantee Agreement"). On 12 January 2007, Jaken Properties Australia Pty Ltd ("Jaken") was registered with Mr Tony Sleiman as its sole director. ' ' Mr Tony Sleiman, the third respondent, is the brother of Peter Sleiman and, for a time, was Jaken's sole director.'  There was an unchallenged finding of the primary judge that, at all relevant times, Peter Slieman was the de facto and shadow director of Jaken and one of its alter egos. On 13 February 2007, Jaken replaced JPG as trustee of the Trust through a deed of appointment. ' Legal title of the Victorian Properties, Kings Cross Property and Granville Land was subsequently transferred to Jaken as trustee of the Trust. In March 2007, Mr Naaman lodged caveats over the Kings Cross Property and Granville Land in relation to his claim under the Guarantee Agreement. In July 2009, Mr Naaman commenced separate proceedings against Jaken and Peter Sleiman. On 7 October 2011, JPG was deregistered.' '  JPG was reinstated and joined the proceedings on 14 March 2013. On 3 March 2014, judgment was entered in favour of Mr Naaman against JPG for $2 million plus interest.'  The balance of the proceedings against Peter Slieman and Jaken was adjourned. On 12 March 2014, the Liquidator lodged a caveat over the Kings Cross Property in respect of the trustee's right of indemnity. The judgment against JPG was set aside by consent.'  The proceeding was reheard and dismissed in December 2014. Between 2012 and 2014, Jaken entered into various transactions, including:

• the transfer of the Victorian and Granville properties to PSJK Holdings Pty Ltd, the sixth respondent and Superior Family Investments Pty Ltd, the seventh respondent respectively, entities controlled by Peter's wife, Samantha Slieman (who was not a party) for no consideration; and
• the transfer of $3.6 million to Powerhouse Corporation Pty Ltd, the seventh respondent that had the economic effect of reducing the equity in the Kings Cross Property available to Jaken's unsecured creditors.

In effect, these transactions dissipated the Trust assets to put them beyond JPG's reach. An appeal by Mr Naaman was allowed in part with the 2009 Proceedings being remitted to the Equity Division of the Supreme Court for determination of the quantification of damages. On 25 February 2016, judgment was entered for Mr Naaman against JPG for $3.4 million ("Judgment Debt") and it was declared that: "[JPG] is entitled as against [Jaken] and generally, to be indemnified out of the assets of [the Trust] for liabilities incurred by it in its capacity as trustee of [the Trust], including in respect of [the Judgment Debt]. ... [Mr Naaman] is subrogated to the rights of [JPG] for its entitlement to be indemnified from the assets of [the Trust] in respect of the judgment to be entered in these proceedings". On 23 January 2019, Jaken filed a summons seeking removal of the caveats on the Kings Cross Property. ' ' Mr Naaman brought a cross-claim seeking to enforce the Judgment Debt.'  ' Mr Naaman argued that the transactions entered by Jaken were of a "dishonest and fraudulent design" and constituted a breach of fiduciary duty owed by Jaken to JPG.' '  Mr Naaman made claims for equitable compensation against Peter and Tony Sleiman, as well as the transferees of the Trust property for their knowing receipt.

Procedural history

First instance

At first instance, the Kunc J in the Supreme Court of NSW[1] found that Jaken, as successor trustee, owed a fiduciary duty to JPG, as former trustee, "not to deal with the trust assets so as to destroy, diminish or jeopardise the former trustee's right to indemnification". The judge held that the third parties knowingly assisted and knowingly received property from Jaken in the dishonest and fraudulent breach of its fiduciary duties.'  ' ' This finding formed the basis on which the judge held the third parties to be amenable to orders for equitable compensation and to account

Appeal to the NSW Court of Appeal

The NSW Court of Appeal[2] majority overturned the primary judge's finding of a fiduciary obligation. ' Leeming JA and Kirk JA held that a successor trustee does not owe a fiduciary duty to a former trustee in respect of the former trustee's entitlement to indemnification out of the Trust assets or the former trustee's commensurate beneficial interest. In his dissenting judgment, Bell CJ upheld the primary judge's ruling. His Honour found that "at the latest", a fiduciary obligation arises when the successor trustee becomes aware of the former trustee's claim to indemnification. The denial of the existence of a fiduciary obligation removed the basis for the equitable remedies against the third parties.

High Court

The High Court by majority (4/3) upheld the Court of Appeal decision. Justices Gageler CJ, Gleeson, Jagot and Beech-Jones found that the nature of a trustee's entitlement to indemnification out of trust assets is "an entitlement to have the trust assets applied for the purpose of recouping expenditure or exonerating liability properly incurred by the trustee". Their honours stated: "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 stated that 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" and rejected that a fiduciary relationship should arise by reason that a person holds trust property in which another has an equitable proprietary interest or because the person knows the other person claims to have such an interest in it. The majority opined that a former trustee's equitable proprietary interest arises from and is commensurate with the continuing ability 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. That order, however, would not enforce any pre-existing obligation on the part of the successor trustee. 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, the majority opined 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.

Dissenting judgment

In a dissenting judgment, Justices Gordon, Edelman and Steward found that a fiduciary relationship existed between JPG and Jaken. Their honours opined that the "starting point" is recognising that the former trustee has an enduring right to be indemnified out of the trust property, which gives rise to equitable proprietary rights in the trust estate.'  Accordingly, Jaken was obliged to prioritise JPG's right to indemnification over the claims of the cestui que trust. Their honours determined that that the successor trustee is under an obligation not to deal with the trust estate so as intentionally to destroy, diminish or jeopardise the former trustee's entitlement to be indemnified from it. That obligation arises because the relationship between the successor trustee and the former trustee is one by which the successor trustee assumes a responsibility to the former trustee as would reasonably entitle the former trustee to expect that the successor trustee will 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 interest. It is an obligation not to allow the successor 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. ' That conflict principle is the irreducible core of the fiduciary obligation. The minority considered the fiduciary nature of the obligation was reinforced by reason that the former trustee's right of exoneration out of the trust assets for the expenses or liabilities incurred by the trustee takes priority over the claims of beneficiaries.

Take Aways

This judgement has significant ramifications for practitioners who are appointed to insolvent trustees. Whilst equity provides remedies for a trustee to protect and enforce its equitable charge or lien against trust assets, it seems those remedies will be of little utility if the trust assets are disposed of or depleted by the successor trustee by bona fide or dishonest means. It is not clear whether s172 of the Property Law Act 1958 (Vic) (prohibiting the alienation of property to defeat creditor claims) can provide any assistance given that a former trustee is not a creditor of the successor trustee. What this means is that a former trustee will have to act swiftly to protect its right of indemnity in trust assets. ' ' Of course, this may be impractical or improbable if there is a dishonest or nefarious intent in the minds of those who control the trustee entities. [1] [2022] NSWSC 517 [2] [2024] NSWCA 265