When a company goes into liquidation, the liquidator's job is generally to identify and realise the company's assets and distribute the proceeds to creditors.

But how does the liquidator do this if the company in liquidation is a trustee, and the assets it holds belong to the trust?

A "trading trust structure" is one in which the trustee carries on business for a trust. Usually, the trustee is a limited liability company. The trustee company carries on the business, enters into contracts, employs staff and incurs liabilities, but holds the business assets on trust for the beneficiaries. Often, the company has few, if any, assets of its own.

If the company becomes insolvent, the liquidator needs to look beyond the company's balance sheet to understand what assets may be available to creditors. When a corporate trustee goes into liquidation, the trust assets do not automatically become available to the company's creditors. However, the liquidator may be able to access those assets through the trustee's right of indemnity for liabilities properly incurred on behalf of the trust. The extent of that right, and any competing claims to the assets, will determine what can ultimately be recovered.

The distinction between company assets and trust assets

A trust is not its own legal entity and therefore cannot legally own assets. The trustee company owns the trust assets in its capacity as trustee, but those assets are subject to the rights of the beneficiaries and the terms of the trust.

The appointment of a liquidator to the trustee company does not mean that the trust assets automatically become assets available for distribution to all of the company's creditors. Equally, the trust assets are not automatically protected from the company's liquidation simply because they are held on trust.

The important question is whether the trustee company (and by extension, the liquidator) has a right to use those assets to meet the liabilities the company incurred in operating the business. While that may seem like a straightforward question, the answer can be complex.

How does a trustee's right of indemnity work?

Under section 81 of the Trusts Act 2019 (Act), a trustee who incurs expenses or liabilities while acting reasonably on behalf of a trust is generally entitled to meet those expenses or liabilities from trust property. This is known as the trustee's right of indemnity.

The trustee's indemnity is supported by an equitable lien over the trust assets. This gives the trustee a proprietary interest in the trust assets to secure its indemnity, notwithstanding that it does not enjoy beneficial ownership of those assets.  It is this proprietary interest that allows a liquidator to access trust property. The lien generally ranks ahead of the beneficiaries' interests, but behind registered security interests.  

For a trading trust, the indemnity (and the resulting lien) is often the trustee company's most valuable asset.

Can the liquidator recover assets held in a trading trust?

A liquidator will need to establish the nature and extent of the trustee company's indemnity before determining what assets are available to meet creditor claims. That requires an examination of the trust deed, the liabilities incurred by the company and the circumstances in which those liabilities arose.

Not every liability incurred by a trustee company will necessarily be covered by the trustee indemnity and therefore recoverable from trust assets.  For example, a liability incurred outside the trustee's powers, or in circumstances involving a breach of trust, may give rise to questions about whether the trustee is entitled to an indemnity. The answer will depend on the nature of the liability and the trust terms. In certain circumstances, the Act permits a trustee to be indemnified for liabilities arising from a breach of trust, subject to statutory requirements concerning beneficiary consent or court approval. The nature of the breach and the circumstances in which the liability arose therefore need to be examined carefully.

A further complication arises where the trustee company has acted for more than one trust, or has incurred liabilities in its own capacity as well as in its capacity as trustee. In those circumstances, identifying which assets support which liabilities becomes particularly important.

Can the liquidator pursue the beneficiaries personally?

Where the trust assets are insufficient to meet the trustee's liabilities, a liquidator may be able to claim against the beneficiaries personally.

In certain circumstances, a trustee has a right to be indemnified by the beneficiaries for liabilities properly incurred in administering the trust. This generally requires the beneficiaries to have full legal capacity, an absolute entitlement to the trust property, an expectation of benefiting from the trust, and the ability to terminate the trust at any time.

This does not mean that beneficiaries of a discretionary family trust will ordinarily be personally liable for the trustee's debts.  Discretionary beneficiaries generally do not have the absolute entitlement required for such a claim. However, the position may be different where a beneficiary has requested that the trustee incur the liability.

For a liquidator of a corporate trustee, this is another potential source of recovery worth considering, particularly where the trust assets are insufficient to meet creditor claims.

What recourse do creditors have?

Creditors may have rights against trust assets independently of the liquidator's enforcement of the trustee's indemnity. Section 86 of the Act provides a statutory right for creditors to claim against trust property in certain circumstances. Importantly, a creditor who has given value, acted in good faith and whose transaction benefited the trust may be able to recover from trust assets even where the trustee's own right of indemnity has been lost or reduced because of a breach of trust.

What happens if the insolvent corporate trustee is removed?

The appointment of a liquidator does not itself remove the company as trustee. Unless the trust deed provides otherwise or the company is subsequently removed, the company remains trustee, with the liquidator assuming control of its affairs.

A liquidation may lead to the trustee company being replaced as trustee, whether under the trust deed or by court order. A person with the power to remove a trustee may remove the trustee by giving written notice under s 105 of the Act. Sometimes, the person with the power of removal is the trustee, and they may not act to remove themselves.  In that instance, ss 112 and 114 of the Act enable the Court to order the trustee's removal.

Replacing the trustee does not extinguish the former trustee's right of indemnity for liabilities properly incurred during its trusteeship. That right may continue to be enforceable against trust assets, notwithstanding the appointment of a replacement trustee.

This can create tension between a new trustee seeking to preserve trust property for the beneficiaries and a liquidator seeking to realise the former trustee's indemnity for creditors.

The fact that the former trustee retains its indemnity does not mean the liquidator can afford to wait. In the Australian decision of Naaman v Jaken Properties Australia Pty Ltd [2025] HCA 1, the High Court held that a replacement trustee does not owe a fiduciary duty to the former trustee to protect its indemnity.  While the former trustee's rights remain enforceable, a liquidator may need to take steps to protect the trust assets, including seeking an injunction, the appointment of a receiver or an order for sale.

What should a liquidator of a trustee company look for?

Where a liquidator is appointed to a corporate trustee, an early review of the trust structure is imperative. The starting point should be to identify the trusts for which the company acted, obtain the relevant trust deeds and amendments, and establish which assets and liabilities relate to each trust.

It is also important to consider whether the company properly exercised its trustee powers, whether there have been distributions or transfers of assets before liquidation, and whether the company's indemnity may have been affected by any breaches of trust.

The liquidator needs to identify the position of secured creditors, including the scope of any security over the trustee's interests or trust assets.

These issues may determine whether there is any meaningful recovery for creditors, even where the company appears to hold substantial assets.

A trustee company's liquidation raises questions that do not usually arise in an ordinary corporate insolvency. The liquidator is dealing with a company that may have substantial legal ownership of assets but little beneficial ownership, and whose ability to meet creditor claims depends on rights arising under trust law.

Even where the liquidator can recover from trust assets under the indemnity, questions then arise as to how those recoveries are distributed.  In particular, the position of trust creditors and the company's other creditors may differ, and the application of statutory creditor priorities can be complex. This will be the subject of another article by this author.

For insolvency practitioners, understanding the trustee's indemnity and the relationship between the company and the trust is the key to identifying what can be recovered.

How we can help

Trading trust insolvencies can raise difficult questions about the rights of trustees, creditors and beneficiaries, particularly where the trustee company has few assets of its own. The insolvency of a corporate trustee can also raise questions about the personal liability of its directors, which we discuss in our article on the limits of limited liability for directors of trading trust companies.

We advise insolvency practitioners, trustees and creditors on these issues, including the enforcement of trustee indemnities, competing claims to trust assets and disputes involving corporate trustees.

If you are dealing with the insolvency of a trading trust or would like to discuss any of the issues raised in this article, please feel free to get in touch.