A trustee, Agusta, transferred trust property, in respect of which its creditor, Provident, had lodged a writ to secure a judgment debt, to a new trustee. Before the transfer took place, the writ lapsed and the new trustee became the registered proprietor of the property. The new trustee then sought to remove the notation on the title preventing any dealings.
The creditor argued that the transfer was done with intent to defraud creditors and should be declared void. The trial judge declared that the creditor had an equitable charge over the property which it can enforce by sale if the judgment debt is not paid to it within a short period–click here for our case note on the decision at first instance.
The decision of the Court of Appeal
The Court of Appeal held that:
- By entering into the contract with Provident, Agusta became contractually bound to pay the agreed fees and thus indebted to Provident, so that Provident was entitled to maintain an action in debt against Agusta if payment was not duly made. But when it incurred the debt to Provident, Agusta was a trustee; and it acted as a trustee in incurring the debt to Provident. There is no suggestion that Agusta did not incur the debt in due exercise of trustee powers. It accordingly had a right to be indemnified out of the trust estate for the payment obligation so incurred.
- A trustee’s right thus to be indemnified out of trust assets for all debts duly and properly incurred as trustee is a right exercisable prospectively by way of exoneration or retrospectively by way of reimbursement. The right arises simply as an incident of the office of trustee and is recognised and confirmed by s 59(4) of the Trustee Act. Any attempted displacement of the statutory right of indemnity will be ineffective.
- When Agusta became trustee (whether formally or as a trustee de son tort under a constructive trust), it came to occupy, in equity, the position in relation to the land that the former trustee had originally occupied; and this was so even though Agusta did not become the registered proprietor of the land until a later time. Agusta’s right to be indemnified out of trust property for the Provident debt, along with other debts properly incurred as trustee, subsisted in relation to the land.
- The right of a trustee to be indemnified out of trust property is often described as a charge or lien, however the High Court prefers to regard it as a proprietary right constituting a beneficial interest enjoying priority over the beneficial interests of the beneficiaries. It is anomalous to refer to a person having a charge or lien over property of which the person is the owner.
- Agusta therefore had, at material times, a proprietary right to the land constituting a beneficial interest in that land commensurate with the debts it had incurred, including the Provident debt – an interest, moreover, that enjoyed priority over the interests of the trust beneficiaries.
- The consequences, as regards the trustee’s preferred beneficial interest, of a transfer of trust property by the trustee to a new trustee. Is that the original trustee’s preferred beneficial interest continues to subsist in the trust property in the new trustee’s hands.
- When there is a change of trustee with the trust assets being vested in the new trustee, the former trustee no longer has direct access to such assets, and should make the necessary claim for indemnity against the trustee who represents the trust.
- If a writ of execution is issued so as to affect trust property, equity will generally intervene to prevent sale of the property pursuant to the writ. It is well settled that such a judgment cannot be enforced by execution levied upon trust assets even though the judgment against the trustee is founded on a debt incurred by him in the capacity of trustee.
- The only exception is if the whole beneficial interest is in the judgment debtor by virtue of his lien. In the case of trust assets, that will be the case only where the balance on a final account is in favour of the trustee, so that nothing at all is due to the beneficiaries. Generally that will not be known to the creditors until the account is taken.
- As a matter of general principle, a creditor obtaining judgment against a trustee who, in the normal way, is entitled to be indemnified out of trust property for debts including the judgment debt may be restrained from enforcing the judgment by levy of execution against trust property. The trustee’s preferred beneficial interest in the trust property which comes from the right of indemnity out of that property in respect of all debts incurred would be destroyed if creditors were able to levy execution against the trust property. The unavailability of trust property to answer a writ of execution was said to be explicable on that basis.
- When execution against trust property is in contemplation, the preoccupation of equity is thus with preservation of the beneficial interest of the trustee referable to all debts the trustee has incurred and for which the trustee is entitled to be indemnified out of the trust assets. Because of the existence of that equitable interest in trust assets and the fact that seizure and sale of trust property under a writ of execution will destroy it, equity will not countenance such seizure and sale.
- Special considerations will arise if the judgment creditor seeking satisfaction through a writ of execution is the only creditor of the trustee. The trustee’s preferred beneficial interest will then arise solely from and be co-extensive with the debt owed to the single creditor. If execution against trust property in such a case extinguishes the trustee’s preferred beneficial interest, the requirements of equity will not be offended, since the absence of other debts means that there is no other basis for the existence of that interest. The fact that any surplus in the Sheriff’s hands after satisfaction of the judgment debt will pass to the trustee and become part of the trust assets means that there is not in any other way interference with beneficial interests in trust property.
- Notwithstanding the general rule the provisions of the Real Property Act mean that once the writ has been recorded, no injunction will lie at the suit of the trustee to restrain execution of the writ by sale of the land. This is because the statutory scheme based on the recording of a writ in the register proceeds on the basis that a purchaser from the Sheriff obtains, through registration of the resultant transfer, a title that is unencumbered except by estates and interests actually recorded in the register or preserved by s 42. The grant of an injunction to protect an unregistered and unregistrable interest (such as the preferred beneficial interest of a trustee) by restraining the process culminating in registration of the transfer by the Sheriff would therefore be inconsistent with the scheme of the legislation.
- This unavailability of injunctive relief will continue, however, only during the “protected period” or until effectuation (by registration of a transfer) of any sale made by the Sheriff during that period. Thereafter, the Real Property Act provisions no longer have any part to play with respect to the writ.
- Although unsecured creditors and other claimants do not have a direct claim against the trust property in respect of unsecured liabilities incurred by trustees in the administration of the trust, and cannot levy execution upon trust property they may by subrogation have a right to stand in the place of the trustee and enforce their liabilities against the trust property to the extent that the trust will be so entitled.
- The “right” of subrogation might perhaps be better viewed as a “remedy” of subrogation. That characterisation seems appropriate in a case such as the present where equity would allow creditors with an unsatisfied money judgment at law to bring proceedings in which the creditors, for their own benefit, asserted in respect of the trust property in the trustee’s hands, the beneficial interest enjoyed by the trustee by virtue of the right of indemnity.
- The trustee will be compelled to deal with the preferred beneficial interest for the benefit of the unpaid creditors and, in order to give a particular creditor the fruits of that beneficial interest, equity will appoint a receiver, thereby facilitating a sale of trust property and ensuring that the proceeds, having been brought under the control of the court, are, to the appropriate extent, put into the hands of the creditors entitled by subrogation rather than the hands of the trustee.
- The trial judge correctly proceeded on the basis that Agusta was a trustee and that, in respect of the judgment debt owed to Provident, Agusta had a right of indemnity out of trust assets that gave rise to a preferred beneficial interest in those assets.
- The trial judge had before him no basis on which it might have been found that Provident was the sole creditor of Agusta. Nor was there any suggestion that it was.
- There was accordingly no obstacle under the Real Property Act or otherwise to Agusta’s acting to protect its preferred beneficial interest by injunction directed at preventing renewed resort by Provident to the remedy of execution at law. Nor was there any obstacle to the lodging of a caveat on the title to the Kings Park land to achieve like protection.
- Therefore the alienation did not, in reality, eliminate a method of obtaining satisfaction that would have been available to Provident had Agusta remained the registered proprietor. That method of recovery would not have been available to Provident, over opposition by Agusta, even if Agusta had remained the registered proprietor.
- Provident and other trust creditors were entitled by subrogation to the benefit of Agusta’s preferred beneficial interest. Equitable execution by way of the appointment of a receiver and sale of trust assets held by Agusta would have been available for the benefit of trust creditors. After the trust assets had passed into the hands of Riva as successor trustee, Agusta’s preferred beneficial interest (and the rights accruing to Agusta’s creditors by subrogation) continued to subsist in those assets and the same remedy could have been obtained in relation to trust property in Riva’s hands.