Provident Capital v Agusta [2011] NSWSC 258

A former trustee transferred trust property, in respect of which its creditor 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. 

Section 37A of the Conveyancing Act 1919 (NSW) provides that property transferred with intent to defraud creditors is voidable at the instance of any person prejudiced by it.

The court examined the following basic principles concerning the rights and liabilities of trustees in dealing with third parties:

  1. A trustee is personally liable for debts and liabilities incurred in its capacity as trustee;
  2. However, the trustee has a right of indemnity out of the trust assets for expenses or liabilities incurred by the trustee;
  3. This right of indemnity is secured by an equitable lien over the trust assets, which arises by operation of law and confers a proprietary interest, in the nature of a security interest, in the trust assets, and takes priority over the claims of beneficiaries;
  4. This equitable lien extends to all of the trust assets, save only those that are specifically excluded by the trust instrument;
  5. The security is enforceable by the trustee only by judicial sale or appointment of a receiver, and not by foreclosure or by sale out of Court;
  6. The right of indemnity accrues at the time the obligation is incurred and is not subsequently lost by cessation of office, whether by retirement or removal;
  7. Upon bankruptcy or liquidation of a trustee, its right of indemnity vests in its trustee in bankruptcy or liquidator;
  8. 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 perhaps in the exceptional case of a bona fide purchaser for value without notice;
  9. A trustee is entitled to retain possession of trust property against a beneficiary until its indemnity is exercised.

The Torrens system of land in New South Wales does not permit trust interests to be recorded in the Register (section 82 of the Real Property Act 1900 (NSW)). The Real Property Act does permit trust instruments to be lodged and if lodged, the Registrar-General is required to record in the Register a caveat. In the absence of the trust instrument being lodged, the fact that the registered proprietor holds the land as trustee is relevant only as between himself and the trust but not as between himself and third parties. 

It follows from the above principles that:

  1. The former trustee incurred a debt in the course of acting as trustee of the trust;
  2. The former trustee’s registration as owner of the property did not require any notation as “trustee”, and it was, as trustee, entitled to be registered as the owner of the property without lodging the trust instrument; and 
  3. If the former trustee was validly appointed as trustee, it was entitled to an indemnity out of trust assets for the judgment debt owed to the creditor.
    Intent to defraud in section 37A is interpreted liberally to mean “delay, hinder or otherwise defraud”. The court found such intent by the former trustee because at the time of transfer, it was well aware that the creditor was seeking to enforce its judgment debt and efforts were made to block the sheriff’s attempts to sell the property and when the writ expired, it was transferred without any arrangement with the new trustee for indemnification out of trust assets of the debt or for its payment by the new trustee. The new trustee had no intention of accepting that the debt should be paid out of trust assets. The creditor could not execute a writ and was thereby prejudiced by the transfer.

The court held that it can achieve the effect of avoiding the transfer by such measures as seem appropriate. Here the register cannot be “rectified” because that would reinstate the former trustee as the registered proprietor of the property when it is not. The court declared that the creditor has 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. 

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