Case: Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360
Outcome: cited
right of indemnity Carringbush enjoyed out of trust assets in respect of liabilities incurred in performing the trust confers upon the trustee a "beneficial interest" in the trust assets: Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 367 per Stephen, Mason, Aickin and Wilson JJ. However, the right of indemnity Carringbush enjoyed was in any meaningful sense, illusory as the trust fund consisted of significant accumulated losses ultimately rendering the trust in terms of any activities, dormant. Mr Clark was not prepared to make a contribution to the trust fund that would be immediately susceptible to the former trustee's indemnity claim and thus there would not have been any future contribution in respect of which the liability of the original trust estate to the former trustee became altered. Whilst the deed purported to extinguish the beneficial interest of the trustee by discharging or extinguishing the underlying right of indemnity and thus alter an aspect of the beneficial interests in the trust assets, the measure of that right was, in all practical senses, valueless having regard to the state of the trust fund. The Commissioner contends that the right of indemnity as it subsisted in the trustee prior to extinguishment meant that the trust property was valueless to the unitholders and the extinguishment changed that "state of affairs" by enhancing the value of the assets from the perspective of the unitholders and freeing the trust estate (including future contributions) from any claim. Thus, the trust property was fundamentally altered. The trustee of the trust may be replaced. The second break in continuity is said to arise out of the discharge of the trustee's right of indemnity on the footing that the discharge altered the trustee's interest in the trust estate. The trustee's right of indemnity constitutes a beneficial interest in the trust assets: Octavo Investments Pty Ltd v Knight (supra at [107] of these reasons). The right of indemnity continues notwithstanding the trustee's retirement from office and creditors of the trustee are entitled to be subrogated to the trustee's right of indemnity. The new trustee takes the trust property subject to the right of indemnity of its predecessor in office. The right of indemnity is consistent with the right of reimbursement conferred by s 59(4) of the Trustees Act 1925 (NSW) which applied to the CU Trust. The Commissioner says that the right of indemnity conferred as a matter of law is not capable of being excluded from the trust instrument: Kemtron Industries Pty Ltd v Commissioner of Stamp Duties (Qld) [1984] 1 QdR 576 at p 585. The Commissioner contends that the waiver of the right of indemnity was not brought about by any authorised amendment of the Trust Deed. Two things are said to flow from this. Firstly, the waiver of the former trustee's right of indemnity brought about a material change in the rights and obligations attaching to the trust property which was inconsistent with the continuity of the trust estate for tax purposes. Secondly, the release of the former trustee's right of indemnity is properly understood as an agreement which gave rise to a new trust in the same terms as the CU Trust absent the term as to indemnity and thus a new trust was brought into existence for the purposes of the general law.