Trustee’s Right of Indemnity and Creditor’s Right of Subrogation

Sustainability and MaterialityIn a recent Federal Court case of The Bankrupt Estate of Colleen Anne Rayhill v Truthful Endeavour Pty Limited– the Court clarifies whether the Bankrupt is a Creditor of a Trust by reason of payments by or on behalf of the Bankrupt in respect of Trust Property.

The Bankrupt had set a Company(a Deregistered Company) bank account where by the money deposited by the Bankrupt and the money taken out of that account was money used to meet the Bankrupt’s liabilities. The Bankrupt agreed, with the Trustee of a Trust which owned a property, to be liable to the Trustee for the payment of all interest and fees in respect of the Trust Property.

Consistent with that agreement, it was inferred that the Bankrupt caused the payments to be made from the Company account, on account of her own personal liabilities to the Trustee of the Trust. For this reason, the Court considered that the Company Bank Account was a convenient vehicle by which the Bankrupt dealt with money that was her own. As such, payments made from that Company bank account were not payments of the Company, they were payments from the Bankrupt. More to the point that the Bankrupt alone incurred and discharged liabilities for the Trust. The Bankrupt’s liability in this regard was personal as are her associated rights against the Trust.

Accordingly, it cannot be said that the Deregistered Company was a Creditor of the Trust. The Company did not own any of the money in the Company’s bank account. The Bankrupt owned the money. The Company did not make payments in relation to the Trust property, as such the Company did not accrue any rights as against the Trust, the Bankrupt did.

It follows that the Bankrupt is a Creditor of the Trust in respect of all the payments made out of the Company’s bank account in relation to the Trust property. The Court ordered that the proceeds of the sale of the Trust property are subject to an equitable charge in favour of the Trustee of the Bankrupt, to secure repayment to the applicant of the debt due from the Trust to the Bankrupt.