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22 Jun 11 Bare trustee not disqualified from indemnification out of trust assets - Bruton Holdings

The Full Court of the Federal Court has held that a trustee (Bruton) was not disqualified from indemnification by exoneration out of the assets of a trust for expenses that it incurred in successfully pursuing legal proceedings against the Commissioner after the time (28 February 2007) that it ceased to be trustee of the trust (because it went into liquidation with effect from that date), at which time it became only a bare trustee of the assets of the trust. The Court allowed Bruton’s appeal from the decision of Graham J in the Federal Court, reported as FCT v Bruton Holdings Pty Limited (in liquidation) [2010] FCA 978; (2010) 188 FCR 516.

Bruton had successfully opposed the Commissioner’s attempt to garnishee, by means of a notice under s 260-5 of Schedule 1 of the Taxation Administration Act 1953, trust funds held by Bruton’s solicitors. The issue in this appeal was whether Bruton was entitled to indemnification for its litigation costs by exoneration or recoupment out of the trust property. The question was whether Bruton’s obligations, as bare trustee, extended to opposing by litigation the Commissioner’s action in issuing a notice under s 260-5.

The Full Court held that Bruton’s proceeding was essentially a defensive action in response to the Commissioner’s impermissible attempt to garnishee the trust funds. This was sufficient to amount to an action that was necessary to protect the trust property against unauthorised appropriation. Bruton was therefore not disqualified from indemnification by exoneration out of the trust property for its costs and expenses incurred in resisting the Commissioner’s garnishee notice.

The Court also repeated remarks of the High Court to the effect that, once Bruton had gone into liquidation, the Commissioner's proper remedy was that under the regime for liquidations (s 260-45), not the garnishee regime provided by s 260-5.

Bruton Holdings Pty Limited (in liq) v FCT [2011] FCAFC 79 (Full Court of the Federal Court, Stone, Jacobson and Edmonds JJ, 17 June 2011).