In Condon (Trustee), in the matter of Rayhill
(Bankrupt) v Truthful Endeavour Pty Ltd  FCA 7, Condon,
as trustee of the bankrupt estate of Colleen Ann Rayhill (known as
Colleen Lewis), sought a declaration that various payments made in
respect of a property (the Property) rendered Lewis a creditor of
the Kenthurst Investment Trust (KI Trust).
Appinville Pty Ltd (Appinville) purchased the Property
in its capacity as trustee of the KI Trust. Lewis entered into an
agreement with Appinville whereby she agreed to pay any interest or
fees incurred by Appinville to service any loans in respect of the
Interest payments on a loan taken out by Appinville were made by
a company Lewis controlled.
In 2005, Lewis became trustee of the KI Trust. Thereafter, the
interest payments on the Appinville loan were made by another one
of the companies controlled by Lewis.
The Property was subsequently sold and Condon contended that as
the interest payments were made by Lewis, the whole of the sale
proceeds should be transferred to him as Lewis' trustee in
The Court found that the proceeds of sale were subject to an
equitable lien in favour of Condon to secure Lewis' right to
indemnity from the KI Trust.
The Court accepted that the money in the bank accounts of the
companies controlled by Lewis was beneficially owned by her. The
accounts functioned as a convenient vehicle through which Lewis
could deal with her own money and the companies did not incur or
discharge any liability for the KI Trust.
The Court restated the principle that a trustee is personally
liable for debts and liabilities incurred in its capacity as
trustee, but has a right of indemnity out of the trust assets. The
payments made by the companies after Lewis became trustee of the KI
Trust were at Lewis' direction in order to discharge her
liability to Appinville, being a liability she incurred for the
purposes of the KI Trust. Accordingly, Lewis had a right to be
indemnified out of the trust assets.
Further, the costs and expenses Lewis incurred while not acting
as trustee meant that she was a creditor of the KI Trust. By
subrogation to the rights of the trustee, Lewis also had the
benefit of a charge over the trust assets in respect of those costs
Under s 58 of the Bankruptcy Act 1966 (Cth), the
property of Lewis vested in Condon (her trustee in bankruptcy) when
she became bankrupt. That property included the right of indemnity
and the right of subrogation to the trustee's right of
indemnity against the trust assets. Those rights take priority over
those of the beneficiaries of the KI Trust.
This decision confirms that where payments are made by an
undischarged bankrupt (in their capacity as trustee of a trust),
prior to their bankruptcy and in order to satisfy personal
liabilities, the bankrupt will be entitled to be indemnified out of
the trust assets and that right will be secured by an equitable
lien over those assets. This right of indemnity and the lien will
then vest in the trustee in bankruptcy upon the making of a
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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