Trustees Corporate Trustees Ltd & Anor v Capmark Bank Europe Plc

A trustee’s right to indemnity and lien over trust assets does not take priority over a lender’s security merely because the security was granted by the trustee in that capacity. Priority depends on the proper construction of the security instrument. A contractual limitation stating that the trustee’s liabilities extend only to trust assets ordinarily limits the trustee’s recourse exposure; it does not protect the trustee against liabilities to third parties or reserve the trustee’s lien ahead of the lender’s charge. An implied term giving such priority will not be added where it is not necessary for business efficacy, is not obvious, or conflicts with an express order of priorities.

The appellants were trustees of a Jersey-based property unit trust which held a warehouse. The respondent bank financed the acquisition and took security under a guarantee and debenture granted by the trustees. After the property became vacant, the trustees incurred substantial unoccupied property rates. The bank later enforced its security and sold the property, leaving insufficient proceeds to satisfy the secured loan and the trustees’ claimed indemnity.

David Richards J rejected the trustees’ contention that their indemnity and lien under the trust instrument ranked ahead of the bank’s security. The trustees appealed with permission. The central issue was whether the debenture, expressly or by implication, gave priority to the trustees’ indemnity and lien.

1. Appeal dismissed. The Court of Appeal upheld the order of David Richards J.
2. The trustees accepted that no general principle made a charge granted by trustees subject to their lien. Their priority therefore depended on the proper construction of the debenture.
3. Clause 17.6, read in context, limited the trustees’ liability to the bank under the debenture and protected the trustees’ personal assets and assets held for other trusts. It did not regulate the trustees’ liability to third parties, nor did it give priority to their indemnity or lien under the trust instrument.
4. “The assets of the Unit Trust” naturally meant all assets of the trust, including the charged property. Trust assets did not cease to be trust assets because the trustees had a right of indemnity over them. The words “under this Deed” in clause 17.6.2, and the structure of clauses 17.6.1 to 17.6.3, confirmed that the limitation concerned liabilities under the debenture.
5. The construction advanced by the trustees was also inconsistent with the express priority provisions in clause 11. The parties would have needed clear language to displace the receiver’s expenses and the bank’s priority under that clause. The commercial circumstances relied on by the trustees could not overcome the clear contractual wording.
6. The alternative implied-term argument failed. If priority was expressed clearly in clause 17.6, it should be enforced as an express term; if not, it could only be implied under established principles. The alleged term was not necessary for business efficacy, was not obvious, and conflicted with clause 11. The Court adopted the judge’s reasoning, including the approach stated by Lord Hoffmann in AG of Belize v Belize Telecom Ltd [2009] 1 WLR 1988, that where an instrument makes no provision for an event, the usual inference is that the express provisions continue to operate.

• Court of Appeal (Civil Division): The appeal from the Chancery Division was dismissed, and the order of David Richards J was upheld.
• High Court of Justice, Chancery Division: David Richards J rejected the trustees’ claim that their indemnity and lien ranked ahead of the bank’s security: [2010] EWHC 1605 (Ch).