Liquidator's Claim Succeeds: Former Trustee's Right Of Indemnity Defeats Limitation Defence Over $2.55 Million Directors' Loan

On 30 September 2026, Justice Wheatley found that the Applicants are entitled to relief in respect of a $2,551,330 directors' loan owed to the Benjamin M T Chow Family Trust. The Court rejected each limitation defence the directors raised.

Background

Sydney Subdivision was the corporate trustee of the Chow Family Trust, a trading trust. For many years, the trust invoiced and collected the professional fees the two directors earned in their engineering and medical practices. The directors drew funds from the trust to meet personal expenses. The trust's accounts recorded these drawings as an unsecured loan, which stood at $2,551,330 at 30 June 2012.

In 2015, the Commissioner issued amended assessments against the company, as trustee, of approximately $2.6 million. The company went into liquidation that year. The liquidator demanded repayment of the directors' loan in October 2015 and commenced proceedings in March 2020.

A successor trustee was appointed in 2018. The Court later joined it to the proceedings and appointed the liquidator as receiver over all of the trust's property.

The directors' defence

The directors accepted that the loan had been recorded in the accounts. They also accepted that later book entries purporting to offset it had no legal effect. They then advanced two lines of defence:

• Limitation. They argued that each advance was a simple loan, repayable immediately. On that view, the claim was statute barred under s 14 of the Limitation Act 1969 (NSW).
• Wrong plaintiff. They argued that the loan had vested in the successor trustee. On that view, any claim by the successor trustee became time-barred before it was joined in 2024.

The Court's findings

The Court found for the liquidator on every issue.

1. The claim is equitable and proprietary, not a debt claim. The liquidator was enforcing the former trustee's right of indemnity out of trust assets. Applying the High Court's recent decision in Naaman v Jaken Properties Australia Pty Ltd [2025] HCA 1, that right is an equitable proprietary interest in the trust assets. It is not a cause of action founded on contract. Section 14 therefore did not apply (see s 23 of the Limitation Act). The directors' defence, built on characterising the claim as one in debt, fell away.
2. The right of indemnity survives replacement of the trustee. The successor trustee holds the trust assets subject to the former trustee's interest. The Court also observed something important about cases where the indemnity exceeds the value of the trust assets. In that situation, those assets may no longer properly Sydney Subdivision Pty Ltd (in liq) v Chow (No 4) [2026] FCA 1435 Page 1be described as "trust property" at all. That undercut the directors' argument that the loan had vested in the new trustee.
3. In any event, the loan was repayable only on demand. The Court considered the limitation question in the alternative. There was no written agreement. The arrangement operated like a running account or line of credit, with amounts drawn and repaid year after year. It was always classified as a non-current receivable and carried no interest. Objectively, the parties intended an ongoing facility that became repayable only on demand. The liquidator's demand in October 2015 started time running, so the proceedings were brought well within time.
4. "Loans" in the accounts did not mean separate loans. The directors argued that each advance was a distinct loan with its own limitation clock. They led no evidence to identify those advances. The Court treated the facility as a single loan and declined to read significance into the plural label used in the accounts.

The Court will now hear the parties on the form of final orders and on costs.

Why this matters

This decision is directly relevant to liquidators, the ATO and other creditors of insolvent corporate trustees. It is also relevant to the directors and advisers of family and trading trusts.

• Limitation defences have limited reach. Where a liquidator enforces a former trustee's right of indemnity,limitation defences framed around debt or contract may not apply.
• Informal directors' loans may not be time-barred. Long-standing, informal director and beneficiary loan accounts in family trusts may only be repayable on demand. They should not be written off as statute barred without careful analysis.
• Receivership is a practical enforcement tool. Appointing the liquidator as receiver over trust property gives a direct route to realising trust assets in aid of the indemnity.
• The Federal Court is applying Naaman in practice. This decision confirms that the High Court's 2025 reasoning on former trustees' rights is being applied with real practical effect.

Our team

Eventus Lawyers (formerly known as SLF Lawyers) acted for the liquidator, led by Managing Partner and National Head of Litigation Rebecca Fahey. We briefed Mr Bernard Coles KC with Ms Michelle Castle of counsel. We thank counsel and our client for their trust in us throughout this long-running matter. If you are a liquidator, creditor or adviser dealing with an insolvent corporate trustee, our insolvency and commercial litigation team would be glad to help.