It is a well known principle that a Trustee is entitled to be indemnified for its costs by way of a right of indemnity out of trust assets.  However, the Trustee’s conduct may mean that the right of indemnity is not always available.

In the recent Federal Court decision of Frisken (Trustee) v E K Recruitment Pty Limited (in liq), in the matter of E K Recruitment Pty Ltd (in liq) (Costs) [2026] FCA 852 (30 June 2026), a Trustee was ordered to pay the other parties’ costs of a proceeding and he was not entitled to be indemnified for his own costs out of the trust fund.

There are several relevant facts which can be summarised and which culminated in the decision on costs:

• The original proceedings (Frisken (Trustee) v E K Recruitment Pty Ltd (in liq), in the matter of E K Recruitment Pty Ltd (in liq) [2026] FCA 223) were commenced by Mr Frisken in his capacity as trustee of the EK Recruitment Creditors Trust (the Trust). A range of orders were sought in the original proceedings including substantial variations to the DOCA and the Trust Deed, directions as to approval of remuneration, convening a meeting of creditors, judicial advice as to the proof of debt of the Deputy Commissioner of Taxation (DCT) and an indemnity for his costs from the trust fund.  Ultimately, the application was dismissed;
• Mr Frisken was voluntary administrator of E K Recruitment Pty Ltd (the Company) and then deed administrator under a Deed of Company Arrangement (DOCA) for the period 15 May 2020 to 23 June 2020. Between July 2020 to January 2022, monthly contributions were made by the Company to Mr Frisken under the DOCA;
• On 27 November 2023, Mr Ghedia was appointed voluntary administrator and subsequently Liquidator of the Company. Mr Frisken was requested by Mr Ghedia to convene a meeting of beneficiaries of the Trust to terminate the Trust and paying the funds held by Mr Frisken to the Company;
• Several interested parties were granted leave to appear in the original proceedings being the DCT, three guarantors and the solicitors who drafted the DOCA and the Trust Deed. The Court formed the view that the DCT and the guarantors should have been joined as parties as there was significant relief sought which would affect their rights or liabilities;
• Mr Frisken abandoned his application for advice as to his own costs being payable from the trust fund (noting that his own costs were $115,267.02) but maintained his application that any costs orders made against him be paid out of the trust fund or alternatively by the solicitors (who had drafted the documents the subject of the original proceedings).

In the judgment, Justice Jackman raised several important factors concerning the right of indemnity:

• A person who is given leave to be heard neither receives nor pays costs: see Morelli (Liquidator), in the matter of FW Projects Pty Ltd (in liq) v White Hills Pty Ltd (No 2)[2024] FCA 955 at [19]–[21] (Halley J);
• However, Mr Frisken’s conduct in the course of the original proceedings increased costs unnecessarily by abandoning claims at the final hearing (and preparing written submissions on those issues) and therefore, he did not conduct them efficiently. As a result of this conduct, the beneficiaries of the Trust, including the DCT, would receive a reduced distribution and the trust fund would be depleted if Mr Frisken was entitled to be indemnified for any adverse costs orders against him;
• Importantly, it is within the broad discretion of the Court under s 43 of the Federal Court of Australia Act 1976 to determine that a trustee should bear a liability for costs personally rather than being indemnified out of the trust fund.  Therefore, the Court found that a substantial proportion of Mr Frisken’s liability for the Company’s costs was not properly incurred;
• Notwithstanding they were third parties to the original proceedings, the interested parties persuaded the Court to make third party lump sum costs orders based on comprehensive affidavit material by solicitors acting for those parties. Consequently, Mr Frisken was ordered to pay the DCT’s costs in the lump sum of $43,721.82 and the guarantors’ costs in the lump sum of $ 69,314.03.  Mr Frisken was to pay his own costs, so he was out of pocket personally for costs of almost $230,000.00.

This case is an important reminder to insolvency practitioners (and others who act as trustees of a Trust) to be mindful of conduct throughout court proceedings, the orders which are being sought, what claims are being pursued and whether there is sufficient evidence to substantiate certain claims by the final hearing.  A Trustee should not simply assume that as Trustee of a Trust, certain costs, expenses and liabilities which are incurred in acting as Trustee will be recoverable and that there will be a right of indemnity out of trust assets.  The exposure could be significant and as this case demonstrates, the adverse costs orders which resulted from the way in which proceedings were conducted almost exceeded his own costs personally.