Trusts and Disclosure - by Richard Dew - Ten Old Square by Ten Old Square

Trusts and Disclosure Richard Dew

Ten Old Square This article explores the principles upon which disclosure of trust documents can be obtained, with particular reference to recent cases involving claims by spouses of beneficiaries. In trusts, information—meaning documents—is key. Knowing the terms of the trust, the assets held by it and the means by which the trustees go about their business will inform those interested as to their likely entitlement. It will also form the basis of any attack upon the trust or the trustees, whether by disgruntled beneficiaries or interested third parties. Obtaining documents is therefore a vital battleground. Schmidt v Rosewood1 has moved that battleground to the area of discretion. That has changed the nature of the contest but done nothing to make it less contentious or difficult. This is particularly so in matrimonial litigation. Where one spouse (usually the wife) claims that the other (usually the husband) has stashed the matrimonial assets in an offshore trust, over which he may exercise actual or de facto control, it will be vital for her legal team to obtain details of the assets, of the trust documentation and of the manner in which the trustees have exercised their discretion in the past. Equally, the husband, and possibly other beneficiaries, may well be prejudiced by what is an attack by a third party against the trust itself and so wholly opposed to assisting. Trustees frequently find themselves in the middle of this battleground, damned if they do and damned if they don’t. Revealing the information may only encourage the attacker and provide ammunition, leading to protests from other beneficiaries (including husbands). Not providing it may give rise to equally trenchant criticism. In the matrimonial context, criticism can take the shape of adverse orders, including orders against assets located in England and Wales.

Trustees and beneficiaries Proprietary right Together all the beneficiaries are entitled to all of the assets belonging to the trust. Prima facie, that includes all documents that belong to the trust or to the trustees in their position as such. That this is the starting point is frequently overlooked in the criticism of the decision in Re Londonderry’s Settlement,2 a decision which is itself based in the earlier case of O’Rourke v Darbishire.3 The decision in O’Rourke involved a claim by an individual who, through various rather spurious allegations, claimed to be absolutely entitled to the estate of Sir Joseph Whitworth. On that basis he sought production of various documents, which was resisted. In the course of his judgment Lord Wrenbury said4:

* Richard Dew is a barrister at Ten Old Square, Lincoln’s Inn. He practises across the range of Chancery practice but particularly trusts and estates, both contentious and non-contentious including tax planning (principally capital taxation), Wills, family provision and the administration of estates. 1 Schmidt v Rosewood [2003] UKPC 26; [2003] 2 A.C. 709. 2 Re Londonderry’s Settlement [1965] Ch. 918; [1965] 2 W.L.R. 229 CA. 3 O’Rourke v Darbishire [1920] A.C. 581 HL. 4 O’Rourke [1920] A.C. 581 HL at 620.

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“If the plaintiff is right in saying that he is a beneficiary, and if the documents are documents belonging to the executors as executors, he has a right to access to the documents which he desires to inspect upon what has been called in the judgments in this case a proprietary right. The beneficiary is entitled to see all trust documents because they are trust documents and because he is a beneficiary. They are in this sense his own. Action or no action, he is entitled to access to them. This has nothing to do with discovery. The right to discovery is a right to see someone else’s documents. The proprietary right is a right to access to documents which are your own. No question of professional privilege arises in such a case. Documents containing professional advice taken by the executors as trustees contain advice taken by trustees for their cestui que trust, and the beneficiaries are entitled to see them because they are beneficiaries.” This is not a controversial statement. The residuary beneficiaries of the estate have a right to see the documents belonging to the estate because they are the estate’s documents and because together they own the whole estate. In Schmidt Lord Walker said, with reference to the decision5: “If Mr. O’Rourke was right in his claim … the grant of probate … should have been revoked and Mr. O’Rourke … would have been entitled to the whole of the estate, including any document which formed part of it.” The difficulty in O’Rourke was that the claimant’s entitlement was actually in issue in the proceedings. Thus, he could not assert a proprietary right and the other basis for his application were dismissed. This difficulty did not arise in the recent New Zealand decision in Re Maguire6 in which the residuary beneficiaries sought certain documents from the executors regarding the administration of the estate and rights (regarding properties passing by survivorship) arising before death. The judge was wrong to consider that his decision was a matter of discretion or that he could refuse that request. The documents belonged to the beneficiaries and they were entitled to them. The decision, to refuse to order disclosure to the beneficiaries, is wrong.

Re Londonderry’s Settlement The mistake in Re Londonderry’s Settlement was to take the concept of proprietary rights further. Where the person seeking the documents is only one of a number of beneficiaries then he has no right per se to all of the documents. The question is only what documents he is entitled to see in his status as a beneficiary. At that point various competing factors come into play. In order to enforce the trusts and ensure proper administration a beneficiary should be able to see trust accounts and be informed as to how the trust is being administered. Otherwise the trustee’s “irreducible core of obligations”7 will not be enforced. In many ways, these rights can be described as proprietary because they arise from the beneficiary’s rights as a beneficiary. A competing consideration is that a trustee is entitled to decline to give reasons for the exercise of the discretions conferred upon him by the settlor and in many instances disclosure of documents (such as letters of wishes and correspondence with beneficiaries) may reveal that or give a flavour of it. Since the discretions are themselves integral to the powers conferred by the trust the courts would undermine the trust were they to give an automatic right to the production of such documents.

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Schmidt [2003] UKPC 26; [2003] 2 A.C. 709 at [46]. Re Maguire (2010) 13 ITELR 139. From Armitage v Nurse [1998] Ch. 241; [1997] 3 W.L.R. 1046 CA (Civ Div). [2011] P.C.B, Issue 5 © 2011 Thomson Reuters (Professional) UK Limited and Contributors

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Re Londonderry’s Settlement identified various categories of documents which should be revealed, whilst refusing to make available others. The flaw in the decision was to accept (based upon O’Rourke) that there were some documents to which an individual beneficiary had a proprietary right (defined confusingly and circuitously as “trust documents”) and those which he was not.

Schmidt v Rosewood The substance of the decision in Schmidt is to re-state that the courts have a general discretion in considering whether or not to disclose trust documents8: “… the more principled and correct approach is to regard the right to seek disclosure of trust documents as one aspect of the court’s inherent jurisdiction to supervise, and if necessary to intervene in, the administration of trusts”. The result is that no discretionary beneficiary has an absolute right to the disclosure of any document9: “However, the recent cases also confirm (as had been stated as long ago as In Re Cowin 33 Ch D 179 in 1886) that no beneficiary (and least of all a discretionary object) has any entitlement as of right to disclosure of anything which can plausibly be described as a trust document. Especially when there are issues as to personal or commercial confidentiality, the court may have to balance the competing interests of different beneficiaries, the trustees themselves, and third parties. Disclosure may have to be limited and safeguards may have to be put in place. Evaluation of the claims of a beneficiary (and especially of a discretionary object) may be an important part of the balancing exercise which the court has to perform on the materials placed before it. In many cases the court may have no difficulty in concluding that an applicant with no more than a theoretical possibility of benefit ought not to be granted any relief.”

The balancing act In considering what document should be disclosed to beneficiaries it has become clear that there are different categories and kinds of documents, in respect of which some documents will usually be disclosed whereas others will usually not be.

Core trust documents It is a rare case where the protagonist does not have at least the basic trust documents (e.g. the settlement deed and subsequent amendments). Where he (or she) does not then their disclosure will usually be ordered, at least in favour of a beneficiary or object of a power (Schmidt is a probable example of this, although remitted for reconsideration).

Accounting documents In most cases the basic accounting documents, revealing the assets of the trust and the nature of its investments, will be disclosed, see Re Rabaiotti10 and Re The Avalon Trust.11

See, for example, Schmidt [2003] UKPC 26; [2003] 2 A.C. 709 per Lord Walker at [51]. Schmidt [2003] UKPC 26; [2003] 2 A.C. 709 per Lord Walker at [66]. Re Rabaiotti 1989 Settlement [2000] W.T.L.R. 953; (1999–2000) 2 I.T.E.L.R. 763. 11 Re The Avalon Trust [2007] W.T.L.R. 1693; (2006–07) 9 I.T.E.L.R. 450. 9

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Reasons There is a firm presumption against trustees being ordered to disclose the reasons for their decisions to any of the beneficiaries. For that reason, any documents disclosing those reasons (e.g. minutes of meetings, records of discussions) will normally not be disclosed unless there is some good reason for doing so. This is the ratio of Re Londonderry’s Settlement as identified in the High Court decision in Breakspear v Ackland.12

Letters of wishes Largely for the same reason, and because letters of wishes are normally communicated to trustees on a confidential basis, there is a strong presumption against disclosing the letter of wishes, see Breakspear and Re Rabaiotti. However, there will be instances where to disclose the letter will better inform the beneficiary (and perhaps the English Family Division) of the basis upon which the trustees’ discretion is exercised and (because it thereby avoids inaccurate assumptions about that exercise) thus be in the interests of all the trustees to disclose it. It was those considerations which justified disclosure of the letter of wishes in Re Rabaiotti and Re The Avalon Trust.

Communications with the trustees It will be a very unusual case where communications between the trustees and other beneficiaries will be ordered to be disclosed. Such communications are usually (inherently) confidential. Moreover, their disclosure will tend to reveal the basis upon which the trustees have exercised their discretion and so breach the bar on disclosing reasons. See Re The Avalon Trust.

Trustees and wives Objectives The spouse’s initial objective will be to obtain as much information as possible regarding the trust. She will then wish to use this information so as to assert that its assets are part of the matrimonial “pot” and to seek orders against the trust itself (or against the husband by way of “judicial encouragement”). The information she will most want, therefore, will relate to (i) the assets within the trust and (ii) the basis upon which the trustees have previously exercised their discretions.

Wife as beneficiary The wife may be a beneficiary of the trust and so may wish to assert an entitlement to such documents as beneficiary. That may be effective in establishing a right to certain “core” documents, such as the settlement deed and basic accounting information. However, where the documents sought fall within the wider category of documents, disclosure of which are normally restricted, then this is unlikely to succeed. That is particularly so where in reality she is bringing, or intends to bring, hostile claims against the trust, whether by way of an order varying the trust or for findings that is a sham. In such instances it will be recognised that she is in reality a hostile third party and disclosure is unlikely to be made.

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Orders from the Family Division of England and Wales That leaves the wife to seek orders from the English court, which she can then seek to enforce against the trust in its jurisdiction (if offshore). The most common order appears to be an order against the husband for disclosure by him. As a beneficiary of the trust he can then ask the trustees to make the requested disclosure and they can ask the supervising court whether they should comply (this is what happened in both Re Rabaiotti and Re The Avalon Trust). Similarly, the court can make an order for disclosure against the trustees themselves. The problem will then be in enforcing that order, particularly where enforcement of foreign orders is not possible (e.g. Jersey). Nevertheless, faced with such an order a trustee may choose to ask the supervising court whether they should comply, or else provide voluntary information and disclosure.

Letters of request One procedure is to obtain from the English court a “letter of request” asking the foreign court to order the trustees to provide disclosure or even to give evidence regarding the existence or otherwise of certain documents. The nature of the court’s discretion to make such requests was considered in Charman v Charman.13 It is apparent that it is wide. Whilst it must relate to information relevant to the dispute it need not relate to documents or information that are known to exist. In essence it can amount to a request for the trustees to inform the court as to the questions it will have to consider in the ancillary relief dispute. The request in Charman was refused by the Bermudian court. Subsequently it has been held that the court was wrong to do so and that in most cases the court will give effect to such a request, see Jennings v Jennings.14

The approach of the supervising court The courts of the various offshore jurisdiction now have some experience in considering requests by trustees as to the amount and nature of information that they should disclose to a wife (or to the husband for the wife’s benefit). In principle, the considerations are the same as in Schmidt. The unique feature of these cases is that the court must balance the interests of the beneficiaries of the trust against those of a wife. The wife may or may not be a beneficiary and in any event brings a claim that may well endanger all or most of the trust assets. In such circumstances it might appears wise to disclose as little as possible, so as to prevent the wife from having the information upon which to make a claim. However, in most cases she will already have sufficient knowledge of the trust for some order to be made and the real danger is of the English court making a very adverse order based upon misconceptions as to the nature of the trust. Such misconceptions can be made worse by the refusal to disclose sufficient information regarding the trust. As a result, there has grown a general tendency to regard it as in the interests of all the beneficiaries for the wife to have all the relevant information. For example, in Re The H Trust15 the Royal Court of Jersey said16:

Charman v Charman [2005] EWCA Civ 1606; [2006] 1 W.L.R. 1053. Jennings v Jennings [2009] SC (Bda) 62 Civ. Re The H Trust [2006] J.L.R. 280. 16 Re The H Trust [2006] J.L.R. 280 at [17]. 14 15

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“It seems to us important, in this case, that the husband and the wife should have the fullest information concerning the financial affairs of the trust so that any compromise which they reach, failing which any decision of the Family Division, is based upon the true financial position.” In more than one case, that has included disclosure of the letter of wishes, particularly where she has a copy of a previous but out of date version, see Re Rabaiotti and Re The Avalon Trust. There also appears to be a general judicial tendency to prevent husbands deliberately flouting their obligations in the English courts by, for example, refusing to assist in the process of disclosure or, later on, enforcement. So, having ensured that the trustees made proper disclosure, the Jersey Royal Court in the case of Re the H Trust later made some stringent criticism of the trustees’ later refusal to accede to the English court’s order or even to seek directions of the court and ordered the trustees to divide the trust in accordance with the order of the English High Court, see (2007) J.R.C. (despite the provisions in art.9).

Conclusion The law on the disclosure of trusts documents is now relatively clearly established. Recent experience, both in the United Kingdom and overseas, has now made the exercise of the discretion conferred upon the court a relatively predictable exercise, at least for the “usual” trust documents. This remains, though, a difficult and dangerous area for trustees and one where they are often best advised to seek the sanction and approval of the Court before doing anything that could be criticised by the various warring factions.