Knowledge

Trustees' duty to account

Traditionally, it was a reasonably established general principle that a beneficiary is generally entitled to inspect all documents relating to the affairs of the trust. In O'Rourke v. Darbishire [1920] AC 581, the English House of Lords referred to a beneficiary's right to access to documents on the basis of a "proprietary right".

However, the decision of the English Court of Appeal in Re Londonderry's Settlement [1965] Ch 918 made clear that, in some cases, it may be appropriate to withhold documents from beneficiaries on the grounds of confidentiality. The court set out categories of document that trustees are not normally bound to disclose, on the basis of protecting the well-established principle that, in the exercise of discretionary powers, trustees are not required to provide reasons.

In the English case of Armitage v Nurse [1998] Ch 241 it was held that a trustee owes an "irreducible core" of obligations to beneficiaries, which is fundamental to the concept of a trust. If those obligations are missing then there is no trust. The duty of trustees to account to beneficiaries for their administration of a trust is one of those core obligations and the right of beneficiaries to trust documents enables them to enforce that duty to account.

Although it is clear that, in principle, beneficiaries have a right to disclosure of certain trust documents, there are limitations on this right and, as a result, it is often difficult for a trustee to decide how to react to requests for disclosure.

The Cayman position

Re Ojjeh Trust [1992-93] CILR 348 is the principal decision in Cayman on beneficiaries' rights to inspect trust documents. It was held (applying the dicta of Lord Wrenbury in O'Rourke and the dicta of Romer, LH and Evershed M.R. in Butt v Kelson [1952] Ch 197) that the principles governing the disclosure of information to beneficiaries were as follows:

• A beneficiary will normally be permitted to inspect and take copies of essential trust documents on the basis of the proprietary right he holds over them.
• That normal right does not extend to detailed information about the affairs of companies owned by the trust. To obtain information of that kind, the beneficiary must make out a special case.
• In order to make out a special case, the beneficiary must specify the documents that he or she wishes to see.
• There must be no valid objection by the trustees or directors, or (in special circumstances), beneficiaries whom the trustees consider should properly be consulted upon the matter.
• The beneficiary seeking disclosure must give proper assurances that he or she will not disclose the documents to anybody but his or her own legal or other advisers and will not make copies save as may be properly advised by his or her legal or other advisers.

In Lemos v. Coutts & Company (Cayman) Limited [1992-93] CILR 460, the only reported decision of the Cayman Islands Court of Appeal on this issue, it was held that, whilst a beneficiary has a proprietary right to trust documents, it is by no means an absolute right and there may be documents or categories of documents which it would be just and proper to exclude from the ambit of the right where the documents are not relevant or evidentially essential to the beneficiaries' case, or whether the probative value is minimal and considerably outweighed by prejudice to the other beneficiaries or to the proper administration of the trust. However, it was further held that, where the beneficiary is making serious allegations impugning the validity of the trustees' actions, it is only in an exceptional case that an absolute refusal of an application for accounts would be justified. Again, the court emphasized that each case had to be considered on its merits.

Other recent persuasive overseas authority

Re Rabaiotti 1989 Settlement [2000] WTLR 953 concerned an application by the trustees of discretionary settlements. The Jersey Royal Court held that there was a strong presumption in favour of beneficiaries seeing trust documents, unless it could be shown that there was a good reason why disclosure was not in the interests of the beneficiaries as a whole. As regards letters of wishes, the presumption was against disclosure on the basis that the settlor was likely to have intended the letter to be confidential, although the court could and would order disclosure where there were good grounds to do so.

In what is now generally considered to be the leading case of Schmidt v Rosewood Trust Limited [2003] 2 AC 709, the Judicial Committee of the Privy Council held that, rather than considering whether or not a beneficiary has a proprietary right to information, the 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. Lord Walker stated that the dictum of Lord Wrenbury in O'Rourke could not be regarded as a binding decision that a beneficiary's right or claim to disclosure of trust documents or information must always have the proprietary basis of a transmissible interest in trust property. The Privy Council therefore concluded that:

"No beneficiary (and least of 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 exercising 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 application with no more than a theoretical possibility of benefit ought not to be granted any relief."

In Nearco Trust Company (Jersey) Limited v AM and Others [2003] JRC 002A, the court had consider an application for disclosure of documents made by the former wife of the settlor of two Jersey trusts, both in her own capacity and as guardian for her daughter. The wife was a beneficiary of one trust, and the daughter a beneficiary of both trusts. The wife instigated proceedings in the State of Illinois concerning the level of maintenance appropriate to be paid for the daughter for whom the former wife acted as guardian. In those proceedings she alleged that both trusts were shams and, therefore, invalid. The Deputy Bailiff ruled that it is impossible to regard an application for disclosure made in these circumstances as being in the interests of the beneficiaries of the trust as a whole. If released, the information would be used in proceedings intended to produce an order that the trusts were shams which could not possibly be in the interests of the wider beneficial class of the trusts. Nevertheless, he further indicates that, if the former wife was to drop her allegation of invalidity, the court would view sympathetically an application for disclosure of documentation revealing the extent of the assets in the trusts and the level of provision which might be made, or had been made, from the trusts for the benefit of the settlor. The Deputy Bailiff did, however, note that the documentation, which it might be appropriate to disclose for these purposes, would be considerably less than the categories of documents contained in an order for disclosure already made against the trustee in the Illinois proceedings.

In Bathurst v Kleinwort Benson (Channel Islands) Trustees Ltd. [2003-04] GLR N [32] the judge stated that a beneficiary has the right to ask trustees to disclose information and documents about trust assets and administration, and this right does not simply arise from the trustees' duty to keep accounts, but arises as a matter of principle. Further, that if it were to exercise its discretion to order disclosure of certain documents, it could do so even in favour of an excluded beneficiary, so long as the documents related to periods when the excluded person was a named beneficiary and a potential object of disclosure by the trustees.

In the case of Breakspear v Ackland [2009] Ch 32, the question of whether letters/memoranda of wishes in the context of a family discretionary trust needed to be disclosed was considered. The court decided that the defining characteristic of a letter/memorandum of wishes was that it contained material which the settlor wanted the trustees to take into account when exercising their discretionary powers and, as it was produced for the sole purpose of facilitating an inherently confidential process, it should itself be regarded as confidential. Although the trustees need not disclose such letters or memoranda, they may disclose them if they feel (having taken all the relevant circumstances into account) that to do so is within the interests of the sound administration of the trust and the discharge of their powers and discretions.

Tchenguiz-Imerman v Imerman [2013] EWHC 3627 (Fam) is a case in which, because the trustees refused to provide information regarding the trust in the context of matrimonial proceedings, the Family Court ordered disclosure of the relevant information by adult beneficiaries.

In Application for Information about a Trust [2013] CA (Bda) 8 Civ, the Bermuda Court of Appeal held that a restrictive veto power to withhold information could only be supported if it was consistent with the proper administration of the trust. Disclosure of financial information to a beneficiary was ordered as it was considered necessary to ensure that the trustees were held accountable to their beneficiaries.

The appeal was against the decision of the Chief Justice and his subsequent order requiring the trustees to produce trust accounts and related documents with safeguards intended to maintain their confidentiality and restricting the use of information.

The trust was discretionary. Under a deed of appointment, beneficiary B was potentially entitled to a fixed percentage of the assets of the trust and a right to income payments for life. The protector of the trust, also a beneficiary, was B's mother who held a power to prohibit trustees from disclosing trust information under the terms of the trust. The relevant clause provided as follows:

"9.2 Subject to the provisions of clause 24 below and except to the extent that the Trustees (with the prior written consent of the Protector) in their discretion otherwise determine no person or persons shall be provided with or have any claim [or] right or entitlement during the Trust Period to or in respect of accounts (whether audited or otherwise) or any information of any nature in relation to the Trust Fund or the income thereof or otherwise in relation to the Trust or the trusts powers or provisions thereof (and whether from the Trustees or otherwise)."

The protector had additional wide powers under the trust including the power to give directions to the trustees with respect to certain powers of the trustees, including directions to the trustees regarding any act or omission to take action with respect to any asset from time to time forming the trust fund or otherwise subject to the control of the trustees. Also, the protector owed no fiduciary duty and was not accountable to any person or persons interested in the trust or to the trustees and was free from any liability whatsoever (in the absence of fraud or dishonesty). The protector had become estranged from her son and refused disclosure that was requested arguing that there were legitimate concerns about confidentiality of the information which needed to be protected.

The Supreme Court considered the validity and effect of Clause 9.2 and concluded that the clause was valid. Nevertheless, the clause could not validly oust the supervisory jurisdiction of the court; the Chief Justice held that "the information control mechanism of the Trust neither eliminated the Trustees' duty to account altogether nor purported to oust the jurisdiction of the Court", and concluded that B had established that the court should order disclosure of trust documents by the trustees.

The protector appealed against the Chief Justice's decision that the court should exercise its supervisory jurisdiction in favour of B notwithstanding the terms of Clause 9.2 and submitted that the order for disclosure was incorrect on the following grounds:

• The court, having ruled that the express disclosure mechanism was valid, should respect that clause;
• Disclosure ought not to be ordered unless there is real cause for concern that the trust was being mismanaged;
• The exercise of the court to order disclosure went against the weight of the evidence.

The Court of Appeal supported the Chief Justice's conclusions that, whilst the information control mechanism clause was valid as it did not seek to oust the court's jurisdiction or generally to prohibit beneficiaries' rights to information, the evidence had established real cause for concern which justified intervention by the court:

"… there is no defined threshold which the applicant must cross before the Court's power can be exercised: the beneficiary's right is defined by reference to the Court's willingness to make the Order sought and it follows from this that the burden on the applicant is to show the Order should be made in the circumstances of the case; as the Chief Justice put it he must establish a prima facie case that the Order should be made … the evidence establishes real cause for concern sufficient to cross the suggested threshold as a pre-condition to the exercise of the Court's power to order disclosure. We agree with the Chief Justice that the machinery by clause 9.2 has broken down which justifies intervention by the Court."

The Court of Appeal stipulated that the protector's powers under Clause 9.2 must be exercised in the interests of the trust and all of its beneficiaries notwithstanding that the protector owed no fiduciary duties. Further, supporting the Chief Justice's reasoning, that the protector's rationale for refusing to consent to disclosure did not justify withholding information from the beneficiaries; the protector's powers must be exercised within the limits imposed by the trust instrument and in the interests of the trust.

Leave was given to the protector to appeal the matter to the Judicial Committee of the Privy Council.

In the English case of Blades v Isaac and Alexander [2016] EWHC 601 (Ch) the beneficiaries wished to see legal advice provided to the trustees. Although acknowledging there is no absolute right for the beneficiaries to see trust documents, if legal advice is a trust document, then a trustee would normally need a positive reason to refuse disclosure to a beneficiary. However, if the advice were not a trust document and privileged then the trustee could refuse disclosure. The court distinguished between advice sought personally, perhaps if the trustee was concerned about a personal attack, and advice obtained as trustee for the benefit of the trust. If the trustee was seeking personal advice than they would normally have to pay for this advice personally. The court made it clear that a trustee cannot expect to take legal advice at the expense of the trust fund and then expect this advice to be viewed as personal to it.

In Lewis v Tamplin [2018] EWHC 777 (Ch) the High Court held that the principle that trustees are not obliged to disclose the reasons behind their decisions applied only to the exercise of dispositive powers and not to the exercise of administrative powers.

The Confidential Information Disclosure Act

The Confidential Information Disclosure Act, 2016 ("CIDA") came into force in the Cayman Islands on 15 July 2016, replacing the Confidential Relationships (Preservation) Law, 2015.

The new law made breach of duty of confidentiality no longer a criminal offence. However, a person whose confidentiality is breached can sue the person who divulged the confidential information.

CIDA defines "confidential information" as including information, arising in or brought into Cayman, concerning any property of a person to whom a duty of confidence is owed by the person who receives the information. CIDA does not provide a definition of when a duty of confidence is owed, which will fall to be determined in accordance with common law principles governing confidential information. These principles include that the information must, by its nature, be confidential (such as health, legal or financial information), which is neither common knowledge nor in the public domain, and which is disclosed in circumstances where it gives rise to a duty of confidence. Examples where there are established relationships which give rise to a duty of confidence include a banker/doctor/lawyer and client, or where the information is disclosed under a contract which has terms setting out a specific duty of confidence.

CIDA specifies when it will not be a breach of confidentiality to divulge confidential information. In summary, confidential information may be revealed when it is disclosed:

• With the express or implied consent of the owner of the information.
• In compliance with an applicable law or regulation.
• At the request of the Cayman Police or other named authority.
• Under a court order obtained in accordance with the CIDA.

In each of those circumstances the disclosure "shall not be actionable at the suit of any person".

CIDA also offers protection where a person, acting in good faith and who reasonably believes that the confidential information is true, discloses confidential information which is evidence of wrongdoing which is a serious threat to life, health or safety of a person or to the environment. A person disclosing confidential information in these circumstances shall have a defence to an action brought against them for a breach of the duty of confidence.

If you would like any further information, please get in touch with your usual Bedell Cristin contact or one of the contacts listed.