Beneficiaries´ Rights To The Disclosure Of Trust Documents

INTRODUCTION

The purpose of this briefing note is to consider Jersey trust law in relation to beneficiaries' rights to trust documents, in particular, Article 29 of the Trusts (Jersey) Law 1984, as amended, and the cases of In re Rabaiotti 1989 Settlement [2000 JLR 173] and Schmidt v. Rosewood Trust Company Ltd [2003] 3 All ER 76.

TRUSTEES' DUTY TO ACCOUNT

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

Although it is clear that, in principle, beneficiaries have a right to see trust documents, it is also the case that 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.

RIGHTS TO DISCLOSURE CONFERRED ON BENEFICIARIES UNDER THE TRUSTS (JERSEY) LAW 1984 (AS AMENDED) (THE "LAW")

Article 29

Article 29 of the Law reads as follows:

"Trustee may refuse to make disclosure

Subject to the terms of the trust and subject to any order of the court, a trustee shall not be required to disclose to any person, any document which –

unless, in a case to which sub-paragraph (d) applies, that person is a beneficiary under the trust not being a charity, or a charity which is referred to by name in the terms of the trust as a beneficiary under the trust or the enforcer in relation to any non-charitable purposes of the trust."

The right of beneficiaries to see the accounts of the trust

At first glance Article 29 can appear somewhat confusing, but it is clear that, despite its heading, it confers positive rights on beneficiaries to see documents relating to the accounts of the trust (a point confirmed in Rabaiotti).

Unfortunately, the meaning and scope of the phrase, "documents which relate to or form part of the accounts of the trust", is not entirely clear. In West v. Lazard [1987-88 JLR 414] it was given a very wide meaning so as to include "all accounts, vouchers, coupons, documents, and correspondence relating to the administration of the trust property". However In re Lombardo Settlement (5 December 1990 unreported) and In re a settlement [1994 JLR 139] it was suggested that the phrase did not have such a wide meaning. The Economic Development Committee, in its recent consultation on proposed amendments to the Law, did consider introducing a definition of accounts but decided that to do so would be too difficult.

Documents which beneficiaries are not entitled to see

Article 29 also sets out several categories of documents which a trustee is not normally required to disclose to beneficiaries, namely, documents which fall within sub-paragraphs (a) to (c). In very general terms, they are those documents which set out the reasons for the exercise of the trustee's powers or the performance of his duties.

The role of the courts and the trust instrument

It is also important to note the opening words of the Article, which make it clear that disclosure or nondisclosure (as the case may be) is subject to an order of the court (see Rabaiotti below) or the terms of the trust instrument. In relation to the latter, it may be possible for a trust instrument to further restrict beneficiaries' rights to trust documents or indeed widen them beyond the scope of Article 29. What is clear though is that the trust instrument cannot unduly restrict or exclude entirely beneficiaries' rights to trust documents and the court would probably assist beneficiaries to prevent this from happening.

IN RE RABAIOTTI SETTLEMENT 1989

This decision of the Royal Court from 2000 is the leading Jersey case on beneficiaries' rights to trust documents. The Court considered the meaning of Article 29 and looked at a number of cases on beneficiaries' rights to trust documents from Jersey and beyond. The Court set out a number of general principles:

The trust instrument and financial and accounting documents should usually be disclosed

There is a strong presumption that a beneficiary is entitled to see the trust instrument and documents which show the financial position of the trust, what assets are in the trust and how the trustee has dealt with those assets. This is essential to ensure that trustee can be held accountable for the administration of trusts by beneficiaries. However, beneficiaries do not have an absolute right to these documents. Instead, their rights are subject to the court's overriding discretion to withhold documents where it is satisfied that to do so would be in the best interests of the beneficiaries as a whole. This discretion is based on general equitable principles and, in relation to Jersey proper law trusts, Article 29 (which, as we have seen, makes beneficiaries' rights subject to any order of the court). In coming to this conclusion the court rejected the argument that beneficiaries' rights to trust documents are based on proprietary rights.

The letter of wishes need not usually be disclosed

The Court also decided that the position as regards letters of wishes was the opposite of the trust instrument and trust accounts. There is a strong presumption that a letter of wishes does not have to be disclosed. This is because the letter of wishes is confidential to the trustee and is likely to be something upon which the trustee bases his decisions (ie it falls within the category of documents in Article 29(b)). However, the Court may exercise its overriding discretion to order disclosure if it is appropriate to do so.

SCHMIDT V ROSEWOOD TRUST LTD

Schmidt v Rosewood, a decision of the Privy Council from 2003, dealt with a case from the Isle of Man. It is of highly persuasive authority and it appears clear that the Jersey courts will follow the decision.

The decision in Schmidt is consistent with that of Rabaiotti in a number of ways. The Privy Council rejected the argument that beneficiaries' rights to trust documents are based upon proprietary rights and instead considered them to be based on the fiduciary duty of trustees to account to beneficiaries for the administration of trusts. This is likely to have determined this issue once and for all. The court also held, like Rabaiotti, that beneficiaries do not have an absolute right or entitlement to trust documents.

An important consequence of Schmidt is that the exact nature of a beneficiary's interest will no longer determine whether he or she has a right to trust documents. Instead, it should be seen as just one of a number of factors which must be considered. For instance, a beneficiary whose right is contingent may be entitled to receive information regarding the trust documents notwithstanding that he has no right at present to benefit from the trust.

PRACTICAL GUIDANCE

How then should a trustee deal with a request from a beneficiary to see trust documents? Obviously, he must have regard to the obligations under Article 29 but in what circumstances can he or should he refuse disclosure?

What is clear from Rabaiotti and Schmidt is that a trustee, when faced with a request by a beneficiary for trust documents, must consider the same factors that the Court would consider before deciding whether or not to disclose those documents. This means that it is not possible to lay down any hard and fast rules and each case will depend on its own particular circumstances. The issues that a trustee should consider include those set out below.

Who is asking for disclosure?

Although the nature of a beneficiary's interest will not on its own determine whether or not that beneficiary is entitled to trust documents, it is clear from Schmidt that it is still a relevant factor. A trustee should therefore be clear who is asking for disclosure and what his interest in the trust is. Life tenants will obviously have a much stronger claim to the disclosure of trust documents than, for example, the object of a discretionary power who may have a remote chance of receiving benefit from the trust.

Until recently it was not clear whether former beneficiaries had any rights to trust information and documents. However, in the case of Bathurst v Kleinwort Benson (Channel Islands) Trustees Limited and others (14 September 2004), the Guernsey Royal Court held that a former beneficiary was entitled to apply to the courts for disclosure of information and documents relating to the period during which he or she was a beneficiary and for a short time thereafter. Although Bathurst is a Guernsey case the Jersey courts may well follow the decision.

What type of document has the beneficiary asked for?

Rabaiotti demonstrates that if a beneficiary is asking for disclosure of the trust instrument or accounting records showing the financial position of the trust there is a strong presumption that the beneficiary is entitled to them and the trustee must have a very good reason to refuse disclosure. By contrast, a letter of wishes is a document that the trustee is not obliged to disclose. In fact, it may be said that the trustee is under an obligation not to disclose a letter of wishes even if he has no objections to doing so. This is because it is confidential as between the trustee and the settlor and the trustee should seek the consent of the settlor or the court before disclosing it. In addition, a trustee need not disclose to beneficiaries those documents which fall within the categories set out in sub-paragraphs (a) to (c) of Article 29. For example, trustees may refuse to disclose the agenda and minutes of trustee meetings on this basis if those documents reveal the reasons behind the trustees' exercise of their powers and duties.

The question often arises as to whether a beneficiary is entitled to documents which relate to underlying companies. In re Lombardo Settlement (5 December 1990 unreported) the Royal Court held that the accounts of the trust included the accounts of underlying companies of which the trustee was a shareholder and therefore the trustee was under a duty to disclose those company accounts to the beneficiaries. In two recent Guernsey cases, Stuart-Hutcheson v Spread Trustee Company Limited (15 July 2002) and Bathurst v Kleinwort Benson (Channel Islands) Trustees Limited and others (14 September 2004), the Courts went further and ordered that beneficiaries were entitled to minutes of the meetings of the shareholders and directors of underlying companies on the basis that the trustee controlled the affairs of those companies.

What are the beneficiary's motives or reasons?

A trustee should consider the beneficiary's motives or reasons for requesting disclosure. A good example of this is the Jersey case of Nearco Trust Company (Jersey) Ltd v AM and others (Royal Court, 2003 unreported) in which the court applied the principles set out in Rabaiotti. In Nearco, a beneficiary was seeking disclosure of documents in order to use them in foreign proceedings in which she was alleging that the trust was invalid. The court decided that disclosure was clearly not in the best interests of the beneficiaries as a whole and decided that the trustee should not disclose the documents.

Will disclosure have any adverse consequences?

A trustee must decide whether disclosure may have any adverse consequence on the other beneficiaries. It is important to understand that a trustee's fundamental obligation is to act in the best interests of the beneficiaries as a whole. If disclosure would prejudice the rights of the beneficiaries as a whole then the trustee should refuse to disclose. Nearco is a perfect example of this approach. In Schmidt the court also indicated that some consideration should be given to the interests of trustees themselves and third parties in addition to weighing up the competing interests of the beneficiaries. For example, a trustee may be provided with documents by a third party on a confidential basis. In such cases the trustee should not disclose without that third party's consent. A trustee should also consider whether any limitations or safeguards should be imposed on disclosure. This may enable the trustee to disclose the documents because it will protect the interests of others.

CONCLUSION

A trustee should bear in mind that even if he refuses disclosure it is not necessarily the end of the matter. The beneficiary might apply to the Royal Court for directions under Article 51 of the Law and, as we have seen, the Court may exercise its overriding discretion and order disclosure. In addition, discovery in legal proceedings is based on different principles to beneficiaries' rights under trusts law. The result might be that the trustee may be required to disclose documents as part of the process of discovery that he would not otherwise have been obliged to disclose.

If a trustee weighs up the various factors described above and come to a decision in good faith, it is it to be hoped that, even if the Courts later overturn his decision, the trustee should be protected from adverse costs orders being made against him personally. With that in mind, a trustee should deal with requests for disclosure in a timely manner and, if in any doubt, they should seek legal advice and/or directions of the Royal Court under Article 51 of the Law. This Memorandum is intended to outline the law on beneficiaries' rights to trust documents. It is not intended to be comprehensive in its scope, and we recommend that clients seek legal advice on any particular matters.

Memoranda, on other aspects of Jersey law, have been prepared by Walkers and are available on request, or on our website at www.walkrsglobal.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.