Clarification obtained from the Privy Council as to the rights of beneficiaries to obtain disclosures from trustees
2nd April 2003
On 27 March 2003, the Judicial Committee of the Privy Council handed down its judgment in the case of Vadim Schmidt v Rosewood Trust Limited, on appeal by Vadim Schmidt from the Court of Appeal of the Isle of Man (the Staff of Government Division). The full text of the judgment is available from the Privy Council website at www.privy-council.org.uk.
The judgment represents a landmark decision as to:
1. The rights of so called mere objects of a discretionary power of appointment to obtain information and accounts from trustees in relation to the trustees' dealings with trust assets; and
2. Whether the right of beneficiaries of trusts to obtain accounts and information is proprietary in nature or based upon fiduciary duties to account owed by the trustees to the beneficiaries.
The full judgment should be essential reading for all trustees and trust lawyers (both offshore and onshore) based in Commonwealth jurisdictions.
The Brief Facts
The Respondent trustees were (and remain) trustees of two trusts, the Angora Trust and the Everest Trust. Both settlements are established in the Isle of Man. The Appellant's father, Vitali Schmidt, was a named member of the class of discretionary beneficiaries under each trust. During his lifetime the Appellant's father received substantial transfers of trust assets from the trustees.
The Appellant's father died intestate in Russia on 31 August 1997 and the Appellant became the administrator of his father's Isle of Man estate on 17 August 1998.
On 1 June 1999 the Appellant issued Petition proceedings in the Isle of Man High Court seeking an Order that the trustees provide to him an account of their dealings with the trust
assets. The Appellant brought the Petition proceedings both in his capacity as administrator of his father's estate and in his personal capacity as a discretionary object of each of the trusts.
At first instance, the trustees accepted that the Appellant was entitled to the information sought and a detailed and lengthy Order was made, which essentially required the trustees to provide extensive disclosures of information and documents. The trustees brought an appeal to the Staff of Government Division against the terms of the Order on various grounds. Prior to the trustees' appeal being heard by the Staff of Government Division, the trustees amended their appeal to allege that the Appellant was not a beneficiary in any sense of the word under the two settlements, that the Appellant's father was, during his lifetime, only ever a mere object of a discretionary power, and that neither the Appellant's father nor the Appellant were entitled to trust documents or information.
The Decision of the Staff of Government Division
The full text of the Staff of Government Division decision is reported in the Isle of Man law reports at [1999-01] MLR 570.
The Appellant appealed to the Judicial Committee of the Privy Council against various findings of the Staff of Government Division and the Judicial Committee has remitted certain issues back to the Staff of Government Division for further argument. For present purposes, the point of law that fell for consideration by the Judicial Committee and arising out of the Staff of Government decision was whether an object of a discretionary power of appointment vested in trustees is entitled to obtain disclosure of information and documents relevant to the dealings with the assets of the trust by the trustees.
On this point, the Staff of Government Division determined that an object of a discretionary power vested in trustees was not entitled to such information. The court further held that the rights of an object of a dispositive power are limited to requiring the trustee to consider the exercise of the power in the objects favour and that only the person or entity to whom the trust results in default has the power to object to any wrongful exercise of the power and to obtain an account of the trustees' stewardship of the trust assets. In reaching this conclusion the Staff of Government Division determined not to follow authority cited by Vadim Schmidt's Counsel in support of his contention that disclosure should be provided (and in particular Chaine - Nickson v Bank of Ireland [1976] IR 393, Spellson v George [1987] 11 NSWLR 300 and Murphy v Murphy [1999] 1 WLR 282).
The Staff of Government Division itself acknowledged that their conclusion may have the consequence that trustees of assets held on discretionary trusts for lengthy terms (which it is suggested would be a substantial number of trusts worldwide) would be unsupervised in their administration of the trusts as there may be no person or entity with both the legal standing and economic interest to hold the trustee to account. It is submitted that the potential effects of such a finding were wide reaching, for obvious reasons.
The Judgment of the Judicial Committee of the Privy Council
As might be expected, during the course of the parties' submissions the Judicial Committee was referred to numerous well established and often cited authorities as to the nature of trusts and the rights of beneficiaries in relation to trusts.
The judgment itself was delivered by Lord Walker of Gestingthorpe. Interesting observations and findings were made on the following issues:-
1. The contemporary use of trusts
Lord Walker noted that it has become common for wealthy individuals in many parts of the world to place funds at their disposal into trusts. It was further acknowledged that the trusts and powers contained in such settlements may give no reliable indication of who will ultimately benefit from those settlements. Also, whilst the Judicial Committee was referred to numerous authorities dating so far back as the beginning of the 19th century, the Judicial Committee noted that the form and functions of such settlements has changed very significantly. In particular, Lord Walker identified the increased use of offshore trusts driven by tax-avoidance motives following on from the introduction of capital gains tax in the UK in 1965 and also the higher levels of estate duty imposed in the UK post world war two. (Paras 1, 34 - 35 of the judgment).
2. The terms of the settlements - points of construction
The Judicial Committee noted that both the Appellant and the Respondent agree that the terms of the Angora Trust have been badly drafted. Consequently, the Judicial Committee was unable to determine the Appellant's status under the Angora Trust, such that it will be necessary for the terms of the trust to be construed by the Isle of Man High Court, and that an application would be required to the Isle of Man High Court for this purpose. Until such a course of action is taken, it could not be assumed that the Appellant in his personal capacity was a beneficiary (in any sense) under the Angora Trust.
In relation to the Everest Trust the Judicial Committee stated that the Appellant in his personal capacity is no more than a possible object of a very wide power to add beneficiaries conferred by the terms of the trust.
The Judicial Committee stated that they would have to consider what rights or claims to disclosure the Appellant had, either personally, or as his father's personal representative, under two badly drafted settlements whose terms may have been moulded by the influences identified at paragraph 1 above. In the absence of any suggestion that the settlements themselves were shams, or tainted with illegality, the court declined to adopt the approach that if the Appellant's father and his colleagues had "deliberately entered into a web of camouflage, it is hardly for anyone claiming through them to complain that the position is not transparent". The Judicial Committee considered that it is fundamental to the law of trusts that the court has jurisdiction to supervise and, if appropriate, intervene in the administration of a trust, including a discretionary trust. (Paras 27 - 33 and 36)
3. Discretionary trusts and powers
Their Lordships reviewed a number of authorities concerned with the general characteristics of interests (or rights) under discretionary trusts on the one hand and mere powers (of a dispositive character) conferred on trustees in their fiduciary capacity on the other hand. Their Lordships concluded that, in practice, there are a number of similarities between the position of the objects of trust powers and the objects of mere powers. (Paras 37 - 42)
4. Disclosure to discretionary beneficiaries: a proprietary basis?
It was submitted to the Judicial Committee by the Respondent that a beneficiary's right or claim to disclosure of trust documents should be regarded as a proprietary right and that from that starting point, no object of a mere power could have any right or claim to disclosure. The Respondent relied in particular on the decision in O'Rourke v Darbishire [1920] AC 581 in support of this proposition.
The Judicial Committee reviewed several Australian cases which had reason to further consider O'Rourke v Darbishire, and concluded that O'Rourke v Darbishire could not be regarded as a reasoned or 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, as this was not an issue in O'Rourke v Darbishire. Their Lordships further considered that 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 a trust. The right to seek the court's intervention does not depend on entitlement to a fixed and transmissible beneficial interest. The object of a discretion (including a mere power) may also be entitled to protection from a court of equity, although the circumstances in which he may seek protection, and the nature of the protection he may expect to obtain, will depend upon the court's discretion.
Their Lordships therefore preferred to follow the judgments of Kirby P and Sheller JA in the Australian case of Hartigan Nominees Pty Limited v Rydge (1992) 29 NSWLR 405 wherein it was further stated that a beneficiary's right to inspect trust documents was not based upon any equitable proprietary right but upon the trustees' fiduciary duty to keep the beneficiary informed and to render accounts. The Judicial Committee categorically stated that it is neither sufficient nor necessary for an applicant to have a proprietary right to obtain documentation and information. In this respect, the Judicial Committee agreed with the findings of the Staff of Government Division.
The Judicial Committee went on to state that if the court exercised its discretion in favour of granting relief, the court would have to consider further:-
i) what classes of documents should be disclosed (either completely or in redacted form);
ii) what safeguards should be imposed, by provision of undertakings to the court or arrangements for professional inspection or otherwise, to limit the use to which the documents or information disclosed pursuant to the order may be put. (Paras 43, 50- 55)
5. Disclosure to discretionary beneficiaries: the recent cases
The Judicial Committee considered that the Staff of Government Division was too ready to dismiss the Chaine-Nickson decision as untypical and unhelpful on the basis that offshore settlements do very commonly have no ascertained beneficiary with a fixed interest and a real economic stake in the enforcement of the trustees' fiduciary duties. The Judicial Committee stated that the contrary view (adopted by the Staff of Government Division - supra) "does indeed lead to remarkable results". (Para 58)
In addition, the Judicial Committee considered that the Staff of Government Division's criticism of the Spellson v George case was "surprising and unwarranted". The Staff of Government Division also found the case of Murphy v Murphy of no assistance, stating that it was based on a concession and that the judge did not have the benefit of detailed submissions. Nevertheless, the Judicial Committee considered the judgment of Neuberger J in Murphy v Murphy "illuminating and helpful". (Paras 60 - 64)
6. Conclusions of the Judicial Committee
Having reviewed the case law and considered the submissions of Counsel, the Judical Committee reached the following conclusions:-
a) A beneficiary's right to seek disclosure of trust documents is best approached as one aspect of the court's inherent jurisdiction to supervise (and, where appropriate, intervene in) the administration of trusts. Their Lordships saw no reason to draw any "bright dividing - line" between the rights of an object of a discretionary trust and those of the objects of a mere power of a fiduciary character. It was stated that differences in this context between trusts and powers are a good deal less significant than the similarities and that the tide of Commonwealth authority is seemingly flowing in the direction of supporting such a proposition. (Para 66)
b) No beneficiary (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. The court may have to balance the competing interest of different beneficiaries, the trustees themselves and third parties, especially where issues of personal or commercial confidentiality arise. Accordingly, disclosure may have to be restricted and safeguards imposed. An important part of the balancing exercise which the court will have to undertake will be evaluating the claims of a beneficiary, and in particular any claim by a discretionary object, on the basis of the materials put before the court. In an important qualification to the bringing of such disclosure applications, the Judicial Committee stated that in many cases the court may have no difficulty in concluding that an applicant with nothing more than a theoretical possibility of benefit ought not to be granted any relief. The floodgates are not opened. (Para 67)
In view of the above conclusions (but reserving to the Isle of Man High Court the issue as to whether or not to exercise its discretion to order disclosure in favour of the Appellant) the Judicial Committee considered that on the face of the matter the Appellant (as personal representative) seemingly has a powerful case for the fullest disclosure in respect of the funds distributed to Mr Vitali Schmidt during his lifetime. In addition, the Judicial Committee stated that the Appellant, as personal representative, would have a strong claim to disclosure of documents or information relevant to the issue as to whether, but for breaches of fiduciary duty, more funds would have been available for distribution to Mr Vitali Schmidt and would, or might have been, allocated to him in practice. The Judicial Committee gave no view as to whether the Appellant has any case for breach of fiduciary duty against the trustees. (Para 68)
7. Costs
The Judicial Committee ordered that the trustees must pay the Appellants costs before the Staff of Government Division and before the Judicial Committee itself. The issue of whether the trustees should be entitled to reimbursement of those costs out of the trust property was referred back to the Isle of Man High Court.
Summary
As stated above, in relation to the Angora Trust and the Appellant's personal claims thereunder, the Appellant's status as beneficiary will need to be determined by the Isle of Man High Court. Nevertheless, in relation to the Everest Trust, the Judicial Committee was of the view that the Appellant, as a possible object of a very wide power of appointment, was also an object who may be regarded in the circumstances as having "exceptionally strong claims to be considered".
The judgment of the Judicial Committee in this matter confirms that, upon the application of an object of a discretionary power of appointment, the court has a discretion, which can be exercised in appropriate cases, in favour of providing such applicants with information and documentation concerning the administration of a trust by its trustees.
In future when trustees are faced with a request for information from objects of a discretionary power of appointment, they will have to give full and careful consideration as to whether the person making the request, in all the circumstances of the case, could demonstrate to the court that they had something more than a theoretical possibility of benefit. If so, and if the trustees fail to provide information to such persons, the trustees may well find themselves the subject of an application to the court, which may further result in the trustees being ordered to pay the costs of the application.
Robert Colquitt
Advocate
The author acts for the Appellant, Vadim Schmidt, in relation to this litigation and associated litigation both in the Isle of Man and various other jurisdictions, and is a Senior Associate advocate with Cains Advocates in the Isle of Man. Vadim Schmidt was represented before the Judicial Committee of the Privy Council by Alan Steinfeld QC and Marcus Staff, both of 24 Old Buildings, London.
This article is for general information purposes only and cannot be regarded as a substitute for specific legal advice.
Copyright 2003
For more details please contact: Robert Colquitt. |
