August 11 2011
The Jersey Royal Court recently discussed the extent of a trustee's obligation to disclose documents (including correspondence between the trustee and its legal advisers), in The A Settlement ( JRC 109). This is the latest judgment arising from an application made to the court for directions by a corporate trustee in relation to three settlements of which it is trustee - the B, C and D Settlements.
In the 1930s three brothers set up a joint business in Ireland that was run through a series of companies. In due course each brother settled certain of his shares in these Irish companies into separate discretionary trusts (the B, C and D Settlements). The structure of these trusts is complex - in short, the trustee held some of the settled shares through a wholly owned holding company, which itself held:
The trustee held the shares of the holding company on trust equally between the B, C and D Settlements, at one-third each. In addition, there were other interests of the B and C Settlements that were not held through the holding company.
The directors of the Irish companies were primarily beneficiaries of the D Settlement. In 2001 the beneficiaries of the B and C Settlements raised concerns with the trustee regarding the management of the Irish companies by the such directors (ie, the D directors). Through the holding company, the trustee took certain steps to procure the appointment of its own directors in those Irish companies that the holding company controlled as 100% shareholder.
The trustee thus held a majority at board level and could therefore investigate the complaints. It appointed a chartered accountant, who produced a report. The report indicated, among other things, potential excessive director remuneration, which had created potential tax liabilities. In the wake of this analysis, both the accountant and the trustee directors resigned. The beneficiaries of the D Settlement, including some or all of the D directors (ie, the first respondents in this case), appointed their own tax and legal counsel, who purported to rebut the concerns of the accountant. The matter is ongoing.
Since 2007 the trustee has regularly sought directions from the Royal Court in relation to its investigations into the Irish companies. It has surrendered its discretion to the court, on the basis that it faced either actual or potential conflicts of interests. The matter has already been before both the Royal Court and the Court of Appeal, regarding the disclosure of information by the first respondents in respect of the affairs of the Irish companies. In advance of a further directions hearing, due in September 2011, an application was brought by the first respondents requesting that the trustee disclose certain documents.
There were five categories of documents for which the first respondents sought disclosure:
all correspondence between the trustee (or its advisers) and the accountant (or his firm) concerning potential additional disclosure from the D directors.
The Royal Court detailed the general principles to which it refers when deciding whether to order disclosure of documents by a trustee, by reference to a list submitted by the advocate appearing for the trustee. This list should assist all trustees at the outset in deciding how to respond to requests for disclosure and in deciding whether to apply to the Royal Court for directions. The factors to be considered are as follows:
The Royal Court added that it is not in the interests of justice for trustees that are seeking directions from the Royal Court to be obliged to disclose communications with their advisers on the issue before the court.
Trustees should not be inhibited from seeking advice in the context of difficult trust issues by the fear that such advice would, as a matter of course, be required to be disclosed and would therefore find its way into the hands of the beneficiaries. However, such disclosure may be appropriate on certain occasions (eg, where the conduct of the trustee's behaviour itself is impugned). Trustees must consider their position very carefully and professional advice will play a vital role in such considerations.
Finally, the Royal Court made clear that, in deciding whether to order disclosure in this instance, it would aim to prevent the parties and the court from being "side-tracked into a series of mini-investigations about the past". The court was sitting in an administrative capacity in proceedings that were not hostile. The case was a consideration of the practical steps that the trustee should adopt in its future conduct and was not a trial of the underlying issues. Disclosing excessive information would potentially lead to time and money being spent considering irrelevant points, and an unnecessary depletion of the trust's assets accordingly.
This position was all the more relevant given the potential for hostile proceedings to develop in Ireland and the prejudice that might be caused by extensive discovery at this stage.
Taking each category of document in turn, the court decided as follows:
The scope of trustee disclosure to beneficiaries (or indeed to third parties) is a complex area requiring careful examination of the pertinent considerations. The answer will often not be straightforward. Although every situation is different, this case has helped trustees and lawyers alike by clarifying the basis upon which the Royal Court will approach the issues. It should inform trustees from the outset and assist in deciding whether to apply to the Royal Court for directions. It also encourages trustees to seek advice and guidance in the event that difficult questions arise, safe in the knowledge that the Royal Court will be slow to order disclosure of the details of that guidance or advice. Trustees should consider all of these issues closely before taking any decision in relation to a beneficiary's request for documents.
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