Documents being sought
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:
- 100% of two of the Irish companies directly;
- 100% of another of the Irish companies indirectly (through a further holding company); and
- 50% of a further of the Irish companies directly.
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:
- redacted documents - these had previously been before the Royal Court and the Court of Appeal, but the first respondents had not seen them;
- instructions to counsel and the underlying documents that had been sent to the trustee's English barrister;
- the trustee's correspondence regarding the reason for the accountant's resignation - the first respondents suggested that the accountant resigned not because of the potential tax liabilities, but because of an alleged breach of duties of confidentiality;
- the trustee's correspondence regarding a change to the Irish lawyers acting for the trustees; and
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:
- Context - this may include the state of the relationship between the trustee and its beneficiaries and the nature of any legal proceedings. Hostile proceedings may complicate matters.
- Capacity - the court must consider whether the beneficiary is seeking documents simply as a beneficiary and in no other context, or whether the beneficiary has been convened to legal proceedings in which he or she must make submissions. If the former is the case, it is safe for the beneficiary to see trust documents (although not letters of wishes), as demonstrated in In Re Rabaiotti (1989) Settlement ( JLR 173). If the latter is the case, then the principles in Re A Settlement ( JLR 139) apply - the appropriate test is for the beneficiaries to have sufficient information to make fully informed submissions.
- Relevance - this is often a matter of opinion and dependent on whether a narrow or broad approach to relevance is taken, but it can act to include or exclude documents from disclosure.
- Purpose - once again, it is important to consider why the beneficiary seeks the documents (eg, if a beneficiary seeks to attack the validity of the trust, then it may warrant non-disclosure).
- Implications - is this a specific request or a general request resembling a 'fishing expedition'? The court must consider whether the request is likely to result in extensive correspondence and set an unwelcome precedent for further applications for disclosure, leading to significant costs to the detriment of other beneficiaries.
- Third parties - the court must consider whether the documents concern any third parties whose interests (eg, confidentiality) require protection.
- Procedural appropriateness - does the request amount to pre-action disclosure? The concept of obtaining discovery of an adversary's documents in advance of the commencement of formal legal proceedings does not, in general, find favour with the Royal Court. Trustee disclosure and its underlying principles should not be utilised as a mechanism to circumvent this procedural rule.
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:
- Redacted documents - as these related to communications between the trustee and beneficiaries or their advisers, disclosure was not appropriate. A beneficiary is entitled to see correspondence between itself and the trustee, but not a trustee's correspondence with other beneficiaries or (without good reason) working communications between the trustee and its lawyers.
- Instructions to counsel - adopting the 'mini-investigations' argument above, the Royal Court held that they were of no relevance to the practical issues of trustee directions to be considered at the hearing in September 2011.
- The trustee's correspondence regarding the resignation of the accountant and the change in the trustee's Irish legal team - this bore no particular relevance to the issue under discussion and could side-track the matter. It may also be prejudicial should hostile proceedings be commenced.
- Correspondence between the trustee and the accountant regarding potential additional disclosure by the D directors - this was not a permissible line of inquiry, as the Court of Appeal had considered and rejected the reason why the first respondents were seeking this information.
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.
For further information on this topic please contact Nick Williams at Ogier by telephone (+44 1534 504 000), fax (+44 1534 504 444) or email ([email protected]).