In Erceg v Erceg1 the New Zealand Court of Appeal ruled on the standing of bankrupt beneficiaries to bring claims against trustees. In addition, the Court considered the role of trustee discretion when determining beneficiary access to trust documentation. The decision is useful for trustees and beneficiaries alike, and provides clarity on the steps a Court may take when deciding whether or not to grant beneficiaries disclosure of trust information. Although this is a New Zealand decision, other common law courts such as Hong Kong may reach similar conclusions.
The Appellant, Ivan Erceg, was both a discretionary and final (or residuary) beneficiary under two trusts. Both trusts were wound up in 2011 with no distribution made to the Appellant. At the time of the winding up, the Appellant was bankrupt, and his estate was being administered by the assignee in bankruptcy (known in some other jurisdictions as a "trustee in bankruptcy"), the Official Assignee.
A clause in both trust deeds stated that the trustees were not bound to disclose information or documents, including their reasons for decisions, to beneficiaries. The clause also stated that this information should be kept confidential.
The Appellant had applied to the High Court for some documents relating to the trusts. The High Court ordered disclosure of those documents.2 The Appellant then applied for disclosure of certain other documents from the trustees. That second set of documents concerned the winding up of the trust. The trustees opposed this application. They argued that the Appellant did not have standing to bring the claim because he was a bankrupt at the time of the winding up. At first instance, the High Court found that the Appellant did not have standing and, even if he did, it would not have ordered disclosure.
The Appellant appealed that decision of the High Court.
Reasoning and Decision of the Court of Appeal
The Court of Appeal considered that there were three questions to be resolved in the appeal:
- Did the Appellant have standing as a beneficiary to bring the claim?
- Did the judge at first instance exercise her discretion incorrectly?
- What level of disclosure was required?
It was held that the Appellant did have standing to bring the claim. The Court found that this standing was derived from the Appellant's status (or capacity) as a beneficiary of the trusts – bankruptcy did not alter or annul that status. The High Court's approach to standing, that the beneficiary's right to seek disclosure of the trust documents was a "right…in relation to property" was rejected and it was held that "having beneficiary status is not in itself property, even if some of the rights that come with that status are".
Further, the Court considered that if the Official Assignee did not pursue any available claim, the Appellant could do this, notwithstanding that the Appellant may be acting on behalf of his creditors.
2. Incorrect exercise of discretion by the judge
The Court found that the High Court judge had not incorrectly exercised her discretion to find that, even if the Appellant had standing, she would not have ordered disclosure of the documents requested.
It was held that a request by a beneficiary for disclosure of trust documents should be approached by a trustee as "one calling for the exercise of discretion in discharge of the fiduciary duty a trustee owes a beneficiary". Neither the Court nor a trustee are required (nor is it sufficient or necessary) to consider a proprietary right to inspect as a precondition for disclosure.
Further, there is no presumption favouring disclosure; the Court should not intervene "unless satisfied the trustee erred in law or principle, overlooked a relevant point or made a decision which is plainly wrong".
With regards to confidentiality and disclosure, the Court found that the beneficiary does not have a proprietary right to information – the right is in fact to have the trust properly managed and the Court may order disclosure of information to ensure trustees meet their obligations to their beneficiaries.
In considering the High Court judge's approach, the Court held that she had not erred from the principles set out above.
3. Level of disclosure
Given the answer to the second question, the Court was not required to answer this question. However, it nevertheless set out how it would have ordered disclosure, which would have involved the appointment of an independent person. The independent person would report to the High Court, and disclosure to the Appellant would be considered on the back of this. One of the reasons the Court would have taken this approach was the high level of animosity between the Appellant on the one hand and the trustees and other beneficiaries on the other.
This case emphasizes the importance of trustee discretion when deciding whether or not to disclose requested documents to a beneficiary. The Court will not intervene unless it is clear that an error has been made in the way this discretion has been exercised.
Importantly, trustees need not consider whether a bankrupt beneficiary has a "proprietary right" to ask for information. It is the beneficiary's status as such which gives him standing to request documents to ensure that the trust is being properly managed. However, there is no presumption that this information will be provided.
For beneficiaries applying to Court for trust documentation, if the decision is made to give them access to documents, they should not be surprised if this comes about via an independent person who initially reviews the information. This will not necessarily be a quick process, and it may be worth fully exploring negotiations with trustees before making an application. This is particularly so in a highly-charged family situation.