Summary

A recent decision of the Supreme Court of Victoria, Krok v Szaintop Homes Pty Ltd & Ors (No 1) [2011] VSC 1613 (Krok) suggests that if a trustee obtains legal advice in relation to its administration of a trust:

  • a beneficiary and the trustee have a joint interest in the legal professional privilege attaching to that advice, and
  • the trustee cannot rely on a claim of legal professional privilege to withhold the document from the beneficiary.

Unless this decision is reversed on appeal, it has significant implications for trustees. While not specifically dealing with a superannuation fund trust, we nonetheless think that the it is important for super fund trustees to be aware of the possible ramifications of the decision.

Background

The background facts were:

  • Ms Krok was a discretionary beneficiary of the relevant trusts in her own right and as executrix of her father’s estate
  • documents were seized from the office of an accountant pursuant to an Anton Pillar order directed to each of the trustees of those trusts, and
  • the court granted Ms Krok leave to inspect the seized material subject to claims of legal professional privilege and the trustees’ right to later contend that the material was not covered by the Anton Pillar order.

This judgment concerns whether, in relation to 4 documents, the trustees could maintain a claim for legal professional privilege against Ms Krok in her own right and as executrix of her father’s estate.

Ms Krok’s arguments

  1. No legal professional privilege applied to the documents.
  2. Even if the documents were subject to legal professional privilege, any privilege was jointly held with the beneficiaries of the trusts and, accordingly, the trustees could not assert a valid claim to legal professional privilege against Ms Krok or her father’s estate even if they could assert legal professional privilege against the rest of the world.  

Trustees’ arguments

  1. The circumstance in which a trustee may be required to disclose a privileged document are those in which a trustee is required to disclose trust documents, ie, when the beneficiary has a proprietary interest in the document.
  2. If a beneficiary was not entitled to the document, because of the nature of the document or the status of the beneficiary, there could be no basis for joint privilege.
  3. As Ms Krok and her late father were merely objects of a discretionary power, they were only entitled to a limited range of documents which did not include the documents in dispute.  

Balancing a trustee’s legal professional privilege and a beneficiary’s right to inspect documents The key issue in this case is the relationship (if any) between:

  • a trustee’s right to keep legal advice confidential based on legal professional privilege, and
  • a beneficiary’s right under trust law to access certain trust documents.

Uncertainty about a beneficiary’s right to access certain trust documents There is a degree of uncertainty about the formulation of a beneficiary’s right under trust law to certain trust documents:14

  • Gzell J in Avanes v Marshall15 followed the approach advocated by the Privy Council in Schmidt v Rosewood Trust Pty Ltd IOM.16

In Schmidt, the Privy Council rejected the proprietary interest approach of Re Londonderry's Settlement17 and held that (subject to limited exceptions) there is no longer a general rule that a beneficiary has a right to inspect trust documents and in each case it is a matter for the court to decide by balancing the competing interests.

In Avanes, Gzell J refused to allow beneficiaries access to a legal opinion provided by a barrister to a solicitor which was for the personal guidance of the trustees. This is because, using the balancing approach in Schmidt, as ‘the documents do not relate to the exercise of any discretion or power the trustees possess’ the requirement for openness between the trustees and the beneficiaries was outweighed by the interests of the trustee in keeping the opinion confidential.

  • Bryson AJ in McDonald v Ellis18 did not follow the approach in Avanes and instead (in relation to a beneficiary of a fixed trust) followed the ‘established’ authority (including Re Londonderry's Settlement) of a strict beneficiary having a proprietary right of access to trust documents, subject to certain exceptions.

In Re Londonderry’s Settlement, the court held that beneficiaries have a right to inspect trust documents (which does not include the reasons for a trustee’s discretionary decision) and that trust documents are documents with the following characteristics:

  • the document is in the trustee’s possession
  • the document contains information about the trust that the beneficiary is entitled to know, and
  • the beneficiaries have a proprietary interest in the document.

In the absence of an appellate court decision, uncertainty will remain as to which approach Australian courts will follow.

Krok – overturns the ‘balancing’ approach and severs the nexus

In Krok, Judd J rejected the ‘balancing’ approach of Gzell J in Avanes on the basis that it would result in a trustee’s right to legal professional privilege being able to be eroded by a court’s exercise of discretion in relation to a beneficiary’s right to trust documents.19

Accordingly, Judd J removed any nexus between a trustee’s claim of legal professional privilege and a beneficiary’s right under trust law to certain trust documents.

Krok – Trustee’s legal professional privilege is held jointly with beneficiaries

The end result of the Krok decision is that Judd J held that there was not sufficient evidence for the trustees to maintain a claim for legal professional privilege over the relevant documents.

However, importantly, Judd J also stated (obiter dicta) that even if the trustees could maintain a claim for legal professional privilege over the relevant documents, Ms Krok also had a joint interest in the privilege in common with the trustees. Accordingly, the trustees were not entitled to rely on their claim for client legal privilege to withhold inspection of the documents from Ms Krok.

Implications of Krok for trustees

  • If a trustee seeks legal advice in relation to the administration of the trust and the cost of that advice is paid out of the assets of the trust, then, based on the principles in the Krok decision, the trustee and the beneficiaries jointly hold the legal professional privilege.
  • However, this rule cannot be applied inflexibly, eg, this rule will not apply if the cost of the legal advice is paid for out of the assets of the trust pursuant to a court order following the trustee defending itself against unjustified litigation by the beneficiary.
  • It is also important to remember that legal professional privilege is a ‘shield’ and not a ‘sword’. That is, a beneficiary must have a basis to access that document, such as:
    • a statutory right to do so20
    • a court granting the beneficiary access to trust documents under trust law, or
    • the beneficiary accessing those documents as part of litigation

The fact that privilege in a legal advice may be jointly held by a trustee and a beneficiary is not, of itself, a basis for the beneficiary to access the advice.

  • However, it does mean that a trustee cannot assert legal professional privilege to deny a beneficiary access to legal advice that they would otherwise be entitled to access.
  • This case has important implications for the legal advice that a trustee obtains including:
    • whether the trustee pays for legal advice out of trust assets or their own assets
    • whether a trustee should set up a process for obtaining legal advice so as to be able to contend that the advice was not in relation to ‘administration of a trust’
    • whether a preference for verbal advice will be evidenced over time
    • the ability of the trustee to withhold legal advice from a beneficiary during litigation, and
    • whether these principles apply to superannuation funds.
  • There is a consequent need for trustees to consider what processes they will use to manage the potential rights of beneficiaries to access legal advice obtained by the trustee.