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Beneficiaries, Beneficiary rights, General, Right to trust information, Trustees

A step back for beneficiaries or a nil all draw?

The Court of Appeal decision in Erceg v Erceg has provided the Court of Appeal’s view of the correct approach to the disclosure of trust information to beneficiaries.  Prior to this Court of Appeal decision in Erceg v Erceg it was settled law in  New Zealand that beneficiaries had a rebuttable right to trust information pursuant to the High Court’s inherent jurisdiction to manage trusts.  No information – no ability to establish if the trustees are acquitting their responsibilities appropriately.  Perhaps a fair and reasonable position given the very limited rights that beneficiaries have to ensure the protection of what could be considered an indeterminable interest in a fungible asset?

However, the position is not hopeless, the Court of Appeal stating at [27] that while  “No beneficiary has an entitlement as of right to disclosure of trust documents” and “Consequently, there is no presumption favouring disclosure”  importantly  “nor is there a presumption against disclosure.

Erceg v Erceg presents a complete sea change regarding the assessment of whether beneficiaries are entitled to information as the basis upon which any challenge will now be decided is not by reference to any beneficiary’s right to ensure the proper management of the trust; but rather by reference to whether or not the trustees have correctly exercised a discretion regarding the provision of information.

The decision whether or not the trustees will make disclosure is not by reference to beneficiary rights, but rather requires the exercise by the trustees of discretion in the discharge of a fiduciary duty owed by the trustees to a beneficiary.  As noted at [26] in Erceg (references removed):

“…This duty was described in one of the leading texts as “… the core accountability of trustees to [beneficiaries]”. When the Court is involved, it should approach review of the trustee’s decision as an incident of its supervisory function over trusts and trustees. It is wrong and unnecessarily complicated for a trustee or the Court to approach disclosure as an inquiry as to whether or not the beneficiary making the request has a proprietary right to inspect — that is, as requiring “the adjudication upon a proprietary right” “It is neither sufficient nor necessary” that an applicant beneficiary establish a proprietary right as a precondition for disclosure.”

The standard that needs to be failed, by the trustees, such that the court will intervene, is that that the trustees must have “erred in law or principle, overlooked a relevant point, factored in an irrelevant point or made a decision that is plainly wrong.” (Erceg at [32]).

The considerations for trustees will always be circumstances-dependent.  However, wise trustees (and even wiser beneficiaries who are seeking information) should consider the “excellent guide” (as noted by the Court of Appeal in Erceg) provided by Schmidt v Rosewood Trust Limited as to the factors to take into account when making a decision regarding the provision of information to beneficiaries:

(a) Whether there are issues of personal or commercial confidentiality;

(b) The nature of the interests held by the beneficiary or beneficiaries seeking disclosure;

(c) The competing interests of — and therefore the impact on — the beneficiary or beneficiaries seeking disclosure, the trustee(s) themselves, other beneficiaries and any affected third parties;

(d) Whether some or all of the documents can be withheld in full, or disclosed only in a redacted form;

(e) Whether safeguards should be imposed on the use of the disclosed trust documentation (for example, undertakings or professional inspection) to avoid illegitimate use;

(f) Whether (in the case of a family trust) disclosure would be likely to embitter family feelings and the relationship between the trustee and applicant beneficiary to the detriment of the beneficiaries as a whole.

The Court of Appeal went on to suggest the addition of:

(g) The nature and context of the application for disclosure.

The addition of point (g) to the list may provide some solace for beneficiaries given that (in the writer’s experience) the practical reality is that many information disclosure request refusals are not based on trustees making a considered exercise of discretion, but more a knee-jerk reaction to ensure the trustees avoid scrutiny.

The approach trustees should adopt when considering a request for disclosure is (see Erceg at [29]:

“What, if any, disclosure will best:

(a) ensure the sound administration of the trust?

(b) discharge the powers and discretions in respect of the fiduciary obligations the trustee owes the beneficiary, in particular the trustee’s duty to account?

(c) meet the trustee’s obligation to fulfil the settlor’s wishes? This refers to the principle that the exercise by a trustee of the trustee’s dispositive discretionary powers is “an essentially confidential process”. That was the phrase used by Briggs J in Breakspear v Ackland where the Judge gave this explanation of the confidential process:

It is in the interests of the beneficiaries because it enables the trustees to make discreet but thorough inquiries as to their competing claims for consideration for benefit without fear or risk that those inquiries will come to the beneficiaries’ knowledge. They may include, for example, inquiries as to the existence of some life-threatening illness of which it is appropriate that the beneficiary in question be kept ignorant. Such confidentiality serves the due administration of family trusts both because it tends to reduce the scope for litigation about the rationality of the exercise by trustees of their discretions, and because it is likely to encourage suitable trustees to accept office, undeterred by a perception that their discretionary deliberations will be subjected to scrutiny by disappointed or hostile beneficiaries, and to potentially expensive litigation in the courts.

Patently, this requires a trustee to balance those aims, the latter two of which may be opposed in any particular case.”

A post script of sorts to Erceg provides a useful guide as to how trust information might be provided to a beneficiary in a hostile situation.  It is useful to consider that there are many shades of grey in the provision of information and that it is not necessarily all or nothing; rather what will suffice in the circumstances at hand.

Editor’s note:

The question of a bankrupt’s beneficiary’s standing or rights to trust information will be addressed in a separate blog.

Note that leave to appeal was granted by the Supreme Court on 17 June 2016 – the approved question being:

Should the conclusion that disclosure not be made/required be set-aside?

 References:

  • Erceg v Erceg [2016] NZSC 69
  • Erceg v Erceg [2016] NZCA 7
  • Schmidt v Rosewood Trust Limited [2003] UKPC 26, [2003] 2 AC 709
  • Breakspear v Ackland [2208] EWHC 220

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