Trust in control

Sunday, 01 September 2013

In In the matter of an application for information about a trust [2013] SC (Bda) 16 Civ, a beneficiary of a trust applied to the Supreme Court of Bermuda for disclosure of the trust’s financial information. However, the trust deed contained an information control mechanism designed to prevent disclosure of financial information to a beneficiary unless the protector consented. The protector, who was also the principal beneficiary of the trust, had refused to release information to the plaintiff beneficiary. This raised two important legal questions:

  1. whether the mechanism was valid on its face; and
  2. the principles to be applied by the court on an application by a beneficiary for relief when a protector refuses to give consent.

Validity of the information control mechanism

Kawaley CJ held that the control mechanism did not violate the irreducible core requirements of a trust and was not invalid on its face, considering that:

  • the trustees were required to have the accounts independently audited;
  • the protector was empowered to obtain financial information from the trustees; and
  • the protector was required to have regard to the interests of the beneficiaries when exercising his supervisory powers.

Although the protector was not expressly accountable to the beneficiaries in respect of the exercise or non-exercise of his powers, the trust deed did not purport to exclude the court’s supervisory jurisdiction over the trust generally or in respect of the beneficiaries’ ability to enforce the due administration of the trust by obtaining appropriate financial information by applying to the court (at [27]).

Principles to be applied by the court

Kawaley CJ suggested that the court’s supervisory jurisdiction exists to enable the beneficiaries to hold the trustees accountable to ensure the due administration of the trust. The court must assess to what extent the information control mechanism is designed to ensure the due administration of the trust, and whether failure to order disclosure would substantially impair the fundamental requirements of trust accountability (at [37]).

Unless the information control mechanism has broken down (at [57]), there is no presumption in favour of disclosure, but nor does a beneficiary have to show a capricious or perverse use of the protector’s veto (at [43]). The Chief Justice distinguished the Queensland case of Tierney v King (1983) 2 Qd R 580, which counsel for the trustees relied on in support of a perversity requirement. Tierney was distinguished as it concerned a different context, namely an appeal from a decision of the trustees where the judge opined that the object of the right of appeal was not the substitution of a judge’s opinion for that of a trustee. The correct approach for the court to take is to show due deference to the trust deed and to order disclosure only if it is necessary in the proper exercise of the court’s inherent supervisory jurisdiction. This involves exercising its own discretion in supervising and, where necessary, intervening in the administration of trusts. It is not the function of the court merely to review the trustees’ exercise of discretion (at [44]).

Kawaley CJ found that there was a prima facie case for disclosure, given the potential conflict between the protector’s dual role of protector and principal beneficiary, the possible erosion of the plaintiff’s interest by distributions made to the protector, and an acrimonious relationship between the parties. The information control mechanism was not working properly, and the plaintiff had not waived his rights by agreeing that the principal beneficiary could take the role of protector (at [54]-[55]).

After citing reasons given in a confidential appendix to the judgment, Kawaley CJ ruled in favour of disclosure of certain financial documents. He concluded by saying that a beneficiary must be entitled to such information as is needed to hold the trustees to account, but cannot expect information if it does not serve that aim or if it would damage the interests of other beneficiaries (at [63]). The judgment will give comfort both to trustees concerned about the validity of control mechanisms, and to beneficiaries, by setting out when disclosure might be ordered. 

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Peter Sanderson

 Peter Sanderson is an Associate with Wakefield Quin ltd in Hamilton, Bermuda.

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