To disclose or not?

Thursday, 01 October 2009
The factors a Cayman Islands trust should take into account when asked to disclose information to beneficiaries.

The purpose of this article is to consider the interplay between beneficiaries’ rights to trust documents and trustees’ obligations of confidentiality from a Cayman Islands perspective. Guidelines from the Cayman court were given as long ago as 1992 and are still relevant following Schmidt v Rosewood. Special considerations apply in the Cayman Islands, in particular due to confidentiality legislation.

The Cayman position

In In Re Ojjeh Trust [1992-93] CILR 348, Smellie Ag. J (as he then was – now the Chief Justice of the Cayman Islands) held that the principles governing the disclosure of information to beneficiaries, in particular about the affairs of underlying trust companies, were as follows:

  1. beneficiary will normally be permitted to inspect and take copies of essential trust documents;
  2. that normal right does not extend to detailed information about the affairs of companies owned by the trust. To obtain information of that kind, the beneficiary must make out a special case;
  3. to make out a special case, the beneficiary must specify the documents that he or she wishes to see;
  4. there must be no valid objection by the trustees or directors, or any beneficiaries whom the trustees consider should properly be consulted upon the matter; and
  5. the beneficiary seeking disclosure must give proper assurances that they will not disclose the documents to anybody but his or her own legal or other advisors and will not make copies save as he or she may be properly advised.

Trustees are required to undertake a careful balancing exercise between the interests of individual beneficiaries in complete disclosure and the interests of the trust as a whole in limiting disclosure. It is not enough for the trustees unilaterally to decide what information may be commercially sensitive or what documents may be used by a beneficiary. The above principles also apply to a parent or guardian ad litem of a minor beneficiary.

In Lemos v Coutts [1992-93] CILR 460, the Cayman Islands Court of Appeal held that although a beneficiary has a proprietary right to trust documents, it is by no means absolute and there may be documents or categories of document that it would be just and proper to exclude. Kerr, JA said that in general an order for accounts will be granted save in circumstances where the documents are not relevant or evidentially essential to the beneficiary’s case, or where the probative value is minimal and considerably outweighed by prejudice to the other beneficiaries or to the proper administration of the trust.

In the particular case, it was ordered that the trustees provide properly audited accounts to the beneficiary, but subject to an undertaking that he would not use the material obtained in foreign proceedings in which he was seeking to set aside the trust.

Schmidt and beyond

The Privy Council in Schmidt v Rosewood [2003] UKPC 26 held that rather than considering whether or not a beneficiary has a proprietary right to information, the correct approach is to regard the right to seek disclosure of trust documents as one aspect of the court’s inherent jurisdiction to supervise, and if necessary to intervene in, the administration of trusts. (Although in a different context, this principle was applied by the Cayman Islands Grand Court in Lemos v Coutts [2004-05] CILR 317.) The Privy Council concluded in Schmidt as follows:

‘No beneficiary… has any entitlement as of right to disclosure of anything which can plausibly be described as a trust document. Especially when there are issues as to personal or commercial confidentiality, the court may have to balance the competing interests of different beneficiaries, the trustees themselves and third parties. Disclosure may have to be limited and safeguards may have to be put in place.’

The Cayman court would certainly follow Schmidt in disclosure cases today. However, in practice the test it would apply is unlikely to have changed significantly. The Privy Council referred to the importance of balancing competing interests, which the court did in Ojjeh, and to putting in place necessary safeguards, which can be seen in practice in Lemos v Coutts.

There is as yet no reported decision in the Cayman Islands on the disclosure of letters of wishes, so the English case of Breakspear v Auckland [2008] EWHC 220 (Ch) would be significant. In that case, Briggs J said that there is an inevitable tension between confidentiality and disclosure in relation to letters of wishes. They are generally brought into existence for the sole purpose of serving and facilitating an inherently confidential purpose, and are properly to be regarded as confidential to a similar extent to the confidential process itself. However, confidence may be overridden by the exercise of the court’s discretion.

The Confidential Relationships (Preservation) Law

Trustees of Cayman Islands trusts should consider the application of the Confidential Relationships (Preservation) Law (2009 Revision) (the CRPL), which governs the disclosure of confidential information. It defines ‘confidential information’ as including information concerning any property that the recipient thereof is not, otherwise than in the normal course of business, authorised by the principal to divulge. Subject to certain exceptions, it is an offence to divulge or obtain confidential information.

The CRPL applies to ‘all confidential information with respect to business of a professional nature which arises in or is brought into the Islands and to all persons coming into possession of such information at any time thereafter whether they be within the jurisdiction or thereout’. It therefore purports to have extraterritorial effect.

The CRPL will not apply to any professional person acting in the normal course of business. The definition of ‘professional person’ expressly includes trust companies and their employees. ‘Normal course of business’ is defined as ‘the ordinary and necessary routine involved in the efficient carrying out of the instructions of a principal including compliance with such laws and legal process as arise out of and in connection therewith and the routine exchange of information between licensees’. There is little guidance as to the scope of this exception, and it should therefore be used with caution.

The CRPL also does not apply where the person divulging the information has the consent of the relevant principal to do so. ‘Principal’ is defined as a person who has imparted to another confidential information in the course of the transaction of business of a professional nature. In In re Merrill Lynch [2006] CILR N33, it was held that in the context of a trust the relevant principal is the settlor. In many cases (such as where the settlor has died) it may not be possible to obtain the settlor’s consent to disclosure.

An application may be made under the CRPL for directions if difficulties arise, but only where proceedings are on foot. In the context of a trust it will often be more appropriate to seek directions under the Trusts Law (2009 Revision). Indeed, in In re Merrill Lynch the court held that it is appropriate for a trustee to make an application to court for guidance as to the propriety of revealing information, even when the settlor has consented to disclosure, since he holds a fiduciary duty to the beneficiaries under the trust.

Applications for directions

A trustee may apply to the court for directions under section 48 of the Trusts Law (2009 Revision) (the ‘Trusts Law’) and/or Order 85 of the Grand Court Rules (GCR). Trustees and beneficiaries are encouraged to refer issues as to disclosure to the court: in Ojjeh, the Judge said ‘…the trustees and the beneficiaries should be in no doubt that they should refer disputes as to disclosure to this court’.

The Trusts Law enables a trustee to apply to the court at any time for ‘an opinion, advice or direction on any question respecting the management or administration of the trust money’. GCR Order 85 is even broader in scope, stating that an action may be brought, among other things, for the determination of ‘any question arising in the… execution of a trust’ and ‘any question as to the rights or interests of a person claiming to be… beneficially entitled under a trust’.

If trustees act on the directions given by the court, they will be deemed to have discharged their duty as trustee in respect of the subject matter of the application, unless they have been guilty of ‘any fraud, wilful concealment or misrepresentation’ in making the application.

Trustees should ensure that all relevant information is put before the court, both to enable the court to carry out the necessary balancing exercise, and to ensure that they can safely act in accordance with the court’s directions.

STAR trusts

STAR trusts are statutory trusts, the objects of which may be persons or purposes or both. The trust instrument specifies one or more enforcers, who have standing to enforce the trust. Unless they are also enforcers, beneficiaries do not have standing to enforce the trust, or any enforceable right against a trustee or an enforcer. Accordingly it is the enforcers, rather than any beneficiaries, of a STAR trust who have the right to disclosure of appropriate trust information and the same principles applying to disclosure to beneficiaries of an ordinary trust will apply. GCR Order 85 expressly states that a trustee may apply to the court for the determination of ‘any question as to the rights or duties of an enforcer’.

Conclusion

Whilst trustees generally have a duty to provide information to beneficiaries arising out of their fiduciary obligation to account for their dealings with trust property, no beneficiary is entitled as of right to disclosure of trust documents or trust information. Indeed, there may be compelling reasons for refusing disclosure, in particular confidentiality considerations, but each case will depend on its own facts and on a balancing exercise between the competing interests. If there is any doubt or disagreement, trustees should apply to the court for directions.

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Lindsay Luttermann

Lindsay Luttermann TEP is an Attorney at Law with Walkers.

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