“Now we got bad blood” - Court of Appeal confirms beneficiaries’ right to trust documents is circumstances dependent

Monday 22 February 2016

Author: Rebecca Rose

​​​​​​​​​​There is no presumption for or against disclosure of trust docum​ents to beneficiaries, even bankrupt beneficiaries. But whether to disclose information and the extent of any disclosure are discretionary decisions for the trustees, according to a recent decision of the Court of Appeal.

The decision (Erceg v Erceg1) remedies the lack of New Zealand appellate guidance about the correct approach to disclosure of trust information. The Court’s conclusions apply to both:

  • trustees of large and small trusts facing information requests from beneficiaries; and

  • courts dealing with applications by either:

    • beneficiaries to review trustees’ disclosure decisions; or

    • trustees about how to respond to a beneficiary’s information request.

The context

The long-running and bitter family stoush over the fortune of the late Independent Liquor magnate, Michael Erceg (who was killed in a helicopter accident nearly 10 years ago), is the decision’s context.

Ivan Erceg (Michael’s brother) is a former superyacht builder and director of the now liquidated Sensation Yachts Ltd. The Court declared him bankrupt in 2010. 10 months later, the trustees wound up the two trusts that had held much of Michael’s fortune. Ivan did not receive a distribution from either trust. Subsequently, he requested a variety of documents from the trustees about the trusts. The trustees refused his requests. Their reasons for doing so included Michael’s express wish as settlor of the trusts for confidentiality, a confidentiality clause in the trust deeds, and the trustees’ view that disclosure to Ivan would “create further disharmony between family members where there was already an unfortunate history of tension and conflict”.

Ivan brought proceedings seeking orders that, as a discretionary and final beneficiary, the trustees were required to disclose to him various documents relating to administration of the trusts. Ivan’s mother (Millie Erceg – who also did not receive a distribution from the trusts upon their winding up) had earlier had some success in obtaining limited disclosure of certain trust documents.2

The trustees argued that Ivan did not have standing to seek disclosure of trust documents because, upon bankruptcy, section 101 of the Insolvency Act 2006 vested all of a bankrupt’s property (including Ivan’s claim) in the Official Assignee. Alternatively, the trustees argued that if Ivan was entitled to bring his claim, the Court should refuse disclosure. The High Court agreed with the trustees in relation to both arguments.3 Ivan appealed to the Court of Appeal.

Court of Appeal’s conclusions

The Court of Appeal held that bankruptcy did not deprive Ivan of standing to bring his claim. But it found that in the case’s “unusual circumstances” requiring “fine judgement” about whether to order disclosure and the extent if so, that the High Court had not erred in law or principle, overlooked a relevant point, factored in an irrelevant point, or made a decision that was plainly wrong. It therefore dismissed Ivan’s appeal overall.

Key conclusions reached by the Court include:

Standing of bankrupt beneficiaries to bring claims

  • Subject to a trust deed’s express terms, a beneficiary’s bankruptcy does not alter his/her beneficiary status. As such, a bankrupt beneficiary remains entitled to have the trustees’ duties to beneficiaries enforced and, to that end, may request disclosure of trust documents.

  • Although it may transpire that a bankrupt beneficiary in bringing his/her claim is actually acting on behalf of creditors, there is nothing wrong with that. The fact of bankruptcy does not affect a beneficiary’s standing.

Principles guiding disclosure of trust documents

  • Beneficiary requests for disclosure of “trust documents”4 require an exercise of discretion by trustees as part of the fiduciary duty they owe. If trustees decide to disclose materials, the trustees’ discretion includes whether the disclosure should be complete or partial (e.g. with redactions).

  • Following a request for disclosure, the core question for trustees is always: what, if any disclosure will best:

    • ensure the trust’s sound administration;

    • discharge the powers and discretions in respect of the fiduciary obligations the trustee owes the beneficiary, in particular the trustee’s duty to account; and

    • meet the trustee’s obligation to fulfil the settlor’s wishes?

  • In any exercise of the discretion, trustees must balance all relevant factors, including the nature and context of the application for disclosure and the well-known list of matters that the Privy Council set out in Schmidt v Rosewood.5 The outcome is therefore “circumstances-dependent”.

  • Where a court is involved in reviewing a trustee’s exercise of discretion, beneficiaries do not need to establish a proprietary right to information as a precondition for disclosure. That is because review of trustees’ decisions is part of the Court’s supervisory function over trusts and trustees. But the well-established principles governing courts’ review of trustees’ discretionary decisions apply. Consequently, a court will not interfere simply because it considers a trustee’s decision to be unwise or because it would have exercised the discretion differently.

Implications

While appellate guidance about disclosure requirements in the trust context is welcomed, the decision does not create one rule for all cases and some uncertainty remains.

There are five key points to take away:

  • It is now clear that there is no general presumption for or against disclosure of trust documents to beneficiaries, including bankrupt beneficiaries. All vested or contingent beneficiaries may seek disclosure of information about a trust. But whether or not disclosure is required from trustees is “circumstances-dependent”.

  • A confidentiality clause in a trust deed does not alone preclude disclosure. Likewise, the absence of an express power for trustees to withhold information does not always require full disclosure. Instead, the information (and therefore the disclosure) required to enable beneficiaries to hold the trustees to account will vary from case to case. 

  • If sufficient evidence exists for a court to find that a trust’s aim is to provide for wider family interests, that factor will generally weigh in favour of disclosure.

  • Where court-ordered disclosure to another beneficiary has already occurred notwithstanding a confidentiality clause and there has been no specific complaint against the trustees, such factors may tell against any improper administration of the trust by the trustees. In those circumstances, it will likely be harder for other beneficiaries to obtain disclosure.

  • When deciding whether to give disclosure, trustees must take into account all relevant and no irrelevant considerations. In any particular case, items (b) and (c) of the core question above may conflict. Trustees need to decide how to weigh and apply the various relevant considerations. That may not be an easy task. For large trusts and/or significant decisions, an application seeking directions from the Court under section 66 of the Trustee Act 1956 may be the safest route for trustees. If time and cost are of concern, appointment of an agreed independent person to assess whether disclosure ought to be given and if so to what extent and upon what terms may be a useful alternative.

What next?

Legislative changes to information disclosure rights and duties and general trust law have been suggested.

The Law Commission completed its review of the law relating to private trusts in 2013. In March 2014, the Government accepted the Law Commission’s recommendation for a new Trusts Act but said further analysis of the other recommendations was needed.

In terms of information rights, the Law Commission has recommended that the following be included in any new Trusts Act:

  • a presumption that trustees must notify beneficiaries who the settlor intended to have a realistic possibility of receiving trust property as soon as practicable of the fact that they are a beneficiary; and

  • a requirement for trustees to supply trust information to any beneficiary who requests it within a reasonable time.

However, until the Government implements a new statute, the Court of Appeal’s Erceg decision is likely to remain among the best guidance available about how beneficiaries and trustees should each approach requests for disclosure of trust information.

If you would like to discuss the Erceg case’s potential relevance to your trust, please contact the lawyers featured or your usual Bell Gully adviser.


1 Erceg v Erceg [2016] NZCA 7.

2 Erceg v Erceg [2014] NZHC 155.

3 Erceg v Erceg [2015] NZHC 594.

4 As the Court of Appeal recognised, the definition of “trust documents” is not finally settled. Courts internationally have generally accepted, however, that a settlor’s “wish-list” falls within the definition and that trustees are not required to give beneficiaries the reasons for their discretionary decisions.

5 Schmidt v Rosewood Trust Ltd [2003] UKPC 26, [2003] 2 AC 709.


Disclaimer

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

For more information
  • Ian Gault

    Partner and Deputy Chair Auckland
  • Willy Sussman

    Partner Auckland
  • Rebecca Rose

    Senior Associate Auckland
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