Who needs to know?

Daniel Hochberg says regulating trustees obligations to beneficiaries poses a number of problems. Daniel Hochberg is a barrister at 9 Old Square.



Practising trust lawyers in offshore jurisdictions should not be surprised by the English Court of Appeal's recent observation in Armitage v Nurse (1997) that there is an irreducible core of obligations owed by the trustees to the beneficiaries, the enforcement of which is fundamental.

Similar things can be said about many legal obligations. But one topic which is ripe for consideration in this area is the question of the rights of beneficiaries to trust information. That is the subject of the Jersey Law Commission's first consultation paper, which was published last month.

It asks whether trustees ought to owe a duty to beneficiaries to inform them that they are beneficiaries, and what limits might be imposed, and by whom, on trustees' obligations to disclose trust documents to beneficiaries.

The English case of Hawkesley v May (1956) suggests trustees are obliged to inform beneficiaries that they have vested interests. But there are obvious difficult cases.

It may be practically impossible or prohibitively expensive to inform a wide discretionary class of many thousands of people that they are beneficiaries of a trust, and to do so might excite false hopes. A drafting answer is to define a narrow class of beneficiary but confer a wide power of appointment to add to the class.

A harder case is where a beneficiary suffers from an expensive drug addiction but is not under the protective jurisdiction of any court. It may be harmful for him to know that trustees control substantial funds, and trustees might reasonably wish to withhold the information from the beneficiary.

This case suggests scope for the role of an "enforcer" of trustees' duties, even in cases where the trust has personal beneficiaries. That may be achieved using a new Cayman Islands "special trust" formed under the Special Trusts (Alternative Regime) Law 1997.

Special trusts have generated controversy precisely because they are designed so that only the enforcer is entitled to enforce the trust obligations against the trustees.

But it is not self-evident why enforcement by beneficiaries should in all cases be preferable to enforcement by an enforcer. An enforcer in a fiduciary position (and liable to report to the court) may be more impartial than a beneficiary motivated by self interest and not by the interests of other members of the beneficial class.

The second question gives rise to other problems. The trustees hold the trust assets for the benefit of beneficiaries, not for themselves. Their fundamental obligation is to provide an account of their dealings with the trust property. An account is information. But since Re Londonderry's Settlement (1965) it has been recognised that, unless litigation has started, trustees are entitled to withhold information about how they exercised their discretions. Beneficiaries must be given an account of the trustees' dealings with the trust assets, but not of the reasoning behind them.

The Jersey Law Commission's primary concern is the question of whether the settlor or protector of the trust should be able to restrict or entirely exclude the rights of beneficiaries to accounts or other information about the trust. To exclude the right to an account would be inconsistent with the trustees' fundamental obligation. But there are good reasons for autonomous decision-making by trustees.

The commission's suggested options include legislatively defining what information trustees must produce, defining the restrictions which a settlor may lawfully impose, or leaving the law unchanged.

There is much to be said for leaving the law unchanged to be developed judicially, case by case. Drafting definitions leads to innovative avoidance techniques. And access to information is in a state of electronic revolution.

Trustees are already obliged to produce accounts showing what has happened to the trust fund, and courts can compel them to do so. Beneficiaries or enforcers should consider the accounts. If there appears to have been a departure from the trustees' obligation to act prudently, the question of replacing the trustees or taking proceedings will arise.

In proceedings, the trustees must disclose all their relevant documents. If replaced, they will have to hand over the trust administration documents to their successors.

There is no reason why courts should not continue to exercise control, having regard in each case to a settlor's express desire to restrict trustees' obligations to provide information, but nevertheless ensuring that the trustees' fundamental obligations can be enforced.