Beneficiary disclosure rights clarified

Erceg v Erceg [2016] NZCA 7

The Court of Appeal has set out principles under New Zealand law dealing with the rights of beneficiaries to disclosure of trust information. The Court adopted and applied principles from the Privy Council’s decision in Schmidt v Rosewood Trust Limited when reviewing on appeal a High decision refusing to grant access to certain records and information held by a trust.

The case emerged from the often rancorous relationships within the family of the late Michael Erceg who made a sizeable fortune in the RTD liquor trade. His company, Independent Distillers, was sold was sold for $1 billion ten years ago and since then there has been a stand-off between family interests of his widow and those supporting Michael’s brother Ivan Erceg. Ivan was spectacularly bankrupted over the failure of superyacht constructor Sensation Yachts. He sought disclosure of various trust documents, essentially because he wished to take issue with the fact that, although a discretionary and final beneficiary of the trusts in question, he had not benefited from them when the trusts were wound up in 2010. The High Court had refused to require the trustees of the trusts to provide the documents and Ivan Erceg appealed.

There were three issues in play in the appeal. The first was whether Ivan Erceg had standing to seek the documents given that he had been adjudicated bankrupt. The High Court had found that he had lost his standing to bring proceedings because his rights as beneficiary were property and so had fallen into the hands of the Official Assignee. The Court of Appeal dealt swiftly with this issue, confirming that a bankrupt beneficiary does not lose their relationship with the trust and so retained standing in proceedings such as these. However, that small win did not avail Mr Erceg in the end.

The second issue was whether the High Court had correctly concluded that, even if Mr Erceg had standing, the Court would have exercised its discretion not to require documents to be provided to him. Given the opposing views and lack of appellate guidance in New Zealand, the Court set out the principles that should apply to disclosure of trust documents. It concluded that:
  1. When considering a request for documents the trustees are exercising a discretion in the discharge of a fiduciary duty owed to beneficiaries.
  2. When the Court becomes involved it does so under its role in the supervision of trusts.
  3. There is neither a presumption in favour nor against disclosure.
  4. Trustees must weigh three factors in making their decision: What ensures the sound administration of the trust; is the decision consistent with the trustee’s duties, especially to account; is it consistent with meeting the settlor’s wishes?
The Court then turned to the list of considerations which the Privy Council had made in Schmidt. These were:
  1. Issues of personal or commercial confidentiality.
  2. The interest held by the beneficiary seeking disclosure.
  3. Competing interests between beneficiaries, with the trustees, or third parties.
  4. The need to safeguard against illegitimate use of information.
  5. The effect of disclosure on family relationships.
  6. The nature and context of the application for disclosure.
Balancing these factors was for the trustees and the Court said it ought not to intervene unless it was clear that the trustees had failed to consider relevant matters, considered irrelevant matters or were plainly wrong.  The Court observed that an application for disclosure of documents had to be considered as ancillary to the right of a beneficiary to have the trust properly managed and disclosure ought to be shaped by a consideration of what was required to hold trustees to account for their management of the trust.

The Court concluded that the factors which the High Court had taken into account when weighing whether or not to require disclosure were relevant and that no irrelevancies had been considered. Indeed, it concluded that the matters which were asserted to be irrelevant actually showed the trustees behaviour in a good light which was a relevant factor to be considered. Central to the consideration of these factors was evidence that the settlor, Michael Erceg had not wanted Ivan to be anywhere near his affairs and that disclosure of the basis on which others had benefitted was likely to lead to familial tension, a matter supported by some inflammatory communications from Ivan Erceg with the trustees. There were also unresolved allegations of email having been forged.

Despite having concluded that no disclosure was required the Court went on to explain what it would have required were its earlier conclusions incorrect. It is clear that Ivan Erceg would have received a fairly tightly constrained disclosure through an independent intermediary appointed for the purpose to examine trust documents and answering certain very specific questions. Essentially the answers to those would have told Mr Erceg if there had been funds with which to pay final beneficiaries of the trusts when they were wound up, whether all distributions had been made to beneficiaries of the trust and whether the trustees had considered whether Ivan should benefit from the trusts. The Court envisaged that matters would then be remitted to the High Court for further orders in the light of the independent report.

The Court of Appeal’s approach is certainly a reminder that a beneficiary has limited rights and that trustees will be given the latitude that is required to manage their trusts properly. But there is also a dynamic in the case which could lead to worrying and potentially unjust outcomes. In this case the approach taken to the application seems to have been coloured by the fact that the relationship between the applicant and the trustees (who included the applicant’s sister in law) had deteriorated to the point where they essentially represented implacable foes on either side of a deep family rift. Those circumstances could well present exactly the sort of case where a person with a legitimate hope of benefiting from family wealth could be locked out unjustifiably. Yet if the aggrieved person clamours too loudly they may be seen to threaten family relationships (even though the breakdown of those may have led to the lock out) and cement the view that they should not be able to inquire into how such breakdown might then have led to questionable decision-making by trustees.
© G D Clews, 2016           

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