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Rosewood Trust Ltd v Vadim Schmidt [2001] 3 ITELR 734

Ref.: Disclosure of trust information to the object of a power denied

An action on the disclosure of trust accounts and trust documents in the Isle of Man, first before the Deemster in the High Court and subsequently, on appeal, in the Court of Appeal of the Isle of Man, gave rise to a review of this aspect of the law trusts.

The arguments on behalf of Rosewood Trust Ltd in the Appeal Court changed from those presented by a different counsel before the Deemster in the High Court.

The facts of the case are as follows. Rosewood Trust Ltd took over from a previous trustee company two Manx discretionary trusts, the Angora trust and the Everest trust. Both settlements contained substantially the same provision. The trustee, in both trusts, was given discretionary powers. These powers depended on the meaning of a clause in the trust deeds which stated the trustees’ duties in the words

“with such gifts over and with and subject to such discretionary trusts powers of appointment or other powers or discretions ... and generally, with and subject to such trust powers and provisions and in such manner and in all respect for the benefit of all or any one or more than beneficiaries as the Trustee ... may at any time or times the ... appoint.”

The clause in each deed where these words appeared was complex, unpunctuated and archaic. There appears in the clause to be no clear distinction between the function of the trustee in the exercise of the trust and in the exercise of his powers. This proved to be an important element behind counsel’s submissions in the Appeal Court. The position does not seem to have been clear to anyone.

The transcript of the case suggests that the archaic wording created some doubt. “It thus seems that under each settlement Rosewood ... was given the various dispositive powers exercisable in favour of a class of objects described as “beneficiaries” and that, subject to exercising such powers, it held the trust fund and the income therefrom upon trust for charitable purposes” was how the Appeal Court interpreted this clause.

The court added that they understood that such “beneficiaries,” which the court admitted was used loosely, were the Russian businessmen associated with Lukoil and that one of the named beneficiaries, Vitali Schmidt, was senior executive of that large privatised Russian oil company. Distributions made to the beneficiaries were paid or transferred to certain Manx companies as nominees for Vitali Schmidt. The shares of the two companies, “Gingernut” and “Petragonis” were held by directors of the trust companies on trust for Rosewood as trustee for the Angora and Everest settlements. Substantial sums were paid to both companies from the settlements by Rosewood.

Vitali Schmidt died and his son Vadim Schmidt was appointed the administrator of his father’s affairs. He was concerned to appraise all his father’s assets particularly in the light of his father’s unexpected death and his suspicion that the executives of Lukoil were trying to interfere in his father’s interests. He recognised that very substantial funds, which had been held by the two companies, had been paid to him but nevertheless he commenced action against Rosewood as trustee of the two settlements and against the two companies for damages for breaches of trust and fiduciary duties.

Prior to the action, a Mareva injunction accompanied by a wide-ranging disclosure order was obtained against Rosewood. Because Rosewood had not operated separate trust accounts for the settlements the order was detailed and complex so as to avoid revealing details of the client or assets, which were not relevant to the action.

The respondent claimed that he should be entitled to inspect all trust accounts and all documents detailing receipt of trust assets and of all transactions relating to trust assets since Rosewood had failed to provide proper accounts and that the information which they had provided was insufficient for the respondent to fully understand the matter. He relied upon the report from Ernst & Young, which stated that for a full and accurate account it would be necessary to conduct an audit of both the settlement and the companies.

Rosewood contended that given the limited purpose of the Mareva injunction, and mindful of its duties of confidentiality, the information disclosed did not and could not amount to nor was intended or represented to be, a full accounting as might be made to a trust beneficiary.

Before the Deemster the arguments put by counsel for Rosewood were largely related first to matters covering the abuse of process in that the petition before the Deemster raised the same matters that had already been raised in the preceding action for breach of duty and the documents that he sought would be obtained on discovery in that action. Secondly, the confidentiality of the information sought and of the identities of other beneficiaries and, thirdly, the extent of the disclosure sought.

The Deemster considered that he could not accept the submissions that there was an abuse of process. The other action had been started for a different purpose and had sought remedies far wider than was asked for in the petition before him. Then, he was satisfied that there is no confidentiality as such between the trustees and the beneficiaries and that the beneficiary is entitled to know what the trustee has done with the money.

So, having agreed with the petitioner at this point the Deemster had to work out some mechanism by which the other clients of Rosewood would have their proper confidentiality protected. This called for an Order to provide the information but where confidential information relating to third parties was concerned this should be made available to the petitioner’s legal or accountancy advisers and not the petitioner himself or indeed anyone else. This resulted in a complex and lengthy order against which Rosewood appealed. Rosewood’s case was based on the abuse of process argument which had been used before the Deemster and on the Deemster’s failure to protect the privacy and confidentiality of the other beneficiaries and, thirdly, that the inspectors who were appointed should have been an independent syndicate since the “Chinese wall” offered by the undertakings gave insufficient protection.

Rosewood changed its counsel. The Appeal Court agreed that Rosewood could amend the petition of appeal. In the amended petition Rosewood recognised, as conceded in the court below, that a beneficiary under a trust, including under a discretionary trust, is entitled to see the trust documentation and accounts but Vadim Schmidt was not a beneficiary in any sense of the word under the trusts. Furthermore, his late father was only ever a mere object of a power and as such had no entitlement to inspect the trust documents or to receive information and, even if he did, the court below was wrong to make an order in favour of the administrator of his estate because other beneficiaries, including other objects of the trustees’ powers are entitled to confidentiality as against all third parties.

The Appeal Court accepted these new arguments. Beneficiaries, said the court, under a discretionary trust and objects of a dispositive power cannot be equated. As a mere object of a power Vitali Schmidt had no right to the disclosure of trust documents or information. He only had the right to require the trustee to consider the exercise of a power from time to time. Even if he did have the right to disclosure that entitlement derived from his status under the settlements and such entitlement must have ceased upon his death and could not be used by his personal representatives.

Counsel for Rosewood referred to the cases where the right of a beneficiary to the documents is a proprietary right. In O’Rourke v Darbishire [1920] AC 581 Lord Parmoor stated in connection with the right of the beneficiary “... this right is to be regarded as a paramount proprietary right in the cestui que trust, or as right to be enforced under the law of discovery.” Lord Wrenbury was more definite: “this has nothing to do with discovery. The right to discovery is a right to see someone else’s documents. The proprietary right is a right of access to documents which are your own.” The proprietary interest approach was adopted in Re Londonderry’s Settlement [1965] Ch 918.

Counter argument brought out the Australian case Hartigan Nominees Pty Ltd v Ridge [1992] NSWLR 405 where the judge said that concentration on the proprietary interest was unsatisfactory and that access should not be limited to documents in which a proprietary interest may be established.

Rosewood also submitted that the decided cases unequivocally demonstrated that the sole right of an object of a power was to require the trustee to consider the exercise of a power from time to time. Cases such as In Re Gulbenkians’s Settlement and McPhail v Doulton [1971] AC 424 and others were brought out to support this view.

Counsel for the other side submitted that a discretionary trustee is in a fiduciary position with certain fiduciary duties and that the object of a dispositive power is entitled to enforce compliance of those fiduciary duties and obtain an account of the trustees’ stewardship of the trust assets. The cases which supported this were criticised by counsel for Rosewood as not containing a detailed analysis of the law on the position of the beneficiary or object in question. These cases included Chaine-Nickson v Bank of Ireland, Hartigan Nominees Pty v Ridge [1976] IR 393 and Murphy v Murphy [1999] IWLR 782. These and others had to be considered in detail.

The court concluded that, following the analysis of the cases by counsel, these authorities relied upon by the respondent were not persuasive. The court gave its decision in favour of Rosewood and stated that the order made by the Deemster must be discharged. The court said that it was not necessary for them to consider whether or not a right ceased on the death of the person entitled to information and so could not be used by his personal representatives nor was it necessary for them to consider the privacy and confidentiality of the other beneficiaries, nor matters relating to the order made by the Deemster.

This case is to be heard by the Privy Council.