Privy Council Appeal No. 2 of 2002
Vadim Schmidt Appellant
Rosewood Trust Limited Respondent
THE STAFF OF GOVERNMENT DIVISION
OF THE ISLE OF MAN
JUDGMENT OF THE LORDS OF THE JUDICIAL
COMMITTEE OF THE PRIVY COUNCIL,
Delivered the 27th March 2003
Present at the hearing:-
Lord Nicholls of Birkenhead
Lord Hope of Craighead
Lord Hobhouse of Woodborough
Lord Walker of Gestingthorpe
[Delivered by Lord Walker of Gestingthorpe]
The terms of the settlements.
(1) "The Trust Period" and "the Accumulation Period" are both defined as the period of 80 years from the execution of the settlement (and that period is by clause 2 the perpetuity period permitted by the law of the Isle of Man) subject to powers for the trustees to terminate either period before the expiration of 80 years.
(2) "The Beneficiaries" are defined as the Royal National Lifeboat Institution ("the RNLI") and the persons listed in the Second Schedule. That schedule (originally copied in a redacted form, but later without redaction) contains the names of Mr Schmidt and other Lukoil senior executives.
(3) "The Protector" is defined as Mr Schmidt "or any other person holding the office of Protector hereunder".
Clause 3 provides for the settlement to be regulated by the law of the Isle of Man, subject to a power for trustees to change the proper law.
(1) Clause 4(1) contains a wide power of appointment exercisable by the trustees, with the prior written consent of the Protector, by deed executed during the Trust Period. The objects of the powers are all or any one or more of the Beneficiaries, subject to certain restrictions set out in the proviso to clause 4(1). Some of these restrictions relate to United States taxation and need not be set out in detail, but it is notable that provisos (ee) and (ff) are as follows:
"(ee) no distribution of income shall be made to any beneficiary who has not attained the age of twenty-one years except in payment of educational or necessary medical expenses or for the alleviation of hardship.
(ff) no distribution of capital shall be made to any beneficiary who has not attained the age of twenty-five years except in payment of educational or necessary medical expenses or for the alleviation of hardship."
(2) Clause 7 contains a comparable power (except that the consent of the Protector is not required) for the trustees to make transfers to other settlements benefiting all or any of the Beneficiaries.
(3) Clause 5 contains a power for the trustees to accumulate income during the Accumulation Period.
"(2) Upon the death of any Beneficiary the Trustee shall hold that portion of the Trust Fund to which the deceased Beneficiary had been entitled during his lifetime UPON TRUST for such person or persons as the deceased Beneficiary had notified the Trustee in writing and in the absence of such notification for that person or those persons whom the Trustee believes to be the closest surviving relative or relatives of the deceased Beneficiary."
The problem here is that unless and until the trustees have exercised their power of appointment under clause 4(1) in such a way as to give any of the beneficiaries a fixed entitlement (for instance, a life interest in some fraction of the trust fund) the reference to "that portion of the Trust Fund to which the deceased Beneficiary had been entitled during his lifetime" is inapposite.
"Subject as aforesaid the Trustee shall hold the Trust Fund and the income thereof so far as not effectively dealt with pursuant to the foregoing trusts and powers UPON TRUST for such purposes as are according to the laws of the Isle of Man or any subsequent forum of administration."
The problem here is that there is a gap. It is possible to conjecture (especially by reference to the comparable clause of the Everest Trust) that the gap should be filled by "charitable" (or "charitable and public") but it would be a strong thing for any court to fill the gap as part of a process of construction (as opposed to rectification).
(1) Clause 29 enables a sole corporate trustee to act, and clauses 28 and 29 together provide for the remuneration of trustees.
(2) Clauses 30, 31 and 32 provide for the devolution (and possible lapse) of the functions of the Protector (since Mr Schmidt's death, Mr Alexander Djparidze has been appointed as Protector).
(3) Clause 33 confers on the Protector the power of appointing and removing trustees, and (in subclause (c), which also seems to have a gap) "power to require the Trustee or Trustees upon request information relating to the Trust including minutes accounts documents papers records or other information no matter how maintained or any part thereof whether specified or in general".
(4) Clause 34 gives the trustees power to have the trust accounts audited and ends with the words "and any Beneficiary may require such an audit".
(5) Clause 38 gives the trustees power to release or restrict their own powers.
(1) Clauses 1, 2 and 4 correspond to clauses 1, 2 and 3 respectively of the Angora Trust except that (i) the definition of "the Beneficiaries" includes any person or charity added under clause 3; (ii) the same definition refers to a Second Schedule which was apparently never included in the deed, but the names of Lukoil senior executives were added in manuscript at the end of the deed (the full list has never been disclosed, but it included Mr Schmidt); and (iii) the Protector was named as Mr Ralif Safin.
(2) Clause 3.3 confers on the trustees power exercisable by written instrument during the Trust Period to add to the class of Beneficiaries "any person or persons or class or classes of person (including an individual then unborn) or charity" other than a current trustee or (while the trustees are resident in the Isle of Man) any Isle of Man resident. Other provisions in clause 3 permit the trustees to exclude beneficiaries and permit a person (if sui juris) to exclude himself.
(3) Clause 5(a) contains a wide power of appointment very similar to that in clause 4(1) of the Angora Trust, except that the provisos are different (in particular, they do not refer to United States tax nor do they refer to benefits for persons under 21 or 25 years of age). There is no clause 5(b).
(4) Clause 6 contains, in default of and subject to any appointment under clause 5, (i) a discretionary trust of income in favour of the Beneficiaries, subject to (ii) a proviso containing a power for the trustees to accumulate income during the Accumulation Period.
(5) Clauses 7 and 8 correspond to clauses 6 and 7 respectively of the Angora Trust, except that the apparent gap in clause 6 of the Angora Trust is in clause 7 of the Everest Trust filled by the words "both charitable and public as the Trustee shall from time to time determine".
(6) Clause 35 of the Everest Trust (corresponding to clause 34 of the Angora Trust) does not include the final words "and any Beneficiary may require such an audit".
"I understand that I am a beneficiary of the Angora Trust. If I should die prior to the termination of the Trust I wish any portion to which I might have been entitled to be held upon trust for [and then he gave the appellant's name and date and place of birth]."
"The Everest Trust. While I recognise the discretionary powers vested in you as Trustees of the above Trust, it would be my wish if I were to die prior to the termination of the Trust that my share of the trust property be given to Vadim Schmidt."
The proceedings below.
"… firstly, the privacy and confidentiality of the other beneficiaries of the settlement; secondly, the scope of the order; and thirdly the appointment of the [appellant's, ie Vadim Schmidt's] lawyers [which seems to be a mistake for 'accountants'] as inspectors."
Her Majesty in Council gave special leave to appeal on 19th September 2001.
Issues of construction.
(1) The appellant's printed Case contended that clause 4(1) contains not a power of appointment, but a discretionary trust. Mr Steinfeld rightly did not seek to develop this contention in his oral submissions, although he did not formally abandon it. It is a hopeless argument.
(2) The gap in clause 6 may well have been intended to be filled by a reference to charity, but it would be a strong thing for the court to fill the gap as part of a process of construction (see for instance In re Whitrick, decd  1 WLR 884). The trustees could at any time fill the gap, if they thought fit, by appointing an ultimate trust to the RNLI. But it is not necessary to pursue the point because it has no practical bearing on the outcome of the appeal.
(3) The effect (if any) of clause 4(2), in conjunction with the Angora letter, is however potentially of very great importance, and it must be considered more fully.
Disclosure to discretionary beneficiaries: the background.
"… no matter how wide the trustee's discretion in the administration and application of a discretionary trust fund and even if in all or some respects the discretions are expressed in the deed as equivalent to those of an absolute owner of the trust fund, the trustee is still a trustee."
Discretionary trusts and powers.
"… some general observations, or reflections, may be permissible. It is striking how narrow and in a sense artificial is the distinction, in cases such as the present, between trusts or as the particular type of trust is called, trust powers, and powers. It is only necessary to read the learned judgments in the Court of Appeal to see that what to one mind may appear as a power of distribution coupled with a trust to dispose of the undistributed surplus, by accumulation or otherwise, may to another appear as a trust for distribution coupled with a power to withhold a portion and accumulate or otherwise dispose of it. A layman and, I suspect, also a logician would find it hard to understand what difference there is.
It does not seem satisfactory that the entire validity of a disposition should depend on such delicate shading. And if one considers how in practice reasonable and competent trustees would act, and ought to act, in the two cases, surely a matter very relevant to the question of validity, the distinction appears even less significant. To say that there is no obligation to exercise a mere power and that no court will intervene to compel it, whereas a trust is mandatory and its execution may be compelled, may be legally correct enough but the proposition does not contain an exhaustive comparison of the duties of persons who are trustees in the two cases. A trustee of an employees' benefit fund, whether given a power or a trust power, is still a trustee and he would surely consider in either case that he has a fiduciary duty: he is most likely to have been selected as a suitable person to administer it from his knowledge and experience, and would consider he has a responsibility to do so according to its purpose. It would be a complete misdescription of his position to say that, if what he has is a power unaccompanied by an imperative trust to distribute, he cannot be controlled by the court unless he exercised it capriciously, or outside the field permitted by the trust (cf. Farwell on Powers, 3rd ed., p. 524). Any trustee would surely make it his duty to know what is the permissible area of selection and then consider responsibly, in individual cases, whether a contemplated beneficiary was within the power and whether, in relation to other possible claimants, a particular grant was appropriate.
Correspondingly a trustee with a duty to distribute, particularly among a potentially very large class, would surely never require the preparation of a complete list of names, which anyhow would tell him little that he needs to know. He would examine the field, by class and category; might indeed make diligent and careful inquiries, depending on how much money he had to give away and the means at his disposal, as to the composition and needs of particular categories and of individuals within them; decide upon certain priorities or proportions, and then select individuals according to their needs or qualifications. If he acts in this manner, can it really be said that he is not carrying out the trust?
Differences there certainly are between trust (trust powers) and powers, but as regards validity, should they be so great as that in one case complete, or practically complete, ascertainment is needed, but not in the other? Such distinction as there is would seem to lie in the extent of the survey which the trustee is required to carry out: if he has to distribute the whole of a fund's income, he must necessarily make a wider and more systematic survey than if his duty is expressed in terms of a power to make grants. But just as, in the case of a power, it is possible to underestimate the fiduciary obligation of the trustee to whom it is given, so, in the case of a trust (trust power), the danger lies in overstating what the trustee requires to know or to inquire into before he can properly execute his trust. The difference may be one of degree rather than of principle: in the well-known words of Sir George Farwell, Farwell on Powers, 3rd ed. (1916), p. 10, trusts and powers are often blended, and the mixture may vary in its ingredients."
"Nor does an intermediate power break the principles laid down by Lord Eldon LC in the passage which I have read because, in relation to a power exercisable by the trustees at their absolute discretion, the only 'control' exercisable by the court is the removal of the trustees, and the only 'due administration' which can be 'directed' is an order requiring the trustees to consider the exercise of the power, and in particular a request from a person within the ambit of the power."
However in Mettoy Pension Trustees Ltd v Evans  1 WLR 1587, 1617-8, Warner J (after referring to Lord Wilberforce's observations in McPhail v Doulton at pp 456-7 and to some authorities not cited in In re Manisty's Settlement) took a broader view of the court's power to intervene in the case of a fiduciary dispositive power.
Disclosure to discretionary beneficiaries: a proprietary basis?
"A cestui que trust, in an action against his trustees, is generally entitled to the production for inspection of all documents relating to the affairs of the trust. It is not material for the present purpose whether this right is to be regarded as a paramount proprietary right in the cestui que trust, or as a right to be enforced under the law of discovery, since in both cases an essential preliminary is either the admission, or the establishment, of the status on which the right is based."
"If the plaintiff is right in saying that he is a beneficiary and if the documents are documents belonging to the executors as executors, he has a right to access to the documents which he desires to inspect upon what has been called in the judgments in this case a proprietary right. The beneficiary is entitled to see all trust documents because they are trust documents and because he is a beneficiary. They are in this sense his own. Action or no action, he is entitled to access to them. 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 to access to documents which are your own."
On the facts of the case, what Lord Wrenbury said was very apposite. If Mr O'Rourke was right in his claim, the executors had had no proper legal or equitable title to Sir Joseph's estate. The grant of probate to them should have been revoked and Mr O'Rourke (together with the representatives of Mrs McGowan) would have been entitled to the whole of the estate, including any documents which formed part of it.
"But he would have the right to say to the trustees, What estates have you sold? What debts have you paid?"
"All documents held by the trustee in that character must be produced by him to the cestuis que trust, who are in equity the true owners."
But North J clearly considered that the particular interest of an individual beneficiary might in some circumstances run counter to the collective interest of the beneficiaries as a body. He said at p 187:
"I do not say that he is entitled as of right, but only that he is entitled under the circumstances, because there might be a state of circumstances under which the right to production would not exist."
Chitty J took a similar approach in In re Tillott  1 Ch 86, noting (at p 89) that a trustee is not bound to give a beneficiary information about a share in which he has no interest.
"I do not consider that it is imperative to determine whether that document is a 'trust document' (as I think it is) or whether the respondent, as a beneficiary, has a proprietary interest in it (as I am also inclined to think he does). Much of the law on the subject of access to documents has conventionally been expressed in terms of the 'proprietary interest' in the document of the party seeking access to it. Thus, it has been held that a cestui que trust has a 'proprietary right' to seek all documents relating to the trust: see O'Rourke v Darbishire (at 601, 603). This approach is unsatisfactory. Access should not be limited to documents in which a proprietary right may be established. Such rights may be sufficient; but they are not necessary to a right of access which the courts will enforce to uphold the cestui que trust's entitlement to a reasonable assurance of the manifest integrity of the administration of the trust by the trustees. I agree with Professor H A J Ford's comment, in his book (with Mr W A Lee) Principles of the Law of Trusts, 2nd ed (1990) Sydney, Law Book Co, at 425, that the equation of rights of inspection of trust documents with the beneficiaries' equitable rights of property in the trust assets 'gives rise to far more problems than it solves' (at 425):
'... The legal title and rights to possession are in the trustees: all the beneficiary has are equitable rights against the trustees. ... The beneficiary's rights to inspect trust documents are founded therefore not upon any equitable proprietary right which he or she may have in respect of those documents but upon the trustee's fiduciary duty to keep the beneficiary informed and to render accounts. It is the extent of that duty that is in issue. The equation of the right to inspect trust documents with the beneficiary's equitable proprietary rights gives rise to unnecessary and undesirable consequences. It results in the drawing of virtually incomprehensible distinctions between documents which are trust documents and those which are not; it casts doubts upon the rights of beneficiaries who cannot claim to have an equitable proprietary interest in the trust assets, such as the beneficiaries of discretionary trusts; and it may give trustees too great a degree of protection in the case of documents, artificially classified as not being trust documents, and beneficiaries too great a right to inspect the activities of trustees in the case of documents which are, equally artificially, classified as trust documents.'"
Disclosure to discretionary beneficiaries: the recent cases.
"However, in the case of a discretionary trust, none of the potential beneficiaries have any right to be paid capital or income. All the trust fund is held by the trustees in this case on discretionary trusts and, if the plaintiff is not entitled to the trust accounts and particulars of the investments, it follows that none of the potential beneficiaries have a valid claim to any information from the trustees. The result is that the trustees are not under an obligation to account to anyone in connection with their management of the trust fund. This logical conclusion from the defendants' argument leads to remarkable consequences.
The amount of remuneration to which the trustees are entitled is specified in the settlement and the potential beneficiaries have an interest in seeing that the amount is not exceeded, for they are the persons who will ultimately benefit by payments of capital and income. The defendants' contention, however, has the result that they do not have to account for or disclose the amount of their remuneration. This seems to me to be contrary to the basic concept of a trustee being accountable for his management of the trust fund."
"The question then is, whether a person whose status is only that of a potential object of the exercise of a discretionary power can properly be regarded as one of the cestuis que trust of the relevant trustee. I do not doubt that he can, and should, properly be so regarded, for although it is true to say that, unless, and until, the trustee exercises his discretion in his favour, he has no right to receive, and enjoy, any part of the capital or income of the trust fund, it does not follow that, until that time arises, he has no rights against the trustee. On the contrary, it is clear that the object of a discretionary trust, even before the exercise of the trustee's discretion in his favour, does have rights against the trustee (see, eg, Gartside v Inland Revenue Commissioners (at 605-606) per Lord Reid, (at 617-618) per Lord Wilberforce) – those rights, so it seems to me, are not restricted to the right to have the trustee bona fide consider whether or not to exercise his (the trustee's) discretion in his (the object's) favour, but extend to the right to have the trust property properly managed and to have the trustee account for his management, a view, I am glad to say, which appears to have been shared by both Holland J in Randall v Lubrano and Kenny J in Chaine-Nickson v Bank of Ireland."
"The facts that in this case the plaintiff is merely within the class of discretionary beneficiaries (as opposed to being someone with a vested beneficial interest in the trust property) and that there is no suggestion of wrong-doing on the part of the trustees appear to me to go to the question of whether to exercise the discretion [to exercise what the judge called the equitable jurisdiction] rather than whether the discretion exists at all."
(1) The Board were also assisted by references to a number of leading textbooks. Of the leading English works on trusts Lewin on Trusts (17th ed, 2000) appears to favour the proprietary approach and Underhill and Hayton's Law Relating to Trusts and Trustees (15th ed, 1995) the alternative approach. But each has a balanced survey of the cases and neither takes an extreme position.
(2) Neither side made any submissions seeking to distinguish between trust documents and documents relating to the affairs of a company controlled by the trustees (see for instance Butt v Kelson  Ch 197). This may have represented a realistic decision made by the trustees in the light of how the two settlements were in fact administered.
(3) Mr Steinfeld did not base himself on the final words of clause 34 of the Angora Trust, or on any other express provision of either settlement. Mr Brownbill made some brief submissions based on the Protector's powers to obtain documents and information. These points may conceivably bear on the exercise of the court's discretion but they cannot in the Board's view go to the issue of jurisdiction.
(1) It seems to be common ground that during Mr Schmidt's lifetime substantial distributions were made for his benefit, all or most by allocation of funds to the two companies (Gingernut and Petragonis) which were regarded as being (in some sense) Mr Schmidt's. The appellant as Mr Schmidt's personal representative does not accept that these funds have been fully accounted for. His contention is that in respect of allocated funds Mr Schmidt ceased to be a mere discretionary object, and became absolute owner. On the face of it the appellant (as personal representative) seems to have a powerful case for the fullest disclosure in respect of these funds.
(2) The appellant as personal representative would also, on the face of it, have a strong claim to disclosure of documents or information relevant to the issue whether, but for breaches of fiduciary duty (such as for instance overcharging) more funds would have been available for distribution to Mr Schmidt, and would or might have been allocated to him in practice. The Board express no view whatever as to whether the appellant has a case for overcharging or any other breach of fiduciary duty. But claims of that sort have been put forward in the 1998 proceedings, and the possibility must be noted in order to make the position clear.
(3) As regards the appellant's personal claims under the Angora Trust since his father's death, his status as beneficiary of any sort depends on the issue of construction discussed at paras 28-32 above.
(4) As regards the Everest Trust, the appellant is (see para 33 above) a possible object of the very wide power in clause 3.3, but an object who may be regarded (especially in view of the Everest letter) as having exceptionally strong claims to be considered.