The role of trustees and personal representatives in ... · The role of trustees and personal...

N.B. While every effort is made to ensure the accuracy of the information given in these notes, they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.

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The role of trustees and personal representatives in litigation

Charlie Newington-Bridges, St John’s Chambers

1. The duties of trustees to beneficiaries in relation to third party litigation are

essentially:

a) To call in the trust or estate assets, i.e. to enforce causes of action

for damages etc.

b) To preserve the trust or estate, i.e. to protect the trust against

litigation which affects the value or composition of the estate.

2. There are two principal risks for trustees in third party litigation. They are (fairly

obviously):

a) Fighting and losing the litigation (adverse costs consequences); and

b) Choosing not to fight (running the risk of a future claim by a

beneficiary that they have committed a breach of trust in failing to

get in or preserve the trust fund/assets).


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3. Where the trustees have the express consent of all beneficiaries to prosecute

proceedings, and possibly a deed of indemnity where the trust assets prove

insufficient to meet any costs order, a court order will not be necessary.

However, in many cases involving pension funds that will not be possible.

Beddoe Applications

4. Fortunately the "Beddoe application" offers a practical and often essential

means of protection for trustees faced with the difficulties of balancing their

duties to protect and recover the trust fund whilst preserving the limited

resources within the scheme in the first place.

5. Beddoe applications are made in third party litigation and not in respect of

claims affecting the interests of beneficiaries inter se or a claim by a beneficiary

against trustees. A Beddoe application can include a claim by the present

trustees against former trustees for equitable compensation for breach of trust

or against a beneficiary for the recovery of a trust asset, but they are not made

in the following types of litigation:

a) construction actions;


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b) claims by beneficiaries against trustees for breach of trust or for

declaration that some act(s) of the trustees is invalid or their

removal from office;

c) claims by a third party which, if successful, invalidates the whole

trust (e.g. a claim by a settlor that the trust is voidable for undue

influence or incapacity or by HMRC that the settlement is a sham);

d) claims under the Inheritance (Provision for Family and Dependants)

Act 1975;

6. Essentially a Beddoe application is made where a trustee requires an order or

directions from the Court as to whether to prosecute an action, to continue to

do so once commenced, or to defend third party proceedings against the trust,

estate or pension scheme.

7. In Re Beddoe1 Lindley LJ said:

“A trustee who, without the sanction of the Court, commences an action or

defends an action unsuccessfully, does so at his own risk as regards costs,

even if he acts on counsel’s opinion; and when the trustee seeks to obtain

1 Re Beddoe Downs v Cottam [1893] 1 Ch 547


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such costs out of his trust estate, he ought not to be allowed to charge them

against his cestui que trust unless under very exceptional circumstances.”

8. The practice of seeking directions from the Court of Chancery existed long

before the case of Re Beddoe but for the first time trustees were able to seek the

direction of the court without allowing the beneficiaries to see all of the

evidence.

9. In such an application the trustees do not normally ask the court to direct them

what to do, rather they propose a particular course of action (backed up by

counsel’s advice) and they ask the judge to sanction it as proper. Often the

decision will be a choice between suing (or defending) or abandoning (or

conceding), so that if the court sanctions or refuses to sanction a proposed

course of action, the trustees have no choice but to treat it as though it were a

court direction.

How do we do it?

10. The first step should always be to canvass the beneficiaries as to their reaction to

the proposed course of action. If they are in agreement then that can be

recorded and no application is necessary. However, if that is not possible or it is

unsuccessful then the application should be made.


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11. Under the Civil Procedure Rules a Beddoe application should be commenced by

a separate Part 8 Claim Form2 and is made under CPR 64.2(a).3

When are they made?

12. Ordinarily the trustee will make a Beddoe application before he brings

proceedings or as soon as proceedings are commenced against him,4 but there is

no reason why a trustee should not make an application at a later stage should it

become necessary.

13. One could envisage trustees commencing apparently simple possession

proceedings over a parcel of land in the belief that it would be undefended, only

to be met with a robust and complicated defence and counterclaim which alerts

the trustees to potentially lengthy and costly litigation. In such a situation

trustees may wish to make an application notwithstanding it being sometime

after proceedings had been commenced.

Confidentiality?

14. A major attraction to the Beddoe application is that it can be made without

disclosing the evidence to the beneficiaries. If the trustees want the directions

2 Under the old Rules of the Supreme Court it was possible to make the application within existing proceedings, that

is no longer the case. 3 CPR 64.2(a): This Section of this Part applies to claims (a) for the court to determine any question arising in (i) the

administration of the estate of a deceased person; or (ii) the execution of a trust. 4 It may be necessary to obtain a stay of the main action whilst a defendant trustee takes out a Beddoe application.


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they seek to be confidential5 they can be set out in only very general terms in the

Claim Form, but coupled with a detailed witness statement with exhibits in

support, setting out what specific directions are sought.

15. This is particularly important because the judge hearing the application will see

counsel's opinion on the strengths and weaknesses of the claim or defence.

Who should be named as a party?

16. It is not necessary to join every beneficiary as a defendant. Usually a

representative of each class of beneficiary is joined, but where there is effectively

one main argument for the application and one against, only one beneficiary

needs to be joined.6

The hearing

17. The trustees’ position will be further protected by the fact that the hearing of

the Beddoes application will initially be listed in private and therefore, the

documents on the Court record, other than the claim form will not be open to

public inspection without the Court’s permission.7

5 Under CPR 5.4 the Claim Form is publicly accessible and therefore the proposed third party defendant

will be able to find out the directions being sought. 6 para. 4.1 PD. B to CPR r.64

7 CPR r.5.4(2)


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18. The application is heard by a judge who will not be the trial judge in the third

party litigation. Paragraph 5.1(e) of the Practice Direction B supplementing CPR

r.2:

"A District Judge may not deal with the following......(e) giving permission to

executors, administrators and trustees to bring or defend proceedings or to

continue the prosecution or defence of proceedings, and granting an

indemnity for costs out of the trust estate, except in plain cases."

19. In practice most Beddoe applications will be dealt with by District Judges or

Masters. In fact para. 6.1 of PD.B to CPR r.64 says that the Court will always

consider whether it is possible for the application to be dealt with on paper and

without a hearing.

20. The evidence should include :

a) witness statement of the salient facts8;

b) the instructions to and advice of a suitably qualified lawyer;9

c) the prospects of success;

8 para 7.1 PD. B to CPR r.64

9 paras 7.2, 7.3 PD. B to CPR r.64


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d) the likely costs;

e) the value of the trust assets;

f) the significance of the main action to the trust;

g) why the Court’s directions are needed.

h) information as to the means of the third parties, if known;

i) a draft of any proposed statement of case;

j) whether any Pre-Action Protocol has been followed;

k) whether the trustees have undertaken or intend to propose

mediation or ADR and if not why not.

21. In addition to exhibiting the advice, the trustees are required to file evidence of

contact with all adult beneficiaries who are of sound mind and are traceable,

whether or not there are also minors and unborns who are interested under the

trust, together with the findings of any soundings taken.

22. Where one or some of the beneficiaries are minors consultation will not be

possible, however it will still be necessary to put before the Court an opinion

setting out the benefits and disadvantages of the proposed course of action

from the point of view of the child.

23. Where the application proceeds by way of hearing:


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"If the advice of a lawyer has been put in evidence......that lawyer should if

possible appear on the hearing."10

What if it is urgent?

24. In cases of urgency (e.g. where a limitation period is about to expire) the Court

can give directions on a summary consideration of the evidence to cover only the

steps that need to be taken urgently (such as issuing a Claim Form).11

The scope of the final order

25. Generally the Court will give the trustees permission to pursue the third party

action up to a certain point. Usually the order permits the action to proceed up

to disclosure and exchange of witness statements, and then provides for it to be

returned to court for further consideration.

26. In addition, if before reaching the approved stage of proceedings the trustees

become aware of some new adverse development then the application should

be brought back before the court for reconsideration.

The Test

10

para. 7.12 of PD. B to CPR r.64 11

para. 7.9 PD B CPR r.64


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27. The court is concerned to establish the merits of the defence or claim in the

hostile litigation, the justice of the case, the likely order for costs at trial in the

main action and whether there are any special factors.12 Essentially all of the

matters that a reasonably well informed lay client would ask their lawyers.

28. ….and on that basis it will decide whether to effectively sanction the litigation

and grant the order sought.

Costs

29. Unless the application was wholly unnecessary or unmeritorious, the costs of the

application will be allowed out of the trust fund on the indemnity basis, as will

the assessed or agreed costs of the beneficiary defendants.

Some recent cases….

30. Bonham v Blake Lapthorn Linnell and another [2007] WTLR 189 a decision of

Kitchen J:

a) The first claimant ("Toby", a member of the Bonham family)

owned the shares in a company called Montpelier Properties Ltd

("Montpelier"). In 1994 Montpelier became known as Bonham

12

Alsop Wilkinson v Neary [1996] 1 WLR 120


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Group Ltd ("Bonhams"), which owned the well known Bonhams

auction house;

b) Toby established a trust ("the Bonham Settlement") in 1989. The

then trustees ("the Original Trustees") were the second defendant

("Mr Fishwick") and another;

c) There were a number of spin off court cases but for the purposes

of this seminar the relevant third party dispute concerned

proceedings which the Original Trustees of the Bonham Settlement

began in the High Court ("the Bonham-Cozens litigation") against

Toby and his sister, Eve Bonham-Cozens ("Eve"). Blake Lapthorn

(First Defendant) were the solicitors who acted for the Original

Trustees in that litigation;

d) In the Bonham-Cozens litigation Mr Fishwick acted upon the

advice of the defendant solicitors (who in turn relied upon

counsel), proceedings had been issued without first obtaining a

Beddoe order. This decision was in part taken because the trustees

had been given an indemnity to cover any costs that could not be

recovered from the fund;

e) These proceedings comprised two parts; the first part was settled

by consent. The judge held that the terms of the settlement meant


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that the trustees had, in substance, succeeded on this part of the

claim. The second part was abandoned part way through the trial

so that the trustees had a considerable costs liability which they

sought to recover from the trust fund;

f) An action was commenced against Mr Fishwick and Blake

Lapthorn alleging that they had acted in breach of trust by

pursuing litigation relating to various shares;

g) The judge determined that the trustees could not be criticised for

prosecuting this part of the claim and dismissed the action against

them. In the course of his judgment, Kitchen J said [190-191]:

“First......I am quite satisfied that Mr Fishwick believed throughout

that his actions were taken for the benefit of the [trust], that the

claims had a reasonable prospect of success and that they were

brought for a proper purpose….. Secondly, the fact that a trustee

makes a deliberate decision not to apply for a Beddoe order does

not, in my judgment, constitute evidence of wilful wrongdoing.

Failure to apply for a Beddoe order does not constitute a breach of

trust at all. The application is made for the benefit of the trustee.

Furthermore, a trustee does not need a Beddoe order so long as he

can show that the relevant costs were properly incurred.”


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31. Three Individual Present Professional Trustees of Two Trusts v. (1) An Infant

Prospective Beneficiary of One Trust (2) An Adult Beneficiary, Mrs A., of the

other [2007] EWHC 1922 (‘Trustees v. A’) a decision of Lindsay J:

a) a directions appointment as to what disclosure should be made

before a Beddoe application and how the hearing itself should be

conducted;

b) Mrs A was both the life tenant and one of the trustees of the

original trust;

c) the proposed action was going to be against Mrs A for breach of

trust;

d) She argued that if she was not provided with the exhibits the

hearing would not be Article 6 Human Rights Act 1998 compliant;

e) Article 6 refers to the determination of a person’s ‘civil rights and

obligations’;

f) Lindsay J came to the conclusion that a Beddoe application did not

make such a determination and accordingly Article 6 was not

engaged;


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g) However Lindsay J referred to the decision of Hoffmann LJ in

McDonald v Horn13 where had stated that in a Beddoe application

the trustee is required to:

“make full disclosure of the strengths and weaknesses of his case.

Provided that such disclosure has been made, the trustee can have

full assurance that he will not personally have to bear his own costs

or pay those of anyone else.”

h) Lindsay J noted that a Beddoe order could subsequently be

revoked if it was decided that the trustees had not made full

disclosure, and stated:

"The whole point of a Beddoe application from the Trustees' point

of view is, in a case such as this, to achieve a position for them as

close as may be to assuredly complete protection against the

Trustees becoming personally and unrecoupably liable in costs,

either for their own costs or the costs of others. If I am right in

thinking that, even if Beddoe relief is granted, the protection which

a trustee acquires is not truly absolute in the sense that Beddoe

relief could later be departed from, then an important factor which

could weaken or undo protection of a Beddoe order is if that "full

disclosure of all relevant matters", which is now required by PDB

64.7.1, is not made. That recent phrase echoes the point made,

13

[1995] 1 All ER 961


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before the CPR, in McDonald v Horn supra. It is a phrase which,

even more plainly, would appear to be able to include disclosure

not just to the Beddoe Judge but, for example, to a beneficiary

who is a prospective opponent in the main proceedings and who

will have a concern to ensure that the disclosure to the Judge

made by the Trustees is, indeed, fair and adequate.

If there is want of that full disclosure, the whole Beddoe

application can become close to pointless and that suggests that

the trustees should err, if at all, if only for their own sake, on the

side of disclosure. The modern notion of all cards being laid, in

general, face up on the table, points in the same direction. Added

to that is the fact that advices received by trustees as such are, in

effect, trust property to which all beneficiaries are, broadly

speaking, prima facie entitled. "

i) Accordingly he determined that Mrs A was entitled to see redacted

copies of counsel’s advice.

32. The lesson? If you successfully obtain a Beddoe order but failed to make full

disclosure at the application stage, then you need not have bothered because it

will afford you no protection.


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Disclosure

33. ‚The position of trustee imposes onerous obligations on those who accept it‛ ‘a

trust is an office necessary in the concerns between man and man, and which if

faithfully discharged, is attended with no small degree of trouble and anxiety. It

is an act of great kindness in anyone to accept it’: Lord Hardwicke in Knight v

Earl of Plymouth (1747) Dick 120 at 126.

34. It is fundamental principle of trust law that a beneficiary must be able to enforce

the trust and to make the trustee account for his conduct in the administration

of the trust. To allow the beneficiary to enforce he/she must receive sufficient

information about the trust assets.

35. Until recently, it was considered that the beneficiary’s right to information or

disclosure about the trust was a proprietary right:

“The beneficiary is entitled to see all the trust documents because they

are trust documents and because he is a beneficiary. They are in a sense

his own.” O’Rourke v Darbishire [1920] AC 581 at 626

36. However, it was recognised that the right was not an absolute right: Re Cowin

(1866) 33 CH D 179. The Trustees could take into account the effect of the

disclosure on the other beneficiaries and whether disclosure might not be in the

best interests if the beneficiaries as a whole.


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37. Documents in the possession of trustees as trustees, such as trust deeds, trust

accounts and legal advice would be treated as trust documents. A beneficiary is

entitled to see trust documents and only in exceptional circumstances would a

court support a trustees refusal to make disclosure: Re Rabaiottis Settlements

[2000] WTLR 953

38. In Re Londonderry's Settlement [1965] Ch 918, the Court of Appeal (Harman,

Danckwerts and Salmon LJJ) held that beneficiaries had a right (expressly

acknowledged to be proprietary by one judge) to see trust documents; but they

did not have the right to see documents underlying the exercise of the trustees

powers or giving reasons for the decisions. In the result it was held that

beneficiaries could see:

a) The trust instrument;

b) Any deed of variation or court orders effecting a variation;

c) Documents (e.g. Deeds of Appointment, Resolutions) which

actually create interests and give effect to decisions;

d) Accounts – there is no question that the fundamental obligation of

accountability owed by trustees to beneficiaries implies that

accounts are trust documents.

By contrast, there was no right to see:


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a) Minutes of meetings;

b) Resolutions which include deliberations and arguments pertaining

to decisions;

c) Trustee correspondence and memoranda.

39. The difficulty with the judgment was that evidence of breach may often be

contained in resolutions, minutes of meetings and in particular in trustee

correspondence and memoranda. For example:

a) Failure to understand and act on the terms of the trust –

investment decisions taken in ignorance of the width of powers;

b) Failure to act honestly in the best interests of beneficiaries

(disclosure of non-trust motives such as loyalty to the settlor);

c) Malice;

d) Lack of even-handedness.

40. The judgments of the three members of the court in Re Londonderry are not

easy to reconcile and they came under pressure in a series of judgments

culminating in Schmidt v Rosewood Trust [2003] 2 AC 709 which sought to

change, to some degree, trustees obligations to disclose. The case was an appeal

to the Privy Council from the Isle of Man in which the Claimant, the son of a

Lukos oil executive who had died suddenly and unexpectedly, was strictly no

more than the object of a power despite being the son and PR of one of the

settlors. In Schmidt Lord Walker giving the opinion of the board held that the


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right to seek disclosure of documents was one aspect of the court’s inherent

jurisdiction to supervise and if necessary intervene in the administration of trusts.

There was no authority for the proposition that the right to seek the court’s

intervention depended on entitlement to a fixed and transmissible beneficial

entitlement.

41. Lord Walker concluded in that case that:

“no beneficiary has any entitlement as of right (emphasis added) to

disclosure of anything which could plausibly be described as a trust

document.”

The Court of Appeal reasoned that as a result the Court’s jurisdiction was

discretionary and its role involves a balancing exercise in which the often

competing interests of different beneficiaries, trustees and third parties are

weighed.

42. The ruling in Schmidt identified three areas in which where the Court may have

to form a discretionary judgment:

a) The nature of the beneficiary’s interest and whether a discretionary

object (or some other beneficiary with only a remote or wholly

defeasible interest) should be granted relief at all;


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b) The sort of documents that ought to be disclosed and the form of

disclosure;

c) What safeguards should be imposed to limit the use which may be

made of documents or information disclosed under the court

order.

43. The decision in Schmidt created significant practical difficulties for trustees.

What, in effect, the judgment does is suggest that trustees should second guess

what the court is likely to do in a particular set of circumstances. The Court may

have been attempting to ensure that the each a case is assessed on it merits by

the trustees and not in relation to proprietary rights. However, the practical

implication is that trustees ought to consider what sort of claim the beneficiary

can make, that he has the right to receive the information requested and then

consider would whether a court would uphold the beneficiary’s request for the

information or reject it. Not quite clairvoyance, but certainly strong predictive

powers are required of the trustee.

44. The flip side of course is that the decision may well offer the hope of obtaining

disclosure to a wider class of beneficiaries over a larger range of documents.

Certainly, the distinction between trust documents and other documents is likely

to have been weakened and so documents that under what might be described


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as the Re Londonderry regime which would not have been trust documents, may

now under certain circumstances be disclosable.

45. Following Schmidt, the case law has demonstrated that that trustees need to be

alive to the following issues:

a) The nature of the beneficiary’s interest. It may be easier to refuse a

disclosure of documentation where a request has been received

from, say, a default beneficiary: Foreman & Others v Kingstone

[2005] WTLR 823.

b) The information that the beneficiary is requesting. As a minimum it

is likely that a beneficiary would be entitled to receive trust

accounts so that he can ascertain the nature and state of trust

assets. There may, however, be good reasons for not disclosing a

letter of wishes to a beneficiary: see Hartigan Nominees v Rydge

1992 NSWLR 405 where it was held that such a letter need not be

made available and Breakspear v Ackland [2008] EWHC 220 where

a letter of wishes was held to be confidential because it was in

existence to facilitate an inherently confidential process viz. the

exercise of the trustees’ discretionary powers, but cf Charman v

Charman [2007] 1 FLR 1246 where letter of wishes were disclosed

and assisted the court in finding that the trust assets were part of


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the husband’s resources for the purposes of ancillary relief

proceedings.

c) The reasons for the request for information. It would be difficult to

refuse a request where the request was made for the purposes of

completing a tax return. However, if a trustee has good reason to

believe the information will be used against another beneficiary or

there are ulterior motives a refusal may be reasonable.

d) The effect of disclosure on the beneficiaries as a whole e.g. the

likelihood of acrimony within a family.

e) Whether the information is commercially sensitive.

f) Whether the document says anything about disclosure. Although

in Bathurst v Kleinwort Benson (Channel Islands) Trustees Ltd

[2007] WTLR 959 where a document purported to exclude the

right of beneficiaries to information and it was found that it was

not effective to oust the court’s inherent jurisdiction.

g) How best to make the documentation available to the beneficiary.


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h) Whether the beneficiary should be asked to enter into a

confidentiality agreement.

i) Claims for disclosure may not always be against trustees: Broere

Mourant & Co Ltd & Other [2004] WTLR 1417 where a beneficiary

refused disclosure on the grounds that he held information other

than in his position as a beneficiary. See also In the matter of HHH

Employee Benefit Trust [2012] JRC 127B in which it was held that

the duty to disclose imposed by Schmidt extended to persons other

than trustees who had fiduciary powers under the trust.

j) In North Shore Ventures Ltd v Anstead Holdings Inc [2012] EWCA

Civ 11, the Court of Appeal upheld the judgment at first instance

compelling former beneficiaries of a trust to disclose documents

that were not in their possession. On the facts of the case the

beneficiaries of the trust were the wives and children of the former

beneficiaries and production was ordered.

46. Overall, the test for disclosure that emerged from Schmidt may be summarised

as this: a document will be ordered to be disclosed if such disclosure will be

conducive to the proper administration of the trust. Schmidt changed the

disclosure requirement in that trustees need to consider the case being made by

the beneficiary to have access to the trust information rather than the whether a


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document can be classified as a trust document. The consideration of the case

needs to be undertaken on the basis of the full circumstances and not in the

context of whether a document is a trust document or not.

Charles Newington-Bridges

Tuesday, 22 October 2013

[email protected]

St John’s Chambers

mailto:[email protected]

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