Some beneficiaries discover that faith in fiduciaries can be misplaced. A combination of events, poor decision making, or even malign actors can see the value of fortunes thought to be in safe hands wiped out.
What should a beneficiary in such a position do next? The first step is to obtain information.
Certain types of information and documents held by trustees are normally disclosable to beneficiaries if they ask for them. Documents which relate to or form part of the accounts of the trust carry a strong presumption in favour of disclosure, which can be backed by the threat of a court application if the trustee does not volunteer them.
Fortunately for beneficiaries concerned with ‘missing’ trust assets, ‘documents which relate to or form part of the accounts of the trust’ has been interpreted widely. With a well-crafted series of requests, beneficiaries can build up a comprehensive picture of what has happened to their assets.
While a trustee is not obliged to disclose to beneficiaries the basis for its decisions, the trustee has no absolute right to withhold documents and information from the beneficiary and the court may order the disclosure of documents in the right circumstances.
In Re I, J, K & L Trusts  JRC 214, a wealthy central American family, for whom this firm acted, got both very extensive disclosure from their trustee, HSBC, and a cost order against the trustee for having been dilatory in responding to legitimate requests for information. A recent Jersey breach of trust case in which we acted for an Australian family started with an application for disclosure which the trustee conceded almost immediately.
Who should bring the litigation?
A breach of trust and a substantial loss to the fund is likely to seriously dent beneficiaries’ confidence in their trustee—this may be sufficient to remove the trustee if they do not step down. The temptation is often to hurriedly find a replacement trustee, but there are good reasons why beneficiaries might elect to sue an incumbent trustee themselves, rather than find a replacement to sue its predecessor:
- A shortage of ready cash within a trust can make it difficult to find a trustee willing to act. If a beneficiary has to bankroll a new trustee to litigate, why not fund (and then control) the claim herself?
- Adding the cost of running litigation to the cost of everyday trust administration can be very expensive. Litigation consumes a lot of management time which will be charged to the trust fund. This presents a practical challenge in terms of cash flow. Management time spent dealing with litigation is neither recoverable as an item of legal cost nor recognised as a head of damage. This means even if the litigation succeeds, there will be a shortfall to the trust fund.
- A new trustee will instruct its own lawyers, take its own advice (which it will charge to the trust) and make its own decisions. There may not be total alignment with the priorities of beneficiaries, who cannot realistically control how the trustee acts. If the trustee seeks Beddoe relief (a court order blessing the trustee’s decision to pursue litigation and permitting the trustee to charge costs to the trust fund), there will be a parallel set of proceedings which will need to be funded.
- Trustees are not temperamentally well suited to litigation. Trustees are fiduciaries who make decisions for the benefit of others. They are generally more risk-averse than a beneficiary might be about their own interests and litigation is high-risk and requires hands-on decision making. It cannot be delegated.
- Litigation will inevitably place strain on the relationship with a new trustee. Beneficiaries should consider selecting an institution they can work with on a long-term basis.
- There might not be time to force a trustee to retire and identify a replacement if limitation is about to expire. It remains an open question whether Article 57(3B) TJL 1984 has the effect of postponing limitation of a breach of trust claim against a previous trustee where prescription has already begun to run against some or all of the beneficiaries who are in a position to do something about, which was an issue in Walker v Egerton Vernon & Ors [2014 (1) JLR 182]
The catalyst in many trust disputes is the demise of the wealth creator. However, limitation may have already started to run if there are issues in the administration of the trust which are known about, but go unaddressed before the settlor has died. Beneficiaries should be aware that the limitation periods in breach of trust claims can be relatively short—just three years in Jersey and Guernsey.
The battleground will often be over who had the requisite knowledge of relevant facts and when. A beneficiary may be able to claim they were subject to an empechement (often a lack of knowledge) which practically impeded them from bringing a claim sooner.
Apart from gathering sufficient information to bring a claim, one of the primary issues facing beneficiaries is how to fund litigation.
Assuming there are insufficient resources left in the trust to fund a claim, and if the beneficiary does not have independent means, funding is going to have to come from elsewhere.
The litigation funding market for offshore private wealth disputes is diverse and well developed. Large institutions can advance funding for claims worth up to the hundreds of millions (as was available to the plaintiff beneficiary in the Crociani litigation). The return funders require can be a fixed percentage (typically 30-50% of recovery) or a funding multiple (typically x3 to x4).
Hunting as a pack
While beneficiaries are not obliged to act together to bring litigation, if they act as a cohort and there is a falling out between them midway, this can present a serious problem for efficiently managing the litigation. Funding arrangements where a wealthy family member or other beneficiary agrees to fund litigation should be formalised at the outset so that everyone knows where they stand.