In In the Matter of Z Trust (unreported, 26 September 2024, Kawaley J), the Grand Court considered the scope of the duty of confidentiality owed by the Trustee of a Cayman Islands unit trust.
Overview
The issue arose in the context of an attempt to wind up trust affairs, but where trust assets appeared to be missing, and the management of the trust's affairs had passed to an Interim Receiver and Manager. The Trustee sought authorisation for the Trustee or the Interim Manager/Receiver to disclose confidential information (as defined in the Trust Deed), where it determined such disclosure was necessary either:
a) to investigate the trust's assets or to take steps to protect or recover those assets; or
b) to inform underlying investors of the steps taken by the Trustee on their behalf.
Matters were complicated by a number of factors:
1. the Trust Deed did not contain an express power to make such a disclosure;
2. confidential information was broadly defined in the Trust Deed and the limited, boilerplate exceptions to the prohibition on disclosure of confidential information did not apply; and
3. any amendment to the Trust Deed (for example to narrow the definition of confidential information) required the sanction of the unit trust holder, and ordinarily, a Trustee would consult with the unit trust holder(s) regarding the management of the trust, including the proposed disclosure. However, the sole unit trust holder had been struck off the register of companies and therefore could not be consulted or sanction any amendment to the Trust Deed.
The Legal Basis for the Disclosure
In the absence of any prior Cayman Islands authority on the point, the Court was invited to permit the requested disclosure on two grounds:
1. pursuant to section 48 of the Trusts Act (which permits a trustee to seek the Court's opinion, advice or direction on any question relating to the management or administration of the trust assets); or
2. in the alternative, pursuant to the Court's inherent jurisdiction to supervise and, where appropriate, intervene in the administration of trusts.
The Court rejected the s.48 argument, drawing a distinction between a legal basis for obtaining directions (which s.48 did provide) and a legal basis for permitting disclosure (which it did not).
As to the second ground, the Court found that its inherent jurisdiction to permit disclosure to a beneficiary was "potentially powerful support for the proposition that the Court must be empowered to permit a trustee to voluntarily give disclosure to de facto beneficiaries". However, noting that that reasoning would not necessarily extend to permitting disclosure to strangers to the Trust, it ultimately disposed of the application (which was acknowledged from a purely practical perspective to be compelling) as a matter of construction.
Kawaley J held that:
1. clause 19.1 of the Trust Deed empowered the Trustee to deal with the trust assets as both legal and beneficial owner, and thus it was authorised to pursue all legally available remedies to recover trust assets;
2. it was consistent with the Trust Deed for the Trustee to have regard to and consult with underlying investors (the real beneficiaries of the Trust), and to pursue appropriate asset recovery proceedings in respect of the apparently missing Trust assets;
3. the confidentiality provisions of the Trust Deed should be viewed as designed to preserve value for unitholders and construed in a manner which supported business efficacy; and
4. there was by necessary implication a power for the Trustee to disclose confidential information to the extent required to consult with those economically interested in the Trust and pursue asset recovery steps.
As such, the order was granted, with "conservative" disclosure of confidential information by the Applicants, with both retrospective and prospective effect.
Analysis
Whilst on its face a decision on the terms of this particular Trust Deed, In the Matter of Z Trust illustrates both the Grand Court's willingness to interpret deeds in a purposive manner, and more generally the pragmatic approach taken to the protection of beneficiaries, Kawaley J stating that "It must be doubted whether any express confidentiality clause could validly deprive a trustee of the ability to deploy confidential information altogether for the purposes of investigating or prosecuting proceedings to recover misappropriated trust property". Whilst Trustees should continue to carefully consider the scope of their power to disclose information under any given Trust Deed, they can draw comfort from the Court's willingness to provide assistance in unforeseen circumstances.
