Put up or shut up orders – how much disclosure should trustees give?
Where trustees have been threatened with a claim for breach of trust, but the claimant delays in issuing the claim, it can put trustees in a difficult position as they balance the need to deal with the potential claim against the need to get on and administer the trust in the best interests of the beneficiaries without undue delay. A recent High Court decision in the case of Parsons and another v Reid and another  EWHC 755 (Ch) has confirmed, in this context, that the trustees of a discretionary will trust must give full disclosure of their reasons for the proposed distribution of the estate before they can be granted freedom of liability from a potential future claim on behalf of a beneficiary.
The case involved discussion of the following established principles:
- that trustees are not in general required to disclose their reasons for taking a particular decision or to disclose documents which give the reason for exercising their discretion in a particular way (Re Londonderry’s Settlement );
- when applying for a blessing of their decision under Public Trustee v Cooper jurisdiction, trustees must give full disclosure (Tamlin v Edgar ); and
- if the exercise of a discretionary power is challenged, the trustees will be required to disclose the validity of their reasons and information regarding these under CPR 18.
Under his will, the deceased, William Reid, had left his residuary estate on discretionary trusts for his children and grandchildren, and the trustees were his solicitor, Nicholas Parsons and his land agent, Mark Hill. He had two children living at his death, Stephen Reid and Judith Shaw. William had also left a Letter of Wishes expressing the wish that payments first be made to Stephen, reflecting various moral and financial obligations owed by the deceased to Stephen, and the residuary estate then divided 60% to Stephen and 40% to Judith.
By a Deed of Appointment the trustees made a payment of £600,965 to Stephen (by reference to schedules Stephen had supplied to them claiming sums in excess of £950,000) in order to meet the obligations set out in the Letter of Wishes and appointed the remainder of the residuary estate 60% to Stephen and 40% to Judith. Interim distributions were then made to both Stephen and Judith which left around £450,000 in the trust fund for distribution. The trustees then received a letter from Judith’s solicitors complaining about the £600,965 appointed to Stephen and seeking an undertaking that they would not distribute the remainder of the fund. The trustees responded to this request, explaining that they were under no obligation to consult the beneficiaries regarding the distribution of the trust fund and they had exercised their discretion in making the distributions as reflected in the Deed of Appointment.
A month later, Judith’s solicitors wrote a lengthy letter of claim stating that she did not accept the propriety of the trustees’ decision. At this point, she had not withdrawn her challenge against the trustees but she had also not brought a claim.
As a result of this, the trustees were left holding around £450,000 in the trust, but if they distributed this they risked facing a claim of breach of duty from Judith, on the basis that the Deed of Appointment was defective. Therefore, they brought a claim seeking an order from the court that they may distribute the remaining trust fund pursuant to the Deed of Appointment. Judith asserted that the trustees’ claim was a Blessing Application by the trustees under the Public Trustee v Cooper jurisdiction, and that as a result of this, the trustees were under a duty to provide full disclosure of all relevant facts and documents materially relevant to their decision.
The trustees rejected the suggestion that their application was a ‘Blessing Application’, and submitted that it was not unreasonable for Judith to decide now whether she would or would not make a claim. The trustees contended that the court should either direct that Judith was out of time to bring a challenge, it being two years since the Deed of Appointment, and as a result the trustees could distribute the trust fund without risk of a claim being brought against them, or the court should impose a time limit on Judith within which she must bring her claim (commonly known as a ‘put up or shut up order’).
The Court held that, in order to decide whether to grant the relief sought by the trustee claimants, namely permission to distribute the funds retained by them in accordance with the Deed of Appointment, the court would have to consider whether Judith’s claim was insubstantial, remote or speculative. In order to do this, the Court would require all available material relevant to its merits. Further, the consequences of making the order sought by the trustees would be to extinguish their liability, and as such full disclosure was the appropriate price to pay for such a exoneration.
In support of this decision, the Judge made reference to applications for leave to distribute, notwithstanding a possible claim by a third party, where a trustee will only be protected from liability if they have made full disclosure to the court.
The decision provides another example of a set of circumstances where trustees can be required to give disclosure of documents supporting their decision-making process and a warning that the general rule that trustees have no duties to disclose has an ever-widening set of exceptions to it. It serves as a reminder to trustees to ensure that their decision-making process is well-documented. If documentation is limited, it may be difficult for the Court to conclude that the decision was reasonable.