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The right to know

(Article published in the Mar 21, 2007 issue of Manila Standard Today)      

             Increasing globalization of investments of the wealthy and the further liberalization of Philippine rules on foreign exchange have resulting in a number of Filipinos opening offshore trust relationships abroad thereby making it important, in the local scene, both for trust beneficiaries and trust service providers, or what the law calls “trust entities”, to thoroughly understand the nature and extent of the offshore trust beneficiary’s right to know. 

           Local reporting and disclosure rules, which will be treated no doubt competently by lawyer Alegria Ribaya-Legaspi in her lecture today (21 March 2007) on “Know Your Rights as an Investor” at the Makati Sports Club on the occasion of trust industry’s celebration this year of Trust Consciousness Week, fully recognize the beneficiary’s right to be informed.  Section X425 of the Manual of Regulations requires the reporting to clients at least quarterly “in such forms as to apprise the party concerned of significant developments in the administration of the account.”

        To avoid doubt, the regulations require the reports to consist of (a) a balance sheet; (b) an income statement; (c) a schedule of earning assets of the account and (d) an investment activity report.  Minimum data to be contained in items (c) and (d) include the name of issuer or borrower; type of the instrument; the collateral, if any; amount invested; earning rate or yield; amount of earnings; transaction date; and maturity date.

          Not as specific as the local regulations, though, are the reporting and disclosure entitlements of a beneficiary of offshore trusts.  Nevertheless, certain fundamental principles are universally recognized, even in the offshore financial centers. 

          The basic rule was stated as early as 1920 in the English case of O’Rourke v Darbishire, AC 851.  It said:

         “The beneficiary is entitled to all trust documents because they are trust documents and because he is a beneficiary.  They are in a sense his own.  Action or no action, he is entitled to access to them….The proprietary right is a right to access to documents which are your own.”

        Over the years, the broad statement was tweaked a bit.  In 1965, another English case, Re Londonderry’s Settlement, Ch 918, carved out of the generality of Darbishire, the agenda of meetings of trustees, correspondence of trustees relating to appointments with those who had power to name beneficiaries, correspondence between trustees, appointor and beneficiaries, and minutes of meetings at which decisions were made by the appointors or the trustees relating to the exercise of their discretion.  Over these specific documents, a discretionary beneficiary (i.e. a beneficiary who is so only at the discretion of a third party) does not have a proprietary right.

         The courts of Cayman Islands were, of course, happy with Londonderry and cited it with approval in their rulings in the Lemos cases, namely, In re The Lemos Trust Settlement (1992-93) CILR 26 and Lemos and Others v Coutts and Company (Cayman) Ltd and Others, and in the In re Ojjeh Trust (1992-93) CILR 348.  In Lemos, the beneficiaries wanted to get evidence of the trust and its administration from the trustees so that the said documents can be used in a proceeding that was going on in Greece.  The attempt, based on the argument of proprietary right over the documents, was resisted, but somehow, the conflict was resolved when the trustee offered to disclose audited accounts in return for an undertaking by the beneficiary not to use them in the Greek litigation.  In Ojjeh, Mrs. Ojjeh, as guardian of her minor son who was beneficiary of a Cayman-based trustee, wanted to get information about the companies whose shares were owned by the trust.  The trustees maintained that the documents requested were commercially sensitive matters.  The Cayman court said that such a demand was “unreasonable, untenable and oppressive” and upheld the right of the trustees not to disclose them.  However, the court required that the issue of the commercial sensitivity of the documents be referred to the Cayman court and not left to the unilateral decision of the trustee.

          For local trustees to discern the invisible line between what has to be disclosed and what may be kept confidential from a beneficiary, the guiding principle is the reason for giving the beneficiary any right at all to know. And the weight of authority and of judicial pronouncements ground such right on, as Professor David Hayton points out, both the very status of being a beneficiary and the trustee’s status as an accountable fiduciary.  The right to information, says the good professor, is a “necessary incident of the trustee-beneficiary relationship at the core of the trust...”  A trustee is duty bound to “find and pay a beneficiary entitled to an income or capital payment, thereby making such beneficiary aware that he is beneficiary.”  “Knowledge of the trust is necessary to make the trustee accountable, this being an essential core incident of the relationship of trustee and beneficiary.”  As succinctly stated by Lord Justice Millett in Armitage v Nurse [1973] 3 WLR 1046, “... there is an irreducible core of obligations owed by the trustees to the beneficiaries and enforceable by them which is fundamental to the concept of a trust.  If the beneficiaries have no rights enforceable against the trustees, there are no trusts.”

           These decisions on what a beneficiary may know are buttressed by rulings on how soon he ought to know.  The weight of authority is that trustees must provide the needed information promptly.

         Thus, in West v Lazard Brothers (No.1)(1987-88) JLR 414, the Jersey Royal Court gave the trustees “within 31 days of today’s hearing” to provide information on “all accounts, vouchers, coupons, documents and correspondence relating to the administration of the trust property or otherwise to the execution of the trust, including a full inventory of the trust assets,and all dealings relating to any real property…”  When the trustees failed to comply fully, the court ordered the trustees to pay plaintiff’s cost on a full indemnity basis.

          This was followed by Re The Den Hagg Trust (1997/98) 1 OFLR 495, Ernst and Young Trustees Ltd, did comply with request for disclosure but with some delay.  The court criticized the delay, saying “immediate proposals means what it says and inactivity is not a viable excuse”.  As in Lazard Brothers, the trustees had to pay plaintiff’s costs on a full indemnity basis.

         The Lazard Brothers ruling was pushed further in Bhander v Barclays Private Bank & Trust Co Ltd (1997/98) 1 OFLR 497.  In the latter case, the court included in the information to be disclosed even those not in documentary form.  It held the withholding of that information to be “an inordinate delay…after numerous requests had been made.”

         Assessing these cases, Willoughby sums up: “The message for trustees in Jersey, and possibly elsewhere, when requested to provide trust accounts, and any information having a bearing on those reports, is to cooperate promptly and, if there is genuine uncertainty over providing the information requested, to seek the guidance of the court without delay.”