#lisaberg

Background

In Henchley and others v Thompson, the Claimants were the beneficiaries of two trusts created by Mr WCC Henchley in September 1960, who died in 1972.  Mr Thompson is married to Mr Hinchley’s daughter, and had been a trustee (or de facto trustee) up to the early 1990s.

The Claimants applied to the court for an order directing Mr Thompson to give a full account of his dealings with the assets of the two trusts during his term.

The first trust constitutes a house occupied by two beneficiaries, with an estimated value of £3m.  A share portfolio was referred to in the 1972 deed of appointment, but Mr Thompson had no recollection of what had happened to this and claimed that they would have no value now in any case.  Further, he stated that he maintained no records of the trust himself, and that Doris Watson had been employed as the trusts' bookkeeper and record keeper.  As Mr Thompson apparently had no information, an order to account would be pointless.

The second trust had some helpful information from the HMRC, dating from the early 1990s, showing that it closed in 1996, meaning that no further tax returns had been issued to the trustees for completion.  However, the trust might have continued to exist, and HMRC was unable to explain why tax returns had no longer been issued from 1996.

Again, Mr Thompson claimed that he had only limited involvement with both trusts, and that Ms Watson has been the designated administrator for the trusts, acting as bookkeeper keeping all of the relevant accounts and records.  Further, she would deal with any payments to be made and would supply all document to him for signature.  However, any of the trusts’ records which Ms Watson might have once held have not survived and are no longer available.

The only records which possibly be described as ‘accounts’ were prepared by chartered accountants on the trustees’ instructions, and consist of a balance sheet for the trust as at 5 April 1991 and an income and expenditure account for the year ended at that same date.

Outcome

At the High Court, the judge confirmed that it is within the court discretion to order for an account of trust assets to be produced by a trustee.  The court held that while there is no strict presumption in favour of making such an order, where a trustee holds (or has held) trust assets, the court will only decline a request for an order in rare circumstances.

Further, the court made a clear statement that part of the general duty to account to beneficiaries is a specific obligation to keep records and retain them for future inspection.  While trustees may reasonably divide responsibilities amongst themselves and designate a person responsible for keeping records, trustees still have a collective responsibility to account to the beneficiaries.  Therefore, the court was not satisfied with Mr Thompson’s explanation that he had left record keeping to Ms Watson, meaning that the fact that no documents have been retained would not absolve him from providing an account to the Claimants.

The judge made a clear distinction between business accounts and trust accounts: the former is intended as a snap shot of the business’s asset position on a particular date and as a trading report covering a period; by contrast, the collective trust accounts are intended to from period to period what distributions and disposals of the trust assets have taken place, and more generally, how the trust assets have been dealt with. Importantly, a beneficiary should be able to use the trust accounts to show that the trust assets conform with the terms of the trust document.

The judge noted that the accounts produced for 1990 and 1991 were not suitable to illustrate to a beneficiary how the trust assets had been managed in the relevant periods.  It seemed likely to the court the preceding periods would have suffered from the same problems, and so it seems that the accounts had never been adequate for their required purpose.

Conclusion

The decision serves as a reminder of a number of considerations for trustees:

1.       Even many years after the trust is created, the trustees are still bound by the core duty to account to beneficiaries.

2.       Trustees can delegate record keeping responsibilities amongst themselves, or even employ others to fill this role, they still have a collective duty to beneficiaries.

3.       It is within the court’s discretion whether the trustees should be ordered to account to the beneficiaries, but there would need to be compelling reasons for not making the order.

Interestingly, the court also held that section 21(3) Limitation Act 1980, which imposes a limitation period on actions brought by a beneficiary for any breach of trust or to recover trust property, did not apply to a beneficiary seeking a positive order to enforce the trustees’ obligation to account.  This was based on the court stating that applications for an account ‘in common form’ do not require a breach of trust or any adverse finding against a trustee, and that such an order was essentially administrative.