Schmidt v Rosewood Trust
| Jurisdiction | UK Non-devolved |
| Judge | Lord Walker of Gestingthorpe |
| Judgment Date | 27 March 2003 |
| Neutral Citation | [2003] UKPC 26 |
| Court | Privy Council |
| Docket Number | Appeal No. 2 of 2002 |
| Date | 27 March 2003 |
[2003] UKPC 26
Present at the hearing:-
Lord Nicholls of Birkenhead
Lord Hope of Craighead
Lord Hutton
Lord Hobhouse of Woodborough
Lord Walker of Gestingthorpe
Privy Council
[Delivered by Lord Walker of Gestingthorpe]
Introduction.
It has become common for wealthy individuals in many parts of the world (including countries which have no indigenous law of trusts) to place funds at their disposition into trusts (often with a network of underlying companies) regulated by the law of, and managed by trustees resident in, territories with which the settlor (who may be also a beneficiary) has no substantial connection. These territories (sometimes called tax havens) are chosen not for their geographical convenience (indeed face to face meetings between the settlor and his trustees are often very inconvenient) but because they are supposed to offer special advantages in terms of confidentiality and protection from fiscal demands (and, sometimes from problems under the insolvency laws, or laws restricting freedom of testamentary disposition, in the country of the settlor's domicile). The trusts and powers contained in a settlement established in such circumstances may give no reliable indication of who will in the event benefit from the settlement. Typically it will contain very wide discretions exercisable by the trustees (sometimes only with the consent of a so-called protector) in favour of a widely-defined class of beneficiaries. The exercise of those discretions may depend on the settlor's wishes as confidentially imparted to the trustees and the protector. As a further cloak against transparency, the identity of the true settlor or settlors may be concealed behind some corporate figurehead.
All these considerations may encourage a settlor to entrust substantial funds to an apparently secure and confidential off-shore shelter. But the very same features may, as this case strikingly illustrates, present problems to the close relatives of a settlor who dies unexpectedly, as did Mr Vitali Schmidt ("Mr Schmidt"), the co-settlor of two Isle of Man settlements called the Angora Trust and the Everest Trust.
The main issue on this appeal is the claim of Mr Schmidt's son Vadim, the appellant, to obtain trust accounts and other information from the trustees of the two settlements. The sole trustee of each settlement is Rosewood Trust Ltd ("Rosewood"), an Isle of Man company which is in business as a provider of corporate and trustee services. It is the respondent to the appeal. The appellant's claim for disclosure of accounts and other information has been made in two capacities, that is both personally and as the administrator of Mr Schmidt's estate. Mr Schmidt died intestate in Moscow on 31st August 1997 and letters of administration to his estate in the Isle of Man were granted to the appellant on 17th August 1998.
Before any summary of the trusts and powers of the settlements it is appropriate to say something about the background to this litigation, and the evidence which was before the lower courts. When Mr Schmidt died (according to the appellant's evidence, unexpectedly and alone at his Moscow apartment) the appellant was nineteen years of age (he was born on 28 September 1977). He was entitled to share in his father's estate together with his mother Svetlana and his paternal grandmother Alisa. He has deposed that he has devoted his time and resources to tracing the assets of his father's estate. His father was a senior executive director of Lukoil, which is the largest oil company in Russia and one of the largest oil companies in the world. The appellant believes that his efforts to trace his father's assets (in Liechtenstein, Austria, Cyprus and the Isle of Man) have been frustrated by some of his father's co-directors.
In June 1998 the appellant commenced proceedings ("the 1998 proceedings") in the Isle of Man against Rosewood, its directors and several other defendants. In the 1998 proceedings the appellant alleged breach of trust and breach of fiduciary duty. He obtained an ex parte order made on 10th July 1998 (and varied by consent on 16th July 1998) prohibiting Rosewood and other defendants from dealing with assets comprised directly or indirectly in the Angora Trust and the Everest Trust. The order also provided for extensive disclosure of information.
The appellant commenced the present proceedings by petition on 1st June 1999. His case, as set out in an affidavit sworn by him on 7th June 1999, is that the disclosure made to him pursuant to the ex parte order "raised more questions than it answered", especially as parts of some disclosed documents had been obliterated. It appears that over US$105m was received by the two settlements between their creation and 1998. The appellant deposed that sums totalling about US$14.6m had been paid to him (as his father's administrator) between August and October 1998. These sums were not accepted by him by way of compromise of the claims made in the 1998 proceedings, and he believed them to represent only a fraction of Mr Schmidt's total entitlement under the two settlements. The appellant has obtained a lengthy accountants' report dated 4th June 1999 from Ernst & Young setting out alleged deficiencies and inconsistencies in the material provided.
The appellant's present proceedings seek fuller disclosure of trust accounts and information about the trust assets, not by way of discovery in the 1998 proceedings but by virtue of the discretionary interests or expectations which the appellant claims that he himself has, and that his late father had during his life, under the two settlements. The present proceedings were initially attacked by Rosewood as being an abuse of process, but that submission was rejected at first instance and was not pursued on Rosewood's appeal to the Staff of Government Division.
That is only a brief summary of the background to the litigation. It has many features which might be thought to prompt further questions. However neither side has suggested that the settlements should be regarded as sham documents, or as documents entered into for illegal purposes. It is unnecessary to try to go further, at this stage, into the origins of the settlements. Indeed it would not be possible to go much further since the judgments below are very short on any findings of fact, and the Record before the Board does not contain all the affidavit evidence sworn in the two sets of proceedings. It appears that Rosewood does not accept that Mr Schmidt was a settlor of either settlement. Certainly he was not named as a settlor. But (in responses filed in the High Court of the Isle of Man) Rosewood has described Pacquerette Limited ("Pacquerette"), the named settlor, as "simply a nominee" and has stated that Mr Schmidt "was involved in the setting up" of each trust. Rosewood also stated in its answer that its involvement was "simply to receive and pay out such funds as [Mr Schmidt] chose to channel through the Isle of Man". In the absence of other evidence that justifies the conclusion that he was one of those who joined in causing the settlements to be made and funded, and was in substance a co-settlor.
The terms of the settlements.
The Angora Trust was executed on 6th April 1992 between (1) Pacquerette and (2) Lorne House Trust Limited ("Lorne House"). The Everest Trust was executed on 20th June 1995 between Pacquerette and Lorne House. Lorne House (an Isle of Man company apparently controlled by the same persons as Rosewood) retired from the trusteeship of both settlements, and Rosewood was appointed as sole trustee in its place, on 3rd May 1997.
The Angora Trust and the Everest Trust are in similar but by no means identical form. The convenient course is to summarise the trusts and powers of the Angora Trust and then identify the points of difference in the Everest Trust.
Clause 1 of the Angora Trust contains definitions. Some are self-explanatory but the following should be noted:
(1) "The Trust Period" and "the Accumulation Period" are both defined as the period of 80 years from the execution of the settlement (and that period is by clause 2 the perpetuity period permitted by the law of the Isle of Man) subject to powers for the trustees to terminate either period before the expiration of 80 years.
(2) "The Beneficiaries" are defined as the Royal National Lifeboat Institution ("the RNLI") and the persons listed in the Second Schedule. That schedule (originally copied in a redacted form, but later without redaction) contains the names of Mr Schmidt and other Lukoil senior executives.
(3) "The Protector" is defined as Mr Schmidt "or any other person holding the office of Protector hereunder".
Clause 3 provides for the settlement to be regulated by the law of the Isle of Man, subject to a power for trustees to change the proper law.
Clauses 4, 5, 6 and 7 contain the dispositive trusts and powers affecting the trust fund. These present some difficulties of construction but their general effect is as follows:
(1) Clause 4(1) contains a wide power of appointment exercisable by the trustees, with the prior written consent of the Protector, by deed executed during the Trust Period. The objects of the powers are all or any one or more of the Beneficiaries, subject to certain restrictions set out in the proviso to clause 4(1). Some of these restrictions relate to United States taxation and need not be set out in detail, but it is notable that provisos (ee) and (ff) are as follows:
"(ee) no distribution of income shall be made to any beneficiary who has not attained the age of twenty-one years except in payment of educational or necessary medical expenses or for the alleviation of hardship.
(ff) no distribution of...
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