13 March 2019

Protection from prying eyes: Trusts in the Cayman Islands

While the flaunting of one's wealth remains a common pastime for many of the world’s well-heeled, increasingly so in the age of social media, the majority of private clients wish to remain just that – private. However, remaining discreet and keeping personal affairs under wraps can be a huge challenge when litigation looms large on the horizon.

Often, the need for privacy goes beyond a wish to avoid the intrusions of inquisitive third parties; in the trust context in particular, there can be very real risks to beneficiaries if details of their wealth (present or pending) becomes known, sometimes even to them. The need for protection from the courts in circumstances such as these is a pressing one, and was recently dealt with by the Grand Court of the Cayman Islands (the Court).

Background facts

In In the Matter of a Settlement dated 16 December 2009,[i] a trustee (the Trustee) of a Cayman Islands trust (the Trust) had sought the Court's blessing for certain decisions and proposed actions by the Trustee. However, in advance of the main action being formally issued, the trustee made an ex parte application, pursuant to which it sought confidentiality orders on three main grounds:

  1. That such confidentiality orders were necessary to protect actual and contingent beneficiaries of the Trust from the personal safety risks of being publicly linked to the substantial wealth associated with the Trust and its assets;
  2. That, as the settlor’s minor grandchildren had all been revocably excluded as beneficiaries of the Trust, there was no useful purpose in apprising them of a mere expectancy that they might benefit under the Trust at some point in the future; and
  3. In any event, the adult beneficiaries did not wish the minor grandchildren to become aware of their family’s link to substantial wealth, for fear that it would adversely affect their personal development.

The Honourable Justice Kawaley agreed that confidentiality orders were appropriate in the circumstances described by the Trustee, but considered only grounds (1) and (3) to be material in reaching that decision. While the concerns raised by the Trustee on behalf of the beneficiaries were described by the Judge as ‘generic concerns often expressed in similar applications’ made in the jurisdiction, he nonetheless considered that it was because of their familiarity to the Court that those concerns were both cogent and credible.

The Judge also acknowledged that it is increasingly common for persons who have accumulated significant wealth to wish their children to live, as far as possible, ‘ordinary’ lives and to be left unaware of the scale of wealth to which family members potentially have access. Security issues were also taken into consideration, with the Judge noting:

 ‘…it is self-evident that being associated with substantial wealth gives rise to personal safety risks; such risks may be greater in certain parts of the world than in others but are material risks as a matter of common sense in all cases’.

Legal principles

In reaching a final decision in respect of the Trustee's ex parte application, the Judge was required to carefully balance the principle of open justice and the rights of privacy, both of which are constitutionally protected under Cayman Islands law. Section 7 of the Cayman Islands Constitutional Order 2009 (the Constitution) records, among other things, that everyone has the right to a fair and public hearing in their determination of their legal rights and obligations, and that all proceedings instituted for the determination of any civil right or obligation shall be held in public.

However, it is open to the Court to hold private hearings in circumstances where publicity would prejudice the interests of justice, or where the welfare of minors or the protection of the private lives of persons concerned in the proceedings is warranted. The ‘public hearing’ requirement is therefore not an absolute one and subject to these exceptions.

Acknowledging that it was a novel one in the Cayman Islands, the Trustee put forward the argument that a private hearing was also justified on two additional and alternative bases:

  1. that because the proceedings related merely to the administration of a trust, they were not ‘civil’ proceedings that triggered the application of s.7(9) of the Constitution in the first place; or
  2. even if s.7(9) of the Constitution were engaged by the proceedings before the Court, the proceedings fell within the ambit of a constitutionally permitted exception, having regard to common-law open justice principles.

The Judge was not immediately taken by these alternative arguments, noting that caution would be required before the Court would adopt a technical legal approach that would have the effect of narrowing the scope of ‘civil proceedings’, which are protected by s.7 of the Constitution. However, the Judge did form the view that the public hearing requirement was not a protection for individual litigation so much as ‘a general protection for the independence and impartiality of court proceedings generally’.

In the course of considering the matter, the Judge also noted the overlap between the public hearing requirements of s.7 of the Constitution and the freedom of information requirements of s.11.[ii] The Judge held that ss.7 and 11 are to be read together when deciding whether or not any form of confidentiality order should be made in relation to civil proceedings broadly construed.

Private hearings

Ultimately, the Court acknowledged that private hearings may take place, but only in circumstances of necessity or expedience involving the following categories of cases:

  1. Where publicity prejudices the public interest;
  2. Interlocutory proceedings;
  3. Grounds of public morality
  4. The welfare of minors;
  5. The protection of commercial confidence; and
  6. The protection of the private lives of persons concerned in the proceedings.

In the trusts law context, the relevant ‘gateways’ for accessing a confidentiality order in relation to a non-contentious trusts application will typically be (d) and (f). However, the Judge also noted that art.1 of the European Convention on Human Rights, which states that ‘every natural or legal person is entitled to the peaceful enjoyment of his possession’ is also of relevance to confidentiality orders in trust cases.[iii] The Judge noted that local offshore courts ‘must to my mind be at least sympathetic to confidentiality applications such as the one made in the present case.’

The Judge took care to note that this approach does not involve any dilution of the basic constitutional and common-law test that there is a presumption in favour of open justice and that confidentiality orders should not be granted (or continued) where there is a public interest in transparency. The needs of transparency will be strongest where persons linked to the trust are subject to tax or regulatory proceedings, or the sources and ‘concealment’ of their wealth are matters that are already the subject of media scrutiny.

In such cases, there will be an obvious risk that the granting of a confidentiality order will have the effect of the Court appearing to provide a ‘cloak for impropriety’. This means that trustees who obtain ex parte confidentiality orders are subject to continuing duties to make full and frank disclosure, and there is invariably a positive duty to make disclosure to the Court either before or after a confidentiality order is obtained if any persons linked with the trust are or become subject to foreign criminal, tax, or other public investigative proceedings, and/or information about the trust or the beneficiaries’ wealth is in or enters the public domain.

Conclusion

The Judge concluded that in such cases the Court is required to act as a judicial watchdog, with one eye on the private needs of locally established trusts and the other eye on the public requirements of open justice. In this case, the Judge was satisfied that there was no public interest in open justice, which outweighed the countervailing interests of protecting the welfare of minor beneficiaries, protecting the private lives of adult beneficiaries, and generally protecting the Trustee’s ability to ‘peaceably hold and administer the trust assets’.

On this occasion, the private lives of the beneficiaries of the Trust were, quite properly, protected from the prying eyes of the public.

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[i] Unreported, 25 July 2018

[ii] Section 11 has previously been the subject of judicial analysis by the Honourable Chief Justice in Re The Sphinx Group of Companies (in Official Liquidation) [2017] 1 CILR 176.

[iii] Affirming the Judge's previous judgment while sitting on the Supreme Court of Bermuda, in Re the G Trusts [2017] SC (Bda) 98

 

An original version of this article was first published by STEP Journal, March 2019.

© Carey Olsen 2019.