In the case of In the matter of the Onorati Settlement the Royal Court of Jersey considered the so called "rule in Hastings Bass" for the first time following the judgment of  the Supreme Court of the United Kingdom in the cases of Pitt v Holt and Futter v Futter [2013] UKSC 26 and set aside an instrument of appointment and declared it to be invalid on the basis that the trustee was in breach of its fiduciary duty. The Royal Court's judgment (given by the Bailiff, Sir Michael Birt) is of interest to trust practitioners and is summarised below.

Jersey: the position before the Supreme Court's decision

The rule in Hastings Bass developed over the years in England to its form as presently applied in Jersey is as follows:

  • Where trustees act under a discretion given to them by the terms of the trust and they act within the parameters of that discretionary power, but their exercise of discretion has effects other than those which they intended, the Court will set it aside if it is clear that they would not have acted as they did had they not failed to take into account considerations which they ought to have taken into account, or taken into account considerations which they ought not to have taken into account.
  • It is not a prerequisite that there has been a breach of duty by the trustees (or by their advisors or agents).
  • Unintended tax consequences are among the matters which may be relevant for the purposes of the principle.

However, not every judge has been in agreement about the correct articulation of the Hastings Bass principle. In obiter comments in the case of In the matter of the B Life Interest Settlement [2012] JRC 229, William Bailhache, Deputy Bailiff, stated that, if he had been required to decide the point, he would have held that previous Jersey decisions under Hastings Bass were clearly wrong. Part of his reasoning was that he saw there to be no reason in principle why a person should be in any better position as a beneficiary of a trust where the trustees have taken a particular step than he would have been in had he taken the same step personally in relation to his own legal interests.

Pitt v Holt and Futter v Futter – the Supreme Court

We have commented on the Supreme Court's judgment in a previous briefing but, in summary, the Supreme Court (with Lord Walker giving the leading speech) affirmed Lloyd LJ's restatement of the rule in Hastings Bass: the Court will only have jurisdiction to intervene in a matter concerning a trustee's flawed decision where that decision was within the parameters of a power held by it if the trustee has acted in breach of fiduciary duty in taking that decision. This rules out bad decisions that result from the trustee having obtained professional advice which advice turned out to be wrong: the principle simply does not apply there since the trustee will not have committed a breach of duty. It also rules out any other decisions that transpire to be disadvantageous but where the trustee did not breach its duties.

The Onorati Settlement

In the first case of its type in Jersey following the Supreme Court's decision in Pitt v Holt and Futter v Futter, the Royal Court of Jersey heard an application brought by two beneficiaries of a Jersey law governed trust following the exercise of a power of appointment executed in 2010 by the trustees in a manner which led to a tax liability to those beneficiaries. The trustee did not oppose the application.

The beneficiary with whom the trustee had the closest relationship was the mother of  two other adult beneficiaries who brought the application (although the mother is referred to as "the daughter" in the anonymised judgment. The mother was resident in England but domiciled in Italy, whilst her adult children were resident and domiciled in England. When winding up the trust the trustee appointed the entire trust fund to the children, thereby incurring them a tax liability (income and capital gains tax) in the UK which comprised approximately 35% of the value of the trust fund. It was claimed by the children that the trustee failed to have regard to the tax consequences of appointing the trust fund  to the children and that it would not have done so had it had regard to the correct tax position. In the circumstances the children applied to have the deed by which the appointment was made set aside on the basis of the Hastings Bass principle.

The situation arose as a result of a breakdown in communication between the mother and the trustee. The funds were initially requested by the mother for the purchase of a property. The trustee expressly warned the mother that there would be adverse tax consequences were the funds to be distributed to the children because of their UK domicile.

The mother appeared to misunderstand this warning. She assured the trustee that she had taken professional tax advice but the reality was that she did not properly understand this advice or, if she did, she appeared to have forgotten it. Her requests to the trustee as to the manner in which she wished the distribution to be made changed on several occasions. To compound matters the relevant director of the trustee was absent from the office during the critical period. As a result the important questions were not asked by the trustee, no professional tax advice was sought or received and the distribution was made to the children and hence the tax liability arose.

The Royal Court concluded that the trustee was in breach of fiduciary duty by failing to have regard to the tax consequences of the appointment of the trust fund to the children rather than the mother as originally envisaged. Whilst the trustee's decision ultimately to appoint direct to the children may have been contributed to by the mother's errors and misunderstandings, responsibility for deciding on the appointment rested firmly with the trustee. Its conduct amounted, in the Royal Court's judgment, to a clear breach of fiduciary duty. The evidence showed that, if the trustee had known (or recalled) the tax consequences of an appointment to the children when it made the appointment, it would not have made the appointment but would have appointed the trust fund to the mother, leaving her to do what she wished in relation to any subsequent gift to the children. 

In relation to tax advice the Royal Court commented: "In some circumstances, provision of written advice obtained by a beneficiary will be sufficient for a trustee to act on the basis of that advice. But the trustee will always need to see the advice in order to satisfy itself that the advice is appropriate and is based on a correct understanding of the facts….It is wholly insufficient and is a breach of duty for a trustee to rely on oral confirmation from a beneficiary that he or she has received appropriate tax advice."

The children did not have the benefit of their own tax advice and should not bear responsibility for what occurred. Their potential remedies against the trustee were not straightforward and would be expensive. More generally the Bailiff expressed the Royal Court's view that it is not attracted by the proposition that beneficiaries should be left to claims against trustees or professional advisors. To force them to incur further expense in what may be uncertain litigation when the law allows for the avoidance of a decision made in breach of the trustee's duties seems unnecessary, undesirable and unjust.

The Royal Court exercised its discretion in favour of setting aside the appointment and declared it invalid. It considered that the facts of the case fell squarely within the Hastings Bass principle as articulated by the Supreme Court in Pitt v Holt and Futter v Futter and accordingly it did not have to decide whether Jersey law should follow the Supreme Court's judgment concerning the narrower ambit of the Hastings Bass remedy. However, the Royal Court did state that "the position remains open, although any party wishing to submit that Jersey law should continue to plough its own furrow will have to explain why the closely reasoned judgments of Lord Walker and Lloyd LJ should not be applied."

HMRC was notified of the hearing but declined to attend it. In a letter considered by the Royal Court HMRC reserved rights to contend that, so far as any UK tax consequences are concerned, any decision of the Royal Court setting aside the appointment on the basis of the rule in Hastings Bass should not be recognised in England. However, the Royal Court commented in response that the consequence of its decision is that, under Jersey law (which is the governing law of the trust), the 2010 instrument of appointment having been avoided, it is as if it never existed and the trust fund is still being held upon the terms of the trust and does not belong (and has never belonged) to the children.

The Court cited with approval the decision of Mostyn J in AC v DC [2013] 15 ITELR 811:

“The law of tax is not an island entire of itself. Unless a taxing statute says to the contrary  the right of the state to charge tax in relation to a given transaction is subject to the effect  of that transaction as defined by the general law ... there is long standing authority from the Court of Session (First Division) in Scotland, IRC v Spence [1941] 24 TC 312, never doubted in subsequent tax cases in the English courts, which says that the tax affects of a transaction will be annulled retrospectively if it is subsequently found to be voidable, and is declared void ...”

The position in Jersey in the future

On 16 July 2013 the States of Jersey (the Island's legislature) passed an amendment  to the Trusts (Jersey) Law 1984 which will, subject to Privy Council consent, give statutory force to the original formulation of the rule in Hastings Bass and to the doctrine of mistake in its application to Jersey law trusts. This is desirable for trustees, settlors and beneficiaries in situations where the alternative would be expensive and potentially risky litigation against professional advisers. Furthermore the remedy will be available in situations even where the trustee was not necessarily in breach of trust.

The amendments, which are contained in the Trusts (Amendment No. 6) (Jersey) Law 201-, are subject to the sanction of the Privy Council which, it is anticipated, will be received in the latter part of 2013, but will have effect in relation to transfers of property to trusts and exercises of power which occur both before or after the amendment to the Trusts Law comes into force.

The position of the Cayman Islands in the future

The courts of the Cayman Islands have not had an opportunity to consider the application of the Hastings Bass principle since the decision of the Supreme Court in Pitt v Holt and Futter v Futter was handed down. Prior to that, the leading Cayman Islands' cases of A v Rothschild Trust Cayman Limited [2004-05] CILR 485 and In the Matter of the Ta-Ming Wang Trust [2010] (1) CILR 541 reflected the position as it was set out in the English case of Sieff v Fox [2005] 3 All ER 693.

However, in a paper given at a conference  in Geneva in June this year, the Honourable Anthony Smellie QC, the Chief Justice of  the Cayman Islands, acknowledging that the Supreme Court's decision would be "highly persuasive" in the offshore jurisdictions, pointed out that:

"… the applicability of the rule in Hastings Bass must now be reconsidered in the light of the UK Supreme Court decision in Futter and Pitt." 

The Chief Justice went on to say , as he did in A v Rothschild Trust Cayman Limited, that the development of the court's statutory jurisdiction under s48 of the Cayman Islands' Trusts Law to give an opinion, advice or direction on any question respecting the management or administration of trust assets "has been influenced by the case authorities, not least those which derived from the so-called "rule in Hastings Bass" as well as those cases dealing with the grant of relief by way of rectification for mistake".

It is also notable that in his judgment in A v Rothschild Trust Cayman Limited, the Chief Justice found that:

"if it is appropriate for the court to intervene  in order to avoid or mitigate a fiscal consequence which would be injurious to the interests of innocent beneficiaries … the court might well do so notwithstanding the fact that the beneficiaries may have other recourse available to them against the ill-advised or mistaken trustees or their advisors", a finding echoed in the views of the Royal Court of Jersey expressed by the Bailiff in the Onorati Settlement case (see above).

Accordingly, it remains to be seen whether the Cayman Islands' court will follow its previous line of authority and follow a course distinct from that of the English courts.