A recent judgment(1) relates to an application to the Royal Court under the so-called Hastings-Bass principle, brought by two beneficiaries of a sub-fund of the Onorati Settlement. In brief, two of the beneficiaries sought to set aside a deed of appointment distributing the trust fund of the trust to them without adequate consideration of the tax consequences of the appointment and without professional tax advice, rather than to their mother, who was also a beneficiary of the trust (as was originally envisaged).
The application was brought on the grounds that the appointment to the two beneficiaries resulted in a breach of the trustee's fiduciary duty and an unnecessary tax charge for two beneficiaries. Importantly, the trustee failed to take professional advice as to the tax implications, despite being aware that the appointment would have adverse tax consequences.
Although Her Majesty's Revenue and Customs (HMRC) was notified of the application, it declined to appear, but did draw the attention of the Royal Court to obiter comments made by the deputy bailiff in Re the B Life Interest Settlement.(2)
Given that the Hastings-Bass principle has been the subject of recent and detailed consideration by the English Court of Appeal and Supreme Court in Pitt v Holt and Futter v Futter(3), before issuing its ruling the Royal Court first summarised the position of the courts in both England and Jersey.
The principle, as summarised in Sieff v Fox,(4) concerns decisions of trustees where they have failed to take into account relevant considerations or have taken into account considerations that they should not have. In most instances, it has been the trustees themselves who have sought to have their decision set aside on the basis of the principle.
In Pitt v Holt, the principle was reviewed for the first time by the Court of Appeal (with the benefit of contributions by HMRC as a party), with the decision essentially being upheld by the Supreme Court.
The English courts held that the decision in Hastings-Bass(5) is not in fact authority for the principle to which it has given its name (as the case in fact related to excessive execution rather than inadequate deliberation), but concluded that the misnomer is now so familiar that it is best to continue to use it. For convenience, the Royal Court also decided to continue to refer to the 'Hastings-Bass principle' or the 'rule in Hastings-Bass' in the same way.
The English courts held that the law had taken a wrong turn, and that the principle was more restricted than had been articulated by courts at first instance. The Royal Court summarised that the two key differences (compared with the principle as it was understood to be at the time of Sieff v Fox) were as follows:
- The inadequate deliberation on the part of trustees must be of sufficient seriousness as to constitute a breach of fiduciary duty. If there is no breach of fiduciary duty, the court cannot intervene. Furthermore, there will be no breach of such duty where trustees have conscientiously obtained and followed apparently competent professional advice, even if such advice turns out to be wrong.
- An application to challenge the exercise of a discretionary power on the basis of the principle should normally be made by one or more beneficiaries.
The Royal Court summarised that to date, the principle has been applied in Jersey in the terms in which it was thought to exist in England and Wales, and as encapsulated by the following passage in Sieff v Fox:
"Where trustees act under a discretion given to them by the terms of the trust, in circumstances in which they are free to decide whether or not to exercise that discretion, but the effect of the exercise is different from that which they intended, the court will interfere with their action 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 does not seem to me that the principle only applies in cases where there has been a breach of duty by the trustees, or by their advisers or agents."(6)
In Re Seaton Trustees Limited(7) the court stated that the test to be applied under Jersey law is threefold:
- What were the trustees under a duty to consider?
- Did they fail to consider it?
- If so, what would they have done if they had considered it?
Furthermore, in Re the R Trust(8) the principle was held to apply to protectors as well as trustees.
In Leumi Overseas Trust Corporation Limited v Howe(9) the Royal Court held that it was not necessary for there to be a breach of duty on the part of the trustees before the principle could be brought into play.
Accordingly, the Royal Court concluded that the principle as applied under Jersey law now differs from English law as it has been clarified by the English courts in Pitt v Holt and posed the following question: what should be the effect in Jersey law of the changes to the principle brought about in Pitt v Holt?
In Re B Life Interest Settlement – the only case in Jersey to consider the application of the principle since the Court of Appeal decision in Pitt v Holt – the Royal Court found on the facts that even if it were to apply the historic Hastings-Bass principle (ie, the principle as it was encapsulated in Sieff v Fox), the application would not succeed. It was therefore unnecessary to go on to consider whether the Royal Court should adapt the principle so as to conform with the Court of Appeal decision in Pitt v Holt. Nevertheless, the deputy bailiff made some obiter observations to the effect that, had it been necessary to decide the point, the Royal Court would have rejected the previous Jersey decisions and applied the principle as it was declared to be in Pitt v Holt.
The Royal Court, in applying the law to the facts, concluded that the facts of the case fell "fairly and squarely" within the principle as articulated by the English courts. The trustee was in breach of its fiduciary duty by failing to have regard to the tax consequences of the appointment of the trust fund of the trust to the beneficiaries.
Therefore, it was not necessary for the Royal Court to consider whether Jersey law in relation to the principle should be modified so as to accord with the current state of English law. The Royal Court did comment 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 the English Courts in Pitt v Holt should not be applied.
The Royal Court held that responsibility for deciding to make the appointment and considering the tax consequences of the appointment rested firmly with the trustee (notwithstanding any errors or misunderstandings on the part of any of settlor or the beneficiaries).
In particular, the Royal Court criticised the failure to take any professional tax advice and stated that, while in some circumstances the provision of written advice obtained by a beneficiary will be sufficient for a trustee to act on the basis of such advice, the trustee should always see such advice in order to satisfy itself that the advice is appropriate and based on a correct understanding of facts. It is wholly insufficient and a breach of duty for a trustee to rely on an oral confirmation from a beneficiary that it has received appropriate tax advice.
The Royal Court concluded that if the trustee had known the tax consequences of the appointment to the two beneficiaries, it would not have made the appointment to them, but would instead have made the appointment to their mother (resulting in a substantially lower tax liability). The Royal Court then went on to consider the other requirements of the principle as laid down by the English courts in Pitt v Holt.
First, the Royal Court noted that the application had been brought by the beneficiaries (not the trustee), as suggested in Pitt v Holt. Second, it noted that Pitt v Holt confirmed that if an exercise by trustees of a discretionary power is within the terms of the power, but the trustees have in some way breached their duties in respect of that exercise, the trustees' act is not void, it is voidable. This means that it is subject to the court's discretion and to any equitable defences.
The Royal Court concluded that its discretion should be exercised in favour of setting the appointment aside and declaring it to be invalid, with the effect that the trust fund was still held on the terms of the trust and had never (in law) belonged to the two beneficiaries. The court reiterated its previous position that it was not attracted by the proposition that beneficiaries should be left to a remedy of bringing litigation against trustees or professional advisers. The beneficiaries are usually not at fault and have already incurred loss by reason of unnecessary tax charges. 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 Trusts (Amendment 6) (Jersey) Law 2013, which introduces a statutory test for mistake and enshrines in law the Hastings-Bass principle (as it currently exists in Jersey), came into effect on October 25 2013. The introduction of a statutory test will provide certainty to trustees, fiduciaries, beneficiaries and settlors of Jersey trusts as to the scope of the remedy. It also avoids the additional cost and uncertainty of an action for negligence between the trustee, the beneficiaries and their professional advisers in order to resolve such matters.
It is likely that in addition to the statutory tests introduced by this law, applications seeking to rely on the old common law Hastings-Bass principle will continue to be made.
For further information on this topic please contact Josephine Howe at Ogier by telephone (+44 1534 504 000), fax (+44 1534 504 444) or email (firstname.lastname@example.org). The Ogier website can be accessed at www.ogier.com.