The Court of Appeal has now handed down its eagerly awaited decision in Pitt and Another v Holt and Another1, unexpectedly overturning what has been known as the principle set out in Re Hastings-Bass.
The principle, which the lower courts have followed, with increasing enthusiasm, for over 30 years, provided a “get out of jail free card” for trustees and, more often, their professional advisers, who either committed (usually inadvertent) breaches of trust or whose acts had unintended tax consequences.
The basic principles
In Re Hastings-Bass the Court of Appeal set aside a transaction where assets had been advanced from one trust into another in order to minimize inheritance tax (then estate duty).
The court held that, in cases where a trustee acted under a discretionary power, a court should not interfere in that action unless it was clear that the trustee would not have acted as he did, had he (i) not taken into account considerations which he should not have taken into account; or (ii) failed to take into account considerations which he ought to have taken into account.
In cases where it was alleged that a professional had acted negligently when advising a trustee, it was possible for the trustee to apply to court under the Re Hastings-Bass principle to unravel a transaction (ie put the trustees and beneficiary in the position they were in before entering the transaction).
The Court of Appeal’s decision
Last week’s unanimous Court of Appeal decision has effectively overturned the principle which the lower courts had followed since Re Hastings-Bass. In giving the lead judgment Lord Justice Lloyd said there had been a “misunderstanding” of the effect of the decision in Re Hastings-Bass.
The Court of Appeal held that the principle established in Re Hastings-Bass, properly formulated, was that where a trustee makes a decision that leads to unintended consequences, those consequences can only be unravelled where:
- the trustee acts outside the scope of his power or its exercise is a fraud on the power or defective. Here the transaction is void and the assistance of the court is not required; or
- the trustee is in breach of duty. Here the transaction is voidable on the application of a beneficiary and at the discretion of the court.
That leaves the question, what constitutes a breach of duty by a trustee? The Court of Appeal held that a failure to take into account a relevant factor in making a decision could be a breach of duty by a trustee. However, in a situation where a trustee seeks professional advice and follows that advice, in the absence of any other basis on which to challenge the trustee’s decision, a trustee is not in breach of his fiduciary duty. It is not a breach of a trustee’s duty if he acts on advice which turns out to be materially wrong.
There is likely to be general dissatisfaction expressed with the outcome of the Court of Appeal’s decision, overturning such a well-established principle on the basis that the lower courts had incorrectly applied the decision in Re Hastings-Bass.
The position now seems to be that if a trustee is reckless in the exercise of his powers he is likely to be able to turn the clock back and walk away. If, on his own, he makes a bad call, he may be able to go to the court, with the support of his beneficiaries, and ask them to set aside the exercise of the power. However, if the trustee takes proper and due advice which turns out to be wrong (which of course the trustee will be unaware of or he would not usually have sought the advice in the first place) the trustee and beneficiaries are stuck with the consequences.
A remedy, which was a quicker and cheaper way to unravel a transaction with unintended consequences, has been removed. The replacement is likely to be prolonged and expensive litigation.