Where trustees have undertaken transactions with unintended consequences (usually unwanted or unexpected tax consequences), they have been able to make use of the "Hastings Bass rule" to set those transactions aside. The Hastings Bass principle allows transactions to be set aside, where it can be shown that the trustees' error is based on the trustees' taking into account irrelevant considerations or failing to take into account relevant considerations. The scope of the Hastings Bass rule has become a hot topic in the trusts world following recent English court cases which have apparently narrowed the scope of a rule which had previously been thought to have wide application. The UK Supreme Court (whose decisions are very often followed in Hong Kong and Singapore) has taken the opportunity to make some important findings on the scope of the rule in the joined cases of Futter and another v The Commissioners for HMRC; Pitt and another v The Commissioners for HMRC [2013] UKSC 26.

The Futter and Pitt cases

In Futter the trustees, acting on legal advice, exercised powers of advancement under two discretionary trusts based upon the understanding that personal losses of the beneficiaries could be offset against the trustees' gains. The advice turned out to be incorrect and significant amounts of capital gains tax became payable.  The trustees relying on the Hastings Bass principle sought to have the transactions declared void.

In Pitt, damages payable to Mr Pitt were settled in a discretionary trust. The trust was established in accordance with legal advice obtained from solicitors and with a view to being tax efficient. However, no thought had been given to the inheritance tax consequences which could have been avoided had the settlement been established as a 'disabled trust' rather than a general discretionary trust. The trustees sought to have the trust set aside either under the Hastings Bass rule or on the ground of (unilateral) mistake. Mistake had not been pleaded in the Futter case.

The Supreme Court's Decision

The Supreme Court found that the Hastings Bass principle did not apply in either of the Futter and Pitt cases, but considered that the trust arrangement in Pitt could be set aside based upon mistake.

The Supreme Court laid down the following rules relating to the application of the Hastings Bass principle:

  •  If trustees act in a way that is outside the scope of their discretionary power then that act is void regardless of whether they have taken and followed professional advice or not.
  • If trustees act within their discretionary power any inadequate consideration of relevant matters has to be sufficiently serious as to amount to a breach of fiduciary duty. There are no 'hard and fast' rules as to what trustees should take into account when exercising their powers although fiscal consequences are likely to be relevant considerations. On the other hand, it is not enough to show that a trustee's deliberations have fallen short of the highest possible standards.
  • Where trustees have breached their duty by failing to consider sufficiently relevant circumstances, the transaction is voidable rather than void and the court has discretion in deciding whether it is equitable to set aside the transaction in the circumstances.
  • It is generally inappropriate for trustees to bring proceedings to avoid a transaction based upon their own failings and they should not regard them as uncontroversial proceedings in which they can expect to recover their costs out of the trust fund. Proceedings should more appropriately be brought by the beneficiaries.
  • If trustees acting within their discretionary powers obtain and follow apparently competent professional advice they are not breaching their fiduciary duties and the transaction is not voidable.

As the trustees in both the Futter and Pitt cases had taken and followed professional advice there was no basis to assert that they had breached their respective duties which was why the Hastings Bass principle did not assist. However, the Supreme Court made the following findings in relation to mistake when considering the trust settlement in Pitt:

  • Mere ignorance, even if causative, is insufficient to establish a "mistake". However, it may be possible to draw an inference of "conscious belief" or "tacit assumption" which can establish an actionable mistake in the context of voluntary dispositions. The distinction will not always be easy to draw.
  • The mistake needs to be sufficiently serious. This test will normally be satisfied when there is a mistake either as to the legal character or the nature of a transaction, or as to some matter of fact or law which is basic to the transaction. This may be a mistake relating to the effect or the wider consequences of a transaction.
  • Ignorance as to a tax liability arising as a consequence of a disposition can be sufficiently grave so as to lead to a mistake being established. However, a court may be less willing to grant relief where the parties to the trust have attempted artificially (but ultimately unsuccessfully) to avoid tax.

In Pitt, the Supreme Court found that there was a bona fide mistake in that the trustees had apparently assumed that the trust would be protected from all sorts of taxes including inheritance tax, and there would have been nothing artificial or abusive in setting up the trust so as to obtain protection from inheritance tax.

Relevance and take away points

As Hong Kong and Singapore courts tend to follow the decisions of the UK Supreme Court it has to be expected that the same restrictions regarding application of the Hastings Bass principle will apply in Hong Kong and Singapore.

The key points to take away from the judgment are that:

  • Trustees may not be able to rely on the Hastings Bass principle where they have acted within their powers and have taken professional advice, even if that advice later turns out to be incorrect.
  • Where trustees have acted based upon incorrect professional advice they (and/or the beneficiaries) may be limited to bringing a negligence claim against their professional advisors.
  • Where the Hastings Bass route is not available trustees should consider avoiding the erroneous transaction by relying on (unilateral) mistake.
  • Trustees who rely on their own breach of fiduciary duty to avoid a transaction will not necessarily be able to recover their costs from the trust funds.

The Supreme Court's decision will have implications for private, commercial and charitable trusts. Pension trusts will of course also be affected.