The High Court of Justice of the Isle of Man has indicated that the English Supreme Court decision in Pitt v Holt1should not be followed in the Isle of Man. At the same time, the Court reiterated that the law of the Isle of Man (known as the Manx legal system) is separate and distinct from English law.
Prior to 9 May 2013 the courts of the Isle of Man, England and Jersey (to name a few) universally followed what is known as the rule in Hastings-Bass2. The effect of this rule was that where a trustee had exercised its power but had made an error when doing so, the Court was able to interfere with that trustee's decision and set that decision aside (effectively "undoing" the transaction). This was known as the trustees' "get out of jail free card". In summary, in order to set a trustee decision aside, the Court had to be satisfied that the trustee had acted outside its power, had taken into account considerations it should not have, or had failed to take into account considerations it should have.
The law in England changed in 2013 as a result of the decision of the English Supreme Court in Pitt v Holt. The Supreme Court held that in order for the rule in Hastings-Bass to apply, a simple error made by a trustee was no longer sufficient; the error made by that trustee must have been so serious that it amounted to a breach of fiduciary duty before the Court would intervene.
Some common law jurisdictions have chosen to follow the decision in Pitt v Holt. In Gibraltar, for example, Pitt v Holt seems to have been followed by the local courts in relation to trustees' mistakes. Other jurisdictions, however, have rejected the notion that a trustee must breach its fiduciary duty before a court will intervene. Bermuda and Jersey have both passed legislation (post-Pitt v Holt) that codifies the lower threshold established in Hastings-Bass.
The case of AB v CD provided an opportunity for the Isle of Man Court to consider whether Manx law would follow Pitt v Holt.
In this case the Court was asked to consider whether a number of call options that had been put in place by a trustee with the settlor/beneficiary (the "Call Options") could be avoid because the trustee had not appreciated the tax consequences of the Call Options should the settlor/beneficiary move to the UK. This was notwithstanding that a specific issue in relation to the tax consequences had been raised with the trustees at the time of entering into the Call Options.
The Court had to consider a number of issues:
- Whether the trustee needed merely to have made an error of judgment per the rule in Hastings-Bass, or whether that error must have amounted to a breach of fiduciary duty, before the Court would intervene;
- Whether the granting of the Call Options could otherwise be set aside for mistake, as per the equitable discretion of the court allowed by Manx law; and
- If the action of the trustee reached the relevant threshold in (1), whether the transaction would be void or voidable.
Application of Pitt v Holt
In a detailed judgment, the Isle of Man Court considered the relevance of English law in relation to Manx law. It also considered the various criticisms that have been made of the Pitt v Holt decision since its delivery.
The Court started from the premise that the Isle of Man is a separate jurisdiction, with its own system of law and its own policy issues. It found that whilst the Court will have regard to English law, it can, and consequently sometimes will, reach different conclusions to those reached by English Courts.
Ultimately, the Manx Court held that it did not need to make a finding as to whether the severity of error required by either (a) the rule in Hastings-Bass or (b) Pitt v Holt applied. The Court reached this conclusion on the basis that the trustees "failed to have regard to material tax considerations", and this constituted a breach of fiduciary duty on their part. Therefore as the higher standard, namely that of breach of fiduciary duty, had been reached, there was no need to consider whether relief should be granted at the lower standard of the rule in Hastings-Bass.
However, the Court did, take the opportunity to express "serious reservations" as to whether Pitt v Holt should be applied in the Isle of Man. That Court's view was that a Manx Court would be unlikely to follow Pitt v Holt.
The Court went on the say that it was satisfied that it should also grant the relief sought on the equitable ground of mistake. It pointed out a number of mistakes on the part of the trustees, such as their failure to take professional tax advice, and their assumption that other parties had investigated the tax consequences of the Call Options. Therefore the Court was satisfied that a mistake had been made that it was equitable for it to undo.
The final question for the Court was whether the granting of the Call Options was void or voidable. If void, the consequence would be that it would be as if the decision had not ever taken place. If voidable, the Court would have to make an order setting aside the decision. The Court commented on the uncertainty in this area, and reviewed the differing judicial and academic comments on which approach to take. Ultimately, the Court described the law on the void/voidable point as "somewhat confusing and in a state of uncertainty" but avoided deciding the issue on the basis that the practical result was the same – the Call Options are deemed never to have taken effect. Acknowledging that it was within the jurisdiction of the Court to declare the Call Options void ab initio (invalid from the outset) and without establishing a rule for future cases to follow, he declared these options void ab initio. This meant they would be treated as if they had never been entered into by the trustees.
This case can be seen as a further attack on the decision in Pitt v Holt, and an example of the differing approaches taken by the offshore jurisdictions when compared to that taken in England. However, the Court did not decide whether the rule in Hastings-Bass would remain good law in the Isle of Man. It seems unsatisfactory for trustees in that jurisdiction that the position has not been definitely decided. Having said that, the case also reminds parties that Isle of Man law is a separate and distinct legal system; parties should not assume that Manx law will always follow English case law developments.