The Supreme Court has agreed with the Court of Appeal in not allowing the actions of trustees of two separate trusts to be set aside under the "Hastings-Bass" rule. The trustees of the trusts in question had set up discretionary trusts, acting on the advice of professional advisers, which had resulted in unexpected, adverse tax consequences. Broadly, the so called Hastings-Bass rule allows trustees' actions to be set aside where trustees have acted outside of their powers or where they have acted within their powers, but when doing so, failed to take into account a relevant matter or taken into account an irrelevant matter. The Court did, however, allow the actions of the trustee of one of the trusts to be set aside under the legal principle of mistake. In reaching its decision, the Supreme Court gave detailed guidance on the Hastings-Bass rule and the principle of mistake - in this briefing, we consider the guidance given in relation to these principles.

Background

The appeal was a consolidated appeal, relating to the Court of Appeal's decision in the case of Pitt and another v Holt and another; Futter and another v Futter and others [2011] EWCA Civ 197.

Futter involved a transfer from an offshore trust which the trustees, acting on legal advice, thought would not give rise to Capital Gains Tax provided that the beneficiaries' available annual exemption for CGT and allowable losses were enough to absorb any gains attributed to them. The advice turned out to be wrong and a significant amount of capital gains tax became payable.

Pitt involved a transfer of assets into an ordinary discretionary trust with disastrous, unintended, inheritance tax consequences.

In both cases, the trustees had been successful, in the High Court, in having their actions set aside. On appeal by HMRC, however, the Court of Appeal had set aside the High Court orders.  

Key points

The Rule in Hastings-Bass

The Supreme Court, endorsing the Court of Appeal's conclusions on the application of the Hastings-Bass Rule, made the following points in relation to the rule:

  • There must be a high degree of flexibility in the range of the court’s possible responses to the Hastings-Bass principle. To lay down a rigid rule would get in the way of the court reaching the best practical solution in different situations.
  • Where trustees act outside of their powers, their actions will be void. This means that those actions will have no legal effect.
  • Where trustees have acted within their powers but have not taken into account a relevant matter or taken something irrelevant into account, they will be in breach of trust and their actions will be voidable, mainly at the instance of a scheme beneficiary. In these circumstances, the Court, at its discretion, may set the decision aside subject to any defences that the trustees raise.
  • Lloyd LJ in the Court of Appeal did not regard this strand of cases as being part of the Hastings-Bass rule. He said that the cases of this type are applying the rule created by Warner J in Mettoy Pension Trustees Ltd v Evans [1990] 1 WLR 1587, who, according to Lloyd LJ, had misapplied the rule in Hastings-Bass. The Supreme Court agreed with this distinction but stated that the "misnomer is by now so familiar that it is best to continue to use it, inapposite though it is".
  • Trustees may not be in breach of trust- and their decision therefore not voidable - if they have relied on competent professional advice when making their decision even where that advice later turns out to be wrong or incomplete.
  • Where trustees obtain and follow professional advice, it would be contrary to principle and authority to impose a form of strict liability on them, even if the professional advice later turns out to be wrong.  Liability on the trustees cannot, in these situations, be imposed through attributing fault on the part of the professional advisers to the trustees either.
  • Generally, it will be inappropriate for trustees to bring proceedings before the court seeking to unravel their decisions under the Hastings-Bass rule.  (It would normally be the beneficiaries who bring the matter before the court.)  If trustees do so, they should not regard the proceedings as uncontroversial nor should they confidently expect to recover their costs from the trust fund.

In both Pitt and Futter, advice from a solicitor had been taken, which turned out to be unsound. On the facts, there was no reason to hold that the trustees had failed in the exercise of their fiduciary duties. The Supreme Court upheld the Court of Appeal's decision that there had been no breach of trust and that therefore the trustees' decisions could not be set aside under the rule in Hastings-Bass.

Mistake

The Court of Appeal had confirmed the established position that firstly, there had to be a mistake as to the legal effect of the transaction or to some material fact and secondly, the mistake had to be of sufficient gravity. In Lloyd LJ's opinion, the trustees in Pitt had failed at the first hurdle. A mistake about the tax implications was a mistake about the 'consequences' and not the 'legal effect of a transaction'. In the Supreme Court, Lord Walker, however, disagreed with the need for a distinction to be drawn as to effect and consequences. To do so would leave the law in an "uncertain state" and be "contrary to the general disinclination of equity to insist on rigid classifications expressed in abstract terms".

Lord Walker made the following points about the principle of mistake:

  • The "true" test for mistake is whether there has been a causative mistake of sufficient gravity.
    • "Causative" meaning that the transaction would not have occurred without the mistake.
    • "Sufficient gravity" is to be assessed with close examination of the facts and by considering the injustice or unconscionability of leaving the mistake uncorrected.

The test would normally only be satisfied where there is a mistake as to the legal character or nature of the transaction, or some matter of fact or law which is basic.

  • Mere ignorance is not enough, but a court should not shy away from inferring conscious belief or tacit assumption about the law or facts where there is evidence to do so.
  • Mistake also has to be distinguished from a "misprediction". A misprediction relates to some possible future event, whereas a mistake normally relates to some past or present matter of fact or law.
  • The court cannot decide the issue of what is unconscionable by an elaborate set of rules. It must consider in the round a mistake (as compared with total ignorance or disappointed expectations), its degree of centrality to the transaction in question and the seriousness of its consequences, and make an evaluative judgment whether it would be unconscionable, or unjust, to leave the mistake uncorrected.
  • If the mistake arises in the context of tax avoidance then relief may not be available for a number of reasons, including on grounds of public policy.

On the facts in Pitt, the court held, applying the above test for mistake and guidelines, that the test was satisfied. There would have been nothing "artificial" or "abusive" in the settlement having been drafted in the first place so as not to give rise to the adverse IHT consequences (had the tax consequences been known at the outset). The Court overturned the Court of Appeal's decision and set aside the discretionary trust set up in Pitt. (Mistake had not been argued in Futter).

Comment

Although from the trustees' point of view, it is unfortunate that their decision could not be set aside under the Hastings-Bass rule, the considerable guidance given by the Supreme Court (agreeing largely with that given in the Court of Appeal) on unscrambling trustees' decision under the Hastings-Bass principle is to be welcomed. The trustees in Pitt were however able to have their actions set aside under the principle of mistake and trustees may be able to use this route to have their decisions set aside where the Hastings-Bass principle is not available.