Isle of Man: Oops! Can A Trustee's Mistake Be Undone?

In the recent case of AB and CD (CHP 2016/7) the Isle of Man Court has given some consideration to the so called rule in Hastings-Bass, applied the established Manx authorities on mistake and considered the application of the rules set out in Delphi Trust Limited 2014 MLR 51 in respect of protected information orders.

Mistake

The Court will set aside a voluntary transaction on the grounds of mistake based on the established Isle of Man case law. Known as the "but for" test, the Court will invoke this jurisdiction if the mistake was so serious as to render it unjust and unconscionable for the donee to retain the property given to him, irrespective of the precise nature of the mistake.

The case involved the trustee of a number of Isle of Man trusts granting several call options. The call options could have led to capital gains tax consequences for the beneficiaries resident in the UK. The trustee had been advised by its legal adviser to consider the tax implications of granting the call options. However, this was not followed up and the call options were issued without the trustee seeking any tax advice.

The Court found that the trustee would not have granted the call options but for the mistake as to the possible adverse fiscal consequences.

Hastings- Bass or the proper deliberation rule

The interpretation of the rule in Hastings- Bass (ruled upon by the Supreme Court in the joined cases of Pitt v Holt and Futter v Futter. Click here for DQ's previous note) under Isle of Man law was also considered.

Deemster Doyle commented at paragraph 39 of his judgment:

"I can envisage strong arguments that as a matter of principle and policy Pitt v Holt on the proper deliberation rule [Hastings-Bass] should not be followed in Manx law, but I keep a mind that is open to persuasion by further submissions in another case and further consideration of this area of the law".

At paragraph 87 further commented:

"I expressly leave open the question as to whether Pitt v Holt on the proper deliberation rule is good Manx law. I have serious doubts as to whether it is, but I keep a mind that is open to persuasion in any future cases."

However, the Deemster made the point at paragraph 89 of his judgment that "if, (and that may be a big if) it is necessary in Manx law to establish a breach of duty it has been established in this case."

The Court held that the possible adverse fiscal consequences were material considerations which the trustee ought to have taken into account in reaching its decision to grant the call options. It further held that the Court was justified in intervening and granting relief pursuant to the proper deliberation rule.

Other offshore jurisdictions have enacted statutory Hastings-Bass legislation and discussions are ongoing as to whether Manx trust law would benefit from the certainty of a statutory test. Legislation in other jurisdictions has not included any requirement for a breach of duty on the part of the trustee for a transaction to be set aside.

Protected Information Orders

The judgment follows the Delphi Trust Limited case principles and held that, whilst the claim was heard in public, the confidentiality of the trustee, the settlor and beneficiaries should be protected. This gives hesitant, publicity shy claimants comfort to apply to the Court for guidance knowing that where appropriate confidentiality will be asserted.

Independence of the Manx Courts

Deemster Doyle indicated that he believed Lord Walker's judgment in Pitt v Holt to be motivated by public policy and revenue concerns. Lord Walker's comments indicated that the remedy should not be available to assist in cases where mitigation of tax was the primary goal of the transaction and criticised the actions of offshore trustees. Deemster Doyle defended the modern offshore trust world and stated that trustees "do not act as puppets with the settlor pulling the strings" (paragraph 41).

The Court took the opportunity to remind us that the Isle of Man will not slavishly follow English law and that English law is not binding on the Manx Courts. Whilst English law will be persuasive authority in the absence of Manx law, the Manx Courts will where applicable formulate the law to suit the interests of the Isle of Man.

Points to note

This case is an important reminder that trustees should, where appropriate, take, and carefully contemplate, all necessary professional legal and tax advice when considering the exercise of their powers. Failure to do so could be considered a "flawed decision-making process" and open the trustee to criticism and conclusions that it acted in breach of its fiduciary duties.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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