Facts
The settlor of a Jersey discretionary trust (the "Trust") had transferred to the Trust certain rights which he had in respect of a deferred compensation package offered by his employer. In doing so he had taken advice from his accountants as to the UK tax implications of such a course of action. The addition to the trust fund was accepted by the trustees and they resolved to execute two agreements (governed by Manx law) by which the settlor assigned his interest in the compensation package (the "Agreements").
It became clear that a substantial inheritance tax liability had arisen on the transfer, as the accountant's advice had failed to take into account inheritance tax implications. The trustee applied to Court to have the agreements set aside under the Hastings-Bass principle. The Court considered a number of preliminary issues and held as follows:
Applicable Law
Although the Agreements were governed by Isle of Man law, the Trust was governed by Jersey law and as the Hastings-Bass principle relates to the way in which a trustee exercises its discretion in relation to a trust it was therefore appropriate to apply Jersey law.
Application of the Hastings-Bass Principle
Although the Hastings-Bass principle formed part of Jersey law (In the matter of the Green GLG Trust [2002] JLR 571) it was necessary to ask whether the principle applied where the trustee was accepting additional funds into the trust rather than exercising its discretion. In the present case the trustee had determined to enter into agreements in relation to the addition and, as such, there was an exercise of discretion and Hastings-Bass could apply.
Application of Hastings-Bass to administrative discretions
It was also necessary to ask whether the principle applied to administrative, as well as dispositive, discretions. In an English case cited before the Court, the judge at first instance had declined to apply Hastings-Bass to an administrative discretion. However the Court was of the opinion that there was no reason in principle to distinguish between administrative and dispositive discretions - the principle is dependent upon the trustee acting under a discretion; the nature of that discretion is irrelevant.
'Might' or 'Would'
The Court did not consider whether it would be sufficient that the trustees 'might' or 'would' have acted differently had they taken the relevant factor into consideration because, as had been the case in the Green GLG case, the higher test had been met on the facts.
Bona Fide Third Party Purchasers for Value
It was not clear that the principle could be easily applied to set aside agreements with bona fide third party purchasers for value. The Court expressed concern that it would lead to uncertainty if agreements with trustees could be set aside on the ground of deficiencies in the internal decision making process of the trustee. However all parties in the present case agreed to the remedy sought by the trustee, so this issue did not arise and was not determined.
Fault/Breach of Duty
The decision in Abacus v Barr [2003] Ch 409, that some fault or breach of duty on the part of the trustees was necessary, had been much criticised; however even if this was a pre-requisite it was clear from Sieff v Fox that a breach of duty can be attributed to the trustee even where the fault is that of the trustee's advisers. Therefore, the higher test was met because the trustee's professional advisers were at fault.
Decision
In considering the Hastings-Bass principle, the court should ask itself three questions (Mettoy Pensions Trustees Limited v Evans [1991] WLR 158):
What were the trustees under a duty to consider?
Following Sieff v Fox, the tax consequences of a decision are in general relevant; here, it must have been relevant for the trustee to consider UK tax implications since confirmation of these was sought by the Jersey office of the accountants from the London office.
Did they fail to consider it?
The inheritance tax implications were not considered because the advice was deficient in that respect.
If so what would they have done if they had considered it?
The trustee would not have entered into the Agreements had it appreciated the tax implications. Accordingly the Court set aside the decision and declared it to be of no effect. In doing so the Court avoided the question of whether the decision should be regarded as void ab initio (from the beginning) or voidable.
Comment
This judgment is extremely helpful in that it makes clear, as far as the Jersey Court is concerned, that the Hastings Bass principle can be applied to the exercise of administrative decisions as well as to dispositive ones. Once more the Jersey Court has been prepared to be brave and to push the boundaries of this remedy out a little further which is good news for trustees and advisors.
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.
