UK: Court Performs An About Turn On Trustees And Their Advisers

Last Updated: 6 April 2011
Article by Neil Jamieson, Sara Larmour and Tom White

The Court of Appeal has recently reformulated the "rule in Hastings Bass" which allows the acts of trustees to be set aside in certain circumstances. The rule as previously understood and applied allowed trustees' acts to be undone where they were based on apparently competent professional advice which subsequently turned out to be wrong. That is no longer the case.

The rule as it had evolved, which originated from Hastings Bass (Deceased) Re (1975), was most recently defined by Lloyd LJ in Sieff v Fox (2005) as follows:

"Where trustees act under a discretion given to them by the terms of the trust, in circumstances in which they are free to decide whether or not to exercise that discretion, but the effect of the exercise is different from that which they intended, the court will interfere with their action if it is clear that they would not have acted as they did had they not failed to take into account considerations which they ought to have taken into account, or taken into account considerations which they ought not to have taken into account."

The ability for trustees' acts to be set aside on the basis of this rule in circumstances where the acts were based upon negligent professional advice was an important feature in the defence of claims against the adviser in question. Where, for example, the trustees acted on the basis of negligent tax advice it was open to the tax adviser to argue that in order to mitigate loss the claim against the adviser should be stayed while the trustees made a Hastings Bass application to unwind the relevant actions.

In Pitt v Holt; Futter v Futter (2011), which were two cases heard together by a Court of Appeal which included Lloyd LJ (who gave the leading judgment, in which he substantially reversed his own decision in Sieff v Fox), the Court considered the scope of the rule in Hastings Bass and decided that it should be narrowed significantly.

Facts

HMRC appealed against two decisions under the rule in Hastings Bass by which a settlement and assignment of an annuity and the subsequent exercise by trustees of powers of advancement were set aside.

Pitt v Holt concerned the treatment of the proceeds of a successful personal injury claim by the estate of the claimant's late husband, who had been seriously injured in a road accident. The claim was settled on terms that provided for a lump sum and subsequent monthly payments. On the basisof professional advice, the lump sum and annuity were transferred into a discretionary trust. It later transpired that this transfer had unintended adverse inheritance tax consequences that could have been avoided if the trust had been drafted differently. At first instance, the court held that the creation of the trust should be set aside on the basis of the rule in Hastings Bass.

Futter v Futter involved the exercise of powers of advancement under discretionary trusts. The intention was to advance "stockpiled gains" from offshore trusts to UK residents in a manner that avoided capital gains tax (CGT). The trustees took advice from solicitors, who incorrectly thought that losses incurred by a recipient beneficiary could be set off against the stockpiled gains for CGT purposes. At first instance the court held that the advancements were void and should be set aside.

The Court of Appeal's decision

The Court of Appeal held that the rule in Hasting Bass, as developed in Mettoy Pension Trustees Ltd v Evans (1990), was not correct as a matter of legal principle, nor was the original judgment in Hastings Bass authority for the rule as it had since evolved. The correct position is that the trustees' duty to take relevant matters into account is a fiduciary duty, and an act done in breach of that duty is voidable. Where acts that are within the powers of trustees are said to be vitiated by the failure of the trustees to take into account a relevant factor, for example tax consequences, a beneficiary must therefore show a breach of fiduciary duty by the trustees. That will not be the case where the trustees have acted on apparently competent professional advice.

As Lloyd LJ pointed out, the purported exercise of a discretionary power on the part of the trustees will be void if what has been done does not fall within the scope of the trustees' power. If, on the other hand, the exercise of the power was within its scope but the trustees have breached their duties when exercising that power, their actions will be voidable rather than void.

Trustees are obliged to take into account all relevant factors when exercising their discretionary powers. There is no definitive rule as to the matters that trustees should and should not take into account. Nevertheless, it is generally accepted that fiscal matters are relevant considerations. If, therefore, trustees have acted on advice from apparently competent advisers the trustees will not have breached their duties simply because it turns out that the advice was wrong even if the advice was very wide of the mark.

Applying these principles to the facts in Pitt v Holt the Court of Appeal concluded that the claimant trustee was not in breach of her fiduciary duties by transferring assets to the discretionary trust because she had taken professional advice which she believed to be correct. It followed that the transaction was neither void nor voidable. The fact that the transaction resulted in unforeseen tax liabilities was a consequence, and not an effect, and lacked sufficient gravity to invoke the equitable jurisdiction to set aside a voluntary disposition for mistake.

Likewise, in Futter v Futter the trustees had failed to take into account the true tax consequences of the proposed transaction in reliance upon professional advice so the transactions were neither void, because they were within the powers of the trustees, nor were they voidable because there had been no breach of fiduciary duty by the trustees.

Conclusion

The Court of Appeal's decision marks a significant shift in the interpretation of the law from the position as previously understood, perhaps best summed up by Longmore LJ's comment that the rule in Hastings Bass provided "a comparatively rare instance of the law taking a seriously wrong turn" which the Court of Appeal has now corrected. In the context of professional negligence claims the judgment, if it stands, has closed the door on a well-used method of mitigating claims against solicitors, accountants, pensions advisers and others who advise trustees on financial matters, when negligent advice leads to unintended fiscal consequences. Henceforth it will be more difficult to unwind transactions entered into by trustees in order to reverse the claimant's losses and reduce the size of a claim to the cost of remedial measures. There has been debate and uncertainty around the rule in Hastings Bass for some time and the Court of Appeal has now, to a large extent, consigned it to history unless the Supreme Court decides to take another look.

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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