Cayman Court Agrees To Unwind The Establishment Of A Trust Tainted By Mistaken Advice As To The Settlor's Domicile

Conyers is pleased to have acted for the Settlor in a successful application to have the establishment of a Cayman Islands discretionary trust, the S Trust, set aside from its inception. The application to the Cayman Court was made under section 64A of the Cayman Islands Trusts Act (2021 Revision), which provides relief in relation to mistaken exercise of fiduciary powers. The case demonstrates the flexibility of the section 64A jurisdiction and the Cayman Court's pragmatic approach to delivering relief in unforeseen circumstances which may arise in the administration of trusts.

Background

The S Trust was established by the Plaintiff in 2012 on the basis of professional advice that, at the time of the Trust's establishment, the Settlor was not deemed domiciled in the UK for inheritance tax purposes. However, it came to light that the professional advice overlooked an earlier period of the Settlor's UK residence, with the consequence that the Settlor was likely deemed domiciled in the UK at the time of the Trust's establishment, such that the tax treatment was significantly different from that which was anticipated.

The Settlor concluded that he would never have established the Trust had he been aware of its actual consequences. He therefore sought relief to have the S Trust declared void ab initio, with the effect that the Trust's establishment and subsequent transfer of assets, would be treated as if it never occurred.

Statutory Framework – Section 64A

Section 64A was enacted in the Cayman Islands in 2019 to revive the form of relief historically available under the "Hastings-Bass" doctrine,¹ before its application was restricted be by the decision in Pitt v Holt.²
In broad terms, section 64A empowers the Court to set aside an "exercise of a fiduciary power" where:

1. the power-holder failed to take account of a relevant consideration (or took account of an irrelevant one); and
2. but for that error, the power would not have been exercised (or would have been exercised differently).

Importantly, the statute dispenses with any need to allege breach of trust or negligence and provides that a transaction set aside is treated as if it never occurred. In the S Trust case, Kawaley J reaffirmed an earlier decision where it was expressed that the Cayman court should construe section 64A so as to "facilitate a flexible approach to setting aside the flawed exercise of fiduciary powers".³

Adopting such an approach, the Court had little difficulty concluding that the trustee's decision to execute the declaration of trust establishing the S Trust and accept the trust assets constituted an "exercise of a fiduciary power" for the purpose of section 64A. Once the mistake as to the Settlor's domicile was evidenced, the statutory conditions fell into place, namely:

• Relevant considerations overlooked: the earlier period of the Settlor's UK residence and its impact on the tax treatment of the S Trust was clearly a relevant consideration;
• Causative link: evidence showed that, had the correct information been known, the trustee would not have accepted the assets, and the Settlor would not have settled them onto the S Trust.
• Good faith: although not expressly required under section 64A, the Court reiterated that an applicant should come to the Court with "clean hands", a consideration that assumes particular significance where the relief sought is designed to neutralise unintended tax consequences.

In the S Trust case, the requirement was amply met: the Settlor had relied on reputable professional advice when establishing the Trust, his planning was orthodox and consistent with the UK tax regime (rather than any aggressive avoidance scheme), and he acted transparently by putting HMRC on notice, both of the mistake and the present application to the court.

Finding the requirements satisfied, Kawaley J exercised his discretion to set aside the establishment of the S Trust ab initio and declare that the trust assets were held on bare trust for the Settlor.

Key takeaways

1. The case highlights that a court application does not necessarily need to be made by the Trustee (or the holder of the relevant fiduciary power), but may be brought by another adversely effected party. Section 64A grants standing to a broad class of applicants including any beneficiary of a trust, and such persons as the court thinks appropriate.
2. The decision underlines the Cayman Court's willingness to wield its statutory powers swiftly and sensibly. The Court also decided the case in an efficient manner on the papers without a hearing. This underscores Cayman's position as a preferred trust jurisdiction which can reliably protect the interests of families in complex cross-border scenarios.
3. While the 64A jurisdiction has only ever been exercised in relation to trusts, it is apparent from the wording of the provision that relief is available more broadly to other fiduciary decisions (such as those of directors and/or in relation to Cayman foundation companies). Fiduciaries, advisers and beneficiaries alike should therefore keep section 64A front of mind as a potent, user-friendly mechanism for safeguarding against the unintended fallout of mistaken decisions and professional errors.

Footnotes

1 Re Hastings-Bass [1975] CH 25

2 Pitt v Holt [2013] UKSC 26

3 Re Settlements (FSD 228 of 2023 (IKJ)), Judgment dated 28 September 2023 (unreported)

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