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General, Trustee liability, Trustees, Trusts

Hastings-Bass revisited

The “Rule” in Hastings-Bass (more properly the rule in Mettoy) invites a court to “wave the judicial magic wand” and void decisions made by trustees, together with the attendant consequences,  when trustees have made decisions with consequences from which they now with to resile.    The logic of “the “Rule” was to protect beneficiaries.  However, where it has application the parties who can benefit include the trustees and their advisers and professional indemnity insurers (to name but a few) as the maligned act can be technically expunged.

The  “Rule” originated in the context of regretted United Kingdom tax consequences and has not, to date, been followed in New Zealand. It has also been substantially reduced (but not extinguished) in scope by the United Kingdom Supreme Court decision in Futter v Futter, Pitt v Holt. 

The Supreme Court refers in its decision to the Court of Appeal decision in Futter at para 3 as follows:

“This is another application by trustees who wish to assert that they have acted in an un-trustee-like fashion and so have failed properly to exercise a power vested in them. The trustees wish to take advantage of this failure to perform their duties in order to enable the beneficiaries to avoid paying the tax liability consequent upon the trustees’ decision. Put like that (and I am conscious that that is not the only way in which the situation may be described) the possibility is raised that the development of the rule may have been diverted from its true course.”

More recently, the Royal Court of Guernsey decision in M v St Anne’s Trustees Limited has provided a considered and useful assessment of the Hastings-Bass jurisdiction together with an assessment of trustee decision making in the context of breaches of duties owed by trustees.

At para 54 the Court importantly observes the danger in legal discussion of analysing a concept by way of reference to conventional legal shorthand and then proceeding to use the label rather than the underlying concept. The context of this discussion related to the breach of duties owed by trustees. The Rule in Hastings-Bass allows trustees to avoid the consequences of failing to properly exercise discretion. As noted by the Royal Court of Guernsey at para 86:

“86. The proposition which is frequently found in the authorities is that

(i) what is required is a breach of fiduciary duty,
(ii) a trustee’s duty to take all relevant matters into account in making a decision is a fiduciary duty, and that consequently
(iii) “inadequate deliberation” of such matters, ie failure to take all relevant mat-ters into account, is a breach of fiduciary duty.”

The Court considers these propositions and questions the focus on the label of fiduciary duty and the appropriateness of the same. As noted at para 90  “a fiduciary duty is a duty of loyalty; it is not a duty of care.”  This may seem like semantics but is actually highly relevant when considered in the context of inadequate deliberation because conflating care and loyalty overstates the duties of trustees such that the duty to act for the proper purposes of the trust is then re-stated such that making fully informed decisions is a purpose of a trust. This is not correct. For the Hastings-Bass jurisdiction (such as it is) to be invoked the breach of a properly owed duty must be identified. In M v St Anne’s Trustees Limited Her Honour summarised  her view as follows:

“98. To summarise, therefore, in my judgment, breaches of duty by trustees fall into three broad types for present purposes (i) breach of a duty to act only within the ambit of the proper purposes of the trust, (ii) breach of a duty of good faith/loyalty to the trust and (iii) breach of a duty of care to the trust/the beneficiaries. Categories (i) and (ii) are both fiduciary duties in the strict sense. However a breach of a category (i) duty renders the relevant act void whilst a breach of a category (ii) duty renders it voidable. For Hastings-Bass purposes, a breach of either a category (ii) or (iii) duty will suffice potentially to engage the jurisdiction, although in practice it will need to be sufficiently serious. Either will render the act in question potentially voidable by the court, in its discretion. There is no need for Hastings-Bass relief in respect of a category (i) breach, because the act is void anyway, and the court will declare it to be such; there, there is no discretion.”

105. To pull the above points together, in the end, I am satisfied that even if, as I would conclude if left to myself, the duty of “proper deliberation” is better classed as a breach of a trustee’s duty of care, and not as a breach of fiduciary duty, this does not matter for Hastings-Bass purposes, as I cannot see that any material consideration with regard to the exercise of that jurisdiction rests either at this stage or subsequently on the correct classification of the duty breached. The point is simply that there has been some act or omission so serious as to amount to breach of duty owed by the trustee to the trust’s beneficiaries as such (I leave aside, here, the separate and different question of any duty to the settlor). The policy behind the recognition of the Hastings-Bass jurisdiction is the arising of a need to protect beneficiaries from the aberrant conduct of trustees (Pitt v Holt at [83]) and it cannot matter, therefore, in what way the guilty trustee can be said to be aberrant. I shall though, studiously refer from this point only to a “breach of duty”, rather than to a “breach of fiduciary duty”.

The case provides useful direction regarding the importance of effective decision making and a trustee’s fiduciary obligations to discharge that duty in the best interests of the beneficiaries, in priority if necessary to the trustee’s own interests.  Proper decision making is not a fiduciary duty in and of itself, but derives from the trustee’s duty of care such that where a trustee who fails to adequately deliberate has breached the trustee’s duty of care.

Also see In the Matter of the E Settlement where the trustees decision to payment of interest that lead to a UK income tax charge was able to be set aside under Article 47G of the Trusts (Jersey) Law 1984, which provides that the Court has the Power to set aside the exercise of powers in relation to a trust or trust property due to mistake [Note that there is no equivalent power in the Trustee Act 1956].  As noted In the Matter of the E Settlement:

21.      We are satisfied that the requirements of Article 47G of the Law are satisfied as submitted by Advocate Sanders for the Trustee and by Advocate Heywood for the beneficiaries.  Thus:-

(i)        The Trustee made a mistake as to the consequences of its decision to demand payment of accrued interest on the Loan Notes.  It believed that there would be no UK tax consequences as a result of its decision whereas in fact payment of accrued interest led to a charge to UK income tax at 45% on the interest paid. 

(ii)       The Trustee would not have exercised the power to demand payment of interest if it had not made that mistake.  Although it needed to obtain some income for the maintenance and education of the grandson, there was an easy alternative way of arranging payment of the interest.  It would have assigned the Loan Notes to a wholly owned non-UK company which would then have demanded payment of the interest.  The interest received by that company could then be paid to the Trust and hence applied for the maintenance and education of the grandson without any charge to UK tax. 

(iii)      We consider that the mistake is indeed of so serious a character as to render it just for the Court to declare the decision to demand interest voidable and to avoid it from the time of its exercise.  The Demand has led to a charge to UK income tax payable out of the trust fund of a sum in excess of £1m.  Payment of the sum will therefore prejudice the beneficiaries.  The alternative would be for action to be taken by one or more of the beneficiaries against the Trustee and/or S&W.  This would not be clear cut in view of the exoneration provisions in relation to the Trustee contained in paragraph 3 of schedule C of the trust deed and of the difference of position as between the Trustee and S&W referred to at paras 9 – 15 above.  In any event, the Court remains of the view expressed in Re Onorati Settlement [2013](2) JLR 324 where the Court said at paragraph 44:-

“More generally, we are not attracted by the proposition that beneficiaries should be left to a remedy of bringing litigation against trustees or professional advisors.  The beneficiaries are usually not at fault and have already incurred loss by reason of unnecessary tax charges.  To force them to incur further expense in what may be uncertain litigation when the law allows for the avoidance of a decision made in breach of the trustees’ duties seems unnecessary, undesirable and unjust.” 

22.      Onorati was of course concerned with the Hastings-Bass principle rather than the law of mistake and the reference to a breach of duty by the trustees is now subject to the provisions of Article 47H(4) (quoted above) which makes it clear that a breach of duty is not required.  However, the sentiment expressed in the above passage from Onorati seems to us to be equally applicable to decisions made by a trustee due to a mistake and whether it is just for the Court to grant relief under Article 47G.    

References

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