Mistakes that trustees make

The “rule in Re Hastings-Bass, deceased” has been referred to as a trustee’s “morning-after pill”. The rule, as it has been applied in the Cayman Islands, essentially provides that where trustees exercise their discretion and an unintended effect results, the Court may interfere with the trustees’ decision if it is clear that the trustees would not have acted as they did had they not failed to take into account relevant considerations, or taken into account irrelevant ones. That interpretation of the rule has now been overturned by the English Court of Appeal in the recent Pitt and Futter decisions of March 2011 and it remains to be seen whether the Cayman Islands courts will follow suit.

The “rule in Re Hastings-Bass deceased” became part of Cayman Islands law following the decision of Justice Levers in Barclays Private Bank & Trust v Chamberlain and was applied by the Chief Justice in A v Rothschild Trust Cayman Ltd and more recently in Re Ta-Ming Wang Trust. If Cayman Islands law were to follow the English Court of Appeal’s decision in Pitt and Futter, the Cayman Court would need to depart from the previous decisions of the Grand Court on this point. The material question for the a Cayman judge to consider is whether Cayman Islands law should follow the new direction taken by English law on this question.

One of the implications of the decisions in Pitt and Futter is that trustees’ decisions will no longer be voidable under the rule where, for example, the trustees have taken appropriate tax and/or legal advice (and have reasonably considered all other relevant factors) and any unforeseen tax charge results. This is likely to result in an increase in negligence claims against professional advisors as well as more applications for directions to the Cayman Islands court. In light of this, with regard to tax advice, it might not be unreasonable for a trustee to adopt a “hit and hope for the best” approach. If the desired outcome is achieved then no problems should arise. If it is not achieved then the disposition could still be set aside under the rule in Hasting-Bass (for there has been a breach by the trustee in not taking appropriate tax advice) and the tax which was mistakenly paid might then be refunded. In such a situation, a failure to take tax advice may, ironically, be the best course of action, however, this would be a very risky path for trustees to follow. Pitt and Futter also make clear that an act of a trustee may only be set aside on the basis of mistake where there was a mistake as to the legal effect of the transaction or a relevant mistake as to some material fact. It is also made clear that a mistake as to the fiscal consequences (which is taken to include taxation ramifications) of a transaction does not fall within this principle. It is difficult to see how an obligation to pay tax should not be regarded as one of the legal effects (or perhaps a “side effect”) of a transaction when such an obligation arises as a direct result of the transaction itself!

As a leading International Financial Centre, we deal with many clients in high tax jurisdictions and many of the decisions made by our trustees require tax advice to be obtained. It cannot be desirable or prudent to encourage wilful blindness on the part of trustees. It is also clear that the acceptance of Pitt and Futter would prevent any transaction from being set aside for mistake as to tax ramifications, which was the reason that the rule was applied locally in at least two of the three cases referred to. Given that the English Court of Appeal’s decisions in Pitt and Futter have not received the warmest of welcomes from English practitioners and that the Cayman Islands Government will not receive the taxes paid when a mistaken decision cannot be avoided, it is to be hoped that if a case on the rule in Re Hastings-Bass were to come before the Cayman Islands Court in future, the Court would decline to apply Pitt and Futter.