The new test for Hastings-Bass under Jersey law and the need to take tax advice

24 Sep 2013

On 17 September 2013, the Royal Court of Jersey delivered a judgment, In the matter of The Onorati Settlement [2013] JRC 182.

When considering the correct test under Jersey law for the so-called Hastings-Bass principle, the Royal Court followed the decision of the Supreme Court (of the United Kingdom) in Pitt v Holt; Futter v Futter [2013] UKSC 26, rather than the earlier interpretation set out in Sieff v Fox [2005] EWHC 1312 (Ch).

As the facts satisfied this latest test, the Royal Court did not need to decide whether its past decisions, based on the Sieff v Fox test, and as further developed by the Royal Court, would continue to apply.  The Royal Court said the position still remains open to argue that they do.  However, it said that a party submitting that Jersey law should continue to plough its own furrow will need to explain why the closely reasoned judgments in the Supreme Court and Court of Appeal should not be applied.

Sir Michael Birt, Bailiff stated that the key differences between the earlier and later English tests are that:

  1. The inadequate deliberation on the part of trustees must be of sufficient seriousness as to constitute a breach of fiduciary duty. If there is no breach of fiduciary duty, the court cannot intervene. Furthermore, there will not be a breach of such duty where trustees have conscientiously obtained and followed apparently competent professional advice even if such advice turns out to be wrong (Lord Walker at [73] and [80], Lloyd LJ at [127]).
  2. An application to challenge the exercise of a discretionary power on the basis of the principle should normally be made by one or more beneficiaries - Lord Walker at [69].
  3. The trustee of the Onorati Settlement had distributed trust assets direct to two UK domiciled and UK resident beneficiaries.  The distribution could and should have been made to their UK resident but foreign domiciled mother.  She could then have gifted the cash to her children to purchase a property abroad.  The trustee's decision resulted in additional and unnecessary UK tax.

The Royal Court declared the trustee's decision was in breach of fiduciary duty, was voidable and set it aside.  The reasons were that:

  1. the trustee was required to consider the tax consequences of an appointment of the trust fund to UK domiciled and UK resident beneficiaries;
  2. the trustee took no tax advice but was informed that the mother of the two adult children, to whom the distributions were made, had taken UK tax advice but the trustee had not seen it nor asked for it;
  3. a senior representative of the trustee was aware that if the distribution was made to the children direct there would be adverse tax consequences compared to a distribution to the mother, but this was overlooked;
  4. by distributing to the children instead of the mother, extra and unnecessary tax of about £368,000 was payable.


The Court stressed the need for trustees to have adequate tax advice.  If trustees do not have their own advice, it may be sufficient for a trustee to act on a beneficiary's advice but only if the trustee has seen it.  An oral confirmation is insufficient.

Finally, the Royal Court helpfully referred to the stance of HMRC in the light of the decision and concluded that as the distribution was set aside under the proper law of the trust there was simply no distribution; the trust fund never belonged to the beneficiaries and it continued to be held on the trusts of the Settlement.

COMMENT

1. In the matter of the B Life Interest Settlement [2012] JRC 229, there is a helpful summary of the earlier Jersey decisions based on the Hastings-Bass principle and a suggestion obiter that trustees, as well as beneficiaries, should retain tax advisers.

In the matter of the Onorati Settlement, the Royal Court indicated that, where there was a breach of fiduciary duty, it was not attractive for beneficiaries to be left to obtain a remedy by litigation against trustees or professional advisers and to incur further expenses in so doing.  Such a course seems unnecessary, undesirable and unjust in circumstances where the law allows for the avoidance of a decision made in breach of the trustees' duties.

With the door still just ajar for applications based on the old Hastings-Bass test, it may be that in the right case (perhaps involving errors by professional advisers), there is still a case to be made that the old test should be applied if the new test cannot be met.  If successful, that would again have the desirable effect of avoiding litigation, with its attendant costs and uncertainties.

2.  The Trusts (Amendment No. 6) Jersey Law 201- will, when in force, apply a new statutory test for setting aside trustee decisions as indicated in our e-alert of 17th July 2013.  As the statutory test does not expressly overrule the common law test of the so-called Hastings-Bass principle, it is suggested the common law will still live on, alongside the statutory test.

On this basis, in future it will, in our view, be open to seek relief:

(1) under the statute, or, failing that;
(2) under the new Hastings-Bass test, or, failing that;
(3) under the old Hastings-Bass test (if justifiable).

For further information, please click here to see our last e-alert and to see our briefing contact Rob Gardner (a member of Bedell Cristin's litigation department who appeared for the beneficiaries in this case and who has been involved with a number of successful mistake and Hastings-Bass applications) or Zillah Howard (a member of the Trusts Law Working Group).