Trustee Amendment Act 2014 — the “magical morning after pill” still available in Bermuda
About Jane Collis
Jane Collis is a member of the property and private client practice group, specializing in estate planning, wills, international and domestic trusts and probate.
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…it would seem that, unnoticed by the equity judges and academics over the centuries, actions subsequently regretted by trustees have a quality of reversibility. It appears that Doctor Equity can administer a magical morning after pill to trustees suffering from post-transaction remorse, but not to anyone else.[1]
The Trustee Amendment Act 2014 (the “Act”) (35 KB PDF) will have the effect of amending the Trustee Act 1975 to introduce a new section 47(A), giving the court jurisdiction to set aside the exercise of a fiduciary power, which has gone wrong, thereby enshrining in law the “Rule in Hastings-Bass”, referred to by Lord Neuberger in commentary as a “magical morning-after pill”.
In the case of Hastings-Bass,[2] Lord Justice Brown laid down the following, which became known as the “Rule in Hastings-Bass”:
…where by the terms of a trust… a trustee is given a discretion as to some matter under which he acts in good faith, the court should not interfere with his action notwithstanding that it does not have the full effect which he intended, unless (1) what he has achieved is unauthorised by the power conferred upon him, or (2) it is clear that he would not have acted as he did (a) had he not taken into account considerations which he should not have taken into account or (b) had he not failed to take into account considerations which he ought to have taken into account.[3]
Application of the Rule ensured that the court would intervene in respect of the exercise of a trustee’s discretion, where it was clear that the trustee would not have acted as it did if it had not taken into consideration irrelevant factors, or failed to take into consideration relevant factors. Effectively, the Rule provided an escape hatch for trustees who had made mistakes, most commonly those giving rise to unforeseen tax consequences. It was on the basis of attempting to undo such tax consequences, that the cases of Futter v Futter[4] and Pitt v Holt[5] came before the court.
In Futter v Futter, trustees acting on the advice of solicitors made distributions from trust assuming that the distributions would receive an identified tax treatment and could be offset against certain losses. In fact, the beneficiaries of the trust suffered a significant capital gains tax liability and the trustees went to court to have the distributions declared void. In Pitt v Holt, the damages from a personal injuries claim awarded to Mr Pitt were settled in a discretionary settlement, on the advice of financial advisors. Unfortunately, this proved to be an unfavourable form of trust from a tax perspective and gave rise to an inheritance tax charge. Mr. Pitt initiated proceedings against the financial advisors for professional damages, and his personal representatives (after his intervening death) endeavoured to have the settlement set aside.
The cases were combined[6] and made their way to the Supreme Court in the spring of 2013, where the court dismissed both appeals as they related to the application of the Rule, but allowed the appeal in Pitt v Holt on the ground of mistake. On the facts of both cases the trustee in question had exercised its discretion within the ambit of the relevant power conferred upon it and had sought professional advice. The advice proved to be incorrect. The court made it clear that its equitable jurisdiction to intervene could only be exercised in the case of a trustee who was acting within the scope of its powers, if that trustee could be shown to have acted in breach of fiduciary duty or breach of trust. There was no breach of duty found in either case. As a rule, if professional advice has been sought and care had been taken in the selection of an advisor, there will be no breach of duty simply because the solicited advice proved to be incorrect. This could be seen as a protection of sorts to the trustee, but left no means of correcting the error.
Effectively, the Rule was thereby put to sleep, leaving it necessary for beneficiaries of a trust to show that the trustee acted in breach of fiduciary duty, or to prove mistake on the part of the trustee in order to set aside a transaction. With respect to doctrine of mistake, the Supreme Court in Pitt v Holt made it clear that there must be shown a causative mistake of fact or law, which is integral to the very nature of the transaction, and which has grave ramifications, in order for the transaction to be set aside. The court must evaluate the facts, looking for the most basic type of mistake, one in which it would be unconscionable for the court not to intervene.
The current common law position has provided the legislative initiative in Bermuda to amend the Trustee Act 1975 and Bermuda has been quick off the mark in taking this action, following in the wake of Jersey, which has also chosen to commit the doctrine of mistake to statute. The relevant provision confers a discretionary jurisdiction on the court to intervene under prescribed circumstances, at the behest of certain persons, in relation to the exercise by a trustee of a fiduciary power and to set aside the exercise of that power, wholly or partly and on condition or unconditionally. The Act will have retroactive effect.
The requisite conditions are that the person who holds the power, did not, in exercising the power, take into account one or more considerations (whether of fact or law or a combination thereof) that were relevant to the exercise of the power, or took into account one or more irrelevant considerations and but for this, the person who holds the power would not have exercised the power or would have exercised the power, but on a different occasion or in a different manner. To the extent that the exercise of the power is set aside, it is as if it had never occurred. Importantly, there is no requirement to allege or prove a breach of duty, or breach of trust, on the part of the person exercising the power, or any advisor to such person.
Application to the court may be made by the person who holds the power, where the power is conferred in respect of a trust or trust property, by any trustee; beneficiary or person appointed for the purposes of section 12(B) of the Trusts (Special Provisions) Act 1989 as an “enforcer” of a purpose trust; the Attorney-General in the case of a charity or any other person with leave of the court. The court has a discretion as to the relief granted and no order may be made by the court which would prejudice a bona fide purchaser for value of trust property without notice.
Passing of the Trustee Amendment Act 2014 will be of tremendous value from a commercial perspective, as all parties (trustees, beneficiaries and professional advisors) will know that if a transaction is entered into that proves to have adverse consequences, an application may be made to the court to unwind it. This remedy is far preferable for beneficiaries than having to rely on a claim for breach of fiduciary duty against trustees, or a claim in negligence, which would certainly prove more expensive, time consuming and unpredictable. It means trustees have recourse to a remedy for errors giving rise to unforeseen consequences. While it should never be viewed as a “get out of jail free card” for hasty or poorly-considered advice, it does reflect the commercial reality that trustees are dealing with an ever-changing playing field, particularly when it comes to tax planning.