Peta McLean, Solicitor, Tax and Private Capital, Lawrence Graham LLP, UK
The overturning of the rule in Hastings-Bass was welcomed by commentators who considered the rule objectionable. Peta McLean considers the position trustees and beneficiaries now find themselves in.
Numerous cases have been taken to court on the basis of the rule in Re Hastings-Bass and it has been repeatedly sanctioned and even widened by the English courts over the years. Many advisors and commentators had felt the rule objectionable, and the recent Court of Appeal cases of Pitt v Holt and Futter v Futter have confirmed that the rule should not have been interpreted in the way it has been. The rule, as it had been argued and developed, is a falsity. So, what is the true rule and where does it leave us?
Pitt v Holt
Mr Pitt had been seriously injured in a road accident in 1990. Under a compromise of damages claim he was entitled to a lump sum as well as monthly payments. In 1994, with the benefit of professional advice, Mrs Pitt established a settlement for Mr Pitt's care, into which she put the lump sum and assigned the annuity to the trustees.
It was later discovered that the tax consequences of the settlement were disadvantageous. A charge to inheritance tax should have been paid on the transfer of assets into trust, another, albeit smaller, charge to inheritance tax arises whenever capital is paid out of the trust and an inheritance tax charge is incurred on the value of the trust fund every 10 years after its creation. This could have been avoided if the settlement had been created so as to comply with s89 Inheritance Tax Act 1984.
Mrs Pitt sought a declaration from the court that the settlement and subsequent assignment of the annuity were void or voidable and ought to be set aside under Re Hastings-Bass, or alternatively, that the court should exercise its equitable jurisdiction to grant relief on grounds of mistake. HMRC were joined in the proceedings with their agreement.
At first instance, the settlement and assignment were set aside under the rule in Re Hastings-Bass. Whether or not the transactions were void or voidable was not decided. HMRC appealed.
Futter v Futter
In this case the trustees exercised their powers of enlargement and advancement under two discretionary trusts in order to bring the trusts to an end. There were gains in the trusts, but the trustees proceeded on the basis that a capital gains tax liability could be avoided as losses incurred by the recipient beneficiaries could be set off against the stockpiled gains. This turned out to be incorrect.
Proceedings were brought by the trustees who sought declarations that the enlargements and advancements out of each settlement were void and of no effect, or alternatively an order setting each aside. HMRC were later joined as a defendant. It was held that the advancements should be set aside under the rule in Re Hastings-Bass. It was further held that the transaction was void.
Court of Appeal and the Correct Principle
The leading judgment was delivered by Lloyd LJ, in which he analysed authorities and looked at the decision in Re Hastings-Bass more closely. The clarity that the judgment provides is welcomed.
Lloyd LJ decided that the judgment of Buckley LJ, which has frequently been put forward and relied on, was merely obiter and should not be considered to be the true ratio of the decision. He further decided that his earlier decision in Sieff v Fox, which had been relied on in both cases, was incorrect. The principle as formulated in that decision is as follows:
"Where trustees act under a discretion given to them by the terms of the trust, in circumstances in which they are free to decide whether or not to exercise that discretion, but the effect of the exercise is different from that which they intended, the court will interfere with their action if it is clear that they would not have acted as they did had they not failed to take into account considerations which they ought to have taken into account, or taken into account considerations which they ought not to have take into account.”
The correct ratio of Re Hastings-Bass was now held to be:
“Trustees considering an advancement by way of sub-settlement must apply their minds to the question whether the sub-settlement as a whole will operate for the benefit of the person to be advanced. If one or more aspects of the provisions intended to be created cannot take effect, it does not follow that those which can take effect should not be regarded as having been brought into being by an exercise of the discretion. That fact, and the misapprehension on the part of the trustees as to the effect that it would have, is not by itself fatal to the effectiveness of the advancement. … If the provisions that can and would take effect cannot reasonably be regarded as being for the benefit of the person to be advanced, then the exercise fails as not being within the scope of the power of advancement. Otherwise it takes effect to the extent that it can.”
Lloyd LJ went on to hold:
"The trustees' duty to take relevant matters into account is a fiduciary duty, so an act done as a result of a breach of that duty is voidable. Fiscal considerations will often be among the relevant matters which ought to be taken into account. However, if the trustees seek advice (in general or in specific terms) from apparently competent advisers as to the implications of the course they are considering taking, and follow the advice so obtained, then, in the absence of any other basis for a challenge, I would hold that the trustees are not in breach of their fiduciary duty for failure to have regard to relevant matters if the failure occurs because it turns out that the advice given to them was materially wrong. Accordingly, in such a case I would not regard the trustees' act, done in reliance on that advice, as being vitiated by the error and therefore voidable.”
As a result of the Court of Appeal's decision, it is now necessary to distinguish between two types of case:
The effect of this is that the actions taken by the trustees in both Pitt and Futter were neither void (being within the scope of their powers) nor voidable (as professional advice had been obtained and relied on).
The judgment, whilst not without its resulting hurdles, is a welcome one. The rule as it had been developed was considered unprincipled and unjustifiable. It had been criticised on the basis that trustees were able to extract themselves from actions that individuals could not, and was all too readily replied upon by trustees to magically undo all the adverse consequences of their actions, without any accountability.
The consequence of the judgment for trustees, it has rightly been suggested, will be close scrutiny of their actions and conduct, with a two-fold result. First, trustees will be more likely to seek legal advice before taking any action and, secondly, they may be more guarded when it comes to providing reasons for their decision making and exercise of their discretionary powers, for the following reasons.
If trustees act within the scope of their powers then beneficiaries, in order to succeed under Re Hastings-Bass (as redefined), must claim and prove breach of fiduciary duty. This may however be difficult as the judgment makes it clear that trustees will not have committed any breach of trust if they obtain and act on professional legal advice (in general or specific terms) from a proper source. The duty to take relevant matters into account is a fiduciary duty, but the duty of skill and care is fulfilled if the aforementioned steps are followed. Whether or not obtaining proper advice provides a complete exoneration for trustees in relation to all their actions surrounding the offending transaction remains to be seen.
The ability for trustees to avoid any blame may be further protected, and any potential future action against them hindered or denied, through minimum disclosure requirements and record keeping. In seeking to maximise the protection available to them, and to reduce the possibility of any claim for breach of fiduciary duty, trustees may limit the depth and extent of information available to beneficiaries. It could rightly be asked though whether professional trustees, having been appointed to act in the interests of beneficiaries, should properly be able to take such defensive measures.
Furthermore, Lloyd LJ accepted in his judgment that a claim by beneficiaries may often be precluded by an exoneration clause in the trust deed. This may therefore present another hurdle.
Beneficiaries may now therefore, quite rightly, seek to hold advisors accountable for the advice they have given. However, any claimant must show that a duty of care was owed to him and that, as a result of a breach of that duty, he has suffered loss. As it is the trustees who seek and obtain professional advice, rather than the beneficiaries, the duty of care is normally owed by the advisors to the trustees, not the beneficiaries. Similarly, the risk is that beneficiaries will be unlikely to hold trustees personally liable, as trustees will not be in breach of their duty of skill and care if they obtain appropriate legal advice. This means that the only person to whom the duty is owed suffers no loss, and the person who has, has no claim. Whether or not future cases will argue this lacuna ought to be filled, and that the assumption of responsibility towards beneficiaries ought to be extended, remains to be seen. This has certainly occurred before, but the basis of any such claim is often of limited application. However, it may be that a further extension of the principle is argued and it may indeed serve a useful purpose in these types of case where there would otherwise be no remedy available.
The judgment also gives rise to the incongruous result that beneficiaries may be in a better position if trustees have failed to obtain proper advice, as in that instance the transaction may be voidable, rather than if they had, where it would not (in the absence of any breach of duty).
It appears to be a strange and unfair result that in seeking to put the Re Hastings-Bass rule on the footing that it was always supposed to have been (ie, to exist for the protection of beneficiaries, not the trustees) this objective may not in fact be achieved. Whilst the reasoning of the judgment and the rule as formulated is logical and welcomed, the rule as we knew it is now seemingly weaker and possibly toothless. Beneficiaries may therefore find themselves frustrated by the lack of any meaningful remedy available to them, and having to accept any loss that has been incurred. It will be interesting to see how the courts will deal with these types of claims in the future.
  Ch. 25;  2 WLR 904 CA (Civ Div)
 Pitt v Holt; sub nom. Futter v Futter  EWCA Civ 197;  STC 809
 The so-called Hastings-Bass rule arose as a result of Warner J's judgment in Mettoy Pension Trustees Ltd v Evans (Mettoy)  1 WLR 1587;  2 All E.R. 513 Ch D.
  EWHC 45 Ch.
  EWHC 449 Ch.
  1 WLR 3811
  EWHC 1312 (Ch);  1 WLR 3811 
  WTLR 643 
  WTLR 622 
 Article "The end of Re Hastings-Bass" by Edward Hewitt. Trusts & Trustees, Vol 17, No 7, August 2011.
  WTLR 662 
  WTLR 662  where Lloyd LJ accepted that not all those who have suffered loss would have a claim against the advisers
 Hedley Byrne & Co Ltd v Heller & Partners Ltd  UKHL 4 in relation to economic loss. White v Jones (claim for economic loss for compensation for failure to receive benefits).
Peta McLean, Solicitor, Tax and Private Capital, Lawrence Graham LLP, UK