16/10/23

CAYMAN ISLANDS: Cayman court agrees to unwind trustee's tax mistake

As published on: step.org, Monday 16 October, 2023.

The trustee of three Cayman Islands trusts has obtained a court order under s.64A of the Cayman Islands Trusts Act (2021 Revision) to unwind errors that produced adverse tax consequences.
Lawyer rewinding clock
The case is the first published decision to apply this relatively new amendment. It was enacted by the Cayman Islands government in 2019 to restore the original interpretation of the Hastings-Bass rule of trustee mistake, the scope of which had been significantly restricted by the UK Supreme Court's ruling in Pitt v Holt (2013 UKSC 26).

The Hastings-Bass rule had traditionally been used by courts to set aside a trustee's exercise of their powers under the terms of the trust, where the effect of the exercise of power was different from what they intended. It was a powerful remedy to address mistakes by trustees and has often been deployed to undo transactions having unforeseen and significant adverse tax consequences. However, the Pitt ruling laid down that the rule only applied where the trustee's error is sufficiently serious as to amount to a breach of fiduciary duty, and not where trustees had acted on professional advice that turned out to be wrong.

Following that ruling, several offshore jurisdictions introduced their own legislation designed to override the effect of Pitt and restore the courts' traditional wider jurisdiction to set aside trustee mistakes. The British Virgin Islands government brought such a measure into effect in the Trustee (Amendment) Act 2021 and Probates (Resealing) Act 2021. The Cayman Islands government made a similar amendment in 2019, but this appears to be the first time it has been called into action.

The case concerned the settlement of shares in a company on three family trusts, which was done many years ago by the settlors and the unpaid lay trustees without getting advice about the tax implications of the settlements in the settlors' onshore domicile. Ultimately, a professional trustee services company was appointed to administer the trusts and soon discovered that these settlements had given rise to a significant unforeseen tax liability, both for the settlors and for the trust funds.

The new trustee, law firm Maples and Calder, applied for the s.64A order. It was duly granted, the judge remarking that s.64A is intended to facilitate a flexible approach to setting aside the flawed exercise of fiduciary powers, and the court will generally be obliged to give it effect subject to appropriate limitations. These limitations were that the mistake amounted to the improper exercise of a fiduciary power, and that the applicant had not deliberately pursued a course of conduct designed to gain some undisclosed and impermissible onshore tax advantage or some other improper benefit (Re Settlements made by Declarations of Trust dated 9 May 2013, FSD 228 of 223).

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Cayman Islands Trusts Tax