Trustee Mistakes: A More Forgiving Offshore World

Tuesday 11 October 2016

Despite the Supreme Court of the United Kingdom limiting the circumstances in which a court could set aside a trustee’s flawed exercise of power in Pitt v Holt, Futter v Futter [2011] EWCA Civ 197, a number of offshore jurisdictions have declined to follow. This has been achieved in some offshore jurisdictions, including Bermuda, through enacting legislation to restore the status quo as it existed prior to the Supreme Court’s jurisdiction. In at least one other jurisdiction, the courts have cast a critical eye over the Supreme Court’s decision. The clear desire in certain offshore jurisdictions to cure trustee’s mistakes in appropriate circumstances is obviously welcome news for trustees and their indemnity insurers as well as for settlors and beneficiaries of offshore trusts.     

In Re F Trust and Re A Settlement [2015] Bda LR 116, [2015] SC Civ (Bda) 77, the Supreme Court of Bermuda has confirmed that section 47A of Bermuda’s Trustee Act 1975, being Bermuda’s statutory ‘Hastings-Bass’ jurisdiction, confers an ‘unfettered discretion’ on the court to set aside the flawed exercise of fiduciary powers.

The decision is the first reported decision to be handed down on section 47A since its enactment, and it confirms the Bermuda Parliament’s statutory intention to maintain in Bermuda law the rule in Re Hastings-Bass (deceased) [1975] Ch 25 (CA) (the Hastings-Bass rule) as it existed prior to its limitation by the Supreme Court of the United Kingdom in Pitt v Holt, Futter v Futter [2011] EWCA Civ 197.

In his decision, Chief Justice Kawaley had to consider whether the appointment of a UK resident trustee in the case of two Bermuda trusts in 2005 and 2008, should be set aside in circumstances where no legal advice had been sought prior to making the appointments and the appointments had led, or would lead, to adverse UK tax consequences.

In reaching his decision to set aside the appointment of a UK resident trustee, Chief Justice Kawaley made a number of important observations.

First, he made clear that pursuant to subsection (7), section 47A is applicable retrospectively.
Second, he confirmed that the power of appointment of trustees falls within the broad definition of fiduciary power under section 47A.

Third, Chief Justice Kawaley held that the tax implications of the appointment were a ‘financially significant factual and legal [consideration]’ relevant to the appointment, which was not properly taken into account, and that the appointment would not have been made, or would have been made in a different manner (i.e. by appointing a different trustee), had such advice been sought.

The judgment is significant for Bermuda’s trusts industry, as well as for other offshore jurisdictions.  

In a separate development, the High Court of the Isle of Man has also handed down a recent judgment expressing considerable reservations about the application of Pitt v Holt, Futter v Futter to a jurisdiction such as the Isle of Man. In AB v CD [CHP 16/0007], Deemster Doyle set aside certain call options granted by trustees on the basis that the options would not have been granted had the trustee taken professional tax advice. On the facts of the case, the court did not have to decide whether Pitt v Holt applied as a matter of Manx law, as the court found that the failure by the trustee to take advice was a breach of fiduciary duty. The court did express significant reservations as to whether Pitt v Holt applied in the Isle of Man, and noted that this area of the law may have to be considered again by the Privy Council in the future.


Original article part of Sedgwick’s Offshore Professional Risks Newsletter of October 2016 and included here with permission from Sedgwick LLP.

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