Previously the law had been in a state of uncertainty as to the precise legal test to be applied and the exact circumstances in which fiduciaries could seek to avoid transactions giving rise to adverse fiscal charges. This important judgment re-examined the scope of the relief, and is now the leading authority with respect to the applicability of the rule in the Island. Appleby’s Litigation and Dispute Resolution Team, led by Advocates Anthony Williams and Jared Dann and assisted by Associate Camilla Cook, acted for the successful Appellant.
In M v St Anne’s Trustees Limited, the Court of Appeal decided to exercise its discretion to set aside a decision of the Trustees to acquire shares in two property holding companies and other associated transactions in satisfaction of loans owing by the principal beneficiary, which had given rise to significant adverse UK tax charges. In doing so the Court of Appeal clarified the legal test for the applicability of the rule in Hastings Bass in Guernsey and proceeded on the assumption (without expressly deciding) that Guernsey law is to like effect as the revised approach set out by the UK Supreme Court in Pitt v Holt.
In summary, the Court of Appeal stated that in order for the rule to be applied, there must be a finding that the failure by the Trustee to take account of certain matters (typically fiscal consequences), i.e. the duty inadequate deliberation, is of sufficient seriousness to amount to a breach of fiduciary duty. Such a breach is a necessary pre-requisite for the exercise of the jurisdiction. Once a sufficient breach has been established, the decision in question is liable to be set aside by the court as a matter of its discretion. The Court of Appeal stopped short of setting out an exact test for the exercise of discretion under the Hastings Bass principle on the basis that each case is likely to be fact specific. It is noteworthy that the Court declined to adopt the position of the Royal Court at first instance and import the element of unconscionability as a test for deciding whether to avoid the transaction, on the basis that such a test is more appropriate in relation to the doctrine of equitable mistake, which is deployed in cases where beneficiaries seek to set aside dispositions into trust.
On the facts of this case the Court of Appeal found that there had been a breach of sufficient gravity to constitute a breach of fiduciary duty and described it as an “extremely serious failure to consider a relevant matter”. The court exercised its discretion to avoid the transaction on the basis of a number of factors, most notably as a result of the substantial prejudice caused to the Appellant as a result of the Trustee’s breach, and the fact that the Trustee had neither taken independent tax advice nor enquired whether the Appellant had taken tax advice, in circumstances where the ”consideration of the possible tax consequences was clearly called for”.
This judgment demonstrates that the court must closely examine the underlying facts in each case. As a general rule fiduciaries ought to consider in every case whether tax advice is required in relation to a particular transaction, or at the very least seek sight of any advice obtained by the beneficiary before deciding to proceed with the transaction in question. However the judgment has clarified the legal test, which will in turn allow advisors to more precisely determine the circumstances in which an application for Hastings Bass relief may be made prior to incurring the significant costs of doing so.