The much awaited judgment of the Guernsey Court of Appeal in M v St Annes Trustees on the scope of Hastings-Bass relief was handed down on 20 June 2018.
The background to the case can be found in our earlier article, but in summary the case concerned a loan from a pension which the principal beneficiary repaid by way of a transfer of shares of two property-holding companies giving rise to significant adverse UK tax consequences. The principal beneficiary applied for Hastings-Bass relief to set aside the trustee's implementation of the transaction.
At first instance the Royal Court found that the revised approach set out by the English Supreme Court in Pitt v Holt should be followed as a matter of Guernsey law and significantly found that part of that test required a finding that it would be "unconscionable" to leave the transaction stand. Applying this test, the Royal Court refused to set aside the transaction.
The principal beneficiary appealed this decision and the Court of Appeal decided to exercise its discretion to set aside the trustee's decision to accept the shares as payment of the loan and in doing so has gone some way to clarifying the legal test for Hastings-Bass relief in Guernsey.
In determining the appropriate legal test to apply, the Court of Appeal proceeded on the assumption (but without expressly deciding) that Guernsey law is to like effect as the revised approach established in Pitt v Holt. The reason for adopting this approach, was because neither party challenged the decision of the Royal Court that Guernsey law should follow the Pitt v Holt approach.
The Court of Appeal confirmed that in order for the relief to apply there must be a breach of fiduciary duty by the trustee. In its discussion, the Court of Appeal considered whether a duty of adequate deliberation was a fiduciary duty and therefore able to fall within the remit of the relief (the breach of which would need to be of sufficient seriousness to amount to a breach of fiduciary duty). The Court of Appeal proceeded on the basis that it was (but without deciding) as it had been expressly acknowledged as being a fiduciary duty in the approach of Pitt v Holt which was not being challenged in the appeal.
The Court of Appeal rejected the Royal Court's finding that there needed to be some causal nexus between the breach and the damage to the trust.
Once a breach of duty has been found, the decision in question is voidable and it is a matter of discretion as to whether or not the court grants relief by setting aside/avoiding the transaction resulting from the decision. Significantly, the Court of Appeal found that the test for exercising such a discretion is not one of "unconscionability" as held by the Royal Court. The Court of Appeal found that no such test could be found in the case law for Hastings-Bass relief and such a test was more appropriate in relation to the doctrine of equitable mistake, which can be used by beneficiaries to set aside dispositions into or out of a trust on the grounds that it would be unconscionable for the donee to retain the gift.
As to defining what the proper test is for exercising discretion, the Court of Appeal did not think it would be practicable to do so as the decision to exercise such a discretion is likely to be fact specific.
In this case the facts were such that the Court of Appeal were able to exercise its discretion to set aside the transaction.
This decision is a welcome clarification on the scope of Hastings-Bass relief in Guernsey. However, as the revised approach set out in Pitt v Holt was not challenged by the parties we remain in a situation where Guernsey law requires a higher-bar (a breach of fiduciary duty) to establish Hastings-Bass relief than its offshore counterparts, such as Jersey which provides greater protection for settlors and beneficiaries. We hope that now the position has been clarified, the Guernsey legislature will consider incorporating an amendment to the Trusts (Guernsey) Law, 2007 which is currently under review that will bring Guernsey into line with the other offshore jurisdictions.