Dealing with trustees’ mistakes

Dealing with trustees’ mistakes

A recent case in the Isle of Man has revisited the ability of the court to overturn a decision by trustees when the consequences of that decision are different to those anticipated.  

The law in this area has been the subject of much consideration in recent years.  Historically, trustees’ decisions could be overturned if the trustees would not have acted as they did under different circumstances or with different advice, particularly where the trustees failed to take into account considerations that in fact they ought to have taken into account (usually tax considerations), or where they had taken into account considerations that they ought to have ignored.  This is known as the rule in Hastings-Bass and previously it applied whether or not there had also been a breach of fiduciary duty by the trustees.

However, in the jointly heard cases of Pitt v Holt and Futter v Futter, the Supreme Court reconsidered the scope of the rule in Hastings-Bass and made clear that trustees’ decisions could only be set aside if they are in breach of their fiduciary duties.  On this basis, if trustees take advice which turns out to be wrong, a claim should be made against the professional advisers in negligence (rather than an application being made to the court to overturn the relevant decision).    

In the recent Isle of Man case the claimant was the settlor and beneficiary of a number of Isle of Man trusts.  The defendant trustee had granted call options which provided a way for the claimant to take back beneficial ownership of the trust assets.  The call options resulted in potentially adverse tax consequences for UK resident beneficiaries and the claimant returned to the UK.  The trustee had not taken appropriate tax advice and relied on other advisers to obtain this.  The trustee would not have granted the call options had the tax consequences been understood.  

The claimant applied for an order for the call options to be set aside under the rule in Hastings-Bass or alternatively on the basis of mistake.

In this case, the trustee had committed a breach of duty in failing to receive tax advice on which they could rely and the call options were set aside.  

First, this is therefore an example of the court making clear that a trustee should always obtain tax advice when required and not rely on other advisers to take appropriate steps or make assumptions that someone else is dealing with this element.  

The case is also interesting as it casts doubt on whether the restricted rule in Hastings-Bass is good law in the Isle of Man.  It signals a potential divergence between the law in that jurisdiction and English law in this still unsettled area.