Hastings-Bass Reborn—the Jersey Statute in Action

First published in Private Client Business

This article describes an application in Jersey to set aside a disposition made by trustees in exercise of a discretionary power of appointment, in some ways a classic post-Pitt v Holt example of what in England came to be known as the rule in Hastings-Bass. It illustrates the changes which the statutory reaction to Pitt v Holt have effected, and the differences between Jersey and England which those changes have created. It will become obvious to readers of this article in England and Wales that the Jersey statute has departed in a number of ways from the legal position under the law of England and Wales. The word voidable in art.47H(2) (reproduced below in an appendix to the article) is interesting, seeing that English law also draws a distinction between dispositions which are made in excessive execution of the power (and are in consequence void) and those which are effected by what has been called inadequate deliberation, which may be voidable at the instance of a beneficiary. In England, the errant trustee (or other appointor) does not apply to set aside his own disposition on the ground of his own inadequate deliberation amounting to a breach of trust. As Lloyd LJ said in the course of his judgment in the Court of Appeal, explicitly approved by the Supreme Court:

if an exercise by trustees of a discretionary power is within the terms of the power, but the trustees have in some way breached their duties in respect of that exercise, then (unless it is a case of a fraud on the power) the trustees’ act is not void but it may be voidable at the instance of a beneficiary who is adversely affected.¹

Another distinction between Jersey and English law is that in England the relief is generally not availableif the trustee acted properly on (perhaps negligent) professional advice, a point from which the Jersey legislation has expressly departed in the final words of art.47H(4). The Cayman Islands also have recently introduced a statutory Hastings-Bass jurisdiction.² As with the Jersey provisions, there is no requirement under Cayman Islands law to show fault on the part of the trustee or the trustee’s legal advisers and the application may be made by the trustee or power-holder. Interestingly, in Cayman, there is no statement that the exercise of the power is voidable, but simply that the court may:

….set aside the exercise of power, either in whole or in part, and either unconditionally or on such terms and subject to such conditions as the Court may think fit ...”.³

Re the D and E Trusts

The representation of Pinnacle Trustees Limited in Re the D and E Trusts⁴ concerned an application to the Royal Court of Jersey by the trustee of two Jersey law trusts that certain actions of the trustee by which the assets of the trusts were transferred into a circular ownerless corporate structure, thereby terminating the trusts, be declared void.

The trustee sought a declaration to that effect pursuant to the Royal Court’s statutory Hastings-Bass jurisdiction.⁵

The classes of beneficiaries of the trusts comprised mostly French tax residents. In 2011, in response to the introduction in France of new tax legislation, the Trustee was advised to transfer the assets of the trusts to companies incorporated in the BVI and to terminate the trusts.

The purpose of the transfer was the legitimate avoidance of the reporting requirements under the French tax legislation and the deferral of the potential tax liabilities which would otherwise have been incurred in relation to the assets of the trusts. The trustee exercised its powersin each of the trusts(which were on similar terms) to transfer the whole of the assets of both trusts to two holding companies, at that stage owned by the trustee in its capacity as trustee. The shares in each of those holding companies were then transferred to a BVI company. An additional BVI company was also incorporated and was structured such that each BVI company wholly owned the other—the circular structure. Two of the beneficiaries of the trusts entered into consultancy agreements, by which the family could draw some value from the funds previously held on trust.

The powers in each of the respective declarations of trust were broadly expressed and permitted the trustee to pay, transfer, apply or deal with the assets of the trusts in any manner which isin their opinion for the benefit of all or any one or more of the beneficiaries. Accordingly, the transfers were within the scope of the relevant powers and this was not therefore a question of an excessive execution, whereby the exercise of the power is rendered void ab initio.⁶

In effecting the changes in 2011, the trustee considered the transfer of assets to be in the best interests of the beneficiaries of the trusts on the basis that it would be advantageous for the purposes of French tax under the new tax regime.

In 2019 the trustee obtained French tax advice that the BVI circular structure would be viewed from a French tax perspective as having created a de facto or constructive new trust and that the trustee should have filed a number of annual and event-based tax returns with the French tax authoritiesin the intervening years. The advice also explained that the inheritance tax consequences for the settlor would be higher than if no new trust had been created and furthermore that theFrench tax authorities might regard the circular structure as an artificial arrangement, enabling them to claim penalties of 80 per cent.

The trustee was also advised that there was a question as to whether the circular structure was valid under BVI law. While an ownerless structure is in principle permissible under BVI law, ⁷ where the companies’ assets are beneficially owned by the companies themselves without any powersto apply those assets in furtherance of particular objects outside the structure, it raised an issue of public policy because it tied up property indefinitely without a clear legitimate public or private purpose. If the structure was valid, there was also a possibility that on the dissolution of the BVI companies the assets would pass to the Crown.

Accordingly, the trustee sought a declaration pursuant to art.47H of the Trusts (Jersey) Law 1984 (as amended)⁸ that the steps taken in 2011 to restructure were void, and an order that the trusts be reinstated. The court granted the application on the basis that, had the trustee taken all relevant considerations into account, namely the French tax implications of the restructuring, and advice as to the effect of the structure as a matter of BVI law, it would not have exercised the relevant powers.

The trustee had standing to apply for the relief sought as it was the trustee who exercised the powers concerned. Article 47I(2) of the Trusts (Jersey) Law 1984 permits statutory Hastings-Bass applications to be brought not only by the person who exercised the power but also by any other trustee, a beneficiary or enforcer, the Attorney General where the trust contains charitable powers or provisions and/or any other person with leave of the court.

The application was made in full consultation with the beneficiaries of the trusts, each of whom was represented at the hearings. The majority of the beneficiaries were supportive of the application, with two of the beneficiaries resting on the wisdom of the court.

There is nothing to prevent a beneficiary bringing an application in these circumstances. However, the trend in Jersey is that such applications are brought by the person who exercised the power in question, in consultation with the beneficiaries. The remedy being discretionary, the question of whether the court will grant the relief sought will fall to be determined on the evidence. As a practical matter, it will naturally be the person who exercised the power who will have the evidence upon which to found the application. Applications are typically brought by representation by the donee of the power, with the relevant parties, including the beneficiaries, being convened to the application. The representation is a form of originating process by which the court’s attention is brought to a particular issue in relation to which relief is sought. The court will be astute to ensure that justice is achieved, and there is a requirement that all relevant material, and all arguments for and against the remedy sought be placed before the court.

The Royal Court held that the test under art.47H(3) had been met (so the disposition in question was voidable) and it exercised its discretion under art.47H(2) to declare the disposition to be of no effect from the time of its exercise and thus void.

In previous decisions the Royal Court has considered the question of the justice of involving the Royal Court in helping trustees and individual beneficiaries out of a tax problem which has been created by mistaken advice, and whether litigation against the defaulting trustee or negligent tax adviser should be the preferred outcome.⁹ The Royal Court’s general view is that a beneficiary’s sole remedy should not be litigation against trustees and/or advisors, in circumstances where the beneficiary is not usually at fault and has already incurred loss by reason of avoidable tax charges. Forcing a beneficiary to incur further expense in what may be uncertain litigation would be unnecessary, undesirable and unjust.

* The authors are all partners or employees of Mourant Ozannes: Jonathan Speck is a partner, Luke Olivier counsel, Dilly Wright an associate, all three in Jersey, and Tony Pursall is a consultant at the firm’s London office. ¹ Pitt v Holt [2011] EWCA 197 at [99], on appeal [2013] UKSC 26; [2013] 2 A.C. 108 at [93]. ² T. Pursall, “Cayman Islands Trust and Succession Law Update” [2019] P.C.B. 84.³ Trusts Law (2020 Revision) s.64A. ⁴ Re the D and E Trusts [2019] J.R.C. 246. ⁵ Trusts (Jersey) Law 1984 art.47H (see below). ⁶ See, for example: In the matter of the B Life Interest Trust [2012] J.R.C. 229. ⁷Ernest de la Sala v Compania de Navegacion Palomar, S.A. and others [2018] SGCA 16 (Civil Appeal no.34 of 2017) at [10]; contrast the position under Jersey law, where these types of structures are prohibited by statute: Companies (Jersey) Law 1991 art.26. ⁸ The text of art.47H is set out in the Appendix. ⁹ Re Onorati Settlement [2013] (2) JLR 324; Re B Life Interest Settlement [2013] (1) JLR 1

Appendix

Article 47H of the Trusts (Jersey) Law 1984 (as amended)

(1) Power to set aside the exercise of fiduciary powers in relation to a trust or trust property. In this paragraph, person exercising a power means a person who, otherwise than in the capacity of trustee, exercises a power over, or in relation to a trust, or trust property and who owes a fiduciary duty to a beneficiary in relation to the exercise of that power.

(2) The court may on the application of any person specified in Article 47I(2), and in the circumstances set out in paragraph (3), declare that the exercise of a power by a trustee or a person exercising a power over, or in relation to a trust, or trust property, is voidable and –

(a) has such effect as the court may determine; or

(b) is of no effect from the time of its exercise.

(3) The circumstances are where, in relation to the exercise of his or her power, the trustee or person exercising a power

(a) failed to take into account any relevant considerations or took into account irrelevant considerations; and

(b) would not have exercised the power, or would not have exercised the power in the way it was so exercised, but for that failure to take into account relevant considerations, or that taking into account of irrelevant considerations.

(4) It does not matter whether or not the circumstances set out in paragraph (3) occurred as a result of any lack of care or other fault on the part of the trustee or person exercising a power, or on the part of any person giving advice in relation to the exercise of the power.