This article was originally published in STEP Journal, Issue 2, 2023.
The Cayman Islands reformed its trust laws to provide a statutory mechanism by which flawed decisions of trustees and other fiduciaries can be set aside on application to the court. The codification of the Hastings-Bass rule (the Rule) provides a clear statutory framework for all fiduciaries, not only trustees. This departs from the position under English and Welsh1: law following the UK Supreme Court's decision in Pitt v Holt 2 where the Rule was significantly tightened in relation to trustees' inadequate deliberations, which must be sufficiently serious to amount to a breach of fiduciary duty.
Where a trustee makes a mistake in the exercise of their powers,
innocent beneficiaries should have relief from the consequences of
that mistake. Traditionally, common-law courts had recognised wide
powers in this regard, relying on the Rule,3 which
concerns the validity or otherwise of a trustee's exercise of
their powers in reaching a fiduciary decision.
In reliance on this principle, common-law courts had held that trustees' exercise of their power was invalid not only where the power was exercised in bad faith or excessively but also where the trustees, in exercising their powers, had taken into account irrelevant matters or failed to take into account relevant matters. If the UK authority of Pitt v Holt was followed (and before codification of the Rule in 2019, it had found some favour in the Cayman Islands),4 it would require the applicant to prove a breach of fiduciary duty for a court to set aside a mistaken decision. This had the potential to set an unreasonably high threshold and deny relief in circumstances where the trustee made their decision based on incorrect professional advice.
Fortunately, the Cayman Islands' legislative reforms in 2019 inserted a new s.64A in the Trusts (Amendment) Law 2019 (the Act) to provide a statutory framework for the setting aside of mistaken decisions by trustees and other fiduciaries. As a result of s.64A(4), it is not necessary to prove that the person who exercised the power (or their advisor) acted in breach of trust or duty.
The Grand Court of the Cayman Islands (the Court) is empowered to set aside such 'mistaken' decisions, with the relevant exercise of power treated 'as never having occurred'. It can also make such consequential orders as necessary. However, protection is granted to ensure that orders do not prejudice a bona fide purchaser for value of any trust property who did not have notice of the circumstances behind the mistaken exercise of power. As such, innocent third parties should not suffer as a result of any orders.
A range of interested parties, including the trustee or some other 'holder' of the fiduciary power, can make applications under s.64A for a decision to be set aside. The Court can also grant leave to allow any other person to apply.
Subsequent to the introduction of s.64A of the Act, it is clear that trustees and other fiduciaries may now apply to the Court to set aside a decision, but does this extend to company directors and other fiduciaries? The question has not yet been determined by the Court, but when looking at English case law, the approach has been varied, as discussed below.
Hunter v Senate Support Services LTD and Others5
Hunter concerned a claim where the claimant sought a
declaration that the forfeiture of his shares in the first
defendant subsidiary companies and the subsequent transfer to the
second defendant holding company were invalid. In the absence of
any clearer guidance on the 'void' or 'voidable'
question in the context of company law and, in particular,
decisions of directors, it was concluded that the appropriate legal
consequence of a relevant failure by directors to take into account
a material consideration is voidability. Relief was granted on the
basis that the directors, analogous to trustees, ought to have
considered alternative courses of action.
Pitt v Holt6
The first-instance decision in Pitt saw the Rule applied to a
receiver acting under the English Mental Health Act 1983
(the 1983 Act) dealing with her mentally incapacitated
husband's property. Pitt was concerned with two
issues: the first has become known as the Rule and the second was
the scope of the equitable jurisdiction to set aside a voluntary
disposition on the ground of mistake. It was found that, in
principle, there was no material distinction between a trustee
exercising a power for the benefit of a beneficiary under a trust
instrument and a receiver exercising a power for the benefit of a
patient under the 1983 Act. In each case, the power was a fiduciary
one and the person exercising the power was doing so in the
interests of another but not on their instructions and, therefore,
the Rule was applicable.
Segesta LTD v HMRC7
In Segesta, the Rule was held to be inappropriate to
extend to the exercise of authority under a contract of agency. The
First-tier Tax Tribunal determined that the doctrine was confined
to trusts and could not be extended more generally to the exercise
of fiduciary powers outside the confines of a trust.
Power Adhesives Ltd v Sweeney & Ors8
The decision of Power Adhesives Ltd strongly supports the
view that the Rule is available to companies, their directors and
other 'fiduciaries' when exercising fiduciary powers, just
as it is available to trusts and trustees. The directors in this
case sought apparently competent advice and acted upon it. The
claimant company sought a declaration that a decision taken by the
defendant directors in relation to company shares was in breach of
their fiduciary duties and should be set aside. The court granted
the declaration. It is arguable that, in this case, the mistake was
so obvious that no reasonable director could have followed that
advice without seeking a second opinion or following up on the
particular issue raised. If so, it is a rare case and may be
narrowly confined. Nonetheless, this case demonstrated that
directors were held to fall within the Rule.
The Cayman Islands Position
In In the Matter of the Ta-Ming Wang Trust,9 the
beneficiaries of a Cayman Islands trust sought to set aside the
declaration of a dividend from one of the trust's underlying
companies. Due to an erroneous calculation of relevant dates, the
trustee was faced with a significant tax liability payable from the
trust. The Court determined that the trustee's decision to
procure the dividend and receive it as an addition to the trust
fell within the jurisdiction of
Hastings-Bass. The trustee's decision was
liable to be set aside, as the trustee was not authorised to make
the decision, as it was not a decision that could operate as
intended. Therefore, it was held to be void. Although the Court
declined to set aside the decision by the company's directors
to declare the dividend on the particular facts of the case, the
Court did accept that the Rule could, in principle, be applied to
decisions of company directors on the basis that it may apply to
the exercise of a fiduciary power by any person in a fiduciary
position.
The Chief Justice ruled that, in this case, there was no evidence of what factors the directors took into consideration and no basis on which the Court could assume that the directors had the interests of the trust or its beneficiaries in mind when making their decision. It is clear from the judgment that had there been evidence as to the intentions and state of mind of the directors of the company sufficient to attract the Rule, the Court would have been prepared to make the further declaration sought.
Conclusion
The relatively recent reform of the Act is a positive step towards
modernisation of the trust legislation in the Cayman Islands. Now
that the Cayman Islands has placed the Rule on a statutory footing
in its judicial armoury for the remediation of the failings of
directors, trustees and other fiduciaries to provide protection
from unjust consequences, it will be interesting to see how the
Court reacts to s.64A applications, especially in the context of
companies and directors.
Footnotes
1 For the remainder of this article,
'English and Welsh' will be abbreviated to
'English'.
2 Futter v Futter and Pitt v Holt [2013] UKSC
26
3 [1975] Ch 25
4 Schroder Cayman Bank and Trust Company Ltd v
Schroder Trust AG [2015] 1 CILR 239
5 [2004] EWHC 1085 (Ch)
6 [2010] EWHC 45 (Ch)
7 [2010] UKFTT 235 (TC)
8 [2017] EWHC 676 (Ch) (31 March
2017)
9 [2010] (1) CILR 541
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