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Into the void

Advisers need to take note of a recent appeal court decision

Since 1974, trustees have been able to rely upon the principle set out in the case of Hastings-Bass when applying to court to ask for transactions with unintended results to be set aside. The rule in Hasting-Bass has been applied as follows:
When trustees have exercised a discretionary power, the court can set aside the actions of the trustees if:
a: The effect of exercising the power is different to that which the trustees had intended, and
b: The trustees would not have exercised their power in the way that they did, had they not: failed to take account of relevant considerations, or taken into account considerations which turned out to be irrelevant.

Commonly, the rule has been relied upon where the transaction in question has resulted in unforeseen tax consequences. However, any comfort that trustees may have taken from knowing they could rely upon the rule in Hastings-Bass may now be a thing of the past following the recent Court of Appeal decision in the twinned cases of Pitt v Holt and Futter v Futter.

The two cases, heard together, both involved applications to set aside the transactions which had resulted in unexpected tax bills for the trustees in question. Lord Justice Lloyd, in the Court of Appeal, delivered the leading judgment.

Lloyd first distinguished between two types of cases:

1: Where a trustee acts outside the scope of his powers. This type of act is void and so is ineffective.
2: Where a trustee acts within the scope of his powers but either fails to take into account a relevant factor or takes into account a factor which turns out to be irrelevant. In these circumstances, the act may be voidable.

A voidable act is, the court held, one which can be set aside by the court, but only if it amounts to a breach of the trustee’s fiduciary duty. It follows therefore that any application to set aside on this basis must be made by the beneficiaries rather than the trustees.

In both cases, the court held the trustees had acted within the scope of their powers and so their actions were not void.

In considering whether the trustee’s actions were voidable, the court concluded the effect of the decision taken in each case was different to that which had been intended.

However, in both cases, the trustees had sought professional advice before taking their decisions and so had fulfilled their fiduciary duty, despite the fact the advice turned out to be incorrect. The trustee’s actions in both cases were therefore found to be neither void nor voidable.
In Pitt v Holt, the court also considered the argument for the action to be set aside on the grounds of mistake but rejected this argument on the basis there had not been a mistake as to the legal effect of the action, merely a mistake as to its tax consequence.

It would seem that a trustee’s ability to rely upon the Hastings-Bass rule to provide an escape route in circumstances where they have taken a poor decision is severely restricted by this judgment. Consequently, professional advisers may, in future, find that beneficiaries who have suffered loss in these circumstances may seek a remedy through a negligence action against their trustees or tax advisers.

Nick Mendoza is a solicitor at law firm Howard Kennedy

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