Turning back the clock

HAVE YOU EVER wished that you had not done something which had disastrous results? I can confidently predict that just about every reader will sheepishly remembering times when they had wished the floor had opened up and swallowed them. What about that ink pellet which landed squarely on the history master's new tweed jacket, or an idiotic remark made publicly to an assembled throng? Did you really back your aged rusting mini into a Rolls Royce and cause mayhem or, (very close to home now!) write an article which blithely overlooks a key subsection?

If you are a trustee, I might have some good news for you. I seem to remember a Church of England liturgy which lamented the fact that 'we have done that which we ought not to have done, and left undone that which we ought to have done' - a neat encapsulation of just about everybody's daily life. The good news for trustees is that a principle of law may sometimes help them where they have done that which they should not have done; unfortunately, all good things have their limits and the principle will not apparently help them if they have left undone that which they should have done. This, I think, sums up the position in a nutshell, but some more flesh on these bare bones will no doubt be helpful.

In the beginning

The principle has become known as the Hastings-Bass principle because it was formally set out by Lord Justice Buckley in the case of Re Hastings-Bass (deceased), Hastings and others v Commissioners of Inland Revenue [1974] 2 ALL ER 193. In fact, however, the principle goes back well before that time, and, so far as I have been able to discern, it had early beginnings in the case of Dundee General Hospital's Board of Management v Walker [1952] 1 ALL ER 896. I need not digress into the details of that case, but the House of Lords' judgment includes the following statement concerning trustees who have exercised a discretionary power:

'If it can be shown that the trustees considered the wrong question, or that, although they purported to consider the right question they did not really apply their minds to it or perversely shut their eyes to the facts or that they did not act honestly or in good faith, then there was no true decision and the Court will intervene.'

Long pause for thought

It seems that the trail of this subject leads through a number of other cases in the 1960s (Re Pilkington's Will Trusts [1962] 3 ALL ER 622 and Re Abrahams' Will Trusts [1967] All ER 1175), but these need not be examined here because, as mentioned, the essential principle emerged in fully fledged state in the 1974 case of Re Hastings-Bass (deceased). The delightful thing about the Hastings-Bass case itself was that it was an attempt by the Revenue to show that an estate duty avoidance scheme had failed to achieve its objective. The attempt at the time was unsuccessful but the Hastings-Bass principle is now a marvellous shield for the taxpayer against the Revenue; it was a classic case of the Revenue firing at the taxpayer, but only shooting itself in the foot.

The full details of the Hastings-Bass case are fairly complex and it will not serve any great purpose to examine them in great detail. Suffice it to say that the avoidance scheme involved an exercise of a power of appointment so as to take funds out of a trust for Captain Hastings-Bass and transfer them into a trust for his son. On the death of Captain Hastings-Bass some six years later in 1964, the Revenue took a point concerning the trustees' exercise of the power to advance the funds to the trust for William. The appointment failed the rule against perpetuities, and so it was argued that if the trustees had known this at the time they would never have made such an appointment in the first place. The contention was that the appointment on trust for William should be completely set aside as one which the trustees would not have made if they had fully appreciated all the ramifications of it.

It appears that the Revenue had been happily taxing William on the trust income in the intervening period, but belatedly the Revenue was also having second thoughts about that as well. Note also that infringing the rule against perpetuities does not of itself mean that the whole appointment is completely void. The rule can have this effect in certain circumstances, but here the life interest was prior to the interests which offended the rule.

With the benefit of considerable hindsight, the Hastings-Bass case was rather a long shot by the Revenue. It may be one thing for trustees to regret what they have done and to ask the court to set it aside, but it is quite another for the Revenue to allege that trustees ought to be unhappy about their own appointment and the court should relieve them of that unhappiness. It was perhaps therefore fairly predictable that the court would decline to interfere, saying that the trustees wanted to benefit William and to save estate duty, and their appointment had indeed provided a benefit to the right person.

The formulation of the Hastings-Bass principle in that case itself had more 'nots' than a politician wriggling out of a Jeremy Paxman question. Much better then to quote the summary of the principle as transposed into a positive statement in the case of Mettoy Pension Trustees v Evans [1990] WLR 1587:

'Where a trustee acts under a discretion given to him by the terms of the trust, the Court will interfere with his action if it is clear that he would not have acted as he did had he not failed to take into account considerations which he ought to have taken into account'.

Applying the principle

This very helpful principle of law has saved the day in a number of subsequent cases. For example, in Turner v Turner [1983] 2 ALL ER 745 a whole raft of appointments made by trustees on the instructions of a very dominant settlor was set aside on the basis that 'the trustees never applied their minds at all to the exercise of the discretion entrusted to them'. They had simply followed the settlor's instructions and the results were appointments which conflicted with each other and a transfer of property to a beneficiary who had already been excluded. This was all disentangled by setting aside three separate appointments. The conclusion of the Court was one which should be a lesson to many trustees:

'If appointors fail altogether to exercise the duties of consideration … then there is no exercise of the power and the purported appointment is a nullity'.

Offshore disaster

The case of Green v Cobham [2000] WTLR 1101 illustrates another circumstance in which the Hasting-Bass principle was applied. Once again, all the details of the background circumstances were fairly involved, but the basic point was that the trustees of a will trust, set up originally by a non-domiciled and non-resident individual, appointed sub-funds in 1990 for the benefit of three infant grandchildren. It appears that the trustees thought that the sub-funds would be separate settlements in their own right, but it was later concluded that this was not so and they were all part of the will trust structure for capital gains tax purposes; we do not know the details of the argument on this point.

Accepting that the sub-trusts were all one with the will trust, there was no immediate problem. There were sufficient non-resident trustees to ensure that the non-resident status of the various trusts was preserved. One of the trustees was a resident professional trustee and so, under section 69(2), Taxation of Chargeable Gains Act 1992, he was treated as being non-resident. Unfortunately, one month after the appointment he retired from practice and so ceased to be a professional trustee within the terms of that subsection. This upset the balance between the resident and non-resident trustees and as a result there was no longer a majority of trustees treated as being non-resident. All the trusts involved therefore became resident in the United Kingdom on his retirement.

Although the immediate results may not have been catastrophic - it was only the gains actually realised during 1990-1991 which would have been caught for tax, the long term effects were a much greater problem. In 1991, an export charge was introduced on trusts leaving the United Kingdom and so it became impossible to rectify the position without major tax liability arising.

Mr Justice Jonathan Parker saw this as a clear case where the Hastings-Bass principle should be applied. The trustees would never have made the appointments in 1990 had they appreciated the tax consequences of them.

It seems that the trustees were fortunate to secure this result. The contrary argument put to the judge was that it was not the appointment which had the disastrous results but rather the retirement of the professional trustee from practice. The 1990 appointment carried out the intention of the trustees precisely and in itself it had no adverse tax effects. It was the inadvertent consequences of the retirement of the professional trustee which produced the tax problems. This was no doubt a powerful point, but the judge rejected it. The root cause of all the problems was the 1990 deed and the oversight as regards the new fund being one with the old for capital gains purposes. The appointment was therefore an invalid exercise of the trustees' powers.

No doubt a very unwelcome negligence claim was avoided here by the judge's decision. It would still seem that the correct course of action would have been to arrange for the retiring professional trustee to be replaced with a non-resident trustee before he left his practice. The Hastings-Bass principle does not, however, as I have already mentioned, enable that which was not done to be performed retrospectively, so that the only option open to the judge was to declare the appointment invalid. If this decision is followed in the future, it means that the Hastings-Bass principle can come to the rescue when problems arise from separate aftershocks where a deed of appointment is the root cause of them; donning my latin hat for a change, the appointment need only be the causa sine qua non, and not necessarily the causa causans.

Failed flip flop

Taxation, 14 March 2002 at pages 584 to 586 contained a report by John Newth of the decision in Abacus Trust Company v NSPCC which concerned a tax avoidance scheme which was improperly executed. I need not repeat the details again here as they should perhaps be still fresh in the minds of readers, but suffice it to say that it was a flip flop scheme carried out in 1997-98, but which fell flat on its face because the trustees executed a deed of appointment of the remaining trust funds on 3 April 1998, this being in favour of the NSPCC. This meant that there was a capital gains tax disposal of the entire settlement funds during 1997-98, when counsel had clearly advised that the appointment should not take place until early in the following fiscal year. That was essential for the flip flop scheme to achieve the desired results. As it was, the gains on the deed disposal on 3 April 1998 were assessable on the settlor.

Is the Revenue bound?

Once again, the appointment was set aside but the further interesting point is that the Revenue had previously stated that it would not agree to be bound by the decision of the Court, nor did it want to be joined as a party in the case in order to make any submissions. The refusal to agree to be bound by the decision of the Court is ominous; no doubt the Revenue was greatly aggrieved that its tax-raising attempt in the original Hastings-Bass case had now come home to roost by using the decision to salvage faulty tax avoidance. It remains to be seen whether the case will resurface with the Revenue contending that the tax position has been unaffected by the Court decision.

I understand there is a suggestion that a Court variation under Hastings-Bass is binding only on the parties joined in the action; hence the Revenue may still want its tax. On the other hand I have not seen anything in the past Hastings-Bass cases to support such a suggestion, and there has never been any indication that the Revenue was not happy to raise assessments in accordance with the revised position following a successful action.

There is a parallel equitable principle which deals with the rectification of documents where they do not carry out what the parties intended to achieve. Rectification is certainly binding on the Revenue (see Re Slocock's Will Trusts [1979] 1 All ER 358).

The Frankland case

Readers will recall that Frankland v Commissioners of Inland Revenue [1996] STC 7325 concerned an appointment within three months of the death of a testator, who left his property on discretionary will trusts. The appointment was intended to secure the benefit of the spouse exemption, but failed to do so because of the technical point that there is no charge on an appointment out of a discretionary trust within the first three months of its life, and the provision relating to discretionary will trusts was phrased in terms of relieving a discretionary trust charge which would otherwise have arisen. As no charge would have arisen, it was not possible to read the appointment to the spouse back into the will and so the estate was treated for inheritance tax purposes as having been left on discretionary trusts.

In the Court of Appeal, Christopher McCall QC argued that the anomalous results of the High Court decision should not be allowed to stand, but was unsuccessful. However, in a recent conference, Mr McCall pointed out that the emerging principle in Hastings-Bass could now be expected to save the day in such a case. The appointment by the executors and trustees had disastrous tax consequences which they had completed overlooked and this now seems to be ideal material for the application of the Hastings-Bass principle.

A contrary view

All this may seem to be going swimmingly in favour of the negligent trustee but there is one fly which has appeared in the ointment. In Breadner v Granville-Grossman [2000] 4 ALL ER 705 trustees had executed a deed of appointment one day after their power to make such an appointment had expired. They therefore made a bold attempt in the High Court to have their appointment treated as if it had been made timeously. Sir Andrew Park flatly refused to countenance any such action:

'In my judgment, however, there is a very big difference between, on the one hand, the courts declaring something which the trustees have done to be void, and, on the other hand, the courts holding that a trust takes effect as if the trustees had done something which they never did at all.'

It has to be said that this seems to be an entirely valid point and it was no doubt rather a long shot by Nicholas Warren QC on behalf of the trustees. Unfortunately, Mr Justice Park went even further. He had the following to say:

'There must surely be some limits. It cannot be right that, whenever trustees do something which they later regret and think that they ought not to have done, they can say that they never did it in the first place.'

On first reading, these remarks may appear to be the first voice of dissent which we have heard in the High Court on this subject. This, however, is probably an unwarranted conclusion. There are indeed limits. The principle applies only where:

(i) a trustee has failed to take into account some matter which he ought to have taken into account; and

(ii) as a result he reached a decision which he would not otherwise have done, in exercising a discretionary power.

Hence, in the context of the case where counsel was arguing for the Hastings-Bass principle to be extended, it is not surprising that Sir Andrew Park's sharp reaction was that there must be some limits. It is indeed certainly not the case that trustees can apply to the court to have an appointment declared void if they did consider all relevant matters at the time, but later realise that they came to a wrong conclusion.

Time limits

In Breadner v Granville-Grossman, counsel's ingenious argument, in the event of failure in relation to the 1989 appointment, was to find fault with a 1976 appointment in the same trust. This had been executed in the early days of capital transfer tax when there was a rush out of discretionary trusts. Counsel had indeed discovered some defects in the appointment and so argued that, if the 1989 appointment was not declared void, then at least the 1976 one should. Once again, this received short shrift from Sir Andrew Park. As he said, 22 years had gone by without anyone suggesting that there was anything wrong with the appointment. The Hastings-Bass principle was analogous to the law concerning judicial review of the exercise by public bodies of its statutory powers, and in judicial review there are tight time limits. He continued:

'It would be astonishing, and to my mind unacceptable, for the emergent Re Hastings-Bass (deceased) principle to be capable of being invoked in an attempt to upset some action by trustees which may have been taken decades ago (as in this case), and on the basis of which many intervening decisions and actions have been taken.'

This is the first we have heard about a time limit problem. In the Turner v Turner case, a 1967 appointment (along with others) was set aside in 1983. In Green v Cobham, a 1990 appointment was set aside in 1997. It remains to be seen to what extent Sir Andrew Park's evident dislike for the Hastings-Bass principle will colour the decisions reached in future cases, and whether some time limits may be introduced.

'Would' or 'might'?

There is apparently much debate at the Bar on whether the test is that trustees definitely would have acted in some other way, if they had taken all proper matters into account, or whether it is simply sufficient that they might have acted in some other way. There are cases which support both views. I would imagine that in the vast majority of cases the point is completely academic as the reason for them being in court arguing the case will be to have a disastrous result avoided. There is some discussion of the matter toward the conclusion of the judgment in AMP (UK) Plc v Barker [2001] WTLR 1237, where the conclusion reached obiter was that it would be sufficient if trustees might have acted differently.

The point will probably arise only where parties involved have strongly conflicting interests, but that may not be so unusual given that the beneficiary under an appointment which is to be set aside may lose out.

All or nothing?

Does an entire appointment, or trustees' resolution, have to be set aside, or can just the offending parts be struck out? In Mettoy Pensions Trustees v Evans [1990] WLR 157 the court was firmly of the conclusion that in appropriate cases it could declare only the offending part of the document to be void. The principle therefore is not 'all or nothing'.

Generally

Whilst the full scope of the Hastings-Bass principle has perhaps only been recognised in very recent years, causing it to be described as an 'emerging principle', it is in fact nothing more than a branch of trust law which has very early roots. My edition of Lewin on Trusts notes that the court will not generally interfere in the discretions exercised by trustees, but then states:

'But the discretion must be exercised within the limits of a sound and honest execution of the trust, and where the court is of the opinion that the exercise of the discretion has not been proper it will set it aside and regulate the maintenance irrespective of the wishes of the trustees'.

The authority quoted for this is an 1879 case. So, surprising as it may be that Hasting-Bass enabled the trustees in the Abacus case to salvage their tax avoidance scheme, the principle has roots deep in history. Furthermore, it is not simply a creation of the High Court, as there are some pension trust cases from the Court of Appeal where a very similar principle has been recognised. Within the limits I have mentioned, trustees can indeed turn back the clock and no doubt avoid a substantial negligence claim. They will still be left with the costs of the necessary court action, as trustees cannot say that they would obviously succeed in court and so attempt to dispense with the necessary action.

Finally I think it would be correct to attribute much of the recent development of the law in this field, at least as far as tax is concerned, to Nicholas Warren QC, whose name appears as counsel for the trustees in several cases. We still may not be able to get the ink off a tweed jacket, but it seems that the complete typescript in a deed of appointment can be much more easily erased!

Issue: 3850 / Categories: Comment & Analysis