Will Dispute News – Supreme Court decision in Pitt v Holt and Futter
The Supreme Court (SC) has reached a decision in the appeals in Pitt v Holt (Pitt) and Futter v Futter (Futter) relating to the “rule in Hastings-Bass” (the Rule).
The Rule permits discretionary acts by trustees to be set aside where they have failed to take into account relevant considerations, for example that the effect of the exercise of their powers was different from that intended.
This rule is important as it had been historically been used to set aside actions taken by trustees based on professional advice which subsequently turned out to be wrong.
In the case of Pitt, following advice from financial advisers, monies received from a personal injury claim were transferred into a discretionary trust. Unfortunately, this had unintended adverse inheritance tax consequences, which could have been avoided if the trust had been established differently.
In Futter powers of advancement under a discretionary trust were exercised in accordance with legal advice received which failed to achieve the aim of avoiding capital gains tax.
At first instance the judges held that the actions could be set aside relying on the Rule.
Court of Appeal
HMRC appealed both decisions successfully. The Court of Appeal (CA) decided that the correct extent of the Rule was that, where a trustee does an act which falls within the scope of his power, it may be voidable on the basis that he has failed to take relevant matters into account, but this will only be the case where that failure amounts to a breach of fiduciary duty.
The CA held that, while financial considerations will often be among the relevant matters which trustees take into account, if the trustees seek and follow advice from apparently competent advisers as to the implications of the proposed course of action, then they will not generally be in breach of fiduciary duty if the advice turns out to be wrong.
Accordingly, in Pitt and Futter the CA held that the trustees had not acted in breach of their fiduciary duties as they had both relied on professional advice on the relevant issues.
The SC have now agreed with the CA’s decision on the application of the Rule.
However, in doing so, they did grant an appeal in the case of Pitt permitting the actions to be set aside on the ground of mistake. The CA held for mistake to operate there must be a “causative mistake” of sufficient gravity, which was to be distinguished from, for example, ignorance or forgetfulness. The “sufficient gravity” test will normally be satisfied when there is a mistake either as to the legal character or nature of a transaction or as to some matter of fact or law which is basic to the transaction.
Consequences such as tax implication are relevant to the gravity of the mistake and whether it would be unconscionable to leave it uncorrected.
The CA’s decision, which represented a shift in the interpretation of the Rule has therefore been approved and the effect will be to restrict the use of a common method of mitigating claims against professionals who advise trustees on financial and fiscal matters.