Apr 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 are 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. The question that has not yet been determined by the Court is, does this extend to company directors and other fiduciaries? When looking at English case law, the approach to this question has been varied, as discussed below.
Hunter v Senate Support Services LTD and Others
Hunter 5 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 Holt
The first‑instance decision in Pitt 6 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 HMRC
In Segesta,7 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 & Ors
The decision of Power Adhesives Ltd 8 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 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.
This article was originally published in STEP Journal, Issue 2, 2023.
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