Abacus Trust – Counting The Cost

Article by Matthew Lawson and Emma Trinick

Re Hastings-Bass (1975) was a case where the trustees of a trust settlement wished to avoid estate duty by transferring part of the trust fund to the trustees of another settlement. It later became clear from case-law that the new sub-trust was invalid. The question to be decided by the court was whether the whole transaction failed or whether the transfer itself was valid, thus avoiding the estate duty. The court established a principle which subsequent case law has stated more clearly as follows: "… 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." (Mettoy Pension Trustees Ltd v Evans (1990)).

This principle has since been applied, not only to cases where legal principle invalidated the trustees’ actions but also to cases of human error, with the effect that where it could be shown that a trustee would have done nothing or exercised their power differently had they properly understood the effects of their action, the whole purported exercise of the trustees’ discretion would be void ab initio.

This application and extension of the principle has thus been used to avoid situations where professional advisors gave negligent advice to trustees and the trustees took a decision based on that advice which had unforeseen consequences for the trust (for example, adverse tax consequences).

There have been numerous concerns raised by both judges and commentators along the lines that the principle in Re Hastings-Bass has been taken too far. In Breadner v Granville- Grossman (2001), Park J. stated that: "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". Sir Robert Walker (speaking extrajudicially) has also questioned:

"…why the Chancery Division, rather than the parties’ professional indemnity insurers, should have to pick up the pieces".

In Abacus Trust & Another v Barr & Others (2003),* the settlor of a trust decided that he would exercise a power of appointment conferred under the trust settlement to appoint 40% of the trust fund for the benefit of his sons. The settlor told professional advisors, who were found to be agents of the trustees, to relay his wishes to the trustees. Unfortunately, the professional advisor misinterpreted the settlor’s wishes with the effect that the trustee appointed 60% of the fund for the benefit of the settlor’s sons. Although the mistake in the appointment was identified far earlier, it was not until ten years later that the parties challenged the appointment under the principle in Re Hastings-Bass.

In his judgment, Mr Justice Lightman appears to have limited the application of the principle in two respects. Firstly, he held that for the principle to apply, it had to be established that the trustee, in exercising his power, acted in breach of duty by failing to consider what he was under a duty to consider. If the trustee, in accordance with his duty, identified the relevant considerations and obtained advice relating to those considerations, he could not be held to be in breach of duty and his decision could not be impugned merely because that information turned out to be partial or incorrect.

Secondly, Mr Justice Lightman went on to hold that a successful application of the principle resulted in the appointment being voidable and not void ab initio.

The apparent requirement for a breach of duty may raise more questions than it answers. It appears to rule out invoking the principle merely because the trustees’ decision was in some way mistaken or had unforeseen or unpalatable consequences. At first blush, this would seem to cover the circumstances in which professional advisors give negligent advice as a result of which trustees fail to take into account a relevant consideration which, for example, leads to unfortunate tax consequences. However, on the facts Lightman J held that the trustees in Barr had breached their duty. One interpretation of his judgment is that they did so merely through the fault of their agent, the professional advisor who failed to pass on correctly the wishes of the settlor. This would seem to suggest that the requirement for a breach of duty may be satisfied by an error on the part of the professional advisors for which the trustee must take responsibility. On the other hand, Lightman J arguably relied on an independent failure by the trustees – a failure adequately to obtain or confirm the settlor’s wishes. That raises the prospect of trustees, on different facts, being found to have relied reasonably on the actions or advice of an agent or other advisor whose own breach of duty will not therefore be enough for the trustee to invoke the principle in Re Hastings-Bass.

The ruling that the act of the trustees is voidable, rather than void ab initio, means that in any event there will in future have to be a detailed inquiry, taking account of all relevant circumstances, to establish whether or not a decision by the trustees should be avoided. The court may look at factors such as how long it has taken the parties to challenge the decision and whether the parties have previously taken actions on the basis that the decision was a valid one, for example, by paying money out of the trust. However, ultimately, the matter will be decided by judicial discretion.

Although grey areas remain following the decision in Barr, the scope for trustees and professional advisors to avoid the adverse consequences of their wrong or incomplete advice or actions under the principle in Re Hastings-Bass has been limited. Even if the principle does still apply to a particular set of facts, a detailed inquiry will still take place because the court will have to consider whether the action of the trustees should in the circumstances be avoided or not. However it is interpreted in the future, Barr may herald a shift towards pursuing the professional advisers of trustees, rather than seeking to nullify the effect of the decision made by the trustees by relying on Re Hastings Bass.