A v Rothschild Trust Cayman Ltd

• Jurisdiction: Cayman Islands
• Judge: (Smellie, C.J.)
• Judgment Date: 04 August 2005
• Court: Grand Court (Cayman Islands)
• Date: 04 August 2005

Grand Court

(Smellie, C.J.)

A and SIX OTHERS

and

ROTHSCHILD TRUST CAYMAN LIMITED

Mrs. S. Warnock-Smith, Q.C. and Mrs. M.P. Crinis for the plaintiffs;

Ms. S.J. Collins for the defendant.

Cases cited:

(1) Abacus Trust Co. (Isle of Man) Ltd. v. Barr, [2003] 1 All E.R. 763; [2003] EWHC 114, considered.

(2) Abacus Trust Co. (Isle of Man) Ltd. v. NSPCC, [2001] S.T.C. 1344, considered.

(3) Barclays Private Bank & Trust (Cayman) Ltd. v. Chamberlain, Grand Ct., Cause No. 475 of 2004, unreported, referred to.

(4) Edge v. Pensions Ombudsman, ELR[2000] Ch. 602; [1999] 4 All E.R. 546, referred to.

(5) Gisborne v. GisborneELR(1877), 2 App. Cas. 300, referred to.

(6) Green v. Cobham, [2002] S.T.C. 820, considered.

(7) Hastings-Bass decd., In re, [1975] Ch. 25; [1974] 2 All E.R. 193, applied.

(8) Mettoy Pension Trustees Ltd. v. Evans, [1990] 1 W.L.R. 1587; [1991] 2 All E.R. 513, considered.

(9) Scott v. National Trust, UNK[1998] 2 All E.R. 705, referred to.

(10) Sieff v. Fox, [2005] 3 All E.R. 693; [2005] EWHC 1312, applied.

Legislation construed:

Trusts Law (2001 Revision) (Law 6 of 1967, revised 2001), s.48: The relevant terms of this section are set out at para. 42.

Trusts-beneficiaries-repayment of advancement-distribution under void trust invalid and must be repaid-if long delay before invalidity discovered and difficult to reverse distributions without hardship, court may have power to declare voidable from date of discovery

Trusts-powers and duties of trustees-exercise of discretion-duty to take into account all relevant but no irrelevant factors, including tax consequences of actions-if trustee exercises fiduciary discretion improperly, not for benefit of beneficiaries, actions may either be declared void ab initio or voidable from when recognized-fails to give proper consideration to relevant factors if given incorrect legal advice by legal advisers

The plaintiffs applied for orders declaring that the restatements of original settlements into subsequent settlements were invalid and void.

The first plaintiff, the primary beneficiary and settlor of the original settlements governed by Cayman law, contemplated that he would be spending extended periods of time in the United States and would therefore become a US resident for tax purposes, and the concern arose that under US law the assets of the trusts would be deemed to be his and therefore that the income would be liable to tax as his income. According to legal advice, the original trusts could not be restructured, but had to be restated to avoid those consequences. The defendant trustee accepted and acted upon that advice (by creating new trusts), but these actually gave rise to the tax consequences it was intended to avoid. In fact, only minor amendments to the original settlements would have been required.

The plaintiffs sought to have the original settlements restored in order to make the necessary changes, and to avoid the otherwise potentially severe tax consequences of the defendant trustee”s reliance upon erroneous legal advice.

The defendant submitted that (a) it had acted in error, in a manner which could not be described as being for the benefit of the beneficiaries, even though that was what had been intended; and (b) had it received the correct advice and been aware of the true consequences of the new trusts it would not have concluded that they were for the benefit of the beneficiaries and would therefore not have created them.

Held, declaring the restatements void ab initio and restoring the original settlements:

(1) The fiduciary duty vested in the trustee, which governed the exercise of its fiduciary powers, required it to take into account all of the relevant but no irrelevant factors. The tax consequences of the transactions were matters which it was under a duty to consider, and which it did in fact consider, but to which it failed to give proper consideration because its legal advisers gave incorrect advice. The trustee had therefore made and acted on decisions taken under a mistaken or seriously flawed understanding as to the nature of the benefit to be conferred as the consequence of its decision, and could not be said to have exercised its discretion properly for the benefit of the beneficiaries. Having acted improperly, and given that its reliance on incorrect legal advice was fundamental to the erroneous exercise of its discretion, the declaratory order would vitiate ab initio the new trusts. It remained open, in a suitable case, for the court to decide that it had the discretion to declare a trustee”s exercise of discretion voidable rather than void (paras. 13–14; para. 24; para. 28; paras. 37–38; paras. 40–41).

(2) The new trusts being void ab initio, the one invalid distribution made under them had to be repaid. Had the error come to light later, however, after many distributions and other payments from the fund which could not have been reversed without great hardship to the beneficiaries or liability for the trustees, the court might have had the power to vitiate the exercise of discretion pro tanto, from the time the problem was recognized (paras. 24–28; paras. 37–38).

(3) The wide powers and discretion conferred under the Trusts Law (2001 Revision), s.48 were convergent with the evolving Hastings-Bass principle and would permit the court to intervene, as the justice of the case required, to avoid or mitigate a fiscal consequence which would be injurious to the interests of innocent beneficiaries, notwithstanding that other recourse might be available to them against the ill-advised or mistaken trustees or their advisers (paras. 42–43).

1 SMELLIE, C.J.: The plaintiffs applied for orders declaring that the restatements of certain original trust settlements into certain subsequent settlements made on December 31st, 2001 were invalid and void. The subsequent settlements are referred to as ‘the 2001 transactions.’ They were entered into by the defendant trustee in the following circumstances.

2 When, in March 2001, the first plaintiff, A, who is also the primary beneficiary and settlor of the original settlements, contemplated that he would be spending extended periods of time in the United States and would therefore become a resident of the United States for tax purposes, the concern arose that by operation of US law the assets of the trusts would be deemed to be his assets and so their income deemed to be liable to tax as his income.

3 The 2001 transactions were made on the basis of legal advice to the effect that, without them, there would be those severe tax consequences. It was also advised that the original trusts could not be restructured to avoid those consequences and that it was necessary instead entirely to restate the settlements in the manner of the 2001 transactions. This advice, which was accepted and acted upon by the defendant trustee in the 2001 transactions, turned out to be incorrect and the tax consequences of the 2001 transactions themselves turned out to be the very consequences which they were intended to avoid.

4 The correct advice is that instead of the 2001 transactions, only certain minor amendments to the original settlements were and are required to achieve the intended result.

5 All the settlements are expressed to be governed by the laws of the Cayman Islands, hence the application to this court. The plaintiffs (including ATC Cayman Ltd. as successor trustee) seek to have the original settlements restored in order to make the necessary changes and to avoid the otherwise potentially severe consequences. The immediate result would be that the assets held in the trusts created by the 2001 transactions will revert to being held in the trusts of the original trusts. In

order to bring this about, they applied for the declaratory orders mentioned in para. 1 above and those orders were granted. These are the reasons for the grant of those orders.

6 The defendant, as the sole trustee of the original trusts at the material time of the 2001 transactions, supported the application and, in particular, affirmed that it acted in error and thus in a manner which could not be described as being for the benefit of the...