Cutting through conceptual thickets

The impugned transactions

In the Matter of Settlements made by Declarations of Trust dated 9 May 2013 concerned three Cayman Islands-law-governed trusts established in 2013 by a husband and wife domiciled in an onshore jurisdiction. The purpose of the trusts was to preserve and accumulate largely inherited family wealth. The two initial trustees were lay individuals who were close friends of the settlors. Neither trustee had ever acted as a professional trustee nor had they received any remuneration throughout their trusteeship of the trusts.

The trusts were each settled with USD100 and, in early 2014, the shares of a Cayman Islands company were transferred to each of the three trusts. Neither the settlors nor the initial trustees in the settlors’ domicile sought tax advice about the implications of establishing the trusts in this manner.

By the end of 2019, the two lay trustees had retired and been replaced by a Cayman Islands professional corporate trustee. One of the settlors had died and, in response to a contemplated restructuring in 2021, tax advice was taken on the structures for the first time. The tax advice confirmed that the transfer of assets to the trusts had triggered potentially significant tax liabilities and penalties covering several years. As noted by Justice Kawaley in the decision:

‘It was obvious that had appropriate tax advice been taken at the relevant time, the settlements would not have been made.’^[5]

Accordingly, the new trustees applied on an urgent basis to set aside the transfers made to the three trusts, pursuant to the s.64A statutory jurisdiction. The Grand Court of the Cayman Islands (the Court) noted that, without exception, all adult beneficiaries had essentially the same interests and fully supported the relief sought by the trustees.

One of the settlors’ children was appointed to represent the minor and unborn beneficiaries and the consensus among all beneficiaries, as confirmed by the evidence filed, was that their common interests would be best served by the trustee’s application. The effect of a successful application would be that the relevant assets would revert to the ownership of the surviving settlor and the adult beneficiaries confirmed that they were content to benefit through the surviving settlor’s personal succession arrangements. Further, the surviving settlor confirmed her unequivocal intention to pay whatever sums were lawfully due to the relevant tax authorities should the trustee’s application be successful.

The application was dealt with on the papers and, on 5 September 2023, the Court granted the relief sought declaring the relevant transfers void ab initio. Noting that there were no reported decisions applying this relatively new statutory regime, Kawaley J subsequently delivered written reasons for his decision on 28 September 2023.

The statutory regime

Under s.64A(1), the Court has jurisdiction to:

‘(a)  set aside the exercise of a fiduciary power, either in whole or in part, and unconditionally or on such terms and conditions as it thinks fit; and

‘(b)  to make such consequential orders as it considers appropriate, provided that the conditions set out at s.64A(2) of the Cayman Islands Trusts Act (2021 Revision) (the Trusts Act) are met.’

Described by Kawaley J in the decision as the ‘pivotal conditions for the Court exercising the jurisdiction’,^[6] the s.64A(2) conditions are as follows:

‘(a)  In the exercise of the power, the person who holds the power did not take into account one or more considerations (whether of fact, law or a combination of fact or law) that were relevant to the exercise of the power, or took into account one or more considerations that were irrelevant to the exercise of the power; and

‘(b)  But for that person’s failure to take into account one or more such relevant considerations or that person having taken into account one or more such irrelevant considerations, the person who holds the power –

(i)   would not have exercised the power;

(ii)   would have exercised the power, but on a different occasion to that on which it was exercised; or

(iii)  would have exercised the power, but in a different manner to that in which it was exercised.’

Section 64A(4) expressly confirms that the s.64A(2) conditions may be satisfied without it having to be alleged or proven that, in the exercise of the power, the power holder acted in breach of trust or fiduciary duty.

An application pursuant to s.64A can be made by the power holder; a trustee, beneficiary or enforcer of a purpose trust; the Attorney General in respect of a charitable trust; or any other person with the leave of the Court (s.64A(5)). A ‘fiduciary power’, which includes a discretion as to how an obligation is performed, is defined as ‘any power that, when exercised, must be exercised for the benefit of or taking into account the interests of at least one person other than the person holding the power’. A power holder expressly includes a person to whom a power has been delegated.

By s.64A(3), where the exercise of a power is set aside under s.64A, it shall be treated as never having occurred. However, no order can be made under s.64A(1) if it would prejudice a bona fide purchaser for value of any trust property without notice of the matters allowing the Court to set aside the exercise of the power.

The Court’s guidance

In considering the trustees’ application, Kawaley J accepted the trustee’s submission that, following the enactment of s.64A, ‘it is now only necessary to consider the terms of the statutory provision itself’.^[7] However, he also accepted the settlor’s submission that, in the absence of case law applying the statutory regime, the Court should also consider the evolution of the rule in Re Hastings-Bass and the legislative intent behind s.64A on the basis that:

• The rule in Re Hastings-Bass as developed in English and Welsh case law has been applied in the Cayman Islands^[8] to inform the Court’s statutory jurisdiction under s.48 of the Trusts Act, by which a trustee may make an application for opinion, advice or direction on any matter concerning the management or administration of trust property.
• The Re Hastings-Bass jurisdiction was a very ‘broad and flexible one’^[9] until the UK Supreme Court narrowed the jurisdiction in Pitt v Holt to one in which the inadequate deliberation by the trustee must be sufficiently serious to amount to a breach of fiduciary duty.
• Following the decision in Pitt, the Cayman Islands, along with other offshore jurisdictions, enacted legislation ‘broadly designed to override the constraining effect of Pitt v Holt’.^[10]
• Accordingly, the starting point for the exercise of the statutory regime must be the provisions of s.64A of the Trusts Act.

Kawaley J noted that the case law prior to the introduction in Pitt of the requirement of a breach of fiduciary duty is likely to be of assistance when applying the statutory regime pursuant to s.64A of the Trusts Act. He noted:

‘[T]his conclusion is primarily justified by a straightforward reading of the main strands of the statutory language itself, which corresponds closely to the language developed in the previous case law.’^[11]

However, he went on to conclude that although the s.64A jurisdiction cuts through the ‘conceptual thickets’^[12] erected by Pitt, the Court is still required to find facts that would have amounted to the improper exercise of a fiduciary power, either by relevant matters having been ignored or irrelevant matters having been taken into consideration. He further noted:

‘[T]his is to my mind likely in many (if not most) cases to be indistinguishable (legal labelling apart) from having to establish a breach of the fiduciary duty of due deliberation in conceptual terms.’^[13]

That said, the statutory jurisdiction ‘can confidently be construed as intending to facilitate a flexible approach to setting aside the flawed exercise of fiduciary powers’ because the clear intent of the legislation was to sidestep the narrowing of the jurisdiction by Pitt. The Court will generally be required to give effect to this ‘important legislative purpose’,^[14] subject, of course, to appropriate limitations as the facts of each case require. Further, Kawaley J held that, under the statutory regime, the flawed exercise of a fiduciary power is expressly void; whereas the obiter findings in Pitt were that an impugned transaction is merely voidable.

Although not expressly required by the language of s.64A, based on the decision in Re Hastings-Bass itself, Kawaley J suggested that there is an additional implied requirement of good faith. Although this point will be subject to further analysis in future cases, he put it this way:

‘In my judgment the starting assumption ought to be that, by necessary implication, section 64A relief can only be obtained when the applicant has acted in good faith in relation to the impugned transaction and has not deliberately pursued a course of conduct designed to gain some undisclosed and impermissible onshore tax advantage, not indeed designed to procure any other improper benefit.’^[15]

Conclusion

Kawaley J’s decision provides welcome guidance on the proper interpretation and application of s.64A. However, as he notes at para.25 of his decision, his analysis of the regime focuses on a traditional application by a trustee:

‘[S]omewhat different considerations might well apply if the applicant is not a trustee, especially if they are not even a beneficiary, enforcer, holder of the power of the Attorney General, but are invoking the catch-all standing category of “…any other person”.’^[16]

It will be interesting to see how this statutory jurisdiction develops and whether any of the ‘conceptual thickets’ of Pitt weave their way back into the jurisdiction when considering applications by those other than the trustee of the trust.