Complex trust structures are usually administered by experienced and conscientious professionals at the top of their game. But mistakes can happen, and fixing them can be hard, time-consuming and expensive.

High net worth families in the 21st century are internationally mobile, and this mobility often requires complex structures spanning a number of jurisdictions. This complexity can occasionally lead to mistakes being made by trustees.

To alleviate the hardship experienced by beneficiaries owing to mistakes made by their trustees, English law developed a doctrine, known as the Hastings-Bass principle (after a case bearing that name), which enables the court to reverse the actions of trustees taken in circumstances where the trustees’ decision was made on the basis of irrelevant considerations, or through their failure to consider relevant factors.

Most, if not all, offshore, common law jurisdictions followed suit and, in a line of authorities in the early 2000s, trustee mistakes were regularly set aside. The most common examples were where the trustees’ failure to consider the tax consequences of a transaction resulted in an otherwise avoidable charge to tax.

This changed in 2013 when the Privy Council held, in Futter v Futter, that Hastings-Bass had gone too far. In a landmark decision, the Court stated that trustees’ decisions would only be reversed if the action resulted from a breach of trust, which can be difficult to show where the trustees have acted on (erroneous) legal advice; and the mistake was sufficiently serious to merit judicial intervention.

In circumstances where the trustees had taken legal advice that proved to be erroneous, said the Court, the remedy was to sue the lawyers. But this is not always possible: first, wrong advice is not necessarily negligent to the point where an action in negligence can be pursued; and second, the trustee may be reluctant to sue the lawyers.

Imagine, for example, that a trustee took a step that resulted in an otherwise avoidable charge to tax in the United States, not knowing that one of the beneficiaries became tax resident there earlier in the year. The failure by the trustee to appreciate the risk may not amount to a breach of trust, and the legal advice, which similarly ignored US tax considerations, may be erroneous but not negligent. Under English law, this would leave the beneficiaries without a remedy.

A number of offshore jurisdictions responded to the Privy Council decision by introducing legislation that reinstated the Hastings-Bass doctrine. Others—including the British Virgin Islands (BVI)—did not, and left the question open for future consideration.

One such consideration took place recently in Gany Holdings (PTC) SA and Asif Rangoonwalla v Zorin Khan v Others, which is a Privy Council decision on appeal from the BVI.

Gany Holdings

In Gany Holdings, the head of the family and father of the main protagonists settled a discretionary family trust known as the ZVM Trust. Following his death in 1998, his daughter Zorin, her husband, and hero daughter made repeated requests for information about the trust from the trustee, Gany Holdings; her brother Asif, who controlled it; and a number of other persons, including lawyers and family members, who had knowledge about the trust.

Zorin’s efforts were unsuccessful over a number of years, and she and her family ultimately issued proceedings against Gany Holdings and Asif for disclosure of information about the trust and an account of the trustee’s dealings with the trust assets.

During the proceedings, Asif and Gany Holdings gave conflicting evidence about the assets received by the trustee. The explanations ranged from statements that the trust had never held any assets at all; to statements that it had, in fact, held shares in a Hong Kong company that had very little value; to statements that those shares had been appointed to Asif in December 1998, following which the Trust had come to an end. At first instance, the court accepted Asif’s version of events, and held that Zorin had failed to disprove his evidence. Zorin’s appeal reached the Privy Council in 2018.

The Privy Council found that the trust had, in fact, held valuable assets in the form of company shares, and that the contradictory evidence given by Asif and Gany Holdings showed that the trustee had failed to appreciate the extent of the assets in the trust fund, such that any appointment or distribution of those assets to Asif was founded on a fundamental mistake. The mistake was serious enough to affect the legality of the transaction, which was therefore reversed.

The Privy Council also helped Zorin (and other beneficiaries who may follow in her footsteps) in one other, significant way.

Up until this case, a trustee who failed to take into account the interests of beneficiaries such as Zorin, may have been able to say: “But so what? Even if I had taken her interests into account, I, or another trustee acting reasonably on an informed basis, would have acted in the same way. The result would have been the same.”

Unless the trustee’s decision was fraudulent, or so capricious as to be completely bizarre, it would be almost impossible for a beneficiary to show that a reasonable trustee would have acted differently. Showing that a reasonable trustee might have acted differently was only marginally easier. In Gany Holdings, the Privy Council said this was not part of the legal test, but rather one factor among others that the court would take into account.

The Court also held that there was no legal presumption that a transfer of assets to a person acting as trustee was intended as a settlement of the assets. If there is a dispute as to whether or not assets are held in trust, a court would look first to any written or oral declaration made by the settlor and/or the trustee. If no such declaration was made, the court would look at the factual circumstances surrounding the transfer to try and ascertain the intention from the conduct of the parties. If no such intention could be inferred from their conduct, the legal presumption of a “resulting trust” would arise, meaning that the assets would be seen as having remained in the ownership of the transferor.

Implications

There are a number of important lessons to be learned from the doctrine of Hastings-Bass and Gany Holdings. Prevention is better than cure and, while it is not always possible to avoid mistakes, there are steps that can minimise the risk of them happening.

• Regular communications between trustees and beneficiaries are key.
  • Trustees should take the initiative to truly know and understand the circumstances of the family for whom they hold assets, and keep themselves up to date on changes and developments in their beneficiaries’ life choices.
  • Family members should ensure they share their news with their trustees and tell the trustees if they, for example, plan to educate a child abroad; if their leisure or business travel takes them regularly to other jurisdictions where they may become inadvertently tax resident; or if they plan to buy assets or property for their use and benefit in another country, as this may also have unintended tax consequences.
• Different jurisdictions offer different advantages or disadvantages in terms of their trust legislation. The needs of beneficiaries vary from family to family, and even within the same family they can vary over time or at the point of generational change. Understanding those needs and having a good knowledge of the relevant legislation across the common law world may contribute to wealth preservation and the ultimate benefit of the families.
• The jurisdiction of the court to reverse trustee mistakes can be an important safeguard for beneficiaries. Both trustees and beneficiaries should be aware of what is available, and act quickly if it appears that a mistake has occurred in the administration of the trust. There may be ways to fix the problem without engaging in lengthy and