Pitt v Holt [2011] EWCA Civ 197
As receiver under the MHA 1983 (old equivalent to deputy under the MCA 2005) for her husband, Mrs Pitt set up a settlement trust which overlooked the impact of inheritance tax (the linked case of Futter case did not involve mental capacity so is not summarised here). (1) The court considered the Hastings-Bass rule, including the distinction that an act in the exercise of a dispositive discretion is (a) void if done by trustees outside the scope of the relevant power, but may be (b) voidable if done within the terms of their power but in breach of a fiduciary duty (the same principles apply to others in a fiduciary position, including receivers). (2) Mrs Pitt's acts were within the terms of the power conferred by the Court of Protection, so were not void. They were not voidable either, as she had taken professional advice (albeit inadequate advice) from a proper source as to the advantages and disadvantages of the various courses open to her. (3) For a voluntary disposition to be set aside on the basis of mistake: (a) the donor must be mistaken, at the time of the disposition, as to its legal effect or as to an existing fact which is basic to the transaction; and (b) the mistake must be of sufficient gravity to satisfy the Ogilvie v Littleboy test (which provides protection to the recipient against too ready an ability of the donor to seek to recall his gift). (4) Mrs Pitt was under a mistake (she believed that the transaction would not have any tax disadvantages) which met the Ogilvie v Littleboy test, but unforeseen fiscal liabilities are a consequence, not a legal 'effect', so the disposition would not be set aside.
Related judgments
Pitt v Holt [2013] UKSC 26, [2013] MHLO 46
ICLR
The ICLR have kindly agreed for their WLR (D) case report to be reproduced below.
Catchwords
TRUSTS — Trustee — Settlement — Exercise of trustees’ powers — Mistake — Failure to have regard to tax consequences of exercise of powers — Trustees seeking advice before exercising powers and acting on advice — Trustees subsequently discovering advice incorrect — Whether transactions voidable as breach of trust or on grounds of mistake — Whether transactions to be set aside
Headnote
Where trustees, acting within their powers, carried out a transaction which was said to be vitiated by breach of trust on the ground that the trustees failed to have regard to a relevant matter, and where the reason that they did not have regard to it was that they had obtained and acted on advice from apparently competent advisers which turned out to be incorrect, then the charge of breach of trust could not be made out and the transaction was not voidable.
The Court of Appeal so stated in allowing two appeals by the Revenue and Customs Commissioners. The first, in which the revenue appeared as the second defendant, was from the decision of Robert Englehart QC sitting as a judge of the Chancery Division in Pitt v Holt [2010] 1 WLR 1199B, setting aside the discretionary special needs trust executed in 1984 by the claimants, Patricia Madge Pitt (the widow and personal representative of the estate of her late husband, Derek Pitt) and David Neville Waite Shores, her co-trustee, together with the predecessor of the third trustee, David Langford Holt, the first defendant, on the ground that the settlement had been ineffective owing to a failure to consider the inheritance tax liabilities to which it would (and did) give rise.
The second appeal, in which the revenue appeared as the fifth defendant, was from the decision of Norris J in Futter v Futter [2010] Pens LR 145, granting a claim by the claimants, Mark Stephen Futter and his adviser, Clive Donald Cutbill, to set aside two transactions exercising powers of enlargement and advancement under two discretionary trusts, in such a way as to avoid incurring a charge to capital gains tax. The power of enlargement had been exercised in favour of Mr Futter, and that of advancement in favour of his three children, Adam Jacob Futter, James Daniel Futter and Natalie Helen Futter. The premise on which the transactions had been made turned out to be incorrect and the claimants sought to have the transactions declared void and of no effect.
Both cases had been decided on the application of the rule in In re Hastings-Bass, decd [1975] Ch 25 in circumstances to which the revenue contended it did not or should not apply. The court comprehensively considered and restated the correct principle on which the rule in In re Hastings-Bass, decd had been based.
LLOYD LJ said that the purported exercise of a discretionary power on the part of trustees would be void if what was done was not within the scope of the power. Otherwise, it would be valid. If an exercise was within the terms of the power but the trustees had in some way breached their duties in respect of the exercise, then (in the absence of fraud on a power) the trustees’ act was not void but might be voidable. If no relevant person took steps to have it set aside, it was valid and effective.
Where matters of tax were relevant, as they often would be, it was likely to be part of the duties of the trustees, under their duty of skill and care, to take proper advice as to those matters. However, if the trustees, aware of the need to consider relevant matters, sought advice as to the position while considering what, if anything, to do under their discretionary powers, then unless the process of taking and acting on the advice was itself open to challenge in some way, the trustees could not be said to be in breach of their duty if they proceeded to address the exercise of their discretionary power on the basis of the advice given to them as to, for example, tax consequences. Accordingly, in a case where the trustees’ act was within their powers, but was said to be vitiated by a breach of trust so as to be voidable, if the breach of trust asserted was that the trustees failed to have regard to a relevant matter, and if the reason that they did not have regard to it was that they had obtained and acted on advice from apparently competent advisers, which turned out to be incorrect, then the charge of breach of trust could not be made out.
The principled and correct approach to these cases in which trustees’ acts were said to be vitiated by their failure to take into account a relevant factor to which they should have had regard, was, first, that in such a case the trustees’ act was not void, but it might be voidable. It would be voidable if, and only if, it could be shown to have been done in breach of fiduciary duty on the part of the trustees. If it was voidable, then it might be capable of being set aside at the suit of a beneficiary, but this would be subject to equitable defences and to the court’s discretion. The trustees’ duty to take relevant matters into account was a fiduciary duty, so an act done as a result of a breach of that duty was voidable. Fiscal considerations would often be among the relevant matters which ought to be taken into account. However, if the trustees sought advice (in general or in specific terms) from apparently competent advisers as to the implications of the course they were considering taking, and followed the advice so obtained, then, in the absence of any other basis for a challenge, the trustees were not in breach of their fiduciary duty for failure to have regard to relevant matters if the failure occurred because it turned out that the advice given to them was materially wrong. Accordingly, in such a case the trustees’ act, done in reliance on that advice, could not be regarded as being vitiated by the error and therefore voidable.
That was the correct statement of the principle. The principle known as the rule in In re Hastings-Bass, decd [1975] Ch 25, as developed in later cases from Mettoy Pension Trustees Ltd v Evans [1990] 1 WLR 1587Not on Bailii! onwards, was not a correct statement of the law. His Lordship then went on to apply the correct principle to the two instant cases.
In the case of Futter v Futter, the trustees had approached the issue of whether to make any, and if so what, enlargement or advancements out of the two settlements in a proper manner, taking and relying on advice from suitable professional advisers. They had failed to take into account a relevant matter, namely the prospective charge to capital gains tax on the distributions which the enlargement and advancements represented, but they did so in reliance on the advice obtained. It followed that the enlargement and the advancements were not only not void, because they were within the relevant powers of the trustees, but they are also not voidable, because no breach of fiduciary duty had been committed in the process of making them.
In Pitt v Holt Mrs Pitt had fulfilled any duty of skill and care she was under by looking for advice to her solicitors and could not be said to have been acting in breach of her fiduciary duties to Mr Pitt in entering into the deeds. The contention that the settlement and assignment were voidable on the principles discussed so far had to be rejected. However, there remained the contention, rejected by the judge, that the transaction was voidable by reason of mistake. For the equitable jurisdiction to set aside a voluntary disposition for mistake to be invoked, there had to be a mistake on the part of the donor either as to the legal effect of the disposition or as to an existing fact which was basic to the transaction. Moreover the mistake had to be of sufficient gravity as to satisfy the test in Ogilvie v Littleboy (1899) 15 TLR 294, which provided protection to the recipient against too ready an ability of the donor to seek to recall his gift. The fact that the transaction gave rise to unforeseen fiscal liabilities was a consequence, not an effect, for this purpose, and was not sufficient to bring the jurisdiction into play. In this case, even though Mrs Pitt had been under a mistaken belief at the time of the disposition, and it was a mistake of sufficient gravity to satisfy the Ogilvie v Littleboy test, nevertheless it was not a mistake as to the legal effect of the disposition, and it therefore did not qualify as a basis for invoking the jurisdiction of equity to set aside a voluntary disposition for mistake.
LONGMORE and MUMMERY LJJ gave concurring judgments
Other
Pitt and another v Holt and another
Futter and another v Futter and Others
[2011] EWCA Civ 197B; [2011] WLR (D) 84
CA: Mummery, Longmore, Lloyd LJJ: 9 March 2011
Appearances: Philip Jones QC and Ruth Jordan (instructed by the Solicitor, HM Revenue and Customs) for the revenue; William Henderson (instructed by Thring Townsend Lee & Pembertons) for the respondents in Pitt v Holt; Richard Wilson and Jennifer Seaman (instructed by Withers LLP) for the respondents in Futter v Futter.
Reported by: Ken Mydeen, barrister
Citations
[2011] EWCA Civ 197B, [2011] WLR (D) 84, [2011] All ER (D) 101 (Mar)