Hawk-i Newsletter - Issue 5 - March 2013

Issue 5 | March 2013

Thinking

beyond

tomorrow

In this issue page 2

A welcome to Hawk-i from Peter Murley

page 3

Guest column: Captive Insurance …is it for me? - Richard Packman, Vantage Limited

page 4

The New UK-Swiss Tax Treaty

page 6

Middle East and Switzerland offices – market update

page 7

Guest column: The view of the protector - Stuart Pryke, Fiduciary Business Group

page 8

Protectors - a settlor's friend - and a trustee's too?

page 10

Mistake, Hastings Bass and the Jersey Court’s approach

| March 2013

We have had an exciting few months at Hawksford and 2013 has got off to a very busy and positive start.

Acquisition We are delighted to announce that in February we acquired Jersey based company, Key Trust. Key Trust had established a very strong reputation with skilled, experienced staff and excellent clients. The staff from Key Trust will maintain their client relationships and will integrate fully into the Hawksford team over the next few months. This provides both Hawksford and Key Trust’s clients with an even greater resource pool of experts. We are pleased to be able to welcome Key Trust’s clients to the Hawksford Group.

We are building our business to provide better choice for our clients and to ensure our stability in the market. We will not however lose sight of what matters most: providing high quality, personalised, good value service for our clients.

New system Following a three month testing and incubation period, our new client administration system, Jobstream, was introduced to the business in November.

The rigorous testing we underwent paid off and the transition to the new system

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went very smoothly. We are already seeing improvements as the new system enables us to be more efficient in the way we work.

Client research At Hawksford, we understand the importance of providing top quality service.

We also understand that no company is perfect. For this reason we invest significantly in research to understand what our clients think we are doing well and what we need to improve on.

We have now completed our second round of client insight research. We were very encouraged to see such positive overall results and we are working on action plans to address the areas you told us we need to focus on.

You will hear more about the results and what we’re doing to improve in the next issue of Hawk-i.

Peter Murley Chief Executive Officer T: +44 (0) 1534 740132 E: peter.murley@hawksford.com

Captive Insurance …is it for me?

Vantage Limited is regulated by the Jersey Financial Services Commission.

Richard Packman Managing Director Vantage Limited T: +44 (0) 1534 706503 E: richard.packman@vantage.je www.vantage.je

It is well known that the conventional insurance market frequently fails to meet the needs of the buyer, with criticism usually falling into one, or more, of three categories – price, cover, and service.

What if you could have more control of these elements? What if you could form your own insurance company for your own purposes? Well, the captive insurance market can allow this.

People forming their own insurance companies to insure the risks of the owners dates back to the dawn of the modern insurance industry. From the 1920s, more and more larger corporations established their own insurance companies, but the term “captive” (as we know it today) was first used in the 1950s. A US industrial company in Ohio had a series of mining operations and its management referred to the mines whose output was put solely to the corporation’s use as captive mines. When they incorporated their own insurance subsidiaries, they were referred to as captive insurance companies because they wrote insurance exclusively for the captive mines.

Today the captive insurance industry is still growing, with thousands of captives established in more than 50 jurisdictions around the world. The rate of captives traditionally develops in response to “hard” insurance markets (where premiums increase), although they are to be regarded as part of a longer term risk management strategy, rather than short term cost saving vehicles.

Why do it?

The conventional insurance market can be a cumbersome and inflexible risk management tool.

Commonly located in an offshore domicile, the captive will be licensed by the local regulator to operate either as an insurance or reinsurance company.

Creating a captive insurance vehicle provides a bona fide self-insurance mechanism, which can offer a superior alternative to the traditional insurance market for all, or sometimes just part, of an insurance programme. Advantages fall broadly into two categories:

Invariably the premium paid into the captive will not be sufficient to cover the overall exposure insured within; for example, a £1million premium spend for a portfolio of 50 properties valued at £10million each. The captive will therefore purchase reinsurance protection to cover this additional financial risk. Reinsurance increases the captive’s underwriting capacity and enables it to stabilise its underwriting results. Pound for pound, reinsurance is cheaper to buy than primary insurance as it is effectively buying from the wholesale market, and reinsurers do not have the front-line overheads of insurance companies.

• the opportunity to retain underwriting profit derived from better than average loss records or niche portfolios of insurance business where the traditional market offers little or poor value; and/or • cost effective risk transfer where the traditional market is applying high rates, restricted cover, increased deductibles or where there is limited capacity.

Captives can offer a degree of insulation from the unpredictable swings of the insurance market cycle, and additional benefits such as direct access to the reinsurance market, positive cash flow, capital leverage, investment income and bespoke cover all contribute to the rationale.

How does it work?

In short, a captive is a specific insurance company established to insure specific risks.

In most cases a captive insurer’s owner and its customer(s) - the insured(s) - are one and the same, which results in captives being different from commercial insurance companies.

A captive is a registered and authorised insurance company established to write all or part of the risks of a company, its affiliates, or for the members of a group.

Traditionally they have been subsidiary companies of their parent (whose risks they underwrite) however there are now numerous additional uses for such vehicles - including the writing of third-party risks.

Who is it for ?

Traditionally captives have been used by corporations for their commercial insurance risks (PLCs, private companies, the public sector, and trade associations) and there is still growth in this area, but more recently interest is being received from private clients. High net worth individuals and family offices with significant premium spend are realising the benefits of a selfinsurance arrangement. They may have substantial property assets, art collections, yachts or even a garage full of classic cars – all of which will require insurance protection. In addition, a captive may also provide estate planning benefits as a HNW individual or privately owned business can structure their captive for it to be owned by a trust. In time, the underwriting profit generated from the captive can be transferred to the trust beneficiaries.

In summary, captives offer a wide range of opportunities for a wide range of clients and their growth will continue as more realise the benefits that they can provide.

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| March 2013

The new UK-Swiss Tax Treaty Tim Urquhart Consultant T: +41 (0) 43 500 3873 E: tim.urquhart@hawksford.ch

The new “Agreement between the Swiss Confederation and the United Kingdom of Great Britain and Northern Ireland on cooperation in the area of taxation” was ratified in September 2011, published in October 2011 and came into force on the 1st January 2013.

Similar agreements have been negotiated between Switzerland and Austria (also now in force) and Germany (since rejected) and negotiations continue between Switzerland and Italy and Belgium.

The overall effect of the Treaty The Treaty is intended to do two things overall: • To regularise the past; and • To provide for taxation of assets held in accounts in Switzerland without disclosure of the names of the account holders who have UK tax residence.

Except in the case of “Voluntary Disclosure” (see below) all the tax levied and collected, if it is due from Switzerland, will be paid by way of withholding tax.

The definitions “Swiss Paying Agent” (SPA): All banks, securities dealers, persons (natural or legal) established in Switzerland, partnerships, establishments of foreign companies which accept hold invest or transfer assets of or for third parties or make payments of income or gains for third parties or secure such payments. NOTE: this definition includes trustees of trusts holding assets in Switzerland.

“Relevant assets”: All forms of bankable assets with an SPA, including cash and precious metals, assets held as a fiduciary, stocks, shares and securities, options debts and forward contracts, other structured products traded by banks, and insurance “wrappers”.

“Relevant person”: Any individual resident in the UK at any time (it does not have to be for the whole time) between the dates of 31st December 2010 and 31st May 2013 who as a contractual partner of an SPA is the account holder or the beneficial owner of the assets. NOTE: A beneficial owner includes a domiciliary

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company, foundations, trust companies, or similar an insurance company where a wrapper is used.

The timetable 1st January 2013: the Treaty came into force and from this date, unless voluntary disclosure is made, the SPA is obliged to deduct withholding tax from all income and capital gains made by the relevant assets.

31st May 2013: the final date by which the relevant person must notify the SPA what he has chosen to do.

The withholding tax 1. One-off charge for the past Accounts held by relevant persons in Switzerland will be subject to a one-off deduction of capital from the relevant assets, unless the relevant person consents to the bank releasing historic information to HMRC regarding the account (“voluntary disclosure”). This deduction will settle income tax, capital gains tax, inheritance tax and VAT liabilities in relation to the funds in the account for prior years. Such one-off payments are calculated in accordance with the formula laid down in the Treaty by reference to the capital value of the account on 31st December 2010 or 2012 (depending which is higher).

The formula is a complicated one, and takes into account such factors as how long the account has been held, the value of the additions to the account, the amount of capital growth it has seen etc. The minimum payment under the Agreement will be 21% of the capital value, which will affect account holders who have not seen much capital growth in the reference period. The maximum rates, for those with accounts of a higher capital value (£7 million or more), will be 41%.

2. Future charge From 2013, income and gains arising on relevant assets held by relevant persons with an SPA will be subject to a new withholding tax. The rates of this tax will be close to the top levels of UK tax – a rate of 48% on interest and other ordinary income, 40% on dividends and 27% on capital gains.

The Choices open to a Relevant Person

B. For the Future – withholding tax on undisclosed accounts The Treaty allows for one of three courses of action

A. For the past-regularisation of existing banking relationships The Treaty gives a relevant person the option to choose between two courses of action (see table below).

Voluntary disclosure Where there is voluntary disclosure, the onus shifts from the SPA to the relevant person. Once disclosure is made, the relevant person will be responsible for filing details of the relevant assets each year in his tax return.

Voluntary disclosure Where the SPA receives written authority from the relevant person before the 31st May 2013 it must report with the full information relating to the relevant assets to the Federal Tax Authority (FTA) and the FTA then passes this information on to the HMRC. The relevant person then will be subject to whatever retrospective taxation (with interest and penalties) that HMRC may choose to impose. NOTE: Unlike the Liechtenstein Disclosure Facility, Voluntary Disclosure under the Treaty does not guarantee immunity from criminal prosecution.

Non-Disclosure Where the SPA receives notification from the relevant person that he does not wish to disclose, or where no reply is received to the SPA’s letter, in which case an assumption of non-disclosure is made. The SPA must immediately deduct the appropriate amount of “one off” in accordance with the calculation laid down in the Treaty. This amount of tax is then transferred to the FTA, which in turn accounts to the UK government.

Closure of the account in Switzerland Where the relevant person refuses to authorise either of the two above courses of action, the SPA has to insist that the relevant assets must be transferred out of Switzerland within five months of the date of the Treaty (i.e. 31st May 2013).

Anonymous payment of tax Where no disclosure is made, the SPA is responsible for deducting and accounting to the FTA for the withholding tax on the income and capital gains arising in each year on the account.

Inheritance Tax In addition to tax on income and capital, the Treaty also covers Inheritance Tax (IHT). In each case the SPA is obliged to collect and account to the FTA tax at the maximum rate in the UK (40%).

It is the SPA’s duty to “freeze” the assets of a relevant person as soon as the death is known. The SPA must then deduct from the relevant assets the amount of tax due and must withhold this, eventually accounting for this to the FTA. The treaty does allow withdrawals from the net estate once the withholding tax has been deducted. NOTE: This could especially apply to trustees Not affected by the Treaty 1. Non-domiciled residents of the UK will not be affected by the provisions of the Treaty but must obtain: a. A residence certificate from the relevant competent authority where they claim domicile in another jurisdiction b. A certificate from a lawyer, accountant, or tax advisor (in each case they must be members of a relevant professional body in the UK) that the person concerned has claimed remittance basis taxation in whichever year non-domiciled status is claimed.

2. Although there is no specific provision in the Treaty, it is generally accepted that a fully discretionary trust will not come within the provisions of the Treaty because it is not possible to ascertain the beneficial ownership of the assets.

Penalties The treaty provides a series of penalties if an SPA does not comply with the provisions or assists a relevant person to illegally hold relevant assets.

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| March 2013

Market update Switzerland –––––––––––––––––––––––––

Tax Withholding Agreement between Switzerland and Germany fails The German Parliament has refused to ratify the tax withholding agreement which the German federal government signed with Switzerland in September 2011. Following initial approval by the lower house of the German Parliament, the upper house then rejected the tax withholding agreement on 23rd November 2012. The mediation committee, which represents members of both chambers, decided on 12th December 2012 to reject definitely the bilateral tax withholding agreement after the German federal government appealed against the negative decision of the upper house.

The purpose of the tax withholding agreement between Switzerland and Germany was to allow German taxpayers holding undeclared funds in Switzerland to regularise the funds on an anonymous basis by means of a withholding tax of between 21% and 41%, to be levied through the paying agent in Switzerland. These tax rates had already been re-negotiated on 5th April 2012, after Germany considered the tax rates that were originally proposed of between 19% and 34% as being too low.

Evelyn Widmer-Schlumpf, last year’s president of the Swiss federal council, and the Swiss Bankers Association has expressed regret at Germany’s non-ratification of the bilateral withholding tax agreement. Despite this setback, Switzerland nevertheless intends to continue with its white money strategy by negotiating further bilateral tax agreements with other countries. Switzerland is currently in discussion with Greece and Italy.

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The two existing withholding tax agreements between Switzerland/ United Kingdom and Switzerland/ Austria remain unaffected by the latest moves in Germany and are now in effect as of 1st January 2013.

Switzerland concluded the approval process for the withholding tax agreements with the United Kingdom and Austria on 19th December 2012 and the federal act on international withholding tax, which governs the implementation of the withholding tax agreements, entered into force on 20th December 2012.

If you have any questions regarding the Swiss withholding tax agreements or any other tax matters relating to Switzerland our team in Zurich would be delighted to assist.

Marc Renggli Senior Lawyer T: +41 (0) 43 500 3874 E: marc.renggli@ hawksford.ch

Middle East –––––––––––––––––––––––– Since the introduction of the new High Value UK Residential Real Estate taxation legislation our Middle East team have experienced first hand a number of issues from within the GCC that have raised concerns. These include:

• That clients and advisers alike were not prepared for the possible impending charges; • That they were not aware of the option available to take and timeframes in which to take them; or • That some clients and their advisers are simply not aware of this new legislation.

From our offices in Dubai, we have been able to proactively meet with clients (and their advisers) in the region to discuss all aspects of the legislation that will impact any offshore company that holds high value UK residential property.

During the rest of the year, we will see the increasing need to work closer with clients and their advisers so that we can establish the best way in which to deal with these issues.

As we have seen, it is not possible to apply a “one size fits all” solution against each entity. Instead we are working on the basis that each client requires a tailored solution for their structure.

For example, the options open to an elderly non resident, non domiciled patriarch may be entirely different from those required for one of his sons who is 30 years younger and looking to spend increasingly more time in the UK. Our Middle East team have the experience and expertise to assist clients in these areas. To arrange a meeting in the Middle East or to discuss this further by phone, please get in touch.

Tim Cartwright Director T: +44 (0) 1534 740115 E: tim.cartwright@ hawksford.com

The next issue of Hawk-i Middle East will be out in the spring. It will focus on key issues relevant to our clients in the region. If you would like to register to receive Hawk-i Middle East, which is a twiceyearly publication, please contact Matthew.Morel@hawksford.com

The view of the protector Stuart Pryke Fiduciary Business Group T: Fiduciary Legal: +44 (0) 208 8915547 T: Fiduciary Protector Limited: +44 (0) 1534 888766 E: stuart.pryke@fiduciarylegal.com www.fiduciarylegal.com

In recent years, the importance of the role of a protector in relation to private trusts has become increasingly highlighted.

The Jersey cases of Centre Trustees v Rooyen1, and more recently, Representation of A and B, Re the C Trust2 amply illustrate the difficult and complex decisions which can face protectors and indeed the criticism to which they can be subject if they fail to carry out their duties properly.

Furthermore, the ever increasing academic commentary on the duties of protectors has recently been significantly added to by the publication of a text devoted entirely to the subject by Andrew Holden3. Thus the oftentimes fiduciary role of the protector is in the spotlight like never before.

What should the conscientious protector be doing then if they want to acquit themselves properly of their duties? Firstly, they should take nothing for granted. All too often it is easy for the protector to fall into the trap of assuming that, because the trustees are skilled professionals themselves, everything concerning the trust is as it should be. Unfortunately this is not always so. Trusts, unlike the commercial world, tend to operate over a lengthy timeframe. Thus the opportunity for unnoticed errors to creep into the documentation or an unquestioned established ‘understanding’ of what the trust is for, can arise all too easily.

Protectors therefore need proper access to information if they are to carry out their role diligently. Ideally then trust deeds should be drawn up in such a way so as to make it

clear that protectors should be given access to all the documentation they need in order to make their decisions properly. In the case of non-charitable purpose trusts, the role of the protector is effectively given statutory status in the form of an ‘enforcer’ whose role it is to enforce the trust’s purposes.

Therefore the question of a protector’s access to (and possibly even an obligation to regularly review) trust documents is likely to be the subject of much academic debate, if not judicial commentary, in the coming years.

Protectors should read and consider the trust documentation very carefully, both at the time of their appointment and on an on-going basis. Protectors need to be able to ask difficult and awkward questions of the trustees without fear of the consequences and they need to exercise truly independent judgement in relation to their tasks.

Protectors should also be constantly alive to conflicts of interests in their roles. All too often protectors are chosen because of their perceived trustworthiness and closeness to the settlor, rather than for their ability to carry out the role and avoid conflicts of interest. Unfortunately a failure to consider and address these problems early on in the trust’s ‘life’ makes the consequences of untangling the problems later on much more difficult and costly.

Money laundering checks are an ever present feature in the trust world. Whilst many protectors may not currently be subject to statutory obligations in this regard, it is probably only a matter of time before the regulators turn their attention to this issue. How many protectors currently operating would be able to satisfy modern money laundering regulations in relation

to their functions if this should become a statutory requirement?

It is inevitable that the modern world will demand that protectors are better qualified and more professional in doing what they do. This has a number of advantages. A better and more professional protector, which is free from conflicts of interest, is much better able to protect family interests under a trust in the longer-term. Trustees will be better and more appropriately brought to account. Reserved powers can potentially be extended much further, as arguments by tax authorities that the trust is essentially being controlled by the settlor will be more difficult to sustain.

A professional and more independent protector can better act as an informal arbitrator in family conflicts, leaving the trustees better placed to get on with the role of being trustees.

A good professional protector, free from conflicts of interest, is of benefit to the settlor, the trustees and the beneficiaries of a trust. As a certain pundit might put it, as far as private trusts are concerned, with a good professional protector in place, it is a case of ‘trebles all round’!

1

Mark Centre Trustees (CI) Limited v Jacques Van Rooyen [2009] JRC 109.

2

Mark In the Matter of the Representation of A and B and In the Matter of the C Trust [2012] JRC086B (albeit that a later judgement of the Royal Court in the same case on protecting the identities of those involved has probably gained wider publicity).

3

Mark Trust Protectors by Andrew Holden published

by Jordans in 2011.

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| March 2013

Protectors - a settlor's friend - and a trustee's too?

The offshore industry has done much to promote protectorship as a concept and as a valuable adjunct to a fiduciary relationship.

This reflects a move away from the time when many trusts were hastily established, often because of apprehended tax changes, without the settlor meeting his trustee.

The trustee would generally be appointed on the recommendation of professional advisers who might incorporate a protector to provide a level of security to the settlor, at least prior to the time when a close relationship could be established with the trustees.

There are many reasons why a protector might be considered appropriate and this short article summarises the role of the protector, considers some practical issues arising in relation to protectorship and looks at the potential for using the protectorship concept.

What is a protector?

In broad terms, a protector will be appointed to protect the respective interests of the settlor and/or the beneficiaries.

In certain instances he may have wider powers vested in him as part of this function, but he will traditionally need to consent to key trustee decisions, such as the appointment or exclusion of beneficiaries from the beneficial class, the appointment of capital and perhaps also the change of proper law. He would usually have the positive power to hire and fire trustees.

A protector can have a valuable wider role in a governance context, providing for appropriate checks and balances in a family structure, particularly a complex one

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Michael Powell Director T: +44 (0) 1534 740204 E: michael.powell@hawksford.com

Julian Hayden Director T: +44 (0) 1534 740140 E: julian.hayden@hawksford.com

or where there is a family business. He or she can provide an element of security and reassurance, act as a sounding board for the family or for the trustees on strategic issues and can be a point of contact for beneficiaries.

Who can be a protector?

As long as the individual is adult, of sane mind and has or can acquire an understanding of the settlor’s wishes and the family dynamic, there is no reason why anyone should not be a protector.

There are certain other issues which might impact on the appropriateness of choice, including, for example, the residence of the protector where it may not be advisable to have a protector and settlor resident in the same jurisdiction for tax reasons. In certain circumstances the protector may be a corporate entity and professional protectors can bring special advantages.

Who cannot be a protector?

Apart from those exclusions referred to in the preceding paragraph it is generally not advisable to appoint:a. A protector from the beneficial class unless the powers vested in him do not give rise to any potential or actual conflict. A protector required to give consent to any distributions is going to struggle to persuade other members of the beneficial class as to his objectivity if he is also a beneficiary. b. Whilst close friends are often chosen and frequently of considerable assistance to the trustees with their intimate knowledge of the settlor and family, care must be taken to ensure that such a protector is not predisposed to favour one beneficiary over another. c. It was not uncommon for a trust company to appoint an in-house individual (often also a board member of the trust company) as protector.

Whilst there is nothing to suggest that this arrangement could not work, perception will always militate against the presumption in practice, and combined with commercial and possibly other pressures this does not generally make for a happy mix. d. On a purely practical level it is always advisable to appoint someone who is willing to be appointed, resides in a broadly similar time zone, speaks the same language and is willing and able to understand the responsibilities of his role.

Why have a protector?

At one end of the spectrum, the protector’s role is limited and often viewed with scepticism by trustees and by their advisers, potentially involving uncertainty or hampering administration through having to delay decisions whilst awaiting a protector’s consent.

A good protector can however provide not only the settlor but also the trustee with a considerable degree of comfort, particularly as relationships are established and cemented between the trustees and the settlor and his family. Many of the above comments have assumed relatively straightforward structures, however arguably protectors really come into their own in the following circumstances:1. Very complex family structures where, for example, there have been multiple marriages and progeny combined with considerable wealth; and/or 2. Very complex structures involving, for example, numerous trusts and companies or other entities/interests; and/or 3. A desire to involve the protector in a wider capacity, for example in relation to some of the investment functions.

"A good protector can provide not only the settlor but also the trustee with a considerable degree of comfort…"

In these circumstances, consideration might be given to appointing a corporate protector where the board could comprise a number of individuals whose particular skill sets will help to ensure the smooth running of the trust by personnel, all of who bring something to the relationship, ensuring that the trusteeship runs smoothly with the trust fund invested and utilised to the maximum benefit of the beneficial class.

Benefits of professional protectors There can be significant advantages for professional trustees in working with specialist professional protectors, enforcers and guardians who have special skills in fiduciary matters or the tax aspects thereof, or indeed in the underlying business activity in which the settlor and/or trustees are engaged.

A specialist protector can of course retain the power of appointing and removing trustees and can continue to have veto or consent powers over key strategic issues.

They also however provide significant comfort for settlors and beneficiaries in providing a mechanism for succession and overview.

This is particularly useful in the context of will trusts, trusts or foundations set up to span generations or in the circumstances previously listed. The trust will be large, complex and multi-generational. There is then an overwhelming need for a system of checks and balances and on-going review in case the original trustee, however competent and trusted, retires or if a corporate is bought or dissolved.

It is in the area of strategic governance that there is the primary need for suitably qualified fiduciary protectors, enforcers of purpose trusts and guardians of foundations, but this does not necessarily involve a major international multi-

generation trust. Even in a smaller, less complex arrangement a professional protector may act as such alongside the trusted family adviser who may lack specialist fiduciary expertise (and who accordingly may not be an ideal protector, or who may simply not want that responsibility) but whose overview of family or commercial matters is still valued and who can act as a quasi-protector alongside the formally appointed one.

A professional protector might be particularly valuable where relations break down between families, such as where there is a court-appointed trusteeship or in the context of a divorce and a fight over trust assets or in the commercial context where the trusteeship is effectively an escrow arrangement.

There may also be a role for a professional protector in reinforcing a trust’s standing against claims of sham or against Revenue attack, arguing that the settlor has, for example, retained control or retained valuable economic rights. If the protector is patently not a stooge of the trustees, nor of the settlor, but an independent professional, whether individual or corporate, it should be harder for such allegations to succeed.

Trustees might also welcome the reassurance given to settlors of offering a balance of powers and the security it provides through fostering better relations with settlors or founders.

Costs There are likely to be cost implications in appointing a protector and in particular, a protectorship committee where almost certainly the members of a protectorship committee will expect to be compensated in some way. Whether or to what extent they should be paid will be a matter for

independent consideration in each case, but this will generally mean that the concept of a protectorship committee is likely to be of more appeal in cases where there are significant and/or complex trust funds.

Is this a fiduciary relationship?

Whether or not a protectorship role is fiduciary will depend on the terms of the trust deed and the nature and extent of the protector’s role. In some cases the protector will not assume fiduciary responsibilities, but if his role is proactive rather than simply one of giving consent, failure to carry out his role appropriately may amount to a breach of fiduciary duty.

If a protector simply fails to exercise his powers or does not fulfil his duties, it could hinder the administration and the trusteeship. Such issues can be addressed in part by the express provisions of the trust deed. Ultimately, however, if the trustee’s role were so hindered by a protector’s failure to act, the trustees would have to consider whether this failure justified an application to court to remove the protector or to proceed without consent.

Summary The role of protectorship can be a complex one but where settlors, most customarily masters of their own wealth and frequently entrepreneurial in nature, are minded to establish a trust, they often want the security of knowing that they have a well informed ally and sometimes one who can make a positive contribution to the settlor/ trustee relationship. From a trustee’s perspective the constructive potential of a protector’s involvement should never be underestimated and may indeed do much to cement and enhance what can be a challenging and complex set of relationships.

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| March 2013

Mistake, Hastings Bass and the Jersey Court’s approach Charlotte Brambilla Director T: +44 (0) 1534 740194 E: charlotte.brambilla@hawksford.com

In the recent case of In the Matter of the B Life Interest Settlement [2012] JRC229, the Jersey Court took a detailed look at its jurisdiction to assist trustees and beneficiaries to unwind or undo transactions made by trustees or settlors which had resulted in unfortunate and, to some extent, unintended consequences.

The case is the first to follow the UK Court of Appeal case of Pitt v Holt where the English Courts held that the Hastings Bass principle had been over-extended beyond its original scope and that, in its developed form, it was no longer good law. The Hastings Bass principle has existed since 1975 and is sometimes referred to, rather provocatively, as the ‘morning after pill’ for trustees.

The case of Pitt v Holt is still awaiting its appeal to be heard before the Supreme Court of England and Wales. The outcome is anxiously awaited since it will change nearly 50 years of trust practice. If the decision is upheld, it will severely limit the Court's ability to unwind transactions which later prove to be prejudicial to beneficiaries or settlors and where a claim of negligence against either the trustee or the adviser may or may not be available. It is significant therefore what the Jersey Court chose to say regarding its own position on the Hastings Bass principle and, more importantly, how it considers it could be bound by the Supreme Court's final decision in Pitt v Holt.

In the case of In the Matter of the B Life Interest Settlement, restructuring was done to mitigate inheritance of the settlor – a man aged 57 with no diagnosed health issues. Shortly after, he was unexpectedly taken ill and died three years later. The application was to unwind the restructuring - it failed as nobody knew he was ill until after the restructure was done.

In the case the Royal Court chose, in giving its judgment, to give a detailed analysis of what test should apply in Jersey following the case law developments in the UK. It stated that while decisions of the English courts are always likely to be of interest, Jersey has its own separate legal jurisdiction.

The Royal Court rejected a new English test for mistake in Futter v Futter [2011] EWCA Civ 197 and Pitt v Holt. This limited its

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application only to voluntary transactions where there is a mistake as to the legal consequence of the transaction, not the consequence of the transaction or an existing fact that is fundamental to the transaction and the mistake must be so serious in its character as to render it unjust for the recipient to retain the benefit of the gift. Instead the Royal Court chose to apply the wider "but for" test, which allows mistake as to the consequence as well as to the fact or legal effect and for this relief to apply to trustees, beneficiaries and settlors.

In explaining why it could choose not to follow English authority now, when in the past its decisions on mistake had been based on its construction of English authorities, the Royal Court gave two distinct reasons. Firstly, it looked at the doctrine of mistake as applicable to gifts into the trust made by a settlor and how the Jersey law principle of "erreur", as derived from Norman French law, might apply. Secondly, it looked at the original principles of equity, adopted by the English courts in determining the test for mistake, and how these should be interpreted in formulating the requirements for the test of mistake as applicable to the administration of a Jersey trust.

In the first instance, The Royal Court has been careful to emphasise that the principle of "erreur" could only apply in limited circumstances, and that where the issue is related to the administration of a trust, only equitable principles, such as that of mistake, could be applied by the Court.

In the second instance, the Royal Court was bold enough to expressly dismiss any suggestion that the equitable principle of mistake should only apply to gifts into a trust by a settlor, and in doing so relied on dicta from English case law. It concluded that its equitable jurisdiction could also extend to the mistaken actions taken by a trustee. It emphasised that the trustee who innocently makes a mistake should not be deprived of equitable relief to the same extent that a settlor can. It also went further to suggest that such equitable relief can also, in some cases, extend to beneficiaries of a trust. Accordingly, the Jersey test for mistake where a trustee is involved was stated as: (i) Was there a mistake on the part of the trustee? (ii) Would the trustee not have made the appointment but for the mistake? (iii) Was the mistake so serious a character as to render it unjust on the part of the donee to retain the property or interest appointed?

This test is substantially more generous than the test for mistake recently proposed in Pitt v Holt. Given the length to which the

Royal Court has gone to set out its own interpretation of its equitable jurisdictions and the equitable principles which apply, it appears highly possible that the Jersey court may continue to apply the existing ‘but for’ test, whatever the decision of the Supreme Court may be.

By contrast, in the same case, the Royal Court was keen to make clear that the use of the Hastings Bass principle to enable sloppy decision making of trustees or bad advice from trustee advisers without penalty was not an appropriate use of its equitable jurisdiction. Accordingly, it was considerably more sympathetic to the argument in Pitt v Holt that the Hastings Bass principle had been over-extended and abused and should only operate as a means of severing a defective or invalid element of any appointment from a valid one.

The Royal Court then considered whether the extension of the Hastings Bass principle, as developed in case law, was still capable of being applied under Jersey law. It emphasised that its ability to do this would only be if, in doing so, it was a legitimate extrapolation of what principles currently applied in Jersey or by the enunciation of a new principle. In simple words, the Jersey court wished to highlight to the Jersey trust industry that it would not continue to adopt what was now recognised by English courts as defective principles, simply because that was how it had worked in the past.

In making this statement it also gave its own somewhat scathing views as to how the principle, as developed, had been used.

It referred to it as the 'get out of jail free card' for trustees and advisers to be used when convenient, regardless of whether the trustees were at fault or not. It highlighted the fact that the principle allowed beneficiaries to avoid consequences, which they would not have been able to do had they acted on their own account.

remedy is available. If however it was in breach of duty, the remedy is for the beneficiaries to make a claim against the trustee.

Where the trustee is not personally in breach of its duty but relies on advice given by professional advisers, the Royal Court indicates that the proper remedy is for the trustee to sue the advisers, not to seek to have the transaction set aside on the grounds of mistake.

This is in accordance with its view that the loss should lie where it should so that trust funds are not be used in exculpation of negligent advisers or delegates of the trustee.

In practice, this shift away from the previous application of the Hastings Bass principle is a shift towards a more litigious route for trustees and beneficiaries. In order to recompense the trust for losses suffered to the trust fund, the trustee or beneficiaries would be expected to risk the trust fund to pursue claims in negligence or breach of duty. The costs arising from such claims are likely to be significant and where the trust is a dry structure, or the losses suffered have diminished the trust fund to the point where it may not be able to fund the costs of the action, such claims may be prohibited by reason of funding issues alone.

Therefore while the Jersey courts have indicated that the Jersey law of mistake, due to its more generous application, should provide equitable relief for all appropriate cases, in reality, this may not be the case. It is useful to see that the Jersey courts remain open to assisting trustees and beneficiaries where there are unintended consequences arising from their actions, provided it is equitable to do so, and that in determining whether it is equitable or not, the interests it considers are those of the beneficiaries and settlor of the trust and not the tax authorities.

This case reinforces Jersey’s advantages as a jurisdiction in which to operate a trust. It is highly expert and has a fully developed case law. At the same time it remains independent from the English courts and the UK policies which may drive certain changes in equitable principles as applicable in the UK.

The Royal Court stated that "the approach of the Royal Court should be to ensure that the loss lies where it should". It made plain that if a trustee transaction was made under a mistake, an equitable

Meet the Hawksford Contentious Trusts team: We have a specialist team dedicated to dealing with contentious trust issues.

Our strong legal heritage enables us to work closely with legal advisers as we have a solid understanding of the legal process.

Michael Powell Director T: +44 (0) 1534 740204 E: michael.powell@ hawksford.com

Charlotte Brambilla Director T: +44 (0) 1534 740194 E: charlotte.brambilla@ hawksford.com

Laura Le Meur Senior Associate Solicitor T: +44 (0) 1534 740107 E: laura.lemeur@ hawksford.com

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| March 2013

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