October 24, 2020

The Cayman Islands Court provides guidance on the approach to trust mistake cases

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08-retirement-fundBy Carlos de Serpa Pimentel and Robert Lindley from Appleby

Schroder Cayman Bank and Trust Company Limited v Schroder Trust A.G., FSD 122/2014, Grand Court, 9 March 2015

INTRODUCTION

On 9 March 2015, the Grand Court handed down a decision in the Schroder case concerning an application made by a Cayman Islands trustee to set aside a transfer of assets from a Cayman Islands Employee Benefit Trust (the “Cayman EBT”) to three Employee Retirement Benefit Fund Schemes (“EFRBS”) governed by Jersey law. In reaching its decision, the Court applied the principles on the law of mistake recently articulated by the U.K. Supreme Court in Pitt v Holt and Futter v Futter [2013] 2 AC 108.

FACTS

By way of background, the plaintiff and the defendant (an affiliate of the plaintiff) were appointed as Trustees of the Cayman EBT. In 2011, the Trustees purportedly exercised their powers to transfer the assets (the “Appointments”) from the Cayman EBT to the EFRBS on the basis of two fundamental mistakes, namely the belief (a) based on erroneous professional advice, that the transfers would not attract UK inheritance tax (“IHT”) charges; and (b) that they were exercising their powers so that the transfers would benefit a class of beneficiaries under the EFRBS identical to that under the Cayman EBT, in accordance with the trust deed.

As it turned out, the Appointments were flawed in two important respects:

they purported to benefit a class wider than that permissible under the Cayman EBT (the “excessive execution issue”); and
they were executed on the basis of mistaken beliefs, namely, that (a) the classes of beneficiaries under the EFRBS and the Cayman EBT were identical; and (b) no IHT charge would arise (the “mistake issue”).
On this basis, the Trustees made an application to the Grand Court seeking an Order either that the Appointments amounted to an “excessive execution” of the Trustees’ power of appointment and were void, or, alternatively, that, as a result of the mistakes, the Appointments were voidable and should be set aside.

APPLICABLE LAW AND FORUM

The Grand Court decided the matter under the laws of the Cayman Islands, being the governing law of the Cayman EBT, notwithstanding that the EFRBS were governed by Jersey law. There appeared to be a conflict between the Cayman Islands “firewall” (which provides that any challenge to the validity of an exercise of discretion by trustees of a Cayman Islands trust is to be governed by Cayman Islands law alone) and its Jersey counterpart (which provides that the validity of a transfer into a Jersey law trust (here the EFRBS) is governed solely by reference to the laws of Jersey). However, the Chief Justice held that the Grand Court was the proper forum for the determination of the validity of the Appointments and agreed that the plaintiff correctly chose to bring the proceedings in Cayman as (a) given the conflict between the rival firewall provisions, the correct approach must be to fall back onto ordinary private international law principles, (b) these principles require the identification of the system of law most closely connected with the transactions under challenge, which was clearly Cayman Islands law: the dispositive transactions involved the exercise of discretionary powers by a Cayman resident trustee of a trust governed by Cayman Islands law, and (c) it would be absurd for the validity of such an exercise of powers to be determined by Jersey law simply because the recipient of the assets appointed out from the Cayman EBT happened to be a trustee of a trust governed by the laws of Jersey. Further, if the Appointments were never validly made the assets appointed never made their way to the EFRBS, and so no question of the validity of the EFRBS themselves or of any purported appointment into them necessarily arose for determination.

With respect to the mistake doctrine, the Chief Justice considered the principles enunciated by the U.K. Supreme Court in Pitt v Holt. The approach to be taken by the Court, very broadly, is first to establish whether there has been a genuine mistake (as opposed to mere ignorance or inadvertence) and, if so, to decide if it would be unconscionable or unjust to leave the mistake uncorrected, i.e. if the mistake on which the transaction is based is sufficiently serious that the Court ought to exercise its discretion to set aside the transaction.

DECISION

The Grand Court agreed that the Appointments purported to benefit a class of beneficiaries under the EFRBS that was wider than the class under the Cayman EBT. Thus, the Appointments constituted a wholly excessive execution of the Trustees’ powers of appointment, and were therefore held to be void, rather than voidable.

The Grand Court was also satisfied that the reliance by the Trustees on the erroneous advice and erroneous drafting from their lawyers as to the effect of the Appointments, in terms of both the issues of revocability and tax planning, caused severe consequences to the trusts which were never intended and that the Appointments would never have been made but for those mistakes. Thus, the mistakes were of sufficient gravity as to engage the Court’s jurisdiction to set them aside on the basis of mistake; the Court, adopting the principles on mistake enunciated in Pitt v Holt, held that it would be unconscionable and unjust to leave the mistakes uncorrected.

CONCLUSION

In terms of the development of the law relating to setting aside transactions on the basis of mistake, this decision marks the first occasion when the principles applicable to mistake in trust cases as enunciated by the U.K. Supreme Court in Pitt v Holt have been applied in the Cayman Islands Courts and it follows on from a similar recent decision of the Royal Court of Guernsey in Nourse v Heritage Corporate Trustees Limited et al, 01/2015, 15 January 2015. It will be interesting to see how this area of law develops in the Cayman Islands going forward. While this application was successful, each case will be decided on its own set of specific facts. The decision will be of particular interest to lawyers and other advisors considering the possibility of such trust mistake applications succeeding. Carlos de Serpa Pimentel, Robert Lindley and Selina Tibbetts of Appleby’s Cayman office appeared in this matter for the defendant trustee (as representative of a certain class of beneficiaries).

SOURCE: http://www.applebyglobal.com

IMAGE: www.goodreturns.in

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