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Unravelling Transactions – The Party's Over

13 May 2013. Published by Simon Laird, Global Head of Insurance

The Supreme Court upheld the Court of Appeal's decision in Futter v Futter and Pitt v Holt as to the scope of the rule In re Hastings-Bass, but has overturned the Court of Appeal's decision on the application of mistake in Pitt.

The decision will be of interest to professionals in the fields of tax planning, pensions and private client work.

In both Futter and Pitt the parties found themselves with unwanted tax liabilities due to incorrect professional advice.  The parties applied to court to set aside the transaction relying on In re Hastings-Bass and in Pitt also on mistake.  If successful, the unwanted tax liability would no longer be due.  HMRC intervened to argue that the tax was properly due and the rule In re Hastings-Bass as applied by the lower courts was incorrect.

The Supreme Court said that the rule in In re Hastings Bass can no longer be relied upon to set aside transactions where a fiduciary (such as a trustee) fails to take into account relevant matters it ought to have taken into account, unless the failure amounts to a breach of duty by the fiduciary.

Often the failure by a fiduciary to take into account a relevant consideration was due to incorrect advice received from a professional adviser and the fiduciary has not acted in breach of duty by following that advice.  The professional adviser then encourages the fiduciary to make an application to the court under the In re Hastings Bass principle – the objective being to avoid any loss and therefore a professional negligence claim.  This will no longer be an option.

Where the fiduciary is in breach of duty, In re Hastings Bass might still prove useful as the transaction might be voidable.  A fiduciary might be in breach of duty by acting beyond their powers or for failing to follow advice.  In reality, these types of case are rare.

There is an additional dynamic to Pitt – the Supreme Court held that a mistake might result in vitiating the transaction.  Although Lord Walker's judgment does not go into detail on the reasoning, it clarifies that what is required is a mistake (not ignorance or disappointed expectations) which a court finds is central to the transaction and sufficiently serious to exercise its equitable discretion.  Although the Supreme Court did not make a finding on the issue it also indicated that in circumstances where there is a tax avoidance scheme, it is unlikely that the court will exercise its discretion to set aside a transaction just because it triggers a tax liability.

The decision will come as a disappointment to professional advisers, but is unlikely to be a surprise.  The rule In re Hastings-Bass afforded advisers of fiduciaries a "get out of jail free card" in circumstances where incorrect advice was given which was otherwise unavailable to advisers of any other category of client.

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