England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		11/03/2010

Mr Justice Norris :

1. When the Court of Appeal fashioned for the trustees of the 1947 settlement upon Captain Hastings-Bass a stout shield against an attack upon the validity of their decisions by the Inland Revenue, the members of the court cannot have supposed that they were creating for such trustees a powerful weapon enabling them to attack their own decisions in the face of objections by the Inland Revenue. But that, of course, is what has occurred in the development of what is called "the Rule in Hastings-Bass" (Re Hastings-Bass [1975] Ch 25).
2. This is another application by trustees who wish to assert that they have acted in an untrustee-like fashion and so have failed properly to exercise a power vested in them. The trustees wish to take advantage of this failure to perform their duties in order to enable the beneficiaries to avoid paying the tax liability consequent upon the trustees' decision. Put like that (and I am conscious that that is not the only way in which the situation may be described) the possibility is raised that the development of the Rule may have been diverted from its true course. Such a suggestion is canvassed in an article by Lord Walker ("The Limits Of The Principles In Re Hastings-Bass" Private Client Business 26 February 2002): in a lecture by Lord Neuberger ("Aspects of the Law Of Mistake" a lecture to the Chancery Bar Association on 16 January 2009) and in an article by Mr Mark Herbert QC ("Is Hastings-Bass a Hardy Perennial?" 2009 Trust Quarterly Review volume 7 issue 1 page 14).
3. This is not an occasion for a judge at first instance to indulge in reconsideration of the Rule (itself developed at first instance). My task is to decide the case before me in accordance with the established rules of precedent. Where a decision at first instance has itself been considered by a second judge at first instance, I do not regard myself as free to depart from the second decision (unless persuaded that some binding or persuasive authority has been overlooked): Colchester Estates v Carlton Industries [1984] 2 All ER 601. Adopting this approach I may start with the judgment of Lloyd LJ (sitting as a judge of the Chancery Division) in Sieff v Fox [2005] EWHC 1312 (Ch) which considered the Rule and the authorities from which it was derived; and at this stage to draw from that decision three points.
4. First, the formulation of the principle. This is found at paragraph 119 of the judgment in these terms:-

"The best formulation of the principle seems to me to be this. Where trustees act under a discretion given to them by the terms of the trust, in circumstances in which they are free to decide whether or not to exercise that discretion, but the effect of the exercise is different from that which they intended, the court will interfere with their action if it is clear that they would not have acted as they did had they not failed to take into account considerations which they ought to have taken into account, or taken into account considerations which they ought not to have take into account".

5. Second, the significance of that formulation. At paragraph 58 of his judgment Lloyd LJ had observed that "the precise formulation of the principle may be of greater significance in cases other than this one" and he noted that the formulation had (in a very slightly different form) been promoted by Mr Herbert QC and accepted for the purposes of the case itself by Mr Taube QC, so Counsel had agreed upon the matter. Nonetheless, at first instance Lloyd LJ's formulation is to be treated as a comprehensive exposition (per Sir Andrew Park in Smithson v Hamilton [2007] EWHC 2900 (Ch) at paragraph 52) and a comprehensive synthesis of the current state of the law (per Mr Robert Englehart QC in Pitt v Holt [2010] EWHC 45 (Ch) ).
6. Third, the boundaries of the principle. Lloyd LJ appears to have shared the view expressed by Park J in Breadner v Granville Grossman [2001] 1 Ch 523 that it cannot be right that whenever trustees do something which they later regret and think that they ought not to have done, then they can say that they never did it in the first place. But he expressed the view that

"…the main ways at present open to the court to control the application of the principle are: (a) to insist on a stringent application of the tests as they have been laid down, (b) to take a reasonable and not over-exigent view of what it is that the trustees ought to have taken into account, and (c) to adopt a critical approach to contentions that the trustees would have acted differently if they had realised the true position…."

7. It is in that context that I turn to the present case.
8. The relevant facts may be shortly stated. On 5 August 1985 Mark Futter created the Futter (No.3) Life Interest Settlement ("the No.3 Settlement"). Clause 4 of the No.3 Settlement gave the income from the trust fund to Mark Futter for his life but conferred on the trustees a conventional power of enlargement. Clause 5 then gave Mark Futter a power of appointment. In exercise of that power, on 24 November 1993 Mark Futter declared new trusts to take effect from and after his death. He granted a life interest to the First Defendant Elizabeth Gaye Futter (his wife) (again subject to a conventional power of enlargement) and then gave the capital to such of the SEond to Fourth Defendants Adam, James and Natalie (his children) as should attain 18 or be alive at the end of the trust period. On 31 March 2008 Mark Futter and the other trustee Mr Clive Cutbill executed a Deed of Advancement terminating the No.3 Settlement. They did so by exercising the power of enlargement conferred by clause 4 of the No.3 Settlement with the effect that the entire capital of the fund became payable to Mark Futter freed and discharged from the trusts of the No.3 Settlement and of the 1993 Deed of Appointment. Clause 3 of the Deed of Advancement said that "any…capital gains tax…payable in respect of the Trust Fund by reason of the provisions of this Deed shall be borne by the Trust Fund". The payment to Mark amounted to £141,952 and incurred a charge to capital gains tax ("CGT") in the sum of £90,849.
9. On 5 August 1985 Mark Futter created the Futter (No.5) Life Interest Settlement ("the No.5 Settlement"). By clause 4 Mark Futter retained a life interest in the Trust Fund. Clause 5 conferred upon him a power of appointment over income and capital amongst a defined class, and subsequent clauses declared default trusts. Clause 11 of the No.5 Settlement contained the usual enhancements to the statutory power of advancement under section 32 of the Trustee Act 1925. On 24 November 1993 Mark Futter exercised his power of appointment. The Deed of Appointment of that date provided that from and after the death of Mark Futter there was a trust to pay the income of the fund to the Elizabeth Gaye Futter (with a power of enlargement), and subject thereto the Trust Fund was to be held upon trust for such of the Second to Fourth Defendants Adam, James and Natalie (his children) as should be living at the expiration of the trust period or should previously have attained the age of 18 years. The shares in the Trust Fund so conferred were then, by clause 8 of the No.5 Settlement, resettled upon each primary beneficiary for his or her life, with a power of appointment vested in the primary beneficiary and a default trust in favour of the children of the primary beneficiary born during the trust period. On 3 April 2008 Mark Futter and his co-trustee Mr Cutbill (with his own consent and that of Elizabeth Gaye Futter) exercised the power of advancement conferred by section 32 and extended by clause 11 of the No.5 Settlement to apply £12,000 in cash to each of Adam, James and Natalie. Clause 4 of the Deed of Advancement declared that any CGT payable in respect of the Trust Fund by reason of the provisions of the Deed would be borne by the Trust Fund. The consequence of executing this deed was that each of Adam, James and Natalie became liable to pay CGT in the sum of £1,792.
10. The thinking which led in April 2008 to the exercise of the power of enlargement and the exercise of the power of advancement is recorded in the attendance notes of the trustees' solicitors, Withers. The No.3 Settlement and the No.5 Settlement each contain "stockpiled gains" for CGT purposes. It was anticipated that if those "stockpiled gains" were brought onshore after 5 April 2008 they would be taxed at an overall effective rate of 28.8%, so that the total CGT liability for winding up the No.3 Settlement and the No.5 Settlement was likely to be in the region £163,000. However, the suggestion had been made that if smaller capital distributions were made on an annual basis to Mark Futter or to other beneficiaries then advantage could be taken of the recipients' annual exemption from CGT. Accordingly, on 16 January 2008 it was thought that the No.3 Settlement and the No.5 Settlement might (subject to fiduciary considerations) be wound up over the course of a number of years by making capital payments to Mark Futter and his family in such sums as would use each of their annual exemptions. The position was further considered on 25 February 2008 when the view was taken that the size of the "stockpiled gains" in the No.5 Settlement was such that it was not possible to wind up the Settlement without incurring a substantial charge to CGT: and because it was felt that the CGT price was too high the decision was made that the No.5 Settlement should continue to run.
11. After further consideration on 7 March 2008 Withers prepared a document entitled "Proposed Next Steps" for consideration by the trustees of each Settlement. So far as the No.3 Settlement was concerned the proposal was that the trustees should make capital payments to Mark Futter's children on an annual basis with a view to winding up the Settlement, the payments being equal to the children's unused annual exemptions in order to wash out the "stockpiled gains". So far as the No.5 Settlement was concerned there was to be no action.
12. By 27 March 2008 Mark Futter had changed his mind. As regards the No.3 Settlement, instead of making payments to his children to enable them to use their annual CGT exemption, he considered that he should trigger a number of losses on his own personal portfolio which he thought could be used to absorb the "stockpiled gains", expressing the view that he would be able to generate sufficient losses to cover the maximum gains that could be attributed to him.
13. Following this suggestion Mark Futter's accountant telephoned Withers on 28 March 2008 to discuss the No.3 Settlement. Withers confirmed that the losses on Mark Futter's personal portfolio were indeed to be offset against the "stockpiled gains" in the trust that would be attributed to him on the distribution of the Trust Fund. This was a mistake.
14. Section 87 Taxation of Capital Gains Act 1992 ("TCGA") applies to Settlements where the trustees are not resident or ordinarily resident in the United Kingdom. Section 87(2) TCGA says that there shall be computed in respect of every year of assessment the amount on which the trustees would have been chargeable to Capital Gains Tax if they had been resident and ordinarily resident: these are the "stockpiled gains". By section 87(4) these trust gains are then treated as chargeable gains accruing to beneficiaries of the settlement who receive capital payments from the trustees (but the attribution of chargeable gains to beneficiaries must not exceed the amount of the capital payments received by them). Section 89 TCGA then deals with the situation where (as was the case with the No.3 and No.5 Settlements) the trustees change from being non-resident to being UK-resident. Gains realised during a non-resident period are attributed to beneficiaries who receive capital payments during the subsequent resident period. The attribution of gains to beneficiaries in this way means that they are able to use their annual personal CGT allowances and (prima facie) are also able to set off any allowable losses they personally have. But section 2(4) TCGA specifically says that in relation to these attributed gains allowable losses cannot be set off. Withers overlooked section 2(4) TCGA.
15. On 31 March 2008 Withers produced deeds by which all of the assets held in the No.3 Settlement could be "advanced" to Mark Futter. Mark Futter advised that he had generated sufficient losses that morning to offset the gains that would come into charge on the winding up of the No.3 Settlement. So the Deed was signed.
16. This left the No.5 Settlement. Mark Futter asked whether it would be possible to use the same technique as that used for the No.3 Settlement: he said he was keen to make a payment of £12,000 to each of his three children (to make use of their annual exempt amount and their losses). Withers so confirmed, but pointed out that it would not be possible to use the power of enlargement though it may well be possible to use the statutory power of advancement. After consideration the Deed dated 3 April 2008 exercising this power was drawn up.
17. It was not until 23 September 2008 that Withers recognised that they may have misadvised their client by suggesting that Mark Futter's personal losses and those of his children could be used to offset "stockpiled gains". Mark Futter and Mr Cutbill as trustees of the No.3 Settlement and of the No.5 Settlement now seek a declaration that the advancements out of the No.3 Settlement and out of the No.5 Settlement "are void and of no effect". Mr Cutbill says:-

"Had we been fully aware of the CGT consequences of advancing the entirety of the Trust Fund of the No.3 Settlement to [Mark Futter] and making advancements to [his children] in excess of their annual exempt amounts at the time of the advances [Mark Futter] and I simply would not have made any advancement to [Mark Futter] from the No.3 Settlement nor have made advancements in excess of the [children's] annual exempt amount for CGT…in view of the fact that [Mark Futter] and I failed to pay any regard to the provisions of section 2(4) [TCGA] at the time, and therefore failed to consider the full tax implications, of the advancements, as a consequence the advancements had a very different fiscal effect to that which we had both anticipated and intended".

HMRC is in no position to challenge this evidence and has not sought to cross examine either Mark Futter or Mr Cutbill. In these circumstances I accept that evidence.

18. The question is whether that evidence entitles Mark Futter and Mr Cutbill to the relief they seek upon a proper application of the "Rule in Hastings-Bass". For the claimants Mr Richard Wilson submits that it is plainly sufficient. The power of enlargement and the power of advancement were each discretions given to the trustees in circumstances in which they were free to decide whether or not to exercise them. They chose to exercise them but the effect of the exercise is in each case different from that which the trustees intended. In each case the claimants believed that the gains that would be attributed to the beneficiaries under section 89 TCGA could be offset by the personal losses that they had incurred and in consequence no charge to CGT would arise. On the evidence it is clear that the Claimants would not in fact have acted as they did had they not failed to take into account section 2(4) TCGA. The Claimants failed to consider the true fiscal consequences, and had they done so would not have acted as they did because minimising the CGT payable on the extraction of funds from the Settlements was a priority, and it was the perceived tax consequences which determined the form of the advancements. So runs his analysis.
19. HMRC resists this conclusion. Ms Harman submits that the "Rule in Hastings-Bass" has been carried to almost absurd lengths and that it is important to have firmly in mind Lloyd LJ's guidance as to the means to keep the Rule within reasonable bounds. To that end she advanced three interlinked arguments.
20. The first argument focused upon that part of Lloyd LJ's formulation which identified as a key consideration "the effect of the exercise [being] different from that which [the trustees] intended". She submitted that if this test is applied "stringently" then the effect of the decision the trustees made was not in any meaningful sense different from that which they intended (apart from the tax consequences). The distribution was effective in accordance with its terms, and achieved the primary purpose of making distributions to beneficiaries and bringing the Settlements to an end. This argument has echoes of the distinction between "effects" and "consequences" which, in the context of equitable relief from mistake, Millett LJ drew in Gibbon v Mitchell [1990] 1 WLR 1304 at 1309D-F and 1310A. At the hearing Ms Harman developed the submission in exactly that way arguing that the Rule in Hastings-Bass was but one aspect of the general law of mistake. In Anker-Petersen v Christensen [2002] WTLR 313 Davis J had said (at p.330H):-

"If a party enters into a deed (with a view to saving tax) on terms which are fully understood and where the effect of such terms is fully appreciated and if for whatever reason the anticipated desirable tax consequences thereafter do not flow, it would really not be open, in the ordinary way at least, to such a person to seek to set aside that deed on the ground that he had not understood its nature or effect. I say this appreciating that possibly the position may be different in a case of the exercise of a power or of a discretion by a fiduciary: it may be – and I say no more than that it may be – that the adverse and unexpected tax consequences of the exercise of the power or discretion may be invoked to set aside the exercise of that particular power or discretion. But I think the position is entirely different where what is sought to be set aside is a deed entered into by way of voluntary transaction".

Ms Harman submitted that the effect of the transaction was the same whether undertaken by an individual or a fiduciary, that there could be no reason in principle for treating the mistake of an individual which brought about that effect differently from the mistake of a fiduciary which brought about an identical effect, and that Lloyd LJ's formulation of the Rule in Hastings-Bass by reference to "the effect" of the transaction afforded an opportunity to harmonise the two streams.

21. I cannot accept this argument for three reasons. First, I do not think that the "Rule in Hastings-Bass" has its foundation in the law of mistake. It has a different origin relating to the law of powers. In Re Hastings-Bass the argument of Mr Slade QC and Mr Hillaby for the trustee was that the advance, being made in good faith, was a valid advance and was not invalidated because the intended remainders were perpetuitous. The argument of Mr Browne-Wilkinson QC and Mr Gibson for the Crown was that the power of advancement was only capable of being validly exercised after the trustees had exercised their discretion properly i.e. after giving due weight to all relevant factors, and if the trustees had incorrectly weighed the benefits to the person advanced (because they did not appreciate that some of the trusts were perpetuitous) then they had not validly exercised their power at all. The Court of Appeal held that the power of advancement was validly exercised because the primary purpose of the advance into a sub-settlement was to save death duties coupled with an acceleration of the advancee's interest, the perpetuitous trusts of the sub-settlement being "mere makeweights which might be treated as enhancing the benefit…of the scheme as a whole but which were of far less significance than the major benefits". The power was accordingly validly exercised. It was validity of exercise (not mistake) that lay at the heart of the argument and of the judgments.
22. Second, in Sieff v Fox Lloyd LJ clearly (at paragraph 38) treated "the Rule in Hastings-Bass" as being one of the "categories of case where an exercise by trustees of a discretionary power may be held invalid". Rescission for mistake was argued as an alternative ground for challenging the appointment in Sieff; and Gibbon v Mitchell (supra) was cited and fully argued. Lloyd LJ treated the two strands of argument as entirely separate and did not attempt a synthesis, notwithstanding that Mr Herbert QC had submitted that it would be odd for the rules as regards setting aside an instrument because of a mistake to differ significantly as between one jurisdiction and another unless there were objective reasons why they should: see paragraph 94. It is not open to me in those circumstances to attempt that synthesis.
23. Third, tax liabilities generated by the exercise of power have not, in the authorities which apply "the Rule in Hastings-Bass", been treated as a "consequence" of the trustees' action which did not alter the "effect" of the action itself. In Green v Cobham [2002] STC 820 trustees overlooked the fact that a Will Trust and two sub-settlements together constituted a single composite settlement for the purposes of CGT with a single body of trustees. Because of that mistake they appointed new trustees such that the majority of the trustees of the composite settlement became resident in the United Kingdom with disadvantageous CGT consequences. The deed of appointment was held to be invalid. In Abacus Trust v NSPCC [2001] STC 1344 trustees were advised to declare new trusts in one year and then appoint in favour of a charity in the following year. By mistake they appointed in favour of the charity in the same tax year, thereby generating a £1.2 million liability to CGT for the settlor. Patten J held that the financial consequences for the beneficiaries of any intended exercise of a fiduciary power could not be assessed without reference to their fiscal implications: and that once relevance was established then a failure to take those matters into account must vitiate the exercise of the power. In Burrell v Burrell [2005] EWHC 245 (Ch) shares were appointed by trustees in the belief that they attracted business property relief from inheritance tax. They did not so qualify. Mann J treated the decision in Abacus v NSPCC as clear authority for the proposition that trustees must consider the fiscal consequences of their acts, and that a failure to do so was capable of leading to the application of "the Rule in Hastings-Bass". He declared invalid that part of the appointment which dealt with the shares. All these cases were reviewed by Lloyd LJ in Sieff v Fox without disapproval, and in the context of an argument advanced by Mr Herbert QC that the relevant appointment must have a different substantive effect (and not merely differ as to consequential matters) (ibid paragraph 31). Indeed, the judge said that they demonstrated that the cases had come a long way from the propositions discussed in the authorities considered in Re Hastings-Bass itself (ibid paragraph 75): and that there was no doubt that fiscal consequences may be relevant considerations which the trustees ought to take into account, and that a material difference between the intended and actual fiscal consequences of the act may be sufficient to bring the "Hastings-Bass principle" into play (ibid paragraph 86). In Smithson v Hamilton [2007] EWHC 2900 (Ch) Sir Andrew Park regarded it as settled that "the Hastings-Bass principle" was not restricted to cases where the trustees failed to achieve the direct legal effect which they intended. He noted that the usual situation is that the action which the trustees have taken achieves exactly the legal effect intended but has unwelcome consequences (usually tax consequences) which the trustees failed to foresee: see paragraph 53 of the judgment.
24. I therefore cannot accept Ms Harman's first group of submissions. At first instance it must be accepted that in the application of the "Hastings-Bass principle" no distinction is to be drawn between "effect" and "consequences" and that as regards fiscal consequences the correct analysis is to be found in the passage from the judgement of Patten J in Abacus v NSPCC which Lloyd LJ cited in paragraph 66 and approved in paragraph 86 of his judgment in Sieff v Fox.
25. Ms Harman's second group of submissions focused upon the significance of the error made by the trustees. Adopting the words of Park J in Breadner v Granville-Grossman [2001] Ch 523 at 543d that it cannot be right that whenever trustees do something which they later regret they can say that they never did it in the first place, Ms Harman submitted that the court must be able to find that the mistake was objectively significant. She drew attention to the fact that in Re Hastings-Bass itself the Court had assessed the significance objectively (at pp.39F-40C):-

"In these circumstances, to what considerations is it reasonable to suppose that the trustees addressed their minds before making the advancement? No doubt it is right to say that they should, and would, have considered whether the aggregate of all the provisions of the sub-settlement … would be for William's benefit, but in doing so they could not … have failed to consider to what extent each of those provisions could properly be regarded as contributing to the aggregate benefit … Had it occurred to the trustees that the ulterior trusts might all fail for perpetuity, they could not reasonably have thought that this could tip the scales in the weighing operation against the scheme. The law cannot, in our judgment, require the trustees' exercise of their discretion to be treated as a nullity on the basis of an absurd assumption that, had they realised its true legal effect, they would have reached an unreasonable conclusion as a result of the weighing operation…"

There is another passage at page 41C which refers to the exercise of power being such that it could not reasonably be regarded as beneficial. Ms Harman submitted that this approach survived in Lloyd LJ's guidance (in paragraph 82 of Sieff v Fox) that the court should "take a reasonable and not over-exigent view of what it is that the trustees ought to have taken into account": and in his observation (at paragraph 86 of his judgment) that if the trustees were unaware of some subtle and perhaps unforeseeable detail of the tax consequences of an action it might not be the case that their decision would be vitiated by "the Hastings-Bass principle". She submitted that in the case of the No. 5 Settlement the unforeseen capital gains tax charge of £1762 for each beneficiary failed to cross the threshold of significance.

26. I am unable to accept these alternative submissions. The approach adopted in Sieff v Fox requires the Court first to decide (on a reasonable basis) what factors the trustees ought to have taken into account. In deciding that question it is clear on the authorities as they stand that the tax consequences for the trust estate or for the beneficiaries are, in principle, factors to be taken into account (though not if the tax consequences are subtle or detailed). Then the Court must ask whether a failure to take account of the identified factor made any real difference to the decision. As Lloyd LJ put it (in paragraph 77):-

"The question whether the difference in effect has to be substantial in order for the principle to apply comes into the test as part of the process of answering the question whether, if the trustees had been aware of the true position, they would not have acted as they did."

27. No doubt there is no general principle that a trustee must be familiar with the personal tax position of every intended recipient of funds on a distribution from or dealing with a trust fund. But in the instant case the relevant tax consequence was the attribution of the trusts' stockpiled chargeable gains to beneficiaries on a distribution. The real benefit to a beneficiary who suffered that attribution of trust gains is something which it was reasonable for the trustees to take into account in making a distribution. Moreover the provision that any tax payable was to be borne by the trust fund had implications for the administration of that fund by the trustees. Trustees ought in general to take into account the impact upon the trust fund of an intended distribution. There is no doubt on the evidence that the trustees in fact sought to do so. Nor is there any doubt that if they had realised the true tax consequences of their actions they would not have acted as they did.
28. This brings me to Ms Harman's third submission (which was shortly made and not pressed). The submission was that in Lloyd LJ's formulation of "the Hastings-Bass principle" a key requirement is that the trustees must demonstrate that they would not have acted as they did had they not failed to take into account relevant considerations: and that in the instant case the evidence demonstrated that, far from failing to take into account the capital gains tax consequences, the trustees went to great lengths to take advice upon that very matter. The problem was that the advice was wrong. The "Hastings-Bass principle" did not exist to enable advisors to be relieved from the consequences of bad advice. That submission echoed an observation of Lord Walker in his article:-

"One's instinctive reaction (not necessarily a satisfactory substitute for legal analysis) is to ask why the Chancery Division, rather than the party's professional indemnity insurers, should have to pick up the pieces…"

29. I agree that the principle does not exist to relieve advisors from the consequences of their mistakes. It exists to ensure that beneficiaries do not suffer by an invalid exercise of a power by trustees (no distinction being drawn between the objects in whose favour the power is exercised and those entitled in default). The relevant failure is a failure to take into account a particular factor and its impact upon the true effect of the exercise of the power. If trustees exercise a power of appointment in favour of "the grandchildren of X namely A B and C in equal one third shares" but X in fact has four grandchildren then "the Hastings-Bass principle" is capable of applying, whether the trustees were simply ignorant of or were misadvised as to the true position. The principle is not inapplicable simply because the trustees did think about the number of grandchildren, but got the number wrong. In Burrell (supra) the trustees did think about inheritance tax and did think about business property relief: they simply misunderstood the conditions for its applicability. The true consequence of the appointment they made was to incur an immediate tax liability of something over £800,000. The court was satisfied that if they had known that true consequence they would not have executed the Deed. In Sieff v Fox this was regarded as a perfectly orthodox application of "the Rule in Hastings-Bass".
30. For these reasons I would reject the arguments advanced by Ms Harman and accept the analysis of Mr Richard Wilson. I will set aside the Deed dated 31 March 2008 and that dated 3 April 2008.
31. The form of relief sought by the trustees is a declaration that the relevant deed "is void and of no effect". HMRC did not concede that this was the relief to be granted: none of the other defendants consented to the relief being sought (though they did not oppose). I have therefore been asked to decide the question whether the relevant Deed was void, or was voidable and is now avoided. Deciding this question has itself been avoided on a number of occasions; notably in Sieff v Fox itself (see paragraph 82). In his article Lord Walker described it as "difficult". But I am called on to decide it, so that the tax consequences can be determined.
32. As is noted in the authorities, if the consequence of applying "the Rule in Hastings Bass" is that the exercise of the fiduciary power is void, this might have dramatic and potentially unfair disruptive consequences for trustees and for beneficiaries. It is therefore attractive to hold that the appointment is voidable rather than void. Lightman J did so in Abacus v Barr [2003] EWHC 114 (Ch). But the reasoning that led to this conclusion was not accepted by Lloyd LJ in Sieff v Fox, and that judge regarded it as open to doubt; (ibid para 81).
33. Without the benefit of detailed argument or extensive citation of authority, I would hold that (in relation to private family trusts of the type with which this case is concerned) the consequence of invoking "the Rule in Hastings Bass" is to make the deed or transaction void. The rigours of this analysis may be mitigated in particular cases. First, there must in my view be a "change of position" defence (not advanced by any defendant in the case before me). Second, I would align myself with the argument that Mr Taube QC advanced in Sieff v Fox that, since the remedy lies in equity, and the grant of a declaration is discretionary, matters affecting the conscience of the parties, including laches or acquiescence, can be taken into account by the Court in deciding what (if any) relief to grant: (ibid paragraph 81 and see Stannard v Fisons [1992] IRLR 27 at paragraph 67). As it was put in Cloutte v Storey [1911] 1 Ch 18 at p.31

"…the mere fact that the appointment is void does not prevent the court of equity from having regard to it e.g. an appointment under a limited power to a stranger is void, but equity may cause effect to be given to it by means of the doctrine of election".

I respectfully disagree with the suggestion of Lewison J in Re Griffiths [2008] EWHC 118 (Ch) paragraph 34 that if relief is discretionary it must follow that the relevant transaction is voidable and not void. (I would as a footnote that the doctrine of severance, such as was applied in Re Hastings-Bass itself, will also operate to mitigate the rigours of the analysis).

34. I would briefly express my reasons for that view as follows:-

a) If the origins of "the Rule" lie in the law relating to invalid exercise of a power (rather than in the law of mistake) then in principle an invalid exercise of a power should result in a void transaction. The trustees have not made a decision within the ambit of the power.

b) That the relevant deed was void (not voidable) is the only basis upon which the decision in Re Abrahams WT [1969] 1 Ch 463 can have proceeded.

c) Where a fraudulent execution of a power is established the effect (according to the authorities, some of which have been called "problematic") is that the execution is wholly void: Re Marsden (1859) 4 Drew 594, Cloutte v Storey [1911] 1 Ch 18 Vatcher v Paull [1915] AC 372. (See also Sugden on Powers 8^th ed. at 611).

d) Where a power is exercised in form but not in substance then the appointment will be declared void: Turner v Turner [1984] Ch 100. (I acknowledge that this case is not without its critics: but it seems to me consistent with principle).

e) The form of order approved by the Court of Appeal and by the House of Lords in Topham v Duke of Portland (1869) LR 5 Ch. App. 40 in such cases is a declaration that the appointments "are void" and consequential orders for an account of receipts by the person who has benefited under the void deed: see Seton's Judgments and Orders 7^th ed. p. 1672.

f) Orders declaring the relevant deeds void ab initio were made in Green v Cobham (supra) and Abacus v NSPCC (supra).

g) The statement that the deed is an invalid exercise of trustees power of appointment and consequently void in its entirety is one that recurs in the authorities: see e.g. Mettoy Pensions v Evans [1990] 1 WLR 1578, and AMP (UK) Ltd v Barker [2000] EWHC 42 (Ch) .

h) It is the view favoured in Lewin on Trusts 18^th edition paragraph 29 -249 and in Underhill & Hayton Law of Trusts 17^th edition paragraph 61.22.

35. For these reasons I hold that the two deeds are void. Any property passing as a result of their execution has been held by the recipient upon constructive trust for the trustees of the No.3 and the No.5 Settlements (as the case may be) and it (or the property now representing it) must be returned to the trustees and an account given of all income received. The trustees must be treated as if the property with which they parted has at all material times formed part of the trust fund: and they must pay whatever tax, interest and penalties are due on that footing. The property so returned may be the subject of a fresh and valid exercise of the respective powers of enlargement and advancement.

Mr Justice Norris………………………………………………………..11 March 2010