Jersey Unreported Judgments

Trust.

[2023]JRC080

Royal Court

(Samedi)

18 May 2023

Before     :

R. J. MacRae, Esq., Deputy Bailiff, and Jurats Le Cornu and Entwistle

IN THE MATTER OF THE REPRESENTATION OF ALTUM TRUSTEES LIMITED (FORMERLY LGL TRUSTEES LIMITED) AND VG TRUSTEES LIMITED

AND IN THE MATTER OF THE ANDHA TRUST

AND IN THE MATTER OF ARTICLES 47G and 47H OF THE TRUSTS (JERSEY) LAW 1984 (AS AMENDED)

Advocate J. M. P. Gleeson for the Representors.

Advocate R. S. Christie for the minor and unborn beneficiaries of the Trust.

judgment

the deputy bailiff:

Background

1.        On 16 March 2023, we heard argument in respect of a Representation issued by Altum Trustees Limited ("Altum" or the "Trustee") and VG Trustees Limited ("VG") (jointly referred to as the "Representors"), the former trustee and, since 15 December 2022, present trustee of the Andha Trust ("the Trust").

2.        The Trust is a Jersey law trust established on 4 April 2019.  The Trust was made between the settlor and Altum (under its previous name, LGL Trustees Limited).  The beneficiaries of the Trust were specified in Schedule 3 and were defined therein as the settlor, his children and remoter issue, and such other persons or class of persons added from time to time pursuant to clause 8 of the Trust.  No such persons have been added and any spouse of the settlor is excluded from benefit. 

3.        The settlor has three minor children and they and their remoter issue were represented by Advocate Christie who was convened and appointed for that purpose.

4.        Pursuant to the terms of the Trust, the Trustee has, inter alia, a power to borrow money which provides:

"The Trustee may borrow money and, if on the security of the Trust Fund, may charge the whole or any part of the Trust Fund (including future income) with the repayment of any monies so borrowed and may apply the money so raised in any manner in which money forming part of the capital of the Trust Fund may be paid or applied and so that the Trustee may enter into any joint borrowing arrangement..."

5.        The initial settled property of the Trust was £10 as particularised in the trust instrument.

6.        The settlor was born in Country 1 and was not domiciled in the United Kingdom, on at least one view, until 6 April 2019 - two days after the establishment of the Trust.  This is a matter to which we will return when we summarise the evidence.  The Trust was set up to mitigate potential UK tax consequences for the settlor arising from his domicile in the UK.  The relevant evidence is contained in the affidavit of Mr Tomlinson, sworn on behalf of the settlor and Altum.  The settlor did not swear an affidavit.  Mr Tomlinson is head of the family office of Altum, he met the settlor in 2016 and is acquainted with the settlor's affairs and the circumstances in which the Trust was set up.  He had 'overall responsibility for the Trust' and, notwithstanding the retirement of Altum, remains closely connected with the settlor's financial interests. 

7.        Altum settled another trust, namely the C Trust, on 28 March 2017.  The settled property was £10 but subsequently the settlor transferred to the trustee of the C Trust (also Altum) just over $3 million on 5 April 2017 and just over $8 million in September 2017.  These funds were the proceeds of the settlor's employment in the UK financial services industry.  These assets were funds that the settlor was unlikely to require for his own personal use.  The beneficiaries of the C Trust included the settlor and his children and were, with one exception, not relevant for the purposes of this judgment, identical to the beneficiaries under the Trust.  The beneficiaries of the C Trust are the settlor, his wife for the time being (he is currently unmarried), his children and remoter issue, and a named charity. 

8.        The C Trust was set up in the context of and just before new UK tax rules that were due to come into effect on 6 April 2017.  In respect of those rules, both the settlor and Altum had obtained tax advice from BDO LLP dated 28 March 2017, the day on which the C Trust was settled.  Material sections of that advice were:

"UK tax position from 6 April 2017

3.24 From 6 April 2017 proposed new rules are to govern the UK Income Tax and CGT [capital gains tax] treatment of non UK resident trusts. The new rules will apply to the [C] Trust.

3.25 Certain trust protections are to be introduced for UK Income Tax and CGT purposes - see below.

3.26 Provided a non UK resident trust does not become "tainted" from 6 April 2017 onwards the Income Tax and CGT protections should remain in place.

3.27 A trust can become "tainted" by additional value being added to the trust (e.g. new assets being added on other than arm's length terms) by a non-UK domiciled individual / settlor who is "deemed" UK domiciled under the new 15/20 years of residence rule - see below.

3.28 You should also note that trusts could also become inadvertently tainted in other circumstances (such as where loans are made to the trust and no interest in charged on the loan).  [Our emphasis]

3.29 From 6 April 2017, a non UK domiciled individual / settlor will become "deemed" UK domiciled (for UK Income Tax, CGT and IHT purposes) once they have been UK tax resident for 15 of the previous 20 tax years.

3.30 [The Settlor] should not become "deemed" UK domiciled under the new rules until 6 April 2018. Under the new rules [the Settlor] could therefore "taint" the [C] Trust by adding additional value to Trust (sic) on or after 6 April 2018. Such action should be avoided.

.....

4.3 To seek to ensure the [C] Trust benefits from the proposed trust "protections" from 6 April 2017, [the Settlor] should seek to settle the [C] Trust before he becomes "deemed" UK domiciled under the new rule applicable from 6 April 2017."

9.        The C Trust was accordingly a 'protected trust', in that a UK non-resident settlor had settled assets prior to that date and it would remain 'protected' and not 'tainted' so long as certain conditions were met - some of which are referred to in the extract above.  As the two transfers into trust referred to at paragraph 7 above were made prior to the date the settlor was thought to be due to become 'deemed' domiciled on 6 April 2018, the C Trust was not tainted by these additional sums contributed to the C Trust.

10.      The date upon which the settlor might become domiciled in the UK for tax purposes was revisited in late 2018 / early 2019, in particular by reference to the fact that the settlor had spent some time during the relevant twenty year period living outside the United Kingdom.  Although the point was not free from doubt, leading tax counsel gave advice to BDO in February 2019 for the benefit of the settlor (Altum was not present at the conference) to the effect that the settlor may, although the matter is not free from doubt, have become deemed domiciled in the United Kingdom on 6 April 2019, and not 6 April 2018.  In order to ensure that the C Trust remained 'protected', BDO advised the settlor that he should not settle additional cash into the C Trust, but should settle two additional trusts which are not relevant to the purposes of this decision.  Those trusts were both settled on 20 March 2019, and monies that the settlor regarded as surplus to his living requirements settled into these two trusts on 4 April 2019.  The settlor's date of becoming deemed domiciled in the UK would only be 6 April 2019, and not 6 April 2018, if HMRC did not challenge the settlor's resident status for 2012 / 2013.  Leading counsel advised that the settlor had a 60/40 chance of success at a tribunal, but the likelihood of HMRC raising an inquiry in relation to his residence status in the first instance for that period was estimated to be about 10%.  The settlor interpreted that as being an approximate 4% risk of successful challenge (i.e. 40% of 10%) of his resident status for the period in question. 

The 2019 Tax Advice

11.      On 28 March 2019, BDO released a draft of their further tax advice ("the BDO Advice").  The advice was issued to the parties who had instructed BDO, namely the settlor and Altum as trustee of the C Trust.  It is this advice which is central to the circumstances in which the Trust was settled.  The relevant passages of the advice drawn to our attention are as follows:

"6.1    The following provides an overview of the UK tax position of [other two trusts], and [Andha] (collectively 'the Trusts') for [the Settlor] personally as Settlor and beneficiary of the Trusts. 

6.2      The comments below are provided on the basis [the Settlor] is currently non UK domiciled and non 'deemed' UK domiciled under the 15/20 year rule applicable from 6 April 2017 - see below.

6.3      From 6 April 2017 certain trust protections were introduced (for UK Income Tax and CGT purposes) for non UK resident trusts settled by non UK domiciled (and non 'deemed' domiciled) individuals.  These rules should apply to the Trusts as they were (or are to be) settled before [the Settlor] becomes 'deemed' UK domiciled."

12.      In respect of the UK tax position of the three trusts, including the Trust, and the settlor in his capacity as settlor and beneficiary BDO advised inter alia:

"6.4    Provided a non UK resident trust does not become 'tainted' - see below - the Income Tax and CGT protections should remain in place.

6.5      A trust can become 'tainted' by additional value being added to the trust (e.g. new assets being added on other than arm's length terms) by a non-UK domiciled individual / settlor who is 'deemed' UK domiciled under the 15/20 years of residence rule.

6.6      It should also be noted that trusts can become inadvertently tainted in a number of other circumstances (e.g. where loans are made to the trust and no interest is charged on the loan).

6.7      Under current UK tax rules a non UK domiciled individual becomes 'deemed' UK domiciled (for UK Income Tax, CGT and IHT purposes) once they have been UK tax resident for 15 out of the previous 20 tax years.

6.8      On the basis [the Settlor] had a non UK tax resident status for the 2012/2013 UK tax year, he should not become 'deemed' UK tax domiciled under the 15/20 year rule until 6 April 2019.

6.9      From 6 April 2019 [the Settlor] could therefore 'taint' the Trusts by adding additional value to Trusts on or after that date.  Such action should be avoided."

13.      The advice is extensive and complex and, in respect of tainting, the following advice was given:

"Risk of Tainting

7.16    In addition to the risk of 'tainting' for [Andha], by virtue of [the Settlor] adding value to [Andha] once he is 'deemed' UK domiciled (as set out in section 3 above), there is also a risk of 'tainting' for [Andha] if a funding line extended from the [C] Trust is not on commercial terms at a time when [the Settlor] becomes 'deemed' UK domiciled.

7.17    The reason for the above is that 'tainting' can arise where non-commercial borrowing is extended between related entities (such as non UK resident trusts) settled by a non UK domiciled individual who subsequently becomes 'deemed' UK domiciled.

7.18    To avoid the risk of tainting a commercial rate of interest should be charged on the proposed funding line (and the interest should be paid on at least an annual basis).  We would however recommend the interest due is paid every six months.

7.19    HMRC guidance sets out that a commercial rate of interest for these purposes should be at least the official rate of interest set by HMRC (which is currently 2.5%).

7.20    We would suggest the rate of interest charged on a loan between the [C] Trust and [Andha] tracks the HMRC official rate of interest.  We would also recommend that the trustees monitor the funding line terms (and make any appropriate amendments, as needed) to ensure the funding line remains on commercial terms."

14.      The consequences of the advice given by BDO appear to be to us reasonably straightforward.  Assuming that the settlor did remain non-domiciled for tax purposes until 6 April 2019, he could set up a Jersey trust until that date.  Once the settlor became deemed domiciled, he could not add value to the Trust, but the Trust could receive a loan from, for example, the C Trust so long as it was on commercial terms - which dictated the charging and payment of interest.  Interest should be at the HMRC official rate and interest should be paid on 'at least an annual basis' - with BDO recommending every six months.  It is not expressly claimed that the BDO advice was negligently given and BDO has not been approached by the Trustee or the settlor to that effect, still less have they accepted that their advice was incorrect or defective.

15.      Nonetheless, Mr Tomlinson, on behalf of Altum, criticises the BDO advice because he says that an obligation to pay interest twice during a year, although it would 'halve the risk of accidental non-compliance with the annual interest requirements mandated by the legislation', led him to make a 'mistake' in agreeing on behalf of the Trust the terms upon which the Trust was to borrow the monies which were subsequently borrowed from the C Trust.  He says his attention was not drawn to the terms of section 628B(8) of the UK Income Tax (Trading and Other Income) Act 2005 ("Income Tax Act 2005") which says that a loan of this nature is made on arm's length terms 'In the case of a loan made to the trustees of a settlement, only if interest at the official rate or more is payable at least annually under the loan' and 'in the case of a loan made by the trustees of a settlement, only if any interest payable under the loan is payable at no more than the official rate'.

16.      Mr Tomlinson, in his affidavit, says that it was "imperative" that the Trust did not become tainted owing to the growth in the value of an investment fund which became a significant asset of the Trust shortly after the time it was created, and so long as the Trust retained its protected status then it would be outside the scope of UK taxation.  Should the Trust become tainted, then any profits paid up to the Trust might be the subject of UK taxation and he says that, although this is not the advice he received but merely his understanding, of 'more concern however, is the potential exposure to CGT and IHT.  Should shares in the business be sold....either in whole or in part, then the Trust would be exposed to CGT on the entire value of that transaction' and '...should [the settlor] pass away and the Trust not have protected status then the entire value of the trust fund would be subject to IHT at 40%, whereas with the full trust protections that rate would be nil".

17.      These liabilities to UK tax, although not quantified and possibly not quantifiable, would run to several million pounds.

18.      In any event, in reliance upon the advice from BDO, Mr Tomlinson approached a Jersey law firm, Ward Yates, who also drafted the Trust in this case, with a view to them drafting the proposed Loan Agreement.  On any view, the Loan Agreement was properly drafted in accordance with the BDO advice.  The draft Loan Agreement was considered by BDO on 21 June 2019 and their observations included 'Clause 5.2 sets out that the interest is paid six monthly in arrears, which should be sufficient' and 'Clause 6.1 makes provision for default interest to be payable by the borrower if amounts are unpaid.  The provision is for 3% per annum to be charged.  We would suggest that the default interest charged (if applicable) is also calculated at the Official Rate.... to avoid the risk of a claim from HMRC that the rate of default interest charged could taint either the [C] Trust or the [Trust]'.  BDO concluded 'Whilst the above represents a cautious approach, given the uncertainty surrounding the tainting provisions (and the lack of clear HMRC guidance on this point) we would suggest the default rate of interest is set in line with the HMRC official rate'. 

19.      Those suggestions were incorporated into the final Loan Agreement which was executed by Altum both as lender, i.e. trustee of the C Trust, and borrower, i.e. Trustee of the Trust, on 9 July 2019. 

20.      Mr Tomlinson complains 'At no stage during those communications did BDO ever advise me that any failure to comply with the terms of the Loan Agreement would result in tainting'.  We found this a surprising remark to make as the whole point of the advice given as to the terms of the Loan Agreement was to avoid tainting.  It had no other function.  Altum's case seems to have been that had they known of the fact that a failure to comply with the terms of the Loan Agreement would result in tainting, then they would have not wished for there to be two annual payment obligations but only one, because two payment obligations, it is claimed, 'inadvertently doubled the risk of tainting since it was twice as likely that a payment might be missed'.  Mr Tomlinson also suggested that Altum would have tried harder to comply with the Loan Agreement that was made.  It seemed to us that this rather missed the point; the BDO advice was cautious and prudent.  There were uncertainties as the rules were new, and the guidance from HMRC was unclear.  Two payments per year plainly met the statutory obligation that there should be payments of interest 'at least annually' and ensured that if one payment was for any reason missed, then one payment would have been made.  In any event, for a professional trustee to ensure that payments were made in accordance with a simple Loan Agreement would not, one would have thought, have been a difficult task.

21.      However, that is not what happened.

The Loan Agreement

22.      The loan facility was $1.2 million, later increased to $2.5 million, and the first draw down took place on 10 July 2019 which required the first interest payment to take place six months later, on 10 January 2020, with the second payment of interest due on 10 July 2020.  The funds were used to set up a complex structure pursuant to which companies operating in, inter alia, the United Kingdom were incorporated and wholly owned by a Country 2 company, which in turn was wholly owned, managed and controlled by the Trustee in Jersey.  The details of the structure do not matter for the purposes of our decision.

The "relevant event" - tainting

23.      Altum attempted to set up an automatic internal payment system for the interest, with the administration team of Altum required to make the first payment of interest on 9 January 2020.  In fact, Mr Tomlinson says that a junior staff member who had been given the job of carrying out this task 'switched off the alert reminders for payment and the interest payments due in January and July 2020 (and indeed January 2021...) were accordingly missed on the due dates'.  Mr Tomlinson did not discover this failure until the third quarter of 2021. 

24.      Defects in administration at Altum were compounded by the covid 19 pandemic in early 2020 which resulted in staff members either isolating or trying to work remotely which caused 'significant disruption to the operational efficiencies within the business'. 

25.      Mr Tomlinson discovered that the first payment had been missed a few months later and immediately gave instructions for staff to instruct Citibank to make the interest payment 'to bring all interest up to date and to pay to 5 April 2020 so that at the end of the UK tax year no interest was owing'.  He sent an email to his team on 31 March 2020 in which he said, inter alia:

"As you will be aware the tainting rules are onerous and we cannot miss an interest payment in any tax year.  I believe there are diary reminders set up to pay the interest every six months in line with BDO's advice, has anyone received a flag of that as a reminder, if not can this please be checked because we must have appropriate controls in place on the system to ensure these payments aren't missed."

26.      Mr Tomlinson said that this message shows that he was 'not concerned' about having missed an interest payment, which he says is reflective of his 'lack of understanding' that payments had to be made in strict compliance with the Loan Agreement, and the email also shows that he was 'under the impression' that the 'year' during which an interest payment had to be made was the UK tax year.  This too was incorrect.  However, of course, this had not been advice that BDO had given - they never suggested that payments needed to be made during a tax year as opposed to a calendar year and there had been no request for clarification from BDO in relation to this matter.

27.      Unfortunately, although Altum requested Citibank to transfer the interest due up until 5 April 2020 from an account held by the Trust to an account held by C Trust on 2 April 2020, Citibank simply failed to do so owing to a banking error.  This error was not picked up by Altum until 31 March 2021.  Citibank had made the payment to another trust account in error and not to a bank account held by the C Trust.  As part of the bank's rectification process, Citibank notified Altum that they had engaged Deloitte.  Disclosure of the Deloitte advice to Citibank led to Altum learning of the fact that, pursuant to the relevant provisions of the Income Tax Act 2005, the failure to pay interest in accordance with the terms of the Loan Agreement was or may have been a 'relevant event' for the purpose of tainting, i.e. that the Trust was now tainted. 

28.      Subsequently, on 18 November 2021, Citibank reversed the transaction executed by mistake and re-input the transaction in accordance with Altum's instructions dated 2 April 2020. 

29.      As to the other payments due to be made during this period, Altum failed to pay them in accordance with the terms of the Loan Agreement.  However, on any view, the mistakes were made innocently, and Altum was trying to comply with the terms of the Loan Agreement.  The second payment due to be paid on 10 July 2020 was not paid at that time, as noted above, and was only paid on 30 November 2020.  The next payment was made on 31 March 2021 and not as required on 10 January 2021.

30.      Since the autumn of 2021 all payments have been on time in accordance with the Loan Agreement.  Mr Tomlinson said that he was not aware of the terms of section 628(B) Income Tax Act 2005 until they were drawn to his attention in the summer of 2021.  In Mr Tomlinson's concluding paragraphs he says that 'The complete absence of advice [from BDO] on 'relevant events' combined with the recommendation of a bi-annual interest obligation put Altum on a collision course with a tainting problem'.  He goes on to say that had Altum been properly advised then it would have exercised its borrowing power to enter into a loan agreement with less prescriptive terms concerning interest which would have excluded a bi-annual payment obligation, particularly one that was linked to the date of the first draw down which was something which he says was 'easy to overlook' and is unnecessary for compliance with the Income Tax Act 2005 but amounts to a 'tripwire' for the Trustee by 'doubling' the risk of accidental non-compliance and consequential tainting. 

Advice from Counsel

31.      These matters led to Altum and their advocates seeking advice from a tax silk, James Rivett, in June 2021.  His advice was finalised in October of 2022.  They also took advice from Chancery counsel, Mr Lynton Tucker of New Square Chambers. 

32.      Tax counsel was instructed to deal with the UK tax issues arising from these matters, and Mr Tucker was instructed to advise in respect of this application under Articles 47G and 47H of the Trusts (Jersey) Law 1984 as amended ("the Trusts Law"). 

33.      The advice of leading tax counsel, Mr Rivett, is consistent with, although more detailed than, the BDO advice.  A protected settlement will become tainted if certain conditions are not met.  Importantly the trustee of a protected settlement cannot provide property or income to a trust from another trust settled by the same settlor when that settlor is UK domiciled or deemed domiciled subsequently to 6 April 2017.  But there are exceptions to this - one of which is a loan agreement made to the trustee on arm's length terms - which must include an obligation to pay interest at least annually.  However, this exception is lost if a 'relevant event' occurs, which includes any failure to pay interest in accordance with the terms of the loan agreement - paying interest once a year is not enough; interest payments must also be made in compliance with the terms of the loan agreement, i.e. those provisions dealing with interest.  Once a relevant event has occurred, the trust becomes tainted.  In these circumstances, the failure to make the first and second payments in this case which were not made in compliance with the interest payment obligations set out in the Loan Agreement, have likely resulted in the trust losing its protection and becoming tainted.  Mr Rivett opines that there are good grounds for taking the view that HMRC would not regard Citibank's failure as a matter which would necessarily amount to a relevant event as the Trustee was blameless.  Of course, this payment was not made in accordance with the terms of the Loan Agreement notwithstanding Citibank's error.

34.      Both counsel agree that the tainting issue which may have arisen could be addressed by a declaration that the Trustee's exercise of its power to borrow under the terms of the Trust is voidable and the Court determining that it should set aside clause 5.2 of the Loan Agreement (which deals with the particular stipulation in relation to the payment of interest) and declare that the interest due pursuant to clause 5.1 be payable 'at least annually'.  Tax counsel said that such wording was likely to be 'technically effective' for the purpose of curing the tainting of the Trust and of retrospective effect for the purpose of the relevant UK tax legislation.

35.      Mr Tucker's opinion is dated February 2022.  Mr Tucker reviewed, inter alia, the BDO advice and said in his opinion at paragraph 27:

"27.    The main problems with this advice are these.  First, it is does not say that in order to avoid tainting it is necessary not only for the interest at the official rate to be payable under the loan at least annually but also that there must be no failure to pay interest in accordance with the terms of the loan.  No reference is made to the draconian effect of occurrence of a relevant event. 

28.      Secondly, it recommends interest on the loan is paid on a six monthly basis, and that the interest due is paid every six months, without any explanation of the rationale for these recommendations."

36.      He went on to observe that Altum was 'fully aware' of BDO's recommendation concerning payment of interest every six months, and that Mr Tomlinson told Ward Yates when giving them instructions that 'interest needs to be paid every six months'.  Mr Tucker notes that there is a 'respectable argument' that a failure to pay interest in accordance with the terms of the Loan Agreement does not occur merely by reason of late payment, but only where an obligation to pay interest is waived or discharged.  In this case, of course, there was no waiver or discharge, and we agree that there must be a respectable argument that in the circumstances the Trust is not tainted and it remains protected.  That, of course, is a matter for HMRC if this application by the Representors is unsuccessful.

37.      Mr Tucker is, of course, not giving Jersey legal advice.  He is an English barrister, but he sets out the relevant terms of the Trusts Law and it is convenient for our purposes to do so.

38.      Article 47G of the Trusts Law provides:

"47G Power to set aside the exercise of powers in relation to a trust or trust property due to mistake

(1)       In this paragraph, "person exercising a power" means a person who, otherwise than in the capacity of trustee, exercises a power over, or in relation to a trust, or trust property.

(2)       The court may on the application of any person specified in Article 47I(2), and in the circumstances set out in paragraph (3), declare that the exercise of a power by a trustee or a person exercising a power over, or in relation to a trust, or trust property, is voidable and -

(a)       has such effect as the court may determine; or

(b)        is of no effect from the time of its exercise.

(3)       The circumstances are where the trustee or person exercising a power -

(a)        made a mistake in relation to the exercise of his or her power; and

(b)        would not have exercised the power, or would not have exercised the power in the way it was so exercised, but for that mistake, and the mistake is of so serious a character as to render it just for the court to make a declaration under this Article."

39.      Article 47H provides:

"47H Power to set aside the exercise of fiduciary powers in relation to a trust or trust property

(1)       In this paragraph, "person exercising a power" means a person who, otherwise than in the capacity of trustee, exercises a power over, or in relation to a trust, or trust property and who owes a fiduciary duty to a beneficiary in relation to the exercise of that power.

(2)       The court may on the application of any person specified in Article 471(2), and in the circumstances set out in paragraph (3), declare that the exercise of a power by a trustee or a person exercising a power over, or in relation to a trust, or trust property, is voidable and -

(a) has such effect as the court may determine; or

(b) is of no effect from the time of its exercise.

(3)       The circumstances are where, in relation to the exercise of his or her power, the trustee or person exercising a power -

(a)        failed to take into account any relevant considerations or took into account irrelevant considerations; and

(b)        would not have exercised the power, or would not have exercised the power in the way it was so exercised, but for that failure to take into account relevant considerations, or that taking into account of irrelevant considerations.

(4)       It does not matter whether or not the circumstances set out in paragraph (3) occurred as a result of any lack of care or other fault on the part of the trustee or person exercising a power, or on the part of any person giving advice in relation to the exercise of the power."

40.      For the purpose of these Articles, Mr Tucker says the relevant exercise of the power in this case was the exercise of Altum of its power to borrow by deciding to enter and entering into the Loan Agreement in its original and amended form.  He then explores what might amount to a 'qualifying mistake' in relation to the making of the Loan Agreement and correctly, in our view, says that the failure of Altum to pay interest would not be a qualifying mistake as they were simply mistakes in the performance of the Trustee's contractual obligations under the Loan Agreement, not in themselves mistakes in relation to the exercise of a power.

41.      Counsel suggests that the mistake made by Altum was that it failed in view of what counsel calls the 'inadequacy' of the BDO advice to:

"...understand the requirement of the UK rules concerning tainting under the Finance Act, especially as to relevant events, and mistakenly believed that there was an advantage in having two interest payment dates a year because it would not matter if one of them was missed.  The opposite was the case since it was of crucial importance, at any rate, on the plain literal reading of legislation, in order to avoid the [Andha] Trust becoming tainted, that no interest payment date was missed."

42.      However, BDO, in its advice, did not say that it would 'not matter' if one of the payments was missed.  The BDO advice led to the Loan Agreement being drafted in the terms that it was and all Altum needed to do was to comply with its contractual obligations in order to avoid a 'relevant event' which would lead to tainting.  Mr Tucker observes:

"it would be an exaggeration to say that a proficient Jersey trust company would have had any real difficulty in making sure that it did everything on its part that was needed to make the requisite payments twice a year....I doubt the Royal Court would have been impressed by an application to seek a declaration under Article 47G on the basis of the provisions in the Loan Agreement about time of payment were unnecessarily burdensome."

43.      Mr Tucker says it was 'credible' for Altum to say that but for the mistake it would not have entered into the Loan Agreement providing for the two payments of interest a year in the prescriptive terms of clause 5.2, but would rather have entered into a loan agreement containing less prescriptive terms as to the payment of interest, for example, terms requiring payment of interest under the loan agreement at least annually.  He adds, having made this observation 'That evidence must, of course, be given and accepted by the Court for the requirements for relief under Article 47G to be satisfied'.

44.      Mr Tucker goes on to say that the fact that a mistake has not yet resulted in significant tax liabilities does not mean that the mistake is not a serious one since the mistake may lead to serious tax consequences in the future, even if such tax liabilities are no more than contingent - see Re D Trust, E Trust and F Trust [2016] JRC 166C at paragraphs 26-27.

45.      Mr Tucker observes that this case is 'not as straightforward as other cases in which relief has been given under Article 47G' as in such cases it is the exercise of a power by the trustee which generates a serious liability to tax which has been overlooked by the trustee, often owing to incorrect tax advice - see Crestbridge Trust Limited v Avocado Limited [2021] JRC 171.  But this case is different.  As counsel concedes:

"In the present case, however, the terms of the Loan Agreement did not in themselves operate to taint the [Trust] presently or in the future.  What would operate to taint the [Trust] would be a future breach by [Altum as Trustee of the Trust] of the contractual terms of the Loan Agreement as to the timing of payment of interest.  So long as the contractual terms were strictly adhered to, there would be no problem.  [Our emphasis]  One of the requirements of Article 47G is that it is just for the Court to make the declaration, and this requirement of justice is in addition to the requirement concerning the seriousness of the mistake...."

46.      In our judgment, the advice given by BDO, although cautious, was not wrong.  It was plainly not wrong because the Loan Agreement, drafted in accordance with the BDO advice, would, if it was complied with by Altum, have not resulted in the Trust being tainted.  The tainting has arisen (if it has arisen) as a consequence of the carelessness, albeit in good faith, of the Trustee.  We will return to these issues when we consider the relief that is sought in this case.  Mr Tucker observed that 'what happened in this case as regards the first and second payments of interest was widely at variance from the contractual terms'.  Although it is a matter for the Court, he observes that the Court would expect (as it has received) a 'detailed explanation' in relation to what happened in respect of the first and second payments, to show that this was 'a case of a trustee taking reasonable steps to comply with the terms of the Loan Agreement, and not a case of a trustee getting into a muddle about payment of interest in respect of which the Court would not consider it just to grant the declaration'.  Mr Tucker said the first payment was seventy-two days late and the second payment was over one hundred days late.  He expresses a concern that the Court would not consider it 'just' to make a declaration under Article 47G in the circumstances. 

47.      As to the Court's power to grant relief under Article 47H, the statutory enactment of what was formerly described as the Rule in Hastings-Bass, the Court may grant relief where, in relation to an exercise of a power over or in relation to a trust or trust property, a trustee failed to take into account any relevant considerations (or took into account irrelevant considerations) and would not have exercised the power in the way it was so exercised but for that failure to take into account relevant considerations (or the taking into account of irrelevant considerations).

48.      The relevant exercise of the power is the exercise of the power to borrow under the terms of the Trust.  Again, Mr Tucker notes that a failure to make interest payments under the Loan Agreement would not be a matter qualifying for relief under Article 47H as that was a failure in performance of a contractual obligation, rather than in relation to the exercise of a power.  However, tax considerations are plainly relevant for the purposes of Article 47H and a failure to take into account such considerations may amount to a failure to take into account relevant considerations.  Such a failure, as counsel observes 'does not mean that the [Trustee] would not have entered into the Loan Agreement at all had the relevant considerations concerning the tainting rules been taken into account', but had they been understood then it is 'credible' that Altum would not have entered into the Loan Agreement providing for two payments of interest a year as provided at clause 5.2 and with the omission of certain other terms which are subject of the claim for relief in the Re-Amended Representation.  We observe, as does counsel, that Article 47H does not contain a requirement corresponding to the requirement at the end of Article 47G(3), to the effect that a failure to take into account relevant considerations must be of 'so serious a character as to render it just' to make an order under Article 47H.  In those circumstances it may be that, on the facts of this case, the Representors have a slightly easier path to relief under Article 47H.  However, as counsel observes, in a case where a failure to take into account relevant considerations is a minor matter, it may be easy to say that the power 'might not' have been exercised in the way it was exercised but for the failure to take into account relevant considerations, but not so easy to say that the power 'would not' have been exercised in that way.  Under Article 47H, the requirement is 'would not', not 'might not', and so minor failures to take into account relevant considerations would not normally be sufficient to engage the Court's powers.  Although Article 47H does not have the requirement linking the seriousness of the mistake with the justice of making an order granting relief, the Court does retain a discretion to grant relief under Article 47H and will not make an order which it considers to be unjust. 

HMRC

49.      HMRC has written to counsel for the Representors, having been provided with a copy of the Representation.  HMRC raise two matters.  First, they suggest that there has been delay in the making of this application to the extent that it may disentitle the Representors to the relief they seek.  We disagree, and find that the Representors have acted reasonably promptly since the alleged mistake was discovered. 

50.      Secondly, by reference to the decision of the Court of Appeal in Hawksford Trustees Limited Re The M Settlement [2021] JRC 130 ("Hawksford"), HMRC suggests that the Court needs to consider whether what is sought 'would constitute a transformation of what takes place' and accordingly may be beyond the Court's powers under Article 47G and / or Article 47H in this matter.

51.      Counsel for the minors and unborns supported the Representors in their application, as did the settlor in a letter written to the Court.  Furthermore, counsel for the Representors said that Altum, in its capacity as trustee of the C Trust, did not object to the relief sought.  The Court raised its concern that this was an unusual application in that it was an application which had the effect of potentially setting aside a bilateral contract between the Trustee of the Trust and a third party.  Counsel for the minors and unborns said that his clients, in their capacity as beneficiaries of the C Trust, would not be adversely affected by the relief sought, which would only have the effect of payments being made to the trustee of the C Trust annually and not twice a year.

Applying the law to the facts of this case

52.      We have set out the provisions of Article 47G and 47H above.  'Mistake' is considered in the 'interpretation' provisions of Article 47B of the Law.  Article 47B(2) provides:

"(2)     In Articles 47E and 47G, "mistake" includes (but is not limited to) -

(a)       a mistake as to -

(i)         the effect of,

(ii)        any consequences of, or

(iii)       any of the advantages to be gained by,

a transfer or other disposition of property to a trust, or the exercise of a power over or in relation to a trust or trust property;

(b)       a mistake as to a fact existing either before or at the time of, a transfer or other disposition of property to a trust, or the exercise of a power over or in relation to a trust or trust property; or

(c)       a mistake of law including a law of a foreign jurisdiction."

53.      The Court's powers to set aside the exercise of powers in relation to a trust by reason of mistake are engaged when the trustee has:

(i)        made a mistake in relation to the exercise of its power; and

(ii)       would not have exercised the power, or would not have exercised the power in the way it was exercised but for that mistake; and

(iii)      the mistake is of 'so serious a character' as to 'render it just' for the Court to make a declaration under the Article. 

54.      It is helpful to realise that there are three elements of which the Court must be satisfied, and the third was considered by the Royal Court in The G Trust [2019] 1 JLR 175, where Commissioner Sir William Bailhache, giving the judgment of the Court, said:

"17.    We would like however to add some further commentary as to the third test which the court has to apply-once it is satisfied that there has been a mistake made in relation to the transfer into trust and that that transfer would not have been made but for the mistake, the court needs to ask itself whether the mistake was of such a serious character as to render it just for the court to make a declaration. The grammar of the question makes it plain that there are two component parts; the first is to whether the mistake was of a serious character and the second as to whether it is just for the court to make a declaration. The seriousness of the mistake will often be analysed by reference to the effect both on the transferor and potentially on the trustees and beneficiaries of the trust. In the context of taxation consequences, the mistake may not be of a very serious character if the quantum of tax exposure is very limited as compared with the value of the trust fund or of the remaining assets held by the transferor, although that might also depend on whether there are any future consequences including the loss of future potential in relation to the trust as a result of the particular transfer which is impugned. The mistake would also be of a serious character if the consequence of the mistake is that different people would have the right to benefit from the transfer than the transferor intended-the trust, for example, might include the spouses or partners of the beneficiaries whereas the transferor thought it was the beneficiaries alone who could benefit, or it might be a fixed income trust where the transferor thought it was a discretionary trust, or vice versa. All those types of mistakes are capable of being serious.

18.      The question of justice is more nuanced. It is well settled that mistakes in relation to tax are capable of being taken into account by the court in deciding whether or not to set aside a transfer or disposition into trust or indeed the trust itself."

55.      The Court in The G Trust went on to consider a number of Jersey and English cases and said at paragraph 22, having referred to the decision of the Royal Court in The S Trust [2015] JRC 259:

"22 We do not regard In re S Trust as establishing a set of factual circumstances in which there will automatically be relief. It is an example where, on all the facts which were available to the court in that case, the court resolved that the mistake was such that it was just to grant relief. The case demonstrates that there is a real discretion to be exercised."

56.      Accordingly, the first question is:

(i)             Was there a mistake on the part of the Trustee in relation to the exercise of its power to borrow?

We have set out the relevant provisions of Article 47B above.  In this case, the Trustee says that it made a mistake as to the effect of or consequences of the Loan Agreement it entered into with the C Trust by reason of a fundamental misunderstanding of the need to pay interest at least annually, which was not properly explained to the Trustee, and by virtue of its ignorance of the fact that it was essential to comply with the terms of the agreement that it entered into - not knowing of the risk that failure to comply with the terms of the Loan Agreement in respect of payment of interest would lead to tainting.  We have set out above the nature of the mistake which the Trustee said that it made.  Advocate Christie said that it was not necessary for the mistake to have been a reasonable one, although the reasonableness of the mistake may be relevant to the exercise of the Court's discretion.  Our attention was drawn to the BDO advice in respect of the 'risk of tainting'.  A reasonable reader of that evidence - considering the above provisions - would understand the loan needed to be on commercial terms (the HMRC official rate of interest) and that interest needed to be payable and be paid 'at least on an annual basis'.  But it was said that this advice 'does not say that if you fail to do this then this is a tainting event'.  Counsel said that someone reading the advice 'would be left with the impression that you don't have to make payments on time' and the advice should have clearly said that a failure to pay interest on time would be a tainting event.  Counsel for the minors and unborn said that if Mr Tomlinson had been given the right advice, then he would not have made the mistakes that he subsequently did.  We will come back to this submission shortly.

57.      It seems to us axiomatic that any reasonably competent trustee reading this advice would understand that the terms of the Loan Agreement would need to be complied with and it would not need to be spelt out by BDO that a failure to comply with those terms would lead to tainting / a risk of tainting. 

58.      However, accepting that there is no authority to the effect that a mistake for the purpose of Article 47G needs to be either reasonable or objectively justifiable, then we proceed on the footing that the Representors have satisfied us as to the first limb of the test. 

59.      This leads to the second question:

(ii)            Would the Trustee have exercised the power to borrow in the way it was so exercised, but for that mistake?

60.      It was said on behalf of the Representors that but for the mistake Altum would have not executed the Loan Agreement in the terms that it did and would have agreed other terms, including a term requiring one annual payment of interest only, and an agreement that did not contain the provision in clause 7.1(b) which contains strict provisions (it is said) in relation to the payment of interest on time, i.e. interest should be paid 'in immediately cleared funds on the due date to an account which the Lender may specify to the Borrower'.  We do not accept that.  There is no evidence before us that the BDO advice was wrong.  This was a complex and difficult area and the HMRC guidance was at that stage unclear.  There was no logical reason to change the Loan Agreement from the way in which it was drafted and agreed.  There were good practical reasons for interest to be paid twice a year.  It would ensure, for example, that there was a payment of interest every year and that it was compliant with the provisions of the relevant tax statute.  Indeed, the fact that it was said on behalf of the minors and unborn that if Mr Tomlinson had been given the 'right advice' then the Trustee would not have made the errors that it did when failing to comply with the Loan Agreement rather reinforces the point, but those 'mistakes', i.e. failing to ensure compliance with the Loan Agreement, were not actionable mistakes for the purpose of Article 47B - they were simply administrative errors made by the Trustee when failing to comply with its obligations under the Loan Agreement.  There are no contemporaneous notes of what the Trustee understood the effect of the BDO advice to be and, as we have said, had the BDO advice and the consequential Loan Agreement been complied with by the Trustee then there would not have been, if there has been, a tainting event. 

61.      Although it is not necessary for us to do so, we do nonetheless now consider the third question:

(iii)           Was the mistake made by the Trustee of so serious a character as to render it just for the Court to make a declaration under Article 47G?

62.      We agree that the potential tax consequences identified by Mr Tomlinson, albeit they have not yet and may never crystalise, are of sufficiently serious a character to satisfy the statutory test.  As to whether or not it is on the facts of this case 'just' for the Court to make a declaration under this Article, the question of whether it is 'just' is, having regard to the contents of Article 47G(3), to be considered in the context of the seriousness of the mistake.  We take the view that the seriousness of the tax consequences would make it just for the Court to grant relief.

63.      However, in any event, relief under Article 47G is discretionary and as observed by counsel for the minors and unborn the conduct of the Trustee may be relevant to the exercise of the Court's discretion.  Had we been required to exercise our discretion then we would have declined to grant the Representors the relief that they seek.  We do not repeat our findings as to the cause of the errors made in complying with the terms of Loan Agreement.  It is those errors which may have led to tainting and which have led to this application.  Altum failed to comply with straightforward obligations based upon what appears to us to have been reasonably prudent tax advice from BDO.

64.      Accordingly and in summary, we are not satisfied that the Trustee would not have exercised the power, or would have exercised it in a different way from the way in which it was exercised but for the alleged mistake, and in any event in our discretion, we would have declined to set aside the exercise of the Trustee's power to borrow and enter into the Loan Agreement in this case under Article 47G.

65.      We now turn to Article 47H, the power to set aside the exercise of fiduciary power in relation to a trust. 

66.      It was relief under Article 47H that was granted by the Court in the case The Grundy Trust [2020] (1) JLR 153, which was the focus of submissions made on behalf of the Representors - the Court being invited to take the view that this was in many respects a case similar to the decision in Grundy.  Accordingly, it is appropriate to briefly revisit this case (which was subsequently approved by the Court of Appeal in Hawksford).

67.      In Grundy, property comprised in a Jersey trust settled by a non-UK domiciled settlor who was eligible to benefit under the trust, included UK residential property which faced an impending charge to inheritance tax as a result of changes introduced by the Finance (Number 2) Act 2017.  The trustees responded to this tax issue by exercising their power to irrevocably exclude the settlor and his wife from benefit under the trust without drawing the settlor's attention to the issue and without considering less draconian steps which might have been available to them, including excluding the settlor from benefit under the trust, but excluding the settlor's wife from benefit during the settlor's lifetime only, which would have been sufficient for UK tax purposes.  We will return to consider Grundy when examining the remedy sought in this case below.

68.      In Grundy, the Court said at paragraph 30:

"In applying the relevant provisions of the Law to the facts of this case, it is accepted that in certain circumstances the same facts might engage the Court's jurisdiction under both Article 47G and Article 47H. However, in the view of the Court this case was principally an instance of the Former Trustee, pursuant to Article 47H, failing to take into account relevant considerations and had such relevant considerations been taken into account, the Former Trustee would not have exercised the power which it did or would not have exercised the power in the way it was so exercised but for that failure, The relevant considerations that were not taken into account were:

(i)        The wishes of the settlor's wife;

(ii)       The needs of the settlor's wife;

(iii)      The alternative solution suggested by Smith and Williamson, which was not even discussed with the settlor and would have resulted in a partial exclusion from benefitting from the assets of the Trust only;

(iv)      The second alternative considered by English counsel, referred to at paragraphs 25 and 26 herein;

(v)       The effect of Exclusion upon the settlor and his wife. This was a matter that needed to be considered very carefully and was not.

(vi)      The Exclusion itself recited that Mr and Mrs S had "requested" the Exclusion when they had not - there was simply, at most, one telephone call between the Former Trustee and the settlor.

Furthermore the Former Trustee also took into account an irrelevant consideration namely, on the Former Trustee's evidence, that Mr and Mrs S could still benefit via their children, when that was prohibited by the Trust itself. A further irrelevant consideration taken into account was the recording in the Exclusion that Mrs S had requested that she be excluded when she had made no such request."

69.      When considering relief under Article 47H, the Court needs to consider the following questions:

(i)        When exercising the power to borrow in this case, did the trustee fail to take into account any relevant considerations or take into account any irrelevant considerations?  And

(ii)       Would the trustee not have exercised the power or would the trustee have exercised the power in a different way, but for that failure to take into account relevant considerations or taking into account of irrelevant considerations?

It does not matter whether or not those circumstances occurred in consequence of any lack of care or thought on the part of the trustee or person giving advice in relation to the exercise of the power for the purpose of considering these questions.

70.      In considering the first question, the Representors correctly say that UK tax considerations may be relevant considerations for the purposes of Article 47H and accordingly a failure to take such matters into account can engage the relief sought under Article 47H - see Crestbridge Trustees Limited v Avocado Limited [2021] JRC 171 at paragraph 35.  It is said that Altum was aware of the existence of the tainting rules in accordance with the advice given by BDO but was 'not aware of the true nature and effect of those rules and so did not take into account the law concerning tainting...and in particular not take into account the rules considering relevant events of which it was wholly unaware'. 

71.      It is true that Altum was not told of the precise terms of section 628B of the Income Tax Act 2005  referred to above, nor was it aware of some of the matters drawn to its attention by leading tax counsel in his various opinions, for example the fact that the prescriptive terms of clause 7.1 of the Loan Agreement were 'unhelpful' and Altum says it was not adequately aware of the fact that any failure to pay interest due under the terms of the Loan Agreement would or may lead to the Trust being 'tainted'.

72.      As to the first stage of the test under Article 47H, we do not take the view that Altum took into account any irrelevant considerations when exercising its powers to borrow in this case.  We do find on balance that they failed to take into account relevant considerations as the Trustee was not aware of the express terms of the relevant English legislation and specifically of the fact that a single breach of the Loan Agreement might amount to a 'tainting event'.  We reject the assertion that Altum was unaware of the fact that it would be sufficient for there to be a single annual payment of interest under any loan agreement, as that was in effect explained by BDO in its advice as set out above.

73.      As to the second stage of the test, we are not persuaded that Altum would have entered into a loan agreement on different terms from those that they entered into having regard to the BDO advice which, in our view, appeared to be careful, cautious and consistent with the relevant legislation.  There were solid reasons for the bi-annual payments, bearing both in mind the terms of the legislation and the need to ensure that at least one payment was made per annum. 

74.      In any event, although the Court does not, when considering its powers under Article 47H, have to consider the seriousness of the relevant considerations that were taken into account or whether or not it is 'just' to make a declaration, the Court plainly has a discretion under Article 47H(2) as to whether or not to grant relief under Article 47H and we would, even if we were wrong in our conclusions as to how the Trustee would have exercised its power to borrow had it known of all relevant considerations, in any event decline to grant relief.  As we have already held and as noted by Chancery counsel, had the Loan Agreement been complied with then the tainting issues would probably not have arisen.  We considered this aspect of the case already at some length and do not need to repeat our observations on the evidence.

75.      Accordingly, we decline to grant the relief sought in the Representation.

The relief sought

76.      However, as it has been the subject of extensive submission, we do think it appropriate to consider whether or not the Court is able to grant the relief sought in the Re-Amended Representation, assuming the statutory tests were met.  Pursuant to both Articles 47G and 47H, the Court may declare the exercise of the relevant power to be 'voidable' and have 'such effect as the Court may determine or of no effect from the time of its exercise'. 

77.      The relief sought by the Representors is that the exercise by Altum of its borrowing power to enter into the Loan Agreement is voidable and the Loan Agreement shall have effect ab initio as if it had been executed on the same terms, save that clauses 5.2 and 7.1(b) were omitted and the words 'at least annually' were inserted after the words 'the loan' in the first line of clause 5.1.  Leading tax counsel advised that the 'better argument' is that the payment instruction given by Altum to Citibank on 2 April 2020 was 'sufficient to discharge' the Trustee's obligation under the Loan Agreement if the relief sought by the Representors is granted.

78.      We were concerned that that relief went beyond a declaration in respect of the exercise of a power and may be regarded as amounting to the re-writing of a bilateral contract.  We also had in mind the words of caution of the Royal Court at paragraph 35 in the decision of Grundy:

"That is not to say that the Court is entitled to re-write history, or to make a new decision which the trustee wished it had made at the time. That is clear from the statute and from case law. In Representation re The B Trust [2019] JRC 035 the court agreed with the Representor that transfers into trust could be voided on the grounds of mistake under Article 47E. However, the Representor went further and asked the Court to give effect to certain intentions that the Representor had at the time of making the transfers into trust. Merely voiding the transfers into trust meant that the assets would fall back into the Representor's estate and this would not be as tax efficient as he had intended. The court was asked to make a declaration that the transfers were not merely voidable but should take effect as gifts to the Representor's wife. The court refused and at paragraphs 41 and 42 of the judgment said:

"41. ... This Court will not be drawn into such schemes. It is one thing to make orders as to the validity of transactions where those orders might have tax consequences, and it is quite another thing to select for one of the parties which order to make so as to achieve the best taxation outcome. That is no part of the business of this Court.

42. The second submission which Advocate Brown made in this connection was that Article 47E contains innovative powers as described in the Crociani case and there is no reason why the Court should not therefore direct the repayment of money not to the Representor but to his wife. For similar reasons as described above, we are not prepared to do this. It requires the Court to take a positive step to improve the taxation outcome for the Representor as though that were the objective itself. It may be the Representor's objective, but it is not the objective of the Court.""

79.      However, in Grundy, the Court continued:

"36. In this case the Former Trustee intended to exclude Mrs S and did so. However, that decision was flawed and is liable to be set aside ab initio. The Former Trustee had a duty to consider the exclusion of Mrs S very carefully and take into account the relevant considerations listed above and not take into account irrelevant considerations. Had the Former Trustee acted in accordance with its duty there can be no doubt that it would have excluded Mrs S during the settlor's lifetime only. It would have been the obvious course. Accordingly for the Court to order the exclusion of the settlor's wife as a beneficiary to take effect only for the duration of the settlor's life is not to substitute a different transaction for that which was undertaken. To make such an order is squarely within the Court's power to declare that the Former Trustee's exercise of its fiduciary power shall have such effect as the Court may determine.

37. Further, we needed to be satisfied that to make such an order was within the powers of the Former Trustee under the Trust. Clause 5 does not expressly provide for a person to be excluded temporarily and the effects of exclusion under Clause 23 are radical.

....

39. The general proposition is that the greater includes the less; that is to say that a power to exclude permanently would generally encompass a power to exclude for a lesser time unless expressly excluded. In Re de la Bere Marriage Settlement Trusts [1941] Ch. 443 at 448 the Court held:

" ... [l]f I look at the substance of it [the settlement] I find a power, unqualified and unlimited in its language, which is intended to give to the trustees exercising it the power to make the trust fund the property of any one or more of the daughters or their issue. It has been held that, where there is a power of that kind, it is competent for the donee to exercise it in such a way as to qualify the interest which may be given so that a power to appoint the whole of the fund must include the power to appoint a part of it. The power to appoint an absolute interest must include the power to appoint a limited interest, whether a life interest or a reversionary interest, and includes the power to hedge about the creation of an absolute interest with such restrictions as the donor of the power himself might have imposed.""

80.      The width of the Court's powers under Article 47E were considered by the Court of Appeal in BNP Paribas Jersey Trust Corporation v Crociani [2018] JCA 136A ("Crociani").  In Grundy, the Court said:

"33. First, dealing with the terms of the statute, the Court has been assisted by the decision of the Court of Appeal in BNP Paribas Jersey Trust Corporation Limited -v- Crociani [2018] JCA 136A. The relevant part of the judgment concerned the court's power to set aside a transfer or disposition of property to a trust due to mistake pursuant to Article 47E of the Law, but the same approach applies to setting aside the exercise of powers in relation to a trust or trust property owing to mistake or the setting aside the exercise of fiduciary powers in relation to a trust or trust property under Article 47H. The key paragraphs are as follows, with our emphasis where appropriate:

"87. In our judgment this construction of Article 47E (2) is consistent with the general approach of the Trusts Law in establishing overall principles and allowing them to be developed flexibly by the Royal Court. In essence, the legislature has conferred upon the court a discretion to determine which of the three courses it would follow if satisfied that the mistake was of so serious a character as to render it just for the court to make any declaration at all under that Article.

93. From this examination it can be seen that Article 47E, in almost every salient operational aspect, follows the settled approach of the Royal Court. The nature of a relevant mistake may be of almost any character (save that the doctrine of erreur is not to be used): see Articles 47B and 47C. The result of the mistake is that the transfer is voidable at the instance of the settlor: see Article 47E read with Article 471. It is voidable not void and therefore has legal effect until declared avoided. The effect of avoiding the transfer may bear upon donees and third parties: compare the power to identify that a transfer may have had some effect. We therefore find that, upon a proper interpretation, Article 47E is the statutory embodiment of an existing equitable jurisdiction, the purpose of which is to enable a mistaken transferor to recover his or her property, with the appropriate remedial declaration and consequential orders being at the discretion of the court. The innovation of the Article lies in confirming that the court has alternate powers (a) to allow some effect to the transfer or (b) to declare that it has been of no effect. That provision, however, may be little more than a reflection of a need to give consideration to the interests of donees and third parties and of the possible availability of change of position defences (as compared with the position of the bona fide purchaser for value and without notice whose protection is maintained under Article 471(4)).

94. Turning to guiding principles in the exercise of this jurisdiction, the court must first identify, as the Royal Court did below, that the application has been made by an appropriate person and that there has been a mistake bearing the characteristics required by the statute. The court then has a discretion as to whether to declare the transfer voidable and, the jurisdiction being equitable, it may be that, even with the required characteristics, the whole circumstances militate against a declaration. Having determined to make such a declaration the court will bear in mind for its consequent orders that the transfer or disposition will have had legal effect until the point of the declaration. It is only upon the making of the declaration that the trustee will become a bare trustee of the transferred funds or property: declaring the transfer to be of no effect will not result in the relationship of trust never having existed. In considering the effect of the declaration upon donees and third parties (and in this respect the trustee is entitled to be considered as a potentially affected third party) the court may require to adjudicate upon change of position defences. Accordingly, in exercising its discretion as to the appropriate remedies and consequential orders to authorise, the court will have to take into account all factors relevant to those issues.

97. Given that we construe Article 47E to be providing a flexible framework, we do not think that it is appropriate to attempt an exclusive list of factors which will be relevant from case to case; but in our judgment potentially many factors could be relevant considerations in the process of identifying the appropriate declaration. In some instances the parties may be indifferent as to the date as at which the transfer is avoided: an example is the simple mistake, with no taxation consequences and no distributions in the intervening period. On the other hand, a mistaken transfer may well have unattractive taxation consequences and the court must be persuaded that a declaration that the transfer has had no effect is a proper declaration to make. Equally, there may be competing factors to be taken into consideration in identifying which, if any, of the effects of a transfer are to be declared to be retained. Where, as here, the transferee is no longer in possession of the assets transferred, the exercise will be more complex."

34. The Court takes the view that similar principles apply to the exercise of the Court's powers under Article 47H.  The Court has a discretion as to determining what effects, if any, of the exercise of the trustees' fiduciary powers are to be retained."

81.      The notes of caution sounded in Grundy were echoed by the Court of Appeal in Hawksford.  At paragraph 6, the Court of Appeal said:

"The Royal Court's decision was that, while Article 47G may facilitate the setting aside of a transaction, it does not go so far as to allow the Court to substitute a different transaction, namely a simple gift to P; and this, the Royal Court concluded, was what it was in fact being invited to do."

82.      The Court of Appeal in Hawksford went on to refer to the decision of the Court of Appeal in Crociani.  The Court noted that Article 47I provides, inter alia, at sub-paragraph 3:

"(3) Without prejudice to Article 51 and subject to paragraph (4), the court may, consequential upon a declaration made under any of Articles 47E to 47H, make such order as it thinks fit."

83.      When summarising the facts, the Court of Appeal noted that it was being asked to set aside the sale of a trust asset, namely shares, to a third party company owned by the trust which was nonetheless a bona fide purchaser for value but did not oppose the application to the Court.  Accordingly it was 'unnecessary to give any consideration to the possible limits resulting from Article 47(I)(4)' which provides that 'no order may be made under [Article 47(I)(3)] which would prejudice a bona fide purchaser of value of any trust property without notice of the matters which render the transfer of its position of the property to a trust, or the exercise of a power over or in relation to a trust or trust property, voidable'. 

84.      It is not necessary to set out the full facts of Hawksford.  The Representor wished the Court to avoid certain transactions under Article 47G, whilst declaring that another transaction could take effect as a gift and not a sale.  Commenting on the decision of the Royal Court, which had declined to grant the relief requested, the Court of Appeal said:

"38. In the judgment of the Royal Court, when refusing the requested relief, the Commissioner noted at [28(iv)] that H accepted in its submission that "where a trustee enters into a sale agreement under its administrative powers and the sale is set aside on the ground of mistake, it follows that a transfer of ownership to the buyer should also be set aside because the transfer is consequential on the sale and if the sale goes so too should the transfer. ... this is because, if a sale goes ahead and the transfer does not, the transaction is transformed into a voluntary transfer ... "

39. The Commissioner went on to explain the consequence once the sale and purchase of the N shareholding by the Trust to P is treated as removed and why, as a result, it was not appropriate for the Royal Court to give the requested relief:

"[28(vi)] ... Left on its own the disposition of beneficial ownership changes the nature of the transaction from a sale to a gift. The Court may be able to limit the effect of the sale, but arguably not so as to transform it into a different transaction, namely a gift".

40. The Commissioner then went on to say at [29]:

"Standing back we can see that the arguments for and against the Court having the power to give partial effect to the transaction in this case are finely balanced, but we are not persuaded that the circumstances here do give the Court the power under Article 47G(2)(a) to effectively substitute a different transaction from that which the parties entered into. In our view the Court may have the power to determine the extent to which the sale transaction is given effect to, but not to the point where it is transformed into a different transaction; namely where it ceases to be a sale and become a gift. To do so would be to rewrite history by substituting a different transaction for that which was undertaken.""

85.      Having referred to various authorities, the Court of Appeal observed:

"48. There is no warrant, we think, for taking it that in Article 47E(2), or for that matter in the corresponding language in Articles 47F(2), 47G(2) and 47H(2), where the provision gives power to declare the relevant transfer, disposition or exercise of a power "voidable and ... " what follows in sub-paragraph (a) is to be taken as enabling the Court to reform the transfer, disposition or exercise so that it becomes a new and different one from that made voidable. As this Court summarised the power in [85] of the Bailiff's judgment, quoted above, what is set out in sub- paragraph (a) is contrasted with sub-paragraph (b) in that the latter points to the mistaken matter being made altogether void and of no effect at all, while sub-paragraph (a) allows the mistaken matter to be partially avoided so that some effect is given to it. But when sub-paragraph (a) refers to the declaration of voidability including the voidable matter having "such effect as the court may determine", the reference in the context must be to preserving, or allowing to survive, some aspect of what is otherwise declared voidable. The reference cannot reasonably be taken to allow expansion upon or development of what is voidable and to be partially made void.  [Our emphasis]

49. Specifically in Article 47G(2), as in Article 47H(2), what is allowed is a declaration of voidability as to the relevant exercise of a power, and as to the effect or absence of effect of the voidable exercise. It cannot be a correct interpretation of the Article that when a Court declares an exercise of a power to be voidable it may at the same time declare that it is to have effect as if an effective exercise of a different power. We note that Advocate Moran has not contended otherwise on this appeal, and consider that she was correct in this. She did nevertheless seek to emphasise that the power given by paragraph (2) is very wide, seeking to argue that at the same time as declaring an exercise of a power to be voidable, the exercise would be directed to have some effect by a process of reforming the terms of the exercise. This argument she relied on in particular in support of the second ground of appeal addressed at the end of this judgment.

50. We reject the submission that the power given in Article 47G(2) goes that far. We consider that the approach to the scope of the power in that paragraph (2) was intended in the Trusts Law to be the same as that in Articles 47E(2) and 47F(2), which use materially the same words. Further, putting the point in simple terms, it is difficult to see how the relevant words in paragraph (2) of the four Articles (47E, 47F, 47G and 47(H)) can be interpreted so that on the one hand a matter (that is transfer, disposition or exercise of a power) is declared voidable, and on the other hand it is in the same declaration declared to have effect as a different matter. In our judgment the words do not go that far. Succinctly, it is one thing to give the Court a discretion to choose between complete or partial avoidance, and not to be confined to an all or nothing choice as might have been the position before the 2013 amendment to the Trusts Law. It is another thing to give the Court a power to rectify so as to replace something erroneous with a different thing which would have been better but might not have been the thing actually done or intended at the time." [Our emphasis]

86.      Hawksford went on to approve the decision of the Royal Court in Grundy, quoting extracts from paragraphs 34 and 35 of the Royal Court judgment, the latter being set out above.  Commenting on Grundy, the Court of Appeal in Hawksford said:

"57. Thus the essential reasoning of the Court in that case was that there was an exercise of a single power, the power of exclusion, which could be avoided to a limited extent, namely so that it excluded only for a limited time by being avoided after that time, and that this limited avoidance did not involve the substitution of a different exercise.

58. We consider that in these last two cases, as in the present case, the Royal Court rightly concluded that there is no power for the Royal Court, in the guise of avoiding or partially avoiding a transfer or disposition (Articles 47E(2) and 47(F)(2)) or the exercise of a power (Articles 47G(2) and 47H(2)), to bring about a different transfer or disposition or the exercise of a different power. For reasons we have explained already, in our judgment this is a correct view of the scope of what is provided in paragraph (2) of those Articles."

87.      It was argued that the relief sought in this case is, in many respects, akin to the relief granted by the Royal Court in Grundy.  As in Grundy, in this case, there was an exercise of a single power - the power to borrow - and what is sought, as in Grundy, is the avoidance of the exercise of that power to a 'limited extent'.  It was said that in this case what was sought was not a replacement or a re-writing of the Loan Agreement with a different sort of agreement, but simply a declaration that the Loan Agreement should have effect but to a limited extent.  It was accepted that there would be an addition of words to the Loan Agreement / the Loan Agreement would have effect as if words had been added to it, but the Court was urged to look at the substance and not the form.  In Grundy, at paragraph 27, the Court said it was being asked to declare that the power to exclude under clause 5 of the trust should be exercised so as to exclude 'the settlor irrevocably for life and the wife of the settlor irrevocably during the lifetime of the settlor but not thereafter'.  It was argued that the decision in Grundy amounted to the preservation, but limitation, of the actual transaction entered into, rather than the substitution of an entirely different transaction, on the footing that the transaction would have effect as though it were executed in different terms in the first place.  It was said that the relief sought in this case was analogous with that sought in Grundy - envisaging preserving the Loan Agreement (as amended) in its original terms but limiting the frequency with which the required interest is to be paid, and deleting clause 5.2 and 7.1 which simply had the effect of tying the first payment of interest to the first draw down, stipulating that interest be paid once every six months, and prescribing how the payment should be made.  These provisions would be replaced with an obligation to pay interest at least once a year.  It was said that this would not amount to a 'new and different' exercise of a power which the Court could not give effect to under Article 47H. 

88.      The Court has a power to declare that the exercise of a power is voidable and has such effect that the Court may determine and, under Article 47I(3), make such orders as it thinks fit consequential upon such a declaration.  This extends to making orders affecting a contract with a third party and in that regard our attention was drawn to the decision of the Royal Court in Crestbridge Trustees Limited v Avocado Limited, where the Court set aside such an agreement in the following terms:

"40. Accordingly, we granted the application of the Trustee and ordered that the exercise of the power by the Trustee by which it procured that the Company holds the trust property as nominee for the Trustee is avoided and of no effect from the time of its exercise pursuant to Article 47G(2)(b), or Article 47H(2)(b) of the Law. Further, we ordered pursuant to Article 471(3) of the Law that in consequence the Nominee Agreement made between the Trustee and the Company is set aside and is void and of no effect from the time it was entered into and that the declaration of bare trust by the Company is also set aside on the same terms."

89.      The Court of Appeal in Hawksford did not consider that the Court did not have such a power if the other provisions of the statutory test were met. 

90.      As we have noted above, in Grundy, the Court held at paragraph 39 that 'The general proposition is that the greater includes the lesser: that is to say that a power to exclude permanently would generally encompass a power to exclude for a lesser time unless expressly excluded'.  This case is not on all fours with Grundy.  Had we been empowered to grant the relief sought in this case we would have avoided the Loan Agreement and ordered that it had effect ab initio as if executed in the terms referred to above, conscious as we are that such terms were unobjectionable to the counterparty or the beneficiaries under the Trust and (for all practical purposes), the C Trust.  However, we have not heard adversarial argument on this matter and prefer in the circumstances to express no concluded view on whether such an order is permissible.

Authorities

Trusts (Jersey) Law 1984 (As Amended).

Income Tax Act 2005.

Re D Trust, E Trust and F Trust [2016] JRC 166C.

Crestbridge Trust Limited v Avocado Limited [2021] JRC 171.

Hawksford Trustees Limited Re The M Settlement [2021] JRC 130.

The G Trust [2019] 1 JLR 175.

The S Trust [2015] JRC 259.

The Grundy Trust [2020] (1) JLR 153. 

Finance (Number 2) Act 2017.

BNP Paribas Jersey Trust Corporation v Crociani [2018] JCA 136A.