Hastings Bass in the Cayman Islands

J. Ross McDonough, a partner in the litigation department of Cayman Islands attorneys Campbells, highlights two important recent decisions from the Grand Court of the Cayman Islands.

In a recent decision of the Grand Court of the Cayman Islands (A versus Rothschild Trust Cayman Limited (A v RTCL)), the Cayman Court recognised the Hastings-Bass principle and made findings which have established the boundaries of the principle in the Cayman Islands.

‘A’ was the settlor and one of the beneficiaries of two Cayman Island trusts. US tax advisers stated that it was necessary to entirely restate the trusts for tax planning purposes and this advice was acted upon by the trustee. However, it subsequently became apparent that the advice was incorrect and acting on it led to the very consequences it was intended to avoid. The beneficiaries of the trusts therefore applied to the Grand Court to have the trustee’s actions in restating the trusts set aside pursuant to the Hastings-Bass principle.

The rationale behind the Hastings-Bass principle is that when trustees exercise powers, they have an obligation to take into account all relevant considerations and no irrelevant ones. Therefore, when trustees misunderstand the consequences of their actions, they cannot be said to have exercised their discretion properly, so they can apply to the court to have such improper actions set aside.

The English courts have, however, attempted to impose some limitations on the Hastings-Bass principle. First, a requirement that the trustees prove that in carrying out the impugned actions they were in breach of their fiduciary duty, for example in Abacus Trust Co (Isle of Man) Limited versus Barr.

In A v RTCL, the court granted the application without making any findings of breach of fiduciary duty on the part of the trustee.

The second limitation is to find that the trustee’s actions are only voidable rather than void. The distinction is an important one due to the fact that where (as is commonly the case) the trustees’ actions have caused adverse tax consequences, it is often necessary to have them declared void in order to alleviate such consequences.

In A v RTCL, it was held that the trustee’s actions were automatically void and the court had no discretion to order otherwise, regardless of the hardship that this might cause.

In summary

This decision means that so far as the Cayman Islands are concerned, there would appear to be no need for a trustee or other applicant to prove breach of fiduciary duty as part of the trustee. And, if the trustee’s actions fall within the original Hastings-Bass principle, such actions will be declared void. It remains to be seen whether the English courts adopt the reasoning of the Grand Court.

Cayman companies should be wound up by Cayman liquidators, not by foreign office holders

Philadelphia Alternative Asset Fund (PAAF) was a Cayman Islands registered exempt limited company, licensed to operate as a mutual fund by the Cayman Islands Monetary Authority. It stopped trading in June 2005, following the discovery of large trading losses, said to have been caused by a massive fraud on the company. Most of PAAF’s assets and operations were located in the US, where they were under the control of a receiver appointed by the US Court over PAAF and its feeder fund (the US Receiver).

A minority of PAAF’s registered shareholders petitioned the Cayman Court seeking its winding-up. The majority appeared to be content to await a distribution in the receivership proceedings. The evidence suggested that the distribution regime in the receivership proceedings was likely to be similar, but not identical, to that which would apply in a Cayman liquidation. The US Receiver sought recognition from the Cayman court, and opposed the petition on the grounds that a Cayman liquidation would duplicate effort and waste costs. It was accepted that there had been a total loss of the substratum of the fund and that its affairs should, therefore, be wound up.

The question that the Cayman court had to determine was whether that should be done by liquidators appointed by itself, or by the US Receiver.

In his judgment dated 22 February 2006, Justice Henderson reaffirmed the fundamental principle, established by a line of late 19th century English authorities, that the court of the country of a company’s domicile is the “principal court to govern” its liquidation. He stated that when the petitioners made the decision to invest in PAAF, they would have had a reasonable and legitimate expectation that any liquidation would occur in the Cayman Islands, under Cayman law. Although foreign ancillary proceedings may be necessary when a company has assets in a foreign jurisdiction, no precedent had been cited in which the court of a company’s domicile had refused to wind it up in deference to foreign receivership proceedings. He therefore ordered that PAAF be wound up and rejected the US Receiver’s application for recognition, while expressing his expectation that the Cayman liquidators and the US Receiver would seek to reach agreement and co-operate to avoid unnecessary expense.