The trustee was the trustee of two related trusts, the A Trust and the B Trust. As part of a restructuring, the trustee, acting in its capacity as trustee of the B Trust, entered into a phased transaction which entailed the distribution of all the assets of the B Trust to a beneficiary. Thereafter, the beneficiary made a gift of those assets to the trustee in its capacity as trustee of the A Trust. The final step of the transaction was the amendment of the A Trust to reflect the terms of the restructuring.

However, the trustee had not taken appropriate UK tax advice before exercising its power to make the distribution to the beneficiary. Had the trustee done so, it would have realised that the distribution would attract unnecessary additional tax liabilities, and it would not have exercised its power in the way that it did. As a result, the trustee applied to the court under section 47A of the Trustee Act 1975 for an order to set aside its exercise of its power and consequential declaratory relief that the distribution from the B Trust to the beneficiary be treated as never having occurred.

In order to engage the court’s jurisdiction under section 47A, the trustee was required to satisfy the court that (i) when exercising the fiduciary power it did not take into account a consideration of fact or law that was relevant to the exercise of the power and (ii) but for the failure to take that consideration into account the trustee would not have exercised the power at all or would have done so on a different occasion or would have exercised the power in a different manner. Where those conditions are met, the court has a broad and unfettered jurisdiction to set aside the exercise of the fiduciary power either wholly or in part without there being any need to demonstrate that the power was exercised in breach of trust. The effect of making such an order is that the exercise of the relevant power is treated as never having occurred.

The evidence demonstrated that the trustee did not take into account a relevant consideration, namely the effect of an aspect of UK tax law, before exercising its power to make the distribution. Had the trustee taken such tax advice, the trustee would not have exercised its power in the way that it did. Consequently, the court found that the conditions for relief under section 47A were met and set aside the exercise of the trustee’s power and granted a declaration that the distribution from the B Trust to the beneficiary be treated as if it had never occurred.

This decision is a useful reminder to trustees of the care that must be taken when exercising their powers. However, where transactions are entered into under a mistaken understanding of their effect, Bermuda’s statutory regime (along with similar ones which exist in the British Virgin Islands and the Cayman Islands) is helpful in enabling trustees to seek the court’s assistance to unwind those transactions to avoid unintended consequences.