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Sandie Lyne
Partner | Legal
Guernsey
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Sandie Lyne
Partner
Guernsey
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In a recent decision the Royal Court has considered whether to set aside a distribution on the grounds of equitable mistake in circumstances where that mistake led to adverse UK tax consequences.
This is the first time that the Guernsey law principles of equitable mistake have been considered in Guernsey since the seminal decision of the UK Supreme Court in Pitt v Holt[1] in 2013. It should also be noted that Jersey introduced a statutory basis for mistake in 2013, whereas Guernsey has not made any similar enactments.
The Facts
The facts can be summarised as follows:
Mr Gresh’s application, originally before the court in 2010, requested the setting aside of the distribution on Hastings-Bass principles, but following the Supreme Court decision in Pitt the application was amended and proceeded upon the grounds of equitable mistake. Whilst HMRC was not initially a party to the application, it was joined as a result of a decision of the Guernsey Court of Appeal in 2010[2] (read our previous briefing here). HMRC opposed the application whilst the trustee remained neutral.
Issues and Decision
The application was heard by the Bailiff who considered that Pitt was highly persuasive in Guernsey and that he knew of no reason why under Guernsey law the principles set out by Lord Walker in Pitt should not be applied in Guernsey. The main issues for the Royal Court to consider were:
The Bailiff ruled that the Supreme Court decision in Pitt had not altered the test for equitable mistake. What is required is to look at all the relevant circumstances of the mistake and the consequences for the person who made the transfer in question in order to evaluate objectively the injustice or leaving the disposition uncorrected.
Applying these principles, the Bailiff found that it would not be an appropriate exercise of the Court’s jurisdiction to set aside the disposition. Whilst it was clear that Mr Gresh (and the trustee) had believed and relied upon advice which turned out to be incorrect and nor was he seeking to pursue an aggressive tax avoidance scheme (which the court would not want to support for reasons of public policy), in his judgment it was not unconscionable for Mr Gresh to retain the proceeds of the distribution made to him by the trustee for the following reasons:
Comment
The clear guidance from the Royal Court that not every mistake as to tax consequences based on incorrect or negligent professional advice will be corrected by the courts is noteworthy. Whilst the Court was not in a position to form a view as to whether Mr Gresh may have an action against his tax advisers, this was a reminder that there are occasions when it is more appropriate for professional indemnity insurers to pick up the pieces rather than the courts. In some circumstances such actions may now be the more attractive option since the previous decision of the Royal Court in this matter indicated that a foreign revenue authority may be able to intervene in the trust proceedings.
The Royal Court also demonstrated that in considering the requirement that it would be unjust or unconscionable to leave the mistake uncorrected, it is not concerned with whether the donor was engaged in tax avoidance. The Royal Court has previously set aside transactions where the parties were found to be engaged in tax avoidance, whereas it was clear Mr Gresh was not involved in such activity. In fact the crucial element was that, whereas most cases involve setting aside transfers from donors to trustees, here the transfer was in the opposite direction and it was Mr Gresh himself and no-one else who retained the benefit of the distribution.
Sandie Lyne
Partner | Legal
Guernsey
Sandie Lyne
Partner
Guernsey
Michael Rogers
Managing Associate | Legal
Guernsey
Michael Rogers
Managing Associate
Guernsey
Ogier is a professional services firm with the knowledge and expertise to handle the most demanding and complex transactions and provide expert, efficient and cost-effective services to all our clients. We regularly win awards for the quality of our client service, our work and our people.
This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.
Regulatory information can be found under Legal Notice
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