The Bahamas: Hastings Bass & Firewall Protection - Recent Developments in Bahamian Trust Law

The Bahamian Parliament has seen fit to change the landscape of Bahamian trust law by enacting the Trustee (Amendment) Act, 2016 (TAA 2016) and the Trusts (Choice of Governing Law) (Amendment) Act 2016 (TCOGLAA 2016). This article will examine the impact of these pieces of legislation and analyse whether these changes are beneficial and add to the flexibility of offshore trust law; and show how they impact foreign settlors and demonstrate the desirability of setting up trusts under Bahamian law. The article will also discuss these developments particularly in the colourful context of tax and estate planning, family disputes, and forced heirship which are common themes, especially when advising trust clients from civil law-based countries. Whether these new statutory amendments to the bread-and-butter asset protection trust and the offshore purpose trust may be seen as adding new life through the re-interpretation, flexibility, and the evolution of Bahamian trust law will be the subject of discourse.

The Rule In Hastings-Bass & The Trustee (Amendment) Act, 2016

The TAA 2016 incorporates the rule in Hastings-Bass into Bahamian legislation. This is crucial from a tax perspective where decisions are taken by the trustee in breach of fiduciary duty that cause the trust to suffer adverse fiscal consequences[i]. This increases the attractiveness of The Bahamas from an offshore tax position because it renders the trust law more certain and more flexible from a tax planning standpoint, enhancing the desirability of establishing a trust in The Bahamas.

The legislation further provides that the application to invoke the rule may be made by a trustee, protector or any person exercising the power, a successor in title of the trustee or protector, a powerholder under section 81A, a beneficiary, an authorised applicant under the Purpose Trusts Act and, in the case of a purpose trust, the Attorney General is also authorised to commence such an application (if there is no authorised applicant available), or any person with the leave of the court. It is worthy of note that it is immaterial under the amendment whether the person acted in breach of trust or breach of duty. No order may be made under this provision which would prejudice a bona fide purchaser for value without notice of any trust property without knowledge of the matters which allow the court to set aside the exercise of fiduciary power.

The rule in Hastings-Bass was recently analysed in great depth in the leading case from the UK Supreme Court of Futter & Anor v HMRC[ii] which would be considered highly persuasive to the courts in The Bahamas. This case involved two consolidated appeals that involved applications of the rule against the backdrop of different decisions made by trustees that resulted in adverse tax consequences resulting in the Commissioner of Her Majesty’s Revenue and Customs being joined as a party to the proceedings to challenge the very existence of the rule.

Lord Walker delivered the judgment of the UK Supreme Court in this case and regards the correct statement of the law to be as follows (quote at para 40 on pgs 15-16):

“What has to be established is that the trustee in making his decision has, in the language of Warner J in Mettoy Pension Trustees Ltd v Evans [1990] 1 WLR 1587, 1625, failed to consider what he was under a duty to consider. If the trustee has in accordance with his duty identified the relevant considerations and used all proper care and diligence in obtaining the relevant information and advice relating to those considerations, the trustee can be in no breach of duty and its decision cannot be impugned merely because in fact the information turns out to be partial or incorrect”. (Emphasis Added).

The Bahamian legislation expands the scope of the rule by removing the need for the applicant to demonstrate that a breach of duty even took place. This is a very significant development in Bahamian trust law and shows that this added flexibility makes Bahamian trusts much more protected in the event of decisions giving rise to any adverse fiscal consequences that arise from the failure of the offshore trustee to take into account any relevant information prior to making decisions affecting the trust. This would arguably include situations where the trustee received the appropriate advice but this was later found to be negligent or inaccurate.

Firewall Protection & The Trusts (Choice of Governing Law) (Amendment) Act 2016

This legislation seeks to amend the Trusts (Choice of Governing Law) Act (Ch. 179) to expand the provision relating to foreign law and the trust under Bahamian law to provide enhanced protection for trusts from attempted enforcement of judgments arising from family disputes and forced heirship rules.

Section 8 of the principal legislation the Trusts (Choice of Governing Law) Act states as follows:

“[…] no trust governed by the laws of The Bahamas and no disposition of property to be held on trust that is valid under the laws of The Bahamas is void, voidable, liable to be set aside or defective in any manner by reference to a foreign law; nor is the capacity of any settlor to be questioned nor is the trustee or any beneficiary or any other person to be subjected to any liability or deprived by any reason”.

Section 8(b) of the TCOGLAA 2016 states that it deletes paragraph (b) of the principal Act and substitutes the following provision:

(b) the trust or disposition potentially avoids or defeats claims, interests, obligations or liabilities conferred or imposed by foreign law upon any person by reason of a personal relationship to the settlor or any beneficiary, or by way of heirship rights or contravenes any rule of foreign law or any foreign, judicial or administrative order or action intended to recognize, protect, enforce or give affect (sic) to any such claims, interests, obligations or liabilities.

These statutory provisions are of the utmost importance to guard the offshore asset protection trust from any sham attacks, forced heirship attacks, or fraudulent disposition attacks that may be launched so as to impeach the trust in favour of dissatisfied or disenfranchised heirs of the settlor.

Clearly, the intention of the Bahamian Parliament under section 8(b) of TCOGLAA 2016 seeks to address the issues raised in the English Court of Appeal decision of Charalambous v Charalambous[iii]. In this divorce case, during ancillary relief proceedings, Mrs C sought a variation of the trust set up under the exclusive jurisdiction clause and proper law of Jersey as a post-nuptial settlement in the UK court proceedings. Mr C contested that the settlement conferred exclusive jurisdiction on the Jersey courts and the provisions of the settlement established Jersey law to be the proper law of the settlement and the provisions of the Recognition of Trusts Act 1987 imported into English law the provisions of the Hague Convention on the law applicable to Trusts and their Recognition. Wilson J rejected the husband’s contention and ruled in favour of the wife, granting a declaration that the English court had jurisdiction to vary the Hickory Trust under section 24(1)(c) of the Matrimonial Causes Act 1973. The husband subsequently appealed the matter to the English Court of Appeal. The English Court of Appeal unanimously dismissed the husband’s appeal.

Thorpe LJ delivered the decision of the Court held at paragraphs 29 & 30 that:

“Mr. Francis’ submission that the courts of Jersey have exclusive jurisdiction to entertain the appellant’s application by virtue of the provisions of S.3.2 of the settlement seems to me to be completely misconceived. Statutory powers to vary post-nuptial settlements only arise on or after the decree that dissolves or annuls the marriage status. Individuals may not elect in to or out of a jurisdiction that determines marital status. The necessary qualification to invoke such a jurisdiction will depend on habitual residence, or perhaps domicile or nationality depending on the lex fori”.

Similarly, in the Privy Council case of Crociani & Ors v Crociani & Ors[iv] their Lordships considered the effect of an exclusive jurisdiction clause in a trust in favour of the courts of Mauritius on proceedings commenced in Jersey and whether such proceedings should be stayed. The intended beneficiary commenced proceedings against the co-trustees in Jersey despite the fact that the trust contained an exclusive jurisdiction clause in favour of the courts of Mauritius. The Royal Courts of Jersey declined to stay the proceedings on the basis of the exclusive jurisdiction clause in favour of Mauritius. The Privy Council ruled that no stay should be granted over the Jersey proceedings and ultimately dismissed the appeal.

Lord Neuberger delivering the advice of the Privy Council held that (in para 30 on pgs 9-10):

“In the Board’s view, (i) the Court of Appeal was right in concluding that no part of clause 12(6) of the 1987 Deed was concerned with identifying which country’s courts should have jurisdiction to determine disputes relating to the Grand Trust, but (ii) if that conclusion is wrong, (a) it may well be that the clause would only confer non-exclusive jurisdiction on the courts of the country to which it refers, and (b) there would seem to be a strong case for saying that its effect was that Jersey courts had jurisdiction in relation to three out of the four principal claims brought in these proceedings”.

It may be argued that where a trust contains an exclusive jurisdiction clause in favour of The Bahamas that this may be strengthened using a no contest clause (when such proceedings are brought by a party to the trust). Section 87A of the Trustee (Amendment) Act 2011 provides for the termination of the interest of a beneficiary upon the trust being challenged once the trust makes provision for the termination of the interest of a beneficiary upon the validity of the trust being challenged, in whole or in part, in any court within or outside The Bahamas or any action being taken to assist, promote or encourage a challenge.[v] Section 8(b) adds little to the proper law clause in favour of Bahamian trusts (when proceedings are brought by a non-trust party for example a disenfranchised heir engaging in a forced heirship attack or a spouse engaged in divorce proceedings). The strength of the proper law clause only has teeth once the offshore trust stays out of the onshore court proceedings, perhaps bolstered by a flight clause. The offshore trustee is therefore well advised not to add any immovable assets located onshore into the trust because this would be governed by the lex situs rather than the governing law of the trust.

Conclusion

The recent legislative amendments to Bahamian trust law introduced the rule in Hastings-Bass into Bahamian law and also expanded the scope of the rule and the ambit of firewall protection guaranteed by the Trust (Choice of Governing Law) Act. The TAA 2016 allows for the court to have the power to set aside the exercise of a trustee’s discretion where they failed to consider matters that they should have or improperly took matters into account that they should not have done. These legislative upgrades taken by The Bahamas shows a bold willingness to address instances where the common law has taken a left turn, or lack of clear policy initiative to address certain issues, therefore Bahamian trust law has remained on the cutting edge.

Footnotes:

[i] Section 4 of the TAA 2016 amends the principal legislation and provides for section 91C which states that:

(1) A person may apply to the court to declare the exercise of a fiduciary power voidable.

(2) The court may, on an application made under subsection (1), declare the exercise of the fiduciary power void or voidable and make such determination as it deems fit, if the court is satisfied that-

(a) a person with the fiduciary power –

(i) has failed to take into account relevant considerations; or

(ii) would have exercised the fiduciary power, but on a different occasion, or in a different manner, to that in which it was exercised.

^[ii] [2013] UKSC 26.

^[iii] [2005] Fam 250, [2005] 2 WLR 241, [2004] EWCA Civ 1030

[iv] [2014] UKPC 40 (Privy Council Appeal No 0061 of 2014) (Jersey)

[v] Gay, S. Asset Protection Trusts & Sharia Trusts New Wine in Old Wine Skins. IFC Caribbean Review 2020, pg 2.

Mr. Shivron Gay, Esq., LLM, TEP
Shivron Gay is an attorney at law & notary public with 10 years PQE, practising at The Bahamas Bar, and a director of the STEP Bahamas Branch. He is a past Vice Chairman of the STEP Bahamas Branch.