England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
THE HON MR JUSTICE LINDSAY
[2004]EWHC 2874 (Ch)

		Royal Courts of Justice Strand, London, WC2A 2LL
		13th July 2005

Lord Justice Mummery :
 


Introduction

1. This appeal is about the construction of the rules of a defined benefit occupational pension scheme (the Scheme). The rule in question relates to the power of the trustees of the Scheme, if they consider it appropriate after taking expert actuarial advice, to require the employer to pay a contribution to the Scheme during the period of notice given by the employer to terminate the scheme and future liability to pay contributions.
2. The point arises in an unusual procedural context. The proceedings, in which a preliminary issue of construction of the rules was ordered, are for damages for professional negligence against the firm of solicitors who acted for the former trustees of the Scheme. The alleged negligence is in the failure of the solicitors to advise the former trustees, prior to the expiration of a termination notice served by the employer, that they were entitled under the rules to demand a "buy-out" shortfall or deficit as a contribution to the Scheme by the employer.
3. The solicitors denied that, as a matter of construction, the rules of the Scheme permitted the trustees to demand a "buy-out" shortfall from the employer, whether before the expiry of the employer's termination notice or otherwise. If it is held that, on the true construction of the Scheme rules, the trustees had no such power, that would put an end to the negligence claim against the solicitors. There would be no point in taking the action to trial.

The proceedings

4. The appeal is from the order made by Lindsay J on 9 December 2004. He gave judgment on a preliminary issue directed by Master Price to be tried on the construction of the rules of the Kenrick & Jefferson Group Pension Plan (the Scheme). It was a defined benefit occupational pension scheme established by an employer for the benefit of its employees. The Definitive Deed is dated 16 June 1997.
5. Lindsay J held that, under the rules of the Scheme (the Rules), the former trustees of the Scheme had power, before the effective date of the termination notice (31 March 1998), to serve on the employer company, K & J Holdings Limited (the Company, which was previously called Kenrick & Jefferson Limited), a demand requiring it to pay a contribution to them in an amount equal to any shortfall in the Scheme's funds needed to enable the trustees to secure members' benefits by the purchase from an insurance company of policies (in accordance with rule J.4.2 (a) of the Scheme.)
6. Lindsay J also held that, although the trustees had that power before the expiration of the termination notice, they had no such power after the effective date of the termination notice (31 March 1998).
7. The parties to the action are Capital Cranfield Trustees Limited, the present sole independent and professional trustee of the Scheme (the Trustee), respondent to the appeal, and Pinsent Curtis (Pinsents), the appellant. Pinsents are the firm of solicitors against whom the Trustee claims damages for professional negligence in failing to advise the former trustees of the Scheme that they could demand that the Company pay the "buy-out" contribution to the Scheme. Pinsents were instructed by the former trustees on 3 February 1998 to advise, following the service of a notice by the Company to cease contributions under clause L.1.3 of the Scheme and to terminate the Scheme under clause L.1.1. with effect from 31 March 1998. Pinsents were instructed to advise "in relation to the winding up of the Scheme - in terms of what the trust deed and the law permits the trustees to do and what their options are as regards securing benefits and offering transfer options to the members".

The Rules

8. Rule L.1.1 of the Scheme relates to "Employers' contributions." This kind of rule is, so the court was informed, included in the rules of many occupational pension schemes. It provided-

"L. CONTRIBUTIONS

L.1 Employers' contributions

L.1.1 Each Employer shall, subject to the following provisions of this clause L.1, pay such contributions to the Scheme as are determined by the Trustees, having taken advice from the Actuary, to be appropriate but in any event not less than those set out in the schedule of contributions in force from time to time in accordance with section 58 of the 1995 Act."

9. The employer Company was entitled under rules J.1.1 and L.1.3 respectively to give to the Scheme trustees notice in writing that it wished to terminate the Scheme and to cease to contribute to it.
10. The Company gave notice in writing to the trustees on 22 October 1997 of its intention to cease contributing to the Scheme with effect from 31 March 1998 and that it wished that the Scheme be terminated with effect from that date.
11. The trustees did not take any advice from the Scheme Actuary in relation to further contributions under rule L.1.1. or make any determination under rule L.1.1 that it was "appropriate" that the Company should pay any such further contributions to the Scheme.
12. On the termination of the Scheme by the Company, the former trustees had a discretion under the Rules to determine whether to apply the fund in three different ways: (a) they could administer the Scheme as a "closed scheme" until such date as they might decide to wind up the Scheme, with the result that there would be no new members and no more contributions by the Company or by the members (Rule J.2); or (b) they could transfer all or part of the fund to another arrangement with the result that the beneficiaries under the Scheme would become entitled to benefits under the receiving scheme or arrangement (Rule J.3); or (c) they could decide to wind up the Scheme by applying the fund in accordance with Rule J.4, which prescribed the priorities of payment in which the balance remaining (after the payment of costs, charges and expenses) should be applied. The Rule also laid down that the benefits to be provided should be secured by a number of ways, including the purchase of an annuity, assurance contract or policy from an insurance company.
13. A decision was initially made to administer the Scheme as a closed scheme. At that time , the trustees did not know that there was a buy out deficit. It was not until November 1998 that Mercer's actuarial valuation of the Scheme as at 5 April 1998 estimated that there was a buy out deficit of between £1.246 and £2.63 million. It was later resolved to wind up the Scheme. The winding up of the Scheme commenced on 11 April 2003. There is an estimated "buy-out" deficit (i.e. a deficit on seeking to secure benefits with an insurance company) which now exceeds £10m.

The judgment

14. Lindsay J held that the power to require contributions in clause L.1.1 came to an end on the termination date (31 March 1998). Once the termination notice had taken effect and the Trustee elected to administer the Scheme as a closed scheme, the ability of the Trustee to demand contributions was forthwith brought to an end and did not revive when the Scheme passed into a winding up under rule J.4.
15. The judge's conclusion on the power of the trustees during the period before termination took effect was that the wide terms of L.1.1 should be given their full literal effect. He said:

"56. In all, I have been unable to see any good reason why before the 31^st March 1998, clause L.1.1 should not have been given full literal effect, that literal effect including that contribution could be required by reference to what, having taken advice from the Actuary, the Trustee determined to be appropriate as a lump sum sufficient to make good a buy-out deficit. Thus in answer to Preliminary Issue 1(i) of Master Price's Order I would hold that before the effective date of the termination notice the Trustee did have the power, having taken the advice of the Actuary, to demand a contribution to make good any buy-out deficit then obtaining."

Approach to construction

16. There is no dispute about the proper approach to construction of the Scheme in the light of the principles usefully collated in Stevens v. Bell [2002] EWCA Civ 672 at paragraphs 26 to 32. The Rules of the Scheme should be construed as a whole. The construction should give "a reasonable and practical effect" to the Scheme. As the judge said, the approach to construction should be "practical and purposive."

Appellant's submissions

17. Mr Alan Steinfeld QC appearing for Pinsents raised many objections to the construction favoured by the judge. His main complaint was that the judge's construction produced impractical consequences.
18. He pointed out that there was no express requirement in the Deed that the Company should give reasonable notice or, indeed, any notice of its intention to terminate the Scheme and its liability to make contributions to it. In practice, the notice given by the Company might not give the trustees enough time in which to obtain the advice of the Actuary and calculate the exact amount which it would consider "appropriate" to demand as a contribution from the Company before the termination of the Scheme.
19. Mr Steinfeld also relied on the fact that the Trustee accepted the judge's ruling that, once the Scheme was terminated, there was no power to demand a contribution from the Company. It is difficult and impractical to compute the exact amount of the "buy-out" deficit before the winding up of the Scheme has commenced, its assets realised, the costs met, the benefits of the members ascertained and quotations for the purchase of annuities obtained to satisfy those benefits. It is contrary to business common sense to entitle the trustees to demand contribution of a sum to cover an anticipated buy-out deficit before termination and yet to deny the same right after the Scheme has terminated and the deficit has arisen and been quantified. The position was that the trustees had no power to make the demand once the Company had given notice of termination.
20. Mr Steinfeld looked to the purpose of the rule. It was only intended, he submitted, to enable the trustees to require regular contributions from the employer which they determined to be "appropriate" for the purpose of enabling the liabilities of the Scheme to be met on an "ongoing basis," that is whilst the Scheme is ongoing. Further funding might be required to build up the pension fund while the Scheme is ongoing, so that it is sufficient to meet the liability to pay the members' accruing benefits as and when they fall due. A "buy-out" deficiency was not such a liability and the Company was not liable to make a contribution for it.
21. There was, Mr Steinfeld contended, no deficit where the Scheme was terminated by the Company. The benefits of the members on a winding up were defined in rule J.4. The only purpose of the trustees demanding a contribution by the Company after notice of termination would be to enhance the benefits of the members. That was not an "appropriate" payment for the trustees to seek, as the power was concerned with the sufficiency of the fund to meet existing liabilities to members, not to increase the benefits of the members.
22. As the judge held, the rule did not extend to requiring an employer to make a post-termination contribution by the employer. There is no requirement for further funding once the Scheme has been terminated and was being wound up. At that point no new members are admitted. The benefits of the members crystallised and they abated rateably to the extent that the fund is insufficient to purchase an annuity policy to secure in full what would otherwise be their benefits. Yet the judge held that the rule enabled such a payment to be demanded after the service of the termination notice, even though there was no threatened winding up of the Scheme.

Discussion and conclusion

23. The Trustee submits, and I agree, that the ambit of Rule L.1.1 is to be determined by reference to its language read in the context of the whole Scheme and its practical purpose.
24. According to the plain meaning of the clause it is for the trustees to determine what contribution is "appropriate" to enable the benefits under the Scheme, which are a form of deferred pay, to be funded in practice. That power of the trustees to make an appropriate demand for a contribution by the employer is not subject to any express restriction. It continued to be exercisable during the notice period down to 31^st March 1998. Only after the termination date did the Company cease to be liable to make contributions.
25. The key word is "appropriate." It is common ground that it means "sufficient to fund the benefits stated by the Scheme in the circumstances of the case." On the one hand, the clause would not entitle the trustees to demand a contribution for the purpose of building up a surplus and to fund increases to benefits payable to members under the Scheme. On the other hand, if the trustees were advised that there would be a shortfall, the trustees could properly exercise their discretion, after taking advice from the Actuary, to decide that it was appropriate to require the Company to pay a lump sum to make good the shortfall by paying a further appropriate contribution.
26. The crux of the case is that the Trustee asserts and Pinsents deny that the shortfall can include a lump sum contribution to make good a "buy-out" deficit. Mr Steinfeld QC accepted that the trustees were entitled to decide that it was appropriate to demand a lump sum payment by the Company to make good a deficit on an ongoing basis. He conceded that such a deficit on an ongoing basis could be demanded even after a termination notice had been served, provided that it had not yet expired; but he denied that buy out funding could ever validly be demanded.
27. I agree with the Trustee that the judge's construction of clause L.1.1 makes good commercial sense in the context of a defined benefit scheme. It carries into effect the object sought to be achieved: that is, to enable the trustees of the Scheme to ensure that the benefits promised to members, as part of their deferred remuneration, are funded on a winding up. It gives effect to the plain and unrestricted meaning of the words that the trustees should have power to decide that it was appropriate for the Company to make a contribution to the Scheme to enable the benefits to the members under the Scheme to be funded in practice. The liability of the Company to make an "appropriate" contribution did not terminate until the end of the period of notice given by it. During the notice period the Rules remained in full force and effect and the trustees were entitled, in the light of the notice given by the Company, to invoke the powers and discretions in the Deed while it was still current.
28. Although I base my decision on the construction of the Rules of this scheme, I should add that this construction finds some support in the decision of the High Court of New Zealand in McClelland v. Unisys New Zealand [2002] OPLR 39. In that case the employer exercised the power in the trust deed of a defined benefits scheme to give 1 month's notice of its intention to terminate or suspend payment of its contributions. It was held that, following the notice of termination, but prior to its expiration, the trustees were entitled under the terms of the scheme to claim amounts of money, as they thought proper after taking advice, from the employer to top up the fund "to cover the present value of liabilities to members." (paragraph 13 of the judgment of Ellis J).

Result

29. I would dismiss the appeal.

Lady Justice Smith:

30. I agree with the judgment of Mummery LJ and wish to add only a few words of my own.
31. In support of his submission that the construction of Rule L.1.1 favoured by the Judge made the Scheme unworkable or impractical, Mr Steinfield submitted that, because it was open to the Company to give notice under rule L.1.3 to withdraw from the Scheme with immediate effect (there being no express requirement for any particular period of notice to be given), it was not sensible or workable to suggest that the trustees should be entitled to make a demand for a contribution assessed on a 'buy-out' basis. He submitted that the trustees could not decide how they would deal with the fund until after the Company had withdrawn, whether on receipt of the notice of withdrawal or on expiry of the term of notice, if given. As no decision could be taken during the notice period, if any, to transfer the fund to another organisation under a 'buy-out' arrangement, no calculation could possibly be made by the trustees (after consulting with the actuary) as to what amount might be appropriate for such a purpose.
32. I would reject this submission. First, although it is true that the Scheme does not contain an express requirement for any particular period of notice to be given prior to the Company's withdrawal, in my view a term should be implied that reasonable notice should be given. The Scheme would be virtually unworkable if the Company could withdraw with immediate effect. If that were permitted and were to occur, it would not be possible for any demand to be made for a contribution once notice had been given, not even for an amount appropriate on an ongoing basis, which Mr Steinfield concedes should be possible. If notice of withdrawal could be given with immediate effect, a Company with funds could leave the Scheme in the lurch. In my view, reasonable notice is required. It is not necessary to decide what would be reasonable, as six months' notice was given in this case.
33. I would also reject Mr Steinfield's contention that it will not be possible for the trustees to calculate an appropriate sum on a 'buy-out' basis during a notice period. It is true that the decision as to how the fund is to be managed cannot be put into effect until after the date of withdrawal. However, there is nothing to prevent the trustees from deciding, during the notice period, how they intend to deal with the fund after expiry of the notice. Indeed, it seems to me that prudent trustees will wish to do so. The trustees will wish to safeguard the accrued rights of the beneficiaries in the most effective way. To do that, they will wish to consider all the available options, including the possibility of a transfer or 'buy-out'. Although it was agreed that a full actuarial assessment of the state of the fund may take as much as nine months, it was also said that advice as to the approximate sum required to secure a 'buy-out' can be obtained quite quickly, certainly in a matter of a few weeks. It does not appear to me that Rule L 1.1 requires the trustees to make a precise calculation as to the amount to be demanded. An assessment or estimate of what is appropriate is all that is required. In any event, if the sum demanded turned out to be more than was required for the proper purposes of securing the accrued rights of the beneficiaries, the excess could always be repaid to the Company.
34. For these additional reasons, I would agree with Mummery LJ that rule L.1.1 is wide enough to permit the trustees to demand a sum appropriate to secure a 'buy-out'. There is nothing illogical or impractical about such a provision. Indeed, to restrict the ambit of the rule in the way contended for by the appellant would be to deprive the trustees of any opportunity to consider the transfer option that the Scheme expressly provides for at rule J3.
35. I too would dismiss this appeal.

Sir William Aldous:

36. I agree with the judgment of Lord Justice Mummery.