Neutral Citation Number: [2011] EWCA Civ 380
Case No: A3/2010/1746 
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM 
THE HIGH COURT OF JUSTICE , CHANCERY DIVISION
MR JUSTICE DAVID RICHARDS
Case No HC09C04866

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 1st February 2011
Before:

THE MASTER OF THE ROLLS
LORD JUSTICE RICHARDS
and
LORD JUSTICE HUGHES
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Between:

	(1) THE TRUSTEES CORPORATE TRUSTEES LIMITED
(2) THE TRUSTEES TRUST LIMITED	Appellants	
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	CAPMARK BANK EUROPE PLC	Respondent	

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James Ayliffe QC (instructed by Teacher Stern LLP) for the Appellants
Raquel Agnello QC and Philip Hinks (instructed by Lawrence Graham LLP) for the Respondent

Hearing date: 31st January 2011

Note of
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Judgment

The Master of the Rolls: 
1.	This is an appeal from a decision of David Richards J, brought with the Judge’s permission. It raises a point on the interpretation of a debenture granted to a bank over property held by trustees: the point is whether the Judge was correct to reject the trustees’ contention that their right to be indemnified in respect of expenditure under the trust deed creating the trust, had priority over the bank’s rights as chargee under the debenture.
Introductory
2.	The appellants, Dominion Corporate Trustees Ltd and Dominion Trust Ltd (“the Trustees”) are the trustees of a Jersey-based property unit trust called the Maylands Unit Trust (“the Trust”). The Trust was formed, for tax reasons, as the vehicle for the acquisition of warehouse premises at Hemel Hempstead (“the Property”). The purchaser, Cantabria Investments Limited (“Cantabria”), agreed to buy the Property for £28.1m, and the transaction was completed by the vendor transferring the Property to the Trust in exchange for units, which it then sold to Cantabria for £28.1m. 
3.	Cantabria raised £7.1m from its own resources, and the balance of £21m by way of a loan secured on the Property and arranged by the respondent, Capmark Bank Europe PLC (“the Bank”). The security was created by a deed of guarantee and debenture (“the Debenture”) between the Trustees and the Bank as security agent. The lender was a different company in the same group as the Bank, but, for present purposes, it can be treated as the Bank.
4.	As trustees of the Trust, the Trustees were the registered proprietors of the freehold interest in the Property. The Bank was the registered chargee of the Property. It should be added that the Bank was not simply a normal arm’s length secured lender, in the sense that it was closely involved in the whole transaction: it owned a substantial (around 50% or more) interest in Cantabria, and therefore it had a substantial, if indirect, interest in the units issued in the Trust.
5.	At the time of the Trust’s acquisition of the Property, it was effectively subject to a lease at a rent which was more than sufficient to meet all outgoings on the Property and the administration of the Trust. However, the lease ended in April 2008, whereafter the Property remained empty, save between November 2008 and February 2009, when it was occupied by Royal Mail as a licensee. 
6.	A change in rating law which came into force on 1 April 2008 had the effect of imposing unoccupied property rates on premises such as the Property after they had been unoccupied for six months. Liability for such rates falls on the persons entitled to possession. As a result, the Trustees, as the registered freehold proprietors of the Property, incurred a liability for rates (“the rates”) in excess of £1.3m, details of which are set out in the judgment below – [2010] EWHC 1605 (Ch), para 4
7.	Following the failure to repay the loan, the Bank appointed receivers, who sold the Property for only £14.63m in February 2010. There are therefore insufficient funds to repay the secured loan in full, even without taking account of the Trustees’ claim to be indemnified against their liability for the rates. 
8.	As trustees, the Trustees are entitled to be indemnified out of the trust assets for all expenses reasonably and properly incurred by them (and they have a lien over the trust assets for that purpose), and it is not in dispute that the liabilities for the rates fall into that category. The issue is whether their right of indemnity ranks in priority to The Bank’s security under the Debenture. 
9.	The Trustees’ contention that their right of indemnity ranks ahead of the Bank’s security turns on the interpretation of the Debenture. However, the Trustees rightly accept that there is no “general principle that charges granted by trustees over trust property are subject to the Trustees’ lien for their own expenses and they accept that their rights cannot prevail over the Bank’s rights as chargee unless the relevant contract, the Debenture, so provides”, to quote from the judgment below - [2010] EWHC 1605 (Ch), para 7. 
The Trust Instrument
10.	The Trust Instrument constituting the Trust is dated 17 March 2006, and it provided in clause 2.1: 
“The Trust Fund shall be constituted out of the proceeds of issues of Units in accordance with this Trust Instrument. All cash and other property for the time being held by the Trustees pursuant to this Trust Instrument … shall be held as a single common fund (the ‘Trust Fund’) upon trust for the Holders [of the] Units … subject to the provisions of this Trust Fund. The Trust Fund shall be applied and otherwise dealt with by the Trustees in accordance with the provisions of this Trust Instrument. …”
11.	Clause 13.7 empowered the Trustees to create charges in terms which permitted the grant of the Debenture. Clause 15 dealt with the payment of trust expenses. Clause 15.1 defined “Permitted Expenses” in terms wide enough to include the rates, and clause 15.2 provided that, subject to irrelevant exceptions, all Permitted Expenses should be payable out of the Trust Fund. 
12.	By clauses 25.8 and 25.9, the Trustees were given a right of indemnity out of the Trust Fund and a lien over the Trust Fund for “all liabilities and expenses properly incurred” as a result of, and “all actions, proceedings, costs, claims and demands” in respect of, their trusteeship, and clause 31 gave effect to this right of indemnity and lien in the event of termination of the Trust. As mentioned, this indemnity extended to the Trustees’ liability for the rates. 
13.	The Trustees’s fees were set out in clause 23.1: £3,500 was payable on execution of the Trust Instrument, £6,500 for services provided during the first month after execution of the Trust Instrument and thereafter variable fees were payable in respect of each quarter at rates to be agreed. 
The Debenture
14.	The £21m loan was advanced under a facility agreement dated 21 March 2006, pursuant to which the loan was repayable on 21 April 2008 or, at the borrower's option, 20 March 2009. The Debenture was executed next day. 
15.	The definitions included the following: 
a)	“Charged Assets”: 
“the assets and undertaking of [the Trustees] from time to time mortgaged, charged or assigned (or intended to be mortgaged, charged or assigned) by way of fixed and/or floating security as security for the payment or discharge of all or any part of the Secured Liabilities, and ‘Charged Asset’ shall be construed accordingly”.
b)	“Secured Liabilities”:
“all present and future obligations and liabilities, whether actual or contingent and whether owed jointly or severally and whether as principal or as surety or in any other capacity whatsoever, of [the Trustees] to [the Bank] under or in connection with the Finance Documents (including this Deed) ..”.
c)	“Security”:
“a mortgage, charge, security assignment, pledge, lien or other encumbrance security interest securing any obligation of any person or any other agreement or arrangement having a similar effect ..”.
d)	“Trust Fund” had the meaning given by clause 2.1 of the Trust Instrument.
e)	“assets” had a wide meaning, including “undertaking, assets, accounts, revenue, and rights of whatsoever nature … and every kind of interest …”.
16.	Clause 2.1.1 contained a fixed charge over the Property “for the payment, performance and discharge of the Secured Liabilities”. Clause 2.1.2 created a “first fixed charge” over a variety of assets including book debts, and “all other assets comprised in the Trust Fund not otherwise mortgaged or charged pursuant to the foregoing provisions ...”.
17.	Clause 11 was in these terms: 
“11.1 Any monies received by [the Bank], any Receiver or any administrator after this Deed has become enforceable shall be applied in the following order of priority …:
11.1.1 in satisfaction of or provision for all costs and expenses incurred by [the Bank], any Receiver or any administrator and of all remuneration due to any Receiver or administrator;
11.1.2 in or towards payment (in the order specified in … the Facility Agreement) of the Secured Liabilities or such part of them as is then due and payable; and
11.1.3 in payment of the surplus (if any) to [the Trustees] or other person entitled to it.
11.2 Clause 11.1 overrides any appropriation made by the [Trustees].”

18.	By clause 12, the Trustees agreed “to indemnify [the Bank] against all … losses … incurred by or on behalf of [the Bank] … or any Receiver in the execution or purported execution of any of the powers … pursuant hereto …”.
19.	By clause 17.3, The Trustees covenanted to “pay, perform or discharge all the Secured Liabilities on the due date therefore”, and, by clause 17.4.1, they guaranteed the prompt payment, discharge and performance of the Secured Liabilities. 
20.	Clause 17.6, on which the Trustees particularly rely, provided: 
“Notwithstanding any other provisions of this Deed:
17.6.1 [The Trustees have] executed this deed solely in [their] capacity as trustee[s] of and with the intention of binding the assets of the Unit Trust … from time to time (the ‘Trust Assets’);
17.6.2 the aggregate of all liabilities of [the Trustees] under this Deed shall at all times and for all purposes extend only to the Trust Assets;
17.6.3 in no circumstances shall any liability attach to or be enforced or enforceable against the assets of [the Trustees] (held in their capacity as trustees of any other trust or in their personal capacity or in any other capacity whatsoever) other than the assets which comprise the Trust Assets; and 
17.6.4 all representations, warranties, undertaking, obligations and covenants in this Deed are made, given, owed or agreed by or in relation to the Trust Assets and in [the Trustees’] capacity[y] as trustees of the Unit Trust and, for the avoidance of doubt, shall not be construed to be made, given, owed or agreed by or in relation to [the Trustees] in their capacities as trustees of any other trust or in their personal capacity or in any other capacity whatsoever (other than in their capacities as trustees of the Unit Trust).”
Summary of conclusions
21.	The Trustees’ case that their right of indemnity and lien ranks ahead of The Bank’s charge rests on the construction of the Debenture. They base their case, primarily, on the express effect of clause 17.6 of the Debenture (“clause 17.6”), but, alternatively, on a term to that effect to be implied into the Debenture. 
22.	In my view, the Judge was right to reject both arguments raised by the Trustees. I would summarise my reasons as follows.
23.	So far as the primary argument is concerned, it seems to me clear that clause 17.6 was concerned with the Trustees’ liability to the Bank, or, to put the same point another way, it was concerned with the Trustees’ liability under the Debenture. The clause was not concerned with protecting the Trustees in relation to their liability to a third party. Accordingly, the clause did not have the effect of giving the Trustees’ rights of indemnity under the Trust Instrument priority over the Bank’s rights as chargee of the Property. As to the alternative argument, the alleged term is not necessary for business efficacy, it is not obvious, and it appears to conflict with an express term of the Debenture, namely clause 11.
The Trustees’ first argument: clause 17.6 of the Debenture
24.	In the light of the opening seven words of the clause, I accept that clause 17.6 can be said to override other provisions in the Debenture, and so the Trustees’ case would not be undermined simply because their interpretation of the clause appeared inconsistent with another provision of the Debenture. However, the clause has to be read in its context. That context includes the legal and commercial circumstances in which the clause was agreed, and, more particularly, the fact that it is in a document, which contains other provisions, and whose purpose is to enable trustee-owners of property to charge the property as security for a loan. 
25.	In the absence of an express or implied provision (or, exceptionally, some other factor) to the contrary, where a trustee, acting as such, enters into a contractual obligation to another party, that party can enforce the obligation against the trustee, and the trustee’s assets, in the same way as if the trustee had entered into the contract on his own account. In this case, the Trustees, as trustees of the Trust, accepted liabilities to the Bank under the Debenture – for instance in clauses 12, 17.3 and 17.4. In the absence of any stipulation to the contrary, the Bank could have had recourse against each of the Trustees under those clauses to the full extent of the Trustees’ assets, whether held by each of the Trustees qua trustees under the Trust or beneficially – or, conceivably, as trustee of other trusts. 
26.	Hence, it is clear that clause 17.6 was intended to make it clear that the Bank could not pursue the Trustees beyond the Trust assets. As the Judge put it, clause 17.6 “recognises that the Trustees were contracting in a specific capacity, as trustees of the Trust, and is designed to provide protection to them in a personal capacity and to assets held by them for their own benefit or for the benefit of other trusts” – [2010] EWHC 1605 (Ch) 1605, para 31.
27.	However, the Trustees contend that the clause does more than this, and that, fairly read, it has the effect of giving the Trustees’ indemnity and lien priority over the Bank’s charge. By the end of his concise and clear submissions, it became clear that Mr Ayliffe QC was resting the Trustees’ case on the definition of “Trust assets” in clause 17.6.1, the possible reach of clause 17.6.2, and the wording of clause 17.6.3, together with the factual matrix in which the Debenture was executed.
28.	So far as clause 17.6.1 is concerned, it appears, at any rate at first sight, simply to spell out that the Trustees were entering into the Debenture as trustees and were only intending to bind the assets of the Trust. I find it impossible to accept Mr Ayliffe’s argument that the expression “Trust Assets” means the “intention” was to “bind” only what he called the net assets of the Trust – i.e. the assets of the Trust subject to the Trustees’ lien. 
29.	First, the natural meaning of “the assets of the Unit Trust”, particularly in the light of the wide definition of “assets” is all the assets of the Trust. As the Judge said, “it is because they are trust assets that the Trustees are given a right of indemnity out of them and a lien to secure that right. They do not cease to be trust assets to the extent of the Trustees’ claim” – [2010] EWHC 1605 (Ch), para 38. 
30.	Secondly, as pointed out by Richards LJ, the “Trust Assets” in clause 17.6.1 are not only the assets which are to be bound, but also the assets of which the Trustees are described as being trustees. They are clearly trustees of the gross assets of the Trust, as Mr Ayliffe was constrained to accept. 
31.	Thirdly, by clause 2.1.1, the Property was charged to the Bank unconditionally, and it seems very hard to spell out of clause 17.6 that that should be read as being a reference to the Property subject to the Trustees’ right of indemnity and lien.
32.	Mr Ayliffe made much of the fact that clause 17.6 referred to, and indeed defined, “Trust Assets”, whereas elsewhere in the Debenture, the parties were concerned with the “Trust Fund”. Like the Judge, I consider that there is nothing in the point. The “Trust Assets” are defined in clause 17.6.1 as “the assets of the Unit Trust held by [The Trustees] from time to time”. It is true that there appears to be little if any difference there between “Trust Assets” and what is comprised in the “Trust Fund”, but the fact that the parties have included an unnecessary new definition in clause 17.6 cannot justify giving the clause, or any subclauses of the clause, an unnatural meaning.
33.	As to clause 17.6.2, the notion that it is intended to go further than ensuring that The Bank has no recourse against The Trustees beyond the assets of the Trust appears unarguable by the words “under this Deed”. Those words seem to make it clear that clause 17.6.2 is only concerned with limiting the Trustees’ liability to the Bank under the Debenture, and is not concerned with giving the Trustees’ liability to third parties, or their right of indemnity or lien under the Trust Instrument, priority over the Bank’s rights under the Debenture. 
34.	Mr Ayliffe suggested that the Judge’s conclusion would not give effect to clause 17.6.2 if the Trust Assets were depleted by the Trustees exercising their right by indemnifying themselves out of the Trust assets before the Bank brought a claim against the Trustees based on an event before the exercise of the Trustees’ right of indemnity. There is nothing in that argument, which appears anyway to based on rather unlikely facts. If the Trustees’ right of indemnity had been validly exercised, the “Trust Assets” would have been validly reduced, and the Bank could only enforce its rights against those assets, as reduced. That is clear from the words “from time to time” in clause 17.6.1, and the limitations in clause 17.6.3.
35.	Mr Ayliffe also suggested that, if clause 17.6.2 had the effect which Judge accepted, it could result in arbitrary unfairness on the Trustees. This, if, after clause 11.1 applied, the Trustees discovered that they had had a liability which had arisen before clause 11.1 applied, they would be unable to recover on their lien. But that is the type of problem which arises in any case where there is a charge (such as a floating charge) which becomes crystallised on the happening of an event (often an event of default). In any event, the argument does not assist here, where the money against which the Trustees are seeking to enforce their lien is the proceeds of sale of the Property, which was the subject of a fixed charge from the inception of the Debenture.      
36.	That leaves clause 17.6.3. The Trustees’ case appears to involve reading the words “any liability” as extending to any liability of any nature irrespective of the identity of the person or the basis on which the liability arises, whether to the Bank under the Debenture, or to any other person on any other basis, subject to the requirement that it is a liability which arises from The Trustees’ trusteeship of the Trust. In particular, of course, the Trustees say that the words extend to the liability for the rates. There are a number of problems with that interpretation. 
37.	First, it does not accord with the natural meaning of clause 17.6.3 in its context: to my mind, it plainly and naturally refers to liability under the terms of the Debenture. Clause 17.6.1 identifies the basis on which the Trustees entered into the Debenture, namely as trustees of the Trust Assets. Clause 17.6.2 limits the extent of the Trustees’ liability under the Debenture, namely only to the extent of the Trust Assets. Clause 17.6.3 then limits the extent to which any claims can be enforced against the Trustees, namely only against the Trust Assets. There can be no doubt that clauses 17.6.1. and 17.6.3 are only concerned with the Trustees’ liability under the Debenture: it seems to me to be unrealistic to suggest that clause 17.6.3 is not intended to be similarly limited in its extent.
38.	Quite apart from anything else, the reference to “any liability” in clause 17.6.3 must be treated as qualified in some way, as it would otherwise appear to cover all liabilities of the Trustees, whether as trustees of the Trust or in any other capacity, which cannot possibly be right; the natural limitation would be to treat it as referring to any liability under the Debenture. 
39.	An ingenious argument, proffered by Hughes LJ and adopted by Mr Ayliffe, is that the right of lien enjoyed by the Trustees is one of their “assets” in the light of the wide definition of that word, and that, accordingly, clause 17.6.3 precludes the Bank enforcing its charge to the extent that it deprives the Trustees of their lien. In my view, the lien is not an asset “held in [the Trustees’] capacity as trustees of any other trust or in their personal capacity or in any other capacity whatsoever” within the meaning of clause 17.6.3, as those words were not meant to extend to assets held in their capacity as trustees of the Trust. Apart from the reasons already given, it seems to me that that conclusion is heavily reinforced by the closing words of clause 17.6.3, “other than the assets which comprise the Trust Assets”.
40.	In any event, it seems very unlikely that clause 17.6 was entitled to have a meaning which would directly conflict with the order of priorities set out in clause 11.1.1, 2 and 3. As already mentioned, I accept that clause 17.6 plainly appears intended to take priority over any other provision in the Debenture. However, one would have expected some express and clear signal if a fundamental provision such as clause 11 was to be overridden by another clause. 
41.	Further, it would seem to follow from The Trustees’ argument that their lien would rank ahead of any charge or claim which any receiver administrator would have under clause 11.1.1 of the debenture. That seems unlikely, as a matter of commercial common sense, as well as in the light of clauses 11.1.1 and 12.
42.	Mr Ayliffe also relied on the circumstances surrounding the execution of the Debenture. In particular, as both parties would have appreciated, (a) the Trustees’ role was limited to holding the Property as bare trustees, (b) the Bank was an investor with a significant indirect equity interest in Cantabria, (c) the Trust structure was established for the benefit of the shareholders in Cantabria, including the Bank, and (d) the Trustees entered into the Debenture at the request of Cantabria, ultimately for the benefit of those shareholders. In those circumstances, runs the argument, the parties cannot have been intended that the Trustees would be exposed to any risk.
43.	The short answer to that point is that these circumstances cannot justify departing from the clear meaning of clause 17.6. There is nothing unusual about bare trustees charging trust property, and the Dominion group of companies, of which the Trustees are members, is in a substantial way of business and has been providing offshore corporate services from Jersey since 1998. The fact that the Bank was an indirect beneficiary of the Trust, as well as the secured lender to the Trustees does not seem to me to assist the Trustees’ arguments. I cannot see how the various factors I have just identified assist the Trustees’ arguments as to the meaning of clause 17.6 of the Debenture. The only specific point which Mr Ayliffe made in this connection was that the bank would have been particularly well informed about the Trustees’ position, but, as the Judge said at [2010] EWHC 1605 (Ch), para 28, all the relevant facts were “readily deducible from the relevant documents putting the arrangements in place”. 
44.	It is also relevant to mention that the Trustees’ liability for rates has arisen as a result of a combination of circumstances which were not anticipated at the time that the Trust acquired the Property. The Trust appeared to have substantial equity in the Property, namely some £7m (the difference between the £28.1m purchase price and the £21m loan), and a very substantial drop in value, though obviously possible, would have been unexpected. 
45.	Secondly, and connected to this, it was intended that the Property would be held only for a short time by the Trustees, so the risk of any exposure would no have been regarded as substantial. It is true that a new trustee would have been similarly exposed, but, if such a trustee would have expected to hold the Property for a long time, it may well agreed to take the role only if insurance was provided. 
46.	Thirdly, the legislation imposing liability for sums in question only came into force some two years after the Trust Instrument and Debenture were executed. I do not suggest that the liability which has transpired would have been regarded as wholly egregious in March 2006, but it would not have been expected. There is therefore not much force in the contention that the parties cannot have intended the Trustees to be uncompensated for the rates liability, quite apart from the fact that there is at least as much force in the point that the parties cannot have intended the Bank’s security to be reduced by any such rates liability.  
The Trustees’ second argument: an implied term
47.	Having set out in some detail the arguments bearing on the contention that clause 17.6 gives priority over the Bank’s charge to the Trustees’ indemnity and lien under the Trust Instrument, I am bound to say that the implied term for which the Trustees contends appears to me to be plainly unsustainable. 
48.	Mr Ayliffe’s argument as developed orally on this aspect amounted to this, that, if it was apparent from clause 17.6 that the parties intended the Trustees’ lien to have priority over the Bank’s charge, but that this had not been spelled out clearly enough to be an express term, then one should give effect to the intention by way of an implied term. That is a hopeless argument. If the intention is clear from clause 17.6, then one should give effect to it as an express term: the whole point of contractual interpretation is to give effect to the parties’ intention as set out in the contract. If, on the other hand, the intention is insufficiently clearly set out on the clause, then one cannot give effect to it, unless, of course, it is made out on the basis of another clause or on the basis of an implied term established according to well-established principles. 
49.	Subject to that point, I cannot do better than adopt the Judge’s reasons at [2010] EWHC 1605 (Ch), paras 46-48, for rejecting this second argument based on an implied term. He said this:
“46. It is not difficult to accept the proposition that the circumstances in the present case are such that the parties might reasonably have agreed that the Trustees’ lien should rank ahead of the mortgage. But in my judgment the circumstances are not such as to permit or require such a term to be implied. 
47. There are a number of reasons for this. First, it would in my view contradict clause 11 of the Debenture, which is directly in point as the sale of the property was effected by receivers. Clause 11 requires the receiver to apply the proceeds, after payment of his own expenses and remuneration and the Bank’s costs and expenses, in or towards payment of the secured loan. Only the balance, if any, is paid to the Trustees. Secondly, if there were to be some protection for the Trustees’ position, it is far from obvious that it would be by giving priority to their lien. A lender might well say that such protection should take the form of a right of indemnity against the beneficial owners of the property … . Thirdly, the very fact that no provision is made for the Trustees’ lien to take priority is a significant factor against its implication. As was said by Lord Hoffmann in AG of Belize v Belize Telecom Ltd [2009] 1 WLR 1988 at para 17: 
‘The question of implication arises when the instrument does not expressly provide for what is to happen when some event occurs. The most usual inference in such a case is that nothing is to happen. If the parties had intended something to happen, the instrument would have said so. Otherwise, the express provisions of the instrument are to continue to operate undisturbed. If the event has caused loss to one or other of the parties, the loss lies where it falls.’
48. Among the circumstances of the arrangements on which the Trustees relied in support of an implied term for priority of their lien, they particularly stressed that the terms of the Trust Instrument had been the subject of negotiation and agreement by the bank. The Trust Instrument conferred the Trustees’ rights of indemnity and lien, without the requirement contained in a number of the other clauses conferring rights or powers on the Trustees for the Bank’s prior consent. If anything, this seems to me to tell against an implied priority of the lien over the mortgage. It demonstrates that the question of the Trustees’ expenses was considered, but nonetheless no provision for priority was included in the Debenture.” 
Conclusion
50.	For these reasons, I would dismiss The Trustees’ appeal and uphold the order made by David Richards J.
Richards LJ:
51.	I agree.
Hughes LJ:
52.	I also agree.