England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand London WC2
		17th June 1999

MR JUSTICE RIMER: The matter before me is a much amended originating summons issued by the trustees of the Scientific Investment Pension Plan (which I will call "the Scheme") as long ago as 22nd July 1992. I have already dealt with various of the questions it raises. This judgment is on two further questions.

By way of background, the Scheme is a tax approved occupational scheme which was established by an interim trust deed dated 1st May 1974 and is currently governed by a definitive deed dated 28th September 1977, as amended from time to time ("the definitive deed"). It is primarily a final salary scheme, although a money purchase part was added by a supplemental deed dated 30th March 1989. On 20th December 1991, the Scheme's principal employer went into insolvent liquidation and it has since been run as a closed scheme. On 31st January 1992, David Clark was appointed as the statutory independent trustee. On 23rd December 1992, he was replaced by James Kemble. The claimants are the present trustees of the Scheme, namely Investment Capital Pension Trustees Limited, and Mr Kemble. The administration of the Scheme has given rise to a number of problems and questions, many of which have been raised by the originating summons. Mr Kemble's intention is to wind up the Scheme once all the outstanding questions have been answered. The Scheme's assets are approximately £8 million in value. It is unclear whether the Scheme is in surplus or deficit. It is quite likely that it is approximately in balance. I turn now to the two questions.

(1) Insurance Cover.

Mr Kemble is concerned that after the final winding up of the Scheme and the distribution of its assets, the trustees will still face the possibility of claims of one sort or another. They accept that the prospect of any such claims is remote. None is at present threatened, nor is any claim from any particular quarter foreseen. Mr Kemble proposes, before the final distribution of the assets, to place advertisements under section 27(1) of the Trustee Act 1925 and so, subject to anything which that may provoke, that will afford the trustees the protection of section 27(2). Moreover, Clause 18 of the definitive deed provides the trustees with the benefit of an exoneration clause whose validity is in not in question. That excuses the trustees from all liability for which they might be answerable except for wilful default on their part. The scope for the bringing of successful claims against them at the conclusion of the winding up is therefore limited.

Despite all this, the trustees nevertheless entertain a concern that claims may be made against them. Those claims may be hopeless ones to which section 27 and/or the exoneration clause will provide the trustees with a complete defence. Even so, they would be likely to incur irrecoverable expense in resisting them and fending them off. There will, however, at that stage be no undistributed scheme assets to which they could hope to look for an indemnity.

In contemplation of that situation, what the trustees wish to do is to take out indemnity insurance cover which will protect them against such claims and the costs of defending them. They have obtained a quotation for cover under two heads. One head is for indemnity "in respect of claims made against them arising from allegations of breach of duty by reason of any neglect error omission or act occurring or committed in good faith", but excluding cover in respect of claims from persons described in the quotation as "overlooked beneficiaries". The premium for six years' cover of £500,000 under this head is about £25,000. The second head of cover is for "overlooked beneficiary insurance", which will provide an indemnity against "breach of duty by the Trustees by reason of any neglect error or omission or any act attempted occurring or committed in good faith arising out of a claim from a person entitled to be a beneficiary under the Trust but for whom no provision has been made". The premium for £250,000 cover under that head is about £10,000. The direction which the trustees seek is for authority to spend some £35,000 of the Scheme assets in taking out cover of both types. £35,000 represents approximately 0.44 per cent of the Scheme's assets.

The cover proposed to be taken out by the trustees is, therefore, relatively narrow in extent. As it is confined to claims arising in respect of breach of duty other than wilful default or worse, it is accepted by the trustees that it only extends to claims in respect of which they will anyway enjoy the benefit of the exoneration clause. It is recognised by Mr Clifford, who appears for the trustees, that in practice the cover will only provide indemnity against claims which are anyway doomed to failure; that the cover will not be for the benefit of any Scheme beneficiaries or other claimants, and that in the ordinary course it would be likely to do no more than to provide an indemnity against the irrecoverable costs incurred by the trustees in fending off hopeless claims. On this analysis, although the trustees ask that the Scheme should fund the costs of the cover, the purpose of the exercise is solely to benefit the trustees. The cover is not for the benefit of any Scheme beneficiaries, although they are being asked to pay for it.

I say straight away that I am sympathetic to the trustees' wish to be protected by such cover; and, despite the last point, I am sympathetic also to their request that it should be funded by the Scheme funds. I have earlier alluded to the ordinary right which trustees have to an indemnity out of the funds of which they are trustees. In effect, the substance of what the present trustees are asking for is authority to obtain an advance indemnity out of the assets of the Scheme to protect them against possible future claims. Since any such claims will arise only because of their status of trustees, I can well understand how they consider that the trust fund should be expected to fund such protection. However, I cannot decide the point in the trustees' favour simply because of my sympathy for their application. I must first be satisfied that I have jurisdiction to authorise them to do what they want to do and, if I am so satisfied, I must then also be satisfied that it would be proper so to authorise them.

As to the first point, Mr Clifford relies first on Clause 22(a) of the definitive deed. That reads as follows:

"UPON the determination of the Plan, the Trustees shall notify in writing each Member or where appropriate each Dependant or Beneficiary or the Personal Representatives of a deceased Member entitled or prospectively entitled to benefit and before applying the Fund in accordance with sub-clause (b) of this Clause the Trustees shall be entitled to reserve thereout such amount as they consider may be necessary to meet any expenses of the administration and of the determination of the Plan (including any unpaid fees or remuneration payable in accordance with sub-clause (d) of Clause 14 hereof) which in their opinion may not be recoverable from the Employers and to meet any tax for which they may be liable or accountable."

In my judgment, that throws up the question whether the costs of taking out the proposed insurance cover can be described as "expenses of the administration and of the determination of the Plan" within the meaning of that clause. If they can, then no doubt the trustees could properly consider, and conclude, that a sum sufficient to meet such costs should be reserved out of the assets otherwise available for distribution to the beneficiaries.

Mr Clifford submits that the costs of the desired insurance are within the quoted words. Mr Newman, who appears for Mrs Hicks (a Scheme beneficiary who has been appointed to represent all members of the Scheme) submits otherwise. He says that they are simply costs which the trustees wish to expend for their own exclusive benefit; that not a penny of the expenditure will be for the benefit of the Scheme beneficiaries; and that the Scheme can be duly administered and determined without the incurring of this expenditure.

I have not found that question of construction a wholly straightforward one; but I have come to the conclusion, with some reluctance, that Mr Newman's argument is to be preferred and that the taking out of the desired insurance cover cannot properly be described as an expense of the administration or of the determination of the Plan. If the purpose or effect of the cover were to provide benefits for missing beneficiaries or for other claimants under the Scheme, then the position might be different. That would or might justify the view that the proposed cover was a true substitute for the setting aside of a part of the fund necessary to cater for any such claimants' interests and would or might also justify the conclusion that its cost was truly a cost of the administration of the Scheme. The case would, I think, then be in line with the situation which was the subject of the decision by Mr Richard McCombe QC sitting as a deputy judge of the Chancery Division in Re Evans (deceased, Evans v Westcombe [1999] 2 All ER 777. As it is, I regard the present case as distinguishable from that case. Whereas in the Evans case the cover was taken out for the purpose of administration and to enable it to be completed, that is not the position in this case.

Mr Clifford relied in the alternative on section 57(1) of the Trustee Act 1925. That reads:

"(1) Where in the management or administration of any property vested in trustees, any sale, lease, mortgage, surrender, release or other disposition, or any purchase, investment, acquisition, expenditure, or other transaction, is in the opinion of the court expedient, but the same cannot be effected by reason of the absence of any power for that purpose vested in the trustees by the trust instrument, if any, or by law, the court may by order confer upon the trustees, either generally or in any particular instance, the necessary power for the purpose, on such terms, and subject to such provisions and conditions, if any, as the court may think fit and may direct in what manner any money authorised to be expended, and the costs of any transaction, are to be paid or borne as between capital and income."

The difficulty I have with the claimed reliance on section 57 is that I do not accept that it is available to authorise trustees to enter into a transaction of a nature not permitted by the trust deed, and being one intended to be exclusively for their own benefit. In In re Craven's Estate, Lloyds Bank Limited v Cockburn (No. 2) [1937] Ch 431, at page 436 Farwell J said, referring to section 57:

"The word `expedient' there quite clearly must mean expedient for the trust as a whole. It cannot mean that however expedient it may be for one beneficiary if it is inexpedient from the point of view of other beneficiaries concerned the Court ought to sanction the transaction. In order that the matter may be one which is in the opinion of the Court expedient, it must be expedient for the trust as a whole."

And in In re Earl of Strafford, dec'd, Royal Bank of Scotland Ltd v Byng and others [1980] 1 Ch 28, Buckley LJ said at page 45, after referring to Farwell J's words:

"`Expedient for the trust as a whole' must mean, it seems to me, the same as `expedient in the interests of all the beneficiaries under the trust', provided that it be kept in mind that in considering the interests of the beneficiaries collectively, trustees must take into account the effect of what is proposed upon the several individual interests of the beneficiaries and hold the scale fairly between them."

These citations illustrate, in my view, that what section 57 is directed to is authorising transactions for the general benefit of the beneficiaries, not ones for the exclusive benefit of the trustees, a point which is also to be found reflected in the decision of the Court of Appeal in In re Downshire Settled Estates; Marquess of Downshire v Royal Bank of Scotland [1953] Ch 218. There, at page 247, Sir Raymond Evershed MR said in relation to section 57:

"We think that the reason for the appearance of the word `administration' as an alternative to `management' in the section is that, although the words do largely overlap, it was thought possible that an unduly narrow interpretation might be adopted, if only one word were to be used without the other. Be that as it may, we are satisfied that the application of both words is confined to the managerial supervision and control of trust property on behalf of beneficiaries."

I do not, therefore, accept that section 57 affords the trustees any assistance either.

Mr Clifford also referred to and relied upon section 30(2) of the Trustee Act 1925, which reads:

"A trustee may reimburse himself or pay or discharge out of the trust premises all expenses incurred in or about the execution of the trusts or powers."

I have already referred to a trustee's right of indemnity. I cannot, however, see how the expending of trust money by way of a protection against a future and uncertain claim for an indemnity (one which may never arise) can be regarded as an exercise of this right.

Despite my sympathy for the application which the trustees make, I have come to the conclusion that, in the absence of a express provision in the definitive deed permitting them to take out the proposed cover at the Scheme's expense, I have no jurisdiction to authorise them to have recourse to the Scheme's funds in paying for such cover.

(2) The Money Purchase Scheme.

The Scheme constituted by the definitive deed is a "balance of cost" final salary Scheme. On 30th March 1989 the then principal employer of the Scheme, Scientific Investment Corporation Limited, entered into a supplemental deed with the then trustee of the Scheme, Investment Capital Pension Trustees Limited. That deed recited Clause 5 of the definitive deed, by which the principal employer, with the consent of the trustees, could amend the trusts and powers of the definitive deed and also recited that such an amendment had been resolved upon with effect from 1st April 1989, being an amendment which was to be:

"in accordance with the terms of the announcement issued to members and prospective members of the Plan copies of which form the schedule to this Deed."

Clauses 1 and 2 of the operative part of the deed then provided that:

"1. The Principal Employer and the Trustee hereby undertake that they will execute within 24 months from the date hereof an amending deed detailing the amendments to the provisions of the Plan introduced in general terms by this deed.

2, With effect from the Amending Date and until the execution of the said amending deed the Plan shall be administered in accordance with the Trust Deed and Rules modified as necessary to implement the amendments set out in general terms in the announcement scheduled hereto."

The annexed announcement proclaimed that a money purchase scheme was to be established with effect from 1st April 1989. It then continued:

"The new money purchase plan will be structured as individual investment accounts and all the contributions for each member will be allocated to the member's investment account. Therefore, a member will always be able to find out the value of his/her investment account. Furthermore, each member's pension rights will be fully portable and if a member leaves service then the value of the member's investment account can be transferred to a new pension arrangement. The Company will pay contributions into the new money purchase plan at the rate of 8% of each member's basic annual salary and these, together with the member's own contribution of 4% of basic annual salary, will be allocated to the member's investment account. In addition, a one-off payment will be paid to the member's investment account representing the actuarial value of the benefits accrued in the Scheme up to 31st March 1989. The Scheme will be renamed the Scientific Investment Pension Plan. However, all existing members of the Plan will have the choice of remaining on their existing benefit and contribution structure, in which case they will not be affected in any way by these changes, if they do not wish to be provided with money purchase benefits."

The existing Scheme members were thus given the option of remaining within the current final salary scheme or switching to the new money purchase scheme. Each of those who elected to make the switch would have their interest in the new scheme funded as to the future by the employer and employee contributions referred to in the announcement; and, in addition, would enjoy the benefit of a payment to their investment account with the money purchase plan of a sum representing the actuarial value of the benefits accrued in the final salary scheme up to 31st March 1989. The benefits under the new money purchase scheme were secured with an insurance contract with Standard Life Assurance Company. A number of scheme members did elect to transfer to the money purchase scheme. There are at present 53 members in that scheme and 336 members in the final salary scheme.

Despite the undertaking referred to in Clause 1 of the supplemental deed, no amending deed was ever executed. A booklet about the money purchase scheme was, however, produced. It explains the rate of the employer and employee contributions and that such contributions would be invested by Standard Life. It refers to Standard Life's charges. It describes the benefits on retirement. It also says:

"Different provisions to those described in this booklet apply to those members who chose not to transfer to the money purchase section on 1st April 1989 and also to those who were previously members of the PJ Mason & Company Limited Retirement Benefits Scheme.

Every attempt has been made to make this booklet as accurate and complete as possible. However, it cannot cover all circumstances and the Plan's Trust Deed and Rules are controlling in all respects."

Two problems have arisen with regard to the money purchase scheme. In and following March 1989 the final salary scheme was in surplus and the employers were enjoying a contributions holiday. For the year to April 1990 the employers were, however, due to make their 8% contribution to the new money purchase scheme. Their obligation in this respect was purportedly satisfied out of the surplus assets of the final salary scheme, and the contributions so paid to the money purchase scheme totalled £30,181.24. The first question is whether those payments were properly so made.

The second problem is this. Upon the insolvency of the principal employer in 1991, further contributions to the money purchase scheme ceased and Standard Life began to have recourse to the units in which the insurance contract is invested in order to pay its administrative charges. This has resulted in the cancellation of units and with it a diminution in the pension benefits of members of the money purchase scheme. The trustees want, if they can, to restore those benefits by using the assets of the final salary scheme to repurchase the cancelled units. The cost of doing so would be £22,424.27. The second question is whether they can do so.

Turning to the first question, Mr Clifford submits that the contributions were properly paid out of the surplus. (I should mention that it was, I am told, agreed at an earlier stage of these proceedings that, rather than join another party to argue this point, Mr Clifford should do so in his capacity as counsel for the trustees). He says that, in the absence of any deed executed in accordance with the undertaking in Clause 1 of the supplemental deed, the money purchase booklet shows that the definitive deed is the controlling one. He says that both the final salary scheme and the money purchase scheme were part of the same overall fund or scheme, and that the employer's contribution obligation to both is expressed in the general terms to be found in Clause 3(b) of the definitive deed, which reads:

"Contributions of employer.

(i) Each Employer shall from time to time make such contributions to the Fund as shall be Determined by the Appropriate Authority to be required together with the contributions (if any) of the Members under sub-rule (a) of this Rule to enable the Trustees to provide the benefits of the Plan.

(ii) The said contributions shall be calculated on a basis agreed between the Trustees and the Principal Employer and shall be subject to review at intervals of not more than five years."

His submission, as I understand it, is that that obligation was one in relation to the Scheme as a whole of which the money purchase scheme was merely a part; and that it was properly satisfied by the recourse which was had to the surplus in the final salary scheme, since the employers were properly enjoying a contributions holiday in the year to April 1990 and were therefore to be taken to have discharged their contributions obligations to the fund as a whole, including the money purchase part of it.

I do not accept that submission. Although the booklet to which I have referred supports the argument that the definitive deed remains the governing one, I find it difficult to accept the literal and impractical application of the terms of the booklet which Mr Clifford's argument invites. He may be right that the money purchase scheme is properly to be regarded as part of the same overall scheme. But it does appear to me that the establishment of the money purchase scheme involved the setting up of what was, within that overall scheme, a scheme quite separate from the final salary scheme and to which different considerations applied. Those who joined the money purchase scheme severed their connection with the final salary scheme, transferred to a new scheme and enjoyed the benefit of a payment to it of a sum representing the actuarial value of their benefits in the final salary scheme accrued until 31st March 1989. Those who elected not to transfer retained their interest in the assets which remained subject to the final salary scheme. It seems to me to follow that, to the extent that the surplus in the latter scheme was thereafter used to fund the employer's contributions to the money purchase scheme, the money purchase scheme members were thereby improperly and unfairly subsidised by the final salary scheme members, because the surplus remained held on the trusts of the final salary scheme. Mr Newman who argued the case on behalf of Mrs Hicks, the representative defendant, submits that there was no justification for the payment of the money purchase contributions out of the assets of the final salary section. I agree.

For reasons which follow from this, I can similarly see no justification for a further recourse to the assets of the final salary section in order to repurchase units for the benefit of the money purchase members. For the trustees to have such recourse would be unfairly to benefit one set of beneficiaries at the expense of others.

I will make such declarations as are necessary to reflect these conclusions.

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