England and Wales High Court (Chancery Division) Decisions

Trustee Corporation Ltd v. Nadir & Anor [2000] EWHC Ch 41 (12th December, 2000)

Royal Courts of Justice
Strand
London WC2A 2LL

12 December 2000

Before

MR JUSTICE LAWRENCE COLLINS

Between

JUDGMENT

No appearance by the Claimant.
Mr David Grant (instructed by Vizards Staples & Bannisters) appeared on behalf of the First Defendant.
Mr Michael Tennet (instructed by Linklaters & Alliance) appeared on behalf of the Second Defendant.

Hearing: 8 December 2000
Judgment: 12 December 2000

Mr Justice Lawrence Collins

I Introduction

1. Mr Asil Nadir, as is well known, was the driving force behind Polly Peck International plc ("Polly Peck"). Mr Nadir was made bankrupt in 1991, and Mr Cooper and Mr Jacob are his trustees in bankruptcy.

2. Mr Nadir was a member of the Polly Peck Retirement Benefits Plan ("the Plan"). The first trustee of the Plan was Polly Peck, which went into administrative receivership in 1990, and which was also the Principal Employer under the Plan. In 1999, Polly Peck, acting through its administrative receivers, exercised its power as Principal Employer to amend the Plan to appoint the Trustee Corporation Ltd ("TCL") as trustee.

3. The declaration of trust establishing the Plan in 1988 envisaged that the definitive rules would be established by 1990. Until definitive rules were adopted the Plan was to be administered in accordance with the employee's booklet, which was in a standard Legal & General form. New Rules were established by a deed of amendment in February 1999.

4. Mr Nadir was a member in the Plan, and as at March 31, 2000 the value of his interest was about £857,000. Mr Nadir claims to be entitled to that interest by reason of the forfeiture provision in the new Rules. The trustees in bankruptcy claim that the interest vested in them on Mr Nadir's bankruptcy and remains vested in them.

5. In view of these competing claims, TCL has brought proceedings for the determination of the questions whether Mr Nadir's benefits under the Plan remain payable to him; or have vested in the trustees in bankruptcy; or are held on the protective trusts provided for in the new Rules.

6. In this application Mr Nadir seeks an order that his costs in the action be paid out of his interest in the Plan on the ground that he is without the means to fund the legal representation necessary for the complex legal questions at issue. The application is opposed by the trustees in bankruptcy. TCL has not appeared, and is content to leave the question to the determination of the court. The application raises the question of limits of the power of the court to make a pre-emptive costs order, and the relationship between that power and the practice relating to costs of proceedings concerning the ownership of trust funds.

II The underlying claims

7. The position of the trustees in bankruptcy is that

8. Mr Nadir's primary position is that, even if his interest passed to the trustees in bankruptcy, the position is different since the adoption of the new Rules. Those Rules provide as follows:

9. Mr Nadir's argument is that the effect of this provision is that the consequence of his bankruptcy (which would result in his benefits being vested in or payable to the trustees in bankruptcy) is that any right of Mr Nadir to the benefits will cease immediately, and that the benefits will be held on trust to be applied, in the case of hardship only, to Mr Nadir and his dependants.

10. The basis of this argument is that the definitive rules of a pension scheme trust deed take effect from the date of the original deed.

11. Alternatively, Mr Nadir draws attention to the fact that the House of Lords has given permission to appeal in Krasner v. Dennison [2000] 3 All ER 234, and that it may be held that deferred pension scheme benefits of a bankrupt may not vest in a trustee in bankruptcy, at any rate where the pension scheme prohibits assignment.

III Pre-emptive costs orders

12. The modern practice in pre-emptive costs orders is derived from a number of sources which are related to the right of a fiduciary such as a trustee or agent to be indemnified, e.g. out of a fund in the case of a trustee, or by a principal in the case of an agent. In Wallersteiner v. Moir (No.2) [1975] 1 QB 373 Lord Denning MR said (at 391-392) that a minority shareholder bringing a derivative action on behalf of a company against its directors was an agent who was entitled to be indemnified by the company against all costs and expenses reasonably incurred. The indemnity was analogous to the indemnity to which a trustee was entitled from a cestui que trust. But in order to be entitled to the indemnity, the minority shareholder should apply for the sanction of the court to continue the proceedings by analogy with the practice of a trustee making a Beddoe application for the sanction of the court to bring proceedings: Re Beddoe, Downes v. Cottam [1893] 1 Ch 547. On such an application by a minority shareholder, the court should simply consider whether there was a reasonable case for the minority shareholder to bring at the expense of the company.

13. The principle in Wallersteiner v. Moir (No.2) was extended to members of a pension scheme in McDonald v Horn [1995] 1 All ER 961, in which members of a scheme sought to bring proceedings against their employers, the pension fund trustees and others concerning the administration of the scheme. It was held that the extension of the pre-emptive costs jurisdiction to pension fund members could be justified because there was an analogy with a minority shareholder's action. In both cases a person with a limited interest in a fund was alleging injury to the fund as a whole and seeking restitution on behalf of the fund. Because the members had given consideration for their pensions by working, the analogy with companies and shareholders was stronger than in the case of ordinary trusts.

14. But Hoffmann LJ made it clear that the position was different in the case of a pre-emptive application in proceedings concerning the ownership of a fund held by a trustee. In such cases the court should be satisfied that the judge at the trial could properly exercise his discretion only by ordering the applicant's costs to be paid out of the fund. He referred to the practice established in Re Buckton [1907] 2 Ch 406, and said:

IV Conclusions

15. The Supreme Court Act 1981, s.51, gives the court full power to determine by whom and to what extent costs are to be paid, but the discretion must be exercised in accordance with the rules of court and established principles: McDonald v. Horn [1995] 1 All ER at 969.

16. The general rule under the Civil Procedure Rules remains that the unsuccessful party will be ordered to pay the costs of the successful party: CPR 44.3(2). A trustee is entitled to an indemnity out of trust property in respect of expenses properly incurred, and that principle is reflected in the pre-CPR Rules (Ord.62, rr 6(2) and 14(2) and in the Practice Direction to the current rules on administration and similar actions (which relates to actions for the execution of trusts): CPR Sched.1, RSC Ord. 85. As the Re Buckton practice shows, and as the Practice Direction contemplates, a beneficiary may also in some circumstances be entitled to an indemnity.

17. This is not an action by members of a scheme with a limited interested to vindicate the rights of all members and of the company, and to achieve restitution on behalf of the fund. The case is therefore not one for the application of the principles established in Wallersteiner v Moir (No. 2) or McDonald v Horn.

18. No doubt there are cases, by analogy with Re Beddoe and by reliance on the second Re Buckton category, in which a beneficiary can obtain a pre-emptive costs order in a case where the beneficiary brings proceedings to determine some question arising in the course of the administration of a trust. But this is in reality a hostile claim by one alleged beneficiary against another. Even though the proceedings are not brought by Mr Nadir, his position is hostile to that of the trustees in bankruptcy and, as Hoffmann LJ pointed out ([1995] 1 All ER at 971), when trustees bring proceedings which involve a dispute over the beneficial ownership of the trust property, the proceedings may be more akin to an interpleader.

19. Consequently I see no reasonable basis in principle for extending the pre-emptive costs jurisdiction to this case. This is a contest between Mr Nadir and the trustees in bankruptcy over the beneficial interest in the fund. The consequence of a pre-emptive costs order is serious in that if the applicant is unsuccessful at trial, the successful party ultimately bears all the costs. Mr Nadir's application is limited to the fund in which he claims an interest. But Mr Nadir's creditors would bear all the risks of the litigation, and the fund would be diminished even if Mr Nadir loses.

20. If I were wrong in refusing to extend the pre-emptive costs jurisdiction, I would have in any event not exercised my discretion in favour of an order for two principal reasons.

21. The first relates to the merits of the claim. The merits of the claim are plainly relevant in the Re Beddoe jurisdiction, since the trustee (or other applicant) is only entitled to an indemnity for costs reasonably incurred, and the strength of the claim must be balanced against the potential costs and benefits to the trust fund. So also in the Re Buckton practice the losing party may be indemnified out of the trust assets, but only if it has acted reasonably in the conduct of the claim or the defence. In the pre-emptive costs jurisdiction, in Wallersteiner v. Mor (No.2) [1975] 1 QB at 392 Lord Denning MR said that the question for the court is whether there was a reasonable case for the applicant to bring; and in McDonald v. Horn [1995] 1 All ER at 975 Hoffmann LJ, in suggesting investigation by independent parties, plainly considered that the need for caution in making pre-emptive costs orders required that the merits of the claim be taken into account. See also Alsop Wilkinson v. Neary [1995] 1 All ER 431, 437; Laws v. National Grid plc [1998] Pensions LR 295, 302.

22. Mr Nadir's primary case is that the new Rule providing for the cessation of his interest, and the creation of a trust for payment in the case of hardship, overrides the statutory vesting of his property in the trustees in bankruptcy. In Re Scientific Investment Pension Plan Trusts [1999] Ch 53 it was held that a similar provision was effective, as regards benefits payable in the future, to defeat any rights the trustee in bankruptcy might otherwise have.

23. This argument depends on the application, and extension, of the decision of Walton J in Re Imperial Foods Ltd Pension Scheme, January 27, 1986, in Pen. Schemes 23: February 2000. In that case complaints were made against the trustees of the scheme with regard to the amount of a transfer value paid by the trustees to the trustees of a scheme of a company which had taken over two subsidiaries of Imperial Foods. The interim trust deed contained no clause exempting the trustees from liability. But a definitive deed was executed after the events in question, which contained a wide exemption for the trustees. It was held that the definitive trust deed governed the situation from the outset. Except where a provision was never contemplated:

24. This is a controversial decision. But in any event Mr Nadir will face formidable difficulties in extending this decision to the present case for at least two reasons. First, Walton J clearly contemplated that a definitive deed could not alter vested rights. He expressly exempted from the retroactive effect of the definitive rules provisions "for the payment of pensions to totally different classes of person". In this case the trustees in bankruptcy have vested statutory rights and it would be very surprising if Rules adopted in 1999 could remove rights vested in them several years before. Secondly, in the present case the new Rules were adopted by the deed of February 22, 1999 "with effect from the date of this Deed", and it is very difficult to read that as involving an 11 year retrospective effort. There are also other difficulties, including the fact that the Rules were adopted under a power of amendment, which was apparently exercised without the consent of the insurers as required.

25. Nor am I satisfied that Mr Nadir has shown that he is unable to fund legal representation. As the applicant, the onus is on him to show that he cannot do so, and to answer fully and frankly the points made in answer to his contention that he cannot pay. In particular it is said on behalf of the trustees in bankruptcy that he has funded applications in criminal proceedings brought against him. All he says in answer is that he was funded by un-named third parties, and that source of funds is not now available.

26. For completeness I should add that I see no basis for the suggestion (and it was not put much higher than that) to the effect that Mr Nadir's right to a fair hearing under Article 6 of the European Convention on Human Rights would be denied if he were not given the benefit of a pre-emptive costs order. When TCL as the trustee brings this matter before the court, it will no doubt bring to the attention of the court all relevant matters of law and fact which bear on the respective entitlements of Mr Nadir and the trustees in bankruptcy.

27. For these reasons the application will be dismissed.