England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BIRMINGHAM DISTRICT REGISTRY

		Birmingham Civil Justice Centre
		22nd August 2008

Judge Purle QC:

1. The Claimant is the sole trustee of the Noel Penny Turbines Pension Scheme ("the Scheme"). The Defendant is the Principal Employer of the Scheme. The Scheme is in wind-up, and the Scheme's assets exceed its liabilities.
2. Under the Scheme's governing documentation, the power to distribute the surplus assets is vested in the Defendant in its capacity as the Principal Employer.
3. The sole director of the Defendant, who is also a beneficiary of the Scheme, is unwilling to exercise the power of distribution on the Defendant's behalf, conceiving himself to be in an unenviable position of conflict. He has apparently been advised that his position as director may require him to favour the Company's creditors. The Company itself has not traded for many years and is insolvent (subject to issues of limitation).
4. The Claimant accordingly applies (with the support of the Defendant's sole director) for an order substituting the Claimant as trustee of the power over the application of the surplus in place of the Defendant.
5. The Scheme was constituted by a declaration of trust dated 24^th August 1973. The Defendant was the original trustee. The power of appointing new trustees was vested in the Defendant.
6. The Scheme is governed by principal rules ("the rules") adopted on 30^th August 1977, as subsequently amended from time to time.
7. Rule 9 of Part VI of the rules ("Rule 9") provides that on a winding-up of the Scheme and after all benefits due under the Scheme have been secured:

"Any remaining policy monies shall on the direction of the Principal Employer either be applied to increase the benefits so secured or any of them without exceeding any of the limits set out in the Appendix, or be returned to the Participating Employers in proportion to the amounts respectively contributed by them to the Scheme or as may subject to any requirements of the Board of Inland Revenue be otherwise agreed between them."

8. On 30^th October 1991, administrative receivers were appointed over the Defendant, and they caused the present trustee to be appointed as an independent trustee in March 1992.
9. I interpose to note that it has for some time been a statutory requirement for an independent trustee of a pension scheme to be appointed following an insolvency. The legislation dates back to at least Schedule 4 of the Social Security Act 1990, which inserted sections 57C and D into the Social Security (Pensions) Act 1975 ("the 1975 Act") requiring an insolvency practitioner to appoint an independent trustee. The position was modified by the Pensions Act 2004 with the creation of the Pensions Regulator. Rather than requiring an insolvency practitioner to appoint an independent trustee, the legislation now gives the Pension Regulator itself the power to appoint an independent trustee.
10. The current legislation is found in sections 22-6 of the Pensions Act 1995, as subsequently amended. The Pensions Act 1995 is supplemented by the Occupational Pension Schemes (Independent Trustee) Regulations 2005 (SI 2005/703) which revoke the 1997 regulations of the same name.
11. Under the current statutory regime, where an independent trustee is acting, any power which the scheme confers on the employer (otherwise than as trustee of the scheme), and which is exercisable by him at his discretion but only as trustee of the power, may be exercised only by the independent trustee: Pensions Act 1995 as amended, section 25(2)(b). Similar provisions applied to the earlier legislation: see, for example, section 57D(5) of the 1975 Act as amended. In the light of the decision of Warner J.in Mettoy Pension Trustees Ltd. v Evans [1990] 1 WLR 1587, it is doubtful whether an insolvency practitioner could exercise the employer's rights even without these statutory bars, as the power is not an asset of the employer distributable amongst its creditors, but a fiduciary power: p. 1616F. The point is nevertheless reinforced by these provisions, and the conferring of that power on the independent trustee clearly needed legislative input.
12. The administrative receivers appointed the present trustee in succession to the Defendant by a Deed dated 6^th March 1992. Had they continued to act, it seems clear that the power to deal with the Scheme surplus would have been exerciseable by the Claimant alone by virtue of the statutory provisions I have referred to, and no application to the Court would have been necessary.
13. However, the administrative receivers ceased to act on 16^th July 2001. Accordingly, the power to deal with the surplus reverted to the Defendant as donee of the power. By this time, all the Defendant's assets had been realised. The bank was left with a substantial shortfall, far in excess of the pension fund surplus, part of which (£750,000) was guaranteed by a third party who, as a result of meeting the guarantee, claims priority in respect of any further realisations by the Defendant up to that amount.. The Defendant has suggested that the creditors' claims are all now statute-barred. I am in no position to reach a conclusion on that issue. Suffice it to say that if and to the extent that any part of the pension fund surplus reverts to the Defendant, it will either go to the bank (or those claiming through it) or to the shareholders (if the creditors' claims are statute-barred).
14. Although the administrative receivers ceased to act in July 2001, the Defendant did not resume trading. It has been dormant since that date. Payment of contributions ceased much earlier on 3^rd August 1992 when the last active member left pensionable service. The Defendant did not become solvent in July 2001. On the contrary, subject only to limitation issues, it remained insolvent.
15. It is evident that the statutory policy is to remove from an insolvent company the power to determine the destination of a pension surplus, once an insolvency practitioner has been appointed. The duties of an insolvency practitioner are to get the best result for creditors, and that is obviously inconsistent with the exercise of a fiduciary power in favour of a class which includes the employer company as one only of its objects. That observation seems to me to apply with equal force once an insolvency practitioner has ceased to act, but the insolvency remains. The pressure on the directors to have recourse to the fund to relieve the company's own difficulties (having regard to what they may erroneously perceive or be advised to be their duties as directors) may be too much to resist. At the other extreme, the directors may, as disaffected ex-employees and members of the Scheme, be tempted to apply the whole of the surplus for their own benefit. Either way, the need for an independent person to exercise the power is obvious.
16. Had the administrative receivers continued to act in case a pension surplus should arise, or had another insolvency practitioner such as a liquidator been appointed following their ceasing to act, the power to direct the destination of the surplus would have remained the Claimant's as independent trustee, not the Defendant's. It seems absurd that the protection afforded by Parliament should continue down to 16^th July 2001, but not beyond, when nothing of significance changed. I should add that the Defendant had nothing to do with the decision that the administrative receivers should cease to act, which it only discovered some 3 years later when the Registrar of Companies threatened dissolution. Accordingly, I am persuaded that the desirable course would be to appoint the Claimant in place of the Company to exercise the power to determine the destination of the surplus, if that course is open to me, and there are no countervailing factors outweighing the appropriateness of that course.
17. The matter came before me with a time estimate of 30 minutes on 3^rd March this year. It soon became apparent that I needed satisfying on points which had not been fully anticipated. The hearing concluded therefore with my giving permission to the Claimant to lodge further submissions. In fact, 2 further skeleton arguments were lodged after the hearing date by Mr. Rawlings, to whom I am grateful for his industry. In addition, I have conducted my own researches.
18. It is contended by Mr. Rawlings for the Claimant that the power of determining the destination of the surplus is clearly a fiduciary power, and, as the Defendant is required to make a selection among the specified objects, that power can fairly be described as a trust power. It is a power which the Defendant is bound to exercise in some way and has no discretion not to exercise. I agree.
19. Mr. Rawlings refers me in this connection to the Mettoy decision. That case is on point, as it also concerned the power of an employer to augment benefits, the balance going to the employer. The Court held that the power was (in the language of previous authority) "a fiduciary power in the full sense", meaning (also in the language of previous authority) that the power was conferred on the employer "as a trustee of the power itself": p. 1614 A-B. In one sense, the present case is stronger, as the language of Rule 9 is mandatory, whereas the language in Mettoy had permissive elements. Compelling factors in that case were that the power would, Warner J. considered, be illusory if it merely meant that the employer could choose to make gifts out of what was its absolute property (p. 1615 F-G), and that the members of the pension scheme were in no real sense volunteers, as their pension entitlements were inextricably bound up with their contracts of employment (p. 1618 E-G). Each of those factors applies here, too. Given too the mandatory wording of Rule 9, and the absence of any default provision, I have no difficulty in concluding that the power is a fiduciary one which the Defendant is bound to exercise in some way of its choosing.
20. I now turn to the issue of whether I have power to appoint the Claimant to direct the destination of the surplus in place of the Defendant. Mr. Rawlings' primary contention is that I have such power under section 41 of the Trustee Act 1925.
21. Section 41 provides that the court may, whenever it is expedient to appoint a new trustee or new trustees, and it is found inexpedient difficult or impracticable to do so without the assistance of the court, make an order appointing a new trustee or new trustees either in substitution for or in addition to any existing trustee or trustees, or although there is no existing trustee.
22. Section 41 applies if, but only if, it is appropriate to regard the Defendant as a trustee within the meaning of section 41. Mr. Rawlings says that it is appropriate to do so as the power is, as I have accepted, a "trust power" and the Defendant is "trustee of the power itself". In addition to the Mettoy case, to which I have referred, he drew my attention to the speeches of the House of Lords in McPhail v Doulton [1971] AC 424, to reinforce his submission that the Defendant is a trustee of the power.
23. I do not accept that section 41 applies to anyone other than a trustee properly so called, that is to say, a person in whom property is vested as trustee. McPhail v Doulton was concerned with the construction of powers vested in the trustees as such. The trustees were, therefore, true trustees as well as donees of the powers in question. I agree with Mr. Rawlings that the case is relevant in considering the distinction between a mere power and a fiduciary power, but it has no bearing on whether or not the Defendant is a trustee within the meaning of section 41. The expression "trust power" when applied to the mere donee of a power who is not also a trustee (as in Mettoy) is helpful, in that it highlights the imperative nature of the duty which is conferred , and that the power is fiduciary in nature. I do however regard it as misleading to describe the Defendant as a "trustee of the power itself". The donee of such a power is not a trustee in the true sense, unless he happens also to have trust property vested in him. The Defendant was once but is no longer a trustee of the fund which is now in surplus. It has a power, which is imperative and fiduciary in character, to direct the trustee as to the destination of that surplus. The power itself is not property. It cannot be distributed. Only the trust property can, at the direction of the Defendant as donee of the power, and that trust property is held not by the Defendant, but by the Claimant as trustee
24. I accordingly hold that section 41 has no application.
25. That, however, is not an end of the matter, as the Claimant also invokes the inherent jurisdiction of the Court. As the Defendant is bound to exercise the power, but declines to do so, the Court may intervene, under its inherent jurisdiction to execute a trust, to exercise the power or cause it to be exercised in whatever way and by whatever means it thinks fit: see generally Lewin on Trusts, 18^th ed., para 30-19 at p.1121-2, and paras 30-25 to 26 at pp. 1125-7.

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26. The most obvious way in which the Court will intervene is by directing the donee as to how the power should be exercised. As the power in this case is imperative, and the Defendant is bound to exercise the power in some way, the Court's intervention does not depend on any surrender of discretion by the Defendant. The Court would be intervening to ensure that the trust is executed in accordance with its terms.
27. Is the Court, instead of deciding how the power shall be exercised, able to appoint someone else to exercise that power? Outside section 41 of the Trustee Act 1925, the Court has power under its inherent jurisdiction to remove or appoint a new trustee: see Lewin, paras 13-47 to 48 at pp. 462-3. As this is done in exercise of the Court's jurisdiction to execute a trust, it would seem to follow in principle that the Court, in the exercise of that same jurisdiction, could in a proper case appoint some fit and proper person to exercise a fiduciary power in place of the donee. A proper case would be where the donee is refusing to act, has died (or in the case of a corporation been dissolved) disappeared or is otherwise unsuitable to exercise the power in question.
28. In reaching this conclusion, I take note of 3 off-shore authorities, 2 from the Isle of Man, and one from Jersey, where the Courts there have recognised the inherent power of the Court to remove or appoint a protector where (as is commonly the case) the powers of a protector under the settlement in question can properly be described as "fiduciary": see Rawlcliffe v Steele [1993-95] MLR 287; re Papadimitriou [2004] WTLR 287; re Freiburg Trust (2003-4) ITELR 1078. As the Jersey Court succinctly put the matter in the Freiburg decision:

"It would be quite unconscionable and unthinkable that this court should have no jurisdiction to remove a protector who was thwarting the execution of a trust or who was otherwise unfit to exercise the functions entrusted to him by the trust instrument."

29. That reasoning applies to the donee of a fiduciary power. Whether the Court should exercise its power to replace the donee is another matter but where, as here, the donee is acting in breach of its duty by refusing to exercise the power, it is clear that some intervention by the Court is necessary.
30. I therefore rule that I do have power to appoint the Claimant in place of the Defendant to exercise the powers under Rule 9. Are there countervailing considerations which should stop me from doing so? I did initially consider that the proper course was for the Court itself to decide what is on the face of it a one-off distribution rather than leave it to others. There is no doubt that the Court could undertake this task: see Thrells Limited v Lomas [1993] 1 WLR 456. I do not however think this would be the most appropriate course in this case.
31. The Claimant is a professional trustee which has acted in relation to this fund for many years and has intimate knowledge of its structure and the details of its membership and the rights they enjoy. Moreover, it has kept the members informed of this application and no-one has objected to the principle of the replacement of the Defendant with the Claimant.
32. The power that falls to be exercised is not simply one of deciding how much shall go to the beneficiaries and the Defendant, though that is a difficult enough question which would require the Court to be fully informed (with evidence not presently before it except of the most general kind) as to the historical funding arrangements and the reasonable expectations of the Scheme members during their period of employment.
33. In addition, as regards any distribution to Scheme members, the donee has power to direct an increase of the benefits secured "or any of them" but without exceeding any of the limits set out in the Appendix. There is no presumption that all members are to be treated in the same way, as the words "or any of them" confirm. The Court would need to know a lot more about the benefits currently being provided than it presently knows before it could reach an informed judgment on this issue. The Claimant as a professional trustee is in an ideal position to exercise its own judgment.
34. If the way in which the power should be exercised were left to the Court, that would necessarily be a more expensive exercise than the present application, as the different interests would have to be represented – the Company and the different categories of scheme members. As things stand, the Company has been joined but has not been represented before me. The sole director has given a witness statement explaining the reasons for its support for the Claimant's application. The Company has also been in receipt of independent legal advice. As regards the Scheme members, I am asked to make a representation order appointing the Claimant to represent them, which I am prepared to do so far as the present application is concerned, but could not do were I deciding the ultimate destination of the surplus.
35. The surplus is quite large but not infinite (around £1 million). I do not think it is in the circumstances right to add to the costs needlessly.
36. The Claimant is also in contact with the Defendant's bank, and the guarantor who stands in the bank's shoes. It is clear that they (subject to any limitation defence) are alone interested in any surplus the Defendant might receive. I have no doubt that the Claimant, if authorised to exercise the Clause 9 power, will give their views (as persons having a potential claim on the Defendant's assets) such weight as may be appropriate, though it has to be said that the emergence of any surplus after all these years will be something of a windfall for them. A query was raised as to whether any representative creditor should be joined, but I do not think that would be right. Apart from the additional expense that would involve, the creditors have no claim of their own to the surplus. They are not the objects of the power. The Scheme members and the Defendant are. The fact that the Defendant supports the application does not make it appropriate for persons who are technically strangers to the trust to be joined, albeit that they claim through the Defendant and might take a different view. They have no direct claim. Moreover, if a representative creditor were joined, it seems to me that a representative shareholder might have to be joined, too, as the creditors' claims may be statute-barred. That may then lead to needless satellite litigation on side issues such as limitation, which would add to the expense.
37. At the end of the day, I come back to where I started: were it not for the fact that the Defendant is no longer in the hands of an insolvency practitioner, the power to direct the destination of the surplus would be the Claimant's to exercise. The restoration of that power to the Defendant was entirely fortuitous. The Defendant remains dormant and rudderless. It is overwhelmingly a suitable case for appointing the Claimant to exercise the power to direct the destination of the surplus in place of the Defendant, and I do so.