England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		The Rolls Building 7 Rolls Buildings Fetter Lane London EC4A 1NL
		7th March 2012

MR. JUSTICE MORGAN:

1. On 22^nd November 2007 the first claimant, Oakhurst Property Developments (Lowndes Square No. 2) Ltd., established a scheme which has been called the "Oakhurst Property Developments (Lowndes Square No. 2) Ltd. Employer Funded Retirement Benefit Scheme" or "EFRBS" for short. Under this Scheme the Trustee was Hillberry Trust Company Ltd. That Trustee is not a party to these proceedings and, as I understand it, the present proceedings do not involve an issue as to the removal of Hillberry Trust Company as Trustee of that Scheme although the claim form, if taken literally, would suggest otherwise.
2. On 23^rd November 2007 three further EFRBSs were established. These have been described as the "Ronald Edwin Pratt EFRBS, Paul Trevor Heitman EFRBS and the Richard Anthony Blythe EFRBS". Mr. Pratt, Mr. Heitman and Mr. Blythe are directors of the first claimant and are the second, third and fourth claimants respectively in these proceedings. In relation to the three Schemes established on 23^rd November 2007, the Trustee was Blackstar (Isle of Man) Ltd., a company incorporated in the Isle of Man and the first defendant herein. The second defendant is Church Street Trustees Ltd., a company incorporated in Jersey.
3. In this claim the claimants seek various heads of relief. The first head of relief was:

"Declarations as to whether the first defendant has been validly replaced by the second defendant as Trustee of the EFRBSs"

4. The second head of relief was in these terms:

"In the event that the court concludes that the answer to (1) above is in the negative, a declaration as to what is required to be provided by way of reasonable security and indemnities pursuant to clause 6.3 of the EFRBSs."

5. On 24^th February 2012 Floyd J ordered that the trial of these issues be expedited. He further ordered that all outstanding issues in the claim be dealt with at a subsequent hearing to be listed by the court at a later date. Accordingly, the two heads of relief that I have identified are the matters which are before me at this hearing.
6. Mr. Wilson appeared on behalf of the claimants. Mr. Booth QC and Mr. Bourne appeared on behalf of the first defendant. The second defendant, who is the suggested replacement Trustee, has acknowledged service but has taken no part in the hearing before me.
7. Although there is an issue as to whether the first defendant has been removed as a Trustee and replaced by the second defendant, it is accepted that the first claimant is entitled to remove the first defendant and replace it with the second defendant provided that the claimant complies with the relevant terms of the Schemes. I will therefore refer to the first defendant as the "Outgoing Trustee" and the second defendant as the "Incoming Trustee" although, of course, I have not yet decided whether the removal and replacement has already happened or lies in the future.
8. It has been agreed that the resolution of the issues which are before me turns upon the true construction of the terms of the Schemes and the application of those terms to the specific facts of this case. It is also agreed that I can take as typical of the various schemes the Trust Deed and Rules which apply in the case of Mr. Heitman (the third claimant herein). The Trust Deed and Rules are set out in a document dated 23^rd November 2007. The parties to that document are the first claimant identified as the "Principal Employer" and the first defendant identified as the "Trustees". Recital (A) to the document states that:

"The Principal Employer has determined to establish with effect from 23rd November 2007 a retirement benefits scheme ('The Scheme') for the provision of Relevant Benefits for and in respect of those employees and directors of the Principal Employer (or any other employer) as are admitted to Membership in accordance with the provisions of the Scheme."

9. Recital (C) states that:

"It is intended that the Scheme will be funded by contributions from the Principal Employer (or any employer) such contributions to be an expense incurred for the benefit of such employer's trade."

10. The relevant Scheme is established by clause 1.1 of the Trust Deed. Clause 2.1 of the Trust Deed provides for certain meanings to be given to certain terms which are used in the Trust Deed and in the Rules of the Scheme, which are contained in a Schedule to the Trust Deed.
11. Clause 3.1 provides that:

"The Scheme shall be governed by the trusts, powers and provisions contained in the Trust Deed and the Rules.

12. Clause 3.2 provides that:

"The administration and management of the Scheme shall be vested in the Trustees."

13. By clause 3.3:

"The Trust Fund shall be vested in the Trustees and shall be held by them upon irrevocable trusts for application towards the provision of Relevant Benefits under the Scheme in accordance with the Trust Deed and the Rules."

14. Clause 4 deals with "Powers, duties and discretions of the Trustees". Clause 4.2 is headed "Investment". It is not necessary to refer to the various investment powers of the Trustees but it is relevant to refer to a particular power conferred upon the Trustees by clause 4.2 paragraph (c). Pursuant to that power,

"… the Trustees may invest all or any part of the Trust Fund:

…

(c) by making loans on arm's length or non-arm's length terms [to] any Member or other Beneficiary."

15. Thus the Trustees are given an express power which they could exercise by lending all of the Trust Fund to the Member or other Beneficiary on uncommercial terms, for example, that the amount of loan be repaid at a very distant point in time, without any interest being payable in the meantime.
16. By clause 6.1:

"The Principal Employer with the consent of the Member may from time to time, by deed … remove trustees and appoint replacements …"

17. It is accepted that that power exists at the present time and is exercisable by the Principal Employer with the consent of the member.
18. Clause 6.3 is in these terms:

"The removal of a trustee under clause 6.1 shall be effective only after:

(a) receipt by such trustee of written notice of his removal from office; and

(b) reasonable security having been provided for indemnifying such trustee against liability or potential liability to any person for which the outgoing trustee of this Scheme may be answerable as a trustee or former trustee of this Scheme (including without limiting the foregoing liabilities to taxation)."

19. It is clause 6.3 which is at the heart of the present dispute. The Schedule to the Trust Deed contains the Rules of the Scheme. Rule 1.1 defines the Trust Fund as "the money and other assets for the time being held on trust pursuant to the Rules".
20. Rule 8.1 is in these terms:

"If the Trustees are liable for any tax or other fiscal impositions in any jurisdiction (whether enforceable against the Trustees or not) upon any payment or transfer of assets from the Trust Fund, the Trustees may deduct from such payment or retain from such assets sufficient funds or assets to meet that liability. Where the Trustees may have such a liability, but it has not yet been established, the Trustees may defer making all or any part of the payment or transfer until it is established whether the liability exists or not and if it does to what extent."

21. Rule 12 of the Rules contains various provisions dealing with the position of the Trustee and the extent of the Trustee's responsibility for certain matters, and exemption of the Trustee from such responsibility in certain events. Rule 12.5 is in these terms:

"Without prejudice to the rights to indemnity given to trustees by the Trustee Act 1925 … the Trustees will be indemnified out of the Trust Fund in respect of all liabilities and expenses properly incurred in the execution or purported execution of the trusts of this Scheme or of any duties, powers and directions vested in the Trustees under this Scheme and against all actions, proceedings, costs, expenses, claims and demands in respect of any matter relating to this Scheme unless it is proved to have been made, done or remitted in personal conscious bad faith or gross negligence."

22. In October 2011 the Principal Employer, with the consent of the Member under the relevant Scheme, wished to remove the first defendant as Trustee. In accordance with that wish, various persons entered into a Deed described as a "Deed of Appointment, Removal and Indemnity" dated 13^th October 2011. The parties named in the Deed were the first claimant, the first defendant, the second defendant and, in the case of Mr. Heitman, Mr. Heitman himself. The first defendant did not execute this Deed but it was executed by the other named parties.
23. Clause 2 of the Deed provided:

"In exercise of the Power of Appointment and Removal and all and any other relevant powers the Principal Employer hereby appoints the New Trustee to be Trustee of the Settlement in place of the Removed Trustee which is hereby removed as trustee and discharged from the trusts of the Settlement with effect from the receipt by the Removed Trustee of the Written Notice."

The party referred to in clause 2 as the "Removed Trustee" was the first defendant. The party referred to as the "New Trustee" was the second defendant.

24. Clause 4 of this Deed is headed "Indemnity" and is in these terms:

"4.1 The New Trustee for itself its successors and assigns hereby covenants with (a) the Removed Trustee and (b) the successors officers employees servants agents of the Removed Trustee and their respective successors personal representatives and estates (hereinafter the 'Indemnified Persons') at all times fully and effectually (but subject as provided below) to indemnify keep indemnified and hold harmless the Indemnified Persons from and against and in respect of all liabilities actions proceedings claims demands costs and expenses whatsoever or wheresoever's arising for or in respect of which the Indemnified Persons may be or become liable as trustee or former trustee of the Settlement or in connection with or arising out of the Settlement or the Trust Fund comprised therein from time to time or the income thereof whether the same be enforceable in law or not and including in particular (but without prejudice to the generality of the foregoing) all taxes duties and fiscal impositions (including all interest penalties costs charges and expenses or other sums in connection therewith) by the revenue or other authorities of any government in any part of the world PROVIDED THAT the liabilities of the New Trustee under the above covenant shall be limited in the following manner:

(a) Subject to sub-clause 4.1(b) below so long as the whole of the capital of the Trust Fund is retained by the New Trustee its liability shall be limited to the net amount or value of the Trust Fund from time to time;

(b) If following any appointment of new trustees of the Settlement or following any distribution of the whole or any part of the capital of the Trust Fund the same ceases to be retained by the New Trustee then if the New Trustee procures that its successors as trustees or (as the case may be) the recipient or recipients of the distributed capital enter into a direct covenant with the Removed Trustee its successors personal representatives and estates for the benefit of the Indemnified Persons on the same terms mutatis mutandis as this clause 4.1 then the liability of the New Trustee shall thereafter be restricted to the net amount or value from time to time of such part (if any) of the capital of the Trust Fund as is retained by it but if the New Trustee fails to procure the giving of such a direct covenant (or the making of such alternative arrangement) the liability of the New Trustee under this clause 4.1 shall (in addition to extending to the amount or value from time to time of any retained capital) extend also to the amount or value (as at the date when it ceases to be retained by the New Trustee) of any capital which ceases to be retained by it following the appointment or distribution;

(c) Notwithstanding the provisions of sub-clauses 4.1(a) and (b) above there shall be excluded from such indemnities:

(i) any liability in respect of any breach of trust arising from fraud wilful misconduct or gross negligence on the part of the Indemnified Persons;

(ii) liability in respect of actions to recover from the Indemnified Persons trust property in their possession; and

(iii) any liability action proceedings account cost claim or demand in respect of which the Removed Trustee would not have lawfully entitled to indemnification reimbursement or payment out of the Trust Fund of the Settlement according to the governing law thereof if the Removed Trustee had remained a trustee of the Settlement according to its present terms.

4.2 In the event that any of the indemnities above are deemed to be contrary to any provision of any applicable law then the terms shall be valid and binding to the extent that the same are not contrary to any provision of such applicable law."

25. The first question which needs to be addressed is whether the Outgoing Trustee has been removed as a Trustee. The answer to that question turns upon the meaning of clause 6.3 of the Trust Deed and the application of that clause to the facts of this case. There is no dispute about the giving of notice in accordance with clause 6.3(a). The dispute relates to whether reasonable security for indemnifying the Outgoing Trustee has been provided in accordance with clause 6.3(b). The claimants contend that it has been provided. The Outgoing Trustee contends that it has not.
26. Clause 6.3(b) refers to "reasonable security having been provided for indemnifying such Trustee". Does clause 6.3(b) require the Outgoing Trustee to be provided with an unqualified indemnity against the heads of liability identified in clause 6.3(b) and then, in addition, provided with reasonable security in relation to the performance of that indemnity? Alternatively, does clause 6.3(b) require the Outgoing Trustee to be provided with "reasonable security" which will be the measure of the relevant indemnity available to the Outgoing Trustee?
27. There might be a difference between these two readings of the sub-clause. In the former the Outgoing Trustee must be given "an unqualified indemnity against the [identified] heads of liability". On that basis the required indemnity would not be provided if the indemnity on offer was subject to any qualifications, for example, by being limited to the assets in the Trust Fund from time to time or limited in any other way. On the second way of reading the clause, what has to be provided is "reasonable security". The extent of the security must be reasonable. What is reasonable will depend on the relevant circumstances. It may be the case that a security will be reasonable even where it is qualified or subject to limitations, provided always that the qualifications or limitations are reasonable.
28. In my judgment the second reading of clause 6.3(b) is the right one. What has to be provided is reasonable security. The clause does not separately require an indemnity to be provided. It is the reasonable security which will serve the purpose of indemnifying the Outgoing Trustee. Thus, the security which is selected as reasonable in all the circumstances may be subject to qualifications and limitations provided that the security remains reasonable.
29. Further, in my judgment, a covenant from a person of substance can be "security" in this context. I do not read the word "security" as requiring some other form of security interest such as a pledge or a lien or a charge or a mortgage. Indeed, it was accepted by the first defendant, the Outgoing Trustee, that a bank guarantee could be security within the sub-clause. If that is right – and I think it is – then I see no reason to exclude security given by means of a covenant from a person of substance. Indeed, I do not think Mr. Booth in the end quarrelled with this view as he has suggested that the reasonable security which should be provided in this case is a personal covenant by the claimants.
30. The first question then is whether a reasonable security by way of indemnity has been provided to the Outgoing Trustee? I therefore need to consider the nature of the security by way of indemnity which, it is said, will be available to the Outgoing Trustee. I have already referred to Rule 12.5 of the Rules in the Schedule to the Trust Deed. Rule 12.5 identifies the liabilities which may be the subject of the indemnity. No point arises in relation to that. Rule 12.5 is qualified in a case where there has been personal conscious bad faith or gross negligence. Again, no point arises in relation to that.
31. The right conferred by rule 12.5 is a right to be indemnified out of the Trust Fund. This term is defined in rule 1.1 so as to refer to the assets for the time being held on trust. Rule 12.5 refers to the rights to indemnity given to Trustees by the Trustee Act 1925. The relevant statutory provision is in fact in section 31 of the Trustee Act 2000.
32. Section 31(1) provides:

"(1) A trustee –

(a) is entitled to be reimbursed from the trust funds, or

(b) may pay out of the trust funds, expenses properly incurred by him when acting on behalf of the trust."

33. Section 31 refers to the "trust funds". This term is defined in section 39(1) of the Trustee Act 2000 so as to refer to the "income and capital funds of the trust".
34. A Trustee's right to be indemnified out of the Trust Fund as it exists from time to time is discussed in some detail in Lewin on Trusts, 18^th edition at Chapter 21. In particular at paragraph 21-33 under the heading "A trustee's charge or lien [upon] the trust property" Lewin says this:

"A trustee, and each of the trustees separately where the trustees are more than one in number, has a first charge or lien upon the trust fund, conferring an equitable interest in the trust fund, in respect of the liabilities, costs and expenses covered by his right of indemnity. The trustee's charge takes priority over the claims of the beneficiaries, and of purchasers or mortgagees claiming under them."

35. At paragraphs 14-58 and 14-59 of Lewin there is a discussion of the indemnity which continues to be available to former trustees upon the appointment of new trustees. At paragraph 14-58 Lewin says this:

"A trustee's rights of indemnity under the general law consist of rights of reimbursement, exoneration, retention and realisation. A trustee who ceases to hold office and to have trust property vested in him must lose his right of retention for he has ceased to retain the trust property. Thus a trustee's rights of indemnity under the general law are to some extent bound to be prejudiced when he ceases to hold office and parts with the trust assets. This prejudice to the trustee's rights of indemnity is sometimes put forward by a trustee who is asked to retire in favour of new trustees as a reason why he should not retire, particularly where the trustee fears that he might become accountable for fiscal or other liabilities." (I need not read the remainder of that paragraph.)

36. Paragraph 14-59 of Lewin under the heading "Continuance of former trustee's right of indemnity after appointment of new trustees" contains a number of passages which I think I should read. The first is in these terms:

"However, we consider that an outgoing trustee does not lose his rights of indemnity altogether by ceasing to hold office and parting with the trust assets. The rights of reimbursement, of exoneration and realisation are not rights which are dependent upon the exercise of legal control over trust assets in the hands of the trustee."

Later the passage continues:

"The trustee's rights of indemnity go further than simply giving him something like a common law lien which is dependent upon the ability to exercise legal control. The rights of indemnity give him a proprietary equitable charge over, or equitable interest in, the trust property, and there is no reason why this charge or interest should disappear upon the appointment of new trustees. There is, moreover, a difference between a case where trust assets are distributed to a beneficiary upon the winding up of a trust, and a case where trust assets are vested in new trustees upon an appointment of new trustees. By distributing the trust assets to a beneficiary, the trustee should prima facie be taken as releasing any equitable rights which he might otherwise have, at any rate as regards liabilities, other than contingent liabilities, of which he has notice. Where new trustees are appointed, the trust fund remains intact and continues to be available for the purpose of trust liabilities properly falling upon it. There is no reason to take the outgoing trustee as giving up his rights of indemnity merely because new trustees are appointed. That would be especially so where the outgoing trustees had no say in the appointment, for example where a new trustee was appointed in his place because he had become incapable, or where he was removed from office under an express power or where his office was automatically terminated under the provisions of the trust. Australian authority supports the view that a former trustee's rights of reimbursement and exoneration are not lost when a new trustee is appointed in his place and, further will not be lost even if the new trustee subsequently distributes the trust assets to a beneficiary, at any rate where the new trustee does that with knowledge of the outstanding liability of the former trustee covered by his continuing rights and for the purpose of defeating those rights. The former trustee should in the first instance bring his proprietary claim for indemnity against the new trustee, and when that remedy has been exhausted, may claim personally against the beneficiaries who have become absolutely entitled to the trust assets."

37. In the end, there did not appear to be any dispute at the hearing before me as to the operation of these principles. That, then is the background to the Deed of 13^th October 2011 which also deals with the question of an indemnity to the Outgoing Trustee. I have already referred to clause 4 of the Deed which is the relevant provision.
38. Clause 4 is a covenant by the Incoming Trustee. Clause 4 is subject to an all important proviso, (a) which I will read again, in these terms:

"Subject to sub-clause 4.1(b) below so long as the whole of the capital of the Trust Fund is retained by the New Trustee its liability shall be limited to the net amount or value of the Trust Fund from time to time."

39. No point arises as to the meaning of the words used in provision (a) but there is a major point as to the potential operation of that proviso on the specific facts of this case. Provision (b) deals with the appointment of further new trustees and with distribution to a recipient of the capital of the Trust Fund. There is a possible point about what is to happen on a distribution to a recipient where such recipient gives a direct covenant of indemnity mutatis mutandis to the covenant in clause 4.1. That covenant will therefore include proviso (a).
40. It seems to me that if the beneficiary spends the sums he receives, he does not have to obtain a covenant from the person who receives the money from him. Spending the money is not a distribution in favour of the person who receives the money. It does not trigger the requirement for a further direct covenant. But spending the money means that the sum of money which remains within proviso (a) is reduced, perhaps eventually to nil. Proviso (c) deals with a number of exclusions. No point is taken as to the meaning or operation of proviso (c).
41. It can thus be seen that the right of indemnity conferred by rule 12.5 and by section 31 of the Trustee Act 2000 and by clause 4 of the Deed are all restricted to an indemnity out of the assets in the Trust Fund from time to time. On the specific facts of this case, should that be satisfactory to the Outgoing Trustee or should it be a matter of concern? While the Outgoing Trustee was, and remained, a Trustee its right to be indemnified was restricted to an indemnity out of the Trust Fund. During the time that Outgoing Trustee was Trustee, it received some £2 million from the Principal Employer and it lent the greater part of that sum to the employee by way of an unsecured loan. The chose in action represented by the right to be repaid that loan is the principal asset of the Trust Fund. In addition, there remains a small sum in a bank account in relation to each of the Trusts with which I am concerned.
42. The Outgoing Trustee's own actions have therefore caused an alteration in the assets of the Trust so that putting the small sum in the bank account on one side, the chose in action replaces the original £2 million in cash. I have not been given a present valuation of the chose in action. For all that I know, it may be worth the sum advanced or it may be worth less. If less, I do not know how much less. Mr. Booth, on behalf of the Outgoing Trustee, suggests that the chose in action has effectively the same value as the money which has been lent.
43. If the Outgoing Trustee is removed as Trustee and replaced by the Incoming Trustee, what might happen to the value of the Trust Fund in the future? In some cases one might predict that the value of the Trust Fund will move up or down by reference to market forces for the relevant asset class. However there is a feature of the Trusts in the present case which needs careful consideration.
44. I have already referred to clause 4.2(c) of the Trust Deed. That allows the Trustee to make a loan from the Trust moneys on terms which are not arm's length terms. The ability of the Trustee to lend Trust moneys on terms which are not arm's length terms, was central to a proposed scheme which was considered in around January 2011 and which has been called "Independence 1". That Scheme involved a transaction where, say, £1 million was to be lent on uncommercial terms to the employee. The value to the Trustee of the chose in action, namely its rights in relation to that loan, were said to be £50,000. The reduction from £1 million to £50,000 reflected the uncommercial terms on which the money had been left. The Trustee having a chose in action with that value was then to sell the benefit of its chose in action for £50,000, its true value, to an assignee.
45. The assignee and the employee could then re-negotiate the terms of the loan so that the loan continued but, for the future, on commercial terms. The assignee would be prepared to pay the employee as much as £880,000 to persuade the employee to re-negotiate the terms in this way. The employee would then be liable to repay a loan of £1 million and the employee would do so and the assignee would receive £1 million. The result of all of this was to be that the Trustee parted with £1 million of Trust moneys and ended up with £50,000. The employee ended up with £880,000 and the assignee benefitted to the tune of £70,000.
46. What is important about Independence 1, which was considered by the relevant parties to the Scheme, is that it demonstrates the ability of the Trustee to reduce the value of the Trust Assets from, in the example, £1 million to £50,000. Indeed, the exercise could be repeated and the £50,000 could itself be reduced in value by a repetition on one or more occasions to something fairly nominal. The sum of £880,000 which is received by the employee is not a distribution of the Trust Assets so that sum is not subject to the Outgoing Trustee's equitable charge. Nor is it within proviso (b) of clause 4.1 of the Deed of 13^th October 2011.
47. I am told that there is no present intention on the part of the parties involved in the Scheme, including the Incoming Trustee, to implement Independence 1. So the question arises, what do these parties intend to do?
48. On 13^th January 2012 the solicitors for the Outgoing Trustee e-mailed the solicitors acting for the claimant. The e-mail referred to certain information which had been received as to the possibility of there being a further scheme called Independence 2. The e-mail went on to say:

"So that my clients may consider their position further (and hopefully avoid legal proceedings) I should be grateful if you would, as a matter of urgency, let me have a copy of the Scheme known as Independence 2, the PowerPoint presentation made to my clients' customers in relation to this and any advice that Blackstar (Europe) Limited and/or the new Trustees have received from their legal advisers and/or accountants showing how the scheme will operate and how it is proposed to avoid UK income tax if the loans are not repaid by 6^th April 2012."

49. On the same day the solicitors acting for the claimants replied by e-mail as follows:

"For the avoidance of doubt, I am not currently acting for any entity with the ability to provide you with the information you request.

In any event, since it is my client's position that your client is no longer the trustee of the relevant EFRBSs, the nature of the tax planning our client wishes to carry out is of no concern to it. The litigation to which you refer (in which we will be seeking, among other things, a declaration that your client has been removed) is necessary because of your clients' continued refusal to accept this point."

50. The result of these exchanges is that the Outgoing Trustee has been left wholly in the dark as to what might happen following its removal as Trustee. Mr. Wilson tells me that no decision has been made and it is possible that no scheme will be implemented in the near future or possibly at all.
51. So far as the court is concerned, there remains a real possibility that the parties involved in these Trusts and their selected Incoming Trustee will participate in a Scheme which may have the effect of reducing the value of the Trust Assets very significantly, possibly to a nominal amount. If that were to happen then an indemnity given to the Outgoing Trustee which is limited by reference to the value of the assets in the Trust Fund from time to time would be of little value.
52. To meet the difficulty caused by a significant reduction in the value of the Trust Fund, the new Trustee could be asked to covenant, not to devalue the Trust Fund in that or any similar way. It might be objected that the giving of such a covenant would be inappropriate, as a fetter on the future decisions of the Trustees. In any event, no such covenant is to be provided by the Incoming Trustee. It is not said that the Incoming Trustee will owe any duty to the Outgoing Trustee to preserve the value of the Trust Fund. In any case it is not clear that the Incoming Trustee will have any assets of its own that are beneficially owned by it which could answer for any liability in this respect.
53. Apart from the above possibilities, there is also the question of a possible distribution to an employee. If the Trust Assets were distributed to an employee and the money is then spent on, for example, living expenses, then the Outgoing Trustee's equitable charge, which might otherwise be enforceable against the beneficiary, would have nothing on which to bite. Mr. Wilson suggested that if there were a distribution to an employee, the employee would be required to give a covenant in accordance with clause 4.1 of the Deed of 13^th October 2011 and the matter would be governed by proviso (b) contained in such a covenant. This would have the result, it is submitted, that in the absence of any further covenant from anyone who benefitted from the employee's expenditure, the employee would remain liable on this covenant by reference to the amount originally distributed to him.
54. I have already indicated that I do not think this is the correct reading of proviso (b). Proviso (b) would not operate in that way because the employee's expenditure does not involve the appointment of a new Trustee nor a further distribution and those are the only matters dealt with in proviso (b).
55. Standing back at this stage, what has emerged is that the Outgoing Trustee's various rights to be indemnified are all qualified in a way which might well produce the result that if the Outgoing Trustee ever needed to enforce those rights, they could turn out to be virtually worthless. Speaking provisionally only at this stage in the discussion, that does not strike me as providing "reasonable security" by way of indemnity against liability or potential liability. However, I should not reach any conclusion at this stage before I am able to consider my overall conclusion.
56. I will next consider the nature and extent of the liability or potential liability which may, in the event, need to be the subject of "reasonable security" by way of indemnity pursuant to clause 6.3(b). There is no difficulty with the wording of clause 6.3(b) as regards the relevant liability. It may be significant that the liability includes the liability to any taxation. Mr. Wilson submitted that the Outgoing Trustee could not in any circumstances become liable to pay any tax. He took me to what he said were the relevant statutory provisions including the provisions of Part 7A of the Income Tax Earnings and Pensions Act 2003, as introduced by the Finance Act 2011.
57. It was submitted that if the arrangements which were brought into existence by the schemes in this case and any further steps which might be taken under those schemes were to result in any tax becoming payable, the tax would be income tax and/or National Insurance and those taxes would be payable by the employer under the PAYE regulations or possibly by the employee but in no circumstances by the Outgoing Trustee or indeed by any Trustee. Further, the Outgoing Trustee was a company registered in the Isle of Man and so was not liable for tax under those statutes.
58. Mr. Wilson challenged Mr. Booth, as counsel for the Outgoing Trustee, to identify how it could come about that the Outgoing Trustee would ever be liable to pay such taxes or any other tax. In turn, Mr. Booth put forward various suggestions as to how that could come about, as a result of something which had been done under or in relation to the Schemes in question. My attention was drawn to a letter from HMRC dated 23^rd February 2012 to the first claimant which showed that HMRC might wish to contend that the payments by the Principal Employer into these Schemes in 2007 amounted to a payment of income to an employee and so that the employer was liable to account for tax under the PAYE Regulations. The same letter suggested that HMRC might in due course wish to contend on the same basis that National Insurance contributions were payable by the employer in relation to such payments.
59. Taking the letter on its own, the letter suggests the possibility that HMRC might claim tax due from the employer or even conceivably the employee. The letter itself does not provide any support for the suggestion that HMRC would seek to recover tax from the Outgoing Trustee in this case. Nonetheless, Mr. Booth submitted that HMRC might in time come to argue that the Outgoing Trustee was "the employer" for the purposes of the relevant taxes and the PAYE Regulations. He did not show me any statutory provision or any decided case which, when applied to the facts of this case, could possibly produce that result. I regard that suggestion on the material before me as wholly fanciful. Mr. Booth did not otherwise quarrel with Mr. Wilson's submissions as to the operation of Part 7A of the Income Tax Earnings and Pensions Act 2003 as introduced by the Finance Act 2011.
60. Mr. Booth next submitted that this was a case where Parliament might pass retrospective tax legislation so that even though the Outgoing Trustee is not at present liable to pay any relevant tax, it could become so liable under such possible future legislation. It was submitted that retrospective tax legislation is not unknown and my attention was drawn to The Crown on the Application of Huitson v. HMRC [2011] EWCA Civ 893.
61. Mr. Booth then argued that the tax saving scheme represented by the 2007 arrangements and any further tax saving scheme which might be implemented by the proposed replacement Trustee were aggressive tax saving schemes which, when aggregated with other cases where the Scheme was used, potentially involved very substantial sums of tax. It was said to be likely that the Revenue will examine these Schemes in great detail and might even attempt to use what was described as the "nuclear weapon" of criminal or civil proceedings under the Proceeds of Crime Act 2002 and that that nuclear weapon may be directed at the Outgoing Trustee in this case. I was taken through the relevant provisions of that legislation although I do not need to set them out in this judgment.
62. Finally Mr. Booth submitted that it was likely that the Revenue would ask questions of the Outgoing Trustee and require it to produce documents and this would result in the Outgoing Trustee incurring expense. In reply on that point, Mr. Wilson submitted that the Revenue's powers to seek information and disclosure of documents as now contained in the Finance Act 2008 section 113 and Schedule 36 did not extend to a company registered in the Isle of Man. By way of rejoinder Mr. Booth stated that the Outgoing Trustee might wish to provide information to the Revenue to avoid damage to its reputation. Further it was said that its employees might come within the jurisdiction and might be required by the Revenue to provide information and disclosure of documents. Finally, Mr. Booth said that the Revenue might contend that the Outgoing Trustee had in some sense operated with the jurisdiction in such a way as to bring it within the reach of these provisions. Mr. Booth stressed throughout his submissions that what he was concerned to identify was a risk of a potential liability. If the Revenue was to do any of the things which he had identified, the Outgoing Trustee would strenuously resist the Revenue's arguments and submit that they must fail.
63. Apart from the submissions as to liability to pay tax and arguments arising under the Proceeds of Crime Act 2002 and expenses involved in dealing with the Revenue's enquiries, Mr. Booth did not identify any other way in which a liability which fell within clause 6.3(b) of the Trust Deed might arise.
64. In my judgment on the material placed before me and in the absence of HMRC putting forward any submissions on the matter, the Outgoing Trustee has not demonstrated to my satisfaction that there is any real prospect of a potential liability to tax or to a criminal or civil penalty arising out of the arrangements in which it was involved as Trustee.
65. As regards the possibility of the Outgoing Trustee incurring costs in dealing with enquiries from the Revenue, I think that it is likely that it will not have to incur any significant costs of that kind. First, it appears on the material placed before me so far, that the Outgoing Trustee is not subject to the compulsory powers of the Revenue in Schedule 36 to the Finance Act 2008. If members of the Outgoing Trustee's staff were to come within the jurisdiction and if – which I find difficult to assess – that produced the result that they could be made to provide information to the Revenue, then the expense would, in the first instance, be the expense of the individuals although I suppose that the Outgoing Trustee might choose to reimburse those expenses.
66. As to the suggested reputational damage of the Outgoing Trustee if it were to decline to co-operate with the Revenue, I doubt if there would be such damage. If the Outgoing Trustee is beyond the reach of the Revenue that could be politely pointed out. The point could be reinforced by stating that the Outgoing Trustee has ceased to be a Trustee of the relevant arrangements and is not entitled to charge its former client for its expenses of dealing with the Revenue. Further, as I understand it, the Outgoing Trustee has been involved in a large number of arrangements of the present kind so that the part of any expense involved which might be apportioned to one individual Trust might be very modest indeed.
67. Accordingly, on the basis of the arguments before me, I am very doubtful indeed whether there is any relevant liability of any amount which will fall upon the Outgoing Trustee after such time as it is removed as Trustee under the relevant Trust.
68. Standing back again at this point, the position appears to me to be that the Outgoing Trustee has had great difficulty in identifying for the court any real risk of substantial size of any liability falling upon it which would come within clause 6.3(b) of the Trust Deed. Conversely, in my view, on the specific and unusual facts of this case, the right to be indemnified – which right is limited to the value of the Trust Assets from time to time – whether the right is pursuant to Rule 12.5 or section 31 of the Trustee Act 2000 or clause 4.1 of the Deed of 13^th October 2011 may well prove to be illusory.
69. This pair of conclusions gives rise to what is not altogether a straightforward decision for my resolution. Should I take the view that if so far there has not been any identified liability of any significance which might fall on the Outgoing Trustee, that it therefore has nothing to fear and it should be satisfied with an indemnity which might turn out to be of no real value if it ever became necessary to rely upon it?
70. In the end, I have reached the conclusion that I should not take that view. Clause 6.3(b) of the Trust Deed is there to give the Outgoing Trustee a reasonable level of protection against any potential liability. Although I have held that the Outgoing Trustee has not demonstrated to my satisfaction so far that there is a real risk of a liability of any substantial size being imposed upon it, I do not think that I can reach the conclusion – and I do not think any reasonable professional adviser could reach the conclusion – that the risk of potential liability is absolutely nil.
71. The position of the Trustee may be affected by arguments put forward by others, principally the Revenue and by the other parties to these Schemes. As I have explained, the value of the alleged security is going to be under the control of others. If the Outgoing Trustee remains the Trustee, it will have some measure of control in relation to these matters. If it ceases to be Trustee, it loses all control over them.
72. At the end of the day I do not think that this is a case where the Outgoing Trustee should be left to bear whatever degree of risk there might be of a potential liability where it runs the further risk of there being no worthwhile indemnity in relation to it.
73. My overall conclusion then is in accordance with the provisional view I expressed halfway through this discussion which is that the nature and extent of the indemnities available to the Outgoing Trustee are not "reasonable security" in relation to potential liability which falls within clause 6.3(b).
74. The second question for me is to identify what is required to be provided as "reasonable security" by way of indemnity? No doubt a great range of securities could be devised and many of them might be reasonable. However, there is only one form of security by way of indemnity which has been identified for my consideration. It is suggested by Mr. Booth that the claimants should give a personal covenant of indemnity not limited to the Trust Assets from time to time in relation to the liabilities identified in clause 6.3(b). Mr. Booth accepts that such a covenant will satisfy clause 6.3(b). It also seems to me that such a covenant is an entirely reasonable method as between the claimants and the Outgoing Trustee of dealing with the risk of potential liability.
75. The persons who stand to benefit from these Schemes are the claimants and, in particular, the second, third and fourth claimants, the employees or directors. As between the Outgoing Trustee and the claimants, it seems to me to be right that the claimants and not the Outgoing Trustee should bear any element of risk which might be involved. If the claimants are right and no liability is going to be imposed on the Outgoing Trustee in any circumstances, then the claimants have nothing to fear from giving that indemnity. If it should turn out that the claimants are wrong and a liability is imposed in some way on the Outgoing Trustee, then it seems to me to be right that as between these parties the Outgoing Trustee is indemnified by the claimants.
76. Mr. Wilson suggested that a personal covenant might cause a charge to tax to arise under section 554C of the Income Tax pensions and Earnings Act 2003 as introduced by the Finance Act 2011. The point was not fully explored in the course of argument and it seems to me that I should not make a final decision upon it. It did, however, seem to me that there ought not to be a difficulty in this respect and the matter could be assisted by careful expression of the circumstances in which the Outgoing Trustee could claim against any remaining Trust assets and the circumstances in which it could claim on the covenant.
77. As I say, I will not make a final determination in relation to this issue in case one side or the other wishes to take the point further. I will therefore give permission to apply in relation to this part of the decision in case it is suggested there is a problem which cannot be easily solved.
78. Thus, I answer the first question: reasonable security was not provided by the Deed of 13^th October 2011. The consequence is that the first defendant has not been removed as Trustee pursuant to clause 6.3 of the Trust Deed.
79. As to reasonable security, subject to what I have said about the possibility of further argument about the tax consequences, I consider that a personal covenant by the first claimant and the relevant employee under the relevant scheme which is not limited by reference to the value of the Trust assets from time to time but which may be limited by reference to the value of the Trust assets at the time of removal of the Outgoing Trustee will be reasonable security.

(For continuation of proceedings: please see separate transcript)

80. The order that I will make deals with the costs of the two issues which I have determined. I am not dealing with costs of the action and I am not dealing with the costs of other issues which remain to be determined.
81. In relation to the two issues which have come forward for decision it is my conclusion that overall the way in which the payment should go is that the claimant should pay something towards the first defendant's costs. I do not give the first defendant all of its costs for reasons which I will explain briefly in a moment. The right percentage of its costs which reflect the arguments in play, I believe, is 75% and that is the order I make.
82. I have had regard to the two issues before me. I have had regard to the precise way in which I have dealt with those issues and disposed of the arguments. In the event, the first defendant has prevailed on the first issue and has effectively failed on the second issue. My attention has been drawn to the position taken in correspondence. The position has moved around somewhat. In particular, there were times when the first defendant was not wholly forthcoming with the case with which it put forward. There were times when it put forward arguments which have not prevailed. In the skeleton argument for the first defendant and at the hearing the first defendant relied on matters which, one imagines, took some considerable time to research and prepare and present yet did not prevail. It must be right that an appropriate allowance is made for those costs so that they should not be visited on the claimants.
83. Doing the best I can I think removing 25% of the first defendant's costs is the right response. So that is the order I make.

(For continuation of proceedings: please see separate transcript)

84. I doubt if this is one of those discretion cases or fact cases or multi-factorial evaluation cases. On my assessment it was quite a close call whether I should say that an indemnity that is worth very little will do for a liability that is very remote. I felt I could not say there was no risk and therefore there had to be something to cover it, not something illusory.
85. I am minded to give permission to appeal. It may be it will be an extremely difficult appeal to get anywhere in time and it may also be that, frankly, the downside for the claimants of this is negligible apart from the costs involved in the arguments so far. But it is not for me to tell the claimants whether to appeal or not.
86. I think, being faithful to the rules, if I ask myself, is there a real prospect that the Court of Appeal might take a different view, I am inclined to think there is. I am not encouraging an appeal. An appeal might be an extremely awkward, disruptive affair, but if I confine myself to the question of real prospect, I say there is a real prospect.
87. I give permission to appeal.

MR. WILSON: I am very grateful.

MR. JUSTICE MORGAN: I will keep the skeleton arguments in case I have to approve a transcript. I will keep bundle A but I would be quite happy if you recovered all the rest.

Thank you.