England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		1 October 2014

1. The origins of this matter go back some thirty years. For full details reference should be made to the judgment of Proudman J dated 29 January 2014 in Roadchef (Employee Benefits Trustees) Limited v Ingram Hill and ors Case No HC11C0051 ("the Main Proceedings"), in which she held that the claimants were entitled to recover very substantial sums (still to be quantified). Those claimants now seek the agreement of the court to their understanding of the class of persons to whom they may distribute the proceeds of that judgment or any compromise which may be reached with the defendants in advance of an appeal due to be heard next month. For reasons which it is unnecessary to explain, my decision is sought as a matter of some urgency. Though in my desire to assist I have sought in this judgment to concentrate on what appear to me the essentials, I have considered and had regard to all the arguments and factors advanced by counsel.
2. In 1983 Roadchef plc ((the company... or (Roadchef() was the subject of a management buy-out. The then Managing Director, Mr Patrick Gee, acquired 70% of the shares, and Mr Timothy Ingram Hill 3%. Mr Gee was keen to encourage employee share ownership at a level of some 20%, and in December 1986, shortly after his death when he had been succeeded as Managing Director by Mr Ingram Hill, steps were taken to create an employee share option scheme ((ESOP(). The purpose of such schemes was and is to facilitate the transfer of shares to employees taking advantage of a tax-break under which inter alia the employer can deduct its costs of financing that transfer and the shares are not treated as remuneration of the employees. The tax-break is dependant on approval as satisfying the requirements of the relevant Inland Revenue regulations.
3. To this end:

(a) a Share Participation Scheme ((the SPS() was set up by a trust deed dated 18 December 1983;

(b) about the same time the company set up RoadChef Employee Benefits Trust ((EBT1") by a trust deed dated 9 December 1983.

Since August 1993 both trusts have had a sole corporate trustee, RoadChef (Employee Benefits Trustees) Limited ((the trustees().

4. The preamble to the SPS deed recites the intention that "the participating companies", effectively Roadchef, would from time to time pay sums to the trustees to be applied in the acquisition of shares in Roadchef for appropriation to individuals in the scheme. That appropriation was to be made by the trustees to such individuals in such amounts and at such times as the company should direct. I was told that an appropriation could only be made to an employee of three-years standing. Subject to those powers and duties of appropriation the trust fund and its income were to be held on trust for such charity or charities as the trustees should determine.
5. The EBT1 trust deed provides simply that the trust fund, initially (100, should be held on trust to pay or apply the income and capital to or for the benefit of all or any of the (Beneficiaries... as defined in the deed in such shares and in such manner as the trustees should in their absolute discretion think fit (Clause 2). Though it does not emerge from the deed itself, it is clear that the role and function of EBT1 as conceived and operated was to acquire and warehouse Roadchef shares which it would make available by sale to SPS for appropriation by SPS to shareholders as and when the trustees of the latter were so directed by the company.
6. More concretely, EBT1 borrowed money – under what would appear to have been a revolving facility - from United Trust Bank ("UTB") to buy shares. Initially, these were acquired from Mr Gee's widow (her husband having died in early 1986 and been succeeded as Managing Director by Mr Ingram Hill) and others, but subsequently from other sources, in particular ex-employees. The loan from UTB was secured by a charge created by a memorandum of deposit of the shares and guaranteed by Roadchef. Each year Roadchef would determine the amount and recipients of the appropriations to be made by the trustees of SPS, direct them accordingly, and make a (tax deductible) payment equal to their purchase price. The money would then be used by SPS to buy the specified number of shares from EBT1, who would pass it on to UTB in reduction of the loan. The income from the shares warehoused by EBT1 would be utilized to defray its funding costs with UTB. Under this modus operandi for the net assets in EBT1 at any time to be positive the shares would therefore have to increase in value while they were warehoused and by more than any unmet funding costs.
7. In April1995 EBT1 transferred for no consideration all the shares it then held, (over 2.25 million) to a new trust, EBT2, and Mr Ingram Hill was granted by the trustees of EBT2 options to buy (inter alia) those shares at £1.25 per share. In 1998 Roadchef was the subject of a take-over at 131p per share in cash. Mr Ingram Hill's profit on the transferred shares was thus over £26.8 million. It has been determined in the Main Proceedings that Mr Ingram Hill is obliged to account for this sum (subject to certain deductions). The fruits of that judgment (yet to be finally quantified) - subject to appeal or compromise - are or will be therefore an asset of the trust fund. Indeed, since the small contents of the EBT1 trust fund remaining after transfer of the warehoused shares were long ago distributed, after the new owners of Roadchef chose not to continue with the ESOP, those fruits are or will be effectively EBT1's only asset.
8. In those circumstances, the trustees of EBT1 now have to consider (1) to whom they may distribute those fruits when they are received and (2) how they should exercise their discretion as between persons within that class. The application before me is concerned solely with the first of these questions, in effect with the meaning of the word "Beneficiaries" in the EBT1 trust deed, since it is only in relation to such persons that the trustees have power to pay or apply capital or income. Under Clause 1 of the deed

"(4) "the Beneficiaries" means the employees from time to time of the Company and any subsidiary of the Company … which is a participating company in relation to any profit sharing scheme established by the Company and approved in accordance with Part I of Schedule 9 to the Finance Act 1978 and "Beneficiary" has a corresponding meaning".

The question which I am asked to decide is centered on the words which I have underlined.

9. The view advanced by the trustees, and expressed in the declaration which they ask me to make, is that

"Beneficiaries includes all persons who are or have at any time been an employee of the Company (Roadchef) or the estates of such persons and therefore a person may be a beneficiary notwithstanding the fact that such person may not be an employee of Roadchef at the date of distribution by RoadChef (Employee Benefits Trustees Limited, the trustee of [EBT1]."

The effect of this construction would be that any person who at any time has been employed by the company, however long ago and for whatever period of time, would be a "Beneficiary" regardless of his current status. Indeed, the trustees' contention is advanced as extending to the estates of former employees who are now deceased.

10. The alternative, which in the absence of any representation adversarial to counsel for the trustees I put to him for his comments, is that the words "employees from time to time of the Company" refer to those who are employees at the moment in time relevant to the particular exercise of the trustees' discretionary powers. Indeed, I find it hard to see how in the absence of any other indication to the contrary in the deed or in "matrix" evidence the words can refer to anything other than a class with a changing content of this nature. I do not consider that there is any such indication.
11. The trustees do not conceal their underlying motivation, which derives from the nature of the asset with which they are now currently concerned. They view matters as follows. The asset has its origins in the improper removal of the shares in 1995, and but for that improper act the profit resulting from the increase in value to the take-over price would have been received by EBT1 and distributed to the employees at that time or shortly thereafter (which assumes inter alia that the takeover would have occurred even if the shares had not then been vested in Mr Ingram Hill). On this basis they would like to be in a position whereby the persons who would have benefited but for the wrong-doing of Mr Ingram Hill can now benefit from the recoveries that are made from him. Factually, I am told that of the 611 employees in 1998 only 78 were still employed in June 2010 – and doubtless that latter figure has since fallen further.
12. Whether or not one sympathises with the trustees' desired aim, the fate of such an unusual asset does not to my mind assist in the task of construing the word "Beneficiaries". It seems to me most improbable that the creators of the trust, effectively the company, or a reasonable person in their position or reading the deed, would have had in contemplation such a dysfunctional possibility as that which has occurred here or that the fund might in consequence acquire an asset of this nature.
13. What can be treated as in reasonable contemplation was what would happen during the normal ongoing operation of the ESOP, during which an upward movement in the value of the shares might produce a surplus from time to time, which could be considered for distribution. The EBT1, though not the subject of Inland Revenue approval because it itself made no appropriation of shares to employees, was part of the ESOP scheme in creating and providing a reserve of shares to be used by SPS in that manner. The purpose of such schemes is, put generally, to incentivise the company's labour force to on-going productivity and loyalty. A payment or transfer to former employees would fall outside such purpose. That would be as true of a distribution of surplus EBT1 net assets as of the appropriations made by or in effect through SPS. If anything, this consideration would point in the same direction as what is to my mind the natural meaning of the words "from time to time", i.e. that the only beneficiaries are current employees. It would also go in counter of an argument by the trustees that to deprive an employee retired a few weeks ago after twenty five year's employment of a payment would be a result so unreasonable that it could not have represented the intention of the settlor.
14. It was suggested that the restriction to current employees was in practice unworkable in that a proposed distribution listed would always be falsified by retirements before actual payment. I am unimpressed. There is no reason why a list of current employees should not be wholly up-to-date and if necessary payment could be made with the stipulation that it is subject to continued employment at the date of payment. Nor I do regard any minor complications in this regard as of any real significance in ascertaining the intentions of the settlor as expressed in the trust deed.
15. For these reasons, I am not prepared to make the declaration sought by the trustees.