B e f o r e :
LORD JUSTICE ALDOUS
LORD JUSTICE ROBERT WALKER
and
LORD JUSTICE KEENE
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ALLAN
| Appellant
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| | - and -
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| | REA BROTHERS TRUSTEES LTD
| Respondent
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(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
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Mr James Bonney QC and Mr Matthew Caswell (instructed by Levi & Co, Leeds) for the appellant
Miss Beverly-Ann Rogers (instructed by James Chapman & Co, Manchester) for the respondent
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HTML VERSION OF JUDGMENT
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Lord Justice Robert Walker:
Introduction
- This is an appeal by Mr Stuart Allan, the claimant below, against an order of His Honour Judge Behrens made on 12 March 2001 when he was sitting at Leeds as an additional judge of the Chancery Division of the High Court. Mr Allan had brought proceedings for breach of trust and associated claims against (for practical purposes) three defendants, Mr Peter Nolan, Mr Nigel Thompson and Rea Brothers Trustees Ltd (formerly called DJT Actuarial & Trustee Services Limited – “the trustee company”). Mr Allan obtained judgment against Mr Nolan and Mr Thompson but that judgment seems unlikely to bring him any financial benefit. Mr Allan’s claim against the trustee company was dismissed, and that is what Mr Allan seeks to overturn on appeal (although his permission to appeal is limited to a single ground, a point which it will be necessary to return to).
- This appeal is concerned with events which occurred between 1994 and 1997 in the management of two small self-administered occupational pension schemes. Those events are deeply disturbing. They suggest that despite the impact of the Maxwell scandal and the well-publicised steps taken to prevent further abuses (the Goode Committee report, the Pension Schemes Act 1993, the Pensions Act 1995 and numerous statutory instruments made under those Acts) it was between 1995 and 1997 still possible for regulatory restrictions to be flouted and for official safeguards to be shown to be ineffectual. As will become apparent, Mr Allan willingly participated in flouting the law when he thought it was in his interests to do so. He has since had a change of heart and in his action he has sought to be treated as the innocent victim of breaches of fiduciary duty on the part of the defendants.
- In the course of his thorough judgment the judge made detailed findings of fact which are largely unchAllanged in this court. It is therefore possible to summarise the facts (unusual though they are) relatively briefly. But the judge did not give any systematic account of the legislative and regulatory background of small self-administered occupational pension schemes such as the two schemes relevant to this appeal (the Elsie Whiteley Retirements Benefit Scheme, which I will call “the EW scheme”, and the Basdring Pension Scheme, which I will call “the Basdring scheme”).
- The judge’s omission to explain the background to schemes of this sort may have reflected a similar gap in the papers and in counsel’s submissions before him. It is a remarkable fact that the documents regulating the EW scheme seem not to have been before the court at all, although they were the obvious starting-point of any enquiry into the equitable ownership of assets transferred, in exercise of a fiduciary power, from the EW scheme to the Basdring scheme. It is therefore appropriate to give some explanation of the background before coming on to the facts as found by the judge.
The regulatory background
- Occupational pension schemes and their trustees are subject to three separate sets of regulatory controls which have statutory force and are aimed at different (and indeed to some extent conflicting) objectives. The Inland Revenue is concerned to ensure that the valuable exemptions and reliefs available to exempt approved schemes are not abused. This objective is achieved largely by the provisions now contained in Part XIV, Chapter 1 of the Income and Corporation Taxes Act 1988 (“ICTA 1988”) and statutory instruments made under its powers. The second objective (which was given a new and powerful impetus by the Maxwell scandal) is to ensure that the interests of current and prospective pensioneers are protected by an adequately funded scheme honestly and efficiently managed, under the supervision of actuaries and other professionals, and under the ultimate supervision of a regulatory body - now the Occupational Pensions Regulatory Body (“OPRA”), replacing the Occupational Pensions Board. There is a degree of tension between these two objectives in the sense that the Inland Revenue disapproves of excessive actuarial surpluses (as not deserving exemption from tax) while OPRA disapproves of inadequately funded schemes (as providing insufficient protection for pensioneers’ rights). However it is not necessary to pursue that point further in this case. The third objective of competent and prudent investment is the province of the Financial Services Act 1986 and statutory instruments made under its powers (section 191 of the Act being particularly in point).
- The term ‘small self-administered scheme’ (‘SSAS’) is a term of art in the law of occupational pension schemes. It reflects the fact that small schemes (defined as those having fewer than twelve members) are, unless managed by an independent external administrator (such as a life office) particularly vulnerable to irregularity or abuse. This point was explained in Memorandum No 58 (Small Self-Administered Schemes) published in 1979 by the Joint Office of the Inland Revenue Superannuation Funds Office and the Occupational Pensions Board:
“ ... such schemes cannot be treated in the same way as either self-administered schemes catering for large numbers of rank and file employees, or as insured schemes. Employers have been encouraged by press articles referring to ‘tax havens’ and ‘captive funds’ to regard a small self-administered scheme as more than just an arrangement ‘for the sole purpose of providing relevant benefits’ (see section 19(2) Finance Act 1970) and the progressively more critical approach adopted by the SFO in individual cases has followed inevitably from proposals which seem designed either for tax avoidance or to benefit the employer’s business financially, rather than as straightforward arrangements for providing financial support for the members in old age.”
- The point is also explained in the 1991 edition of the official publication Practical Notes on Approval of Occupational Pension Schemes (IR 12), paras 20.2 and 20.3:
“The reasons why the Inland Revenue consider special requirements necessary for the approval of such schemes are:
(a) Under trust law which evolved before the advent of pension schemes, a trust with one or a few beneficiaries is susceptible to being broken regardless of the terms in which the trust is constituted.
(b) The funding of a self-administered scheme for a few members is difficult because the small membership limits the extent to which statistical fluctuations can be smoothed out (eg for mortality).
(c) Small self-administered schemes are usually established to provide benefits for directors. Often the scheme members control the employer company and are also trustees of the scheme. This multiplicity of roles can face a trustee with a conflict of interests leading to actions concerning the scheme being take for reasons other than the provision of benefits on retirement.
The special requirements thus fall into three categories viz:
(a) control of the format of the trust,
control of funding, and
control of investments.”
- It is also relevant to note para 20.11:
“It is not permissible for an approved small self-administered scheme to secure a member’s benefits against particular trust assets. There is no objection to the calculation of the amount of the member’s benefits being notionally linked to the value of particular assets but the trust provisions must ensure that the member’s entitlement to benefit is against the funds of the trust as a whole.”
- These and other special requirements were imposed by statutory instrument made under s.591(6) of ICTA 1988, that is the Retirement Benefits Schemes (Restriction on Discretion to Approve) (Small Self-Administered Schemes) Regulations 1991 (S.I. 1991 No.1614). These regulations introduce another concept which is a term of art, a pensioneer trustee. This curious expression seems to have been invented by the Inland Revenue. A pensioneer trustee is defined (in regulation 2(1)) as a trustee of a scheme who
“(a) is approved by the Board [of Inland Revenue] to act as such, and
(b) is not connected with –
(i) a scheme member,
any other trustee of the scheme, or
a person who is an employer in relation to the scheme.”
- The effect of regulations 3(b) and 9 is to ensure that every SSAS will at all times have one pensioneer trustee. The evident purpose of this requirement is to ensure that there is one independent trustee to supervise its management, and in particular to ensure that there is no premature termination of the scheme (that is not spelled out in the regulations, but it appears from IR 12, para 20.4, that a pensioneer trustee is required to give the Superannuation Funds Office an undertaking to that effect).
- So a pensioneer trustee has a particular status and a particular function for Inland Revenue purposes. But there appears to be nothing in the regulations to alter or qualify a pensioneer trustee’s general duties under the ordinary principles of trust law. A pensioneer trustee (like a member-nominated trustee appointed under sections 16 ff of the Pensions Act 1995) is subject to the same general fiduciary obligations as his co-trustees.
- The other general point to be noted, before coming to the facts, is the importance in pensions law of transfer payments. Over the last thirty years or so the policy of the law has been to make pension rights ‘portable’, while preserving the principle that the bulk of an individual’s rights must eventually be enjoyed in the form of a non-assignable pension subject to income tax. When an individual leaves pensionable employment, not on retirement but in order to take up other pensionable employment, it is common for the trustees of the old employer’s scheme to make a transfer payment to the trustees of the new employer’s scheme, with the effect of terminating the employee’s rights under the old scheme and enhancing his or her rights under the new scheme. The amount of the transfer payment and the extent of the enhancement obtained are always matters for actuarial advice.
- As a matter of legal analysis such a transfer is effected by the concurrent exercise of fiduciary powers by the trustees of the two schemes. One set of trustees can make the transfer, and the other set can accept it and give the incoming member credit for it, only in exercise of and in accordance with powers conferred by the rules of their respective schemes. Although there may be some element of contractual obligation between the two sets of trustees, it is ancillary to the exercise of their fiduciary powers. It could not possibly be suggested (and was not suggested in the pleadings in this case) that trustees receiving a transfer payment could ever be purchasers for value in good faith and without notice that the assets coming into their hands were trust assets. It is inherent in any transfer payment under an exempt approved scheme (see section 591(1) of ICTA 1988) that it is a transfer of trust assets.
The facts
- In 1994 Mr Allan, who was then 54, was a director and shareholder of a clothing manufacturing company called Elsie Whiteley Limited (“EWL”). It was based in Halifax. Mr Allan owned 38 per cent of the shares and his children owned 12 per cent. The other half of the shares was owned by his brother Mr Graham Allan and his family. Mr Allan had pension rights under two occupational pension schemes established by EWL, one being the EW scheme already mentioned. The other scheme is not material for present purposes. The trustees of the EW scheme were Mr Allan, his brother and (as pensioneer trustee) a company called Wolanski & Co Trustees Ltd.
- In 1994 EWL went into administrative receivership. That was the culmination of gathering financial troubles for Mr Allan. He lost his job and his house was already heavily mortgaged, to the extent that there was no equity in it. It has since been sold by the mortgagee. He owed about £70,000 to EWL on a director’s loan account and a further sum of about £20,000 to the Inland Revenue. There were two valuable policies with AXA Equity and Law (“the AXA policies”) held by the trustees of the EW scheme in respect of his prospective pension rights (although any such ‘earmarking’ must have been informal for the reason mentioned in paragraph 8 above).
- The judge rightly described Mr Allan’s position as unenviable. In the absence of physical or mental disability he could not start drawing his pension until the age of 60 at the earliest. The judge referred to a statement which Mr Allan made to the police in October 1997 and commented:
“It is clear from that statement that Mr Allan was looking for a way of generating an income for himself. I am quite satisfied that Mr Allan was at all times aware that an income could not be provided to him without breaking the rules of the scheme. He was after all a trustee of the [EW] scheme and was aware of the basic provisions of the scheme.”
- Those were the circumstances in which Mr Allan was in March 1995 introduced to the second defendant Mr Nigel Thompson, who was closely connected with (but not at that time a director of) a company called Basdring Ltd (“Basdring”). Basdring had offices at an address in Salford. It was said to trade in leasing commercial and domestic property, credit brokerage and debt collection. Its directors were the first defendant, Mr Peter Nolan, and a Mr Cahill.
- Mr Allan was introduced to Mr Thompson by a friend, Mr Peter Breaks, whom Mr Thompson was said to have helped out in the past. The judge found that the help given to Mr Breaks had consisted of providing him with access to funds in breach of pension scheme rules, and that Mr Allan knew that. Mr Allan had several meetings with Mr Thompson and was told that Basdring earned high rates of interest on its investments. He was told that he would be fully consulted. He was also told that Mr Nolan would arrange for the purchase of Mr Allan’s house and that he would be able to live there, and buy it back at a later date. The judge was satisfied that Mr Allan was fully aware that these transactions would have involved a breach of the rules of the Basdring scheme.
- What Mr Allan did not know, at this time, was that Mr Thompson was a thoroughly dishonest man who had already been convicted on 23 February 1994 and 4 May 1994 of offences of dishonesty. The earlier conviction was quashed by the Court of Appeal, Criminal Division, but on 24 November 1995 Mr Thompson was again convicted on five specimen counts of offences of dishonesty (obtaining property by deception, false accounting, obtaining pecuniary advantage by deception and fraudulent trading; none of these related to the Basdring scheme). He was then sentenced to a total of three years’ imprisonment and disqualified for four years under the Company Directors Disqualification Act 1986. Sentence for his convictions in May 1994 had been deferred until the end of the trial in November 1995.
- Basdring had in October 1993 established an SSAS which was in March 1994 approved by the Inland Revenue as an exempt approved scheme. Its first trustees were Mr Nolan, Mr Thompson and (as pensioneer trustee) Mr Michael Field, who was an actuary practising in Manchester. Mr Field did not last long as pensioneer trustee. He resigned that position in September 1994 because (as he put it in a letter dated 10 March 1995 to the incoming pensioneer trustee) he had not been kept fully informed of the scheme’s activities.
- That may have been something of an understatement. It is not clear from materials available to this court (although Mr Brian Tatch, the new independent trustee appointed by OPRA in September 1997, may by now have established) whether the Basdring scheme ever had any genuine existence, or whether it was a complete sham from its inception. In any case it seems clear that there were many serious irregularities apart from the false pretence (in which Mr Allan concurred) that he was (or was to be) in pensionable employment with Basdring. The judge did not accept that Mr Allan ever believed that he would be employed by Basdring in any real capacity. Such employment was a necessary precondition of his becoming a member of the Basdring scheme and being in a position to ask for a transfer payment from the EW scheme.
- After Mr Field’s resignation a new pensioneer trustee should have been appointed without delay. In fact there was considerable delay. At the end of 1994 Mr Thompson approached Mr Robert Hesketh of the trustee company (which was based in Bolton and was then named DJT Actuarial & Trustee Services Ltd) with a view to its becoming pensioneer trustee. Mr Hesketh is qualified as a chartered accountant and he looked after about 200 of the trustee company’s SSAS clients (about 1000 in all). There was a meeting on 27 January between Mr Nolan, Mr Thompson and Mr Hesketh and Mr Andy Bell of the trustee company. Mr Hesketh and Mr Bell were told that Mr Nolan and Mr Thompson were dissatisfied with Mr Field, but were not told that he had already resigned some months previously.
- After protracted correspondence, during which Mr Hesketh obtained some but not all of the information which he wanted, a deed appointing the trustee company as pensioneer trustee was eventually completed on 13 June 1995. Mr Hesketh backdated it to 1 March 1995. That is the sort of casual impropriety which a surprisingly large number of professional men seem willing to indulge in, apparently unconcerned about their professional reputations or about the risk (especially if their clients’ activities subsequently attract official investigation) of prosecution for forgery.
- On 1 May 1995 Mr Allan signed a form applying for membership of the Basdring scheme. On 16 June 1995 the trustees of the EW scheme executed an assignment of the AXA policies to the trustees of the Basdring scheme “subject to the provisions of the [Basdring scheme]”. As already noted, there is no extant documentation as to the EW scheme, but it seems very probable that the rules of that scheme would have contained a power (comparable to that in rule 23 of the Basdring scheme’s rules) for the trustees to make a transfer payment on a member leaving employment with EWL and entering pensionable employment with another employer which had an exempt approved scheme. Any exercise of such a power would normally be evidenced by (i) written advice as to the appropriate amount of the transfer payment; (ii) a written resolution of the trustees exercising the power (iii) a written resolution of the trustees accepting the transfer payment; (iv) an ancillary agreement (embodied either in correspondence or in a formal document) between the two sets of trustees; and (v) appropriate documentary evidence of the actual payment or transfer of assets. In this case the only extant documents are the assignments of the AXA policies. Mr Allan’s pleaded case referred to an oral agreement between himself and Mr Thompson.
- The judge made clear findings (some of which have already been mentioned) to the effect that Mr Allan knew that he was not genuinely employed by Basdring and knew that he was not therefore eligible to be a member of the Basdring scheme. There was a meeting in May or June 1995 – the precise date cannot be established – at which Mr Allan was introduced to Mr Hesketh by Mr Thompson as an employee of Basdring. Mr Hesketh was cross-examined at some length on this point but the judge who saw and heard the witnesses was entitled to make the finding which he made:
“In any event given that Mr Allan was introduced in the context of the execution of the assignment of the AXA policies I am satisfied, on the balance of probabilities, that he was introduced as an actual employee and an actual member of the Basdring Pension Scheme. This was a misleading introduction designed to mislead Mr Hesketh so that he would execute the assignment. Mr Hesketh was duly misled. I am satisfied that Mr Allan was fully aware of the deceit.”
- Within a few weeks of the assignment of the AXA policies Mr Thompson wrote to Mr Hesketh asking him to agree to the full surrender of one of the policies and the partial surrender of another, so as to raise £300,000. Mr Hesketh signed on behalf of the trustee company, and £300,000 was paid to the trustees’ bank account, on which Mr Nolan and Mr Thompson were joint signatories. Within a few months over £300,000 had been spent in purchasing various properties in Salford and elsewhere, some owned by Basdring, including its offices at 69 Singleton Road, Salford, and the adjacent property, no.67, apparently owned by Mr Cahill.
- In October 1995 the trustees loaned £20,000 to a company called Elsie Whiteley Marketing Limited (“Marketing”). This was a non-trading company formed by Mr Allan, probably at Mr Thompson’s suggestion. £10,000 of the loan then found its way to Mr Nolan and Mr Thompson as ‘introduction fees’, and a further smaller sum was paid to Mr Allan himself. There was also an improper payment to Mr Allan of about £1500 in cash withdrawn from the trustees’ account. These were improper transactions which infringed the rules applicable to the SSAS.
- It was at this stage in the chronology that Mr Thompson was convicted at Derby Crown Court on serious charges of dishonesty and was sentenced to imprisonment for those and earlier offences. His convictions and sentences were reported in the press and came to the knowledge of Mr Allan and Mr Hesketh. In December 1995 Mr Allan and Mr Nolan visited Mr Thompson in prison and Mr Hesketh did so on 5 January 1996.
- At an undetermined date during January 1996 Mr Allan visited the trust company’s office and showed Mr Hesketh some documentation provided by Mr Thompson. This occasion is of some importance because the judge found that this meeting was the first occasion on which Mr Hesketh was put on enquiry as to whether Mr Allan was a genuine employee of Basdring. The judge found
“Up till that time Mr Hesketh had no reason to doubt that Mr Allan was in fact employed by Basdring Ltd. He had been introduced as an employee and had completed the form as an employee.”
Mr James Bonney QC (appearing with Mr Matthew Caswell for Mr Allan) sought to attack this finding as contrary to the weight of the evidence, but he did not press this submission very hard and it cannot succeed. The judge made a careful assessment of the oral evidence, relating it to the large volume of documentary evidence which was before him. He found Mr Hesketh and Mr Robin Larby (both of the trustee company) to be honest and in general reliable witnesses. He found Mr Allan’s evidence to be in some respects unreliable.
- It is a remarkable feature of this unusual case that (to judge by the correspondence in the appeal bundles) there seems to have been a sort of conspiracy of silence about Mr Thompson’s convictions. No one seems to have committed to paper any suggestion that Mr Thompson, as a convicted fraudster, should be removed from his trusteeship of the Basdring scheme. On the contrary, on 15 March 1996 Mr Allan joined Mr Thompson in writing to the trustee company proposing that Mr Nolan (and not Mr Thompson) should cease to be a trustee. The first direct reference to Mr Thompson’s imprisonment is in the minutes of a meeting held on 2 July 1996 between Mr Hesketh, Mr Allan and Mr Gordon Scott (another disaffected member or putative member of the Basdring scheme).
- Nevertheless Mr Thompson’s disgrace plainly did have an effect on the attitude of the trustee company’s officers. There was a new note of caution in Mr Hesketh’s letter of 8 February 1996 to Mr Nolan. He wrote:
“As trustees (ie you and [the trustee company]) we have a legal responsibility vis-à-vis pension scheme investments and I for one am not prepared to sanction any new investments until the overall position is clear and all scheme members agree to such investment.”
By then the trustees seem to have had little or no cash available for investment. Mr Hesketh pressed for information (in the form of P60 forms or otherwise) as to the employment of each member by Basdring. He and others at the trust company continued to do so, with no success, for over a year until the trust company eventually gave notice of resignation on 9 April 1997.
- During the same period Mr Allan was (after a short interlude during which he was making common cause with Mr Thompson) making regular but ineffectual efforts to withdraw from the Basdring scheme the assets which had been transferred to it on his behalf. He seems not to have understood, or not to have accepted, that the AXA policies and their proceeds were trust assets and that it was Mr Allan himself who had been instrumental in getting them transferred from the EW scheme to the Basdring scheme. At that stage he seems to have had advice from a financial consultant but not from solicitors.
- It is unnecessary to detail the increasingly tense three-way correspondence which passed from April 1996 to April 1997 between Mr Allan, Mr Nolan and Mr Larby or Mr Nigel McCann of the trust company (Mr Hesketh became ill in June 1996 and ceased to be involved). On 17 April 1996 Mr Allan wrote a letter of complaint to the Occupational Pensions Advisory Service (OPAS), but it did not produce any immediate result. On 16 May 1996 Mr Nolan and Mr Larby wrote to the bank with instructions for the trustee company to be a signatory on any payment out of the trustees’ bank account. The improper loan to Marketing was repeatedly raised by the trust company as an obstacle to any immediate transfer of Mr Allan’s rights. Mr McCann was not told the truth about this loan. Mr Thompson was released from prison at the end of September 1996 and he attended at least one trustees’ meeting. He only ceased to be a trustee when he was statutorily disqualified on the coming into force of the Pensions Act 1995 on 6 April 1997.
- Eventually on 2 April 1997 OPAS responded to the complaint which Mr Allan had made nearly a year earlier. OPAS wrote to Mr Hesketh seeking information, as it had been unable to get a response from Mr Nolan. By notice given on 9 April 1997 the trustee company resigned its trusteeship as from 7 May 1997. At about the same time Mr Allan instructed solicitors. On 25 September 1997 OPRA appointed Mr Tatch as a trustee of the Basdring scheme, with sole control (by way of an order under section 8(4)(b) of the Pensions Act 1995) of the scheme assets. Mr Allan objected to Mr Tatch’s appointment (surprisingly, as he had made the original complaint of mismanagement). On 21 January 1998 OPRA removed Mr Nolan as a trustee. The writ in this action was issued in October 1998.
The judgment below and the issues on the appeal
- At the end of the introduction to his written judgment the judge summarised the issues before him:
“Mr Allan contends that as he was not an employee of the principal employer he was never a member of the new scheme and thus the trusts failed. He goes on to assert that there was a resulting trust in favour of the old scheme. Accordingly the pensioneer trustee (together with the other two trustees) are liable to make good to the old trustees the £300,000 together with interest or with an enquiry on the footing of wilful default. In the alternative he contends that the new trustees – including the pensioneer trustee – have been in breach of trust in a number of ways for which he is entitled to compensation.
The pensioneer trustee disputes that there is any resulting trust and/or that it has been in breach of trust. It raises a number of defences including estoppel, acquiescence, and concurrence in breach of trust. In addition it seeks to rely on an exemption clause in the Trust Deed.”
- After making his findings of fact the judge dealt with the parties’ legal submissions under three main heads: resulting trust; breach of trust; and the exemption clause (there was a further short section on condition precedent and misrepresentation which has played no significant part in the appeal).
- Under the heading of ‘resulting trust’ the judge considered submissions by Mr Bonney which centred on the two Vandervell cases (Vandervell v IRC [1967] 2 AC 291; Re Vandervell (No.2) [1974] Ch 269) and submissions by Miss Beverly-Ann Rogers (for the trustee company) which centred on the speeches in the House of Lords in Westdeutsche Bank v Islington LBC [1996] AC 669. He saw it as his duty to follow the guidance given by the speeches of Lord Goff and Lord Browne-Wilkinson in Westdeutsche. He expressed his conclusion on this point as follows:
“In my judgment, therefore, Miss Rogers’ arguments on this point are to be preferred. In particular it is clear that [the trustee company] had no knowledge that Mr Allan was not an employee until the end of January 1996. By that time the £300,000 had been mixed with other funds belonging to the Basdring Pension Scheme and could not be separately identified. It follows that there was no resulting trust.”
- Under the heading of ‘breach of trust’ the judge considered the allegations of breach of trust pleaded in paragraph 16 of the much-amended statement of claim. These (together with paragraph 14 of the statement of claim) are considered in detail later in this judgment. At this stage it is sufficient to note that the judge found none of these allegations established, but he reached that general conclusion by different routes in relation to different allegations.
- The first route followed on from the judge’s decision that there was no resulting trust. The second route was estoppel by acquiescence arising from Mr Allan’s active part in deceiving the trustee company as to whether he was a genuine employee of Basdring and a genuine member of its scheme. The third route was the trustee company’s practice (as the judge put it) of delegating day to day administration of the trust to the other trustees.
- Mr Bonney has criticised all three elements of the judge’s reasoning. That led Miss Rogers to complain, not unreasonably, that it was hard for her to know what case she had to meet, since the order under appeal granted permission to appeal only on the resulting trust issue (“whether the said sum of £300,000 ... was or became held upon a resulting trust for the [EW] scheme” – a form of words which was not well chosen if it was intended to cover all the pleaded allegations of breach of trust). However this court thought it best to hear argument on all these points (and on Miss Rogers’ late respondent’s notice relating to the indemnity clause).
- In relation to the indemnity provision in rule 33 of the EW scheme’s rules the judge stated that if (contrary to his view) there had been a resulting trust, he would have held that the trustee company was not entitled to rely on it because
“The resulting trust is outside that scheme and thus not subject to its rules and its exclusion clauses.”
Miss Rogers has criticised that part of his judgment.
- He went on to state that if he had found any breach of trust established then (on his view that there was no resulting trust) the trustee company would have been entitled to rely on the indemnity, which made an exception only for “wilful and individual fraud or wrongdoing on the part of the person who is sought to be made liable”. The judge said that the allegations even if proved
“do not in my view come within a measurable distance of satisfying the above test.”
Mr Bonney has criticised that part of his judgment.
Resulting trust
- In Westdeutsche the House of Lords was concerned with money paid by a bank to a local authority as part of a commercial transaction which was beyond the local authority’s statutory powers. Although the point at issue was limited to whether compound interest should be awarded, the case raised important and difficult general issues as to the development of the law in relation to equitable proprietary claims (see the speech of Lord Goff [1996] AC at 685-6). The case was not concerned with money which, when it changed hands, was already subject to an express trust (as occurred in the important and difficult case of Foskett v McKeown [2001] 1 AC 102).
- In the present case the assets which changed hands (the AXA policies which were formally assigned in June 1996) were already subject to express trusts, that is the trusts of the EW scheme. That all-important fact seems to me to have been, if not entirely overlooked, at any rate insufficiently considered by the judge. I would not be unduly critical of the judge because there were several factors making correct analysis more difficult: none of the documentation of the EW scheme was before the court; Mr Allan was a sole claimant claiming what he regarded as his money; and counsel on both sides relied mainly on authorities in which what changed hands was not trust property when it left the transferor.
- In these circumstances the most instructive and apposite passage in the speeches in Westdeutsche is in my view this passage from the speech of Lord Browne-Wilkinson (at 707):
“The bank contended that where, under a pre-existing trust, B is entitled to an equitable interest in trust property, if the trust property comes into the hands of a third party, X (not being a purchaser for value of the legal interest without notice), B is entitled to enforce his equitable interest against the property in the hands of X because X is a trustee for B. In my view the third party, X, is not necessarily a trustee for B: B’s equitable right is enforceable against the property in just the same way as any other specifically enforceable equitable right can be enforced against a third party. Even if the third party, X, is not aware that what he has received is trust property B is entitled to assert his title in that property. If X has the necessary degree of knowledge, X may himself become a constructive trustee for B on the basis of knowing receipt. But unless he has the requisite knowledge he is not personally liable to account as trustee: In re Diplock; Diplock v Wintle [1948] Ch 465, 478; In re Montagu’s Settlement Trusts [1987] Ch 264. Therefore, innocent receipt of property by X subject to an existing equitable interest does not by itself make X a trustee despite the severance of the legal and equitable titles. Underhill and Hayton, Law of Trusts and Trustees, pp.369-370, whilst accepting that X is under no personal liability to account unless and until he becomes aware of B’s rights, does describe X as being a constructive trustee. This may only be a question of semantics: on either footing, in the present case the local authority could not have become accountable for profits until it knew that the contract was void.”
- This passage clearly spells out the very important distinction between the proprietary remedy and the personal remedy. One is (as Lord Browne-Wilkinson has more recently put it in Foskett v McKeown [2001] 1 AC at 108),
“ ... based on the assertion by [the claimants] of their equitable proprietary interest in identified property.”
The other (as Lord Browne-Wilkinson said in Westdeutsche at 705) depends on the conscience of the legal owner being affected. The special feature of the present case (which does not make it unique, but does distinguish it from many of the authorities that were cited) is that the trustee company knew (at all material times) that the AXA policies and their proceeds were trust property but did not know (on the judge’s findings, until January 1996 at the earliest) that there was doubt as to what the relevant trusts were.
- Since the trust deed and rules of the EW scheme are not available, this court does not know the precise trusts and powers on which the AXA policies were originally held. But since the scheme was an exempt approved scheme under ICTA 1988 the court can be confident as to the general shape of the trusts and powers, and in particular that there cannot have been any power for the trustees to distribute the policies to Mr Allan at the age of 55 (or indeed at any age) as his absolute property. The only relevant power can have been a power to make a transfer payment to another pension scheme. The terms of the power are likely to have been similar to those in rule 23 of the Basdring scheme’s rules.
- The power must have been a fiduciary power which the trustees of the EW scheme could exercise only if acting in good faith and for the purposes for which the power was intended – that is, on a transfer from one genuine employment to another. This court has no findings or evidence of the state of mind of the other two trustees (Mr Allan’s brother and Wolanski & Co Trustees Limited) but there are clear findings that Mr Allan himself knew that Mr Thompson’s plan was improper and deceitful. Had his co-trustees known the true facts, they could not properly have joined, and would not have joined, in the exercise of the power. Although the legal interest in the AXA policies passed under the assignments, the beneficial interest remained in the EW scheme. As Cross J put it in Re Abrahams [1969] 1 Ch 463, 485, the beneficial interests
“go back to – or, more properly I think, never left – the [original settlement].”
- Since the court does not know the precise terms of the transfer payments power in the EW scheme it is impossible to say whether the invalidity of its exercise should be classified as an excessive (ie ultra vires) exercise of the power, or as a fraud on the power (which makes the exercise void, not voidable: Cloutte v Storey [1911] 1 Ch 18) or as an example of the operation of the principle in Re Hastings-Bass [1975] Ch 25: see Mettoy Pension Trustees v Evans [1990] 1 WLR 1587 at 1621-24, where Warner J stated at 1624
“For the principle to apply however, it is not enough that it should be shown that the trustees did not have a proper understanding of the effect of their act. It must also be clear that, had they had a proper understanding of it, they would not have acted as they did.”
This court formulated the test in less demanding terms in Stannard v Fisons Pensions Trust Ltd [1992] IRLR 27, but in this case even the most demanding test would lead to invalidity.
- The authorities mentioned in the last two paragraphs were not cited by counsel but they are well known to trust practitioners. Re Hastings-Bass was mentioned in the course of argument but neither side took up the implied invitation to refer to it.
- In my judgment the judge was therefore wrong to reject the argument that the beneficial interest in the AXA policies was never validly transferred to the Basdring scheme, and remained in the EW scheme. The judge’s conclusions on the breach of trust issues must therefore be reviewed in the light of that conclusion, but also so as to give due weight to the judge’s incontestable findings of fact as to Mr Allan’s part in the deception of the trustee company, and as to the trustee company not being on enquiry (as to the genuineness of Mr Allan’s employment by Basdring) until January 1996, after the AXA policies had been cashed and the proceeds spent, largely on the acquisition of freehold property.
Claims for breach of trust
- Where money subject to one express trust is paid improperly (and without valuable consideration) to another trust the money or its traceable proceeds still belong in equity to the first trust and its trustees have a proprietary claim to recover them. That is strikingly illustrated by the unusual facts of Foskett v McKeown, where money subject to a commercial trust had been used to pay premiums on a life policy subject to a family trust. In this case the trustees of the EW scheme appear to have a claim to recover a proportionate share of the blended assets now held by Mr Tatch as trustee, although the realisation and division of those assets may be a long and difficult process (Mr Bonney had no instructions as to what progress Mr Tatch has made with that task). But on this appeal, as both sides have been at pains to emphasise, the court is concerned only with claims seeking to impose on the trustee company personal liability for breach of trust even though it no longer holds or controls any of the assets subject to the Basdring scheme.
- These claims fall into two distinct categories. One (pleaded in paragraph 14 of the statement of claim) relates to the trust company’s failure to account for £300,000 (the proceeds of the AXA policies) to the EW scheme trustees. The other (more elaborately pleaded in paragraph 16) relates to the trustee company’s stewardship of the transferred assets while in the hands of the Basdring scheme trustees. (I should add that the judge regarded it as no more than a technicality that the other trustees of the EW scheme had not been made parties. That is a procedural requirement under CPR 19.3 and it cannot be dismissed as a mere technicality. But the point was left in the air as Mr Bonney could not get instructions from Mr Allan’s brother and neither side wished for an adjournment.)
- The judge rejected the first claim on the ground that there was no resulting trust. As I have explained, I consider that he was wrong in his reasoning on that point. Nevertheless I consider that he was correct in his conclusion. Until January 1996 at the earliest the trustee company had no reason to doubt the validity of the transfer payment. Its corporate conscience was not therefore affected by actual knowledge (or any ‘blind eye’ knowledge such as is discussed in the cases on liability as a constructive trust). After January 1996 doubts as to the position were emerging, but the trustee company continued to ask for P60’s or other evidence of employment, and Mr Nolan continued to offer empty promises. The trust fund was illiquid and the improper loan to Marketing was a further complication. As the true facts emerged it became more and more obvious that the disentanglement of the fund would be a long and difficult process (as Mr Tatch’s subsequent experience has evidently confirmed).
- In short although the trustee company may have been rather ineffectual and indecisive there was never a time at which it had both (i) actual knowledge that the transfer payment was invalid and should be returned and (ii) the means either of ascertaining what sum was due to be returned to the EW scheme trustees (it was almost certainly a lot less than £300,000, for reasons mentioned below) or of raising that sum. It was not therefore personally liable for breach of trust under this head.
- What were the duties of the trustee company during the period when it had no reason to suppose that the AXA policies were not part of the trust fund of the Basdring scheme? The only sensible answer is that its duties were those imposed on it by the general law of trusts and by the trust deed and rules of the Basdring scheme which it believed to be the documents regulating its trusteeship. The conclusion that the trustee company’s acts and omissions can only sensibly be judged by the standards of its trusteeship of the Basdring scheme is powerfully confirmed, in this case, by Mr Allan’s part in deceiving Mr Hesketh and the other officials of the trustee company into thinking that he was a genuine employee of Basdring bringing a valid transfer payment into the Basdring scheme; and by Mr Allan’s failure to produce any evidence showing that the administrative powers and provisions of the EW scheme were materially different.
- The breaches of trust on the part of the trustee company complained of in paragraph 16 of the statement of claim (which were alleged to have been committed wilfully or recklessly) can be summarised as follows:
(1) investing the transfer payment in freehold property when the trustees knew that the payment ought not to have been made;
(2) failing to realise investments (promptly or at all) in order to make a refund to the EW scheme;
(3) failing to advise Mr Allan that he could not be a member of the scheme;
(4) investing £195,000 in the purchase of the two Singleton Road properties despite Mr Thompson’s conviction or impending trial for offences of dishonesty;
(5) investing the transfer payment without Mr Allan’s approval;
(6) failing as pensioneer trustee to protect the trust property, in particular by failing to exercise control over the trustees’ bank account, by failing to get Mr Thompson replaced, and by abrogating its responsibilities by resigning as trustee.
The allegations at (1) to (5) above were also made (and found to be established) against Mr Nolan and Mr Thompson, but there is no appeal by either of them.
- Some of these claims can be disposed of (and were disposed of by the judge) quite shortly. Points (1) and (3) must fail because the trustee company, despite repeated enquiries, did not know the true facts. Its ignorance was due to Mr Thompson and Mr Nolan, who, with Mr Allan’s complicity, deceived the trustee company and withheld the true position. Point (2) adds nothing to the point dealt with at paragraph 55 above.
- As to point (4), the judge found that the trustee company was not aware of Mr Thompson’s impending trial, or of his conviction, until after 24 November 1995, by when the purchase of the Singleton Road properties had been completed. The trustee company had not been involved in the purchase (I will return shortly to the question whether the trustee company should have been involved in the purchase).
- Point (5) adds nothing unless the trustee company was under an obligation to bring about the appointment of Mr Allan as a trustee of the Basdring fund. The rules of that fund contained (in clause 24.4) a provision that “all members shall be appointed trustees of the scheme”. When the court suggested in argument that that was a most unusual and inconvenient provision counsel informed the court that it was included for reasons connected with the Financial Services Act 1986 (and apparently so as to reduce regulatory requirements under that Act). If it was a valid rule it seems to have been totally disregarded (since according to Mr Nolan and Mr Thompson there were about a dozen members of the scheme) and Mr Allan accepted that he had not, until much later, asked to be appointed as a trustee. No breach of trust was established under this head.
- Finally there is the claim that the trustee company abrogated its responsibilities, both throughout its trusteeship and by its resignation. This is the claim which calls for the most serious consideration, since it appears that the officers of the trustee company had a mistaken idea of its responsibilities as a pensioneer trustee. They seem to have believed that so long as the company complied with its special undertakings to the Inland Revenue, it need not concern itself with the day to day management of the trust (and in view of the number of pensioneer trusteeships which it held, it might have been impossible for it to do so without much greater management resources).
- The judge seems to have been sympathetic to the trustee company’s position. He observed in his judgment:
“Mr Bonney QC criticised [the trustee company] for delegating to the other trustees the day to day administration of the trust. [The trustee company] were in breach of trust in failing to prevent the use of the bank account which would have prevented the use of trust moneys without their consent. No expert evidence was called before me as to the practice of pensioneer trustees but the evidence from both Mr Hesketh and Mr Larby was to the effect that it was common practice for the pensioneer trustee to delegate the day to day administration of the trust to the other trustees. This is confirmed by the express power to delegate contained in rule 28.2 and 31 of the Rules. Furthermore the letter from PSO dated 11th August 1997 sets out the purpose of the appointment of a pensioneer trustee. As at that date it was not a normal function to monitor investments.”
- In my view this approach was in some ways erroneous. The practice of pensioneer trustees might be a matter for expert evidence (relevant to a claim for relief under section 61 of the Trustee Act 1925, if any had been made) but the responsibilities of pensioneer trustees must be a question of law. The view of the PSO (a branch of the Inland Revenue) reflected their official preoccupations and should not have been taken as a comprehensive and reliable statement of all a pensioneer trustee’s obligations. There was a power of delegation, but such a power can give protection only if it is exercised responsibly, and with appropriate safeguards (including regular reporting and monitoring) to ensure that any delegation of day to day management could not be abused by co-trustees.
- There is therefore a serious issue to be examined here. But here too there is in my view ample scope for the application of the principle that a beneficiary cannot complain of a breach of trust in which he knowingly participated or acquiesced, whether or not he has benefited from it (for that principle see Fletcher v Collis [1905] 2 Ch 24; and in particular regard to acquiescence and estoppel, Habib Bank Ltd v Habib Bank AG [1981] 1 WLR 1265, 1284-5).
- The judge found that Mr Nolan and Mr Thompson went to great lengths to explain how they would use the transfer payment for Mr Allan’s benefit, by means which Mr Allan knew amounted to a breach of the scheme rules. Mr Allan knew (both from his discussion with Mr Nolan and Mr Thompson and from the “customised” document prepared for him) that management of the scheme assets had been delegated by the trustee company. Had it not been delegated, the dishonest plan would not have been practicable. In these circumstances it would be unconscionable for Mr Allan to base a claim for breach of trust on the trustee company’s shortcomings which he knew of and hoped to take advantage of. By the time of the trustee company’s resignation Mr Allan may have had a change of heart (as Mr Bonney pointed out, Mr Allan himself complained to OPAS, and later gave a statement to the police). But by April 1997 OPRA was at last taking steps to intervene, and the trustee company’s resignation, if irresolute, cannot be regarded as a breach of trust.
- I conclude that Mr Allan failed to establish any actionable breach of trust in respect of which he was entitled to any remedy based on personal liability of the trustee company.
The indemnity clause
- In these circumstances it is not necessary to give any lengthy consideration to counsel’s submissions on rule 33 of the rules of the Basdring scheme. That rule is in the following terms:
“In the professed execution of the trusts and powers hereof none of the Trustees or the Administrator shall be liable for any loss arising by reason of any improper investment made in good faith or for the negligence or fraud of any agent employed by such Trustee or by any other Trustee hereof or by the Administrator although the employment of such agent was not strictly necessary or expedient or by reason of any mistake or omission made in good faith by any Trustee hereof or by the Administrator or by reason of any other matter or thing except wilful and individual fraud or wrongdoing on the part of the person who is sought to be made liable and except as aforesaid the Trustees and the Administrator shall be indemnified against all liabilities incurred by them in the professed execution of the trusts and powers hereof and the management and administration of the Scheme and shall have a lien on the funds of the Scheme for such indemnity.”
- Had the judge accepted the resulting trust argument he would have held the trustee company disentitled to rely on rule 33, because
“ ... the exemption clause is part of the rules of the Basdring Pension Scheme. The resulting trust is outside that scheme and thus not subject to its rules and its exclusion clauses.”
I cannot agree with that, for the reasons already stated in paragraph 56 above. Mr Allan had joined in deceiving the trustee company into believing that it was in receipt of a valid transfer payment to be held on and subject to the trusts, powers and provisions of the Basdring scheme, and he could not now be heard to object to the trustee company’s reliance on the indemnity clause applicable under the rules of that scheme.
- I agree with the judge’s view that any breaches of the trustee company’s duty which were not barred by complicity or acquiescence would not “come within a measurable distance” of amounting to wilful and individual fraud or wrongdoing. Indemnity clauses of this sort were very fully considered by this court in Armitage v Nurse [1998] Ch 241, which concluded (see the judgment of Millett LJ at 256) that they are not contrary to public policy, and that if they are to be restricted it is a matter for Parliament. (There is now a limited restriction in s.33 of the Pensions Act 1995.)
- Mr Bonney made some submissions (based in part on the trustee company’s having held itself out as respectable and professional) with a view to establishing that the trust company committed breaches of trust which were reckless and, therefore, wilful. But there was no finding by the judge to support that approach. The decision of this court in Walker v Stones [2001] 2 WLR 623, now on appeal to the House of Lords, was (so far as now relevant at all) concerned with the alleged dishonesty of a course of action deliberately undertaken by a solicitor, and it is not of assistance to Mr Allan.
- For these reasons I would dismiss this appeal.
Lord Justice Keene:
- I agree.
Lord Justice Aldous:
- I also agree.
Order: The parties not being present, the appeal is dismissed; the claimant, who is was in receipt of services funded by the legal services commission, do pay the fourth defendant its costs of the appeal, and that the determination of any amount which the Community Legal Services Costs Regulation 2000; legal aid detailed assessment of the claimant’s own costs of the appeal.
(Order not part of approved judgment)
