Capital Cranfield Trustees Ltd v Walsh and Another

JurisdictionEngland & Wales
CourtCourt of Appeal
JudgeLord Justice Mummery,Lady Justice Smith,Sir William Aldous
Judgment Date13 Jul 2005
Neutral Citation[2005] EWCA Civ 860
Docket NumberCase No: A3/2004/2692

[2005] EWCA Civ 860

[2004] EWHC 2874 (Ch)

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE CHANCERY DIVISION

THE HON MR JUSTICE LINDSAY

Royal Courts of Justice

Strand, London, WC2A 2LL

Before

Lord Justice Mummery

Lady Justice Smith and

Sir William Aldous

Case No: A3/2004/2692

Between
Pinsent Curtis
Appellant
and
Capital Cranfield Trustees Ltd
Respondent

MR ALAN STEINFIELD QC (instructed by Messrs Lovells) for the Appellant

MR NIGEL INGLIS-JONES QC & MR NICOLAS STALLWORTHY (instructed by Messrs Sacker & Partners LLP) for the Respondent

Lord Justice Mummery

Introduction

1

This appeal is about the construction of the rules of a defined benefit occupational pension scheme (the Scheme). The rule in question relates to the power of the trustees of the Scheme, if they consider it appropriate after taking expert actuarial advice, to require the employer to pay a contribution to the Scheme during the period of notice given by the employer to terminate the scheme and future liability to pay contributions.

2

The point arises in an unusual procedural context. The proceedings, in which a preliminary issue of construction of the rules was ordered, are for damages for professional negligence against the firm of solicitors who acted for the former trustees of the Scheme. The alleged negligence is in the failure of the solicitors to advise the former trustees, prior to the expiration of a termination notice served by the employer, that they were entitled under the rules to demand a "buy-out" shortfall or deficit as a contribution to the Scheme by the employer.

3

The solicitors denied that, as a matter of construction, the rules of the Scheme permitted the trustees to demand a "buy-out" shortfall from the employer, whether before the expiry of the employer's termination notice or otherwise. If it is held that, on the true construction of the Scheme rules, the trustees had no such power, that would put an end to the negligence claim against the solicitors. There would be no point in taking the action to trial.

The proceedings

4

The appeal is from the order made by Lindsay J on 9 December 2004. He gave judgment on a preliminary issue directed by Master Price to be tried on the construction of the rules of the Kenrick & Jefferson Group Pension Plan (the Scheme). It was a defined benefit occupational pension scheme established by an employer for the benefit of its employees. The Definitive Deed is dated 16 June 1997.

5

Lindsay J held that, under the rules of the Scheme (the Rules), the former trustees of the Scheme had power, before the effective date of the termination notice (31 March 1998), to serve on the employer company, K & J Holdings Limited (the Company, which was previously called Kenrick & Jefferson Limited), a demand requiring it to pay a contribution to them in an amount equal to any shortfall in the Scheme's funds needed to enable the trustees to secure members' benefits by the purchase from an insurance company of policies (in accordance with rule J.4.2 (a) of the Scheme.)

6

Lindsay J also held that, although the trustees had that power before the expiration of the termination notice, they had no such power after the effective date of the termination notice (31 March 1998).

7

The parties to the action are Capital Cranfield Trustees Limited, the present sole independent and professional trustee of the Scheme (the Trustee), respondent to the appeal, and Pinsent Curtis (Pinsents), the appellant. Pinsents are the firm of solicitors against whom the Trustee claims damages for professional negligence in failing to advise the former trustees of the Scheme that they could demand that the Company pay the "buy-out" contribution to the Scheme. Pinsents were instructed by the former trustees on 3 February 1998 to advise, following the service of a notice by the Company to cease contributions under clause L.1.3 of the Scheme and to terminate the Scheme under clause L.1.1. with effect from 31 March 1998. Pinsents were instructed to advise "in relation to the winding up of the Scheme—in terms of what the trust deed and the law permits the trustees to do and what their options are as regards securing benefits and offering transfer options to the members".

The Rules

8

Rule L.1.1 of the Scheme relates to "Employers' contributions." This kind of rule is, so the court was informed, included in the rules of many occupational pension schemes. It provided—

" L. CONTRIBUTIONS

L.1 Employers' contributions

L.1.1 Each Employer shall, subject to the following provisions of this clause L.1, pay such contributions to the Scheme as are determined by the Trustees, having taken advice from the Actuary, to be appropriate but in any event not less than those set out in the schedule of contributions in force from time to time in accordance with section 58 of the 1995 Act."

9

The employer Company was entitled under rules J.1.1 and L.1.3 respectively to give to the Scheme trustees notice in writing that it wished to terminate the Scheme and to cease to contribute to it.

10

The Company gave notice in writing to the trustees on 22 October 1997 of its intention to cease contributing to the Scheme with effect from 31 March 1998 and that it wished that the Scheme be terminated with effect from that date.

11

The trustees did not take any advice from the Scheme Actuary in relation to further contributions under rule L.1.1. or make any determination under rule L.1.1 that it was "appropriate" that the Company should pay any such further contributions to the Scheme.

12

On the termination of the Scheme by the Company, the former trustees had a discretion under the Rules to determine whether to apply the fund in three different ways: (a) they could administer the Scheme as a "closed scheme" until such date as they might decide to wind up the Scheme, with the result that there would be no new members and no more contributions by the Company or by the members (Rule J.2); or (b) they could transfer all or part of the fund to another arrangement with the result that the beneficiaries under the Scheme would become entitled to benefits under the receiving scheme or arrangement (Rule J.3); or (c) they could decide to wind up the Scheme by applying the fund in accordance with Rule J.4, which prescribed the priorities of payment in which the balance remaining (after the payment of costs, charges and expenses) should be applied. The Rule also laid down that the benefits to be provided should be secured by a number of ways, including the purchase of an annuity, assurance contract or policy from an insurance company.

13

A decision was initially made to administer the Scheme as a closed scheme. At that time, the trustees did not know that there was a buy out deficit. It was not until November 1998 that Mercer's actuarial valuation of the Scheme as at 5 April 1998 estimated that there was a buy out deficit of between £1.246 and £2.63 million. It was later resolved to wind up the Scheme. The winding up of the Scheme commenced on 11 April 2003. There is an estimated "buy-out" deficit (i.e. a deficit on seeking to secure benefits with an insurance company) which now exceeds £10m.

The judgment

14

Lindsay J held that the power to require contributions in clause L.1.1 came to an end on the termination date (31 March 1998). Once the termination notice had taken effect and the Trustee elected to administer the Scheme as a closed scheme, the ability of the Trustee to demand contributions was forthwith brought to an end and did not revive when the Scheme passed into a winding up under rule J.4.

15

The judge's conclusion on the power of the trustees during the period before termination took effect was that the wide terms of L.1.1 should be given their full literal effect. He said:

"56. In all, I have been unable to see...

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