Don't Trust the Trustee
| Date | 01 May 1990 |
| DOI | http://doi.org/10.1111/j.1468-2230.1990.tb01819.x |
| Author | Richard Nobles |
| Published date | 01 May 1990 |
May
19901
Don’t Trust the Trustee
Don’t Trust the Trustee
Richard
Nobles
*
When a company goes into liquidation or receivership, the presence of a substantial surplus
in its pension scheme provides an attractive source of additional finance with which to
pay the creditors.’ If the company is to be sold as a going concern, the surplus represents
an asset that can be passed onto the purchaser, who can be expected to pay more for the
company as a result. But if the company is to be wound up, and its assets realised, the
beneficiaries of the pension scheme may become involved in a conflict of interest with
the company’s creditors. The scheme rules will provide for assets left after securing benefits
to be returned to the employing company,2 and they may also provide for such assets to
be used up by providing additional benefits to the scheme members. The beneficiaries
will wish to see the surplus used to increase their benefits, but every
El
used for this
purpose is
f
1
less for the creditors or the contributories. In those schemes which provide
that the decision to increase benefits is to be taken by the trustees, or an equivalent
fid~ciary,~ an interesting question arises: what is the duty of such a trustee or fiduciary
as between the creditors or contributors and the scheme’s beneficiaries? This question
becomes particularly acute when the person who occupies the fiduciary’s position is also
the receiver or liquidator, which was the situation in two recent high court decisions:
Zcarus
(Hertford) Limited
v
Dri~coll,~
and
Mettoy Pension Trustees Limited
v
Evans.S
These judgments are important both for their implications for liquidators and receivers,
and for the developing jurisprudence of pension schemes. The two decisions are reached
in very different ways. In
Mettoy
Warner
J
expressly states that scheme members have
earned
the right to have their interests considered when the fiduciary decides if, or how,
to
exercise their power.
In
Zcarus
Aldous
J
regards the surplus as the result of overfunding
by the employer. From these different starting points Warner
J
concludes that a conflict
of interest prevents the receiver or liquidator from exercising the discretion to increase
benefits, and requires the discretion to be exercised by the court; whilst Aldous
J
concludes
that the liquidator is free to exercise her discretion or not as she sees fit, provided that
she acts ‘bona fide’. The two cases represent a cross roads. Can the courts interpret the
general law of trusts to create enforceable duties for the trustees or other fiduciaries of
~~ ~
now have
no
individual protection even when the company’s auditors have been
so
optimistic,
or
so
complacent, as to be held negligent. Why then has parliament decreed that shareholders should receive
a copy of the auditor’s certificate? Lord Oliver’s answer is that ‘The purpose
.
.
.
is to provide those entitled
to receive the report with information to enable them to exercise the proprietory interests conferred upon
them and
not
for the purposes of individual speculation with a view to profit. The duty
of
care was one
owed to the shareholders as a body.’
A
separate note
on
the House of Lords’ decision
in
Cupuro
will appear
in
a
later issue of the MLR.
*London School of Economics
1
2
In
the cases which are the subject of this note the surpluses were f9 million and f200,000.
Since 1970, the Revenue have insisted that pension schemes include a rule giving the surplus to the employer.
Without this rule, they will not grant exempt approved status, and the scheme will not secure the consequent
tax reliefs.
See
Occupational Pension Schemes, Notes
on
Approval under the Finance Act 1970 as amended
by the Finance Act 1971, IR 12 at para 15.4. Some older schemes do not have this provision.
See
generally
Nobles, ‘Who
Is
Entitled To The Pension Scheme Surplus’, (1987) 16
IU
164.
In
many, if not most schemes, the trustees have
a
power to increase benefits, but this power is made
subject to the consent of the employer, who therefore has a veto. Where the receiver
or
liquidator inherits
the employer’s power to veto benefit increases the beneficiaries can expect that the whole of the surplus
will
go
to the creditors
or
the contributories.
3
4
4 December 1989.
5
12 December 1989.
377
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