Analysis
The claimant was an Employee Benefit Trust (EBT) created by a company as part of a scheme to encourage employee share ownership. The mechanics of the scheme were that the EBT borrowed funds from a bank which it used to purchase shares in the company, with the loan being secured by a charge on the shares and guaranteed by the company. A separate share participation scheme (SPS), financed through funds provided by the company, purchased shares from the EBT which it then transferred to beneficiaries of the scheme (being employees of the company) in accordance with directions provided by the company from time to time. Any income from the shares warehoused by the EBT between purchase of the shares and their sale to the SPS was utilised by the EBT to pay costs of the funding from the bank.
In April 1995 the EBT transferred all the shares it held to a new trust, which in turn granted the managing director of the company an option to buy those shares at 125p per share. In 1998 the company was the subject of a takeover at 131p per share resulting in a profit to the managing director in respect of which the he was subsequently held liable to account to the EBT.
The trustees of the EBT applied to the court for a declaration confirming their understanding of the class of persons to whom they could distribute the proceeds of the judgment against the managing director. The EBT’s trust deed provided that the trust fund was 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 a manner as the trustees should in their absolute discretion think fit. The beneficiaries were defined in the deed as employees from time to time of the company and any subsidiary company.
The trustees understanding, of which it sought confirmation, was that ‘beneficiary’ included all persons who were currently or had ever been an employee of the company or the estates of such persons. This view was derived from the fact that the funds available to distribute related to the improper removal of the trust fund in 1995, in the absence of which, the profit to the fund following the takeover in 1998 would have been distributed to employees of the company at that time or shortly thereafter rather than current employees (of whom few had been employed in 1998).
Held, refusing the declaration sought, that:
- 1) It was improbable that the creators of the trust or a reasonable person in their position or reading the deed, would have had in contemplation such a dysfunctional possibility as that which had occurred.
- 2) What could be treated as within their reasonable contemplation was what would happen during the normal ongoing operation of the scheme 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.
- 3) This consideration would point in the same direction as the natural meaning of the words ‘from time to time’, being that the beneficiaries were current employees only.
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