Analysis
The first claimant (the principal employer) set up employee retirement benefit schemes (ERBS) for three of its directors, the second to fourth claimants on 23 November 2007, under which the directors were each members of their own schemes. The first defendant, Blackstar (Isle of Man) Ltd (Blackstar) was the trustee for all three schemes. Under the ERBSs, the trustees were given an express power that they could exercise by lending all of the trust fund to the member or other beneficiary on uncommercial terms, and in each case Blackstar received some £2m from the principal employer and it lent the greater part of that sum to the employee by way of an unsecured loan. The chose in action represented by the right to be repaid that loan is the principal asset of the trust fund and there is a small sum in a bank account in relation to each of the trusts. In January 2011, a scheme called Independence 1 was considered, which illustrated the ability of the trustee to reduce the value of the trust assets from, in the example used, £1m to £50,000.
In October 2011, the principal employer, with the consent of the member under the relevant scheme, wished to remove the first defendant as trustee and various persons entered into a deed described as a ‘deed of appointment, removal and indemnity’ dated 13 October 2011. The parties named in the deed were the first claimant, the first defendant, the second defendant (as incoming trustee) and, in each case, the member himself. Blackstar did not execute this deed, but it was executed by the other named parties. By clause 6.3 of the ERBS, removal of a trustee would only be effective after reasonable security had been provided for indemnifying such trustee against liability or potential liability to any person for which the outgoing trustee of the scheme might be answerable as a trustee or former trustee of the scheme (including without limiting the foregoing liabilities to taxation). The rights of indemnity conferred on Blackstar by r12.5 of the rules of the scheme, by s31 of the Trustee Act 2000 and by clause 4 of the deed were all restricted to an indemnity out of the assets in the trust fund from time to time and Blackstar disputed that it had been removed as trustee on the basis that reasonable security for indemnifying it had not been given. Proceedings were started between the parties and, among other things, the claimants sought declarations as to:
- whether Blackstar had been validly replaced by the second defendant as trustee of the EFRBSs; and
- in the event that the court concludes that the answer to (1) was in the negative, a declaration as to what was required to be provided by way of reasonable security and indemnities pursuant to clause 6.3 of the EFRBSs.
The trial of these two issues was expedited. At the time of the hearing there was no present intention of the claimants to implement the Independence 1 scheme, but Blackstar had been left completely in the dark as to what might happen following its removal as trustee.
Held:
(1) Reasonable security was not provided by the deed of 13 October 2011 and the first defendant was not removed as trustee pursuant to clause 6.3 of the trust deed [78]. Clause 6.3(b) referred to ‘reasonable security having been provided for indemnifying such trustee’. Did it require the outgoing trustee to be provided with an unqualified indemnity against the heads of liability identified in clause 6.3(b) and then, in addition, provided with reasonable security in relation to the performance of that indemnity? Alternatively, did it require the outgoing trustee to be provided with ‘reasonable security’, which would be the measure of the relevant indemnity available to the outgoing trustee? There might be a difference between these two readings of the sub-clause. In the former, the outgoing trustee must be given ‘an unqualified indemnity against the [identified] heads of liability’. On that basis the required indemnity would not be provided if the indemnity on offer was subject to any qualifications, for example by being limited to the assets in the trust fund from time to time or limited in any other way. On the second way of reading the clause, what had to be provided was ‘reasonable security’. The extent of the security had to be reasonable. What was reasonable would depend on the relevant circumstances. It might be the case that a security would be reasonable even where it was qualified or subject to limitations, provided always that the qualifications or limitations were reasonable. The second reading of clause 6.3(b) was the right one [28].
The position appeared to be that Blackstar had had great difficulty in identifying any real risk of substantial size of any liability falling upon it, which would come within clause 6.3(b) of the trust deed. Conversely, on the specific and unusual facts of the case, the right to be indemnified – which right was limited to the value of the trust assets from time to time – whether the right was pursuant to r12.5 or s31 of the Trustee Act 2000, or clause 4.1 of the deed of 13 October 2011, may well prove to be illusory. Was it right to take the view that if, so far, there had not been any identified liability of any significance, which might fall on the outgoing trustee, it therefore had nothing to fear and it should be satisfied with an indemnity that might turn out to be of no real value if it ever became necessary to rely upon it? No, clause 6.3(b) of the trust deed was there to give the outgoing trustee a reasonable level of protection against any potential liability. Although Blackstar had not demonstrated that there was a real risk of a liability of any substantial size being imposed upon it, it was not the case that any reasonable professional adviser could reach the conclusion that the risk of potential liability was absolutely nil. The position of the trustee might be affected by arguments put forward by others, principally the Revenue and other parties to these schemes. The value of the alleged security was going to be under the control of others. If the Blackstar remained the trustee, it would have some measure of control in relation to these matters. If it ceased to be trustee, it lost all control over them. The nature and extent of the indemnities available to Blackstar were not ‘reasonable security’ in relation to potential liability, which falls within clause 6.3(b) [73].
(2) A personal covenant by the first claimant and the relevant employee/member under the relevant scheme, which was not limited by reference to the value of the trust assets from time to time, but which might be limited by reference to the value of the trust assets at the time of removal of Blackstar, would be reasonable security [79]. A covenant from a person of substance could be ‘security’ in this context. the word ‘security’ did not require some other form of security interest such as a pledge or a lien or a charge or a mortgage. Indeed, it was accepted by the first defendant, Blackstar, that a bank guarantee could be security within clause 3. If that was right there was no reason to exclude security given by means of a covenant from a person of substance [29]. The persons who stood to benefit from these schemes were the claimants and, in particular, the second, third and fourth claimants, the employees or directors. As between Blackstar and the claimants, it seems to me to be right that the claimants and not Blackstar should bear any element of risk that might be involved. If the claimants are right and no liability is going to be imposed on the outgoing trustee in any circumstances, then the claimants have nothing to fear from giving that indemnity. If it should turn out that the claimants are wrong, and a liability is imposed in some way on Blackstar, then it was right that as between these parties Blackstar was indemnified by the claimants. It seemed that any potential charge to tax that might be caused by a personal covenant could be dealt with by careful expression of the circumstances in which the outgoing trustee could claim against any remaining trust assets, and the circumstances in which it could claim on the covenant, but permission was granted to apply in relation to this matter if there was a problem that could not easily be solved [75-78].
Judgment Mr Justice Morgan: [1] On 22 November 2007 the first claimant, Oakhurst Property Developments (Lowndes Square No 2) Ltd, established a scheme which has been called the ‘Oakhurst Property Developments (Lowndes Square No 2) Ltd Employer Funded Retirement Benefit Scheme’ or ‘EFRBS’ for short. Under this scheme the trustee was Hillberry Trust Company Ltd. …Continue reading "Oakhurst & ors v Blackstar (Isle of Man) Ltd & anr [2012] EWHC 1131 (Ch)"