Analysis
This was an application by the trustees of a trust arrangement forming part of Schemes of Arrangement following the insolvency of English & American Insurance Company Ltd (EAIC). The trustees were unable to make distributions to the vast majority of beneficiaries under the trust owing to the existence of a small subset of beneficiaries who potentially had rights under the fund. Accordingly the trustees made an application under s57 of the Trustee Act 1925 for power to apportion the trust fund or alternatively for power to make interim distributions either under the court’s inherent jurisdiction in relation to trusts or under s57.
EAIC was incorporated on 28 June 1929 to write insurance business. EAIC experienced an increase in claims during 1992 resulting in a significant deterioration in the company’s financial position. EAIC ceased underwriting completely from 23 November 1992 and subsequently a winding up petition was presented by EAIC on 19 March 1993. The provisional liquidators developed a run-off plan for EAIC under which EAIC continued in run-off and made payments to creditors pro rata on their agreed claims. This scheme became effective on 8 February 1995. The scheme was amended by a revised scheme, approved by the court and effective from 31 August 2000 (the run-off scheme). On 6 October 2010 the court sanctioned a further amendment to the scheme in order to set a bar date for claims (the closing scheme). A category of potential claims was not included in the closing scheme, as these policy holders also had rights under a letter of credit issued in favour of ILU by Marsh & McLennan Companies Inc (the Marsh Mac Protected Liabilities)
Certain of EAIC policy holders’ policies had been issued through the Institute of London Underwriters (the ILU). Those policy holders benefited from guarantees given in their favour to the ILU as their trustee by other companies in EAIC’s group. Those companies were also within insolvency processes and it was agreed to compromise the ILU’s claims under the guarantees against these companies by way of a payment of £9,783,906 to the ILU. The ILU then agreed to settle that sum into a trust for such policy holders within the overall context of EAIC’s proposed run-off scheme.
The trust deed defined the beneficiaries as any:
‘… creditor of EAIC… who has (or potentially has) a valid and enforceable claim properly due and payable be EAIC under a policy signed and issued by the Institute of London Underwriters on EAIC’s behalf… on or after 1 September 1983’.
Under the terms of the trust deed the trustees could not make payments to beneficiaries until all relevant liabilities as defined by the trust deed had become established liabilities or ceased to be relevant liabilities.
It was clearly envisaged that all claims would be dealt with by some reasonable point in time and that all relevant liabilities would either become established liabilities or would have been rejected and thus ceased to be relevant liabilities. However, there existed a small class of beneficiaries whose policies were Marsh Mac Protected Liabilities and also fell within the definition of beneficiaries under the trust (the overlapping beneficiaries). As the Marsh Mac Protected Liabilities were not included in the closing scheme these liabilities had not ceased to be relevant liabilities. This had the unintended effect of ‘freezing’ the trust fund and preventing lawful distribution to any of the beneficiaries for a considerable further period, which was prejudicial to all of the beneficiaries’ interests.
The trustees proposed three potential solutions. The first option was to confer a power under s57(1) of the Trustee Act 1925 so as to create a principal sub-trust for the majority of beneficiaries and a residual sub-trust for the overlapping beneficiaries. The second option was to grant a power to make interim payments to beneficiaries with established liabilities while leaving sufficient within the trust fund to secure the due payment of sums to overlapping beneficiaries who come to have established liabilities thereafter. This power would be granted under the court’s inherent jurisdiction. The third option was the same as the second but pursuant to s57 of the Trustee Act 1925 rather than under the court’s inherent jurisdiction.
Held:
- (1) Following the approach adopted by Morgan J in Alexander v Alexander [2012] WTLR 187, on an application under s57(1) the matters the court must consider are firstly, whether the court has jurisdiction to act under that subsection, secondly whether it is ‘expedient’ to confer the power which is sought and thirdly whether the court should in the exercise of its discretion confer that power. When considering the issue of expediency the court should take a broad and common-sense view of the matter and look at the interests of the trust as a whole while attempting to hold the scales fairly between the various beneficial interests.
- (2) The decision of the court of Appeal in Southgate v Sutton [2011] WTLR 1235 makes clear that although the court’s jurisdiction under the subsection is confined to ‘management or administration’ of the trust property and this does not include a power to depart from the beneficial interests under the trusts, the court may confer powers for the purpose of a proposed transaction if the exercise of the powers conferred by the court might only ‘incidentally’ affect the beneficial interest in the trust property.
- (3) In this case, the court had jurisdiction to grant the trustees power to partition the trust fund under s57 of the Trustee Act 1925 by creating a principal sub-trust for the vast majority of beneficiaries and a residual sub-trust for the overlapping beneficiaries. Whilst this would affect the beneficial interest in the trusts, it would do so only incidentally. This was on the basis of actuarial calculations showing that the variation was likely to be less than 0.1% in respect of the overlapping beneficiaries. Each beneficiary ultimately entitled to a payment would receive a sum very close to the amount that he would have received had no apportionment taken place.
- (4) It was expedient to confer this power as this approach was the more cost effective and administratively efficient means of proceedings. If the court made no intervention there was clearly real and material prejudice to the vast majority of beneficiaries. There were a very small number of overlapping beneficiaries both in number. Furthermore, The amount in question was small both in absolute terms and relative to the amount of the trust fund as a whole. The risk of the claims of the overlapping beneficiaries falling outside the ranges provided was negligible. Taking into consideration the interests of all of the beneficiaries and taking a broad and common-sense view it was expedient to confer the power. In the circumstances the same factors indicated that the discretion should be exercised under s57, and there did not appear to be any reason indicating that the discretion should not be exercised.
- (5) Obiter, that if contrary to the above, s57 could not be applied, the court would in any case make an order for interim distribution under the court’s inherent jurisdiction following the approach taken by David Richards J in Re Benjamin [1902] 1 Ch 723. This would have the effect of immunising the trustees from personal liability if as a result they distributed too much to some beneficiaries and thereby acted in breach of trust in respect of other beneficiaries. However, this was a less satisfactory solution than apportionment as the administrative costs were greater.
- (6) It was not necessary to consider the third option proposed given the conclusions in relation to the first two options. An order was made granting a power to apportion the trust fund under s57.
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