Statement of intent: HR Trustees v Wembley plc

When trustees fail to comply with some formal requirement in a trust deed, but it is obvious what was supposed to happen, lay persons often ask – can’t we just act like it was done correctly anyway?

In HR Trustees Ltd v Wembley plc [2011] EWHC 2974 that precise question came before the courts. And the answer, surprisingly, was that in some circumstances you can.

Problem area

The case was about a pension scheme. Do not let that put you off though, because for all significant purposes it was really just about a trust. The problem came from a purported amendment to the scheme documents in 2000. The precise details of the amendment were pretty technical, but they dealt with amending the rate of increases the pension scheme promised for members’ pensions while in payment.

In brief, before the amendment, a pensioner’s pension would increase every year by five per cent per annum (which was pretty generous in 2000), and after the amendment they would increase by only the retail price index (RPI) for that year, capped at five per cent (which was the statutory minimum in 2000).

The amendment was only going ?to effect pension benefits accrued after 6 April 2000, so it may not sound very significant. To put it in context though, if the amendment was ineffective, the members would be better off collectively to the tune of around £3m.

And it would be Wembley plc ?that would have to foot that additional £3m liability.

One thing that the authorities on pension schemes do make clear is that if the formal requirements of a power of amendment have not been complied with, then the prima facie result is that ?the amendment is ineffective.

There are plenty of authorities that emphasise that one should not take an overly technical construction of pension schemes (see, for example, LRT Pension Fund Trustee Co v Halt [1993] PLR 227).

However, where there is a clear and express requirement for a formality to be complied with, then the courts will require it and, in the absence of that formality, the amendment will almost always be found to be invalid (see, for example, Neuberger J’s judgment in BESTrustees plc v Stuart [2001] PLR 283).

The power of amendment in this case was clearly set out in the scheme’s deed. It was a relatively standard one for pension schemes, because it came from one of the insurance companies’ precedents in the 1980s.

There were four requirements for the power of amendment:?

1. authorisation from the principal employer in writing to the trustees;

2. the trustees had to declare the amendment “in writing under their hands”;

3. the trustees had to notify the members in writing; and

4. the amendment had to not breach various restrictions, one of which was that no amendment could be made which would diminish any rights accrued to a beneficiary under the scheme before the ?date on which the amendment took effect.

Sticking point

The requirement that this article is really concerned with is the second one, requiring a declaration.

The precise words were: “The trustees shall forthwith declare any such alteration or addition to the rules in writing under their hands...”

There were five trustees at the time of the amendment and, although there were a few wrinkles, they had done almost everything correctly. They had considered and approved the amendment not just once, but twice – in November 1999 and January 2000. However, they did not sign anything at those meetings.

In July 2000 though, there was a further trustee meeting, at which only four of the five trustees were present. By that stage a notice had been drawn up by their advisers which accurately summarised the proposed amendment.

The notice was signed by the four attending trustees, and was also signed ?on behalf of the principal employer. ?But the fifth trustee failed to sign it then, or thereafter.

The evidence was very clear that this was simply a slip. The missing trustee had already agreed to the amendment in both November 1999 and January 2000, and would have happily signed it had she been asked. Her failure to do so was no more than an administrative oversight.

The notice was then sent out to the members, who would have been in no doubt about the effect it had. And for a little under ten years the scheme was administered on the basis that the amendment had been effective, with no complaints or concerns.

In the circumstances, the suggestion that the members should have an accidental windfall worth £3m at the expense of the principal employer might sound a little unreal, not to say unjust. As Vos J said to Wembly plc’s counsel on the first day of trial: “You don’t have to address me on the merits – you have me on the merits.”

What counsel for the representative beneficiary said at this point to his instructing solicitor is, perhaps fortunately, not recorded.

The question therefore was, could the court see a way around the formal requirements of the deed?

Main arguments

The two main areas of argument in the case were:

• Did the words “in writing under their hands” require all five signatures, or would a majority suffice? and

• If five were required, could the formal requirements be avoided by application of the maxim that equity treats as done that which ought to be done??

The first argument was hard fought by Wembley plc, but ultimately won by the representative beneficiary. There is strong authority that “under hand” means ‘signed’ (see Trustee Solutions Ltd v Dubery [2006] EWHC 1426 (Ch) for a good summary of the cases).

In this particular document the words “under their hands” was held ?to mean signed by all the trustees, not just a majority. That element of the judgment was unsurprising and had the matter rested there the case would have been unexceptional.

The second argument though was far more wide reaching in its impact. Wembley plc’s argument was essentially:

• the trustees were under a duty to sign the declaration;

• they could therefore be compelled to do so, by means of an injunction of specific performance or equivalent;

• accordingly, equity should treat the signatures as having been made, and the amendment as being effective.

By way of reminder, the maxim that equity treats as done that which ought to be done has a number of different applications. However, its best known are:

• the constructive trust imposed on a vendor of property when the purchase price has been paid by the land not yet transferred to the purchaser; and

• the doctrine in Walsh v Lonsdale, giving rise to the imposition of an equitable lease where there is a legally enforceable agreement to grant a lease.

The maxim’s application to a faulty exercise of a power of amendment might at first sight appear to be a stretch. The maxim has also come in for a lot of criticism in the text books in recent years, with Snell going so far as to advocate the abolition of all the equitable maxims altogether.

However, there are two authorities where it had been applied, albeit arguably obiter, to amendments to pension schemes; Davis v Richards and Wallington Industries Ltd [1990] 1 WLR 1511 and Harwood-Smart v Caws [2000] PLR 101. Both cases were materially different from HR Trustees Ltd, but they at least opened the door for the argument.

The representative beneficiary’s arguments in response were broadly:?

• there is no duty to sign the declaration, nor any enforceable obligation to do so;

• even if there were, the doctrine should not be extended to this novel area of the law; and

• in any event, there are difficulties with the conflict between the maxim taking away benefits which, but for ?it applying, have already accrued to the members.

Decision time

Vos J preferred the solution that Wembley plc offered him. He held that as a matter of construction of the power of amendment, once the trustees had taken the decision to amend, they were under a specifically enforceable duty to make the declaration, and this meant that the maxim applied.

He then went on to analyse the maxim in general and the question of its application in a novel situation such as this. He concluded that even though this may well be a novel situation, it did not prevent the application of the maxim.

“In my judgment, therefore, this is not the exercise of an exorbitant or unpredictable or even unorthodox jurisdiction. It is the stuff of equity, refined and clarified over many years. It is, in short, the proper application of equitable principles to an unfortunate situation,” he said.

Perhaps revealingly, Vos J also considered whether he might be making a bad decision because of the hard facts of the case – and of course concluded that he was not.

The most difficult part of his judgment intellectually is the question of when the maxim takes effect. One would think that the maxim would result in the amendment being valid for all pensionable service from 6 April 2000, as it was intended to be.

However, he held that it was only valid from 5 June 2000, when the four trustees signed it. This was because Wembley plc conceded this point, but it hardly sits well with the conclusion that having decided to make the amendment the trustees were under a duty to sign an appropriate declaration to the same effect.

Presumably they were under that duty immediately, and therefore the maxim should take effect immediately. But, if that is the case, then the signatures become almost irrelevant as the amendment will take effect automatically the moment the decision is reached.

So what of the wider application? The pensions community has been somewhat skeptical about the wider application of this case. Although it concerned a relatively widely used power of amendment, the general response has been that it was either wrongly decided or an extreme example which is unlikely to be replicated in most cases.

It side steps a long line of authorities requiring compliance with formalities and to a certain degree renders those formalities almost irrelevant. It also leaves parties uncertain as to whether there has been an effective amendment or not.

However, it may be that it is limited to its own unusual facts. In particular, finding an enforceable duty to perform a formal act in order to give effect to a decision must be relatively rare.

On the other hand, it could be a very useful weapon in a private client lawyer’s arsenal. To date, if there has been a failure to complete, say, the transfer required by a power of appointment or appropriation, then the only remedy for a beneficiary was to seek directions compelling the trustees to do so. It now appears arguable that, if the trustees were so compellable, at least the equitable title passed already.

Fenner Moeran is a barrister at 3 Stone Buildings. He appeared for the representative second defendant in HR Trustees v Wembley plc