Nicholas Luckman

Overview

Nick is the Practice Director at Wilberforce Chambers.

Nick works with the Practice Management Team and our barristers at Wilberforce to deliver a high level of service to all our clients. He sits on the Management Board and is responsible for instigating and delivering agreed business strategies. Nick has specialist experience delivering professional services to domestic, international and offshore legal markets.

The Coronavirus corporate insolvency cliff edge is extended to the new year

To download and read this piece as a pdf, please click here.

Commentary by Jamie Holmes.

At the 11^th hour the Government has, effective today, 29 September, extended some (but not all) of the temporary provisions (which were due to expire on 30 September 2020) introduced by the Corporate Insolvency and Governance Act 2020 (“CIGA” or “the 2020 Act”): see here.[1]
The structure and effect of these four sets of extensions, by way of two separate Statutory Instruments (“SIs” 2020 No. 1031 and 1033) are summarised below with extracts from their respective Explanatory Memorandums. These extensions apply to the temporary provisions within CIGA concerning:
1. winding up;
2. the ‘small entity’ exception to the (otherwise permanent) suspension of insolvency-triggered clauses within certain contracts;
3. the new (and otherwise permanent) moratorium process; and
4. the format and timing of certain meetings of certain ‘qualifying’ bodies.

This article also briefly considers the temporary provisions that have most notably not been extended: the provisions on wrongful trading.[2]

A. The two SIs themselves

The Government has, somewhat inelegantly, enacted two separate SI, each with its own Explanatory Memorandum:
1. The first, which comes into force today, 29 September, extends four of the sets of temporary provisions within CIGA to, variously, 30 December 2020, 31 December 2020 and 30 March 2021 (the “Extension of Time Regulations”, being SI 2020 No. 2031). As set out below, this in effect extends a number of discrete deadlines within these four sets of provisions. The SI can be found here, and its Explanatory Memorandum here. The latter perhaps notably refers at ¶6.4 to the former as “the first exercise” (emphasis added) of the power to extend these temporary provisions.
2. The second SI, which comes into force on 1 October, has the effect of curtailing some of the extensions of time provided for within the Extension of Time Regulations, by re-establishing the time limit originally set out in CIGA (the “Early Termination Regulations”, being SI 2020 No. 2033).[3] The SI can be found here, and its Explanatory Memorandum here.

To date no amendments have been proposed to the Insolvency Practice Direction relating to CIGA (the “CIGA PD”) of 3 July 2020, nor any of the other Insolvency Practice Directions that have been issued or amended this year. Nor has the Government to date proposed to issue any further Guidance in relation to these SIs or CIGA, save as to best practice on holding AGMs flexibly and electronically pursuant to paragraphs 15-16 below.[4]
Guidance on CIGA, the CIGA PD and the substance of their reforms (as have been extended by these SIs and otherwise) can be found in previous #WilberforceWebChats and webinars given by members of Chambers, including here and here. The substance of these reforms, which are considerably detailed, is beyond the scope of this article.

B. The four sets of extensions

(1) The regime for the winding up of companies

First, and perhaps most significantly, the restrictions imposed by CIGA, Sch 10 on the winding up of companies[5] have all been extended to 31 December 2020.[6] The effect of this is, most notably, as follows:
1. No winding up petition can be presented on a statutory demand served between 1 March 2020 and 31 December 2020.[7]
2. During the period 27 April 2020 to 31 December 2020,[8] no creditor[9] may present a winding up petition on any of the bases that the company is unable to pay its debts[10] unless the creditor has reasonable grounds for believing that the Coronavirus Test (as it is termed in the CIGA PD) has been met.[11] Nor may a Court make a winding up order on any of those bases, on a petition presented within the period 27 April 2020 to 31 December 2020, unless it appears/is satisfied that the Coronavirus Test has been met.[12] There is some guidance as to the application of these provisions, including as to the burden of proof, and suggesting a multiple-stage test, in the decision of ICC Judge Barber (albeit prior to CIGA having been enacted) in Re A Company [2020] EWHC 1551 (Ch).
3. Where a winding up order has been made on one of the bases referred to in paragraph 7.b above (following the Coronavirus Test having been satisfied, and on a petition presented within the period 27 April 2020 to 31 December 2020), the winding up is deemed to commence on the making of the order, not the date the petition was presented.[13] A number of the ‘look-back’ time periods within the Insolvency Act 1986 (“the 1986 Act”) have been modified accordingly, including most notably those at s240.[14]

As to these extensions the Explanatory Memorandum to the Extension of Time Regulations provides at ¶¶7.2-7.3, 12.1 and 12.2 as follows:
- [7.2] The reason for extending the duration of the temporary insolvency measures is to continue to provide breathing space to companies whilst coronavirus related restrictions remain in place (including social distancing and regional lockdowns). This extension ensures that the measures remain available to companies that may be in financial difficulties during this difficult and unprecedented time and whilst the Government’s plans are to wind down the package of financial support. The duration of the extension for each measure has been determined having regard to the nature of the measure in question.[7.3] The restrictions placed on the use of statutory demands and winding-up petitions are extended to 31 December 2020. These restrictions help to protect companies from aggressive creditor action during the period when companies are continuing to be financially impacted by coronavirus. The extension of these measures mean creditors cannot rely on statutory demands to bring winding-up petitions, and are prohibited from filing winding-up petitions where the company’s inability to pay is due to coronavirus. It is nevertheless recognised that this temporary measure is a significant intervention into the normal working of insolvency law, in particular the rights of creditors and consequently any single extension of this measure should be of a shorter duration.
- [12.1] The impact on business, charities or voluntary bodies of the restrictions on statutory demands and winding up petitions limits a creditors options for enforcing a debt, which therefore increases risks when doing business. However, the Government assesses the rebalancing of risks described above is an appropriate temporary intervention also with the Government’s wider interventions. …
- [12.2] The impact on the public sector is in relation to the restrictions on statutory demands and winding up petitions, namely public sector creditors. However, the Government has assessed that any impact is an appropriate temporary intervention also with the Government’s wider interventions.

(2) The small entity exception to the suspension of insolvency-triggered rights within certain contracts for the supply of goods or services to a company

As an, at present, permanent reform, CIGA s14 (introducing a new s233B to the 1986 Act) suspended the effect of certain clauses within contacts for the supply of goods or services to a company that are triggered by the company becoming subject to a ‘relevant insolvency procedure’. This, like much of CIGA, is subject to detailed provisions within the 2020 Act (most notably it is broader than it may at first appear, or at least than as it is often described: see (3)-(4)), including a number of exceptions.
One of those exceptions, which applies where the supplier is a ‘small entity’ (as defined in CIGA, s15), is time limited. The second set of extensions of time within these SIs concerns that exception, with the effect that this exception applies where the company in question (to which goods or service are supplied) becomes subject to a relevant insolvency procedure during the period 26 June to 30 March 2021 (and the supplier is at that time a small entity).[15]
As to this extension the Explanatory Memorandum to the Extension of Time Regulations provides at ¶¶7.4-7.5 and 12.1 (in light of 7.2) as follows:
- [7.5] The termination clause provisions in the CIG Act prohibit contractual terms that allow contracts to be terminated if a customer enters an insolvency procedure. To help support small business suppliers who are more likely to experience a greater impact from the effects of coronavirus, the CIG Act included a temporary carve-out which excludes small suppliers from the scope of the termination clause measure. Extending this measure provides certainty to small suppliers that whilst they attempt to recover from any financial impact coronavirus has had on their business they can continue to rely on contractual termination clauses where their customer has entered a formal insolvency procedure.
- [12.1] … The small supplier exemption to the termination clause provisions will assist small businesses, which represents 99% of the business community, although 63% of turnover is through businesses that do not fall within the definition of a small business. …

(3) Certain temporary provisions concerning the new moratorium process

The moratorium process introduced by CIGA s1-3 and Sch 1-4 was one of the two flagship (and, again, permanent) reforms introduced by the 2020 Act.[16] The provisions within CIGA as to the new moratorium are particularly detailed and beyond the scope of this article, save in that they included a number of temporary/transitionary provisions. The effect of the third set of extensions of time with these two SIs is that:
1. some of these temporary/transitionary provisions have been extended by the Extension of Time Regulations, Regulation (2).(b), and will now apply until 30 March 2021, as to which the Explanatory Memorandum to that SI provides some context at ¶7.6-7.7; and
2. some of these temporary/transitionary provisions have not been extended, being the subject of the Early Termination Regulations, Regulation 2, and will cease to have effect on 1 October 2020, as to which the Explanatory Memorandum to that SI provides some context at ¶6-7.

As to these changes the Explanatory Memorandums to the Extension of Time Regulations and Early Termination Regulations provide in turn as follows:
- [Extension of Time Regulations – ¶7.6] The moratorium procedure, introduced in the CIG Act provides companies in financial difficulty with breathing space from creditors whilst they consider a rescue solution. The temporary modifications to moratoriums being extended by this instrument relax the normal eligibility criteria to enter into a moratorium which recognises the extraordinary and temporary difficulties being caused by coronavirus, in order to make the moratorium as widely available as possible. These are being extended until 30th March 2021. The extension of six months is the maximum possible at any one point.
- [Extension of Time Regulations – ¶7.7] The temporary modifications to moratoriums also provide temporary procedural rules to enable the operation of the moratorium. It was necessary to provide temporary moratorium rules in the CIG Act to ensure the procedure was operational as soon as the legislation came into force. These temporary rules need to remain in place to allow time for permanent rules to be drafted (requiring further secondary legislation) and consulted on with the Insolvency Rules Committee (for those rules covering England and Wales). It would also be undesirable to require business to adjust to new procedural rules at a time of great economic uncertainty such as having to adapt to Government fiscal support being withdrawn and other regulatory changes as a result of coronavirus.
- [Extension of Time Regulations ¶12.1] … The temporary moratorium measures will make the procedure more accessible to companies during this difficult period, which therefore provides breathing space for companies to consider rescue and restructuring options, which ultimately could lead to the rescue of more companies impacted by coronavirus. …
- [Early Termination Regulations – ¶7.3] The instrument carves-out certain of the temporary moratorium provisions that would otherwise fall within scope of the Extension of Time Regulations. Specifically, this instrument terminates modifications to the conditions for having a moratorium which allows the supervising insolvency practitioner to disregard aspects of the company’s financial position that relate to coronavirus when considering whether the company is “rescuable” for the purposes of having a moratorium. It also terminates the relaxation of the conditions for extending, monitoring and terminating of the moratorium on the grounds that any worsening of the company’s financial position, because of coronavirus, should be disregarded.
- [Early Termination Regulations – ¶7.4] As a result of this instrument the lowered threshold will no longer apply, and, when considering whether the company is rescuable, the monitor will not be able disregard the economic impact of coronavirus. Whilst the Government’s plans are to wind down the package of financial support, this will ensure that the requirements for obtaining a moratorium will begin to revert to the original legislative intention. That being only a company deemed to be rescuable by the proposed monitor is able to access a moratorium and therefore minimise the risk of increasing the number of so-called zombie companies (those that have no real prospect of servicing and repaying their debts). Allowing the rescue criteria to take into account any worsening of the financial position caused by coronavirus could impede restructuring in the wider economy, leading to further damage to creditors or suppliers.

(4) Format and timing of certain meetings of certain qualifying bodies

CIGA also included a number of provisions relaxing various company law rules outside of the context of any insolvency. These included, for example, the deadline for the filing of public accounts: CIGA, s38.
This also included provisions relaxing certain formal requirements for the holding of certain meetings of ‘qualifying’ bodies. These provisions are detailed in CIGA, s37 and Schedule 14. The fourth set of extensions of time within these SIs applies to these relaxations, which are extended to now apply until 30 December 2020.[17] However, it should be noted that this extension applies to only some but not all of the qualifying bodies listed in CIGA, Sch 14, paragraph 1: Extension of Time Regulations, Regulation (5). As noted above, the Government plans to produce best practice Guidance on holding AGMs flexibly and electronically.[18]
As to this extension the Explanatory Memorandum to the Extension of Time Regulations provides at ¶¶7.8-7.9 and 12.1 (in light of 7.2) as follows:
- [7.8] The company meetings measures are extended to 30 December 2020. The reason for extending this measure is due to the continued prevalence of coronavirus, Government-enforced social distancing measures continue, (albeit to a reduced level), making it difficult to hold a physical AGM.
- [7.9] During July and August 2020, the Government received representations from across the business community urging for the extension of the measures until the end of the calendar year. Research showed that some 120 companies would be negatively impacted should the extension not be granted. While there is potential for an extension to be seen as damaging in the interests of shareholders, the Government in fact received a great deal of active support for the extension from a range of shareholder representatives groups.
- [12.1] … Shareholders’ and members’ rights to vote are unaffected by measures which allow corporate bodies to hold general meetings flexibly.

(C) What has most notably not been extended: provisions on wrongful trading

Most notably, the suspension pursuant to CIGA, s12 of the remedy for wrongful trading liability pursuant to the 1986 Act, s214 or s246ZB has not been extended. No particular reason has been given for this.[19]
Although it would appear that this short-lived experiment has now been curtailed, its effects will remain with us for some time. The suspension pursuant to CIGA, s12 for the period 1 March to 30 September 2020 will, presumably, continue to apply to claims brought following 30 September 2020. Indeed on its face it applies to claims that had been brought prior to 1 March 2020 (although that is subject, presumably, to the usual canons of statutory construction). As with much of CIGA, this reform is subject to detailed provisions within the 2020 Act, including a number of exceptions.

For more information on our Insolvency practice, please click here.

[1] CIGA itself came into force on 26 June 2020.

[2] It should be noted that this is not the only temporary provision within CIGA that has not, as yet, been extended.

[3] Explanatory Memorandum to the Early Termination Regulations, ¶3.2-3.3 and Explanatory Memorandum to the Extension of Time Regulations, ¶3.3.

[4] Explanatory Memorandum to the Extension of Time Regulations, ¶11.1.

[5] No corresponding restrictions were imposed on personal insolvency procedures i.e. bankruptcy.

[6] The Extension of Time Regulations, Regulation 2.(3).

[7] CIGA, s10 and Schedule 10, Part 1, paragraph 1.

[8] CIGA, s10 and Schedule 10, Part 2, paragraph 21(1).

[9] This includes a petition presented by multiple creditors but does not one presented by a creditor together with one or more other persons (presumably as listed in the 1986 Act, s124.(1)), or (presumably) such persons without a creditor: CIGA, Sch 10, Part 2, paragraph 21.(2).

[10] These provisions within CIGA do not appear to apply to the other bases within the 1986 Act, s122 such as the ‘just and equitable’ ground at s122.(1).(g): see the wording of CIGA, Schedule 10, Part 2, paragraphs 2-7.

[11] See CIGA, s10 and Schedule 10, Part 2, paragraphs 2-3.

[12] See CIGA, s10 and Schedule 10, Part 2, paragraphs 5-6.

[13] See CIGA, s10 and Schedule 10, Part 2, paragraphs 8-9; curtailing the effect of the 1986 Act, s127 to the period following the winding up order, rather than applying retrospectively to the date of the petition.

[14] See CIGA, s10 and Schedule 10, Part 2, paragraphs 10-18.

[15] The Extension of Time Regulations, Regulation 2.(2).(a).

[16] The other being the new restructuring plan pursuant to the new Companies Act 2006, Part 26A; as to which see CIGA, s7 and Schedule 9.

[17] The Extension of Time Regulations, Regulation 2.(4).

[18] Explanatory Memorandum to the Extension of Time Regulations, ¶11.1.

[19] Explanatory Memorandum to the Extension of Time Regulations, ¶6.4.

Paul Newman KC

Practice overview

Paul has a litigation and advisory practice concentrating on financial and private client disputes, most notably pensions, financial services and trusts. A substantial proportion of Paul’s practice also involves advising on and acting in liability and negligence disputes involving professionals.

As well as representing some of the highest profile pension schemes in the UK and several major life insurers, Paul has acted for the Pensions Regulator, the PPF and the Financial Services Compensation Scheme. He has been heavily involved in advising on, and appearing in cases relating to, various provisions of the Pensions Act 2004 and he also has extensive experience of advising and litigating on various public sector and industry-wide pension schemes.

An increasing amount of Paul’s work relates to Self-Invested Personal Pension Schemes (or SIPPs). Paul acts for investors, providers and trustees in respect of claims for mis-selling of SIPPs and mis-investments within SIPPS.

The regulation of the auto-enrolment regime has taken up an increasing amount of Paul’s work more recently, with Paul representing several organisations involved in the gig economy who are in discussions or disputes with the Pensions Regulator about their auto-enrolment obligations.

A substantial proportion of Paul’s work has involved dealing with errors in pension schemes, and he has used this experience to produce a book, A Practitioner’s Guide to Correcting Mistakes in Pension Schemes, which was published by Bloomsbury Professional in March 2022. For this, Paul was awarded the prestigious Wallace Medal by the Association of Pension Lawyers.

Paul is the founder and general editor of www.pensionsbarrister.com, a website featuring articles from pensions barristers and podcast interviews with prominent pensions practitioners.

Paul has an interest in legal history and is a member of the Selden Society. In his spare time, he is researching for a part-time PhD at the London School of Economics on the topic of law reporting in the Georgian era, for which he has been awarded a London Arts & Humanities Partnership Research Studentship.

Gilead Cooper KC

Practice overview

Gilead is ranked as a leading silk in various categories of The Legal 500 and Chambers & Partners. He is also featured in Legal Week’s Private Client Global Elite and the CityWealth LeadersList “Top 10 Trust Litigation Barristers” list. He has been described in Who’s Who Legal as “one of the top silks in our research this year”, and is one of silks in the “Most Highly Regarded” category.

Gilead’s practice has a strong international element. He has appeared in the courts of Hong Kong, the BVI, Bermuda, Cayman and Nevis, and has been involved in litigation in Jersey, Guernsey and Gibraltar. He provided expert advice in relation to the Panama Papers in Imran Khan’s action against Nawaz Sharif in the Pakistan Supreme Court which led to Sharif being removed as prime minister.

Gilead specialises in complex, high-value disputes, often involving allegations of fraud, breaches of trust and fiduciary duties, and professional negligence. He also has “a notable specialism in matters involving art and antiquities” (Chambers & Partners).

Before coming to the Bar, Gilead enjoyed a brief career in publishing, editing books on photography, popular science and astronomy. He also spent a couple of years teaching in pre-revolutionary Iran. After completing his pupillage, he worked in the Litigation Department of Freshfields before taking up a tenancy at 7 New Square. He joined Wilberforce Chambers in December 2015.

Immunity for Blackpool FC? It’s not clear…

Article by Samuel Cathro, 30^th August 2023

To read or download this article as a PDF, please click here.

If the court blesses a transaction, the trustee is immune from subsequent challenge. One might be forgiven for thinking that is an uncontroversial statement of the law – but the Court of Appeal’s recent decision in Denaxe Ltd v Cooper [2023] EWCA Civ 752 (30 June 2023) calls it into question.

The decision has two significant implications:

First, it suggests that a trustee who obtains the court’s blessing to enter into a transaction may not be immune from a negligence claim in respect of the very same transaction that has been blessed.
Second, it suggests that the trustee might not have protection unless all affected parties are joined to the proceedings.

Although these appear to be fundamental changes, the decision’s true scope is far from clear.

The sale of the Club

The proceedings concerned the proposed sale of Blackpool Football Club (the Club). A minority shareholder in the Club successfully brought an unfair prejudice petition against the club’s former owner, Mr Oyston, and his company, Denaxe Ltd. Mr Oyston and Denaxe were ordered to buy out the minority shareholder for c. £31m. They were unable to raise the price, and Receivers were appointed (by way of equitable execution). The Receivers proposed to sell various Footballing Assets, including the Club and its stadium, to pay the minority shareholder (the Transaction).

The Receivers applied to the court for an order permitting them to enter into the Transaction. Their preferred purchaser was Mr Sadler, a lifelong supporter of Blackpool who wished to see it continue to play football at the stadium. Marcus Smith J was satisfied the Receivers’ decision to sell the Footballing Assets was a “momentous decision”, and approved the transaction (Cooper v VB Football Assets [2019] EWHC 1599 (Ch)). This was because the price was a reasonable one and Mr Sadler’s bid was clearly the best (at [73]). The Judge was also satisfied that the Receivers acted as ordinary, prudent and reasonable receivers; that (without seeking to second-guess the Receivers) the sale of the Club was a proper transaction in all the circumstances; and that the Receivers genuinely held the view that the transaction was a proper one which should be entered into ([72]-[73]).

After Marcus Smith J’s decision, Denaxe issued a separate claim arguing that the sale to Mr Sadler was at an undervalue, and that the Receivers had therefore breached their duties of care. The Receivers applied to strike out that claim or for summary judgment. Fancourt J granted the strike out application ([2022] EWHC 764 (Ch), [2022] 4 WLR 52). He held that the Receivers’ decision to sell the Club “was the very decision that the court [had] approved” ([88]) and they therefore had immunity against a claim that they should have sold the Club in a different way which would have achieved a higher price (drawing on cases concerning trustee blessing applications). Denaxe appealed.

The Court of Appeal’s decision

The leading judgment was given by Snowden LJ (Asplin LJ gave a four-paragraph judgment agreeing with Snowden LJ, and Falk LJ agreed with both Judges). The court proceeded on the basis that the principles which applied to trustee blessing applications applied equally to equitable receivers (albeit on the somewhat equivocal footing that neither party had suggested the Court should conclude otherwise ([70])).

Lord Snowden decided that there was a lack of binding authority or specific analysis on trustee immunity in these circumstances, so it was necessary to return to first principles ([115]). This was notwithstanding the fact that, in Cotton v Brudenell-Bruce [2014] EWCA Civ 1312, [2015] WTLR 3, Vos LJ had considered this precise question (albeit in obiter). Vos LJ concluded that a trustee who had successfully made a blessing application would have immunity against a beneficiary’s claim that the subject transaction was at an undervalue (at [78], [87]).

The first strand in Lord Snowden’s reasoning in the Court of Appeal was to decide that there is no separate doctrine of trustee “immunity”, and rather that the validity of any challenge following a blessing application would be determined by applying the principles of res judiciata or abuse of process ([118]). It was on this basis that Snowden LJ ultimately dismissed the appeal – Denaxe was a party to the proceedings below, and its opportunity for objecting to the proposed sale was before Marcus Smith LJ. It was clearly a Henderson v Henderson abuse of process for it to bring fresh proceedings objecting to the transaction when it should have done so before the trial judge ([162]).

Is it necessary to join every beneficiary?

Although the Henderson argument appears correct, the conclusion that there is no separate doctrine of “immunity” led on to the first questionable implication of this judgment. Snowden LJ suggested that, if trustees or office-holders do not join interested parties to the blessing proceedings and thereby “bind” them, he could not see how they would obtain immunity (at [134]). Such an approach would suggest that, where a trustee seeks blessing of a momentous decision, it must join every possible beneficiary who might seek to challenge that decision in future. That would at least appear to be inconsistent with CPR 19.10, which provides that a claim brought by trustees is binding even if not all the beneficiaries are joined:

(1) A claim may be brought by or against trustees, executors or administrators in that capacity without adding as parties any persons who have a beneficial interest in the trust or estate (‘the beneficiaries’).

(2) Any judgment or order given or made in the claim is binding on the beneficiaries unless the court orders otherwise in the same or other proceedings.

Consistently, CPR 64.4 and PD 64B, which relate specifically to blessing applications, provide that it may not be necessary to join beneficiaries if their point of view will be advocated by other beneficiaries who are already parties.

These provisions are consistent with the usual practice in blessing proceedings where the court will give directions as to which parties ought to be served and joined. This presumably follows from the fact that blessing applications are governed by the court’s supervisory jurisdiction, rather than being Part 7 proceedings where all parties must be joined for the decision to be bind them.

Does a blessing actually offer protection?

The second questionable implication of the Court of Appeal’s decision relates to the protection afforded to trustees by a blessing application. Snowden LJ suggested that a trustee whose decision to enter into a transaction has been blessed is not necessarily protected against a subsequent claim for negligence in relation to that very same transaction (at [147]). The court’s reasoning on this point appears to rely on the fact that a Public Trustee v Cooper style inquiry is different to the inquiry where a beneficiary has brought a claim in negligence. The former asks whether the trustees have formed a view which, in all the circumstances, reasonable trustees could properly have formed. The latter might concern the more specific factual question of whether the proposed sale price was the best reasonably obtainable for the property in question (see [111]-[112], [130]-[131]).

The court appeared to be concerned that it is not well placed to determine commercial issues that are outside its expertise (see [74], [98]). But, consistent with Fancourt J’s conclusion (at [88] of the decision under appeal), the whole purpose of seeking blessing of a decision to enter into a transaction is to provide the trustees with protection from subsequent claims in respect of that same transaction. As the Guernsey Court of Appeal explained in Re F (unreported, September 10, 2013 at [11]), when granting a blessing application, the Court is deciding: “that the trustees’ proposed exercise of the power is lawful; … and [they] have not reached a decision that no reasonable body of trustees could have reached. The effect is to protect the trustees from any challenge to their decision by persons interested in the trust…” It is difficult to see why trustees would or should embark on a blessing application if, in exercising their power in the manner which the court has approved, they are nevertheless open to allegations of negligence.

The trustees’ duty of care is to “[take] in managing trust affairs all those precautions which an ordinary prudent man of business would take in managing similar affairs of his own” Speight v Gaunt (1883) 9 App. Cas. 1, HL. The court does not need to make the trustees’ commercial decision itself to decide whether the trustee has complied with its duty. Rather, in circumstances where Marcus Smith LJ had concluded that the price was reasonable and clearly the best bid, that the Receivers acted as ordinary, prudent and reasonable receivers, that the sale of the Club was a proper transaction in all the circumstances, and that the Receivers genuinely held the view that the transaction was a proper one ([72]-[73]), it is hard to see how they would have been in breach of that duty of care. This is particularly so where the Receivers took the further, prudent step of seeking court approval of the Transaction before entering into it.

Perhaps for this reason, the Court of Appeal got into difficulty when it came to applying the new distinction it had drawn between claims that could survive a blessing and be brought against trustees, and those that would be barred ([147]). There was “some force” in the submission for Denaxe that Marcus Smith J had not specifically decided whether the Receivers had exercised all due skill and care in obtaining the best price ([151]). On the other hand, there was “considerable merit” in the Receivers’ argument that the substance of the alleged breach of duty was merely the decision to enter into the very same decision that had been blessed ([153]-[154]). Lord Snowden did not consider that he needed to decide which was right ([155]). That is unfortunate – although it was clear on these facts that Denaxe should have raised its objections sooner (and its claim was therefore barred on Henderson v Henderson grounds), the decision leaves open the critical question of what protection a court blessing will offer, and where a trustee will remain vulnerable.

Conclusion

The postscript to the decision rightly notes that the issues encountered here will be avoided if first instance judges are very clear about what decision they are blessing and what consequences should flow from that ([164]). However, the Court of Appeal’s judgment appears to leave the law in an unsettled state – both as to who should be joined to a blessing application, and what protection it will offer. Trust practitioners might hope that this decision is confined to the commercial context rather than expanded to blessing applications generally. It may be that the Henderson argument prevents any appeal from this decision to the Supreme Court. However, important questions remain which that court might be called on to resolve in future.

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The views expressed in this material are those of the individual author(s) and do not necessarily reflect the views of Wilberforce Chambers or its members. This material is provided free of charge by Wilberforce Chambers for general information only and is not intended to provide legal advice. No responsibility for any consequences of relying on this as legal advice is assumed by the author or the publisher; if you are not a solicitor, you are strongly advised to obtain specific advice from a lawyer. The contents of this material must not be reproduced without the consent of the author.

David Phillips KC

Practice overview

David advises and litigates in a broad range of commercial matters including professional liability, regulatory, sports related matters and EU transport regulation, as well as mainstream commercial litigation. Over the past twenty years David’s practice has developed to extend to a variety of overseas jurisdictions, most notably in a number of Caribbean countries (Anguilla, Antigua, BVI, St Lucia, St Vincent and the Grenadines, Trinidad and Tobago, Turks and Caicos Islands) but also Ireland, Bermuda, Gibraltar and Switzerland.

In 2009 David was instructed by the Foreign and Commonwealth Office and the Governor of the Turks and Caicos Islands as leading counsel to head the Islands’ Civil Recovery project. Since then David has been extensively involved in planning and executing the ensuing claims. Some have been resolved without litigation but many have been litigated. So far in excess of $21 million in cash and more than 2,447 acres of land have been recovered. David has conducted a large number of trials in the Supreme Court, appeals to the Court of Appeal and the Privy Council, mostly in the field of civil fraud/ asset recovery but also in relation to related issues such as land registration and stamp duty. In Attorney General of the Turks and Caicos Islands v Akita [2017] AC 590, David succeeded in a case which explores the extent to which an account of profits may be recovered in unconscionable receipt claims.

David’s years of experience with the Turks and Caicos Civil Recovery programme have developed his skills of working in a team. The Turks and Caicos team was made up of other counsel, London commercial litigation solicitors, members of the Attorney General’s Chambers, as well as external advisors and experts (forensic accountants, surveyors, valuers, and others). David brings that experience to his more conventional commercial litigation, with positive effect.

Tim Penny KC

Practice overview

Tim was awarded ‘Chancery Silk of the Year’ at the Chambers & Partners UK Bar Awards 2023. He is a specialist in high-value multi-jurisdictional commercial litigation, WFOs, Search Orders, commercial fraud and asset tracing, shareholder disputes, court-appointed receiverships, banking and financial services related claims, commercial arbitration, breach of confidence, ‘soft’ intellectual property and more recently cryptocurrency disputes.

He has been instructed recently to advise and act in many high-profile commercial cases, including acting for the main defendant and the 17^th defendant during a 20-week Commercial Court trial in Suppipat v Narongdej 2023] EWHC 1988 (Comm), a $1Bn claim under Thai law and s.423 of the Insolvency Act 1986, for the Bank in Invest Bank v El Husseini [2023] EWHC 2302 (Comm), an important Commercial Court decision concerning enforcement of foreign judgments at common law, for Luxembourg investment funds in a fraud and abuse of process claim in the BVI in VDHI v MBFX (1^st instance and Court of Appeal) and for 2 of the 6 defendants In Abu Dhabi Commercial Bank v Shetty & others [2022] EWHC 529 (Comm) – a $1B+ claim arising out of the collapse into administration of NMC Health PLC (2020-2022).

He has been involved in a number of important recent cases in the developing area of receiverships by way of equitable execution and cross-border recognition of court appointed receivers, including being retained by English Court Appointed Receivers in litigation in the Turks and Caicos Islands, and he is the author of the chapter on cross-border recognition of court appointed receivers in Kerr & Hunter on Receivers and Administrators, 21st Edition. He has also been involved in many of the leading recent cases on collective investment schemes in the Supreme Court and Court of Appeal. During the COVID lockdown, he obtained a diploma in Cryptocurrency at LSE, and has been instructed recently on fraud claims involving the misappropriation of cryptocurrency, including the leading case on crypto trust claims, Wang v Darby [2022] Bus L.R 121.

Tim is called to the Bar in the BVI, and regularly litigates not only in the London Commercial Court and the BVI but also in Cayman and other offshore jurisdictions. Tim is ranked in the directories in both commercial chancery and civil fraud.

Protectors’ Powers: The Siren Song of the “Narrower View”?

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Commentary by Gilead Cooper QC

The term “Protector” is not a term of art in trust law. The duties and the powers of any given protector are defined, subject to any applicable statute, by the trust instrument, and the resolution of any doubts will therefore always begin with a question of construction. Partly as a consequence, there is relatively little judicial guidance on the general principles applicable to all protectors. Nevertheless, two recent decisions, one from Bermuda and the other from Jersey, have sought to clarify one question that is likely to apply to many, if not all, protectors where the powers conferred on them are fiduciary. Interestingly, the two cases reached opposite conclusions.

The question in issue in both cases concerned the common situation where a power vested in the trustees can only be exercised with the consent of a protector. Was the role of the protector in such cases limited to asking whether the decision of the trustees was one which a trustee could reasonably arrive at (the “Narrower View”)? Or was the protector to exercise an independent discretion in deciding whether or not to consent (“the Wider View”)? The Narrower View would limit the function of the protector to something similar, if not identical, to that of the court in a blessing application: if the trustees’ decision was within their powers and was rational, the protector would have no choice but to consent. On the Wider View, a protector would be entitled, exercising his own judgment, to withhold consent even if the proposed exercise of power was one which a reasonable body of properly informed trustees was entitled to decide upon.

In In the Matter of the X Trusts [2021] SC (Bda) 72 Civ (7 September, 2021), Kawaley J came down in favour of the Narrower View. In a lengthy and careful judgment, he accepted that on a literal reading of the relevant provisions, the Wider View appeared persuasive. He acknowledged that the dictionary meaning of the word “consent” was “agreement or permission”, which implied an element of choice. He also agreed that the Narrower View echoed the test in a Public Trustee v Cooper Category 2 case, in which the function of the court was to adjudicate on the question whether the decision for which approval was sought was one which a reasonable body of properly informed trustees was entitled to take: if so, the court did not have any discretion to exercise. And he accepted that, in the only case to have considered the question, PTNZ v AS [2020] WTLR 1423, Master Shuman had decided in favour of the Wider View, holding that “the protector’s powers of consent are independent of the powers of the trustee and are to be exercised by the protector on the basis of his own discretion.”

Despite these considerations Kawaley J was persuaded that the Narrower View was, in fact, correct. As he put it, “…the logic of Mr Green QC’s submissions gradually grew in its cogency until, like a Siren song, it became almost irresistible.” The core of those submissions was that the roles of the trustees and that of the protector were fundamentally different: the Wider View would instead result in a duplication of roles, and essentially mean that the decision was the product of a joint exercise of discretion by the protector and the trustees.

In response to the argument that the Narrower View made no commercial sense because it added nothing to what might have been done by the court, Kawaley J accepted the answer that it provided the beneficiaries with a less expensive and time-consuming option.

The second case in which this question arose was In the Matter of the Piedmont Trust & Riviera Trust [2021] JRC 248, which came before the Jersey Royal Court in July 2021. A draft judgment was circulated on 28 September, deciding in favour of the Wider View, but before it was formally handed down one of the parties drew the attention to the court to the X Trusts (dated 7 September 2021). The Jersey court nevertheless maintained its original conclusion, but added a Postscript explaining why it disagreed with Kawaley J.

The only material difference between the facts of the two cases was that the trust deeds in the X Trusts did not give the protector an indemnity; but Sir Michael Birt, giving the judgment of the Royal Court, did not consider that that was sufficient to distinguish the case. However, he firmly rejected the argument that the role of the protector was the same as that of the court in a Public Trustee v Cooper application for blessing, because “…if the role of a protector was simply to review the trustee’s decision in the same way that the Court would do, his role would be almost redundant; he would bring nothing to the table that the Court itself would not bring on a blessing application.”

Sir Michael Birt also pointed out that, if the protector’s role was essentially the same as that of the court, “…the key requirement for a protector would be a legal qualification rather than knowledge of the settlor’s wishes and sound judgment as to what is in the best interests of particular beneficiaries.” But in practice, that is rarely if ever the basis on which settlors choose the protectors of the trusts they create: the protector is chosen because he has personal knowledge and understanding of the settlor, his wishes, and the family circumstances. Often – particularly in the case of offshore trusts – the trustee is a professional trust company, and the settlor has no personal knowledge of the company or its officers.

At the same time, the protector was not another trustee: “…a protector’s discretion lies within a narrower compass than that of a trustee…A protector may often find that he should consent to a discretionary decision of a trustee on the basis that it is for the benefit of one or more of the beneficiaries even though, if he had been the trustee, he might have made a different decision which he thought to be even more beneficial.”

Both The X Trusts and The Piedmont & Riviera Trusts are carefully reasoned decisions by outstanding judges. But they can’t both be right: it seems inevitable that this question will have to be reviewed at a higher level. I would respectfully suggest that Kawaley J ought to have remembered that the Sirens were not reliable guides, but dangerous seducers who lured those who listened to them to their destruction on the rocks.

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Success in the DIFC Court of Appeal

**Rupert Reed QC and Jonathan Chew acted for Damac on it successful appeal in Damac Park Towers v. Ward.**

In this landmark decision, the DIFC Court of Appeal upheld the developer’s right to terminate a ‘reservation agreement’ for purchaser default

In its decision in Damac Park Towers Company Ltd v. Youssef Issa Ward, CA 006/2015, 14 December 2015, the DIFC Court of Appeal overturned a judgment in which a property investor had obtained the restitution of sums paid under a ‘reservation agreement’ terminated by DAMAC for persistent default.

At the core of the dispute was a narrow issue of construction as to how credit transferred from earlier agreements on which the investor had defaulted should be applied to the instalments under the new reservation agreement. However, the judgment of the Court of Appeal is important in a number of respects.

Validity of reservation agreements

This is the first case in which the Court of Appeal has considered the effect of what are usually called ‘reservation agreements’ in Dubai. These are the minimal agreements by which developers and purchasers bind themselves to the sale and purchase of a property, but in anticipation of a detailed written agreement that is to be issued by the developer in due course.

Chief Justice Michael Hwang agreed that such ‘open contracts’ are enforceable insofar as they identify the parties, the property and interest to be disposed of, and the consideration or means for its ascertainment. All other necessary terms, such as the need to complete within a reasonable time, can be implied into the contract.

The fact that such open contracts are entered in the anticipation that they will be superseded by a more extensively drafted contract does not detract from the contractual certainty of the essential bargain between the parties [121].

The judge below had found an implied term that the developer should issue a detailed written agreement of sale within a reasonable time, which the judge found to be six months. The Chief Justice disagreed, finding instead that a reasonable time for the issue of the sale agreement was at or before completion. This was because that agreement would not materially affect the purchaser’s payment obligations, for which there was already detailed provision.

In assessing what was a reasonable time for the issue of an agreement of sale, the Court had to consider not only the obvious intention that the developer should have a wide latitude, but also, with the benefit of hindsight, the fact that the investor had never once requested the issue of an agreement of sale [130].

Repudiatory nature of any breach

A question that arises frequently in construction, development and purchase cases, in which there may be an exchange of termination notices and cross claims, is whether any particular breach is repudiatory, in the sense of evincing an intention no longer to be bound.

The Chief Justice, referring to the observations of Diplock LJ in Hongkong Fir Shipping Co v. Kawasaki Kisen Kaisha [1962] 2 QB 26 at 70, emphasised the distinction between an obligation to perform within a reasonable time and an obligation where time was of the essence. He applied the common law test cited in that decision in asking whether the breach of an obligation to perform within a reasonable time ‘will deprive the party not in default of substantially the whole benefit which it was he intended he should obtain from the contract’. Given that the purchaser, even without an agreement of sale, had significant rights under its reservation agreement, that test could not possibly be satisfied [135].

Commerciality in construing contracts

The Court of Appeal leant strongly towards construing agreements in accordance with commercial sense. The English Courts have tended to commence any exercise in construing an agreement by reciting the ‘rule’ acknowledged in Investors Compensation Scheme Ltd. v. West Bromwich BS [1998] 1 WLR 896 that the starting point is the ‘natural and ordinary meaning’ of the words used. In qualifying that rule, the Chief Justice agreed with Lord Steyn’s extra-judicial view in an article, ‘Contract Law: fulfilling the reasonable expectations of honest men’ 113 LQR 433 at 441, that it is often hard to identify that ‘plain and ordinary meaning’, and that the Court should be guided by the ‘contextual scene’. Quoting further from the article by Lord Steyn, the Chief Justice continued: ‘[a]nd speaking generally, commercially minded judges would regard the commercial purpose of the contract as more important than niceties of language.’

The Court found that view to be reinforced both by the decision of the UK Supreme Court in Rainy Sky SA v. Kookmin Bank [2011] UKSC 50 at [21], and by the iterative process proposed by Lord Neuberger in Re Sigma Finance [2009] BCC 393 and endorsed by the Supreme Court [2010] UKSC 2 at [12]. That process involves ‘checking each of the rival meanings against other provisions of the document and investigating its commercial consequences’.

On the facts of this case, the investor had already fallen into arrears on previous agreements. The Court accepted that DAMAC’s objective in agreeing to transfer credit to a new agreement was to secure cash flow by requiring the payment of a number of reduced instalments. It was not to take further commercial risk by giving the investor immediate credit by dispensing with two instalments. The Chief Justice noted the ‘surreal quality’ of the suggestion that the developer would have intended to take further risk by delaying the payments of a purchaser given the background of that purchaser’s historical defaults.

Construction by reference to subsequent conduct

The DIFC Contract Law departs from the English exclusionary principle in that its Art 51(c) expressly permits the Court to have regard to the parties’ subsequent conduct in interpreting their contract. The Chief Justice found that the investor agreed to various extensions, and failed to mount any protest to a termination notice, that were in both cases premised on the developer’s construction of the reservation agreement. The Court was not persuaded by assertions that the investor had not himself understood the basis of the calculations underlying those extensions and that termination notice [108].

Ability of Court of Appeal to consider new points

The Court of Appeal found that new points could be raised on appeal where their introduction at trial would not have affected the evidence adduced at trial. Where the new point required no further factual investigation, so there was no complaint of prejudice, the interests of justice required that the point should be considered by the Court of Appeal.

The developer could even raise issues of fact, as long as those issues revolved around an inference to be drawn rather than a question of primary fact [70]. In this case, the references to the investor’s subsequent conduct could be characterised as raising issues of mixed fact and law. However, because the investor’s knowledge was matter of inference and because the developer relied on limited facts and evidence, it was difficult to see what further evidence the investor would have given to rebut the inference that he knew of and accepted the developer’s construction. The Court of Appeal was fully entitled under RDC 44.141 to draw that inference for itself [77].

Issues of construction, such as the argument in this case as to a payment schedule, are unlikely to require any further evidence [72]. The developer was therefore not prevented from taking new points of construction. It was not enough for the respondent to refer in general terms to the factual background or to suggest that witnesses could have been examined differently.

There is some tension between this relatively liberal approach to the taking of new points on appeal and the more restrictive approach taken by the DIFC Court of Appeal in Dattani & Rahman v. Damac Park Towers Company Ltd, CA 007/2014 (10 November 2015). In that case, Justice Roger Giles declined to consider a new argument as to the invalidity of a termination notice served by reference to a contractual term that made no provision for any right of termination [64]-[65].

Nature of restitution

The Court of Appeal considered the nature of a restitutionary claim in DIFC law, exploring the connection between traditional vitiating factors such as mistake and the necessary finding that the relevant enrichment was unjust [137]-[145].

Click here to download the judgment

Author: Rupert Reed QC

Breach of trust, directors and corporate trustees: multiple derivative claims following McGaughey v USS

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Commentary by Michael Ashdown.

Introduction

It is commonplace now for the trustee of almost any sort of trust to be a company, and for the individuals who may colloquially be referred to as “the trustees” to in fact not be trustees at all, but to be the directors of the trustee company. Occupational pension schemes have been particularly keen adopters of this structure. In some respects it makes little difference to the beneficiaries: the trustee is the trustee, whether an individual or a company. But when the individuals involved are alleged to have acted in breach of their duties, the corporate structure allows for more complex claims than the ordinary breach of trust claim that would be brought against individual trustees.
In particular, the company itself will often have a claim against its directors for breaches of their statutory duties (under sections 171 to 177 of the Companies Act 2006) which are owed to the company. Where the company has shown no inclination to pursue such claims itself, beneficiaries of the trust may wish to do so in its place. When (if ever) that sort of claim is possible was the subject of the lengthy and detailed judgment of Leech J in McGaughey v Universities Superannuation Scheme Ltd [2022] EWHC 1233 (Ch) (24 May 2022).

The claims

The Claimants in McGaughey v USS are both members of the Universities Superannuation Scheme (the Scheme), and the Defendant (USS), a company limited by guarantee, is the Scheme’s Trustee. The Scheme has both defined benefit and defined contribution elements. Following the Scheme’s 2020 valuation, USS proposed and then introduced an increase in both employer and member contributions, together with changes that would reduce benefits for some members.
The Claimants subsequently made four allegations against the directors of the Trustee, all relating to the administration of the Scheme: the directors were said to have breached their statutory and fiduciary duties (i) in relation to the conduct of the 2020 valuation, (ii) by changing the benefit and contribution structure in a manner which amounted to unlawful discrimination, (iii) by allowing management costs and expenses to increase significantly, and (iv) by failing to create a credible plan for divestment from fossil fuels.

Test for permission to continue the claims

The legal context was the need for the Claimants to obtain the Court’s permission to continue the claim. Leech J accepted that this was not a “derivative claim” as defined by section 260 of the Companies Act 2006, because the Claimants were not members of the Trustee company. In Boston Trust Co Ltd v Szerelmey Ltd [2021] EWCA Civ 1176, Sir David Richards further distinguished “double derivative claims”, where the members of a holding company bring a claim on behalf of a direct subsidiary company, and “multiple derivative claims” where there are multiple intermediate companies (see [17]-[18]). Leech J followed this classification, but expanded the definition of a “multiple derivative claim” to include all derivative claims which are not within the section 260 definition or Sir David Richards’ definition of a “double derivative claim” (see [19], [21]-[22]). The Judge also followed Boston Trust in applying the permission and procedural requirements in CPR 19.9 by analogy (see [20]). The test for permission was held (uncontroversially) to require the Claimants to satisfy four requirements (see [23]):

(1) They have sufficient interest or standing to pursue the claims on a derivative basis on behalf of the company or other entity;

(2) They establish a prima facie case that each individual claim falls within one of the established exceptions to the rule in Foss v Harbottle;

(3) They establish a prima facie case on the merits in respect of each claim; and

(4) It is appropriate in all the circumstances to permit them to pursue the derivative claim or claims.

First, in relation to “sufficient interest or standing”, Leech J held that it was possible in principle for members of a pension scheme to have standing to bring a derivative claim, such as “where the directors of the corporate trustee conspire to misappropriate the scheme’s assets on an industrial scale” and the directors are the only members of the corporate trustee ([28]). But Leech J also accepted USS’s submission that “members of a pension scheme would only have standing if the loss which the subject company (or the scheme) is claimed to have suffered is reflective of their own loss” (see [29]-[30]). The Judge did not, however, accept that the possibility of the beneficiaries bringing an alternative claim (e.g. a breach of trust claim) would necessarily deprive them of standing in relation to the multiple derivative claim (at [32]-[33]).
Second, in relation to the “established exceptions to the rule in Foss v Harbottle”, the Claimants relied on the fourth exception, namely that a “fraud has been committed and the minority (or other interested stakeholders) are prevented from remedying the fraud because the subject company is controlled by the wrongdoers” ([34]). Leech J followed the decision of McCombe LJ in Harris v Microfusion 2003-2 LLP [2016] EWCA Civ 1212 that this required the Claimants to “establish a prima facie case that the defendants have committed a deliberate or dishonest breach of duty or that they have improperly benefitted themselves at the expense of the company (although the nature of that benefit need not be exclusively financial).” Mere “equitable fraud” or “fraud on a power” would not be sufficient ([40]-[43]).
Third, in relation to whether there is a “a prima facie case on the merits”, Leech J held that, where the relevant facts are disputed, “the appropriate course is to find that a prima facie case has been made out only where I am satisfied that there are issues of fact on which it would be wrong to accept the Company’s evidence without cross-examination”, reflecting the fact that there is no live evidence at the permission stage ([44]-[45]).
Fourth, in relation to whether it is “appropriate in all the circumstances” to give permission, Leech J held that he would consider, inter alia, the alternative claims said to be available to the Claimants ([33], [46]-[47]).
The Claimants, however, failed to obtain the Court’s permission in relation to any of the four claims.

Claim 1: the 2020 valuation

The first claim concerned the 2020 valuation of the Scheme, which was alleged to have been conducted by the directors in a manner which did not promote the best interests of the Scheme’s beneficiaries, failed to take into account relevant considerations (including possible ways of avoiding the need to raise contribution rates or to reduce benefits) or to exclude irrelevant considerations, and which improperly fettered their discretion ([70]). These alleged breaches of duty were said to have been intended to reduce future defined benefit accrual in the Scheme ([72]).
Permission was refused by Leech J because the Trustee did not itself suffer any loss by carrying out the 2020 valuation as alleged, and even if it did, that loss was not reflective of a loss suffered by the Claimants. The Claimants’ benefit entitlements will be lower, but that will cause a reduction in the Trustee’s liabilities. The increased contributions due from both employers and members will cause the Trustee’s assets to increase: the Trustee will in fact be better off as a result of the changes. Leech J consequently found that the Claimants did not have a “sufficient interest or standing” in relation to the first claim ([130]-[132]).
Had this claim not failed on the first limb of the permission test, Leech J would also have turned it down on the basis that it was not within the fourth exception to Foss v Harbottle, because there was not “sufficient evidence from which to draw the inference that the Directors were pursuing their own ends or motivated by their own personal interests” ([145]), or a prima facie case on the merits.
Interestingly, though, Leech J would not have refused permission on the fourth limb, if the others had been satisfied, notwithstanding the other possible routes to bringing a claim in these circumstances. Leech J recorded that:

The Claimants submitted that any complaint to the Pensions Ombudsman or breach of trust claim was fraught with difficulty, that a complaint to the Ombudsman was not suited to a group or class action of this kind and that a court claim by a beneficiary would face considerable and practical hurdles. In his oral submissions Mr Grant emphasised that beneficiary claims are rare (as opposed to employer or trustee claims) and that the practicalities involved in trying to ensure that 470,000 members were properly represented meant that I could not be confident that it would be straightforward or that the Claimants would be able to make or fund a claim. ([153])

Leech J accepted that “the Claimants were not overstating the difficulties which they would have faced in pursuing a trust claim (and which they may still face)” ([155]). The Judge clearly felt some discomfort at permitting the Claimants to avoid the effect of CPR 19.3, which provides that “[w]here a claimant claims a remedy to which some other person is jointly entitled with him, all persons jointly entitled to the remedy must be parties unless the court orders otherwise”, but nevertheless would not have refused permission on this basis, since “If the Claimants had been able to bring themselves squarely within the fourth exception to the rule in Foss v Harbottle, then the constitution of a company limited by guarantee clearly lends itself to wrongdoer control. Moreover, McDonald v Horn provides authority (if it is needed) that the Court could give permission to members to bring a multiple derivative claim in those circumstances.” ([157]).
In other words, if bringing the sort of multiple derivative claim envisaged here was the only way to see justice done, the Court would not stand in the Claimants’ way if the first three limbs of the permission test could be met just because they might proceed in another way, with different procedural requirements.

Claim 2: unlawful discrimination

The second claim concerned the benefit changes introduced by USS, which were alleged to “indirectly discriminate against women, younger and black and ethnic minority members contrary to section 19 of the Equality Act 2010” ([101]). This was said to amount to a breach by the directors of their duties to the Trustee, which exposed the Trustee to discrimination claims by Scheme members ([103]).
Leech J refused permission for the same reason as in the first claim: neither Claimant has a discrimination claim himself, and “[i]f an individual member brings a claim in the Employment Tribunal or a civil court, the liability of the Company to pay compensation is not reflective of any loss which the individual member has suffered because he or she has a direct claim against the Company.” (]160]) Furthermore, that liability of the Trustee to the member discriminated against does not give the Claimants a sufficient interest to bring a claim against the directors, there being no “causal connection between the Company’s liability to pay compensation to members for indirect discrimination and the benefits to which the Claimants are entitled” ([161]).
The second claim would also have failed on the second and third limbs of the test (it being relevant to the prima facie case on the merits that, even if unlawful discrimination could be proved, the directors had acted on legal advice that the benefit changes did not amount to unlawful discrimination ([171])). Permission would also have refused as a matter of discretion: “[i]f individual members have claims for discrimination, it is far better that they should make them directly against the Company either individually or in group litigation” ([174])

Claim 3: costs and expenses

The third claim concerned the Scheme’s costs expenses, which were said to have increased by 320% from 2007 to 2020, including a 1318% increase in investment management personnel costs ([109]). This was said to amount to a breach by the directors of their duties to the Trustee, and to have been to the personal advantage of the directors ([110]).
This claim did not fall down on “sufficient interest or standing”: the Trustee conceded that “the wrongful depletion of the Scheme’s assets would involve a loss to the Company and potentially a reflective loss to members if the Scheme was unable to pay promised benefits as a result” and Leech J held that this was enough to meet the first limb ([175]-[176]).
It did, however, fail on the second limb, there being no allegation that the directors “used their control over the Company to confer benefits on themselves through increased fees or salary” ([178]), and on the third, the Claimants not having made a sufficiently particularised case on the merits ([184]). Leech J would, though, have been prepared to give permission if the first, second and third limbs had been satisfied, for the same reasons as in relation to the first claim.

Claim 4: fossil fuels

The fourth claim concerned the Scheme’s investment in fossil fuels. The Claimants alleged that the directors’ failure to divest from fossil fuels or to make an adequate plan for divestment was a breach of their duties to act for proper purposes and to promote the success of the Trustee ([120]).
Leech J here refused permission on the first limb, the Claimants not having satisfied the Court that the Trustee had suffered any immediate financial loss, or, if they had, that it was reflective of any financial loss that they had suffered, there being no causal link alleged between fossil fuel investment and the benefit changes which had been implemented ([191]). It would also have failed on the second and third limbs, and would have been refused on the fourth limb as a matter of discretion, Leech J stating that he: “would not have exercised my discretion to permit the Claimants to continue Claim 4 but would have left them to pursue a direct claim for breach of trust. The Claimants have not sought an injunction to compel the Directors to adopt an immediate plan for divestment or specified what plan they should adopt and I am not satisfied that the Court would be prepared to grant declaratory relief in the vague terms sought in the prayer for relief or, indeed, that any useful purpose would be served by doing so” ([197]).

Where does this leave beneficiaries?

Leech J’s judgment is necessarily a long and detailed one, which is dominated by a meticulous analysis of the four claims and the complex facts and allegations which underpin them. Much of what is said is therefore of relevance only to the parties. It is nevertheless clear that there are a number of important lessons for trust beneficiaries (and their advisers) contemplating claims against the directors of a corporate trustee, perhaps as part of a wider consideration of other possible claims, including breach of trust claims against the corporate trustee itself.
First, and perhaps most importantly, Leech J accepted that this sort of claim would be possible in the right circumstances. If the mere existence of an alternative claim would suffice to deprive beneficiaries of standing, that would almost always make this sort of claim impossible, since a breach of trust claim will generally be available against the corporate trustee. As already noted (at paragraphs 15 and 16 above) there are real difficulties involved in bringing such a claim, and the Court is entitled to have regard to those difficulties in deciding whether to give or refuse permission. Beneficiaries may be motivated to pursue a multiple derivative claim, notwithstanding the enormous difficulties it presents, because of its undoubted procedural advantages in other respects: in particular, there being no need to join every other beneficiary or make arrangements for them to be represented (see paragraph 15 above), and the possibility of obtaining a prospective costs order (though this was refused in this case at [198]).
It is notable that in this case Leech J would have given permission (had the other limbs of the test been satisfied) on the first and third claims, but not the second or fourth. In the latter two, there was either a more obviously sensible way to proceed, or no useful purpose in the claim proceeding. The door is therefore left open, in principle, for a multiple derivative claim to succeed in the trust context.
Second, the major hurdle to surmount will often be establishing a “sufficient interest or standing” since that entails establishing both that the corporate trustee has suffered a loss and that this loss is reflective of the claimant beneficiaries’ own loss. Where the claim is for the misappropriation of trust assets, Leech J’s treatment of the third claim suggests that this will not cause much difficulty (see paragraph 21 above): if the trustee’s money is stolen, it has less with which to pay members or beneficiaries. But in every other case this hurdle was insuperable: in the first and fourth claims it was far from clear that any loss was actually suffered by the Trustee, and in the second claim there was held to be no link between the Trustee’s (hypothetical) liability to pay damages for discrimination and the Claimants’ benefit entitlement.
The latter point is perhaps particularly difficult in defined benefit pension cases, where members’ benefit entitlements are usually prescribed by the scheme rules, and do not depend (as long as the scheme is sufficiently funded) on the actual assets held by the scheme’s trustee. It may still be open to argue that exposing a trustee to damages claims for discrimination would cause a loss to the trustee which is reflective of a beneficiary’s own loss if the beneficiary were entitled to part of the trust fund, the value of which is diminished by the liability to pay damages.
Third, Leech J’s rejection of the Claimants’ argument that the fourth exception to Foss v Harbottle could be satisfied in cases of “equitable fraud” or “fraud on a power” ([36], [42]-[43] – see paragraph 7 above) will rule out this sort of claim in most cases, except where a director has acted dishonestly. It will only be in rare cases that beneficiaries will be able to meet the high hurdle of making even a prima facie case that “the defendants have committed a deliberate or dishonest breach of duty or that they have improperly benefitted themselves at the expense of the company” ([43]).
The practical effect of this is that where directors have arguably committed lesser breaches of duty – such as ordinary negligence – but control the company, a multiple derivative claim will not provide a route for beneficiaries to pursue the claim that the company will not. This is said to accord with the rationale for the fourth exception to Foss v Harbottle, with Leech J holding that “parties are free to choose majority rule and that equity will only step in where the majority have abused that power to excuse their own dishonest and deliberate breaches of duty or to excuse their actions in improperly benefitting themselves at the expense of the subject company”. In such cases the beneficiaries will have to look to other routes to relief.
Fourth, it follows that the sort of multiple derivative claim pursued in McGaughey v USS is likely to be exceptional in future: this was a bold attempt to make use of this procedural route to obtain relief in the context of a pension scheme trust, and it is hard to see how the Claimants (or their advisers) could have done more to succeed. But it is clear from Leech J’s judgment that, as the law stands, the odds are stacked against trust beneficiaries being given permission to continue a multiple derivative claim.
A director who dishonestly misappropriates trust funds to the disadvantage of the beneficiaries and then stymies any attempt by the corporate trustee to bring a personal or proprietary claim may well find that the court would be willing to permit the beneficiaries to bring the corporate trustee’s claim against the director. Following McGaughey v USS, it is hard to see a less extreme case succeeding.