A transcript was published recently of the previously unreported January 2017 High Court decision in Dalriada Trustees Limited v Mcauley and others . The claimant (Dalriada) was the independent and current trustee of two occupational pension schemes and Mr and Mrs Mcauley (the Defendants) were the former trustees of both those schemes.
Dalriada made applications for summary judgment and a freezing order on the basis that the two schemes had allegedly been engaged in pensions liberation.
Dalriada’s application for summary judgment was granted in part, with a freezing order made in respect of the full claim. Regarding a previous freezing order, the Defendants had paid the sum sought, and so it was treated as discharged.
Among other points, the High Court considered whether the Defendants could rely on exoneration or exclusion provisions in the scheme rules. The Defendants accepted that as they had failed to obtain written advice from an appropriately qualified or regulated person before making certain investments, as legally required, they had no defence to Dalriada’s argument that they had breached their statutory duties in this regard.
The Court held that section 33 of the Pensions Act 1995 applied to prevent an exclusion or exoneration from liability in respect of an obligation under any rule of law to take care or exercise skill when making investments. It followed that the Defendants could not rely on such clauses in the scheme rules as a defence.
Many pension liberation schemes are set up ostensibly as occupational pension schemes registered with HMRC and, at first sight, do not appear to fall foul of the law. However, they often breach HMRC tax rules regarding unauthorised payments or loans, resulting in adverse tax consequences for the member.
When making investment decisions in respect of a scheme's assets, trustees must exercise their investment powers in accordance with the terms of the scheme's trust deed and rules and the regulations which specify the trustees' criteria for choosing investments and ensuring their diversification.
Section 36 of the Pensions Act 1995 (PA 1995) provides that, before making any investment, trustees must obtain and consider “proper advice”. Usually, the provision of the advice itself constitutes a regulated activity under the Financial Services and Markets Act 2000 (FSMA). The trustees must obtain the advice from an appropriate person who is FSMA-authorised, it must be in writing (or subsequently confirmed in writing, if given orally).
Generally, trustees can include provisions in their trust deeds excluding or restricting liability for their acts or omissions but they cannot exclude or restrict liability for breach of their duty to act with reasonable skill and care in the performance of any investment functions (section 33 of the PA 1995).
The applications in this case related to two sets of proceedings in respect of two occupational pension schemes with common trustees – a husband and wife. Both former trustees had been removed by the court on the application of TPR, and a professional trustee (Dalriada) had been appointed. A freezing order had subsequently been granted in February 2014 in respect of one of the schemes.
Dalriada alleged that the Defendants had engaged in pension liberation and sought a freezing order and summary judgment in respect of one of the schemes, as well as an extension to the existing freezing order in respect of the other scheme.
Dalriada alleged that:
- payments had been made from one of the schemes to two companies that were not proper payments or investments of funds. The Defendants contended that these payments were in fact loans entered into on the basis of advice. Following the earlier freezing order, payments had been made to Dalriada in the amount of the loans plus interest;
- a £3.275 million “premium” had been paid from the assets of the other scheme as part of three “gilt option agreements” entered into between the Defendants and a third party company. These agreements operated to grant the Defendants the option to have government gilts transferred to them in an amount equal to, broadly, the proceeds of exploiting certain patents;
- a consultancy agreement was entered into whereby only 15 per cent of the funds invested in the “agreements” were to be paid to the company holding the patents, the balance being paid to a different entities including one of the parties to the loans mentioned above.
Dalriada claimed that:
- the premium payment was made in breach of trust by the Defendants for the improper purpose of releasing benefits to members early;
- the Defendants were in breach of their equitable duty of care to exercise their powers as an ordinary prudent man of business. The agreements were either not truly an investment at all, or, if they were, they were investments which no reasonable trustee could make, and made without the benefit of relevant advice;
- the Defendants were in breach of their statutory duties under section 36 of the PA 1995 by not taking proper advice in writing.
As well as freezing orders in respect of the loans and the agreements, the claimants sought summary judgment in respect of the £3.275 million investment in the agreements, based on the claims of breach of the equitable duty of skill and care and the statutory duty under section 36.
In respect of the agreements, the judge (Mr R. Miles QC) granted the application for both summary judgment and the freezing order.
The Defendants had accepted that because they had failed to obtain written advice from an appropriately qualified or regulated person as required by section 36 they had no defence to that claim, and accepted that summary judgment should be entered against them. The judge held that there was “no realistic defence”, either to the claim for breach of the equitable duty or for breach of section 36 and that it was: “clear beyond any reasonable argument that the payments of £3.275 million were not investments that a trustee exercising proper skill and care could make”.
Although the Defendants had claimed that they had relied on advice, and that some due diligence had been done, the judge considered that “… there was no reasonable prospect that an adviser would have advised them to enter into an investment of this kind”.
The Court held that section 33 of the PA 1995 applied to prevent an exclusion or exoneration from liability in respect of an obligation under any rule of law to take care or exercise skill when making investments. It followed that the Defendants could not rely on such clauses in the scheme rules as a defence.
On the basis that just over half of the invested amount had been repaid to scheme members, the judge granted summary judgment in respect of the outstanding sum, with interest to be applied. However, he confirmed that there would subsequently be a final judgment for this amount, as well as in respect of any further liability of the Defendants.
Granting the freezing order in respect of the full amount of the premium, the judge stated that, even if the Defendants were not guilty of dishonesty, they showed a “casual disregard on their part for ordinary standards of commercial propriety”.
As regards the freezing order granted in 2014 in respect of the loans, the judge confirmed that it had ceased to have effect as the sum specified in that order had been secured in full. He rejected Dalriada’s submission that the order should remain in place for a lesser sum representing their costs.
This case is another example of an alleged pension liberation scheme gone wrong. Again, the sums involved are substantial, with the members suffering from a number of potentially unauthorised payments and tax charges.
The judgment is also interesting as there have been relatively few cases considering the application of section 36 and trustees’ investment decision-making. The case is a good example of a clear breach of this duty, and was recognised as such by the Defendants, who conceded their position on this in Court.
The case also serves as an example of how failure to comply with the trustees' duties on investment can result in them being unable to rely on any exoneration provisions of the scheme's trust deed.