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England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Independent Trustee Service Ltd v GP Noble Trustees Ltd & Ors  EWHC 1653 (Ch) (01 July 2010)
Cite as:  EWHC 1653 (Ch)
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Strand, London, WC2A 2LL
B e f o r e :
| Independent Trustee Service Ltd
|- and -
|(1) GP Noble Trustees Ltd
(2) BDC Trustees Ltd
(3) Graham Pitcher
(4) Gary Cordell
(5) Peter Malmstrom
(6) Anthony James Morris
(7) Alexander Starkey
(8) Christopher Webb
(9) Aspect Invest & Finance Ltd
(10) Whitepoint Ltd
(11) South East Asia Real Estate (Thailand) Co Ltd
(12) Amac Asset Management & Consultants Ltd
(13) Number Thirty One SA
(14) La Matze Consultants SA
(15) La Matze Real Estate SA
(16) Multiple & Unilateral Financial Futures (Thai Investments) Ltd
(17) Mutual Financial Futures (Australia) Pty Ltd
(18) Multiple & Unilateral Financial Futures Ltd
(19) Morris Family Holdings Ltd
(20) Newdale Investments Ltd
(21) Edgerbury Investments Ltd
(22) Caprio International Ltd
(23) Davidia Global Ltd
(24) Line Trust Corporation Ltd
(25) Glencalvie Ltd
(26) Benessia Global Ltd
(27) Shellwind Holding Ltd
Graham Pitcher the Third Defendant appeared in person
Gary Cordell the Fourth Defendant appeared in person
Peter Malmstrom the Fifth Defendant appeared in person
Hearing dates: 13th, 14th, 17th, 18th, 19th, 20th and 24th May 2010
Crown Copyright ©
Mr Justice Peter Smith :
PARTICIPATION BY OTHER DEFENDANTS
ANNEXES TO THIS JUDGMENT
OUTLINE OF CLAIM
"It is the duty of a trustee to manage the trust property and deal with it in the interests of the beneficiaries. If he acts in a way which he does not honestly believe is in their interests then he is acting dishonestly. It does not matter whether he stands or thinks he stands to gain personally from his actions. A trustee who acts with the intention of benefiting persons who are not the objects of the trust is not the less dishonest because he does not intend to benefit himself.
… there is an irreducible core of obligations owed by the trustees to the beneficiaries and enforceable by them which is fundamental to the concept of a trust. If the beneficiaries have no rights enforceable against the trustees there are no trusts. But I do not accept the further submission that these core obligations include the duties of skill and care, prudence and diligence. The duty of the trustees to perform the trusts honestly and in good faith for the benefit of the beneficiaries is the minimum necessary to give substance to the trusts, but in my opinion it is sufficient".
"This is an objective standard. At first sight this may seem surprising. Honesty has a connotation of subjectivity, as distinct from the objectivity of negligence. Honesty, indeed, does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated. Further, honesty and its counterpart dishonesty are mostly concerned with advertent conduct, not inadvertent conduct. Carelessness is not dishonesty. Thus for the most part dishonesty is to be equated with conscious impropriety."
However, these subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular circumstances. The standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual. If a person knowingly appropriates another's property, he will not escape a finding of dishonesty simply because he sees nothing wrong in such behaviour.
In most situations there is little difficulty in identifying how an honest person would behave. Honest people do not intentionally deceive others to their detriment. Honest people do not knowingly take others' property. Unless there is a very good and compelling reason, an honest person does not participate in a transaction if he knows it involves a misapplication of trust assets to the detriment of the beneficiaries. Nor does an honest person in such a case deliberately close his eyes and ears, or deliberately not ask questions, lest he learn something he would rather not know, and then proceed regardless. However, in the situations now under consideration the position is not always so straightforward. This can best be illustrated by considering one particular area: the taking of risks"
1) There is property subject to a trust
2) The property is transferred
3) The transfer is in breach of trust
4) The property (or its traceable proceeds) is received by the Defendant
5) The receipt is for the Defendant's own benefit
6) The Defendant receives the property with the knowledge that the property is trust property and has been transferred in breach of trust or if not a bona fide purchaser of a legal estate without notice retains the property or deals with it inconsistently with the trust after acquiring such knowledge.
"whenever the duty under this sub-section applies to a Trustee he must exercise such care and skill as is reasonable in the circumstances and have regard in particular:-
a) to any special knowledge or experience that he has or holds himself out as having, and
b) if he acts as a trustee in the course of a business or profession, to any special knowledge or experience that is reasonable to expect a person acting in the course of that kind of business or profession"
"Investment by trustees
4. —(1) The trustees of a trust scheme must exercise their powers of investment, and any fund manager to whom any discretion has been delegated under section 34 of the 1995 Act (power of investment and delegation) must exercise the discretion, in accordance with the following provisions of this regulation.
(2) The assets must be invested—
(a) in the best interests of members and beneficiaries; and
(b) in the case of a potential conflict of interest, in the sole interest of members and beneficiaries.
(3) The powers of investment, or the discretion, must be exercised in a manner calculated to ensure the security, quality, liquidity and profitability of the portfolio as a whole.
(4) Assets held to cover the scheme's technical provisions must also be invested in a manner appropriate to the nature and duration of the expected future retirement benefits payable under the scheme.
(5) The assets of the scheme must consist predominantly of investments admitted to trading on regulated markets.
(6) Investment in assets which are not admitted to trading on such markets must in any event be kept to a prudent level.
(7) The assets of the scheme must be properly diversified in such a way as to avoid excessive reliance on any particular asset, issuer or group of undertakings and so as to avoid accumulations of risk in the portfolio as a whole. Investments in assets issued by the same issuer or by issuers belonging to the same group must not expose the scheme to excessive risk concentration …
Partial disapplication of regulation 4 in respect of schemes being wound up
9. —(1) The requirements of paragraphs (3) to (7) of regulation 4 shall apply in respect of a scheme which is being wound up except to the extent that—
(a) they conflict with any obligations placed on the trustees arising in consequence of the winding up under or by virtue of the 1995 Act or the 2004 Act, or
(b) it is not reasonably practicable to give effect to them having regard to circumstances in connection with the winding up.
(2) For the purposes of paragraph (1), a scheme shall be taken to be being wound up during the period which—
(a) begins with the day on which the time immediately after the beginning of the winding up of the scheme falls, and
(b) ends when the winding up of the scheme is completed."
BACKGROUND TO WAVE ONE
1) Each sponsoring employee had gone into insolvency well before August 2007 (GPN or BDC were appointed as independent trustees following such insolvencies)
2) The scheme was left with insufficient assets to meet the benefit provided from it in full.
3) None of the schemes had any employer covenant to redress the funding deficit.
4) The schemes both needed to adopt cautious investment strategies such strategies being sensible given the absence of any employer to redress the consequence of investment losses.
DESTINY OF WAVE ONE FUNDS
PAYMENTS TO ASPECT
"…hereby authorise you to release the initial fees and total annual charges for the 3 year period to the Investment Manager. These fees are fixed and payable in any event and are calculated on the value of the initial investment as per the Term Sheet."
FURTHER DEALINGS IN RESPECT OF WAVE ONE FUNDS
DISSIPATION OF THE £3,000,000 BY NUMBER THIRTY ONE
TRANSFERS FROM AMAC TO LINE TRUST/HASSANS
HASSANS BECOME INVOLVED
SETTING UP THE MUFF STRUCTURE
INTERNAL CONCERNS OF HASSANS
GESTATION OF CERBERUS DOCUMENTS
QUERIES UNDER SOME OF THE MONIES
THE DISAPPEARANCE OF CHEAM
FURTHER ADVICE LETTERS
OTHER ADVISORS – PITT
"this Term Sheet is provided as certification that Pitt Partners has reviewed the appropriate documentation including Exchange Contracts, Land Titles, Legal Advice regarding proposed structure of land holdings considering Thai Investment Regulations and an independent land valuation and is satisfied that the collateralised security requirement will be met".
"this Term Sheet is provided as certification that [Pitt] has conducted the necessary financial due diligence on the underlying investments of the Company [MUFF] Pitt is satisfied that the collaterised security cover indicated in this Term Sheet has been met. "
THE HAND OF MORRIS
|Scheme||Amount Transferred in Wave Two||Date||Amount transferred in Wave One in August 2007 (if any)|
|BDC||£1m||18 April 2008||-|
|Alenoy||£1.6m||18 April 2008||-|
|Ravenhead||£7m||18 April 2008||£9.9m|
|Melton Medes||£8.9m||18 April 2008||£9.9m|
|BBN||£1m||18 April 2008||£3m|
|Hill & Tyler||£2m||21 April 2008||-|
|Cuthbert Heath||£500,000||21 April 2008||£3m|
a) £33,000,000 to Edgerbury (D21)
b) £33,400,000 to Newdale (D20)
c) £1,400,000 to Glencalvie (D25)
The third of those was a transfer to enable Mr Morris to settle his liabilities to his former wife in the financial divorce settlement.
"That is a massive ask.
There are elements of trust law, statutes, regulatory guidance, common law, accountancy, insolvency, actuarial and tax law. How long have you got?
I imagine your email was triggered by Fabians (i.e. Mr Picado's) epistle. I will provide a riposte to that email shortly.
In the meantime just to put your mind at rest investments by trustees are governed by the Trustee Investments Act 1961. However because the act is so restrictive most pension trustees allow the trustees to invest in virtually anything (which is normal) and allow trustees to borrow money. The main restriction is that no more than 5% of the scheme assets in the sponsoring employer.
I will forward a typical clause to prove my point."
GESTATION OF THE BONDS
1. "Upon receipt of the monies from Fareston in early January , investments were made and authorised by CDL [Cheam] on behalf of MUFFL since we were informed by both Mr Morris as investment advisor and Mr Pitcher as trustee of the pension funds that were the ultimate investors, that the payments were to be made on a very urgent basis (§63);
2. Since Mr Pitcher the pension trustee was aware of what the monies were being used for and was content and keen for the monies to continue to be used for this purpose, we deemed it satisfactory to make the payments for the investment, irrespective of the fact that there was no agreement securing the obligations of MUFFL to the pension funds (§63);
3. Initially we were informed that the Bond instrument was to be executed imminently between MUFFL and Fareston/GPNT. It was only on the passage of several months that it became clear that the Bonds were not being executed by the parties, and we started to highlight the need to finally agree these and put in place the necessary documentation, however comfortable Mr Pitcher was with MUFFL Group and however transparent the investments made were to Mr Pitcher (§63);
4. There was never any sense of urgency in getting the Bond instrument executed by Mr Pitcher. Despite repeated chasing by my assistant, Gemma Arias, the terms were never finally negotiated by the parties. Although it is not normal practice for monies to be lent without documentation in place, Mr Pitcher- as the representative of the ultimate lender- did not appear concerned at all. This appear to me to be because of the close relationship he enjoyed with Mr Morris and the transparency that there had been with him in respect of the investments made (§64);
5. At no stage did Mr Pitcher ask for the investment activity to cease until the Bonds were in place (§65);
6. During the course of drafting the Bonds, my assistant would send out numerous emails chasing comments on the Bonds, or attempting to arrange an all parties call, as is common in transactions of this nature, to attempt to agree the terms of the Bond. Mr Morris would only give instructions on a piecemeal basis, through Ms Rottier. Often we would find that he would insist on the striking out of an entire clause of the agreement thereby rendering the Bonds unworkable. Ms Arias would then reply to Ms Rottier giving her the reasons as to why the clauses removed could not be simply removed in the manner desired by Mr Morris, to which Ms Rottier would not receive instructions to reply for months. This process continued for several months. In particular the clause relating to the capital guarantee in respect of the monies invested would become more obfuscated as the negotiations progressed (§66);
7. After several months of my assistant chasing the parties to finalise the Bond, we received an executed version of the Bond instrument, which was entirely different to the document we had drafted. This version contained heavily amended capital guarantee provisions, the Bond was not executed by Fareston Limited (effectively the Lender) and the certificate confirming the lending had been removed. Even the term sheets on which the parties were stated to be relying on had been removed as an attachment. The Bond instrument was so different from that which we had drafted (and, we felt that it was ineffective) that we felt it appropriate to send Mr Starkey a letter in his capacity as director of MUFFL, stating that we could take no responsibility for the document as drafted" (§68).
"the repayment of the Nominal Amount is not guaranteed. The Principal payable under this Bond on the event of default is limited to the amount protected under clause 3.1."
"the Issuer shall ensure that the Risk Cover Ratio of the Bond at the date of the execution of this instrument shall be 1:2 to the value of the Nominal Amount. The Issuer shall ensure that the Risk Cover Ratio is met at all times throughout the relevant period "
"the liability of [MUFF] under this Instrument and all certificates issued hereunder shall be equal to the assets of [MUFF] from time to time less any sums which [it] maybe obliged to pay to all or any of its creditors whether actually or contingently ("the company net assets"). The Bond holders shall look solely to the [MUFF] net assets for payments to be made by [it] under this Instrument and all certificates issued hereunder and the Bond holders will have no further recourse to [MUFF] in respect thereof. In the event that the amount due and payable by [MUFF] under this Instrument and all certificates issued hereunder exceeds the Company net assets the right of any person to claim payment of any amount exceeding such amount shall be extinguished on the redemption date."
"The Bond holder shall not in relation to the matters contemplated by this Instrument institute or make any application against [MUFF] or join any other person in instituting or making any application against [MUFF] any winding up arrangement, reorganisation, liquidation, bankruptcy, insolvency or other proceedings under similar law anywhere in the world so long as this Instrument and all certificates issued hereunder shall remain in effect and in no event any earlier than one year after all or any amounts owing by [MUFF] to the Bond holders have been repaid".
DISCUSSIONS AND CONCLUSIONS
GPN AND BDC
MESSRS PITCHER, CORDELL AND MALMSTROM