Mandrake Holdings Ltd & Anor v Balanus Ltd

Mandrake Associates Ltd (“MAL”), the second claimant, carried on business as an independent financial adviser specialising in pension life assurance products. On 29th April 1988 (A-Day) it became subject to regulation in accordance with the Financial Services Act 1986. On 1st July 1988 personal pensions, as permitted by Social Security Act 1986 and Finance (No 2) Act 1987, were introduced. A personal pension was and is a money purchase savings scheme. For the self-employed it replaced the retirement annuity policy, for the employed it provided an alternative to an occupational pension scheme. Thereafter a large number of individuals took out a personal pension in preference to joining or remaining in their employers’ occupational pension scheme. They fell into three classes, namely (1) those who failed to join such a scheme (“non-joiners”), (2) those who withdrew from such a scheme (“opt-outs”) and (3) those who transferred to a personal pension the value of the benefits accruing to them under such a scheme (“transfers”).

In October 1994, following extensive investigations over the previous two years, the Securities and Investments Board (“SIB”) published its review entitled “SIB Pensions Transfers and Opt-outs Review of Past Business” (“SIB 1994 Review”). In Part I it outlined

On 1st March 1996 the defendant (“Hambro”), then called Hambro Countrywide Plc, the parent company of MAL, agreed to sell all its shares in MAL to the first claimant, Mandrake Holdings Ltd (“MHL”), a company formed for the purpose and controlled by Mr Pirie, a director of MAL, and Mr Pritchard, a director of one of the appointed agents of MAL, for £469,120. It was a term of that agreement that Hambro should execute ‘the Pensions Deed’. The Pensions Deed is a deed dated 1st March 1996 and made between Hambro (1) MHL (2), MAL (3) and Mr Pirie (4). It recites that Hambro had agreed to sell its shares in MAL (described therein as ‘the Company’) to MHL and that MAL was a member of the Personal Investment Authority (“PIA”) and continues

By clause 1 of the Pensions Deed MAL agreed (and MHL agreed to procure it to do so) to continue with and complete at its own expense its review of that part of its business relating to the sale of personal pensions “in accordance with the standards and requirements of SIB and PIA as published from time to time”. MAL also agreed to comply with the rules, regulations, guidelines and recommendations of SIB and/or PIA. By clause 2, subject to MHL and MAL observing and performing their obligations thereunder Hambro covenanted with MHL to pay to MAL or, at the option of Hambro, the relevant investor an amount equal to “each Pension Liability”. Pension Liability is defined in clause 2.2 and 2.3 in the following terms:

On 14th August 1998 the Financial Services Authority (“FSA”), the successor to SIB, published guidance as to the procedures to be followed for “those categories of pension transfer and opt-out business transacted between the relevant dates that do not fall within the priority categories”. Paragraph 3 stated:

Hambro maintained that its liability under the Pensions Deed did not extend to Phase 2 cases because of the terms of clause 2.3.1.6. They contended that investors in relation to Phase 2 cases did not fall “within any class of business or category of investor requiring investigation according to the published recommendations of SIB or PIA at” 1st March 1996. MAL and MHL did not agree. On 18th June 2003 they issued the claim form in these proceedings claiming (1) a declaration to the effect that on the true construction of the Pensions Deed Hambro was liable in respect of pension transfer and opt out business transacted between 29th April 1988 and 30th June 1994 except those specified in clauses 2.3.1.1 and 2.3.1.3 of the Pensions Deed and two other limited categories and, in the alternative, (2) rectification of the Pensions Deed so as to produce that result.

The proceedings came before HH Judge Norris QC, sitting as a deputy judge of the Chancery Division, in July 2005. For the reasons explained in his judgment handed down on 10th February 2006 he accepted the contentions of MAL and MHL as to the true construction of the Pensions Deed and by his order dated 3rd March 2006 made a declaration to the appropriate effect. He also considered the alternative claim for rectification and made the requisite findings of fact. He concluded that, had the point arisen before him and on those findings, he would have rejected the alternative claim. Judge Norris QC gave permission to appeal on the construction point but refused such permission on the rectification point. Permission to MHL to appeal on the latter point was given by Neuberger LJ on 26th May 2006.

We heard full argument on the construction point on 21st November 2006. We concluded that the judge was right on that point and informed the parties that we would dismiss the appeal and give our reasons later. Accordingly, as agreed, we did not hear any argument on the rectification point. What follows are my reasons for concluding that the judge was right on the construction point.

The Pensions Deed was executed against the background of the concern of SIB and the Self Regulating Organisations (“SROs”) constituted under the Financial Services Act 1986 in relation to the selling of personal pensions to employed persons. The reason for that concern is described by the agreed witness statement of the expert instructed by Hambro in this case, Mr Steve Dixon, and the various publications issued by SIB, PIA and others. The position was admirably summarised by Judge Norris QC in paragraphs 7 and 8 of his judgment in the following terms:

The SIB 1994 Review contained a Summary of Statement of Policy, a Statement of Policy and, in part II, detailed procedures for firms to follow. I have summarised it in paragraph 2 above but I should now refer to certain passages for further details.

In the light of this statement of policy PIA, the SRO of which MAL was a member, changed its rules in February 1995 in order that it might compel its members to carry out the review that SIB recommended. In April 1995 PIA issued to its members a series of process maps to indicate how the review should be carried out. They show clearly the various stages of the review. Thus, as the map specifies, the member should:

On 16th January 1996 SIB issued a Progress Report in relation to the Pensions Review. It recorded that the response rate was particularly high where vulnerable groups such as public service employees or the older investors were concerned. In paragraph 17 it stated:

In the light of parts of the judgment of Judge Norris QC there are two other aspects of the circumstances surrounding the execution of the Pensions Deed to which I should refer. The first relates to the accounts of MAL and MHL for the year ended 31st December 1995 which were approved by their Boards and signed by Mr Pirie on 27th February 1996. In December 1994 the Institute of Actuaries issued guidance to the boards of Life Offices pointing out that the Review applied in all cases so that reserves should not be restricted to prospective liabilities in a priority category. In a Technical Release issued by the Institute of Chartered Accountants for England and Wales in January 1995 it was suggested that directors of intermediaries and personal pension providers would need to include in their estimate of the total anticipated financial effect of the investigation and compensation not just those associated with priority cases. It was suggested that in non priority cases provision should be made for that proportion of cases where the pension purchasers were themselves likely to seek redress.

On 23rd February 1996 the actuarial department of Hambro reported that provision should be made in the sum of £550,000. In a note headed Non-Priority Business it was stated:

The second aspect arises from the fact, as recognised at the time, that the acquisition of the issued share capital of MAL by MHL took a form (the payment of a dividend by MAL to Hambro whereby the debt of Hambro to MAL was pro tanto repaid) which would involve an infringement of s.151 Companies Act 1985 unless the circumstances were brought within the provisions of s.155 Companies Act 1985. The latter section, by subsection (2), permits a private company, which MAL was, to give financial assistance in connection with the acquisition of its own shares

In addition ss.155(6) and 156 required the directors of MAL to make a statutory declaration stating that

After describing the nature of the claims the judge correctly directed himself [paragraph 3] that he should be careful to distinguish between facts and evidence admissible on the question of construction and those relevant to the claim for rectification. In paragraph 4 he directed himself as to the principles to be applied in determining the true construction of the Pensions Deed. In particular he noted that “excluded from the process are the negotiations of the parties and their declarations of subjective intent”. No criticism is made of any of these passages. In paragraphs 5 to 29 he set out the facts and passages from the relevant documents substantially as I have already done. In paragraph 30 he stated his conclusion:

The judge’s reasons fell into five categories which he described as (1) the extent of the problem, (2) the financial context, (3) the range of the agreement, (4) the structure of the Deed and (5) the language of subclause 2.3.1.6.

In relation to the extent of the problem Judge Norris observed in paragraph 32:

In relation to the financial context the judge dealt, in paragraph 33, with four points. The first related to the fact that MAL made no provision in its accounts against any liability for mis-selling but was, by contrast, paying a substantial dividend. He considered it possible, but unlikely, that the board of a listed company intended to strip a subsidiary of its assets without making proper provision for its liabilities. The second consideration, consequential on the first, was to the effect that following the sale of the shares in MAL its accounts would not comply with the guidance given by the Institute of Accountants for England and Wales, to which I have referred in paragraph 13 above. The third point arose from the provision of £250,000 in the accounts of Hambro in relation to both priority and non-priority cases. The judge commented that if Hambro were not liable for the non-priority cases why was it making provision for them. The fourth point related to the balance sheet of MAL prepared by Hambro for the purposes of ss.151-156 Companies Act 1985. It contained no provision for any pension mis-selling liability arising over the next 12 months or at all. Of the three possible explanations for such an omission he considered that the existence of an unqualified indemnity from a third party was the most likely.

In paragraph 34 Judge Norris dealt with what he described as the range of the Pensions Deed. He said:

In paragraphs 35 and 36 he dealt with the structure of the Pensions Deed. He considered that clauses 2.1 and 2.2 contained a broadly worded obligation from which clause 2.3 excluded certain classes of investor and certain types of liability. He recognised that, although each part of clause 2.3 was intended to have a real function it did not create discrete categories of exclusion because there was some overlap.

Judge Norris then turned to the language of clause 2.3. He recognised (paragraph 37) that this was the starting point and gave rise to a number of points not all tending the same way. First the excluded categories should not be over literally construed. Second, the phrase “category of investor” in clause 2.3.1.6 does not necessarily mean ‘priority case’. Third, what was to be investigated was not the client database but “any class of business” or “any category of investor” so that it is known what or who they are before any “investigation” begins. Fourth, those classes or categories are not clear. Fifth, the phrase “published recommendations at the date of this deed” shows that it was intended to draw a line somewhere. Sixth the provisions of clause 2.3.1.7 could lead to some oddity.

In paragraphs 38 and 39 Judge Norris repeated his conclusion and summarised his reasons in the following terms:

The judge noted that in the light of this conclusion the alternative claim for rectification did not arise before him but he went on to make the requisite findings of fact in case it did on appeal. In the circumstances, as I have explained, the issue of rectification does not arise in this court either. Accordingly it is unnecessary to consider any of the judge’s later conclusions.

Counsel for Hambro submitted that the judge was wrong. He contended that the essential point is the true meaning of the word “investigation” in clause 2.3.1.6. He submitted that it is co-extensive with ‘active review’ as required by the SIB 1994 Review in the case of the priority categories and the ‘write-ins’. He argued that the financial context, as seen by the judge, added nothing or, in some cases, is inadmissible on the issue of construction. He accepted that if he were right on the question of construction then sub-paragraphs 1 to 5 of sub-clause 2.3.1 added nothing because they would be excluded by sub-paragraph 6 anyway.

On the meaning of the word “investigation” he submitted that it was a more stringent term than ‘review’ and was naturally to be equated with the ‘active review’ of the priority categories for which SIB 1994 Review provided. He suggested that Judge Norris had wrongly equated “investigation” with identification. Taking the example of the self-employed he suggested that they were not a “class of business or a category of investor” requiring any investigation for they were excluded for all purposes.

In relation to the various points made by the Judge in paragraph 39 of his judgment (see paragraph 24 above) he commented that in sub-paragraph (a) the judge had confused the risk of SIB extending the priority categories with the risk of write-ins. In respect of sub-paragraph (b) he suggested that it was not necessary to find clear words to limit the indemnity as the question was what on its true construction was its ambit. The factor mentioned in sub-paragraph (c) was on its face neutral.

In relation to the financial context he submitted that what (if any) provision the parties made in the accounts of MAL was an irrelevant or inadmissible consideration. The accounts to the year ended 31st December 1995 were no part of the factual matrix in which the Pensions Deed was agreed and executed and so were irrelevant. The balance sheet prepared as at the day before completion for the purposes of ss.151 to 156 Companies Act 1985 could only reflect the subjective understanding of MAL and MHL as to the effect of the Pensions Deed. As such it was inadmissible. In any event the requisite statutory declaration was made and there was no ground for suggesting that it should not have been made.

Counsel for MAL and MHL submitted that the judge was right for, essentially, the reasons he gave. He agreed that the issue was the true meaning of the phrase “requiring investigation” but submitted that it extended beyond the priority categories and write-ins. He submitted that clause 2.3.1.6 was intended to sweep up those cases not specifically excluded by the prior sub-paragraphs. He pointed to the width of the review envisaged by Recitals (C) and (D) and the fact that the words used were ‘requiring investigation’ and not ‘active review’. He relied, as he had at the trial before Judge Norris, on the financial background and the general proposition that where one of two possible constructions would lead to illegality the court should prefer the other, see Carney v Herbert[1985] 1 AC 301, 317 and Neilson v Stewart[1991] BCC 713, 716.

Counsel for MAL and MHL also relied on the dictum of Staughton LJ in Youell v Bland Welch [1992] 2 Ll.L.R. 127. At p.134 he said:

There can be no doubt that the immediate context of and background to the Pensions Deed was the SIB 1994 Review. I have set out or described the material parts of it in paragraphs 2, 9 and 10 above. Its practical implications had also been considered in the PIA process maps referred to in paragraph 11 and the guidance given by Institute of Actuaries and Institute of Chartered Accountants for England and Wales referred to in paragraph 13. At that time there was no distinction between phases 1 and 2 for that did not arise until the publication by FSA of its 1998 Review. The SIB 1994 Review clearly showed that the review comprised the five stages of (1) identification of the cases in question, (2) fact gathering, (3) assessment of compliance at the time, (4) assessment of loss by the investor and (5) provision of redress. The priority categories were sub-sets of the ‘cases in question’ identified at stage 1 to whom priority should be given in implementing stages (2) to (4). They were to be subjected to an ‘active review’. There was no suggestion in any of the literature dealing with the review published before the execution of the Pensions Deed that ‘a case in question’ not coming within a priority category was excepted from the review or was incapable of giving rise to a liability to provide redress at stage (5).

Recitals (C) and (D) clearly referred to the review as a whole “of the advice given on a case by case basis...since 29th April 1988” some of which might give rise to a liability. Clause 1 imposed on MAL the obligation to continue with and complete its “review of that part of its business relating to the sale of personal pension policies in accordance with the standards and requirements of SIB and PIA as published from time to time”. At the date of execution of the Pensions Deed the obligation to review extended to all ‘cases in question’ not merely those falling into a priority category.

Clause 2.2 limits the ‘cases in question’ by reference to certain types of personal pension business, namely transfers, opt-outs and non-joiners. It does not purport to limit liability by reference to any priority category. Clause 2.3, by contrast, seeks to limit liability by reference to categories of investor. Such categories are the self-employed, those that contracted out of SERPS otherwise than in connection with an occupational pension scheme, those who are in and are to remain in an occupational pension scheme and those who bought a personal pension policy before A-day. These categories are excluded by sub-paragraphs 1 to 5. None of these exclusions is linked to the priority categories.

In its context clause 2.3.1.6 appears to be a sweeping up provision in relation to the classes of business dealt with in clause 2.2 and categories of investor referred to in the earlier sub-paragraphs of clause 2.3. It seems to me to be inherently unlikely that a sweeping up provision in that context should impose for the first time an exclusion by reference to priority categories. Priority categories have no bearing on ‘classes of business’. Whilst they can have a direct bearing on ‘categories of investor’ there seems to be no good reason to exclude from the definition all those non-priority investors to whom MAL was liable when, as the published material at the time showed, the review continued to apply to them.

As counsel for Hambro rightly observed it all depends on the meaning to be attributed to the words “requiring investigation according to the published recommendations of SIB....at the date of this Deed”. As a matter of ordinary English I do not think that “investigation” is more akin to ‘active’ as opposed to ordinary ‘review’. Non-priority investors in the appropriate class of business did require such investigation. Had it been intended to exclude them it could so easily have been done by reference to priority categories as set out in paragraphs 16 and 19 of the SIB 1994 Review or by reference to the ‘active review’ envisaged by SIB in the case of those in the priority categories. But no such course was taken and there is no reason to think that it must have been intended.

This approach is confirmed by the further provisions of the Pensions Deed. Thus clause 2.3.4 refers to the SIB Review, not the active review. The provisions of clause 3 dealing with the conduct of claims by MAL, MHL or Mr Pirie are not limited to investors falling within a priority category. Similarly the power of attorney conferred on Hambro goes much further than would be needed if pension liabilities were limited to those investors who fell into a priority category.

For my part I think that the judge was right in the conclusion to which he came simply on the basis of the words used in the context of the deed as a whole and the factual circumstances surrounding its execution. I do not find it necessary to consider the parties’ accounting treatment or the steps taken to comply with the provisions of s.151 to 156 Companies Act 1985. Counsel for Hambro did not seek to rely on any of them as supporting his case. In my view counsel for MAL and MHL does not need to do so. Nor in my view does any question of the application of the rules to which Staughton LJ referred in Youell v Bland Welch [1992] 2 Ll.L.R. 127 arise.

The foregoing are my reasons for dismissing the appeal. In the circumstances I would make no order on the cross-appeal.

I agree.

I also agree.