AON Pension Trustees Ltd v MCP Pension Trustees Ltd

The respondents in this case are the trustees of Maxwell Communication Works Pension Scheme ("the works scheme"). This is a final salary occupational pension scheme. The claimant provided administration services to the works scheme from around 1992 to late 1997. Between 1988 and January 1996 the works scheme took a transfer of lenders and assets from another Maxwell group occupational pension scheme, namely the Deimer &  Reynolds Limited Retirement and Death Benefit Plan ("the D & R scheme"). In particular there was a transfer of 32 members from the D & R scheme ("the D & R transferees") together with the relevant assets. By an error which the respondent contends was due to the negligence of the appellants, the transferees were wrongly recorded as being members of the staff scheme rather than the works scheme. The trustee of the works scheme bought out the members' benefits between 1997 and 2003. There was an apparent surplus of some £2.67 million after meeting the liabilities and these were used to provide bonuses to the members. However, none of these 32 members were considered in the course of the buyout and they did not have benefits secured by the works scheme. It is accepted that the trustees had genuinely forgotten of the existence of these members.

During the wind-up of the scheme the trustees undertook an extensive advertising campaign calling for former members of the works scheme to notify the claims in accordance with the requirements of section 27 of the Trustee Act 1925. The outcome of this was that three individuals were identified but none of the D & R transferees responded. In the course of the wind-up of the works scheme, the trustees obtained two insurance policies. One was an overlooked beneficiary insurance policy and the other was a run-off liquidated funds insurance policy. These policies were used to pay out benefits to the D & R transferees, who were found on investigation to be entitled to payment. In total there have been, we are told, some 19 persons now who have received benefits from the insurance, and the amount paid out exceeds £1 million.

The trustees acting at the behest of the insurers are suing the appellant administrators of the scheme for negligence. It is said that they mis-recorded the allocation of the D & R transferees and failed to identify them as members of the works scheme. The appellants deny liability. They say that the transferees were never members of the works scheme and, further, they deny any negligence. These matters have not been determined because it was agreed that there should be a preliminary issue of three questions. Two of them were not pursued before the judge below. He had to consider one preliminary issue only, which was this:

If the trustees were not liable, then of course there was no obligation to make any payments to the transferees and the appellant could not be liable for the monies paid out by the insurance company. Paradoxically, therefore, the trustees are admitting their liability and the administration company are saying that they were wrong to do so. The judge held that section 27 did not relieve the trustees from liability. The administration company now appeals that decision.

Section 27 is as follows:

“27 Protection by means of advertisements

(1)

With a view to the conveyance to or distribution among the persons entitled to any real or personal property, the trustees of a settlement [,trustees of land, trustees for sale of personal property] or personal representatives, may give notice by advertisement in the Gazette, and [in a newspaper circulating in the district in which the land is situated] and such other like notices, including notices elsewhere than in England and Wales, as would, in any special case, have been directed by a court of competent jurisdiction in an action for administration, of their intention to make such conveyance or distribution as aforesaid, and requiring any person interested to send to the trustees or personal representatives within the time, not being less than two months, fixed in the notice or, where more than one notice is given, in the last of the notices, particulars of his claim in respect of the property or any part thereof to which the notice relates.

(2)

At the expiration of the time fixed by the notice the trustees or personal representatives may convey or distribute the property or any part thereof to which the notice relates, to or among the persons entitled thereto, having regard only to the claims, whether formal or not, of which the trustees or personal representatives then had notice and shall not, as respects the property so conveyed or distributed, be liable to any person of whose claim the trustees or personal representatives have not had notice at the time of conveyance or distribution; but nothing in this section—

(a)

prejudices the right of any person to follow the property, or any property representing the same, into the hands of any person, other than a purchaser, who may have received it; or

(b)

frees the trustees or personal representatives from any obligation to make searches or obtain official certificates of search similar to those which an intending purchaser would be advised to make or obtain.

(3)

This section applies notwithstanding anything to the contrary in the will or other instrument, if any, creating the trust.”

A preliminary question is whether section 27 applies to trustees and pension funds at all. Both parties accepted before the judge that it did. Nonetheless the judge was asked to express a view on the issue and he did so, agreeing with counsel that it did apply. He gave a series of reasons for reaching that conclusion whilst noting that he had not had the benefit of any contrary argument on the point: see [2010] 2 WLR 268 paras 12 to 21. We have heard no argument at all on this point. Suffice it to say that I find the reasoning of the judge highly persuasive. Of particular significance is the fact that section 27 was amended by the Trusts of Land and Appointment of Trustees Act 1996 to include for the first time trustees of trusts for the sale of personal property. Until that time section 27 was applicable only to trustees of a disposition on a trust for sale and trustees of a settlement. These trusts were defined by reference to land and not personalty: see sections 68(19) and 68(15) of the Trustee Act 1925 respectively. Accordingly there was a cogent argument that they would not include trusts of personalty, which would cover most pension funds: see the discussion by Peter Docking: "Pension schemes and Section 27 notices: do they work?" in 1995 Trusts Law International, Volume 9 Number 4. Whatever doubts there may have been about the application of the section to pension funds before that amendment, they seem to have been laid to rest by that changed wording which ensures that the section covers trusts for sale of personal property. However, since we have not heard contested argument on the point I make no formal ruling about it.

I turn to consider the section. The purpose is clear. If there was the possibility that beneficiaries or potential beneficiaries may emerge from the woodwork and make claims on the funds of a trust after the distribution, trustees would be unwilling to distribute because of the risk of personal liability to such claimants. This section therefore sets out a procedure which, if properly followed, relieves trustees of that risk.

There are three points to note about the drafting of the section and they are not in dispute. First, the section relieves the trustees from liability only with respect to claims of which they did not have notice at the time of distribution. If they did have notice they must honour the claim, even though the claimant does not reply to the advertisement made in pursuance of section 27: see Re Land Credit Co of Ireland, Markwell’s Case (1872) 21 WR 135 and the Privy Council decision in Guardian Trust and Executive Co of New Zealand v Public Trustee of New Zealand  [1942] AC 115 at 127 per Lord Romer. Markwell’s Case was concerned with a statutory predecessor of this section, namely section 29 of the Lord St Leonards’Act (Law of Property and Trustees Relief Amendment Act 1859) and the Guardian case was concerned with similarly but not identically worded New Zealand legislation, but it is accepted that the same principle applies to section 27.

Second, there is no definition in the section or indeed elsewhere in the Act of what constitutes notice. Third, having regard to general concepts of equity, notice means actual or constructive notice and the trustee may have constructed notice of a claim even though he does not have actual knowledge of it. As Lord Esher MR observed in English & Scottish Mercantile Investment Company Limited v Brunton (1892) 2 QB 700 at 708, constructive notice is "wholly founded on the assumption that a man does not know the facts".

There is, however, a dispute between counsel about the reach of the doctrine of constructive notice in this section. This disagreement has as its starting point a five-fold classification of knowledge which was laid down by Peter Gibson J in Baden Delvaux v Societe Generale [1993] 1 WLR 509 at 575-576. He identified five categories of knowledge as follows:

The appellant accepts that the trustees will have constructive notice if they have knowledge falling within either of the first three categories but not categories 4 and 5. The trustees say that they will have notice if any of the circumstances envisaged in 1 to 5 are satisfied. For reasons I develop below, I do not think that it is necessary to resolve this dispute in the circumstances of this case, and nor do I accept that the starting point is a necessary and helpful way of identifying the scope of constructive notice. In my judgment, this case can be resolved simply by focussing on the concept of actual notice.

Since the assumption for the purposes of the preliminary hearing is that the D & R transferees did transfer to the works scheme, it is conceded, for the purposes at least in the preliminary issue, that the trustees did know of the transfers at the time of transfer and did accordingly have actual notice at that time that the D & R transferees were beneficiaries of the scheme. However, the appellant alleges that this does not constitute effective notice within the meaning of section 27 because the trustees had genuinely forgotten that they were beneficiaries by the time the funds were distributed. The submission is that once they had forgotten this fact they ceased to have knowledge of it; and that once they ceased to have knowledge of it, they ceased to have notice of it. It follows in my view that the only real issue which the court has to decide is whether a trustee who once had actual knowledge for the particular person as a beneficiary but who by the time of distribution of the funds has genuinely forgotten that fact can escape liability to that beneficiary by virtue of section 27.

The fundamental premise underlying the appellant's argument is that, at least for the purpose of identifying actual notice, knowledge and notice are the same thing. Once knowledge is lost notice ceases. This is linked with the submission that there is a temporal dimension to the question whether the trustees have notice. Section 27(2) provides in terms that the trustees are not liable to any person "of whose claim the trustees ... have not had notice at the time of ... distribution". The argument is that the trustees do not have notice at the time of distribution that someone is a beneficiary of the trust if they genuinely forget that fact, even though they had such notice at an earlier time. It is said that this does not create any injustice because the trustees have to prove, the onus being on them, that they have genuinely forgotten that fact and this would in practice be difficult to establish. However, if they can prove it, it is submitted that it is just that they should not be liable simply because their memory has failed them.

Reliance is placed in particular upon certain observations of Sir Robert Megarry in Re Montagu’s Settlement Trusts [1987] 1 Ch 264 at page 284 paragraphs B to G:

“If a person once has clear and distinct knowledge of some fact, is he to be treated as knowing that fact for the rest of his life, even after he has genuinely forgotten all about it? To me, such a question almost answers itself. I suppose that there may be some remarkable beings for whom once known is never forgotten; but apart from them, the generality of mankind probably forgets far more than is remembered. So far as the doctrine of notice is concerned, there is authority, in relation to the rule in Dearle v Hall (1828) 3 Russ. 1, for saying that the question is whether at the time in question notice previously obtained continues to operate on the mind of the recipient: see Ipswich Permanent Money Club Ltd v Arthy [1920] 2 Ch. 257. Of course, since 1925 there is a statutory scheme under section 137 of the Law of Property Act 1925 for regulating priority by means of the receipt of written notices; and nothing I say is intended to suggest that such notices might lose their effect if the recipient or anyone else forgets them. But apart from such statutory provisions, it seems to me that a person should not be said to have knowledge of a fact that he once knew if at the time in question he has genuinely forgotten all about it, so that it could not be said to operate on his mind any longer. This is emphasised in relation to constructive trusts in that, in my view, it would be wrong to hold that a person’s conscience is affected by something that he does not know about. Even if section 199 of the Law of Property Act 1925 had any application, and notice were in issue, I cannot accept Mr. Taylor’s contention that the section shows that what a person once knew he is conclusively presumed still to have notice of; for the section is framed in terms of what ‘is’ within the purchaser’s own knowledge, and not ‘is or ever has been’ within his knowledge.” (italics added.)

Similarly it is said that the liability of trustees here should not be engaged once knowledge is forgotten and that the italicised words of the quote strongly support the submission that a person should not be deemed to continue to have notice of something he knew but has forgotten.

Deputy Judge Cousins rejected these arguments, essentially for the reasons advanced by the trustees: see [2010] 2 WLR at 268 paragraphs 63 ff. He held that section 27 merely requires that notice must have been given by the time of contribution. However, notice is not to be equated with knowledge and, even if the trustees forget that notice has been given, that does not cause the notice to lapse or otherwise negate the notice.

I agree with the conclusion reached by the judge. Trustees have actual notice of the interests to the beneficiaries, notwithstanding that the transferees did not reply to the advertisement. Markwell’s case applies. The fact that the trustees had forgotten that they had notice is immaterial. I agree with the judge that knowledge and notice are different things and that, even on the assumption that forgetting something involves no longer having knowledge of it (itself an interesting philosophical point), the fact that the trustees may have forgotten that they had received notice by the time of distribution is quite irrelevant. Section 27 is only concerned with whether the notice has been received by the time funds are distributed. Once actual notice is given, then in general it will persist and remain notice at the time of distribution. The observations of Sir Robert Megarry do not assist, because he was concerned with considering the question of knowledge when seeking to identify whether the obligations of a constructive trustee should be imposed on someone at all. In this case the obligations of a trustee already exist. The only issue is whether the trustee can avoid these obligations by forgetting that he owes them. I recognise that the words I have italicised in Sir Robert Megarry's judgment do lend some support to the appellant's argument that he can, but they are obiter and do not in terms apply to section 27. If they were intended to apply in that context, I would respectfully not follow them.

In my judgment it is quite impossible to say that notice lapses with memory, and I am satisfied that section 27 does not have that effect. It would be astonishing if, as between the interests of the innocent beneficiaries and forgetful trustees, Parliament had intended to give precedence to the interests of the latter. It is no answer to say that satisfactory safeguards are provided by the difficulty of establishing that a fact has genuinely been forgotten. That may limit the cases when the forgetful trustees are given precedence, but it still affords them that precedence where the conflict arises, in my view wholly unjustifiably. It is not necessary to provide this protection to trustees in order to achieve the purposes of the section, namely allowing trustees to distribute the funds without risking proceedings from those whose interest they could not reasonably be expected to know about. Of course if the trustees can satisfy the court that they have acted honestly and reasonably and ought fairly to be excused, either wholly or in part, for the breach of trust, the court can grant them relief from liability under section 61 of the Trustee Act but this does not negate the liability itself. (In fact the question of whether the trustees could be excused from liability under section 61 was one of the preliminary issues which the appellant chose not to pursue)

In the circumstances it is not necessary to consider the reach of the doctrine of constructive notice in this section. Indeed it is difficult to see how it has any relevance to this case whatever its reach. If, contrary to my view, the appellants were right in asserting that the trustees do not have actual notice as a result of forgetting the identity of the beneficiaries, I do not see how they could be said to have been put on inquiry at the point of distribution so as to engage any of these other categories of knowledge either (although no doubt the trustees may then be subject to some other claim such as one in negligence). None of the Baden categories could apply.

In any event I have real reservations about whether the five Baden categories developed after the Trustee Act was passed are necessarily the best starting point for analysing what Parliament meant in section 27 when it used the concept of notice. I think it unnecessarily complicates an essentially simple case to engage with the issue of constructive notice at all. It follows that in my judgment the appeal fails. The case will have to be remitted for trial on the outstanding issues.

I agree.

I agree with the judgment of Elias LJ. I would add that the position of a pension fund trustee who, following the procedure for advertisement contained in s.27 of the Trustee Act 1925, makes a distribution which fails to take account of a claim of which it has notice, may not in substance be different from that of a voluntary liquidator who decides to advertise his intention to pay a distribution to creditors, in a members voluntary winding up. A creditor who fails to prove his debt in time cannot disturb a distribution once paid, but a liquidator may personally take if he fails to take account of any claims of which he would have been aware if he had inspected the company's records properly and made all appropriate inquiries: see Re Armstrong Whitworth Securities  [1947] Ch 673. As I have said, this is so even though Rule 4.182A of the Insolvency Rules 1986 provides that a creditor who does not make a claim in time is excluded from the benefit of any distribution already made.

As emerged from an intervention by Dyson LJ in the course of argument, it would be odd if section 27 of the Trustee Act 1925 exonerated a trustee who incurs, or may incur, liability on some other basis under the general law. In addition, of course, it is always open to a trustee who is in doubt as to his position to apply to the court for directions.