Bestrustees Plc v Kaupthing Singer & Friedlander Ltd

This is an application pursuant to Rule 2.78 of the Insolvency Rules 1986 by BESTrustees plc (“the Trustee”) against the joint administrators of Kaupthing Singer & Friedlander Limited (“KSF”). KSF formerly carried on the business of a bank.

The Trustee is the trustee of Singer & Friedlander Limited Pension & Assurance Scheme (“the scheme”).

The application challenges and seeks to reverse the decision of the administrators to reduce by £2 million the Trustee’s proof of debt in the administration of KSF of £74,652,000 on the ground that the same amount had been paid to the scheme by KSF out of a trust account in which the scheme had a beneficial interest.

The scheme is a defined benefit pension scheme established to provide benefits to or in respect of its members on retirement, death, having reached a particular age, the onset of serious ill health and other circumstances. KSF is the sponsoring employer of the scheme. The scheme is an occupational pension scheme within the Pensions Act 1995 (“PA 1995”) and the Pensions Act 2004.

The scheme held a UK sterling bank account with KSF. The money in that account was used for the administration and management of the scheme, including paying monthly pensions payments to the scheme’s pensioner members.

On 3 October 2008 the Financial Service Authority issued a First Supervisory Notice (“the notice”) under powers conferred on it by the Financial Services and Markets Act 2000 requiring KSF, which was in financial difficulties, to open a segregated trust account. The notice required KSF to credit the trust account with a cash amount at least as great as the aggregate value of deposits accepted by KSF on both 2 and 3 October 2008 and thereafter to credit it with a cash amount at least as great as the value of subsequent deposits accepted by KSF from its customers from time to time. KSF duly set up the trust account at the Bank of England pursuant to the notice (“the trust account”).

Subsequently, on 3 October 2008 the scheme paid £2 million for the credit of its account with KSF. Pursuant to the notice that money was credited to the trust account.

On 8 October 2008 KSF entered into administration and the administrators were appointed in accordance with the provisions of Schedule B1 of the Insolvency Act 1986.

The scheme had a funding deficit as at that date. The Trustee was required to quantify the deficit as being the debt owed to the scheme by KSF, as the employer, pursuant to PA 1995 s. 75 (“the section 75 debt”). That process was not completed until April 2012.

In the meantime, on 13 February 2009 the administrators issued an application for directions on several issues concerning the funds in the trust account, including whether they were subject to a valid trust and, if so, the persons beneficially entitled to those funds. Mr Justice Peter Smith delivered his judgment on 15 July 2009 (Brazzill v Willoughby [2009] EWHC 1633 (Ch)), in which he held that all the money in the trust account was held on trust. He also specified who were the persons beneficially entitled to that money. There were appeals from his decision in relation to the identity of the beneficiaries and also whether there was an entitlement on the part of KSF to withdraw sums subject to the trust. The issue of the existence of the trust was not itself appealed. The judgments of the Court of Appeal (Sedley, Thomas and Lloyd LJJ) were delivered on 27 May 2010 ([2010] EWCA Civ 561). The Court of Appeal effectively reduced the beneficiaries who were entitled to claim against the funds in the trust account. It also held that KSF was not entitled to withdraw funds from the trust account unless the account was fully funded as regards the entitlement of regulated depositors, and then only to the extent of the surplus.

Barnett Waddingham LLP, the scheme actuary (“the actuary”), produced a report and certificate dated 3 April 2012 certifying the section 75 debt at £74,652,000. The report and certificate were based upon the annual report and financial statements for the scheme for the period ended 7 October 2008 audited by KPMG LLP. Those accounts attributed no value to the £2 million deposited by the scheme with KSF on 3 October 2008. The explanation given in the accounts was that the Trustee was unable, with certainty, to confirm the likely level of any recovery from the scheme’s bank account pending the outcome of legal proceedings. The audit opinion was dated 3 June 2009.

On or shortly after 31 May 2012 the scheme was paid the sum of £2 million from the trust account together with interest of £16,039

On 25 July 2012 a revised proof of debt was filed with the administrators based upon the actuary’s certification of the section 75 debt at £74,652,000.

By letter dated 2 August 2012 served in accordance with rule 2.77(2) of the Insolvency Rules 1986 the administrators said that they were only willing to admit the claim to rank for dividend as a non-preferential claim in the amount of £71,938,921. They made two deductions from the Trustee’s proof. The first was a sum of £713,079 representing the set-off of a claim of KSF against the Trustee. That is not challenged by the Trustee. The second deduction, which is challenged by the present application of the Trustee, was a sum of £2 million “representing amounts paid to the Trustee in respect of the claim of the Scheme against funds held [in the trust account].” The letter continued with the following explanation:

“This amount has been treated by the [administrators] as part of the dividend payable to the Scheme under its section 75 debt claim. As you are aware, the accounts on which the Scheme actuary based his section 75 valuation report do not, as far as the Administrators are aware, include any value for the funds held at the Bank of England, this increasing the section 75 debt by £2 million. As the [trust account] funds and the section 75 debt claim are, to the extent of the £2 million deposit, being made in respect of the same debt, the double dipping principle applies so as to prevent the Trustee from recovering a total of more than 100p in the pound on that claim.”

Those grounds for the £2 million reduction by the administrators have subsequently been amplified in correspondence and by the written and oral submissions on behalf of the administrators in the course of these proceedings to include, among other things, reliance on unjust enrichment and subrogation.

The administrators have so far made distributions to unsecured creditors of 76p in the pound. Their best estimate of the total dividend which will be paid to non-preferential creditors is 84p to 86.5p in the pound.

The debt claim under section 75 of PA 1995 is a statutory debt triggered by, in the present case, the entry into administration of KSF on 8 October 2008. In very general terms, that insolvency event triggered a statutory debt becoming due under the provisions of section 75 because, immediately before KSF entered into administration, the value of the assets of the scheme were less than the amount at that time of the liabilities of the scheme. By virtue of section 75(4) an amount equal to the difference was to be treated as a debt due from KSF to the Trustee. By virtue of section 75(4A) the debt is to be taken to have arisen immediately before the entry into administration of KSF.

Section 75(5) states that, for the purposes of ascertaining the existence and amount of the statutory debt, the liabilities and assets to be taken into account and their amount or value must be determined, calculated and verified by a prescribed person and in the prescribed manner. The relevant regulations are the Occupational Pension Schemes (Employer Debt) Regulations 2005 (“the Employer Debt Regulations”). In very broad terms, sufficient for the purpose of this judgment, the Employer Debt Regulations provide that (1) the amount of the relevant scheme liabilities are to be calculated and verified by the scheme actuary; (2) they are to be so calculated and verified on the basis that they would be discharged by the purchase of annuities; and (3) the assets, which are to be valued by reference to the same date as the liabilities are calculated, are those attributable to the scheme in the relevant audited accounts and are to have the value given in those accounts.

The relevant accounts in the present case are the audited accounts prepared for the period ended 7 October 2008 (“the audited accounts”). The parties agree that, strictly speaking, those accounts should have been prepared for the period ending on 8 October 2008, which was the date on which KSF entered into administration, but no point has taken on that detail in this application.

On the hearing of the application, Mr Tom Smith, counsel for the administrators, emphasised that the administrators do not challenge the validity of the section 75 certificate and they accept that the section 75 debt is the sum certified by the actuary. He supported the administrators’ reduction of the amount of the Trustee’s proof (as to the £2 million element of the reduction) on two bases. Firstly, he contended that payment to the Trustee of the £2 million from the trust account partly discharged the section 75 debt to the same amount and that recovery of the same amount from KSF’s assets was barred by the rule against “double dipping”. Secondly, he contended that, unless the Trustee’s proof was reduced by £2 million to reflect what has been paid to the Trustee from the trust account, there would be over-recovery by the Trustee and, by virtue of the principles of unjust enrichment, the excess recovered by the Trustee on behalf of the scheme would be held on trust for KSF.

Mr Smith drew attention to the audited accounts underlying the section 75 certification in order to show how the assets taken into account by the actuary had been calculated. He observed that those accounts were expressly mentioned in the section 75 certification letter as the basis for the value of the assets taken into account by the actuary. The audited accounts contained the following passage:

“The Trustees maintained a bank account with Kaupthing Singer & Friedlander Limited, the Principal Employer. A £2 million disinvestment was paid into this bank account on 4 October 2008. The disinvestment amount of £2 million was made in order to be able to pay monthly pension payments and other benefits over the next 6 months. When the Principal Employer entered administration on 8 October 2008 the assets in this bank account were frozen. Legal proceedings are currently underway in order to recover the amounts. The Trustees are unable, with certainty, to confirm the likely level of any recovery from the Scheme’s bank account pending the outcome of these legal proceedings.”

There was also the following note in relation to the current assets:

“When the Principal Employer entered administration on 8 October 2008 the assets in this bank account were frozen. Legal proceedings are currently underway in order to recover the amounts. The Trustees are unable, with certainty, to confirm the likely level of any recovery from the Scheme’s bank account pending the outcome of these legal proceedings.”

Mr Smith reasoned that the audited accounts recognised that the £2 million deposited with KSF and transferred to the trust account was an asset of the scheme but was given no value, and, had it been given its true value of £2 million, the section 75 debt would have been reduced by the same amount. Accordingly, he submitted, the Trustee’s claim against the trust account and that part of the section 75 debt attributable to the £2 million were in substance the same claim; payment of the £2 million from the trust account discharged the section 75 debt to that extent; and the rule limiting “double dipping” prevents the Trustee recovering anything further from KSF in respect of the same £2 million.

The rule limiting “double dipping” prevents recovery of what is in substance the same claim against two estates. Mr Smith said that, in the present case, the two distinct estates were, firstly, the funds held on trust by KSF in the trust account and, secondly, KSF’s insolvent estate available for distribution to its unsecured creditors.

Mr Smith further submitted that, even if, strictly speaking, the £2 million paid to the scheme out of the trust account did not legally discharge the section 75 debt in the same amount, the effect of the rule limiting double dipping is that receipt by the Trustee of the £2 million from the trust account bars recovery of the same amount from KSF because they are in substance the same claim. He advanced that argument by referring to Barclays Bank Ltd v T.O.S.G. Trust Fund Ltd [1984] AC 626, Re Polly Peck International plc (in administration) [1996] 2 All ER 433 and Mills v HSBC Trustees (CI) Ltd [2012] 1 AC 804. Those cases were concerned with the rule against double proof, that is to say the rule preventing more than one proof of the same debt being made against the same estate, leading to the payment of a double dividend out of one estate, rather than the rule limiting double dipping which prevents a double proof of the same debt against two separate estates Mr Smith submitted that those cases are, nevertheless, relevant to the rule limiting double dipping because the policy considerations underlying both rules in the context of insolvency are the same, namely “to ensure pari passu distribution of the assets comprised in the estate of an insolvent in pro rata discharge of his liabilities” and so to avoid injustice to the other unsecured creditors: T.O.S.G. Trust Fund at 659H-660A (Slade LJ) and 636G (Oliver LJ).

Mr Smith particularly relied on statements in T.O.S.G. Trust Fund that the application of the rule against double proof (and so, by analogy, the rule limiting double dipping) depends on whether the proofs or claims “are in respect of what is in substance the same debt”: see 660A. He referred to statements of Kerr LJ in that case (at 649A, 652A and 654H-655A) that the rule against double proof is ultimately based on what the court regards as justice between all the creditors; that, even where the situation is not analogous to that considered in any decided case, the court might have to find a just solution stemming from the nature of the transaction, the relationship between the parties and their presumed common intention; and that it would be unfair to the general body of creditors and inconsistent with the principle of the rule against double proof for both the banks and the agency in that case to prove and receive a dividend “whether or not this rule is strictly applicable in the circumstances of this case”. In Mills (at [11]) Lord Walker also described the rule against double proofas preventing a double proof of what is “in substance the same debt being made against the same estate”.

Mr Smith submitted that, looking at the matter as one of substance rather than form, the claim to the £2 million from the trust account, which has been duly paid, is the same as the claim to the same amount as part of the section 75 debt.

Mr Smith supported those arguments by positing the example of a person who has deposited a sum with KSF in the period covered by the notice and has submitted a proof for that amount. He said that, once such a person has been paid the entire amount of that deposit out of the trust account, there is nothing further for which they can in principle prove or have in fact sought to prove in KSF’s administration.

Mr Smith’s alternative argument was based on unjust enrichment. As I understood it, his submissions on unjust enrichment fell into two parts. He contended, firstly, that if the payment of the £2 million from the trust account discharged the section 75 debt in the same amount, then KSF, as trustee of the trust account, would be entitled to be subrogated to the Trustee’s rights against KSF’s insolvent estate in administration. He submitted that followed from a principle that where two persons are both liable to the same creditor, and one person pays the creditor and discharges the other person’s debt, then the paying debtor will usually be entitled to be subrogated to the creditor’s rights against the non-paying debtor (in addition to having a direct claim for contribution or reimbursement against that non-paying creditor). On the facts of the present case, however, that argument has no practical consequences if payment of the £2 million from the trust account has indeed discharged the section 75 debt in same amount since it is accepted that in those circumstances the section 75 debt is itself reduced by the same amount.

Mr Smith’s second way of arguing for subrogation on the basis of unjust enrichment rested on an assertion by him that there would be an over-recovery by the Trustee if, in addition to the £2 million the scheme has already received out of the trust account, the Trustee received further payment in respect of its proof for the section 75 debt. He said that the payment to KSF’s unsecured creditors of an anticipated dividend of 86.5p in the pound together with the £2 million already paid to the Trustee out of the trust account would result in the Trustee receiving more than 100p in the pound. Mr Smith contended that, in order to prevent such over-recovery and the consequent unjust enrichment, principles of subrogation would mean that any such over-recovery by the Trustee would be held on trust for KSF as trustee of the trust account. He articulated the principle, on which that analysis rested, as being that equity will intervene to impose a trust to prevent a creditor recovering more than 100p in the pound where the creditor has two claims in respect of the same liability and even though satisfaction of one of those claims does not discharge the other. He classified this head of unjust enrichment as “over-accumulation of recoveries” by a creditor.

Mr Smith supported that argument by reference to obiter comments made by Sir Richard Scott V-C in Howkins & Harrison v Tyler [2001] PNLR 27 at [20] and the observations on those comments by Professor Charles Mitchell in his book on The Law of Contribution and Reimbursement at paragraphs 7.07 and 7.21, a footnote to which refers to the earlier paragraph 2.44. Mr Smith submitted that KSF would be entitled to any such over-recovery held by the Trustee on trust for KSF as trustee of the trust account since KSF is itself a beneficiary of sums in that account in excess of what is due to depositors. Mr Smith relied upon paragraphs [92] and [144] in the judgment of Lloyd LJ of 27 May 2010 ([2010] EWCA Civ 561) as finding that KSF is a beneficiary of any such excess. He said that the trust account was, in fact, overfunded by £13 million.

Mr Smith has presented arguments in opposition to the application as persuasively as it is possible to do, but I consider that they all fail, and plainly so. I can state my reasons very briefly.

There are two insurmountable problems for the administrators in the stance they have taken in relation to their reduction of the Trustee’s proof by a sum equal to the £2 million received by the scheme from the trust account. First and foremost, there is no challenge by them to the amount of the section 75 debt certified by the actuary, including the figure for the assets of the scheme based on the audited accounts. They do not seek to challenge, and have adduced no evidence to challenge, the nil-value attributed to the £2 million deposit in the audited accounts as at the date to which those accounts were drawn. They, therefore, accept that, as at that date, the deposit had no value because of the uncertainty arising from the issues in the pending litigation, which included the number and identity of those entitled to claim a beneficial interest in the funds in the deposit account.

The value of those deposits only became clear as and when (1) it was determined by Peter Smith J in his judgment of 10 July 2009 ([2009] EWHC 1633 (Ch)) at [102] that the payments into the trust account were held on trust; and (2) the Court of Appeal delivered its judgments on the appeal from Peter Smith J on 27 May 2010 ([2010] EWCA Civ 561), including on the issues as to who the beneficiaries of the money in the trust account were and as to the right of KSF to make withdrawals from the trust account.

As Sales J lucidly explained in his judgment of 16 March 2012 in BESTrustees plc v Kaupthing Singer & Friedlander Ltd [2012] EWHC 629 (Ch), the Employer Debt Regulations require the assets and liabilities of a pension scheme to be valued, for the purposes of ascertaining the section 75 debt, in a notional exercise immediately before the trigger event, here KSF entering into administration on 8 October 2008. Changes in the value of assets or the extent of liabilities after that time are irrelevant. In the present case, just as the value of the £2 million deposit increased after 8 October 2008 as litigation progressively clarified the rights of those, including the Trustee, entitled to the money in the trust account, so the evidence also shows that the scheme’s “buy out” liabilities, that is to say the notional cost of going into the market to purchase the annuities which would match the scheme’s liabilities to its pensioners and members, also increased substantially after that date.

That is not to say that it is impossible to envisage circumstances in which the actuary’s certification of the section 75 debt could be set aside or adjusted because of matters subsequently coming to light concerning the audited accounts by reference to which the value of the assets was fixed. Fraud is an obvious example. There may be other circumstances, but it is not necessary to consider them in the present case because there is no accountancy or other relevant evidence to support any case for reviewing the value placed in the audited accounts on the £2 million deposit made by the Trustee with KSF on 3 October 2008 or for challenging the adoption by the actuary of the value of the scheme’s assets in those accounts for the purposes of calculating the section 75 debt. Indeed, as I have said, no such challenge is made.

The second insurmountable problem for the administrators is that the £2 million held in the trust account for the scheme was owned by the Trustee. As I understand the position, the £2 million deposit made by the scheme on 3 October 2008 was immediately credited to the trust account. It was always held beneficially for the Trustee. It was always the Trustee’s property. It follows that the relationship between the Trustee and KSF in relation to the £2 million deposit was never one of creditor and debtor. Subject to any particular conditions applicable to the operation of the trust account, it was only ever one of bare trust for the Trustee.

It follows inexorably that payment by KSF of the £2 million to the Trustee out of the trust account could not have discharged any part of the section 75 debt. To treat the payment as such a discharge would be both to treat the £2 million as an asset which was or ought to have been taken into account by the actuary and also to treat the relationship between KSF, as trustee of the trust account, and the Trustee as one of creditor and debtor rather than trustee and beneficial owner. For the same reasons, the rule limiting double dipping has no relevance. In relation to the £2 million the Trustee never had the same claim against both KSF in administration and KSF as the trustee of the trust account. It only ever had one claim, namely to the return of its own £2 million from KSF, as trustee of the trust account. That £2 million claim was never any part of the section 75 debt. Neither in form nor in substance was the £2 million in the trust account the same as any part of the section 75 debt provable in the administration of KSF. In this context, as was pointed out by Walker J in Re Polly Peck International plc [1996] 2 All ER 433 at 444, the focus is normally on legal substance rather than economic substance. In any event, on the facts of the present case, there is no difference between the two.

I do not accept Mr Smith’s analogy with a person who deposited a sum with KSF in the period covered by the notice and has subsequently been paid the entire amount of that deposit out of the trust account. In such a case, that depositor is not entitled to any payment in KSF’s administration because the proof was in respect of precisely the same deposit as has now been repaid. In the case of the Trustee, however, re-payment of the deposit and the section 75 debt are quite different since the value of the deposit lies entirely outside the section 75 debt (for which it was given a nil-value on the basis of the audited accounts), and the section 75 debt is a statutory debt which is not challenged. So far as there is an analogy at all, it is one that conflicts with Mr Smith’s reliance on the paripassu principle. The payment in full of the other depositors means that they too were not re-paid pari passu with the general body of unsecured creditors. That is simply the inevitable consequence of the establishment of the trust account to which their deposits were credited and which had to be repaid in full to reflect their beneficial ownership.

The claim advanced by Mr Smith in unjust enrichment for over-recovery by the Trustee fails on many counts. So far as concerns the section 75 debt, there has not been an over-recovery by the Trustee. Nor will there be. Taking the best estimate of the likely final dividend for unsecured creditors of KSF as 86.5p in the pound, the Trustee’s ultimate recovery from the administration of KSF in respect of the section 75 debt certified by the actuary at £74,652,000 will be £65,574,000. Even if the £2 million was taken into account, there would still be a substantial shortfall.

It is not possible to carve £2 million out of the section 75 debt and apply Mr Smith’s unjust enrichment and subrogation arguments in relation to that element. The statutory debt is, as Ms Raquel Agnello QC, for the Trustee, submitted, a single indivisible debt. To go behind the actuary’s certification of the total amount of the statutory debt would also be unprincipled for all the reasons I have given earlier, including, in particular, that neither in form nor in substance was the £2 million in the trust account the same as any part of the section 75 debt.

Ms Agnello had other challenges to Mr Smith’s unjust enrichment and subrogation arguments but it is not necessary to consider them.

For those reasons I grant the application. I order that the decision of the administrators to reduce the Trustee’s proof by £2 million on account of the £2 million paid to the Trustee out of the trust account be reversed.