Keymed (Medical & Industrial Equipment) Ltd v Hillman & Anor

The First Defendant, Mr Paul Hillman, joined KeyMed in 1978, from Coopers & Lybrand, as an accountant. The Second Defendant, Mr Michael Woodford, joined KeyMed in 1981 as a 20-year old salesman. Both rose through KeyMed and within Olympus more generally. Mr Woodford, although he joined KeyMed later than Mr Hillman and was the younger man, rose faster. In time, Mr Hillman became Mr Woodford’s right-hand man and they worked together closely for most of their careers.

Mr Woodford, having joined KeyMed in 1981 as a 20-year old salesman, was rapidly promoted. He became KeyMed’s Managing Director a mere 9 years later (on 30 June

It will, in due course, be necessary to consider the circumstances of Mr Woodford’s departure from Olympus. For present purposes, it is only necessary to note that, on 19 December 2011, Mr Woodford began proceedings against Olympus in this jurisdiction (specifically the East London Employment Tribunal), claiming unfair dismissal on the grounds of racial discrimination and whistleblowing.

Mr Woodford’s claim against Olympus was compromised by a settlement agreement dated 29 May 2012 (the “Compromise Agreement”). The Compromise Agreement was approved by the Olympus board in a meeting on 8 June 2012.

The recitals to the Compromise Agreement say as follows:

“Whereas:

(1)

Mr Woodford was employed within [Olympus] from 16 March 1981 and by the [Olympus Corporation] from 1 April 2011 to 14 October 2011, when his employment was terminated. (The dates upon which his engagements started are: as president on 1 April 2011; as director on 29 June 2011; as representative director on 29 June 2011; and as chief executive officer on 1 October 2011, and his engagement ended: as president, representative director and chief executive officer on 14 October 2011; and as director on 1 December 2011).

(2)

Following termination of his employment, Mr Woodford commenced proceedings in the Employment Tribunal under Case Number 3200002/2012 on 3 January 2012 for automatic unfair dismissal under the Employment Rights Act 1996 (“ERA”) section 103A; unfair dismissal under ERA section 94; unfair detriment on the grounds of making one or more protected disclosures, contrary to ERA section 47B; unlawful discrimination and harassment due to his race, contrary to the Equality Act 2010 sections 39 and 40 (the “ET Proceedings”).

(3)

In order to achieve certainty and finality, it is the intention of Mr Woodford and

[Olympus Corporation] in entering into this Agreement that it shall operate to terminate

the relationship between them and, in consideration of the settlement set out herein, provide a full and absolute and irrevocable release by Mr Woodford and [Olympus] of all current and future Claims, in whatever jurisdiction, against (respectively) (i) [Olympus Corporation] or any Associated Company and (ii) Mr Woodford, whether or not the party in question has knowledge of them, whether or not they are in the contemplation of the parties and whether or not they exist in fact or law, as at the date of this Agreement.

(4)

Further, [Olympus Corporation’s] executive directors have undertaken to recommend to [Olympus Corporation’s] full Board of Directors that the terms of this Agreement be approved at the Board meeting scheduled to take place on 8 June 2012 and the Agreement is entered into by Mr Woodford on this basis.” 7. Mr Woodford’s counterparty to the Compromise Agreement was Olympus Corporation. Clause 4 of the Compromise Agreement contains various definitions. The following are material:

“Associated Company”	A company which is a subsidiary or a holding company of [Olympus Corporation], as the case may be, or a subsidiary of that holding company, “subsidiary” and “holding company” in this definition having the same meaning as in section 1159 of the Companies Act 2006.
“Claims”	Any claim, potential claim, counterclaim, potential counterclaim, right of set-off or potential right of set-off, right of contribution, right to indemnity, potential right to indemnity, cause of action, potential cause of action or right or interest of any kind or nature whatsoever, whether in existence now or coming into existence at some time in the future, whether known or unknown, suspected or unsuspected, however and whenever arising, in whatever capacity or jurisdiction, whether or not within the contemplation of the parties at the time of this Agreement, including claims which as a matter of law did not at the date of this Agreement exist and the existence of which cannot currently be foreseen and any claims or rights of action arising from a subsequent change or clarification of the law.
“Effective Date”	The date on which the Board of Olympus Corporation notified Mr Woodford’s legal advisers that the terms of the Compromise Agreement had been approved by the Board.
“Service Agreement”	The agreement between Olympus Corporation and Mr Woodford dated 5 March 2011.

Clause 11 of the Compromise Agreement provided (so far as material):

“11.

Full and Final Settlement

Mr Hillman was, for most of his career at KeyMed and in the Olympus Group, Mr

He held a variety of other positions in parallel with these. It is unnecessary to set these out, but it is important to note their existence, since they would undoubtedly have made demands on Mr Hillman’s time.

Mr Hillman’s employment with Olympus ceased, as did his directorships, in November 2011. His departure from Olympus was directly related to Mr Woodford’s.

At all material times, KeyMed operated an occupational pension scheme – the Staff Scheme, as I have described it. (Footnote: ⁸) The Staff Scheme was established with effect from 6 April 1975 by an Interim Trust Deed dated 3 April 1975. (Footnote: ⁹) The Staff Scheme was, initially, a defined benefit occupational pension scheme. (Footnote: ¹⁰) As will be described, in due course the Scheme ceased to be a defined benefit scheme and became (at least for entrants after that time) a defined contribution scheme. On 12 August 1992, a new trust deed and rules (the “1992 Trust Deed” and “1992 Rules”) were made and adopted. (Footnote: ¹¹) On 28 July 2000, a Definitive Trust Deed and Rules were adopted, which I shall refer to as the “2000 Staff Scheme Definitive Deed and Rules”. (Footnote: ¹²)

Between 2004 and 2011 – which is the critical period for the purpose of these proceedings – the trustees of the Staff Scheme were as follows. Between 2004 and 2007, there were three trustees:

Mr Hillman became a trustee in 1985, and Mr Woodford in 1989. Mr Craig had been a trustee from the Staff Scheme’s inception in 1975. (Footnote: ¹³) Mr Woodford described Mr Craig’s role as follows:¹⁴

“John “Hugh” Craig was a fellow trustee of the Main Scheme, and had a long history with KeyMed, having been a close adviser and confidant to Albert Reddihough. Hugh was not a KeyMed employee and had been an independent trustee representative of the members of the scheme for many years. He was a partner with Bates, Wells & Braithwaite (a London law firm that acted as advisers to KeyMed), and for a time was its senior partner. Hugh gave ongoing legal advice to the company on a range of matters and also acted as KeyMed’s Company Secretary until 31 March 2009. Over time, Hugh became a close and trusted personal friend.”

Until 2011, these three remained trustees. Mr Hillman and Mr Woodford ceased to be trustees of the Staff Scheme when their relationship with Olympus ended in November 2011. Specifically, they ceased to be trustees on 1 November 2011. Mr Craig remained a trustee until 24 March 2015.

Mr John Rowe and Mr Richard Reynolds joined as additional trustees of the Staff Scheme in 2008. (Footnote: ¹⁴)

Mr Rowe will feature in the events described in this Judgment. Mr Rowe joined KeyMed in 1984 as an assistant accountant. Over the years he assumed ever more senior roles within KeyMed and Olympus. In March 2003, he was promoted to the position of UK Group Financial Controller, reporting directly to Mr Hillman as Finance Director. In April 2008, his title was changed to that of Director of Finance and HR, which title reflected the work he was then undertaking. He was not then a Director of KeyMed: he only became a director on 1 April 2016. By January 2009, his role had expanded to include responsibility for internal audit and compliance for Olympus Europa Holding GmbH. On 1 April 2009, he became KeyMed’s company secretary, succeeding Mr Craig, who had previously held that role. He is now Regional Compliance Officer within Olympus.

Mr Rowe was also (from 28 July 2000) the “Administrator” of the Staff Scheme, (Footnote: ¹⁵) appointed pursuant to section 590(2)(c) of the Income and Corporation Taxes Act 1988 as then in force. (Footnote: ¹⁶) Section 590 sets out various conditions for the approval of retirement benefit schemes under the Act, one of which was that “there is a person resident in the United Kingdom who will be responsible for the discharge of all duties imposed on the administrator of the scheme under this Chapter”. These duties essentially related to the discharge of certain function relating to the taxation of schemes.

Mr Reynolds does not – from the material before me – appear to feature very much in the events described in this Judgment. He was, from 2011, the Vice-President of KeyMed’s Surgical Business and (presumably) was employed by KeyMed in some lesser capacity or capacities previously. His appointment as trustee of the Staff Scheme ceased at the same time as that of Mr Hillman and Mr Woodford (i.e., on 1 November 2011).

Mr Nick Williams was appointed a trustee of the Staff Scheme from 1 November 2011: he remains a trustee as at the date of this Judgment. Mr Williams will also feature in the events described in this Judgment. He became a Director of KeyMed on 12 April 2004, and ceased to be a Director on 31 March 2016, when he retired. He was the Managing Director of KeyMed from April 2011 until his retirement in March 2016. He remains a consultant on the Supervisory Board of “Olympus Europa SE & Co KG”, another company in the Olympus group.

The Staff Scheme actuaries throughout the period 2004 to 2011 were Mercer Limited (“Mercer”). (Footnote: ¹⁷) The principal person within Mercer with responsibility for the Staff Scheme was Mr Mel Wright, although of course others within Mercer acted in relation to the Staff Scheme. These others were (listed in alphabetical order according to surname):

As will be described in greater detail, it is inherent in the nature of pension schemes that there is an enormous potential for conflict between the interests of the members of the scheme and the interests of the employer sponsoring the scheme. Naturally, the advice that an actuary might give could – entirely properly – be influenced by the party the actuary was advising, particularly if the aims or objectives of members and employer diverged.

Save for very isolated instances occurring when the Executive Scheme was being established, Mercer were the only actuary involved in advising in relation to the Staff and Executive Schemes. In this capacity, Mercer advised individual members of the Staff Scheme, the trustees of the Staff Scheme and KeyMed itself. Mercer’s approach appears to have been that it was appropriate for Mercer to act in this way, with Mercer keeping an eye on potential conflicts of interest. If such a conflict arose, Mr Wright said that Mercer would give notice of this, and from then on would only act for the trustees of the Staff Scheme. (Footnote: ¹⁸) The only occasion, in the history related in this Judgment, when Mercer considered there actually to be a conflict was in assessing the transfer value of the rights of Mr Woodford and Mr Hillman from the Staff Scheme to the Executive Scheme. Otherwise, Mercer were content to advise persons with very different interests in relation to the Staff Scheme. (Footnote: ¹⁹)

From 2002, a number of consultations and reviews were undertaken of the UK pensions regime, which resulted in the introduction of the Finance Act 2004 and the Pensions Act 2004. These Acts introduced a number of changes to the UK’s pensions regime.

The Pensions Act 2004 made the following changes (amongst others):

The Finance Act 2004 made the following changes (amongst others):

Although various of the provisions of the Pensions Act 2004 came into force before 6 April 2006, 6 April 2006 was the date on which the Finance Act 2004 came into force. The collective effect of the Pensions Act 2004 and Finance Act 2004 meant that schemes like the Staff Scheme faced a very different regulatory environment from 6 April 2006, which date came to be known as “A-Day”.

Obviously, schemes needed to plan for A-Day well before 6 April 2006. In the case of the Staff Scheme, planning began in 2004. One of the critical questions that needed addressing by schemes – like the Staff Scheme – affected by the A-Day changes was whether to keep in place, on (as it were) a voluntary basis, the Revenue Limits.

The tort in question is the pre-2006 Act breach of the duty to exercise reasonable care, skill and diligence that was codified into section 174 of the Companies Act 2006. This was considered in Section C(2)(b)(v) above, (Footnote: ⁸³) and that consideration is not repeated here.

So far as the contractual duty is concerned, paragraph 16 of the Particulars of Claim pleads that “[p]ursuant to an implied term in his contract of employment dated 19 October 1978 (as amended), Mr Hillman was also under a contractual duty to act in KeyMed’s best interests”.

The precise nature of this duty is not further articulated. I shall treat it as being coterminous with the fiduciary duties considered above, and not more extensive than these duties. It accordingly does not require separate consideration.

The law as regards a director’s duty to disclose his/her misconduct or the misconduct of another director is as follows:

Once again, it is necessary to ask what, exactly, KeyMed alleges against the Defendants. I have no doubt that an innocent – or non-fraudulent – breach of duty is capable, in appropriate circumstances, of amounting to something that a director ought to disclose. However, I do not consider that such a case has been pleaded by KeyMed in this instance. Rather, it seems to me that the breach(es) of duty it is said the Defendants ought to have – and did not – disclose are the breaches of duty committed pursuant to their Conspiracy. That is the case that I find is made against the Defendants considering the pleadings as a whole.

It was accepted by KeyMed that there is no authority which considers directly the question of whether a trustee of a pension scheme owes a fiduciary or equitable duty to the employer sponsoring that pension scheme. (Footnote: ⁸⁸) KeyMed contended that because a trustee of a pension scheme was – in certain cases – obliged to consider the employer’s interests, “it is perfectly consistent with (and indeed follows from) this line of authority that a trustee of a pension scheme owes a duty to an employer. If the proper purpose of the trust involves taking an employer’s interests into account (as it must do when, for example, considering whether to return a surplus to the employer) then it ought to follow that a duty is owed to the employer to properly take its interests into account”. (Footnote: ⁸⁹)

For their part, the Defendants denied the existence of such a duty on trustees: (Footnote: ⁹⁰)

“A central tenet of a fiduciary duty is one of loyalty: the principal is entitled to the single-minded loyalty of the fiduciary. Thus, a fiduciary cannot act for the benefit of a third person without the informed consent of his principal. In the pension scheme context, there is obviously potential for the interests of members and the sponsoring employer to be different. In these circumstances, it is impossible for the trustees to owe funding and investment duties to both the members and the employer simultaneously, such as to render the trustees liable to compensate both for the losses caused by a breach of that duty to either of them. The position is that the trustees owe their duties to the beneficiaries, i.e. the members. That is not to say that the trustees of a pension scheme cannot take the interests of the employer into account if they so wish in the exercise of their powers, but the key point is that the trustees are not required to take those interests into account, and there is no claim against the trustees if they do not, and instead prefer the interests of the members over those of the employer.”

In my judgment, the position is as follows:

Accordingly, I hold that, as a matter of law, the Defendants qua trustees owed no duties to KeyMed. (Footnote: ⁹⁷)

The form of conspiracy alleged by KeyMed is unlawful means conspiracy. This tort is committed where two or more persons combine and take action which is unlawful in itself with the intention of causing damage to a third party who does incur the intended damage. (Footnote: ⁹⁸) There is no need for the parties to the combination to have a predominant purpose to injure: it is enough for them to have an intention to injure the claimant, and it is no defence for them to show that their primary purpose was to further or protect their own interests.¹⁰⁵ The intention to injure must simply be a contributing cause of the defendant’s conduct. (Footnote: ⁹⁹)

What constitutes “unlawful means” appears to be broadly defined, although there remains a degree of uncertainty as to what this embraces. (Footnote: ¹⁰⁰) However, it is clear that a director acting in breach of his or her fiduciary duties constitutes unlawful means. (Footnote: ¹⁰¹) I find that the causes of action alleged by KeyMed in this case and as described above at paragraphs

It is said by KeyMed that it is entitled to rely upon non-fraudulent breaches of duty committed by the Defendants, as its alternative case against Mr Hillman. (Footnote: ¹⁰²) In support of this contention, KeyMed relies upon the following points:

I do not consider that KeyMed’s alternative case remains open to it. I have reached this conclusion for the following reasons:

These two points are expanded upon below.

The Particulars of Claim contain a regrettably unclear statement of what, in terms, is being alleged against the Defendants. That is apparent from that fact that – at the opening of the trial – the Defendants (and Mr Hillman in particular) were uncertain as to precisely what was being alleged against them. It is necessary to consider various aspects of the pleading.

Although pleaded under the title “Summary of Claim”, paragraphs 7 to 12 of the Particulars of Claim set out and define the essential limits of KeyMed’s case, namely that the Defendants conspired against KeyMed, and that they committed various breaches of duty pursuant to that Conspiracy. (Footnote: ¹⁰⁸) The alleged breaches of duty and the alleged Conspiracy are inseparably linked. Because the Conspiracy allegation is based on an unlawful act conspiracy, the alleged breaches of duty are an essential element of this allegation; and the Conspiracy allegation itself necessarily involves deliberate wrongdoing. (Footnote: ¹⁰⁹)

Of course, the fact that the Conspiracy allegation requires KeyMed to show that the Defendants had an intention to injure KeyMed does not necessarily imply that the breaches of duty on which the Conspiracy is based were done dishonestly, but it is suggestive of that.

However, KeyMed’s case goes further than this. It is said that the breaches of duty alleged to have been committed were committed “pursuant” to the Conspiracy: (Footnote: ¹¹⁰)

“…Such breaches of duty were pursuant to an agreement or common understanding between the Defendants initially reached in or around 2005 (and continued thereafter) that they would, with an intent to injure and/or cause loss to KeyMed by those unlawful means, maximise the amount and security of their pension benefits…”.

In light of this nexus between the Conspiracy and the unlawful means which found the Conspiracy, I do not consider that it is open to KeyMed to maintain an alternative case of innocent breach of duty on the part of the Defendants. I expand on this further below.

The substance of the breaches of duty alleged

My conclusion is largely borne out when the specific allegations of breach of duty are considered:

Thus, an analysis of KeyMed’s pleas in relation to all duties save the duty to avoid conflicts of interest bears out my conclusion in paragraph 128 above that a case alleging dishonesty is the only one being advanced.

The expansion of KeyMed’s case in subsequent paragraphs of the Particulars of Claim bears this out:

Viewed on their own, the paragraphs of the Particulars of Claim dealing with conflicts of interest (paragraphs 84ff) are less clear in whether KeyMed is necessarily asserting a dishonest breach of duty or merely an innocent one. The pleas in paragraphs 85 and 87 of the Particulars of Claim are certainly suggestive of dishonesty, but in my judgment when viewed on their own these paragraphs are capable of being read as advancing a case on innocent breach of duty.

The problem with these paragraphs is that, when read in isolation, they appear to allege only an innocent breach of duty, whilst read in the context of the other allegations it is hard to see how anything other than a deliberate breach of duty can have been intended. One thing is clear: these paragraphs cannot, in my judgment, plead alternative cases of deliberate breach of duty and innocent breach of duty. There is no alternative case.

It seems to me, given the context, that even as regards the duty to avoid conflicts of interest, it must be KeyMed’s case that if and to the extent that the Defendants failed to declare their interests, that failure was not an innocent failure, but a very deliberate one, without which the Conspiracy would have failed.

If the ambit of the Particulars of Claim is clear, then that ambit cannot be widened by the Claim Form or the Reply

I have concluded that the ambit of the Particulars of Claim is limited to a dishonest claim against Mr Woodford and Mr Hillman. I accept that the allegations in the Claim Form and the Amended Claim Form are wider than this, but I do not consider this to be material. (Footnote: ¹¹⁷)

Equally, a subsequent pleading – like a Reply – cannot rectify a claim that has been abandoned.

Having set out and considered the relevant law and the scope of the case KeyMed is advancing, it is necessary to consider a number of other aspects relating to:

Finn draws a distinction between conflicts of interest and conflicts of duty. (Footnote: ¹¹⁸) In terms of a fiduciary’s responsibilities, English law draws no such distinction: the rules apply as much to conflicts of duty and duty as they do to conflicts of duty and interest. (Footnote: ¹¹⁹) Nevertheless, the distinction is a valuable one in the present case.

It is readily apparent that in the context of occupational pension schemes, the potential for conflicts of interest and conflicts of duty will be rife. In the present case, Mr Woodford and Mr Hillman were: (Footnote: ¹²⁰)

This is not an uncommon situation in the pensions field and it is worth seeking to identify the various conflicts – both of interest and of duty – that can arise:

In this case, the breaches of duty alleged by KeyMed involved conflicts between the Defendants’ interests as members of the Staff and then Executive Schemes and their duties as directors of KeyMed. It is worth noting, however, that when cross-examining the Defendants, Mr Wardell, QC, ranged rather more widely and put to both Defendants other decisions concerning the Schemes in which they had been involved.

In First Subsea Ltd v. Balltec Ltd, the Court of Appeal considered when a breach of a director’s duty might be said to be “fraudulent”: (Footnote: ¹²¹)

“For a breach of trust to be fraudulent, it is not enough to show that it was deliberate. There must also be an absence of honesty or good faith. This can include being reckless as to the consequences of the action complained of. The Judge’s finding was that Mr Emmett was dishonest because he committed his breaches of duty towards the company knowing that they would injure [the company] and intending that they should.”

In Armitage v. Nurse, (Footnote: ¹²²) Millett LJ said that “actual fraud” “connotes at the minimum an intention on the part of the trustee to pursue a particular course of action, either knowing that it is contrary to the interests of the beneficiaries or being recklessly indifferent whether it is contrary to their interests or not.”

The test, in civil proceedings, as to whether particular conduct amounts to dishonesty was set out by the Privy Council in Barlow Clowes International Ltd v. Eurotrust International Ltd: (Footnote: ¹²³)

“Although a dishonest state of mind is a subjective mental state, the standard by which the law determines whether it is dishonest is objective. If by ordinary standards a defendant’s mental state would be characterized as dishonest, it is irrelevant that the defendant judges by different standards.”

This test was reaffirmed in civil actions and introduced into criminal actions – overturning the test in criminal proceedings laid down in R v. Ghosh (Footnote: ¹²⁴) – by the Supreme Court in Ivey v. Genting Casinos (UK) Ltd. (Footnote: ¹²⁵) Lord Hughes stated: (Footnote: ¹²⁶)

“…When dishonesty is in question, the fact-finding tribunal must first ascertain (subjectively) the actual state of the individual’s knowledge or belief as to the facts. The reasonableness or otherwise of his belief is a matter of evidence (often in practice determinative) going to whether he held the belief, but it is not an additional requirement that his belief must be reasonable; the question is whether it is genuinely held. When once his actual state of mind as to knowledge or belief as to facts is established, the question whether his conduct was honest or dishonest is to be determined by the fact-finder by applying the (objective) standards of ordinary decent people. There is no requirement that the defendant must appreciate that what he has done is, by those standards, dishonest.”

In submissions, KeyMed emphasized that a director’s compliance with his or her duty to declare an interest does not in any way relieve that director of his or her other director’s duties. I accept this submission. In Neptune (Vehicle Washing Equipment) Ltd v. Fitzgerald (No 2), (Footnote: ¹²⁷) Alan Steinfeld, QC (sitting as a deputy judge in the Chancery Division) stated:

“…the mere fact that the strict equitable self-dealing rule is excluded or modified, does not entail that the director is relieved from his other obligations to the company, including his duty to act bona fide in the company’s interests. The conflict between a director’s duty to the company and his personal interest does not disappear merely because the strict equitable rule against selfdealing has been excluded. On the contrary, if the conflict remains, there is a distinct danger that the director will be tempted, in breach of his duty to the company, to place his interests before that of the company. It is, indeed, this very danger that gave rise to the strict equitable rule. When the rule has, as I see it, been excluded, it becomes the duty of the court, in my judgment, to scrutinize the transaction with great care so as to determine whether in carrying it out the director has truly managed to avoid the temptation of putting his personal interests before that of the company.”

2002, Ms McBrearty worked part-time in the Pensions administration, whilst also supporting the Payroll function. From about this time, she assumed responsibility for some of the in-house administration of the Staff Scheme.

difficulty in understanding the questions put to him nor in making himself understood.

Mr Nick Williams. Mr Williams joined KeyMed in 1986 as a territory manager. He became a member of the KeyMed board in 2004, at which time he was seconded to an American part of Olympus’ business. He returned from secondment in 2008, and subsequently held various senior posts within KeyMed and Olympus until he retired from KeyMed’s employment in April 2016. He now works as a consultant, and is on the Supervisory Board of Olympus Europa Holding SE. He became a trustee of the Staff Scheme in 2011. Mr Williams gave two statements, the first dated 16 November 2017 (“Williams 1”) and the second dated 18 December 2017 (“Williams 2”). Mr Williams gave evidence on Days 1 and 2 of the trial (13 and 14 March 2018).

Mr John Rowe. The role and position of Mr Rowe has already been described in paragraphs 28, 29 and 160(3) above. Mr Rowe gave two statements, the first dated 16 November 2016 (“Rowe 1”) and the second dated 18 December 2017 (“Rowe 2”). Mr Rowe gave evidence on Days 2, 3 and 4 of the trial (14, 15 and 16 March 2018).

Mr Yasuo Takeuchi. Mr Takeuchi began working for the Olympus group in 1980 and has held a variety of positions throughout his career with Olympus. Mr Takeuchi’s involvement in the events relating to these proceedings arises at and after the departure of the Defendants from the Olympus group. Mr Takeuchi gave a single witness statement dated 16 November 2017 (“Takeuchi 1”). He gave evidence on Day 4 of the trial (16 March 2018). English was not Mr Takeuchi’s first language, and he had the benefit of an interpreter in the witness box. However, I encouraged him to attempt to give his evidence relying as little as possible on the interpreter, as this would assist me in evaluating his evidence. (Footnote: ¹⁵⁶) As a result, Mr Takeuchi made relatively little use of the interpreter, and I am grateful to him for this.

Ms Sally McBrearty. Ms McBrearty’s role and position has already been described in paragraphs 158 and 160(4) above. Ms McBrearty gave a single witness statement dated 16 November 2017 (“McBrearty 1”). She gave evidence on Day 5 of the trial (19 March 2018).

Mr Richard Cherry. Mr Cherry is employed by KeyMed. He played no part in the events with which these proceedings are concerned, save to give evidence regarding the deletion of certain emails. This is a matter that I consider further below. He gave a single witness statement dated 9 February 2018 (“Cherry 1”). Mr Cherry gave evidence on Day 5 of the trial (19 March 2018).

The position in 2005 was that Mr Woodford and Mr Hillman were the two most senior Board directors. They were also the only Board members to be trustees of the Staff Scheme. Mr Virgo and Mr Greengrass had also been directors for some time. Mr Williams and Mr Calcraft were recent appointments to the Board.

Mr Williams’ terms of appointment (and, it is to be inferred, Mr Calcraft’s) were set out in a letter dated 19 March 2004. Although promotion to the Board meant some enhanced benefits for both Mr Williams and Mr Calcraft, the letters notifying them of their new terms stated that “[b]enefits under the Defined Benefits Pension Scheme…continue unchanged”. Mr Williams did not consider this unfair at the time, (Footnote: ¹⁶⁵) indeed he frankly acknowledged that he would have accepted promotion to the Board on inferior terms. (Footnote: ¹⁶⁶)

Mr Williams was probed about what he knew of the Staff Scheme at this time. In his witness statement, Mr Williams said this: (Footnote: ¹⁶⁷)

“At the date of my appointment as a Director, I was already a member of the Staff Scheme and had been since 1987. I was never a member of the Executive Section of the Staff Scheme. This was also the case for Mr Calcraft. Mr Calcraft and I were more junior to the other Directors. It was my understanding at the time that, with the exception of myself and Mr Calcraft, all the other UK based Board members, as well as former Directors, were included in the Staff Scheme with more favourable benefits than the general members of the Scheme. I assumed from the fact that Mr Stuart Greengrass, a former Board member, retired at 52 that he and some of the other Board members that had been with KeyMed for very many years had beneficial pension arrangements that were not open to Mr Calcraft and me.”

Thus, Mr Williams knew in a generalized way that he and Mr Calcraft had less beneficial pension entitlements than those of the other, more senior, directors, but he did not know exactly what these differences were. (Footnote: ¹⁶⁸) He also, I find, knew: of the existence of the Executive Section of the Staff Scheme; that he was not a Member of that part of the Scheme; but that Mr Woodford and Mr Hillman (at least) were. (Footnote: ¹⁶⁹) (Footnote: ¹⁷⁰)

Mr Williams was taken to the change made to pensions in future payment in April 2005. These changes were described in paragraph 45 above. The minutes of the meeting of the trustees, at which the change was agreed, were distributed to Mr Williams (and to Mr Calcraft) and Mr Williams accepted that he would have received the letter to Members describing the change in pension benefit entitlement. (Footnote: ¹⁷¹) As to this:

Mr Williams sought to suggest that had he considered the minute and the letter to Members, the change would have struck him as unfair and been the catalyst for a discussion with Mr Calcraft. (Footnote: ¹⁷⁴) I do not accept this. In cross-examination, Mr Williams gave the following evidence: (Footnote: ¹⁷⁵)

Mr Williams’ and Mr Calcraft’s knowledge of and attitude towards these differences in entitlement – particularly as regards the rights attaching to future pensions in payment – matters because of what Mr Williams says his likely reaction would have been when presented (in 2007) with the documentation regarding the removal of the PIP Limits from the Executive Scheme. In 2005, the position was as follows:

Obviously, these minutes would have been finalized after the meeting on 20 December 2005. Here, I consider the drafting history of the minutes.

As I have noted, absent documentary support, I do not accept Mr Rowe’s evidence regarding the existence of a draft minute prior to the 20 December 2005 meeting. Mr

Communications with Mr Craig

On 21 December 2005, Mr Hillman emailed a draft of Item 53 to Mr Craig for his comments. At that time, for reasons that are unknown and probably do not matter, this was Item 67 of the minutes. More significantly, Item 67 contained no explicit reference to the existence of a conflict of interest on the part of Mr Woodford, Mr Hillman and Mr Virgo. (Footnote: ¹⁹⁶) The draft did, however, identify the interest of Messrs Woodford, Hillman and Virgo. Thus, the draft reads in part:

“Consistent with the objective of simplification, it was agreed that the current “Executive Member” category, which is now closed to new members, would be discontinued within the current [Defined Benefit] scheme and the benefits and related liabilities for the remaining current active members (MC Woodford, P Virgo and PA Hillman) transferred to a separate [Defined Benefit] company pension scheme. The objective is for this new scheme to be wound up on cessation of the liabilities in respect of these remaining executive members.”

It was Mr Hillman’s evidence (Footnote: ¹⁹⁷) that the interest of Messrs Woodford, Hillman and Virgo was clear at the meeting and on the face of this draft. The subsequent addition of the words “[Mr Woodford], [Mr Virgo] and [Mr Hillman] declared their interests in this change” – which, as will be seen, was inspired by Mr Craig – was, according to Mr Hillman, simply clarifying the language.

Mr Hillman and Mr Craig spoke over the telephone. Mr Craig then emailed his note of their conversation. This note stated:

“Advising that proposed minute 67 sent with today’s email should be revised as follows:

The note is dated 21 December 2005, and I infer that the conversation it purports to record took place on this date. There is then a further note from Mr Craig, apparently recording a conversation he had with both Mr Woodford and Mr Hillman on 22 December 2005, recommending the deletion from the draft of the words “to ensure good governance” and stressing that “it was important for [KeyMed] to understand the implications of establishing the separate Executive Scheme”. The note records that Mr Woodford and Mr Hillman said that Mercers would be approving a copy of the minute and would be asked to confirm that there would be no adverse consequences to [KeyMed] arising from the new arrangement.”

Communications with Mr Wright

In an email dated 22 December 2005, Mr Hillman emailed Mr Wright:

“It was good to talk to you again this morning. As discussed, at our meeting earlier this week, the directors agreed to proceed with the changes to the pension arrangements we discussed and, in this context, please find attached the relevant excerpt from the draft minutes relating to this part of the meeting.

I would appreciate your reviewing these and letting me know any comments you may have – if you call me, we can talk these through and make any necessary amendments.”

Mr Wright responded by email on the same day, stating that “the terminology and detail of the minute is consistent with our discussions earlier this week”, and making a few minor and immaterial comments.

This discussion on 22 December 2005 refers to an earlier conversation (“again”). That appears to be a reference to a telephone conversation between Mr Hillman and Mr Wright, on 20 December 2005, taking place before the Board meeting on 20 December 2005. Mr Hillman was clarifying the options before the company for the purposes of the meeting, and he recorded these in a type-written file note which reads as follows:

“Further to the recent discussions on rationalizing the Defined Benefits Pension Scheme, in the context of the “A-Day” changes to streamlining pension provision and establish a simple and transparent tax regime, [Mr Wright] outlined the options to rationalize the position in relation to the Executive Member category.

The Executive Member category is now closed to new members. The objective is to simplify the main DB scheme and deal separately with the liabilities in respect of the three remaining Executive Members. This should be done in such a way that there would be no enhancement of benefits compared with those currently resulting from being a member of the existing Executive Member category and on the principle of “no gain, no loss” to either the individual or the company.

[Mr Wright] outlined three options:

Option 1 – Retain the existing single DB scheme with the existing two categories of membership

(i.e., “Staff” and “Executive”) with separate investment pools allocated to each category – the same Trustees would be responsible for both categories.

Option 2 – Set up a new separate DB scheme for the Executive Members with separate Trustees.

As the assets of the scheme would effectively be held in Trust for only three remaining Executive Members and their dependents, the Trustees could be nominated by the Members rather than by the company.

Option 3 – Set up “Self Invested Personal Pension” schemes (SIPPs) for each of the individuals whereby annual contributions were paid into this vehicle. This would be supported by an undertaking from the company to the individual that it would be funded to a level so that it would provide the same level of benefit entitlement currently available under the Executive Member category.

This would have the advantage that the assets were under the control of the Beneficiary. It would, however, have the disadvantage that the company would have to undertake to contribute to the scheme at such a level that, at the individual’s retirement date, there was a sufficient fund to purchase an annuity to provide the pension which would be likely to be more expensive than Option 2. There would also be an issue in terms of how any shortfall was made up and over what period.

[Mr Hillman] explained that these options would be considered by the company and a decision reached as to the way forward – if there were any further points of clarification required, he would discuss them with [Mr Wright].”

It is clear that this file note – or the notes Mr Hillman made, which were typed up to become the file note – was intended to provide something of a speaking note for Mr Hillman at the board meeting. Although the note sets out various options, like Item 53 itself the file note is silent about why the changes were being considered: it simply refers to “the recent discussions on rationalizing the Defined Benefits Pension Scheme”.

The only persons present at the meeting on 20 December 2005 who gave evidence before me were Mr Woodford, Mr Hillman and Mr Williams. I shall consider the evidence of Mr Woodford, Mr Hillman and Mr Williams in that order.

Mr Woodford’s recollection of the meeting was as follows: (Footnote: ¹⁹⁸)

“13.3

I returned to the UK and was present for the second part of the directors’ meeting, which was held on 20 December 2005. One of the items discussed was the review of the company’s pension arrangements in the context of ‘A Day’ and the advice that Mercer had been providing to the trustees in their report.

13.4

I recall that Paul explained the introduction of the A day changes, with the associated

new tax regime that included a ‘recovery charge’ on pension income, which meant that we would both in effect incur a tax rate of 55% above the lifetime allowance, compared with the then higher rate of 40%. We discussed the fact that some companies were compensating affected individuals, but we agreed that KeyMed would not do this, and that Paul and I would bear the financial consequences personally. I felt strongly that it was important to record explicitly that the company would not provide any enhancement whatsoever, whether through pension, salary, incentive or any other remuneration, to compensate the individuals affected.

13.5

I also recall that Paul explained to the meeting the distortion created in the management of the scheme by the liabilities in relation to the Executive Category members. That effect was created by the fact that the Executive Category represented a large proportion of the overall pension scheme liabilities, which was compounded by any salary increases I was awarded. It was important to ensure that these liabilities were adequately funded over the period until our retirement (all within the next ten years), so as to prevent a deficit which would adversely affect the security of the pensions of all members and create an unfunded liability for the company. After discussion, the group agreed that the most attractive option was to set up a new, separate, scheme (the “Executive Scheme”).

13.6

I emphasised to the other directors that, in the course of creating the new arrangements, there would be no enhancements of benefits for [Mr Hillman], [Mr Virgo] and me compared to those we had already by virtue of our existing membership, within the Executive Category. I recall making it clear that the funding levels (as opposed to funding basis) across both schemes would, over time, be targeted to achieve equality of treatment between the members.”

Mr Woodford stated that these decisions “were significant issues, and I therefore reviewed the relevant section of the minutes with great scrutiny. I note that [Mr Hillman] asked Mercer to review and comment on the minute relating to the creation of the new scheme.” (Footnote: ¹⁹⁹) This is true, but (as I have noted) neither the minutes nor the draft minutes shed any particular light on why the decision was taken.

As can be seen, Mr Woodford’s explanation was that the distortion in the Staff Scheme created by the Executive Section was the trigger for the decision to establish the Executive Scheme. (Footnote: ²⁰⁰) That this was the explanation was challenged by Mr Wardell, QC, in cross-examination, but Mr Woodford stood by his statement. (Footnote: ²⁰¹) He described the distortion in the following way: (Footnote: ²⁰²)

“…the most effective way of ensuring security for all members, including the Executive category, was the option of breaking the Executives away – we had this distortion that we were around 20% of the scheme. My salary increase earlier that year, when I had been made head of the

European medical business, in itself generated millions more liability. We couldn’t fund within the existing scheme and give preference to one particular category. The liabilities of those people were coming due, Peter Virgo in one year, Paul Hillman in three years, myself within the foreseeable future, and the conclusion was that that would be the most effective way and most cost-effective way to manage these liabilities, which were distorting the whole scheme. Very unusual.”

In short, the scale of the liabilities owed to the Executive Members and the timing as to when these liabilities would have to be paid caused, according to Mr Woodford, a distortion to exist. The distortion lay in the fact that the assets that the Staff Scheme had accumulated looked healthier than was in fact the case: put another way, if the liabilities of the Executive Members were discharged, there might be a funding issue for the nonExecutive Members.

In terms of his recollection of the meeting, Mr Woodford said this: (Footnote: ²⁰³)

The evidence of Mr Hillman

Mr Hillman recalled that the relevant part of the meeting was 20 December 2005. (Footnote: ²⁰⁴) Prior to this meeting, Mr Hillman recalled a conversation with Mr Wright. According to Mr Hillman, “[t]he purpose of that discussion was to ensure that I fully understood the options that would be presented to the other board members in respect of the Staff Scheme.” (Footnote: ²⁰⁵) This is a reference to the file note described at paragraph 212 above.

In terms of his explanation to the Board, Mr Hillman’s evidence was as follows: (Footnote: ²⁰⁶)

“14.3

I remember that I gave a high-level overview of A-Day to the attendees of the meeting, including the fact that the introduction of the Lifetime Allowance would result in an effective 55% tax charge on high earners. I am reminded by the board minutes that other companies were compensating executives to equalize the after-tax effect for the individual. Mercer’s IR Report had stated that KeyMed may wish to consider compensating for the effect of the additional tax liability to put the individual in the same position as before the changes. However, I remember that Michael felt strongly that the impact of this change should be borne by the relevant individuals (including Michael and me), without any compensation by KeyMed, to which the directors agreed. I am reminded that this point is clearly stated in the minutes of this meeting.

14.4

I recall that I explained to the other directors the various options available to simplify and streamline pension provision, using a manuscript version of my file note dated 20 December 2005 as a prompt. I recollect that I explained to the other directors that to fully fund the whole Staff Scheme on a buyout basis would be disproportionately expensive as Mercer had indicated that this would cost nearly £40 million and would require an estimated £8 million annual contribution to ensure that the Staff Scheme remained fully funded on a buy-out basis.

14.5

I remember highlighting that Mercer had put forward an option for the executive category of the Staff Scheme to be discontinued and the remaining executive members to be transferred to a new Executive Scheme. I pointed out that the liabilities of the executive category of the Staff Scheme created a distortion which could be better managed under a separate Executive Scheme and that the aim was to reorganize KeyMed pension liabilities so that these could be managed more effectively.

14.6

During the discussion that ensued, I made it clear to the attendees of the meeting that Michael, Peter and I were the only remaining members of the executive category of the Staff Scheme and that we would therefore be directly and personally affected by the establishment of the Executive Scheme. I also explained that the objective was that the new scheme would be wound up once the last member had retired and the liabilities of the scheme had crystallised. I explained that the intention was for the Executive Scheme to move to a buy-out basis to allow this objective to be fulfilled.

14.7

I remember Peter asking some questions about how the changes would affect his benefits. I also recall that Michael and I explained that both Schemes would be funded on an equal basis, meaning that each Scheme would be funded to achieve the same percentage funding level (although I explained that the funding basis and the investment strategy might differ between the Schemes). I do not remember Luke or Nick posing any questions.

14.8

Following that discussion, and as recorded in the minutes of the meeting, I remember that the directors agreed that a separate Executive Scheme should be established and that, in doing so, there would be (i) no enhancement of benefits for the members of the Executive Scheme compared with those derived from the executive category of the Staff Scheme; and (ii) no enhancement in funding (i.e. that both schemes would be funded to exactly the same actuarial funding level to ensure equality of treatment). It was also agreed that the members of the Executive Scheme should have the power to appoint the Trustees of the Executive Scheme.”

Like Mr Woodford’s witness statement, (Footnote: ²⁰⁷) and his evidence in cross-examination, (Footnote: ²⁰⁸) Mr Hillman referred to a “distortion” that could be better managed under a new Executive Scheme. (Footnote: ²⁰⁹) In cross-examination, this evidence was challenged: it was suggested by Mr Wardell, QC that Item 53 in the minute said nothing about the security of the Executive members, and that the question of distortion was nowhere mentioned: (Footnote: ²¹⁰)

The evidence of Mr Williams

Mr Williams’ evidence was that he was not present for that part of the meeting at which the setting up of the Executive Scheme was discussed: (Footnote: ²¹¹)

“For the purpose of making this statement, I have reviewed my notebook that I kept at the time to see if the setting up of the Executive Scheme was discussed at the meeting on 14 December 2005 or that part of the meeting on 20 December 2005 which I attended (I left KeyMed at approximately 1.55pm that day to take a flight from Heathrow to return to the US where I was working). I have no recollection of any such discussion taking place on 14 or 20 December 2005 and there is no record of any discussion in my day book about the Executive Scheme for either date. As Mr Woodford did not attend the meeting on 14 December 2005, I believe that any discussion about the pension must have occurred after I had left the meeting on 20 December 2005.”

I consider that Mr Williams’ recollection – aided by his reference to his travel plans – is correct and that he was not actually present for the relevant part of the meeting, and that this explains his inability to recall a discussion on this point. (Footnote: ²¹²) It is fair to say that Mr Woodford had a strong recollection of Mr Williams being present – which, of course, he was for part of the meeting – but also that Mr Williams was present for the discussion regarding the setting up of the Executive Scheme. (Footnote: ²¹³) I find that, for entirely understandable reasons, Mr Woodford’s recollection is faulty in regard to this point.

Of course, Mr Williams was sent the minutes once finalized, (Footnote: ²¹⁴) and he accepted that their content was in no way concealed from him. (Footnote: ²¹⁵) Had he read the minutes – and, of course,