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Mad, Bad and Dangerous to Know: Part 1 – Background, Cowan V Scargill and MNRPF

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Mad, Bad and Dangerous to Know: Part 1 – Background, Cowan V Scargill and MNRPF The Short-form ‘Best Interests Duty’ – Mad, Bad and Dangerous to Know: Part 1 – Background, Cowan v Scargill and MNRPF David Pollard1 Overview Trustees, company directors and others occupy a ‘fiduciary‘ position towards the relevant trust, company or other principal. There is clearly a need for an explanation to be given to the relevant office holder of what this means – and for judges to describe the relevant duties when looking at claims of breach. How should a trustee board actually exercise a relevant power or discretion? Much of the case law and commentary seeks to encapsulate the essence of the fiduciary duties in a simple phrase: that a trustee owes an overarching duty to ‘act in the best interests of the beneficiaries’. In the UK (where private sector pension schemes are established as express trusts), many pension lawyers play ‘best interests‘ bingo in spotting (and condemning) the use of this phrase. It even creeps into legislation (rather worryingly). But, as this article will seek to demonstrate, this is a very misleading encapsulation of the nature of fiduciary duties. There is a risk that, understandably given its use by judges and sometimes in statutes, trustee boards and directors take the formulation literally. This could easily take them into error. Clearly it does not override the terms of the trust, nor can it be taken literally. This article is split into two parts. Part 1 (‘Background, Cowan v Scargill and MNRPF’) looks at: ● the nature of any best interests duty; ● why does the analysis of the supposed duty matter; ● some examples of a best interests duty in official guidance; ● why the test appears in cases about who is a fiduciary (including looking at the decisions of Millett LJ in Mothew and Armitage v Nurse in this context); ● why a literal duty is both dangerous and imprecise and unworkable; 1 Barrister, Wilberforce Chambers, Lincoln’s Inn. This paper draws on some materials in David Pollard The Law of Pension Trusts (Oxford University Press, 2013) and Pollard ‘Exercising Powers: Proper Purposes rather than Best Interests: Fiduciaries and Eclairs’ (2016) 30 TLI 71. This paper is a revised (and shorter) version of the papers given at the Conference ‘The Use and Abuse of Trusts & Other Wealth Management Devices’ (Singapore Management University and University of York, Singapore, July 2017) and to a seminar of the Association of Pension Lawyers (APL) in September 2017. I am grateful for comments and thoughts on an earlier draft from Tim Cox, Isobel Carruthers, Sara Chambers, Vanessa Knapp, Tharusha Rajapakse, Marcus Symonds and Li(lly) Yuan. The errors remain my own. 106 Trust Law International, Vol. 32, No. 2, 2018 ● a discussion of the decisions of Megarry V-C in Cowan v Scargill, Nicholls V-C in Harries and Asplin J in Merchant Navy Ratings Pension Fund;2 and ● a look at two English cases rejecting a literal reading of an express contractual best interests duty (Fish v Dresdner) or an express regulatory duty (IG Index v Ehrentreu). Part 2 (‘The Problems and a Suggested Better Formulation’) will appear in the next issue of Trust Law International and will: ● look at the problems with such a supposed best interest duty, if taken literally; ● look at recent case law that holds that there is no such duty – in particular the decision of Asplin J in 2015 in Merchant Navy Ratings Pension Fund; ● warn against the use of such a phrase by advisers (and in legislation); ● seek to suggest a better formulation, based on exercise of powers for proper purposes and seeking the success of the trust/company; ● compare the statutory duties on directors under Companies Act 2006, s 172 and in particular note the modified duty for trustee companies under s 172(2); and ● (briefly) look at the Australian position (where Parliament has included statutory ‘best interest’ duties in legislation with abandon). This article does not consider the separate issues of how this impacts on ethical or social investment issues (see the recent Law Commission Reports) or how pension trustees should take account of the interests of the employer. Introduction Trustees, company directors and others occupy a ‘fiduciary’ position towards the relevant trust, company or other principal. There is clearly a need for an explanation to be given to the relevant office holder of what this means – and for judges to describe the relevant duties when looking at potential challenges. How should the trustee or director actually exercise a relevant power or discretion? Much of the case law and commentary seeks to encapsulate the essence of the fiduciary duties in a simple phrase – that a trustee has a ‘paramount duty to act in the best interests of the beneficiaries’, and (before the Companies Act 2006) that a director has a duty ‘[T]o act bona fide in the best interests of the company’. The authority for such a duty is sometimes left unstated or a reference is made to the decision of Megarry V-C in the 1984 case, Cowan v Scargill.3 Examples of this in the case law are: (a) In 1994 in Fulham Football Club Ltd v Cabra Estates plc4 the Court of Appeal held: ‘It is trite law that directors are under a duty to act bona fide in the interests of their company.’ (b) In 2011, in F & C Alternative Investments (Holdings) Ltd v Barthelemy (No 2)5 Sales J held: ‘A fiduciary is required to act in the best interests of his beneficiary’. 2 [2015] EWHC 448 (Ch), [2015] PLR 239 (Asplin J). 3 [1985] Ch 270. 4 [1994] 1 BCLC 363 at 392 (Neill LJ giving the judgment of the court). 5 [2011] EWHC 1731 (Ch), [2012] Ch 613 at [227], summarising the decision of Millett LJ in Bristol and West Building Society v Mothew [1998] Ch 1 (see below). 107 Trust Law International, Vol. 32, No. 2, 2018 (c) In 2012 in Foo v Foo6 the Singapore Court of Appeal held: ‘It is trite law that the [trustee] has the fiduciary duty to act, and to exercise his discretionary powers, in the best interests of the beneficiaries.’ Despite the oft repetition in case law of this short form ‘duty’, the aim of this article is to say that: ● such a short form duty does not exist – use of the short form phrase should be avoided; ● even in a modified or longer form, the phrase needs to be treated with care; and ● ultimately the phrase qualifies as one which is ‘mad, bad and dangerous to know’.7 Key cases and articles The nature of the duty has been discussed in various cases and articles in the UK8 and Australia.9 The key UK cases are: Cowan v Scargill (1984);10 Harries v Church Commissioners (1993);11 and MNRPF (2015).12 The aim of this article is to reflect on the position in the light of those articles and the case law, in particular the decision of Asplin J (as she then was) in MNRPF. Misleading and confusing This short form ‘duty’ is misleading and confusing for a variety of reasons: (a) It implies a free-standing duty – not just one that applies to the exercise of powers and discretions. What is the width of the ‘act’ when used in the phrase ‘duty to act in the best interest …’? Does it give an independent free-standing power to trustees? (No). 6 Foo Jee Seng v Foo Jhee Tuang [2012] SGCA 41, [2012] 4 SLR 339, Sing CA (Chao Hick Tin JA, delivering the judgment of the court) at [79]. The Singapore Court of Appeal cited Ng Eng Ghee v Mamata Kapildev Dave [2009] SGCA 14, [2009] 3 SLR(R) 109, itself citing Cowan v Scargill [1985] Ch 270. 7 Mad, Bad, and Dangerous to Know’ is a phrase attributed to Lady Caroline Lamb to describe Lord Byron in the 1810s. Paul Douglass notes in his biography of Lady Caroline Lamb that there is no contemporary evidence to prove Lady Caroline actually created the famous phrase at the time – see Paul Douglass, Lady Caroline Lamb: A Biography (Palgrave Macmillan, 2004) at pp 104 and 164. 8 The key UK articles and papers are: Lord Nicholls (extra judicially), ‘Trustees and their broader community: where duty, morality and ethics converge’ (1995) 9 TLI 71 and (1996) 70 ALJ 205; Xenia Frostick, ‘Is there a duty to act in the best interests of beneficiaries?’ (2000) 83 Pension Lawyer 2; SEK Hulme, ‘The basic duty of trustees of superannuation trusts – fair to one, fair to all?’ (2000) 14 TLI 130; Geraint Thomas, ‘The duty of trustees to act in the ‘best interest’ of their beneficiaries’ (2008) 2 J Eq 177 and also Thomas on Powers, 2nd edn, (Oxford University Press, 2012) at 10.158 to 10.183; M Scott Donald, ‘“Best” interests?’ (2008) 2 J Eq 245 (2008); the Law Commission report ‘Fiduciary Duties of Investment Intermediaries’ Law Com No 350 (June 2014); and Nugee J (extra judicially), following the MNRPF decision in his lecture ‘The Duties of Pension Scheme Trustees to the Employer – Revisited’ (2015) 29 TLI 59. 9 From Australia (and therefore to be viewed in the light of the express statutory provisions there): Michael Vrisakis, ‘The best test of (or the “bestest”) interests of members’ (2006) 17(9) Australian Superannuation Law Bulletin 138; Michael Vrisakis, ‘The best interests of beneficiaries viewed as a whole’ (2009) ASLB 71; Michael Vrisakis, ‘Inputs versus outputs – an increased focus on trustee decision making?’ (2009) 20 ASLB 126; Daniel Mendoza-Jones, ‘Superannuation trustees: governance, best interests, conflicts of interest and the proposed reforms’ (2012) 30 C&SLJ 297; and Paul Collins, ‘The best interests duty and the standard of care for superannuation trustees’ (2014) 88 ALJ 632.
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