Wrightson Ltd v. Fletcher Challenge Nominees Ltd (New Zealand) [2001] UKPC 23

Judicial Committee of the Privy Council
Case No Privy Council Appeal No. 34 of 2000Venue FROM THE COURT OF APPEAL OF NEW ZEALAND
Between
Wrightson LtdAppellantFletcher Challenge Nominees Ltd (New Zealand)Respondent
Before
Lord Bingham of CornhillLord Hope of CraigheadLord HoffmannLord Hobhouse of WoodboroughLord MillettDate 3 May 2001
[1]This appeal is concerned with the proper approach to the calculation of the sum to be paid out on the secession of a participating company and its employees from a group superannuation scheme. The question turns on the terms of the particular trust deed governing the scheme.[2]In 1981 Fletcher Challenge Limited ("Fletcher Challenge") was formed by the merger of Fletcher Holdings Limited and two other companies. As a result of the merger the appellant Wrightson Limited ("Wrightson") became a wholly owned subsidiary of Fletcher Challenge.[3]Two years later the Fletcher Challenge Retirement Plan ("the Plan") was established by the merger of several earlier schemes to constitute a superannuation fund for the employees of Fletcher Challenge and its subsidiary and associated companies. Companies which were admitted to participate in the Plan were known as "participating companies" and their employees were entitled to be admitted to membership of the Plan. Wrightson was admitted as a participating company from the outset and its employees became members of the Plan.[4]Over the next ten years the Plan grew substantially in both value and membership. The growth was attributable in part to the absorption of more than 50 retirement plans of companies which merged with or were taken over by Fletcher Challenge. The growth in the value of the Plan was also the result of successful investment. By 30th September 1995 the Plan had assets of $NZ441.5 million, past service liabilities of $408 million, and an actuarial surplus of $33.5 million.[5]The Plan was governed by a succession of trust deeds. For the purpose of the present proceedings the governing document is the deed ("the Trust Deed") dated 13th June 1994 as amended by two subsequent deeds.[6]In 1993 Fletcher Challenge disposed of the business carried on by Wrightson by a flotation of its shares. Following the sale Wrightson operated as an independent company. Wrightson's existing employees, 533 of whom were members of the Plan, continued to be employed by Wrightson. Pursuant to arrangements made with Fletcher Challenge Wrightson continued to be a participating company for the time being and those of its employees who were existing members continued to be members of the Plan. The Plan was, however, closed to new employees of Wrightson.[7]In due course Wrightson gave the requisite notice and withdrew from the Plan with effect from 30th September 1995. Under the terms of the Trust Deed this constituted a partial dissolution of the Plan. Wrightson set up a new superannuation scheme of its own. One section of the scheme was established to receive funds from the Plan for the benefit of former members of the Plan and it reflected with only minor amendments the provisions of the Plan. The present dispute concerns the determination by the trustee of the Plan ("the Trustee") of the amount to be transferred to the Wrightson scheme.[8]Wrightson complains that the Trustee allocated to the Wrightson scheme no share of the actuarial surplus of $33.5 million. This represented the difference between the value of the assets of the Plan at the date of Wrightson's withdrawal ($441.5 million) and the actuarially calculated amount of the liabilities of the Plan to employee members (including potential liabilities in respect of discretionary augmentations) at the same date ($408 million). The amount of the entitlement of Wrightson members to a share of the $408 million, calculated on a pro rata basis, was $65 million, and this sum was duly transferred to the Wrightson scheme. On a similar basis the Wrightson share of the surplus would have amounted to $5.4 million (or $4.11 million after a necessary adjustment). It is this sum which is the subject of the present dispute.[9]Wrightson contends that the Trustee should have made a pro rata allocation of the whole $441.5 million, so that the new Wrightson scheme would have received the share of the actuarial surplus attributable to the Wrightson members. The Trustee contends that it had a discretion as to the amounts to be allocated and that its decision to exclude any share of the surplus from the sum allocated to the Wrightson members was a proper exercise of its discretion. Fisher J upheld Wrightson's claim, but his decision was reversed by the New Zealand Court of Appeal.[10]While Wrightson's claim was based primarily on an allegation that the Trustee had misconstrued the Trust Deed, it also alleged that the Trustee's actual determination was unlawful. The judge upheld two of the allegations (that it had taken irrelevant considerations into account and that it had acted for an improper purpose), but the Court of Appeal reversed the judge's findings on these also.[11]The issue is primarily one of construction of the Trust Deed. The relevant provisions of the Trust Deed are set out at length in the judgment of the Court of Appeal, to which reference may be made, and it is not necessary for their Lordships to repeat them. They can be summarised as follows. The Trustee is a wholly-owned subsidiary of Fletcher Challenge, referred to in the Trust Deed as "the Company". Fletcher Challenge is given significant powers under the Trust Deed, including power to fix the amount of employee contributions, to dissolve the Plan, and to refuse consent to alterations to the Trust Deed, increases in pensions and augmentations of benefits. It also has power to appoint the directors of the Trustee, six of whom were either directors or executives of Fletcher Challenge at the time of Wrightson's withdrawal. The expression "Participating Companies" is defined to include Fletcher Challenge and any company admitted to participation in the Plan and "Participating Company" in relation to a member or employee means the company by which the member or employee is employed. Although it is not necessary for a participating company to be a member of the Fletcher Challenge group, the consent of Fletcher Challenge is required before a company can be admitted to participation.[12]The Plan is a defined benefits contributory scheme. Individual members make their own contributions by deductions from salary and employers' contributions are made by the participating companies. It is a balance of cost scheme in which each participating company is obliged to make only such contributions each year as Fletcher Challenge decides (after considering the advice of the actuary of the Plan and the Trustee) are necessary to provide the benefits payable under the Plan in respect of those members of the Plan who are its employees. Augmentations of benefits payable to employees of a participating company may be made at the discretion of the Trustee at the request of the participating company in question and upon payment by that company of such additional contributions as the Trustee (after considering where appropriate the advice of the actuary) may consider appropriate.[13]Clause 4.2 deals with the withdrawal of a participating company. It provides as follows:
"2. A Participating Company (other than the Company) shall cease to participate in the Plan if: (a) it shall give not less than one month's previous notice (or such shorter period of notice as the Trustee shall be willing to accept) in writing to the Trustee that it intends to cease to contribute to the Plan for any reason, or (b) … or (c) … and upon any such cessation of participation there shall be deemed to be a dissolution of such part of the Plan as the Trustee determines to be appropriate to the Participating Company and the provisions of Clauses 5.5 to 5.11 (application of Fund) shall (mutatis mutandis) apply to the partial dissolution."
[14]Clause 5 deals with the application of the trust fund ("the Fund") in the event of a full dissolution of the Plan. This may occur in certain specified circumstances as, for example, the liquidation of Fletcher Challenge (otherwise than for the purpose of reconstruction) or the giving by Fletcher Challenge of written notice of its intention to cease to contribute to the Plan. Clause 5.2 provides that upon dissolution of the Plan the Fund shall be applied under Clauses 5.5 to 5.12. These provisions are set out in full in the judgment under appeal and their Lordships need not repeat them. In the event of a partial dissolution of the Plan they apply to the part of the Fund which the Trustee has previously determined under Clause 4.2 to be appropriate to the withdrawing company. There is no express provision which requires the Trustee to apply the part in accordance with Clauses 5.5 to 5.11 as if the part constituted the whole and there had been a full dissolution of the Plan, but that is the general effect of the Clause.[15]Clauses 5.5 to 5.11 set out four steps in the order in which they are to be taken:(i) the setting aside of an amount necessary for administration, dissolution and winding up expenses, and taxes (Clause 5.5);(ii) the application of the Fund "so far as the Fund permits" in securing the individual benefits in accordance with a pre-determined set of priorities (Clause 5.6 (a)-(h)) including augmentation of benefits with the consent of Fletcher Challenge (Clause 5.6 (i));(iii) payment of the balance with the consent of the Government Actuary to participating companies "in such proportions as the Trustee thinks fit" (Clause 5.8); and(iv) if the consent of the Government Actuary is withheld, the application of the unexpended balance by way of augmentation of benefits under Clause 5.6 (i) in which event the consent of Fletcher Challenge is not required (Clause 5.9). The Trustee is given power to secure individual benefits by the purchase of annuities from an insurance company or by transferring an amount equivalent to the value of the benefits to another retirement benefits plan relating to the employment of members by the participating companies (Clauses 5.7(d) and 5.11).[16]The critical words are those in Clause 4.2:
"and upon any such cessation of participation there shall be deemed to be a dissolution of such part of the Plan as the Trustee determines to be appropriate to the Participating Company…."
It is common ground that these words give the Trustee a discretion to determine the extent of the part of the Plan which is deemed to be dissolved. In the circumstances of the present case it is a discretion to determine the amount to be transferred to the new Wrightson scheme to secure the benefits payable in respect of Wrightson members. The dispute is over the extent of the discretion or, as it was put in argument, "the starting point" for its exercise.[17]In a carefully reasoned judgment Fisher J. held that prima facie the Trust Deed requires the Trustee to adopt what the parties described as "a share of fund" rather than "a benefits based" approach. A share of fund approach involves dividing the whole Fund, whether in surplus or in deficit, pro rata (in proportion to past service liabilities due to them respectively) between the withdrawing company and its members on the one hand and the continuing companies and their members on the other. A benefits based approach involves allocating to the withdrawing company and its members a sum equal to the aggregate value of the benefits (including discretionary augmentations) to which such members are entitled. The judge laid considerable stress upon the link between each of the participating companies and its own employees, and observed that the scheme could be viewed as dividing participants into a series of self-funding cells, each cell consisting of a participating company and its employee members. Benefits were provided by the contributions of members of the cell and their own participating company. Discretionary increases in benefits for members of the cell were made at the request of and funded by the cell's participating company. Although members could leave the Plan individually, Clause 4.2 provided for the departure of a cell en bloc . The question was whether Wrightson was correct in contending that the departing cell should take its share of the surplus with it unless there was good reason for it not to do so.[18]The Judge found five indicia which supported a share of fund approach. First, there was the elaborate scheme of priorities set out in Clause 5. He considered that this was pointless on a benefits based approach but necessary on a share of the fund approach. Secondly, Clause 4.2 required the Trustee to determine what part of the Fund was appropriate to the participating company rather than to its members. Thirdly, Clause 4.2 referred to the dissolution of a part of the Plan, language which he considered apt to describe a division of the whole Fund rather than merely that part of the Fund which was equal in value to the amount of the liabilities. As he observed, the Trustee was to determine what part of the Plan should be wound up and not merely what value was attributable to members' entitlements. Fourthly, and most importantly, Clause 5.8 envisaged "the refund" of any unexpended surplus (with the consent of the Government Actuary) to the participating companies for their own use and benefit. The ultimate balance was payable to the members only if the refusal of the Government Actuary to give his consent would make such a payment unlawful. The judge regarded this as a clear indication that the determination of the appropriate part to be subject to dissolution under Clause 4.2 was not confined to a valuation of entitlements, since participating companies had no such entitlements. Only on a share of fund approach was there any potential for the distribution of an actuarial surplus and hence of a payment to participating companies. Fifthly, Clause 5.5 permitted the Trustee to deduct administration expenses and taxes from the part attributable to the withdrawing company. He considered that this was difficult to reconcile with the benefits based approach. Such an approach, he reasoned, presupposed that the departing members should receive their entitlements in full regardless of the availability of the funds necessary to meet them, any actuarial surplus or deficit being available to or borne by the continuing companies and their members. On that basis, the costs should be borne by the continuing companies and their members rather than come out of the entitlements of the departing members. The judge also relied on the absence of any express requirement in Clause 4.2 for the Trustee to obtain actuarial advice before determining the extent of the partial dissolution.[19]The Court of Appeal did not share the judge's analysis of the Plan as dividing participants into a series of cells each comprising a participating company and its members. The Plan was a composite whole; there was a single undivided Fund; and members were entitled to have the value of the Fund maintained as security for their defined benefits. Their benefits were neither reduced by a temporary reduction in the value of the assets nor increased by a temporary surplus. In reversing the judge, it laid particular stress on three features. The first was the width of the discretion given to the Trustee by Clause 4.2. This did not dictate a share of the fund or any other approach as a starting point for the exercise of its discretion. Secondly, the Plan was a defined benefits scheme which provided pre-determined benefits to members and which required the Fund and the contributions of participating companies to be maintained at a level sufficient to meet those benefits. Thirdly, and in the view of the Court of Appeal most importantly, a member's entitlement on the cessation of his employment was not dependent on the current state of the Fund and whether it was in temporary surplus or deficit.[20]The fallacy in Wrightson's argument, the Court of Appeal thought, lay in the need to rely on Clause 5.8 (power to refund any unexpended surplus to the participating companies) to support its interpretation of Clause 4.2. Clause 5.8 did not drive the Clause 4.2 determination. On the contrary, Clause 5.8 could operate only if the Trustee exercised its discretion under 4.2 in such a way that there was a surplus in the amount allocated to the withdrawing company and its members. The other factors on which the judge relied did not impress the Court of Appeal. There was no reason to read Clause 4.2 as requiring a presumptive pro rata division of the Fund as it happened to be at the time of the participating company's withdrawal. In the case of a continuing scheme, the temporary state of the Fund, whether in actuarial surplus or deficit, would normally have little if any practical effect on the existing entitlements of members.[21]Their Lordships would begin by observing that many of the difficulties in the case have been caused by the assumption that all the provisions of Clauses 5.5 to 5.11, which direct the application of the Fund in the event of a full dissolution of the Plan, are necessarily applicable to a partial dissolution where the rest of Plan continues in operation. Clause 4.2 provides that those Clauses shall apply to a partial dissolution mutatis mutandis, and their Lordships have no difficulty in reading this as also meaning "so far as appropriate".[22]It would be a remarkable coincidence if, on the final dissolution of the Plan, the value of its assets exactly equalled the amount of its liabilities together with the costs and expenses of the winding up. In all probability the value of the assets will either exceed the amount of the liabilities or be insufficient to meet them, and Clauses 5.5 to 5.11 are necessarily drawn to cater for both possibilities. Clause 5.6 directs the application of the Fund "so far as the Fund permits", and its elaborate scheme of priorities cater for the possibility of a deficit. If the Plan is in surplus, these priorities can be disregarded. In the event of a partial dissolution the scheme of priorities can be disregarded even if the Fund is in deficit. Departing members would no doubt take with them the full value of their entitlements, but this should not be at the expense of the continuing members. Two courses would be open to the Trustee. It could ask Fletcher Challenge to call upon the withdrawing company to make further contributions to bring the Fund into balance before it withdrew from the Plan. Alternatively, it could set off the amount of such further contributions from the amount allocated to the withdrawing company on a benefits based approach (which would produce the same result as a share of fund approach). Either course would place the responsibility for meeting the deficit in respect of the departing members on the withdrawing company. This would accord with the basic principle of the Plan, for it is in the nature of a balance of cost scheme that the security for the payment of benefits to members is a funding obligation of the employer.[23]Clauses 5.8 and 5.9, by contrast, cater for the possibility of a surplus. In directing payment of the surplus (with the consent of the Government Actuary) to the participating companies, Clause 5.8 recognises that, on a final dissolution, the ultimate surplus is prima facie held on a resulting trust for those who contributed to it: see Air Jamaica Ltd. v Charlton [1999] 1 WLR 1399 ,1411. In a balance of cost scheme like the present, any surplus arising on a final dissolution is generally regarded as the consequence of past overfunding by the employer: see In re Courage Group's Pensions Schemes [1987] 1 WLR 495, 514-5; Davis v Richards & Wallington Industries Ltd. [1990] 1 WLR 1511, 1542-3. The requirement that the consent of the Government Actuary should be obtained and the use of the word "refund" show that any sums payable to participating companies under Clause 5.8 are paid to them for their own use and benefit and in satisfaction of their interests under a resulting trust. These inferences are not displaced by the Trustee's discretion to determine the proportions in which the surplus should be divided among the participating companies. The amount of any particular contributor's past overfunding and the extent to which it has contributed to the surplus are at best difficult and at worst impossible to determine. The Trustee is given a discretionary power to determine the proportions in which the participating companies should share in the final distribution for the avoidance of disputes and as a practical solution to what could otherwise be a very complex and possibly insoluble problem.[24]Their Lordships agree with the Court of Appeal that Clause 5.8 cannot bear the weight which the judge gave it. It applies on a final dissolution only if the Fund is in surplus, and if applicable at all on a partial dissolution is applicable only after the Trustee has already exercised its discretion under 4.2 and has done so in such a way that there is a surplus to be allocated to the withdrawing company. It cannot be relied upon as an indication to the Trustee that it should do so. Their Lordships do not accept the judge's inference that Clause 5.8 provides an indication that the Trustee's determination under Clause 4.2 cannot be confined to a valuation of members' entitlements because participating companies have no such entitlements. As they have explained, on a final dissolution participating companies take under Clause 5.8 not by virtue of any entitlement but in right of their interest under a resulting trust.[25]But it goes further than this, for their Lordships do not consider that the Trustee's power to allocate part of the surplus to the new Wrightson scheme (which is not disputed) is derived from Clause 5.8. As they have observed, in the event of a final dissolution the Clause envisages the making of refunds to participating companies for their own use and benefit. Moneys paid into the new Wrightson scheme on the partial dissolution arising from Wrightson's withdrawal from the Plan, however, are not paid for Wrightson's own use and benefit, but as part of a new fund held as security for the benefits due to Wrightson members. The justification for including part of the surplus in such a payment would lie in a desire to give Wrightson members the same cushion of security for their benefits under the new scheme as they enjoyed under the Plan at the date of Wrightson's withdrawal. The Trustee's power to achieve this does not, their Lordships think, derive from Clause 5.8 but from its overriding obligation on a dissolution not to pay but to secure the members' benefits (see Clauses 5.6 and 5.11). The extent of the security is in the Trustee's discretion. While the value of the benefits obviously constitutes the minimum amount of the security which the Trustee must provide, it is not precluded from providing additional security if in its discretion it thinks fit to do so. Equally there is nothing which obliges it to provide more than the minimum if in its discretion it thinks fit not to do so.[26]Accordingly, their Lordships derive no assistance from the scheme of priorities in Clause 5.6, which is applicable in the event of a final dissolution when the Fund is in deficit, nor from Clause 5.8, which is applicable to a partial dissolution (if at all) only if the Trustee has exercised its discretion to allocate part of the surplus to the withdrawing company and its members. They agree with the judge's description of the scheme as a cellular one, each cell consisting of a participating company and its members, but they do not think that this carries the matter very far. It is not entirely accurate to say that the benefits payable to the members of each cell are provided by that cell's participating company, for the contributions are pooled and invested as a single Fund. It is true that for some purposes each participating company represents its own members, and this explains the reference to the participating company in Clause 4.2. But on any view that Clause requires the Trustee to determine what part of the Fund is appropriate to the withdrawing company in right of its members and not in its own right. On the other hand, there is force in the judge's observation that the Trustee's task is to identify a part of the Plan and not just to value accrued benefits, even though the point is probably only a semantic one. Moreover, even on a share of fund approach there must be a valuation of members' entitlements in order to determine the proportions in which the Fund is divisible. The difference is that on a benefits based approach the Trustee need value the augmented entitlements of departing members only whereas on a share of fund approach it must value the basic entitlements of all members but may not need to take discretionary augmentations into account.[27]Their Lordships are also unable to agree with the judge that a share of fund approach is indicated by Clause 5.5 (provision for the costs and expenses of the dissolution). Whether there is a full or partial dissolution, it is natural that these should be given priority over the benefits payable to members. In a final dissolution or on a share of fund approach in a partial dissolution, they are provided for before division of the Fund. On a benefits based approach in a partial dissolution when the Fund is in surplus, the Trustee might ordinarily be expected to include an allowance for the costs and expenses when determining the amount allocated to the withdrawing company, as otherwise it would be depleted by the costs and expenses of the dissolution and be insufficient to provide full security for the benefits of the departing members.[28]Nor, with respect, do their Lordships derive assistance from the fact, to which the Court of Appeal attached particular importance, that the Plan is a defined benefits scheme. It is that feature which gives rise to the possibility of an actuarial surplus, and its presence cannot indicate how the surplus is to be dealt with. At the same time their Lordships do attach some importance to two features which are present in every such scheme. First, the members have no proprietary interests in the scheme funds; they are merely security for the payment of benefits to them. Secondly, while the scheme is a continuing one, the surplus is merely an actuarial valuation which may be falsified by events and which does not represent any sum to which either the employer or the employees as a body has any legal right without the consent of the other. It may be used to fund increased benefits to employees or a contributions holiday to the employer; but otherwise it must remain as continuing security for the payment of benefits until such time as the scheme is finally wound up and it crystallises into an actual surplus. The Court of Appeal deduced from this that a share of the surplus would not give Wrightson members any benefit, since the Trustee's determination already took further augmentations of benefits into account, but merely provide Wrightson with a contributions holiday of its own, something outside the purpose of the Plan. In this respect their Lordships prefer the judge's reasoning. Though flawed in matters of detail, and in particular in his reliance on provisions which are not necessarily appropriate to a partial dissolution, it is nevertheless attractive in its emphasis on the spreading of risk and its insistence on equality of treatment between the departing and the continuing members.[29]Their Lordships find the question nicely balanced, but they remind themselves that the discretion conferred on the Trustee by Clause 4.2 is an extremely wide one. It is not, of course, completely at large. The Trustee is not entitled to allocate to the withdrawing company so much of the Fund "as it thinks fit", but so much "as is appropriate" to the company in question. This limits the matters of which the Trustee can take account, but in their Lordships' opinion it does not dictate the choice between a share of fund and a benefits based approach. The circumstances attendant on a partial dissolution are many and various, and their Lordships think that it would have been unwise to fetter the Trustee's discretion to choose between the rival approaches in any way, even by indicating a presumptive "starting point". Accordingly, they agree with the Court of Appeal that the Trustee should approach the determination of the part of the Plan attributable to the withdrawing company with an open mind, and without adopting any presumption as to the adoption of one or other of the rival approaches.[30]Their Lordships have considered the rival arguments in relation to the manner in which the Trustee exercised its discretion, and consider that the Court of Appeal came to the right conclusion. The surplus was relatively small and might well disappear in a short period of time should market conditions deteriorate. The Trustee was entitled to take the view that no part of it should be allocated to the Wrightson scheme. While some of the arguments which the Trustee considered might appear to be irrelevant to the exercise of its discretion, most of them had been raised by Wrightson and the Trustee could not be criticised for responding to them.[31]Their Lordships will humbly advise Her Majesty that the appeal should be dismissed with costs.