When a trustee is aware of all beneficiaries and creditors, matters of trust can be plain sailing. Fenner Moeran looks at what happens when things don’t go according to plan
When a trust comes to the end of its life, the trustees have to pay off creditors and their own proper administration costs, and thereafter pay out the assets to the beneficiaries according to the terms of the trust.
But what about beneficiaries and creditors of which the trustee is not aware? There are two basic answers: insurance and advertisement under the Trustee Act (1925), Section 27.
The first option is self-explanatory. Missing beneficiary insurance is relatively readily available on the market. However, it can prove to be prohibitively expensive, or even unavailable, where the trust is years old and the records poor. Also, many insurers demand as a precondition to granting insurance that advertisements under Section 27 are taken out, which leads us to the next option.
Section 27 essentially allows a trustee to advertise for any creditors or beneficiaries of which he has no notice. The advertisements are put in the London Gazette and other suitable newspapers. At the expiry of two months the trustees can distribute the trust property without worrying about anybody who has not notified the trustees of their claim (whether a creditor or a beneficiary) and whose claim the trustee did not have ’notice’ of.
This is a very useful provision, and one that any sensible trustee engaged in winding-up a trust will make use of. The difficult question is, what is ’notice’?
Taking note of notice
Despite the fact that the section is effectively more than 150 years old (it was based on an 1859 statute), the first time the Court of Appeal grappled with it was in March this year in the case of AON Pension Trustees Ltd v MCP Pension Trustees Ltd (2010). The case makes sobering reading for trustees.
It was concerned with one of the Maxwell pension schemes. It had started winding up in around 2003 and discovered (contrary to what you might assume for a Maxwell scheme) that it had a surplus. The trustees therefore advertised for missing beneficiaries before buying missing-beneficiary insurance and using the remaining surplus to provide increased benefits for the members.
Only after they had spent the ’surplus’ did they discover that actually there were another 30-odd members who had been lost off the records at some point in the past. The insurers paid them off, and then sued the former administrators alleging that it was due to their negligence that the beneficiaries had been ’lost’. That allegation has yet to come to trial.
However, as a preliminary issue the administrators argued that because the trustees had advertised and the missing beneficiaries had not responded, there was no liability to them. Effectively they sought to argue that ’notice’ is the same as knowledge, and forgetting about a beneficiary means that you lose notice of them and can be protected by Section 27 advertisements.
The High Court, and then the Court of Appeal, disagreed. In essence they held that:
- ’notice’ is not the same as ’knowledge’;
- in particular, while you can forget something, this does not remove ’notice’.
In other words, if the trustees ever knew of a beneficiary, then simply having forgotten about them will not allow them to claim protection under Section 27.
This is bad enough for a private family trust where Uncle Bobby had a few peccadilloes in his youth and the trustees once heard about an illegitimate child but forgot about them in the intervening 50 years. But for pension schemes the problems are legion.
By their very nature pension schemes last for decades, and sometimes have thousands of members who leave employment and move away, and even the best-administered scheme’s records are never 100 per cent perfect. The chance of members simply being lost off the records in such circumstances is very real – and by their very nature there is no way of identifying them in advance.
Beneficiaries of the doubt
So what can trustees do about lost beneficiaries? The answers are not particularly gratifying:
- insurance – still the first and only sure-fire protection against these claims;
- indemnity – obtain an indemnity from all the other beneficiaries to the extent of any overpayment before you pay out to them. Easy in theory, often difficult in practice to obtain from angry beneficiaries who are cynical about trustees seeking cover for their own inadequacies;
- Trustee Act – if all else fails, and you end up on the end of a claim for breach of trust, seek relief from the court under the Trustee Act 1925 Section 61 as having acted honestly and reasonably.
One last word of warning about the third option though. In Aon Pension Trustees the administrators had originally sought to use this as another argument as to why the trustees were not liable. However, at an early hearing Briggs J made it clear that if a trustee had a claim against a former adviser and failed to pursue it, they would be in difficulty in claiming to have acted ’reasonably’.
So as a final word of advice – look for somebody to sue.
Fenner Moeran is a barrister at 3 Stone Buildings