Aon Trust Corp Ltd v KPMG (a firm) and others
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[2005]
EWCA Civ 1004
PENSIONS
COURT OF APPEAL, CIVIL DIVISION
MUMMERY,
CHADWICK AND JONATHAN PARKER LJJ
23–25
MAY, 28 JULY 2005
Pension – Pension scheme – Company pension scheme
– Minimum funding requirement – Minimum funding requirement applicable to
schemes other than money purchase schemes – Whether scheme money purchase
scheme – Pension Schemes Act 1993, s 181 – Pensions Act 1995, ss 56, 67.
The claimant was the sole trustee of an occupational
pension scheme (the scheme) and the defendants were the principal employer in
the scheme, a representative member of the scheme who was receiving the pension
due to her (the retired member), and a representative member of the scheme in
pensionable employment (the active member).
The scheme provided for employees and employer to pay into the fund a
sum equal to a specified percentage of the employee’s salary. The benefit to which a member became entitled
on retirement was a pension equal to the sum of the amounts arrived at by
multiplying the payments into the fund made by the employee and the employer by
the factor set out in a table applicable at the time of payment and designed to
give rise to a product equal to the prospective pension at normal retirement
age to be expected from those payments on the basis of the actuarial estimates
made at the time. As the calculation of
the amount of pension was based partly on actuarial estimates, periodic
actuarial valuations were necessary to test the scheme’s performance against
actual experience, with a view to achieving an equilibrium between the scheme’s
assets and liabilities. Under cl 8.4 of
the schedule to the deed governing the scheme, if a periodic valuation revealed
a surplus the trustee had power to decrease contributions and/or increase
benefits and under cl 8.5, if the periodic valuation revealed a deficiency, the
trustee had power to make the adjustments ‘to the benefits secured or
thereafter accruing’ which were necessary to secure the continued solvency of
the fund. While the scheme had enjoyed
an actuarial surplus bonuses had been declared which were expressed in terms of
percentage of a member’s total pension accrued to date. In 2002 an actuarial valuation revealed a
substantial deficit. The trustee sought
the determination of the court in relation to a number of questions including
whether the scheme was a ‘money purchase scheme’ within the meaning of the
Pension Schemes Act 1993 and the Pensions Act 1995. A ‘money purchase scheme’ was defined as a
pension scheme under which all the benefits that could be provided were money
purchase benefits and ‘money purchase benefits’ were defined in s 181a of the 1993 Act as ‘benefits the rate or
amount of which is calculated by reference to a payment or payments made by the
member or by any other person in respect of the member and which are not
average salary benefits’.
________________________________________
a
Section 181, so far as material, is set out at [41], below
________________________________________
238
The relevance of the question was that unless the
scheme was a ‘money purchase scheme’ s 56b of the 1995 Act would apply to the scheme and
would impose a ‘minimum funding requirement’ which would have the effect of
requiring the employer to make good the scheme’s current deficit. The minimum funding requirement was a requirement
that the value of the assets of a scheme was not less than the amount of the
liabilities of the scheme. Section 56
also provided that in calculating the value of any liabilities for the purposes
of the section ‘a provision of the scheme which limited the amount of its
liabilities by reference to the amount of its assets was to be
disregarded’. The other two questions
were designed to clarify the nature and extent of the power to reduce benefits
conferred by cl 8.5. The one question
asked whether the exercise of that power was subject to the restrictions
imposed by s 67c of the 1995 Act which
by sub-s (1) applied to any power conferred on any person by an occupational
pension scheme ‘to modify’ that scheme.
Section 67(2) provided that the power could not be exercised on any
occasion in a manner which would or might affect any ‘entitlement’ or ‘accrued
right’ of any member unless the requirements under sub-s (3) for members’
consent or, alternatively, certification by an actuary that the proposed
exercise of the power would not adversely affect any member, were
satisfied. The other question asked
whether the trustee had power under cl 8.5 to reduce pensions already in
payment. In the High Court the Vice Chancellor
held (i) that the scheme was not a money purchase scheme; (ii) that the power
in cl 8.5 was a power to ‘modify’ the scheme within the meaning of s 67 of the
1995 Act; and (iii) that the power in cl 8.5 of the scheme empowered the
trustee to reduce pensions already in payment.
The employer, the pensioner member, and the active member appealed.
________________________________________
b
Section 56, so far as material, is set out at [36], [37], [45], below
c
Section 67, so far as material, is set out at [47], [49], below
________________________________________
Held – (1) The scheme was not a ‘money
purchase scheme’ within the meaning of the 1993 Act and the 1995 Act. Neither of the two components of the pension
benefit under the scheme, namely the standard pension and any bonuses declared,
was a ‘money purchase benefit’ as neither was calculated only by
reference to contributions in the sense that the benefit in question had to be
the direct product of the contributions, because the first stage of the
calculation process included actuarial factors.
Moreover, it was implicit in s 56 of the 1995 Act that the inclusion of
a provision which purported to limit the amount of the scheme’s liabilities by
reference to the value of its assets (so as automatically to extinguish any
deficit revealed on valuation) would not in itself render the scheme a ‘money
purchase scheme’, for if it were, s 56 would not apply to it. Yet the inclusion of such a provision in a
scheme would, on the face of it, inevitably produce a situation in which
benefits (liabilities) would be calculated by reference to contributions
(assets). The standard pension benefit,
and bonuses (to the extent that they were expressed in terms of a percentage of
accrued pension) were ‘average salary benefits’ being calculated by reference
to the average salary of a member over the period of service on which the
pension was based (see [163], [166]–[176], [188]–[190], below).
(2) The exercise by the trustee of the power in cl
8.5 was subject to the restrictions imposed by s 67(2) of the 1995 Act. The power in cl 8.5 of the scheme
239
to reduce benefits where the scheme was in deficit
was a power to ‘modify’ the scheme within s 67(1) of the 1995 Act. The modification of a benefit under the
scheme in the exercise of an express power in the scheme to make such a
modification was self-evidently a modification of the scheme. ‘Entitlement’ in s 67(2) referred to a
pension already in payment whereas ‘accrued right’ referred to a member’s
current right to a future pension (see [178], [181], [188]–[190], below).
(3) There was no power for the trustee, under cl 8.5,
to reduce pensions already in payment.
On the true construction of the scheme, the calculation of a pension was
a once-for-all calculation, carried out as at the date when the pension first
came into payment. The power in cl 8.5
was expressed as a power to adjust or amend ‘the benefits secured or thereafter
accruing’ in respect of members. The
antithesis of ‘benefits secured’ as against ‘benefits … thereafter accruing’
made it plain that what was envisaged was a situation in which a member was
still accruing pension rights, year on year.
The pension already accrued constituted the benefit ‘secured’: the
benefit ‘thereafter accruing’ referred to pension rights accruing in the future
(see [184]–[186], [188]–[190], below).
Decision of Sir Andrew Morritt V-C [2005] 3 All ER
587 reversed in part.
Notes
For the minimum funding requirement, see 44(2) Halsbury’s
Laws (4th edn reissue) para 81.
For the Pension Schemes Act 1993, s 181, see 33 Halsbury’s
Statutes (4th edn) (2003 reissue) 810.
For the Pensions Act 1995, ss 56, 67, see 33 Halsbury’s
Statutes (4th edn) (2003 reissue) 913, 926.
Cases referred to in judgments
Barclays Bank plc v
Holmes [2001] OPLR 37.
National Grid Co plc
v Mayes, International Power plc (formerly National Power plc) v
Healy [2001] UKHL 20, [2001] 2 All ER 417, [2001] ICR 544, [2001] 1 WLR
864.
Appeals
KPMG appealed, with permission of Sir Andrew Morritt V-C
as to one declaration, from his judgment on 29 July 2004 ([2004]) EWHC 1844
(Ch), [2005] 3 All ER 587), in which he made declarations in answer to the
three questions (set out at [20]–[23], below) in proceedings by which Aon Trust
Corporation Ltd, the sole trustee of the KPMG Staff Pension Scheme, had sought
the determination of the court as to the provisions contained in the
Consolidated Text of the Third Deed of Revision dated 24 April 1996 as amended
by five deeds of variation which governed one of the two funds in the pension
scheme. The defendants were KPMG, the
principal employer under the scheme, Ruth Muir James (the pensioner member), a
representative former employee of KPMG receiving pension under the scheme, and
Julian Walker (the active member), a representative member of the scheme who
had not retired. KPMG applied for
permission to appeal on one of the remaining questions and the pensioner member
applied for permission to appeal on the other.
The facts are set out in the judgment of Jonathan Parker LJ.
240
Jonathan Sumption QC
and Paul Newman (instructed by Linklaters) for KPMG.
Robert Ham QC and
Michael Tennet (instructed by Pinsent Masons) for the pensioner
member.
Brian Green QC
and Emily Campbell (instructed by Macfarlanes) for the active
member.
Christopher Nugee QC
and Jonathan Evans (instructed by DLA Piper Rudnick Gray Cary UK LLP)
for the trustee.
Cur adv
vult
28 July 2005.
The following judgments were delivered.
JONATHAN PARKER LJ.
PART 1: INTRODUCTION
A. The proceedings
[1] The claimant in these proceedings, Aon
Trust Corporation Ltd (the trustee), is the sole trustee of an occupational
pension scheme known as the KPMG Staff Pension Fund (the scheme). As its name implies, the scheme provides
benefits for employees of KPMG, the well-known firm of accountants, and its
associated organisations. In these
proceedings, the trustee seeks the determination by the court of five questions
arising in the administration of the scheme, consequent upon the fact that the
scheme is currently in substantial deficit.
[2] The proceedings were heard by Sir Andrew
Morritt V-C on 14, 15 and 16 July 2004 ([2004] EWHC 1844 (Ch), [2005] 3 All ER
587, [2005] 1 WLR 995). Before Sir
Andrew Morritt V-C it was agreed by the parties that the fifth question should
be stood over until answers had been given to the earlier questions. By his order dated 29 July 2004 Sir Andrew
Morritt V-C made declarations in answer to the first three questions. In the light of his answer to the third
question, the fourth question did not arise.
[3] In relation to each of Sir Andrew Morritt
V-C’s declarations one or more of the defendants (whose identities and
interests are explained below) sought permission to appeal. Sir Andrew Morritt V-C granted permission to
appeal in relation to the third question, but refused permission to appeal in relation
to the first and second questions.
Applications for permission to appeal on the first and second questions
were then made to this court. Those
applications were listed to be heard together with the appeal on the third
question, with a direction that in the event of permission being granted, the
substantive appeal on the earlier questions should follow. In the event, we considered it appropriate to
hear full argument on the earlier questions.
Having done so, I would for my part grant permission to appeal on those
questions.
[4] On that basis, each of the first three
questions is a live question on this appeal.
The fourth question will also become a live question in the event that
the appeal on the third question succeeds.
B. The parties
[5] The trustee is a professional trustee
company. It has been sole trustee of the
scheme since 23 December 2002. It
appears by Mr Christopher Nugee QC and Mr Jonathan Evans (both of whom appeared
before Sir Andrew Morritt V-C).
241
[6] The first defendant, KPMG, is the
principal employer in the scheme.
Although at one time the majority of members of the scheme were employed
by KPMG, following a series of reorganisations all the members of the scheme
who are currently in pensionable employment are employed by KPMG (UK) Ltd,
which is a participating employer in the scheme. KPMG appears by Mr Jonathan Sumption QC and
Mr Paul Newman (neither of whom appeared before Sir Andrew Morritt V-C).
[7] The second defendant, Ms Ruth James, is
currently in receipt of pension under the scheme: that is to say, she is a
pensioner member of the scheme. She has
been appointed to represent all other pensioner members of the scheme and those
who have or might have similar interests.
She appears by Mr Robert Ham QC and Mr Michael Tennet (neither of whom
appeared before Sir Andrew Morritt V-C).
[8] The third defendant, Mr Julian Walker, is
a member of the scheme who is currently in pensionable employment: that is to
say, he is an active member of the scheme.
He has been appointed to represent all other active members of the
scheme and any other members of the scheme not represented by the second
defendant. He appears by Mr Brian Green
QC and Ms Emily Campbell (both of whom appeared before Sir Andrew Morritt V-C).
C. The general nature of the scheme
[9] The scheme is a contracted-in occupational
pension scheme, approved by the Inland Revenue.
It was established by a trust deed dated 20 June 1949, the terms of
which have subsequently been revised.
The third (and latest) deed of revision is dated 24 April 1996 (I will
call it ‘3DR’). 3DR has in turn been
varied by five deeds of variation, the latest of which is dated 2 January 2001.
[10] With effect from 31 March 2000 the scheme
was varied so as to constitute two funds, a pre-2000 fund and a post-2000
fund. The pre-2000 fund thereupon became
a closed fund. Since the questions for
decision relate only to the pre-2000 fund, references hereafter to the scheme
are references to the scheme as it applies to the pre-2000 fund.
[11] The scheme provides for contributions to
be made by active members and participating employers. These contributions secure for members of the
scheme an annual pension on retirement the amount of which is determined by a
formula involving the application of multipliers figures contained in tables
which form part of the scheme.
Application of the multipliers figures contained in the tables
determines the amount of annual pension payable at the member’s ‘normal pension
date’ in respect of each £1 of contribution paid during specified periods. The multipliers figures are in turn based
upon actuarial estimates of such factors as investment returns, price inflation
and mortality. Thus the amount of a
member’s annual pension depends not only upon the contributions made by him and
his employer towards that pension, but also upon the actuarial estimates which
lie behind the multipliers figures contained in the tables.
[12] Since the calculation of the amount of
the annual pension is based partly on such estimates, periodic actuarial
valuations are necessary in order to test the scheme’s performance against
actual experience, with a view to achieving, so far as possible, an equilibrium
between the scheme’s assets and its liabilities. To that end, the scheme gives the trustee
powers to adjust the level of benefit which it provides (ie to adjust the
scheme’s liabilities) upwards or downwards as may be required from time to
time, according to whether the periodic actuarial valuation reveals a surplus
or a deficit of assets against liabilities.
The trustee also has power, where the actuarial valuation reveals a
surplus, to decrease the level of
242
funding by reducing contributions. These powers, which are central to the
arguments which have been addressed to us on this appeal, are contained in cll
8.4 and 8.5 respectively in Sch 1 to 3DR, to which further reference is made
below.
D. The history of the scheme
[13] In the past, the scheme enjoyed an
actuarial surplus. That led to the
trustee for the time being declaring bonuses pursuant to cl 8.4 (or its
equivalent in earlier deeds).
[14] The bonuses were expressed in terms of a
percentage of a member’s total pension accrued to date. That percentage figure was added to the base
figure, together with the additional pension accruing in the current year. As an example of this treatment, the evidence
refers to the annual record card of a Mr Woolf.
In his case, a bonus of 5% was declared in 1976: ie 5% of his accrued
pension as at the end of 1975 which was £869·077. 5% of £869·077 is £43·453. The latter sum, together with the additional
pension attributable to the current year (£360·238), was then added to the base
figure of £869·077, giving a new total accrued pension as at the end of 1976 of
£1,272·768.
[15] In 1984 members’ manual records were
replaced by computerised records. Since
the early 1990s a member’s electronic record has shown (1) a fund value which
is effectively accumulated contributions, interest and bonuses, and (2) the
amount of the accrued pension to date, with bonuses added to that figure (as in
the case of Mr Woolf).
[16] However, the days of surplus came to an
end in 1999. An actuarial valuation as
at 31 March 1999 revealed a deficit of some £600,000. In the light of that valuation, no bonuses were
declared in 1999, 2000 or 2001.
[17] As at 31 March 2002 the scheme had 1,835
active members, 4,426 deferred members and 550 pensioner members. An actuarial valuation as at that date
revealed a deficit of between £65m and £71m.
[18] In consequence, the trustee is presently
faced with the possibility that, unless KPMG is obliged to make good the
current deficit, and/or the trustee has power to reduce pensions in payment,
the trustee will be faced with a situation in which, if it continues to pay
pensions in full as they fall due, the scheme will run out of money. In effect, the trustee will have operated
what has been dubbed a ‘reverse tontine’, in which the older members receive
their benefits in full whilst younger members suffer reductions in benefit,
with the youngest taking no benefit at all.
In these circumstances the trustee understandably wishes to know what
obligation (if any) KPMG has to fund the current deficit, and whether the
trustee has power to reduce pensions already in payment. The trustee recognises that if it has such a
power it may have little alternative but to exercise that power in order to
maintain the solvency of the scheme, albeit it views the prospect of reducing
pensions already in payment with very considerable unease (to put it no
higher). Other possible courses might be
to wind up the scheme, or to invite the Pensions Regulator to do so.
PART 2: THE QUESTIONS BEFORE THE COURT
[19] Questions 1 and 2 in the claim form are
designed to clarify the nature and extent of the power to reduce benefits
conferred by cl 8.5.
[20] Question 1 asks (by sub-para (i)) whether
the trustee has power under cl 8.5 to reduce pensions already in payment, and
(by sub-para (ii)) whether it has power under cl 8.5 to make different
reductions to the benefits of different members (and
243
those claiming in respect of them). These are pure questions of construction of
cl 8.5, read in the context of the scheme as a whole. Before Sir Andrew Morritt V-C the parties
agreed that if the answer to question 1(i) was in the affirmative, then so too
was the answer to question 1(ii); and in his judgment Sir Andrew Morritt V-C
confirmed that the answer to question 1(ii) was in the affirmative. In the circumstances, no separate argument
has been addressed to us on question 1(ii).
[21] Question 2 asks whether the exercise of
the power in cl 8.5 is subject to the restrictions imposed by s 67 of the
Pensions Act 1995. The relevant
restrictions under that section are the requirement for members’ consent,
alternatively for certification by an actuary that the proposed exercise of the
power would not adversely affect any member of the scheme (without his
consent).
[22] Question 3 is the central question on
this appeal. It asks whether the scheme
is a ‘money purchase scheme’ within the meaning of the Pension Schemes Act 1993
and the 1995 Act. The relevance of this
question is that, as is common ground, unless the scheme is ‘a money purchase
scheme’ s 56 of the 1995 Act will apply
to the scheme and will impose a ‘minimum funding requirement’ which will have
the effect of requiring KPMG to make good the scheme’s current deficit, and s
75 of the 1995 Act will have a similar effect on a winding up of the scheme.
[23] There is an overlap between questions 2
and 3, in that the effect of s 67 of the 1995 Act (if it applies to the power
in cl 8.5) may itself have a bearing on whether or not the scheme is a ‘money
purchase scheme’ within the meaning of ss 56 and 75 of the 1995 Act.
[24] Question 4 arises only if the scheme is a
‘money purchase scheme’. It asks
whether, if that be so, KPMG will nevertheless be subject to a funding
obligation on a winding up of the scheme.
[25] At the hearing below, the trustee invited
Sir Andrew Morritt V-C to determine a number of additional questions arising in
the administration of the scheme, but in the event Sir Andrew Morritt V-C
declined to do so. Before us, the
trustee has renewed that invitation, albeit to a very much more limited
extent. I will return to this aspect in
part 7 of this judgment.
PART 3: MONEY PURCHASE SCHEMES IN GENERAL
[26] We were helpfully referred in argument to
passages from the Report of the Pension Law Review Committee (Cm 2342)
(Chairman: Professor Roy Goode) entitled ‘Pension Law Reform’ (better known as
the Goode Committee Report), which was published in 1993 following the Maxwell
debacle. The general observations which
follow in this part of the judgment are based upon my understanding of those
passages.
[27] An employer setting up an occupational
pension scheme must decide at the outset what benefits the scheme is to
provide, and how those benefits are to be funded. He may, for example, decide that the level of
benefit is to be earnings-related: ie that it is to be set by reference to the
member’s earnings. Such a scheme is
commonly called a ‘defined benefit scheme.’
[28] Typical examples of defined benefit
schemes are final salary schemes (where the pension represents a specific
percentage of the member’s salary as at the date of his leaving pensionable
employment) and average salary schemes (where the base figure on which the
pension is calculated is the member’s average salary over the whole period of
his employment).
244
[29] Since (by definition) the cost of
providing future benefits under a defined benefit scheme cannot be accurately
predicted, such schemes usually contain a provision obliging the employer to
make good any deficit (that is to say, any shortfall of assets as against
liabilities). Such a provision is
commonly called a ‘balance of cost obligation’.
Similarly, a defined benefit scheme may provide for the reduction or
suspension of contributions (ie a contributions holiday) where the scheme is
currently in surplus.
[30] Thus, in a typical defined benefit scheme
any mismatch from time to time between assets and liabilities is cured by
adjusting the assets to match the liabilities: ie by increasing or, as the case
may be, decreasing the level of funding as appropriate in the light of the most
recent actuarial valuation. In such a
scheme, the level of benefit dictates the level of contribution.
[31] Alternatively, an employer setting up an
occupational pension scheme may decide to define the level of benefits by
reference solely to the contributions made in respect of the member concerned,
so that the benefit represents no more and no less than the product of the
contributions. Such a scheme is commonly
called a money purchase scheme (I will come to the statutory definition of that
term later).
[32] Thus in a typical money purchase scheme
there can, by definition, be no mismatch between assets and liabilities. Hence there is no need (indeed, no scope) for
a ‘balance of cost’ obligation on the employer, since the level of contribution
dictates the level of benefit and no ‘balance of cost’ can arise.
PART 4: THE RELEVANT LEGISLATION
[33] As already noted, question 1(i) raises a
pure question of construction of cl 8.5 of the scheme, which falls to resolved
without reference to statute. The only
questions which require a consideration of the relevant legislation are
questions 2 and 3 (in any event) and question 4 (if it arises).
[34] The statutory provisions of direct
relevance to questions 2 and 3 are ss 56, 67 and 75 of Pt 1 of the 1995 Act.
[35] Part 1 of the 1995 Act applies to
occupational pension schemes. It is
common ground that the scheme is an ‘occupational pension scheme’ as that
expression is defined in s 1 of the 1993 Act (a definition which is imported
into the 1995 Act by s 124(5)), that is to say it is a scheme—
‘which is comprised in
one or more instruments … and which has … effect in relation to one or more
descriptions or categories of employments so as to provide benefits, in the
form of pensions or otherwise, payable on termination of service, or on death
or retirement, to or in respect of earners with qualifying service in an employment
of any such description or category …’
[36] Section 56 of the 1995 Act subjects certain occupational
pension schemes to a ‘minimum funding requirement’ as defined in sub-s 56(1),
that is to say: ‘a requirement … that the value of the assets of the scheme is
not less than the amount of the liabilities of the scheme.’
[37] Section 56(2) provides that the section
does not apply to ‘a money purchase scheme’ (sub-para (a)) or to certain other
types of scheme (sub-para (b)).
[38] (It should be noted that under the
Pensions Act 2004 the minimum funding requirement is to be replaced, with
effect from a date to be appointed, by a scheme-specific funding requirement
which proceeds on the same basis as s 56 of the 1995 Act in that it does not
apply to a ‘money purchase scheme’ and provisions for reducing liabilities by
reference to assets are to be ignored.)
245
[39] It is common ground that s 56 applies to
the scheme unless it is a ‘money purchase scheme’. Accordingly, question 3 asks whether the
scheme is a ‘money purchase scheme’: in effect, whether the scheme is subject
to the ‘minimum funding requirement’.
[40] The 1995 Act contains no definition of
the expression ‘money purchase scheme’, but s 124(5) of the 1995 Act imports
the definition contained in s 181(1) of the 1993 Act, namely, ‘a pension scheme
under which all the benefits that may be provided are money purchase benefits’.
[41] The expression ‘money purchase benefits’
is in turn defined in s 181(1) of the 1993 Act as meaning, in relation to a
member of an occupational pension scheme or the widow or widower of a member of
such a scheme—
‘benefits the rate or
amount of which is calculated by reference to a payment or payments made by the
member or by any other person in respect of the member and which are not
average salary benefits …’
[42] Thus, a scheme is not a ‘money purchase
scheme’ if any of the benefits for which it provides is an ‘average salary
benefit’.
[43] There is no all-purpose statutory
definition of the expression ‘average salary benefit’ in either the 1993 Act or
the 1995 Act, but s 84 of the 1993 Act (basis of revaluation of benefits by the
final salary method) contains, in sub-s (4), a definition of that expression
where it is used in that section. For
that purpose the expression ‘average salary benefit’ is there defined as
meaning: ‘benefit the rate or amount of which is calculated by reference to the
average salary of a member over the period of service on which the benefit is
based …’
[44] Before Sir Andrew Morritt V-C it was common
ground that, absent any other statutory definition of the expression ‘average
salary benefit’, the definition of that expression in s 84(4) of the 1993 Act
is applicable for present purposes. The
contrary has not been argued on this appeal.
[45] Returning to the 1995 Act, s 56(4)
provides that in calculating the value of any liabilities for the purposes of s
56: ‘a provision of the scheme which limits the amount of its liabilities by
reference to the amount of its assets is to be disregarded.’
[46] It is thus implicit in s 56 that the
inclusion of a provision which purports to limit the amount of the scheme’s
liabilities by reference to the value of its assets (so as automatically to
extinguish any deficit revealed on valuation) will not in itself render the
scheme a ‘money purchase scheme’.
[47] I turn next to s 67 of the 1995 Act. Section 67(1) provides that the section
applies to ‘any power conferred on any person by an occupational pension scheme
… to modify the scheme’. Question 2 asks
whether the power in cl 8.5 of the scheme is a power to ‘modify’ the scheme
within the meaning of s 67(1) since, if it is, the restrictions contained in
the following provisions of s 67 will apply to its exercise.
[48] There is no definition of the word
‘modify’ in either the 1993 Act or the
1995 Act. However, s
181(1) of the 1993 Act defines the word ‘modifications’ as including
‘additions, omissions and amendments’; and that definition is imported into the
1995 Act by s 124(5).
[49] Section 67(2) of the 1995 Act provides as
follows (so far as material):
‘The power cannot be
exercised on any occasion in a manner which would or might affect any
entitlement [or] accrued right … of any member of the scheme acquired before
the power is exercised unless the requirements under subsection (3) are
satisfied.’
246
[50] Section 124(2) of the 1995 Act provides
that for the purposes of Pt 1 of the 1995 Act (which includes s 67):
‘(a) the accrued rights
of a member of an occupational pension scheme at any time are the rights which
have accrued to or in respect of him at that time to future benefits under the
scheme, and (b) at any time when the pensionable service of a member of an
occupational pension scheme is continuing, his accrued rights are to be
determined as if he had opted, immediately before that time, to terminate that
service; and references to accrued pension or accrued benefits are to be
interpreted accordingly.’
Neither the 1993 Act nor the 1995 Act contains any
definition of ‘entitlement’.
[51] As noted earlier, the relevant
requirements under s 67(3) are for members’ consent, alternatively for
certification by an actuary that the proposed exercise of the power would not
adversely affect any member of the scheme (without his consent).
[52] Finally in the context of s 67 of the
1995 Act, I note s 117 of the 1995 Act, which is headed ‘Overriding
requirements’ and which provides as follows (so far as material):
‘(1) Where any provision
mentioned in subsection (2) conflicts with the provisions of an occupational pension
scheme—(a) the provision mentioned in subsection (2), to the extent that it
conflicts, overrides the provisions of the scheme, and (b) the scheme has
effect with such modifications as may be required in consequence of paragraph
(a).
(2) The provisions
referred to in subsection (1) are those of—(a) this Part [ie Pt 1 of the 1995
Act] …’
[53] Section 75(2) of the 1995 Act provides
that if any time during the winding up of such a scheme (the employer not
having been placed in insolvent liquidation or, if an individual, become
bankrupt) the value of the assets is less than the amount of the liabilities of
the scheme at such time: ‘an amount equal to the difference shall be treated as
a debt due from the employer to the trustees of managers of the scheme.’ Section 75(6) is in identical terms to s
56(4) quoted in [45], above.
[54] As already noted, question 4 only arises
if the answer to question 3 is that the scheme is a money purchase
scheme. The question is whether,
notwithstanding that fact, the scheme (on its true construction) imposes a
funding obligation on KPMG corresponding to the obligation which is imposed on
an employer by s 75 of the 1995 Act on a winding up of a non-money purchase
scheme.
PART 5: THE DETAILED PROVISIONS OF THE SCHEME
[55] References hereafter to the text of 3DR
(including its schedules) are references to the consolidated text; that is to
say, to the original text as varied by subsequent deeds of variation.
[56] The revised terms of the scheme are set
out in Schs 1 and 2 to 3DR. Schedule 1
contains the substantive clauses.
Schedule 2 contains the general rules of the scheme (the rules). Appended to the rules are the actuarial
tables referred to earlier.
[57] Clause 1 of Sch 1 to 3DR contains
definitions. ‘Member’ is defined as (so
far as material): ‘an individual who has been admitted to membership of the
Scheme … and who remains entitled (whether prospectively or actually) to any
benefit from the Scheme.’
247
[58] ‘Salary’ is defined as meaning, in
relation to a member:
‘(a) at any time when
the Member is not participating in a profit-related pay scheme constituted by
his Employer, the annual rate of his basic salary or wages from his Employer as
determined by the Principal Employer; or
(b) at any time when the
Member is participating in a profit-related pay scheme constituted by his
Employer, the annual rate of his notional salary or wages from his Employer
being the total of his basic salary or wages from his Employer as determined by
the Principal Employer and his planned profit-related pay;
and such other element
or elements (if any) of his remuneration from his Employer as his Employer may
from time to time determine to be pensionable and notify as such to the
Principal Employer and the Trustees.’
[59] Clause 2 contains the trusts of the
scheme. Clause 2.3 defines the main
purpose of the scheme as being the provision of pensions on retirement for or
in respect of employees of the ‘Principal Employer’ (ie KPMG) and the
‘Participating Employers’ (ie, currently, KPMG (UK) Ltd). Clauses 3–7 inclusive deal with essentially
administrative matters, and I need not refer to them.
[60] I will set out cl 8 in full. It provides as follows:
‘Actuary
8.1 The Trustees shall
have power, in consultation with the Principal Employer, to appoint an Actuary
to be the Actuary to the Scheme on such terms as they shall think fit. The Trustees shall have power, in
consultation with the Principal Employer, to remove the Actuary from office for
any reason whatsoever.
Actuarial valuations
8.2 The Trustees’ duty
to obtain actuarial valuations of the Scheme’s assets in relation to its
liabilities is limited to the duty imposed on them by Regulation 8 of the
[Occupational Pension Scheme (Disclosure of Information) Regulations 1986].
8.3 In addition, the
Trustees shall have power, with the consent of the Principal Employer to obtain
an actuarial valuation or an interim review prepared by the Actuary or such
other Actuary, as at such date, on such basis, and for such purpose as the
Trustees shall think fit.
Surplus revealed by actuarial valuation
8.4 If an actuarial
valuation or interim review of the [Pre-2000] Fund shows a surplus the Trustees
may, with the consent of the Principal Employer and after taking the Actuary’s
advice and after making any such amendments to the Trust Deed and/or the Rules
as may be necessary, decrease the contributions of any Member and/or increase
(by declaration of bonuses or interim bonuses or otherwise) the benefits or
future benefits of any Member or other person entitled to receive any benefit
from the [Pre-2000] Fund.
Deficiency revealed by actuarial valuation
8.5 If an actuarial
valuation of the [Pre-2000] Fund reveals a deficiency in the [Pre-2000] Fund’s
resources, the Trustees may with the consent of the Principal Employer make
such adjustments and amendments to the benefits secured or thereafter accruing
for or in respect of the Members as are necessary in the opinion of the
Trustees after taking the Actuary’s advice to secure the continued solvency of
the [Pre-2000] Fund.
248
Actuarial advice and determination
8.6 Where any amount is
required by any of the provisions of the Trust Deed or the Rules to be
determined by the Trustees with the advice of the Actuary, or to be determined
by the Actuary, tables from time to time supplied to the Trustee by the Actuary
may be used for this purpose.’
[61] I need not refer to cl 9, which contains
a number of administrative powers exercisable by the trustee. Clause 10 deals with augmentation. It provides as follows:
‘Request from Employer to Trustees
10.1 Any Employer may
request the Trustees to grant additional or new benefits under the Scheme for
or in respect of any of its employees or former employees whether or not the
employee or former employee is or is not already a Member.
Estimate of cost of benefits
10.2 Before granting any
benefits to which an Employer’s request pursuant to sub-Clause 10.1 relates,
the Trustees shall obtain an estimate of the increase in the value of the
liabilities of the Scheme which will result from doing so together with advice
as to the funding of such increase.
Grant of additional and new benefits
10.3 The Trustees shall
grant any benefits to which a request made pursuant to sub-Clause 10.1 relates,
subject to the following conditions:
10.3.1 the benefits do
not exceed Revenue Limits;
10.3.2 the Employer
which makes the request makes such additional contributions to the General
Fund, or enters into such other arrangements (if any) with the Trustees, as the
Trustees may require in order to fund the increase in the value of the
liabilities of the Scheme resulting from the grant of the benefits.’
[62] In the context of the expression ‘accrued
right’ in s 67(2) of the 1995 Act (see [49], above) our attention was drawn in
the course of argument to similar expressions in cl 13 (power to buy out
benefits) and cl 14 (power to transfer benefits to another scheme), as follows:
cl 13.1 contains a power for the trustees to buy out
benefits ‘accrued under the Scheme to and in respect of any Member’;
cl 13.2 provides that in exercising that power the
trustee may secure benefits which are ‘the same as those accrued to or in
respect of the Member under the Scheme’;
cl 13.8 refers to ‘the benefits accrued to and in
respect of [a Member] under the Scheme’;
cl 13.11.1 refers to ‘the benefits which have accrued
to or in respect of [the Member] under the Scheme’;
cl 13.12 refers to ‘the benefits accrued’ to any
person on the death of a member of the scheme;
cl 14.1 refers to ‘the benefits accrued under the
Scheme’;
cll 14.6.1 and 14.15 contain similar references (as
does r 17.9, referred to below); and
cl 14.8, which is concerned with transfer payments,
provides as follows (so far as material):
‘the amount of any
transfer payment to be made pursuant to this Clause shall be the amount which
the Trustees determine to be equal to the value
249
of the Member’s interest
in the Fund at the time of transfer, being not less than the cash equivalent …
of the benefits accrued to and in respect of the Member under the Scheme.’
[63] Clause 17 is concerned with participating
employers. Clause 17.11.3 provides that
a participating employer:
‘shall cease to have any
obligation to pay any contributions to the Scheme after the date when its
participation terminates except contributions due but unpaid at the date of
termination and any sum payable by it pursuant to [s 144 of the 1993 Act: the
forerunner of s 75 of the 1995 Act].’
[64] Clause 18.1 contains a power of amendment
in the following terms:
‘The Trustees shall have
power with the consent of the Principal Employer at any time or times to alter,
amend, add to and/or cancel all or any of the provisions of the Trust Deed or
Rules provided that nothing shall be done which would:
(a) cause the main
purpose of the Scheme to cease to be that stated in sub-Clause 2.3 or
(b) cause the payment or
transfer of the Fund or any part of it to the Principal Employer or any
Participating Employer.’
[65] Clauses 19 and 20 contain provisions
which are relied on by the pensioner member and the active member in support of
their contention (in the context of question 4) that even if the scheme is a
‘money purchase scheme’, KPMG is nevertheless under an obligation, imposed by
the scheme itself on its true construction, to make good any deficiency on a
winding up of the scheme. The relevant
clauses are cll 19.4.3 and 20.12.
[66] Clause 19 deals with termination. Clause 19.4 sets out certain consequences of
termination, including (at 19.4.3):
‘the Employers shall
cease to have any obligation to pay any contributions to the Scheme except
contributions due but unpaid at the date of termination and any sum payable by
them pursuant to [s 144 of the 1993 Act: the predecessor of s 75 of the 1995
Act].’
[67] Clause 20 deals with winding up. Clause 20.12 (which is headed ‘Power to
secure liabilities on an interim basis’) provides as follows (so far as
material):
‘If for any reason the
Trustees experience delay in realising the assets of the Scheme (including the
discharge of any debt due to them from any of the Employers under [s 144 of the
1993 Act: the predecessor of s 75 of the 1995 Act]) or in determining the
Scheme’s liabilities in respect of pensions and other benefits, they shall have
power to apply such part of the assets of the Scheme as they shall think fit in
securing any or all of such liabilities as they are able to determine …’
[68] I turn next to the rules. Section II of the rules (comprising rr 5 and
6) deals with contributions. Rule 5
deals with members’ contributions. It
provides for compulsory contributions equal to a specified percentage of a
member’s salary (but with a power for the member in certain circumstances to
elect to pay an increased percentage).
Rule 6 deals with employer’s contributions. In essence, it obliges the employer to pay
contributions equal to a specified percentage of a
250
member’s salary, such percentage varying according to
the age of the member and according to whether he has elected to pay increased
contributions.
[69] Section III of the rules (comprising rr
7–9) deals with the calculation of a member’s pension. Rule 7 governs the calculation of a pension
commencing at normal retirement date. It
provides as follows (so far as material):
‘Member’s entitlement to pension from Normal
Retirement Date
7.1 A Member whose
pensionable service terminates as a result of his retirement from Service on
his Normal Pension Date shall be entitled to a pension from the Scheme which
shall commence to be payable with effect from the day following his Normal
Pension Date for the remainder of his lifetime and calculated in accordance
with this Rule.
Annual amount of Member’s pension
7.2 The annual amount of
a Member’s pension under sub-Rule 7.1 shall be calculated as follows:
(1) by taking the total
amount of the contributions paid by him and his Employer into the General Fund
during or in respect of each Contribution Period up to and including the
Contribution Period ending 31 March 2000 and multiplying it by the appropriate
factor determined from the Tables in Appendix A in accordance with sub-Rule 7.3
in order to give the amount of pension derived from each Contribution Period;
(2) by increasing the
amounts determined in accordance with paragraph (1) of this sub-Rule by bonuses
declared pursuant to sub-Clause 8.4 … and/or by reducing them by any
adjustments made pursuant to sub-Clause 8.5; and
(3) by aggregating the
amounts of pension determined in accordance with paragraphs (1) and (2) of this
sub-Rule …
Sources of additional pension
7.5 A Member’s pension
on retiring at Normal Pension Date may exceed the pension determined in
accordance with the preceding sub-Rules of this Rule by virtue of:
(1) any additional
voluntary contributions paid [by the Member] and not taken into account … in
calculating the benefits payable to or in respect of him from the General Fund;
(2) any rights and
benefits granted upon the acceptance or a transfer payment in respect of him …
and
(3) any augmentation of
his benefits in accordance with Clause 10 or the corresponding provisions of
the Scheme previously in force.
Other provisions applicable to Member’s pension
7.6 The Member’s pension
payable under this Rule:
(1) shall be reduced in
accordance with Rules 10 and 11 if the Member exercises either or both of his
options under them …’
[70] Rule 8 governs the calculation of
pensions commencing before normal pension date.
It provides as follows (so far as material):
‘Circumstances in which Member’s pension may
commence early
8.1 A Member may elect
that his pension shall commence from a date before Normal Pension Date if the
following conditions are satisfied:
(1)(a) having attained
the age of 50 he retires from Service … or
(b) he retires from
Service before attaining age 50 … as a result of incapacity … and
251
(2) if the pension is to
commence before the Member’s 60th birthday, his Employer and the Trustees
consent to the commencement of his pension from that date …
Annual amount of early retirement pension
8.3 Subject to sub-Rule
8.4, the annual amount of a Member’s pension under sub-Rule 8.1 shall be
determined by taking the pension to which he would be entitled in accordance
with Rule 7 on retiring at Normal Pension Date and adjusting it by such amount
as the Trustees having taken the advice from the Actuary consider appropriate
…’
[71] Rule 9 governs the calculation of
pensions commencing on a date after normal pension date. Rule 9.1 enables a member who continues in
pensionable employment after his normal pension date to postpone the
commencement of his pension. Rule 9.2
provides that where a member has exercised that power—
‘the annual amount of
his pension shall be equal to the pension which would have been payable to the
Member under Rule 7 if the Member had retired on the Member’s Normal Pension
Date increased by such proportion as the Trustees having taken advice from the
Actuary consider appropriate having regard to the Member’s age at the date when
the pension starts to be paid.’
[72] Rule 10 contains provisions as to
commutation. Rule 10.4 provides as
follows (so far as material):
‘A Member who continues
to be employed by any of the Employers after his Normal Pension Date may not
receive a lump sum by way of commutation pursuant to this Rule until he
commences to receive his pension from the Scheme unless he is a Class B Member
or a Class C Member … in which case he may make an election [to commute part of
his pension for a lump sum] at any time from his Normal Pension Date to the
date when his late retirement pension commences to be paid.’
[73] Rule 17 governs the entitlement of early
leavers to preserved benefits under the scheme.
Rule 17.9 provides that, as an alternative to retaining his entitlement
to such benefits, an early leaver may request the trustee to exercise its power
under cl 13 or cl 14 to buy out ‘the benefits accrued to or in respect of him
under the Scheme’ or to transfer them to another scheme.
[74] Rule 9 governs payment of pensions. Rule 19.1 provides that, subject to rr 19.2
and 19.3, all pensions are to be paid in arrears by monthly instalments. Rule 19.2 confers power on the trustee to
alter the date on which and/or intervals at which pensions are paid. Rule 19.3 deals with accrual of pension, as
follows (so far as material):
‘A Member’s pension
shall accrue at an equal daily rate from the day following the day of the
Member’s retirement to the day of his death (both dates inclusive). A spouse’s or Dependant’s pension shall
accrue at an equal daily rate from the day after the death of the Member … to
the day of the spouse’s or Dependant’s own death (both dates inclusive) …’
[75] Rule 20 governs increases in
pension. It provides as follows (so far
as material):
‘20.1 [In so far] as any
pension payable from the Pre-2000 Fund is attributable to contributions paid to
the Scheme after 31 March 1997 … its
252
annual rate shall be
increased with effect from 1 January in each year by the lesser of:
(i) the percentage
annual increase in the RPI … and
(ii) 5% …
20.4 [In so far] as any
pension payable from the Pre-2000 Fund is attributable:
(a) to contributions
paid to the Scheme before or on 31 March 1997; or
(b) to contributions
paid to the Scheme after 31 March 1997 in respect of employment before or on
that date;
no increase in its
annual rate is guaranteed, but increases may be payable as a result of the
declaration of bonuses pursuant to sub-Clause 8.4.’
[76] Rule 21 concerns the maintenance by the
trustee of a Special Account. Rule 21.1
requires the trustee to maintain such an account, together with sub-accounts
relating to each employer in the scheme, to which the amounts specified in r
21.2 are to be credited. Rule 21.2 lists
various situations in which money is retained within the scheme. Rule 21.4 provides as follows:
‘The Trustees shall at
the direction of the Principal Employer apply the whole or any part of the
balance standing to the credit of the Special Account in or towards the payment
pro rata of the Employer’s future contributions or in payment of additional
benefits to any Member or Members or for any other purpose of the Trust Deed
and these Rules (including the payment of new or increased benefits under
clause 10).’
[77] Appended to the rules are the actuarial
tables mentioned earlier. There are nine
of them, each relating to different contribution periods. Table 1 relates to contributions made in
respect of periods prior to 30 September 1954, table 2 to contributions made in
respect of periods between 1 October 1954 and 30 September 1964, and so
on. Each table is described in its
heading as ‘showing the amount of pension secured by a contribution of £1
during the year at the end of which the Member attained the next birthday
shown’.
PART 6: THE VICE CHANCELLOR’S JUDGMENT
[78] Sir Andrew Morritt V-C answered question
1(i) in the affirmative. That is to say,
he held that cl 8.5 empowers the trustee to reduce pensions already in
payment. He gave his reasons as follows
([2005] 3 All ER 587 at [25], [2005] 1 WLR 995):
‘Clause 8 deals with
actuarial valuations and their consequences.
Such a valuation is bound to take account of liabilities in respect of
pensions in payment as well as in prospect.
The terms of cl 8.5, when read with the definition of member, reflect
this requirement. The definition of
member and the reference to benefits secured each embrace pensions in
payment. Rule 7.2(2) expressly
contemplates a reduction in accordance with cl 8.5 before retirement but does
not exclude the consequence of a reduction thereafter. Whether or not the further provisions in
relation to increases to be found in cl 10.4 and r 20.4 are necessary, I do not
consider that the absence of a corresponding provision in respect of cl 8.5
leads to any conclusion different from that which the clear language of both cl
8.5 and r 7.2(2) require.’
[79] Sir Andrew Morritt V-C also answered
question 1(ii) in the affirmative.
Having noted (in para [18] of his judgment) that there was no dispute as
to the
253
answer to question 1(ii), he nevertheless addressed
the question, saying this (at [26]):
‘As I have already
indicated no party was concerned to argue for a negative answer to question
1(ii). Having considered the matter for
myself I think they were right not to do so.
If the power exists at all, there are no words to indicate that it must
be exercised in the same way for all members.
Nor, given the fiduciary duty of the trustee, is there any reason to
imply any such limitation.’
[80] Sir AndrewMorritt V-C also answered
question 2 in the affirmative, holding that the power in cl 8.5 is a power to
‘modify’ the scheme within the meaning of s 67 of the 1995 Act, since an
exercise of the power would amount to an ‘omission’ for the purposes of the
definition of ‘modifications’ in s 181 of the
1993 Act.
[81] As to the meaning of the definition of
‘modifications’, Sir Andrew Morritt V-C said this (in para [31] of his
judgment):
‘Thus an “addition” or
“omission”, not amounting to or requiring an amendment will be a
modification. It follows that an
adjustment requiring such an addition or omission comes within the section. This demonstrates that a modification does
not require any change to the relevant documents.’
[82] Sir Andrew Morritt V-C continued:
‘[32] Then does the
exercise of the power conferred by cl 8.5 necessitate such an addition or
omission? In my view it does. The argument of counsel for the active member
appears to me to attribute to the word “scheme” a sense corresponding to the
document in which it is recorded but excluding the rights conferred by it. It may be that an exercise of the power
contained in cl 8.5 can be implemented without any alteration to the
constituting documents of the scheme. In
this sense an adjustment not involving an amendment can be made by deducting
from the pension otherwise due the amount of the reduction. But to conclude from that consideration that
the section does not apply appears to me to ignore the clear intention behind
it.
[33] The purpose of the
section is to protect, amongst other things, entitlements. A pension in payment is an entitlement under
the scheme (see Barclays Bank plc v Holmes [2001] OPLR 37 at 60 (para
129)) albeit subject to reduction in the event of the exercise of the power
conferred by cl 8.5. The entitlement is
a part of the scheme. In my view to
reduce the entitlement is, to that extent, to modify the scheme by the
equivalent of an omission. The fact that
the reduction or omission from that part of the scheme is effected by the use
of another part of the scheme, that is cl 8.5, does not seem to me to be
material. For these reasons I will
answer question 2 in the affirmative.’
[83] In answer to question 3, Sir Andrew
Morritt V-C held that the scheme is not a ‘money purchase scheme’. After referring to the relevant statutory
provisions, and after summarising the arguments which had been addressed to
him, Sir Andrew Morritt V-C continued:
‘[40] I shall start by
considering the derivation of the expression “money purchase benefits” and the
contexts in which it has been used. The
earliest use to which my attention was drawn is in Sch 1A to the Social Security
Act 1975 which was inserted by Sch 1 to the Social Security Act 1985 with
effect
254
from 1 January
1986. Such a benefit was defined as “any
benefit the rate or amount of which is calculated by reference to a payment or
payments made by the member, or by any other person in respect of him” (see
para 5(1) of Sch 1A). The schedule deals
with the revaluation of pensions of early leavers, that is persons whose
pensionable service terminates before normal pension age. Different methods of revaluation were to be
applied to differently calculated pensions.
Paragraph 3 dealt with pensions calculated by reference to the member’s
average salary, para 4 to pensions calculated by reference to the member’s
length of service and para 5 to pensions calculated by reference to a payment
or payments made by the member or by any other person in respect of him. In the case of para 5 “the investment yield
and any bonuses arising from” such payments were to be applied in providing
such benefit as would have been provided under the scheme.
[41] These provisions
with amendments were re-enacted in s 84 of and Sch 3 to the 1993 Act. Schedule 3 provides for four methods of
revaluation, final salary method, average salary method, flat rate method and
money purchase method. The last
mentioned method is applicable to money purchase benefits arising under an
occupational pension scheme (see s 84(3)).
The method is to apply the investment yield and any bonuses arising from
payments made by or on behalf of a member towards providing any pension or
other retirement benefit which would have been payable under the scheme.
[42] I accept the
submission of counsel for KPMG that the evident object of these provisions is
to try to ensure that an early leaver should ultimately obtain a benefit
equating as nearly as possible with what he would have got had he remained an
active member of the scheme. Equally it
demonstrates quite clearly that it is envisaged that a money purchase benefit
arises from and is correlative to a fund, actual or notional, and its
investment yield constituted by the contributions paid by the member and his
employer.
[43] The second context
in which the expression “money purchase benefit” had been used is that of
“contracting out”. The Social Security
Act 1986 made provision by s 6 and Sch 2 for schemes providing money purchase
benefits to contract out of the state earnings-related pension scheme
(SERPS). The definition of such benefits
was—
“benefits the rate or amount of which is calculated
by reference to a payment or payments made by a member of the scheme or by any
other person in respect of a member other than average salary bene-fits.” (See para 11(b) of Sch 2.)
These provisions were re-enacted in ss 7–39 of the
1993 Act.
[44] The purpose of
singling out money purchase benefits was to ensure that if the scheme was to be
allowed to contract out, a member with only money purchase benefits must have
special money purchase contracted-out rights rather than a salary-related
guaranteed minimum pension. Thus the
distinction recognised that a money purchase benefit had no guaranteed or
defined benefit for it depended on the investment yield obtained or
attributable to the fund derived actually or notionally from the contributions
made by the member and his employer.
[45] The third context
on which counsel for KPMG relied is s 144 of the 1993 Act.
This was concerned with cases of a deficiency of assets on the winding
up of the scheme or of the employer. It
has been re-enacted with
255
amendments in s 75 of
the 1995 Act. The effect was to deem the
deficiency to be a debt due from the employer to the trustees. The relevance for present purposes is that
the schemes to which the provision applied excluded money purchase schemes as
defined in s 181 of the 1993 Act.’
[84] After discussing the effect of s 144 of
the 1993 Act (re-enacted in s 75 of the
1995 Act, and after referring to the report of the Goode Committee, Sir Andrew
Morritt V-C referred to various other provisions of the 1995 Act. He continued:
‘[52] This excursus into
the various contexts in which the definitions or concepts of money purchase
benefits or schemes appear does show the characteristics such benefits or
schemes are expected to have. First, a
money purchase benefit cannot be a defined benefit because the investment yield
from the underlying fund whether actual or notional cannot be precisely
predicted. Second, a money purchase
scheme is fully funded in the sense that liability for the benefits is in all
normal circumstances exactly matched by available assets. Such schemes or benefits are to be contrasted
with salary-related schemes. They
provide a benefit defined by reference to the salary of the member whether
average or final. The liability for such
benefit is unlikely to be exactly matched by available assets.’
[85] Sir Andrew Morritt V-C then turned to r
7.2, concluding (in para [54] of his judgment) that the definition of ‘average
salary benefits’ in s 84 of the 1993 Act, and in particular the phrase
‘calculated by reference to’, ‘points to the yardstick or measure by which the
benefit is to be ascertained or defined in the context of an occupational
pension scheme.’
[86] Sir Andrew Morritt V-C continued:
‘In a conventional money
purchase scheme that will be the payments, actual or notional, into the fund
for the ultimate benefit is defined only by what the fund will purchase at
retirement. By contrast in a final
salary scheme the benefit is ascertained or defined by reference to the final
salary whether or not the liability for it has been matched by the contributions.’
[87] In para [55] of his judgment Sir Andrew
Morritt V-C concluded that the reason for the exclusion of ‘average salary
benefits’ from the definition of ‘money purchase benefits’ in s 181 of the 1993
Act was that whilst in an average earnings-related scheme it was necessary to
have resort to both earnings and contributions in ascertaining or defining the
resulting benefit, that benefit was ultimately defined by reference to average
earnings, not contributions, and as such was not to be regarded as a ‘money
purchase benefit’. He continued:
‘[56] I conclude that
this element of the pension benefit is calculated by reference to the average
salary of a member over the period of service on which the benefit is
based. The requirement for an annual
calculation and a percentage contribution based on the earnings in that year
gives rise to a measure or yardstick based on average salary. The application each year of a different
factor to the contribution provides for weighting that average. The resulting benefit is ultimately
calculated by reference to average earnings not payments. As such it cannot be a money purchase
benefit. It follows that for this reason
alone the scheme is not a money purchase scheme.’
256
[88] Sir Andrew Morritt V-C then turned to the
calculation required by r 7.2(2) where bonuses have been declared, saying this:
‘[57] The other element
of the pension benefit which enters into the calculation required by r 7(2) is
any bonus declared in accordance with cl 8.4.
This benefit is both contingent and discretionary. It is contingent on there being a surplus
revealed by the actuarial valuation, the consent of the principal employer and
favourable advice to the trustees from the actuary. Even then the right of the member depends on
the exercise by the trustees of the discretion given to them by cl 8.4. Such a benefit need not be calculated by
reference to payments made by or in respect of the member at all. For example an increase in benefit of 5% in
the year to which my example (see [14], above) relates is an increase to the
amount of the prospective benefit. No
doubt in deciding how large an increase to award the trustees would consider
the size of the surplus but that would not give rise to the calculation of the
benefit by reference to the surplus.
Further, the proportion of the surplus attributable to the bonus
credited to a member would not necessarily have arisen from that member’s
contributions. An example given by
counsel for the pensioner member illustrates this. Take two members of the same age who each
retired at 65 with a pension of £4,000 per annum. Their contribution record may be very
different, one may have served at a relatively modest level but for longer than
the other, yet both will receive the same bonus.’
[89] For those reasons Sir Andrew Morritt V-C
concluded (in para [58] of his judgment) that the bonus element in the pension
benefit was not a ‘money purchase benefit’ either. It followed that the scheme is not a ‘money purchase
scheme’.
[90] In the light of that conclusion, question
4 did not arise.
PART 7: THE TRUSTEE’S ADDITIONAL QUESTIONS
[91] The Vice Chancellor’s decision that the
scheme is not a ‘money purchase scheme’ was based on his conclusion that
neither the standard pension benefits nor bonuses awardable under cl 8.4 are
‘money purchase benefits’. In the light
of that conclusion, it was not necessary for Sir Andrew Morritt V-C to consider
the nature of other benefits for which the scheme provides, as Mr Nugee had
invited him to do. Similarly, although
he concluded (in para [56] of his judgment) that standard pension benefit is an
‘average salary benefit’, it was not necessary for Sir Andrew Morritt V-C to
consider whether bonuses awardable under cl 8.4 also fell within the meaning of
that expression.
[92] Mr Nugee, rightly recognising the
inherent undesirability of inviting an appellate court to decide questions
which, in normal circumstances, would fall to be decided at first instance, has
not renewed before us the wide-ranging invitation which he extended to Sir
Andrew Morritt V-C to decide, in relation to each of the various benefits for
which the scheme provides, not merely whether or not such benefit is a ‘money
purchase benefit’, but, if it is not, whether it is an ‘average salary benefit’
or some other kind of benefit. He has,
however, invited us to address that question in relation to standard pension
benefits and bonuses awardable under cl 8.4.
[93] The reason why Mr Nugee seeks an answer
to this additional question, should it arise, is that there are (as I
understand it) differing requirements for revaluation depending upon the
category into which the benefit falls (ie whether
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it is a ‘money purchase benefit’, an ‘average salary
benefit’ or some other kind of benefit).
He tells us that for the purposes of revaluation the trustee’s
predecessors as trustee treated both standard pension benefits and bonuses as
‘money purchase benefits’. However, if
in either case the court concludes that the benefit in question is not a ‘money
purchase benefit’, the trustee will wish to know for the purpose of revaluation
whether or not such benefit is an ‘average salary benefit.’
[94] In the particular, and somewhat unusual,
circumstances of the instant case, I consider that it is appropriate that we should
accede to Mr Nugee’s invitation and address that additional question, should it
arise.
PART 8: THE ARGUMENTS ON THIS APPEAL
A. The arguments for KPMG
[95] KPMG is the appellant in relation to
questions 2 and 3 and the respondent in relation to question 1(i). Mr Sumption addressed questions 2 and 3 in
his opening, but addressed question 1(i) in the course of his reply (having
heard the submissions of Mr Green and Mr Ham on that question).
[96] Central to Mr Sumption’s submissions on
questions 2 and 3 is the proposition that the powers in cll 8.4 and 8.5 are
powers of adjustment which are integral to the process of calculating the
amount of a member’s pension entitlement prescribed by r 7.2. He submits that the application of the tables
at the first stage of the calculation process produces only a ‘provisional’
figure, and that the calculation process prescribed by r 7.2 is not complete
until the powers of adjustment in cll 8.4 and 8.5 have been engaged. It follows, he submits, that there can no
entitlement to the figure produced simply by applying the tables,
without regard to cll 8.4 and 8.5.
[97] Basing himself on that proposition, he
submits (a) that the powers of adjustment in cll 8.4 and 8.5 are not powers ‘to
modify the scheme’ within the meaning of s 67(1) of the 1995 Act since they are
themselves an integral part of the calculation process (question 2); and (b)
(which, if I have understood the argument correctly, is really the other side
of the same coin) that the scheme is a ‘money purchase scheme’ for the purposes
of ss 56 and 75 of the 1995 Act since the scheme itself provides (by cll 8.4
and 8.5) that its liabilities must match its assets (question 3).
[98] He stresses that prior to the coming into
force of ss 56 and 75, the scheme was operated in practice as a money purchase
scheme. He submits that it cannot have
been Parliament’s intention in enacting ss 56 and 75 of the 1995 Act to
transform a money purchase scheme into a defined benefit scheme by creating
rights or obligations for which the scheme does not provide: rather,
Parliament’s intention must have been to ensure that the existing rights of
members were properly and regularly funded.
He submits that if the effect of s 67 is to render the power of
adjustment in cl 8.5 unenforceable without consent, the absence of any ‘balance
of cost’ obligation on the employer will mean that the scheme no longer
contains any provision for assets to match liabilities.
[99] Mr Sumption submits that the scheme
should not be construed on the footing that the draftsman was content to leave
it to statute to fill what he describes as ‘the funding gap’. He advances three reasons for that: first,
that the statutory provisions themselves are not comprehensive; second, that
the inference must be that the draftsman intended the scheme to operate
autonomously; and third, the fact that the scheme contains no ‘balance of cost’
obligation.
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[100] Turning specifically to s 67 of the 1995
Act (ie to question 2), Mr Sumption submits that cl 8.5 is not caught by the section
for two reasons, each of which derives from his basic proposition referred to
above. His first reason is that the
power in cl 8.5 is not a ‘power to modify’ the scheme. His second is that the exercise of the power
in cl 8.5 is not capable of affecting any ‘entitlement [or] accrued right’ of a
member.
[101] As to his first reason, he submits that
in exercising its power in cl 8.5 the trustee is not modifying the scheme:
rather, the trustee is giving effect to it in accordance with its unaltered terms. He submits that s 67 is not concerned with
the modification of provisions which, like cll 8.4 and 8.5, are already an
integral part of the scheme. He points
out that the exercise of the power in cl 8.5 does not change the terms of the
scheme. (He does, however, accept that
an exercise of the power of amendment in cl 18 would be a modification of the
scheme.)
[102] He submits that if s 67 renders cl 8.5
unenforceable without consent, the effect of the section would be to modify the
scheme by creating an entitlement which did not previously exist under the
scheme, namely an entitlement to a pension calculated without reference to cl
8.5, which would in turn mean that benefits could be payable at a level which
would exceed the funding of the scheme.
[103] As to his second reason, he submits once
again that there is no entitlement under the scheme to a pension calculated
without reference to the powers of adjustment in cll 8.4 and 8.5. He points out that the process prescribed by
r 7 expressly includes the cl 8.5 adjustment.
He submits that it follows an exercise of the cl 8.5 power does not
effect any change in a member’s right to his pension, since his only right is a
right to a pension in the amount which results from the complete calculation
process, including any adjustment under cl 8.4 or cl 8.5.
[104] As to Sir Andrew Morritt V-C’s
conclusion (in para [32] of his judgment: see [82], above) that the effect of
an exercise of the cl 8.5 power would be to create an ‘omission’ within the
meaning of the definition of ‘modifications’ in s 181(1) of the 1993 Act, Mr
Sumption repeats his submission that the exercise of the cl 8.5 power is simply
a part of the calculation process prescribed by the scheme.
[105] As to Sir Andrew Morritt V-C’s
conclusion (in para [33] of his judgment: see [82], above) that a pension in
payment is an entitlement under the scheme, Mr Sumption repeats his submission
that it cannot be an entitlement if the provision for calculating the pension
amount incorporates the power of adjustment contained in cl 8.5. He draws a parallel in this respect with r
20, which provides for an upwards revaluation.
That too, he submits, is merely the operation of the existing scheme in
the light of a particular contingency.
He draws a distinction between a modification of the terms of the scheme
and a change in the economic circumstances in which the scheme operates.
[106] As to question 3, Mr Sumption submits
that there is a fundamental difference between a scheme which provides for
defined benefits in an amount which represents an entitlement, coupled with a
discretion to reduce that entitlement, and a scheme which provides for no
entitlement to anything more than what the fund will buy. He submits that the scheme falls within the
latter category, since under the scheme there is no entitlement to a pension
calculated without reference to cll 8.4 and 8.5.
[107] He submits that all the benefits
provided by the scheme are ‘money purchase benefits’ within the statutory
definition (see [41], above) since (1) they are benefits the amount or rate of
which is calculated by reference to
259
contributions, and (2) they are not excluded from
that definition as being ‘average salary benefits’.
[108] He submits that the pension is a ‘money
purchase benefit’ since it is calculated by reference to contributions, cl 8.5
being an integral part of that calculation process.
[109] He further submits that if (contrary to
his earlier submission) an exercise of the power in cl 8.5 to reduce benefits
amounts to a modification of the scheme, then the same must be true of an
exercise of the cl 8.4 power to increase benefits (although it is not his case
that an exercise of the cl 8.4 power would attract s 67). He submits that the only difference between
the two is that members’ consent is more likely to be forthcoming to an
increase in benefit than to a reduction.
[110] Mr Sumption submits that a further
reason why an increase in benefit is a modification of the scheme is that
increasing the benefit for one member may adversely affect other members. He submits that if s 67 restricts the
exercise of the cl 8.5 power to make downwards adjustments, whilst the cl 8.4
power to make upward adjustments remains intact, then the effect of s 67 has been
to make a very radical alteration of the scheme for which s 67 was not intended
and which is inconsistent with the basic nature of a money purchase
scheme. He submits that the purpose of s
67 was not to substitute a different method of calculating benefits so that a
process which depended on adjustments both ways becomes a process which allows
for adjustments one way only; and that s 67 cannot be used so as to substitute
a different method of making the original pension calculation from the one for
which the scheme itself provides.
[111] Mr Sumption submits that Sir Andrew
Morritt V-C was in error (in paras [53]–[57] of his judgment) in treating the
pension benefit as comprising essentially two distinct benefits, namely the
standard pension and any bonuses awarded under cl 8.4. Mr Sumption submits that there is one
composite benefit under r 7.2. In any
event, he submits, Sir Andrew Morritt V-C was in error in categorising the
standard pension benefit as an ‘average salary benefit’ because it is based on
annual salary. In the first place, he
repeats his submission that the calculation based on salary is only an
intermediate stage in a calculation process which includes the powers of
adjustment in cll 8.4 and 8.5. In the
second place, he submits that, even if the figure produced by the application
of the tables were the final figure, rather than merely a provisional figure,
it would not constitute an ‘average salary benefit’ since the calculation
required by the tables is a calculation based on the aggregate amount of a
member’s contributions over his entire working life, with different factors
being applied to those contributions in different periods. The whole object of the tables, he submits,
is to relate contributions (plus investment return) to the benefits
subsequently obtained: ie a classic characteristic of a money purchase
scheme. In the third place, Mr Sumption
takes issue with Sir Andrew Morritt V-C’s reasoning that, because contributions
are based on a given percentage of salary, a pension based on those
contributions can properly be regarded as indirectly based on salary. The right question to ask, he submits, is
whether the benefits are calculated by reference to the contributions. In the case of the scheme, he submits, they
clearly are. He submits that the scheme
is a money purchase scheme because the formula designed to produce a pension
represents what the invested contributions will buy.
[112] As to Parliament’s intention in
excluding ‘average salary benefits’ from the definition of ‘money purchase
benefits’ (see [41], above), Mr Sumption referred us to a passage in Hansard
recording what Mr John Major MP (then
260
Minister of State at the Department of Health and
Social Security) said on 19 May 1986 when moving an amendment to the Social
Security Bill in the House of Commons.
The amendment was designed to alter the definition of ‘money purchase
benefits’ wherever that expression occurred in the Pensions Act 1975 so as to
ensure that it did not include ‘average salary benefit’. Mr Major is recorded as saying this (98 HC Official
Report (6th series) cols 93–94):
‘A few schemes provide
what are known as “unrevalued average salary benefits”, where members pay a
percentage of their earnings as a contribution, and the benefits are then
calculated as a straightforward multiple of those contributions. These are not “money purchase benefits” in
the sense we intend in the new pension arrangements provided by this Bill,
because they are fixed in value and there is no element of investment return. In effect they are salary-related benefits.’
[113] Mr Sumption submits that in the above
passage, Mr Major rightly identified the mischief which led to the exclusion of
‘average salary benefits’ from the definition of ‘money purchase
benefits’. He submits that in referring
to a ‘straightforward multiple’ Mr Major meant a multiplication process which
took no account of investment returns.
[114] Turning to bonuses, Mr Sumption submits
that Sir Andrew Morritt V-C erred in treating bonuses as a distinct benefit
when, on the true construction of the scheme, a bonus is no more than an
adjustment to the provisional figure produced by applying the tables.
[115] Mr Sumption accepts that, given that
valuations will only be made at intervals, it is unlikely that there will ever
be an exact mathematical equilibrium between assets and liabilities. But he submits that that does not mean that
the pension is not ‘calculated by reference to’ contributions within the
meaning of the definition of ‘money purchase benefits’ in s 181(1) of the 1993
Act (see [41], above). He submits that
the function of the calculation formula prescribed by r 7.2 is to relate the
pension as closely as is practicable to the value of the fund which represents
the contributions and to the member’s notional pro rata share of that fund. There is, he submits, nothing in the r 7.2
formula which entitles a member to a defined benefit irrespective of the
invested value of the contributions.
[116] Mr Sumption then turned to a number of
other benefits provided by the scheme (including ill-health and early
retirement benefits under r 8, augmentation under r 10 and benefits paid out of
the special account under r 21.4), submitting that, on analysis, those benefits
are also ‘money purchase benefits’.
[117] As to question 4, Mr Sumption submits at
the outset that the court should not assume that if the scheme is not a ‘money
purchase scheme’, so that the statutory minimum funding requirement applies,
there would necessarily be a deficiency to be met by the employer pursuant to
that requirement.
[118] Turning to cl 19.4.3 of 3DR, he submits
that that clause does not operate so as to import the statutory obligation
imposed by s 75 of the 1995 Act. Indeed,
he submits, cl 19.4.3 makes no assumption as to whether any sum is payable
under the section. He submits that in
this part of 3DR the draftsman was not applying his mind at all to the question
whether the scheme is or is not a ‘money purchase scheme’: he was simply
dealing with what would happen if it were held to be such a scheme. In support of these submissions Mr Sumption
cited a short passage from the speech of Lord Hoffmann in National Grid Co
plc v Mayes,
261
International Power plc (formerly National
Power plc) v Healy [2001] UKHL 20 at [54]–[56], [2001] 2 All ER 417
at [54]–[56], [2001] ICR 544 in which Lord Hoffmann stressed the perils
inherent in linguistic arguments of the ‘expressio unius’ variety in the
context of ‘a patchwork document like the pension scheme’.
[119] Mr Sumption submits that the same points
can be made in relation to cl 20.12 of 3DR, in that the draftsman is there
referring to the possible application of a provision which would only apply to
the scheme if it is not a ‘money purchase scheme’, but without making any
assumption as to whether the scheme is or is not such a scheme.
[120] As to question 1(i) (which, as noted
earlier, he addressed in the course of his reply on questions 2 and 3), Mr
Sumption supports Sir Andrew Morritt V-C’s conclusion that the cl 8.5 power
extends to reducing pensions which are already in payment. He submits, first, that there is nothing in r
7.2 which suggests that the cl 8.5 power is restricted to reducing pensions
which have not as yet become payable. He
makes the same point in relation to cl 8.5 itself. He submits that pensions under the scheme are
secured by the contributions made in respect of them, taking into account
investment return. He also relies on the
definition of ‘Member’ (see [57], above), submitting that the words ‘(whether
prospectively or actually)’ can only relate to a member who might either be
about to obtain a pension or who is already in receipt of one. He submits that there is no commercial logic
in the suggested restriction on the cl 8.5 power.
[121] In response to Mr Ham’s reliance (see
[144], below) on the corresponding power in the deed of revision which
immediately preceded 3DR (I will call it ‘2DR’), namely cl 17.2 of 2DR, and on
the differing definition of ‘Member’ in 2DR (which only extended to active
members), Mr Sumption submits that benefits under the scheme accrue and are
secured by reference to a member’s pensionable employment, notwithstanding that
the pension is payable after he has ceased pensionable employment. Mr Sumption submits that what falls to be
adjusted under cl 17.2 is a benefit which, whenever payable, accrued or was
secured during the period while the recipient was in pensionable employment.
B. The arguments for the active member
[122] Mr Green addressed us orally on
questions 2 and 3. In relation to
question 4 he relied on his written skeleton argument. He did not address us (either orally or in
writing) on question 1(i), being content to leave it to KPMG to take the active
role in seeking to uphold Sir Andrew Morritt V-C’s answer to this question.
[123] Mr Green submits that Sir Andrew Morritt
V-C was right to treat the r 7.2 calculation as comprising two elements: scale
benefits (ie the standard pension) and bonuses.
Sir Andrew Morritt V-C was also right, he submits, to conclude that the
scale benefits are ‘average salary benefits’.
As to bonuses, Mr Green points out that bonuses are referable to the
level of benefits previously provided in respect of any given member
immediately before a bonus is declared, and not to the member’s contributions. Accordingly, he submits, bonuses are not
‘money purchase benefits’ either.
[124] Mr Green further submits that the effect
of s 67(2) of the 1995 Act is to
prevent the trustee from exercising the power in cl 8.5, the availability of
which power is a crucial plank in Mr Sumption’s argument on question 3. Accordingly, he submits, unless we are
persuaded that Sir Andrew Morritt V-C’s answer to question 2 was wrong, KPMG
must lose on question 3. (This
submission
262
illustrates the overlap between questions 2 and 3 to
which I referred in [23], above.)
[125] Mr Green points out that, applying s
124(2), the ‘accrued right’ which is protected by s 67 is a future right. As to the reference to ‘entitlement’ in s
67(2), Mr Green submits, relying on Barclays Bank v Holmes [2001] OPLR
37, that that is a reference to pensions in payment. He submits that accrued rights and
entitlements thus go hand in hand, both under s 67(2) and under r 7.2. At any point in time, he submits, a member
can ask the trustee what are his accrued benefits under the scheme, and the
trustee, having made the calculation required by r 7.2, will be in a position
to tell him what pension he currently stands to receive at normal retirement
date. He contrasts such accrued rights
and entitlements with what he describes as a ‘money purchase pot’ which may be
available to provide a benefit for the member at normal retirement date, the
size of which will be affected by the financial conditions then existing.
[126] Mr Green submits that (leaving aside the
effect of s 67) the trustee is not obliged to exercise the cl 8.5 power
whenever there is a deficiency, any more than it is obliged to exercise the cl
8.4 power whenever there is a surplus.
Hence, he submits, there is no duty on the trustee to operate these
powers so as to achieve, so far as possible, perfect equilibrium as between
assets and liabilities.
[127] Mr Green also relies on the inevitable
time-lag between the point of time at which a deficiency arises and any
exercise of the cl 8.5 power following a periodic revaluation which reveals
that the existence of the deficiency. He
submits (leaving s 67(2) aside) that this time-lag is in itself fatal to the
contention that the scheme is a ‘money purchase scheme’, since during the
time-lag benefits will continue to be paid and to accrue on their pre-defined
and pre-set terms.
[128] Turning to the definition of ‘money
purchase benefits’ in the 1993 Act (incorporated into the 1995 Act by s 124(5):
see [41], above), Mr Green makes four points.
First, he submits that it is clear that the focus of the definition is
member-specific. Second, he relies on
the references to ‘the member’ in the singular as a further indication that in
order to constitute ‘money purchase benefits’ the benefits in question must be
the product of contributions made by or in respect of ‘the member’ (in the
singular) as opposed to the members as a body.
Third, he submits that the expression ‘calculated by reference to’
describes a process whereby the sum standing to the credit of a member’s
account is applied in the purchase of benefits: in other words, the benefit is
directly related to contributions and to no other factor. Fourth, he submits that the expression
‘average salary benefits’ means benefits which are based the entirety of a
member’s pensionable service, in contrast to benefits which are based on a
member’s final salary. He
describes the scheme as a weighted average salary scheme since in calculating
the scale benefits a different multiplier is applied to the salary-based
contribution for each year of pensionable employment.
[129] Mr Green points out that neither cl 8.4
itself, nor the cl 10 power of augmentation, nor the r 21 special account
machinery requires that any new or additional benefit should be a ‘money
purchase benefit.’
[130] As to the legislative policy behind the
exclusion of money purchase schemes from the operation of s 56 of the 1995 Act,
Mr Green submits that money purchase schemes were expressly excluded simply
because in such schemes, by definition, no deficiency can arise.
[131] Mr Green points out that although the
scheme has been in deficit since 1999, benefits have not as yet been reduced,
and pensions which have fallen into payment have been met in full. He submits that that demonstrates that the
263
scheme is not a ‘money purchase scheme’ since such
schemes (as he put it) ‘do not provide you with benefits, they provide you with
a pot’.
[132] Reverting to cll 8.4 and 8.5, Mr Green
submits that these clauses cannot sensibly be read as mere timing provisions
designed to enable the trustee to maintain an equilibrium as between assets and
liabilities. As to cl 8.4, he points out
that it confers a mere power, the exercise of which requires KPMG’s
consent. There is, he points out, no
obligation on the trustee to exercise the power, and in any event KPMG could
veto any exercise of it. Thus, the
trustee could, if it saw fit, decline to declare a bonus on the ground that it
was desirable to maintain a surplus in the scheme as a reserve against future
contingencies (including contingencies having nothing whatever to do with
investment returns); moreover, KPMG could, if it saw fit, veto the declaration
of a bonus for the same reason. He
points out that cl 8.4 enables the trustee to reduce the contributions to be
made by a member, whilst maintaining the level of benefits, thereby
demonstrating that benefits are not linked to contributions. He further points out that under cl 8.4 (as
in the case of cl 8.5) the trustee may treat members differently. This, he submits, is a further demonstration
of the fact that increases in benefit have nothing at all to do with investment
returns and everything to do with the fact that some cases may be more
deserving of an increased benefit than others.
[133] As to the absence of a ‘balance of cost’
obligation in the scheme, Mr Green submits that whilst most defined benefit
schemes include such an obligation, not all do.
He submits that the effect of rr 5 and 6 is to share the cost of the
benefits as between employer and employee, in the proportions specified.
[134] As to the quotation from Hansard to
which Mr Sumption referred us (see [111], above), Mr Green submits that when Mr
Major used the expression ‘straightforward multiple’ he meant that the
calculation process was a simple mathematical exercise whereby the average
salary in a given contribution period is multiplied by a factor specified in
the scheme. Mr Green submits that in
essence that is what the scheme requires.
He submits that notwithstanding that the calculation includes a
weighting factor, the process of calculation for each contribution period is
nevertheless a straightforward multiplication.
[135] As to question 4, Mr Green submits (in
his written skeleton argument) that cll 17.11.3, 19.4.3 and 20.12 of 3DR
acknowledge the application of s 144 of the 1993 Act in a winding up of the
scheme. He further points out that cl
1.2 of the 3DR provides that references to statute include re-enactments, and
that s 75 of the 1995 Act is the re-enactment of s 144 of the 1993 Act.
[136] He submits, therefore, that KPMG entered
into the scheme on the footing either that it was not a ‘money purchase scheme’
or that s 144 of the 1993 Act should apply to it, and that accordingly s 75 of
the 1995 Act applies on a winding up of the scheme, irrespective of whether it
is a ‘money purchase scheme’.
C. The arguments for the pensioner member
[137] The pensioner member (through Mr Ham)
supports the case of the active member on questions 2, 3 and 4. As to question 1(i) (namely whether the power
in cl 8.5, on its true construction, enables the trustee to reduce pensions
already in payment) she contends that Sir Andrew Morritt V-C erred in answering
that question in the affirmative.
[138] Addressing question 1(i), Mr Ham submits
that cl 8.5, on its true construction, does not confer a power to reduce
benefits already in payment. He
264
recognises that, depending on the answers given to
questions 3 and 4, question 1(i) may not arise in practice; but equally there
is a possibility (which he cannot ignore) that it may do so. Moreover, as Mr Nugee explained to us,
whatever the answers to questions 3 and 4, there may still be a funding gap
which KPMG is not statutorily obliged to fund; and in such a situation question
1(i) could be a live question.
[139] Mr Ham submits that the r 7.2
calculation is a once-for-all calculation.
He points out that r 7.1 refers to ‘a pension’ (in the singular). Rule 7.2 prescribes the method of calculating
the amount of that pension. He submits
that the reference in r 7.2 to the ‘annual amount’ of the pension means no more
than that the pension is expressed as a yearly figure rather than as a monthly
or weekly figure, and that it does not imply that one has to recalculate the
amount of the pension year by year.
[140] Mr Ham also relies on the express
reference to a reduction in pension in r 7.6 (see [69], above). He submits that if cl 8.5 were intended to
extend to reductions to pensions in payment one would expect to see some
similar provision in cl 8. He further
submits that r 19.3 (see [74], above) is inconsistent with the notion that
pensions in payment may be reduced. In
support of this submission he relies in particular on the expression ‘at an
equal daily rate’ in r 19.3.
[141] Mr Ham points out that (in contrast to
cl 8.4) cl 8.5 does not apply to all benefits under the scheme. He submits that whereas cl 8.4 is completely
comprehensive, in that it covers every possible benefit under the scheme, the
formula in cl 8.5 is different, in that it refers to ‘adjustments and
amendments to the benefits secured or thereafter accruing for or in respect of
the Members …’. Mr Ham submits that the
natural interpretation of cl 8.5 is that it is directed at rights to future
benefits: what s 67 calls an ‘accrued right’, as opposed to an ‘entitlement’ (a
word which, he submits, refers to a benefit which has actually come into
payment). He submits that the reference
to ‘benefits secured’ in this context is a reference to benefits which have
been accrued to date; and that the reference to ‘benefits … thereafter
accruing’ is a reference to benefits which will be secured by contributions in
future years.
[142] Mr Ham submits that Sir Andrew Morritt
V-C’s reliance (in para [25] of his judgment: see [78], above) on the
definition of ‘Member’ as including pensioner members was misplaced. He also relies on what he calls ‘ordinary
Revenue practice’ in approving the scheme as an occupational pension scheme.
[143] Reverting to r 7, he points out that r
7.5 (see [69], above) lists the possible components of additional pension, but
contains no reference to any possibility of such components being reduced once
the pension has come into payment.
[144] Mr Ham points to the practical
difficulties which would arise if the trustee has power to reduce pensions
already in payment. In particular, he
refers to the possibility of a buyout of a member’s benefit, asking
(rhetorically): How can you buy out something which is liable to be reduced in
the future? A similar point would arise,
he submits, in relation to commutation.
[145] Mr Ham invites us to take into account
the evolving nature of the scheme. He
submits that the transitional provisions of 3DR inevitably refer back to the
pre-existing provisions in 2DR. He
relies on the definition of ‘Member’ in 2DR as meaning an active member. He submits that it is clear as a matter of
construction of 2DR that pensioner members were not exposed to a risk of their
pensions being reduced.
265
[146] Turning to question 2, Mr Ham referred
us by way of background to passages from the Goode Report. As to s 67 of the 1995 Act, he submits that,
given that its general thrust is the provision of safeguards for members, the
section should be broadly rather than narrowly construed. He submits that it is inherent in any ‘power’
that the person on whom the power is conferred has a choice whether or not to
exercise it in any particular circumstances.
He accepts that if something happens automatically under the
scheme in response to some external event or circumstance, no exercise of a
power is involved. But, he submits, that
is manifestly not the position under the scheme, where any adjustment is at the
discretion of the trustee. He submits
that the expression ‘modify the scheme’ in s 67 does not refer to alterations
in the terms of the scheme documentation; rather, it means modifying the rights
and obligations arising under the scheme.
[147] Mr Ham adopts Mr Green’s submissions on
questions 3 and 4.
[148] As to question 3, Mr Ham submits that,
if one is looking for common sense badges of a ‘money purchase scheme’, one
such badge is the fact that in such a scheme the measure of the benefit is the
value of the fund, and hence there is no need for an actuary. He submits that the fact that the tables to
be applied in calculating the amount of a member’s basic pension under the
scheme incorporate actuarial factors is a very strong indication that the
scheme is not a ‘money purchase scheme’.
There is, he submits, no equivalent under the scheme to the ‘pot’ which
is the badge of a ‘money purchase scheme.’
D. The comments of the trustee
[149] In a written note supplied to us
following the conclusion of the hearing, Mr Nugee warns us against reaching
final conclusions as to the meaning and scope of s 67 which may not be strictly
necessary for the purpose of giving a definitive answer to question 2.
PART 9: CONCLUSIONS
[150] I begin by addressing question 3 (viz:
Is the scheme a ‘money purchase scheme’ within the meaning of s 56(2) of the
1995 Act?). I do so first without regard
to s 67 of the 1995 Act.
[151] The key to answering question 3 lies, in
my judgment, in the relationship between contributions and benefits, as that
relationship emerges from a consideration of the scheme as a whole, properly
construed. So, faced with such a
plethora of argument and counter-argument, I think it helpful to start at the
beginning and remind myself of the salient features of the scheme in that
respect.
[152] First, contributions. The basic position in relation to
contributions is straightforward.
Contributions are governed by r 5 (members’ contributions) and r 6
(employer’s contributions). These rules
provide for compulsory annual contributions of amounts equal to a specified
percentage of a member’s annual salary in each year of his pensionable
employment (see the definition of ‘Salary’ in cl 1 of 3DR, quoted in [58],
above), the specified percentages being referable to the member’s age. Clause 8.4 gives the trustee power (with the
consent of the principal employer and after taking the actuary’s advice) to
reduce contributions if (but only if) an actuarial valuation or an interim
review reveals that the scheme is in surplus.
[153] As Mr Green and Mr Ham pointed out,
there is no obligation on the trustee to exercise the cl 8.4 power: the trustee
may, for example, leave the contributions at their current level in order to
build up a reserve in the scheme.
Alternatively, the trustee may decide to take an intermediate course by
allowing a smaller reduction than that which would be required to extinguish
the surplus. It is, in other words, a
266
matter for the trustee (subject to the requirements
of the principal employer’s consent and actuarial advice) (a) whether to
exercise the cl 8.4 power at all, and (b) if the power is to be exercised, to
decide how it is to be exercised. Nor is
there any stipulated period of time following the actuarial valuation or
interim review revealing the existence of the surplus within which the trustee
is required to decide whether to exercise the power, and if so how. The existence of the surplus, as revealed by
the actuarial valuation or interim review, does no more than set the scene for
the possible exercise of the cl 8.4 power: it does not dictate how the power is
to be exercised, or, for that matter, whether it is exercised at all.
[154] Finally, so far as contributions are
concerned, cl 10 obliges the employer to make additional contributions (or
other satisfactory funding arrangements) to fund any additional benefit or new
benefit which the trustee may grant; and r 21.4 gives the employer power to
direct the trustee to apply sums in the special account in or towards payment
of its future contributions.
[155] Next, benefits. I turn first to what I will call the standard
pension, that is to say the pension which comes into payment on normal pension
date and which continues to be payable during the remainder of the member’s
lifetime. The annual amount of the
standard pension is to be calculated in accordance with r 7 (see r 7.1, quoted
in [69], above). The calculation
process, as prescribed by r 7.2, comprises three stages.
[156] The first stage in the calculation of
the standard pension, as prescribed by r 7.2(1), is to find the total amount of
contributions (including employer’s contributions) made in respect of each
contribution period (a contribution period is a year to 31 March) and to apply
to that total the appropriate multiplier as determined by the tables. The tables themselves are designed to show
the amount of pension ‘secured by’ (which must connote ‘attributable to’) a contribution
of £1 in respect of each successive year of the member’s life until age
65. Different multipliers are given for
males and females. Moreover, it is
common ground that the multipliers are (at least in part) the product of
actuarial assessments of factors such as future investment return, inflation
and mortality. Thus the quantification
of the standard pension depends in part upon actuarial assessments of future
anticipated trends.
[157] The second stage in the calculation
process, as prescribed by r 7.2(2), is to adjust the totals resulting from the
first stage of the process by adding any bonuses declared pursuant to cl 8.4 or
(as the case may be) deducting from them any reduction made pursuant to cl 8.5.
[158] The third and final stage of the
calculation process, as prescribed by r 7.2(3), is to aggregate the totals
(adjusted pursuant to r 7.2(2), as the case may be). The result of that aggregation represents the
amount of the member’s standard pension as at the date of the calculation.
[159] Rule 8 (which deals with pensions coming
into payment before normal retirement date) and r 9 (which deals with pensions
coming into payment after normal retirement date) are subsidiary to r 7 in that
the calculation process under each of those rules is based on the r 7
process. So all the pensions for which
the scheme provides share the characteristic that the process of calculation
includes actuarial factors. This seems
to me to be a highly relevant consideration in the context of question 3, and I
return to it below.
[160] As noted earlier, Mr Sumption’s basic
submission on question 3 is that the calculation process prescribed by r 7 is a
single process, of which the intermediate ‘adjustment’ stage (as per r 7.2(2))
is an integral part. From that premise,
he submits that a member’s only accrued right or entitlement, so far as his
pension is concerned,
267
is to the final figure which results from that entire
process: that is to say, to a figure which has been adjusted to take account of
any increase or reduction in benefit resulting from an exercise of the powers
in cl 8.4 or cl 8.5.
[161] I have already considered the nature of
the power in cl 8.4 to reduce contributions where an actuarial valuation or
interim review reveals a surplus. Also
included in cl 8.4, however, is the power to increase benefits by declaring
bonuses where an actuarial valuation reveals a surplus. It is this aspect of the cl 8.4 power which
is relevant in the present context. The
powers to adjust benefits in cll 8.4 and 8.5 respectively are complementary in
that each enables (but does not oblige) the trustee to make appropriate
adjustments to the level of benefits in the light of actuarial valuations
revealing a surplus or a deficit, as the case may be. Moreover, as in the case of the cl 8.4 power
to reduce contributions, there is no prescribed time limit within which the
trustee has to decide how (if at all) to exercise such powers.
[162] Clause 8.5 differs from cl 8.4 in that
the power in cl 8.5 is exercisable only in respect of adjustments or amendments
which are ‘necessary in the opinion of the Trustees after taking the Actuary’s
advice to secure the continued solvency of [the Pre-2000 Fund]’. The terms of that restriction recognise that
the mere existence of a deficit on actuarial valuation does not necessarily
threaten the scheme’s continued solvency.
[163] So I conclude that, on the true
construction of cll 8.4 and 8.5, the existence of a surplus or a deficit (as
the case may be) does no more than set the scene for the possible exercise of
the powers of adjustment of benefits conferred by those clauses. The relevant power may not be exercised at
all; or it may be exercised in a way which leaves some part of the surplus or
deficit still in existence. There is,
therefore, no question of any automatic adjustment of benefits following
an actuarial valuation which reveals the existence of a surplus or a deficit;
still less of an adjustment which will have the effect of extinguishing the
entirety of that surplus or deficit.
[164] There is also the time factor to be
considered. Even if the trustee, with
the employer’s consent and acting on actuarial advice, decides to exercise the
appropriate power of adjustment (according to whether the actuarial valuation
has revealed a surplus or a deficit) there will inevitably be an interval of
time (which may be substantial) between the date when the surplus or deficit
first arose and the date when the power is exercised. Yet during that time rights will inevitably
have accrued under the scheme and benefits will inevitably have been paid out,
notwithstanding the existence (by definition) of a continuing mismatch between
assets and liabilities. Moreover, the
effect of any adjustment of benefits (whether upwards or downwards) will
usually take effect over time, by gradually eroding the surplus or
deficit. Thus even in a situation where
the adjustment is designed entirely to extinguish the surplus of deficit, the
mismatch between assets and liabilities may continue for a substantial period
of time after the adjustment has been made.
[165] In the light of the above analysis, I
conclude that Mr Sumption’s basic submission must be rejected. So far as the cl 8.4 power to increase
benefits is concerned, the declaration of a bonus will give the member the
right to an increased pension. But it
does not follow that the member has no right to a pension under r 7 until the
trustee has considered whether or not to exercise that power (and, it may be,
decided not to exercise it, or to exercise it not by declaring a bonus but by
reducing contributions). The same
consideration applies, in my judgment, to the cl 8.5 power. In my judgment it does not follow from the
existence of that power that a member has no right to a pension under r 7 until
the trustee has taken a decision as to whether the power should be exercised,
and if so how.
268
[166] The correct analysis in law, in my
judgment, is that on the true construction of the scheme a member has an
accrued right to a pension under r 7 in the (unadjusted) amount calculated by
aggregating the total amounts referred to in r 7.2(1), but subject to any
adjustments made under cl 8.4 or cl 8.5.
I therefore reject the notion that that calculation produces only a
‘provisional’ sum (to quote Mr Sumption).
In my judgment, to read the scheme in that way is to attempt to force a
square peg into a round hole.
[167] Looking no further for the moment,
therefore, the scheme would appear to lack the basic characteristics of a money
purchase scheme (using that expression for the moment in a colloquial as
opposed to a statutory sense) as identified in part 3 of this judgment. In the first place, the requisite direct
relationship between contributions and benefits is broken by the introduction
of actuarial factors (see [159], above).
As Mr Ham succinctly put it at the conclusion of his submissions (see
[147], above), in the case of a money purchase scheme you do not need an
actuary. Secondly, by including the
powers in cll 8.4 and 8.5 the scheme not only recognises but positively caters
for a continuing mismatch between assets and liabilities.
[168] However, the overall appearance of the
scheme (on its true construction) is not necessarily determinative of the
question whether it is a ‘money purchase scheme’ in the statutory sense. I therefore turn to the relevant statutory
provisions (but leaving s 67 of the 1995 Act on one side for the moment).
[169] As noted earlier (see [40]–[42], above)
an occupational pension scheme is a ‘money purchase scheme’ if ‘all the
benefits that may be provided are money purchase benefits’: ie ‘benefits the
rate or amount of which is calculated by reference to [contributions] and which
are not average salary benefits’ (see s 181(1) of the 1993 Act).
[170] I turn first to the question whether either
of the two elements in the pension benefit as prescribed by r 7.2, that is to
say the standard pension benefit and any bonuses declared in exercise of the cl
8.4 power are, on analysis, ‘calculated by reference to’ contributions within
the meaning of that definition.
[171] In my judgment the inclusion in the
first stage of the calculation process of the actuarial factors to which I
referred earlier is fatal to such a contention.
The expression ‘calculated by reference to’ means, in my judgment,
‘calculated only by reference to’, in the sense that the benefit in question
must be the direct product of the contributions (that being the basic
characteristic of a money purchase scheme, as that expression is commonly
understood: see part 3 above). Neither
the standard pension nor bonuses fall within that category.
[172] Support for this strict interpretation
of the definition of ‘money purchase benefits’ is, in my judgment, to be found
in s 56 of the 1995 Act itself. As noted
earlier (see [46], above) it is implicit in that section that a provision in
the scheme which is designed to achieve automatic equilibrium between assets
and liabilities by limiting the amount of the scheme’s liabilities by reference
to its assets is not in itself enough to render the scheme a ‘money purchase
scheme’: for if it were, s 56 would not apply to it. Yet the inclusion of such a provision in a
scheme would, on the face of it, inevitably produce a situation in which
benefits (liabilities) would be calculated by reference to contributions
(assets). As indicated in para [53],
above, the same considerations apply in relation to s 75.
[173] Accordingly, I respectfully agree with
the Sir Andrew Morritt V-C that neither of the two components of the pension
benefit prescribed by r 7, that is to say the standard pension and any bonuses
declared under cl 8.4, is a ‘money purchase benefit’. It follows that in my judgment (and leaving
aside s 67 of the 1995 Act) the answer
to question 3 is: No.
269
[174] I turn next to the question whether
either or both of those components is an ‘average salary benefit’. I accept Mr Green’s submission that an
‘average salary benefit’ for this purpose is a benefit which is referable not
to a member’s final salary but to his salary from year to year throughout the
entire period of his pensionable employment.
As such, it is in the nature of a defined benefit, and for that reason
it is difficult to see why Parliament thought it necessary to amend the
relevant statute by expressly excepting it from the definition of ‘money
purchase benefits’. Nor, I must confess,
do I derive any assistance from what Mr Major said in the House of Commons when
moving the amendment (see [112], above).
In the circumstances, the true reason will have to remain a mystery, at
least for the purposes of this judgment.
[175] In para [56] of his judgment (quoted in
[87], above) Sir Andrew Morritt V-C concluded that the standard pension benefit
is an ‘average salary benefit’, since it is ‘calculated by reference to the
average salary of a member over the period of service on which the benefit is
based’. I respectfully agree with that
conclusion. As Mr Green demonstrated in
argument, the effect of the application of the tables in carrying out the first
stage of the calculation process prescribed by r 7.2 is that the pension
benefit is based upon the average salary of the member throughout his period of
pensionable employment.
[176] I would for my part reach the same
conclusion in relation to bonuses, at least to the extent that they are expressed
(as up to now they have been) in terms of a percentage of the accrued
pension. In my judgment, just as the
accrued pension is based (in effect) on the member’s average salary throughout
his pensionable employment, so also is a bonus which takes the form of a
percentage of the accrued pension.
[177] I now turn to question 2, and to s 67 of
the 1995 Act.
[178] I can deal with question 2 quite
shortly. In my judgment the power in cl
8.5 to reduce benefits where the scheme is in deficit is plainly a power to
‘modify’ the scheme within s 67(1) (see [47], above). I do not accept Mr Sumption’s submission that
the reference to ‘the scheme’ in s 67(1) is a reference only to the terms of
the scheme as recorded in the scheme documents.
In my judgment, the modification of a benefit under the scheme in the
exercise of an express power in the scheme to make such a modification is
self-evidently a modification of the scheme.
[179] I do not for my part find it necessary,
as Sir Andrew Morritt V-C did, to analyse the effect of an exercise of the
power in cl 8.5 by reference to the statutory definition of ‘modifications’ in
s 181(1) of the 1993 Act (see [48], above): that is to say, in terms of
‘additions, omissions and amendments’.
If one thing is certain, it is that that definition was intended to be
all-embracing. Moreover, it is expressed
in inclusive, not exhaustive, terms.
[180] Mindful of Mr Nugee’s warning (see
[148], above), I will resist the temptation to express a concluded view as to
whether or not the power in cl 8.4 to increase benefits is also a power
to ‘modify’ within the meaning of s 67(1).
I content myself with expressing the provisional view that it would, to
my mind, be somewhat surprising if it were.
The idea of requiring the members’ consent to an increase in
benefits seems to me, at first sight, to be somewhat incongruous. Moreover the requirement in s 56(3) for an
actuary’s certificate that a proposed exercise of a power to ‘modify’ will not
adversely affect any member of the scheme would appear to add further support
for my provisional view. In the
circumstances, I leave the point there.
[181] Accordingly, I respectfully agree with
Sir Andrew Morritt V-C that the exercise by the trustee of the power in cl 8.5
is subject to the restrictions imposed by
270
s 67(2) of the 1995 Act. As to the meaning of ‘entitlement’ and
‘accrued right’ in that subsection, I accept the submissions of Mr Green and Mr
Ham that ‘entitlement’ refers to a pension already in payment, whereas ‘accrued
right’ refers to a member’s current right to a future pension. This interpretation accords with the many
other references in the scheme to ‘accrued’ benefits, as listed in [62], above,
and is supported by the definition of ‘accrued rights’ in s 124(2) of the 1995
Act (see [50], above).
[182] I have already rejected Mr Sumption’s
submission that on the true construction of the scheme cl 8.5 is an integral
part of the calculation process, and I have no hesitation in rejecting his
further submission that for that reason s 67(2) does not apply to any exercise
of that power. To my mind, the ingenuity
of that argument is matched only by its artificiality.
[183] In the light of my conclusion on
question 3, it is unnecessary for me to consider the effect on the cl 8.5 power
of s 67 (coupled with s 117 of the 1995 Act (see [52], above)) in the context
of that question. I would prefer not to
express a view on that question, which seems to me to be one of some
difficulty.
[184] I turn next to question 1(i). On this question, I respectfully differ from
Sir Andrew Morritt V-C. In the first
place, I accept Mr Ham’s submissions to the effect that on the true
construction of the scheme the calculation of a pension is a once-for-all
calculation, carried out as at the date when the pension first comes into
payment. That seems to me to be the
natural construction of r 7.2, and it is supported, in my judgment, by the
other provisions of the scheme on which Mr Ham relies.
[185] Against that background and in that
context, a power to reduce pensions already in payment would in my judgment
require the clearest words. I
accordingly return once again to cl 8.5.
Far from clearly conferring such a power, the terms of cl 8.5 lead, in
my judgment, to the opposite conclusion.
The power is expressed as a power to adjust or amend ‘the benefits
secured or thereafter accruing’ in respect of members. The antithesis of ‘benefits secured’ as
against ‘benefits … thereafter accruing’ makes it plain, in my judgment, that
what is envisaged is a situation in which a member is still accruing pension
rights, year on year. The pension
already accrued constitutes the benefit ‘secured’: the benefit ‘thereafter
accruing’ refers to pension rights accruing in the future.
[186] Accordingly, in respectful disagreement
with Sir Andrew Morritt V-C, I would answer question 1(i) in the negative.
[187] Given my answer to question 3, question
4 does not arise.
RESULT
[188] I would uphold Sir Andrew Morritt V-C’s
decisions on questions 2 and 3, but reverse his decision on question 1(i). It follows that question 1(ii) does not
arise.
CHADWICK LJ.
[189] I agree with the conclusions reached by
Jonathan Parker LJ on the questions raised by this appeal, and with the reasons
which lead to those conclusions.
MUMMERY LJ.
[190] I also agree.
Applications for permission to appeal
granted. Appeal allowed in part.
Melanie
Martyn Barrister.
271
[2006] 1 All ER 272
Re Walker Windsail Systems Ltd
Walker v Walker
Walker v Walker
[2005]
EWCA Civ 247
CIVIL PROCEDURE
COURT OF APPEAL, CIVIL DIVISION
CHADWICK,
LAWS AND JONATHAN PARKER LJJ
27
JANUARY 2005
Costs – Order for costs – Discretion –
Discontinuance of action – Claimant pursuing for several years proceedings
which were commercially valueless from outset – Claimant eventually realising
claim to be valueless and seeking permission to discontinue with no order as to
costs – Whether appropriate to make no order as to costs in such circumstances
– CPR 38.6.
The defendants, a husband and wife, were the former
directors of a company which had gone into liquidation. For several years, the liquidator pursued
proceedings against them for misfeasance in relation to the company. In defending those proceedings, which
involved the imputation of dishonesty, the defendants had incurred legal
expenses in excess of £100,000. The
liquidator eventually applied, under CPR Pt 38, for permission to discontinue
the proceedings against the husband and his wife’s estate (the wife having died
during the course of the proceedings) with no order as to costs. The basis of the application was that the
liquidator had concluded that the proceedings no longer served any useful
purpose because they had become increasingly worthless as a result of events
since their commencement. In fact, the
proceedings had been commercially worthless from the outset, but that had not
been appreciated by the liquidator. CPR
38.6a provided that, unless the court ordered
otherwise, a claimant who discontinued was liable for the costs which a
defendant, against whom he discontinued, had incurred on or before the date on
which the notice of discontinuance had been served on him. The judge did order otherwise, granting the
liquidator’s application that the proceedings be discontinued with no order as
to costs. In doing so, he did not
consider why a claim, which had started on the basis of certain expectations,
should be discontinued without an order for costs against the liquidator in
circumstances where those expectations had not changed, even though they might
have been re-evaluated. The husband appealed.
________________________________________
aRule 38.6, so far as
material, is set out at [24], below
________________________________________
Held – Under CPR 38.6, the court had to be
persuaded that it was just to depart from the normal rule, namely that the
normal order on discontinuance was that the claimant bore the defendant’s costs
up to the date on which notice of discontinuance had been served. The burden was on the party who sought to
persuade the court that some other consequence should follow, and the task of
the court was to consider whether there was some good reason to depart from the
normal order. The rule recognised that
justice would normally lead to the conclusion that a defendant, who defended
himself at substantial expense against a claimant who changed his mind in the
middle of the action for no good
272
reason—other than that he had re-evaluated the
factors that had remained unchanged—should be compensated for his costs. Nor was there anything in the authorities
which should lead the court to accept that, in the instant case, there would be
good reason for departing from the general rule merely because the liquidator
had come alive at a late stage to the commercial effect of factors which had
been there from the outset and which, if properly evaluated, could have led to
a decision at the outset that the proceedings were not worth pursuing. The judge’s exercise of discretion was flawed
because he had failed to take that into account, and it therefore fell to the
Court of Appeal to exercise the discretion itself. There was no reason at all for departing from
the normal rule. Indeed, it would be
most unjust if the husband were left to bear the costs of the proceedings
simply because the liquidator had arrived late at a decision which he could and
should have reached at the time when the proceedings were commenced. Accordingly, the appeal would be allowed to
the extent of requiring the liquidator to pay the costs of the defendants down
to the date of the notice of discontinuance (see [24], [36], [40]–[46], below).
JT Stratford & Son Ltd v Lindley (No 2)
[1969] 3 All ER 1122 distinguished.
Notes
For liability for costs on the discontinuance of
proceedings, see 37 Halsbury’s Laws (4th edn reissue) para 805.
Cases referred to in judgments
Barretts & Baird
(Wholesale) Ltd v Institute of Professional Civil Servants [1987]
IRLR 3.
Britannia Life
Association of Scotland v Smith [1995] CA Transcript 353.
Everton v World
Professional Billiards and Snooker Association (Promotions) Ltd
[2001] All ER (D) 172 (Dec).
RTZ Pension Property
Trust Ltd v ARC Property Developments Ltd [1999] 1 All ER 532, CA.
Stratford (JT)
& Son Ltd v Lindley (No 2) [1969] 3 All ER 1122, [1969] 1 WLR
1547, CA.
Appeal
The first defendant, John Graham Walker, appealed with
permission of Neuberger J granted on 7 October 2004 from that part of the order
of Lawrence Collins J on 17 June 2004 ([2004] EWHC 1886 (Ch), [2004] All ER (D)
159 (Jun)) whereby, in permitting the claimant, Ian Edward Walker, the
liquidator of Walker Windsail Systems Ltd, to discontinue proceedings,
commenced by the liquidator on 4 October 1999, against Mr Walker and his late
wife, Jean Walker, for misfeasance in relation to the company, the judge
directed that there should be no order as to the costs of the proceedings. The facts are set out in the judgment of
Chadwick LJ.
Mr John Walker appeared
in person.
Richard Ascroft
(instructed by Bevan Ashford, Exeter) for the liquidator.
CHADWICK LJ.
[1] This is an appeal from an order made on 17
June 2004 ([2004] EWHC 1886 (Ch), [2004] All ER (D) 159 (Jun)) by Lawrence
Collins J in proceedings brought by the liquidator of Walker Windsail Systems
Ltd against Mr John Walker and his late wife, Mrs Jean Walker.
273
[2] The company, Walker Windsail Systems Ltd,
was incorporated in 1981. Its business
was the development and marketing of fixed vanes or sails—described as
windsails—designed to provide forward propulsion at sea by the use of wind
forces. When used in conjunction with
mechanical power in propeller-driven commercial vessels the windsail was
intended to produce an increase in speed or a saving in fuel, or both. The concept attracted considerable investment
in the company, but it did not prove a commercial success. The company was placed in creditors’ voluntary
liquidation in 1998 with a substantial deficiency as regards contributories,
and an excess of liabilities over assets of some £1·7m.
[3] Mr John Walker was appointed a director of
the company on incorporation. Mrs Jean
Walker was appointed a director in 1984.
Mr Walker and, save for a period between 1997 and 1998, Mrs Walker
remained directors of the company up to the date of liquidation.
[4] These proceedings were commenced on 4
October 1999 by the issue of an originating application in the winding up of
the company. That application sought
declarations that Mr and Mrs Walker had been guilty of misfeasance in relation
to the company in a number of respects which were listed under four main
headings: remuneration, expenses, patents and preferences to creditors. The application sought orders for repayment
to the company of sums said to have been misapplied or misappropriated. It sought, also, orders pursuant to ss 213 and
214 of the Insolvency Act 1986 in respect of alleged fraudulent and wrongful
trading.
[5] The application was supported by an
affidavit sworn by the liquidator on 1 October 1999. No copy of that affidavit is now before this
court. But it was on the basis of that
affidavit that application was made on 1 October 1999 to Ferris J, without
notice to Mr and Mrs Walker, for freezing injunctions restraining the
disposition of their assets up to the value of £500,000. That is indicative of the value which the
liquidator was then putting on these claims.
[6] Those injunctions were granted on 1
October 1999. They were continued at a
hearing on 8 October at which Mr and Mrs Walker were represented by counsel.
[7] Following directions for service of
evidence, the trial of these misfeasance proceedings was set for a date at the
beginning of October 2000. But that date
was overtaken by events. In August
2000—just before the end of the period of two years from the commencement of
liquidation—the Secretary of State commenced proceedings against Mr and Mrs
Walker under the Company Directors Disqualification Act 1986. On their application, the date for trial of
the misfeasance proceedings was vacated and it was ordered that the misfeasance
proceedings and the disqualification proceedings should be heard together—on
the ground that they raised issues which were, in substance, the same. After some delay and extensions of time, a
date for the trial of the conjoined proceedings was fixed for 12 November
2001. Sadly on 1 October 2001 Mrs Walker
took her own life. The trial which had
been due to start on 12 November 2001 was adjourned to a date to be fixed in
the future. No further date has been
fixed; although it seems that at some point a provisional date of 11 May 2002
was in mind.
[8] The conjoined proceedings came before
Lawrence Collins J on 21 April 2004.
There were before him on that day, first, an application by the
Secretary of State to sever the disqualification proceedings from the
misfeasance proceedings and, second, an application by Mr Walker to strike out
the misfeasance
274
proceedings on the grounds of delay. At that hearing an informal application was
made by the liquidator for leave to discontinue the misfeasance
proceedings. Leave to discontinue was
required, on any view, because the freezing injunctions granted in October 1999
remained in force (see CPR 38.2(2)(a)).
[9] By his order, made on 21 April 2004, the
judge dismissed the application to strike out the misfeasance proceedings and
reserved the costs of that application.
He adjourned the liquidator’s application to discontinue to a date to be
fixed. He ordered severance of the
disqualification proceedings so that those proceedings could continue
independently. We were told that they
are still on foot.
[10] The liquidator’s formal application to
discontinue with no order as to costs was made on notice dated 10 June
2004. The basis for the application, as
appears in the notice, is—
‘because there is now no
useful purpose to be served by the continued prosecution of the claim having
regard to (i) the costs of the proceedings; (ii) the apparent assets of the 1st
respondent and the estate of the 2nd respondent; and (iii) the likely
recoveries by the applicant.’
[11] That application was made under CPR
38.2. It was supported by a witness
statement made by the liquidator on 14 May 2004. At paras 7 and 8 of that statement the
liquidator set out, in general terms, the position as he then saw it:
‘7 In short, I consider
that the continued prosecution of these proceedings would now serve no useful
purpose. More particularly, there is,
having regard to the costs incurred by me and Mr Walker’s apparent means with
which to satisfy any judgment, no prospect of any return for the company’s
creditors even if I were ultimately wholly successful. To pursue the claim to trial would now be
wholly about recovery in part but not all of my legal costs.
8 The decision to seek
to abandon the claim against Mr Walker and his late wife’s estate has not been
made lightly. Apart from the significant
energies and resources devoted to the investigation and conduct of the claim by
me and professionals instructed on my behalf, I remain of the view that Mr
Walker’s conduct as director of the company manifested itself in several
serious breaches of duty causing loss to the company. In no way therefore should the application
for permission to discontinue the proceedings be seen as any sort of
acknowledgment or recognition by me that the claims against Mr Walker and his
late wife’s estate are unlikely to succeed.
I consider, notwithstanding voluminous evidence adduced by Mr Walker and
his late wife in opposition to the allegations against him, my claim has good
prospects of success.’
[12] In the following ten paragraphs—paras
9–18 of his witness statement—the liquidator explained why he continued to take
the view that the claims against Mr Walker and the estate of the late Mrs
Walker remain well founded. That is, of
course, wholly and hotly disputed by Mr Walker.
But it is no part of the function of a court on an application to
discontinue to attempt to reach a decision whether or not the claim would
succeed. I am content, as the judge was,
to assume that the liquidator has a serious claim deserving of argument at the
trial. This is not a claim which could
be dealt with on a summary basis; and it is not a claim that could be struck
out as having no real prospect of success.
275
[13] At paras 19 and 20 of the witness
statement, the liquidator refers to the disqualification proceedings commenced
in August 2000. At para 21 he says:
‘It has been the impact
of the proceedings being run in tandem and the orders made by Mr Justice Hart
on 26 September 2001 and by Mr Justice Evans-Lombe on 30 July 2002 which has
rendered the claim against Mr Walker and his late wife’s estate progressively
worthless.’
The two orders to which the liquidator referred in that
paragraph were orders which had the effect of releasing assets from the
freezing injunctions for the purpose of enabling Mr Walker to fund the costs of
his defence in these and in the disqualification proceedings.
[14] In the following paragraphs of his
witness statement the liquidator analysed the movement of Mr and Mrs Walker’s
assets which, it must be remembered, had been the subject of freezing
injunctions at all material times. The
position may be summarised as follows.
The amount of the assets as they appear from the affidavit of means
sworn on 26 October 1999—that is to say at the outset of these proceedings—was
£292,000 or thereabouts. Following the
death of Mrs Walker there was an accretion of those assets of £150,000
representing the proceeds of a life policy which matured on Mrs Walker’s
death. Against that, there were to be
set the amounts allowed by way of payment of legal costs (some £55,000). There must also be set—although they may not
yet have been paid—the costs both of defending these proceedings (something in
the order of £200,000) and of defending the disqualification proceedings (some
£55,000). Mr Walker has told us that his
understanding is that his former solicitors will not be pursuing him for the
£55,000 billed in respect of the disqualification proceedings. And we have been told by counsel for the
liquidator that it would be wrong to assume that the whole of the profit costs
billed in respect of these proceedings (£167,000-odd) will have to be paid:
first, because some part will be met by public funding which was available to
Mr and Mrs Walker for part of the proceedings and, second, because that figure
is before assessment or deduction on any taxation which Mr Walker may seek against
the solicitors. But in broad terms,
assets of some £440,000 have been reduced by outgoings in respect of legal
expenses which may be regarded as exceeding £100,000 on any basis.
[15] Seen in that light, the position, now, is
that the assets are of very much the same order as they were at the time when
the proceedings were started. That is
because the outgoings in respect of legal expenses is balanced—or more than
balanced—by the proceeds of the insurance policy which fell in on the death of
Mr Walker’s wife. In fairness to Mr
Walker, I should add that, in his written submissions, he asserts that his net
assets are rather greater now than they were in 1999. He attributes that to two factors: first,
because frozen pension policies have increased in value as a result of the
accrual of income and dividends and, second, because the proceeds of the
insurance policy were used to purchase the house in Greece in which he now
lives and which, he says, has increased substantially in value because of local
conditions. Leaving that out of account,
the broad position is that there has been little or no change in the amount of
the assets available to meet (i) the liquidator’s claim of £500,000 or
thereabouts, (ii) any costs and expenses which the liquidator may be entitled
to recover in these proceedings and (iii) any residual costs to be incurred by
Mr Walker.
[16] The liquidator has indicated, in para 46
of his statement, that his own legal costs are estimated to be in the region of
£180,000; but that figure, I think, is
276
before taking account of the costs of the trial,
which he estimates at three to four weeks.
Further his own liquidation costs as at February 2001 were approximately
£100,000 (see para 29). On any basis
therefore, if the liquidator were to proceed to trial in this matter, his
liquidation costs and his further litigation costs, together with Mr Walker’s
own further litigation costs, would be likely to absorb any available pool of
assets, leaving nothing to satisfy the £500,000 claim which the liquidator has
been pursuing.
[17] The liquidator’s witness statement
concludes (at para 52) in these terms:
‘The claim against Mr
Walker has become increasingly worthless because of progressive reduction in
the value of his reserved assets. That
reduction has been a direct consequence of the use of such assets to fund the
defence in the misfeasance and disqualification proceedings permitted by
successive court orders starting with the order made by Mr Justice Hart on 26
September 2001. Although Mr Walker’s asset position altered considerably in May
2001 following receipt by him of the proceeds of the Equitable Life insurance
policy, the point has been reached where continued prosecution of the claim
cannot be justified.’
[18] To my mind, on a proper examination,
there has been no substantial change in the assets available to meet the claim;
seen in the overall context of the size of the claim and the costs of pursuing
it. The size of the claim can be
estimated, from the freezing orders, at about £500,000. The assets then available to Mr and Mrs
Walker were £292,000 or thereabouts.
That was known to the liquidator by the end of October 1999 when the
affidavits of means were filed in response to the requirement in the freezing
injunctions. So that £292,000 was all
that was then thought to be available to meet the claim, and the liquidator’s
costs of pursuing the action and the defendant’s costs of resisting it.
[19] The liquidator contends that it was not
to be envisaged that the defendants would resist the claim; or, at least, that
they would spend money on doing so. But
it was reluctantly conceded by the liquidator, to some extent at least, that Mr
and Mrs Walker were entitled to resist declarations sought against them which,
in the circumstances, would plainly have involved the imputation of
dishonesty. It is important to keep in
mind that the declarations sought included declarations as to fraudulent
trading.
[20] It is said, also, that the liquidator was
entitled to assume that—once the funds were secure within the freezing
orders—Mr and Mrs Walker’s further costs would all be paid through public
funding. It is not clear to me why that
would be a reasonable assumption to make.
It is common practice that funds are released from freezing orders for the
purpose of defending claims. I know of
no principle which supports the view that funds should not be released so that
the public purse can be left to meet the defence costs.
[21] Further as it seems to me, given the
allegations that were being made in the misfeasance proceedings, it was
obviously foreseeable that proceedings for disqualification would be commenced
by the Secretary of State; if only for the reason that the liquidator would
have been required to report to the Secretary of State, or to the Official
Receiver, the facts on which he was relying in his misfeasance
proceedings. Those allegations, if made
good, would be likely to lead the Secretary of State to the view that this was
a case in which unfitness to be a director required disqualification.
[22] So that from the outset, as it seems to
me, the claim against Mr and Mrs Walker has been commercially worthless. I am not persuaded by the
277
assertion in para 52 of the liquidator’s witness
statement that it has become worthless as a result of events which have taken
place since proceedings were commenced.
Indeed it is the unfortunate death of Mrs Walker which has made the
claim worth, if anything, rather more than it otherwise would have been.
[23] The stance adopted on behalf of the liquidator
is that it is perfectly proper to bring proceedings against a defendant for a
claim which can never be met having regard to the assets available to meet it;
to pursue that claim until all those assets have been expended by the
defendants in defending that claim, perfectly properly; and then to walk away
on the basis that the defendants are left to bear all their own costs. If that is what the law permits or requires,
then I am bound to say I find that startling.
[24] The matter came back before the judge on
the application to discontinue on 17 June 2004.
He referred to the relevant rule, CPR 38.6(1). It is in these terms:
‘Unless the court orders
otherwise, a claimant who discontinues is liable for the costs which a
defendant against whom he discontinues incurred on or before the date on which
notice of discontinuance was served on him.’
The form in which that rule is expressed—which differs
from the earlier rule, RSC Ord 21, r 3—makes it clear that the normal order on
discontinuance is that the claimant bears the defendant’s costs up to the date
on which notice of discontinuance is served.
The rule makes it clear that a court may order otherwise; but the burden
is on the party who seeks to persuade the court that some other consequence
should follow; and the task of the court is to consider whether there is some
good reason to depart from the normal order.
[25] The judge directed himself by reference
to two authorities to which he referred—Britannia Life Association of
Scotland v Smith [1995] CA Transcript 353, a pre-CPR case and Everton v
World Professional Billiards and Snooker Association (Promotions)
Ltd [2001] All ER (D) 172 (Dec), a post-CPR case—that he had to look at the
state of the action as it was at the date when the application for leave to
discontinue was made and see what was the fair and just thing to do at that
time. He thought that that was really
all that had to be done. He went on to
say ([2004] All ER (D) 159 (Jun) at [12]):
‘Taking into account
what is fair and just, I take into account the following matters: whether the
application by the defendant can be safely equated with defeat or an
acknowledgment of defeat, whether the proceedings have in some way become
academic, whether the claimant has obtained some legitimate benefit from the
proceedings which it might not otherwise have obtained, what the economic value
of the claim is, what the potential benefits of the claim might be, what the
strength of the claim on a very prima facie basis is, not so as to conduct a
mini-trial but simply to see whether there was a reasonable basis for the claim
and a continuing reasonable basis for the claim.’
[26] In making that list of the matters which
he took into account, the judge made no reference to the relevance of any
change (or not) in circumstances between the date when the proceedings were
started and the date when the application to discontinue was made or the
decision to discontinue was taken. In
other words, he left out of account any consideration as to why a claim which
was started on the basis of certain expectations should be discontinued without
an order for costs against the claimant in circumstances where the expectations
have
278
not, in fact, changed—even though they may have been
re-evaluated. The nearest that the judge
came to that was at [18] of his judgment where he said:
‘Another important
factor is that although the claim is for several hundred thousand pounds the
assets available for execution are very limited. When the action was started Mr and Mrs Walker
disclosed assets of some £292,000. It is
possible now that the assets consist of no more than the house in Greece, which
may be worth £200,000, and some pension policies of modest value.’
But the assets available for execution at the time when
the claim was started were not £292,000; they were £292,000 less the costs of
pursuing and resisting the claim, liabilities which would have to be met before
the assets could be available to satisfy this claim of £500,000. Further, in that context, the diminution which
the judge identifies—from £292,000 to a figure just over £200,000—is of little
or no significance. This is not a claim
in which it can be said that the underlying position has changed.
[27] To my mind, the judge failed to take that
material consideration into account.
That was pointed out when permission to appeal was given by Neuberger LJ
on Mr Walker’s application in person. I
read from that judgment—not of course because we are required to follow it, but
because it encapsulates the point clearly and succinctly and Mr Walker has
adopted it, in effect, as his ground of appeal in substitution for the grounds
which he set out in his appellant’s notice.
Neuberger LJ said this at paras 6–8 of his judgment of 7 October 2004:
‘[6] The argument is
this. When the liquidator began these
proceedings, the position was as follows.
First, he has a reasonable case for expecting in due course a judgment
for a substantial sum for wrongful trading.
I use the rather vague expression “a reasonable case”, because it is
clear that the judge thought the claim had a real prospect of success and, in
so far as that is relevant, I assume that that was always the position.
[7] Secondly, it must
have been clear to the liquidator that Mr Walker and (until she sadly died) his
wife would fight the claim vigorously.
That would not change from the start of the proceedings.
[8] Thirdly, as the
judge said, again quoting from para 18 of the judgment … “When the action was started Mr and Mrs
Walker disclosed assets of some £292,000.”
In other words, and in many ways crucial to my mind, the assets position
of Mr and Mrs Walker (now sadly only Mr Walker) was almost identical when the
action started to when the action was sought to be discontinued. [Counsel] makes the point that, because of
the directors disqualification proceedings and the costs incurred by Mr Walker
in connection therewith, it appeared from time to time that Mr … Walker had
less money. That may or may not be
right, but the essential point may well be that the value of the assets they
had at the date that the liquidator was seeking to discontinue was virtually
identical to the value of the assets they had when he began the proceedings.’
He went on:
‘[9] In all these
circumstances, on the face of it, it appears to me that it is strongly arguable
the crucial point is that there is no difference between a situation, in terms
of prospects of success, likelihood of the matter being an expensive fight and
the level of the defendants’ recoverable assets, nothing in
279
those three vital
respects, that changed between the issue of proceedings and the date on which
the proceedings were sought to be discontinued.
In those circumstances, as a matter of principle I can see a very
powerful argument for saying that the only correct answer at which the judge
could have arrived, absent other points, was that the normal rule had to
apply. Otherwise, it might be said with
force that the normal rule is a dead letter.’
[28] Mr Ascroft—who has appeared for the
respondent liquidator in this appeal and has sought valiantly to defend the
judge’s judgment—has taken us to a number of authorities which he suggests
makes it unnecessary to consider the point identified by Neuberger LJ: that is
to say whether it is a good reason to depart from the normal rule that the
claimant discovers at a late stage that which he could have discovered at an
early stage, namely that his claim has, all along, been commercially valueless.
[29] He began by inviting us to look at
observations in this court in JT Stratford & Son Ltd v Lindley (No
2) [1969] 3 All ER 1122, [1969] 1 WLR 1547.
As will be familiar, JT Stratford & Son Ltd v Lindley was a
case which went to the House of Lords on the question whether the
plaintiffs—barge owners and repairers—could obtain an injunction restraining
the defendants (who were trade union officials) from enforcing an embargo on
the plaintiffs’ barges in furtherance of a trade dispute. One outcome of the hearing in the House of
Lords was that all the costs of the interlocutory proceedings for the
injunction were ordered to be costs in the cause; so that those expensive
interlocutory proceedings had no immediate costs consequences. It was, no doubt, anticipated that, sooner or
later, the action would go to trial.
But, by the time the matter was before this court again, in July 1969,
the action had never come to trial. No
one had lost; no one had won. And there
was no likelihood that the action ever would come to trial. It is in the nature of that type of
litigation that the result that the parties are interested in is whether or not
the interlocutory injunction is granted at the outset.
[30] Lord Denning MR, explained that the
defendants—that is the trade union officials—in order to bring matters to a
head had taken out a summons to dismiss the action for want of
prosecution. The plaintiffs had taken
out a cross-summons seeking leave to discontinue on terms that the defendants
should pay the plaintiffs’ costs. Those
summonses had come before the master and then the judge; and were on appeal to
this court. Lord Denning MR said ([1969]
3 All ER 1122 at 1123, [1969] 1 WLR 1547 at 1553):
‘It is plain that
neither side wishes to go on with the action so as to get his own costs. But neither side wishes to pay the other
side’s costs. Each will fight rather
than pay the other side’s costs. So what
is to be done? Is this case to go on
simply about costs?’
He referred to the rule in relation to striking out, and
to the rule (then RSC Ord 21, r 3(1)) as to discontinuance. Order 21, r 3(1) was in these terms:
‘… a party may not
discontinue an action … without the leave of the Court, and the Court … may
order the action … to be discontinued … on such terms as to costs, the bringing
of a subsequent action or otherwise as it thinks just.’
This court held that the right course was to give leave to
discontinue on the basis of no order as to costs.
[31] There are three important features of
JT Stratford & Son Ltd v Lindley (No 2). The first, of course, is that the case was
determined on the basis of RSC Ord 21, r 3
280
and not on the basis of CPR 38.6. In so far as there is a difference between
the two rules, the later rule indicates what the normal order should be in a
case where a plaintiff seeks to discontinue, in a way that the former rule did
not. Second, as Lord Denning MR and
Cross LJ ([1969] 3 All ER 1122 at 1125, [1969] 1 WLR 1547 at 1555) make clear,
neither side wanted the issue to be determined for its own sake; so that the
issue was, in truth, academic in the sense that neither side had any interest
in the outcome of the underlying issue in the litigation. Third that was a case between powerful
employers and a powerful trade union in which both sides could continue to
fight over the question of costs; that is to say, they each had the means to do
so.
[32] The distinction between JT Stratford
& Son Ltd v Lindley (No 2) and this case, quite apart
from the difference in the wording of the rule, is that in this case Mr Walker
would like to have the question whether or not the allegations of misfeasance
and fraudulent trading made against him are well founded, decided; and is quite
happy to continue to fight in person to that end. It is the liquidator who no longer wants that
issue decided: first, because it will not bear him any fruit even if it is
decided in his favour and, second, because his own funding position, as counsel
frankly accepted, is such that he cannot afford to continue to fight. By that, I take counsel to accept that there
are no funds in the liquidation to finance a three- to four-week trial; that
there are no creditors willing to indemnify the liquidator against the costs of
a three- to four-week trial; and that the funding that the liquidator is at
present enjoying, under a conditional fee arrangement, is unlikely to continue
for the purpose of conducting a three- to four-week trial against a defendant
who, on the figures, would be unlikely to meet any costs that were
awarded. So that, in contrast to JT
Stratford & Son Ltd v Lindley (No 2), this is not a case where,
if the claimant is refused leave to discontinue on the terms which he seeks, he
will simply go on with the action. He is
not in a position to do so.
[33] We were referred, also, to the decision
of this court in RTZ Pension Property Trust Ltd v ARC Property Developments
Ltd [1999] 1 All ER 532, and to a decision made on application for
permission to appeal to this court in Britannia Life Association of Scotland
v Smith [1995] CA Transcript 353.
[34] The Britannia Life case is the
earlier of the two. It must be kept in
mind that it was an application for leave to appeal rather than an appeal
itself; and it was an application which required consideration of the old rule,
Ord 21, r 3. In that case the defendant
was Mr Wallace Smith, who—as was quite notorious at the time—had been convicted
of offences of dishonesty in relation to his commercial activities. Those convictions did not relate to the
particular claim that was being made in the proceedings. But it is difficult to see that Mr Wallace
Smith could have had any interest in wishing to pursue, or to be pursued, in
the action; having regard to the fact that he had already been convicted of
dishonesty in related matters. This
court refused permission to appeal on the basis that Waller J, at first instance,
had been correct in the test which he had applied. That test, which is set out in the judgment
of Morritt LJ in this court, was this:
‘… the real point at the
end of the day is that one just has to look at the state of the action as it is
at the date when the application is made and see what the fair and just thing
to do is at that moment in time.
Obviously in doing that, one has to take a variety of different matters
into account.’
[35] Waller J took into account five factors,
of which the first was that the plaintiff had a strongly arguable case against
the defendant. It does not appear from
the judgment in this court what the other four matters were. The parties’ researches have not unearthed a
transcript of the judgment of Waller J.
281
[36] It is clear that the test formulated as
‘one just has to look at the state of the action as it is … and see what the
fair and just thing to do is at that moment in time’ influenced the judge in
this case. For my part, I doubt whether
the test is as simple as that under CPR 38.6.
Plainly, under the new rule, the court has to be persuaded that it is
just to depart from the normal rule. The
rule recognises that justice will normally lead to the conclusion that a
defendant who defends himself at substantial expense against a plaintiff who
changes his mind in the middle of the action for no good reason—other than that
he has re-evaluated the factors that have remained unchanged—should be
compensated for his costs.
[37] For my part, I do not think much weight
can be put upon the judgment in the Britannia Life case in the
circumstances that we do not know what were the other factors that Waller J
took into account. The point that was
exercising this court, as it seems, is that there had become a perception, following
a decision of Henry J in Barretts & Baird (Wholesale) Ltd
v Institute of Professional Civil Servants [1987] IRLR 3, that the claimant
would only be required to pay a defendant’s costs on discontinuance if he was,
in effect, surrendering and acknowledging defeat. That perception was laid to rest in the
Britannia Life case; and it is plainly no longer the law in the light of
CPR 38.6, if (indeed) it ever was.
[38] We were referred also to the decision of
this court in RTZ Pension Property Trust Ltd v ARC Property Developments Ltd
[1999] 1 All ER 532, in which Potter LJ (at 541) indicated that he was
approaching the case on the basis that where discontinuance occurs in
circumstances tantamount to an acknowledgment of defeat, then the more normal
rules as to costs, namely that a defendant is entitled to an order for his
court costs, should apply unless good reason can be shown to the contrary. As I have said, if the rule was ever so
circumscribed, it is not now in the light of the CPR.
[39] The only post-CPR authority that we were
shown was a decision of Gray J in Everton v World Professional Billiards and
Snooker Association (Promotions) Ltd [2001] All ER (D) 172
(Dec). The particular feature of that
case was that the fourth defendant, against whom the claimant was seeking to
discontinue, had become bankrupt during the course of the proceedings as a
result of his unsuccessful claim against a newspaper for libel. He had been ordered to pay the newspaper’s
costs in the sum of £325,000; and he has to bear his own costs in a further
£416,000. So that, during the course of
the proceedings with which Gray J was concerned, there had been a substantial
change in the defendant’s position leading to bankruptcy. That change was not a consequence of the
proceedings in which he was being sued by the claimant. Gray J summarised the position in para 17 of
his judgment. He said this:
‘Certainly it cannot be
said that this discontinuance “can safely be equated with defeat or an
acknowledgment of likely defeat”. I must
seek to make an order which is in the circumstances of this case just. The reality is that the claimant’s claim
against the fourth defendant has become worthless to him through no fault of
his own but rather by reason of the supervening bankruptcy of the fourth
defendant. I think the claimant would be
entitled to feel that there was some injustice in ordering him to pay costs
whether to the fourth defendant or to Gouldens [the fourth defendant’s
solicitors] in circumstances where he has in effect been compelled to abandon
his claim against the fourth defendant.
For these reasons I have decided that the just and reasonable course is
to permit the claimant to discontinue his claim against the fourth defendant with
no order as to costs.’
282
Everton v World Professional Billiards and Snooker
Association (Promotions) Ltd was a case in which the change
in the factors which had to be taken into account in deciding whether or not it
was sensible to pursue the claim had occurred, not as a reason of anything the
claimant had done, but because the fourth defendant had embarked on
unsuccessful libel proceedings which had led to his bankruptcy. The claimant’s claim had become worthless as
a result of something the fourth defendant had done of his own initiative. That feature is wholly absent from the
present case; not least because there is, in the present case, the unusual
factor that the defendant’s assets have at all times been subject to the
control of the court under the freezing orders.
[40] I have taken those authorities into
account. There is nothing in them which
leads me to think that we should accept that it would be a good reason for
departing from the general rule under CPR 38.6 merely because the plaintiff has
become alive at a late stage to the commercial effect of factors which have
been there from the outset and which, if properly evaluated, could have led to
a decision in 1999 that these were proceedings which were not worth pursuing.
[41] It is because the judge failed to take
that into account that I am persuaded that his exercise of discretion is
flawed. It is only because I am
persuaded that his exercise of discretion is flawed that I think it appropriate
that this court should go on to consider the matter itself in the exercise of
the discretion conferred under CPR 38.6.
[42] The question then is whether there is a
good reason for departing from the normal rule.
To my mind, there is no reason at all for departing from the normal
rule. Indeed as it seems to me, it would
be most unjust if Mr Walker was left to bear the costs of these
proceedings—amounting to a sum likely to be in excess of £100,000—simply
because the liquidator has arrived late at a decision which he could and should
have reached at the time when the proceedings were commenced. I do not think it is just to allow the
liquidator to walk away from these proceedings leaving Mr Walker to bear his
own costs, in the circumstances that the relevant factors have not changed in
any material respect since the time at which proceedings were commenced.
[43] For those reasons I would allow this
appeal to the extent of setting aside para 3 of the order of 17 June 2004—that
is the paragraph that records ‘no order as to costs’. In place of that paragraph I would substitute
the usual order requiring the claimant to pay the costs of the defendant down
to the date of the notice of discontinuance.
LAWS LJ.
[44] I agree that this appeal should be
allowed for all the reasons given by
Chadwick LJ, and that the orders proposed by Chadwick LJ should be made.
[45] In my judgment, the judge below has, with
respect, articulated no proper reason why the liquidator should not pay Mr
Walker’s costs as the price of his discontinuing his action. The order made below was, in my opinion,
frankly unjust.
JONATHAN PARKER LJ.
[46] I agree with both judgments.
Appeal allowed.
Rachel
Ramez Barrister.
283
[2006] 1 All ER 284
AIG Capital Partners Inc and another v Republic of
Kazakhstan (National Bank of Kazakhstan intervening)
[2005]
EWHC 2239 (Comm)
CIVIL PROCEDURE: CONSTITUTIONAL; Other: HUMAN RIGHTS;
Fair Trial
QUEEN’S BENCH DIVISION (COMMERCIAL COURT)
AIKENS
J
26,
27 JULY, 20 OCTOBER 2005
Practice – Pre-trial or post-judgment relief –
Third party debt orders – Account held by bank on behalf of trustee where
judgment debtor beneficial owner of funds – Whether funds belonging to judgment
debtor – Whether funds capable of being subject to third party debt order – CPR
72.2(1)(a).
Constitutional law – Foreign sovereign state –
Immunity from suit – Central bank of foreign state – Domestic enforcement
proceedings against foreign state in respect of arbitration award – Application
to make charging order against assets of state central bank – Whether assets
attracting immunity against enforcement jurisdiction – State Immunity Act 1978,
s 14(4) – Human Rights Act 1998, s 12, Sch 1, Pt I, art 6, Pt II, art 1.
The claimants obtained an arbitration award against
the defendant from the International Centre for the Settlement of Investment
Disputes, in respect of the expropriation of land in Kazakhstan in which they
had invested. Cash and securities (the London assets) representing the sum of a
National Fund in relation to which the intervener, the central bank of
Kazakhstan, was trustee and the defendant was beneficial owner, were held in
England by third party financial institutions on behalf of the intervener. The claimants registered the award in England
and Wales and then obtained an interim third party debt order pursuant to CPR
72.2 and charging orders under the Charging Orders Act 1979 against the cash
and securities held by the third parties.
They then sought to obtain final orders.
CPR 72.2(1)(a) permits an order to be made where there was a ‘debt due
or accruing due to the judgment debtor from the third party’. The intervener applied to discharge the
existing interim orders on the basis that the cash and securities held by the
third parties were its property and were subject to immunity from enforcement
pursuant to, inter alia, s 14(4) of the State Immunity Act 1978 which provided
immunity to the property of a state’s central bank or monetary authority. The following issues arose: (i) whether the
cash held by the third parties belonged to the defendant as beneficial owner,
(ii) whether the London assets were ‘property’ of the intervener as opposed to
the defendant for the purposes of s 14(4) of the 1978 Act; (iii) whether s
14(4) operated to prevent enforcement against assets; and (iv) if it did,
whether such a construction was contrary to the right to a fair trial in art
6(1) of the European Convention for the Protection of Human
________________________________________
_ CPR
72.7, so far as material, is set out at [20], below
_ Section 14, so far as material, is set out at
[26], below
_ Article 6, so far as material, is set out at
[62], below
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284
Rights and Fundamental Freedoms 1950 (as set out in
Sch 1 to the Human Rights Act 1998) as preventing access to the enforcement
jurisdiction of the English courts, and art 1 of the First Protocol of the
convention which guaranteed the protection of property, in that the claimants
argued that lack of enforcement jurisdiction affected the peaceful enjoyment of
the arbitration award.
________________________________________
_ Article
1, so far as material, is set out at [85], below
________________________________________
Held – (1) The cash in the cash accounts
reflected a debt owed by the third parties to the intervener, which was the
account holder. The fact that the
defendant held the ultimate beneficial interest in the National Fund and
thereby in the cash accounts, did not mean that there was a debt due to it in
respect of those accounts. There was no
relationship of debtor or creditor between the defendant and the third parties
and the fact that the defendant might ultimately have a beneficial interest in
the cash accounts could not create such a relationship. The interim third party debt order would
therefore be discharged (see [30]–[32], [95], below).
(2) The London assets were ‘property’ within the
meaning of s 14(4) of the 1978 Act.
‘Property’ included all real and personal property and embraced any
right or interest, legal, equitable, or contractual in assets that might be held
by a state or any ‘emanation of the state’ or central bank or other monetary
authority that came within ss 13 and 14 of the 1978 Act, irrespective of the
capacity in which the central bank held it, or the purposes for which the
property was held (see [45], [61], [89]–[91], [95], below); Alcom Ltd v Republic of Colombia (Barclays
Bank plc, garnishees) [1984] 2 All ER 6 applied and AIC Ltd v
Federal Govt of Nigeria [2003] EWHC 1357 (QB) considered.
(3) The property of a state’s central bank (or other
monetary authority) enjoyed complete immunity from the enforcement processes in
the United Kingdom courts. The wording
of s 14(4) was clear and imperative and not capable of qualification. Parliament had intended that the position of
a central bank or other monetary authority should be dealt with distinctly from
either any other department of the government of a state, or any ‘separate
entity’ as defined in s 14. Further, it
was to be noted that when a central bank or a state’s monetary authority was
performing its key functions of acting as guardian and regulator of the state’s
monetary system, it would be exercising governmental or sovereign authority; it
would not be acting for commercial purposes.
In addition the most obvious ‘property’ of a central bank, a state’s
reserves, would be held and used for governmental, or sovereign purposes and
not for commercial purposes (see [56]–[58], [95] , below).
(4) Section 14(4) impinged on the rights of access of
parties to the enforcement jurisdiction of the United Kingdom courts thereby
engaging art 6 of the convention, but the restriction on the right of a party
to enforce a judgment on the property of a central bank or other monetary
authority that was imposed by the section was both legitimate and
proportionate. That was supported by
international opinion, the existing legislation of states which evidenced a
lack of consensus on the point, the fact that such a rule assisted the
promotion of comity and good relations between states and the fact that even
though the claimants could not enforce against the London assets that did not
render the award ineffective and a nullity.
For the purposes of art 1 of the First Protocol, peaceful enjoyment of
the arbitration award was not affected.
The
285
award was subject to existing law and so had
limitations on its utility and value from the moment it was created and as such
it was always going to be subject to the existing rules concerning immunity of
states and the property of central banks (see [78]–[88], [95] below).
Notes
For the law relating to state immunity under the State
Immunity Act 1978 generally see 18(2) Halsbury’s Laws (4th edn reissue)
paras 825–827, and for the law relating to third party debt orders, see 3(1) Halsbury’s
Laws (4th edn) (2005 reissue) para 179.
For the State Immunity Act 1978, s 14(4), see 10 Halsbury’s
Statutes (4th edn) (2001 reissue) 839.
For the Human Rights Act 1998, Sch 1, Pt I, art 6, Pt
II, art 1, see 7 Halsbury’s Statutes (4th edn) (2004 reissue) 706, 712.
Cases referred to in judgment
AIC Ltd v Federal
Govt of Nigeria [2003] EWHC 1357 (QB).
Al-Adsani v UK (2001)
12 BHRC 88, ECt HR.
Alcom Ltd v Republic
of Colombia (Barclays Bank plc, garnishees) [1984] 2 All ER 6,
[1984] AC 580, [1984] 2 WLR 750, HL.
Elettronica Sicula
SpA (USA v Italy) (1989) ICJ Rep 15, ICJ.
Ghaidan v Mendoza
[2004] UKHL 30, [2004] 3 All ER 411, [2004] 2 AC 557 [2004] 3 WLR 113.
Golder v UK (1975)
1 EHRR 524, [1975] ECHR 4451/70, ECt HR.
Hornsby v Greece
(1997) 24 EHRR 250, [1997] ECHR 18357/91, ECt HR.
Jones v Ministry of
the Interior of the Kingdom of Saudi Arabia, Mitchell v Al-Dali [2004] EWCA
Civ 1394, [2005] QB 699, [2005] 2 WLR 808.
Stran Greek
Refineries v Greece (1995) 19 EHRR 293, [1994] ECHR 13427/87, ECt HR.
Trendtex Trading Corp
v Central Bank of Nigeria [1977] 1 All ER 881, [1977] QB 529, [1977] 2 WLR
356, CA.
Application
The claimants AIG Capital Partners Inc and CJSC Tema Real
Estate Co Ltd were granted an arbitration award by the International Centre for
the Settlement of Investment Disputes on 7 October 2003, against the defendant,
the Republic of Kazakhstan. They
subsequently registered the award in England and obtained interim third party
debt and charging orders against assets of the National Bank of Kazakhstan held
in London by the third parties ABN AMRO Mellon Global Securities Services BV
and ABN AMRO Bank NV. The National Bank
of Kazakhstan intervened in the proceedings and applied to discharge the
interim orders. The facts are set out in
the judgment.
Richard Salter QC,
David Lloyd Jones QC and Paul Key (instructed by Holman,
Fenwick & Willan) for the claimants.
Ali Malek QC and
David Quest (instructed by Richards Butler) for the defendant and
the intervener.
Cur adv
vult
286
20 October 2005.
The following judgment was delivered.
AIKENS J.
A. THE MAIN ISSUE
[1] This case concerns a claim for state
immunity by the Republic of Kazakhstan (the RoK) and its central bank, the
National Bank of Kazakhstan (the NBK).
The claimants have obtained an arbitration award (Case No. ARB/01/6)
from the International Centre for the Settlement of Investment Disputes (ICSID)
in Washington, DC, against the RoK. The award required the RoK to pay to the
claimants a total of US$9,951,709 plus continuing interest. The claimants have obtained leave to register
this award in the High Court under s 1 of the Arbitration (International
Investment Disputes) Act 1966. They wish
to enforce this award as a judgment by obtaining final third party debt and
charging orders against cash and securities that are held in London by the
third parties (AAMGS), pursuant to a Global Custody Agreement dated 24 December
2001 with the National Bank of Kazakhstan.
The claimants have already obtained interim orders and they say that the
cash and the securities are assets of the RoK that can and should be the
subject of final orders. The National
Bank of Kazakhstan intervened in the proceedings and applied to discharge both
orders on the ground that the cash and securities held by AAMGS constitute
‘property’ of the NBK and are the subject of immunity from enforcement under ss
13(2)(b) and 14(4) of the State Immunity Act 1978. The claimants say that those sections,
properly construed and applied to the facts of this case, do not grant
immunity, so that the interim orders should indeed be made final.
________________________________________
_ The
award was dated and published to the parties on 7 October 2003.
_ Order
of Langley J dated 2 July 2004.
_ Originally the Global Custody Agreement was
between the National Bank of Kazakhstan and Boston Safe Deposit and Trust
Company and Mellon Bank NA, London Branch.
In December 2002 a ‘dedicated new bank’, ABN AMRO Mellon Global Security
Services BV (AAMGS), was set up to continue to provide the global custody
services and there was a novation of the agreement so as to be between the
National Bank of Kazakhstan and AAMGS: see letter from AAMGS to the National
Bank of Kazakhstan dated 27 December 2002: C/Tab 12/page 210.
_ Orders of Master Fontayne dated 13 September
2004.
_ Application dated 23 November 2004: the NBK
had also asked to be joined as a party to the proceedings. On 25 November 2005, Master Miller ordered
that NBK be joined.
________________________________________
[2] Following an order of Master Miller made
on 25 November 2004 giving directions on the trial of the issue, (which was
varied by a further order of Langley J on 23 February 2005), I heard argument
on 26 and 27 July 2005 on whether final third party debt and charging orders
should be made against the cash and securities held by AAMGS in the name of the
NBK. No witnesses were called. It was agreed between the parties that the
statements, experts’ reports and documents before the court should all be
received as evidence of the facts stated in them, subject to any comments as to
weight. I was also supplied with five
bundles of authorities. After the succinct and very helpful oral submissions
________________________________________
_ He
also ordered that: (i) AAMGS need not take any further part in the proceedings
on agreeing to be bound by the result;
(ii) a commercial judge should determine the issue of whether final
orders should be made.
_ The
principal statements were two by Mr Yuri Gerasimenko, a Deputy Director of the
Monetary Operations Department of the NBK.
_ Each
side put in an expert’s report on the law of Kazakhstan relating to the NBK and
the National Fund of the RoK: Professor AG Didenko for the claimants; Professor
MK Suleimenov for the RoK and NBK. The
two experts prepared a joint protocol: A/Tab 23. The protocol stated that the experts’ opinions
on the interpretation of the provisions of the legislation of Kazakhstan ‘are
generally consistent with each other’: A/Tab 23/page 141.
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287
from Mr Salter QC
for the claimants and
Mr Malek QC for the RoK and NBK,
for which I am most grateful, I reserved judgment.
B. THE FACTS GIVING RISE TO THE MAIN ISSUE
The Project and the dispute giving rise to the
ICSID Arbitration
[3] In 1999 and 2000 the first claimant (AIG)
became involved in a project to develop a residential housing complex called
‘Crystal Village’ in Almaty, in the RoK.
This project was a joint venture between AIG and a Kazakhstan company
called LLP Tema, which was owned and controlled by Kazakhstani principals. Those two companies together formed a joint
venture company, CJSC Tema Real Estate Co, the second claimant. Property was purchased for the project;
contracts for the construction were signed and the work begun. Then the government of the RoK announced that
the project was to be cancelled because the land concerned was required for a
national arboretum. In March 2000 the
Almaty Oblast issued a resolution ordering the transfer of the project property
to the City of Almaty, without compensation to the joint venture. On 15 May 2000 the joint venture attempted to
resume construction work on the site, but the city authorities, accompanied by
the police, expelled the joint venture’s contractors from the property. In February 2001 the City of Almaty physically
seized the project property. The ICSID
arbitration award recorded that these actions amounted to expropriation, were
arbitrary, in wilful disregard of the due process of law and ‘were shocking to
“all sense of juridical propriety”’.
________________________________________
_ See:
ICSID award, para 3.2: E/Tab 1/pages 12–13.
_ See:
ICSID award, para 10.5.2: E/Tab 1/page 199.
The phrase in quotes ‘all sense of juridical propriety’ refers to a
decision of the International Court of Justice: Elettronica Sicula SpA (USA v
Italy) (1989) ICJ Rep 15 at 76 (para 128):
‘Arbitrariness … is a wilful disregard of due process of law, an act
which shocks or at least surprises a sense of juridical propriety’.
________________________________________
[4] The project had been started pursuant to a
bilateral investment treaty between the United States and the RoK dated 19 May
1992 (Treaty between the United States of America and the Republic of
Kazakhstan concerning the reciprocal encouragement and protection of
investment) (the BIT). Article VI(4) of
the BIT stated that investment disputes between an investor and the host
company could be submitted to arbitration by ICSID. On 3 May 2001 the two claimants filed a
request for arbitration with ICSID, claiming that the RoK had expropriated the
claimants’ investment in the project.
The ICSID Arbitration Tribunal was constituted on 5 October 2001. It held hearings in 2002, at which the RoK
was represented by McGuireWoods, Kazakhstan LLP. The tribunal’s award was published to the
parties on 7 October 2003. No part of
the sums awarded to the claimants have been paid by the RoK.
________________________________________
_ Both
the United States and the RoK are parties to the Convention on the Settlement
of Investment Disputes between States and Nationals of Other States
(Washington, 18 March 1965; TS 25 (1967), Cmnd 3255), which set up ICSID (the
ICSID convention).
________________________________________
[5] Under the terms of the ICSID convention,
to which the United Kingdom is also a party, each contracting state shall
recognise an arbitration award made pursuant to the ICSID convention. Contracting states will ‘enforce the
pecuniary obligations imposed by that award within its territories as if it
were a final judgment of a court of that State’. The convention provides that ‘Execution of
the award shall be governed by the laws concerning the execution of judgments
in force in the State in whose territories such execution is sought’. However, art 55 of the ICSID
________________________________________
_ ICSID
convention, art 54(1).
_ Ibid,
art 54(3).
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288
convention states expressly that: ‘Nothing in Article
54 shall be construed as derogating from the law in force in any Contracting
State relating to immunity of that State or any foreign State from execution’.
[6] The 1966 Act was passed to implement the
ICSID convention. Section 1(2) provides
that a person seeking recognition or enforcement of an award made pursuant to
the ICSID convention (ie an ICSID award) ‘shall be entitled to have the award
registered in the High Court’ subject to various matters set out in the 1966
Act. Section 2(1) of the 1966 Act
provides that, subject to the provisions of the Act, an award registered under
the Act—
‘shall, as respects the
pecuniary obligations which it imposes, be of the same force and effect for the
purposes of execution as if it had been a judgment of the High Court given when
the award was rendered pursuant to the Convention and entered on the date or
registration under this Act, and, so far as relates to such pecuniary
obligations—(a) proceedings may be taken on the award, (b) the sum for which
the award is registered shall carry interest, (c) the High Court shall have the
same control over the execution of the award, as if the award had been such a
judgment of the High Court.’
[7] As I have said, on 2 July 2004, Langley J
made an order permitting the claimants to register the ICSID award as a
judgment.
The assets against which the claimants wish to
enforce the judgment
[8] As referred to above, AAMGS’ predecessors
had agreed with the RoK to hold cash and securities of the National Fund of the
RoK, ‘as custodian and banker’ pursuant to a Global Custody Agreement (GCA)
dated 24 December 2001. AAMGS is
now the global custodian of cash and securities of the National Fund of the
RoK. The claimants wish to enforce the
judgment against these assets insofar as they are held by AAMGS in the
jurisdiction.
________________________________________
_ GCA
Recital C: C/Tab 2/page 12.
________________________________________
[9] In a letter dated 22 September 2004 from
AAMGS to Holman, Fenwick & Willan, solicitors for the claimants, AAMGS
stated that it held cash and securities ‘to the order of the NBK’ in a
number of jurisdictions, including England and Wales. The letter stated that the value of the cash
held on behalf of the NBK within England and Wales was £3·1m. The value of the securities held on behalf of
the NBK was stated as £91m. It is agreed
that this cash and these securities form part of the assets of the National
Fund of Kazakhstan (the National Fund).
These assets were referred to (together) as ‘the London assets’ of the
National Fund. It is also agreed that
AAMGS holds the cash and securities in two separate types of account,
respectively the cash accounts and the securities accounts. Under the terms of the GCA, the cash and the
securities are held by AAMGS in the name of the NBK.
________________________________________
_ C/Tab
14/pages 231–232.
________________________________________
The National Bank of Kazakhstan
[10] The Deputy Director of the Monetary
Operations Department of the NBK, Mr Gerasimenko, describes the National Bank
in his statement as ‘the central bank of Kazakhstan’. The NBK carries out its activities under the
Law on Banks and Banking Activity of 31 August 1995 and the Law on the National
Bank of the Republic of Kazakhstan dated 30 March 1995. Article 1 of the latter law provides that the
NBK shall be the central bank of the RoK.
Article 6 states that NBK will be
________________________________________
_ Gerasimenko (1): paras 1 and 5: A/Tab 15/pages
68, 69.
________________________________________
289
a distinct legal entity, with a single structure that
has branch offices, representative offices and organisations. Article 7 of the same law sets out the
responsibilities of the NBK. These
include: the development and pursuit of the credit and monetary policy of the
RoK; ensuring that payment systems function properly; currency regulation and
control; and assisting towards the stability of the financial system of the
RoK.
________________________________________
_ Gerasimenko (1): paras 5 and 6: A/Tab 15/pages
69–70.
________________________________________
The National Fund of Kazakhstan (National
Fund) and its management
[11] Kazakhstan has large oil resources. In common with other states which are rich in
natural resources like oil and natural gas, (such as Norway, Venezuela and
Canada), Kazakhstan has set up a ‘national resources fund’. The object of such funds is to ‘help
stabilise fiscal policy and save a portion of oil and gas revenues’. As described by Miss Tsalik in ‘Caspian Oil
Windfalls’, natural resources funds are established to deal with the
principal challenge that faces a country whose state revenues are mainly
dependent on the export of natural resources such as oil and gas. This challenge arises from the volatility of
commodity prices. When prices are high,
there is a temptation to spend all the revenues obtained from the production
and export of the commodities, without retaining some for times when prices,
and so state revenues, are low. Natural
resources funds can be used as ‘stabilisation funds’ or ‘saving funds’ or a
combination of both. Stabilisation funds
smooth out government spending by transferring excess revenues to the
stabilisation fund when commodity prices are high and then transferring funds
for government spending when prices are low.
Saving funds ‘act as a kind of “rainy day” fund, storing up wealth for
future generations’.
________________________________________
_ As
stated in ‘Caspian Oil Windfalls: Who will benefit?’ (C/Tab 15/page 261). This is a paper written by Svetlana Tsalik,
the director of Caspian Revenue Watch, a project run by the Open Society
Institute, which is a private and grant-making foundation based in New York,
USA, whose aim is to promote ‘open society’.
The paper was published in 2003.
Chapter 6 of the paper deals with the National Fund of the Republic of
Kazakhstan and makes some criticisms of the management of the fund. Those are not relevant to the present
matters. The paper was disclosed by the
claimants, but referred to by both sides at the hearing.
_ C/Tab
15/page 276.
________________________________________
[12] The National Fund was constituted on 23
August 2000 by Presidential Decree Number 402.
That stated the purpose of the National Fund as to be:
‘[To ensure] stable
social and economic development of the country, accumulation of financial
resources for future generations, [and] reduction of the vulnerability of the
economy to the influence of unfavourable external factors’.
________________________________________
_ Preamble to the Decree: B/Tab 9/page 325.
________________________________________
The management of the National Fund is governed by ‘Rules
for the Formation and Use of the National Fund’, which were promulgated by
Presidential Decree No 543 of 29 January 2001 and also by the Budget Code of
the Republic of Kazakhstan. The latter
is now the governing code. Paragraph 2
of art 11 of the code describes the object of the National Fund in similar
terms to those set out in the Presidential Decree. Paragraph 3 of art 11 describes its two
functions as being to run savings and stabilisation functions with aims as
follows:
________________________________________
_ Law
No 548 of 24 April 2004.
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290
‘Savings function
provides for the accumulation of financial assets and other property …
Stabilisation function is purposed [sic] for the reduction of the Republican
budget from the influence of world prices for raw materials.’
[13] Paragraph 1 of art 24 of the code
specifies the matters on which the National Fund can be spent. These include: any deficit between planned
and actual state revenues from raw materials; specific projects as determined
by the President and set out in the state budget; and the cost of managing the
National Fund and auditing it.
[14] The National Fund is described in a
presentation document that was prepared by the NBK in 2003. That states that the funds that make up the
National Fund come from tax revenues derived from oil extraction and other
mining activities; budget transfers of other earnings derived from the oil
sector and other mining activities; investment income from the management of
the National Fund itself; and some other revenues. The assets of the National Fund were US$2·2bn
as at 1 May 2003.
________________________________________
_ D1/Tab 13/pages 201–225.
________________________________________
[15] The rules for the investment of sums that
are transferred to the National Fund are set out in para 2 of art 24 of the
code. That states:
‘2. The [National Fund]
shall be placed in authorized financial assets and other property … in order to
secure:
(1) maintenance of the
[National Fund];
(2) support of the
sufficient level of liquidity of the [National Fund];
(3) high profitability
level of the [National Fund] in the long term outlook at the reasonable risk
level;
(4) gaining of
investment income.’
[16] The National Fund is managed by the
National Bank of Kazakhstan under the terms of Agreement No 299 on Trust
Management of the National Fund of the Republic of Kazakhstan, as amended by
Addendum Agreement On Changes and Amendments No 305 of 16 August 2004 (the
Trust Management Agreement). By cl 1.1
of the Trust Management Agreement the government of Kazakhstan transferred the
National Fund of Kazakhstan ‘under trust management by [the NBK]’ and
the NBK agreed to carry out trust management of the National Fund ‘for the
benefit of the Government by way of investing financial assets of the [National
Fund]’. By cl 2 of the Trust Management
Agreement the bank is given the rights to ‘possess, use and dispose of the Fund
assets in accordance with the terms and conditions set forth herein’; and,
subject to investment rules, ‘to invest the [National Fund] assets’. For this service there is a fee arrangement
between the government of Kazakhstan and the NBK. NBK will receive commission if the National
Fund profits, but it must pay the government of Kazakhstan compensation if
there is a loss. Clause 7.1 of the Trust
Management Agreement states that ‘The Government shall be the beneficiary under
this Agreement’.
________________________________________
_ C/Tab
1/page 1.
_ Clause 2.1.1.
_ Clause 2.1.2.
_ Clauses 2.1.3 and 2.1.4.
________________________________________
[17] According to the opinion of Professor
Didenko, the claimants’ expert on Kazakhstan law, under a trust management structure
established under Kazakhstan law, the trust manager does not become the owner
of the property that is subject to the trust management. He states that Kazakhstan law does not
differentiate
291
between legal and beneficial ownership as does
English law. ‘Therefore, the property
held by the trust manager remains under the full ownership of the trust
founder’, and ‘the trust manager does not acquire any title to the property
under his management’. However,
Professor Didenko also quotes art 888.1 of the Civil Code, Specific Part, which
provides that ‘the trust manager has a right to take any actions with respect
to the property in trust that could have been taken by the owner with the
purpose of its proper management’. He
also states that the powers of dealing with the property under trust are
primarily to be exercised by the trust manager, rather than the ‘beneficiary’
or trust founder or ‘owner’ of the funds under trust, but ‘the trust manger
does not acquire any title to the property under his management’. As I understood the argument of Mr Malek QC,
on behalf of RoK and NBK, he did not challenge this analysis of Kazakhstan
law. However, he said that this did not
preclude the NBK having ‘property’ in both the cash and securities that are in
the custody of AAMGS for the purposes of English law and, in particular, for
the purposes of the provisions of the State Immunity Act 1978; indeed, he
submitted that was so in this case.
________________________________________
_ Didenko report: paras 59; 60: A/Tab 19/page
102.
_ Paragraph 62: A/Tab 19/page 103.
_ Paragraph 62.
_ Paragraph 62.
________________________________________
The terms of the Global Custody Agreement (GCA)
between the NBK and AAMGS and its operation
________________________________________
_ C/Tab
2/page 11.
________________________________________
[18] The GCA (as novated) appointed AAMGS to
act as custodian and to provide custodian services to the NBK, as ‘the Client’,
on the terms set out in the GCA. The GCA
is governed by English law. It expressly
provides that the agreement is not enforceable by third parties under the
Contracts (Rights of Third Parties) Act 1999.
Recital A of the GCA states that the NBK is carrying out ‘certain trust
management services with respect to the (sic) certain securities of the
Republic of Kazakhstan (the “National Fund”) in accordance with the Trust
Management Agreement by and between the Government of [the RoK] and [the NBK]
…’ Under the terms of the GCA, AAMGS was
appointed as banker to the NBK. AAMGS
agreed to open cash accounts to hold cash of the NBK received by AAMGS. Clause 16(j) confirms the general position in
English law that cash of the NBK in the cash account constitutes ‘a debt owed
by [AAMGS] to [the NBK]’. In respect of
securities, AAMGS agreed to open securities accounts for them. The securities were (unless special
arrangements were agreed) to be registered in the name of a nominee of
AAMGS. However AAMGS agreed that it
would hold the securities in safekeeping for the account of the NBK. The ownership of securities held in the
securities account would be ‘clearly recorded on [AAMGS’s] books as belonging
to [the NBK]’.
________________________________________
_ Clause 2(a): C/Tab 2/page 13.
_ Clauses 26 and 27 respectively.
_ Clause
2(b).
_ Clause 3(b).
_ Clause 3(a).
_ Clause 6(b).
_ Clause 5(a).
_ Clause 5(b).
________________________________________
[19] AAMGS holds assets (ie cash and
securities) under the GCA in 16 custody accounts. The securities held include United Kingdom
government bonds and
________________________________________
_ Letter from AAMGS to NBK dated 15 November
2004: C/Tab 12/page 213.
________________________________________
292
shares in United Kingdom listed companies. NBK has disclosed statements for these 16
accounts for the period from 1 July 2003 to 31 December 2004. It is clear, and is accepted by the RoK and
NBK, that the securities in these accounts have been actively traded. I was informed by the claimants (without
challenge) that during the period from July 2003 to December 2004 there were
some 120,500 trades, or just under 6,700 trades per month. Income and profits from the securities held
by AAMGS have almost invariably been re-invested in other securities and there
have been very few cash withdrawals from AAMGS’ custody.
________________________________________
_ See:
E/Tab 4/pages 202 – 3 and Tab 5/page 215.
_ All
the trades were recorded electronically and the material was disclosed on a CD
Rom; it would have translated into 19,000 A4 pages so was not before the court
in hard copy.
_ Letter of AAMGS to NBK dated 18 January 2005:
C/Tab 12/page 215.
________________________________________
C. THE ENGLISH LEGISLATION
Third party debt orders
[20] The court’s jurisdiction to make a third
party debt order (TPD order) is
found in CPR 72.2.
That provides:
‘(1) Upon the
application of a judgment creditor, the court may make an order (a “final third
party debt order”) requiring a third party to pay to the judgment creditor—(a)
the amount of any debt due or accruing due to the judgment debtor from the
third party; or (b) so much of that debt as is sufficient to satisfy the
judgment debt and the judgment creditor’s costs of the application.’
Charging orders
[21] The court’s jurisdiction and powers in
respect of charging orders are set out in ss 1 and 2 of the Charging Orders Act
1979. These provide:
‘1. Charging
Orders.—(1) Where, under a judgment or order of the High Court or a county
court, a person (the “debtor”) is required to pay a sum of money to another
person (the “creditor”) then, for the purpose of enforcing that judgment or
order, the appropriate court may make an order in accordance with the
provisions of this Act imposing on any such property of the debtor as may be
specified in the order a charge for securing the payment of any money due or to
become due under the judgment or order …
(3) An order under
subsection (1) above is referred to in this Act as a “charging order”.
(4) Where a person
applies to the High Court for a charging order to enforce more than one
judgment or order, that court shall be the appropriate court in relation to the
application if it would be the appropriate court, apart from this subsection,
on an application relating to one or more of the judgments or orders concerned.
(5) In deciding whether
to make a charging order the court shall consider all the circumstances of the
case and, in particular, any evidence before it as to—(a) the personal
circumstances of the debtor, and (b) whether any other creditor of the debtor
would be likely to be unduly prejudiced by the making of the order.
2. Property
which may be charged.—(1) Subject to subsection (3) below, a charge may be
imposed by a charging order only on—(a) any interest held by
293
the debtor beneficially—(i)
in any asset of a kind mentioned in subsection (2) below, or (ii) under any
trust; or (b) any interest held by a person as trustee of a trust (“the
trust”), if the interest is in such an asset or is an interest under another
trust and—(i) the judgment or order in respect of which a charge is to be
imposed was made against that person as a trustee of the trust, or (ii) the
whole beneficial interest under the trust is held by the debtor unencumbered
and for his own benefit, or (iii) in a case where there are two or more debtors
all of whom are liable to the creditor for the same debt, they together hold
the whole beneficial interest under the trust unencumbered and for their own
benefit.
(2) The assets referred
to in subsection (1) above are—(a) land, (b) securities of any of the following
kinds—(i) government stock, (ii) stock of any body (other than a building
society) incorporated within England and Wales, (iii) stock of any body
incorporated outside England and Wales or of any state or territory outside the
United Kingdom, being stock registered in a register kept at any place within
England and Wales, (iv) units of any unit trust in respect of which a register
of the unit holders is kept at any place within England and Wales, or (c) funds
in court.
(3) In any case where a
charge is imposed by a charging order on any interest in an asset of a kind
mentioned in paragraph (b) or (c) of subsection (2) above, the court making the
order may provide for the charge to extend to any interest or dividend payable
in respect of the asset …’
State Immunity Act 1978
[22] The law relating to the immunity of
sovereign states and their property in respect of proceedings in the courts of
the United Kingdom is set out in the State Immunity Act 1978. The Act replaced and codified the English
common law on the topic. The common law
had developed swiftly over the previous decade, from a rule that sovereign
states had absolute immunity from suit, (in the absence of consent by a foreign
sovereign state) to a rule that states had more restricted immunity. This development gave effect to what had
become widely recognised, viz that the English common law rules as to state
immunity, as had been stated in the courts, were out of step with the law in
most countries outside the Commonwealth, where a more restricted theory of
state immunity was applied. The 1978 Act
also gave effect in English law to the European Convention on State Immunity
(Basle, 16 May 1972; Misc 31 (1972); Cmnd 5081), to which the United Kingdom
had become a party in May 1972. That
convention provides that a state should be immune from the jurisdiction of a
contracting state’s courts subject to various exceptions.
[23] Section 1(1) of the 1978 Act provides
that a state is immune from the jurisdiction of the United Kingdom courts,
except as provided for in Pt I of the Act.
The succeeding sections set out the circumstances in which a state is
not immune from suit. Section 2(1) provides
that a state is not immune with respect to proceedings where it has submitted
to the jurisdiction of the courts of the United Kingdom. Section 3 deals with the important exception
from immunity when a state engages in commercial transactions. That section provides:
‘(1) A State is not
immune as respects proceedings relating to—(a) a commercial transaction,
entered into by the State …
(3) In this section
“commercial transaction” means—(a) any contract for the supply of goods or
services; (b) any loan or other transaction for the provision
294
of finance and any
guarantee or indemnity in respect of any such transaction or of any other
financial obligation; and (c) any other transaction or activity (whether of a
commercial, industrial, financial, professional or other similar character)
into which a State enters or in which it engages otherwise than in the exercise
of sovereign authority …’
[24] Section 13 is headed ‘Other procedural
privileges’. Subsections (2), (3) and
(4) deal with injunctions and enforcement of a judgment or arbitration award
against a state. They provide:
‘(2) Subject to
subsections (3) and (4) below—(a) relief shall not be given against a State by
way of injunction or order for specific performance or for the recovery of land
or other property; and (b) the property of a State shall not be subject to any process
for the enforcement of a judgment or arbitration award, or in an action in rem,
for its arrest, detention or sale.
(3) Subsection (2) above
does not prevent the giving of any relief or the issue of any process with the
written consent of the State concerned; and any such consent (which may be
contained in a prior agreement) may be expressed so as to apply to a limited
extent or generally; but a provision merely submitting to the jurisdiction of
the courts is not to be regarded as a consent for the purposes of this
subsection.
(4) Subsection (2)(b)
above does not prevent the issue of any process in respect of property which is
for the time being in use or intended for use for commercial purposes; but, in
the case not falling within section (1) above, this subsection applies to
property of a State party to the European Convention on State Immunity only if
…’
[25] Section 13(5) is also important in the
present case. It provides that the head
of a state’s diplomatic mission in the United Kingdom shall be deemed to have
authority to give on behalf of that state, for the purposes of s 13(4), ‘his
certificate to the effect that any property is not in use or intended for use
by or on behalf of the State for commercial purposes…’ and such a certificate
‘shall be accepted as sufficient evidence of that fact unless the contrary is
proved’. In this case the ambassador of
the RoK to the Court of St James has certified, in a letter dated 18 November
2004 addressed to the High Court, that the assets held by AAMGS for the NBK
form part of the National Fund and beneficially belong to the RoK. The letter
continues:
________________________________________
_ A/Tab
18/page 89.
________________________________________
‘The National Fund is
designed to ensure economic stability of Kazakhstan and to accumulate funds for
future generations by way of investment in securities. In this connection, the assets held in
custody in NBK’s accounts with AAMGS have never been used for commercial
purposes since they were opened in 2001, and they are not intended to be used
for such purposes.’
[26] Section 14 of the 1978 Act deals with the
entities that are entitled to the immunities and privileges set out in Pt I of
the Act. Subsections (1)–(4) provide as
follows:
‘14. States
entitled to immunities and privileges.—(1) The immunities and privileges
conferred by this Part of this Act apply to any foreign or commonwealth State
other than the United Kingdom; and references to a State include references
to—(a) the sovereign or other head of that State in his
295
public capacity; (b) the
government of that State; and (c) any department of that government, but not to
any entity (hereafter referred to as a “separate entity”) which is distinct
from the executive organs of the government of the State and capable of suing
or being sued.
(2) A separate entity is
immune from the jurisdiction of the courts of the United Kingdom if, and only
if—(a) the proceedings relate to anything done by it in the exercise of
sovereign authority; and (b) the circumstances are such that a State (or, in
the case of proceedings to which section 10 above applies, a State which is not
a party to the Brussels Convention) would have been so immune.
(3) If a separate entity
(not being a State’s central bank, or other monetary authority) submits to the
jurisdiction in respect of proceedings in the case of which it is entitled to
immunity by virtue of subsection (2) above, subsections (1) to (4) of section
13 above shall apply to it in respect of those proceedings as if references to
a State were references to that entity.
(4) Property of a
State’s central bank or monetary authority shall not be regarded for the
purposes of subsection (4) of section 13 above as in use or intended for use
for commercial purposes; and where any such bank or authority is a separate
entity subsections (1) to (3) of that section shall apply to it as if
references to a State were references to the bank or authority …’
D. THE ARGUMENTS OF THE PARTIES IN OUTLINE
The arguments on behalf of the claimants
[27] Mr Salter QC, on behalf of the claimants,
submitted as follows:
(1) The RoK is the beneficial owner of all the London
assets held by AAMGS, because those assets are part of the National Fund. As the RoK has an equitable proprietary right
in the cash accounts held by AAMGS, the cash constitutes ‘debts due or accruing
due’ to the RoK, within the meaning of CPR 72.2. Therefore, subject to the issues of immunity,
which are the same in relation to both the TPD order and the charging order,
the claimants are entitled to a final TPD order to the extent of the cash held
by AAMGS in the United Kingdom on behalf of the RoK.
(2) Subject to the question of immunity, the
claimants would be entitled to a charging order against the security accounts
held by AAMGS in London so as to discharge the judgment debt of the RoK.
________________________________________
_ This
was not in dispute. The steps are: (a)
the RoK has an interest in the securities as the sole and unencumbered
beneficiary under a trust of which the NBK is the bare trustee; therefore (b)
either the RoK, as the judgment debtor, holds an interest beneficially in the
securities (s 2(1)(a) of the 1979 Act), or (c) the RoK holds the whole
beneficial interest, unencumbered and for its own benefit, in the securities
under a trust of which the NBK is the trustee, so that the charging order can
be made on the interest held by the person as trustee of the trust, ie NBK; (d)
AAMGS holds the securities on behalf of
NBK: s 2(1)(b)(ii) of the 1979 Act.
________________________________________
(3) The claimants accept that the NBK is the central
bank of Kazakhstan and that it is to be treated as a separate entity from the
RoK for the purposes of s 14(4) of the 1978 Act. However, the London assets held by AAMGS,
which are held ultimately for the beneficial ownership of the RoK, do not
constitute ‘property of a State’s central bank or other monetary authority’
within s 14(4). If that section is
properly construed, then on the facts: (a) the London assets are not ‘property’
of the NBK, but the RoK; and/or (b) the words only apply to property that is
held by a central bank (or other monetary authority) in its capacity as such,
ie when it
296
is acting as in the exercise of sovereign authority
and not for commercial purposes.
(4) This constitutes the proper construction of s
14(4) as a matter of common law canons of construction. But if the ‘common law construction’ is
otherwise, then s 14(4) must be read in accordance with s 3(1) of the Human
Rights Act 1998. Section 14(4) of the
1978 Act must be construed in a way that makes it compatible with the
claimants’ rights of access to the adjudicative and enforcement jurisdiction of
the court under art 6 of the European Convention for the Protection of Human
Rights and Fundamental Freedoms 1950 (as set out in Sch 1 to the Human Rights
Act 1998) (the ECHR), or with the claimants’ rights (under art 1 of the First
Protocol of the ECHR), to the peaceful enjoyment of their possessions, ie the
ICSID arbitration award that they have obtained. The only way to make s 14(4) ‘Convention
compliant’ is to read it so as to grant a narrower immunity in respect of
property held by central banks; the immunity can only apply to property that is
held by a central bank (or other monetary authority) in its capacity as such.
(5) Those parts of the London assets not in cash,
which are held by AAMGS on behalf of the National Fund, are invested in
securities that are actively traded so as to produce a high level of investment
income, as is required by para 24 of the Budget Code of the RoK.
(6) This has two consequences. First, those assets do not fall within the
term ‘property of a State’s central bank or other monetary authority’ within s
14(4) of the 1978 Act.
(7) Secondly, those assets are, in fact, the property
of RoK, which are ‘for the time being, in use or intended for use for
commercial purposes’, within s 13(4) of the 1978 Act. Therefore those assets can be the subject of
a charging order, which is a ‘process for the enforcement of a judgment’ within
s 13(2)(b) of the 1978 Act.
________________________________________
_ That
is at the time that the enforcing process was begun: Alcom Ltd v Republic of
Colombia (Barclays Bank plc, garnishees) [1984] 2 All ER 6 at 13, [1984] AC 580
at 604 per Lord Diplock.
________________________________________
(8) The same arguments apply in relation to the cash
accounts held by AAMGS in London.
(9) Therefore neither the NBK nor the RoK can claim
that the London assets are immune from the enforcement process of the English
court. So, the TPD order and the
charging order should be made final.
The arguments on behalf of the RoK and NBK
[28] Mr Malek QC, on behalf of the RoK and
NBK, submitted as follows:
(1) The cash accounts held by AAMGS within the jurisdiction
represent a debt due by AAMGS to the NBK, because the relationship created by
the GCA is between AAMGS and the NBK.
They do not constitute a ‘debt due or accruing due to’ the judgment
debtor, ie the RoK. There is no
relationship of creditor and debtor between AAMGS and the RoK. Therefore the court has no jurisdiction under
CPR 72.2 to make a TPD order in respect of the cash accounts held within the
jurisdiction. So the interim TPD order
must be discharged.
________________________________________
_ The
wording of CPR 72.2(1)(a).
________________________________________
(2) It is accepted that the RoK has a beneficial
interest in the London assets held by AAMGS.
It is therefore accepted that, subject to the issue of state immunity, a
charging order could be made on those securities held by AAMGS which compromise
United Kingdom government stock or United Kingdom listed companies, (the United
Kingdom securities), although not other securities.
________________________________________
_ As
the value of the United Kingdom securities far exceeds the amount of the
judgment debt, the status of non-United Kingdom securities is irrelevant.
________________________________________
297
(3) However, the United Kingdom securities do
constitute ‘property’ of the NBK, within the meaning of s 14(4) of the 1978
Act. As the NBK is the central bank of
the RoK, then, in accordance with s 14(4), the United Kingdom securities held
by AAMGS, being property of a state’s central bank, ‘shall not be regarded for
the purposes of subsection (4) of section 13 [of the 1978 Act] as in use or
intended for use for commercial purposes’.
That provision is clear and conclusive.
(4) The fact that NBK is a separate legal entity from
the Republic of Kazakhstan makes no difference.
By virtue of the wording of the last sentence of s 14(4) of the 1978
Act, the provisions of s 13(4) of the SIA will still apply to the property of
the NBK as a separate legal entity.
________________________________________
_ ‘where any such bank or authority [ie central
bank or other monetary authority] is a separate entity subsections (1) to (3)
of [section 13 of the 1978 Act] shall apply to it as if references to a State
were references to the bank or authority’.
________________________________________
(5) Therefore the London assets held by AAMGS as
custodian for the NBK cannot be regarded as being in use or intended for use
‘for commercial purposes’ within s 13(4) of the 1978 Act. Thus they are immune from any process for the
enforcement of a judgment, by virtue of s 13(2) of the 1978 Act, because the
London assets are in the same position as ‘the property of a State’, within
the meaning of that subsection.
(6) As to the claimants’ argument that s 14(4) of the
1978 Act must be construed to be consistent with the claimants’ rights under
art 6 of the ECHR, that article has no application to the present case, because
the claimants never had any right to a hearing or determination in the United
Kingdom or before a United Kingdom court of their rights against the RoK. Article 1 of the First Protocol is also
irrelevant to the present case, because the 1978 Act, in particular s 14(4),
does not infringe the claimants’ peaceful enjoyment of their ICSID award or the
judgment obtained. Even if art 6 or
Protocol rights are involved, the grant of immunity to assets of foreign
central banks is proportionate and in pursuit of a legitimate aim of the state,
ie the United Kingdom. Therefore the
construction of the section should not be altered, pursuant to s 3(1) of the
1998 Act.
(7) Even if, as the claimants argue, the London
assets are not ‘property of a State’s central bank or other monetary authority’
within the meaning of s 14(4), nonetheless the London assets are the ‘property’
of the RoK. As the certificate of the
ambassador of the RoK has certified, those assets in the hands of AAMGS are not
and never have been used or intended for use for commercial purposes.
(8) On the contrary, it is clear on the facts that
those assets, being part of the National Fund, are being used and always have
been used in the exercise of sovereign authority. Therefore the London assets are immune from
being subject to any process for the enforcement of the judgment obtained by
the claimants, pursuant to s 13(2) of the 1978 Act. Therefore the interim charging order must be
discharged.
(9) The same arguments as to immunity apply to the
cash accounts relating to money held by AAMGS for the account of the NBK, if
the argument at (1) above is not accepted.
Therefore the TPD order must be discharged on the ground of immunity in
any event.
E. THE ISSUES TO BE DETERMINED
[29] In my view, given the arguments set out
above, the following issues have to be determined:
298
(1) The third party debt order. The question is whether, in relation to the
cash accounts held by AAMGS (within the jurisdiction), they constitute a ‘debt
due or accruing due to the judgment debtor [ie the RoK] from the third party
[ie AAMGS]’, within the terms of CPR 72.2(1)(a). If they do not constitute such a debt, then
the interim TPD order must be discharged.
If they do, then the same issues as to immunity arise as with the
securities accounts.
(2) The construction of s 14(4) of the 1978 Act:
using common law principles of construction.
There are two questions to be decided. First, what is the scope of the word
‘property’ in that section? In
particular, what is the position if one entity has legal ownership or some
other interest in assets and another entity has a beneficial interest or some
other interest? Secondly, do the words
‘property of a State’s central bank or other monetary authority’ mean any
property that is allocated to or held in the name of a central bank,
irrespective of the capacity in which or the purpose for which that property is
held (as RoK and NBK contend); or is the scope of the words restricted to
property held by a central bank (or other monetary authority) as such, as the
claimants contend?
(3) Does s 14(4): (a) potentially have an impact on
the claimants’ right of access to the adjudicative and enforcement jurisdiction
of the United Kingdom courts; alternatively (b) does it potentially affect
their rights to peaceful enjoyment of their possessions—ie the ICSID award and
the judgment derived from it?
(4) If the answer to either question in (3) above is
‘yes’, is it possible to alter the construction to be given to s 14(4) of the
1978 Act and, if so, should that be done in the manner proposed by the
claimants?
(5) What are the characteristics of the cash accounts
and the security accounts held in London by AAMGS for the NBK? In particular are they: (a) ‘property of a
State’s central bank’ within s 14(4) of the 1978 Act; (b) if not, are they
‘property [of a State] which is for the time being in use or intended for use
for commercial purposes’ within s 13(4) of the 1978 Act? The second of these questions will only arise
if the claimants are correct in respect of either the first or second question
that arises on the construction of s 14(4) of the 1978 Act and I conclude, on
the facts, that the London assets do not constitute property held by the NBK
(as the central bank of the RoK) in its capacity as a central bank.
F. FIRST ISSUE: IS THERE A DEBT DUE OR ACCRUING DUE
FROM AAMGS TO THE RoK, FOR THE PURPOSES OF MAKING A THIRD PARTY DEBT ORDER?
[30] A TPD order cannot be made unless there
is a ‘debt due or accruing due’ from a third party to the judgment debtor. In this case the judgment debtor is the RoK,
not the NBK. The relevant third party is
AAMGS. The cash accounts held by AAMGS
in London are in the name of the NBK, not the RoK. The cash accounts were opened pursuant to the
GCA and cl 16(j) of the GCA (which is governed by English law) recognises the
common law rule that cash in the cash accounts reflects a debt owed by AAMGS to
the NBK, which is the account holder.
________________________________________
_ CPR
72.2(1)(a).
________________________________________
[31] The fact that the RoK holds the ultimate
beneficial interest in the National Fund and thereby has a beneficial interest
in the cash accounts held by AAMGS on behalf of the NBK does not, in my view,
mean that there is a debt due or accruing due to the RoK in respect of those
accounts. The RoK has no contractual
rights against AAMGS either under the GCA or otherwise. There is no relationship of debtor and
creditor between them. The fact that the
RoK may, ultimately, have a beneficial interest in the money represented in the
cash accounts cannot, in my view, create such a relationship.
299
[32] Therefore there is no basis on which to
make a TPD order against AAMGS. On this
ground alone, the interim TPD order must be discharged.
G. SECOND ISSUE: WHAT IS THE PROPER CONSTRUCTION OF
SECTION 14(4) OF THE STATE IMMUNITY ACT 1978 USING COMMON LAW PRINCIPLES OF
CONSTRUCTION?
[33] The clause of the State Immunity Bill
which became s 14(4) of the 1978 Act was introduced by amendment in the House
of Commons. The somewhat laconic
explanation of the provision and its scope, given by the Parliamentary Secretary
to the Law Officers on behalf of the government, was that—
‘[the amendment] ensures
that a central bank or other monetary authority shall have the same immunity
with regard to execution or in respect of relief by way of injunction or order
for specific performance … as a State shall have, irrespective of whether the
central bank is a separate entity or is acting in the exercise of sovereign
authority.’
________________________________________
_ Hansard, Standing Committee D, (951 HC
Official Report (5th series), col 844 (13 June 1978)), quoted in Fox The Law of
State Immunity (2002) p 364.
________________________________________
[34] The argument of the claimants is,
basically, that if the wording of s 14(4) is read literally, or even
‘naturally’, then that provision appears to grant a greater immunity to the
assets of a central bank than is granted to those of a state; which do not have
immunity if they are used for commercial purposes. Such a wider immunity cannot have been the
intention of Parliament, they say, so that a narrower reading has to be given
to the words, as proposed by the claimants.
[35] Mr Salter emphasised the fact that s
14(4) is phrased so as to apply to two situations. First, where the central bank is not a
separate entity from the state concerned and, secondly, where it is a
separate entity. He submits that in the
first of those circumstances, if the central bank is not a separate legal
entity, then (at least so far as English law is concerned) it could not be
capable of owning property independently from the state of which it is the
central bank. Any ‘property’ of the
central bank would, in fact, be the property of the state of which the bank is
a department or agent. Therefore, in
that situation the wording ‘Property of a State’s central bank or other
monetary authority …’ in s 14(4) cannot be applied literally; it does not make
sense.
[36] Furthermore, Mr Salter submits, the
second situation also creates difficulties.
If the central bank is a separate entity, then its property will belong
to the central bank; but may not necessarily belong to the relevant state. Yet if the state is the judgment debtor, then
execution of the judgment debt can only be made on the property of the state
itself, not another’s property. But s
14(4) appears to contemplate execution against the property of a central bank
when the judgment debtor is the relevant state, because of its reference back
to s 13(4) and s 13(2)(b), which are dealing with enforcement against a state.
[37] Mr Salter submits that if the words
cannot be applied literally because of these problems then, in order to give
them proper effect, they must be given a ‘purposive’ construction. He submits that this purposive construction
must apply to all cases, that is whether the central bank is, or is not, a
separate entity from the state concerned.
To arrive at this proper, purposive, construction, he submits it is
necessary to deal with three issues. The
first is: what is meant by ‘property’ in s 14(4). Mr Salter says that ‘property’ is confined to
property owned beneficially by a state’s central bank or other monetary
authority against which only a judgment against the central bank or other
monetary authority could be executed.
The second issue is: what is a central bank or other monetary authority;
and the third is:
300
what is it about such an institution that requires
that its property should have a special immunity from execution by virtue of s
14(4)?
[38] Mr Salter notes that the 1978 Act does
not define a ‘central bank or other monetary authority’. There is no handy definition of a central
bank in either English law or public international law. The status of a central bank varies from
state to state. However, the key
characteristics and functions of a central bank are well-known and clear. Fundamentally, a central bank is set up by a
state with the duty of being the guardian and regulator of the monetary system
and currency of that state both internally and internationally. The same applies, I would say, to a ‘monetary
authority’.
________________________________________
_ See:
Fox State Immunity p 360; Blair ‘The Legal Status of Central Bank Investments
Under English Law’ (1998) CLJ 374, p 375; Statutes of the Bank of International
Settlements: art 56; Mann on the Legal Aspects of Money (6th edn, 2005) by Charles
Proctor LLD, Ch 21, pp 540–541.
________________________________________
[39] Mr Salter accepts that there is good
reason to confer special immunity on the assets held by a central bank or
monetary authority, where the assets are being used to perform the functions
set out above. But, he says, there is no
sound reason to grant immunity to assets held in the name of a central bank for
other purposes. Hence the claimants’ submission
that, on the proper construction of s 14(4) of the 1978 Act, the words
‘property of a State’s central bank or other monetary authority’ must be
construed so as to apply only to property held by a state’s central bank or
monetary authority when acting in respect of its duties as such. Mr Salter suggested, as an alternative
construction of s 14(4), that it should cover those assets held by a state’s
central bank or other monetary authority, but held only ‘for the purpose of
acting as a central bank or other monetary authority’. To my mind there is no significant difference
between the breadth of the two proposed constructions.
[40] Mr Salter submitted that if any broader
construction were to be given to the words of s 14(4), then it could facilitate
abuse by central banks who could use funds held in their name for commercial
purposes and then not honour contracts.
He also noted that it has been suggested that an unspoken reason for the
width of the immunity granted by s 14(4) is the commercial interest of the
banking community in the City of London, which could thereby attract funds of
states’ central banks with the assurance that they are immune from execution at
the hands of judgment creditors of the relevant states. If there were such a motive, then it has been
criticised in characteristically trenchant terms by the late Dr FA Mann.
________________________________________
_ The
suggested policy is referred to by Prof James Crawford (then an Australian Law
Commissioner, now Whewell Professor of International Law at Cambridge
University) in ‘International Law and Foreign Sovereigns: Distinguishing Immune
Transactions’ (1983) BYIL 75, p 117. The
comment by Dr FA Mann is at ‘The State Immunity Act 1978’ (1979) BYIL 43, p 62:
‘Is it in the true interest of Britain and the City of London to assist foreign
States or their central banks in avoiding the discharge of their commercial
debt? … Does principle and financial and commercial probity no longer count?’
________________________________________
[41] Mr Salter also draws attention to the
fact that in other jurisdictions the scope of the immunity granted to the
property of central banks appears to be narrower than that which the words of s
14(4) would confer if construed literally.
He submits that the United Kingdom should not be out of step.
________________________________________
_ Compare United States Foreign Sovereign
Immunities Act 1976: s 1611 (b): ‘the property of a foreign state shall be
immune from attachment and from execution, if—(1) the property is that of a
foreign central bank or monetary authority held for its own account …’ The Canadian State Immunity Act 1982, which
exempts only property of a central bank ‘that is held for its own account and
is not used or intended for a commercial activity’: s 12(4). The Australian Foreign State Immunities Act
1985 s 32 provides that ‘commercial property [of a State]’ is not immune from
any process of enforcement. ‘Commercial
property’ is defined as ‘property, other than diplomatic property or military
property, that is in use by the foreign State concerned substantially for
commercial purposes …’
________________________________________
Discussion on the ‘common law construction’ point
[42] In order to determine the scope of s
14(4), I must look at it in its context in the 1978 Act as a whole. Section 1(1) sets out the general rule that a
state is immune from the jurisdiction of the United Kingdom courts, unless the
circumstances in which it is sued falls into one of the categories specified in
Pt I of the Act. In Alcom Ltd v
Republic
301
of Colombia (Barclays Bank plc, garnishees)
Lord Diplock described the method of draftsmanship of the succeeding sections
as ‘a somewhat convoluted style’. I
respectfully agree. The Act draws a
distinction between what Lord Diplock called the ‘adjudicative’ jurisdiction of
the United Kingdom courts and the ‘enforcement’ jurisdiction. In the former category, as I have already
noted, one of the most important exceptions from immunity of suit against a
state is in respect of proceedings relating to ‘a commercial transaction
entered into by the state’: s 3(1)(a).
‘Commercial transactions’ are defined in s 3(3). ‘Commercial purposes’ are defined in s 17(1)
as being purposes of such transactions and activities as are mentioned in s
3(3).
________________________________________
_ [1984] 2 All ER 6 at 10, [1984] AC 580 at 600;
hereafter ‘Alcom’.
_ Alcom
[1984] 2 All ER 6 at 10, [1984] AC 580 at 600.
________________________________________
[43] The jurisdiction of the United Kingdom
courts as to enforcement of a judgment against a state is dealt with by s 13,
which is in Pt I of the Act but comes under the general heading ‘Procedure’ and
the particular heading of ‘Other Procedural Privileges’. Subject to exceptions, the property of a
state shall not be subject to any process for the enforcement of a judgment or
arbitration award: s 13(2)(b). But this
rule is subject to the all-important exception in s 13(4), which says that s
13(2)(b) ‘does not prevent the issue of any process in respect of property
which is for the time being in use or intended for use for commercial
purposes…’
[44] The word ‘property’ in s 13(4) clearly
refers to ‘the property of a State’, which is the phrase used in s
13(2)(b). So s 13(2)(b) and (4) set out
the rules on immunity from enforcement with respect only to the property of a
state. It is noteworthy that even if a state can be sued because one of the
exceptions set out in the earlier sections of the 1978 Act applies, still it
may not be possible to enforce a judgment obtained against it on that state’s
property in the jurisdiction, unless the state’s property falls within the
scope of s 13(4).
[45] There is no definition of ‘property’ in
the 1978 Act. However, in the Alcom
case, Lord Diplock stated that the expression ‘property’ in s 13(2)(b)
and (3) ‘is broad enough to include, as being the property of a banker’s
customer, the debt owed to him by the banker which is represented by the total
amount of any balance standing to the customer’s credit on current
account’. In AIC Ltd v Federal Govt
of Nigeria , Stanley Burnton J stated (albeit obiter) that the word
‘property’ in s 14(4) included a chose in action constituted by the debts owed
by the Bank of England to the Central Bank of Nigeria that had accounts with
the Bank. In my view the word ‘property’
must have the same meaning and scope in both ss 13 and 14 of the Act. Moreover, I think it clear from Lord
Diplock’s statement in the Alcom case, which I have quoted above, that
the word should be given a broad scope.
So, in my view, ‘property’ will include all real and personal property
and will embrace any right or interest, legal, equitable, or contractual in
assets that might be held by a state or any
________________________________________
_ [1984] 2 All ER 6 at 11, [1984] AC 580 at
602. The issue in that case was whether
a commercial trader could obtain a ‘garnishee order’ against the current
account of the embassy of the Republic of Columbia in respect of goods supplied
to the embassy. The House of Lords,
reversing the Court of Appeal and restoring the judgment of Hobhouse J, held it
could not.
_ [2003] EWHC 1357 (QB) at [47].
________________________________________
302
‘emanation of the State’or central bank or other
monetary authority that comes within ss 13 and 14 of the 1978 Act.
________________________________________
_ The
phrase used by Lord Diplock in Alcom [1984] 2 All ER 6 at 10, [1984] AC 580 at
600.
________________________________________
[46] Section 14 of the 1978 Act comes under
the general heading (still in Pt I of the Act) of ‘Supplementary
Provisions’. The section is headed:
‘States entitled to immunities and privileges’.
However, the section deals with more than that. Section 14(1) sets out not only which states
can take advantage of the privileges and immunities set out in the Act, but it
also defines which ‘entities’ are embraced by the word ‘State’. A ‘central bank or other monetary authority’
is not included amongst those definitions.
‘Separate entities’ which are ‘distinct from the executive organs of the
government of the State and capable of suing and being sued’ are expressly
excluded from the scope of s 14(1).
[47] Section 14(2) deals with the
circumstances in which such ‘separate entities’ can have immunity from the
jurisdiction of the United Kingdom courts.
As I read it, this subsection refers to both the adjudicative and the
enforcement jurisdictions of the court.
Two pre-conditions must be fulfilled before a separate entity can have
immunity. First, the proceedings must
relate to anything done by the separate entity ‘in the exercise of sovereign
authority’. Secondly, the circumstances
must be such that a state would have been ‘so immune’. So, only limited right of immunity from suit
is given to ‘separate entities’. In my
view of s 14(2), the definition of a ‘separate entity’ would cover a central
bank or other monetary authority which is distinct from the executive organs of
the government of a state and is capable of suing and being sued. If so then such a central bank (or other
monetary authority) is covered by s 14(2).
Therefore, on the face of it, a central bank or other monetary authority
that falls within the statutory definition of a ‘separate entity’ is not immune
from the jurisdiction of the United Kingdom courts (both as to adjudication and
enforcement) unless if fulfils the two pre-conditions for immunity set out in s
14(2).
[48] Section 14(3) deals with enforcement when
a ‘separate entity’ has submitted to the adjudicative jurisdiction of the
United Kingdom courts. It specifically
states that it does not apply to a state’s central bank or other monetary
authority. The position of those
entities, in relation to the enforcement jurisdiction of the United Kingdom
courts, is dealt with in s 14(4).
[49] Section 14(4) is concerned solely with
enforcement processes. That is clear
from the reference back to s 13(4), which itself refers to s 13(2)(b), which
prohibits the property of a state from being subject to ‘any process for the
enforcement of a judgment or arbitration award’. Once this limitation on the scope of s 14(4)
is grasped, I think that it becomes much easier to follow the scheme of the Act
in relation to the immunity of a central bank or other monetary authority from
suit and the immunity of state property and central bank property from the enforcement
processes of the United Kingdom courts.
[50] In my view the scheme of the Act in
relation to the immunity of a central bank (or other monetary authority) from
suit and the immunity of its property from the enforcement processes of United
Kingdom courts has the following pattern.
First, if the central bank (etc) is a department of the government of
the state, but is not a ‘separate entity’ as defined by s 14(1), then the
central bank is immune from the adjudicative process unless it falls within one
of the exceptions in the Act, including the ‘commercial transaction’ exception
set out in s 3. That is the effect of s
14(1).
303
[51] Secondly, any process for the enforcement
of a judgment or arbitration award may only be issued as against a state’s property
if, ‘for the time being [it] is in use or intended for use for commercial
purposes’. That is the effect of ss
13(2)(b) and 13(4). As I have already
stated, in my view what constitutes ‘property’ must be given a broad
interpretation and ‘property’ must mean the same in ss 13(2)(b), 13(4) and
14(4). Of course, whether a particular
enforcement provision can be used against a state’s property by the United
Kingdom court will depend on three matters: (a) proof that the state concerned
does have an interest in the particular asset; (b) proof that the state’s
property comes within the exception expressed in s 13(4); and (c) the nature of
the property to be the subject of enforcement and the scope of the particular
enforcement process under English law.
________________________________________
_ For
example, compare the scope of a TPD order in CPR 72.2 and the property against
which a charging order can be made under s 2 of the Charging Order Act 1979.
________________________________________
[52] Thirdly, because s 14(1) defines what is
covered by the words ‘a State’, it must mean that the property of any
department of the government of the state will constitute ‘State property’, for
the purposes of ss 13(2)(b) and (4), unless the department or other emanation
of the state is a ‘separate entity’ as defined in s 14(1). This must follow from the wording of the
opening sentence of s 14(1).
[53] Therefore, if s 14(4) did not exist, then
because central banks and other monetary authorities are not excluded from the
scope of s 14(1), a central bank (etc) that is a department of the government
of a state and is not a ‘separate entity’, (as defined), and its property could
be the subject of an enforcement process in respect of a judgment obtained
against the relevant state. But to be so
the property of the central bank (etc) would have to fall within the scope of s
13(4).
[54] Fourthly, as to the immunity of ‘separate
entities’, which is dealt with in s 14(2), the same rules as to immunity of a
state apply, (for both the adjudicative and enforcement jurisdictions), if the
two pre-conditions set out are fulfilled.
If s 14(4) did not exist, then it seems to me that s 14(2) would be
applicable to a central bank (etc) that fell within the definition of a
‘separate entity’ as set out in s 14(1).
This means that, but for the existence of s 14(4), the property of a
central bank that is a ‘separate entity’ could be the subject of the
enforcement jurisdiction of United Kingdom courts in respect of a judgment
against the central bank (etc), provided the property came within the scope of
s 13(4)—ie that the relevant property is in use or intended for use for
commercial purposes at the relevant time.
[55] Fifthly, if a ‘separate entity’ (which is
not a central bank etc), is entitled to immunity, but it submits to the
jurisdiction of the United Kingdom courts, then its property can be the subject
of process to enforce a judgment against it.
If the exclusion of central banks (etc) from the scope of s 14(3) was
not present, then that subsection would have dealt with the situation when a
central bank (etc) was indeed a ‘separate entity’ as defined in s 14(1) and the
central bank (etc) had submitted to the jurisdiction in circumstances when it
could have asserted immunity. In that case,
there could be enforcement of a judgment obtained against a central bank (etc)
as against ‘the property’ of the central bank (etc) that is a ‘separate
entity’, but only if that property of the central bank (etc) as a ‘separate
entity’ was in use or intended for use for commercial purposes: s 13(4).
[56] But, sixthly, s 14(4) does exist and
effect must be given to its wording. It
is specifically directed to the question of enforcement processes against
‘Property of a State’s central bank or other monetary authority’. In my view it is clear that Parliament
intended that the position of a central bank or other monetary authority should
be dealt with distinctly from either any other department of the government
304
of a state, or any ‘separate entity’ as defined in s
14(1). As I have attempted to show, it
would have been possible to deal with the position of central banks (etc) using
s 14(1), (2) and (3) without the need for a separate subsection. But s 14(4) was specifically introduced as an
amendment. To my mind that makes it
clear that Parliament intended this separate subsection to have a different
effect from the preceding subsections of s 14 so far as they concern the
ability to use enforcement processes against states and ‘emanations of the State’.
[57] In my view the wording of s 14(4) is
clear and imperative; hence the wording ‘The property of a State’s central bank
… shall not be regarded …’ The words
are, in their natural meaning, not capable of qualification. When they are set in their context, as I have
tried to do, it is clear that they should not be qualified. This has the following consequences:
(1) All ‘property’ of a state’s central bank or other
monetary authority is covered by s 14(4).
The only question is whether the central bank (etc) has one of the types
of interests in the property concerned, as I have described the interests
above, so that the assets concerned can be described as the ‘property’ of the
central bank concerned.
(2) It does not matter whether the central bank is a
department of the state or a separate entity.
In all cases the central bank’s property ‘shall not be’ regarded
as in use or intended for use for commercial purposes ‘for the purposes of [s
13(4)]’.
(3) Given the wording of s 14(4), then the property
of a state’s central bank (or other
monetary authority) must enjoy complete immunity from the enforcement process
in the United Kingdom courts.
(4) If the central bank (etc) has an interest in the
property concerned, but the state of the central bank has another interest in
the same property, then in my view the effect of s 14(4) is that the relevant
property is immune from enforcement in respect of a judgment against that
state, whether the property concerned is in use or intended for use for
commercial purposes or not.
[58] One can only speculate on why a separate
subsection was introduced by amendment to deal with the position of property of
central banks and other monetary authorities with regard to the enforcement
process in United Kingdom courts. But one
can note, first, that generally speaking, when a central bank or a state’s
monetary authority is performing its key functions of acting as guardian and
regulator of the state’s monetary system, it will be exercising governmental or
sovereign authority; it will not be acting for commercial purposes. Secondly, it is likely that the most obvious
‘property’ of a central bank, a state’s reserves, will be held and used for
governmental, or sovereign purposes and not for commercial purposes. It may be that it was recognised by the
draftsmen of the Act that it would be difficult, if not impossible, to
determine whether a particular asset of a central bank or monetary authority
was, at a relevant time, being used or intended for use for sovereign purposes
or for commercial purposes. The assets
of a state’s central bank (or monetary authority) would be an obvious target
for the enforcement process in relation to judgments against the state or its
central bank (etc). This might lead to
unwelcome and perhaps embarrassing litigation in United Kingdom courts.
Therefore this possibility was pre-empted by the all-embracing and imperative
immunity granted by s 14(4).
[59] Contrary to the submissions of Mr Salter,
the wording of s 14(4) will work in relation to ‘property’ of the central bank
whether the central bank is a department of a state or a separate entity. Take first the case where the central bank is
a department of the state. If the central
bank handles ‘property’, then it will do so
305
as a part of the state. But, as a department of state, it might have
the capacity to sue and be sued and it could have the right to enter
contracts. That capacity will all depend
on the law of the particular state concerned.
If the central bank has no interest in the relevant property, then s
14(4) does not apply. But if it is
established that the central bank has ‘property’ in the asset in the sense I
have described above, then this asset is immune from any enforcement process,
whether the judgment is against the state as such, or it is the central bank
that has been sued.
[60] In the case of a central bank that is a
separate entity from a department of the state, there can be no problem (in
English law at least) about it having ‘property’ in assets. Thus in the present case it is clear that the
NBK has ‘property’ of some form in the London assets; viz a contractual right
to the payment of debts in the case of the cash accounts held by AAMGS, and a
beneficial interest in the securities held by AAMGS. At the same time the state could also have an
interest in the same property; it may be some kind of beneficial interest, as
it is agreed to be in this case. But in
all cases, whatever the nature of the ‘property’ right of the central bank, the
assets concerned are immune from the enforcement process.
________________________________________
_ See,
respectively, cl 16(j) and cl 5(b) of
the GCA.
________________________________________
[61] Therefore I conclude that the words
‘Property of a State’s central bank or other monetary authority’ in s 14(4),
when construed using common law principles of construction, mean any asset in
which the central bank has some kind of ‘property’ interest as I have
described, which asset is allocated to or held in the name of a central bank,
irrespective of the capacity in which the central bank holds it, or the purpose
for which the property is held.
________________________________________
_ It
follows that I also agree with the conclusion of Stanley Burnton J at [47] of
the AIC case although I fear I have
expressed my reasons at greater length.
________________________________________
H. ISSUES THREE AND FOUR: (A) DOES SECTION 14(4)
POTENTIALLY HAVE AN IMPACT ON THE CLAIMANTS’ RIGHT OF ACCESS TO THE
ADJUDICATIVE AND ENFORCEMENT JURISDICTION OF THE UNITED KINGDOM COURTS (ART
6(1) ECHR); AND/OR (B): DOES THAT SECTION POTENTIALLY AFFECT THEIR RIGHTS TO
THE ‘PEACEFUL ENJOYMENT’ OF THEIR POSSESSION: VIZ THE ICSID AWARD? IF THE ANSWER TO EITHER (A) OR (B) IS ‘YES’,
THEN WOULD IT ALTER THE CONSTRUCTION TO BE GIVEN TO SECTION 14(4) OF THE 1978
ACT?
The art 6(1) point
[62] The claimants submit that, whatever the
position may be using common law principles of construction, a construction
that gives a narrower immunity must be given to s 14(4), by virtue of s 3 of
the Human Rights Act 1998. Section 3 of
the 1998 Act requires that: ‘So far as it is possible to do so, primary
legislation … must be read and given effect in a way which is compatible with
Convention rights’. The section applies
to all legislation, whenever enacted.
The convention rights granted by art 6(1) include the right that: ‘… In
the determination of his civil rights and obligations … everyone is entitled to
a fair and public hearing within a reasonable time by an independent and impartial
tribunal established by law …’
________________________________________
_ Section 3(2)(b).
________________________________________
[63] Mr Malek did not dispute that the case
law of the European Court of Human Rights has derived from art 6(1) the principle
that a person has a right of access to the court in order to secure the
determination of his civil rights and obligations. Nor did Mr Malek dispute that the European
Court of Human Rights has also held that this right of access extends beyond
the right to the adjudication of civil claims.
It has held that such a right of access would be illusory if a
contracting state’s legal system allowed a final, binding judicial decision to
be inoperative to the
________________________________________
_ Golder
v UK (1975) 1 EHRR 524 at 536 (para 36).
________________________________________
306
detriment of one party. Thus ‘Execution of a judgment given by any
court must therefore be regarded as an integral part of the “trial” for the
purposes of Article 6’.
________________________________________
_ Hornsby v Greece (1997) 24 EHRR 250 at 268
(para 40).
________________________________________
[64] Mr Salter argued that a statute which
grants immunity to a central bank from the enforcement process of United
Kingdom courts constitutes a procedural bar on those courts’ power to determine
and enforce the claimants’ civil rights, in this case the right to enforce an
arbitration award that has legitimately been turned into a judgment of the
English court. He accepts that the
‘right of access’, as developed in the jurisprudence of the European Court of
Human Rights, is not an absolute right.
But he submits that any restriction on the right of access to the court
must be justified under art 6 as being a proportionate measure in pursuit of a
legitimate objective. He submits that it
is impossible to justify the restriction that results if s 14(4) is given its
‘common law’ construction. In this
regard, he referred me to the analysis and statement of principle by the
European Court of Human Rights in Al-Adsani v UK.
________________________________________
_ (2001) 12 BHRC 88 in particular at 102–103
(paras 53–56). The principles were
applied in Jones v Ministry of the Interior of the Kingdom of Saudi Arabia,
Mitchell v Al-Dali [2004] EWCA Civ 1394 at [82], [2005] QB 699 at [82], [2005]
2 WLR 808 per Mance LJ.
________________________________________
[65] That case concerned an attempt by Mr
Al-Adsani to pursue a claim in the English courts against the State of Kuwait,
whose officials he alleged had tortured him when he was imprisoned in a state
jail in Kuwait. The Court of Appeal had
held that proceedings could not be brought against Kuwait, because it was
entitled to claim sovereign immunity pursuant to s 1(1) of the 1978 Act in
respect of acts allegedly committed outside the jurisdiction of the English
courts. The Court of Appeal held that
there could be no implied exception in relation to a claim for damages for
being tortured by a state. Mr Al-Adsani
took his case to the European Court of Human Rights.
________________________________________
_ Under
s 5 of the 1978 Act, ‘A State is not immune as regards proceedings in respect
of—(a) death or personal injury … caused by an act or omission in the United
Kingdom …’ Therefore, as the claimant
alleged that the torture took place in Kuwait at the hands of state employees,
the general rule in s 1 of the 1978 Act applied to give the state of Kuwait
sovereign immunity from suit in the United Kingdom courts.
________________________________________
[66] The European Court of Human Rights held:
(i) that it was not concerned with the substantive law of contracting states to
the convention, but with procedure, in particular in this case, with the
question of access to the court; (ii) that the grant of immunity by a state in
favour of other states did not qualify a substantive right of a litigant, but
acted as a procedural bar on a national court’s power to determine the
litigant’s substantive right; (iii) the issue was whether the grant of immunity
was a legitimate aim that was proportionate; (iv) the grant of sovereign
immunity to a state in civil proceedings pursued a legitimate aim of complying
with international law to promote comity and good relations between states through
the respect of another state’s sovereignty; (v) measures taken by a high
contracting party (to the ECHR) which reflect generally recognised rules of
public international law on state immunity cannot in principle be regarded as
imposing a disproportionate restriction on the right of access to a court as
embodied in art 6(1); (vi) it was not yet established, as a matter of
international law, that states were not entitled to claim sovereign immunity in
respect of civil claims for damages for alleged torture committed outside the
state where the claim
________________________________________
_ (2001) 12 BHRC 88 at 101 (paras 47–48).
_ At
102–103 (para 54).
_ At
103 (para 56).
________________________________________
307
is made; (vii) therefore, the 1978 Act, which grants
sovereign immunity in respect of claims for personal injury unless the damage
was caused within the United Kingdom, is consistent with the limitations
generally accepted by the community of nations as part of the doctrine of state
immunity. So the English court’s
application of the 1978 Act to uphold Kuwait’s claim for immunity was a
justified restriction on the applicant’s access to the court; therefore (viii)
there was no violation of art 6(1).
________________________________________
_ At
105 (para 66).
________________________________________
[67] Mr Salter submitted that the analysis of
the European Court of Human Rights in Al-Adsani’s case leads to
the conclusion that an absolute rule granting immunity to the property of
central banks was both an illegitimate objective and disproportionate. He submitted that there is no requirement in
international law that the courts of states should have an absolute rule making
the property of central banks of states immune from the enforcement jurisdiction
of the courts where it is sought to enforce a judgment. He pointed to the legislation in other
countries, in particular Switzerland, Australia, Canada, the United States, and
also a resolution of the Institut de Droit International. All of these placed limitations on the right
of a central bank to claim immunity from enforcement for its property. Generally the test adopted in these
circumstances was whether the property was being held by the central bank for
its own account as a central bank. He
also submitted that immediately before the 1978 Act was passed, under English
common law the property of central banks was available for attachment and
enforcement.
________________________________________
_ He
relied on the reasoning in Trendtex Trading Corp v Central Bank of Nigeria
[1977] 1 All ER 881, [1977] QB 529, although that did not directly concern
enforcement of a judgment debt of a state against the property of the Central
Bank of Nigeria. However, the spirit of
this landmark judgment is certainly consistent with Mr Salter’s submission.
________________________________________
[68] Mr Salter fairly pointed to the fact that
many countries have adopted similar wording to that in the 1978 Act in their
statutes dealing with sovereign immunity.
But, he submitted, this simply demonstrated that there was no consensus
of international law that the immunity to be granted to the property of central
banks should be absolute.
[69] Mr Salter therefore submitted that, in
the absence of such a consensus, then there can be no valid justification for
the imposition of a restriction in the enforcement procedures against assets of
central banks of states, which would otherwise be available in the United
Kingdom courts. So, s 14(4) should be
‘read down’, to give it the narrower construction for which the claimants
contend. He submitted that it is clear,
on House of Lords authority, that even if the wording of the statute is
apparently unambiguous, a different construction can be given to a statute in
order to make it consistent with ECHR rights.
The only limit on what is ‘possible’ under s 3(1) of the 1998 Act is
that the court cannot adopt an interpretation of the legislation under
consideration which is inconsistent with a fundamental feature of the legislation
itself.
________________________________________
_ Ghaidan v Mendoza [2004] UKHL 30, [2004] 3 All
ER 411, [2004] 2 AC 557 in particular at [30]–[33] per Lord Nicholls; [44]–[49]
per Lord Steyn.
________________________________________
[70] Mr Malek has two responses. First, he submits that art 6(1) of the ECHR
is not brought into play at all in this case.
The claimants had access to the adjudicative process by virtue of the
ICSID arbitration. The enforcement
process is separate and immunity in relation to that does not involve a denial
of access to the courts.
[71] I do not accept that submission. It is not legitimate to say that because one
tribunal decides the merits and another decides on enforcement, therefore art
6(1) cannot apply to the latter stage.
Such a submission is, in my view, quite contrary to
308
the reasoning and spirit of the European Court of
Human Rights’ decision in Hornsby v Greece. A party to an ICSID arbitration has the
right, by virtue of the 1966 Act, to enforce an ICSID award as a judgment of
the English court. Execution of that
judgment is an integral part of the ‘trial’ because it is part of the overall
process of the ICSID arbitration procedure that was set up by the ICSID convention
to which the United Kingdom is a party.
The 1966 Act was passed to give effect to the ICSID convention in the
United Kingdom and so as to assist in effective enforcement of ICSID
arbitration awards in the United Kingdom.
________________________________________
_ (1997) 24 EHRR 250.
________________________________________
[72] Mr Malek’s second response is that s
14(4) does not impose a restriction on a party’s access to the United Kingdom
courts, but simply imposes a restriction on the enforcement jurisdiction
available in the courts in this case. Mr
Malek further submits that a holder of a ‘domestic’ or ‘foreign’ arbitration
award does not have the general right to enforce it against state assets. He says that the general rule in
international law, as shown by the legislation of many countries, is to the
opposite effect.
[73] In this regard Mr Malek has drawn my
attention to the UN Resolution 59/38, adopted by the General Assembly at the
UN’s 59th session on 16 December 2004.
By that resolution, the General Assembly adopted a United Nations
Convention on Jurisdictional Immunities of States and Their Property (the UN
convention), which had been produced as a result of work by the International
Law Commission and an Ad Hoc Committee (of the UN) on Jurisdictional Immunities
of States and Their Property. The
convention is annexed to the resolution.
It has been deposited with the Secretary-General of the UN and is open
for signature but, I am told, no states have yet signed or ratified it.
[74] Within Pt IV of the UN convention, art 19
deals with ‘State immunity from post-judgment measures of constraint’. That article provides:
‘No post-judgment
measures of constraint, such as attachment, arrest or execution, against
property of a State may be taken in connection with a proceeding before a court
of another State unless and to the extent that …
(c) it has been
established that the property is specifically in use or intended for use by the
State for other than government non-commercial purposes and is in the territory
of the State of the forum …’
[75] That may be called the general rule. However, art 21 is headed ‘Specific
categories of property’. That provides:
‘1. The following
categories, in particular, of property of a State shall not be considered as
property specifically in use or intended for use by the State for other than
government non-commercial purposes under article 19, subparagraph (c): …
(c) property of the
central bank or other monetary authority of the State’
[76] Mr Malek submits that this convention
shows a consensus of international opinion on what categories of state property
should be immune from enforcement processes in the courts of another
state. He points out that the language
of art 21 is very similar to that of s 14(4).
He submits that art 21 of the UN convention shows that s 14(4) is a
legitimate and proportionate restriction on the ability of parties to enforce
judgments against state property.
[77] Mr Malek therefore submits that even if s
14(4) does constitute a restriction on a party’s access to the United Kingdom
courts, it is both legitimate and
309
proportionate.
The UN convention is in keeping with the views of the international
community on what property should be immune from enforcement procedures.
Conclusions on the art 6(1) ECHR point
[78] I accept Mr Salter’s submission that s
14(4) does impinge on the rights of access of parties to the enforcement
jurisdiction of the United Kingdom courts and so art 6(1) is involved. A restriction on the remedies available in
particular types of case, if severe, can amount to a limitation of access to
the court for a party. Therefore I
accept that it is the court’s duty, under s 3(1) of the 1998 Act, to ensure, so
far as is possible, that s 14(4) is read and given effect in a way that is
compatible with those convention rights.
[79] But, in my view, the restriction on the
right of a party to enforce a judgment on the property of a central bank or
other monetary authority that is imposed by s 14(4) is both legitimate and
proportionate. This is for four principal
reasons.
[80] First, I regard the UN convention,
adopted by the General Assembly, as a most important guide on the state of
international opinion on what is, and what is not, a legitimate restriction on
the right of parties to enforce against state property generally. I accept that
the convention does not constitute a jus cogens in international
law. I recognise that the convention has
not yet been adopted by any states. But
its existence and adoption by the UN after the long and careful work of the International
Law Commission and the UN Ad Hoc Committee on Jurisdictional Immunities of
States and Their Property, powerfully demonstrates international thinking on
the point. It suggests that the grant of
immunity to all the property of a state’s central bank is, in the eyes of the
international community of states, legitimate.
It must be their view that it will promote comity and good relations
between states through respect of one another’s sovereignty as regards a
state’s central bank and its property.
________________________________________
_ The
UN General Assembly resolved to refer the question of jurisdictional immunities
of States and their property to the International Law Commission in December
1977. After it had reported the matter
was taken up by a Working Group of the Sixth Committee of the General
Assembly. Subsequently the Ad Hoc
Committee reported. See the preamble to
Resolution of 16 December 2004.
________________________________________
[81] Secondly, in the existing legislation of
states there is no consensus which grants only limited immunity as to
enforcement procedures against the property of a state’s central bank. Some states’ legislation permits enforcement
against a central bank’s property if used for commercial purposes; other
states’ legislation does not.
[82] Thirdly, the wording of s 14(4) provides
a sensible rule which is easy to apply and thereby assists the promotion of
comity and good relations between states.
As I have already pointed out, the overwhelming presumption must be that
a central bank’s work is for sovereign purposes and that its property is used
for sovereign purposes. But if there had
to be a more restrictive provision than s 14(4) then there could be much scope
for litigation. A party could obtain a
legitimate judgment against a state. It
might wish to enforce it in the United Kingdom and that state’s central bank
may maintain funds in the United Kingdom.
Those funds would be the obvious target for enforcement. Such an attempt could lead to a dispute over
whether the funds are for use or intended for use for commercial purposes, with
the need for disclosure, statements and a
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hearing. That
is not conducive to comity and good relations between states. The interpretation of s 14(4) I have adopted
avoids all that.
[83] Fourthly, the fact that the claimants
would not be able to enforce the ICSID award against the London assets does not
mean that the award is ineffective and a nullity. I do not know what other assets might be
available for enforcement purposes. But
there is no evidence before me to indicate that the claimants would be left
without a remedy worldwide.
[84] Therefore I conclude that although s
14(4) does affect the claimants’ rights of access to the courts, the
interpretation that I have given it is consistent with their art 6(1) rights;
it is legitimate and proportionate in the circumstances.
The art 1, First Protocol point
[85] Article 1 of the First Protocol to the
ECHR provides:
‘Every natural or
legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions
except in the public interest and subject to the conditions provided for by law
and by the general principles of international law.
The preceding provisions
shall not, however, in any way impair the right of a State to enforce such laws
as it deems necessary in order to control the use of property in accordance
with the general interest or to secure the payment of taxes or other
contributions or penalties.’
[86] Mr Salter submits that the ICSID
arbitration award is a ‘possession’ within art 1 of the Protocol. Mr Malek accepts that is so. Mr Salter submits that s 14(4) deprives the
claimants of the peaceful enjoyment of that possession because the effect of s
14(4) is to make the award less valuable and more difficult to enforce.
________________________________________
_ He
relies on Stran Greek Refineries v Greece [1994] 19 ECHRR 368, in particular
paras 61 and 62, where the court held that an arbitration award against the State
of Greece and in favour of Stran Greek Refineries was a ‘possession’ within art
1 of the Protocol.
________________________________________
[87] I do not accept that submission. The ICSID arbitration procedure, the award
that resulted from it and the judgment obtained using the 1966 Act were all
subject to the existing law, which included s 14(4). In other words, the ‘possession’ always had
limitations on its utility and value from the moment it was created. The ‘possession’ was always going to be
subject to the existing rules concerning immunity of states and the property of
central banks. The case is entirely
unlike Stran Greek Refineries v Greece (1995) 19 EHRR 293 where the
Greek government passed legislation after the award to render it invalid
and unenforceable. So I hold that art 1
of the Protocol is not involved. But
even if it is, to the extent that the claimants have been deprived of the
peaceful enjoyment of their possession by virtue of s 14(4), that is legitimate
and proportionate. My reasons are the
same as those set out in relation to the art 6(1) point.
Conclusions on the ECHR points
[88] For the reasons I have given, I have
concluded that the proper construction of s 14(4) on common law principles is
consistent with the claimants’ ECHR rights under art 6(1) and art 1 of the
First Protocol. Therefore there is no
need to ‘read down’ s 14(4).
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I. ISSUE FIVE: WHAT ARE THE CHARACTERISTICS OF THE
CASH ACCOUNTS AND THE SECURITIES ACCOUNTS HELD IN LONDON BY AAMGS FOR THE NBK;
IN PARTICULAR ARE THEY (A) ‘PROPERTY OF A STATE’S CENTRAL BANK’ WITHIN SECTION
14(4) OF THE 1978 ACT; (B) IF NOT, ARE THEY ‘PROPERTY [OF A STATE] WHICH IS FOR
THE TIME BEING IN USE OR INTENDED FOR USE FOR COMMERCIAL PURPOSES’ WITHIN
SECTION 13(4) OF THE 1978 ACT?
[89] Given the conclusions I have reached on
issues one to four, I can deal with this issue briefly. AAMGS holds the cash and securities that
constitute the London assets to the order of NBK. NBK has the contractual right to payment of
the debt that is constituted by the cash accounts: cl 16(j) of the GCA. AAMGS records the NBK as being the owner of
the securities it holds in the securities accounts: cl 5(b) of the GCA. On my construction of s 14(4) of the 1978
Act, in particular the word ‘property’, that makes the London assets the
‘property’ of the NBK, which, everyone agrees, is the central bank of the
RoK. Therefore all the London assets are
within s 14(4) and so cannot be the subject of enforcement processes by the
United Kingdom courts at all.
[90] In my view that conclusion is not
affected by the fact that, as the experts on Kazakhstan law agree, the NBK
holds those assets as part of the National Fund of Kazakhstan under the Trust
Management Agreement with the RoK, by which the government of the RoK is the
beneficiary: cl 7.1. Professor Didenko
appears to contemplate (at para 60 of his report) that there can be ‘property
held by the trust manager’, ie the NBK, which ‘remains under the full ownership
of the trust founder’, ie the RoK. Professor
Suleimenov does not dissent from this view.
Therefore, as a matter of Kazakhstan law, the RoK remains the owner, but
gives the trust manager the power to deal with the relevant property. That is enough, in my view, to bring the
London assets within s 14(4).
[91] The conclusion that the London assets are
within s 14(4) means that they are immune from enforcement proceedings in the
United Kingdom courts. So I think I do
not need to decide whether, for the purposes of s 13(4) of the 1978 Act, the London
assets were, at the time the enforcement processes were started, (a) also the
property of the RoK and, if so, (b) ‘in use or intended for use for commercial
purposes’. However, on the first of
these points it is agreed that the RoK is the beneficial owner of the London
assets. Therefore they must, on my
reading of the word ‘property’, constitute ‘the property of a State’ within s
13(2)(b) and s 13(4).
[92] On the second point, my firm view is that
the London assets were not in use or intended for use for commercial purposes
at any stage. My reasons, briefly, are
as follows:
(1) The London assets formed part of the National
Fund. That fund was, in my opinion,
created to assist in the management of the economy and government revenues of
the RoK, both in the short and long term.
Management of a state’s economy and revenue must constitute a sovereign
activity.
(2) The National Fund had to be managed by the NBK in
accordance with the law set out in the Budget Code, in particular art 24. That demanded that the National Fund be
invested: art 24 para 2. I accept that
this required that investment had to be placed in authorised financial assets
in order to secure, amongst other things, ‘high profitability levels of the
[National Fund] in the long term outlook at reasonable risk levels’. I also accept the uncontroverted evidence
that the securities accounts held by AAMGS on behalf of the NBK were actively
traded at all times and that the NBK obtained from the RoK a commission on good
results and paid a penalty for poor ones.
But I cannot accept that this activity is inconsistent with the
Stability and Savings Funds of the National Fund being used or intended for use
for sovereign purposes. The aim of the
exercise, at all times, was and is to enhance the National Fund. To do that the assets have
312
to be put to use to obtain returns which are
reinvested in the National Fund, ie to assist the sovereign actions.
(3) Mr Salter relies on the definition of ‘commercial
purposes’ set out in s 17(1) of the 1978 Act and points to the fact that
‘commercial purposes’ means transactions and activities mentioned in s 3(3) of
the Act. Those include ‘any transaction
or activity (whether of a commercial … financial … or similar character) into
which a State enters or in which it engages otherwise in the exercise of
sovereign authority’. He says that the
trading activities of the securities accounts by AAMGS are clearly financial
transactions and their aim is to make profits.
Therefore they could not be transactions ‘in the exercise of sovereign
authority’ within s 3(3). So, for the
purposes of 13(4), at least the securities accounts of the London assets
constitute ‘property in use or intended for use for commercial purposes’. Again, I must disagree. The dealings of the securities accounts must,
in my view, be set against the background of the purpose of the GCA. That was established to assist in running the
National Fund. The securities accounts
contain assets which are part of the National Fund. In my view the dealings are all part of the
overall exercise of sovereign authority by the Republic of Kazakhstan.
(4) Last, but not least, there is the certificate of
the ambassador. That is clear and
unambiguous. I have seen no evidence to
contradict it other than the fact that the securities accounts are traded. For the reasons I have given, the trading of
those accounts does not mean they were being used or were intended for use for
commercial purposes.
Conclusion on issue five
[93] My conclusion is that all the London
assets were, at all times, in use for sovereign purposes and pursuant to the
exercise of sovereign authority of the RoK, acting through the National Bank
and AAMGS as the global custodian of the National Fund. Therefore even if I had concluded that s 14(4)
should be construed more narrowly and in the claimants’ favour, I could not
have avoided a conclusion that the London assets constituted property held by
the NBK in its capacity as such and it does not matter that it held them simply
as trust manager for the RoK and had only a limited interest in those assets.
[94] Further, even if I were wrong about the
construction of the word ‘property’ in s 14(4), and I should conclude (on the
facts of this case) that the London assets cannot be regarded as property of
the NBK at all, my conclusion would be that the London assets were at all times
the ‘property’ of the Republic of Kazakhstan (within s 13(2)(b)) and were the
subject of transactions that were (through the NBK and AAMGS) the exercise of
sovereign authority. Accordingly, the
London assets do not fall within s 13(4), so are immune from the enforcement
process of the United Kingdom courts.
J. OVERALL CONCLUSIONS
[95] In summary, my conclusions are:
(1) As to the third party debt order, the cash
accounts held by AAMGS in London are in the name of the NBK. The cash accounts constitute a debt owed by
AAMGS to the NBK, which is the account holder.
The RoK has no contractual rights to that debt against AAMGS. Therefore there is no ‘debt due or accruing
due’ from AAMGS (the third party) to the judgment debtor. So the court has no power under CPR
72.2(1)(a) to make a third party debt order in respect of the cash
accounts. The third party debt order
must be discharged on this ground.
(2) The meaning of s 14(4) of the 1978 Act, using
‘common law’ rules of construction, is clear.
In particular: (a) the word ‘property’ must have the same
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meaning in s 14(4) as it does in s 13(2)(b) and
13(4); (b) ‘property’ has a wide meaning.
It will include all real and personal property and will embrace any
right or interest, legal or equitable, or contractual, in assets that are held
by or on behalf of a state or any ‘emanation of the State’ or a central bank or
other monetary authority that comes within ss 13 and 14 of the 1978 Act; (c)
the words ‘property of a State’s central bank or other monetary authority’ mean
any asset in which the central bank has some kind of property interest as
described above, which asset is allocated to or held in the name of the central
bank, irrespective of the capacity in which the central bank holds the asset or
the purpose for which the asset is held.
(3) The immunity created by s 14(4) does concern the
rights of access to the court of a claimant who wishes to enforce against the
assets of a central bank. In this case s
14(4) does affect the right of the claimants to enforce an ICSID arbitration
award that has been legitimately registered as a judgment under s 1 of the 1966
Act. Therefore s 14(4) does concern the
right of a claimant to a civil right to have access to the courts, in
accordance with art 6(1) of the ECHR.
(4) However, that right is not absolute. The immunity granted to assets of central
banks, as set out in s 14(4), is both legitimate and proportionate and is in
accordance with the expectations of states.
Therefore there is no violation of the claimants’ rights under art 6(1).
(5) Section 14(4) does not deprive the claimants of
their possession, ie the ICSID award or the judgment that has been
registered. The award was always subject
to the restrictions on enforcement that existed at the time it was made. Those restrictions are clear from art 55 of
the ICSID convention which set up the ICSID arbitration procedure. Therefore there is no infringement of art 1
to the First Protocol to the ECHR.
(6) Accordingly, there is no requirement to modify
the ‘common law’ construction of s 14(4) of the 1978 Act in order to give it
effect in a way which is compatible with convention rights, because it is
compatible anyway.
(7) On the facts of this case, the London assets,
held by AAMGS on behalf of the NBK are ‘property of a central bank’, ie the
property of NBK, within the meaning of s 14(4).
This is because NBK has an interest in that property within the
definition of ‘property’ that I have set out above. Therefore all the London assets are immune
from the enforcement jurisdiction of the United Kingdom courts.
(8) If, contrary to my view, the London assets are
not the property of NBK within the meaning of s 14(4), then, on the facts of this
case, they constitute ‘the property of a State’ within the meaning of s
13(2)(b) and 13(4) of the 1978 Act. The
London assets were not at any time either in use or intended for use for
‘commercial purposes’ within the meaning of s 13(4) of the 1978 Act. Therefore they are immune from the
enforcement jurisdiction of the United Kingdom court by virtue of s 13(2)(b) of
the 1978 Act.
(9) Accordingly, the court must discharge the interim
charging order. As the same reasoning
applies to both the cash and securities accounts within the London assets, even
if the court had otherwise had jurisdiction to make the TPD order, it would
have to discharge it because the cash accounts are immune from enforcement
proceedings for the reasons set out above.
[96] Therefore I must discharge both interim
orders.
Orders accordingly.
KUJUA STYLE TAMU ZA KUMKUNA MSICHANA AKAKUPENDA DAIMA ASIKUSALITI BONYEZA HAPA CHINI
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