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In Mettoy Pensions Trustees Ltd v Evans, the High Court created a third type of power, namely, ‘a fiduciary power in the full sense’. This is a power that cannot be released by the trustees. The courts will not compel the trustees to exercise their discretion, for the gift remains a fiduciary power and is not treated as a trust. But if the trustees fail to exercise the power, the court may adopt a scheme that has the effect of exercising the power in accordance with the aims of the gift and the surrounding circumstances. This unique type of power is exercisable in respect of pension funds.

Mettoy Pension Trustees Ltd v Evans [1990] 1 WLR 1587, HC

Facts

Mettoy Co plc launched an occupational pension scheme on 1 January 1968. The plaintiff, a wholly owned subsidiary of Mettoy, became the sole trustee of the scheme. In 1980, with the introduction of new legislation, new scheme rules were made. Rule 13(5) provided as follows:

Any surplus of the trust fund remaining after securing all the aforesaid liabilities in full may, at the absolute discretion of the employer be applied to secure further benefits within the limits stated in the rules, and any further balance thereafter remaining shall be properly apportioned amongst the principal employer and each participating employer.

Mettoy experienced financial difficulties and receivers were appointed in 1983. The company was wound up in 1984. As a consequence, the scheme was required to be liquidated. The plaintiff asked the court for directions in respect of a surplus of funds.

Held

Warner J held that r 13(5) created a fiduciary power that could not be released or exercised by a receiver or liquidator. Accordingly, the court was required to decide what method of exercise of the power would be appropriate as if a trust had been created:

Warner J: The beneficiaries under a pension scheme such as this are not volunteers. Their rights have con- tractual and commercial origins. They are derived from the contracts of employment of the members. The benefits provided under the scheme have been earned by the service of the members under those contracts and, where the scheme is contributory, pro tanto by their contributions.

It would be inappropriate and indeed perverse to construe such documents so strictly as to undermine their effectiveness or their effectiveness for their purpose. I do not think that, in saying that, I am saying anything different from, what was said by Lord Upjohn when in In Re Gulbenkian’s Settlements [1970] AC 508, he referred, in the context of a private settlement, to ‘the duty of the court by the exercise of its judicial knowledge and experience in the relevant matter, innate common sense and desire to make sense of the settlor’s or parties’ expressed intentions, however obscure and ambiguous the language that may have been used, to give a reasonable meaning to that language it if can do so without doing complete violence to it’.

What the court has to do here is to perform that duty in the comparatively novel and different context of pension scheme trusts. The most important and difficult, though by no means the only, question in this case is as to the validity of the conferment on the employer, by the last paragraph of r 13(5) of the 1983 rules, of the discretion to augment benefits out of surplus.

The first of those questions is whether that discretion is a fiduciary power. As Mr Walker pointed out, so to express the question is, in a way, to oversimplify it, because there are different kinds of fiduciary power. Mr Walker, in an impartial and helpful way, afforded me a wide-ranging and illuminating discussion of the law about fiduciary powers as it has so far been developed in the context of trusts.

I am attracted by counsel’s submission that the classification of powers into powers simply collateral, powers in gross, and powers appendant or appurtenant, which was set out by Sir George Jessel MR in Re D’Angibau (1880) 15 Ch D 228, is now of antiquarian interest only. That seems to be the view also of the authors of Megarry and Wade on The Law of Real Property 5th ed, 1984, p 489. I accept at all events that that classification is of no assistance in deciding the present case. Mr Walker suggested a more pertinent classification, which I accept, of fiduciary discretions into four categories. In this classification, category 1 comprises any power given to a person to determine the destination of trust property without that person being under any obligation to exercise the power or to preserve it. Typical of powers in this category is a special power of appointment given to an individual where there is a trust in default of appointment. In such a case the donee of the power owes a duty to the beneficiaries under that trust not to misuse the power, but he owes no duty to the objects of the power. He may therefore release the power but he may not enter into any transaction that would amount to a fraud on the power, a fraud on the power being a wrong committed against the beneficiaries under the trust in default of appointment: see Re Mills [1930] 1 Ch 654 and Re Greaves [1954] Ch 434. It seems to me to follow that, where the donee of the power is the only person entitled under the trust in default of appointment, the power is not a fiduciary power at all, because then the donee owes no duty to anyone. That was the position in Re Mills [1930] 1 Ch 654 and will be the position here if the discretion in the last paragraph of r 13(5) of the 1983 rules is in category 1.

Category 2 comprises any power conferred on the trustees of the property or on any other person as a trustee of the power itself: per Romer LJ, at p 669. I will, as Chitty J did in Re Somes [1896] 1 Ch 250 at p 255, call a power in this category ‘a fiduciary power in the full sense’. Mr Walker suggested as an example of such powers vested in persons other than the trustees of the property the powers of the managers of a unit trust. A power in this

category cannot be released; the donee of it owes a duty to the objects of the power to consider, as and when may be appropriate, whether and if so how he ought to exercise it; and he is to some extent subject to the control of the courts in relation to its exercise: see, for instance, Re Abrahams’ Will Trust [1969] 1 Ch 463 at p 474, per Cross J; Re Manisty’s Settlement [1974] Ch 17 at p 24 per Templeman J; and Re Hay’s Settlement Trusts [1982] 1 WLR 202 at p 210 per

Sir Robert Megarry VC [emphasis added].

Category 3 comprises any discretion which is really a duty to form a judgment as to the existence or otherwise of particular circumstances giving rise to particular consequences. Into this category fall the discretions that were in question in such cases as Weller v Ker (1866) LR 1 Sc & Div 11; Dundee General Hospitals Board of

Management v Walker [1952] 1 All ER 896 and the two cases reported by LEXIS that I have already mentioned,

namely, Kerr v British Leyland (Staff) Trustees Ltd [1989] IRLR 522 and Mihlenstedt v Barclays Bank International Ltd (1989) The Times, 18 August; Court of Appeal (Civil Div) Transcript No 817 of 1989.

Category 4 comprises discretionary trusts, that is to say, cases where someone, usually but not necessarily the trustees, is under a duty to select from among a class of beneficiaries those who are to receive, and the proportions in which they are to receive, income or capital of the trust property. Mr Walker urged me to eschew the phrases ‘trust power’, ‘power coupled with a duty’, ‘power coupled with a trust’ and ‘power in the nature of a trust’, which, as he demonstrated by means of an impressive survey of reported cases, have been variously used to describe discretions in categories 2, 3 and 4.

In the present case the question is whether the discretion given to the employer by the last paragraph of r 13(5) of the 1983 rules is in category 1 or category 2. That depends on whether the words by which that discretion is expressed to be conferred on the employer mean in effect no more than that the employer is free to make gifts out of property of which it is the absolute beneficial owner or whether those words import that the employer is under a duty to the objects of the discretion to consider whether and if so how the discretion ought to be exercised. That is a question of construction of the deed of 1983 in the light of the surrounding circumstances. I have come to the conclusion that the discretion conferred on the employer by the last paragraph of r 13(5) of the 1983 rules is a fiduciary power in the full sense. The considerations that have led me to that conclusion are these. If that discretion is not such a fiduciary power it is, from the point of view of the beneficiaries under the scheme, illusory. As I have pointed out, the words conferring the power mean no more, on that construction of them, than that the employer is free to make gifts to those beneficiaries out of property of which it is the absolute beneficial owner.

The exercise of a fiduciary power in the full sense vested in the company cannot be necessary for distributing its assets. Whether it may be necessary for winding up the affairs of the company is less clear. However the liquidator in this case would, as Mr Inglis-Jones submitted, be precluded from exercising the power because, if he did so, he would be in a position where his duties conflicted. As trustee of the power he would be under a duty to hold the balance between the interests of the beneficiaries under the pension scheme and the interests of the persons entitled to share in the assets of the company, namely its creditors and possibly its contributories. As liquidator his duty would be to have regard primarily, if not exclusively, to the interests of the creditors and contributories. His position in that respect would differ from that of the directors of the company while it was a going concern, for they would be able to pay proper regard to the interests of the beneficiaries under the pension scheme and would be concerned to do so if only for the sake of the company’s reputation as an employer.

The question then arises, if the discretion is a fiduciary power which cannot be exercised either by the receivers or by the liquidator, who is to exercise it? I heard submissions on that point. The discretion cannot be exercised by the directors of the company, because on the appointment of the liquidator all the powers of the directors ceased. Mr Inglis-Jones and Mr Walker urged me to say that in this case the court should step in by giving directions to the trustees as to the distribution of the surplus in the pension fund. They relied in particular on the passage in Re Baden’s Deed Trusts [1971] AC 424, pp 456, 457, where Lord Wilberforce said:

As to powers, I agree with my noble and learned friend Lord Upjohn in Re Gulbenkian’s Settlements [1970] AC 508 that although the trustees may, and normally will, be under a fiduciary duty to consider whether or in what way they should exercise their power, the court will not normally compel its exercise. It will intervene if the trustees exceed their powers, and possibly if they are proved to have exercised it capriciously. But in the case of a trust power, if the trustees do not exercise it, the court will: I respectfully adopt as to this, the statement in Lord Upjohn’s opinion (p 525). I would venture to amplify this by saying that the court, if called upon to execute the trust power, will do so in the manner best calculated to give effect to the settlor’s or testator’s intentions. It may do so by appointing new trustees, or by authorising or directing representative persons of the classes of beneficiaries to prepare a scheme of distribution, or even, should the proper basis for distribution appear by itself directing the trustees so to distribute. The books give many instances where this has been done, and I see no reason in principle why they should not do so in the modern field of discretionary trust.

Clearly, in the first two sentences of that passage, Lord Wilberforce was referring to a discretion in category 2 and in the following part of it to a discretion in category 4. In that latter part he was indicating how the court might give effect to a discretionary trust when called on to execute it. It seems to me, however, that the methods he indicated could be equally appropriate in a case where the court was called on to intervene in the exercise of a discretion in category 2. In saying that, I do not overlook that, in Re Manisty’s Settlement [1974] Ch 17, p 25, Templeman J expressed the view that the only right and the only remedy of an object of the power who was aggrieved by the trustees’ conduct would be to apply to the court to remove the trustees and appoint others in their place. However, the earlier authorities to which I was referred, such as Re Hodges (1878) 7 Ch D 754 and

Klug v Klug [1918] 2 Ch 67, had not been cited to Templeman J. I conclude that, in a situation such as this, it is open

to the court to adopt whichever of the methods indicated by Lord Wilberforce appears most appropriate in the circumstances.

Question

How many types of powers of appointment exist?