[2002] EWHC 1354 (Ch)
IN THE SUPREME COURT OF JUDICATURE
CHANCERY DIVISION
Friday 5th July 2002
Between:
-and-
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Andreas Gledhill (instructed by
Lawrence Graham) for the applicant.
Mark Arnold (instructed by Taylor Joynson Garrett) for the respondent.
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1. This application to set aside a statutory demand has been transferred to me from Guildford County Court under rule 7.11(2) of the Insolvency Rules 1986 by a consent order dated 23rd April 2002. Accordingly it comes before me for hearing at first instance instead of coming to a High Court Judge only upon appeal, as is more usual. The reason for dealing with the matter in this way was the perceived importance and difficulty of the point in issue.
2. The statutory demand in question is for the sum of £877,883.03, being the amount, including interest, said to be due from the applicant, Mr Robert Woodland-Ferrari (“Mr Woodland”) by reason of a determination of the Pensions Ombudsman dated 29th August 2001.
3. The essential facts can be stated quite shortly. Mr Woodland and a Mr Lewis were appointed trustees of a pension scheme known as the UCL Group Retirement Plan (“the Scheme”) by a deed dated 20th February 1990. They ceased to be trustees when they were replaced by GMBC Pension Trustees Limited (now Abbey National Pension Trustees Limited, which I shall refer to as “ANPTL”) by an order of the High Court made on 9th December 1992. In the intervening period Mr Woodland and Mr Lewis were the only trustees of the Scheme.
4. After Mr Woodland and Mr Lewis had been removed as trustees two members of the Scheme, Mr Robson and Mr Boswell, made a complaint to the Pensions Ombudsman about the loss or diminution in the value of the assets of the Scheme during the period that Mr Woodland and Mr Lewis were trustees. Mr Robson also made complaints against a company named Acorn Pensions and Financial Services (“Acorn”) which acted as adviser to and administrator of the Scheme. The Pensions Ombudsman delivered his determination on 29th August 2001. He found that Acorn had been guilty of maladministration in certain respects but that this maladministration had not caused Mr Robson injustice. He found also that certain investments had been made by Mr Woodland and Mr Lewis in breach of trust and that neither of them was entitled to rely upon an exoneration clause contained in the Scheme to excuse personal liability.
5. As to quantum, the Pensions Ombudsman found that the shortfall suffered by the Scheme as a result of the making of investments in breach of trust, including interest down to the date of the determination, was £874,482.33. He directed that Mr Woodland and Mr Lewis should between them pay this sum to ANPTL for the benefit of the Scheme within 28 days of the date of the determination. Neither of them has paid this sum or any part of it. Interest for the period between 29th August 2001 and 28th September 2001 (the date of the statutory demand) brings the amount due to the £877,887.03 referred to in the statutory demand.
6. If this were all Mr Woodland would have no defence to the claim made in the statutory demand (see section 151 of the Pension Schemes Act 1993, particularly subsection (5)). What is said to make the difference is that Mr Woodland was made bankrupt on 7th June 1993. He was discharged from bankruptcy on 19th September 1996. The breaches of trust giving rise to the liability found by the Pensions Ombudsman were all committed before the date of the bankruptcy order. Accordingly he claims that he was discharged from all the bankruptcy debts, which included his liability to make good his breaches of trust, by virtue of section 281(1) of the Insolvency Act 1986.
7. In these proceedings it has not been disputed that Mr Woodland’s liability for breach of trust was part of his bankruptcy debts for the purposes of section 281(1). But it is argued that Mr Woodland is not discharged from this particular liability by reason of section 281(3), which so far as material provides:
(3) Discharge does not release the bankrupt from any bankruptcy debt which he incurred in respect of ... any fraud or fraudulent breach of trust to which he was a party.
8. The only material which is relied upon in these proceedings in support of the contention that Mr Woodland’s liability in respect of the debt referred to in the statutory demand was incurred in respect of “fraud or fraudulent breach of trust” is the determination of the Pensions Ombudsman.
9. On these facts two main questions arise, namely
(a) What are the ingredients of “fraudulent breach of trust” for the purpose of section 281(3)? In particular does dishonesty have to be shown?
(b) Are these ingredients proved to exist by the Pensions Ombudsman’s determination?
In addition there is a question on the form of the statutory demand which may need to be determined. I will come to this at the end of this judgment.
10. It is not submitted that the Pension Ombudsman’s determination establishes actual fraud on the part of Mr Woodland in the Derry v. Peek (1889) 14 App Cas 137 sense. It is for this reason that I am concerned only with the limb of section 281(3) which refers to “fraudulent breach of trust”.
11. In order to elucidate the meaning of this expression I was referred to the old law from 1869 onwards. One of the matters which I shall have to consider is whether this, and the decisions under it, constitutes a guide to the meaning of a provision in the 1986 Act. But first I must explain what emerges from the old law.
12. The first piece of legislation to which I was referred was the Bankruptcy Act 1869. Section 48 of this Act gave the court a discretion, on the application of the bankrupt, to discharge the bankrupt from bankruptcy provided certain conditions were fulfilled. Section 49 provided, so far as material,
An order of discharge shall not release the bankrupt from any debt or liability incurred by means of any fraud or breach of trust ... but it shall release the bankrupt from all other debts provable under the bankruptcy with the exception of [certain specified debts].
13. On the face of it the section 49 release did not extend to any debt incurred by reason of any breach of trust, whether or not it was occasioned by fraud. However there does not appear to be any decision in which this point was put to the test.
14. The Bankruptcy Act 1883 adopted a somewhat more elaborate scheme in respect of discharge from bankruptcy. By section 28 provision was made, as before, for a bankrupt to apply to the court for discharge. It was, however, specifically provided that on the hearing of the application the court was to take into account a report of the official receiver in respect of the bankrupt’s affairs. Section 28(3) contained a list of eight facts which were to be taken into account. These included, in paragraph (h),
That the bankrupt has been guilty of any fraud or fraudulent breach of trust.
On proof of any of the enumerated facts the court was obliged either to refuse the application, or to suspend its operation for a specified time or to attach conditions to it.
15. Release from bankruptcy debts was dealt with by section 30 of the 1883 Act. This begins with a provision specifying certain debts which were not released by an order of discharge. In particular the latter part of section 30(1) provides
An order of discharge shall not release the bankrupt from any debt or liability incurred by means of any fraud or fraudulent breach of trust to which he was a party, nor from any debt or liability whereof he has obtained forbearance by any fraud to which he was a party. Subsection (2) then provides that an order of discharge “shall release the bankrupt from all other debts provable in bankruptcy.
16. I was referred to two decisions under these provisions of the 1883 Act. The first was ex parte Castle Mail Packets Company, In re Payne (1886) 18 QBD 154. This was an appeal by a creditor against an order granting two bankrupts a suspended order of discharge. The creditor contended that no order of discharge should have been granted because, amongst other things, the bankrupts had committed, in the slightly tentative words of counsel for the creditor, “a fraudulent breach of trust, or, at any rate, a fraud”.
17. Lord Esher MR graphically described the conduct complained of as follows:
When this application for a discharge was made the first thing shewn by the opposing creditors was that the bankrupts had continued to trade after knowing themselves to be insolvent. That is no light offence. The opposing creditors also shewed that the bankrupts, acting as brokers, had received money from time to time for freights largely in excess of any deduction which they were entitled to make; that they did not merely neglect to send in accounts to their principals, but that they sent in misleading accounts, and that before doing so they had misappropriated to their own private use money for which they ought to have accounted; and that, therefore, the inevitable inference was that they had knowingly misused these moneys for which they ought to have accounted; that they knew they had done wrong, and that they sent in these misleading accounts in order to conceal what they had thus done. And, still worse, when they did send in a final account, in order to get rid of that which they knew to be a valid claim against them, they knowingly, falsely, and wickedly asserted that they had a counter-claim, which they knew to be wholly unfounded.
What offences, then, have they been guilty of? Besides trading after they knew they were insolvent, they have for their own purposes, and in order to conceal a fraud, made an improper and fraudulent entry in their books. I will not say that they have been in the strict sense of the words guilty of a fraudulent breach of trust, but any more fraudulent conduct in business as between principal and agent I cannot conceive. I come, therefore, to the clear conclusion that these bankrupts have been guilty of three offences against the Bankruptcy Act: by trading after they knew that they were insolvent; by sending in misleading accounts and making misleading entries in their books; and by committing a wicked fraud upon their employers.
Under these circumstances the bankrupt Payne applied for his discharge, and in my opinion the only proper course is to refuse the application altogether.
18. The other two members of the Court of Appeal, Lindley and Lopes LJJ, agreed with Lord Esher. Lindley LJ said (at page 159)
I am compelled to say that he has been guilty of gross fraud. Whether technically there has been a “fraudulent breach of trust” may be open to question. I am inclined to think that a man who, knowing that he has a balance to pay over to his employers, embezzles it, may fairly be said to be guilty of fraudulent conduct as a trustee. But, at any rate, it is clear that he comes within sub-s 3(h) of s. 28 as having been guilty of fraud. In my opinion, therefore, the order of discharge ought to be refused.
19. The second case under the 1883 Act to which I was referred was Re Freeman (1890) 7 Morr 38, decided by a Divisional Court consisting of Cave J and A. L. Smith J. There a county court judge had refused an order of discharge on the ground that the bankrupt was guilty of a fraudulent preference, was guilty of a fraudulent breach of trust and had sold his business before the date of the receiving order without the consent of his creditors. As to the breach of trust, it appears that the bankrupt had used a sum of £130, which was held by him as a trustee, for the purposes of his own business. As to this Cave J said (at pages 44-45)
The main ground for alleging that he has been guilty of a breach of trust at all was the statement which he himself made in his previous affidavit, that he had been advised by his solicitor that he had been guilty of a breach of trust; that the consequences might be distressing to him, and that he therefore desired to repay the money which he had so diverted from its original purpose. Now all that is perfectly consistent with the breach of trust not having been in any sense a fraudulent breach of trust. The difference between the two things, of course, is very considerable. A man is guilty of a breach of trust whenever he applies trust money to any purpose which is not warranted by the deed which creates the trust, and breaches of trust of that kind undoubtedly do exist to a considerable extent, leading to civil remedies against the trustees but not necessarily involving any dishonour in them or any conduct which in a moral point of view can be said to be blameable. A trustee is very frequently induced at the solicitation of the cestui que trust to consent to invest the trust funds, for the purpose of getting a higher rate of interest, in a class of security which is not warranted by the deed of trust, for which trustees not unfrequently are made to pay out of their own pocket. But no one goes the length of saying that if a thing of that kind is proved to have existed in the case of a man who afterwards became bankrupt, that ought to be taken into account in considering whether he ought or ought not to have his discharge.
He then referred to the evidence of a Mrs Harvey, a beneficiary of the trust, which had not been before the county court, to the effect that the breach of trust had been committed with her knowledge and acquiesced in by her. He went on (at page 46)
I think, therefore, the learned County Court Judge, while warranted in coming to the conclusion that there was a breach of trust, was not warranted in coming to the conclusion that the breach of trust had been fraudulent. That no doubt is the point which weighs most heavily against the debtor in this case. A breach of trust is always a serious matter in a civil point of view, but when in addition it becomes a fraudulent breach of trust it assumes a criminal aspect, and is undoubtedly a matter of serious consequence which ought properly to be taken into consideration by the judge when he is considering an application for discharge.
20. The 1883 Act was replaced by the Bankruptcy Act 1914, the material parts of which were amended by the Bankruptcy (Amendment) Act 1926. Discharge was dealt with by section 26 of the 1914 Act the general scheme of which was similar to section 28 of the 1883 Act. The list of facts proof of which limits the discretion of the court to grant the order has been somewhat expanded, from eight items to twelve, the last of them being
(e) That the bankrupt has been guilty of any fraud or fraudulent breach of trust.
This reproduces without change the wording of the equivalent provision in the 1883 Act.
21. Release from bankruptcy debts was governed by section 28 of the 1914 Act, as amended, which was, for all practical purposes, in the same terms as section 30 of the 1883 Act.
22. A further change in the law was made by the Insolvency Act 1976, which greatly enlarged the scope for discharging bankrupts, in particular by providing for automatic or semi-automatic discharge in a wide range of cases. Discharge under the provisions for automatic discharge after a period of time was to have the same effect as if the court had made an absolute order of discharge on the relevant date under section 26 of the 1914 Act (see section 7(2) of the 1976 Act).
23. I was referred to one decision under section 26 of the 1914 Act, namely that of the Court of Appeal consisting of Oliver and Neill LM and Sir David Cairns in the case of Re Waldron given on 30th January 1985. The decision is unreported, except very briefly at 129 Sol. J 171, but I was provided with a full transcript of the judgments. The appeal was from a decision of Mr Registrar Dewhurst who had refused a bankrupt an order of discharge on a number of grounds, including a finding that he had been guilty of fraudulent breach of trust. The bankrupt did not seek to reverse the Registrar’s refusal to make an order of discharge, but he sought an order setting aside the finding of guilt of fraudulent breach of trust.
24. Early on in his judgment Oliver LJ explained the importance of the finding of fraudulent breach of trust saying
The significance of that is emphasised by the provisions of Section 28 of the Act which deals with the effects of discharge. The effect of the discharge, as appears from sub- sections (1) and (2) of that Section, is that the bankrupt is released from all indebtedness provable in the bankruptcy except for a number of specified exceptions, and (b) is as follows: "from any debt or liability incurred by means of any fraud or fraudulent breach of trust to which he was a party". So one can see that the finding against the bankrupt which is contained in the order I have recited is a very important one from the bankrupt’s point of view.
25. The facts relied upon in support of the finding of fraudulent breach of trust in Re Waldron were that the bankrupt, who had carried on the business of insurance broker in partnership with another, had (i) failed to pay over a sum of £32,000 which had been paid to him for the purpose of being invested in a policy of some sort with an insurance company; and (ii) had failed to pay over to insurers some £17,000 received by him in respect of the premiums due under motor insurance policies issued by the insurers.
26. In his decision Mr Registrar Dewhurst had cited what was said by Cave J in Re Freeman from which he held that it followed
that in order to prove fraudulent breach of trust the conduct of the bankrupt must have been, (i) blameable in a moral sense, (ii) against the wishes and without the knowledge of the persons to whom the money was due, and (iii) with a criminal aspect.
As to the case before him he concluded
I accept [counsel’s] submission that the bankrupt’s conduct was not deliberate and that he was not guilty of dishonesty, but it seems to me plain from the evidence that it meets the test which I conceive to be the right one.
On the appeal the contention was that, on the test propounded by Cave J, it was impossible for the bankrupt to have been guilty of fraudulent breach of trust if, as the Registrar had held, his conduct was not deliberate and he was not guilty of dishonesty.
27. In seeking to uphold the Registrar’s decision counsel for the Official Receiver submitted that, although the word “fraud” in section 26 of the 1914 Act did not mean anything other than common law fraud, the words “fraudulent breach of trust” must mean something different because they appear in the section as an alternative to “fraud” simpliciter. He relied upon cases under section 26 of the Limitation Act 1939 in which the expression “fraudulent breach of trust” had been given a meaning which extended to equitable fraud and covers conduct which
having regard to some special relationship between the two parties concerned, is an unconscionable thing for the one to do towards the other
(see Kitchen v. Royal Air Force Association [1958] 1 WLR 563 at pages 572-3, per Lord Evershed MR).
28. As to this attempted reliance upon the Limitation Act authorities Oliver LJ said:
It does not seem to me that one can really treat the two sections as being pari materia, and as it seems to me the true construction of the section with which we are concerned here, namely section 26 of the Bankruptcy Act, is that which is contained in the judgment of Cave J in [Re Freeman.]
29. Oliver LJ expressed his conclusion in Re Waldron as follows:
What [counsel] has submitted is that when the learned Judge, Cave J, used the expression “but when in addition it becomes a fraudulent breach of trust it assumes a criminal aspect”, he was not there meaning that the fraud involved dishonesty or was equivalent to a crime but merely that it was something more serious than a mere civil wrong, and that what he was indicating was what indeed the learned Registrar understood by the phrase, namely that criminal aspect meant something that was not in fact criminal but which might be considered otherwise blameworthy in some respect, or unconscionable. For my part I find myself quite unable to accept that submission as being a correct analysis of what Cave J was saying in the judgment under consideration. In my judgment, where one is looking at a case of this sort, but particularly having regard to the very serious consequences which are involved in the finding of fraud or fraudulent breach of trust in the Act, one has to interpret the phrase strictly and in its ordinary sense, and in my judgment the finding of the learned Registrar that the bankrupt was not acting deliberately and that he was not guilty of dishonesty is in itself quite contrary to the concept of his being guilty of a fraudulent breach of trust, though undoubtedly he was guilty of a breach of trust. In those circumstances it seems to me inevitable that the appeal must be allowed and that the order asked for in the notice of appeal should be made, namely the same order as the learned Registrar made but with the omission of the critical finding (1).
30. Neill LJ agreed with Oliver LJ. Sir David Cairns also agreed but expressed his own reasons as follows:-
I have no doubt that in section 26(3)(1) of the Bankruptcy Act the expression “fraudulent breach of trust” means breach of trust which, among other things, is dishonest. In common parlance and in common law the words “fraudulent” and “fraud” certainly connote dishonesty. There are other contexts in which conduct which has not been held to be dishonest has nevertheless been held to be fraudulent. That is true of the Limitation Act in connection with concealment by fraud - Section 26 of that Act. And indeed it is true of the Bankruptcy Act itself in relation to the expression “fraudulent preference”. But in my judgment there is no reason for giving an exceptional and extended meaning to the words “ fraud” and “ fraudulent”, or either of them, in Section 26 of the Bankruptcy Act.
My reasons may be summarised as follows:
(1) No positive ground is advanced for giving any extended meaning to the words.
(2) The consequence of a finding of fraudulent breach of trust are very serious to a bankrupt, because under Section 28(b) of the Act any debt or liability incurred by such a breach is excepted from the release effected in general by an order of discharge.
(3) In Section 26(3) there are set out 12 types of fact on the ground of which the Court may refuse or suspend an order for discharge. Many of the facts so listed are of such a character as would usually amount to unconscionable conduct, but it is only in connection with fact (1), fraud or fraudulent breach of trust, that debts incurred in connection therewith are picked out as being an absolute bar to discharge.
(4) The judgment of Cave J in Re Freemen supports the natural and ordinary interpretation of the word in this section.
31. I was at one stage a little puzzled by Sir David Cairn’s third reason. Section 26 does not, so far as I can see, make a finding of fraudulent breach of trust an absolute bar to discharge. But I think he must have been considering the joint effect of sections 26 and 28, which is that any discharge from bankruptcy is of no substantive effect in relation to debts attributable to fraudulent breach of trust. Moreover, although “fraudulent breach of trust” does not mean the same thing in section 26 of the Bankruptcy Act 1914 as it meant in section 26 of the Limitation Act 1939, conduct which is found to amount to “fraudulent breach of trust” for the purposes of section 26 of the 1914 Act must be within the scope of “ fraudulent breach of trust” for the purposes of section 26 of the 1939 Act. Accordingly a finding of fraudulent breach of trust for the purposes of the 1914 Act means that the bankrupt is indefinitely liable for the consequential debt, regardless of any lapse of time.
32. In the light of these authorities there can be no doubt that for conduct to amount to fraudulent breach of trust within the meaning of section 26 of the 1914 Act and its predecessor there must have been deliberate conduct involving an element of dishonesty.
33. In relation to the present case, however, the relevant legislation is not the Bankruptcy Act 1914 as amended but the Insolvency Act 1986. This Act, as is well known, made a number of fundamental changes in the law relating to bankruptcy. In particular, in relation to matters relevant to the present case, the old machinery for discharge was swept away. In most cases (the exception being cases of a second or subsequent bankruptcy within a fifteen year period which fall within section 279(1)(a)) no court order for discharge is now required. Discharge is automatic at the expiration of the specified relevant period unless the Official Receiver applies successfully under section 279(3). The commission of a fraudulent breach of trust is therefore now irrelevant to discharge from bankruptcy.
34. Under the regime established by the 1986 Act it is, however, still necessary for the legislation to prescribe the effect of discharge. This is done by section 281. While this is very different in form from section 28 of the 1914 Act it retains many of the old concepts. Thus the section prescribes (in subsections (2) to (6)) a number of debts from which the bankrupt is not released by discharge. The list is more extensive than the corresponding list in section 28 of the 1914 Act, but subsection (3) deals with debts incurred in respect of fraud or fraudulent breach of trust in language which is substantially indistinguishable from the equivalent part of section 28 of the 1914 Act. Subject to these exceptions discharge has the effect of releasing the bankrupt from all “bankruptcy debts” (see section 281(1)). This is a more extensive release than that which was provided for by section 28 of the 1914 Act, since “bankruptcy debts” are defined in section 382 more widely than “debts provable in bankruptcy” which were the only debts from which the bankrupt was released by section 28(2). This difference is not material in the present case, but it probably explains why the exceptions to the release provided for by section 281(1) are more extensive than the exceptions to the release provided for by the old section 28.
35. On this application the first question which I have to consider is whether “fraudulent breach of trust” in section 281(3) of the 1986 Act has the same meaning as the same expression in section 26 of the 1914 Act. It was contended on behalf of Mr Woodland that it does and that dishonesty must therefore be established. In support of the statutory demand, however, it was argued that it has a more extended meaning, similar to that unsuccessfully contended for in Re Waldron, so that conduct which is unconscionable, though not dishonest, is enough.
36. In support of this latter argument Mr Mark Arnold, seeking to uphold the statutory demand, relied upon two main contentions. First he said that all the old authorities concerned the meaning of “fraudulent breach of trust” only in relation to the power of the court to make an order for discharge, not in relation to the effect of the statutory release. In terms of the 1914 Act they are authorities on section 26, not on section 28. It is section 28, not section 26, which was the predecessor of section 281(3). Secondly he said that the 1986 Act represents a new code and the cases decided on the previous legislation provide no guidance as to its true construction.
37. As to the first contention, it is true that the applications leading to the authorities I have mentioned were applications for discharge, not attempts to enforce a bankruptcy debt against a discharged bankrupt. But where one has the same expression used in a single statute in sections which not only closely follow each other as a matter of arrangement but deal with the same general subject matter, the strong likelihood is that parliament intended that expression to have the same meaning in each case.
38. Moreover the Court of Appeal in Re Freeman plainly assumed that the Registrar’s finding of fraudulent breach of trust in the application for discharge under section 26 would prevent the bankrupt being released from the relevant debts under section 28. If this had not been so there would have been little purpose in the appeal in Re Waldron. The Registrar had, in that case, refused an order for discharge on a number of grounds besides fraudulent breach of trust and there was no challenge to his decision on these other grounds. Oliver LJ, with whose reasons the other two members of the court agreed, expressly referred to section 28 early on in his judgment and Sir David Cairns specifically based the second of his own reasons on section 28(3).
39. I therefore reject the argument that the pre-1986 authorities provide no guidance as to the meaning of “fraudulent breach of trust” in the context of a provision denying a discharged bankrupt a release from certain debts.
40. As to the second contention, it is true that the Insolvency Act 1986 is an entirely new code in relation to the Bankruptcy Act 1914. In Smith v. Braintree District Council [1990] 2 AC 215 a question was raised as to the power of the court to restrain proceedings against a bankrupt under section 285(1) of the 1986 Act. The decision of the Court of Appeal in Re Edgcome [1902] 2 KB 403 was that the equivalent legislation at that time precluded the debtor’s application and this was applied by the High Court in Smith’s case. On appeal to the House of Lords it was held that Re Edgcome and a case which preceded it were wrongly decided. But Lord Jauncey, with whom the rest of their lordships agreed, gave a second reason for allowing the appeal. He said (at pages 237-8)
The Act of 1986, although re-enacting many provisions from earlier statutes, contains a good deal of fresh material derived from the Insolvency Act 1985. In particular, the legislation now emphasises the importance of the rehabilitation of the individual insolvent, it provides for automatic discharge from bankruptcy in many cases, and it abolishes mandatory public examinations as well as enabling a bankrupt to be discharged without public examination. Thus not only has the legislative approach to individual bankruptcy altered since the mid-19th century, but social views as to what conduct involves delinquency, as to punishment and as to the desirability of imprisonment have drastically changed. It is, for example, most unlikely that anyone today analysing the six exceptions in section 4 of the Act of 1869 would conclude, as did Lord Hatherley in 1871, that they all involved an element of delinquency. In these circumstances, I feel justified in construing section 285 of the Act of 1986 as a piece of new legislation without regard to the 19th century authorities or similar provisions of repealed Bankruptcy Acts: an approach which was, in my view, correctly adopted by the Court of Appeal in In re a debtor (No. 1 of 1987) [1989] 1 WLR 271. So construed, I have no doubt that, for reasons which I have already given, the words “or other legal process” in section 285(1) covered the proceedings in the magistrates’ court for the issue of a warrant of committal, and that accordingly the registrar had jurisdiction to stay those proceedings.
41. What was said in Smith’s case does not, however, lead to the result that pre-1986 authority must always be disregarded in construing the 1986 Act. Hoffmann J dealt with the matter in what has become a well-known passage in his judgment in In re a debtor (No. 784 of 1991) [1992] Ch 554. Having referred to Smith’s case and other authorities he said (at pages 558-9)
Those authorities show that, in approaching the language of the Act of 1986, one must pay particular attention to the purposes and policies of its own provisions and be wary of simply carrying over uncritically meanings which had been given to similar words in the earlier Act. It does not, however, mean that the language of the new Act comes to one entirely free of any of the intellectual freight which was carried by words and phrases in earlier bankruptcy or other legislation.
Decisions of the court upon the meanings of phrases used in Acts of Parliament may come, in the course of time, to give them the quality of terms of art which Parliament may well be assumed to have intended them to bring with them when used in subsequent legislation. In section 265, for example, terms such as “domiciled,” “personally present,” “ordinarily resident,” have had attributed to them, both in the context of bankruptcy and in that of civil procedure generally, a wealth of refined construction which it is difficult to suppose Parliament did not intend equally to apply when those words were used in the Act of 1986. Is there any reason why that should not apply equally to the words “has carried on business?” There does not seem to me to be anything in the policy of the new Act which suggests that in this provision Parliament was intending to give those words a different meaning from those which they had been held to bear under the Act of 1914.
42. Applying the test which is implicit in the last two sentences of the passage quoted from Hoffmann J’s judgment, I ask myself whether there is anything in the policy of the 1986 Act which suggests that in section 281(3) of the Act parliament was intending to give the words “fraudulent breach of trust” a different meaning from that which they had for the purposes of sections 26 and 28 of the 1914 Act and their predecessor sections. In my judgment this question must be answered in the negative.
43. The main changes in legislative approach and social views as to the relevant conduct in respect of the law of bankruptcy which occurred between 1914 and 1986 were the abandonment of a retributive approach and the giving of a new emphasis to rehabilitation. This explains why there is no direct equivalent of section 26 of the 1914 Act in the 1986 Act. Discharge from bankruptcy as the result of the exercise of discretion by the court has now in most cases been replaced by automatic discharge after the lapse of the prescribed time. However section 281 still provides, as had section 28 of the 1914 Act, exceptions to the scope of the release from debts consequential upon discharge. One would expect, however, that the effect of the new climate would be to limit the scope of the exceptions rather than to enlarge them.
44. This expectation is, I think, supported by the fact that section 281 begins by providing the release from debts, subject to exceptions, while section 28 had begun by listing the cases in which discharge did not release the bankrupt and only later provided for a release in respect of all other debts. I do not consider that the fact that sections 281(2) to (7) contain a rather longer list of exceptional cases than section 28 had contained is of significance. The additional cases referred to in subsections (4) and (5) (fines, personal injury damages and debts arising from orders made in family proceedings) are, I think, included because of the widening in the extent of the general release by the reference to “bankruptcy debts” instead of to “debts provable in the bankruptcy.”
45. Mr Arnold argued that “fraudulent breach of trust” must mean something different from “ fraud” because it appears in section 281(3) as an alternative to fraud. However the same juxtaposition appeared in sections 26 and 28 of the 1914 Act and this same argument was raised by counsel in Re Waldron and rejected by the Court of Appeal. In my view there is no substance in it.
46. The reason why section 281(3) refers to both fraud and fraudulent breach of trust appears, I think, from the judgment of Millett LJ in Armitage v. Nurse [1998] Ch 241 at pages 250-251 where he said
The common law knows no generalised tort of fraud. Derry v. Peek 14 App. Cas. 337 was an action for damages for deceit, that is to say, for fraudulent misrepresentation. In such a case fraud must be proved by showing that the false representation was made knowingly, that is to say, without an honest belief in its truth, or recklessly, that is to say, not caring whether it was true or false. Care needs to be taken when these concepts are applied not to a representation but to a breach of trust. Breaches of trust are of many different kinds. A breach of trust may be deliberate or inadvertent; it may consist of an actual misappropriation or misapplication of the trust property or merely an investment or other dealing which is outside the trustees’ powers; it may consist of a failure to carry out a positive obligation of the trustees or merely of a want of skill and care on their part in the management of the trust property; it may be injurious to the interests of the beneficiaries or be actually to their benefit. By consciously acting beyond their powers (as, for example, by making an investment which they know to be unauthorised) the trustees may deliberately commit a breach of trust; but if they do so in good faith and in the honest belief that they are acting in the interest of the beneficiaries their conduct is not fraudulent. So a deliberate breach of trust is not necessarily fraudulent. Hence the remark famously attributed to Selwyn LJ by Sir Nathaniel Lindley MR in the course of argument in Perrins v. Bellamy [1899] 1 Ch 797, 798: "My old master, the late Selwyn LJ, used to say, ‘The main duty of a trustee is to commit judicious breaches of trust.’"
47. It appears to me that the use of the concept of “fraudulent breach of trust” in addition to that of fraud shows an appreciation by the draftsman of the need for care later articulated by Millett LJ.
48. The interpretation of “fraudulent breach of trust” which was urged upon me in this case would, if accepted, result in a considerable narrowing of the release from debts by comparison with the old law. This seems to me to be contrary to the legislative and social changes which underlie the 1986 Act.
49. Further the narrowing which was contended for would, in my view, be of uncertain, although probably very substantial, extent. If the requirement of an element of dishonesty, or “criminal aspect”, is no longer an essential ingredient of fraudulent breach of trust, where, if anywhere, is a dividing line to be drawn between these breaches of trust which are fraudulent and those which are not? Mr Arnold suggested that the test should be one of unconscionability. But it seems to me to be arguable that all, or virtually all, breaches of trust involve an element of unconscionable conduct. A trustee acts in breach of trust when he deals with trust property in a manner inconsistent with the terms of the trust, even though he would be fully entitled to deal with the property in that way if the trust property were his own, as indeed it is in the eyes of the common law. In such a case equity intervenes because it regards the trustee as behaving unconscionably when he deals with the trust property as if it were his own.
50. I see no reason for regarding “fraudulent breach of trust” in section 281(3) of the 1986 Act as meaning anything different from what the same expression meant in section 28 of the 1914 Act. Dishonesty therefore remains an essential ingredient.
51. As I have already observed, the only material relied upon as establishing fraudulent breach of trust in the present case is the findings of the Pensions Ombudsman in his determination. It was accepted that an issue estoppel would be capable of arising from those findings, so that if the Ombudsman has found a fraudulent breach of trust that would be sufficient to substantiate the statutory demand. The question is whether the Ombudsman made such a finding.
52. The starting point must, I think, be to consider what functions the Pensions Ombudsman was discharging when making his determination. The functions of the Ombudsman are set out in section 146 of the Pension Schemes Act 1993. Section 146(1), which is the only material part of the section for present purposes, gives the Ombudsman jurisdiction to investigate and determine certain specified matters. The only matters which are potentially relevant to the present case are those set out in paragraphs (a) and (c). Paragraph (a) relates to complaints by a beneficiary of a pension scheme resulting from injustice in consequence of maladministration of the scheme. Paragraph (c) includes
any dispute of fact or law ... in relation to an occupational or personal pension scheme between
(a) a person responsible for the management of the scheme, and
(b) an actual or potential beneficiary.
53. There is no dispute that Mr Woodland and Mr Lewis (“the trustees”) were persons responsible for the management of the Scheme and that the complainants Mr Robson and Mr Boswell were beneficiaries under it. No complaint of maladministration as such was made against the trustees. The complaint against them was that they had
removed assets from the Scheme and reinvested them in companies in which they had personal interests and, in doing so, they had failed to act prudently, did not take advice and were influenced by their personal interests.
(see paragraph 1 of the determination).
54. What the Ombudsman considered in relation to the conduct of the trustees was first whether this amounted to a breach of trust and secondly, if it was a breach of trust, whether the trustees, or either of them, were exonerated from liability by means of a clause which provided
No trustee shall be responsible chargeable or liable in any manner whatsoever for or in respect of any loss of or any depreciation in or default upon any of the investments ... in which the moneys and assets of the Fund or any part thereof may at any time be invested ... or by reason of any other matter or thing except wilful default on the part of the trustee who is sought to be made liable.
55. In paragraphs 12 to 24 of the determination the Ombudsman set out his findings in respect of “the Investments”, namely the investments which were the subject of the complaint, and in paragraphs 25 to 31 he dealt with certain matters concerning the conduct of the trustees. Paragraphs 32 to 46 relate to a complaint of maladministration against Acorn. In paragraph 47 the Ombudsman returned to the conduct of the trustees. His first conclusion on this is stated in paragraph 59, where he says
For the reasons set out in paragraphs 47-58 above, I find that the Investments were made by the Trustees in breach of trust. They are, subject to my comments below on the exoneration clause, jointly and severally liable to the Scheme for all losses caused by those breaches.
56. To some extent the Ombudsman’s reasons are clear. Of the paragraphs of the determination which are said to set out his reasons, paragraphs 48 to 52 are preliminary. Paragraph 53 contains a clear finding that it was a breach of trust for the trustees to move the majority of the assets of the Scheme from the low risk investments in which they were held when the trustees took office into high risk investments, without taking any investment advice and contrary to the previous advice of Acorn. Paragraph 54 finds that the trustees did not seek legal or investment advice in respect of the new investments, save in one limited case. Paragraph 55 finds that the trustees were in breach of their duties to diversify investments. Paragraph 58 states, quite correctly, that it was of no relevance that the trustees may not have relished their duties.
57. Paragraphs 56 and 57 are less straightforward. The two paragraphs must, I think, be read together. Although all the steps in the Ombudsman’s reasoning are set out I think it may be more helpful to take them in a slightly different order from that in which they are stated. The Ombudsman found that the trustees had placed themselves in a position where their duties to members of the Scheme conflicted with their own personal interests in the companies in which they invested. He found also that a clause to the effect no decision of the trustees should be invalidated on the ground that the trustees had a personal interest in the result of such decision did not relieve the trustees from their obligations to consider the matters which trustees ought to consider when making or varying investments. He accepted that the fact that the trustees had a personal interest in the new investments which they made did not automatically make those investments improper. But he considered that the existence of the trustees’ personal interest cast upon them the burden of showing that the transactions which they had entered into were reasonable and proper and he found that the trustees had not done this.
58. Neither in paragraphs 56 and 57, which I have sought to explain in some detail, nor in paragraphs 48 to 55 which I have dealt with in less detail, does the Ombudsman’s determination as to breach of trust (as distinct from exoneration) appear to me to demonstrate anything capable of being regarded as dishonest or having a criminal aspect.
59. The Ombudsman next turned to the question whether the trustees could claim to be exonerated from personal liability in respect of the breaches of trust which he found they had committed. The question which he asked himself was whether the trustees could satisfy him that they were not in wilful default.
60. The meaning of “wilful default” was considered by the Court of Appeal in Armitage v. Nurse [1998] Ch 241. Millett LJ, with whom the other members of the court agreed, pointed out at page 253 that the expression is used in two senses. The first is when a trustee is said to be accountable on the footing of wilful default, meaning that he is accountable not only for money which he has in fact received but also for money which he could with reasonable diligence have received. In such a case it is sufficient that the trustee has been guilty of a want of ordinary prudence. Millett LJ went on to deal with the second sense of the expression as follows:
In the context of a trustee exclusion clause, however, such as section 30 of the Trustee Act 1925, it means a deliberate breach of trust: In re Vickery; Vickery v. Stephens [1931] 1 Ch 572 ... Nothing less than conscious and wilful misconduct is sufficient. The trustee must be
conscious that, in doing the act which is complained of or in omitting to do the act which it is said he ought to have done, he is committing a breach of his duty, or is recklessly careless whether it is a breach of his duty or not: see In re Vickery [1931] 1 Ch. 572, 583, per Maugham J.
A trustee who is guilty of such conduct either consciously takes a risk that loss will result, or is recklessly indifferent whether it will or not. If the risk eventuates he is personally liable. But if he consciously takes the risk in good faith and with the best intentions, honestly believing that the risk is one which ought to be taken in the interests of the beneficiaries, there is no reason why he should not be protected by an exemption clause which excludes liability for wilful default.
61. In his determination the Ombudsman based himself on what was said in Re Vickery, as quoted in the passage set out above, and on the paragraph from the judgment of Millett LJ which follows that quotation. He addressed a submission of the trustees, who were not legally represented before him, to the effect that they honestly believed that the Investments were in the best interests of the beneficiaries (see paragraphs 61-62). In the case of Mr Woodland he did so after Mr Woodland had attended an oral hearing. (Mr Lewis declined to attend such a hearing).
62. The Ombudsman’s conclusion in respect of Mr Woodland is stated in paragraph 73 of the determination, which reads as follows:
I find from the documentary evidence and from oral evidence given by Mr Woodland, that he acted with a dual motivation. One, instinctive, motivation was to gain a good investment return. Having heard Mr Woodland give evidence, I find that this motivation came from his own commercial instincts and ambitions rather than any duty he felt to members of the Scheme. I find that his other, conscious, motivation was the personal advantages he and his family would gain as a result of his involvement in the Investment companies as directors and shareholders. Whilst I do not find that he was actually aware that he was committing a breach of trust I do find that he was recklessly indifferent in blindly following suggestions made by Mr Lewis in not taking legal advice and in not taking advice on the suitability of the Investments as assets of a pension scheme. I do not find that Mr Woodland gave any significant thought to his duties as a Trustee or to the interests of the members. Whilst I do not find that he deliberately set out to defraud members he was reckless in failing to take advice and recklessly indifferent in relying on Mr Lewis. There is no firm evidence that Mr Woodland genuinely took into account members’ interests. Had he done so I do not accept that, in a scheme in winding up, Mr Woodland could have come to the conclusion that the Investments were appropriate for the Scheme and that he would have decided to invest a large proportion of Scheme assets in them. I therefore do not accept his evidence that he considered the interests of the Scheme members when making the Investments. I find that he deliberately acted as he would have done had the Scheme money been his own. I therefore find that the Investments made in breach of trust resulted in losses caused by wilful default on the part of Mr Woodland. Accordingly he may not rely on the exoneration clause to excuse his personal liability to the Scheme.
63. Mr Arnold argued that this conclusion was sufficient not only to prevent Mr Woodland relying on the exoneration clause but also to establish that Mr Woodland was guilty of a fraudulent breach of trust. In advancing this argument he relied upon a number of matters.
64. First he pointed out that in Armitage v. Nurse at page 251 Millett LJ accepted a formulation advanced by counsel that “actual fraud” (the expression at the heart of the dispute in Armitage v. Nurse)
connotes at the minimum intention on the part of the trustee to pursue a particular course of action, either knowing that it is contrary to the interests of the beneficiaries or being recklessly indifferent whether it is contrary to their interests or not.
To this Millett LJ added
It is the duty of a trustee to manage the trust property and deal with it in the interests of the beneficiaries. If he acts in a way which he does not honestly believe is in their interests then he is acting dishonestly. It does not matter whether he stands or thinks he stands to gain personally from his actions.
65. Secondly, in Walker v. Stones [2001] 2 WLR 623 the Court of Appeal held that the test of dishonesty in relation to reliance upon a trustee exoneration claim should be the same as the test applicable in the case of accessory liability in accordance with Royal Brunei Airline v. Tan [1995] 2 AC 378. In particular the subjective state of mind of the trustee cannot be determinative where his conduct is dishonest according to objective standards. On this Mr Arnold referred also to Twinsectra Ltd v. Yardley [2002] 2 WLR 802 at page 812 D-E per Lord Hutton.
66. Thirdly he maintained that the facts found by the Ombudsman showed that Mr Woodland acted dishonestly in that
(a) He intentionally pursued the course of causing funds belonging to the Scheme to be applied in making the Investments;
(b) The Ombudsman rejected the trustees’ claim that they had honestly believed that the Investments were in the best interests of the beneficiaries;
(c) He also rejected the trustees’ claim that they took legal and investment advice;
(d) He found that Mr Woodland treated the funds with which he dealt as if they were his own property without considering the interests of the beneficiaries and was thus recklessly indifferent whether his action was contrary to their interests, with the result that he cannot honestly have believed that his actions were in their interests; and
(e) He acted not with any intention of benefiting the beneficiaries but so as to benefit himself and his family.
67. I do not think that the last of these factors emerges with clarity from the Ombudsman’s decision, although it is clear that Mr Woodland and his family were interested in the making of the Investments. The other factors are, I think, fairly established by the Ombudsman’s decision.
68. Nevertheless I am not persuaded that the Ombudsman’s decision gives rise to an issue estoppel which establishes that Mr Woodland was not only guilty of breaches of trust but that these breaches were fraudulent. I do not think that the issue which the Ombudsman had to consider was the same as that which has to be considered in relation to section 281(3). It does not appear to me that “wilful default” is precisely the same as “fraudulent breach of trust” so that a finding of the first necessarily involves a finding of the second as well.
69. Fraudulent breach of trust, like any other fraudulent conduct, must be distinctly alleged and as distinctly proved (see Davy v. Garrett (1878) 7 Ch D 473 at 489 and Armitage v. Nurse at page 256). There are no formal pleadings in the present case and the only claim which can be taken to be impliedly pleaded is that the Ombudsman’s decision establishes fraudulent breach of trust. Unless this decision can be said to establish conduct which can only be characterised as fraudulent conduct it is not enough to support the plea, because if the facts pleaded are consistent with innocence it is not open to the court to find fraud (see Armitage v. Nurse at page 256G). I do not consider that the decision establishes unequivocally conduct of the requisite character.
70. In my view therefore the statutory demand ought to be set aside on the ground that the debt is disputed on grounds which appear to be substantial. This decision will not, of course, prevent ANPTL, as the present trustee of the scheme, commencing a new action in which the claim of fraudulent breach of trust is duly pleaded with the necessary particularity and, if it is possible to do so, proved with the necessary degree of certainty.
71. I mentioned earlier that I would return, at the end of my judgment, to a point on the form of the statutory demand. In the demand the creditor is described as “ UCL Group Retirement Benefits Scheme”. It asserts that the Pensions Ombudsman determined that Mr Woodland must pay the sum in issue to “the creditor”. The Scheme as such has, however, no separate legal personality enabling it to sue or be sued. The Ombudsman’s direction was for the payment of the specified sum not to the scheme as such but to ANPTL for the benefit of the scheme. It appears to me, therefore, that any statutory demand ought to have been served by ANPTL and that ANPTL would be the correct petitioner if a bankruptcy petition were to ensue. As the statutory demand must, in my judgment, be set aside the point is one of no practical importance. But if I had taken a different view on the substantive issues it might nevertheless have been necessary to set aside the statutory demand even though there would be no answer to a new statutory demand served by ANPTL In that event, of course, the outcome in respect of costs would be likely to be very different.