Mitchells & Butlers Pensions Ltd v Mitchells & Butlers Plc (High Court, Chancery Division) (12 November 2021)


The High Court has ordered the rectification of pension increase provisions contained in the rules of the Mitchells & Butlers Pension Plan (the “Plan”).

Mitchells & Butlers Pensions Limited (“the Trustee”), the sole corporate trustee of the Plan, raised the claim on behalf of the members. Mitchells & Butlers plc (“M&B”) has been the principal employer under the Plan since November 2003, succeeding to Mitchells & Butlers Retail Limited (“Retail”), which had itself succeeded Six Continents Plc formerly Bass Plc (“Bass” or “6C Plc”) in March 2003.

Rectification was sought for:

  • a trust deed and rules dated 24 July 1996 (the “1996 deed”) and rules (the “1996 rules”), where the change was initially made,
  • a deed adopting alterations to the Plan dated 17 December 2002 (the “2002 deed”) and rules (the “2002 rules”), and
  • the current governing documents of the Plan dated 6 April 2006 (the “2006 deed” and “2006 rules”).

The principal employer under a 1988 deed, the 1996 deed and the 2002 deed was Bass/6C Plc.

Background

Two aspects of the pension increase provisions contained in the Plan rules were in issue:

  • whether the Trustee’s entitlement under the 1988 deed and rules to select an index for determining the annual increase to be applied to pensions in payment (the index selection power or “ISP”), which was not included in the 1996, 2002 or 2006 deeds and rules, should have been continued, and if so whether that right was enforceable against M&B
  • whether M&B was entitled to exercise the right to decide the rate by which pensions in payment should be increased each year (the increase alteration power, or “IAP”). This right was introduced into the governing documentation of the Plan by the 1996 deed and rules and continued in the 2002 and 2006 rules.

The Trustee argued that the rules annexed to the 1996 deed, the 2002 deed and the 2006 deed should be rectified to delete the IAP and reinsert the ISP. M&B accepted that mistakes were made in the drafting of the rules annexed to the 1996 deed and the 2002 deed, which meant that they would be rectifiable, but argued that these should only be rectifiable against Bass/6C Plc. M&B reasoned that when it became principal employer in 2003, it did so as a bona fide purchaser for value without notice of any issues, and as such the deeds could not be rectified against it. M&B also disputed that any rectifiable mistake was made in the drafting of the 2006 deed and rules.

The judge, Mr Justice Trower, who also granted rectification in Univar, recapped the conditions for rectification (an equitable remedy which amends documents so that they accurately reflect the true intention of their makers). The standard of proof is the balance of probabilities, but “convincing proof” is required to counteract what is displayed on the face of the instrument itself. The judgment goes on to set out in brief a useful summary of the “essential conditions to be satisfied” (as determined by case law including FSHC among others) for a rectification claim as follows:

  • the claimant must establish a continuing common intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified
  • this must be an actual, subjective intention, “which is rightly a demanding test to satisfy and as a matter of policy should be difficult to prove”
  • while an outward expression of accord must normally be proved, it is not required where the claim is for rectification of the rules of a pension scheme made pursuant to a power of amendment exercisable by trustees with an employer’s consent. In that context it is sufficient if the (subjective) intentions of trustees and employer coincide, so that they both independently have the same intention
  • the common intention must have continued to subsist at the time of execution of the instrument
  • it must be shown that, by mistake, the instrument did not reflect that continuing, common intention.

Judgment

Witness evidence

Witness evidence was heard from a number of individuals and included a number of general themes.

The witnesses all expressed what the judge accepted was a universal belief at the time the 1996, 2002 and 2006 deeds were executed that the existing Plan documentation contained a guaranteed pension increase entitlement. He also “found compelling” a belief they all held that, broadly, had a proposal to make such a substantive change to the provisions been on the table they would have been aware of it.

 The judge concluded, on the evidence, that the Trustee did not intend to make this particular change. It had crept in through the use of a “standard form” template during a general updating of the Plan documentation, and was subsequently simply copied across to the later rules.

 Separately, M&B opposed the rectification of the 2006 documentation on the grounds that there was no rectifiable mistake (as it had become principal employer by the time the 2006 deed was executed, there was no question of a bona fide purchaser defence). M&B argued that it was specifically intended that the 2006 rules would replicate the increase provisions in the form contained in the 1996 rules and the 2002 rules. The Trustee argued that only limited changes were intended in 2006, and that, when the decision-makers for the Trustee and M&B were considering the 2006 deed and intending there to be no change to the pension increase provisions, they believed the pensions increase provisions were as they understood them to be (ie in the form for which rectification is sought).

The judge was satisfied that this was the generally held understanding, and that this had been the situation since before the 1996 deed and rules, and remained the situation after the 2006 deed and rules were entered into. There was a continuing common intention by the decision-makers in 2006 that, although the 2006 deed and rules had not been intended to make substantive changes to the form of the 2002 deed and rules, this was because the decision-makers all had an actual, albeit erroneous, belief that the pension increase provisions had the pre-1996 meaning.

In these circumstances, the judge considered that the rectification sought by the Trustee should be granted.

 Bona fide defence

The High Court agreed with the Trustee: the defence of bona fide purchase without notice was not available to M&B, because it is inapplicable to a transaction such as the one by which M&B became principal employer: M&B was not a purchaser for value of an interest in property, but was assuming the role of principal employer in relation to the Plan under a deed of substitution as prescribed by the Plan’s governing documents.

M&B succeeded in all respects, so far as its duties and powers under the Plan were concerned, to the position of principal employer held by its predecessor; it was not merely a successor in title to property The Trustee therefore could enforce its rights against the new principal employer to the same extent as it would have been able to enforce those rights against the old one. Whilst wording preserved the obligations of the old principal employer in respect of the period prior to the substitution and release, it did not prevent the incoming principal employer from becoming subject to existing obligations which may fall to be enforced at any time after the date of substitution. These included the subsisting equity of rectification.

Consultation with the Plan actuary

The Trustee argued that the removal of the ISP and the inclusion of the IAP infringed the terms of the power of amendment contained in the Plan and were therefore invalid. The powers of amendment in the relevant documents required the Trustee to consult with the Plan actuary before it was able to alter or modify all or any of the trusts, powers or provisions contained in the rules. This was also subject to a proviso that no alteration or modification could be made which in the opinion of the Plan actuary substantially prejudiced the rights or interests of Plan members in respect of prior service.

The judge noted that consultation with the Plan actuary would not satisfy the requirement if there was no sufficient identification of the subject matter of the consultation. What is sufficient in terms of consultation generally will vary from case to case, but appropriate steps must be taken to ensure that the consultee is made aware of the proposed alterations or modifications on which they are being consulted. In this case, the actuary’s attention was not drawn to the changes by the draft, any accompanying or explanatory materials, or instructions from the Trustee or its lawyers.

The judge added that he was doubtful that it would have been sufficient for M&B to show that the actuary should have identified the matter on which they were being consulted. The way in which the accompanying materials described the nature of the substantive changes meant that the actuary was entitled to assume that the legal meaning and effect of the pension increase provisions were unchanged from what they and everyone connected with the Plan at the Trustee assumed they were.

The judge therefore concluded that there was no valid consultation with the Plan actuary on the introduction of the IAP and the removal of the ISP at the time of execution of the 1996 deed. As this was a condition precedent to the effectiveness of that alteration to the Plan’s deed and rules, he was satisfied that the modification of the pension increase provisions by the 1996 deed was invalid and of no effect.

For the same reasons, the alterations to the pension increase provisions made in the 2002 and 2006 deed were also invalid.

Section 67 PA95

Had the judge concluded that the introduction of the IAP and the deletion of the ISP only took effect for the first time in 2002 (ie where the 1996 change was invalid), section 67 (protection of subsisting rights) was potentially engaged.

As it was plain from the evidence that the actuary was never asked (and therefore could not have addressed) the question of whether the pension increase changes affected accrued rights the 2002 actuarial certificate was not binding. In fact, had the actuary asked themselves the right question, the evidence indicated that a certificate would not have been given. As a consequence, the introduction of the IAP and the exclusion of the ISP as reflected in the 2002 deed were both invalid and of no effect.

By 2006 the law had changed. Section 67 PA95 now provides that any exercise of a power to modify a scheme “to make a regulated modification” was voidable (but not void) unless specified requirements were satisfied. The judge considered that there was no need for a separate declaration from TPR as the trustee could rely on the court’s findings.

Comment

The case is relatively unusual, in that rectification was granted on behalf of a scheme’s members against an employer. In addition, the discussion of witness statements and proper consultation will be of interest to schemes, lawyers, and actuaries alike.