Ombudsman awards £10m against trustee director in groundbreaking ruling

The Pensions Ombudsman has determined that a corporate trustee breached its duties in multiple ways. He has ordered a former director, Mr Shroff, to pay £9.8m into the relevant schemes.

Background

The Uniway and Genwick Retirement Benefit Schemes (the Schemes) are money purchase occupational pension schemes. During the relevant period, Ecroignard Trustees Limited (ETL) was the trustee of both schemes. Mr Shroff was ETL's sole shareholder and director.

More than 200 people took transfers from their existing pension arrangements into the Schemes.

ETL used most of the Schemes' assets to lend or subscribe to unorthodox offshore companies, purportedly vehicles for investment in property, forestry and natural resources.

The investments failed, and, following an investigation by the Insolvency Service, ETL was wound up.

Several members of the Schemes complained to the Ombudsman. A complaint was also made by the replacement trustee.

Findings against ETL

The Ombudsman concluded that:

·       The investments made by ETL had involved extremely high risk.

·       ETL had failed to comply with section 36 of the Pensions Act 1995. Section 36 requires trustees to obtain and consider proper advice before investing.

·       ETL had failed to comply with requirements of the Investment Regulations 2005, in particular as to diversification of investments.

·       ETL had failed to comply with its fiduciary duty to invest for a proper purpose (ie in the long-term financial interests of members). ETL's actual purpose appeared to have been to help third parties channel money towards investments in which they had an economic interest. This was a breach of trust.

·       ETL was responsible for various failures of governance. It had not properly managed conflicts of interest, assessed or documented investment charges, or appointed a suitable administrator. All of this was inconsistent with the relevant Code of Practice which applied at the time. Having regard to the Code, ETL had breached section 249A of the Pensions Act 2004, which required trustees to establish and operate internal controls.

Liability of Mr Shroff

The Ombudsman acknowledged that trustee directors are generally protected from liability by the "corporate veil". However, he found that Mr Shroff had dishonestly assisted in the application of Scheme assets. Mr Shroff was therefore liable as a dishonest accessory to ETL's breaches of trust.

Mr Shroff was in any case liable on other bases. Having procured the breaches of trust by ETL, he was liable as a "constructive trustee". He was also liable as a "manager" and "administrator" of the Schemes; the Ombudsman's jurisdiction extends to people acting in those capacities.

Possible defences

The Ombudsman rejected the idea that members had consented to the breaches committed by ETL. Members might have chosen particular investments, but they did not have full knowledge of the terms and circumstances.

Given the nature of ETL's breaches, neither ETL nor Mr Shroff could rely on a defence of contributory negligence.

Section 33 of the Pensions Act 1995 meant that ETL was not protected either by the exoneration clauses in the Schemes' trust deeds, or by indemnity forms which members had signed when joining the Schemes. Section 33 prevents trustees from excluding or restricting liability for breach of their investment duties.

Given the circumstances, the Ombudsman could not and would not excuse ETL or Mr Shroff from liability using powers under section 62 of the Trustee Act 1925. Section 62 allows a person to be excused only if they have acted honestly and reasonably.

Outcome

Mr Shroff was ordered to pay £7.3m into the Uniway Scheme and £2.5m into the Genwick Scheme. He was also ordered to pay £5,000 to each of the complainant members, as compensation for exceptional non-financial loss.

Comment

One suspects that little will be recovered from Mr Shroff. However, the Ombudsman's ruling is a shot across the bows for others working in the pension scam industry.

There are three points of wider interest:

·       A reminder that, in the absence of deliberate wrongdoing, trustee directors are generally protected by the corporate veil.

·       A discussion as to whether members who have transferred to scam schemes (perhaps on the back of promises which are "too good to be true") might have contributed to their own misfortune, limiting their potential recourse. In this case at least, the answer was a firm "no".

·       An illustration of the significance of Codes of Practice. Codes are not legally binding, but failure to follow a Code may (as here) mean that trustees are in breach of statutory obligations. The point is topical, as trustees work towards compliance with the new General Code.