The Companies Act 2006 is the largest piece of legislation ever passed by Parliament. The Act is intended to simplify and modernise company law rather than to make wholesale changes to the current law. However, it does make some changes to current requirements.

Many pension schemes have corporate trustees. These trustee companies must comply with the Act’s requirements. This briefing note considers the aspects of the Act which are particularly relevant to corporate trustees.

What aspects of the Act are particularly relevant to corporate trustees?

The Act revises many aspects of company law including the streamlining of the regulatory regime for private companies. However, there are aspects of the Act which are particularly relevant to corporate trustees. These are:

  • Directors’ liabilities
  • The general duties of directors (in particular, conflicts of interest)

Directors’ liabilities: the current law

For many years company law has included prohibitions on exonerations or indemnities given by a company in favour of its officers or directors. From 6 April 2005 the law was amended so that the prohibitions and limitations applied to indemnities given:

  • In favour of a director of an associated company, and
  • By an associated company in favour of a director of the company.

However, companies are allowed to grant “qualifying third party indemnity provision”. Such an indemnity may cover all of a director’s liabilities except for:

  • Any liability owed by the director to the company or any associated company
  • Any liability of the director for a criminal fine or penalty payable to a regulatory authority
  • Any liability of the director in defending criminal proceedings (if convicted) or in defending civil proceedings brought by the company or a group company (in which judgement is given against him) or regarding an application for relief from the court if this is refused

Companies are, however, allowed take out insurance for directors against liability. Any qualifying third party indemnity provision must be disclosed in the directors’ report with the statutory accounts.

Directors’ liabilities: current law issues for pension scheme trustees

The current law was not drafted with pension scheme trustees in mind. In particular, it is not clear whether or not the statutory limitations would catch an indemnity given to a director in his or her capacity as a pension scheme trustee: the limitations only apply to a director’s liability “in relation to the company” and such an indemnity would not be “in relation to the company”. However, the safest route has been to assume that the legislation applies.

In addition, the current law applies differently where the trustees are individuals or a trustee company. The main difficulties are as follows:

  • Individuals: there is only an issue where the individual trustee being indemnified by the company/employer is also a director of the employer or an associated company. It is possible that an indemnity from the scheme’s assets may be considered an “indirect” indemnity from the employer and so prohibited.
  • Corporate trustees: where the trustee is associated with the employer, no indemnity can be given by the employer to any of the directors of the trustee company (regardless of whether or not they are directors of another group company) unless it is a qualifying third party indemnity provision. The provisions will only bite on trustee directors who are also directors of a group company, where the trustee is not an associated company of the employer.

The current law does not apply retrospectively. Instead the provisions have no effect “in relation to provisions made before 29 October 2004 which were not void” under the old law. The problems with this are:

  • It is not clear whether an indemnity in a trust deed made before 29 October 2004 will apply to directors or trustees who are appointed after that date.
  • It is not clear whether an existing indemnity which is replaced (for example by a new trust deed) will qualify for the exemption.

Any indemnity which does not comply with the current law is void.

Directors’ liabilities: the new law for pension scheme trustees

The new law extends the current law provisions to allow companies to provide qualifying pension scheme indemnity provisions (QPSIPs). A company can indemnify a director of a corporate trustee against liability in connection with the company’s activities as trustee of the scheme.

This means that a corporate trustee may indemnify its own directors or be indemnified by an associated company (usually the sponsoring employer). The new provisions do not prevent the sponsoring employer indemnifying the directors of a trustee company with which it is not associated.

A QPSIP must not indemnify the corporate trustee against any liability to pay a fine imposed in criminal proceedings, a penalty imposed by a regulatory authority or any liability arising from defending criminal proceedings resulting in a conviction.

A QPSIP must be disclosed in the directors’ report and copies must be kept and made available for inspection for a further year after it has expired.

Companies may still purchase insurance for its directors and those of an associated company against any liability in connection with any negligence, default, breach of duty or breach of trust by them in relation to the company of which they are a director.

The new law also allows shareholders to ratify (by ordinary resolution) conduct of a director which amounts to negligence, default, breach of duty or breach of trust in relation to the company. Votes of any member connected with the director (or the director if a member) are to be disregarded in deciding if the resolution has been passed.

Directors’ liabilities: when does the new law come into force?

The new requirements came into force on 1 October 2007. They apply to any provision made on or after that date. The current law will continue to apply in relation to any provision to which it applied (and the pre-2005 law will continue to apply to provisions made before October 2004).

Directors’ liabilities: what are the implications for pension scheme trustees?

It is a welcome development that the Act has recognised that corporate pension scheme trustees are in somewhat of a unique position and should be protected accordingly. However, the new requirements do not remove all uncertainties. In particular, it is still not clear:

  • Whether or not an indemnity contained in a new consolidation counts as a new indemnity subject to the new provisions or whether it is subject to the requirements which were in force when the indemnity was first introduced.
  • Whether or not indemnities which were in place before October 2004 would apply to trustees or directors appointed after that date.

The new law does not affect the current position allowing a company to indemnify the directors of a non-associated corporate trustee. In addition, the provisions relating to qualifying third party indemnity provisions (i.e. not specific to pension scheme trustees) are restated in the Act and continue to apply.

General duties of directors: the current law

Generally, directors have many duties in relation to their company imposed on them by case law. Examples include the duty to exercise skill and care, duty to act within powers conferred by the company’s memorandum of association and articles and the duty to avoid conflicting interests and duties. In the pensions context, the duty to avoid conflicts of interest is particularly important. General duties of directors: the new law

The Act codifies directors’ duties. However, it does not contain all the necessary details concerning these duties since regard has to be had to the case law principles which already exist to interpret and apply the duties in the Act.

Key duties for pension scheme trustees are the avoidance of conflicts of interest and declaration of interests. The rest of this section focuses on these duties.

The Act provides that a director must avoid situations in which he or she has an actual or potential conflict of interest. However, the duty is not infringed if the situation cannot reasonably be regarded as likely to give rise to a conflict or if the matter is authorised by a quorum of directors which does not include the conflicted director. Authorisation is effective where the articles specifically allow the directors to authorise the conflict in question.

In addition to the duty to avoid conflicts of interest, the Act provides that a director must declare to the other directors the nature and extent of any interest, direct or indirect, in a proposed transaction or arrangement with the company. The director does not have to be a party to the transaction for the duty to apply. No declaration is necessary where the director is not aware of his or her interest or the transaction/arrangement in question.

General duties of directors: when does the new law come into force?

The provisions relating to conflicts will come into force on 1 October 2008. For completeness, the other provisions relating to directors’ duties will come into force on 1 October 2007.

General duties of directors: what are the implications for pension scheme trustees?

Corporate trustees need to ensure that they comply with the general duties of directors as set out in the Act and in case law. However, this is not a change from the position as it currently applies.

The key duty is the avoidance of conflicts of interest. However, corporate trustees should be well aware of this duty already. The main difficulty facing them is the extent to which they are able to manage any conflict which arises. This difficulty has been recognised by the Pensions Regulator which is, we understand, currently putting together guidance for both individual and corporate pension scheme trustees.

The main implication for directors of corporate trustees is the ability to authorise a conflict in the company’s constitution. However, at the same time the directors need to bear in mind that they are directors of a company which is a corporate trustee of a pension scheme. The company, as trustee, owes fiduciary duties to the scheme and its members. This means that the directors owe duties both to the company and to the pension scheme.

The Pensions Regulator is concerned to ensure that pension schemes have appropriate governance mechanisms in place. Directors of corporate trustees need to be aware that there might be tension between the Pension Regulator’s guidance and the ability in the Act to authorise conflicts. We think that directors of corporate trustees should think very carefully before they amend the constitution of the company to authorise conflicts of interest.