In its terms the scheme indemnity did not apply to wilful wrongdoing. Separately, in Scots law no indemnity is available in respect of ‘gross negligence’. The trustee needed to know that it could continue to rely on the indemnity to administer the scheme, collect section 75 debts, and respond to any claims.
One employer and an employers’ representative body lodged responses to the trustee’s petition, but withdrew these before the hearing. In order to gain a full picture of the situation the court appointed Lord Drummond Young as reporter to investigate the circumstances and express a view on whether or not the court should confirm the availability of the indemnity.
The reporter told the court that neither wilful wrongdoing or gross negligence were established, and on that basis the indemnity ought to be available to the trustee.
The report
Lord Young’s summary of the law covering these issues noted that no clause in a trust deed can permit a trustee to ignore his basic duties in that office. ‘Gross negligence’ involves a fundamental disregard for the duties of the office of trustee and the exception for gross negligence applies only where there has been a serious lack of attention to the affairs of the trust or serious mismanagement.
In its decision, the court agreed with the reporter that there was no arguable basis for stating that the trustee, or its officers, had ever acted in bad faith; there was no suggestion of fraud or dishonesty; and the conduct of the trustee did not amount to either wilful wrongdoing or gross negligence.
As a result, the court confirmed the trustee’s ability to use the indemnity clause to deal with any relevant proceedings. It also said that if the trustee stopped being the scheme trustee, it would still have recourse to the indemnity in the event of any claims.
Practical implications
Pension scheme rules generally set out the protections available to pension scheme trustees. Typically they will consist of an immunity from claims; an indemnity from either the scheme assets or the employers; or both.
Immunities and indemnities usually exclude protection against fraud, wilful default, and sometimes gross negligence. While the extent of the protection available to a trustee depends on the terms of its scheme rules, similar exclusions apply in Scotland, irrespective of what the rules say.
In Scots law indemnity and immunity clauses in a trust deed are valid and enforceable in respect of ordinary breaches of trust – including negligent breaches – but they do not apply where the breaches involve fraud, dishonesty, bad faith or gross negligence.
In the context of gross negligence this means that no immunity or indemnity is available where a trustee’s actions or omissions are so extreme as to amount to a fundamental disregard for the duties of a trustee.
The court defined this as: “A serious lack of attention to the affairs of the trust or serious mismanagement of its affairs; a mere failure to deal with one particular problem does not normally fall within this category”.
The court said its decision meant there was no need to give further consideration to questions of conflict of interest or replacing the trustee.