The case of Roadchef (Employee Benefits Trustees) Limited v Hill (and others) [2014 EWHC 109 (Ch] concerns an employee benefit trust (EBT) but not the tax treatment or the various challenges to tax planning involving EBTs initiated by HMRC and evidenced by the Rangers case.
Roadchef instead concerned an EBT established to provide more conventional benefits to employees through employee share schemes. The detailed facts are complex, but in outline:
Roadchef was subject to a management buy-out in 1983.
- Following the MBO, an EBT (or ESOP) was established to acquire shares and deliver them to employees through broadly based share schemes open to staff members equally, subject to satisfying the requirements of the “Share Participation Scheme” (or “SPS”) established for this purpose.
- Timothy Ingram Hill was Chief Executive of Roadchef and a trustee of EBT 1. As trustee, he was unable to participate in the SPS.
- He resigned as Trustee on 5th April 1988.
- A second EBT was established later that year and a resolution passed to transfer a significant number of shares to the second EBT from the ESOP.
- Following the creation of further share rights, those shares became available for Mr Ingram Hill who as a result derived personal benefit from the shares held in the second EBT and which had originated from the holding of shares in the ESOP which he was precluded from being a beneficiary.
Expressed simply, the issue considered by the Court was whether the transfer of shares from the ESOP to the second EBT and the subsequent benefits derived by Mr Ingram Hill were valid so that he could retain those benefit or whether they were void so that he would be required to surrender his profits and restore them to the trustees of the ESOP.
The Court concluded that the transfer and benefits were void so that restoration would be necessary in a total amount still to be determined.
This conclusion was based on a number of findings:
- The Trustees of the ESOP had acted in breach of their duties by benefitting the beneficiaries of the second EBT rather than solely being concerned with the trustees of the trust they were responsible for.
- This applied both through an application of general trust law and the specific terms of the ESOP.
- Mr Ingram Hill in acting as a director of Roadchef and as a director of the Trustee of the ESOP had at least in part an improper purpose, namely to benefit personally.
- The acquisition of the shares by Mr Ingram Hill was not made in good faith.
- Further, he was in breach of his fiduciary duties at Trustee.
To some extent, the case was peculiar to its own facts. There are some wider lessons to be drawn, however:
- Trustees of all trusts, including ESOPs and EBTs, owe extensive duties as Trustees.
- This includes acting at all times in the interests of the Beneficiaries of the trust and avoiding a conflict between their own interests and those of the Beneficiaries.
- This implies a requirement for independent decision making and full disclosure of potential conflicts.
These are points which may be particular pertinent when setting up Employee Ownership Trusts owning more than 50% of the Company consistently with the new reliefs offered for such trusts.