| QC report on Halifax Demutualisation
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RE: RIGHTS OF DECEASED MEMBERS OF HALIFAX BUILDING SOCIETY ON TRANSFER
OF BUSINESS TO HALIFAX PLC
JOINT ADVICE
CRANSWICK WATSON
7 GREEK STREET
LEEDS LSI 5RR
Ref: JSG.MP.3499.
RE: RIGHTS OF DECEASED MEMBERS OF HALIFAX BUILDING
SOCIETY ON TRANSFER OF BUSINESS TO HALIFAX PLC
FURTHER JOINT ADVICE
1. We advised in writing on 9th March 1998.on the question
whether the estates of deceased members of the Society have any reasonably
arguable claims against Halifax Plc arising from their treatment under the
terms of the transfer of the Society's business to Halifax Plc. 2. By
letter dated 13th March 1998, our Instructing Solicitor has asked us to
advise shortly on a separate but related point, namely, whether the
estates of any deceased members have a claim against the Building
Societies Commission in the events which have happened-and having regard,
in particular, to the Commission's letter to our Instructing Solicitor of
13 March 1998.
The role of the Commission
3. The Commission is a body corporate established by statute (the
Building Societies Act 1986) and it exercises public functions. As such,
its decisions ought to be susceptible to judicial review if, for example,
unreasonable (in the Wednesbury sense) or the product of a
misdirection as to the relevant law.
4. The Commission's statutory role, so far as the transfer of business
to Halifax Plc was concerned, was to confirm such transfer (pursuant to s.
98(2) of the Act which imposed a mandatory duty to do so) unless it
considered pursuant to s.98(3) of the Act that any of the exceptions set
out in (a) - (d) of the subsection applied.
5. Potentially relevant for our purposes is (d) which covers the case
where it some relevant requirement of this Act or the rules of the society
was not fulfilled". However and as is clear from our earlier Advice,
we think that the terms of the transfer complied with the 1986 Act and
with the rules of the Society. Accordingly, and on our present
instructions, we do not think it arguable that the Commission confirmed
the terms of the transfer when applying s.98(2) and (3) of the Act - it
ought not to have done so.
The Commission's letter
6. Further, in our view, the Commission's letter of 6 March 1998
(referred to above) does not seem to us to reveal errors of law in the
Commission's approach to the matter.
7. What the Commission says in the first substantive paragraph of its
letter about the respective responsibilities of the Board. the voting
membership and the Commission itself is consistent with what we say in our
earlier Advice and above.
8. In its next paragraph, the Commission says that it is a matter for
Halifax Plc to justify its distribution of shares to PRs who had not been
registered as members as at the date of distribution. If, in so doing, the
Halifax thereby acted in breach of its rule 34 (set out in para. 21 of our
earlier Advice), that, in our view does not support an argument that the
Commission ought not to have confirmed the transfer. Moreover, and from a
practical perspective, the contention that Halifax breached its rules in
distributing shares to unregistered PRs does not assist in mounting the
argument that Halifax acted unlawfully in not distributing shares to
registered PRs.)
Bars to relief
9. Even if there were a respectable argument that the Commission had
acted unlawfully in confirming the transfer, so that its confirmation
should be susceptible to judicial review, we think that any application
for leave to apply for judicial review-would be practically certain to
fail.
10. We say this for two reasons - delay and third party rights.
11. The Commission confirmed the transfer on 23 May 1997. Not only is
the 3month time-limit for commencing judicial review proceedings long past
but almost a full year has passed since the decision complained of.
12. Secondly, a decision quashing the Commission's decision confirming
the transfer would (theoretically) require an unraveling of the
consequences of the (now to be treated as) unconfirmed transfer. In our
view, this is a result which the court would do its utmost to avoid
achieving.
Original signed by
JAMES GOUDIE Q.C. and
SIOBHAN WARD
11. KING'S BENCH WALK,
TEMPLE, LONDON EC4Y 7EQ.
13 TH May
1998.
RE: RIGHTS OF DECEASED MEMBERS OF
HALIFAX BUILDING SOCIETY
ON TRANSFER OF BUSINESS TO HALIFAX
PLC
JOINT ADVICE
Background
1. Halifax Building Society transferred its business to
Halifax PLC on 2 June 1997. Under the terms of the transfer, members of
the society became entitled to free shares in the PLC. However, the
Transfer Agreement (which, by s. 97(5) of the Building Societies Act 1986
("the Act"), is deemed to confer enforceable contractual rights
on members) distinguished between members who were alive at the time of
the transfer and those who had died by then. Deceased members whose deaths
had been registered with the Society prior to the transfer were treated
less favourably. Their PRs were required to satisfy certain requirements
which, in practice, they could not, leading to the result that the estates
of such deceased members obtained f ewer shares than would have been
obtained by the members, had they lived.
2. We are instructed to advise whether the estates of
deceased members which have found themselves in the above predicament have
any reasonably arguable claims against Halifax PLC.
3. The essential complaint of the PRs of these deceased
members is that they have not been treated fairly. The unfairness is
self-evident: why should living members obtain a greater entitlement than
the estates of members who had the misfortune to die before the vesting
date? Halifax PLC do not suggest that there is any reason to distinguish
between living and deceased members on their respective merits. What they
say is that the terms of distribution of the free shares had to
distinguish between deceased and living members in order to avoid
contravening the relevant legislation: (see, e.g., Halifax letter to Mr.
Johnston dated 12th September 1997). We consider this justification below.
For the present, we focus upon the potential legal framework in which the
essential complaint of unfairness might be placed.
Legal framework - implied duty to
act fairly
4. Rule 78 of the Rules of the Society dated July 1996
empowers the Board to "exercise all such powers and do all such acts
and things as the Society is by its Memorandum, the Rules, or the Act,
authorised to exercise and do, and as are not by its Memorandum, the
Rules, or the Act, required to be exercised and done by the Society in
general meeting." Rule 78 further provides that, for the purpose of
exercising these powers, the Board "shall have power, subject to the
Rules, to do all such acts and things as are in the opinion of the Board
necessary or desirable for the good conduct of the affairs of the
Society". The rule further directs the Board to "conduct and
manage the affairs of the Society in all things according to its
discretion".
5. In or about December 1996, the Board circulated the
Society's membership with a Transfer Document which set out the terms of
the proposed transfer agreement with Halifax PLC. The Transfer Document
(at p.147) gave notice of a special general meeting to be held on 24th
February 1997 for the purpose of passing certain resolutions approving the
terms of the transfer set out in the proposed transfer agreement. In order
to transfer its business to Halifax PLC, the Society was required by s.
97(4) of the Act inter alia to agree conditionally with its successor in a
transfer agreement on the terms of the transfer and to approve the
transfer and the terms of the transfer by the requisite transfer
resolutions passed by the Society in general meeting in accordance with
paragraph 30 of Schedule 2 to the Act.
6. Thus the Board, in conditionally agreeing the terms of
the transfer agreement with Halifax PLC and in proposing to the membership
a transfer on the terms set out in the Transfer Document, will have acted
pursuant to Rule 78. The transfer itself, however, will have been effected
by the Society in general meeting having passed the requisite resolutions
approving the transfer.
7. It is well-established that the rules of a building
society constitute a contract between the society and its members: Re West
Riding of Yorkshire Permanent Benefit Building Society. Ex p. Pullman, Ex
p. Charnock, Ex D. Johnson and Greenwood (1890) 45 Ch D 463. There is
authority too for the proposition that, at least in the context of mutual
undertakings (such as mutual insurance) and bodies exercising
self-regulatory powers, that the exercise of powers by the regulatory body
with respect to its members will be controlled by considerations of
legality, rationality and fairness: CVG Siderurgicia del Orinoco SA v
London Steamship owners' Mutual Insurance Association Ltd. (The Vainqueur
Jose) [1979] 1 Lloyd's Rep 557; Shearson Lehman Hutton Inc v Maclaine
Watson & Co. Ltd. [1989] 2 Lloyd's Rep 570.
8. In The Vainqueur Jose, Mocatta J. made no distinction
between the rules of law applying to a contractual discretion and those
applying to a statutory discretion, saying (at 574): "To the exercise
of such (contractual) discretion the common law principles must apply and
these undoubtedly include fairness, reasonableness, bona fides and absence
of misdirection in law." Webster J. in Shearson (which concerned the
rules of the London Metal Exchange) approved this dictum (at 625), stating
(at 628) that, in passing a rule which provided for the fixing of
settlement prices, the LME was required to act fairly and to take into
account relevant considerations and exclude irrelevant considerations.
Webster J. was prepared to reach this conclusion by implying a term to
this effect into the contract between members and the Exchange, saying (at
628): "Even if these requirements were not to be implied as being
necessary to give efficacy to the rules, their implication is such an
obvious requirement that the parties, namely the members of the IME who
made the rules, must have intended them to form part of the rules; I am
satisfied that the members would, as reasonable men, have agreed to those
requirements had they been suggested to them, and that they are
requirements that must have been intended by them."
9. Beatson in his article "Public Law Influences in
Contract Law" (at p. 263 of Good Faith and Fault in Contract Law, ed.
Beatson and Friedmann) suggests that the distinguishing feature of the
cases on regulatory bodies (e.g., Shearman above) is that a contractual
power is held by a person who is in a sense holding the balance between
different groups, whether they be mutual insurers, metal dealers, union
members (as in Breen v AEU [1971] 2 QB 175) or those engaged in a
particular sport (see Enderby Town Fottball Club Ltd. v Football
Association Ltd. [1971] 1 Ch. 591). Plainly, the Board of a building
society can be regarded as in a sense charged with holding the balance
between members of the society.
10. Having regard to the above, we think there is a
reasonable argument that the powers given to the Halifax Board by Rule 78
(set out above) were subject to an implied term that, in exercising its
powers according to its discretion, the Board should act fairly, in good
faith and after having directed itself properly as to the law.
11. As pointed out above, it was not the Board who
effected the transfer to Halifax PLC on the terms of which the PRs of
deceased members now complain. The Board had no power to effect such
transfer, which was effected by the company in general meeting. However,
it was the Board who proposed and recommended the resolutions which were
required to be passed in order to effect the transfer. Further, as appears
from the text of the Transfer Document, it was the Board who decided the
terms of the distribution and the principles to be applied in deciding
such terms (see p.31). In our view, in so doing, the Board will have acted
pursuant to Rule 78. Consistently with our views expressed in the
preceding paragraph, we think that the following implied term of the
contract of membership can reasonably be contended for, namely:
"that in determining the terms of distribution of
free shares on the transfer and in determining the applicable principles
for the purpose of such distribution, the Board should:
(i) direct itself properly as to the relevant law;
(ii) direct itself properly as to the true and proper
construction of the Rules;
(iii) save insofar as required by the Rules or by the
relevant law to do otherwise, act fairly so as to produce equality as
opposed to inequality amongst members of the Society."
12. Having developed the argument-in support of the
implied term set out in the preceding paragraph, we now consider the
strength of the argument that such implied term has been breached.
Breach of duty to act fairly - s. 100(8) and whether
membership ceases on death
13. The Society's justification for treating living and
deceased members differently is as follows. First, it is said that
membership ceases on death: (see paras. 1.5.1 and 1.5.2 of Section C of
Transfer Document). Second, it is said that, since membership ceases on
death and further since entitlement to any free shares is conditional upon
the member remaining a member until midnight on the day before vesting
day, the estates of members who died before vesting day should (strictly
speaking) have no entitlement to any free shares. Thirdly, however, (and
as it were by way of concession to deceased members) it is said that
"special terms" will apply if the death of a member has been
notified to the Society before vesting day. These "special
terms" are set out in detail over several pages in para. 1.5.3 of
Section C of the Transfer Document. They permit the PRs of a deceased
member whose death has been notified to the Society prior to the vesting
day to claim for the estate the basic distribution of shares (provided
that a number of other conditions are satisfied), but once only. (Thus, if
the same individuals are PRs for a number of deceased members' estates,
they will never become entitled to more than one basic distribution.)
Further, PRs who themselves have been members for the two years ending
with the qualifying day will be entitled to the (more valuable) variable
distribution of free shares, but PRs who have not been members for that
two-year qualifying period (even if the relevant deceased members had been
members for that period) will not. To have permitted PRs who had not
themselves been members for the two-year qualifying period to claim the
variable distribution (it is said) "would have contravened the
relevant legislation" (see letter of 12th September 1997, supra).
14. The starting-point for the Society's approach (as
summarised in the preceding paragraph) is that membership ceases on death.
We focus upon this starting-point. We can see how the Society's
construction of the relevant legislation is supported if the Society is
right about membership ceasing on death: (see further paras. 15-16 below).
(However, and though it is to run ahead, we think that, even if the
Society is wrong on this point, their approach (so far as construction of
the relevant legislation is concerned) is still likely to be upheld.) If
the Society's construction of the legislation is correct, in our view, the
Society will not have breached the implied term set out above. The answer
to the complaint of unfairness in that event would be that the inequality
between living and deceased members results from applying the relevant
legislation and no implied duty to act fairly could override the
requirements of the relevant legislation.
15. S. 100(8) of the Act (the relevant legislation)
provides:
"Where, in connection with any transfer, rights are
to be conferred on members of the society to acquire shares in priority to
other subscribers, the right shall be restricted to those of its members
who held shares in the society throughout the period of two years which
expired with the qualifying day; and it is unlawful for any right in
relation to shares to be conferred in contravention of this
subsection."
16. We obtain very limited assistance from the two
reported decisions on the sub-section (Abbey National Building Society v
Building Societies Commission [1989] 5 BCC 259 and Building Societies
Commission v Halifax Building Society and another (1995] 3 All E.R. 193)
apart from confirming our opinion that the entitlement to the variable
distribution is plainly a priority right within the meaning of s. 100(8).
In our view, if membership ceases on death, so that the only possible
member capable of claiming an entitlement to the variable distribution in
respect of the deceased member's estate is the member's PR (who has been
registered as member in the place of the deceased member prior to the
vesting date), we think that the Board's position - that s. 100(8)
required the PR member to have been a member for the two-year qualifying
period - is virtually impregnable. We say this because we think that the
only member entitled under the section to have a priority right conferred
on him or her is a member who has served the two-year qualifying period.
If membership ceases on death, the member who has satisfied the two-year
rule and the member who is claiming the free shares - the PR - cannot be
regarded as one and the same.
17. If membership does not cease on death, we think there
may be some scope to argue that the Board's approach to s. 100(8) was
wrong, but we would regard the argument (developed below) as very weak
indeed. We nonetheless develop the contention that membership does not end
on death since, at the least, it would permit the argument that the Board
approached its task of construction on a false premise.
18. Whether or not membership of the Society ended on
death is, in our view, a matter of construction of the Rules of the
Society. Members on being admitted to membership of the Society become
parties to the contract constituted by the Rules. It ought to be for the
contract - the Rules - to state when a member's membership should cease.
19. Rule 26 is headed "Commencement and Termination
of Membership". Sub-rules (b) and (d) provide respectively for
investing membership and borrowing membership to cease when there is no
amount standing to the credit of the investing member and when there is no
money outstanding between the borrowing member and the Society in respect
of an advance. The rule does not provide for membership to terminate on
death.
20. Although it plainly assists the argument that
membership does not end on death that there is no express and specific
rule to this effect, the absence of such a rule cannot be conclusive on
the point. We think that the Society would be very likely to argue that it
is implicit in the Rules themselves and/or in the very concept of
membership that membership cannot survive death. So (the argument would
run) if one looks at the incidents of membership under the Rules, it is
plain that the rights of membership can only be exercised by the living:
to take the obvious example, a dead member cannot vote.
21. The argument set out in the preceding paragraph would
undoubtedly be attractive to a court. However, we think there is a
respectable argument that, apparently straightforward though that approach
may be, it is too crude and a more sophisticated analysis is required. We
are assisted in this approach by rule 34 of the Society's Rules which is
headed "Deceased Members" and provides as follows:
"Except where the Society may otherwise make payment
under the Act, the personal representatives of a deceased member (not
being one of several joint members) shall be the only person recognised by
the Society as having any title to any money of the deceased member in the
funds of the Society but the personal representative shall not be treated
as a member in respect of the deceased member's Share unless registered as
such."
22. We think it is significant that rule 34 does not say
in terms that membership ceases on death. Moreover, we think that that
rule provides a basis for the argument that the membership of a member
continues after his death, but that the rights of the deceased member are
only exercisable by his PR after that PR has been registered as a member
in respect of the deceased member's share. The membership of the PR,
following his registration as member, has the special feature that, in
accordance with rule 34, the PR is treated as member in respect of the
deceased member's share. Thus, the PR has no rights of membership personal
to him. The deceased member's share has not been transferred to him. There
is no requirement that, in order to become a member, he should open an
account with or accept an advance from the Society. The PR simply stands
in the shoes of the deceased member in order (so the argument runs) that
the deceased member's rights may be exercised. The PR is not exercising
any membership rights personal to him: he is exercising the deceased
member's rights of membership. Thus (and so the argument concludes) whilst
the name on the register in respect of a deceased member's share will
change following the member's death and registration of his PR in his
stead, the same rights of membership and in substance the same membership
continue in existence throughout, so that the PR may receive the variable
distribution for the account of the deceased member's share without any
contravention of s.100(8).
23. It is the final stage of the argument set out in the
preceding paragraph which, we think, is the trickiest. The trouble is that
s.100(8) focuses not so much on membership as on the individual
"member". S.119(l) of the Act states that "member"
"includes any person who for the time being holds a share (whether
advanced or not) in the society". Although the word
"includes" in s. 119(1) leaves some room for argument, we think
that once a person other than the deceased member holds the deceased
member's share, it is very difficult to avoid the result that that person
is now the relevant member. Thus, the counterargument to the argument
advanced in the preceding paragraph would be that, whether or not
membership survives death, the registered member who is the PR and the
registered member who was the deceased are not one and the same
individual. They do not share a common identity and therefore the
requirements of s. 100 (8) -which focuses on the identity of the person
who is member at the two relevant dates for the purpose of the sub-section
(it will be said) - are not satisfied.
24. Although we think that the argument that membership
survives death cannot be relied upon as the means to break open the
Society's approach to the construction of s. 100(8), we are of the view
that there is potential leverage to be gained (in terms of prospective
settlement negotiations with the Society) in challenging the premise on
which the Society plainly approached its construction task. That premise
can be challenged having regard to what the rules do and do not say (see
paras. 18-22 above). The inequitable result achieved on the Society's
approach to the matter can also be relied upon. Moreover, Some assistance
can be obtained from the authorities.
25. Helpful (up to a certain point), in our view, is the
decision of the Court of Appeal in James v Buena Ventura [1896] 1 Ch. 670.
The broad facts of the case and the considerations of equality and equity
which there arose are distinctly comparable to this case. James concerned
Art. 27 of the then Table A which provided that on increase of the capital
of a company the new shares should be offered to the "members"
in proportion to these existing shares. It was held that
"members" in the Article included a deceased member so long as
his name was on the register. Lord Herschell appears to have been
influenced by the need to produce equality of treatment between classes of
shares, stating (at 465) that there was no sufficient reason "for
denying to the estate of the deceased member an advantage which is offered
to all the other persons who are members of the company whist continuing
to hold that estate liable to all the burdens attaching to the shares
registered in his name".
26. A limitation of the decision in James is that Lord
Herschell proceeded on the basis that membership "strictly
speaking" ended on death and based his decision on his construction
of the relevant Article. Secondly, and more importantly, the court appears
to have assumed that, if the PR of the deceased member had been registered
as member, the estate would have had no claim to be offered more shares.
Relevant to this point are our instructions that the Society adopted the
policy that, if a member died before the vesting date but his death was
not registered with the Society prior to the vesting date, the PRs would
be entitled to claim for the benefit of the estate both the basic and
variable distributions irrespective of the duration or existence of the
PRIs membership of the Society. This approach is plainly consistent with
the James approach. It is on the face of it, however, inconsistent with
the Society's starting-point in the Transfer Document that membership
ceases on death.
27. If James is potentially of assistance, we should point
out that the decision of the Court of Appeal the previous year in Re
Bowling & Welby's Contract [1895] 1 Ch. 663 is potentially unhelpful.
Moreover, unlike James (which concerned membership of a limited company),
Bowling was concerned with membership of a building society.
28. The question in Bowling was whether an order for the
winding up of the building society had been validly made. In order for the
society to have been capable of being wound up under the relevant section
of the then Companies Act, it was necessary for the society to have had
more than seven "members". Lindley L.J. considered whether this
requirement had been satisfied (at 669-670): "What is the meaning of
"members"'.;' ... when you come to look at each particular
company, you must look at the constitution of that company, and see what
constitutes membership in it. You must look at the rules of the company...
Building society rules are not very intelligible as they are usually
framed, and it is not very easy to find out what constitutes a member of a
particular society; but if you look at the rules of this society member
means a person who subscribes to the funds of the association, and who is
admitted a member on the payment of a certain fee, -and every member who
pays his fees is entitled to a share. Now, did this society then consist
of seven members when this winding-up happened? The answer to that is
unquestionably No. It had a few members, but only a few members . . -
there were four existing members, and some deceased members, and a
bankrupt member. The purchase contends that that will not do. He says that
the executor of a deceased member is not a member. That is perfectly
correct. You cannot look upon the executors and administrators of a
deceased member as being "members" unless they become
such."
29. Is Bowling authority for the proposition that deceased
members cannot be members of a building society? We would say not. We
think it is authority at most for the proposition that the personal
representatives of a deceased member are not to be treated as members
unless they are registered members. Moreover, the decision is consistent
with the approach we advocate, namely, that what constitutes membership of
any one building society will depend upon the rules of that society.
Conclusion
30. We think that it is reasonably arguable that the
contract between the Society and the members contained an implied term
that, in determining the terms of distribution of free shares on the
transfer and in determining the applicable principles for the purpose of
such distribution, the Board should (i) direct itself properly as to the
relevant law and (ii) direct itself properly as to the true and proper
construction of the Rules. In our view, there is a respectable argument
that the Board misdirected themselves as to the relevant law and
misconstrued the relevant rules in concluding that membership ended on
death. Accordingly, we think that there is a respectable argument that the
Board acted in breach of contract to this extent.
31. However, although we think it fairly arguable that
there was also an implied term that, in determining the terms of
distribution of free shares, the Board was required, save insofar as
required by the Rules or by the relevant law to do otherwise, to act
fairly so as to produce equality as opposed to inequality amongst members
of the Society, we think that the argument that this implied term was
breached is extremely weak. This is because, even if the deceased members'
membership continued after their death, once their PRs were registered
members in their stead, we think that a court would be very likely to hold
that s. 100(8) did prevent the Society from granting the variable
distribution to the deceased members' estates.
32. The conclusion, in practical terms, at which we have
arrived is that, even though a respectable argument can be advanced that
the Society has acted in breach of contract, the breach of contract in
question, even if established, would produce an award of only nominal
damages since the Society would be very likely to establish that that
breach had caused the estates of the deceased members in question no loss.
Other arguments - the Woolwich
solution?
33. The Woolwich Building Society adopted a different
approach to deceased members to that adopted by the Halifax. The principle
which the Woolwich applied (see para. 5.1.1 of Part B of the Woolwich
Transfer Document) was "to preserve and protect the entitlement of a
qualifying deceased member to free shares through his or her PRII.
Applying this principle, the Woolwich created three categories of
non-members, one of which consisted of PRs of deceased investing and
borrowing members. PRs falling within this category (and provided that
certain eligibility criteria were satisfied) were entitled to the same
free shares as would have been available to the deceased members whose
estates they represented, had the members survived the vesting-date. By
treating the PRs as non-members, the Woolwich avoided any difficulty with
s.100(8) of the Act. The PRs not being members, there was no risk of
granting a priority right to members in breach of s.100(8).
34. Is there a reasonable argument that the Halifax was
under a contractual duty to its members to adopt the Woolwich solution? We
think not. It is- fundamental to the Woolwich approach that the Society is
making special provision for nonmembers. Unless the PRs are treated as
non-members, s.100(8) comes into play. There is therefore, in our view, no
realistic scope for the argument that the Woolwich solution should have
been adopted in order to produce equality among members since, on this
analysis, the PRs are to be treated as non-members. In our view, the
contention that the Society was under a contractual duty to adopt the
Woolwich solution with a view to producing equality between members and
(on this analysis) nonmembers is not sustainable.
Original signed by:
JAMES GOUDIE Q.C.
SIOBHAN WARD
11, KING'S BENCH WALK,
TEMPLE, LONDON EC4.
9 March 1998 |
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