§ 2.59 p.m.
§ Order of the Day for the House to be again in Committee read.
§ Moved, That the House do now resolve itself into Committee.—(The Earl of Dundee.)
§ On Question, Motion agreed to.
§ House in Committee accordingly.
§ (The Lord MERTHYR in the Chair]
§ Clause 2 [Restrictions on wider-range investment]:
§ On Question, Whether Clause 2, as amended, shall be agreed to?
§ LORD CONESFORD
I should be grateful if one of my noble friends in charge of the Bill would enlighten us a little further on one point in Clause 2 of the Bill. This clause lays down that advantage is not to be taken of the Bill unless the trust fund—and then I quote the words in subsection (1):has been divided into two parts ".This division is of great importance throughout the rest of the Bill, and I want to be a little clearer about what is meant by the division. Is the division a physical division or is it purely notional? If, as I assume from the absence of any subsequent provisions in the Bill, it is a notional division—that is to say, something that exists in the minds of the trustees—I wish to know whether the fact of the division and the particulars have to be recorded, and, if so, when they have to be recorded, and whether the information has to be given to anybody. I think the Committee would desire that we should be a little 378 clearer on what is meant by this division.
§ THE EARL OF DUNDEE
The division has to be recorded in the annual accounts of the trust. In these accounts it has to be shown which securities are in the narrower-range half and which in the wider-range half of the trust. All the beneficiaries of the trust are entitled to see the annual accounts, so that they will be aware of the position and will have an opportunity of examining which securities are in which half. Once this division has been made it is, as my noble friend is aware, a permanent division, except as provided for by the Bill.
§ Clause 2, as amended, agreed to.
§ Clause 3 [Relationship between Act and other powers of investment]:
§ LORD CONESFORD
In this Amendment I am moving to omit subsections (4), (5) and (6) of this clause because I do not know what they mean, and I find that my inability to understand them is very widely shared. The Committee will, I hope, agree that the provisions of a Trustee Act ought to be comprehensible to trustees. I am moving to leave out these three subsections in order to encourage my noble and learned friend the Lord Chancellor to do two things: first, to tell us what each of these subsections means; and, secondly, to show us that each is necessary and wise. I beg to move.
§ Amendment moved—
§ Page 3, line 22, leave out subsections (4), (5) and (6).— (Lord Conesford.)
I think it would be convenient at this stage if I put forward a few propositions, of which I have given my noble and learned friend notice, and which, if he can confirm them, will stand on the record as showing what the Bill does in relation to several basic forms of trust, because these are things that are worrying trustees up and down the country. First of all, I understand that a trust with adequate existing powers need take no notice of the Bill at all. Secondly, a trust with inadequate powers and with no existing investments allowed under the Bill divides into 50 per cent. narrower-range investments and 50 per cent. wider-range investments. It can 379 invest more than 50 per cent. in the narrower range, but not more than 50 per cent. in the wider range. Thirdly, there is the trust with no power to hold equities but power to retain investments which are not authorised under the Bill—for instance, land, shares in a private company, foreign bonds or foreign shares. The trustees of such a fund can carry on under their existing powers, but if they wish to invest in equities they must divide the fund. Their unauthorised investments will be put in the wider half, and sufficient funds must be raised and invested in narrower-range securities to provide a matching narrower-range half. After that, if they wish to buy equities, they will have to receive from the wider-range half enough to pay for those equities plus an equal amount of narrower-range securities to match those equities.
Fourthly, there is the trust which has power to retain or invest in unauthorised securities—lands, et cetera—but which has divided its funds and has taken advantage of the Bill in order to buy some equities. If this trust receives a gift or legacy of unauthorised securities which the trustees wish to retain, they must put the gift or legacy into the wider-range part of their fund and must receive sufficient cash from the wider-range part to buy an equivalent in narrower-range securities to put into the narrower-range part. In practice this means 50 per cent. of the value of the gift. Finally, if those same trustees want to invest in an unauthorised security under these special powers, the same procedure will have to be adopted. If my noble and learned friend can confirm that that reading of this clause is correct, and it gets on to the official Record, it will do quite a lot to clear up the doubts of some of the trustees up and down the land who are bombarding the would-be experts with questions which at the moment they cannot answer.
There is a question in my mind, but perhaps I have not quite understood my noble friend correctly. I should like to know whether it is the case that, if the trustees of a trust which is empowered to hold land wish to buy some equities under this Bill, they have to bring in their holding of land and real property as part of the wider-range 380 investments before they buy the equities. That seems to me an extraordinary position.
§ LORD SPENS
That is the point which I took on the Second Reading: what happens where a trust under the existing powers of the Settled Land Acts or otherwise has land and has an invested fund? I suggested on Second Reading that the trustees were entitled to take into account the value of the land in order to try to get at a "fifty-fifty" division so as to take advantage of the power in the Bill to invest in equities, if they have not already got it. Of course, many of the old strict trusts in this country have not got investment powers.
On Second Reading, my noble friend Lord Dundee said that he thought land did not come into the trust at all. Since then I have had the advantage of making inquiries and considering the matter, and I have been informed that in fact where land is held on exactly the same trust as a number of investments, then it is one trust, except in so far as under Clause 4 part of the land is used as a dwelling-house, which has to be kept as a separate trust. Otherwise, the land can be valued and the trustees, if they want to take advantage of the powers in the Bill, can in fact take it into account in deciding how much of the invested funds they can put into equities. I hope that that is the position. Certainly I think that a great number of trustees whose trusts have land want to know how they stand.
§ 3.8 p.m.
§ THE LORD CHANCELLOR
I shall be pleased to do my best to deal with the three points that have been raised by my noble friends. May I first deal with the general point raised by my noble and learned friend Lord Conesford? The three subsections which the Amendment would delete are a necessary part of the clause which is concerned with the relationship between the powers conferred by the Bill and those conferred by the trust instrument. The aim is to secure that a trustee may, first, use exclusively the powers conferred upon him by his trust instrument; secondly, use exclusively the powers conferred on him by the Bill; and, thirdly, use jointly the powers conferred by the trust instrument and those conferred by the Bill, but with the proviso that the two sets of powers should not be cumulative.
381 The proviso which I have just mentioned is important. Without it, many trustees would get powers greatly in excess of those intended by the testator or by the other authority which made or amended the trust instrument. For example, a trustee might quite recently have obtained authority from the courts to invest, say, 60 per cent. of the trust fund in equities and the balance in securities comprised in the present trustee list. In other words, the courts would have taken a positive decision that the right proportion of equity investment for the fund in question was 60 per cent. Without the proviso which I have just mentioned, the trustee would be able, after the passage of the Bill, to invest the whole of his fund in equities. That is to say, he would first be able to make use of the powers contained in his trust instrument to invest 60 per cent. in equities, and as the balance of his fund was less than 50 per cent., he would be able, under the provisions of the Bill, to put the whole of it into equities. That would be wrong anti that is why the proviso has to exist. Subsections (4), (5) and (6) of Clause 3 are no more than machinery to implement that proviso; they prescribe rules which a trustee must observe if he makes use of both the powers conferred by his instrument and those conferred by the Bill. The observance of these rules will prevent the cumulative effect and will thus ensure that the intentions of a testator or of the courts are not frustrated.
If your Lordships will bear with me (because I want to try to make this clear) I should like to explain the matter a little more. As your Lordships are aware, many trustees who may wish to make use of the wider powers granted by the Bill may already have investment powers going beyond the existing trustee list, and this clause lays down how such other powers (referred to as "special powers") fit in with the Bill's powers. To take an example, the special power may be a power to postpone, at the discretion of the trustees, the conversion into authorised trustee investments of securities in the hands of the trustees at the time of the creation of the trust; or it may be a specific power to invest in the securities, perhaps the shares, of named companies or a class of companies; or again, as is common, it may include a power 382 to invest in land. Such powers may have been granted in the original instrument or, as I said, they may have been granted by the courts or by Parliament as the result of a bid by the trustee for freedom from the trustee list.
The Bill, therefore, offers the trustee the following choice. First, he may at any time rely solely on his special powers. In that case, if the fund has been divided under Clause 2 (1) the restriction imposed by Clause 2 (2) on the type of investment which may be bought with property held in the narrower-range part of the fund is lifted. Secondly, he may at any time use the bowers conferred by the Bill. Thirdly, if he uses the powers under the Bill to buy or retain wider-range investments then any investment, other than narrower-range investments, bought or held under a special power must be held only in the wider-range part of the fund in other words, Clause 2 (2) becomes effective again.
If my noble friend would be kind enough to follow me through the clause I should be grateful. Subsection (1) explains that the powers granted by the Bill are additional to, and do not derogate from, existing special powers. Subsection (2) allows special powers to be used to invest or retain narrower-range property in investments other than narrower-range investments; that is, contrary to the general rule in Clause 2 (2) that the narrower-range part may be used only for narrower-range investment. So much for the provisions of the first of my three propositions which I put a moment ago.
Subsection (3) provides that where a special power was granted, before the passing of this Bill, to invest in trustee investments, such power shall have effect only subject to the same limitations as a power granted under the Bill. This is to make clear that a special power, for example, to invest in "investments for the time being authorised by law for trustees", which by the passing of the Act will authorise the investments in the First Schedule, may authorise such investment subject to the limitations contained in the Bill, and not without regard to them. I think that is clear.
The remaining three subsections are simply machinery to enforce my third 383 proposition. May I remind your Lordships that my third proposition was that if the trustee uses the powers under the Bill to buy or retain wider-range investments, then any investment other than narrower-range investments bought or held under a special power must be held only in the wider-range part of the fund; in other words, Clause 2 (2) of the Bill becomes effective again. It shall have effect, as I said, only according to the Bill. Subsection (4) requires that if the special powers are used to invest or retain narrower-range part property in investments other than narrower range (as permitted by subsection (2)), the property so invested must forthwith be transferred to the wider-range part. This is no more than machinery to earmark an amount of property which has contrary to the general rule in Clause 2 (2), been invested in investments other than narrower range. I hope that is clear: that if you use the special powers to invest or retain narrower-range part property in investments other than narrower range, then you must earmark them. That is the effect of subsection (4).
Subsection (5) causes the same thing to happen to similar property accruing to the fund which the trustee is entitled to retain under a special power. Subsection (6) lays down what must happen when either of the foregoing subsections has effect and the powers under the Bill are used to invest in or retain wider-range investments. I will take a case. When subsection (4) has had effect (for example, the special powers were used to invest narrower-range property in investments other than narrower range), subsection (6) requires that before the powers under the Bill are used to buy wider-range investments, property shall be transferred from the wider-range part to the narrower-range part equal in value to the property which was transferred to the wider-range part when subsection (4) had effect. In other words, the value of the earmarked property must be returned to the narrower-range part. There may, of course, have been a gap in time between the effect of subsection (4) and subsection (6).
When subsection (5) has had effect, a similar transfer of property must occur before the powers in the Bill may be 384 used to buy or retain wider-range investments, except that in order to achieve the right allocation of property to each part on accrual—perhaps the noble Lord will look at Clause 2 (3) (b)—property equal to only half the value of the earmarked property, at the time of accrual, is transferred to the narrower-range part. I should be very doubtful about giving an example, because it is so difficult to make an example clear by word of mouth, but if I may take a simple one I hope it may help my noble friends. Take the example of a trust deed which permits the trustee to retain such shares in the family business as he has in his hands at the death of the testator—that is, a special power under subsection (1) of this clause—and otherwise to invest the trust property in trustee investments.
I will assume, for the sake of my example, that the trust property consists of £6,000 worth of shares in the family business and £4,000 of gilt-edged stock. Having that £6,000 in the family business and £4,000 in gilt-edged, the trustee decides to make some wider-range investment for reasons that seem good to him under his Bill powers. He first divides the fund into two—that is under Clause 2 (1). Then subsection (4) (a) of this clause insists that if any of the family shares are allocated to the narrower-range part, they must forthwith be 'transferred to the wider-range part. That is the first step, so that his division would be divided "fifty-fifty ", and consist of £4,000 gilt-edged and £1,000 family shares on the narrower side and £5,000 worth of family shares on the wider side. The next stage, of course, is that he would have to place the 1,000 family shares in the wider range, so that he would then be faced with the position that in the narrower range are £4,000 gilt-edged, and in the wider range are £5,000 family shares, and the other £1,000, making £6,000 of family shares in all.
Before the trustee can buy the wider-range equities which he wants, on my hypothesis under the Bill, he must first transfer back from the wider-range to the narrower-range property equal in value to the property previously transferred—that is under subsection (6) of the clause. In this case, therefore, there being no lapse of time between the operation I have just mentioned and this transfer, he switches back the same 385 block of family shares, still worth £1,000; but Clause 2 (2) will then require him, as he is going under the Bill, to re-invest this £1,000 worth of property in narrower-range investments because it has come to the narrower-range side. The penultimate position is that he will have £5,000 worth of gilt-edged and £5,000 worth of family shares; and, then ultimately he must sell some more of the family shares in order to buy the wider-range equities that he wants.
I have tried to give a simple example, and I hope that shows how it works. I should like to tell my noble friend Lord Conesford that in the preliminary stages of devising this Bill, a process with which he is very well familiar from his ministerial experience, we went through a great number of other choices to the one that we have taken. I am not going through them again to-day, but I should like him to know that we tried, and we found grave objections to the other methods of dealing with it. I am most willing to explain them if anyone is interested, but I do not think I need at the moment.
Now I come to the "examination paper" which my noble friend Lord Hawke has been good enough to set me. Contrary to other examination papers of which I have the most disastrous memories, he set me the questions in advance, so that I have been able to do a little more research. I should like to deal with them. As to the first and second, I have no qualification to make, to the best of my ability, to what my noble friend Lord Hawke said. In the third question, in the last sentence which he read, he said that after that, if they wished to buy equities, they would have to receive from the wider half enough to pay for those equities plus an equal amount of narrower-range securities to match the equities. I have tried to explain that, but it seemed to me that there was a suggestion in that sentence that trustees can realise narrower-range securities to buy equities. This, if it is intended, is wrong. Once there has been a division, narrower-range property cannot be invested in wider-range investments. There is one exception. Under the Government's Amendment made yesterday to Clause 2—Amendment No. 4 on the Marshalled List—a gilt-edged security in the wider- 386 range part is allowed to be exchanged for a gilt-edged security in the narrower-range part for the purpose of selling the latter in order to buy equities.
The only other matter—this is a small one—is that in example number 4 my noble friend Lord Hawke said that trustees must put the gift or legacy into the wider part of the fund and must receive sufficient cash from the wider part. I think the word "realise" instead of "receive" would be clearer, although I am not saying that "receive" is wrong.
Before my noble and learned friend leaves that point, may I say that I thank him very much for this, and that where he has queried my example number 3 it is because of my faulty draftsmanship. I fully intended that an amount of the wider-range should be sold sufficient not only to pay for the new equities but also to buy an equivalent of narrower-range investments; and I think my example is entirely on all fours with the one he gave my noble friend Lord Conesford.
§ THE LORD CHANCELLOR
I think that point is clear now. I wanted to avoid misapprehension so far as I could. Now I come to the point which was troubling my noble friend Lord Saltoun, and was raised in greater detail by my noble and learned friend Lord Spens. Your Lordships will remember that in the Second Reading debate my noble and learned friend Lord Spens asked whether settled land can be a separate fund for the purpose of the Bill, or would count as a wider-range investment so as to limit the trustees' powers of investing in equities. As he indicated just now, the question is concerned with what is technically known as a strict settlement and typically land—for example, a family estate is settled on "A" for life with the remainder in tail; investments for maintaining the estate may be settled with him and, on the sale of any of the settled land, the proceeds of sale, technically referred to as capital moneys arising under the settlement, may be invested. This is what may loosely be described as one settlement, or contain both settled land and 387 investments, and the question is whether the two form one fund or two.
In the normal case the question does not arise, for under the Settled Land Act, the settled land would be vested in the tenant for life and not in the trustees, while it is the trustees who will hold the capital moneys. But if the tenant for life is an infant, the land will be vested in the trustees of the settlement until he reaches his majority. But this will not prevent the settled land and investments from being separate funds, for under Clause 3 (2) of the Bill there must be separate funds unless the purposes and powers are identical. I believe my noble and learned friend will agree that this is not so, for while the trustees have the powers of a tenant for life over the settled land, they have (under the Settled Land Act, or the terms of the settlement) a different set of powers given for different purposes over the investments and capital moneys.
§ LORD CONESFORD
I believe my noble and learned friend referred just now to Clause 3 (2) whereas no doubt he meant Clause 4 (2).
§ THE LORD CHANCELLOR
I am much obliged to my noble friend and I apologise. Subsections (3) and (5) of Clause 4 would in some cases make this settled land a separate fund, but only if all the estate were occupied by the beneficiary—which is unlikely in the case of a large agricultural or town estate. My noble and learned friend has also asked whether trustees should not be given power to invest in land, and I believe that that matter has been in the minds of many of your Lordships. Land may be a very good investment and it is not uncommon for trust instruments to contain power to invest in it; but there are often special problems and responsibilities which go with the holding of land, even for investment purposes, and, further, it is not readily marketable in all circumstances.
While therefore—and I hope your Lordships will follow the differentiation I am making—such an investment power may be perfectly suitable for a particular trust, I do not think the investment powers of trustees generally should be widened in this way, for the reasons I have given. There is only one point 388 about which I am not sure I made myself clear. I do not know that I was absolutely right in what I said in my exchange with my noble friend Lord Hawke, for it is very difficult to be clear in an exchange of words; but I want to make clear that once the wider-range part has been set up it can be used for reinvestment in equities without any balancing purchase of gilt-edged. I believe my noble friend understood that.
§ THE LORD CHANCELLOR
Yes. I hope that that is now clear. I apologise for taking up so much of your Lordships' time, but I have tried to give an exposition of the law as it is.
§ LORD SPENS
Is the position the same with land settled under a trust for sale? That is a very common modern form of settlement, compared with the old strict settlement. One gets land settled on trust for sale and investment with exactly the same beneficiaries and, I suspect, more or less the same powers. There would then be a trust in which it would be necessary to take in the value of the land to get the "fifty-fifty" position.
§ THE LORD CHANCELLOR
I should very much like to look into that again, and I will write to my noble friend. I ought to give the caveat that I have been very free with legal opinions this afternoon. I believe that I am right, but it is only to the best of my knowledge and belief for, despite your Lordships' helpful interpositions, I have not really had the case argued in front of me. I must make that qualification. But I have given my account of the law as it seems to me, and in the firm belief that it is right.
§ EARL WINTERTON
Before the noble and learned Viscount sits down may I ask him a question which I believe is pertinent? I understand that an association known as the British Insurance Association, which represents the interests of the insurance companies, who are very much concerned with trustee work, is in the main satisfied with These clauses and, indeed, agrees with everything that my noble and learned friend has said. Have there been consultations of which my noble and learned friend is aware?
§ THE LORD CHANCELLOR
I believe that that is so, and I am very grateful to my noble friend Lord Winterton for what he has said. As he has raised the point of reinsurance of opinion, as well as dealing with insurance funds, I would say also that my noble and learned friend Lord Cohen, who unfortunately cannot be with us to-day, as he has another very important engagement, authorises me to say that he is in agreement with the views I put forward. My legal friends will know what a tower of strength that is to me.
As my noble and learned friend must know very well, in Scotland, as well as in England, many businesses are carried on by a company which is unlimited, and the trustees who 'have to administer such properties get special powers in their trust; and whether it is legal or not they do, in fact, hold these shares. Although they are valued for estate duty they have no market value, because one cannot sell a share in an unlimited company to a stranger. I should like to know whether I am right in taking it that such trusts would be absolutely precluded from making any use at all of this Bill when it becomes an Act, or whether there is any way in which they can do so in handling their affairs.
§ THE LORD CHANCELLOR
My noble friend Lord Saltoun has mentioned the words "special powers in the trust", and one would have to look at that and see what powers were given. I should not have thought it was beyond the wit of man to dispose of such shares according to the method which, in my experience, is usually laid down in the articles of the company. They can dispose of them only in a certain limited way, but usually there are provisions as to the valuation of shares in that way. I should like to look at that point again, however, because I cannot put myself forward as an authority on Scots law, much at it interests Mme and deeply as it runs in my blood; and therefore perhaps I might write to my noble friend when perhaps I can give him a better answer.
§ LORD CONESFORD
The Amendment that I put down to omit these three subsections has produced an admirably careful exposition from my noble and learned friend who has greatly enlightened the Committee. That was the aim of my Amendment. Those who are interested will certainly wish to study in the pages of Hansard what my noble and learned friend has said, because there may be Amendments which, at a subsequent stage, we may wish to move. Meanwhile, I thank my noble and learned friend very much for the exposition which he has given and ask leave to withdraw my Amendment.
§ Amendment, by leave, withdrawn.
§ VISCOUNT HAILSHAM
As my noble friend the Duke of Devonshire is now in a position to answer the Question put earlier by the noble Viscount the Leader of the Opposition, I beg to move that the House do now resume.
§ Moved, That the House do now resume.— (Viscount Hailsham.)
§ On Question, Motion agreed to, and House resumed accordingly.