(1) Alan Robert Bloom (2) Alan Michael Hudson (3) Christopher John Wilkinson Hill (4) Stephen John Harris (5) David Martin Hughes v (1) The Pensions Regulator and Others
| Jurisdiction | England & Wales |
| Judge | Lord Justice Lloyd,Lord Justice Rimer,Lord Justice Laws |
| Judgment Date | 14 October 2011 |
| Neutral Citation | [2011] EWCA Civ 1124 |
| Court | Court of Appeal (Civil Division) |
| Date | 14 October 2011 |
| Docket Number | Case Nos: A2/2011/0062 and 0103 |
[2011] EWCA Civ 1124
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
MR JUSTICE BRIGGS
[2010] EWHC 3010 (Ch)
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Laws
Lord Justice Lloyd
and
Lord Justice Rimer
Case Nos: A2/2011/0062 and 0103
In The Matter of Nortel Gmbh (In Administration) And Other Companies
(Appeal 2011/0062)
In The Matter of Lehman Brothers International (Europe) (In Administration) And Other Companies
(Appeal 2011/0103)
Appeal 2011/0062
Appeal 2011/0103
William Trower Q.C., Andrew MoldandTom Smith (instructed by Herbert Smith LLP) for the Nortel Administrators, appellants in appeal 2011/0062
Robin Dicker Q.C., Paul NewmanQ.C. andDaniel Bayfield (instructed by Linklaters LLP) for the Lehman Administrators, appellants in appeal 2011/0103
Raquel Agnello Q.C., Jonathan HilliardandThomas Robinson (instructed by the Pensions Regulator) for the Pensions Regulator, respondent in both appeals
Richard Sheldon Q.C., Michael TennetQ.C. andFelicity ToubeQ.C. (instructed by Hogan Lovells International LLP) for Nortel Networks UK Pension Trust Ltd and for the Board of the Pension Protection Fund, respondents in appeal 2011/0062
Gabriel Moss Q.C., Nicolas StallworthyQ.C. andDavid Allison (instructed by Travers Smith LLP) for the Lehman pension fund trustees and for the Board of the Pension Protection Fund, respondents in appeal 2011/0103
Barry Isaacs Q.C. (instructed by Weil Gotshal & Manges LLP) for the seventh and eighth respondents in appeal 2011/0103
Hearing dates: 26 to 29 July 2011
Introduction
These appeals raise important and difficult questions posed by the impact of legislation for the protection of pension funds upon companies which are undergoing an insolvency process. The proceedings were issued in September 2010 and came to trial before Briggs J over 5 days at the end of November 2010. He gave judgment, [2010] EWHC 3010 (Ch), on 10 December 2010. The appeals, for which he gave permission, came on before us at the end of July 2011.
UK legislation for the protection of the funds of defined benefit occupational pension schemes has developed considerably over recent years, to meet different problems as they have been perceived and experienced. Following the report of the Goode Committee (the Pension Law Review Committee, Cm 2630), the Pensions Act 1995 was passed. Among its provisions was section 75. This created a debt owed by the employer to the trustees of an occupational pension scheme which was not a money purchase scheme, if the value of the assets of the scheme, at a given time, was less than the amount of its liabilities, the debt being of the amount of that difference. The given time was when the scheme was being wound up (before any insolvency event in relation to the employer), unless an insolvency event occurred as regards the employer before the scheme came to be wound up, in which case the given time was immediately before the insolvency event. Since the Pensions Act 2004, an insolvency event includes entering administration. For the purposes of insolvency legislation, the debt was deemed to arise immediately before the insolvency event. This had the effect that it would be a provable debt; it was expressly provided not to be a preferential debt. (Some obligations of an employer to contribute to its pension fund are preferential: see Insolvency Act 1986 Schedule 6 paragraph 8, and Pension Schemes Act 1993 Schedule 4. These are much more limited in scope and amount than the section 75 debt or any amount payable under the liabilities at issue in these appeals.)
The legislation with which these appeals are most directly concerned is in the Pensions Act 2004, and is directed at a different but related problem. As an example, a group of companies may be organised in such a way that the employees who are to work on behalf of any company in the group are employed by one particular company, which may have no other significant functions within the group, and in particular may have no particularly valuable assets. As employer of those employees, it would be the employer in relation to the occupational pension scheme. It may, however, depend on transfers of funds, by way of management charges or otherwise, from its parent company or from other companies within the group, to discharge its obligations to the employees, and generally. It will be subject to the section 75 debt, if the pension fund assets are inadequate, as they often are nowadays, but it may well not have assets with which to discharge that debt.
In order to alleviate that problem, the Pensions Act 2004 includes provisions by which the Pensions Regulator, the new regulator set up by that Act, can require other companies which are or were associated with the employer to provide financial support for the scheme, issuing a financial support direction for that purpose. An elaborate procedure is laid down for this process, which I will describe later. At the end of the process, if it is not complied with at an earlier stage, the Pensions Regulator may issue a notice, called a contribution notice, under which the person on whom it is served is liable to pay a specified sum to the trustees of the scheme, which is the whole or part of the shortfall sum, measured by reference to the amount estimated to be due at the time by way of a section 75 debt. The 2004 Act provides for contribution notices in other situations as well, but these appeals are only concerned with contribution notices following non-compliance with a financial support direction.
The 2004 Act also introduced the Pension Protection Fund (PPF), which is financed by levies on occupational pension schemes, and which provides protection (albeit limited) for beneficiaries of defined benefit schemes in deficit where the employer has become insolvent. Part of the point of the financial support direction regime is to avoid or reduce the risk of the moral hazard that groups of companies including an employer in such a position would leave the scheme without adequate funds to meet the liabilities of the scheme and leave the employer without assets with which to make good the deficit, thereby passing the risk to the PPF.
Unlike section 75, both as originally passed and as modified by the 2004 Act itself, the provisions of the 2004 Act about financial support directions and contribution notices refrain from making any express provision as to how the liability under a contribution notice, or any obligation under a financial support direction, is to be treated for the purposes of any insolvency proceedings. That issue has to be resolved by reference to the general provisions of the insolvency legislation. The sums in question may be large. In relation to the Lehman Brothers insolvency the shortfall under section 75 is estimated to be of the order of £125 million; in the case of Nortel Networks UK Ltd it was put at £2.1 billion when that company went into administration in January 2009. Accordingly, the way in which any liability under a financial support direction or a contribution notice is to be treated in insolvency proceedings may have a major impact on the members of the scheme and on the creditors of relevant companies.
The Pensions Regulator has not got to the stage of issuing either a financial support direction or a contribution notice in relation to any company in either the Nortel group or the Lehman Brothers group which is a party to these appeals as yet, but it has started on the way towards such steps being taken. In January 2010 it issued a Warning Notice to a number of Nortel companies to the effect that it was considering exercising its power to issue a financial support direction. After the appropriate statutory process, the Determinations Panel of the Pensions Regulator gave notice that it had concluded that a financial support direction should be issued, as set out in a determination notice dated 25 June 2010. It is open to the recipients of such a notice to refer the matter to the Upper Tribunal (Tax and Chancery Chamber) and that right has been exercised by the companies which are parties to these appeals. (Four Nortel companies did not exercise the right, and financial support directions have been made in relation to them.) In the meantime the question of the issue of a financial support direction remains in suspense. In the case of the Lehman Brothers group, after a Warning Notice dated 24 May 2010, served on various dates between then and early July 2010 on different companies in the Lehman Brothers group, the Determinations Panel determined on 13 September 2010 that a financial support direction should be issued in relation to six companies in the group, though not against others on which the Warning Notice had been served. Again, that process remains in suspense pending a reference to the Upper Tribunal. The judge said at paragraph 6 of his...
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