Granada Group Ltd v The Law Debenture Pension Trust Corporation Plc
| Jurisdiction | England & Wales |
| Judge | Lord Justice Lewison,Lord Justice Christopher Clarke,Lord Justice Hamblen |
| Judgment Date | 16 December 2016 |
| Neutral Citation | [2016] EWCA Civ 1289 |
| Docket Number | Case No: A3/2015/1961 |
| Court | Court of Appeal (Civil Division) |
| Date | 16 December 2016 |
[2016] EWCA Civ 1289
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE, CHANCERY DIVISION
Mrs Justice Andrews
HC2014001132
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Lewison
Lord Justice Christopher Clarke
and
Lord Justice Hamblen
Case No: A3/2015/1961
Mr Fenner Moeran QC (instructed by Slaughter and May) for the Appellant
Mr Paul Newman QC & Ms Mary Stokes (instructed by Linklaters LLP) for the Respondent
Hearing dates: 8 & 9 December 2016
Approved Judgment
Introduction and facts
This appeal concerns the legality of pension arrangements for former directors of Granada Group Ltd ("Granada"). Andrews J held a trial on liability only, at the conclusion of which she decided that the arrangements were lawful. Her judgment is at [2015] EWHC 1499 (Ch), [2015] Bus LR 1119. With the permission of Arden LJ Granada appeals. The trial on liability was conducted without any witness evidence; so I take the relevant facts from the judge's lucid summary.
At all material times, Granada had an occupational pension scheme for all its employees, ("the Granada Pension Scheme") which was approved by HMRC so as to qualify for tax relief on contributions, investments and benefits. However, the Finance Act 1989 introduced an earnings cap limiting the total amount of pensionable earnings which could be taken into account in calculating the benefits payable to members joining such schemes after 1 June 1989. After those changes were introduced, Granada, in common with many other companies whose senior executives earned salaries in excess of the cap, resolved to continue to provide new senior employees and directors with pensions based upon their full salary, so that they would not be disadvantaged in comparison with colleagues who had joined the Granada Pension Scheme before 1 June 1989.
In order to do so, it was necessary for Granada, as employer, to enter into "top up" arrangements to provide the benefits, which would operate outside the regime of HMRC approval. Such arrangements could be provided on a funded or an unfunded basis; Granada chose to go down the unfunded route. This involved Granada contracting with the director in question to "top up" the relevant member's benefits from the approved Granada Pension Scheme, but without making contributions into a trust fund which would accumulate and provide the source of those additional payments in due course. Therefore, Granada would have to find the money from its own resources when the time came. The agreement to this effect was contained in a contract made between Granada and each individual director. The sample which we were shown is dated 6 August 1992.
Although that type of arrangement had certain fiscal advantages and was simple to establish and run, the obvious disadvantage for the members was that the employer's promise was unsecured. While that remained the case, those who stood to benefit from the contractual promise had no protection against the employer running into severe financial difficulty and being unable to afford to pay the additional sums. As a result, employers often provided security for the payment of the promised benefits.
On 11 May 2000, Granada's non-executive directors resolved that security should be granted in support of the "top up" contractual arrangements that had already been made by Granada in favour of its executive directors ("the directors"). There has been no suggestion that in passing that resolution the non-executive directors acted otherwise than in accordance with their duties to act bona fide in the best interests of the company. On 23 May, an actuarial report was obtained which valued the prospective or contingent benefits payable to the directors under the existing contractual arrangements collectively at £18,850,000.
The Scheme was established and is governed by the following documents, which are all dated 23 August 2000:
i) Letters sent to each of the directors by Granada ("the Special Terms");
ii) The Trust Deed and Rules (as amended); and
iii) The Charge Deed, by which Granada granted the Trustee a first fixed equitable charge over certain gilts, which Granada had acquired two days earlier.
The Special Terms referred to the agreement of 6 August 1992 and said that Granada's obligations under that agreement would be deemed to be revoked immediately before the director in question was admitted to the new scheme. They also said that under the Scheme the director would have all the benefits under the old scheme as if they were set out in full. The Trust Deed was made between Granada and The Law Debenture Pension Trust Company plc, described in the Deed as "the Trustee". Recital (C) recited that "The Trustee has agreed to be the first trustee of the Scheme". Clause 1.1 provided that the Scheme was governed by the Deed and the Rules. By Clause 2.1 Granada appointed the Trustee as first trustee of the Scheme and the Trustee accepted the appointment and undertook "to manage and administer the Scheme in accordance with … the … Deed and the Rules." By Clause 2.2 of the Deed Granada undertook with the Trustee "(such undertaking to be held on trust)" to pay the benefits to members in accordance with the Rules of the Scheme. Clause 3.1 of the Deed gave the Trustee power to require Granada to provide security in accordance with Rule 6. Clause 5 of the Deed contained indemnities in the Trustee's favour. Clause 8 of the Deed provided for what would happen if the scheme terminated (in effect because Granada had become unable or unwilling to pay the benefits for which the scheme provided). In that event the Trustee was required to realise the security and, after payment of certain costs, provide the requisite benefits to members.
Under the Rules Granada was defined as the "Employer". The definitions also defined an "Event of Default". The precise details do not matter; but in essence each event of default described Granada's inability or unwillingness to comply with the Scheme. Rule 4.1 defined the benefits payable to members by reference to the Special Terms; and rule 5.1 provided that those benefits were to be paid out of Granada's own resources. Rule 6.1 required each Employer to provide security over assets acceptable to the Trustee for the payment of all amounts due or contingently payable under the Scheme. The benefits payable under the Deed and the Rules were defined in the Special Terms.
The Charge Deed was the security required by rule 6.1. It secured the amounts payable by Granada under the Scheme, and by clause 2 of the Charge Deed Granada covenanted with the Trustee that it would pay the amounts secured in accordance with the Scheme. Clause 6.2 of the Charge Deed required the value of the assets subject to the charge to be no less than 110% of the aggregate present value of the benefit prospectively or contingently payable under the Scheme in respect of each Member. The assets over which the charge was granted consisted of gilts. Clause 7 made provision for service of a notice on the happening of an Event of Default. It was the giving of such a notice that triggered the Trustee's power to dispose of or appropriate the securities.
The Scheme was administered in accordance with these documents for 13 years. From time to time, as actuarial values changed, Granada provided additional security as required by the Charge Deed. In 2013, however, Granada alleged that the charge was liable to be set aside because it contravened section 320 of the Companies Act 1985 (whose successor is now to be found in section 190 of the Companies Act 2006). The gilts to which the charge now applies are worth over £40 million.
Section 320 of the 1985 Act provided, so far as material:
"(1) With the exceptions provided by the section next following, a company shall not enter into an arrangement –
(a) whereby a director of the company… or a person connected with such a director, acquires or is to acquire one or more non-cash assets of the requisite value from the company…
unless the arrangement is first approved by a resolution of the company in general meeting.
(2) For this purpose a non-cash asset is of the requisite value if at the time the arrangement in question is entered into its value … exceeds £100,000."
The expression "connected person" was defined by section 346. Section 346 (2) provided that:
"A person is connected with a director of a company if, but only if, he … is:
(c) a person acting in his capacity as trustee of any trust the beneficiaries of which include
(i) the director, his spouse or civil partner or any children or step-children of his…"
Section 346 (3) (b) provided that sub-section (2) (c) did not apply "to a person acting in his capacity as trustee under an employees' share scheme or a pension scheme".
A "non-cash asset" was defined by section 739 of the 1985 Act:
"(1) In this Act "non-cash asset" means any property or interest in property other than cash; and for this purpose "cash" includes foreign currency.
(2) A reference to the transfer or acquisition of a non-cash asset includes the creation or extinction of an estate or interest in, or a right over, any property and also the discharge of any person's liability, other than a liability for a liquidated sum."
The liabilities for a contravention of section 320 were set out in section 322. First, the transaction was voidable at the instance of the company unless certain conditions are satisfied: section 322 (1). Second, the director was liable to account to the company for any gain which he had made directly or indirectly by the arrangement: section 322 (3) (a). Third, the director was liable to indemnify the company for any loss or damage...
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The Children's Investment Fund Foundation (UK) v HM Attorney General and Others
...was effectively excluded from the operation of section 252(2)(b) by section 252(2)(c). He relied by analogy on Granada Group Ltd v. The Law Debenture Pension Trust Corporation Plc [2016] EWCA Civ 1289, which concerned the operation of section 320 of the Companies Act 1985 (now section 190 ......