Granada Group Ltd v The Law Debenture Pension Trust Corporation Plc
| Jurisdiction | England & Wales |
| Judge | Mrs Justice Andrews |
| Judgment Date | 22 May 2015 |
| Neutral Citation | [2015] EWHC 1499 (Ch) |
| Docket Number | Case No: HC 2014001132 |
| Court | Chancery Division |
| Date | 22 May 2015 |
[2015] EWHC 1499 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Mrs Justice Andrews DBE
Case No: HC 2014001132
Michael Furness QC and Edward Davies (instructed by Slaughter & May) for the Claimant
Paul Newman QC and Mary Stokes (instructed by Linklaters) for the Defendant
Hearing dates: 11, 12 and 13 May 2015
Introduction
The Claimant ("Granada") is now a wholly-owned subsidiary of ITV plc and part of the ITV group. In 2000, it was known as Granada Group Plc and was a publicly listed company.
This claim challenges the legality of, and seeks to set aside, certain arrangements that were made by Granada in August 2000, shortly after its merger with Compass Group Plc, to secure the payment of supplementary retirement and death benefits to Granada's executive directors, then five in number. One of the directors concerned subsequently transferred his pension arrangements to a new employer; the remainder retired before 1 October 2006. The Defendant ("the Trustee") is a professional corporate Trustee and the Trustee under those arrangements.
Having adhered to those arrangements for more than fourteen years, Granada now contends that they were entered into in contravention of section 320 of the Companies Act 1985 ("the 1985 Act") and are therefore voidable at its behest under section 322, because they did not obtain prior shareholder approval. This judgment follows the trial on issues of liability only.
S.320 of the 1985 Act provides, 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 "non-cash asset" is defined by s.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."
Granada's objective is to recover gilts worth in excess of £40 million, which are charged as security for its obligations under the supplementary pension scheme ("the Scheme"). It claims that the return of the security will make no difference to the underlying contractual obligations in respect of the pensions, which it will continue to honour.
If Granada is right, there will be significant adverse implications for the very large number of secured unfunded occupational pension schemes which include directors of the employer company among their members. Indeed Mr Newman QC, who appeared with Ms Stokes for the Trustee, pointed out that the decision could have a similar impact upon funded pension schemes as well, since most such schemes will involve the investment of non-cash assets, typically commercial property.
Moreover, many funded occupational pension schemes have adopted a practice, approved by the pensions regulatory authorities, of using security over non-scheme assets to help to fund the pension benefits. The assets (known as "contingent assets") will produce cash for the pension scheme contingent upon the happening of certain events, typically where the employer becomes insolvent, or where the funding of the scheme falls below a prescribed level. The adoption of this practice reduces the annual levies payable to the Pension Protection Fund ("PPF") by registered funded schemes. Although the PPF was only set up in 2004, and thus the draftsman of the 1985 Act could not have had it in mind, it is nevertheless a relevant consideration that if the security arrangements are voidable at the instance of the employer, the settled contingent asset arrangements of many pension schemes will be thrown into doubt. This, in turn, could cast doubt on the reductions of the PPF levies.
On any view, there are significant implications for the pensions industry in this jurisdiction if Granada is right. Mr Furness QC, who appeared with Mr Davies for Granada, acknowledged that Mr Newman may well be right about the wider ramifications of a decision in Granada's favour, although he pointed out that the consequences of infringing s.320 are that the arrangement is voidable, not void. He submitted that even if it was too late for the shareholders to ratify an existing scheme, it would still be open to the parties to revoke the existing schemes and replace them with fresh, identical schemes after obtaining shareholder approval. Thus, he submitted, the consequences of acceding to Granada's argument are not quite as dire as the Trustee would have the Court believe.
At the end of the day, the legal argument is either right or wrong; and if it is right, the fact that there are unforeseen adverse consequences for the pensions industry, however regrettable, cannot be a reason for the Court to refuse the relief that is sought. Indeed, if s.322 is rightly invoked, the Court has no choice but to accede to the application to set aside the voidable arrangement. However, the likely impact on many other pension schemes of a finding that Granada is right is a reason why the Court must scrutinise the rival arguments with particular care.
Factual background
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 promising 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.
Although that type of arrangement, known as an unfunded unapproved retirement benefits scheme, or "UURBS", 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 UURBS 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 benefits promised under the UURBS.
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.
On 1 June 2000, Lovells (acting for Granada) and Sacker & Partners, a specialist pensions firm (acting on behalf of the Trustee), attended a consultation with Leading Counsel, Mr David Richards QC (as he then was). In written instructions to Counsel dated 25 May 2000, which were given jointly on behalf of Granada and the Trustee, Counsel was given an explanation of Granada's policy to offer senior employees separate contractual commitments to provide retirement and death benefits as though the earnings cap had not applied. He was told that the commitments provided by Granada were intended to be legally binding, but they were not backed by a separate pool of assets or advance funding in any form. These commitments were, therefore, less secure than the benefits provided under the Granada Pension Scheme.
The instructions then state as follows:
" Granada Group Plc, accordingly, intends to establish the Scheme in order to provide relevant employees and directors with some additional security in relation to the unfunded pension commitments that they have already been given. Initially, only the main board directors of Granada Group Plc will be admitted to the Scheme, but it is intended, in due course, that other employees and directors within the Granada group of companies will be...
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