Granada UK Rental & Retail Ltd v The Pensions Regulator

Hearing dates: 13–17 May 2019

Approved Judgment

Introduction

This is the judgment of the Court to which we have all contributed.

The appellants are five companies within what is now the ITV group. We shall refer to them collectively as “the Targets”. The Granada companies are subsidiaries of ITV plc which was formed and became their parent company on 2 April 2004. On 21 December 2011 the Determination Panel (“the DP”) of the Pensions Regulator (“the Regulator”) decided to issue a Financial Support Direction (“FSD”) to the Targets (strictly a number of FSDs were determined to be issued, but we shall refer to them as one) pursuant to s.43 of the Pensions Act 2004 (“PA 2004”). The FSD would require the Targets to provide financial support for the Box Clever Group Pension Scheme (“the Scheme”) which has an estimated deficit of some £115m. The Targets exercised their right under s.96(3) PA 2004 to refer the determination to the Upper Tribunal (“the Tribunal”). In a decision released on 18 May 2018 the Tribunal (Rose J, Judge Timothy Herrington and Ian Abrams) confirmed that the Regulator had power to issue the FSD in this case and that it was reasonable to impose the requirements of the FSD on the Targets: see [2018] UKUT 0164 (TCC). The Targets now appeal to this Court against that decision with the leave of the Tribunal.

The Scheme was established with effect from 1 October 2001 under the terms of an Interim Trust Deed which was intended to be replaced in due course by a Definitive Trust Deed in circumstances we will come to later, but in fact never was. It provided benefits for employees of the Box Clever group of companies which was established between 1999 and 2000 as a joint venture (“the Joint Venture”) between the Granada group of companies and the Thorn group to take over their respective TV rental businesses.

The Joint Venture was formed against a background of a decline in the market for rented televisions which had been ongoing for many years by the late 1990s. With the benefit of hindsight, it can be seen that the continuation of this decline to the point where, within a few years, the market would no longer exist was inevitable. Even at the time, however, the decline was viewed as likely to continue, and both Granada and Thorn were implementing strategies to cope with it. Granada had also explored the sale of its rental business and had received offers or indicative offers of £400 million and £450 million.

Discussions between Granada and Thorn began in early 1999. The commercial rationale for the Joint Venture was to bring together the two largest businesses in the declining market for the rental of consumer electronics, thereby achieving economies of scale and a benefit from cost synergies through, for example, a rationalisation of stores, service infrastructure and staff. A valuation prepared for Granada by Lazard Brothers in March 1999 showed that, with the benefit of these cost synergies, the Granada business could be valued at £600 million. This was the figure ultimately adopted as the amount to be paid to Granada in consideration of the transfer of its rental business to the Joint Venture.

Eventually, it was agreed between Granada and Thorn that the appropriate enterprise value of the merged businesses was £1 billion and that they would participate equally in the Joint Venture. Granada, as the owner of the larger business, would receive the greater “share of the cake”. The transfer of the businesses to the Joint Venture was to be financed by a bank loan to the Joint Venture secured on the assets of the Joint Venture and its subsidiaries, which would enable Granada and Thorn to be paid in cash. It was envisaged that the loan would be securitised a short time after completion.

The Joint Venture was thereafter established under the terms of a Contribution Agreement dated 17 December 1999, whereby Granada and Thorn each agreed to sell their respective TV rental businesses to the Box Clever group of companies. The ultimate holding company in the group was Box Clever Technology Limited (“BxC Tech”), in which Granada and Thorn each held 50% of the shares. We shall refer to Granada and Thorn in their capacity as shareholders in the Joint Venture collectively as the “Shareholders”. Annexed to this judgment is a structure chart of the Box Clever group as at 31 December 2009 which, as we will explain, is the relevant date for determining whether the Regulator had jurisdiction to issue the FSD in this case. Carmelite is the name of the former Thorn group. As can be seen from the chart, BxC Tech controlled the companies which operated the combined rental business via an intermediate holding company called Box Clever Holdings Limited (“BxC Holdings”). The companies in question included the operating subsidiaries of Box Clever Finance Limited (“BxC Finance”).

The sale of the rental businesses to the Joint Venture companies was completed in June 2000 for a total of £980m, of which £600m was payable to Granada. The £600m included some £73.9m in loan notes issued by BxC Finance of which £5m was applied as an equity contribution to BxC Tech. In addition to the loan notes, the purchase was funded with a loan facility to the Box Clever group of £860m from Westdeutsche Landesbank (“WestLB”), which was secured on the group's assets under the terms of a debenture (“the Debenture”) dated 28 June 2000. BxC Holdings and BxC Finance together with the operating subsidiaries were parties to the Debenture as primary obligors and in that capacity covenanted to pay and discharge all the liabilities under the loan facility granted by WestLB to BxC Finance. Each of them also charged all of their assets (including, where relevant, the shares in any subsidiary) in favour of a Security Agent which acted as the agent and trustee for the lenders. The shares held by BxC Holdings in Telebank Television Rentals Limited (“Telebank”), Endeva Fulfilment Limited (“Fulfilment”) and Endeva Service Limited (“Endeva”) (we shall refer to Telebank, Fulfilment and Endeva collectively as “the Trio”) and the shares held in TUK Holdings Limited (“TUK”) by Thorn High Street Properties Limited (“THSP”) were therefore secured by a fixed first charge in favour of WestLB.

The loan facility provided under these arrangements was made without recourse to either Granada or Thorn, and under clause 2.4 of the Contribution Agreement Thorn and Granada were obliged to take the necessary steps to procure that each of the relevant Joint Venture companies drew down the maximum amount available to them under the WestLB facility. This meant that the acquisition of the rental businesses by the Joint Venture was highly leveraged and, as a result, it would need to generate substantial amounts of cash in order to service its debt. Failure to do so would lead to a default. Although the Joint Venture undertook this debt, the Joint Venture itself (as distinct from Granada or Thorn) carried out no due diligence of its own and received no advice as to the value of the businesses which it was acquiring or its ability to service the debt obligations that it would assume. Granada and Thorn undertook no legal obligation to support the Joint Venture, and they were not required to charge their own assets as security for the debt taken on by the Joint Venture. Having obtained value for the businesses in the form of the cash paid for the transfer of their shares (used to pay off intra-group indebtedness and external debts), they were insulated from any further decline or even collapse of the business. At the same time, both Granada and Thorn stood to benefit from any upside in the Box Clever business whether by way of dividends or increases in the value of their shareholdings in BxC Tech.

These features of the Joint Venture were spelt out in the Shareholders' Agreement of 28 June 2000 which regulated the relationship between the Joint Venture parties. Under this agreement, major decisions relating to the Joint Venture required the approval of at least one of the directors representing Granada and one representing Thorn. Major decisions included the establishment of, or material amendment to, the Scheme. The Tribunal found that, in practice, major decisions were agreed informally between Mr Allen (a Granada appointed director and the Chief Executive of the Granada group) and Mr Hands, his Thorn counterpart; that the Joint Venture business was run on “autocratic” lines; and that no major decisions were made without the agreement of these two individuals.

Clause 3 of the Shareholders' Agreement provided:

“The parties intend that the Box Clever Group should be self-financing and should obtain additional funds from third parties without recourse to its Shareholders. Subject to any contrary agreement, no shareholder shall be obliged to contribute to the working capital or other financial requirements of the Company, whether by further subscription per shares, by...