Following a series of sporadic reports on the case in the pensions press, the Pensions Regulator has finally published the decision of its Determinations Panel, made in May 2010, to issue a Contribution Notice against two individuals connected with the Desmond and Sons Limited 1975 Pension and Life Assurance Scheme.
The Regulator had previously declined to comment on the case on the grounds that it had proceeded to the Upper Tribunal and the Tribunal had imposed an embargo.
The original targets of the proceedings were four individuals associated with a manufacturing business in Northern Ireland, Desmond & Sons Limited. In February 2004, the company became aware that its sole customer, Marks & Spencer, was planning to end their commercial relationship. In June 2004, the company entered a members' voluntary liquidation (MVL), a liquidation procedure which is open to companies that are still solvent.
According to the Regulator, the MVL was intended to exploit a "loophole" because it allowed the employer to be treated as an insolvent company for the purposes of calculating its Article 75 debt (the Northern Ireland equivalent of the Section 75 debt). This in turn meant, under the legislation as it stood at the time, that the scheme's liabilities were calculated by reference to the relatively undemanding minimum funding requirement (MFR) rather than the much more conservative – and expensive – buy-out basis.
In fact, there was no MFR deficit in the scheme at the relevant time, whereas the buy-out deficit was estimated at between £10.9 million and £17 million. The company paid a contribution of £4 million into the scheme in May 2004. The targets were said to have recovered £26 million from the MVL. The scheme ended up in the Financial Assistance Scheme, the safety net for pension schemes which entered winding-up before the Pension Protection Fund became active in April 2005.
The legislation provided that a Contribution Notice could be issued in respect of an act or failure to act by individuals where the main purpose, or one of the main purposes, of the act or failure was "to prevent the recovery of the whole or any part of a debt which was, or might become, due from the employer in relation to the scheme" under Article 75. The legislation in force in Great Britain contained the same provisions (though it has since been amended to add a requirement that the act or failure be materially detrimental to the scheme).
The targets argued that, far from preventing a debt from becoming due, they had performed a trigger event for an Article 75 debt by executing the MVL – which itself was the inevitable result of M&S withdrawing its custom. On the other hand, there was evidence that the targets had been aware of the "loophole" and the prospect that it was facing closure. They had been discussing the subject with their professional advisers, and had sought counsel's opinion on two occasions. An email between two KPMG advisers had listed, under the heading "Goals", the following point: "get as much money out the company as possible without the pension scheme grabbing windup costs".
The Panel found that the criteria for the issuance of a Contribution Notice were satisfied on the basis that putting the company into an MVL at short notice and thereby triggering an MFR debt (of zero) had prevented a buy-out debt from arising. Moreover, the company had not kept the trustees informed about what was going on, contrary to their duties under the Scheme Administration Regulations. This had prevented the trustees from negotiating with the company for additional funding, or demanding extra funding via the scheme's contribution rule.
Two of the four targets whom the Panel sought to make liable for the Contribution Notice, Mr Desmond and Mr Gordon, had been in undisputed control of the company. The remaining two targets were shareholders of the company, but the Panel found that their role in the MVL had been too minor to justify extending the Contribution Notice to them. The legislation requires that imposing a Contribution Notice on a target be "reasonable", and this was not the case with the latter two individuals.
Mr Desmond and Mr Gordon were ordered to pay £900,000 and £100,000 respectively, to reflect the proportions in which they had benefited from extracting value from the company.
The Panel's determination was referred to the Upper Tribunal. The Tribunal's final decision is still awaited and until the reference is disposed of the Contribution Notice cannot be issued. The Regulator and the scheme trustees have so far claimed before the Tribunal that the Panel ought to have imposed heavier liabilities on Mr Desmond and Mr Gordon, and that another of the targets, Mrs Desmond, should have been included in the Contribution Notice.
In February 2011, the Upper Tribunal ruled on a preliminary application by Mr Desmond and Mr Gordon to have parts of the Regulator's case struck out. The application failed. Mrs Desmond applied at the same time to have her name removed from the reference. The Upper Tribunal granted this application, but this decision has since been appealed to the Court of Appeal in Northern Ireland.
Clyde & Co comment
From one perspective, it is surprising to see the Regulator pursuing an employer under the employer debt anti-avoidance legislation where the employer has deliberately triggered a debt on itself. On the other hand, there are good reasons for concluding that the actions of the targets were oriented towards precisely the sort of avoidance manoeuvre that the Contribution Notice legislation was designed to prevent.
The litigation offers further proof, following other recent regulatory actions in ITV and other cases, that the Regulator is both able and willing to pursue employers under its anti-avoidance powers. There may also be evidence here of a practical, purposive approach to enforcement of the legislation rather than a literal-minded one. It illustrates (as with the ITV case) that the legislation is more widely drafted than to provide protection just to the PPF, which was the rationale for the "moral hazard" provisions.
The Tribunal's decision on the preliminary applications is interesting as it indicates the Tribunal may be prepared to consider evidence that was not before the Determinations Panel (provided that the Regulator is not trying to make out a completely new case), and to allow the Regulator to argue against aspects of the Panel's decision, so that the Regulator's role can extend beyond merely defending the determination which has been referred to the Tribunal. The Tribunal's decision did not perhaps break new ground here, and it referred to its decision in the Bonas Contribution Notice case and other tribunal case-law. Nevertheless, given that references from the Panel to the Upper Tribunal are still mostly uncharted legal territory, it is useful to have an indication of the Tribunal's likely approach in future litigation.
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