On 31 March 2015, the High Court ruled in Heis & Others v MF Global UK Services Limited that there was an implied contract for the procurement of staff in return for the reimbursement of payroll costs, between group companies, which included an indemnity for any pension scheme debt under section 75 Pensions Act 1995.
MF Global UK Services (MF Services) and MF Global UK Limited (MFG UK) are both wholly-owned subsidiaries of MF Global Holdings Europe Limited (MF Holdings), which in turn was a subsidiary of MF Global Holdings Limited, a US company. Employees of MF Services were seconded to other UK companies within MF Global group, the vast majority being seconded to MFG UK.
MF Services operated a defined benefit pension scheme. In October 2011, MF Global Holdings Limited filed for Chapter 11 bankruptcy protection in the US and MF Services and MFG UK entered administration. The administration of MF Services triggered a debt under section 75 Pensions Act 1995 to the pension scheme valued at over £35 million. The Scheme also entered into a PPF assessment period.
Subsequently, the administrators of MF Services and MFG UK entered a settlement agreement with the PPF in the sum of £29 million, to be paid to trustees in respect of the section 75 debt. This allowed the scheme to wind up outside of the PPF. The Pensions Regulator also announced that it would no longer seek to impose a financial support direction against MFG UK.
MF Services claimed an indemnity for the section 75 debt from MGF UK. MF Services and MFG UK could not reach agreement and so applied to the Court for its determination.
There were two issues before the court. Firstly, was there a contract between MF Services and MFG UK regarding the secondment of staff and their reimbursement? Secondly, if there was a contract, did its terms extend to include a section 75 indemnity?
1. Was there a contract between MF Services and MFG UK?
By relying on established contract law principles of offer and acceptance, the court identified an implied contract between MF Services and MFG UK. MF Services offered to provide MFG UK with staff on the condition that MFG UK would reimburse MF Services with all the associated costs in respect of the secondees. These costs included employer contributions and pension deficit reduction contributions. By way of acceptance, MFG UK made these payments directly to MF Services and fulfilled their contractual obligations. These payments were not made gratuitously and there were clear intentions to create legal relations with one another.
Evidence of such a contract could be seen within MFG UK's annual accounts where multiple references were made to the recharging of employee costs, including pension contributions.
2. Do the terms in the implied contract extend to include a section 75 indemnity?
The court found the implied contract did include a section 75 indemnity. When considering the extent of the implied contract, the court paid close attention to the structure of MF Group. MF Services was a non-trading company, whose only income was the reimbursement, including pension contributions, paid by group companies in return for staff without any mark up. Consequently, MF Services had no ability to meet any liabilities other than through reimbursement from other group companies. The Court found there was no evidence or reason to assume that the directors of the MF Global companies intended to create a company which may be unable to meet the contingent section 75 debt if it arose. It was much more likely to be the case that another group company was expected to take responsibility for any liabilities, including section 75 debt.
MFG UK argued that, on the finding of a contract between itself and MF Services, it would mirror terms in the Service Agreement held between MF Services and MF Holdings. In Clause 3.1 of the Service Agreement, MF Holdings Europe agreed to procure that all "Payroll Costs" for all secondees would be met on behalf of the recipient company, i.e. MFG UK. Clause 3.2 defined Payroll Costs to include all salary, bonus and contractual and discretionary cash and non-cash benefits including, but not limited to pension contributions. It was agreed that past service pension contributions made by MFG UK constituted costs and on that basis the judge concluded that section 75 debt constituted a cost in relation to the pensions of seconded staff.
Accordingly, the judge declared that MFG UK was obliged to indemnify MF Services in respect of its section 75 debt.
Clyde & Co comment:
The conclusion of the case demonstrates a willingness of the Court to accept the commercial reality of the situation. Despite the absence of a written contract, there was an agreement between two companies to fund a pension scheme and the terms of the agreement stretched beyond on-going contributions and included the section 75 debt.
Whilst the case centres around the specific circumstances of the MF group of companies, the judgment has wider implications when considering service agreements. "Pension Contributions" was found to include section 75 debt, as would a broad reference to "costs" of the secondees. However, making it more explicit how section 75 liabilities would be funded could have avoided both this Court case and the earlier intervention of the Pensions Regulator. Trustees of defined benefit schemes, who are reliant on a service company, may want to investigate the terms of the service agreement that are in place as part of their duty to monitor the employer covenant.