The trustees of the Olympic Airlines SA Pension and Life Assurance Scheme -v- Olympic Airlines SA
On 29 April 2015, the Supreme Court handed down its judgment in relation to the trustees’ appeal. The unanimous decision was in favour of Olympic Airlines SA (the respondent). The Supreme Court agreed with the Court of Appeal that the High Court was wrong and confirmed that in order for there to be an ‘establishment’ there must be some business dealings with third parties. The trustees’ appeal was therefore dismissed.
The respondent was wound up on the order of the European Commission on 2 October 2009. Following this, the main liquidation proceedings had been conducted in Greece. The respondent is the principal employer in the scheme. The rules of the scheme dictate that upon the liquidation of the respondent, the scheme must be wound up. It was during this process that a deficit of £16 million was revealed, with the respondent responsible for this deficit.
On 20 July 2010 (the relevant date), a winding-up petition was presented by the trustees in the UK, on the grounds that the principal employer could not meet its liability. Though the trustees will not have expected to recover the deficit, the winding-up petition was required in order for there to have been a ‘qualifying insolvency event’, without which the scheme could not qualify for entry into the Pension Protection Fund (PPF). At this stage the only ‘qualifying insolvency event’ open to the trustees was contained in Section 121(3)(g) Pensions Act 2004, which allows for an order by the court to wind up an entity under the Insolvency Act 1986.
At this point, only three people were employed in the UK office. Their work consisted of paying suppliers and utility bills, copying and sending documents and records to the liquidator in Athens and dealing with other instructions that they received from the liquidator.
The High Court was of the view that it had jurisdiction to issue the winding-up order on the basis that the respondent had an ‘establishment’ in England on the relevant date within the meaning of Council Regulation EC 1346/2000 on insolvency proceedings (the ’Insolvency Regulation’). However, the respondent (through the Greek liquidator) appealed this, arguing that the Insolvency Regulation’s definition of establishment (article 2(h)) required more than what had been identified by the High Court. In particular, it required ‘economic activity’ which was external and market facing, and that the desultory running down of a business did not count.
The appeal was allowed and was successful, with the Court of Appeal overturning the decision of the High Court. They were of the view that ‘economic activity’ had to consist of more than the activity involved in winding up the company’s affairs and that the three remaining employees were doing no more than that. This decision meant that there had been no ‘qualifying insolvency event’ and the scheme could no longer enter the PPF, and therefore were not eligible for PPF compensatory benefits.
Following the decision of the Court of Appeal, the Secretary of State for Work and Pensions drew up The Pension Protection Fund (Entry Rules) (Amendment) Regulations 2014 (the ‘Amendment Regulations’). The Amendment Regulations allowed the scheme to enter the PPF on 2 October 2014, being the fifth anniversary of the commencement of liquidation proceedings in Greece. The Amendment Regulations were drafted on a bespoke basis to assist the members affected by this particular case.
Judgment of the Supreme Court
The issue in dispute in this case was whether or not the respondents had an ‘establishment’ in England within the meaning the Insolvency Regulation on the relevant date. Despite the introduction of the Amendment Regulations, which ensured entry into the PPF, deciding this issue was still important. Lord Sumption noted the reason for this in paragraph 8, acknowledging that the Board of the PPF may want the trustees to recoup any overpaid benefits between the commencement of the liquidation proceedings in Greece and the relevant ‘insolvency event’. The amount of benefits that the Trustees would need to claw back would vary considerably depending on the date on which the insolvency event was deemed to have occurred. The trustees appealed to the Supreme Court in an attempt to fix this date at 20 July 2010, rather than 2 October 2014.
Lord Sumption was of the view that 'Article 2(h) must be read as whole, not broken down into discrete elements, for each element colours the others. The relevant activities must be (i) ‘economic’, (ii) ’non-transitory’, (iii) carried on from a ‘place of operations’, and (iv) using the debtor’s assets and human agents. This suggests … a fixed place of business' (paragraph 13). Like the Court of Appeal, he was particularly swayed by Professor Miguel Virgos and M Etienne Schmit’s Report, which states that the activities must be ‘exercised on the market (i.e. externally)’. Reference was also made to (Case C-396/09) Interedil Srl (in liquidation) -v- Fallimento Interedil Srl  ECR I-9939:  BUS LR 1582 (Interedil) in which the Court of Justice observed that the activities must be ’sufficiently accessible to enable third parties…to be aware of them’. Lord Sumption read this as referring to ’the character of the economic activities’, rather than the debtor being locatable or identified ‘by a brass plate on the door’.
Based on this, the respondent could not be said to have had an establishment in England on the relevant date, as the work that was being carried out by the final three employees could not be described as being ‘exercised on the market’. It was merely internal administration associated with the company’s disposal. As a result there had been no ‘qualifying insolvency event’ and the scheme could therefore not enter the PPF from 2010 (as advanced by the Trustees). The Scheme was only eligible to enter the PPF following the bringing into force of the Amendment Regulations, and consequently suffered a ‘qualifying insolvency event’ on 2 October 2014.
This case provides clarity for companies, creditors, insolvency professionals and pension schemes. EU companies with a UK presence that are winding down must show that they are still carrying on some degree of business with third parties in order to enter into insolvency proceedings in the UK.
It also acts as a sage reminder for trustees that schemes can all too easily be denied entry to the PPF, and members of such schemes are unlikely to be as fortunate as those in this case in terms of regulations being drafted after the event in order to assist. Legislation dealing with entry requirements for the PPF following insolvency currently only cover UK insolvency events. There is no protection provided for UK employees of overseas entities should they suffer an insolvency event abroad, unless they are able to bring secondary winding up proceedings.
It is expected that a recast EC Regulation on Insolvency Proceedings will be formally adopted in the coming weeks, and that it will define ‘establishment’ as ‘any place of operations where the debtor carries out or has carried out in the three months prior to the request to open main insolvency proceedings a non-transitory economic activity with human means and assets’. If this is the case courts will instead have to consider if an employer had an 'establishment' that was carrying out ‘market activity’ in the three months prior to the opening of the main proceedings, rather than only considering the date on which an application is made to open secondary proceedings.