There have been a number of recent cases where companies have sought a reduction in their share capital by way of a High Court sanctioned process. One such case involving Aer Lingus raised interesting issues about the status of pension fund shortfalls as liabilities of the employer company as Emmet Scully and Jennifer McGuire report.

In a reduction of capital application, the High Court’s primary concern is whether the company’s creditors would be prejudiced by the reduction of capital.

On 15 March of this year, the High Court ordered a reduction in the share capital of Aer Lingus Group Plc by €500 million, subject to a condition that notice must be given to the trustees of the company’s pension scheme if any proposed distribution would cause the aggregate of the reserves of the company to be less than the aggregate of the deficits in the company's pension schemes attributable to persons currently or formerly employed by Aer Lingus and certain associated companies.At any earlier stage in the application, the High Court had refused to sanction the €500 million share capital reduction unless the company made provision for potential legal claims resulting from the €930 million deficit in the Aer Lingus pension schemes. Mr Justice Roderick Murphy held that the shortfalls in the pension schemes “would seem” to constitute a contingent future claim against Aer Lingus. In those circumstances, he found that the court approval of the resolution to reduce the reserves was subject to a condition that Aer Lingus provide for potential claimants arising from the pension funds deficit.

The proposed reduction in the capital reserves of Aer Lingus Group Plc from almost €860 million to about €360 million was “substantially below” the level of the shortfall of the pension funds, Mr Justice Murphy noted. He held that the trustees of the pension schemes owed duties to the Aer Lingus pensioners and were contingent creditors of Aer Lingus Group Plc in the circumstances of a shortfall in funding the schemes.

This is not the first Irish case relating to a capital reduction where there is a deficit in a pension fund. Another recent case involved Irish Continental Group seeking court approval for a €46 million reduction in its share premium account for purposes that included the payment of a dividend to shareholders. The judge transferred the proceedings to the Commercial Court, noting the position relating to the pension funds. He said the fund trustees had an opportunity to apply to the court if they so wished.