Introduction

On 18 December 2013, the High Court handed down a judgment that will be of concern to all group companies with schemes in which a funding deficit may arise.

The principal issue in Storm Funding Limited (in administration) and other companies in administration [2013] was whether the aggregate maximum amount either specified in contribution notices issued by the Pensions Regulator, or the amount recovered under them, was limited to the section 75 debt.

The High Court rules that the amount recovered could exceed that sum.

The issue in Storm Funding

The principal issue in Storm Funding Limited (in administration) and other companies in administration [2013] (Storm Funding) was whether, in circumstances where two or more contribution notices (CNs) are issued as a result of non-compliance with a previously issued financial support direction (FSD), the aggregate maximum amount either specified in the CNs, or recovered under them, is limited to the shortfall sum which in this case was £119 million.

The section 75 debt in Storm Funding had been certified as at 15 September 2008. By the first half of 2013, estimates of the scheme deficit on a buy-out basis ranged from £214 million to £275 million.

Legal background

The Pensions Regulator (TPR) can issue an FSD if it considers that a scheme's sponsoring employer is either a service company or is insufficiently resourced. An FSD can be issued to “one or more persons” including the employer and any person who is “connected with or an associate of” the employer.

If a person fails to comply with an FSD, TPR may issue a subsequent CN for non-compliance with the original FSD. The sum specified in the CN may be “either the whole or a specified part of the shortfall sum in relation to the scheme”. If, at the time of non-compliance, there is an outstanding debt due under section 75 of the Pensions Act 1995 (a section 75 debt), the shortfall sum is the amount of that debt. If no such debt was due at the time of non-compliance, the shortfall is TPR’s estimate of the notional section 75 debt calculated as at the time of the non-compliance.

Facts of the Storm Funding case

The applicant companies in the Lehman Group which brought the claim (the Applicant Companies) had been issued with FSDs in 2010. The administrators of the Applicant Companies sought the following directions:

  • whether TPR could issue CNs which in aggregate exceed the £119 million; and
  • whether the sum specified in any one CN was limited to the amount of the section 75 debt.

The parties all agreed, for the purposes of this case, that the shortfall sum in any one CN was limited to the section 75 debt.

Submissions on behalf of the Applicant Companies

The Applicant Companies submitted that:

  • there was an implied limit that the aggregate amount in all CNs issued for the same non-compliance should not exceed the section 75 debt;
  • the same implicit limit applied to the amount which could be recovered;
  • any CNs issued on a joint and several basis should be treated as a single notice;
  • the legislative purpose of the CNs was to enable the trustees to recover no more than the outstanding section 75 debt; and
  • on the general principle that a creditor is not permitted to recover more than 100 per cent of what is in substance the same debt, the trustees should not be able to recover more than 100 per cent of the sum specified in a CN or CNs issued in respect of the same section 75 debt – that is, £119 million.

Lehman Brothers Holdings Inc (LBHI), the ultimate parent company and a creditor of the Applicant Companies, supported the Applicant Companies’ submissions and additionally submitted that:

  • pensions and insolvency legislation should be construed consistently. The ability to recover an amount greater than the section 75 debt would lead to uncertainty; and
  • while the aggregate amounts specified in the CNs could exceed the section 75 debt, the amount recoveredcould not.

Submissions on behalf of the trustees and TPR

As already noted, the central issue was whether there is any limit on the aggregate amount which may be specified in, or recovered under, two or more CNs issued following the same non-compliance with an FSD.

The position of the trustees and TPR was that:

  • any limit on the amount derived only from the statutory requirement that TPR must exercise its powers reasonably;
  • it was accepted that it would be an improper exercise of such power to recover sums in excess of the scheme’s liabilities; and
  • neither the aggregate amount specified in the CNs nor the aggregate of sums recovered under them were limited to the section 75 debt.

The decision

David Richards J recognised that there was a balance to be struck between the achievement of TPR’s statutory objectives and the amounts which it was reasonable to require targets to pay to the pension scheme, although his disagreed with the Applicant Companies’ submissions that limits were implicit in the legislation.  

The Court also noted that there may be considerable delay before the issue of any FSDs, or subsequent CNs, during which time the need for financial support for the scheme could have risen (or fallen).

The specific regime for the issue of CNs for non-compliance with FSDs

David Richards J found that where CNs are issued to a number of persons for the same amount, they could be (but need not be) expressed to be jointly or severally liable.

If the intention (he said) had been to limit the total amount in the CNs, the expectation would be for such a limit to be provided expressly in the legislation. Instead, the legislation empowered TPR to issue a number of CNs to a number of different people, each of which could specify the whole of the shortfall sum.

David Richards J said:

…the issue of contribution notices is not a response to the non-payment [of a section 75 debt] but is a response to non-compliance with one or more FSDs. The purpose of FSDs is to secure for a scheme financial support which may be different from, and larger than, any section 75 debt. In these circumstances, there seems little logic in linking the aggregate amounts which may be stated in contribution notices to the section 75 debt.

He also saw as significant the fact that liability under a CN may, but need not, be joint and several. The legislation, he reasoned, therefore expressly limits in some circumstances where the recovered amount may not exceed the shortfall sum.

The conclusion was that:

  • sums may be specified in a number of CNs that exceed the shortfall sum in aggregate;
  • it is a matter for TPR whether or not to impose joint and several liability and thereby limit total recovery under a number of CNs by reference to the amount specified in each of them;
  • nothing in the legislation suggested that notices imposing joint and several liability should be treated as one notice.

While accepting the existence of the general principle that creditors are not permitted to recover more than 100 per cent of the same debt (so-called double-dipping), it was not accepted that section 75 debts and debts arising under CNs were the same debts. David Richards J held that a section 75 debt is triggered automatically by certain events, including insolvency, whereas a CN is a discretionary remedy, imposed (in these circumstances) following a failure to comply with an FSD. The statutory regimes governing the creation of section 75 debts and debts under CNs were different.

The Court held that the true construction of the relevant legislative provisions was that CNs may be issued to more than one qualifying target specifying an aggregate  sum in excess of the shortfall sum, and such excess could also be recovered.

Comment

The judgment raises several important issues.

The result of David Richards J’s decision is that the level of a scheme’s recovery will depend on the number of targets issued with CNs. Where only one CN is issued for non-compliance with an FSD, the recovery is limited to the shortfall amount, which in this case was the section 75 debt. Where there are several target companies, the CN in respect of each target may specify the whole or part of the shortfall amount.

Where there are fewer target companies, the inevitable effect would be to reduce the level of potential recovery.  This may seem a bizarre decision, but the judge noted that on any footing, the full amount of the shortfall debt could be specified in CNs issued to those who have not complied with the FSD, without giving credit for the financial support provided by the others.  

The counter argument is that it is perverse to allow TPR to impose funding orders on targets that exceed those a single employer would have to pay at insolvency. As a result, group structures with multiple subsidiary companies could potentially face liabilities greater than the scheme deficit at insolvency.

The decision relates to CNs issued as a result of a failure to comply with an FSD. It is unclear whether it also relates to CNs issued in other circumstances, such as where the material detriment test is met, or where an act or failure to act prevents the recovery of an employer debt. In the absence of any appeal, our view is that the better interpretation is the narrower one. However, as things stand, due to the way the judge in this case construed the legislation, the decision is of concern to group companies with schemes in which a funding deficit may arise.

Proceedings are ongoing in the Upper Tribunal in relation to the issuing of FSDs against the Applicant Companies, with a directions hearing scheduled for “early 2014”. Given the magnitude of the sums involved, there is obviously a great deal at stake, and this long-running litigation in relation to FSDs imposed more than three years ago is set to continue.

View the judgment.