Re MF Global UK Ltd (In Special Administration)  EWHC 883 (Ch) (the Case)
MF Global Group's main business was to act as broker dealers in the investment markets. In the UK, MF Global used an operating company called MF Global UK Limited (UK) and a service company called MF Global UK Services Limited (Services). Both shared an immediate parent in MF Global Holdings Europe Limited (Holdings) and Services ran a defined benefit pension scheme called the MF Global UK Pension Fund (the Scheme).
Services seconded staff to other MF Group companies, with UK receiving the most secondees. Although there was no direct agreement between Services and UK, there was an agreement between Holdings and Services (the Agreement) which provided Holdings would:
"procure that all Payroll Costs for all Secondees shall be met on behalf of the Service Provider by the Service Recipients to be apportioned on such basis as Parent shall determine from time to time".
The Agreement defined Payroll Costs as the aggregate costs associated with a broad selection of heads. These included "pension contributions". In practice UK paid contributions to Services for new accrual costs and recovery plan payments required under the UK's pension scheme funding regime to cover the shortfall in the scheme. It also made provision for potential funding shortfalls in the Scheme in its accounts.
What triggered the Case?
In October 2011, UK and Services both entered insolvency proceedings. This triggered a pension debt on Services due to the Scheme under section 75 of the Pensions Act 1995. This was in the region of £35 million and Services could not meet this liability.
After negotiations with the various MF Global Group companies, the Trustees agreed a settlement on 16 October 2013 which provided for a payment to the Scheme. This would allow the Scheme to buy out its benefits with an insurance company at a level greater than would be the case if the Scheme entered the Pension Protection Fund.
Based on this settlement the Pensions Regulator issued a section 89 report confirming that it would not be using its moral hazard powers against the MF Global Group.
So where's the problem?
Eagle-eyed readers may have noticed that the settlement agreement was a little vague on who would pay the settlement amount. This was intentional. There was a side agreement between UK and Services stating that this would be negotiated between them, and if they could not agree then they would ask the court. As they could not agree, they went to court.
What was the court asked to decide?
Whether UK was obliged to indemnify Services for the section 75 liability to the Scheme?
The court chose to analyse this question as:
- Was there an implied contract between Services and UK?
- If so, did it cover the section 75 debt payment directly or imply an indemnity from UK to Services for any such debt?
What did Services argue?
Services argued there was a contract created by conduct between it and UK, and that under that agreement UK was liable for all the pension costs associated with the seconded staff, including this section 75 debt.
What did UK argue?
UK argued there was no contract between it and Services. The only contractual relationship was between Services and Holdings. It claimed there was an implied contract which led to it making payments to Services, but this was between UK and Holdings and in this way Holdings met its obligations to Services under the Services/Holdings contract.
In the alternative it argued that if there were a contract between UK and Services then the terms would be identical to the terms of that between Holdings and Services and that these only covered ordinary pension contributions and did not include a section 75 debt to the scheme and no indemnity for such a claim should be implied.
What did the court decide?
The court held that in the circumstances of the case there was an implied contract between UK and Services. It also held that the term "pension contributions" in the definition of Payroll Costs covered a section 75 debt despite UK's arguments to the contrary. Therefore, UK was required to indemnify Services against this debt (and in respect of any other payroll costs associated with the secondees).
The court also held that the existence of the moral hazard regime was irrelevant to its consideration of this situation.
Do I have to worry about the case if I use a service company to provide my staff?
The case is relevant if:
- you use a service company to provide your operating company with staff; and
- the service company provides a defined benefit pension scheme to the secondees.
In this scenario there is a possibility the court will impose liability on the operating company for the pension scheme's section 75 debt without the need for the Pensions Regulator to consider using its moral hazard issue.
Looking at the specific elements of the case, the court noted that in the UK MF Global appeared to run as a single entity. It also gave particular weight to the fact that Services received no more funds above the basic costs from UK for the seconded staff. So this left Services with no source of income to meet the Scheme's liabilities when things went wrong.
Are there wider implications?
The decision would indicate a relatively effective means for the trustees of a defined benefit pension scheme recovering a section 75 debt without the need for the Pension Regulator to exercise its powers to impose a financial support direction (FSD) in service company cases. Indeed the decision may prevent a repeat of complex, evidence-heavy cases such as the Lehman Brothers FSD case. It is possible that future cases may seek to extend the boundaries of this decision. Would the court be prepared to hold an implied contract to meet the section 75 debt in any instance where the employer liable for the section 75 debt is little more than a nominee company in a group where all the financial benefits go to other companies in the group?
However, we understand that UK is seeking permission to appeal so much will depend on whether an appeal is successful.