The High Court judgment in Easterly -v- Headway is a very interesting case on section 75 debts - particularly for schemes where the debt is not calculated on a pure buy-out basis. It confirms that trustees can increase the value of the debt by partially buying out benefits before setting the applicable time for calculating the debt. The decision does turn on the express Scheme Rules (as well as statutory provisions) but may be relevant to other schemes.
Headway (H) was the principal employer of the Scheme, and Easterly the trustee. Winding up was triggered in May 2001, this meant that would mean the s75 debt would be calculated on the basis of full buy-out for pensioners and MFR for other benefits. E decided to do a "partial buy-out" which consisted of:
- using all available assets to purchase annuities for members;
- then fixing the applicable time for calculating the s75 debt; and
- then using any monies recovered under s75 to secure a further tranche of benefits.
The trustee argued that by removing assets and liabilities (on a buy out basis) at the first stage from the debt calculation it effectively increased the debt which meant that the balance available at stage 3 is greater than it would otherwise have been. Essentially the question is whether the liability from which the Trustee was released on buy-out was ascertained by reference to the benefit it would otherwise have to provide (Trustee argument) or the underlying MFR value of that benefit (H argument). The second question was whether, following the partial buy-out the Trustee could still set the applicable time (i.e. was the Scheme still being wound up)?
The Vice-Chancellor found in favour of the trustee on both questions. The partial buy-out bought out the full value of that part of the benefit (rather than the MFR equivalent value), leaving a larger portion of benefit remaining to be considered as a liability for the s75 debt. It was also held that so long as assets remain uncollected or unapplied then the winding up is continuing. Following the partial buy-out the Trustee still has the benefit of a s75 claim and so the wind up is not complete. It is still therefore open to the Trustee to set the applicable time.
- the partial buy-out route was permissible (under the Rules and statute) and the Trustee could fix the applicable time after the buy-out;
- the subsequent s75 calculation will be based on the remaining liability of the Trustee to provide benefits in full (not on the underlying MFR value).
This case will be less relevant for schemes commencing winding up on or after 6 April 2005 as their s75 debts will be calculated on the basis of full buy-out for all members.