The Upper Tribunal's tax and chancery chamber has ruled that a contribution notice should compensate the pension scheme for detriment suffered. It should not actively penalise the target. The case will now proceed to the Upper Tribunal but its conclusions are likely to carry much weight in future cases.
This briefing outlines the background and summarises the main points that may affect future cases involving contribution notices.
1. Strike-out application rejected
The Upper Tribunal (tax and chancery chamber) has rejected a strike-out application by the target of the first contribution notice (CN) issued by the Pensions Regulator (TPR)'.
In June 2010, TPR confirmed that it had issued its first CN against a Belgian company, Michel Van De Wiele (vDw), the parent company of Bonas UK (Bonas), the sponsoring employer of the Bonas Group pension scheme. Bonas had entered administration in 2006 and then had its business sold to another subsidiary of VDW under a pre-pack insolvency process, leaving the scheme to be taken over by the Pension Protection Fund (PPF). The CN would, if issued, order VDW to pay just over £5m to the PPF.
VDW appealed to the Upper Tribunal and made an interlocutory application to strike out TPR's case. Although the application was refused, Mr Justice Warren, the president of the tax and chancery chamber, criticised the amount specified in the contribution notice, stating that some of the determinations panel's reasoning as to the relevant amount was 'unsustainable'.
Warren J reasoned that the purpose of a CN should be to compensate the scheme for the detriment suffered rather than actively penalise the target. Any recovery of additional amounts should be obtained through the
financial support direction (FsD) regime. On the facts presented, Warren J felt that if TPR could show that (for example) the assets of Bonas had been sold at an under-value (as part of the pre-pack administration) the appropriate amount for a CN would be no more than the difference between the market value of the business and the price obtained.
The case is now due to proceed to a hearing before the Upper Tribunal.
2. What does this mean?
This decision is definitely a shot across TPR's bows by Mr Justice Warren - it is not strictly binding on a future tribunal but is likely to be given lots of weight. The main points include the following.
a) The statute says that any CN award must be reasonable. Mr Justice Warren considered that this means the amount must not be penal and so it is 'not easy to see' how it should exceed the amount of the section 75 debt avoided by the relevant act (ie the obligation to contribute to the scheme under section 75 of the Pensions Act 1995, triggered by an event such as a company re-organisation). This means it is very difficult to justify the £5m CN based on just (say):
- VDW failing to inform the trustees or TPR of its proposals; or
- (even if shown) the sale of Bonas's assets at an under-value (given that the asset value was probably no more than £100,000).
b) These limits on a CN probably do not apply to an FSD. This is likely to mean that in future TPR is even more likely to look for an FSD ahead of a CN (but note the more restrictive time limits).
c) TPR cannot itself appeal against the determinations panel's decision - eg here the panel decided not to grant a CN personally against one of the directors:
- but if there is an appeal (eg by the company or trustees as a directly affected party), TPR could argue for an increased CN — ie as here against the parent company; and
- this is a point that targets will need to bear in mind if they are thinking of appeal - it could result in a larger award.
d) There is no strike-out here on most of the points because they will depend on the factual evidence (still to be finalised and heard). But the judgment contains pretty strong hints by Mr Justice Warren that the evidence is not enough to justify the £5m CN previously determined.
3. Background - the appeal to the upper tribunal
TPR's determinations panel decided in May 2010 that a CN for about £5m should be issued against VDW. It also decided not to issue a CN against one of the directors of Bonas, Mr Beauduin.
VDW appealed to the Upper Tribunal against the decision against it and applied to strike out part of TPR's claim.
Mr Justice Warren, the president of the Upper Tribunal (tax and chancery chamber) gave judgment on 17 January 2011. This was a preliminary strike-out application (and not a full hearing of the appeal).
4. Points to consider for future CNs
Warren J's decision is the first real appeal hearing from a determinations panel decision in a moral hazard case. It includes several important points, as discussed below.
The appeal is a new decision
An appeal to the Upper Tribunal operates as a new decision. It is not necessary to show that the determinations panel was in error - paragraph 38.
New facts can be introduced
New facts can be introduced by all the parties, including the target of the CN and TPR — paragraph 39. The Upper Tribunal may be reluctant to hear all the evidence that has already been given (but could decide to) - paragraph 40.
TPR cannot appeal alone
TPR cannot itself appeal a decision of the determinations panel, but the target or another 'directly affected' person (eg the pension trustees) can - paragraph 66.
Entirely new claims cannot be brought
A new claim probably cannot be introduced. TPR probably cannot claim a new measure not in the original warning notice - paragraph 702.
TPR can argue for a higher amount
If there is an appeal, TPR can seek a CN for a higher amount than was decided by the determinations panel - paragraph 70.
Each determination is separate
Each target is the subject of a separate decision by the determinations panel, so the appeal by VDW is not an appeal in the case involving the director, Mr Beauduin. No appeal has been made in Mr Beauduin's case, so it is not possible for the Upper Tribunal to issue a CN against Mr Beauduin - paragraph 199.
The requirements for a 'main purpose CN' were analysed
There is some analysis of the meaning of the CN legislation (section 38 of the Pensions Act 2004), but note this was dealing with the 2004 Act before the amendments made in 2008 (by the Pensions Act 2008).
In particular Warren J reviewed:
a) when there would be a 'failure to act'. Warren J thought this did not require a failure to do something under a positive duty - paragraph 88;
b) how the 'main purpose' would be identified. Warren J thought this would probably have a subjective element (what the person intends) as well as an objective element (the act must be able to prevent recovery of a section 75 debt) - paragraphs 90 and 91; and
c) recovery of all or part of a section 75 debt can be prevented only if the person is liable to pay an amount (eg the employer or a guarantor). It is not enough to prevent a voluntary payment - paragraphs 93 and 94.
'Walking away' does not justify a CN
Warren J considered that a failure to negotiate with TPR about clearance cannot itself be an act or failure justifying a CN — paragraphs 159 to 161. Failure by VDW to engage with trustees or TPR is 'not of great significance' because it does not prejudice TPR from issuing a CN later- paragraph 163.
But non-engagement could be relevant to establish subjective intention. So TPR can still in this case seek to rely on the 'walking away' evidence - paragraph 164.
Sale at under-value can be discussed
TPR is allowed to produce evidence that the sale by the administrator of Bonas of its business to another VDW group company was at an under-value (ie the company was worth more than the £40,000 paid).
a) But it is now quite late for such evidence to be introduced (it was produced too late to be discussed before the determinations panel and still has not been produced in the proceedings before the Upper Tribunal). Leave would be needed from the Upper Tribunal.
b) Warren J thought it likely to be 'hard to contend' that the market value should have been more than £100,000 - paragraph 178. So any CN based on such a sale at an under-value would probably be limited to £60,000.
c) `178. It is a different matter, however, whether it would be reasonable to issue a contribution notice on that basis for a sum of £5.089 million let alone any higher figure. If no further evidence is adduced, the most that the Regulator could say is that the sale price was at the bottom end of the range. Even if one takes a very generous view in favour of the Regulator, it appears to me to be hard to contend on the evidence so far that the market value was more than £100,000. In that case, it is difficult to see how the Regulator could properly form the view, by reference to the sale at undervalue point, that it would be reasonable for the contribution notice to specify an amount more than the difference between that sum and the price actually paid.'
Whether the sale prevented recovery of the section 75 debt is a matter for factual investigation
TPR argued that putting Bonas into a pre-pack administration prevented the payment of future contributions by Bonas.
Warren J rejected TPR's argument that vpw's failure to continue funding Bonas meant that it avoided the payment of the ongoing contribution payments and so prevented payment of a section 75 debt - paragraphs 162 and 180.
Warren J discussed an alternative argument that this also meant that VDW had prevented the recovery of contributions that would have reduced the section 75 debt. He considered that this raised a difficult factual case for TPR — it would have to show that Bonas would have paid the ongoing contributions, but he suspected that instead Bonas would have gone into liquidation - paragraph 186. But this was a matter for factual investigation, so Warren J decided that no bar should apply at this stage. He did comment that:
a) `187. Whether it is possible to issue a contribution notice to VDW on the basis that it could have chosen voluntarily to support Bonas and thereby the Scheme but chose not to do must be highly questionable. It is the territory of the FSD regime to impose liabilities on associated companies in such circumstances. To say that VDW has prevented payment by Bonas of part of the section 75 debt by declining to support Bonas when it was not obliged to do so would represent an extreme interpretation of section 38. As with the first difficulty, I do not consider that I can properly resolve this issue on this application. I consider that it should be resolved only after a full investigation of the facts. The facts may reveal that it would not be reasonable to issue a contribution notice at all based on the failure by VDW voluntarily to support Bonas in which case it may be unnecessary to rule one way or the other on this second difficulty. Reasonableness, however, is a matter which can only be dealt with at a full hearing.'
Amount of a CN - it should reflect loss, not be a penalty
There should be no penalty element to a CN. Recovery of any amount more than the loss caused by the act or omission is more a matter for the FSD regime' - paragraphs 100, 121 and 187.
In this case the evidence was that the legal advice to VDW was that if it had sought clearance from TPR, this would probably have involved a contribution to fund the scheme to the PPF level - about £8m. Warren J considered it 'frankly inconceivable' that VDW would have agreed to this - paragraphs 123 and 144.
The legislation specifies that a CN must be reasonable. Warren J considered that this means that there must be no penalty element (paragraph 100) and that it is 'not easy to see' how TPR could impose liability for a whole debt if only part has been prevented from being paid ¬paragraphs 96 to 98:
a) `96... Section 38(5) refers to the recovery of the whole or any part of the debt. If an act or failure to act prevents payment of only part of the debt, then the case falls within the subsection. The person
preventing that payment is then exposed to the risk of a contribution notice being issued against him. But the liability which can be imposed is restricted, under section 38(3)(d) to the sum which the Regulator considers that it is reasonable to impose. Since payment of part only of the debt has been prevented by the act or failure to act under consideration, it is not easy to see how the Regulator could properly be of the opinion that it is reasonable to impose a liability for the whole debt. To take an extreme case, the act or failure to act might have prevented recovery of only £1,000. It would be very surprising if the Regulator was able to impose a liability under section 38 for £1,000,000 being the total section 75 debt.'
The amount of any CN must reflect the amount that the act or failure has made irrecoverable, except in the 'most exceptional circumstances' - paragraph 193. The determinations panel's reasoning in imposing a CN for £5m based on the PPF funding level was 'unsustainable':
a) `192. My analysis of section 38 shows that this reasoning on the part of the Panel is unsustainable. VDW has not, by failing to negotiate openly, prevented payment of any part of the section 75 debt any more than if it had negotiated but failed to reach a negotiated settlement. If it had negotiated but failed to arrive at an agreed figure, it cannot be suggested that some sum, which the Regulator or the Panel or the Tribunal thinks would have been a reasonable negotiated figure, represents part of the section 75
of which VDW has prevented payment. Instead, the focus must be on what Bonas has been prevented from paying.
b) `193. More generally, section 38(5)(a)(i) applies where the relevant act or failure to act has as one of its main purposes to prevent recovery of the whole or part of the section 75 debt. The purpose of this provision (in contrast with the different regime of FSD5) must, I suggest, be to enable the Trustees to recover from the persons concerned the amount which the act or failure to act has resulted in becoming, or possibly becoming, irrecoverable. It is no part of section 38 to make him liable for a large sum (£20 million in the present case, according to the Regulator) when, but for his acts, the section 75 debt would not have been recoverable, in whole or in part, quite apart from those acts. The section is concerned with recoverability and the extent to which the relevant act or failure to act prejudices that recoverability.'