by Roderick Ramage, solicitor, www.law-office.co.uk
first published in New Law Journal (firstname.lastname@example.org) on 2 July 2004
This article is not advice to any person and may not be taken as a definitive statement of the law in general or in any particular case. The author does not accept any responsibility for anything that any person does or does not do as a result of reading it.
liability of connected and associated persons for deficits
impact of corporate finance transactions
This is a preliminary note is based on the text of the Pensions Bill, as brought from the Commons on 21st May 2004, and should be treated as “thinking out loud” rather than a concluded interpretation.
update 8 July 2004
In the House of Lords debate, in which amendments had been tabled to limit the effect of the contribution notice procedures, it was announced that the Government announced that it was prepared to rethink these provisions. It is likely that their purpose will remain broadly intact but that some of the concerns about their impact on corporate finance transactions may be addressed. Whether the Government’s rethink will extend to the provisions for financial support directions is not yet known.
Two linked sets of provisions of the bill, summarised below (at the risk of over-simplification), greatly widen the range of persons who may be made liable for the deficits of final salary pension schemes. The main impact of the first (contribution notices) is likely to be that any corporate reconstruction, including the sale of companies and businesses, might trigger a liability for a pension debt. The second (financial support directions) can impose on other members of a group of companies, liability for the pension liabilities of a company in that group. In both cases persons connected or associated with the company can be made liable.
1 Clauses 35 to 38 of the Pensions Bill gives the regulator power to issue a contribution notice stating that the addressee is liable to pay the sum specified to the scheme. The addressee can be any person, who, in the relevant period, was the scheme’s employer or a person connected with or an associate of the employer and who was party to an act or failure to act, if, in the opinion of the regulator the main purpose or one of the main purposes of the act or failure was:
(a) to prevent the recovery of the whole or any part of a debt which was or might become due from the employer under s75; or
(b) otherwise than in good faith, to prevent the debt from becoming due or reduce its amount.
2 The relevant period starts with the date on or after 11 June 2003 of the act or failure to act and ends with the decision of the regulator to issue the contribution notice. The Insolvency Act 1986 definitions apply to connected persons (s249) and associated persons (s435).
3 The amount in a contribution notice will be all or part of a “shortfall amount”, which is:
(a) the estimated amount at the relevant time of the actual debt on the employer if it was already due; or
(b) if there is no debt on the employer at the relevant time, the regulator’s estimate of what the amount would be.
financial support directions
2 Clauses 39 to 46 of the Pensions Bill gives the regulator power to issue financial support directions requiring the addressee, to secure that financial support for the scheme is put in place and maintained, if the employer:
(a) is a service company (ie, its turnover is derived principally from supplying the services of employees to other companies in its group); or
(b) is insufficiently resourced (ie, it has insufficient resources to meet the prescribed percentage of the debt on the employer and there is a person connected or associated with it who has sufficient net assets to meet it).
3 The addressee can be any person, who, at the relevant time, was the scheme’s employer or a person connected with or an associate of the employer. Relevant time is any time falling within a period to be prescribed and ending when the regulator makes the directions. Financial support means arrangements:
(a) whereby all the members of the same group of companies are jointly and severally liable for the scheme’s liabilities;
(b) whereby a company which meets prescribed requirements and is the holding company of the group is liable for the scheme’s liabilities;
(c) which meets prescribed requirements and whereby additional financial resources are provided to the scheme; or
(d) as may be prescribed.
4 If a financial support direction is not complied with, the regulator may issue a contribution notice to every person to whom the directions were given, requiring each person to make a payment to the scheme of the whole or part of the amount by which the scheme’s assets fall short of the amount or estimated amount of the debt on the employer. Group has the same meaning as in s736 of the Companies Act 1985 (holding company and its subsidiaries).
impact of contribution notice provisions
5 “Party to” and “main purpose” are likely to be the key expressions, the first to identify the persons to whom a contribution order might be issued and the secondly to assess whether the act or failure to act can give lead to a contribution notice. Of the two the second is likely to provide the greatest difficulties. While it may be tax lawyers who are most familiar with the expression “main purpose”, it is likely that company and corporate finance lawyers, in considering the impact of these provisions, may draw on their experience of “purpose” notably in connection with financial assistance under s151 of the Companies Act 1985. Whenever there is or is a suspicion of financial assistance, they do not, in practice, spend time asking whether the financial assistance is for the purpose of the acquisition, but move directly, in the case of private companies, to the “whitewash” procedures. It will be a brave company lawyer and client who, with the prospect of the Pensions Bill contribution notice provisions becoming law, will proceed with a transaction on the basis that the non-recovery of debt on the employer of part of it or its reduction is not a purpose of the transaction, if the effect of the transaction will in fact be that that the debt on the employer or part of it will not be recovered of the amount will be reduced.
6 How these provisions will work, assuming that they will be enacted, is speculative, but solicitors, their clients and their clients’ other advisers must work now with the risk they or something like them will be enacted. This and paragraphs 7 to 9 consider only those acts which are corporate finance transactions and, for this stage of speculation about the Bill, do not address the “main purpose” question or other forms of act or failure. The writer’s guess is that the first two factors to consider are likely to be the effect of the transaction the employers’ net assets and its effect on the employer’s income.
7 If, as an example, an employer disposes of a business to a company which does not participate in the scheme, so that liability for the scheme remains solely with the employer, and the disposal is by way of a distribution of profits or financial assistance, the employer’s net assets will be reduced as a result of the transaction. Even if, using the same example, the transaction is undertaken for full value, so that the employer’s net assets remain unaltered, the result of the transaction may still be to reduce the employer’s profits.
8 Whether a reduction in the employer’s net assets or its profits from which it will pay contributions will prevent the recovery of the whole or part of the debt on the employer will depend on the scale of those reductions in relation to the employer’s remaining resources and profits and the amount of scheme’s liabilities. It is to be hoped that, if the employer can show that its resources are sufficient to discharge the debt on the employer, that will be an end of the matter. Conversely, the writer guesses, if the employer’s financial position after the transaction is such that it would not be capable of meeting the whole of the debt, but before the transaction it could do so, or if the employer could not meet it before and the amount by which it cannot meet it is increased as a result of the transaction, the regulator is likely determine that a contribution notice should be made.
9 It is premature to conclude what sellers of business should do, but the writer’s provisional suggestions, until experience, the advice of other practitioners and the progress of the legislation show otherwise, that sellers should:
(a) assume initially, whether rightly or not, that any transaction which results in resources to discharge a scheme’s debt on the employer being reduced, will have as its purpose the prevention of the recovery or part of the debt,
(b) record and analyse the reasons for the transaction with a view to demonstrating that the assumption in (a) is false;
(c) calculate the impact of the transaction on the ability of the employer to meet the debt on the employer;
(d) if the result of the transaction would be to reduce the employers’ ability to meet the debt
(i) either earmark assets leaving the employer to meet any liability under a contribution notice, or
(ii) structure the deal so that the buyer undertakes sufficient of the scheme’s liabilities to ensure that the employer’s ability to meet its remaining share of the debt is not reduced; and
(e) keep the regulator and in the meantime OPRA fully informed (regardless whether or not they wish to be informed).
impact of financial support directions
10 The impact of these provisions, in piercing the veil of incorporation to make other group companies liable even though otherwise they have no connection with the scheme, is self-evident. They are likely to be of considerable value to trustees of underfunded schemes of employers in a group, where other group members, possibly better resourced, do not participate in the scheme but, if these provisions are enacted, will become liable.
copyright Roderick Ramage
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