ITV Plc & Ors v The Pensions Regulator & Anor

It is of great importance to employees and pensioners that their pension fund does not go into deficit. In this case, the beneficiaries of the pension fund are the former employees of the Box Clever group (“Box Clever”). There is now a deficit of over £60m on their pension fund. The Pensions Regulator (“TPR”), a body set up by the Pensions Act 2004 (“PA04”) in succession to the Occupational Pensions Regulatory Authority, can take regulatory action to protect the benefits of members of occupational pension funds, including requiring additional funding from employers and associates, if there are grounds for doing so. TPR must give a warning notice (“WN”) if it intends to take this action. This appeal concerns the extent to which, following a WN, TPR can rely on grounds that it did not mention in the WN if its action is challenged. It is a novel point: it does not appear that this point has been previously considered by the Court of Appeal in the context of the PA04.

TPR’s powers importantly include the power to issue financial support directions (“FSDs”) if it considers that the employer in relation to the scheme is insufficiently resourced at a time determined by TPR within a period of two years prior to giving a WN in respect of the FSD in question (section 43 PA04). An FSD requires the person or persons to whom it is addressed (which may be the employer or persons connected or associated with him) to provide additional financial support to the scheme. The financial support to be provided is not fixed by statute or the FSD. This -i.e. whether or not an FSD is to be issued - depends on such matters as TPR thinks relevant (section 43(7) PA04). Fault is not a necessary condition for liability, but can be taken into account.

The procedure to be adopted by TPR in this case is the standard procedure, to which the provisions of section 96 PA04 apply. The first step in the standard procedure is for TPR to issue a WN to persons who appear to TPR to be directly affected by the regulatory action it is considering. An FSD can only be issued if the Determinations Panel of TPR, whose membership is separate from TPR’s executive officers, so decide.

On 30 September 2011, TPR issued WNs to five companies (“the targets”) (all members of the Granada group) in respect of the Box Clever pension fund. Both TPR and the targets put in detailed representations to the Determinations Panel.

In their reasons, the Determinations Panel identified the factors that they considered relevant to the question whether it was reasonable to issue FSDs to the targets. Having regard to those facts the Determinations Panel concluded that it would be reasonable to issue FSDs to the targets.

The targets exercised their statutory right to refer the determination of the Determinations Panel to the Upper Tribunal. Following a procedural hearing, the Upper Tribunal (Judge Tim Herrington) in its judgment dated 13 December 2013 decided that TPR could maintain allegations that were not asserted in the WNs. The targets, now the appellants, appeal from the Upper Tribunal’s determination.

Before I address the issues on this appeal, I shall summarise the relevant background about Box Clever, the reasons in brief why the Determinations Panel considered that TPR should issue FSDs, the steps taken by the parties and the arguments of the parties. The principal provisions of the PA04 relevant to this appeal are set out in the Annex to this judgment.

Box Clever was formed as a joint venture between two entities which I shall call Granada and Thorn in June 2000 to run their TV rental businesses. By a transaction which I shall call “the Joint Venture transaction”, Granada and Thorn (a) “hived down” (i.e. transferred for consideration) their businesses to Box Clever for the sum of £860m, most of which Box Clever borrowed from its bank; and (b) transferred the employees engaged in those businesses to Box Clever. A new pension scheme was established for Box Clever employees of which the trustee (“the trustee”) was Box Clever Trustees Ltd. Using the loan monies, (simplifying somewhat) Box Clever paid approximately £530 million to Granada and the rest to Thorn.

Box Clever’s business did not prosper. It was unable to service the loan from its bank and went into insolvent administrative receivership in about November 2003. There were inconclusive negotiations after this date about what should happen to the pension fund. At some point, TPR conducted the investigation which led to the issue of the WNs on 30 September 2011.

To simplify matters, I will where possible use the names Granada, Thorn and Box Clever to include their groups of companies, or a relevant member of that group, without identifying that company separately.

The WNs issued by TPR were each some 96 pages in length (including appendices). They contain an explanation of the basis on which they were issued. They do not criticise as inadequate the price paid on the hive down of Granada’s business to Box Clever; they simply say that the transaction was not an arm’s length sale to, or investment in, an unconnected third party.

The WNs identified 30 December 2009 as the first day of the “look-back” period for the purposes of section 43(9) PA04 (see the Annex to this judgment). The significance of this is as follows. First, to be the subject of regulatory action, the employer must have been insufficiently resourced and a target must have been either the scheme employer or a person connected or associated with the employer (sections 43(2) and (5) PA04). Both these conditions must have been satisfied at the “the relevant time”. At the date of the WNs in this case, “the relevant time” had to fall within a prescribed period which ended with the determination by the Regulator to exercise the power to issue the FSD. That period was prescribed as 24 months (The Pensions Regulator (Financial Support Directions etc) Regulations 2005, paragraph 5). All this meant that TPR had to determine to issue the FSDs by 31 December 2011. It did so, through the Panel, on 21 December 2011. These provisions have been modified with effect from 3 January 2012 so that the prescribed period ends with the giving of a warning notice: but that amendment has no application to the circumstances of the present case.

The “standard procedure” established by section 96 PA04 applied because the power to issue an FSD is a “reserved regulatory function” within paragraph 33 of schedule 2 to PA04 (see section 93(2)(c)), ie a function which the Determinations Panel had to authorise. Under the standard procedure, therefore, the next step was for the Determinations Panel to consider what action TPR should take.

The Determinations Panel issued its determination under section 96(2)(d) of the PA04 on 21 December 2011. It gave its reasons on 26 January 2012. It noted that there did not have to be evidence of fault. It noted that the jurisdiction to issue FSDs was not fault-based. It did not need therefore to find misconduct. It considered that the issue of FSDs was an appropriate and reasonable response to these events without finding misconduct. It concluded:

168…it is our view that it would be reasonable to issue FSDs to the Targets and to require them to secure that financial support is put in place for the Scheme, within six months of the issue of the FSDs. The factors that have weighed most heavily with us are the value of benefits received by the Targets from the Employers and the Targets’ relationship with those Employers. Overall it seems to us that this is a case where the Scheme’s principal employer, BCT, was set up by the Granada and Thorn groups as part of a transaction that aimed to extract value from the consumer rentals businesses of those groups, but leave them able to share in any future profit. A requirement of that transaction was that a pension scheme be set up for transferring employees; no value could have been extracted without this. Valuable financial benefits were received by the Targets, while the structure used to obtain them required BCT to borrow £860m from West LB, left all of BCT’s assets charged to secure that borrowing, and left the Scheme with a weak employer as a result. It is also relevant that this borrowing was not secured on any assets of Granada or Thorn group companies, insulating them from financial difficulties of BCT. We do not find misconduct on the part of the Targets, but consider the issue of FSDs to be an appropriate and reasonable response to the events of 1999 to 2003 in relation to BCT and the Scheme.

In effect, therefore, the Determinations Panel based its conclusions on outcomes and not any culpable conduct.

On 17 January 2012, the targets referred the Determinations Panel’s decision of 21 December 2011 to the Upper Tribunal. On 10 February 2012, the Upper Tribunal allowed the trustee’s application to be joined as a party. The pleadings started with the statements of case of TPR and the trustee, followed by the targets’ response and TPR’s reply.

One would have thought that if TPR was going to mount a significant new case against the targets it would have done so in its statement of case. It did not do so; nor did the trustee. TPR’s statement of case relied on a “no hive down, no benefit argument” (my description). It did not maintain criticisms of Granada’s conduct of the hive-down transaction. TPR adopted paragraph 168 of the reasons of the Determinations Panel that Granada and Thorn had benefitted from the hive down to Box Clever and that they could not have extracted any value from their rentals businesses without transferring employees to a new pension scheme with Box Clever. TPR went no further than to point out that it was known that the rentals business was declining, that the extraction of value left the Box Clever group and its employees’ pension rights in a vulnerable position and that the valuation of the business and the value extracted from it proved to be excessive. It disclaimed any allegation that Granada was negligent or acting improperly in fixing the hive down terms. Thus paragraph 123 of TPR’s statement of case reads:

… the consideration paid to [Granada] reflected a market valuation exercise that had been [the] subject of due diligence…[TPR] does not contend that the price paid for the businesses on their hive down to the Joint Venture was improperly or negligently derived. Yet that does not prevent it being entirely clear that [Granada] received significant benefits. In the event, it is plain that the valuation was based on a business plan that proved overly optimistic and that more value was extracted from the businesses than the Joint Venture could ultimately bear.

On the cause of the Scheme’s deficit, and the targets’ assumption of no responsibility for the Scheme’s liabilities, TPR’s pleaded case adopts the reasons of the Determinations Panel.

The trustee in its intervention stated that the hive down in return for the substantial debt assumed by Box Clever had involved obvious risk.

Then came the targets’ reply. In paragraph 10 of their response to TPR and the trustee (dated 15 October 2012), the targets sought to articulate what they thought was common ground between the parties, namely that there was no misconduct on their part, that this was reflected in paragraph 168 of the reasons and adopted in paragraph 41 of the statement of case, that the hive down had been at market value, supported by “sophisticated due diligence”, as accepted by the Determinations Panel, and that the price was not “improperly or negligently derived” (as accepted by TPR in its statement of case) and that (also accepted by the Determinations Panel) they were not seeking to escape from their pre-existing pensions liabilities when setting up the joint venture. The targets added that neither TPR nor the trustee had alleged that the applicants knew, or ought to have known, at any material time that the joint venture might fail or was at material risk of failing or of being unable to service its debt (para 17). It was stated that the applicants had prepared their reply on that basis. They denied any improper intervention in the management of Box Clever.

This drew fire from TPR in their response, which rejected what it saw as a new positive case of proper conduct. In its reply TPR admitted that it was not in issue before the Upper Tribunal whether there was any misconduct on the part of the applicants or whether anything inappropriate was done in the joint venture. TPR also accepted that the Upper Tribunal might proceed “on the basis of a negative, default, assumption that there was no such misconduct or inappropriate conduct”. However TPR did not accept as common ground the positive assertions in paragraph 10 of the targets’ reply. If the applicants wanted to establish such assertions it fell to them to prove them. TPR expressed the view that a reference to misconduct was not helpful in the context of a jurisdiction which was not fault-based.

TPR reserved the right, after disclosure of documents, to make further admissions or allegations as to the extent to which at any time the Applicants knew, believed or suspected that the Joint Venture would or might fail. This was in addition to pointing out that the effect of the transfer of pensions liabilities had been to relieve the applicants of any exposure to them, and that the purchaser was not independent of the parties to the joint venture. It laid the ground for a case of misconduct or lack of due diligence by asserting that there was in substance no independent advice on the terms of the sale.

The trustee took a similar course. For example, the trustee pleaded in detail that the hive-down was not accompanied by sophisticated due diligence.

The targets applied to the Upper Tribunal to strike out from the pleadings of TPR and the trustee allegations relating to “commercial propriety, legitimacy and reasonableness of the joint venture transaction.” In their application the targets made the point that, to permit TPR to “embark on a wholescale modification” of its case ran the risk that the determination of the Determinations Panel would be

reduced to the status of a mere preliminary hurdle, after which [TPR] and the trustee can advance their “real” case or a newly thought-up case before the UT. To permit such a wholescale modification would be to deprive the targets of one of the important protections built into the FSD legislation, namely that after a certain period a target may not be faced with a claim for the imposition of an FSD based on a given set of facts.

The targets also complained about the fact that there had been considerable delay on TPR’s part in this case:

The true nature of the oppression inherent in what the Regulator and Trustee now seek to do is thrown into sharp relief by the extraordinary and, in the Targets’ view, disgraceful, procedural history of this case. Not only did the Regulator fail to bring the FSD claims until 2011 (even though the relevant facts occurred in 1999-2003), it then subjected the Targets to an expedited process before the Panel (under 2½ months from Warning Notice to hearing); it subsquently, in the two weeks before the Panel hearing, substantially changed its case (see the Panel’s Reasons at paragraphs 15-16 and 20); and it now proposes to change its claims again, by expanding its case some 18 months into the Upper Tribunal proceedings, with no end realistically in sight (as to which see Reason 4 below). Furthermore, the Regulator has refused to be drawn on the quantum of its claims and it appears to envisage that another, subsequent regulatory process would deal with the amount of any FSDs. Left unchecked, the Regulator will turn this case into the regulatory equivalent of Jarndyce v Jarndyce.

The Upper Tribunal started by considering the scope of a reference and the function of the Upper Tribunal in relation to a reference. The Upper Tribunal examined with care the decision of Warren J sitting in the Upper Tribunal in Re Bonas Group Pension Scheme [2011] Pens LR 109. Warren J held that the Upper Tribunal should consider the matters in dispute by way of rehearing and not as an appeal. Warren J further held that, under section 96(3) PA04, the matter referred to the Upper Tribunal was the determination of the Determinations Panel and not the reasons for it. He also held that, once the decision is challenged, there is no reason why TPR should be bound by the determination, though TPR might not be able to go beyond the relief sought in the WN. So TPR could rely on any act, whether or not within the WN, to support the regulatory action of which notice was given in the WN. The Upper Tribunal therefore concluded that it was not bound either by the grounds on which the regulatory action was sought in the WN or by the basis on which the proposal was before the Determinations Panel. The only limit was that it could only decide on an FSD against the five targets, and not another remedy, or a remedy against any other person.

The Upper Tribunal concluded that it could take account of evidence that was not presented to the Determinations Panel. Its admission would depend on whether there was any prejudice to the other party.

The Upper Tribunal also had to consider whether the trustee could rely on any matters of which notice was not given in the WN. The Upper Tribunal considered that the trustee would be in the same position as TPR as regards raising points not in the WN:

…when as in a case such as this the Trustee is essentially taking a role of support to the regulatory action proposed then it should work within the same boundaries as TPR. So if the boundary in this case is held to be the scope of the matters within the scope of the Warning Notice then the Trustee’s pleadings should be limited to matters falling within that boundary. Sight should not be lost of the fact that the subject matter of the reference is whether it is appropriate to issue an FSD and the powers to do so fall upon TPR. The prime responsibility for making that case falls upon TPR. It may be supported in that quest by the Trustee, who may be able to bring its own perspective and deal with matters that are more properly within its own knowledge than TPR, but ultimately it is TPR who has to justify the proposal and it should do so within clearly defined boundaries. The Interested Party is just that, someone who is interested in the structure of the proceedings and should be able to make representations accordingly, but does not have prime responsibility for making the case for an FSD. That role falls to TPR. It is a recipe for chaos if the Trustee is free to advance entirely different arguments of its own that fall outside these boundaries at the tribunal stage. That is not to say that it should not be permitted to advance arguments that do fall within the scope of the matters referred, even if they are not advanced by TPR. (paragraph 111)

The Upper Tribunal’s conclusion is in paragraph 114(4):

It follows that the starting position is that TPR, and by analogy the Trustee, should be free to present its case in reliance on any facts and circumstances that were within the scope of the allegations made in the Warning Notice and which were canvassed before the Determinations Panel and in doing so may rely on any evidence relevant to these facts and circumstances, whether or not that evidence was available to the Determinations Panel. This follows from the de novo nature of the Tribunal’s jurisdiction and the specific provisions of s 103(2) of the Act which allow the Tribunal to consider any evidence relating to the subject matter of the reference whether or not it was available to TPR at the relevant time. Although s 103(2) suggests that the Tribunal has a discretion whether to admit such evidence (provided of course it is relevant to the issues in dispute), in my view it should not normally refuse to do so in circumstances where it relates to the facts and circumstances within the scope of the matter referred.

The Upper Tribunal therefore held that the test for allowing TPR to introduce allegations not made in the WN was whether the facts and circumstances were within the scope of the matter referred, that is, the determination. Applying this test, the Upper Tribunal considered that the circumstances which the targets considered common ground were before the Determinations Panel and therefore they could be aired before it:

If it were proper that they should be aired before the Determinations Panel then in my view it is equally proper that they are capable of being aired again before the Tribunal. (para 118)

As the public interest was involved, the Upper Tribunal considered that it should avoid narrowing the issues (para 118). Any abuse of process could be curbed by the Upper Tribunal’s use of its powers to manage the case by procedural directions.

The Upper Tribunal held that TPR was entitled to take a different view in the Upper Tribunal from the view taken by the Determinations Panel (para 133).

In conclusion, the Upper Tribunal dismissed the application to strike out TPR’s further allegations because the core allegations before the Determinations Panel were not affected and because it was undesirable to exclude allegations in the context of a request for a FSD:

171.

My overall conclusion on The Targets’ Strike Out Application is therefore that the effect of the Responses is not to alter the core of the case against the Targets as originally set out in the Warning Notice and considered before the Determinations Panel. During the course of the process before the Determinations Panel the Targets sought to defend the action on the basis of the positive assertions they made regarding the Propriety Matters and these issues therefore formed part of the facts and circumstances before the decision-maker and therefore within the subject matter of the determination notice that may be referred to the Tribunal. In those circumstances, bearing in mind the Tribunal’s de novo jurisdiction and the undesirability of narrowing its enquiry it should be able to consider the Propriety Matters and their significance in the context of a request for an FSD. The Responses should therefore stand and the application is dismissed.

Accordingly the Upper Tribunal dismissed the targets’ strike out application and the targets now appeal.

The parties are deeply divided in their positions on this question. The targets contend that TPR has to show some good reason for departing from its case in the WN or the determination of the Determinations Panel. TPR contends that there are no restrictions save those imposed by the Upper Tribunal as a matter of case management. The trustee contends that the Upper Tribunal has to perform a balancing exercise and be satisfied that it is not unjust, unfair or abusive to raise a case not presaged by the WN. None of these positions tallies with the approach which the Upper Tribunal actually took.

Lord Pannick QC, who led on this issue for the targets, submits the proposition that TPR may not raise allegations which were not part of the WN or within the findings of the Determinations Panel unless the Upper Tribunal is satisfied that there is good reason to do so. He makes a number of submissions in support of this proposition.

First, he submits that this proposition follows from the special features of the statutory scheme. TPR has to protect the target as well as the pensioners. (Indeed TPR’s duty under section 100(2) PA04 is indeed to have regard to the interests of both scheme members and those directly affected by any regulatory action). There is a balancing exercise to be performed. If an FSD is imposed, it should only be after satisfaction of the procedures before the Determinations Panel and the Upper Tribunal. There should be no FSD without proper procedure. It would make a nonsense of the statutory scheme, which provides for the WN and the Determinations Panel, if the case against the target could be changed at the whim of TPR. It is up to the Upper Tribunal to decide whether good reason exists having regard to the statutory scheme. Fair balance is needed because the target has property rights which have to be balanced against the claims of the beneficiaries of the pension scheme. He also has the right to a fair trial under Article 6 of the European Convention on Human Rights (“the Convention”).

Second, Lord Pannick analyses the procedure which originates in section 93 PA04. The WN is the “charge sheet” in administrative terms. The target is put on notice that it has a case to answer. It is not open to TPR to alter the case that the target has to answer.

On Lord Pannick’s submission, the procedure is strict. It is clear that Parliament did not intend an inquisitorial role for the Upper Tribunal, i.e. that the Upper Tribunal should itself carry an investigation into matters which had occurred relevant to the pension fund. Following the WN any determination to issue the FSD is taken by the Determinations Panel (section 9). This is a special body to make the decision to issue the FSD which must give reasons. Section 96 (3) confers the right to refer the determination of the Determinations Panel to the Upper Tribunal. Section 103 shows that there is no doubt that the Upper Tribunal has broad jurisdiction. There is a carefully drafted set of provisions for the protection of targets with strict time limits. Parliament did not intend that it should be open season as against the target. TPR is constrained by the findings of the Determinations Panel unless it is justified, viz has good reason, for going beyond them.

Third, Lord Pannick relies on judicial observations that the procedure is to protect the target company: see in particular Trustees of Lehman Brothers Pension Scheme v The Pensions Regulator and others [2013] 4 All ER 744 at [12]. He submits that the Upper Tribunal must look to questions of fairness and efficiency. It should only allow a departure for good reason. Lord Pannick submits that the statutory protection which Parliament intended and was required to confer by the Human Rights Act 1998 would be undermined if TPR could raise a new or different case. The Upper Tribunal could then determine that there should be a greater FSD.

Fourth, Lord Pannick submits that his proposition would have the beneficial effect that TPR would know that, if it did not make thorough investigations, it would not be able to raise points. It had ample powers during the administrative process to get the necessary information.

Fifth, Lord Pannick relies on the practice of the Competition Commission Appeal Tribunal: see Napp Pharmaceutical Holdings Ltd (No 4) v Director General of Fair Trading [2002] ECC 13. In that case, the respondent regulator had to make a decision on the merits. It was held that he could not in general rely on a new case or produce new reasons:

133.

On this point, for the same reasons that we consider that our discretion to allow the Director to submit further evidence should be exercised only sparingly, we accept Napp's basic submission that, in principle, the Director should not be permitted to advance a wholly new case at the judicial stage, nor rely on new reasons. To decide otherwise would make the administrative procedure, and the safeguards it provides, largely devoid of purpose; the function of this Tribunal is not to try a wholly new case. If the Director wishes to make a new case, the proper course is for the Director to withdraw the decision and adopt a new decision, or for this Tribunal to remit.

The situation here, submits Lord Pannick, is stronger because the Determinations Panel cannot reach the decision after the end of the period prescribed by section 43(9) PA04. Moreover, the Upper Tribunal was wrong to distinguish Napp on the basis that the competition context is different. There is an appeal in the case of competition law but only de novo reference in Pensions Regulation. But this is not a difference of substance. There is still a determination on the merits (cf the Upper Tribunal’s judgment, para 120).

Lord Pannick distinguishes two cases relied on by TPR which were decided under the Financial Services and Markets Act 2000 (“FSMA”).:

According to Lord Pannick, these factors justify the submission that TPR cannot rely on allegations not in the WN or the Determinations Panel unless there is justification. Otherwise, the protection given by Article 6 of the Convention and the statutory scheme (stemming from the WN) would be undermined.

Lord Pannick submits that these limits also apply to the trustee; otherwise there would be a recipe for chaos. The trustee has to show justification. The trustee may seek a reference and, if it did, the same principle would apply. There must be no new allegation of which the Target has not had a fair indication of the substance of the allegation.

Mr Nicolas Stallworthy QC, for TPR, submits that, where a wide jurisdiction is conferred, the extent to which it should be limited is left to the court. There is no scope in the statute for an anterior threshold test of “good reason” or “justification”, as Lord Pannick contends. Furthermore, he submits that the courts are reluctant to impose rigid fetters on the exercise of a discretion: see Aiden Shipping Co Ltd v Interbulk Ltd [1986] 1 AC 965. In that case, the House of Lords refused to interpret the statutory power to award costs so that the courts could award costs only against a party to the proceedings. Applying that decision, David Richards J held in Re Storm Funding Ltd [2014] Pens L R 73 that the discretion to order contribution notices under the PA04 was unfettered. As to Article 6, the Upper Tribunal could protect the rights of the targets in the reference proceedings and they were not required to do so in the prior administrative procedure.

Mr Stallworthy’s primary case is that the judge was right but he also submits that, on the basis of case law decided under FSMA, it is possible to go beyond the judge’s formulation. He relies on the holding of Sir Stanley Burnton in Hobbs [38]that:

A narrowing of the inquiry by the [Upper] Tribunal that excludes relevant material from its assessment of an applicant is to be avoided provided, of course, that the applicant is given a fair opportunity to address the [FCA's] case.

Mr Stallworthy maintains that the case has always been about responsibility for risks and that there were obvious risks in the Joint Venture transaction. TPR had to respond as it did because of positive allegations made in Granada’s reply.

On his submission, on the true interpretation of section 96 PA04, the determination which is referred to the Upper Tribunal does not include the reasoning for the decision in it. What is referred is the question whether to take regulatory action. The grounds set out in the WN are not referred. Mr Stallworthy submits that his interpretation of section 96 is reinforced by section 103(3) PA04 (see Annex), to which I shall refer below. He submits that Parliament inserted this provision for the avoidance of doubt.

Once there is a reference, there is an entirely fresh set of proceedings with a different framework: see Re Bonas Group Pension Scheme, Michel Van der Wiele NV v the Pensions Regulator [2011] Pens LR 109, where Warren J held that the reference to the Upper Tribunal under PA04 involved a de novo hearing. Mr. Stallworthy submits that since the procedure before the Upper Tribunal will include further pleadings and evidence Parliament must have intended that TPR should be able to raise further issues.

Mr Stallworthy accepts that the Upper Tribunal has to decide whether there is such manifest unfairness that it would be unfair or oppressive to allow new grounds to be raised. It might refuse to allow a ground to be raised if the targets were prejudiced because key evidence had been lost, or if there was no good explanation for TPR not raising the matter earlier. But there has on his submission to be irremediable unfairness. There is no justification for the targets’ submission on the wording of the statute.

In further support of his argument that a threshold test cannot be read into the procedure for making FSDs, Mr Stallworthy relies on Birkett v Department for the Environment, Food and Rural Affairs (“DEFRA”) [2011] EWCA Civ 606, where the applicant sought information from DEFRA under regulations implementing an EU environmental directive. This court held that the Upper Tribunal could not prevent DEFRA from relying on an exemption in the regulations even though it had not sought to do so prior to the proceedings before it. I need not deal further with this authority because there is no provision in the regulations for a WN.

Mr Stallworthy submits that the regulatory decision-making procedure under PA04 is similar to that in FSMA. He submits that authorities decided under FSMA are consistent with his submissions.

Mr Jonathan Hilliard, for the trustee, submits that there cannot be a threshold test as Lord Pannick submits because the reference procedure involves a de novo adjudication. Mr Hilliard goes on to submit that “good reason” is not a suitable threshold test anyway. It would prevent the trustee from raising points that were not in the WN. The important factor is the court’s discretion. The court must take account of and weigh the competing considerations on either side and it should grant leave to introduce a new case unless it is unfair or unjust or there is some abuse of process.

Mr Hilliard submits that it must be possible to refer to the Upper Tribunal a case where the Determinations Panel determined that there should be no regulatory action.

In my judgment, the very requirement that a WN must be given shows that Parliament considered the service of a proper WN was an important protection for targets. The impact of the WN is obvious. From that time on, the targets know the case that they have to meet and, where the WN warns the target that TPR is considering the issue of an FSD, they are formally on notice of their vulnerability to an FSD.

I would accept Lord Pannick’s submission that the WN must tell the target the case against it. While there is no statutory requirement as to what the WN has to contain, it is clear that, to fulfil any sensible purpose, it must effectively describe the bases on which TPR thought that specified regulatory action lay. Public authorities owe a duty to act fairly. It follows that TPR would have to be frank and transparent in this WN. It could not hold anything back.

Section 94 PA04 requires TPR to publish its procedure. As one would expect, the published procedure of TPR shows the level of detail which TPR must give in a WN: see the document entitled Case Team Procedure, updated in January 2013. This states that

9.

Contents of the Warning Notice will ordinarily include:

(i)

The circumstances of the case, the action or decision under consideration and the grounds and evidence on which the Warning Notice is based, including where appropriate the details of any alleged breach of the law;

(ii)

Material received or obtained by the regulator that might reasonably be considered to support or undermine the case for the use of the power(s) (Excluding any material that is legally privileged)…

(iii)

Details of the specific powers that are under consideration…

But it is significant that PA04 does not go on to say that either the Determinations Panel or the Upper Tribunal are constrained in the conclusions they can reach by the absence of a relevant ground in the WN. In my judgment, the absence of a provision to that effect firmly indicates that Parliament left the question whether the Determinations Panel or the Upper Tribunal could do so to their discretion.

Moreover, it is noteworthy that Parliament has protected the target in a number of different and quite specific ways. As I said, giving the judgment of this court in Trustees of Lehman Brothers Pension Scheme v The Pensions Regulator and others:

[12]A salient feature of the statutory scheme for the issue of FSDs is the balance struck between the interests of the members of the pension scheme and the interests of potential targets (and their stakeholders). In particular, the interests of targets are protected by:

– the requirements already mentioned for the decisions to be made by the Determinations Panel and not the Regulator;

– the requirement for FSDs only to be given in the circumstances specified on the face of the PA 2004 (see s 43(2));

– the imposition of the time limit in s 43(9);

– aspects of the process applicable in this case. Most relevantly:

– the Regulator can only issue an FSD if satisfied that (among other matters) it is reasonable to do so and the Act prescribes a number of matters to be taken into account in reaching this conclusion (see s 43(5) and (7));

– potential targets must receive a warning notice so that they can make representations (section 96(2)(a)).

The target is protected in other ways. As explained above, TPR must exercise its powers in the interests not only of the beneficiaries but also of the persons affected by regulatory action: section 100 PA04. Furthermore, under section 103, the Upper Tribunal is not given a completely free hand when it makes its decision. Its power is limited to determining the reference and it is required to remit the matter to the Determinations Panel with any appropriate directions for giving effect to its (the Upper Tribunal’s) determination of the reference.

I therefore conclude that Mr Stallworthy and Mr. Hilliard are correct in their submissions that the Upper Tribunal’s discretion to allow TPR to rely on additional grounds is not fettered by a threshold test of “good reason”. I accept Mr Stallworthy’s submission that, as Warren J held in paragraphs 72, 79 and 80 of Re Bonas Group Pension Scheme, the Upper Tribunal can on a reference permit further evidence to be filed and receive fresh arguments, and that this supports the conclusion that it must be open to TPR, in an appropriate case, to adduce additional grounds for its proposed regulatory action on a reference to the Upper Tribunal.

Is this conclusion also confirmed by section 103(3)? Mr Stallworthy submits that it is. But I would accept Lord Pannick’s submission that this provision does not on examination shed light on whether TPR must show justification for raising a new case. I consider that section 103(3) is consistent with the intention of Parliament that this should be a full hearing, not limited by any rule such as a rule that evidence should not be considered if it was not available to the decision-maker (the Determinations Panel) at the time it made its decision.

Moving from my conclusion that there is no threshold test of good reason, I turn to consider how the Upper Tribunal should approach the introduction by TPR of allegations which go outside the WN. The test applied by the Upper Tribunal in this case is unclear and unsatisfactory. It is either

In my judgment, each of these tests is in its own way too narrow and too prescriptive.

In my judgment, the exercise of the Upper Tribunal’s discretion to allow TPR to raise a new case not contained in the WN should depend on a consideration of all the relevant factors in the case, and not just the narrow question whether TPR had good reason for seeking to enlarge its case. The Upper Tribunal has to weigh up all the facts and circumstances in deciding whether to permit TPR to adopt a new case. It would be impossible to provide a comprehensive list of those facts and circumstances, though I can give a few examples.

The Upper Tribunal has to consider the nature of the new allegations, and their impact on the case. If the new case involves fraud or bad faith, it may be less willing for a new case to be brought forward unless the case is clearly pleaded and appropriate detail given. It has to consider the reasons why the case was not previously put forward.

The Upper Tribunal has to consider whether the targets will be able to deal with the new allegations or are prejudiced in some other way. It may be that some new evidence has been found which the targets could not have anticipated (for example, dishonesty on the part of an employee who escaped all proper internal controls), or that some important evidence has been lost through no fault of the targets, or that the targets have taken some action which they would not have undertaken if they had known that TPR would raise these allegations. On the other hand, the new case may flow from information which the targets failed to disclose to TPR at an earlier stage. The conduct of TPR would also be relevant, including any delay on its part, as well as any delay that would result from the new case going forward.

Accordingly, I do not consider that it is sufficient for the Upper Tribunal to conclude that the matters were in some way “aired” at some earlier stage or to limit its inquiry to asking whether the new case arises from facts and matters which were before the Determinations Panel.

There was a discussion during the hearing whether some concept of even handedness applied so that, if TPR could not raise a point, the same restriction would apply to a trustee who intervened to support the regulatory action proposed. In general, in my judgment, any inhibition on TPR raising a new case must also apply to the trustee who intervenes to support the case for regulatory action. I would not expect the trustee to be able to raise issues which TPR could not raise. On the other hand, Lord Pannick agreed that, if one target wished to claim that another target bore greater responsibility for the pension deficit than it did, there could be no bar on a co-target raising against another target a point which was not in the WNs issued by TPR against them. They cannot be fettered in raising points in their own defence.

Mr Stallworthy relied on cases decided under FSMA as showing that the regulator was not bound to stay within the terms of the WN. It is not, in my judgment, necessary to consider these cases. I agree with Lord Pannick’s analysis in the two cases mentioned in paragraph 44 above, but the further cases cited - Jabre v Financial Services Authority, Allen v Financial Services Authority, and Chaligne v Financial Services Authority - were not considered in any detail in the hearing and the parties did not address us on any potential differences between FSMA and the PA04. Likewise I do not consider that paragraph 133 of Napp, a decision of the Competition Commission Appeal Tribunal under another legislative scheme which essentially turns on the exercise of a discretion, assists on the point before us.

Finally, there was discussion during the hearing why Parliament used the expression “reference” as opposed to “appeal”. There is a precedent for using this term in FSMA. In my judgment, the term “reference” is a recognition that the hearing before the Upper Tribunal is the first judicial hearing that there is in the PA04 scheme to consider the liability of the targets to the regulatory action which TPR proposes. It is noteworthy that TPR cannot refer a matter to the Upper Tribunal. Section 103(3) PA04 makes it clear that this is to be a full hearing and that there is no restriction on the evidence which may be adduced to (say) that which was before TPR when the Determinations Panel made its decision, as might be the case on a judicial review application. I therefore do not accept a submission that Lord Pannick made that this must be a lesser form of review because Parliament had to introduce section 103(3) PA04.

The respondents submitted that this Court should simply dismiss the appeal if we did not accept the “good reason” test propounded by the targets as this was the sole basis for the appeal. I do not agree that this was so. The targets also criticised the vagueness in the tests that were instead applied. Moreover TPR accepted that there was no explicit basis for the judge’s tests in PA04. I would therefore allow the appeal and set aside the order of the Upper Tribunal.

If my Lords agree, that the appeal should be allowed the next question is what form of order we should make. The targets provided us at the end of the hearing with a substantial Scott schedule of amendments to the respondents’ pleading which they sought. This was of course prepared on the basis of their approach (which I have rejected) and the respondents point out that in any event it did not follow the categories of allegations set out in the targets’ application and that has made it difficult for them to reply to this document. In all the circumstances, I would remit the matter to the Upper Tribunal to re-consider the targets' application in the light of this judgment.

I agree.

I also agree.