T&N Ltd. & Ors, Re

This is an application for directions made by the administrators of T&N Limited (TNL) and eleven subsidiaries (the associated companies). TNL is the principal employer under the TNL Retirement Benefits Scheme (1989) (the scheme) and the associated companies also participate in the scheme.

It is the view of the administrators that the associated companies should cease to participate in the scheme and to that end they wish to cause the associated companies to give notice of withdrawal to the trustees of the scheme. As matters stand at present, such a withdrawal will be of significant and direct benefit to the creditors of the associated companies because it will preclude the possibility of liabilities arising to make very substantial payments to the trustees. Such liabilities would either make the associated companies insolvent or increase their existing deficits, resulting in either case in large reductions in the amount of any distribution to existing creditors. Although this will increase the burden which will in due course fall on TNL, as principal employer under the scheme, the administrators are satisfied that withdrawal of the associated companies will also benefit TNL and its creditors, as a result of its interest in the surpluses of some of the associated companies which will arise following the realisation of their assets.

The matter arises as one of some urgency because the trustees of the scheme are in a position to take steps which would lead to an increase in the size of the claims which could be made against TNL and the associated companies, in particular by taking steps to wind up the scheme. The administrators believe that such steps may well be taken in the short term and they are therefore concerned to know whether it is appropriate for them to give notice of withdrawal on behalf of the associated companies.

It appears clear that the associated companies are, with the consent of TNL, lawfully entitled under the terms of the scheme to withdraw from it and that the administrators as a matter of law have the authority to exercise that power on behalf of the associated companies.

TNL and its subsidiaries were until 1998 an independent UK group which had for many years traded under the name of Turner & Newall. In 1998 the TNL group was acquired by Federal-Mogul Corporation Inc, a US corporation. Federal-Mogul is one of the world’s largest automotive and vehicle parts manufacturers. Companies in both the Federal-Mogul group and the TNL group had historically been heavily involved in the treatment, sale and application of asbestos and products incorporating asbestos. The growing volume of asbestos-related litigation, particularly in the United States, led Federal-Mogul and a number of companies in its group to file for protection under Chapter 11 of the US Federal Bankruptcy Code in October 2001. Simultaneously, administration orders were made in respect of 133 English registered companies within the Federal-Mogul group, including TNL and the associated companies. At the time of obtaining the administration orders it was anticipated that the English companies would in due course participate in a reconstruction led by the Chapter 11 proceedings in the United States. Accordingly, the purposes contained in the administration orders made on 1 October 2001 were the survival of the companies and the whole or part of their undertakings as a going concern and the approval or sanction of a company voluntary arrangement or a scheme of arrangement.

A restructuring plan is proceeding in the United States but, for reasons which it is not necessary to go in to on this application, it is unlikely that the administrators will consent to participation by the English companies in the reconstruction or promote voluntary arrangements or schemes of arrangement for that purpose. It is therefore very likely that the purpose of the administrations will become the better realisation of assets than could be achieved in a liquidation, with the businesses of the English companies being sold or closed, and in due course the English companies passing into liquidation or some other process designed to achieve the distribution of their assets amongst their creditors. It is this which has prompted the present application.

The scheme was established in its present form in 1989 and is governed by a definitive trust deed and rules dated 3 June 1996 as amended. The current trustees are T&N Pension Trustees Limited and Alexander Forbes Trustees Services Limited (the trustees), of which the latter is the statutory independent trustee appointed by the administrators under section 23 of the Pensions Act 1995. The number of companies participating in the scheme has greatly reduced over the years, leaving now just TNL and the associated companies. As at 30 September 2003 there were a total of 37,633 members in the scheme, according to the trustees’ annual report as at that date. This comprised 2,645 active members, 14,659 deferred members and 20,329 pensioners. Given that there have been some redundancies since that date it is likely that the number of active members will have reduced and the number of deferred members and pensioners increased correspondingly.

As employers under the scheme, TNL and the associated companies have liabilities to make good any funding deficit in the scheme. The evidence and submissions on this application demonstrate that there are two relevant statutory bases for valuing pension scheme liabilities for the purposes of assessing its funding requirements. The first, the minimum funding requirement (MFR) basis, is a statutory measure of funding for continuing schemes, introduced by section 56 of the Pensions Act 1995. It is designed to provide a statutory minimum funding benchmark for the funding of all final-salary pension schemes, and scheme trustees are required to ensure that the funding level is at least 100 per cent of MFR. If it falls below 100 per cent but is above 90 per cent, the trustees are required to put arrangements in place to ensure that funding is restored to 100 per cent over a period of 10 years. If it is below 90 per cent, immediate steps are required to be taken to restore it to at least 90 per cent. The administrators are advised by consulting actuaries that the scheme’s funding position as at December 2003 was about 98 per cent on an MFR basis, using data supplied to them by the scheme actuary. On that basis, therefore, TNL and the associated companies have at most only a small liability to the scheme. The administrators are working on the basis that this liability could be of the order of £19 million spread amongst those companies. The MFR calculation may however be affected by a change in the investment strategy adopted by the trustees. At present the scheme investments are split equally between equities and gilts/bonds. If the trustees adopted a “gilts-matching policy”, as defined in the relevant regulations and involving a switch to a portfolio comprising only gilts and bonds, it is estimated that the resulting liability could be of the order of £210 million for TNL and the associated companies. The other statutory valuation method, the buy out basis, applies in a winding-up of a scheme and assumes that the accrual of benefits by members and the payment of contributions cease at the date of the valuation. The liabilities are assumed to be secured by the purchase of immediate and deferred annuities from a life office. The estimate of the deficit on a buy out basis stands at some £875 million.

Under section 75 of the Pensions Act 1995, and the Occupational Pension Schemes (Deficiency on Winding Up etc) Regulations 1996 as amended (the Deficiency Regulations), the trustees of a multi-employer pension scheme with a funding deficit are entitled to claim all or part of the deficit as a debt due to them from the employers. A liability under section 75 crystallises in certain stipulated circumstances, depending critically on whether the scheme is being wound up. If the scheme is not being wound up, the liability of an employer company arises either when it ceases to participate in the scheme or when it goes into liquidation. If the scheme is being wound up, the liability will arise at any time after the commencement of the winding up of the scheme and before the liquidation of each of the participating employers. However, the amount of the claim depends and will vary greatly on whether the scheme is being wound up. If a participating employer withdraws or goes into liquidation prior to the winding-up of the scheme, it is liable to pay to the scheme only that amount needed to top up its share of the scheme liabilities to 100 per cent on the MFR basis. That is calculated as at the date on which it withdraws from the scheme or goes into liquidation. If, however, the scheme is wound up the liabilities of the participating employers as at that time are calculated on the basis of the buy out cost. This latter basis of liability is the effect of amendments which have been made to the Deficiency Regulations and apply in the case of a scheme wound up on or after 11 June 2003. No change however has been made to the liability under section 75 of an employer that withdraws from participation or goes into liquidation prior to the scheme’s winding up. This remains on the MFR basis, although there could be an increase in the amount of the liability calculated on an MFR basis if the trustees changed their investment strategy to adopt a “gilts-matching policy”.

The position therefore is that, if the administrators on behalf of the associated companies were to serve notice of withdrawal, the liability of those companies to the trustees would be of a comparatively small amount. However, their liabilities could increase very considerably either if the trustees moved to a gilts-matching policy, which would require consultation with the participating companies, or if they took steps to wind up the scheme. The latter step of winding up the scheme would not necessarily involve any consultation with the participating companies and could in fact take place without their knowledge, by the trustees applying to the Occupational Pension Regulatory Authority for an order directing the winding up of the scheme under section 11 of the Pensions Act 1995.

Calculations made by the administrators show that there is a very significant advantage to creditors of TNL and of the associated companies if the associated companies withdraw from the scheme before there is either a change to a gilt-matching policy or a winding up of the scheme. Taking one of the associated companies which has a large exposure to the scheme, Federal-Mogul Friction Products Limited, its funding liability on the MFR basis would be of the order of £6 million. It is anticipated that it would be able to pay this sum and all its other liabilities in full, including liabilities to former employees in respect of asbestos-related claims, leaving a substantial amount for distribution to TNL as its holding company. The liability to the trustees would increase to approximately £88 million in the event of the adoption of a gilts-matching policy and to £372 million in the event of a valuation on a full buy out basis. Depending on realisation values for its assets, the dividend payable on liabilities if the gilts-matching policy were adopted prior to withdrawal would be between 45 per cent and 100 per cent. If the winding-up of the scheme started before withdrawal, so that the company’s liability to the trustees was calculated on the buy-out basis, the dividend on all liabilities would be between 11.6 per cent and 27.7 per cent. From the point of view, therefore, of the creditors of the associated companies there is everything to be said for giving notice of withdrawal as soon as possible. TNL is not in a position to withdraw but, as already mentioned, its creditors will also benefit if the associated companies withdraw. If they do withdraw, the estimated level of distribution to creditors of TNL is between 9.4 per cent to 11.3 per cent, whereas this drops to 7.8 per cent to 8.5 per cent if they do not withdraw.

As it is now very likely that the administrations will continue with a view to the better realisation of the assets of the English companies, it will be apparent to the trustees that the associated companies are likely to withdraw from the scheme. This in turn greatly increases the likelihood that the trustees will initiate the steps necessary to wind up the scheme. In practical terms, a winding-up of the scheme, rather than a switch to a gilts-matching policy, is seen by the administrators as the probable course for the trustees to adopt.

The primary duty of the administrators is to act in the best interests of the creditors of the companies. Administration is a procedure under which, consistently with that duty, steps may be taken to preserve the companies or their businesses as going concerns, to obtain approval to a compromise with creditors or to achieve a better realisation of assets than is possible in a liquidation. If a company is lawfully entitled to take steps which will preclude a large liability from coming into existence, the duty to creditors would seem to require those steps to be taken. There is no benefit, but there is very considerable detriment, to the creditors if such steps are not taken. The detriment in this case is demonstrated by the estimates for distributions to which I have referred.

While the administrators consider that the right course would be to give notice of withdrawal, they seek the directions of the court in this case because of concern that it might be said that they must also have regard to the interests of the trustees as persons who could make a claim on the buy-out basis if the scheme were wound up. They are also concerned that it might be said that they were acting in a dishonourable way in giving notice of withdrawal.

In considering the interests of creditors, as against the position of the trustees, it is important to note that the associated companies have no liability to the trustees to fund a deficit on the buy-out basis. Although circumstances could arise in the future which would lead to such a liability, no such liability exists now and the companies are lawfully permitted to withdraw from the scheme, so preventing the liability from arising. In my judgment there is in these circumstances no duty to the trustees as to have regard to their interests which can prevent the administrators from acting in the clear interests of the general body of creditors.

The concern as to dishonourable conduct stems from the principle established in Ex parte James [1874] LR 9 Ch App 609 that officers of the court should not act in a manner which is dishonourable or unfair. The principle has long been recognised by the courts as difficult to apply and as anomalous. Attempts to extend its scope to include, for example, liquidators in a voluntary winding-up who are not officers of the court but perform much the same function as a liquidator in a compulsory winding-up, have been rejected: Re TH Knitwear (Wholesale) Ltd [1988] Ch 275, CA. The nature of the principle and its difficulties were summarised by Salter J in Re Wigzell, ex p. Hart [1921] 2 KB 835, in a judgment approved by the Court of Appeal in the same case:

“Legal rights can be determined with precision by authority, but questions of ethical propriety have always been, and will always be, the subject of honest difference among honest men. The effect of exercising the jurisdiction which these decisions have asserted and defined is to deprive the creditors of money which is divisible among them by law. I feel sure that such a power should not be used unless the result of enforcing the law is such that, in the opinion of the Court, it would be pronounced to be obviously unjust by all right-minded men.”

For the principle to apply there must be dishonourable behaviour or a threat of dishonourable behaviour on the part of the court officer, by taking unfair advantage of someone: Re TH Knitwear (Wholesale) Ltd (supra) at 290 per Slade LJ. In my judgment there is nothing dishonourable in the administrators taking lawful steps to prevent a possible liability arising in the future, in order to protect the position of existing creditors. Nor does it involve taking unfair advantage of the trustees. It is to be noted, although it is not fundamental to my conclusion, that the provisions of section 75 of the Pensions Act 1995 and the relevant regulations provide that the right of the trustees to claim on a buy-out basis would not arise if the associated companies went into liquidation before such a claim were made. The only reason why it is not currently proposed to put the associated companies into liquidation is that the administrators consider that there is likely to be a better outcome for creditors if their businesses can be sold as a going concern.

Accordingly, I am satisfied that the court should not restrain the administrators from giving notice of withdrawal on behalf of the associated companies, by reason of the principle in Ex parte James. I reach this view on the grounds set out above, but I should add that it would appear from the authorities that the principle may be confined to cases where the assets available for distribution are increased as a result of a mistake of law or fact or where advantage is taken of payments made by a third person without giving credit for them, i.e. an unjust enrichment of the company: Re TH Knitwear (Wholesale) Ltd (supra) at p.290 per Slade LJ, Re Clarke, ex p. The Trustee v Texaco Ltd [1975] 1 WLR 559. Unjust enrichment also underpins the reliance on the principle in Ex parte James for an award of interest in Powdrill v Watson [1994] 2 BCLC 118 at 144. There does not appear to be any case in which the principle has been held applicable to the exercise of rights analogous to those relevant to this case.

The administrators have drawn attention to provisions in the Pensions Bill currently before Parliament. The courts will not normally have regard to draft legislation, but clause 35 of the Pensions Bill contains provisions which, if enacted, will have retrospective effect to 11 June 2003. Clauses 35 and 36 in the form put before me would entitle the Pensions Regulator, which is proposed to be established by the Bill, to issue a contribution notice requiring a person to make a payment calculated on the buy-out basis to the trustees of a pension scheme. So far as relevant, the Regulator would be entitled to issue a notice only if he is of the opinion that the person was a party to an act and the main purpose, or one of the main purposes, of the act was “otherwise than in good faith” to prevent a debt under section 75 of the Pensions Act 1995 becoming due. Such a notice may be given only to an employer or a person connected or associated with the employer. For these purposes the definitions of connected and associated persons in sections 249 and 435 of the Insolvency Act 1986 apply.

It is clear that the main purpose of the proposed notices of withdrawal to be given by the administration in this case is to prevent a liability on a buy-out basis arising under section 75 of the Pensions Act 1995. The persons on whom a notice could be given by the Regulator if clause 35 were enacted include the associated companies and, it might be argued, the administrators. Such a notice could, however, be given only if they had acted otherwise than in good faith in giving notice of withdrawal. For the reasons already given in deciding that the principle in Ex parte James does not apply, I am satisfied that the administrators will be acting in good faith if they cause the associated companies to withdraw from the scheme.

In the unusual circumstances of requesting the court to give directions, it was in my judgment right for the administrators to draw attention to draft legislation which, if enacted, will have retrospective effect to the time when the direction will be made and acted on. I consider it relevant to the exercise of the court’s discretion. There are nevertheless difficulties in doing so, because not only is the legislation in draft but in this particular case the government has announced that it is giving further consideration to the provisions in question. I have concluded that there is nothing in the draft provisions which should prevent the court from giving the directions sought by the administrators.

My conclusion is accordingly that the administrators will be acting in accordance with their duties if they cause the associated companies to give notice of withdrawal from the scheme, and they will not infringe the principle in Ex parte James in doing so. This is in my view an appropriate case in which to seek the directions of the court. It involves more than the normal exercise of commercial judgment arising in, for example, the sale of assets or the business of the company in administration, which is not usually an appropriate matter for directions: se Re T&D Industries plc [2000] 1 BCLC 471. In view of the directions sought, it is also inevitable that the application is made and heard without notice to the trustees of the scheme. It would of course be far preferable if the application could be made on notice to them, but notice would be likely to produce the very result which the administrators seek to avoid. It is by no means uncommon for applications for directions by administrators and liquidators to be heard without notice to any person.

In giving directions to the administrators to give the necessary notices, I make clear, as I did in argument, that it is on the basis of their commercial judgment as to the effect on relations with the employees of the companies and any consequential effect on the businesses of the companies. The same is true of the assessment of benefit to creditors of TNL, which will not be able to withdraw from the scheme and is likely to be subject to a large liability to the trustees.