Gleave & Ors v The Board of the Pension Protection Fund

On 7^th September 2006 company voluntary arrangements proposed under Part 1 of the Insolvency Act 1986 were approved by the creditors of fifty-one companies in the Federal Mogul group, including a number of subsidiaries of T&N Ltd. They became effective on 11^th October 2006. The CVAs form part of the rescue of the viable parts of the group, after asbestos-related liabilities on a large scale led to a total of 133 companies entering administration in October 2001. The administrators were appointed as the joint supervisors of the CVAs, and the administration orders for the fifty-one companies were discharged with effect from 30^th November 2006.

Under the terms of the CVAs, all claims included within the definition of CVA Claims were discharged as against the companies proposing the CVAs in exchange for the rights conferred by the CVAs. Asbestos-related claims were to be made against a trust fund established pursuant to the CVAs. A general reserve was established for the benefit of all creditors with unsecured claims against T&N subject to certain exceptions including asbestos–related claims and the claim of the trustees of the T&N Retirements Benefits Scheme (1989) (the T&N pension scheme) in relation to the deficit in the scheme. The trustees’ claim was to be compromised by a single payment of £193 million together with interest, which was made shortly after the CVAs became effective.

As regards general unsecured creditors of companies other than T&N, the CVAs provided for the establishment of a Non-T&N General Reserve to which a sum of £116,068,000 was paid out of assets held by the administrators. Separate sub-reserves were created for each company which would be used for the payment of distributions in respect of allowed general claims against the relevant company.

The general unsecured claims against the non-T&N companies included claims by the trustees of the T&N Pension Scheme against fourteen companies which were formerly participating employers in the scheme (the fourteen companies). These claims, as also the claim against T&N, arise under section 75 of the Pensions Act 1995, in relation to the deficit in the scheme fund. The explanatory statement records that under the terms of the CVAs these claims (Section 75 Claims) will have to be proved in the same manner as any other general claims and will be paid at the same rate of dividend and at the same time as other general claims against the relevant company. The only difference is that each section 75 Claim is capped at a figure which has been agreed with the Pension Protection Fund.

Although the Section 75 Claims are claims of the trustees of the T&N pension scheme, their powers in relation to these claims are exercisable by the Board of the Pension Protection Fund (the PPF) under section 137 of the Pensions Act 2004.

A dispute has arisen between the supervisors and the PPF as to how Section 75 claims are to be quantified for the purpose of the CVAs. By the present application, the supervisors seek directions under section 7(4) of the Insolvency Act 1986 to resolve this issue. While it is the PPF and the other general unsecured creditors who are affected by this issue, counsel for the supervisors have quite properly presented submissions on behalf of the general creditors and the PPF has been represented by counsel.

It is necessary to consider section 75 and other related provisions, and the relevant provisions of the CVAs. Section 75, so far as relevant, provides as follows:

“(1)

If, in the case of an occupational pensions scheme which is not a money purchase scheme, the value at the applicable time of the assets of the scheme is less than the amount at that time of the liabilities of the scheme, an amount equal to the difference shall be treated as a debt due from the employer to the trustees or managers of the scheme.

(2)

If in the case of an occupational pension scheme which is not a money purchase scheme -

(a)

a relevant insolvency event occurs in relation to the employer, and

(b)

a debt due from the employer under subsection (1) has not been discharged at the time that event occurs,

the debt in question shall be taken, for the purposes of the law relating to winding up, bankruptcy or sequestration as it applies in relation to the employer, to arise immediately before that time.

……

(5)

For the purposes of sub-section (1), the liabilities and assets to be taken into account, and their amount or value, must be determined, calculated and verified by a prescribed person and in the prescribed manner.

…….

(10)

Regulations may modify this section as at applies in prescribed circumstances.”

In its application to the T&N scheme as a scheme with more than one participating employer, section 75 has effect with modifications made by reg 4 of the Occupational Pensions Schemes (Deficiency on Winding-up etc) Regulations 1996 (SI 1996 No 3128) (the Deficiency Regulations). Subsequent modifications were introduced into the Pensions Act 1995 under Section 75A but only with effect from a date after the withdrawal of the fourteen companies, so that the modifications as set out in the Deficiency Regulations apply in this case. Reg 4(2) inserts sub-section (1A) as follows:

“In the case of a scheme in relation to which there is more than one employer, the amount of the debt due from each employer shall, unless the scheme provides for the total amount of the debt due under subsection (1) to be otherwise apportioned amongst the employers, be such proportion of the total amount as, in the opinion of the actuary after consultation with the trustees or managers, the amount of the schemes liabilities attributable to employment with that that employers bears to the total amount of the scheme’s liabilities attributable to employment with any of the employers.”

Reg 4(3) substitutes a different sub-section (3):

“(3)

In this section “the applicable time” means –

(a)

in relation to a scheme which is being wound up, any time –

(i)

after the commencement of the winding up, and

(ii)

before a relevant solvency event has occurred in relation to each of the employers whom the scheme relates; and

(b)

in relation to a scheme which is not being wound up –

(i)

in relation only to any employer who ceases to be a person employing persons in the description or category of employment to which the scheme relates at a time when at least one other person continues to employ such persons, immediately before he so ceases, and

(ii)

in relation only to any employer in relation to whom a relevant insolvency event occurs, immediately before the event occurs.”

Reg 4(5) provides as follows:

“(5)

For the purpose of section 75(1A) (as inserted by paragraph (2))

(a)

the total amount of the scheme’s liabilities which are attributable to employment with any one of the employers; and

(b)

The amount of the liabilities attributable to employment with any one employer,

shall be such amount as is determined, calculated and verified by the actuary in accordance with the guidance given in GN19: and a determination under this paragraph must be certified by the actuary as being in accordance with that guidance.”

The Deficiency Regulations make provision in reg 3 for the determination of scheme liabilities and assets for the purposes of section 75:

“(1)

The liabilities and assets of a scheme which are to be taken into account for the purposes of section 75(1) and their amount or value shall be determined, calculated and verified by the actuary –

a.

on the general assumptions specified in paragraphs (2) and (3) of regulation 3 of the MFR Regulations;

b.

subject to paragraphs (3) and (4), in accordance with regulations 4 to 8 of regulation 3 of the MFR Regulations;

c.

subject to sub-paragraph (d), in so far as he guidance in GN27 applies as respect regulations 3(2) and (3) and 4 to 8 of the MFR Regulations, in accordance with that guidance; and

d.

in accordance with the guidance given in GN19 so far as that guidance applies for the purpose of the Regulations;

and where in these Regulations (or in the MFR Regulations) there is a reference to the value of any asset or the amount of any liability being calculated or verified in accordance with the opinion of the actuary or as he thinks appropriate, he shall comply with any relevant provision in the guidance in GN27 or, as the case may be, GN19 in making that calculation or verification.

(2)

The value of the assets and the amount of the liabilities of a scheme which are to be taken into account for the purpose of section 75(1) must be certified by the actuary in the form set out in Schedule 1 to these Regulations…”

For the purposes of the Deficiency Regulations “the actuary” means the actuary appointed for the scheme pursuant to section 47(1)(b) of the Pension Act 1995: reg 2(2).

Applying these provisions to the T&N Pension scheme, the “applicable time” as regards the fourteen companies was 16^th July 2004, the date on which they withdrew as participating employers but T&N continued to participate in the scheme: section 75(3)(b)(i) as substituted by reg 4(3) of the Deficiency Regulations. Notices of withdrawal were given pursuant to directions given by me to the administrators on the 13^th July 2004: see In re T&N Ltd [2004] EWHC 1680 (Ch). By reason of section 75(5) and reg 3 of the Deficiency Regulations, the assets and liabilities of the scheme at the applicable time must be determined, calculated and verified by the actuary, in accordance with the assumptions, regulations and guidance prescribed by reg 3(1). The actuary is required by reg 3(2) to certify the value of the assets and the amount of the liabilities for the purposes of section 75(1). Likewise, the actuary is required by reg 4(5) to apportion the liabilities among the employers. Under Section 75(1) the difference between the liabilities and the assets as at the applicable time and as certified by the actuary constitutes a debt from the employer to the trustee. Under section 75(1A), in the case of multi-employer schemes, the debt is apportioned among the employers as determined by the actuary.

In March 2006 the appointed actuary for the T&N pension scheme signed certificates as regards the deficit in the scheme and apportioned relevant shares among the fourteen companies under section 75(1A). The supervisors have mentioned respects in which the certificates do not strictly comply with section 75 and the Deficiency Regulations but they do not contend that they should be treated as invalid on these grounds.

The supervisors and their actuarial advisers took issue with the amounts certified by the scheme actuary, principally by reference to the mortality assumptions used by the scheme actuary. If the mortality assumptions favoured by the supervisor were adopted, it would reduce the aggregate claims by about £10 million from just over £94 million. However, leaving aside the impact (if any) of the CVAs, the effect of the statutory provisions was to make the amounts certified by the scheme actuary debts due from the fourteen companies, unless it could be demonstrated that the scheme actuary had not applied the methodology required by the Deficiency Regulations. This is not in dispute on this application and it is not submitted on behalf of the supervisors that, in the absence of the CVAs, the certificates and apportionment among the fourteen companies would not be binding and would not result in an enforceable debt.

The position of the PPF is therefore that the amounts apportioned between the fourteen companies are debts due from them which should be admitted as such by the supervisors for the purposes of distribution from the Non-T & N General Reserve sub-funds. The supervisors’ position is that because the date as at which claims are to be determined and admitted under the CVAs is 1 October 2001, the scheme trustees’ claims fall to be treated as contingent claims to be valued by the supervisors.

I have already referred to the explanatory statement for the CVAs in which it was said that the Section 75 Claims would have to be proved in the same manner as any other general unsecured claim. Claimants were required by the CVAs to submit notices of claim. The explanatory statement (para 39.3.1) describes the procedure then to be adopted:

“The Supervisors will review and evaluate Notices of Claim. They may request that the holder of a Non-Asbestos Claim submit further details or evidence in support of the claim. After the review and evaluation is complete, the Supervisors will either allow the Non-Asbestos Claim in whole or in part or reject it in whole or in part. If the Non-Asbestos Claim is not for a fixed amount, the Supervisors may also estimate the amount of the claim and allow the claim in the estimated amount.”

The relevant provisions of the CVAs are as follows. “Claim” is defined in paragraph 2.1 as follows:

““Claim” means any right to payment or satisfaction of a debt or liability existing as at the Filing Date, whether the right, debt or liability is present or future, certain or contingent, fixed or liquidated, ascertained or unascertained, and regardless of whether any such right, debt or liability is provable in a solvent or insolvent winding-up or other insolvency process. For the avoidance of doubt:

a)

any right to payment or satisfaction of a debt or liability includes any right to payment or satisfaction of a debt or liability to pay money or money’s worth under any enactment, statute or regulation, any debt or liability for breach of trust, any debt or liability in contract, tort or bailment, and any debt or liability arising out of an obligation to make restitution.”

The “Filing Date” is defined as 1 October 2001. Paragraphs 8.3 – 8.6 provide for the submission of notices of claim and the allowance procedure as summarised in the extract from the explanatory statement cited above. Paragraph 9.2.3 provides that subject to the caps on Section 75 Claims against the fourteen companies, such claims were to be subject to the allowance procedures set out in paragraph 8.

The Section 75 Claims arose as a result of the withdrawal of the fourteen companies from the scheme in July 2004 and were quantified in March 2006, before the CVAs were approved or had become effective in October 2006. However, as at the relevant date for determining claims, 1 October 2001, they were contingent claims only. The supervisors accordingly submit that the only claims which the PPF can submit are those contingent claims as at 1 October 2001. Accordingly the claims are not for the statutory debts which arose on the scheme actuary’s certificate and apportionment in March 2006. In its primary submission, the PPF accepts that this is so far the correct analysis. The supervisors go on to submit that the claims therefore fall to be estimated by the supervisors, for which purpose they may apply such principles and assumptions as to, for example, mortality as appear on actuarial advice to be appropriate.

The common approach that claims which were contingent at 1 October 2001 are to be considered and estimated under the terms of the CVA is essentially the same as that applicable in a liquidation, when all debts, whether present or future, certain or contingent, ascertained or sounding only in damages, existing at the date of liquidation are admitted to proof and valued. In that way, effect is given to the underlying requirement for a distribution of the available assets on a pari passu basis.

In valuing contingent claims, account is taken of those subsequent events which can bring greater certainty to the process of estimation. This is referred to as the hindsight principle. As the process of estimation is designed to put a figure on a contingent claim by reference to what may happen in the future, it would be “pure conceptualism” not to take account of subsequent events which have occurred before the estimation is made.

The operation of the hindsight principle was explained by Lord Hoffmann giving the advice of the Privy Council in Wight v Eckhardt Marine GmbH [2004] 1AC 147. In that case a creditor sought to prove in the liquidation of Bank of Credit and Commerce International (Overseas) Limited for a claim governed by the law of Bangladesh which existed at the date of liquidation but was subsequently novated under Bangladeshi law to a new bank. The Privy Council upheld the liquidators’ rejection of the proof on the grounds that, applying the hindsight principle, a proof should not be admitted for a debt which had ceased to be a liability of the company in liquidation. Lord Hoffmann said:

“29

The image of collecting and uno flatu distributing assets of the company on the day of the winding up order is a vivid one, but the courts apply it to give effect to the underlying purpose of fair distribution between creditors pari passu and not as a rigid rule. Section 136(a) of the Companies Law (2002 rev) provides that “the property of the company shall be applied in satisfaction of its liabilities pari passu . . .” The principle of valuation at the date of winding up ensures that distribution among creditors is truly pari passu. It would, however, be pure conceptualism to apply it so as to require payment of a dividend to someone who, at the time of the distribution, is not a creditor at all.

30

So, for example, a policy of insurance on the life of a person living at the date of the order winding up the insurance company is a contingent debt which will be ordinarily valued in accordance with mortality tables as at the date of the winding up. As Lord Westbury said in In re European Assurance Society Arbitration (Allberg’s Case) (1872) 17SJ 69, 70:

“you could not withhold out of the assets of the company a large sum of money, and keep it invested . . . to answer the claims when they arise. You must have a present value put on these future claims . . .”

31

On the other hand, if the life drops during the course of the winding up, the claim at the date of winding up will be revalued on the assumption that it was known at that date that the person insured would die when he did. If all the assets have been distributed, this will not help the beneficiaries because previous distributions cannot be set aside. But if there are still assets to be distributed, the beneficiaries will participate on the basis of the new valuation. Similarly in In re Northern Counties of England Fire Insurance Co (1880) 17 Ch D 337, the premises of an insured under a fire policy with an insolvent company were burned down during the course of the winding up. He was held entitled to prove for the full loss, that being (with hindsight) the value which would have been attributed at the date of winding up to his contingent claim under the policy if it had been known that his premises would burn down.

32

These cases on the use of hindsight to value debts which were contingent at the date of the winding up order show that the scene does not freeze at the date of winding up order. Adjustments are made to give effect to the underlying principle of pari passu distribution between creditors. Hindsight is used because it is not considered fair to a creditor to value a contingent debt at what it might have been worth at the date of the winding up order when one now knows that prescience would have shown it to be worth more. The same must be true of a contingent debt which prescience would have shown to be worth less.”

To the same effect is what Lord Hoffmann said in Stein v Blake [1996] 1AC 243 at p.252 E-G:

“How does the law deal with the conundrum of having to set off, as of the bankruptcy date, “sums due” which may not yet be due or which may become owing upon contingencies which have not yet occurred? It employs two techniques. The first is to take into account everything which has actually happened between the bankruptcy date and the moment when it becomes necessary to ascertain what, on that date, was the state of account between the creditor and the bankrupt. If by that time the contingency has occurred and the claim has been quantified, then that is the amount which is treated as having been due at the bankruptcy date. An example is Sovereign Life Assurance Co v. Dodd [1892] 2 Q.B. 573, in which the insurance company had lent Mr. Dodd £1,170 on the security of his policies. The company was wound up before the policies had matured but Mr Dodd went on paying the premiums until they became payable. The Court of Appeal held that the account required by bankruptcy set-off should set off the full matured value of the policies against the loan.”

Mr Arden Q.C. for the supervisors accepts that the hindsight principle is applicable to the allowance and estimation process under the CVAs, but only to the extent of taking into account the withdrawal of the fourteen companies from the scheme in 2004, thereby triggering a claim under section 75. He accepts therefore that there should be no discount for the possibility that no liability might arise under section 75. However, he submits that while the certificates and apportionment provided by the scheme actuary in March 2006 are relevant to the estimation process under the CVAs, it is nevertheless for the supervisors to estimate the amount of the claims and they are not bound to accept the certified amounts. In particular, the supervisors will be free to use different mortality assumptions from those used by the scheme actuary. This is the issue between the parties. Mr Tennet QC for the PPF submits that as at 1 October 2001 there was a contingent liability under section 75 to pay the amount certified by the scheme actuary. He submits that by reason of the hindsight principle the supervisors are required to accept the scheme actuary’s quantification. A debt under section 75 can arise only in an amount quantified by the scheme actuary. In estimating the trustees’ claim as at 1 October 2001, the supervisors are as much estimating the amount which would be quantified by the scheme actuary in accordance with the statutory provisions as they are estimating the chances that a claim under section 75 would be triggered by withdrawal from the scheme or by liquidation.

In my judgment, Mr Tennet QC is correct in his submissions on this issue. There is nothing in the rationale underlying the hindsight principle which should restrict its application to whether there has occurred an initial triggering event, in this case the withdrawal of the fourteen companies from the scheme. The subsequent quantification of the liability is equally a matter which renders certain what was previously uncertain, particularly in a case such as the present where a debt does not arise as a matter of law except through a certified mechanism, in this case the certificate and apportionment of the scheme actuary.

The PPF’s position is fully supported by Lord Hoffmann’s statement in Stein v. Blake, cited above. The first technique for dealing with contingent liabilities is:

“…to take into account everything which has actually happened between the bankruptcy date and the moment when it becomes necessary to ascertain what, on that date, was the state of account between the creditor and the bankrupt. If by that time the contingency has occurred and the claim has been quantified, then that is the amount which is treated as having been due at the bankruptcy date.” (emphasis added)

Likewise, in Wight v. Eckhardt Marine GmbH Lord Hoffmann said at para 32:

“Hindsight is used because it is not considered fair to a creditor to value a contingent debt at what it might have been worth at the date of the winding up order when one now knows that prescience would have shown it to be worth more.”

This is illustrated by In re Northern Counties of England Fire Insurance Co. Macfarlane’s Claim (1880) 17 Ch D 337, one of the authorities to which Lord Hoffmann referred in Wight v. Eckhardt. An insured’s premises were burnt down during the winding-up. His claim was contingent as at the date of winding-up but in determining the amount for which he could prove, both the fact of the fire and the value of the damage were accepted. The amount of his policy was £500 and the damage equalled or exceeded that amount, so he was admitted to proof for £500. If the damage had been less extensive, causing a loss of less than £500, it can be deduced that he would have been entitled to prove for the lesser amount. The application of the hindsight principle in other contexts also requires liabilities to be quantified by reference to subsequent events: Bwllfa and Merthyr Dale Steam Collieries (1891) Ltd v. The Pontypridd Waterworks Co [1903] AC 426, Golden Strait Corporation v. Nippon Yusen Kubishika Kaisha [2007] 2AC 353. In circumstances where by the time of estimation the true loss or other sum is known, Lord Halsbury LC in the Bwffla case at p 429 rejected the proposition that “because you could not arrive at the true sum when the notice was given, you should shut your eyes to the true sum now you do know it, because you could not have guessed it then.”

Mr Arden QC submitted that a distinction could be drawn between an objective fact such as the extent of the fire damage and a process of quantification of a liability, such as that performed by a scheme actuary under section 75. I can see no sound basis in principle for this distinction and it is contrary to Lord Hoffmann’s statement of principle in Stein v. Blake. Moreover, the value of damage caused by a fire will itself be subject to a process of assessment, which on the authority of Macfarlane’s Case and Stein v. Blake will bind the liquidator in his estimate of the contingent claim.

I conclude therefore that the supervisors should allow the Section 75 Claims in the amounts fixed by the scheme actuary, subject only to the provisions for caps contained in the CVAs.

I reach this conclusion as a matter of the general application of the hindsight principle to contingent debts. There are also specific features of section 75 and the CVAs which support this conclusion.

One of the triggering events for a liability under section 75 is the liquidation of the employer. In that event the debt is taken to arise immediately before the liquidation: section 75(2). In a liquidation, it would therefore be deemed to be a present but unascertained debt. Nonetheless, section 75, read both on its own and as modified for multi-employer schemes by the Deficiency Regulations, clearly requires the process of ascertainment and apportionment to be undertaken by the scheme actuary and his conclusions will be binding on the liquidator, subject only to such rights of challenge as would be available to any employer.

The CVAs define the trustees’ claims as “any Claim which arises pursuant to section 75 of the Pensions Act 1995”. As already discussed, a claim can arise under section 75 only if the scheme actuary certifies the amount and value of the scheme’s assets and liabilities and apportions the resulting liability among the employers. The definition thus incorporates the process of quantification required by the section. It can be inferred that the explanation for subjecting section 75 claims to the allowance procedures, when the amounts certified and apportioned by the scheme actuary were known before the CVAs were put to creditors, was that it reserved such rights of challenge as were in any event available to an employer.

I will hear counsel on the appropriate form of direction in the light of this judgment.