UT-2024-000019 - [2025] UKUT 00257 (TCC)

The next question we need to ask is whether those acts met the material detriment test. They will do this if they “detrimentally affected in a material way the likelihood of accrued scheme benefits being received”. We pause to note that it is not necessary to show that the acts in question have impacted on the ability of the Scheme to satisfy accrued benefits; what is necessary is that the acts have detrimentally affected in a material way the likelihood of those benefits being received.

We agree with Mr Robinson’s observation that, when we look at the list of factors the statute draws our attention to (e.g. the reference in section 38A(4)(d) to the territory where obligations would be enforced), this is as much a qualitative as a quantitative test.

The factors the statute points to are:

“(a)

the value of the assets or liabilities of the scheme or of any relevant transferee scheme,

(b)

the effect of the act or failure on the value of those assets or liabilities,

(c)

the scheme obligations of any person,

(d)

the effect of the act or failure on any of those obligations (including whether the act or failure causes the country or territory in which any of those obligations would fall to be enforced to be different),

(e)

the extent to which any person is likely to be able to discharge any scheme obligation in any circumstances (including in the event of insolvency or bankruptcy),

(f)

the extent to which the act or failure has affected, or might affect, the extent to which any person is likely to be able to do as mentioned in paragraph (e), and

(g)

such other matters as may be prescribed.”

Clearly, the most relevant statutory factors here are (e) and (f), the question whether these arrangements negatively impacted on the likelihood of DFL being able to meet its Scheme obligations. As we have seen, DFL drew down £800,000 on its facility with RBS. That money was advanced initially to Pink to finance Pink’s purchase of shares in DFHL. In fact, DFG purchased those shares and the loan to Pink was repaid through a series of book entries and replaced with a loan to DFG. Looking at the accounts of DFL, the increased indebtedness would be balanced by the asset the borrowed money was used to acquire (the receivable from Pink/DFG). The question, however, is not whether DFL’s accounts balanced, but what impact these arrangements had (or might have) on the likelihood of DFL being able to meet its obligations to the Scheme. To some extent that turns on the answers to the quantitative question, whether the loans DFL made with that money were likely to be repaid and provide a return equal to the cost of borrowing from RBS, and the qualitative question, whether the loans were as liquid as the RBS facility (Could DFL expect to be repaid as quickly as it could borrow from RBS).

Neither Pink nor DFG had substantial assets of their own. Their ability to repay the loan turned entirely, therefore, on the fortunes and value of DFL. AP suggested that the loan could be repaid by dividends from DFL or by the proceeds of Pink/DFG selling DFHL shares. That, as the Panel noted, was entirely speculative. At the time the loan was made, DFL was loss making. It would be very unlikely, therefore, that it would be in a position, certainly not in the near future, to pay dividends which would enable Pink/DFG to repay the loan.

Similarly, whilst it was always possible that DFG could sell DFHL and then be in a position to repay the loan out of the sale proceeds, the value of DFL was, at its highest, £1.2 million and, depending on the view a purchaser took about future pension scheme liabilities, it could (as Ashgates had observed) be worth significantly less than that, possibly even nothing at all. DFHL was, of course, the parent company of an entirely private group the shares in which were not liquid. DFG’s ability to repay the loan turned entirely, therefore, on DFL’s fortunes increasing, so that it could pay dividends which could be used to repay the loan, or on finding a purchaser for an illiquid asset who would be prepared to pay at least £800,000 for shares with an uncertain (potentially negligible) value. In the meantime, the loan was not providing a yield.

On the other hand, if this transaction had not taken place, DFL might have been able to draw down £800,000 from RBS (on what was, despite its name, a working capital facility) and use some or all of that money to discharge its obligations to the Scheme or to invest in the business, thus increasing the chances of being able to generate future profits out of which it could discharge some of its obligations to the Scheme. We say “might have been able” to draw down on the facility because CW had suggested that, once RBS saw the September 2015 results, they might not be willing to let DFL draw down further funds.

Whatever the position as regards possible future draw downs, the immediate result of these transactions was that DFL had increased its indebtedness by £800,000 and paid that money away without acquiring any real new source to fund the repayment. Although DFL had a receivable in its accounts, DFL would be the source of money to repay that loan. The reality was that, at a time when its finance and future viability were uncertain, DFL had borrowed £800,000 from RBS and indirectly distributed that money to two of its shareholders (AP and PW) by funding the purchase of their shares in DFHL.

We have seen how the initial form of the transaction considered was an own share purchase by DFHL, but that had been rejected for tax reasons. This transaction was a synthetic own share purchase financed in exactly the same way by the target company out of its own resources.

It is hard to see how a transaction like this does not materially impact on the likelihood of DFL being able to meet obligations to the Scheme and others. At a time when its financial position was already uncertain, it increased its indebtedness by £800,000 and transferred the money it borrowed to its shareholders. At a time when the company was valued at no greater than £1.2 million and potentially significantly less than that and its assets (ignoring the deferred tax asset) were £2.4m, it increased its indebtedness by £800,000. This transaction would, therefore, have a material negative impact on the financial position of the Scheme, because it greatly increased the risk of DFL not repaying the PPF levies and expenses the Scheme had already paid on its behalf or meeting its commitments to satisfy the shortfall contributions, which were already significantly “back end loaded”.