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

Having decided that AP was a party to the financing arrangements for the sale of her shares in DFHL and that this act met the material detriment test, we now need to go on to consider whether it is reasonable for a CN to be issued to AP and, if it is, what amount should be specified.

The statute gives some guidance in this area, by identifying certain factors to be considered. The Regulator is directed to consider “the extent to which, in all the circumstances of the case, it was reasonable for the person to act, or fail to act, in the way that the person did” and “such other matters as the Regulator considers relevant, including (where relevant) the matters falling within subsection (7)”; see section 38(3)(d) PA 2004.

We need to keep in mind that a CN is not a financial penalty regime (Shah at [300]), but rather a means for the Regulator to support its statutory objective. As the Upper Tribunal explained in Shah (at [278]):

“The section supports the statutory objective of the Regulator to protect the benefits of members under occupational pension schemes and to reduce the risk of situations arising which may lead to compensation being payable from the PPF. Section 38 seeks to provide this support by imposing liability on those with a close connection with the scheme and its employer and who have been party to acts or failures to act which have caused material detriment to the scheme. Where those circumstances exist, the case for a CN will become stronger where the person concerned has also benefited as a result of the acts or failures which have caused material detriment to the scheme.”

The CN regime is also not a compensation regime, it is not designed to compensate a scheme for loss it has suffered. The Upper Tribunal made this point in Shah at [320], albeit adding the caveat that this was the case “at least when applying the material detriment test”. We can see from the way the material detriment test works (looking at the impact of an act or failure on the likelihood of obligations to a scheme being met and the inclusion of qualitative as well as quantitative factors) that detriment sufficient to trigger a CN can arise where the likelihood of obligations to a scheme being met is impacted and there has not been (and may never be) any loss to a scheme that can be traced back to the act or failure in question. If that is sufficient detriment to justify the issue of a CN, it must be the case that it may be reasonable to require a compensation payment in the absence of realised loss that can be traced back to the act or failure in question.

The CN regime is also not (or not primarily) a disgorgement regime, one designed to make the target disgorge all the benefit (if any) they obtained in connection with their act or default. As the passage from Shah just quoted indicates, a CN may be appropriate in the absence of personal benefit, albeit that the presence of personal benefit makes the case for a CN stronger.

To a degree, there is a measure of tension between these different considerations. The CN regime not being a penalty regime might suggest that a CN should only be issued to the extent that the target has received and retained a measurable benefit, but the passage we have just quoted (at [182] above) from Shah makes it clear that, whilst the receipt of a benefit makes the case for a CN stronger, the receipt of a benefit is not a prerequisite. One of the factors the statute directs us to consider is “the extent to which, in all the circumstances of the case, it was reasonable for the person to act, or fail to act, in the way that the person did” (our emphasis), which indicates that (although this is not a penalty regime) the degree of blameworthiness of a target is a relevant factor. Whilst the primary object of the CN regime is to protect pension schemes and reduce the risk of calls on the PPF, a CN may be appropriate where the target’s acts have no measurable impact on a scheme’s ability to provide benefits.

The resolution of this tension can be found in the observation of the Upper Tribunal in Shah (at [278]-[279]) that the statutory factors (and equally the non-statutory considerations we have just discussed) will not necessarily all have the same weight in every case, and that our task is to undertake a multifactorial assessment, balancing all the relevant circumstances together to reach an assessment or evaluation in the case before us, using our expertise as a specialist tribunal.

Looking at the factors identified in subsection (7), we start with the degree of AP‘s involvement in the act or failure in question. We have already identified AP as being a willing seller of her shares in circumstances where she knew that the purchase price would be financed by DFL from its own resources. She therefore had a significant level of involvement. If she had not been willing to sell her shares, DFL would not have borrowed from RBS to fund her or PW’s sale price.

Turning to her relationship with the employer, AP was a director of DFL. We have already explained that we have found AP to be a party to a relevant deliberate act without regard to the level to which she discharged (or failed to discharge) her duties as a director. However, it was her responsibility as a director of DFL, whether she was aware of that or not, to act in the best interests of the company and she clearly failed to do that. She knew that the Scheme was in deficit, and she knew, because she was copied in on the monthly financial information, that DFL’s financial position was not good. She had been told, in quite graphic terms, by CW that DFL’s financial position was bad and that, if the bank had one more month’s financial information, it might not be allowed to draw down on the facility and that was why DFL drew down from RBS in September. Despite all of this, she went ahead without taking any professional advice (beyond Ashgates’ advice which was focused on the tax position of the participants) and played a pivotal part in a transaction where the company increased its indebtedness in order to benefit her and other family members. She was a director of DFL and she owed duties to that company. There is nothing to suggest that, to the extent she thought about the impact of the proposed drawdown and loan to Pink at all, AP gave any consideration to any of the matters listed in section 172 of the Companies Act 2006 (“CA 2006”), exercised independent judgment (section 173 CA 2006) or reasonable care, skill and diligence (section 174 CA 2006). Whether deliberately or not, she singularly failed to discharge her duties as a director. Although the act we are concerned with (AP’s sale of DFHL shares) is her act as a shareholder in a different company, her direct relationship with DFL (as a director) is an important factor to take into account.

This links back to the factor identified in section 38(3)(d)(i) (“the extent to which, in all the circumstances of the case, it was reasonable for the person to act, or fail to act, in the way that the person did”). It was not at all reasonable for AP to act in the way that she did. She was a director of DFL, and she should not have allowed the employer company to weaken its resources in the way it did without making sure that the interests of all stakeholders in the company were protected. She did not ask any questions or take any advice with a view to even beginning to discharge that responsibility.

As to her connection or involvement with the Scheme, AP had no connection with the Scheme beyond her position as one of two directors in the employer. That was, however, a position of some importance. As one of two directors of the employer, she could have used her position to make sure that the employer maximised its assets and used them to benefit the Scheme to the greatest extent possible.

As far as the value of benefits she received is concerned, we know that AP received just over £360,000 by way of payment for her shares in DFHL. Clearly, to obtain that money, she had to give up her shareholding in DFHL. At one level she simply swapped one asset for another, and that might be thought not to be a benefit (at least if the assets were of equal value). It is, however, common ground that “benefit” here does not mean “net benefit”. In any event, the effect of this transaction is that AP exchanged an illiquid minority stake in a private company of questionable value for a significant amount of cash.

AP had a slightly under 25% stake in DFHL and it is hard to see how she could have sold those shares in the open market, even if the constitutional documents of DFHL allowed this. In practice, she would be restricted to selling alongside all the other shareholders or to one of them, which is what happened. CW came along with an offer to purchase her shares, which he did not need to finance as DFL was going to do that out of its borrowings.

We have seen from the Ashgates’ valuation that there was significant doubt over the valuation of the company. The figure which was used to justify the price paid to AP was at the very top end of the range they thought was supportable (more than double the figure they said they would be comfortable defending to HMRC), and even that required a very bullish view to be taken on the likelihood of the pension deficit presenting itself. It is far from clear to us that this figure represents an open market value of the shares in DFHL. We would have expected an open market value to be calculated by looking at what a third-party purchaser (if one could be found) would require as a discount or price reduction on account of the pension deficit risk, whereas the £1.2m valuation ignores the deficit and assumes a third-party purchaser would not reflect the deficit in the price they would offer. On one view, DFHL was valueless.

Turning to AP’s financial circumstances, these are (as the Upper Tribunal noted in Shah) of limited relevance in the absence of cogent evidence of straightened circumstances. It was not suggested to us that AP’s circumstances were straightened in any way at all. In fact, AP is relatively well off.

As well as the factors listed in subsection (7), we are directed to take into account such other matters as we consider relevant. The only issue, in addition to those identified in subsection (7), we discussed is the impact of CW and his wife settling with the Regulator before the Panel meeting. The Regulator had sought a CN sum of £360,000 from AP on a joint and several basis with CW. As a result of CW settling, the Panel determined that the correct, reasonable figure for the CN on a sole liability basis would be £180,000 for each of AP and PW.

Mr Robinson made substantial submissions to us on the effect of joint and several liability, pointing out, of course, that a joint and several award enables a claimant to proceed for the full amount and then leaves it to those held jointly and severally liable to claim contributions from each other as appropriate. In effect, the Panel was answering the question what was a reasonable figure for the CN by looking at the financial cost AP would have ended up bearing on a joint and several CN and assuming she was able to recover a contribution from CW. What the Panel should have done, in his submission, was focus on the perspective of the Scheme.

The real point it seems to us, however, is that the Panel used this shift from joint and several liability to sole liability as a framework within which to discuss what they thought was the appropriate figure to put in AP’s CN. As they put the point at [126](viii) “[T]he Case Panel has considered it helpful to ask itself, if [CW] were still involved in this process, but the Case Panel considered it appropriate to impose liability on a sole liability rather than joint and several basis, what would have been the reasonable (sole) liability to impose?” Broadly speaking, they considered that she shared responsibility with CW for the money drawn down by DFL and paid to her. Expressing that in terms of subsection (7), the degree of her involvement was a shared involvement with CW.

In addition, as the Panel pointed out, we are not faced, as it often the case, with an insolvent employer and a scheme which is failing to provide benefits. Currently, the Scheme has paid out all the benefits it is obliged to, although it remains significantly in deficit.

However, as Mr Robinson pointed out, in the past DFL has not been able to repay the expenses and PPF levy that the Scheme has paid on its behalf. Putting the point colloquially, as he did, it is not the case that all is well with the world so far as the Scheme is concerned.

Mr Robinson says that, as AP was jointly responsible with CW for DFL drawing down £800,000, one might say that her 50% responsibility should equate with £400,000, albeit that the Regulator would cap this at the value of her benefits, not half the benefit she received.

Although we should pay due regard to the Panel’s decision, we are required to develop a reasoned analysis of our own as to whether it is reasonable to issue a CN to AP and, if it is, what amount would be reasonable.

Our starting point is that AP shares responsibility with CW for DFL drawing down £800,000 from RBS in circumstances unconnected with any business need and driven only by the shareholders’ desire to finance the proposed transaction. Given DFL’s financial position and the position of the Scheme, it was not appropriate for DFL to draw down such a large sum of money and effectively distribute it to its indirect shareholders.

A figure of £400,000, therefore, reflects her involvement in and shared responsibility for the detrimental act, which was significant (both as a shareholder in DFHL and a director of DFL) and, for all the reasons we have discussed, wholly unreasonable.

The value of the benefits AP received is relevant given that the CN regime is not a penalty regime. The Regulator itself has accepted that it is appropriate to cap the figure in AP’s CN by reference to the value of the benefits she received, and we would agree with that approach in this case, given that it has not been possible to put a financial value (let alone one in excess of the benefits AP received) on the loss caused to the Scheme by AP’s act.

Given the difficulty AP would have in selling her illiquid minority stake in DFHL and the potentially very low value of DFL, we consider that she has obtained a very substantial benefit by selling her shares for cash.

Unlike the Regulator, however, we would take tax and the amounts AP paid to her children out of the proceeds of selling the shares her parents gave her into account in valuing the benefits she received. We absolutely agree with Mr Robinson when he says that targets should not be able to escape from the full rigours of a CN by dissipating proceeds or contriving schemes to distance themselves from such amounts, and nothing we say here should be taken as suggesting anything different. However, that is not what we are confronted with here. Although legally AP could do whatever she liked with the proceeds of selling the DFHL shares her parents gave her immediately before this transaction (that had to be the case to make Ashgates’ tax planning work), the reality is that she received those shares and the proceeds of selling them subject to a moral obligation (which she could not and did not ignore) to use the proceeds of selling those shares to make significant provision for her children. In the event, she gave her children £78,640 out of proceeds of £87,379. Effectively, the proceeds of those shares were absorbed by tax on the gain arising on their sale and the gifts to her children.

Similarly with tax, although we would not go as far as saying that the value of a benefit can never exceed its after tax benefit, we agree with Mr Uberoi that the impact of taxation is not something we should automatically ignore. Certainly, in a case where a significant financial value can be put on the loss to a scheme by the act complained of, we can see why tax should be ignored, particularly if the amount of tax (say income tax plus national insurance contributions) would otherwise have a material adverse impact on the amount in the CN. In the circumstances of this case (a target against whom there is no allegation of dishonesty, no “diversion” of funds from the Scheme, no financial value on the loss to the Scheme and a relatively modest (10%) tax burden), we consider that it would be reasonable to take tax into account.

Looking at all the relevant factors in the round, we note:

We do not consider that the shift in award from joint and several to sole liability justified the reduction in the figure claimed from AP. Had CW not settled with the Regulator, it would appear that a joint and several award of £360,437 would have been made against AP and CW, but there can be no guarantee that AP would have been able to recover half of that liability from CW, just as, we understand, he has so far only paid half of his settlement figure to the Regulator. The “effective regulatory burden” (to use the Panel’s expression) could easily have ended up being £360,437, which would have far exceeded the benefits she retained from behaviour which, whilst unreasonable, was not dishonest. More importantly, focusing on the net cost to AP ignores the primary purpose of the CN regime as identified by the Upper Tribunal in Shah.

For all these reasons, we consider that it is reasonable to issue a CN to AP and that the amount which it would be reasonable to issue the CN for would be the full value of the benefits received and retained by her, in other words the proceeds of her share sale (£360,437) less the amounts she paid to her children (£78,640) and the tax payable on account of the sale of her DFHL shares (£36,048), which gives a CN figure of £245,749.

There is another route which leads to a CN figure which is close to the figure we have just arrived at. When the sale of DFHL shares was originally proposed by CW, he said that Pink had £400k and, if that was added to the £800k that could be drawn down from DFL, Pink could pay each of the shareholders (PW, AP and their parents) £400k for their shares. As we have seen, the proposal evolved to one where the parents gave their shares to their three children and CW, PW and AP then sold their DFHL shares for cash. In due course, following the dialogue with HMRC, the proposal evolved further, and CW disposed of his shares in both DFHL and Pink in return for an issue of shares by the acquirer. However, if we look at the amount of cash required for the original transaction and the transaction originally put to HMRC (which valued the consideration given for DFHL at £1.125m), we can see that the cash paid out by the acquiring company and received by the selling shareholders would be greater than the £800k funded by DFL using the drawdown on the RBS facility. We accept that, while she may have been aware in broad terms of what was being discussed, AP was not intimately involved in these structuring discussions. It would be fair to say that she would have been aware in broad terms of the larger transaction involving DFHL where up to 2/3 (£800k) of the required finance (£1.2m) came from DFL and the remaining 1/3 from an associated company, which had common owners and directors but had no responsibility towards the Scheme. Although the economics of the transaction changed, the fact that 2/3 of the sum AP received (2/3 x 360,437 = 240,291) is close to the figure for the CN we have arrived at by a different route gives us significant comfort that the conclusion we reached by a different, more analytical route (that £245,749 is a reasonable figure for the CN) is correct.

This figure needs to be adjusted to reflect the passage of time. The starting point for the calculation of this uplift should be the date on which AP sold her DFHL shares (not the date when she was paid the sale price) as that is the date when the detrimental act was “locked in” (until then, as CW repeatedly told AP and others, the drawdown could have been reversed). As we are not looking at identified financial loss to the Scheme (just what a reasonable contribution would be in the light of all the factors we have discussed), this adjustment needs simply to reflect the time value of money, and we consider that simple interest at a rate of 2% above the Bank of England Base Rate from time to time is sufficient to achieve this.