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

Section 38 PA 2004 authorises the Regulator to issue CNs. So far as relevant, at the time which is relevant to these proceedings, it provided:

“38 Contribution notices where avoidance of employer debt

(1)

This section applies in relation to an occupational pension scheme other than–

(a)

a money purchase scheme, or

(b)

a prescribed scheme or a scheme of a prescribed description.

(2)

The Regulator may issue a notice to a person stating that the person is under a liability to pay the sum specified in the notice (a “contribution notice”)–

(a)

to the trustees or managers of the scheme, or

(b)

where the Board of the Pension Protection Fund has assumed responsibility for the scheme in accordance with Chapter 3 of Part 2 (pension protection), to the Board.

(3)

The Regulator may issue a contribution notice to a person only if–

(a)

the Regulator is of the opinion that the person was a party to an act or a deliberate failure to act which falls within subsection (5),

(b)

the person was at any time in the relevant period–

(i)

the employer in relation to the scheme, or

(ii)

a person connected with, or an associate of, the employer,

(c)

…, and

(d)

the Regulator is of the opinion that it is reasonable to impose liability on the person to pay the sum specified in the notice, having regard to—

(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, and

(ii)

such other matters as the Regulator considers relevant, including (where relevant) the matters falling within subsection (7).

(4)

...

(5)

An act or a failure to act falls within this subsection if–

(a)

the Regulator is of the opinion that the material detriment test … is met in relation to the act or failure (see sections 38A …) or that the main purpose or one of the main purposes of the act or failure was–

(i)

to prevent the recovery of the whole or any part of a debt which was, or might become, due from the employer in relation to the scheme under section 75 of the Pensions Act 1995 (c. 26) (deficiencies in the scheme assets), or

(ii)

to prevent such a debt becoming due, to compromise or otherwise settle such a debt, or to reduce the amount of such a debt which would otherwise become due,

(b)

it is an act which occurred, or a failure to act which first occurred–

(i)

on or after 27th April 2004, and

(ii)

before any assumption of responsibility for the scheme by the Board in accordance with Chapter 3 of Part 2, and

(c)

it is either–

(i)

an act which occurred during the period of six years ending with the giving of a warning notice in respect of the contribution notice in question, or

(ii)

a failure which first occurred during, or continued for the whole or part of, that period.

(6)

For the purposes of subsection (3)–

(a)

the parties to an act or a deliberate failure include those persons who knowingly assist in the act or failure, and

(b)

“the relevant period” means the period which–

(i)

begins with the time when the act falling within subsection (5) occurs or the failure to act falling within that subsection first occurs, and

(ii)

ends with the giving of a warning notice in respect of the contribution notice in question.

(7)

The matters within this subsection are—

(a)

the degree of involvement of the person in the act or failure to act which falls within subsection (5),

(b)

the relationship which the person has or has had with the employer (including, where the employer is a company within the meaning of subsection (11) of section 435 of the Insolvency Act 1986 (c. 45), whether the person has or has had control of the employer within the meaning of subsection (10) of that section),

(c)

any connection or involvement which the person has or has had with the scheme,

(d)

if the act or failure to act was a notifiable event for the purposes of section 69 (duty to notify the Regulator of certain events), any failure by the person to comply with any obligation imposed on the person by subsection (1) of that section to give the Regulator notice of the event, loss of employment),

(ea) the value of any benefits which directly or indirectly the person receives, or is entitled to receive, from the employer or under the scheme,

(eb) the likelihood of relevant creditors being paid and the extent to which they are likely to be paid,

(ec) the effect of the act or failure to act on the value of the assets or liabilities of the scheme or any relevant transferee scheme,

(f)

the financial circumstances of the person, and

(g)

such other matters as may be prescribed.

(7A) In subsection (7)(eb) “relevant creditors” means—

(a)

creditors of the employer, and

(b)

creditors of any other person who has incurred a liability or other obligation (including one that is contingent or otherwise might fall due) to make a payment, or transfer an asset, to the scheme.

(7B) In subsection (7)(ec) "relevant transferee scheme" and the reference to the assets or liabilities of any relevant transferee scheme have the same meaning as in section 38A.

(8)

For the purposes of this section references to a debt due under section 75 of the Pensions Act 1995 (c. 26) include a contingent debt under that section.

(9)

Accordingly, in the case of such a contingent debt, the reference in subsection (5)(a)(ii) to preventing a debt becoming due is to be read as including a reference to preventing the occurrence of any of the events specified in section 75(4C)(a) or (b) of that Act upon which the debt is contingent.

(10)

For the purposes of this section–

(a)

section 249 of the Insolvency Act 1986 (connected persons) applies as it applies for the purposes of any provision of the first Group of Parts of that Act,

(b)

section 435 of that Act (associated persons) applies as it applies for the purposes of that Act, and

(c)

section 229 of the Bankruptcy (Scotland) Act 2016 (associated persons) applies as it applies for the purposes of that Act.

(11)

For the purposes of this section “insolvency practitioner”, in relation to a person, means–

(a)

a person acting as an insolvency practitioner, in relation to that person, in accordance with section 388 of the Insolvency Act 1986, or

(b)

an insolvency practitioner within the meaning of section 121(9)(b) (persons of a prescribed description).

(12)

Subsection (13) applies if the Regulator is of the opinion that—

(a)

a person was a party to a series of acts or failures to act,

(b)

each of the acts or failures in the series falls within subsection (5)(b) and (c), and

(c)

the material detriment test, the employer insolvency test or the employer resources test is met in relation to the series, or the main purpose or one of the main purposes of the series was as mentioned in subsection (5)(a)(i) or (ii).

(13)

The series of acts or failures to act is to be regarded as an act or failure to act falling within subsection (5) (and, accordingly, the reference in subsection (6)(b)(i) to the act or failure to act falling with subsection (5) is to the first of the acts or failures to act in the series).

(14)

In this section “a warning notice” means a notice given as mentioned in section 96(2)(a).”

Section 38A PA 2004 explains what is meant by the “material detriment test” in section 38. So far as relevant, at the time which is relevant to these proceedings, it provided:

“38A Section 38 contribution notice: meaning of “material detriment test”

(1)

For the purposes of section 38 the material detriment test is met in relation to an act or failure if the Regulator is of the opinion that the act or failure has detrimentally affected in a material way the likelihood of accrued scheme benefits being received (whether the benefits are to be received as benefits under the scheme or otherwise).

(2)

In this section any reference to accrued scheme benefits being received is a reference to benefits the rights to which have accrued by the relevant time being received by, or in respect of, the persons who were members of the scheme before that time.

(3)

In this section “the relevant time” means—

(a)

in the case of an act, the time of the act, or

(b)

in the case of a failure—

(i)

the time when the failure occurred, or

(ii)

where the failure continued for a period of time, the time which the Regulator determines and which falls within that period;

and, in the case of acts or failures to act forming part of a series, any reference in this subsection to an act or failure is a reference to the last of the acts or failures in that series.

(4)

In deciding for the purposes of section 38 whether the material detriment test is met in relation to an act or failure, the Regulator must have regard to such matters as it considers relevant, including (where relevant)—

(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.

(5)

In subsection (4) “scheme obligation” means a liability or other obligation (including one that is contingent or otherwise might fall due) to make a payment, or transfer an asset, to—

(a)

the scheme, or

(b)

...

(6)

...

(7)

...

(8)

In this section—

(a)

“work-based pension scheme” has the meaning given by section 5(3);

(b)

any reference to rights which have accrued is to be read in accordance with section 67A(6) and (7) of the Pensions Act 1995 (reading any reference in those subsections to a subsisting right as a reference to a right which has accrued).

(9)

In deciding for the purposes of this section whether an act or failure has detrimentally affected in a material way the likelihood of accrued scheme benefits being received, the following provisions of this Act are to be disregarded—

(a)

Chapter 3 of Part 2 (the Board of the Pension Protection Fund: pension protection), and

(b)

section 286 (the financial assistance scheme for members of certain pension schemes).

(10)

...”

Section 38B PA 2004 provides a statutory defence to the issue of a CN by reference to the material detriment test in certain circumstances, but this is not relied on here.

Section 39 PA 2004 explains what sum may be specified in a CN. The basic rule in subsection (1) is as follows:

“(1)

The sum specified by the Regulator in a contribution notice under section 38 may be either the whole or a specified part of the shortfall sum in relation to the scheme.”

So, the shortfall sum acts as a cap on each CN amount. The shortfall sum is defined in 39(2). Section 39(2)(a) deals with the position where a section 75 (of the Pensions Act 1995) debt has been triggered, and section 39(2)(b) deals with the situation where it has not been. A debt under section 75 of the Pensions Act 1995 can be triggered by certain events, usually employer insolvency. If there is a trigger event, then there is a comparison made between the value of the assets of the scheme at that point in time and its liabilities. The difference between them is treated as a debt due to the trustees of the scheme from the employer. Here we are in section 39(2)(b) territory, and the statute tells us that the shortfall sum is the amount the Regulator estimates would be the section 75 debt if it were triggered at the time of the acts or failures relied on to support the issue of a CN. Here the Regulator’s estimate was that the shortfall sum was not less than £5 million and this is not disputed. The warning notice issued by the Regulator in relation to the Scheme sought £3.2 million in total against a shortfall sum (overall cap) not less than £5 million.

The sum specified in a CN is, therefore, the amount the Regulator considers to be reasonable subject to the cap in section 39(1) PA 2004.

In Shah v The Pensions Regulator, [2023] UKUT 00183 (TCC) at [27], the Upper Tribunal summarised the tests or conditions for the issue of a CN to a target as follows:

“(1)

The Scheme Test: the scheme in question must be an occupational pension scheme other than a money purchase scheme or a prescribed scheme or a scheme of a prescribed description: see s 38(1).

(2)

The Connection Test: the target must, at any time during the relevant period (being the period beginning with the time when the act or failure to act falling within s 38(5) first occurs and ending with the giving of a warning notice), either be the employer or a person connected with or an associate of the employer: see s 38(3)(b)(ii).

(3)

The Party Test: the Regulator must be of the opinion that the target or targets were a party, having regard to s 38(6)(a), to an act or a deliberate failure to act which falls within s 38(5): see s 38(3)(a).

(4)

The Act Test: the act or failure to act must fall within s 38(5). This requires either the “material detriment” test or the “main purpose” test to be satisfied, and the act or failure to act must have occurred within certain time limits.

(5)

The Reasonableness Test: the Regulator must be of the opinion that it is reasonable to impose liability on the target to pay the sum specified in the contribution notice: see s 38(3)(d).”

It is common ground in this case that the Scheme Test and the Connection Test were met, in the case of the Connection Test by AP’s being a director of the employer.