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

Mr Robinson says that the three acts relied on by the Regulator (the monthly payments to CW; the “draw down” of £800,000 from DFL to Pink and subsequent transfer of part of that money to AP in March 2016 (as to £360,437) as part of a purchase of shares in DFHL; the use of DFL’s assets since September 2015 to support other group companies, leading to a write-off of debt of £224,481) form part of a “series of acts” within the meaning of section 38(12) because they are a succession of different ways of extracting money from DFL, for the benefit of CW and his family, at the instigation of CW and with the participation of AP (and others). The OED defines “series” as “a number of things of one kind (freq. abstract, as events, actions ..) following one another in time or in logical order”. That definition is met in this case. It was met in Shah because the UT accepted that the acts in question had “some underlying connection between [them]”, while leaving open the possibility that a series could be formed simply by a chronologically ordered list of acts with no other connection (see [183]-[184]).

AP must be “a party to” an act for it to be taken into account in a CN issued to her. Section 38(6) tells us that parties to an act include, but aren't limited to, those who knowingly assist in it. Mr Robinson says that “party to” should be given its ordinary and natural meaning. That was the approach Warren J took to other words (“prevent” and “recovery”) in section 38 in Re Bonas at [93]. Mr Robinson rejects Mr Uberoi’s “hierarchy” argument. The “party” test is separate from and not informed by the connection test; there are all sorts of ways of being “connected”, not just being a director: see section 249 of the Insolvency Act 1986. These various ways of showing connection are not identifying decision-makers. They are more about proximity. And so, Mr Robinson says, it is wrong to argue that the connection test supports an interpretation of "party to" as requiring a decision-making role.

In relation to all three acts, AP was a director of DFL from January 2010 to March 2016. Her submission that she was a “paper director” only is without merit.

As to the first act, she signed the contracts for services that caused the monthly payments making up the first act, and (with other family members) approved CW’s remuneration in 2011.

As to the sale of DFHL, AP agreed to the proposal laid out by CW in his email of 14 September 2015 and by Ashgates in their email of 12 October 2015. These and the subsequent communications from Ashgates and CW made crystal clear that the £800,000 to be used to part fund the share purchase was a drawdown from DFL, at a time it was financially weak and had a major pensions problem. At the very least her repeated agreement to the DFHL share sale amounts to knowing assistance in this act. But further she was “party to” this act by effecting the stock transfer of her shares in DFHL and receiving consideration as a result. The email exchanges show knowledge of what is proposed in the form of the transaction and its use of employer funds. It then reveals detailed and astute questions from Mrs Pelgrave about the implications of the use of employer funds.

At no point did she press a pause button, saying, "Hold on, what does this removal of £800,000 from the employer mean for the employer or for the Scheme?” That inaction is a form of participation. AP was one of two directors at the time and a director cannot simply do nothing. Mr Robinson referred to re Park, a case on director disqualification, and Barings, a case on directors’ duties, to support that proposition. A duty to take action is something that directors accept when they become a director of the company.

The last point under the party test: does it matter that the extraction from DFL happened without AP’s specific approval? CW’s email saying he was going to draw down the £800k was sent at 7am and acted on at 7.06am. AP says (understandably) that she would not have seen that email before it was acted on, but the email itself says in terms that "this can be undone if we wish". The relevant time is not the six minutes between 7am and 7.06am. It is the 6 months between September when the planning starts and March the next year when the cash transfer happens.

As to the third act, AP was copied into emails showing DFL’s advances to AFR and the use of AFR to pay bonuses at a time it owed increasing sums to DFL. AP did not object to the use of DFL’s money to support AFR, nor did she request professional advice be taken on the impact of this on the Scheme.

The series of three acts meets the material detriment test, as does the second act on its own. As regards the second act, it reduced the extent to which DFL was able to meet its obligations to the Scheme and so directly engages the comparison set out in s.38A(4)(e) and (f). The DFH Share Sale Act resulted in £800,000 that was available to DFL under an invoice finance facility being paid away from DFL and replaced with an interest free unsecured intercompany loan from DFG that has now been written off. But for the DFHL share sale and surrounding financing this money would have been available to support the Scheme, including by repaying (or avoiding the Scheme’s payment of) the PPF levies and expenses that the Scheme paid on DFL’s behalf. These totalled £899,138 (PPF levies) and £318,470 (expenses) in the period September 2015 to February 2019.

Looking at the Scheme valuation as at April 2014, the Scheme liabilities on every valuation measure exceed the market value of the Scheme assets; there is on any basis a multi-million pound deficit. So that means that the employer is a critical source of money for this scheme. No one else is under a liability to pay into it. The valuation sets out a schedule of contributions (the annual payments due from DFL to the Scheme to make up that deficit). The Panel noted was that this is a very long set of contributions. The recovery plan is 15 years long and, as they said at paragraph [88] of the Determination Notice, that indicates a weak employer.

The reduction was material. DFL’s net assets as at 31 July 2015 were £5.820m, of which £3.402m was a deferred tax asset that was illiquid and dependent on future profitability in order to be realised. It had not been recognised until 2015 and DFL’s auditor advised in 2013 that DFL’s future profits were too uncertain to utilise it. £800,000 represents approximately one third of DFL’s net assets in mid-2015, excluding the deferred tax asset. DFL’s employer covenant at that time had been assessed as weak, and its recovery plan was 15 years long. The Scheme would be dependent on DFL’s resources long into the future. £800,000 represents approximately nine years of the deficit repair contributions pledged for the year 2015-2016 (£88,149). Even the sum received by AP alone (£360,437) was over four years’ worth of those contributions.

Given that the employer had net assets of only £2.3 million and was making losses, that extraction has certainly affected, or at the very least, looking at section 38A(4)(f), has affected or might affect the extent to which the employer can meet its scheme obligations.

AP’s position is that the material detriment test is not met because all that happened in relation to the DFHL share sale was DFL borrowing from its bank and adding to its assets in the form of a new receivable. But the material detriment test is far more nuanced than AP’s argument suggests. In essence, section 38A(4) asks the Regulator to consider the effect of the act in question by looking at the position as regards certain specified matters before and after the act. The comparisons that are identified in section 38A(4)(a) to (f) include quantitative comparisons such as the effect of the act on the value of a scheme’s assets (section 38A(4)(a) and (b)), but also qualitative comparisons such as whether the act changes the country in which a person’s obligations to pay a pension scheme would fall to be enforced (section 38A(4)(c) and (d)). AP’s argument looks only at the book value of the receivable, not its actual true value or the qualitative reasons why the employer is worse off in that scenario.

Both Pink and DFG were unable to repay the £800k loan. As AP indicated, DFG might have been able to sell DFL, but whether it could raise £800k would depend on the value of DFL. Ashgates had materially caveated their valuation of DFL and the asset (shares in a private company) were illiquid. None of the other ways AP suggested the loan could be repaid (dividends or raising another loan) were realistic. The new loan solution involves finding a commercial lender for £800,000 on the strength of DFG’s weak balance sheet. And the “dividend” solution depends on dividends from DFL, which at the time was making losses and really amounts to an argument that DFL should fund its own repayment of the loan. The detriment did not occur when the loan was written off. A write-off does not cause a loan to become irrecoverable; it is the loan’s irrecoverability that causes the write-off. In this case the write-off simply recognised the pre-existing reality that DFG could not repay the loan.

As regards the series, this also meets the material detriment test. It reduced the extent to which DFL was able to meet its obligations to the Scheme. It resulted in £1,872,481 that was available to DFL, and would have been available to support the Scheme, being paid away from it.

As regards the monthly payments to CW, AP also says that the first act occurred over six years before the Warning Notice was given and is thus time barred. That is not correct. The act comprises the monthly extractions themselves, from September 2015 until February 2019, by which CW removed £20,000 or £23,000 per month from DFL for the benefit of him and his wife. Those acts are in time.

Section 38(7) makes it a condition of issuing a CN that the Regulator must be “of the opinion that it is reasonable to impose liability on the person to pay the sum specified in the notice” having regard to certain identified factors. Mr Robinson endorses the Panel’s conclusion on the reasonableness of issuing a CN for the reasons it gave (at [101]-[117]). In essence, he points to the facts that AP:

It was not reasonable for AP, knowing what she did, to approve the proposal without at least raising the issue of its impact on DFL and possibly also the Scheme. The most obvious way to do that would have been to ask whether professional advice had been taken and we know AP did not take any advice from lawyers or actuaries. Only Ashgates advised and they were very careful to say whom they are advising and what they are advising on. When CW had moved money out of Pink, she took legal advice. There is no reason why that couldn't have been raised on this occasion as well.

Looking at the overall circumstances (section 38(3)(d)(i)), Mr Robinson says that AP had knowledge of the scheme deficit and DFL’s financial weakness. She knew and understood the transaction that was proposed, in particular the use of DFL’s finance facility, and its potential impact on DFL in the sense that RBS might have to look elsewhere for repayment. And she was one of only two directors of the employer and had a deep distrust of the other one.

Looking at the factors in section 38(7), AP had an important level of involvement throughout, she was a director of DFL (and so had a fiduciary relationship with the company, to protect it and to consider the interests of its stakeholders, including the Scheme), she received benefits in the region of £360k.

As regards quantum, Mr Robinson says that the reasonable sum at the time of the acts is £360,437. That is the amount AP received as a result of the sale of her DFHL shares. There is no reason (except possibly when it comes to financial circumstances) to take tax or her gifts to her children into account, and care should be taken before taking gifts/sending out of benefits into account. AP’s financial circumstances are sufficient to pay the CN sum the Regulator seeks.

Although financial circumstances are relevant, it is important to see that factor in its proper perspective. In Shah (at [300] et seq) the Upper Tribunal made these comments about financial circumstances:

“300.

It is important to bear in mind that the issue of a CN is not akin to the imposition of a financial penalty by a regulator for the breach of regulatory provisions. In those circumstances, as is the case with the imposition of criminal penalties, the financial circumstances of the individual concerned are a very important factor. Even then, financial circumstances will not always be given strong weight in the most egregious cases where it is important not to dilute the deterrent effect of any penalty. As we have said, the purpose of s 38 PA 2004 is to ensure that a person with a close connection with a scheme and its employer and who has been party to acts or failures to act which have caused material detriment to the scheme makes a contribution to scheme in circumstances where it is reasonable to do so.

301.

The second point to be made is that in our view a target who wishes to rely on straitened financial circumstances as a factor tending against the issue of a CN must put forward cogent evidence which clearly demonstrates his financial position.

…

302.

The Regulator has given some helpful guidance on these matters in a report which it issued under s 89 PA 2004 following the determination it made in relation to The Carrington Wire Defined Benefit Pension Scheme in May 2015 which we gratefully adopt:

“When considering the reasonableness of a contribution notice, the reference to a target’s ‘financial circumstances’ under section 38(7)(f) is not limited to the target’s current financial worth but also includes consideration of how the target has ended up in the financial position in which he currently finds himself. This includes taking into account the target’s receipt of monies and how they have been used.

The Panel accepted that it was correct to draw a distinction between the issuing of a contribution notice and its enforcement. Questions about the ability to recover and the costs and proportionality of so doing are far less relevant to the decision to issue a contribution notice than to decisions over whether and how it should be enforced.””

It is reasonable to adjust for the passage of time, whether or not the £800k would have been paid into the Scheme. Shah (at [320]) tells us that we are not to adopt a compensatory analysis; the CN sum is not dictated by "Can I show compensation? Can I show money would have gone to the scheme, how much worse off is the scheme". In any event, on the facts here, there was money that should have gone into the scheme. DFL had promised to pay expenses and didn't and there is the PPF levy element as well.

The Regulator seeks interest at the rate of 2% p.a. above Bank of England base rate on a compound basis up to the date of the Upper Tribunal’s determination of this matter, followed by interest at the rate of 2% p.a. above Bank of England base rate on a simple basis until the date of payment. AP argues for the lower of these rates to apply until the conclusion of this Reference, with the higher rate only taking effect from the date of any CN. Such an approach simply incentivises every target to make a reference, however unmeritorious, and would reduce the compensation to the Scheme from the level the DP had found reasonable simply because AP has chosen to make this Reference. The resulting figure is well below the shortfall sum of £5 million.

It is wrong to reduce the amount sought because the £360,437 was originally sought on a joint and several basis with CW. AP says that this would have left her with a burden of £180,218.50 but that is to misunderstand the nature of joint and several liability. The whole point of joint and several liability is that it gives the creditor the option of pursuing one defendant alone for the full amount sought. Whether the “paying defendant” ends up bearing all the liability, or less, depends on whether that defendant brings contribution claims and with what result. The availability of those contribution claims does not affect its effective burden vis a vis the claimant.

If we were to approach this point (as the Panel ultimately seemed to do) with an eye to who was responsible for the transaction, we should consider the effect of the transaction. Our starting point then would not be a CN sum of £360k. It would be higher. It would be at least £800k plus something for the time value of money. We might then go higher because we might consider the effect of that £800k coming out in terms of what it means for DFL’s ability to pay PPF levies or pay the expenses of the Scheme that it has promised to pay and didn't (which come to £1.2m).

Looking briefly at the other two acts cited against AP, Mr Robinson says that it is perfectly possible for us to reach a decision on the DFHL share sale act without needing to go here. Nevertheless, he says that there is a series of acts, and the material detriment test is met in relation to the series. The payments to CW and his wife total £848,000 in the period of six years ending with the warning notice. And the use of employer resources to support associated companies led to a cost of £224k.

As to whether there is a series, he says that a chronological list of acts is sufficient. However, if some kind of link or interconnection is required, we can see that here as all the acts complained of are a succession of different ways of extracting money from DFL for the benefit of CW and his family at his instigation and with the participation of AP and others.

On the limitation point, Mr Robinson says there are two acts, one (signing the contracts/approving CW’s remuneration) relied on for the party test and another (the monthly extractions) which is the act which causes detriment. We can perfectly well rely on events of participation before the six-year period starts.